Compounding of Offence Under Company Law

This article provides the Detailed procedure to be followed for compounding the offences under the Companies Act, 2013.

IMPORTANT NOTES: –

♦ Compounding can be done either before (or) after the institution of any prosecution.

♦ The compounding authority has no power to impose fine which exceeds the maximum amount of fine which may be imposed for offence so compounded.

♦ In specifying the sum required to be paid or credited for the compounding of an offence, the sum, if any, paid by way of additional fee under sub-section (2) of section 403 shall be taken into account.

Compounding of Offence Under Companies Act 2013

COMPOUNDING BEFORE OR AFTER INSTITUTION OF PROSECUTION

BEFORE INSTITUTION OF PROSECUTION	AFTER INSTITUTION OF 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 authorized by the Central Government against the offender in relation to whom the offence is so compounded	Compounding shall be brought by the Registrar in writing, to the notice of the court in which the prosecution is pending and on such notice of the compounding of the offence being given, the company or its officer in relation to whom the offence is so compounded shall be discharged.
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.

IMPORTANT NOTE:

PENALTY FOR NON-COMPLIANCE WITH ORDER OF COMPOUNDING AUTHORITY: Any officer or other employee of the company who fails to comply with any order made by the compounding authority the maximum amount of fine for the offence proposed to be compounded under this section shall be twice the amount provided in the corresponding section in which punishment for such offence is provided.

Compounding of Offence Under Company Law

PROCEDURE FOR COMPOUNDING OF OFFENCE (SECTION 441)

STEP-1 CONVENE A BOARD MEETING TO DECIDE ON COMPOUNDING UNDER COMP ACT’ 2013.

STEP-2 CALCULATE AMOUNT OF OFFENCE

Board will calculate the amount of the penalty as per the relevant section.

STEP-3 HOLDING OF BOARD MEETING

Pass a resolution to file application with authority for compounding of offence.
Authorize director of the Company and for preparation and signing of documents including application. Company will authorize any professional for follow up the matter with authority.

STEP-4 FILING APPLICATION FOR COMPOUNDING OF OFFENCE WITH ROC IN E-FORM GNL-1 with fees of Rs. 1000 (As per NCLT rules, 2016.)

Detailed compounding application is required in Triplicate;
Board resolution passed for the purpose of making an application;
Affidavit verifying the application/petition;
Memorandum of appearance or power of attorney;
Copy of notice received from ROC or any other competent authority in case application for compounding of offence is filed in pursuance to notice received from ROC or any other authority;
Other documents based on requirements.
Form GNL-1 can be used for compounding of maximum 8 persons excluding the company. If number of persons is greater than 8, then additional details can be provided in optional attachment. Further, the following attachments are also required to submit with e-Form GNL-1.
Also deliver sufficient number of hard copies of the compounding application to ROC for him to forward it to RD/Tribunal based on the quantum of fee involved.
The application can be filed for Company, Director or Manager/Secretary or CEO/CFO or other officers of the Company (even jointly).

STEP-5 ROC will forward the application to the concerned Compounding Authority with his comments thereon.

STEP-6 There will be a personal hearing before the Regional Director or Tribunal which will decide the amount to be paid for compounding.

STEP-7 Get the order passed by the RD/Tribunal and pay the amount stipulated within the time fixed.

STEP-8 File Order of RD/NCLT with ROC in form INC-28 within 7 days from receipt of order. ROC will take note of the same.

‘COMPOUNDING APPLICATION’ SHALL INCLUDE-

General Profile and History of the company containing details such as name, date of incorporation, main objects of the company;
The fact of the case mentioning nature of offence and period of default.
Particular section which has been violated and section under which default is punishable along with the details of applicable penalty.
The details as to how the default has been made good indicating the date on which the default has been made good, wherever applicable;
Prayer to compounding authority for compounding of offences.

FAQS ON COMPOUNDING

No penalty or prosecution after compounding: –

In P P Varkey v. STO (1999) 114 STC 224 (Bom HC DB), it was held that once an offence is compounded, penalty or prosecution proceeding cannot be taken for same offence.

In S Viswanathan v. State of Kerala (1993) 113 STC 182 (Ker HC DB);

It was held that once the matter is compounded, neither department nor assesses can challenge the compounding order. Department cannot reopen the matter on the reason that actual suppression was much higher.

No appeal against order of composition: –

A person having agreed to the composition of offence is not entitled to challenge the said proceeding by filing an appeal. (S V Bagi v. State of Karnataka (1992) 87 STC 138).

Whether NCLT has powers to review its own decision?

In APC Credit Rating Private Limited Vs. Registrar of Companies, NCT of Delhi and Haryana, [2018] 143 CLA 166 (NCLAT) the NCLAT held that;

“it is clear that there is no inherent power to review, as is under Order 47 Rule 11 of the Code of Civil Procedure, 1980 but the Tribunal has power conferred by sub-section (2) of Section 420 of the Act, 2013 to rectify any mistake apparent from the record and to amend the order accordingly.”

Therefore, we can categorically say that NCLT has power to review its own orders unless the statue is amended to make way for such review. From the above decision of NCLAT it is clear that inherent powers under Rule 11 of the NCLT Rules can’t be said to be empowering NCLT with a power to review.

Discretionary power to reject the Application?

The Compounding application cannot be rejected without due consideration. The Company Law Board (now NCLT) in the case of Amadhi Investments Ltd., held that neither of the CLB or the Regional Director has been authorized with discretionary power to reject a compounding application without due consideration.

Permission of Special Court No More required:

As per sub-section (6)(a) of section 441 as stood before being amended by the Companies (Amendment) Ordinance 2018, permission of the Special Court was required for compounding of any offence which is punishable under this Act, with imprisonment or fine, or with both. Such offences can now be compounded without the permission of the special Court in view of the said amended effective from 2nd November, 2018.

Whether joint application by Company and officers in default are allowed?

Yes. Joint application for the same offence is permitted. Since facts leading to any non-compliance will be the same, separate application will only lead to multiplication of proceedings.

Who is authorized to file an application?

Any director of the company authorized by its board in this behalf is eligible to file compounding application on behalf of the company.

Whether making good the default before filing a compounding application is mandatory?

Ans. Yes. The compounding authority, while dealing with a proposal for the compounding of an offence for a default in compliance with any provision of this Act which requires a company or its officer to file or register with, or deliver or send to, the Registrar any return, account or other document, may direct, by an order, if it or he thinks fit to do so, any officer or other employee of the company to file or register with, or on payment of the fee, and the additional fee, required to be paid under section 403, such return, account or other document within such time as may be specified in the order.

In the matter of RSPL Limited, the petitioner company defaulted in filing of cost audit report for the year ended March 31, 2012 within the prescribed time limit. The petitioner company filed the concerned audit report on December 05, 2016 thereby making the default good. The Tribunal in the concerned matter quoted that “since the applicant company showed its bona fide effort to make good of the alleged violation by subsequent filing of its cost audit report though belatedly, the present application should be allowed.

Further, in the matter of General Produce Company Limited. (CLB)6, Company Law Board dismissed the applications for compounding the offences under Sections 159 (now section 137) and 220 (now section 92) of the Companies Act, 1956 (now the Companies Act, 2013) as the defaults arising out of a failure to file the balance sheet and annual return of the company with the Registrar of Companies had not yet been made good by the company.

“officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely: —

(i) whole-time director;

(ii) key managerial personnel;

(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

(iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

(v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

(vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer;

LIST OF OFFENCES COMPOUNDABLE IN NATURE (POWERS VESTED WITH REGIONAL DIRECTOR).

Section	Nature of offence	Fine/ Imprisonment
16(3)	Committing default in complying with the directions issued under sub-section (1) relating to rectification of name of company	Fine upto Rs.1,000 for each day of default on company. Fine not less than Rs.5,000 but may be extended to Rs.1 lakh (for officer in default).
26(9)	Contravention of provisions relating to issue of a prospectus	Fine from Rs.50,000 to Rs.3 lakh on company and every person who is knowingly a party to the issue of such prospectus shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than 50,000 rupees but which may extend to 3 lakh rupees, or with both.
48(5)	Committing default in complying with the provisions regarding to variation of shareholders’ rights	Every officer of company in default – Imprisonment upto six months or fine not less than Rs.25,000 but may be extended to Rs.5 lakh or with both (for officer in default).
56(6)	Failure to comply with the provision relating to transfer and transmission of securities under sub-section (1) to (5)	Fine not less than Rs.25,000 but may be extended to Rs.5 lakh on company and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than 10,000 rupees but which may extend to 1 lakh rupees.
59(5)	Committing default in complying with the order of Tribunal relating to rectification of register of members	Fine not less than Rs.1 lakh but may be extended to Rs.5 lakh on company and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than 1 lakh rupees but which may extend to 3 lakh rupees, or with both.
66(11)	Failure to publish the order of confirmation of the reduction of share capital by the Tribunal	Fine not less than Rs.5 lakh but may be extended to Rs.25 lakh on company.
67(5)

LIST OF OFFENCES COMPOUNDABLE IN NATURE (POWERS VESTED WITH THE TRIBUNAL)

Section	Nature of offence	Fine/ Imprisonment
8(11)	Committing default in complying with the requirements relating to formation of companies with charitable objects, etc.	If a company makes any default in complying with any of the requirements laid down in this section, the company shall, without prejudice to any other action under the provisions of this section, be punishable with fine which shall not be less than ten lakh rupees but which may extend to one crore rupees and the directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than twenty-five thousand rupees but which may extend to twenty-five lakh rupees, or with both:

LIST OF OFFENCES NON-COMPOUNDABLE IN NATURE

Section	Nature of offence	Imprisonment and Fine
57	Deceitfully personating as an owner of any shares or interest in a company	Imprisonment minimum of one year but may be extended to three years and with fine not less than Rs.1 lakh but may be extended to Rs. 5 lakh.
58(6)	Contravention of an order of the Tribunal regarding the refusal of registration and appeal against refusal.	Company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.
67(5)	Contravening provisions relating to purchase by company or loans by company for purchase of its own shares	Company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.
118(12)	Tampering with the minutes of the proceedings of meeting	Imprisonment upto two years and fine not less than Rs.25,000 but may be extended to Rs.1 lakh.
127	Failure to distribute dividend within thirty days	Imprisonment upto two years and fine not less than Rs.1,000 for each day of failure (for every director) and 18% interest liability on company
147(2)

DRAFT BOARD RESOLUTION

Specimen of resolution for authorising to make application for compounding of an offence:

RESOLVED THAT an application be made to the Registrar of Companies pursuant to section 441 of the Companies Act, 2013 for compounding the offence for which prosecution has been filed with the request to forward the same to the Compounding Authority for necessary action.

RESOLVED FURTHER THAT any director of the Company be and is hereby authorised to file/move/present before appropriate authority(ies) as may be deemed appropriate such petitions/ application including any application for compounding on behalf of the Company, in connection with the show cause notice issued by the Registrar of Companies for violation of provisions of the Companies Act, 2013 and any penal proceedings /complaint initiated or may be initiated against the Company and/or directors /officials of the Company, and further verify, sign, affirm, submit the said petitions/applications including affidavits and other statements forming part of such petitions/applications.

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