Management Skills Orientation

Programme (MSOP)

PROJECT REPORT REPRESENTED BY :

GROUP – 10 on

COMPOUNDING OF OFFENCES
UNDER THE COMPANIES ACT, 2013
Our Agenda
To give an overview on the topic of “Compounding of
offences under the Companies Act, 2013”
COMPOUNDING

▪ The word ‘compound’ is not defined

under the Companies Act, 2013 or
the Erstwhile Act i.e. the Companies
Act, 1956.

▪ Dictionary Meaning: As per Black’s

Law Dictionary “Compounding”
means to settle a matter by money
payment ,in lieu of other liability.
Offence
▪ Definition of word “Offence” – Not Defined under
Companies Act, 1956 or 2013.

▪ As per section 3(38) of General Clauses Act, 1897

“Offence” shall mean any act or omission made
punishable by any law for the time being in force.
Compounding of Offence
▪ In today’s Corporate world, good governance means to
comply with all the provisions of Corporate laws. Non
compliance will result in penalties with fine or penalties
with imprisonment or both.

▪ Corporate offences are classified into civil and criminal

offences. Further it has been classified as Compoundable
and Non compoundable offence.

▪ The Compounding of offences is a short cut method to

avoid litigation and to bring an end to a default.
Brief Background
▪ The compounding provision in the Act were inserted by
the Companies Amendment Act, 1988 on the
recommendation of the SACHAR COMMITTEE as
amended by the Companies (Amendment) Act, 2000.

▪ 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.
The concept of compounding of offences was incorporated as a
measure to avoid the long drawn process of prosecution, which would
save both cost and time in exchange of payment of a penalty to the
aggrieved.

In criminal law, the power to compound the offence is at the

discretion of the victim. The perpetrator cannot demand for
compounding of the offence. But in corporate law, compounding is
at the discretion of the offender/offending company.

When compounding is done, the prosecution is converted into fine i.e.

condonation of prosecution by imposing penalty. It enables the offender
company and the director / officer in default to avail peace and
honorable discharge and avoid cumbersome trial.
History of Compounding
Acts Maximum amount Concerned Authority for
of fine imposed handling such case
Act,1956 -- CLB/RD/CG authorized
Companies Rs. 5,000 i. Less than Rs. 5000-RD
(Amendment) Act, ii. More than Rs. 5000- CLB
1988
Companies Rs. 50,000 i. Less than Rs. 50,000- RD
(Amendment) Act, ii. More than Rs. 50,000- CLB
2000
Companies (Second Rs. 50,000 i. Less than Rs. 50,000- RD
Amendment) Act, ii. More than Rs. 50,000- CLB
2002
Act, 2013 Rs. 5,00,000 i. Less than Rs. 5,00,000-
RD/CG authorized person
ii. More than Rs. 5,00,000
NCLT
Benefits of Compounding
▪ No personal appearance for officer in default, as in case of
prosecution for an offence in a criminal court.

▪ Summary proceeding less time consuming.

▪ The defaulter can be discharged on payment of

composition fee, which cannot be more than the maximum
fine leviable under the relevant provision.

▪ Fees payable on compounding are not treated as penalty,

hence no disqualification for Directors.
More to know…
▪ 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)

▪ Avoid harassment due to appearance before adjudicating officer or

special court.

▪ Fine paid in compounding can be claimed as expenses whereas

penalties shall be added to your income on assessment by tax officials
Difference in the provision of the
Act, 1956 and the Act, 2013
[Section 621A Vs. 441]
▪ For offences punishable with imprisonment or fine or
imprisonment or fine or both, the same can now be
compounded with permission of Special Court instead of
High Court as provided in the Act, 1956. The provision of
establishment of Special Court is provided under Section
435 of Act, 2013.

▪ Now, any offence punishable with fine only, cannot be

compounded if the investigation against such company
has been initiated or is pending under Act,2013.
All About Section 441
Enforcement of section by MCA
▪ Ministry of Corporate Affairs ("MCA") in its notification
released on the 1st of June, 2016 has enforced 29
sections of the Companies Act, 2013.

▪ An important section relating to Compounding of

Offences (Section 441) has also been notified while the
relevant rules are awaited.
Applicability
▪ As per provision of Section 441 (1) of the Act,
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, 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
Compoundable VS
Non- Compoundable Offence

Penalties

Fine or imp. Imp. And

Fine only Fine or imp Imp. only
or both Fine

Compoundable With
Non-
permission of
compoundable
special court
Section 441- Who can be the
applicant?
WHOLE-TIME DIRECTOR

KMP

If no KMP, any specified Director /

All Directors if no specified Directors

2(60)
Any person on whose instructions Board
is accustomed to Act

STA/ Registrar/ MB for contravention of

issue/ transfer
Jurisdiction

• Any offence punishable under the Act with

NCLT fine only

Regional Director/ • Where the maximum amount of fine does

Prescribed Officer not exceed Rs 5 lacs

• Any offence liable for imprisonment or fine

Special Court or both can be compounded with the
permission of Special Court u/s 441(6)
Offences by Company or any Officer shall not be
compounded

Any investigation Where similar

against the Company offence has been
is initiated or is compounded within
pending preceding 3 years
from the date of
offence

Offences which are liable for penalty by way of Imprisonment or

Offences which are liable for penalty by way of Imprisonment and
Fine are Non-Compoundable Offences under the Act
Procedure :
▪ APPLICATION in e-Form GNL-1 – Registrar of
Companies
▪ ROC will forward the application with his comments to:

1) NCLT;
or
2) Regional Director;
or
3) Any other Officer authorized by the CG

for the purpose of adjudication.

Drafting of Application / Petition
▪ Heading in Form NCLT 4
▪ General profile and history of the company.
▪ Particulars of Petitioner(s)
▪ Jurisdiction of Bench/RD
▪ Limitation
▪ Facts of the case i.e. nature of offence and period of
default.
▪ How and when the default is made good.
▪ Matters not previously filed or pending before any court.
▪ Relief(s) sought: Prayer to the competent authority.
▪ Annexure
Types of Defaults

Continuing • Non–appoint of CS, Non–holding of

Offences AGM, section188, etc

• Non-holding of Board Meeting in a

One Time
quarter by listed Company,
Offence section188

Annual • Disclosure in Board Report, Financial

Offences Statement, etc.
Post Compounding Obligations
▪ Intimation to ROC – within 7 days in INC-28 from the date on which
the offence is so compounded . It is needless to point out that the
period of seven days shall be reckoned from the date, the order is
made available.

▪ Where the Offence is compounded – before the institution of any

prosecution, no prosecution shall be instituted in relation to such
offence by ROC or by any shareholder of the company or by any
person authorized by CG.

▪ Where the compounding is made after the institution any

prosecution, Roc will brought to Notice of the court and on such
notice of compounding being given, the Company or its officers shall
be discharged.
Penalty for non compliance of
order

▪ Penalty for non-compliance – to comply with the order

made by Tribunal/RD/Officer authorized by CG.

Any officer or other employee of the company –

punishable with imprisonment for term which may extend
to six months, or with fine not exceeding one lakh rupee or
both.
As Per NCLAT Directions The Tribunal
is Required to Notice Relevant Factors such
as :
▪ The gravity of offence.
▪ The act is intentional or unintentional.
▪ The period of default
▪ The report of ROC
▪ The maximum punishment prescribed for such offence, such as fine or
imprisonment or both fine and imprisonment.
▪ grounds taken by the appellants,
▪ Nature of offence
▪ Whether petition for compounding is suo moto before or after notice from
ROC or after imposition of the punishment or during the pendency of a
proceeding.
▪ The defaulter has made good of the default.
▪ Financial condition of the company and other defaulters.
Companies Amendment Bill,
2016
The CLC has observed that most of the offences which
are punishable with fine or imprisonment or both are
technical/ procedural in nature, and thus, for the
leniency and ease in administration of the Act, the old
provisions relating to compounding may be re-instated

Therefore, the Companies (Amendment) Bill, 2016

proposes an amendment under sub-section (1) of
section 441 to give power to the Tribunal to compound
the offences punishable with fine as well as offences
punishable with imprisonment or fine or both.
Sapphire Industrial Infrastructures Pvt.
VS ROC (CA no. 106 of 2017) Order
dated 18.07.2017
▪ In the matter Sapphire Industrial Infrastructures Pvt.
Ltd. Vs. Registrar of Companies, NCLAT held that no permission of
special court required when no case has been lodged or pending
against the appellants.

▪ Where no prosecution has been filed or pending against the

company or its officers, its question of obtaining permission from
the special court, as stipulated in clause (a) of sub section (6) of
section 441 of the Act, 2013, does not arise. The Tribunal is
competent to compound the offences(s) taking into consideration
the minimum and maximum fine prescribed under the Act
Imposition of minimum penalty as
Prescribed in the act – is it Mandatory to
Impose ?
▪ No.
▪ Ref: Sand Land Real Estate Private Limited (CP N0. 58/441/NCLT/
MB/ MAH/2017 NCLT order dated 10.08.2017)
▪ Section : 178 In case of any contravention of the provisions of
section 177 and this section,
▪ Company : Minimum one lakh rupees – five lakh
▪ Every officer : 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 twenty-five thousand rupees but which
may extend to one lakh rupees, or with both:
▪ Penalty Impose: Rs.5000/- each applicant.
Conclusion

▪ Compounding of offences is an important concept

because if an officer or a company admits to commission
of an offence, then in such case, it must be given a
chance of making a payment in terms of fine to the
concerned authority and reduce its punishment with
respect to such offence when punishment for such
offence is not severe.