On 14th August 2018, the Committee formed (in July, 2018) to make recommendations to the Government inter alia on re-categorisation of certain ‘acts’ punishable as compoundable offences to ‘acts’ carrying civil liabilities, improvements to be made in the in-house adjudication mechanism, etc. presented its report. The report was titled “Report of the committee to review offences under the Companies Act, 2013”.
The committee noted that a large number of cases concerning compoundable offences are pending in the trial courts, significant number out of which relate to non-filing of financial statements and annual returns. Several measures have been taken by the Ministry of corporate affairs to reduce the overall pendency of cases in courts such as introducing settlement schemes in 2000, 2010 and 2014 to provide a window to the defaulters to file their annual statements at a discounted fees with concomitant immunity from criminal proceedings. It has been recommended time and again that the cases where large public interest is not involved should be allowed to be withdrawn from the courts to pay more attention on disposal of cases relating to frauds, scams and embezzlement of funds.
The Ministry has taken significant steps to declog NCLT. One of the measures includes enlarging its’ jurisdiction to compound offences under section 441 by enhancing the pecuniary limits from INR 0.5 Mi. to INR 2.5 Mi.
It is also known as Composition of Offence in certain countries. 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. There is no definition of the word “compounding” in the Companies Act 2013, however, the legal meaning of compounding is “doing good the default/non-compliance”.
Therefore, the first and foremost step in compounding is to make the default good. The procedure for compounding has been enumerated step wise later in this blog.
Term “Offence” has been extracted from section 3(38) of General Clauses Act, 1897, which says that “Offence” shall mean any act or omission made punishable by any law for the time being in force. Corporate offences are classified into civil and criminal offences. An offence may be “Compoundable” or “Non-Compoundable”.
The Companies Act, 2013 provides for stricter enforcement of penalties in time bound manner by establishing necessary mechanism for enforcement of penalties such as establishment of special court, appointment of adjudicating officer, imposition of penalties depending on the gravity of an offence.
Thus, the need for compounding was felt for reducing the burden of punishment on the defaulter and also for speedy disposal of cases. There is a great need of leniency in the administration of the Act particularly in its penalty provisions not only because a large number of defaults are of technical nature but also because of procedural lapses.
The following are the advantages of Compounding:
No personal appearance for officer in default, as in case of prosecution for an offence in a criminal court;
No further prosecution shall be initiated either by registrar or shareholder or any other person in respect of that offence after compounding;
Summary proceeding, less time consuming;
The Compounding fee cannot be more than the maximum fine levied under the relevant provision;
No appeal against order of composition;
No disqualification for Directors, since fees payable on compounding are not treated as penalty.
The Indian Companies Act, 2013 permits compounding only to a first-time offender or a person who has not compounded the same Offence in the last three years. Further, Offences punishable by imprisonment, or fine and imprisonment are not compoundable under the Companies Act, 2013.
As per Section 441(1), the following two kind of offences are compoundable:
Section 441 starts with non-obstante clause “notwithstanding anything contained in the Code of Criminal Procedure, 1973”. A specific power or authority has been vested with NCLT or the Regional Director, as the case may be, under Section 441 of the Act to compound any offence punishable under this Act committed by a company or any officer thereof, not being an offence punishable with imprisonment only, or with imprisonment and also with fine. An elaborated procedure has been laid down for compounding such offences under Sub-sections (1) to (5) of Section 441 of the Act. It is nowhere indicated in any of the provisions as contained in Section 441, Sub-sections (1) to (5) that the NCLT or Regional Director while compounding the offences punishable under the Act is required or obliged to insist on obtaining prior permission of the criminal court where any such prosecution is pending.
Offences of serious nature are non-compoundable. Section 447 of the Companies Act, 2013 lays down the punishment for fraud and defined fraud in relation to the affairs of the company or a body corporate. An offence of fraud below a certain financial threshold not involving public interest are compoundable vide Companies Amendment Act, 2017. Broad principles are as follows:
The offence cannot be compounded in case either the investigation against company has been initiated or is pending.
The offence cannot be compounded in case similar offence committed has been compounded and period of three years has not expired.
Any offence which is punishable under this Act with imprisonment only or with imprisonment and also with the fine;
A significant pre-requisite for filing application for compounding is to know where the application should be filed. This is answered in the section 441 itself:
In case the quantum of fine in any offence is upto INR 2.5 million, the jurisdiction to compound that offence is with the concerned Regional Director (RD) or any officer authorised by the Central Government.
In case the quantum of fine exceeds INR 2.5 million, the jurisdiction to compound that offence is with the respective Bench of the National Company Law Tribunal (NCLT).
Note: In case the offence is punishable with imprisonment or fine or both, the prior permission of Special Court was required. But, as per section 90 of Companies Amendment Act, 2017 notified as on 02nd February 2019, the power to decide compounding case for offences punishable with imprisonment or fine or both has been given to NCLT and Regional Director. This amendment is a major step towards ease of doing business.
Where any offence is compounded, an intimation thereof shall be given by the company to the Registrar within seven days from the date on which the order is made available to the petitioner/applicant.
No prosecution shall be filed either by ROC or by any shareholder or by any person authorized by the Central Government.
Where the compounding of any offence is made after the institution of any prosecution, such 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.
Payment of fine, as decided in the order of Compounding, to be made within the time prescribed in the order.
Any officer or other employee of the company who fails to comply with any order made by the concerned authority under Section 441, shall be punishable with imprisonment for a term which may extend to six months, or with fine not exceeding one lakh rupees, or with both.
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.
The NCLT in the case of UW International Training and Education Centre for Health Private Limited held that the principle of imposing minimum fine on compounding matters is not mandatory, as compounding of an offence can be accepted by a Court even by admonishing the defaulter or issuing a warning.
Filing compounding application is the secondary step. The First step is to make the default good. The reason due to which default occurred should come to an end and thereafter the compounding application should be filed.
In GNL – 1, the application can be filed for Company, Director or Manager/Secretary or CEO/CFO or other officers of the Company. Details of only 8 persons can be entered in the e Form. If number of persons is greater than 8, then additional details can be provided in optional attachment.
Compounding application can be filed either before or after the institution of any prosecution.
My company has not filed Annual Filing (i.e. Aoc-4 and Mgt-7) since 2014 till date. Now the late fee is around 25 Lakhs on mca. However we are thinking to go for compunding. So the fine and penalty in companies act and late fee for filing on mca are two different things?. Kindly help.
Dear Reader,
Pursuant to Section 441 of the Companies Act, 2013 notwithstanding anything contained in the Code of Criminal Procedure, 1973 , any offence punishable under this Act (whether committed by a company or any officer thereof) not being an offence punishable with imprisonment only, or punishable with imprisonment and also with fine, may, either before or after the institution of any prosecution, be compounded
Yes, the penalty and the fine are two different things as fine is considered to be a criminal offence and hence compoundable, whereas penalty is considered to be a Civil default and therefore adjudicated by ROC.
Those sections which have stipulated “fines” will necessarily be outside the purview of section 454 i.e Adjudication of penalty since Section 454(3) clearly authorizes the adjudicating officer with a power to impose only penalty and it is implied that he has to take cognizance of the penalty stipulated under the section which has been violated. In whichever fines have been stipulated, the defaulting parties can take recourse to seeking compounding of the offence whether a show-cause notice is issued or not.
Dear Sir,
In a Pvt. Ltd. Company, there were two directors who had family disputes in court with regard to their personal issues. Due to this, no accounts were filed with ROC since 1984 till date. Both expired in 2015 and 2017 respectively. The Board is now formed with new Directors. Please advise what nature of application can be filed with NCLT for waiver of filing Annual Returns for all these years as new Board have no idea about the previous affairs ?? There was no activity over all these years, however the Company was shown as ‘Active’ … Thanks.
Dear Reader,
Your case requires extensive research on all the details and hence it is requested to connect with any Company Secretary for professional advice.
Whether it would be better for the director to resign of his own accord before a compounding application is made to the authorities or wait for the order of the authorities on the compounding and thereafter file the intimation for vacation of office?
Dear Sir,
The facts cited by you are not sufficient to answer your query. However, note that a compounding application under Section 441 of the Companies Act, 2013 (“the Act”), can be filed only after making the default good. Thus, if the subject matter of the compounding application relates to the irregularity in the appointment of Director, such Director should first resign, and thereafter the company may proceed with the filing of an Application.
Further, note that as per the provisions of the Act, the Directors of the Company are considered as Officers in default and thus shall remain liable for all the acts done by them during their tenure as Directors even after resignation.
What is the stamp duty payable for compounding of offence under section 186(3) of companies act? Company is registered with the Karnataka ROC
We could not understand your question with much clarity, however, please be apprised that the payment towards Compounding of offences under Section 441 is towards of penalty for the offence compounded and there is no stamp duty levied on such penalty. The affidavit supporting the compounding application is on a stamp paper of relevant value per the state laws.
Further, we would like to inform you that the penalty, if any levied by the ROC has to be paid via ‘Pay Miscellaneous Fees’ services available on the MCA or as per other direction as given by the ROC in the order itself.
Hi Sir,
Your article is very helpful.
If possible can you advise?
In my case RD passed order for deposit of penalty and which was quite big amount and company could not deposit that amount within due time and now RD is going to dismiss the compounding application.
My question is that can we file the compounding application for same offence with ROC again.
Please reply it will be really helpful for me.
Dear Sir,
Thank you for your appreciation!
Section 441(2) of the Companies Act, 2013, specifies that a Company cannot make a compounding application for a similar offence unless a period of three years has been lapsed since passing of the initial compounding order passed. Please note, not complying to the compounding order issued is a punishable offence under subsection 5 of Section 441.
HELLO,CAN ANYONE MAIL ME COPY OF PETITION FOR DELAY IN AGM.i need some help in drafting of petition.
Dear Ma’am,
This is not an appropriate platform to share drafts or formats. We are here to assist, for general queries only. If you need any professional assistance in any matter, please contact us.
Compounding application i.e. Form GNL-1has been approved by the Roc. However no order has been passed. What to do in that case??
In this case, the company shall wait for communication from the ROC. It will not impact the company if it has aready made the default good.
Further the company can write to the ROC for an update on the same.
for compounding of offence – gap of 15 months 2 days in AGM of 2016 and 2017, however AGMs were well with in 6 months from the end of financial year, how we have to go for compounding or paying penalty
Dear Sir, kindly share the complete facts of the case so that we can guide you accordingly. Also, you can seek our professional advice in this matter.
how to make payment of compounding penalty to ROC?
Compounding penalty can be paid in 2 ways:
1. Online Payment on the MCA Portal: Under “Pay Miscellaneous Fees” head, the payment can be made by selecting the kind of payment i.e. Penalty and entering the SRN, Particulars of Payment & Amount of fees, being the mandatory fields.
However, online payment method can be used only in those cases where SRN is available.
2. Another way is Physical Payment: The payment is to be made in the form of DD drawn in favor of ROC located in the same city or town as the office of the Registrar and to be submitted at the Payment counter of ROC.