Thursday, 30 June 2016

Compounding of Offences under Companies Act, 2013

Compoundable offences:

Good Governance in today’s world is essentially defined by compliance to the   provisions of the relevant laws. Non-compliance results in penalties and punishment. This non-compliance is known as an Offence.

An offence is a violation of a penal law. Thus, any act of parliament which is deemed as an offence by any law is an offence. The term offence has been defined by Section 3(38) of General Clauses Act, as “any act or omission made punishable by any law for the time being in force.

An offence can be classified as Civil and Criminal and further classified as Compoundable and Non-Compoundable. Companies Act, 1956 as well as the Companies Act,2013 clearly define fine, imprisonment or both for non-compliance of the relevant provisions.

Ministry of Companies Affairs ("MCA") in its notification released on the 1st of June has enforced 29 sections of the Companies Act, 2013. The Notification has made effective some vital provisions and has  introduced / amended in the 2013 Act .An important section relating to Compounding  of Offences(Section 441) has also been notified while the relevant rules are awaited.

Section 441- The Compounding of offences is a short cut method to avoid litigation. It  is a settlement process by which the accused pays due charges in lieu of undergoing consequences of lengthy prosecution. Compounding of an offence is a settlement mechanism, by which, the offender is given an option to pay money in lieu of his prosecution, thereby avoiding a prolonged litigation (Re - Bradford Investments Plc. (No.2),  1991 BCLC 688).

This provision was introduced following the Sachar Committee report as it was it was felt that leniency is required in the administration of the provisions of the Act particularly penalty provisions because a large number of defaults are of technical nature and arise out of ignorance on account of bewildering complexity of the provisions.

However there are certain sections/ provisions under both the wherein no specific punishment is given for non-compliance- Section 450  provides for punishment   if no penalty or punishment has been provided

Companies Act (Year)
Maximum Fine Imposed
Concerned Authority
1956
Rs. 50,000
CLB>50,000<RD
2013
RS 5,00,000
NCLT>5,00,000<RD

Section 621A of the Companies Act,1956 had provisions regarding the Compounding of offences.
·         
   Applicability: Only those offences which are punishable with either Penalty or Penalty or imprisonment i.e. where it is at discretion of the court to impose penalty or imprisonment, are compoundable under section 621A.

· Jurisdiction: The power of Compounding of offence is conferred upon Company Law Board and Regional Director. Where the maximum amount of fine which may be imposed for the commission of the offence does not exceed ` 50,000/- that offence is compounded by the Regional Director. All other applications for compounding of offences shall be entertained and tried by the Company Law Board. The Regional Director acts under direction, control and supervision of the Company Law Board

·  Penalty: Penalty which may be imposed under the order of compounding by the CLB* or RD shall not exceed the maximum amount of fine which may be imposed for commission of that offence.

· Effects: Once the offence is compounded, no further prosecution shall be initiated either by registrar or shareholder or any other person in respect of that offence.

·          If the offence is committed for non-filing of any return or document with registrar, then that return or documents needs to be filed with the registrar along with fees and additional fees as may be imposed under the order and within such time frame as may be stipulated under the order.

·          If any prosecution is going in any court in respect of the offence, then on successful compounding of the same, the person against whom the prosecution is going on shall be discharged.

·         Failure of compliance with the order of Compounding is an offence punishable with imprisonment of six months or fine not exceeding ` 50,000/- or with both.

    Once the offence is compounded, the intimation of compounding needs to be given to the Registrar within period of seven days from the day on which the offence is so compounded.
·    
     Procedure for Compounding of Offence:  
  • Board resolution authorizing director for filing petition. 
  • Affidavits duly notarized 
  • Power of attorney / Memorandum of Appearance 
  • Sometimes Copies of 3 years attested financial statements. 
  • Copy of agreement (if any) 
  • E-form No. 61 is required to be filed with Registrar of Companies. 
  • The complete set for petition is to be prepared in triplicate 
  • One for filing with Registrar of Companies 
  • One for presenting in Company Law Board/Regional Director 
  • One as an acknowledgment. 
  • Once the form 61 is filed and physical set of petition is submitted with the ROC, he forwards the same with his comments for Compounding. 
  • After that application can be made to the CLB or RD as the case may be for compounding of offence. 
  • Once the order of Compounding is passed, the same needs to be filed with the registrar of companies in e-form 21.


* With effect from June 1, 2016 CLB has been dissolved and substituted by National Company Law Tribunal (NCLT). 



·  Applicability: As per provision of Section 441 (1) of the Act, 2013-Any offence punishable under this Act, whether committed by a company or any officer thereof, with fine only, may, either before or after the institution of any prosecution, be compounded.Further, as per provision of section 441(6) of the Act, 2013- any offence which is punishable under this act with imprisonment or fine, or offence punishable with imprisonment or fine or with both, shall be compoundable with the permission of the Special Court(Provision of Section 435 of the Act, 2013 lay down the law of establishing the special courts by the central government for speedy trial of offences which are punishable under this Act with imprisonment for 2 years or more) in accordance with the procedure laid down in the Act for compounding of offences.

  Jurisdiction: Power of Compounding of offence is with NCLT/ Regional Director/ Person authorized by Central Government. Amounts exceeding Rs 5,00,000 will be adjudicated upon by the NCLT and the amounts lesser than Rs 5,00,000 by the RD or the Central Government authorized person.

Penalty: Penalty imposed by the RD or the NCLT may not exceed the maximum amount of the fine which may be imposed for the offence so compounded.
·         Effects:  
  • o   Once the offence is compounded, no further prosecution shall be initiated either by registrar or shareholder or any other person in respect of that offence.
  • o   If the offence is committed for non filing of any return or document with registrar, then that return or documents needs to be filed with the registrar along with fees and additional fees as may be imposed under the order and within such time frame as may be stipulated under the order.
  • o   If any prosecution is going in any court in respect of the offence, then on successful compounding of the same, the person against whom the prosecution is going on shall be discharged.
  • o   Failure of compliance with the order of Compounding is an offence punishable with imprisonment of six months or fine not exceeding ` 100,000/- or with both.
  • o   Once the offence is compounded, the intimation of compounding needs to be given to the Registrar within the period as mentioned in the order of compounding (within 7 days has been prescribed under section 441(3)(b) of the Companies Act, 2013 from the date on which offence is so compounded)


Compoundable offences:
o   Offences punishable with fine;
o   Offence punishable with fine or  imprisonment (with the   permission of Special Court);
o   Offences punishable with find or Imprisonment or both (   with the permission of Special Court)

Offences not Compoundable:
o   Offences punishable with imprisonment;
o   Offences punishable with imprisonment and fine.
o   As per proviso of the Section 441(1) of the Act, 2013,    any offence covered under this sub-section by any or its  officer shall not be compounded if the investigation  against such company has been initiated or is pending  under this Act.  

Procedure of compounding of offence:


o   An application for compounding of offence has to be made before the office of the Registrar of Companies where the registered office of the company is situated. A Form GNL-1 has to be filed with ROC along with the following attachments:

o   Board resolution passed for making an application.
o    Detailed application giving the general profile and history of the company, facts of the case like nature of offence and period of default, details about making the default good, prayer for compounding etc.

o   Copy of notice received from ROC. (Not applicable in case compounding application is made suo moto.

o   The office of the Registrar of Companies shall, after going through the contents of the application shall calculate the maximum amount of penalty that can be imposed for violation of provision of the Act, forward the application to office of RD or CLB/Tribunal, as the case may.

o   Office of RD/ CLB/Tribunal shall fix the date and time of personal hearing for the company or officer of the company who is seeking compounding of offence.

o   After hearing the matter, RD/CLB/Tribunal shall pass an order compounding the offence.

Benefits of Compounding: 
  • Compounding means acquittal:-As per section 320 of Criminal Procedure Code, composition will have the effect of acquittal of accused. It is not mere by a discharge. Thus, if an offence is compounded, the person is deemed to be acquitted, and hence does become ineligible to be appointed as a director 
  • No penalty or prosecution after compounding (S.Vishwanath vs State of Kerela) 
  • No appeal against order of composition (S V Bagi v. State of Karnataka) 
  • Avoid harassment due to appearance before adjudicating officer or special court. 
  • Compounding application can be moved even before start of prosecution proceeding which can otherwise be public whereas the compounding can be under wrap. 
  • Fine paid in compounding can be claimed as expenses whereas penalties shall be added to your income on assessment by tax officials
Compounding to be used cautiously – repeated offence within 3 years may not be compoundable

The main objective of the provision of compounding is to avoid cumbersome and costly litigation on technical grounds the section allows all offences under the Companies Act, save those that attract mandatory imprisonment, to be compounded. Without any strictures laid down in the provision to gauge which of the offences were acts of inadvertence and which ones were not, the concept of compounding sometime runs the risk of being abused by the wrongdoers. But at the same it should not forget that the compounding provisions are not a license to commit the offence under the Act. 

It is specifically provided in the Act, that in case same offence is committed by the company or its officers within period of three years from the date on which a similar offence committed by it or him, offence shall not be committed. However, 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.

Sl. No.
Section No.
Provisions
Notified/Not Notified
Remarks
Concerned Authority
1.
8(11)
Formation of companies with charitable objects, etc.
Notified
Offence compoundable for both company and any officers
RD/NCLT
2.
16(3)
Rectification of name of company
Notified
Offence compoundable for both company and any officers
RD/NCLT
3.
26(9)
Matters to be stated in prospectus
Notified
Offence compoundable for both company and any officers
RD/NCLT
4.
40(5)
Securities to be dealt in with in stock exchanges
Notified
Offence compoundable for both company and any officers
RD/NCLT
5.
46(5)
Certificate of shares
Notified
Offence compoundable for both company and any officers
RD/NCLT
6.
48(5)
Variation of shareholders' rights
Not Notified
Offence compoundable for both company and any officers
RD
7.
53(3)
Prohibition on issue of shares at discount
Notified
Offence compoundable for both company and any officers
RD
8.
56(6)
Transfer and transmission of securities
Notified
Offence compoundable for both company and any officers
RD
9.
59(5)
Rectification of register of members
Notified
Offence compoundable for both company and any officers
RD
10.
64(2)
Notice to be given to Registrar for alteration of share capital
Notified
Offence compoundable for both company and any officers
RD
11.
66(11)
Reduction of share capital
Not notified
Offence compoundable for both company and any officers
RD/NCLT
12.
67(5)
Restrictions on purchase by company or giving of loans by it for purchase of its shares
Notified
Offence compoundable for company only
RD/NCLT
13.
68(11)
Power of company to purchase its own securities
Notified
Offence compoundable for both company and any officers
RD
14.
71(11)
Debentures
Notified
Offence compoundable for company
RD
15.
74(3)
Repayment of deposits, etc., accepted before commencement of this Act
Notified
Offence compoundable for both company and any officers
RD/NCLT
16.
76(A)
Punishment for contravention of section 73 or section 76
Notified
Offence compoundable for both company and any officers
RD/NCLT
17.
86
Punishment for contravention of provisions from section 77 to 87 under chapter VI
Notified
Offence compoundable for both company and any officers
RD/NCLT
18.
88(5)
Register of members etc.
Notified
Offence compoundable for both company and any officers
RD/NCLT
19.
89(5) and (7)
Declaration in respect of beneficiary interest in any share
Notified
Offence compoundable for company and any officers
RD/NCLT
20.
92(5)
Annual Return
Notified
Offence compoundable for company and any officers
RD
21.
99
Punishment for default in complying with provisions of sections 96 to 98
Notified
Offence compoundable for company and any officers
RD/NCLT
22.
102(5)
Statement to be annexed to notice
Notified
Offences compoundable for officers
RD/NCLT
23.
105(3)and (5)
Proxies
Notified
Offence compoundable for officers
RD
24.
117(2)
Resolutions and agreements to be filed~
Notified
Offence compoundable for company and any officers
♦ RD/NCLT- for Company
♦ RD- for officers
25.
121(3)
Report on Annual General Meeting
Notified
Offence compoundable for company and officers
RD
26.
124(7)
Unpaid Dividend Account
Not Notified
Offence compoundable for company and officers
♦ RD/NCLT- for Company
♦ RD - for officers
27.
128(6)
Books of accounts, etc., to be kept by company
Notified
Offence compoundable for officers
RD
28.
129(7)
Financial statement
Notified
Offence compoundable for officers
RD
29.
134(8)
Financial statement, Board's Report
Notified
Offence compoundable for company and officers
♦ RD/NCLT- for Company
♦ RD - for officers
30.
137(3)
Copy of financial statement to be filed with Registrar
Notified
Offence compoundable for company and officers
♦ RD/NCLT- for Company
♦ RD- for officers
31.
140(3)
Removal, resignation of auditor and giving of special notice
Notified
Offence compoundable for officers
RD
32.
143(15)
Powers and duties of auditors and auditing standards
Notified
Offence compoundable for officers
RD/NCLT
33.
147(1)
Punishment for contravention of provisions of section 139 to 146
Notified
Offence compoundable for company and officers
RD
34.
157(2)
Company to inform Director Identification Number
Notified
Offence compoundable for company and officers
RD
35.
159
Punishment for contravention of provisions of section 152,155 and 156
Notified
Offence compoundable for company and officers
RD/NCLT
36.
165(6)
Number of directorships
Notified
Offence compoundable for officers
RD/NCLT
37.
166(7)
Duties of directors
Notified
Offence compoundable for officers
RD
38.
167(2)
Vacation of officer or director
Notified
Offence compoundable for officers
RD
39.
172
Punishment for contravention of provisions from section 149 to 172
Notified
Offence compoundable for company and officers
RD
40.
178(8)
Nomination and Remuneration Committee and Stakeholders and Relationship Committee
Notified
Offence compoundable for company and officers
RD
41.
182(4)
Prohibitions and restrictions regarding political contribution
Notified
Offence compoundable for company
RD/NCLT
42.
184(4)
Disclosure of interest by director
Notified
Offence compoundable for company
RD
43.
185(2)
Loan to directors, etc.
Notified
Offence compoundable for company and officers
RD/NCLT
44.
186(13)
Loan and investment by company
Notified
Offence compoundable for company only
RD
45.
187(4)
Investments of company to be held in its own name
Notified
Offence compoundable for company and officers
♦ RD/NCLT- for Company
♦ RD- for officers
46.
188(5)
Related party transactions
Notified
Offence compoundable for company and officers
RD
47.
191(5)
Payment to director for loss of office ,etc., in connection with transfer of undertaking, property or shares
Notified
Offence compoundable for officers only
RD
48.
194(2)
Prohibition on forward dealings in securities of company by director or key managerial personnel
Notified
Offence compoundable for company and officers
RD
49.
195(2)
Prohibition on insider trading of securities
Notified
Offence compoundable for officers only
RD/NCLT
50.
197(15)
Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits
Notified
Offence compoundable for officers only
RD
51.
203(5)
Appointment of key managerial personnel
Notified
Offence compoundable for company and officers
♦ RD- for company
♦ RD/NCLT- for officers
52.
204(4)
Secretarial audit for bigger companies
Notified
Offence compoundable for company and officers
RD
53.
206(7)
Power to call for information, inspect books and conduct enquiries
Notified
Offence compoundable for company and officers
RD/NCLT
54.
221(2)
Freezing of assets of company on inquiry and investigation
Notified
Offence compoundable for company and officers
♦ RD/NCLT- for Company  
♦ RD- for officers
55.
222(2)
Imposition of restrictions upon securities
Notified
Offence compoundable for company and officers
♦ RD- for officers
♦ RD/NCLT- for Company
56.
232(8)
Merger and amalgamations of companies
Not Notified
Offence compoundable for company and officers
♦ RD/NCLT- for Company
♦ RD- for officers
57.
238(3)
Registration of offer of schemes involving transfer of shares
Not Notified
Offence compoundable for officers only
RD
58.
242(8)
Powers of tribunal
Notified
Offence compoundable for company and officers
♦ RD/NCLT- for Company
♦ RD- for officers
59.
243(2)
Consequence of termination or modification of certain agreements
Notified
Offence compoundable for officers only
RD
60.
245(7)
Class action
Notified
Offence compoundable for company only
RD/NCLT
61.
247(3)
Valuation by registered valuers
Not Notified
Offence compoundable for officers only if not willful
RD
62.
249(2)
Restrictions on making application under section 248 in certain situations
Not Notified
Offence compoundable for company only
RD
63.
274(4)
Directions for filing statement of affairs
Not Notified
Offence compoundable for officers only if not willful
RD
64.
284(2)
Promoters, directors, etc. to cooperate with company liquidator
Not Notified
Offence compoundable for officers only
RD
65.
302(4)
Dissolution of Company by Tribunal
Not Notified
Offence compoundable for officers only
RD/NCLT
66.
305(4)
Declaration of solvency in case of proposal to wind up voluntarily
Not Notified
Offence compoundable for officers only
RD
67.
306(5)
Meeting of creditors
Not Notified
Offence compoundable for company and officers
RD
68.
307(2)
Publication of resolution to wind up voluntarily
Not Notified
Offence compoundable for company and officers
RD/NCLT
69.
312(2)
Notice of appointment of Company Liquidator to be given to Registrar
Not Notified
Offence compoundable for company and officers
RD/NCLT
70.
314(5) and (8)
Powers and duties of Company Liquidator in voluntary winding up
Not Notified
Offence compoundable for officers
RD/NCLT
71.
316(2)
Company Liquidator to submit report on progress of winding up
Not Notified
Offence compoundable for officers
RD/NCLT
72.
318(8)
Final meeting and dissolution of company
Not Notified
Offence compoundable for officers
RD
73.
344(2)
Statement that company is in liquidation
Not Notified
Offence compoundable for company and officers
RD
74.
347(4)
Disposal of books and papers of company
Not Notified
Offence compoundable for officers
RD
75.
348(6) and (7)
Information as to pending liquidations
Not Notified
Offence compoundable for officers
♦ 348(6)-RD/NCLT
♦ 348(7)-RD
76.
356(2)
Powers of Tribunal to declare dissolution of company void
Not Notified
Offence compoundable for officers
RD/NCLT
77.
392
Punishment for contravention of provisions from section 379 to 393 except section 391
Notified
Offence compoundable for officers
♦ RD/NCLT- for Company
♦ RD- for officers
78.
405(4)
Power of Central Government to direct companies to furnish information or statistics
Notified
Offence compoundable for company and officers
RD
79.
450
Punishment where no specific penalty or punishment is provided
Notified
Offence compoundable for company and officers
RD/NCLT
80.
452(1)
Punishment for wrongful withholding of property
Notified
Offence compoundable for company and officers
RD
81.
453
Punishment for improper use of "Limited" or "Private Limited"
Notified
Offence compoundable for officers
RD/NCLT
82.
464(3)
Prohibition of association or partnership of persons exceeding certain number
Notified
Offence compoundable for officers
RD
83.
469(3)
Power of Central Government to make rules
Notified
Offence compoundable for officers
RD/NCLT



For more information on Compounding under the Companies Act, 2013 log onto: www.nclt.in 

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