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 litigation.
Compounding of offences under the Companies, Act, 2013 (the Act) is the process whereby the defaulting party settles a matter involving default of provisions of the Act on payment of such sum as specified by the appropriate authority to avoid prosecution instituted or to be instituted in relation to such offence.
Section 441 of the Act deals with compounding of offences committed by companies or any officer thereof. The authority for compounding of offences under the Act lies with National Company Law Tribunal (NCLT) or the Regional Director (RD) depending on the maximum amount of fine that may be imposed.
The Act classifies the following classes of offences, which can be compounded:
- Offences punishable with fine.
- Offences punishable with imprisonment or with fine.
- Offences punishable with imprisonment or with fine or with both.
The following offences are classified as non-compoundable:
- Offences which are punishable with imprisonment only.
- Offences which are punishable with imprisonment and also with fine.
Further in the following situations, an offence, which, though is compoundable can’t be compounded:
- Where any investigation against the company has been initiated or is pending under the Act.
- Where an offence has been committed by a company or its officer within a period of 3 years from the date on which a similar offence committed by the company or its officer was compounded.
The offences under the Act may be compounded by:
- NCLT; or
- Where the maximum amount of fine which may be imposed for such offence does not exceed twenty-five lakh rupees, by the Regional Director (RD) or any officer authorized by the Central Government.
Section 441 lays down the detailed procedure to be followed by a defaulting party for applying to the relevant authorities for the purpose of compounding of an offence. The defaulting party being a company or an officer in default has first to make an application for compounding in Form GNL-1 to the Registrar of Companies (ROC). ROC, after receiving the application, is required to forward the same to the compounding authorities being NCLT or RD, as the case may be, depending upon the quantum of maximum fine involved, along with his comments thereon in the form of a report. Once an offence is compounded, the company shall intimate the same to ROC in Form INC-28 within a period of 7 days from the date on which an offence is so compounded and order is received.
Further, it is pertinent to note here that where an offence is compounded by the relevant authority and any prosecution is pending against the defaulting party in the same matter then in that case, it shall be the responsibility of jurisdictional Registrar of Companies (‘ROC’) to bring the fact of compounding to the notice of the court in which prosecution is pending. Once the relevant court receives the notice of compounding from the ROC, the same shall amount to discharge of defaulting party from the prosecution proceedings. The section further states that where an offence has been compounded before the institution of any proceeding, no prosecution can be instituted in relation to the offence so compounded by the ROC or any shareholder of a company or any person authorized by the Central Government.
NCLAT, New Delhi vide company appeal No. 80 of 2018 in the matter of arising out of orders dated 16th February, 2018 passed by the NCLT, New Delhi Bench- III in various company applications, vide its order dated 27th September, 2018 has discussed the following issues in connection the procedural aspects of compounding application.
- Whether the Act bars filing of a Joint Application for compounding of offence by a defaulting company along with its Officers in Default?
- Whether the Companies Act, 2013 bars filing of a Joint Application for compounding of the same offence committed in different years?
- Whether the Tribunal has jurisdiction to compound offences where the fine prescribed for such offence are less than its monetary jurisdiction?
- How to quantify the limit of Rs. 25 lacs in order determine the jurisdiction of RD?
NCLAT observed that in the absence of any specific bar of ‘joinder of parties’ or joinder of separate cause of actions in preferring a compounding application, joint application for the same offence is permitted. Since facts leading to any non-compliance under the Act on the part of a company and its officers in default will be the same, any suggestion to the contrary will only lead to multiplication of proceedings and different findings, which is not desirable.
With regard to this question, NCLAT held that in terms of the scheme envisaged under Section 441 of the Act, there is no bar on preferring a single application for compounding the same offence committed during different financial years by the Company and its Officers. It is trite that procedures are deemed to be permitted unless expressly prohibited.
NCLAT had clarified that Section 441 only puts a restriction on the power of the ‘Regional Director’ and ‘the authorized officers of the Central Government’ permitting them to compound the offences wherein the maximum amount of fine does not exceed five lakh rupees (now Rs. 25 lacs) and is punishable with ‘fine only’. No such fetter has been put on powers of the Tribunal, which is the main forum for such compounding of offences, the other forum of ‘Regional Director’ and ‘Officer of the Central Government’ being alternative but restricted by extent of quantum of punishment. Thus, NCLAT held that The Tribunal has the powers to compound all the offences irrespective of any pecuniary limit as evident.
In this regard, RD has the jurisdiction to compound an offence which has a maximum fine of Rs. 25 lacs. Now the question arises how to determine this quantum whether it is per compounding application or per applicant. The NCLAT has not specifically answered this question but has re-affirmed the observation of NCLT that the quantum of Rs. 25 lacs shall be determined based upon each applicant and is not required to be consolidated of all the applicants where joint application is moved.
So, for calculating the monetary jurisdiction, fine shall be calculated on the basis of each of the application and shall not be aggregated. If in any case, quantum of fine on a company is less than Rs 25 Lacs but more than the said amount for officer in default, then either a joint application can be filed with Tribunal or company can file the application with RD and officer in default with the Tribunal
In terms of section 441 of the Act, only a company and/or its officers in default who are liable for prosecution under the respective provisions for non-compliances are eligible to make a compounding application. Further, a company being a juristic person cannot file a compounding application on its own therefore, any director of the company authorized by its board in this behalf is eligible to file compounding application on behalf of the company. Before discussing further, it is also important to first understand who all are covered in the ambit of officers in default. Section 2 (60) of the Act defines the term “officer who is in default”.
As per section 2(60), a Whole time Director (WTD) and Key Managerial Personnel (KMP) shall always be the officers in default. Further, in case of a company where there is no KMP, officers in default shall be those directors who are identified by the board in this respect and who also consent to act as such. If no such director has consented as such, all directors shall be officers in default. Further, the list also includes shadow director as officer in default. Now as far as Independent directors and non-executive directors are concerned, while section 149(12) clearly states that an independent director or a non-executive director can be held liable only for acts of omission or commission by a company that occurred with the director’s knowledge or attributable through board processes or with the director’s consent or connivance or where he or she failed to act diligently but it is not clear what will happen when there are only non-executive directors on the Board. While it may happen that any default in filing might have happened without their knowledge but per section 2(60), they will still be treated as office in default since there is no executive director.
Further, for the purpose of issuing show cause notice to the officers in default of the company, the MCA has recently issued a circular dated 2nd March, 2020 wherein guidelines have been issued to the Registrar of Companies, Regional Directors and Official Liquidators in determining the persons as officers-in-default.
The General Clause Act, 1897 defines the term ‘Offence’ as any act or omission made punishable by any law for the time being in force. An offence can be classified as continuing or one-time offence. The essence and nature of these offences have been explained by the courts at various times:
In the matter of State of Bihar v. Deokaran Nanshi1, the Supreme Court took the view that when law requires submission of a return within a certain period and there is a failure to do so, such non-compliance is ordinarily complete on the expiry of the period and is not a continuing offence.
Further, in the matter of Bagirath Kanoria v. State of Madhya Pradesh2, the Supreme Court observed that “the imposition of penalty not confined to the first default, but with reference to the continued default is obviously on the footing that non-compliance with the obligation of making return is an infraction as long as the default continued. Without sanction of law, no penalty is impossible with reference to the defaulting conduct. The position that penalty is imposable not only for the first default, but as long as the default continues and such penalty is to be calculated at a prescribed rate on monthly basis is indicative of the legislative intention in unmistakable terms that as long as the assessee does not comply with the requirements of law, he continues to be guilty of the infraction and exposes himself to the penalty provided by law.”
In the matter of Anita Chadha v. The Registrar of Companies3, the Delhi High Court while quoting the judgment of Supreme Court in the matter of State of Bihar v. Deokaran Nanshi, observed that if the relevant law has not only made the default punishable as an offence, but has further provided that the penal liability therefor would also continue until the default is removed and the continuance of the default is also made punishable so long as it continues, the continuance of the default would be a continuing offence.
After a perusal of the above judgements, it is inferred that a continuing offence is one where the penal liability for the same continues till the default is made good. In the foregoing case laws, the continuous default is determined based upon the fine being levied on each day till it is made good. However , if this is the sole criterion for determining a continuing offence, then majority of the defaults cease to be continuous defaults. Therefore, the nature of the default is also required to be kept in mind while determining the category of default since there are defaults under the Act where per day fine is not prescribed nor any return is required to be filed viz appointment of minimum number of directors, independent directors, woman director, appointment of Internal Auditor, non-adherence to maintenance of minutes book, not keeping the register of members and so on. These kinds of contraventions are continuous in nature and unless these have been complied with in accordance with the law, the default will exist. Hence, the default which has a “start button and a stop button” is a continuous default. This standpoint can be further substantiated from the provisions of section 450 of the Act which is applied where no specific penalty is prescribed under any provision of the Act and that section provides fine for both the category of defaults i.e. continuous and one-time default which means fine is levied based upon the very nature of the contravention of any provision of the Act.
- There is no per day fine;
- Once default is made, it cannot be made good or reversal of the default is not possible;
- The default is not connected with filing of any document, form or information with the registrar or any other authority under the Act.
The above distinction is important while making the application of compounding to the Registrar since NCLT or RD may direct the company to comply with the provision for which application is made where the default is continuing one since without making the default good, it is not possible for the Registrar to determine the maximum fine for the purpose of forwarding the compounding application either to RD or NCLT.
Whether officers in default can escape prosecution without applying for compounding merely on the ground that company has obtained an order for compounding
Where a defaulting company has been discharged from an offence pursuant to compounding order passed by the relevant authority, does the same amount to discharge of officers in default also including those who ceased to hold office in the company but were officers in default at the relevant period. After a careful perusal of section 441, it can be inferred that officers in default including the ones who are no longer associated with the company cannot escape repercussions of an offence to which they are charged with just because the company has been discharged from the offence. They can either choose to go for compounding or face prosecution and the fact that the default is already made good shall be immaterial in such a case. In the matter of Amadhi Investments Limited4,it was observed by Company Law Board (CLB) that where directors who were officers in default at the relevant period have resigned from the office and present directors have signed the compounding application including that of the company, then in that case such application is liable to be rejected except that of company. The CLB in the present matter directed ex-directors to either opt for compounding or face the prosecution.
As per the Black’s Law Dictionary, to “Compound” means “to settle a matter by a money payment, in lieu of other liability”. The Act does not contain any provision which requires a company to make good the default before filing compounding application. However, section 441 (4) states that NCLT or RD, while dealing with the proposal of compounding of an offence relating to default in compliance with any provision of the Act, is of the opinion that the same is necessary then it may direct the defaulting party to comply with the provision, the contravention of which is being requested for compounding. Both the RD/Tribunal, while admitting any compounding application, has always ensured that the defaulting entity/person has made good the default before filing the application and the same can be witnessed from the following orders.
In the matter of RSPL Limited5,the petitioner company defaulted in filing of cost audit report for the year ended March 31, 2012 within the prescribed time limit. The petitioner company filed the concerned audit report on December 05, 2016 thereby making the default good. The Tribunal in the concerned matter quoted that “since the applicant company showed its bona fide effort to make good of the alleged violation by subsequent filing of its cost audit report though belatedly, the present application should be allowed.”
Further, in the matter of General Produce Company Limited. (CLB)6, Company Law Board dismissed the applications for compounding the offences under Sections 159 (now section 137) and 220 (now section 92) of the Companies Act, 1956 (now the Companies Act, 2013) as the defaults arising out of a failure to file the balance sheet and annual return of the company with the Registrar of Companies had not yet been made good by the company.
Compounding is a settlement mechanism which allows a defaulting company or officer in default to avoid prosecution. When a defaulting party opts for compounding, it is an implied ‘admission of default’. Once the compounding authority is satisfied that the defaulting party has made good the default, it admits the application and compounds the offence. The compounding order passed by an authority amounts to discharge of the defaulting party. Now, the main issue here is that when a director being an officer in default applies for compounding, does the same amount to admission of default and consequential disqualification of a director.
Section 167 of the Act clearly specifies that the office of director will be vacated in case of contravention of few of the provisions of the Act such as Sec 184 (non-disclosure of interest), Sec. 165 (limit the number of directorships), and so on. Even if the director concerned has compounded the offence for respective section, the effect of section 167 will remain in operation which means such director has to vacate the office with immediate effect since section 167 is a special provision which has its own consequences where any director does not comply with certain provisions of the Act besides the fine or imprisonment mentioned in such provisions. If the interpretation is adopted otherwise, then the objective or purpose behind section 167 will be defeated and this composition scheme will be considered as an escape route for errant and defaulting director.
As per section 441 (2) an offence is not compoundable if the same has been committed by company or its officer within a period of 3 years from the date on which the similar offence committed by company or its officer was compounded. Further, explanation to the section 441(2) states that any second or subsequent offence committed after the expiry of a period of three years from the date on which the offence was previously compounded, shall be deemed to be a first offence. Here, it is important to note that the offence (not being an offence punishable with imprisonment only, or punishable with imprisonment and also with fine) per se is compoundable but by virtue of this provision, the Company or its officer becomes ineligible to make compounding application for such compoundable offence which virtually makes that offence non-compoundable for a period of three years from last compounding. The objective of such a provision is to deter both a company and an officer in default from repeating their mistakes and if such instance happens, to avoid any escape route in the form of compounding.
However, from the provisions of the Act, it is not clear whether the second offence is to be seen from the point of view same company or the default is to be seen individually whether company or officer. In order to find out the intent of the legislature behind this provision, both the views should be analyzed. Firstly, when the default is seen in relation to the same company and that company has made the same default within 3 years of compounding, then, such offence is non-compoundable which means the company and its officers cannot make compounding application. This interpretation if adopted which would lead to some absurdity or some repugnance such as (a) in case any new officer has joined the company at the time when the same offence is committed again but for him, this is a first default and (b) in a contrary situation, the officer who is holding the same position in other companies get the leverage to repeat the same offence in such other companies where the offence is committed for the first time and then apply for compounding since such other companies are eligible for compounding. Now in the second situation where the default is seen individually then, considering the above situation, the said officer cannot make compounding application for the same offence made in other companies but such other companies which have made a default for the first time are very much eligible to apply for compounding.
Further in a contrary situation, where the company has committed the same offence within three years and in terms of the Act, such company is not eligible to make compounding application but in case of its officer, one has to see whether he has made the same default earlier in the same company or any other company in order to determine his eligibility for making the compounding application. If this interpretation is adopted then, the absurdity and repugnancy so made in the first situation can be avoided and leaves no room for repeated defaulters. Otherwise, it would have been injustice for the officer who has just joined and the company makes the same default again (for example non-holding AGM within time limit) which makes the offence non-compoundable for the new officers besides the company and its old officers and for sure, this cannot be the intention of the Parliament to put this kind of grave consequence on the person who made the default for the first time.
Further in order to strengthen this argument, one has to understand the language used in the provisions which read as “offence committed by a company or its officer within a period of three years”, here the legislature uses the word ‘or’ which means either officer or the company must have committed the same offence within three years and here, the focus or reference is only on the offence which is question irrespective of the fact whether that offence is committed in the same company or in any other company. It can be rightly said that the act of the director/ person/ officer is independent of the company and so is the liability. It is also pertinent to note that there are defaults where only officers/ directors are liable and Company is not liable.
Thus, from the above foregoing discussion, it may be held that the offences committed either by the company or its officers have to be determined on individual basis. So that the company and its officer are not bound by the consequence of other’s action since the liability of the offence is personal in nature which cannot be tagged along with others.
Section 441 of the Act clearly states that only those offences which are punishable with fine only or with fine or with imprisonment or with fine or with imprisonment or with both are eligible for compounding. Prior to the Companies (Amendment) Ordinance, 2018, offences punishable with imprisonment or with fine or with imprisonment or with fine or with both can be compounded with the permission of special court only. However, now the same have come under the ambit of NCLT. As far as offences which are mandatorily punishable with imprisonment are concerned, the Act has made such offences non-compoundable and accordingly defaulting company or/and its officers in default would not be eligible to approach court for compounding of such offences.
It is pertinent to note that the idea behind making offences punishable with mandatorily imprisonment as non-compoundable is to make sure that the offences which are serious in nature are properly tried before relevant courts. The Government has always focused on promoting ease of doing business and accordingly has brought certain progressive changes from time to time and one such example would be decriminalization of several offences under the Act. However, at the same time it has also made sure that no serious defaults go unnoticed. Allowing compounding of serious offences would defeat its overall purpose which is to encourage the defaulting company or its officers to admit its default and make the same good.
The word adjudication means formal judgment on a disputed matter. The concept of adjudication of penalties was provided under the Companies Act, 2013 since its enactment. Section 454 of the Act deals with adjudication of penalties. It allows Registrar or other adjudicating authority to impose penalty on company and/or officer who is in default with respect to any non-compliance under the relevant provisions of the Act along with necessary directions to rectify the concerned non-compliance. As discussed above, Section 441 of the Act deals with compounding of offences punishable with fine only or with imprisonment or with fine or with imprisonment or with fine or with both by NCLT or RD as the case may be. Section 454 empowers Registrar or other adjudicating authority to deal with defaults which are not punishable with fine or imprisonment but by way penalty. Some examples of the same would be:
- breach on the limit of maximum number of directorships as prescribed under section 165 (1).
- failure in filing of annual return under section 92 and financial statements under section 137.
- obtaining more than one director identification number under section 154.
- Failure in filing of resolutions or agreement within a period of 30 days under section 117.
In case of adjudication of penalties, Registrar by issuing show cause notice directs a defaulting company or officer thereof to rectify the default, in compounding, it is the defaulting company and/or officers in default who actually apply for compounding after admitting the default. Further, where offences liable with penalties are committed for the second occasion, there is no bar on adjudication of penalty on the same by the Registrar however, section 441 states that a company and its officers in default are not eligible to go for compounding in case an offence is committed within a time span of 3 years from the date on which similar offence was last compounded.
Further, it is pertinent to note that in order to raise compliance levels without criminalizing minor offences, Companies (Amendment) Act, 2019 was promulgated which decriminalized various offences and thereby increased the scope of adjudication of penalties by Registrar or other adjudicating authority. Pursuant to the amendment around 16 offences under the Act which were earlier covered in the category of compoundable offences were re-categorized to an in-house adjudication framework. In continuation of its effort to decriminalize the various provisions of the Act, the Government of India is moving to further decriminalize other provisions of the Act and has had introduced Companies (Amendment) Bill, 2020 in the Lok Sabha. The Governments efforts in this direction are highly appreciable as it focuses on raising compliance levels without criminalizing minor offences for promoting ease of doing business.
Compounding is a second chance for any defaulting entity/person. It provides an opportunity to a defaulting party to come forward, admit the default and make the same good. Today, more and more entities are going for compounding since court proceedings take a toll on defaulter’s efforts, goodwill, money and time. Though, compounding is the most appreciated tool for settlement of less grave defaults, it is important to ensure that no such defaults occur in the very first place. Government should ensure that all companies, irrespective of size or scale of operation, have stringent policies and mechanisms in place for the timely compliance of the law. As more and more companies are incorporating on a daily basis, it is important that compliances, even the smaller ones, by such companies should be carefully monitored in order to make sure that compounding is not used as a tool for abusing the very legislative framework.