Corporate Law 2026: Decriminalization of Technical Defaults Under Section 454C – A Complete Guide

The Companies (Amendment) Act, 2026 has introduced a paradigm shift in corporate compliance by decriminalizing over 40 technical and procedural defaults. The newly inserted Section 454C establishes an in‑house adjudication mechanism (IAM) that allows the Registrar of Companies (ROC) to impose monetary penalties for minor defaults, completely bypassing the criminal court system.

At Hashmi Law Associates (HLAPL), we advise corporate clients on compliance and decriminalization. This guide explains the scope of Section 454C, the procedure for settlement, and the benefits for Private Limited companies.

1. What Is Decriminalization Under the Companies Act?

Decriminalization means that minor, technical, or procedural violations of corporate laws will no longer attract criminal prosecution. Instead, these defaults will be penalized through monetary penalties imposed by an adjudicating officer (the ROC or a designated officer). The objective is to reduce the burden on criminal courts and encourage voluntary compliance.

Before the 2026 amendment, over 80 compoundable offenses under the Companies Act, 2013 could lead to criminal prosecution of directors and key managerial personnel. Even minor delays in filing annual returns could result in criminal proceedings against company directors, potential imprisonment of up to 6 months, legal costs running into lakhs of rupees, and adverse impact on director disqualification proceedings.

2. Section 454C – In‑House Adjudication Mechanism (IAM)

Section 454C of the Companies Act, 2013 (inserted by the 2026 amendment) empowers the central government to appoint adjudicating officers (typically ROCs) to adjudicate penalties for technical defaults. Key features:

• Applicable defaults: Over 40 technical defaults, including delay in filing annual returns (AOC‑4, MGT‑7), delay in holding board meetings, non‑filing of charge satisfaction documents, and procedural lapses.
• Excluded defaults: Serious offenses involving fraud (Section 447), wrongful trading, misstatement with fraudulent intent, and investor protection violations remain criminally prosecutable.
• No imprisonment: The adjudicating officer can only impose monetary penalties (fines). The company and its directors cannot be imprisoned for the defaults covered under Section 454C.
• Time limit for settlement: The company must file an application for settlement within 180 days of receiving the show‑cause notice.
• Repeat offender provision: If the same default occurs within 3 years, criminal prosecution may be initiated (Section 454C(4)).

3. Offenses Decriminalized Under Section 454C

The 2026 amendment decriminalizes and brings under IAM over 40 compoundable offenses, including:

4. Step‑by‑Step Procedure Under Section 454C

1. Show‑cause notice: The ROC issues a show‑cause notice to the company (and its officers) specifying the default.
2. Filing of settlement application: Within 180 days of receiving the notice, the company files Form GNL‑2 (Settlement Application) along with the prescribed fee (₹5,000 for small companies, ₹10,000 for others).
3. Adjudication hearing: The adjudicating officer may conduct a summary hearing (virtual or physical) to provide an opportunity to be heard.
4. Adjudication order: The officer passes a reasoned order imposing a penalty. The order is uploaded on the MCA‑21 portal.
5. Payment of penalty: The company and officers pay the penalty within 30 days of the order. No criminal proceedings are initiated.
6. Compliance closure: The matter is closed, and the company receives a compliance certificate. There is no criminal record for directors or officers.

5. What Offenses Remain Criminal?

Serious offenses involving fraud, misappropriation of funds, and violations affecting public interest remain criminally prosecutable. These include:

• Fraud under Section 447: Punishable with imprisonment up to 10 years (if public interest is involved, up to 20 years).
• Wrongful trading / fraudulent conduct of business: Section 339.
• Issuance of false or misleading prospectus: Section 34.
• Misstatement in offer documents or financial statements with fraudulent intent: Section 448.
• Undervaluation of assets in fraud cases: Section 247.

6. Benefits for Private Limited Companies

• Reduced litigation costs: Companies save on legal fees for criminal court representation; the adjudication process is streamlined and cost‑effective.
• Faster resolution: IAM matters are resolved in 60‑90 days, compared to 2‑3 years in criminal courts.
• No criminal record: Directors avoid criminal prosecution for technical violations, protecting their DIN status and ability to be directors in other companies.
• Encourages voluntary compliance: The penalty‑based system incentivizes timely filing; companies are more likely to self‑report defaults.
• Director protection: No disqualification under Section 164(2) for a single default handled through IAM (disqualification requires non‑filing for three consecutive years).

7. How HLAPL Can Help with Corporate Compliance

At Hashmi Law Associates (HLAPL), we offer comprehensive corporate compliance services:

• Compliance audits – review of your company's ROC filing history to identify potential defaults.
• Section 454C settlement – filing settlement applications and representing clients before adjudicating officers.
• Legal advisory – guidance on which defaults are decriminalized and which remain criminal.
• Director protection – advising directors on avoiding personal criminal liability.
• MCA filings – end‑to‑end assistance with annual filings (AOC‑4, MGT‑7, DIR‑3 KYC, etc.).