CA Kamal Garg

CA, CS and CMA Guide to Compounding of certain offences under the Companies Act, 2013[1]

Powers of compounding an offence are with:

  1. NCLT/Regional Director/person authorised by Central Government under section 441(1) of the Companies Act, 2013;and
  2. Special Court under section 441(6)(a) of the Companies Act, 2013.

NCLT/Regional Director can compound offences which are punishable with fine only. Offence can be compounded by Regional Director or person authorised by Central Government if maximum amount of fine that can be imposed does not exceed Rs. 5,00,000/=.

What is compounding: ‘Compounding’ is essentially a compromise arrangement between administrator of the enactment and person committing an offence. Compounding crime consists of receipt of some consideration (termed as compounding fees) in return for an agreement not to prosecute one who has committed an offence [Reliance Industries, In re – (1997) 24 CLA 214 (CLB)].

‘Compounding’ means that the accused and the complainant have come to terms and the dispute between the parties has been settled amicably or adjusted by agreement and the complainant agrees not to prosecute the accused. The accused and the complainant then make a joint application to the Court that the parties have come to terms and the case may not be proceeded with. Such compounding can be done either before or after institution of prosecution. After payment of such composition amount, prosecution will not be launched, or if it was launched, it will be withdrawn.

Compounding means acquittal: As per section 320 of Cr PC, composition will have the effect of acquittal of accused. It is not mere discharge. Thus, if offence is compounded, the person is deemed to be acquitted, and hence does not become ineligible to be appointed as a director. [This view was also confirmed in department circular No. 5/23 dated 28-4-1993]. In Maharashtra Power Development Corpn Ltd. v. Dabhol Power Company (2004) 52 SCL 224 (Bom HC DB), it was held that if offence is compounded, it is as if no offence had ever been committed in the first place.

No penalty or prosecution after compounding: In P P Varkey v. STO (1999) 114 STC 251 (Ker HC), it was held that once offence is compounded, penalty or prosecution proceedings cannot be taken for same offence.

No appeal against order of composition: A person having agreed to the composition of offence is not entitled to challenge the said proceedings by filing appeal. – S V Bagi v. State of Karnataka (1992) 87 STC 138 = ILR 1992 Kar 1123 (Karn HC FB); Sakharia Bandhu v. ADCCT (1999) 112 STC 449 (Karn HC DB).

Offence can be compounded when there is no fraud – In Re Reliance Industries Ltd. (1997) 24 CLA 234 (CLB), the company issued duplicate shares when, in fact, original shares were in its possession. The offence was compounded as it was not with intention to defraud.

Full and bona fide disclosure required for compounding of offence: In UOI v. Anil Chanana (2008) 4 SCC 175, it was held that compounding of offences is based on the principle of disclosure. If there are demonstrable contradictions or inconsistencies or incompleteness, application for compounding cannot be entertained. Applicant cannot hoodwink the authority. Applicant has to be a one-time evader. He has to make a clean breast of his affairs. Otherwise, offence should not be compounded.

Compounding of offence of director even if company under liquidation – It has been clarified that even if the company is under liquidation, composition of offences committed by a director is permissible under section 441 of the Companies Act, 2013. However, compounding of offences against the company is not permissible in view of provisions of section 446 of Companies Act, 1956 – DCA letter No. 6/2002 dated 6-3-2002.

No show cause notice necessary before launching prosecution – Compounding is only an enabling provision. Even if an offence is compoundable, it is not necessary to issue show cause notice to the offender or give him an opportunity to compound offence, before launching prosecution as upheld in UOI v. Banwari Lal Agarwal AIR 1999 SC 196 = 1998 AIR SCW 3558.

Offence compoundable under Companies Act

If offence is committed by company or its officer and is punishable only with fine, offence can be compounded by NCLT, and if fine imposable exceeds Rs. 5 lakhs and by Regional Director/person authorised by Central Government if fine imposable does not exceed Rs. five lakhs [section 441(1) of the Companies Act, 2013]. If offence is punishable with imprisonment or fine or both, compounding can be done with permission of Special Court. However, if offence is punishable with imprisonment only or imprisonment and also fine, the offence cannot be compounded – section 441(6) of the Companies Act, 2013.

Compounding will be done by Regional Director/NCLT by fixing sum to be paid as compounding fee. Such amount cannot exceed maximum amount of fine which may be imposed on the offence compounded [first proviso to section 441(1) of the Companies Act, 2013]. While fixing amount payable for compounding, additional fee paid under section 403(2) of the Companies Act, 2013 [second proviso to section 441(1) of the Companies Act, 2013].

Compounding under section 441 of the Companies Act, 2013 can be done before or after institution of prosecution. Prior permission of Court is not necessary for compounding of offence – VLS Finance Ltd. v. UOI (2013) 6 SCC 278. However, if investigation under the Companies Act has been initiated against the company or is pending – third proviso to section 441(1) of the Companies Act, 2013

Once an offence is compounded, similar offence committed within three years from the date on which a similar offence was committed cannot be compounded [section 441(2) of the Companies Act, 2013].

The expression ‘similar offence’ used in section 441(2) need not be the same offence: The expression of ‘similar offence’ used in section 441(2) need not be the same offence. It can be an identical offence. It need not necessarily be an offence falling under the same section. The expression ‘similar offence’ has not been defined in the Criminal Procedure Code. The Code uses the expression ‘offences of the same kind’. Section 219(2) of the Code provides that offences are of the same kind when they are punishable with the same amount of punishment under the same section of Indian Penal Code or of any special or local law. Therefore, the expression ‘similar offence’ and ‘offence of the same kind’ are two different expressions.

If a person has already compounded an offence, he is not eligible to apply for compounding a similar offence for a period of 3 years from the date of compounding the first offence. The 3 years period is to be reckoned from the date of compounding and not from the date on which the offence was committed. However, the Explanation to section 441(2) states that any second or subsequent offence committed after the expiry of a period of 3 years from the date on which the offence was previously compounded shall be deemed to be a first offence.

No hearing necessary to reject application for compounding:  In M P Purusothaman v. ADIT (2003) 126 Taxman 539 (Mad HC), it was held that authority can reject the application for compounding. It is not necessary to give personal hearing before rejecting application for compounding [There could be two views in the matter, as rejecting application for compounding is a quasi-judicial order].

Return etc. to be filed if compounding was for offence of not filing return, account or document – Some times, the offence is in respect of non-filing of any return, account or document. In such case, while compounding offence, Central Government may direct any officer or employee of company to file the return or document with fee and additional fee under section 403 of the Companies Act, 2013 [section 443(4) of the Companies Act, 2013].

Any officer or other employee of the company who fails to comply with any order made by NCLT or Regional Director under section 441(4) shall be punishable with imprisonment for a term which may extend to six months or with fine not exceeding Rs. 1,00,000 or with both [section 441(5) of the Companies Act, 2013]. Notably, this offence is also compoundable.

Special Court can compound offence if offence punishable with imprisonment or fine or both – Any offence which is punishable under Companies Act with imprisonment or with fine, or with both, shall be compoundable with the permission of the Special Court, in accordance with the procedure laid down in Code of Criminal Procedure for compounding of offences.

Non-compoundable offences: Any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable [section 441(6) of the Companies Act, 2013].

Procedure for compounding

Every application for the compounding of an offence shall be made to the Registrar who shall forward the same, together with his comments thereon with his comments to NCLT/Regional Director as applicable [section 441(3)(a) of the Companies Act, 2013]. Application for compounding shall be submitted electronically in prescribed e-form. This form will be forwarded by ROC to NCLT/Regional Director as applicable.

SEBI officers have been authorised to file a complaint in respect of certain offences. In such cases, application should be made to ROC through SEBI. He will then forward it to NCLT or Regional Director as applicable.

Normally, NCLT/Regional Director will give personal hearing and then pass a speaking order giving reasons. The hearing can be attended by director/secretary/officer of the company or by authorised representative like Advocate or practicing CA/CMA/CS.

Where any offence is compounded under this section, whether before or after the institution of any prosecution, an intimation thereof shall be given by the company to the Registrar within seven days from the date on which the offence is so compounded – section 441(3)(b) of the Companies Act, 2013.

After the order, the compounding fee should be paid in appropriate account by way of challan and receipted challan should be produced to compounding authority.

Where any offence is compounded before the institution of any prosecution, no prosecution shall be instituted in relation to such offence, either by the Registrar or by any shareholder of the company or by any person authorised by the Central Government against the offender in relation to whom the offence is so compounded [section 441(3)(c) of the Companies Act, 2013].

Where the composition of any offence is made after the institution of any prosecution, such composition shall be brought by the Registrar in writing, to the notice of the Special Court in which the prosecution is pending and on such notice of the composition of the offence being given, the company or its officer in relation to whom the offence is so compounded shall be discharged [section 441(3)(d) of the Companies Act, 2013].

Recent compounding orders issued by NCLT:

1. Delay in approving inter-corporate loan: Compounding of unintentional delay in approving inter-corporate loan by directors [Narayana Hrudayalaya (P.) Ltd., In re, A. NO. 60/621A/CB/2016];

2. Delay in appointing woman director: Compounding of delay in appointing woman director [Jalpower Corporation Ltd. Registrar of Companies, C.A. NO. 13/621A (HYD.) OF 2016]

3. Providing collateral security without obtaining approval of Central Government under erstwhile section 295 of the Companies Act, 1956: Where applicant company gave collateral security without obtaining approval of Central Government but accepted said violation and had come forward voluntarily to Tribunal by seeking permission to compound violation by paying fine as prescribed under Act, applicants were permitted to compound violations in question [P.R. Agrochem Ltd., In re, C.A. NO. 17/HYD/2016]

4. Delay in holding AGM: Compounding for non holding of Annual General Meeting on time due to server crash at registered office in India which was linked to main server in US [Control 4 India (P.) Ltd.,In re, P. NO. 288 OF 2016]

5. Non-compliance of Schedule III and AS: Compounding of various violations under section 129 read with 133 of the Companies Act which were on account of the following:

  • The company failed to disclose the nature of bank accounts in the Balance Sheet as on 31.03.20XX.
  • The Company failed to bifurcate the amount of Sundry Debtors in the Balance Sheet of 31.03.20WW and 31.09.20XX.
  • The company failed to disclose all related party transactions for the Financial Years 31.03.20VV to 31.03.20XX. [Claro Consultancy Pvt. Ltd., In re, c. P. NO. 16/18/2015 (adapted)]

[1] Sources: NCLT Website, Taxmann Website, MCA Website, IndianKanoon Website

(Author can be reached at cakamalgarg@gmail.com)

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One response to “Guide to Compounding of certain offences under Companies Act, 2013”

  1. ifla says:

    Pursuant to rule 14(2)(c) of the Companies (Prospectus and Allotment of Securities) rules,2014 value of the offer per person should not be less than Rs. 20,000 Face Value (FV). What if the value of the Offer made to a few individuals is less than Rs 20,000 of the ‘face value’ of securities? As per provision of Section 441 (1) of the Act, 2013,it can be compounded by NCLT/ Regional Director/ Person authorized by Central Government, but how can you make the default good? Can you modify F.V or allott more shares?

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