Compounding of Offences is a settlement mechanism, by which, the offender is given an option to pay penalty in lieu of his prosecution, thereby avoiding a prolonged litigation. While there is no definition of the word ‘Compounding‘ provided either in Companies Act, 1956 or the Act 2013. However the legal meaning of compounding of offence is “to make the default/non-compliance good”. Therefore, the first and foremost step in compounding is to make the default good.
The National Company Law Tribunal (“NCLT”) / Regional Director (“RD”) /any officer authorised by Central Government, as the case may be has the power to compound offences punishable with fine only or offence punishable with “fine or imprisonment or both.
Further in following cases, compounding shall not be allowed:
1. Offence punishable with “imprisonment only”; or
2. Offence punishable with “imprisonment and fine”; or
3. Where investigation has been initiated or is pending against the company; or
4. Where similar offence has been compounded within last three years.
Jurisdiction:
- Where the maximum amount of fine which may be imposed for an offence does not exceed INR Twenty-Five Lakh, the Regional Director (“RD”) or any officer authorised by the Central Government has a power to compound such an offence;
- Where the maximum amount of fine which may be imposed for an offence exceeds INR Twenty-Five Lakh, the NCLT has a power to compound such an offence.
Persons eligible to make a compounding application:
1. A company (any director of the company authorized by its board in this behalf) and/or
2. Officers in default of the company who are liable for prosecution under the respective provisions for non-compliances.
Pursuant to section 2(60) of the Companies Act, 2013, a Whole-time Director (WTD) and Key Managerial Personnel (KMP) shall be the officers in default. Further, where there is no KMP, officers in default shall be those directors who are identified by the board in this respect and who also consent to act as such. If no such director has consented as such, all directors shall be officers in default.
Documents required:
1. Compounding Application under section 441 of the Companies Act, 2013;
2. Board resolution authorising directors for making compounding application;
3. Affidavit verifying the application;
4. Authorisation letter authorising any officer of the company / legal counsel / Company Secretary (“CS”)/ Chartered Accountant (“CA” ) / Cost and Management Accountant (“CMA”) to appear in connection with the matters relating to compounding of offence;
5. Power of attorney in favour of authorised representative to represent and furnish documents etc before RD / NCLT;
6. Memorandum of appearance from the authorised representative; and
7. Any other required document.
Procedure for Compounding of Offence under the Companies Act, 2013:
1. Conducting the Board Meeting to pass a resolution for Compounding of Offence.
2. Preparation of Compounding Application along with required annexures thereto.
3. Filing of compounding application in form GNL -1.
4. Submission of physical copy of the application with annexures with RD and Registrar of Companies (“ROC”).
5. Hearing before NCLT/RD and passing of the Order of Compounding.
6. The NCLT/RD after due consideration may reject the application giving the reasons for rejections.
7. The Company and / or the Director/s and / or Officer in default shall make the payment of penalty on MCA Online and
8. The Company shall file form INC 28 within 7 days from the receipt of the Order.
Penalty for non – compliance of order:
Any officer or other employee of the company who fails to comply with any order made by the NCLT or the RD or any officer authorised by the Central Government shall be punishable with imprisonment for a term which may extend to six months, or with fine not exceeding INR One Lakh, or with both.
List of offences compoundable under the Companies Act, 2013
1. Section 56 (6) – non-compliance relating to transfer and transmission of securities;
2. Section 64(2) – Failure to give Notice to registrar for alteration of share capital;
3. Section 99 – default in holding of Annual General Meeting;
4. Section 102(5) – Not enclosing the explanatory statement to notice;
5. Section 117(2) – failure in filing of resolutions and agreements with the Registrar of Companies;
6. Section 203(5) – Failure to appoint Key Managerial Personnel; etc.
Conclusion:
Compounding is a golden opportunity for any defaulting entity or person to come forward, admit the default and make the same good. The defaulting party gets discharged on payment of composition fee from that particular offence. Though, compounding is the most appreciated tool for settlement of less grave defaults, it is important for the corporates to ensure that no such defaults occur and needs to monitor compliance of law on real time basis.
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