Companies Amendment Act 2020: Changes to Sections 167, 172, 178, 184, 187, 188 and 197

Amendment to Section 167 - Vacation of office of director

What Section 167 covers: Section 167 of the Companies Act, 2013 deals with circumstances in which the office of a director becomes vacant. Sub-section (2) addresses a person who continues to function as a director despite knowing that the office has become vacant under sub-section (1).

The Companies (Amendment) Act, 2020 removed the words providing for imprisonment for a term that could extend to one year from Section 167(2). It also removed the words that permitted punishment with both imprisonment and fine.

Practical effect: The 2020 amendment decriminalised the imprisonment component of this default. The provision retains a fine ranging from Rs. 1 lakh to Rs. 5 lakh for knowingly functioning as a director after the office has become vacant.

Amendment to Section 172 - Penalty for defaults under Chapter XI

What Section 172 covers: Section 172 is the residual penalty provision in Chapter XI, which deals with appointment and qualification of directors. It applies where a company defaults in complying with a provision of that Chapter and no specific penalty or punishment is otherwise provided.

The substituted Section 172 provides a penalty of Rs. 50,000 for the company and every officer in default. For a continuing failure, an additional penalty of Rs. 500 applies for each day during which the failure continues, subject to a maximum of Rs. 3 lakh for the company and Rs. 1 lakh for an officer in default.

Key point: The amendment replaced the former fine-based general punishment with an in-house monetary penalty structure for the residual defaults covered by this section.

Amendment to Section 178 - Board committees and penalties

What Section 178 covers: Section 178 contains provisions concerning the Nomination and Remuneration Committee and the Stakeholders Relationship Committee, including their constitution and functions for companies to which the section applies.

Under amended Section 178(8), contravention of Section 177 or Section 178 attracts a penalty of Rs. 5 lakh on the company and Rs. 1 lakh on every officer of the company who is in default.

Practical effect: The earlier punishment language, including imprisonment for an officer in default, was replaced by specified monetary penalties.

Amendment to Section 184 - Disclosure of interest by director

What Section 184 covers: Section 184 requires directors to disclose specified concerns or interests and regulates participation in contracts or arrangements in which a director is directly or indirectly interested.

The Companies (Amendment) Act, 2020 substituted the punishment in Section 184(4). Instead of imprisonment for a term that could extend to one year, or fine, or both, a director contravening the relevant requirements is liable to a penalty of Rs. 1 lakh.

Amendment to Section 187 - Investments of company to be held in its own name

What Section 187 covers: Subject to statutory exceptions, Section 187 requires investments made or held by a company in property, securities or other assets to be made and held in the company's own name.

The substituted Section 187(4) provides that a company in default is liable to a penalty of Rs. 5 lakh, while every officer of the company who is in default is liable to a penalty of Rs. 50,000.

Amendment to Section 188 - Related party transactions

What Section 188 covers: Section 188 regulates specified contracts and arrangements with related parties, subject to the conditions, approvals, thresholds and exemptions prescribed by the Companies Act, 2013 and the applicable rules.

The 2020 amendment changed Section 188(5). For a listed company, the relevant contravention is subject to a penalty of Rs. 25 lakh. In the case of any other company, the relevant contravention is subject to a penalty of Rs. 5 lakh.

Practical effect: The amendment replaced the earlier imprisonment/fine structure for the specified contraventions with monetary penalties.

Amendment to Section 197 - Managerial remuneration

What Section 197 covers: Section 197 regulates overall maximum managerial remuneration and remuneration payable by public companies to directors, including where profits are absent or inadequate, subject to the Act and Schedule V.

The Companies (Amendment) Act, 2020 inserted, after the reference to a whole-time director or manager in Section 197(3), an express reference to "any other non-executive director, including an independent director".

Practical effect: The amendment expressly brought other non-executive directors, including independent directors, within the remuneration framework applicable in the circumstances governed by Section 197(3), read with Schedule V.