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Compounding Of Offences under Companies Act, 2013: An Overview

calendar05 May, 2023
timeReading Time: 11 Minutes
Compounding Of Offences under Companies Act, 2013: An Overview

One of the most important provisions of the Companies Act of 2013 relates to the compounding of offences. This is because many violations of the Act are technical in nature and result from ignorance due to the confusing complexity of the Act’s provisions. Therefore, it is essential that the Act’s provisions, especially its penalty provisions, be applied leniently and that a settlement mechanism be offered for genuine, unintentional, and technical defaults. According to the Sachar Committee’s recommendations, Section 621A was added to the Companies Act of 1956 with the intention of introducing the rules pertaining to the compounding of crimes for the first time. Section 441 of the Act, which corresponds to Section 621A of the previous Act, contains provisions pertaining to the compounding of crimes.

The author’s goal in writing this article is to discuss the value of compounding of offences, how it is done, and the overall purpose of compounding. Depending on the threshold limitations of the fine, an application for compounding may be submitted to either the responsible NCLT or the Regional Director.

Meaning Of Compounding Of Offences

There is no legal definition of “compounding of offences” in India. Instead, the terms “compound” and “offence” have been defined individually and are covered below:

  1. According to Black’s Law Dictionary, the term “Compound” means:
    • To resolve (a dispute) with financial compensation in lieu of further obligation;
    • To consent in order to avoid prosecuting (a crime)
  2. Offence” is defined as a violation of Section 3 (38) of the General Clauses Act of 1897.
    • Any action or inaction that is criminal under a current law.
  3. Offence,” as defined by Section 2(n) of the Criminal Procedure Code, refers to:
    • Any act or omission that is now illegal, including any conduct for which a complaint may be filed under section 20 of the Cattle-trespass Act of 1871.

The compounding of offences is covered in Section 441 of the Companies Act of 2013 (the Act), which took effect on June 1, 2016. Section 441 states that any offence under the Act that is only punishable by a fine, whether it was committed by a company or one of its officers, may be resolved either before or after filing a complaint by the tribunal, the regional director, or another officer authorised by the Central Government, in cases where the maximum fine that can be imposed for the offence is not more than INR 5 lakhs. Additionally, any offence that is punishable by the Act with incarceration, a fine, or both may be amended with the Special Court’s approval, which was established in accordance with Section 435 of the Act.

Even the clauses of the Companies Act & Rules that mandate obligatory imprisonment are only implemented in a select few instances. Officers are typically charged with crimes under other statutes where the fines and/or jail sentences are substantially harsher. The criminal culpability under other laws and those of the Companies Act & Rules, however, are very different. However, the Companies Act & Rules have a broadly defined definition of an officer who is in default, thereby extending the definition to cover officers as well as people present at the time of the non-compliance or contravention. For example, criminal liability under the Criminal Procedure Code specifically states who will be an accused under a particular provision and there is limited scope for vicarious liability. This suggests that all officials present at the time of the act may be held accountable and may be subject to punishment [Davinder Kaur V. The State of West Bengal & Anr (CRR 1341 of 2015)].

It is uncommon to have general responsibility for all officials, even when vicarious liability implications are present in several other statutes like the Negotiable Instruments Act, 1881. For instance, the Calcutta High Court reiterated the stance taken in several other cases in the 2015 case of Davinder Kaur v. The State of West Bengal and Ors., holding that any person in charge of the company’s affairs during the period of non-compliance or contravention shall also be prosecuted by the trial courts as one of the offenders.

The requirement for a wide definition of an officer in default stems principally from the fact that it is often necessary to identify those who are accountable since offences are frequently committed by a group of people operating on behalf of the firm. However, the Supreme Court of India clarified whether such broad liability on a group of people can be upheld in 2019 in the case of Shiv Kumar Jatia vs. State of NCT of Delhi [Criminal Appeal No. 1263 of 2019]. The Court ruled that in the absence of any particular laws addressing vicarious responsibility, a person who acts on behalf of a corporation can only be charged with a crime if there is adequate proof demonstrating both their active engagement and criminal intent. As a result, in order to hold an officer of a company accountable, it is essential that the officer be in charge of the company’s operations and that strong evidence be presented to prove both the actus reus (the action that constitutes the essential element of the crime) and the mens reus (the criminal intent that motivated the action).

While most crimes have an identifiable actus reus, determining the mens reus can be challenging. In order to establish the mens reus of the authorities in charge of the company’s activities, the Supreme Court of India recommended an acid test of the “doctrine of attribution” in 2011. According to the Doctrine of Attribution, the responsibility of the company’s “alter ego,” or the officials or group of persons participating in its business, is established by determining their criminal purpose and comprehending the rationale behind the action(s) that were taken. An increase in such situations would be a potential remedy given the complexity.

The Indian business sector has had several scams and frauds totaling thousands of crores, and as previously noted, given the challenging COVID-19 context, there may be an increase in such instances. Making sure that officers who are in charge of the company’s affairs and play a significant role in its management are required to purchase a specific amount of the company’s share capital would be one way to ensure that their interests are linked to and aligned with those of the company.

Jurisdiction

The Regional Director (“RD”) or any officer authorised by the Central Government has the authority to compound an offence where the maximum fine that may be imposed for the offence does not exceed INR 25 Lakh; the NCLT has the authority to compound an offence where the maximum fine that may be imposed for the offence exceeds INR 25 Lakh.

Offences Not Covered Under Compounding Of Offences

The clause additionally provides that the following circumstances will prevent from compounding of offences:

  • If an Act-related inquiry against the officer or firm in question is ongoing;
  • If an officer or corporation commits the crime within three years of the date that a related offence committed by that officer or company was compounded,
  • Whether the crimes are only punishable by imprisonment or by both imprisonment and a fine.

Consequently, a violation of the Companies Act of 2013 is compoundable, meaning that the offender may pay a fine even if the violation only entails incarceration.

Offences Covered Under Compounding Of Offences

Since the concept of compounding of offences has already been discussed, let’s take a closer look at the offences that are covered by Section 441 of the Companies Act of 2013:

S. No. Offences compoundable by Regional Director Offences compoundable by the NCLT  
1 Section 11(2) Companies Act talks about the failure complying with the requirements relating to Commencement of business. Section 8(11) Companies Act talks about the – Default in complying with the requirements relating to formation of companies with charitable objects etc.
2 Section 16(3) Companies Act talks about the default in complying with the directions issued under sub-section (1) relating to rectification of name of company. Section 40(5) Companies Act talks about the – Default in complying with the provisions of this section relation to securities to be dealt within stock exchanges.
3 Section 26(9) Companies Act talks about the – Contravention of provisions concerning  issue of a prospectus Section 46(5) Companies Act talks about the – Fraudulently issuing duplicate share certificates by a company.
4 Section 53(3) Companies Act talks about the violation of provisions regarding issue of shares at discount. Section 66(11) Companies Act talks about the default in publishing the order of confirmation of the reduction of share capital by the Tribunal.
5 Section 56(6) Companies Act talks about the failure to comply with the provision relating transfer & transmission of the securities under Sub- Section (1) to (5). Section 67(5) Companies Act talks about the default in provisions concerning purchase by company/loans by company for the purchase of its own shares.
6 Section 59(5) Companies Act default in complying with the order of Tribunal concerning rectification of register of members. Section 117(2) Companies Act talks about the failure to repay the deposit/part thereof/any interest thereon within the time specified/such further time as may be allowed by the Tribunal.
7 Section 64(2) Companies Act talks about the default in filing a notice related to alteration, increase/redemption of share capital along with the altered memorandum with the Registrar. Section Companies Act talks about the failure in filing with the Registrar the copy of notice/agreement within stipulated time.
8 Section 67(5) Companies Act talks about the contravening provisions relating to purchase by company/loans by company for purchase of its own shares. Section 124(7) Companies Act talks about the default in transfer of amount of accumulated profits to unpaid dividend account and violating other provisions of Section 124.
9 Section 68(11) Companies Act talks about the failure in complying with the provisions of this section/any regulation made by the Securities & Exchange Board relating. Section 143(15) Companies Act talks about the failure of auditor to intimate to the Central Government regarding fraud against the company by officers/employees.
10 Section 86 Companies Act talks about the contravention of any provision concerning Registration of Charges (Chapter VI). Section 185(2) Companies Act talks about the contravention of the provisions of sub-section 1 relating to loans, guarantee/security.
11 Section 88(5) Companies Act talks about the failure to maintain register of members/debenture-holders/other security holders as prescribed. Section 245(7) Companies Act – Committing default in complying with the order of Tribunal under this section.
12 Section 89(5) Companies Act talks about the failure to file declaration not holding beneficial interest in any share. Section 314(8) Companies Act talks about the default in complying with the provisions of this except Sub-Section (5).
13 Section 89(7) Companies Act talks about the failure to file return relating to beneficial interest in any share before the expiry of the time specified under Section 403(1)(i) proviso. Section 316(2) Companies Act talks about the failure to send quarterly report on winding up and call meeting by company liquidator.
14 Section 92(6) Companies Act talks about the if a company secretary in practice certifies the annual return otherwise than in conformity with the requirements of this section or the rules made there under.  
15 Section 99 Companies Act talks about the default in holding a meeting of the company as under Section 96, Section 97, Section 98 or in complying with any directions of the Tribunal.
16 Section 102(5) Companies Act talks about the default in complying with the provisions of this section relating to statement to be annexed to notice.
17 Section 105(3) Companies Act – If default is made in complying with sub-section (2) relating to proxies.
18 Section 105(5) Companies Act talks about the, if invitations to appoint as proxy a person.
19 Failure to file Report on annual General meeting.
20 Section 121(3) Companies Act talks about the failure to transfer the amount of accumulated profits to unpaid dividend account and violating other provisions of section 124.
21 Section137 (3) Companies Act talks about the failure to file financial statements with the Registrar.
22 Section 140(3) Companies Act talks about the non-Compliance by auditor of sub-section (2) relating to filing of resignation information.
23 Section 147(1) Companies Act talks about the failure of company to comply with provisions of sections 139 to 146 with regard to auditors.
24 Section 157(2) Companies Act talks about the failure to furnish DIN to Registrar.
25 Section 165(6) Companies Act talks about the acting as a director of more than 20 companies.  
26 Section 166(7) Companies Act talks about the contravention of then provisions of Chapter XI relating to appointment and qualifications of directors.
27 Section 178(8) Companies Act talks about the default in complying with the provisions of section 177 & of this section relating to Committees like Nomination, Remuneration and Stakeholders Relationship Committee.
28 Section 186(13) Companies Act talks about the contravention of the provisions of this section relating to loans and investment.
29 Section 187(4) Companies Act talks about the contravention of the provisions of this section relating to investment of company held in its name.
30 Section 191(5) Companies Act talks about the contravention of the provisions of this section relating to payment to director for loss of office in connection with transfer of property.
31 Section197 (15) Companies Act talks about the contravention of the provisions of this.
32 Section 203(5) Companies Act talks about the contravention of the provisions of this section relating to appointment of Key Managerial personnel.
33 Section 204(4) Companies Act talks about the contravention of the provisions of this section relating to Secretarial Audit for bigger companies.
34 Section 221(2) Companies Act talks about the any removal, transfer or disposal of funds, assets, or properties of the company in contravention of the order of the Tribunal under sub-section (1).
35 Section 222(2)  Companies Act talks about the securities in any company are issued/ transferred/acted upon in contravention of an order of the Tribunal under sub- section (1).
36 Section 232(8) Companies Act talks about the contravention of the provisions by the transfer and transferee company in case of merger or amalgamation.
37 Section 238(3) Companies Act talks about the failure to register the offer of Schemes involving transfer of shares.
38 Section 247(3)(Proviso)  Companies Act talks about the Contravention of the provisions of this section by the valuer.
39 Section 249(2) Companies Act talks about the filing of application in restricted cases for removal of name.
40 Default by the official liquidator in forwarding a copy of the order of dissolution of the company by tribunal within the period specified in the Act
41 Section 306(5) Companies Act talks about the default in calling the meeting of the creditors; to prepare a statement of the position of the company’s affairs along with a list of creditors, estimated amount of claim and filing the resolution with Registrar.
42 Default in publication of resolution to wind up voluntarily.
43 Section 312(2) Companies Act talks about the failure to give notice of appointment of Company Liquidator to Registrar.
44 Section 314(5) Companies Act talks about the failure to prepare quarter statement of accounts by the company liquidator in voluntary winding up & file with the Registrar under sub-section (5).
45 Section 344(2) Companies Act talks about the failure to give statement that the company is in liquidation.
46 Contravention of the provisions of information as to pending liquidation
47 Section 405(4) Companies Act talks about the failure to furnish information/statistics etc. by the companies needed by the Central Government.
48 Contravention of the Rules framed by the Central Government
49 Being a member of a company formed exceeding certain numbers.

The chart above shows that the majority of offences under the Act of 2013 can be amended by the Regional Director, with a few exceptions being under the purview of the NCLT. Any of the relevant agencies may reduce the penalties for some violations because they include additional or additional fines, and there is no way to predict the maximum fine since it depends on how long the offender has been in default.

Documents Required For Compounding Of Offences

The application for compounding of offences as per Section 441 of the Companies Act of 2013 has to be submitted along with the following documents:

  • A copy of a Board resolution where the director has been authorise to make an application for compounding of offences;
  • An Affidavit to verify the application form;
  • A letter of authorisation to authorise any officer of the company or legal counsel or Company Secretary (CS) or Chartered Accountant (CA) or Cost and Management Accountant (CMA) to appear in matters of compounding of offences;
  • Power of attorney in favour of authorised representative to represent and furnish documents before RD (Regional Director) or NCLT (National Company Law Tribunal);
  • Also the authorised representative has to submit the memorandum of appearance;
  • Any other required document as specified by the authority at the time of submitting the application.

Persons Eligible to Make a Compounding Application

The following persons are authorised to make an application for compounding of offences:

  1. A corporation (any director of the corporation approved in this regard by its board) and/or
  2. Officers of the firm who are in default and subject to prosecution for violations of the relevant provisions.

A Whole-time Director short form WTD) and Key Managerial Personnel (KMP) must be the officials in default, in accordance with section 2(60) of the Companies Act, 2013. Additionally, in the absence of a KMP, the directors identified by the board as such and who also give their consent to act in that capacity shall be the officers in default. All the directors will be officers in default if no such director has given their approval in that capacity.

Process of Compounding Of Offences

The compounding application must be submitted to ROC by submitting e-Form GNL-1 in accordance with Section 403 read with Rule 12 of the Companies (Registration Offices and Fees) Rules, 2014 (CROFR). Duty following compounding: If the offence has been resolved, either before or after the start of any legal action, notice of the resolution must be sent to Registrar of Companies (ROC) within a period of seven (7) days of the resolution date. No prosecution may be brought by ROC, upon any shareholder, or any other person designated by the Central Government if the offence has been resolved before the start of any legal action. It goes without saying that the seven-day window will begin to run once the petitioner or applicant receives a copy of the ruling.

  1. Conducting the board meeting to approve the compounding of offence resolution.
  2. Preparation of the compounding application and any necessary annexures.
  3. Submission of the GNL-1 compounding application form.
  4. Physically submitting the application and any accompanying documents to the RD and the Registrar of Companies (“ROC”).
  5. Passing of the Order of Compounding following the hearing before NCLT/RD.
  6. After careful examination, the NCLT/RD may reject the application and provide the reasons.
  7. The Company, the Director(s), and/or the Officer(s) in default must pay the fine via MCA Online and
  8. After receiving the Order, the Company has 7 days to file form INC 28.

Laws Governing E-Form

In accordance with Rule 12(2) of the Companies (Registration offices and Fees) Rules of 2014, e-Form GNL-1 must be submitted. Users can file applications seeking approval from the Registrar of Companies by filing an application in e-Form GNL-1 for different purposes under the Companies Act 2013. Once the e-Form GNL-1 has been successfully submitted, SRN will be generated and will be given to the user, which will be used for future correspondence with MCA.

Conclusion

Both the Companies Act of 2013 and the Companies Act of 1956[1] do not define the term “compound.” According to the Law Commission report on compounding of (IPC) offences, in the context of criminal law, compounding refers to the prosecution refraining from proceeding as a consequence of a mutually agreeable resolution between the parties. The compounding of offences is covered in Section 441 of the Companies Act of 2013 (the Act), which took effect on June 1, 2016. Section 441 states that any offence under the Act that is only punishable by a fine, whether it was committed by a company or one of its officers, may be resolved either before or after filing a complaint by the tribunal, the regional director, or another officer authorised by the Central Government, in cases where the maximum fine that can be imposed for the offence is not more than INR 5 lakhs.

Read Our Article: Directors Under Companies Act, 2013

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