The Corporate Social Responsibility conundrum

Ever since the introduction of the Companies Act, 2013 (“Act”), amendments to the Act have been a regular feature. Unfortunately, some of these amendments may be fraught with interpretation issues. It is in this light that this article would like to examine the amendments effected in the month of September 2018, to the provisions of the Act relating to Corporate Social Responsibility (“CSR”).

Particularly among the changes, effective September 19, 2018, and September 12, 2018 respectively, the explanation to Section 135 and sub-section 4 of section 198 were amended to read as follows:

1. Explanation to S. 135 (Effective September 19, 2018)

For the purposes of this section “average net profit” shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.

1. S. 198(4) (Effective September 12, 2018)

In making the computation aforesaid, the following sums shall be deducted, namely

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(l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;

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The explanation to S.135 was amended based on recommendations received from the Parliamentary Standing Committee so as to “harmonize” the definition of net profit with the rules relating to CSR.

In the context of the recent amendment, it would be interesting to follow the matter of M/s Shri Santhosh Meenakshi Textiles Private Limited (“Petitioner”) vs RoC, Coimbatore. In July this year, the Chennai bench of the National Company Law Tribunal (“Chennai Bench”) had made the following observations:

1. the Petitioner was liable to spend on CSR for FY15 (ending March 31, 2015) taking into account only the net profit before tax for the year FY14.

2. While the computation for net profit was provided under S.198 of the Act, S.198(4) did not mention taking into account the losses during the financial year prior to the commencement of the Act.

3. The Chennai Bench further noted that there was no mention about excluding profit for calculation of the average net profit.

At the time the Chennai Bench pronounced the order, the afore-stated provisions of the Act read as follows:

1. Explanation to S. 135

For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.

1. 198(4):

In making the computation aforesaid, the following sums shall be deducted, namely

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(l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;

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Lex prospicit non respicit?

It is an established rule in law that unless explicitly provided, an amendment to a provision of legislation, cannot be retrospective in nature.

But the wealth of jurisprudence has also established certain guiding principles to interpret statues such as:

1. A statute affecting a substantive right is prospective in nature. However, a statute affecting a procedural right is retrospective in operation.

2. A clarificatory law that removes doubts on the interpretation of a statute or corrects its erroneous interpretation, is retrospective in nature. If an explanatory statute is clarificatory in nature or clears an existing ambiguity, it is also retrospective in nature.

3. If a statute changes the existing legal position and creates a new obligation or liability (except in a procedural issue), then it is not retrospective, unless it is declared to be so, or such effect cannot be avoided without doing violence to the language of the statute.

4. An intention to enact a retrospective statute must be clearly expressed.

Substantive law refers to those aspects of law that govern the rights and obligations whereas procedural law lays down the procedure relating to the enforcement of such laws.

More recently, the Supreme Court has also adopted a purposive interpretation instead of a literal interpretation while examining S.29A of the Insolvency and Bankruptcy Code.

Given the background to the amendment to the explanation to S.135, one could surmise that this amendment would be clarificatory in nature and hence have a retrospective effect. However, in relation to S.198(4)(l), the answer to the nature of the amendment may not be easily inferred. Even supposing that this amendment were substantive, one could then question whether this would be regarded clarificatory in nature.

In the conspicuous absence of a savings clause in the Companies Amendment Act, one would usually rely upon the General Clauses Act, 1897. Among other things, the General Clauses Act provides that unless a different intention appear, a repeal shall not affect any obligation or liability acquired, accrued, or incurred under any enactment so repealed, and such repeal shall also not affect any legal proceeding in respect of such obligation or liability and such legal proceeding may proceed as if such repeal had not been passed.

A strict reading of this provision may prima facie deny any entity from benefitting from the amendment to any actions prior to such amendment. But some judgements have also deliberated that an issue may be re-opened in special circumstances or where there has been a change in the law.

In the instant case provided above (Re M/s Shri Santosh Meenakshi Textiles), it appears that an application has been made by the Petitioner with the National Company Law Appellate Tribunal (“NCLAT”) for consideration under Rule 26(3) of the NCLAT Rules, 2016. On October 3, 2018, NCLAT had directed that a notice be issued to RoC, Coimbatore, and the case has been posted ‘for admission’ before appropriate bench on October 29, 2018.

It would be interesting to see how NCLAT analyses these aspects.

Disclaimer: The author is not representing any of the interested parties in the matter.