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Compounding of offences under Companies Act 1956


P C Agrawal 
posted on 13 August 2013


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. Compounding is a settlement process by which the accused pays compounding charges in lieu of undergoing consequences of lengthy prosecution. 

 

Benefits of compounding:

 

In case of prosecution for an offence in a criminal court, the accused has to appear before the Magistrate at every hearing and an advocate needs to be engaged for appearing before the criminal court. Further court proceedings are time consuming and expensive. However, in case of compounding under the Act, the accused need not appear personally and can be discharged on payment of composition fee which cannot be more than the maximum fine leviable under the relevant provision. It has been clarified by the DCA vide circular dated 28-4-1993 that compounding of offence does not amount to conviction by a court of law and the prohibition contained in paragraph (1)(a) of Schedule XIII to the Act does not apply.

 

Which offences under Companies Act 1956  can be compounded?

 

Offences under various Sections of Companies Act 1956 (‘the Act’) can be classified into following five categories:

 

a) Offences punishable with fine only;

b) Offences punishable with fine or imprisonment;

c) Offences punishable with fine or imprisonment or both;

d) Offences punishable with imprisonment only;

e) Offences punishable with imprisonment and also with fine.

 

As per Section 621A of the Act, offences committed by a company or any officer thereof under the above first three categories are compoundable whereas offences under remaining two categories are not compoundable.  

 

Further, offences under other Acts like Employees’ Provident Funds & Misc. Provisions Act 1952 or Employees’ State Insurance Act 1948 cannot be compounded under Section 621A of Companies Act.

 

Offences committed by persons other than a company or its officers (like trustees, liquidators, contributories etc.) cannot be compounded under the Act.

 

Which offences are not compoundable?

 

i) Offences under Sections 58A(5), 58A(6)(a)(i)& (ii), 58A(10), 58AA(9) relating to acceptance of deposits

ii)  Section 68A(i): Personation for acquisition etc. of shares.

iii) Section 73(2B): Failure to make payment within 6 months from the expiry of the 8th day.

iv) Section 80A(3)(a) & (b): Failure to comply with Section 80A.

v)  Section 108-I(4)(a): Contravention of Sections 108B or 108D.

vi) Section 116: Personation of shareholder

vii) Section 117C(5):  Default in complying with order of Tribunal.

viii) Section 153B(3)(b): Declaration by a trustee as stated in Section 153(3)(b).

ix) Section 207: Not distributing dividend within 30 days.

x)  Section 209A(8): Failure to comply with Section 209A.

xi) Section 269(11): Contravention of Section 269(10).

xii) Section 293A(5)(b): Political contribution made contrary to Section 293A

xiii) Section 446A: Failure of directors and other officers to complete the books of account and get them audited upto date of winding up order made by Tribunal and submitted to Tribunal.

xiv) Section 540: Frauds by officers in relation to winding up.

xv) Section 541(1): Failure to maintain proper books of account in relation to winding up.

xvi) Section 581ZM(2): Failure to furnish information relating to Producer Company.

xvii) Section 625(4): Failure on the part of a shareholder to pay compensation.

xviii) Section 628: False statements as mentioned therein.

xix) Section 629: False evidence given as stated therein.

xx) Section 630(2): Wrongful withholding of property.

 

Whether second offence can be compounded?

 

If a person has already compounded an offence, he is not eligible to apply for compounding a similar offence for a period of 3 years from the date of compounding the first offence.  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.

 

Who can make an application for compounding?

 

Section 621A(1) of the Act provides that a company or an officer thereof who has committed or who is alleged to have committed an offence can apply for compounding the offence.  Section 5 of the Act defines the term ‘officer who is in default’.  It has been held that a compounding application by persons who were not officers in default was to be rejected.  Amadhi  Investments Ltd., re. (2009) 95 SCL 255:2009) 149 Com Cases 617 (CLB).

 

When can an application for compounding be made?

 

Application for compounding of offence can be made before or after institution of any prosecution. Default should be made good before filing application. In case prosecution is instituted, the case can be compounded before the sentence is pronounced.

 

Which authority has the power to compound an offence?

 

The offence can be compounded by the Regional Director (RD) where the maximum amount of fine is upto Rs.50,000/- and by the Company Law Board (CLB)where the maximum amount of fine exceeds Rs.50,000/-.

 

What is the amount of composition fee payable for compounding the offence?

 

The amount that may be specified by the authority to be paid for compounding of offence cannot exceed maximum amount of fine that may be imposed for the offence under the relevant provisions of the Act.  Further, the sum, if any, paid by way of additional fee under Section 611(2) shall be deducted from the amount specified for compounding of the offence. The amount should be decided keeping in view factors like the nature of the offence, financial position of the company, continuation of the default, intention etc.

 

What is the procedure for making an application for compounding of an offence under the Act?

 

The company or the officers thereof can file online application for compounding of an offence to the Registrar of Companies in e-Form 61 who will forward the same to the RD/CLB together with his comments thereon.  The application should state the circumstances leading to the alleged offence and whether the default was made good before or at the time of making the application.  Separate application should be filed by each officer even for the same offence.  The application should be accompanied by Power of attorney for memorandum of appearance in Form 5 of CLB Regulations, affidavit verifying the content, detailed application as per the Regulations, copy of Memorandum & Articles of Association, copy of Balance Sheet and Statement of Profit & Loss etc.As per general circular No.14/2012 dated 21-6-2012 issued by MCA, filing fee should be paid as per Companies (Fees on Application) Rules 1999.

 

What is the procedure after making application for compounding of offence?

 

An opportunity of oral hearing is provided to the company, its officers in default, the Registrar or any other complainant by the compounding authority keeping in view principles of natural justice.  After hearing all concerned, the authority shall pass an order specifying the amount to be credited to the Central Government account for compounding the offence which should be paid together with e-Form 21.  Section 621A(3) of the Act provides that where an offence is compounded before or after the institution of any prosecution, intimation thereof should be given to the Registrar within 7 days from the date on which the offence is so compounded in e-Form 21 along with copy of order and resolution passed by Board of Directors of the company.  If the order is made after institution of any prosecution, Registrar should bring the same in writing to the notice of the court where the prosecution is pending, and on such notice the company or its officers in default shall be discharged by the court.

 

Can directors of a company under liquidation make compounding application?

 

The DCA vide circular dated 6-3-2002 has clarified that in view of the provisions of Section 446 read with Section 621A of the Act, there is no legal bar for composition of offence under Section 621A.  Section 446 does not bar criminal proceedings against the directors of the company for any offence under the Act and the offences are compoundable.  Where the penal provisions provide for proceedings against the companies also and if the offences are compoundable, compounding will not be permissible against the company in view of provisions of Section 446 of the Act.

 

Whether application for compounding of offence be rejected by the authority?

 

The power to compound an offence under Section 621A of the Act is discretionary one and the authority can reject the application if the default is not made good [General Produce Company Ltd. Re (1994) 81 Comp Cas 570 CLB: (1994) 4 Comp LJ 99].

 

Whether the authority has power to issue directions?

 

The authority can also issue directions for filing any document, return etc. with the Registrar within the period specified in the order alongwith the filing fee and the additional fee payable under Section 611.  Failure to comply with such directions is punishable and is compoundable only with the permission of the court.  Any officer or other employee of the company who fails to comply with any such order shall be punishable with imprisonment for a term which may extend to 6 months, or with fine not exceeding Rs.50,000/- or with both.

 

What are the effects of compounding?

 

If the offence is compounded before institution of prosecution, it would act as a bar to institution of any prosecution against the offender by the Registrar or by a shareholder or by any person authorised by the Government in relation to that offence.  However, mere submission of the application for compounding does not operate as a bar for launching prosecution.  If the offence is compounded after institution of prosecution and such composition is brought to the notice of the court by the Registrar in writing, the company or its officer in default shall be discharged.  Where the offence falls within the purview of Section 621A(6)(a), i.e. offence which can be compounded only with the permission of the court, the composition thereof shall have the effect of an acquittal of the accused as per Section 320B(8) of CrPC.In S. Viswanathan v. State of Kerala [1999] 113 STC 182 (Ker.) it was held that the department cannot reopen the matter on the ground that the actual suppression was much higher.

 

In which cases court’s permission is required for compounding of offences?

 

Section 621A(6)(a) of the Act provides that offence which is punishable under the Act with imprisonment or fine, or with both, shall be compoundable with the permission of the Court in accordance with the procedure laid down in the CrPC for compounding of offences.  Sub-section (7) provides that no offence specified in the Section shall be compounded except under and in accordance with the provisions of the Section.  In the case of VLS Finance Ltd. v. Union of India &Ors. Decided on 10th May 2013 the Supreme Court has held that powers of the Central Government to compound offence under sub-section (1) and sub-section (7) of Section 621A are parallel powers and permission of court is not required when compounding is done by Company Law Board.

 

What is the procedure for compounding under CrPC?

 

In case a prosecution is pending before the Trial Court, procedure under CrPC needs to be followed.  Section 320 of CrPC deals with compounding of offences.The complainant or the injured person can make application to the Trial Court.  Parties themselves agree on the composition amount without any say of the court.  The accused should appear before the Trial Court and may engage an advocate.  Trial court’s permission is required for compounding and on compounding the accused gets acquitted.   

 

Who has to pay compounding fee?

 

It has been clarified by the DCA vide its circular dated 28-4-1993 that in the case of a company composition fee shall be paid from its funds.  However, the directors/officers in default should pay the composition fee from their personal funds.

 

Whether an appeal can be filed against the order for compounding of offence?

 

Section 624B provides that notwithstanding anything contained in the CrPC appeal can be filed by the Central Government from an order of acquittal passed by any court other than a High Court.

 

By: P C Agrawal,

B.Com., LL.B., CAIIB, FCS

Email: cs.pcagrawal@gmail.com


Published in Corporate Law
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Views : 5511
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