Brief on Compounding of Offences Under Companies Act 2013
Petitioner defaulted in filling annual return and financials for the year
2014-15. However, default made good as company filed its financials on
14.11.2017 (i.e, during FY 2017-18). While criminal prosecution was
pending under section 137 of companies act, 2013 before tis hazari court
(Special court) , the company went into compounding before NCLT.
1. Section 137 deals with non -filling of AOC4 and Section 92(5) deals with
MGT7. It is pertinent to note that non filling of AOC4 attracts FINE whereas non
filling of MGT7 attracts PENALTY. (However after 2018 ordinance , both are
reclassified as PENALTY only). So the consequences of Fine may attract criminal
prosecution as it evident in case of Section 137.
2. Section 441 of companies act,2013 deals with compounding process.
3. Section 320 Crpc ,1973 make a reference of compounding of offences and the
4. Section 164 of companies act, 2013 deals with disqualification of
1. Whether Compounding before NCLT amount to disqualification of directors ?
If yes, whether there any precedents in contrary ?
2. Whether Penalty imposed by ROC Justified in quantum ?
3. Whether appeal before NCLAT tenable ?
4. Whether prosecution of directors before tiz hazari (Special court) is
compoundable ? whether Crpc has its role here ?
5. Whether compounding amount to disqualification of directors ?
1. Section 320 Crpc:- Compounding will have the affect 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 not become ineligible to be
appointed as a director. Even if otherwise, he admitted himself as guilty and
doesn’t get the fine before NCLT compounded , still the quantum of punishment is
upto 6 months which nowhere attracts section 164 of companies act,2013. Thus, in
either of the case the director cannot be disqualified for non filling of AOC4
and MGT7 (for one or two FY but not more than that) whether get offence
compounded or not.
2. The term offence defined under 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. Further, it is also to be note here that the Section 621A of
companies act,1956 was interpreted in a way which otherwise meant compounding to
be admission of guilty. However, the same is not expressed in section 441 of
companies act,2013. Thus, compounding is not admission of guilt, rather it is
acquittal by paying composite fees.
3. Legal Precedents:-
a) No penalty or prosecution after compounding:In P P Varkey V. STO (199) 114 STC 224 (Bom HC DB), it was held that once an offence is compounded, penalty or prosecution proceeding
cannot be taken for same offence.
b) In S Viswanathan V. State of Kerala (1993) 113 STC 182 (Ker HC DB),it was held that once the matter is compounded, neither department norassessee can challenge the compounding order. Department cannot reopen the matter on the reason that actual suppression was much higher.
c) No appeal against order of composition:A person having agreed to the composition of offence is not entitled to challenge the said proceeding by filing an appeal. (S V Bagi v. State of
Karnataka (1992) 87 STC 138).
d) No hearing necessary to reject application for compounding?:In M P Purusothaman v. ADIT (2003), it was held that authority can reject the application for compounding. It is not necessary to give personal
hearing before rejecting application for compounding.
4. Power of Special Court:-Special Court can compound offence if offence punishable with imprisonment or fine or both:Any offence which is punishable under Companies Act with the permission or with fine, or with both, shall be compoundable with the permissionof Special Court, in accordance with the procedure laid down in Code of Criminal Procedure for compounding of offences. However, any offencewhich is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.
5. Process of Compounding:
a) Calling of Board Meeting Company will call the Board Meeting as per Companies Act, 2013 and SS1.
b) Calculate the amount of offence Board will calculate the amount of the penalty as per the relevant section.
c) Holding of Board Meeting Pass a resolution to file application with authority for compounding of offence and authorize director of the
Company and for preparation and signing of documents including application. Company will authorize any
professional for follow up the matter with authority.
d) Preparation of Compounding Application Company will prepare the application of compounding as
per NCLT Rules.
e) Filling of Form with ROC Procedure for making application:
Application for compounding shall be submitted electronically in eform GNL1. This form will be forwarded by
ROC to NCLT/Regional Director as applicable.
f) Hearing before Authority There is no specific provision in the Act, normally, NCLT/Regional Director will give personal hearing and thenpass a speaking order giving reasons. The hearing can be attended by Director/secretary/ officer of Companyor by authorized representative like advocate or a practicing CA/ CMA/ CA.
6. Appeal before NCLAT is not tenable in present case since the quantum
determined by ROC is in light with those of Section 137 and section 92(5) of
Companies act, 2013. Kindly note that penalty would otherwise be half of what
mentioned in section 137 and section 92(5) if the company fall within the
definition of section 2(85) but here the company is not a small company and as
a result the benefit of section 446B of Companies act,2013 is not available.
7. Language of Section 164(2) of companies act, 2013 expressly mention “
default in non-filling of financials for 3 continuous years”. Thus, in the
present case the directors default is not within meaning of section 164(2), thus
their default doesn’t tantamount to disqualification.
8. Language of Section 164(1)(d) of companies act, 2013 said that the offence
involving moral tripude or otherwise where sentence is more than that of 6
months. The word otherwise depicts the legislature intention to cover all those
cases which doesn’t include moral tripude. However, even if we interpret non
filling of AOC4 as Otherwise offence within meaning of section 164(1)(d), still
the Disqualifications doesn’t attract since Imprisonment under section 137 is
Upto 6 months only. Thus, Section 164(1)(d) doesn’t apply also.
9. Lets suppose the company is not going into compounding and directors got
prosecuted before special court. So, the principal question arise is that
whether the Special court can compound this 6 months imprisonment. Answer to
this question depend upon the section of IPC under which he will be charged.
Please note that compounding under Section 320 Crpc is permissible only for IPC
offences. Thus , power of special court to compound imprisonment as a
consequence of Sction 137 CA 2013 will depend upon section of IPC under which he
will be charged with.
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