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A CRITICAL ANALYSIS

Compoundable offences:

Section 3(38) of General Clauses Act 1897 defines ‘offence’ as ‘any act or omission made punishable by any law for the time being in force’.  Section 2(n) of Criminal Procedure Code 1973 (‘CrPC’) also defines ‘offence’ similarly.  An accused committing an offence is liable to be prosecuted as per relevant provisions of law.   Every section of the Companies Act, 1956 (‘Act 1956’) or Companies Act,2013 (‘Act 2013’) ( both collectively referred as ‘Acts’) prescribes the consequences of the not complying with the provisions which may result into  punishment by imposition of fine, or fine or imprisonment, or fine or imprisonment or both, or fine and imprisonment, or imprisonment. However there are certain sections/ provisions under the Acts wherein no specific punishment is prescribed. In that case there is an enabling section i.e. 450 of Act, 2013 (629A of the Act, 1956) which prescribes the provision of fine for violation of any section of the Acts wherein no specific penalty or punishment is prescribed for the offence.

Compounding is a settlement process by which the accused pays compounding charges in lieu of undergoing consequences of lengthy prosecution. The compounding provision in the Act was inserted by the Companies Amendment Act, 1988 on the recommendation of the Sachar Committee. 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.

Companies Act, 1956 (‘Act 1956’)

As per provision of Section 621A (1) of Act 1956 any - offence punishable under this Act whether committed by a company or  any  officer  thereof,  not  being  an  offence  punishable with imprisonment only, or with imprisonment and also  with fine, may, either before or after the  institution  of  any prosecution, be compounded.

Further as per provision of section 621A(7)(a)- any offence which is punishable under this Act with imprisonment or with fine, or with both, shall be compoundable with the permission of court, in accordance with procedure laid down in that Act for compounding of offences.

Companies Act, 2013 (‘Act 2013’)

As per provision of Section 441 (1) of the Act, 2013-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, 2013- 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, in accordance with the procedure laid down in the Act for compounding of offences.

What is 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.

Conclusion as to offense which are compoundable:

A complete reading of the section 441 of the Act, 2013, puts all offences of the Act, 2013 in the following categories:

Compoundable offences:

1. Offences punishable with fine;

2. Offence punishable with fine or  imprisonment (with the permission of Special Court);

3. Offences punishable with find or Imprisonment or both ( with the permission of Special Court)

Offences not Compoundable:

1. Offences punishable with imprisonment;

2. Offences punishable with imprisonment and fine.

3. As per proviso of the Section 441(1) of the Act, 2013, any offence covered under this sub-section by any or its officer shall not be compounded if the investigation against such company has been initiated or is pending under this Act.  

With deep reading of the section 441, the following questions are bound to come in the mind:

1. As per provision of Section 441(6)(a) of the Act, 2013, offences which are punishable with fine or imprisonment, or fine or imprisonment or both, are required to be compounded only with the permission of the special court. A similar provision was also in the section 621A (7) (a) of the Act, 1956 which prescribed to take the permission of the ‘Court’ before compounding of offences which are punishable with fine or imprisonment or with both. Does that mean even when the prosecution has not been filed one has to go to special court/ court for taking the permission?

 2. How do the special Court/ court exercise its power to give the permission when no prosecution has been filed?

3. As per provision of section 441(1) of the  Act, 2013 any offence which under this Act ( whether committed by a company or any of its officer, with fine only, may, either before or after the institution of any prosecution be compounded by …… . Does that mean application for compounding of offence before institution of any prosecution can be filed only where offence is punishable with fine only?

Answers of points above can be find in the judgment of Hon’ble Supreme court of India in civil appeal no.2102 of 2004     between VLS Finance vs. Union of India & others, decided on  May 10, 2013 which analyzed the power of Company Law Board of compounding of all compoundable offences. It was held that the court has not power until and unless the matter is brought before it by way of filing the prosecution for punishment of offence.  It was held that Ordinarily, the offence is compounded under the provisions of the Code of Criminal Procedure and the power to accord  permission  is  conferred  on the  court  excepting  those  offences  for  which  the  permission  is  not required.  However, in  view  of  the  non-obstante  clause,  the  power  of composition can be exercised by the court or the  Company  Law  Board.   The legislature has conferred the same power to the Company Law Board which  can exercise  its  power  either  before  or  after  the  institution   of   any prosecution whereas the criminal court has no  power  to  accord  permission for composition of an offence before  the  institution  of  the  proceeding.

The objective of the introduction in of the compounding provision in the act to reduce the number of litigation in the court as the offences under the act is of technical nature. The intent of the law make would not have been to take the shelter of the court in every matter where the offence are or compoundable nature.

It was  further held in the matter of VSL Finance vs. Union of the India & other (supra) that  prosecution has been laid, it is the criminal court which is  in  seisin  of the matter and it is only the magistrate or  the  court  in  seisin  of  the matter who can accord permission to compound the offence.  In  any  view  of the matter, according to the learned counsel of the Appellant, the Company Law Board  has  to seek permission of the court and it  cannot  compound  the  offence  without such permission.  This line of reasoning does not commend us.  Both sub- section (1) and sub-section (7) of Section 621A of the Act start  with  a non-obstante clause.  As is well  known,  a   non-obstante  clause  is used as a legislative device to give the enacting part of  the  section,  in case of conflict, an overriding  effect  over  the  provisions  of  the  Act mentioned in the non-obstante clause. Ordinarily, the offence is compounded under the provisions of the Code of Criminal Procedure and the power to accord  permission  is  conferred  on the  court  excepting  those  offences  for  which  the  permission  is  not required. It was further held in the matter of VLS Finance vs. Union of India & other (supra) thatHowever, in  view  of  the  non-obstante  clause,  the  power  of composition can be exercised by the court or the  Company  Law  Board.   The legislature has conferred the same power to the Company Law Board which  can exercise  its  power  either  before  or  after  the  institution   of   any prosecution whereas the criminal court has no  power  to  accord  permission for composition of an offence before  the  institution  of  the  proceeding. The legislature in its wisdom has not put the rider of prior  permission  of the court before compounding the offence by the Company Law  Board   and  in case the contention of the appellant  is  accepted,  same  would  amount  to addition of the words “with the prior permission of the court” in  the  Act, which is not permissible. As is well settled, while interpreting the provisions of a statute, the court avoids rejection or addition of words and resort to that only in exceptional circumstances to achieve the purpose of Act or give purposeful meaning.  It is also a cardinal rule of interpretation that words, phrases and sentences are to be given their natural, plain and clear meaning.   When the language is  clear  and  unambiguous,  it  must  be  interpreted  in  an ordinary sense and no addition or alteration of  the  words  or  expressions used is permissible.  As  observed  earlier,  the  aforesaid  enactment  was brought in view of the need of leniency in the  administration  of  the  Act because a large  number  of  defaults  are  of  technical  nature  and  many defaults occurred because of the complex nature of the provision.

From what we have observed above, we are of the opinion that the power under sub-section (1) and sub-section  (7)  of  Section  621A  are  parallel powers to  be  exercised  by  the  Company  Law  Board  or  the  authorities mentioned therein and  prior  permission  of  Court  is  not  necessary  for compounding the offence, when power  of  compounding  is  exercised  by  the Company Law Board.

The provisions of Section 441(6) of Act 2013 are similar to section 621A of the Act, 1956 with the exception that in the former case, approval of special court is required in the case of the offences punishable with fine or imprisonment and offence punishable with fine or imprisonment or with both whereas in case of later, approval of court was warranted in case of offence punishable with fine or imprisonment or with both.  Since Act, 2013 was promulgated in the month of   March, 2013 whereas the order of Supreme Court (supra) was pronounced in the month of April, 2013. The order shall mutatis mutandis apply to the Act, 2013. Hon’ble Supreme Court in its judgement (Supra), clearly observed that the legislature has conferred the same power to the Company Law Board which  can exercise  its  power  either  before  or  after  the  institution  of  any prosecution whereas the criminal court has no  power  to  accord  permission for composition of an offence before  the  institution  of  the  proceeding.

It is abundantly clear that no approval of the court/ special court (section 441(6) of the Act, 2013) is required for compounding of offence by the tribunal/ regional director or officer authorized by the Central Government, as the case may be and same be exercised by the compound tribunal/ officer same in the line of section 441(1) of the Act, 2013.

Benefit of Compounding:

The benefits of the compounding of offences in the Acts are many fold such as;

a. Peace of mind.

b. Compounding amount shall not be treated as fine for the purpose of Part I of Schedule V of CA-2013 which otherwise if imposed shall make a person disqualified to become the MD/ WTD/ Manager unless you obtain the approval of central government.

c. Avoid harassment due to appearance before adjudicating officer or special court.

d. Compounding application can be moved even before start of prosecution proceeding which can otherwise be public whereas the compounding can be under wrap.

e. Fine paid in compounding can be claimed as expenses whereas penalties shall be added to your income on assessment by tax officials

Authority to Compound

Regional Director:  Power to compound the offence lies within Regional Director or any officer authorized by the Central Government- when maximum amount of find which may be imposed for such offence not exceed Rs. 5,00,000/-

Tribunal: when maximum amount of fine which may be imposed for such offence exceeds Rs. 5,00,0000/-

Here maximum amount of find means, fine which is payable for alleged violation of a particular section of the Act. It is provided in the section 441, the compounding authority has no power to impose fine which exceeds the maximum amount of fine which may be imposed for offence so compounded.

Court before which the prosecution has been filed also has power to compound the offence.

Procedure of compounding of offence:

An application for compounding of offence has to be made before the office of the Registrar of Companies where the registered office of the company is situated. A Form GNL-1 has to be filed with ROC along with the following attachments:

a. Board resolution passed for making an application.


b. Detailed application giving the general profile and history of the company, facts of the case like nature of offence and period of default, details about making the default good, prayer for compounding etc.

c. Copy of notice received from ROC. (Not applicable in case compounding application is made suo moto.

d. The office of the Registrar of Companies shall, after going through the contents of the application shall calculate the maximum amount of penalty that can be imposed for violation of provision of the Act, forward the application to office of RD or CLB/Tribunal, as the case may.

e. Office of RD/ CLB/Tribunal shall fix the date and time of personal hearing for the company or officer of the company who is seeking compounding of offence.

f. After hearing the matter, RD/CLB/Tribunal shall pass an order compounding the offence.

Compounding is not license to commit offence

Objective of compounding provision is to avoid cumbersome and costly litigation on technical grounds; the section allows all offences under the Companies Act, save those that attract mandatory imprisonment, to be compounded. Without any strictures laid down in the provision to gauge which of the offences were acts of inadvertence and which ones were not, the concept of compounding sometime runs the risk of being abused by the wrongdoers. But at the same it should not forget that the compounding provisions are not a license to commit the offence under the Act. It is specifically provided in the Act, Acts that in case same offence is committed by the company or its officers within period of three years from the date on which a similar offence committed by it or him, offence shall not be committed. However, any second or subsequent offence committed after the expiry of a period of 3 years from the date on which the offence was previously compounded shall be deemed to be a first offence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Sushil Aggarwal

Advocate

SA & Associates

Advocates & Solicitors


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