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Compounding of Offences under Section 441 of Companies Act 2013

March 7, 2020
Compounding of Offence under Section 441 of Companies Act, 2013

Compounding of Offence under Section 441 of Companies Act, 2013

What is an Offence?

The term offence is not defined under the Companies Act, 2013 but in general parlance, an offence means an illegal act or crime. As per Section 3(38) of the General Clauses Act, 1897 the term "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 further these offences are usually "Compoundable" or "Non - Compoundable”

What is Compounding?

In today's Corporate world, good governance means to comply with all the provisions of corporate laws. Non-compliance of law results into offences by Company or officer in default. The term compounding is not defined under the Companies Act, 2013 but in general parlance, compounding means doing good the default or the non-compliance.

The Compounding of offences is a short cut method to avoid litigation and it is considered as the foremost step in doing good the default or non-compliance.

Advantages of Compounding:

  • No personal appearance for an 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.

Which offences are Compoundable and which are non- Compoundable Offences?

Compounding Flow chart

Compounding Flow chart

Section 441 of the Companies Act, 2013:

The provisions pertaining to the compounding of offences under Companies Act, 2013 ("the Act") are set forth under Section 441of Act. The offences, which are punishable with fine, only can be compounded either by Regional Director (hereinafter called "RD") or by the National Company Law Tribunal (hereinafter called “NCLT”).

In other words, the offences, which are punishable with imprisonment only or imprisonment and also with fine, cannot be compounded.

Concerned jurisdiction for filing the petition of Compounding:

  • If the fine amount does not exceed INR. 25 lakhs, the jurisdiction to compound that offence is with the concerned RD or any other officer as may be authorized by the Central Government.
  • If the offence is punishable with a fine exceeding INR 25 lakhs, the jurisdiction to compound that offence is with the respective Bench of the National Company Law Tribunal (NCLT).
  • Notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.

Who can be the Applicant?

 "Officer who is in default": As per Section 2(60) of Companies Act, 2013, an "officer who is in default", for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise. Officer in default means any of the following officers of a company, namely:

Officer in default drop down chart

Officer in default drop down chart

Appointment of Officer in Default:

A particular Director shall become an Officer in default if he is specified as such by the Board and the Director has given his consent for the same in writing. The appointment of  Officer in Default can be done by passing a Board resolution after attaining his consent on behalf of the Board and the said appointment has to be reported to Registrar of Companies(ROC) by filing Form GNL-3 with MCA within 30 (Thirty) days of passing Board Resolution.

For any provision in Companies Act, 2013 which enact that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:

Procedure for Compounding of Offence under the Companies Act, 2013:

Pre-compounding obligation:

  • Call a Board Meeting in accordance with the provisions of the Companies Act, 2013 and Secretarial Standard-1 (SS­1).
  • The Board shall then calculate the total amount of offence and the amount of penalty as per the relevant Section of the Companies Act, 2013.
  • Conduct a Board meeting and pass a resolution to file an application with authority for compounding of offence and authorize the director of the Company and for preparation and signing of documents including application.
  • The Company shall prepare the application for compounding of offence along with the relevant documents.
  • The Application of compounding shall be submitted electronically in e-Form GNL-1 with ROC. This e-form will be forwarded by ROC together with their comments thereon, to NCLT / Regional Director or any officer authorized by the Central Government, as the case may be.
  • There is no specific provision in the Act, normally, NCLT/Regional Director will give personal hearing and then pass a speaking order giving reasons. The hearing can be attended by the Director/secretary/ officer of Company or by authorized representative like an advocate or a practicing CA/ CMA/ CA.

Post-compounding obligation:

As per Section 441 3(b) of the Companies Act, 2013:

  • Where any of the offence has been compounded, either before or after the institution of any prosecution, intimation shall be given to the Registrar of Companies (ROC) within 7(seven) days from the date on which, the offence is so compounded.
  • In case the offence has been compounded before the institution of any prosecution, no prosecution shall be filed either by ROC or by any shareholder or by any person authorized by the Central Government.
  • It is needless to point out that the period of seven days shall be reckoned from the date, the order is made available to the petitioner/applicant.
  • 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.
  • 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.

Penalty for non - compliance of order:

  • NCLT or RD, while dealing with a compounding application for an offence of non-filing with ROC of any return or other documents, may order any officer or other employees of the company to file or register such return or document.
  • Penalty for non-compliance: to comply with the order made by Tribunal/RD/Officer authorized by the Central Govt
  • Non-compliance regarding the filing of Order:  punishable with imprisonment for a term which may extend to six months, or with fine not exceeding one lakh rupee or both.

Annexure - I:

LIST OF COMPOUNDABLE OFFENCES UNDER THE COMPANIES ACT, 2013:

Offences Compoundable by Regional Director [RD]

-               Section 16(3):  Default in complying with the directions issued under sub-section (1) relating to rectification of name of the company
-               Section 26(9):  Contravention of provisions relating to the issue of a prospectus
-               Section 53(3):  Violation of provisions relating to the issue of shares at a discount
-               Section  56(6):  Failure to comply with the provision relating transfer and transmission of securities under subsection (1) to (5)
-               Section  59(5):  Default in complying with the order of Tribunal relating to rectification of register of members
-               Section 64(2): Default in filing a notice  related to alteration, increase or redemption of share capital along with the altered memorandum with the Registrar
-               Section 67(5): Contravening provisions relating to purchase by company or loans by company for the purchase of its shares
-               Section 68(11): Failure in complying with the provisions of this section or any regulation made by the Securities and Exchange Board relating to buy back of securities
-               Section 86: Contravention of any provision relating to Registration of Charges (Chapter VI)
-               Section 88(5): Failure to maintain a register of members/debenture-holders/other security holders as prescribed
-               Section 89(5): Failure to file declaration not holding beneficial interest in any share
-               Section 89(7): Failure to file return relating to beneficial interest in any share before the expiry of the time specified UIS 403(1)(i) proviso
-               Section 92(6): If a company secretary in practice certifies the annual return otherwise than in conformity with the requirements of this section or the rules made thereunder
-               Section  99:Default in holding a meeting of the company as u/s 96, I97, I98 or in complying with any directions of the Tribunal
-               Section 102(5): Default in complying with the provisions of this section relating to statement to be annexed to notice
-               Section 105(3): If the default is made in complying with sub-section (2) relating to proxies
-               Section 105(5): If invitations to appoint as proxy a person or one of several persons specified in the invitations are issued
-               Section 121(3): Failure to file Report on the annual general meeting.
-               Section 124(7): Failure to transfer the amount of accumulated profits to unpaid dividend account and violating other provisions of section 124
-               Section 137(3): Failure to file financial statements with the Registrar
-               Section 140(3): Non-Compliance by auditor of sub-section (2) relating to filing of resignation information
-               Section 147(1): Failure of company to comply with provisions of sections 139 to 146 with regard to auditors
-               Section 157(2): Failure to furnish DIN to Registrar
-               Section 165(6): Acting as a director of more than 20 companies
-               Section 166(7): Default in complying with the provisions of this section relating to directors duties
-               Section 172: Contravention of the provisions of Chapter XI relating to appointment and qualifications of directors
-               Section 178(8): Default in complying with the provisions of section 177 & of this section relating to Committees like Nomination, Remuneration, and Stakeholders Relationship Committee
-               Section 188(5)(ii): Related party transaction in case of other company
-               Section 186(13): Contravention of the provisions of this section relating to loans and investment
-               Section 187(4): Contravention of the  provisions of this section relating to the investment of the company
held in its name
-               Section 191(5): Contravention of the  provisions of this section relating to payment to the director for loss of office in connection with the transfer of property
-               Section 197(15): Contravention of the provisions of this section relating to managerial remuneration in case of absence or inadequacy of profits.
-               Section 203(5): Contravention of the  provisions of this section relating to the appointment of Key
Managerial personnel
-               Section 204(4): Contravention of the  provisions of this section relating to Secretarial Audit for
bigger companies.
-               Section 206(7): Failure to furnish any information during inspection or inquiry
-               Section 221(2): 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)
-               Section 222(2): Securities in any company are issued/ transferred/acted upon in contravention of an order of the Tribunal under sub-section (1)
-               Section 232(8): Contravention of the provisions by the transfer and transferee company in case of merger or amalgamation
-               Section 238(3): Failure to register the offer of Schemes involving the transfer of shares.
-               Section 242(8): Contravention of the order of Tribunal relating to alterations in memorandum or articles.
-               Section 247(3)(Proviso): Contravention of the provisions of this section by the valuer
-               Section 249(2): Filing of application in restricted cases for removal of name
-               Section 302(4): default by an official liquidator in forwarding a copy of the order of dissolution of company by the tribunal within the period specified in sub-section (3)
-               Section 306(5): 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
-               Section 307(2): Default in the publication of resolution to wind up voluntarily
-               Section 312(2): Failure to give notice of appointment of Company Liquidator to Registrar
-               Section 314(5): Failure to prepare a quarter statement of accounts by company liquidator in voluntary winding up and file with the Registrar under sub-section (5).
-               Section 318(8): Failure to complying with the provisions of this section relating to final meeting and dissolution of the company
-               Section 342(6): Failure or neglect to give assistance required under sub­section (5)
-               Section 344(2): Failure to state that the company is in liquidation
-               Section 348(6): Contravention of the provisions of information as to pending liquidation
-               Section 356(2): Failure to file a certified copy of the order of Tribunal relating to the dissolution of company void with the Registrar
-               Section 392: Contravention of the provisions of Chapter XXII by a foreign company
-               Section 405(4): Failure to furnish information or statistics etc. by the companies required by the Central Government No specific penalty or punishment is provided in the Act repeated default within 3 years
-               Section 452(1): Punishment for wrongful withholding of property
-               Section 453: Improper use of the words "limited" and "private limited"
-               Section 454(8): Failure to pay the penalty imposed by the adjudicating officer or Regional Director
-               Section 464(3): Being a member of a company formed exceeding certain numbers
-               Section 469(3): Contravention of the Rules framed by Central Government

 Offences Compoundable by the NCLT

-               Section 8(11): default in complying with the requirements relating to the formation of companies with charitable objects etc.
-               Section 40(5): Default in complying with the provisions of this section relating to securities to be dealt with in stock exchanges
-               Section 46(5): Fraudulently issuing duplicate share certificates by a company
-               Section 66(11): Default in publishing the order of confirmation of the reduction of share capital by the Tribunal
-               Section 67(5): Default in provisions relating to purchase by company or loans by  company for the purchase of its shares
-               Section  74(3): Failure to repay the deposit or part thereof or any interest thereon within the time specified or such further time as may be allowed by the Tribunal
-               Section 117(2): Failure in filing with the Registrar the copy of notice or agreement within the stipulated time
-               Section  124(7): Default in the transfer of the amount of accumulated profits to unpaid dividend account and violating other provisions of section 124
-               Section  143(15):  Failure of auditor to intimate to Central Government regarding fraud against the company by officers or employees
-               Section 185(2): Contravention of the provisions of subsection 1 relating to loans, guarantee or security
-               Section 245(7): Committing default in complying with the order of Tribunal under this Section.
-               Section 314(8): Default in complying with the provisions of this Section except sub-section (5).
-            Section 316(2): Failure to send a quarterly report on winding up and call meeting by the company liquidator

Instances where Compounding is not possible:

The third proviso to sub-section (1) of Section 441 says that:-

- The offence cannot be compounded in case either the investigation has been initiated or is pending.

-  The offence cannot be compounded in case a similar offence committed has been compounded and three years has not expired.

-  Any offence which is punishable under this Act with imprisonment only or with imprisonment and also with the fine; cannot be compounded

Disclaimer:

The entire contents of this document have been developed based on relevant information and are purely for private circulation. Though the authors have made utmost efforts to provide authentic information, however, the authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and consequences of anything done or omitted to be done by any such person in reliance upon the contents of this document.

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