Companies Act Section 86

Comprehensive Explanation of Section 86 of the Companies Act: Punishment for Contravention

Section 86 of the Companies Act establishes the penalties and consequences for failing to comply with the provisions governing charges, as well as for providing false or misleading information related to the registration, modification, or satisfaction of charges. 

This section imposes financial penalties on companies, their officers, and individuals involved in contraventions, thereby reinforcing the necessity of adhering to legal requirements. The provision is structured as follows:

Subsection (1): Penalties for Default by Companies and Their Officers

1. Applicability of Penalties

A company is considered in default if it fails to comply with any provision of this chapter related to:

The registration of charges.

The modification of charges.

The satisfaction of charges.

Non-compliance with these provisions leads to statutory penalties to ensure that companies fulfill their obligations in maintaining accurate financial records related to encumbrances on their assets.

2. Penalties Imposed on the Company

If a company is found to be in default, it will be subject to a financial penalty of five lakh rupees.

This penalty serves as a deterrent against neglecting the statutory obligations related to the proper maintenance and reporting of charges.

3. Penalties for Officers in Default

Every officer of the company who is responsible for or involved in the default will be held individually liable.

Each officer will face a penalty of fifty thousand rupees.

This provision ensures accountability among the company’s management and officers, reinforcing the importance of compliance at every level within the organization.

Subsection (2): Penalties for False or Misleading Information

1. Nature of the Offense

This subsection specifically addresses scenarios where an individual:

Willfully furnishes false or incorrect information that is required to be registered under the provisions of Section 77 of the Act (which deals with the registration of charges).

Knowingly suppresses material information that is crucial for the registration process as per Section 77.

The provision ensures that individuals who deliberately engage in fraudulent misrepresentation are held legally accountable.

2. Legal Action under Section 447

If an individual is found guilty of willful misrepresentation or suppression of information, they will be subject to action under Section 447 of the Companies Act.

Section 447 pertains to the punishment for fraud, which includes the following consequences:

Imprisonment for a term that may extend up to ten years.

A fine that may extend up to three times the amount involved in the fraud.

By linking contraventions to Section 447, the Act emphasizes the seriousness of fraudulent conduct in the context of charge registration and corporate governance.

3. Intent and Knowledge

The penalties under this subsection are specifically applicable to willful acts or omissions.

This means that individuals who intentionally violate the law or suppress crucial information with the knowledge that it is required under the Act will face legal consequences.

The inclusion of intent as a key element ensures that unintentional errors or omissions do not attract severe penalties, focusing enforcement efforts on deliberate wrongdoing.

Key Objectives of Section 86

1. Deterrence Against Non-Compliance

The imposition of financial penalties on companies and their officers serves as a strong deterrent against neglecting legal obligations related to charge registration.

Companies are incentivized to maintain accurate and up-to-date records to avoid substantial financial liabilities.

2. Accountability for Fraudulent Practices

By explicitly addressing false or misleading information and linking such offenses to Section 447, the provision underscores the serious consequences of fraudulent activities.

Individuals engaging in fraudulent misrepresentation face severe legal repercussions, including imprisonment and heavy fines, discouraging malpractices.

3. Encouragement of Compliance and Transparency

By holding both companies and individuals accountable for defaults and fraudulent acts, Section 86 fosters a culture of compliance and transparency in corporate governance.

It ensures that all relevant stakeholders adhere to the statutory requirements for maintaining an accurate register of charges, thereby enhancing trust and integrity in financial dealings.