No more jail for bona fide business defaults: Cabinet OKs this amendment to Companies Act

By: |
March 4, 2020 6:09 PM

Prime Minister Narendra Modi-led Union Cabinet has approved the second amendment to the Companies Bill, 2019, giving a major relief to promoters against criminal penalties in case of non-fraudulent business defaults.

Finance minister Nirmala Sitharaman, nirmala sitharamanFinance minister Nirmala Sitharaman

Prime Minister Narendra Modi-led Union Cabinet has approved the second amendment to the Companies Bill, 2019, giving a major relief to promoters against criminal penalties in case of non-fraudulent business defaults. The amendment proposed that company executives not be sent to jail for corporate defaults where frauds did not take place. “The Bill would remove criminality under the Act in case of defaults which can be determined objectively and which, otherwise, lack the element of fraud or do not involve larger public interest,” according to the Act. Finance Minister Nirmala Sitharaman said: “This Bill furthers ease of living for law-abiding corporates and de-clogs the criminal justice system in the country”. In the previous amendment to the Companies Act, 2015, the government had amended certain provisions in order to ease the difficulties faced in the implementation of certain provisions.

Earlier, the government had said that those who buy companies under Insolvency and Bankruptcy Code (IBC) will not be liable for economic offences committed by previous owners. The government had approved changes to the IBC to protect the new management from the wrongdoing of the previous one. In December last year, the Union Cabinet approved Promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019. Under this, the corporate debtor (the company) would not be prosecuted for any liability for offences committed prior to the commencement of the insolvency resolution process. Thus, the new management gets a scot-free firm only if they were not related to the offences of the company before.

In today’s Cabinet Meeting, the government has approved the re-categorisation of as many as 23 offences out of 66 compoundable offences under the Act. Finance Minister Nirmala Sitharaman also said that seven compoundable offences would be omitted from the Act. 

With India facing headwinds of economic slowdown, close to Rs 10.52 lakh crore of the corporate debt is at the risk of default in the next three years, says a report. Credit profiles of corporates are expected to remain under pressure, an India Ratings and Research in a report said this week.

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