The Hindu Business Line : Concept Paper in a penalty corner

VITTORIO Alfieri in Virgiana remarked: "Where there are laws, he who has not broken them need not tremble." A cursory look at the Schedule of Penalties conceived in the Concept Paper (CP) on the Companies Act would make companies and their auditors tremble in case they do not comply with the provisions. Reading the penalty provisions of any law is akin to reading the crime pages of a newspaper — it makes for interesting reading as long as one's name is not there. The CP, which proposes only 289 Sections in the Companies Act, has managed to identify 119 occasions when a penalty could be slapped on companies.

Entry 7 of the Schedule of Penalties, drawing reference to Clause 10(2) of the CP, fixes a penalty of Rs 25,000 subject to a minimum of Rs 2,500 for commencement of business without obtaining the certificate of commencement of business . For a continuing default, the penalty is Rs 1,000 a day. Clause 10 of the CP that deals with registration of companies does not warrant obtaining a certificate of commencement of business at all. The Paper has fixed a penalty for an offence that can never be made.

Similarly, Entry 9 talks about Clause 13(8) and levying a penalty on Section 25 companies. The Section 25 referred to belongs to the old Companies Act, which this Act intends to replace.

Entry 104, drawing reference to Clause 200(5), levies a penalty of Rs 1,00,000 subject to a minimum of Rs 10,000 for wilful default by liquidator to cause forwarding of the order of dissolution to the Registrar. The entry is silent on whom the penalty would be levied. Would any company agree to pay Rs 100,000 for a default on the part of the liquidator? Would a liquidator agree to pay a similar sum if the fault is not his?

It's on the auditor

Fastening liability on auditors is the done thing these days. The Finance Minister proposed a stringent Section 277A in the Finance Bill which was toned down a bit at the time of passing the Bill. The CP does not disappoint here — Entry 51 pertaining to Clause 59(11) tags a minimum and maximum penalty of Rs 50,000 and Rs 100,000 as "liability on auditors". Since the previous Clause talks about penalty for not complying with the provisions regarding accounts and auditors, one assumes that this penalty is also for the same purpose. If it is not, "liability on auditors" can be interpreted in four ways by four different people ultimately culminating in the courts.

In addition, there is a penalty for "falsification of books", which is imprisonment for two years and a monetary fine that could commence with Rs 50,000 and end up at Rs 5 lakh. Taking a cue from Section 277A of the Income-Tax Act, could one point a finger at the auditors? The misery does not stop here. Entry 43 pertaining to Clause 53(9) proposes a fine between Rs 10,000 and Rs 1,00,000 for "not following Accounting Standards". Section 2(2) defines Accounting Standards to mean "standards of accounting as prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards" (NACAS). NACAS has not done much since incorporation in 2001 except making a recent press statement that it would recommend companies following AS 1-28 issued by the Institute of Chartered Accountants of India. In case different treatments are postulated between the ICAI and NACAS, companies would be in a dilemma over choosing between the standards framed by the two Central Government bodies.

The CP feels that "producer companies" would not be able to afford more than Rs 10,000 in penalties, which is the amount imposable on them. A couple of other drafting gaffes have also crept in — Entry 119 talks about wrongful withholding of property of the company (Section 268). A couple of strikes on the page-up key takes one to Section 268 which reads "Appointment of Advisory Committee".

The Schedule of Penalties concludes by declaring that the mandatory levy of minimum penalties is only for public limited companies. One wonders what levy would befall private limited companies — mandatory levy of maximum penalties, non-mandatory levy of minimum penalties or non-levy of any penalties?

(The author is a Hyderabad-based chartered accountant.)

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