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has been recommended time and again that the cases where large public interest is not involved should be allowed to be withdrawn from the courts to pay more attention on disposal of cases relating to frauds, scams and embezzlement of funds.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.