Compounding of Offences under the Companies Act, 2013

Introduction

Companies must follow certain rules and regulations, and failure to comply can result in penalties. While good corporate governance requires adherence to all legal provisions, lapses in compliance can occur due to the complexity and volume of lengthy regulations. The Sachar committee, in its report on 30 November 2006, recommended leniency in enforcing corporate laws, acknowledging that many defaults arise from ignorance of legal provisions rather than intentional misconduct. Hence, companies should be allowed to compound their unintentional offences.

Definition of Compounding

There is no specific definition of the word compounding; however, in common language, compounding can be referred to as “To settle a matter by money payment as additional compensation in lieu of other liability.” By reading Section 441 of the Companies Act, 2013, we can interpret that “compounding is nothing but admission of guilt by the person accused of violation of law.”

Section 441 of the Companies Act, 2013

Section 441 categorizes the offences under the following two heads:

Compoundable Offences

1. Any offence punishable with fine only.
2. Any offence punishable with imprisonment or fine.
3. Any offence punishable with imprisonment or fine or both.

Non-Compoundable Offences

1. Any offence punishable with imprisonment only.
2. Any offence punishable with imprisonment and also with fine.
3. If the investigation against such company has been initiated or is pending under this act.
4. Offence committed within a period of 3 years from the date on which a similar offence is committed.

Compounding Authorities

There are two compounding authorities created under the Companies Act, 2013:

1. National Company Law Tribunal (NCLT): Where the maximum amount of fine which may be imposed for an offence exceeds 25 lakh rupees.
2. Regional Director (RD): Where the maximum amount of fine which may be imposed for an offence does not exceed 25 lakh rupees.

Procedure for Compounding

1. Board Meeting: The board of directors of the company shall pass a board resolution at the board meeting for making an application to the relevant compounding authority for the compounding of an offence.
2. Application to ROC: Make an application to the Registrar of Companies (ROC) in Form GNL-1, which shall forward the copy of the application to the Tribunal or Regional Director.
3. Hearing and Decision: The RD or Tribunal will conduct a hearing and decide the amount to be paid for compounding.
4. Filing Order: The order passed by the RD or Tribunal shall be filed with the ROC within 30 days of the order in Form INC-28.

Important Points

• Notification to ROC: Where any offence is compounded before or after the institution of any prosecution, information shall be given by the company to the ROC within 7 days from the date on which the offence is so compounded.
• No Prosecution Post-Compounding: Where the offence is compounded before the institution of any prosecution, no prosecution shall be instituted in relation to such offence.
• Court Notification: Where the compounding of any offence is made after the institution of any prosecution, compounding shall be brought by the Registrar to the notice of the court in which the prosecution is pending, and the company or its officer in relation to whom the offence is so compounded shall be discharged.
• No Appeals: Neither the department nor the assesse can make an appeal against the order of compounding.
• Failure to Comply: If the company fails to comply with any order made by the Tribunal or the Regional Director, it shall be punishable with imprisonment for a term which may extend to 6 months, or with a fine not exceeding 1 lakh rupees, or with both.
• Similar Offences: Companies cannot compound similar offences committed within the period of 3 years from the date on which a similar offence is committed.

Benefits of Compounding

• Provides peace of mind to the directors of the company.
• Offers comfort to individuals, corporates, and persons connected with it, as they are not required to appear before prosecution authorities.
• The amount paid as a compounding fee can be claimed as a tax deduction under the Income Tax Act, while a penalty paid for contravention is not eligible for deduction.
• Ensures speedy disposal of offences and justice.
• Allows the judiciary to devote more time and concentrate on serious cases.

Permission of the Special Court

Before the Companies (Amendment) Act, 2019, Section 441(6) provided that:

• Any offence punishable under this Act, with imprisonment or fine, or with imprisonment or fine or both, shall be compoundable with the permission of the Special Court, in accordance with the procedure laid down in that Act for the compounding of offences.
• Any offence punishable under this Act with imprisonment only or with imprisonment and also with a fine shall not be compoundable.

However, the committee to review offences under the Companies Act, 2013, recommended that such a requirement of Section 441(6)(a) should be omitted. Hence, in the current scenario, the permission of the special court is not required for the compounding of an offence.

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Article Compiled by:-

Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.