Introduction
Companies have a moral responsibility towards the society in the pursuit of their growth and development. A responsible behavior by a company is demonstrated by the extent of its disclosures and transparency in business and by adherence to the laws applicable to it. These aspects of governance bring about confidence in the minds of the investors in particular and the society at large. Proper, timely and accurate disclosures play a large role in establishing a company as a good corporate citizen.
In context of the companies incorporated in India, the Companies Act, 2013 (the Act) is the base regulation with which a company is supposed to be managed. The Act which got assent from the President of India in August, 2013, provides for the mechanism for dealing with companies who have violated the provisions of the Act in the course of their business activities. Chapters XXVIII and XXIX of the Act provide for the manner in which a company would be adjudicated for non-compliances of the provisions of the Act.
In this Article we try to analyze different aspects by which a company may be held liable for non-compliances under the Act.
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Offences under the Companies Act, 2013
The terms ‘Offences’ is not defined under the Act. However, a general interpretation of the term can be derived by analyzing the following definitions.
The Macmillan Dictionary defines the term Offence as,
“a crime or illegal activity for which there is a punishment”.
As per Section 2(n) of the Code of Criminal Procedure, 1973 (CrPC), an Offence is defined as,
““offence” means any act or omission made punishable by any law for the time being in force and includes any act in respect of which a complaint may be made under section 20 of the Cattle trespass Act, 1871 (1 of 1871);”
A plain reading of these definitions gives a view that an offence is an act committed by not adhering to the provisions of the law under the purview of which the said action was done or was about to be done. Therefore, any act done by an officer of a Company which is not in sync with the requirements of the Act would constitute an Offence. An Offence in a company may be done either by connivance i.e. when the officers of the Company are aware of an unlawful act being committed or by inadvertence i.e. when it was done accidently or unknowingly.
Section 439 of the Act prescribes that all the offences under the Act shall be non-cognizable except for the offences prescribed under section 212(6) i.e. those involving fraud. A non-cognizable offence as per section 2(l) of the CrPC means an offence for which, a police officer has no authority to arrest without a warrant. The Act also provides that the Central Government may, if required, establish Special Courts for the purpose of providing speedy trail of offences under the Act.
On establishment of the fact that an offence has been committed by the Company or its officers, penalty or fine may be inflicted on any or both of them as prescribed under the Act. Many people use the terms ‘penalty’ and ‘fine’ interchangeably thereby giving an impression of both having the same meaning. The Act while prescribing punishment for non-compliance uses the phrase ‘penalty’ at some places and the phrase ‘fine’ at some. Certainly, both would not be having the same meaning, else the whole idea of using both the terms would become infructuous. Therefore, in order to understand the intention behind the law to use these different terminologies, it is first important to understand the difference between the two.
Difference between fine and penalty
| Fine | Penalty |
| As per the Cambridge Dictionary, ‘fine’ means,
“an amount of money that has to be paid as a punishment for not obeying a rule or law” |
As per the Cambridge Dictionary, ‘penalty’ means,
“a punishment, or the usual punishment, for doing something that is against a law” |
| Although, both have almost the same meaning, there is a difference between the two in practical application. Fine can be imposed only by a court of law (i.e. NCLT, High Court) and penalty can be imposed by adjudication i.e. an authority (like ROC, RD) can directly impose a penalty on a non-compliant company. | |
Compounding of an offence
The term ‘compounding’ has not been defined in the Act. However, the Merriam-Webster dictionary defines the term as:
“to settle amicably : adjust by agreement
or
to agree for a consideration not to prosecute (an offense)”
Generally speaking, compounding refers to the process of settling a particular non-compliance under the Act by payment of such sum as prescribed by the concerned authority. Section 441 of the Act deals with compounding of offences. Some offences under the Act are compoundable while some are not. The same is explained in the diagram below:
An offence may be compounded by the Tribunal (i.e. NCLT) or by the Regional Director or any officer authorized by the Central Government.
Offence which cannot be compounded
The following offences cannot be compounded:
- Any offence for which an investigation has been initiated against the company or is pending
- Any offence committed by the company or its officers within a period of three years from the date on which a similar offence was compounded.
- However, any second or subsequent offence committed after the expiry of a period of three years from the date on which the offence was previously compounded, shall be deemed to be a first offence;
Conclusion
Although it is expected that a corporate entity shall act as per the law prescribed, there are still some entities who act contra legem. The provisions of the Act are clear as regards the consequences of non-compliance. It is on the company and its officers to ensure that it functions in a fair, transparent, and compliant manner.
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