EFFECTIVENESS OF IN-HOUSE E-ADJUDICATION MECHANISM IN COMPANIES

INTRODUCTION
Legislation governing companies is one of the most extensive legislation in India. In 2013,
Companies Act 1956 was superseded by the Companies Act 2013. Under Section 454 of the
Companies Act, 2013, the central government is empowered to appoint an adjudicatory officer,
not below the rank of a Registrar, to adjudicate certain compoundable offenses committed by the
officers of the company. This system is referred to as the in-house adjudication mechanism
(IHAM). This system was introduced to lessen the burden of the NCLT and promote Ease of
Doing Business (EoDB).
The paper will try to shed light upon the issues revolving around IHAM in the light of the
Companies (Amendment) Bill, 2020. It shall also look into the negative impact of
decriminalization of a few offences as proposed by the Companies (Amendment) Bill, 2020.
HISTORY OF IHAM
Section 454 was inserted based on the recommendations of the JJ Irani report 1, wherein it
observed that due to procedural delays, the impact of the penalties imposed on the officers of the
company is virtually ineffective. Thus, a need was felt for a faster and more efficient manner to
deal with such cases.2 Presently, there are over 30 offenses for which the in-house adjudication
can be used. In 2020, a new bill was placed in the Lok Sabha in March 2020. This bill proposes
to de-clog 46 penal provisions, out of which 23 will be re-categorized as IHAM. In addition to
this, 7 compoundable offenses are proposed to be omitted, 11 limited only to fine and 5 offenses
are proposed to be adjudged by an alternative framework.3
MECHANISM IN PLACE
Offenses under this system
Under the IHAM system, only the offenses which prescribe penalty are dealt with. Initially, the
upper limit of the pecuniary jurisdiction of the RD was Rs. 5 Lakhs. This limit was increased to
Rs. 25 Lakhs by the Ordinance (2018) 4. In addition to the pecuniary limit of the offenses, only
those offenses can be brought forth, which are compoundable. Furthermore, once the offense is
1 Dr. Jamshed Irani, Report on Company Law, Prime directors, (August 10, 2020; 10:15 am);
http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf.
2 Id.
3 Megha Saraf, Major Highlights of the Company (Amendment) Bill, 2020- A Step towards decriminalization of
offences primarily, (July 15, 2020; 2:00 pm); Vinod Kothari Consultants,
http://vinodkothari.com/2020/03/highlights-of-the-companies-amendment-bill-2020/.
4 Companies Act (Amendment) Ordinance, 2018.
compounded before the initiation of a proceeding before the ROC or the NCLT, no prosecution
shall be instituted in relation to such an offense against the offender in relation to whom the
offense is compounded.5 The system is governed through the MCA 21 system.
Some of the offenses which are triable under the IHAM include- Section 56(6) (Non- compliance
relating to transfer and transmission of securities), Section 99 (default in holding the Annual
General Meeting), Section 203(5) (failure to appoint key Managerial Personnel), etc.
Original application
As per sec 454 read with rule 3(1) of Companies Act 2013 the AO may by order impose penalty
on company, officer in default or any other person in case of non-compliance and in rules it is
stated that adjudication officer will be appointed for the purpose of adjudging penalty.
While adjudging quantum of penalty, the adjudicating officer shall have due regard to the
following factors, namely:-
(a) size of the company; (b) nature of business carried on by the company; (c) injury to public
interest; (d) nature of the default; (e) repetition of the default; (f) the amount of disproportionate
gain or unfair advantage, wherever quantifiable, made as a result of the default and; (g) the
amount of loss caused to an investor or group of investor or creditor as a result of default – stated
in Rule 3(12)
Provided that, in no case, the penalty imposed shall be less than the minimum penalty prescribed,
if any, under the relevant section of the act.
Process of Adjudication
1) The AO shall issue a show cause notice to the company, officer in default, any other
person to show cause within not less than 15 days and not extending more than 30 days
as to why the penalty should not be imposed.
2) The reply notice shall be filed in electronic mode.
3) AO can extend for further 15 days if he is satisfied that there is sufficient cause of not
responding.
4) If AO is of the opinion that physical appearance is required then he shall issues notice
within 10 working days from the date of receipt of reply.

5 Anubhav Pandey, Setting up of e-adjudication mechanism for settling compoundable offences under Companies
Act, Ipleaders (July 25, 2020; 4:30 pm), https://blog.ipleaders.in/e-adjudication-under-company-law-soon-to-be-a-
reality/
 5) The person to whom notice is issued can also make oral representation if he has already
mentioned in his reply.
6) After giving a reasonable opportunity of being heard AO can pass an order he thinks fit
including order of adjournment.
7) The AO shall pass order after expiry of last date of submission of reply
a) In case of physical appearance not required within 30 days
b) In case physical appearance required within 90 days
8) If any delay is made in passing order by AO the reason for delay is recorded and order of
AO shall be valid.
9) The AO shall send a copy of order to company, officer in default , or any other person or
all of them and to the CG and copy of order shall be uploaded on the website.
10) In case any person did not reply or appear before AO , the AO may pass an order
imposing penalty in absence of such person.6
Appeal
Any person aggrieved by the order of AO may prefer appeal to regional director(RD) having
jurisdiction in the matter.7
Every appeal shall be filed within 60 days from the date copy of adjudication order is received
by an aggrieved person.
Repeated default
As per section 454A (newly inserted) it is similar to section 451. Where a company, or an officer
in default or any other person having already subjected to penalty for default again commit such
default within a period of 3 years from the date of order of imposing penalty passed by AO or
RD as the case may be shall be liable for second or subsequent default for an amount equal to
twice the amount of penalty.8
ADVANTAGES OF IHAM
1. Facilitate ease of doing business
EoDB index is a ranking system by the World Bank Groups. The research presents data
for 190 economies and aggregates information from 10 areas of business regulation.

6 Tanishri Khator; ROC (Adjudication) under Companies Act, 2013; Taxguru (August 03, 2020; 1:15 pm);
https://taxguru.in/company-law/roc-adjudication-companies-act-2013.html
7 Section 454(5), Companies Act, 2013.
8 Supra 5
 Since 2014, India’s rank has jumped 79 places. 9 In 2020, India was ranked 63 as against
77 in 2019. De-clogging of offenses is another attempt of the Indian government in
increasing the ranking of the country. This step of the government is supposed to attract a
higher FDI and thereby increase capital inflow.
2. Reduced burden on the NCLT
The NCLT was established under Section 408 of the Companies Act, 2013. NCLT has
jurisdiction over the matters of Company law as well as the matters under Insolvency and
Bankruptcy Code, 2016. Currently, NCLT has about 15 benches all over India with
NCLAT as one appellate body. Thus, the IHAM system is indeed helpful to decrease the
burden on the NCLT when it comes to compoundable offenses under the company law.
3. Efficiency
Since the company deals directly with the RD, the IHAM system is more efficient. The
system is further proposed to be upgraded 10 via e-filing, e-notices, etc. Thus, there will be
a minimum physical interface between the adjudicating body and the defendants. The
MCA 21 will be able to throw up cases of non-compliances. The system is proposed to be
based on the e-adjudication methods of Income Tax proceedings.
DISADVANTAGES OF IHAM
1. Decriminalization of offenses
The amendment proposes to decriminalize certain offenses further. The JJ Irani
committee observed the need for higher compliance by the companies 11. It proposed a
higher degree of penalties to increase deterrence on the companies. Therefore, the
proposed amendments go directly against the recommendations of the JJ Irani Committee
on which the company law is based in India.
2. Arbitrary Assumption
The new amendments are based on the assumption that the offenses so decriminalized
aren’t sufficiently against the public interest. However, such an assumption goes against
the basic agency principle of Company Law. Since, the directors and other officers of the
company act as an agent for the shareholders on behalf of the company, the

9 “About us,” World Bank Doing Business, (July 18, 2020; 6:15 pm); http://www.doingbusiness.org/en/about-us.
10 Companies (Amendment) Bill, 2020
11 Supra 1
 decriminalization of the offenses would be against the interest of the stakeholders of the
company.
3. Less discretionary power to the AO.
The ROC, on objection by the company, can’t decrease the penalty from the minimum
prescribed penalty. This binds the hands of the ROC and the companies ultimately have
to appeal before the RD or the NCLT which defeats the purpose of the IHAM.
4. May lead to recidivism
Decriminalization may also lead to recidivism. The punishments in the Company Act is
based on the deterrence theory of punishment. Thus, the need for the punishment is felt
for compliance. However, once this deterrence is removed, it may lead to reduced
readiness of compliance on part of the Company. This will lead to recidivism and thus,
increase the burden of the RoC. He may have to ask for the requisite report from the
company again and again with no power to impose on the Company officers a
punishment.
CONCLUSION
In today’s economic time, when the country needs more FDI, at the same time, the government
shouldn’t turn a blind eye to the protection of the stakeholders. Thus, there needs to strike a
balance between the two. While some of the offenses under company law are shifted to the
IHAM, yet the stakeholders in the company have ample power to protect their interests. This is
inherent in the basic structure of the Companies Act, 2013 itself. This includes the majority rule,
conduction periodical meetings as well as a reasonable and timely disclosure to the Government
of India. Thus, in conclusion, despite its shortcomings, IHAM can prove to be a handy tool in the
hands of the Indian Judicial System.