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Brief background:

The compounding provision in the Act were inserted by the Companies Amendment Act, 1988 on the recommendation of the 1SACHAR COMMITTEE as amended by the Companies (Amendment) Act, 2000. 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 provisions2.

The concept of compounding of offences was incorporated as a measure to avoid the long drawn process of prosecution, which would save both cost and time in exchange of payment of a penalty to the aggrieved. In criminal law, the power to compound the offence is at the discretion of the victim. The perpetrator cannot demand for compounding of the offence. But in corporate law, compounding is at the discretion of the offender/offending company.

When compounding is done, the prosecution is converted into fine i.e. condonation of prosecution by imposing penalty. It enables the offender company and the director / officerin- default to avail peace and honorable discharge and avoid cumbersome trial

1 Sachar Committee had suggested substitution of the existing provisions for realization of fines through Court proceedings by a system of penalty as provided in the Income-tax Act, and also the Registrar, and the Company Law Board, including the Regional Benches, should be clothed with power of a court so as to empower them to take cognizance of and to impose penalties for any infraction of certain specified provisions of the Act.

2 An example is the decision in Bradford Investments Plc. (No.2), Re, 1991 BCLC 688. In this case, four persons transferred their business to a company which allotted them shares in consideration of the price. They did not know that sec 103 of 1985 Act required an independent report on the value of the business. For this statutory violation they become liable to pay a fine of more then 1 Million Euro though they had relied on the advice of their solicitors, practitioners and the Company’s accountants.



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.


in case of compounding under the Companies 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.

Meaning of Compounding:

What is Compounding?

As per the Black’s Law Dictionary, to “Compound” means “to settle a matter by a money payment, in lieu of other liability.” This definition thoughtfully represents the concept of Compounding as a Settlement Mechanism, a settlement by paying the penalty in lieu of facing the prosecution for the offence committed.

The meaning of word compounding of offence is not defined under Companies Act, 1956/2013. However if we try to analyze the section 621A, we can draw one clear interpretation i.e. “It`s nothing but admission of guilt” In the process of compounding, the person may either Suo Moto or on receipt of notice of default/initiation of prosecution, admits the commission of default and make an application for compounding of the concern offence. The defaulters agree to pay penalty which may be ordered by the Central Government.

Compounding is essentially a compromise or arrangement between administrator of the enactment and person committing an offence. Compounding crime consists of receipt of some consideration (termed as compounding fees) in return for an agreement not to prosecute one who has committed an offence3.

4 Compounding Of 5Offence Under Companies Act:

3 - Reliance Industries, in re-(1997) 24 CLA 214 (CLB)

4 In today's Corporate world, good governance means to comply with all the provisions of Corporate laws. Non compliance will result in penalties or penalties with imprisonment. Corporate offences are classified into civil and criminal offences. Further it has been classified as Compoundable and Non compoundable offence. 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

There is great need of leniency in the administration of the Act particularly its penalty provisions not only because a large number of defaults are of technical nature but also because they arise out of ignorance of the lengthy and bewildering complexity of the provisions of the Act.

Section- 441(1) of Companies Act, 2013:

Power of Compounding of offence is with NCLT/ Regional Director/ Person authorized by Central Government.

Permission of Special Court

Section- 441(6) of Companies Act, 2013: Any offence which is punishable under this Act, with imprisonment or fine, or 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 that Act for compounding of offence.


At present, Section 441 of Companies Act, 2013 and provision relating to Special courts are not effective. Thus, Compounding can be done as per Section 621A of Companies Act, 1956.

Compoundable And Noncompoundable Offences: Compoundable offences are such offences in which the complainant would be at liberty to compound the matter with the accused as a matter of right and such right is not available in case of non compoundable  punishable with a shorter jail term or fine. When an offence is compounded, the party, who has been aggrieved by the offence, is compensated for his grievance.

The compounded amount shall not exceed the maximum amount of fine. Only the aggrieved  an offence. Generally, the compounding of offences is permitted in case of procedural violations which are not prejudicial to the interests of the company or public.

Jurisdiction for Compounding of Offence:


Power of Regional Director:

5 As per 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. Section 2(n) of Criminal Procedure Code 1973 (‘CrPC’) also defines ‘offence’ similarly.

Where the maximum amount of fine which may be imposed for such offences doesn’t exceed Rupees Five Lac (Rs. 500,000).

Power of NCLT:

Where the amount of fine which may be imposed for such offences doesn’t below Rupees Five Lac (Rs. 500,000).


Power of Regional Director:

Where the maximum amount of fine which may be imposed for such offences doesn’t exceed Rupees Fifty Thousand (Rs. 50,000).

Power of CLB:

Where the amount of fine which may be imposed for such offences doesn’t below Rupees Fifty Thousand (Rs. 50,000).

Some Important Provisions:

6 Maximum Amount of Penalty:

Sum so specified in order shall not, in any case, exceed the maximum amount of the fine which may be imposed for the offence so compounded.

Interval between Two Same Offences for Compounding:

7Any second or subsequent offence committed after the expiry of a period of Three year from the date on which the same offence was previously compounded, shall be deemed to be a first offence. section 441(2)

(In other words if any offence committed by a company or its officers with in a period of three year from the date on which a similar offence committed by company or office was compounded under this section, Then Provision of this Section will not be applicable and company & officer will not be eligible for compounding).

In other words, similar offence can be compounded only once in three years. A dissimilar offence i.e. under different provision of law, can be compounded within 3 years of previous offence, which was not similar.

6 Amount of Order can’t be exceeding the maximum amount of penalty given under particular section for which application for compounding is made.

7 After the expiry of three years from the date of compounding of offence, if the second or subsequent offence had been committed, the same shall be treated as the first offence.

List of Offences which Can’t be Compounded:

The third proviso of Section 441 provide that following offences can’t be compounded by the Company or its officer:

(a) In case either the investigation has been initiated or is pending.

(b) In case similar offence committed by it has been compounded and period of three years has not expired.

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

Under Companies Act, 1956: Offences are divided under three categories:-

i. Offences punishable with fine only.

ii. Offences punishable with imprisonment or with fine, or with both, (compounded with the permission of count)

iii. Offences punishable with imprisonment only can’t be compounded.

Effects of Compounding: - Compounding has very significant impacts. They are as follows;

i. Once the offence is compounded, no further prosecution shall be initiated either by registrar or shareholder or any other person in respect of that offence.

ii. If the offence is committed for non filing of any return or document with registrar, then that return or documents needs to be filed with the registrar along with fees and additional fees as may be imposed under the order and within such time frame as may be stipulated under the order.

iii. If any prosecution is going in any court in respect of the offence, then on successful compounding of the same, the person against whom the prosecution is going on shall be discharged.

iv. Failure of compliance with the order of Compounding is an offence punishable with imprisonment of six months or fine not exceeding ` 100,000/- or with both.

v. Once the offence is compounded, the intimation of compounding needs to be given to the Registrar within the period as mentioned in the order of compounding.

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Published by

CS Divesh Goyal
(Practicing Compnay Secretary)
Category Corporate Law   Report

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