Compounding or Adjudication Under the Companies Act, 2013? How to Decide Which Route Your Default Goes To?
Summary: Every professional faces the question of whether a Companies Act default should be addressed through compounding under Section 441 or adjudication under Section 454. The distinction turns principally on the exact language of the provision prescribing the consequence of the default: a “fine” relates to an offence and may attract the compounding mechanism, subject to the restrictions in Section 441, whereas a “penalty” is dealt with through adjudication under Section 454. Section 441 permits compoundable offences to be dealt with by the NCLT or, where the maximum fine does not exceed ₹25 lakh, the Regional Director or authorised officer. Offences punishable with imprisonment only, or imprisonment together with fine, are excluded from compounding. Section 454 provides for adjudication of penalties by the Registrar acting as Adjudicating Officer, hearing of the affected person and an appeal to the Regional Director. The article also explains the relevance of Sections 446A and 446B, the distinction between criminal offences and civil penalties, Forms GNL-1, INC-28 and ADJ, practical procedural steps, examples involving Sections 92(5), 188(5) and 447, and the judicial view concerning the ₹25 lakh jurisdictional limit. TaxGuru materials also illustrate the practical operation of Section 454 adjudication for statutory defaults and the reduced-penalty framework under Section 446B. Section 446B provides the relevant reduced-penalty framework for qualifying entities, while recent TaxGuru adjudication orders demonstrate the operation of Section 454, including the 90-day payment and 60-day appeal framework. Section 92(5) is an example of a provision prescribing a penalty rather than a fine.
- Short Answer
- Applicable Legal Provisions
- Relevant Extracts (Simplified)
- Legal Position
- Full Comparison: Compounding (Section 441) and Adjudication (Section 454)
- Exemptions and Relaxations
- Judicial View
- Practical Steps
- Examples
- Conclusion
- Frequently Asked Questions
- Q. Can a company itself apply for adjudication, the way it files Form GNL-1 for compounding?
- Q. Is there any ₹25 lakh type of limit in adjudication as well?
- Q. Can an adjudication order be compounded instead of being paid?
- Q. What happens if Form GNL-1 is filed by mistake for a default that is actually a penalty?
- Q. Is there any appeal against a compounding order?
Short Answer
A default can be compounded under Section 441 of the Companies Act, 2013, only where the relevant provision prescribes fine as a punishment. This includes cases where the provision prescribes “fine” alone or provides for “imprisonment or fine” as alternative punishments.
However, where a provision prescribes imprisonment alone, or imprisonment together with fine, the offence is not compoundable under Section 441, as specifically restricted by Section 441(6). In such cases, the default can be dealt with only through prosecution before the competent court.
Where the relevant provision prescribes a “penalty” instead of a fine, Section 441 does not apply, as such contravention does not constitute an offence capable of being compounded. Accordingly, the default is dealt with through the adjudication mechanism under Section 454.
Under Section 454, the Registrar of Companies (ROC), acting as the Adjudicating Officer, may conduct the adjudication and impose the prescribed penalty. The company or officer aggrieved by the order may appeal to the Regional Director within the prescribed time and manner.
So, the two are not two doors to the same room. They are two separate doors, and the Act itself tells us which door to use.
Applicable Legal Provisions
- Section 441(1), Companies Act, 2013: allows the National Company Law Tribunal (NCLT) and the Regional Director (RD) to compound an offence under the Act. Offences carrying imprisonment only, or imprisonment along with fine, are kept out.
- Section 441(1)(a): offences that the NCLT can compound. No upper limit applies to the NCLT.
- Section 441(1)(b): offences that the RD or an officer authorised by the Central Government can compound. This power stops where the maximum fine goes above ₹25 lakh.
- Section 441(2): compounding is not allowed if an investigation against the company has started or is going on under the Act.
- Section 441(4): once an offence is compounded, any case already filed in court is withdrawn, and no fresh case can be filed for the same default.
- Section 441(5): punishment for an officer who does not follow the compounding order. This figure should be checked in the current Act before it is quoted, because the Companies (Amendment) Act, 2020 changed this sub-section.
- Section 441(6): the blocking clause. Offences punishable with imprisonment only, or with imprisonment and also fine, cannot be compounded.
- Section 441(7): no offence can be compounded in any manner other than the manner given in Section 441 itself.
- Section 454(1): allows the Central Government to appoint Registrars of Companies as Adjudicating Officers (AO) for imposing penalties.
- Section 454(3): the AO can impose the penalty given in the relevant section and can also direct the company or officer to correct the default.
- Section 454(4): the AO must give a proper hearing before imposing any penalty.
- Section 454(5) to (7): a person unhappy with the AO’s order can appeal to the Regional Director within 60 days. The RD hears both sides and may confirm the order, change it, or cancel it.
- Section 454(8): what happens if the penalty is not paid or the order is not followed within 90 days. These figures should also be checked in the current Act.
- Section 446A: the points the authority must look at while deciding the amount: size of the company, how serious the default is, whether the same default has happened before, and how much gain was made or loss was caused.
- Section 446B: gives a lower penalty to a One Person Company, a small company, a start-up company and a Producer Company. The penalty is not more than half of the normal amount, with a ceiling of ₹2 lakh for the company and ₹1 lakh for an officer in default. This relief works only on the adjudication side.
- Companies (Adjudication of Penalties) Rules, 2014: the rules that govern the adjudication process, including Form ADJ for filing an appeal before the Regional Director. TaxGuru’s practical guide to ROC adjudication discusses the operation of the Rules and the e-adjudication process.
- Form GNL-1: the e-form used to apply for compounding under Section 441. It is filed with the Registrar of Companies.
- Form INC-28: used to inform the Registrar about the compounding order within 7 days of receiving it.
Relevant Extracts (Simplified)
Section 441(1): “…any offence punishable under this Act…not being an offence punishable with imprisonment only, or punishable with imprisonment and also with fine, may…be compounded by (a) the Tribunal, or (b) where the maximum fine does not exceed twenty-five lakh rupees, the Regional Director or any officer authorised by the Central Government…”
Section 441(6): “…any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.”
Section 454(3): “The adjudicating officer may, by an order, impose the penalty on the company, the officer who is in default, or any other person…and direct such company, or officer, or other person, to rectify the default, wherever he considers fit.”
Section 454(5): “Any person aggrieved by an order made by the adjudicating officer…may prefer an appeal to the Regional Director having jurisdiction in the matter.”
Legal Position
Most of the confusion in practice comes from treating the words “fine” and “penalty” as the same thing. They are not the same thing.
A fine is a criminal punishment. It goes with an “offence”. Very often the same section also allows imprisonment. Under Section 441, the company or officer pays a sum fixed by the RD or the NCLT, and in return the criminal case is dropped or is never filed.
A penalty is different. It is a civil liability created for not following a rule. There is no offence here. So there is no court case to drop and nothing to compound. The Registrar of Companies, acting as Adjudicating Officer, simply hears the company and fixes the amount under Section 454.
Between 2017 and 2020, the Government changed the wording of a large number of sections. The word “fine” was replaced with the word “penalty” in many places. The idea was that ordinary paperwork lapses, such as late filing of the annual return or a delay in filing a resolution, should no longer be treated as crimes. This is why the words used in the section, and not our own feeling about how serious the default is, decide the route.
On the compounding side itself, the Act does not treat every fine in the same way. It creates four separate groups, and each group has its own starting position:
| Word Used in the Punishing Section | What It Is | Correct Route |
|---|---|---|
| “Fine only” | Criminal offence | Can be compounded. RD if fine is up to ₹25 lakh, NCLT if fine is above ₹25 lakh |
| “Imprisonment or fine” (court may choose either one) | Criminal offence | Can be compounded. Same RD and NCLT split as above |
| “Imprisonment only” | Criminal offence | Cannot be compounded. Section 441(6) blocks it. Only prosecution |
| “Imprisonment and fine” (both together) | Criminal offence | Cannot be compounded. Section 441(6) blocks it. Only prosecution |
| “Penalty” or “liable to a penalty” | Civil liability, not an offence | Section 441 does not apply. Go for adjudication under Section 454 |
Once the default falls in the first or second row, only one question is left. Which authority do we go to? The answer is a plain number. If the maximum fine written in the section is up to ₹25 lakh, the RD can compound it. If it is more than ₹25 lakh, only the NCLT can compound it. The NCLT itself has no upper limit.
The National Company Law Tribunal Rules, 2016 provide the procedural framework relevant to proceedings before the NCLT.
Once the default falls in the last row, the whole chapter on compounding becomes irrelevant, however big or small the default may look. Only Section 454 applies. And here there is no split between two authorities based on the amount. The Registrar of Companies of that jurisdiction decides the matter whatever the penalty may be, and the only step above him is an appeal to the RD.
Full Comparison: Compounding (Section 441) and Adjudication (Section 454)
| Point of Difference | Compounding, Section 441 | Adjudication, Section 454 |
|---|---|---|
| What kind of wrong | A criminal offence. The section says fine, or gives a choice between imprisonment and fine | A civil default. The section itself uses the word penalty |
| Law that applies | Section 441, with the NCLT Rules, 2016 and the Companies (Registration Offices and Fees) Rules, 2014 | Section 454, with the Companies (Adjudication of Penalties) Rules, 2014 |
| Who decides | NCLT, or the Regional Director or an officer authorised by the Central Government | Registrar of Companies of that jurisdiction, working as Adjudicating Officer |
| How the authority is chosen | RD where maximum fine is up to ₹25 lakh. NCLT where it is above ₹25 lakh. The NCLT has no upper limit | No such split. The Registrar decides whatever the amount of penalty may be |
| Who starts the process | The company or officer, by filing an application. This may be done on its own, or after a notice from the Registrar | Normally the Adjudicating Officer, once the default comes to his notice. A company may also approach him on its own and report its default |
| Form used to begin | Form GNL-1, along with a Board resolution, an affidavit, and a Power of Attorney or Memorandum of Appearance | There is no separate form to start it voluntarily. It usually begins with a show cause notice from the Adjudicating Officer |
| Hearing | Yes, before the RD or the NCLT | Yes. It is compulsory under Section 454(4) |
| How the amount is fixed | The RD or the NCLT decides, but cannot go above the maximum fine written in the section | Section 446A points are applied. Section 446B gives a lower amount to a small company, OPC, start-up or Producer Company |
| Order passed | Compounding order | Adjudication order, that is, a penalty order |
| Informing the Registrar | Form INC-28, within 7 days of receiving the order | Not needed separately. The Adjudicating Officer’s own order is the record |
| Appeal | Section 441 does not give any appeal | Yes. Appeal to the Regional Director in Form ADJ within 60 days |
| What happens after payment | Any case in court is withdrawn. No fresh case can be filed for the same default | The default is treated as settled. The officer may also direct the company to correct it |
| If the order is not followed | The officer can face imprisonment up to 6 months, or fine, or both, under Section 441(5). Please check the current figure | Further consequences follow under Section 454(8) if 90 days pass. Please check the current figures |
| Where imprisonment is involved | Not available. Section 441(6) keeps out imprisonment only and imprisonment with fine cases | Question does not arise. A penalty section never carries imprisonment |
Exemptions and Relaxations
The MCA exemption notifications dated 5 June 2015, and 13 June 2017 give relief to private companies, Section 8 companies and some other classes. That relief is about substantive duties, such as approvals for related party transactions under Section 188 or loans to directors under Section 185. Those notifications do not touch the enforcement machinery. Sections 441 and 454 apply to every company in the same way. A private company does not get a different compounding or adjudication procedure.
There is one real relief, and it works only on the adjudication side. Section 446B says that for a One Person Company, a small company, a start-up company or a Producer Company, the penalty shall not be more than half of the amount given in the section. Even then, it cannot go beyond ₹2 lakh for the company and ₹1 lakh for an officer in default. Compounding has no such half rate. The RD and the NCLT already have full freedom to fix any amount up to the maximum fine, so relief there depends on how they use that freedom at the hearing.
Judicial View
In Magnon Solutions Pvt. Ltd. & Ors. v. Registrar of Companies, Company Appeal (AT) No. 116 of 2018, decided on 27 September 2018, the National Company Law Appellate Tribunal held that the ₹25 lakh limit in Section 441(1)(b) applies only to the Regional Director and to officers authorised by the Central Government. It does not limit the NCLT. The NCLT can compound any compoundable offence, whatever the amount of fine may be.
So, if the maximum fine in a section crosses ₹25 lakh, the application does not fail. It only has to be filed before the NCLT instead of the RD. There is no amount above which a fine based default stops being compoundable. That happens only in the two situations covered by Section 441(6), that is, imprisonment only and imprisonment with fine.
Practical Steps
The first step is always the same. Open the bare section that punishes the default and read the exact word used. Do not rely on a summary, a checklist, or memory. Once that word is known, the two routes move in different directions.
| Step | Compounding (section says fine) | Adjudication (section says penalty) |
|---|---|---|
| 1 | Check that no investigation is going on against the company, and that a similar default was not compounded in the last three years | Check whether a show cause notice has already come from the Adjudicating Officer, or whether the company is reporting the default on its own |
| 2 | Hold a Board Meeting to approve the application and to appoint a professional | Prepare a proper reply to the show cause notice along with supporting papers |
| 3 | File Form GNL-1 with the Registrar, along with the application, affidavit and Board resolution or Power of Attorney | Attend the hearing before the Adjudicating Officer under Section 454(4) |
| 4 | The Registrar sends the application with his report to the RD if the fine is up to ₹25 lakh, or to the NCLT if it is above that | The Adjudicating Officer passes a reasoned order fixing the penalty, applying Section 446A and, where the company qualifies, the half rate under Section 446B |
| 5 | Attend the hearing before the RD or the NCLT and pay the compounding amount within the time given | Pay the penalty within 90 days, or file an appeal before the RD in Form ADJ within 60 days of receiving the order |
| 6 | File Form INC-28 with the Registrar within 7 days of receiving the compounding order | If an appeal is filed, the RD hears both sides and may confirm, change or cancel the order under Section 454(7) |
Two figures in the above table need care. Section 441(5) tells us what happens if an officer does not follow a compounding order. Section 454(8) tells us what happens if a company or officer does not follow an adjudication order within 90 days. Both were changed during the decriminalisation exercise. The amount should be read from the current Act on the day the opinion is given and should never be written from memory.
Examples
| Situation | Section and Word Used | Correct Route |
|---|---|---|
| A private company did not hold its Annual General Meeting even after a direction from the Tribunal | Section 99 says “fine which may extend to ₹1 lakh” and a further fine of ₹5,000 for each day the default continues | Fine only. Compounding before the RD if within ₹25 lakh, otherwise before the NCLT |
| A company filed its annual return 95 days after the due date | Section 92(5) says the company and the officer “shall be liable to a penalty” | Penalty. Adjudication before the Registrar of Companies |
| A director approved a related party contract without Board approval, after 21 December 2020 | Section 188(5) says the director is “liable to a penalty” of ₹5 lakh, or ₹25 lakh if the company is listed | Penalty. Adjudication before the Registrar. This section earlier carried imprisonment and fine, and was changed to a penalty by the Companies (Amendment) Act, 2020 |
| A company is alleged to have committed fraud in its affairs | Section 447 says “imprisonment…and shall also be liable to fine” | Imprisonment and fine together. Not compoundable at all under Section 441(6). Only prosecution |
The annual-return example reflects the statutory penalty approach under Section 92(5). The related-party transaction example concerns Section 188, which governs related party transactions.
Conclusion
The simple test works, and it works because the Act is built that way. Section 441 exists to compound an offence, and an offence needs a fine or imprisonment. Section 454 exists to adjudicate a penalty, which never carries imprisonment and was never meant to be a crime.
One point must be added to the test. The word “fine” by itself is not the end of the enquiry. If the section gives the court a choice between imprisonment and fine, the offence can still be compounded. But if the section says imprisonment only, or says imprisonment along with fine, it cannot be compounded at all, no matter how the fine part reads.
The safest habit, and the one this firm follows, is never to decide the route from memory or from an old checklist. Open the current text of that section every time. The wording and even the sub-section numbers have changed a great deal through the amendments of 2017, 2019 and 2020, and they may change again.
Frequently Asked Questions
Q. Can a company itself apply for adjudication, the way it files Form GNL-1 for compounding?
There is no matching form for adjudication. The process normally starts when the Adjudicating Officer issues a show cause notice. Even so, a company can write to the Registrar on its own, report the default and ask for it to be settled. The exact working of the MCA adjudication platform should be checked before promising a client any timeline.
Q. Is there any ₹25 lakh type of limit in adjudication as well?
No. Section 454 does not divide the work between two authorities on the basis of amount. The Registrar of Companies decides the matter whatever the penalty may be. The only step above him is an appeal to the Regional Director.
Q. Can an adjudication order be compounded instead of being paid?
No. A penalty is not an offence, so Section 441 simply does not reach it. There is nothing to compound. The only ways to bring the amount down are the Section 446B half rate, where the company qualifies, and the Adjudicating Officer’s own judgment under Section 446A while fixing the figure.
Q. What happens if Form GNL-1 is filed by mistake for a default that is actually a penalty?
The application will not be maintainable, because Section 441 covers only offences that carry a fine or imprisonment. It does not cover civil penalty sections. Apart from the time lost, the company may also lose the benefit of Section 446B by delaying the correct filing.
Q. Is there any appeal against a compounding order?
No. Section 441 does not provide an appeal against a compounding order passed by the RD or the NCLT. This is a known difference between the two routes. Any remedy has to be looked for outside Section 441, in the ordinary appeal or writ jurisdiction available against orders of that authority.
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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected]).
