Articles

In view of the COVID-19 pandemic and the mandatory social distancing norms in place, Companies may be facing some practical difficulties in some of the compliances with the Companies Act, 2013 (“Act”). The Ministry of Corporate Affairs (“MCA”), on its part, has taken several steps for easing such difficulties.

By way of examples, the mandatory period for holding of an Annual General Meeting where the financial year ended on 31.12.2019 has been extended[1], suitable amendments have been made to the procedure for calling and holding of Extraordinary General Meetings and of passage of resolutions at such meetings[2], and the application of similar relaxations to the holding of AGMs recently[3].

The non-compliance of some of the obligations under the Act constitutes an offence punishable with fine and/or imprisonment. The Companies Act, 2013 (“Act”) imposes several obligations upon a Company post its incorporation, which obligations are required to be complied with in a timebound manner. The non-compliance of some of the obligations is an offence, which results in punishment either in the form of fines/ penalties and/or imprisonment of the officers in default. As in criminal jurisprudence, so also in Company Law, the offences can be categorized as ‘compoundable’ and ‘non-compoundable’. Section 441 of the Act confers the power of compounding of certain offences upon the authorities under the Act. This provision is a successor to Section 621A in the erstwhile Companies Act, 1956 which introduced the power of composition pursuant to a recommendation of the Sachar Committee[4].

In view of the aforementioned recent developments, we have analysed the law and the judicial trends in the matter of compounding of offences under the Act as under:

As per Section 441 of the Act, an offence under the Act for which the punishment is fine only is compoundable by the Regional Director or any other officer authorized in that behalf by the Central Government, in case the maximum amount of fine that may be imposed does not exceed Rupees Twenty Five Lakhs. The Tribunal, i.e. the National Company Law Tribunal (“NCLT”), has the power to compound any offence irrespective of the amount of fine that may be imposed under the provision. In Pahuja Takii Seeds Limited & Ors. v. Registrar of Companies, NCT of Delhi and Haryana and Others[5], the National Company Law Appellate Tribunal (“NCLAT”) clarified the position that the NCLT is empowered to compound the offence irrespective of the amount of fine specified by the Act for the offence. That is to say, while the Regional Director or any other officer authorized by the Central Government has a limited power of compounding, the power of the NCLT is unlimited, once the other conditions in the Act are satisfied.

The power of compounding of the aforesaid offences has been conferred on the aforementioned authorities notwithstanding anything contained in the Criminal Procedure Code, 1973 (“CrPC”).

Both, the company as well as the officers in default who are liable for commission of the offence (as per the applicable provisions of the Act), may prefer an application for compounding. In Pahuja Takii Seeds (supra) a bench of three members of the NCLAT answered the question as to whether a combined application could be preferred by the companies and the officers in charge. The NCLT in the judgment under appeal had held that a combined application was not maintainable. The NCLAT reversed the aforesaid view and held that there was no bar under the Act against preferring a joint application by the company with the officers in default.

An Application for compounding can be preferred before or after initiation of prosecution for the offence. Section 441(3)(b) provides for notice for compounding of any offence to be given to the Registrar of Companies (“RoC”) within seven days of the order of compounding.

If an application for compounding is allowed, and an offence is compounded before the institution of any prosecution, Section 441(3)(c) prohibits the initiation of prosecution in relation to such offence, either by the RoC or by any shareholder of the company or by any person authorised by the Central Government against the offender in relation to whom the offence is so compounded. Similarly, if an offence is compounded after initiation of prosecution, the Registrar of Companies shall bring to the notice of the court in which the prosecution is pending the fact of such compounding, and on such notice of the compounding of the offence being given, the company or its officer in relation to whom the offence is so compounded shall be discharged.

In Shri Subhinder Singh Prem v. Union of India through RoC[6], the NCLAT reversed the decision of the NCLT and upheld the argument of the Appellant therein to the effect that the pendency of cases initiated by the SFIO could not be a ground for rejection of the request for compounding.

As per Section 441(6) of the Act, the offences for which the punishment is imprisonment only or is imprisonment and also fine, are not compoundable notwithstanding anything contained in the CrPC. This means the offence may not be compounded by the NCLT or any officer under the Act, or even by any other person empowered under the CrPC to compound offences for which the punishment is one of the aforesaid.

Prior to its amendment by Section 39 of the Companies (Amendment) Act, 2019 (“2019 Amendment”) [which provision came into force on 2.11.2018], Section 441(6) read as follows:

“(6) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974),— (a) 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 offences;

 

(b) any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.”

 

In M/s Cinepolis India Pvt. Ltd. v. Registrar of Companies, NCT of Delhi & Haryana, New Delhi[7], the question that arose before the NCLAT was as to whether the offences under Sections 92, 137, 96 and 129 of the Act were compoundable. Upon an examination of the provisions, it was found that except Section 96 (i.e. violation of Section 96, for which the punishment was provided in Section 99) all other provisions were those for which imprisonment was provided as a punishment in the alternative. Section 96 read with Section 99 was the only provision which provided only fine as the punishment. Thus, it was held that the offence under Section 99 could be compounded by the NCLT under Section 441.

The rest of the provisions were those which provided for punishment of imprisonment in the alternative. The NCLAT referred to the decision of the Supreme Court in VLS Finance v. Union of India[8] which had dealt with a similar question under Section 621A (predecessor to Section 441, as it then stood) and wherein it was held that there was no prohibition to compounding offences which were punishable with imprisonment in the alternative. Thus, the NCLAT held that the offences under Sections 92, 137 and 129 were compoundable by the NCLT. Having noticed that there were no proceedings pending before the Special Court, the NCLAT held that the NCLT could proceed to compound the offence without any reference to the Special Court.

In Cisco Video Technologies India Private Limited[9], compounding of offence under Section 186 of the Act was sought before the NCLT, Bengaluru Bench. The punishment prescribed therein was one of fine on the Company, and of imprisonment of the officers in default. An ingenious argument came to be advanced, viz., that although imprisonment as well as fine were provided as punishment, the offence insofar as the Company is concerned may be compounded on a ‘stand-alone basis’, since the Company was not liable for the punishment of imprisonment in terms of the provision. The argument was rejected by the NCLT, and the application was permitted to be withdrawn.

In Karthikeya Paper & Boards Limited & 2 Ors. v. Registrar of Companies, Tamil Nadu[10], the offence committed was under Section 92(5) of the Act for failure to file annual return and the punishment prescribed under the said provision was one of imprisonment and also fine. On a request for compounding having been made, and based on a report of the RoC, the NCLT Chennai permitted compounding of the offence and reduced the fine imposed by the RoC. On an appeal being preferred by the Company and the Directors against the order of the NCLT (praying for further reduction of fine), the NCLAT raised the issue of jurisdiction of the NCLT to compound the offence in view of the bar in Section 441(6). The NCLAT found that the offence in question could not have been compounded except with the prior permission of the Special Court.

Section 441(6) was substituted by the following, vide the 2019 Amendment:

“(6) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.”

Thus, while the absolute prohibition on compounding of offences which were punishable with imprisonment only or with imprisonment and also fine was continued, the requirement of permission of the Special Court for compounding of offences which were punishable with imprisonment in the alternative was done away with.

Section 441(7) is also of relevance in this regard. It states that the offences compoundable under Section 441, may be compounded only in the manner set out in Section 441 itself, and in no other manner. This absolutely clarifies that compounding of any offence under the Act (other than those for which punishment is imprisonment, or both imprisonment and fine) may only be permitted by the Tribunal or the Regional Director or any other officer appointed by the Central Government (as the case may be) in the manner set out in Section 441.

What are the Other Conditions laid down by the Act for a Request for Compounding to be considered?

The third proviso to Section 441(1) lays down that an application for compounding cannot be entertained if an investigation against the Company has been initiated or is pending on the date of such application. An investigation into the affairs of the Company is provided under Chapter XIV of the Act.

Section 441(2) prohibits a request for compounding of an offence by a company or person for a period of three years from the date on which a previous similar offence committed by that company or person has been compounded in terms of Section 441. The express intention of the legislature in enacting this provision is to prevent ‘repeat offenders’ from drawing the benefit of this provision. The Explanation to the provision clarifies that a subsequent offence committed after the expiry of three years from the date of compounding of the first offence, shall be deemed to be a first offence for the purposes of Section 441(2).

In Viavi Solutions India Pvt. Ltd. & Ors. v. Registrar of Companies, NCT Delhi and Haryana[11], the NCLAT laid down certain factors which ought to be considered by the NCLT while considering a request for compounding. These are as follows:

(i)                 The gravity of offence;

(ii)               The act is intentional or unintentional;

(iii)             The maximum punishment prescribed for such offence, such as fine or imprisonment or both fine and imprisonment.

(iv)             The report of the Registrar of Companies.

(v)               The period of default.

(vi)             Whether petition for compounding is suo moto before or after notice from Registrar of Companies or after imposition of the punishment or during the pendency of a proceeding.

(vii)           The defaulter has made good of the default.

(viii)         Financial condition of the company and other defaulters.

(ix)             Offence is continuous or one-time.

(x)               Similar offence earlier committed or not.

(xi)             The act of defaulters is prejudicial to the interest of the member(s) or company or public interest or not.

(xii)           Share value of the company, etc.

In the same decision, the NCLAT broadly allowed compounding of the offences upon payment of approximately 1/5th of the maximum fine prescribed. This has broadly been followed by the NCLTs in the country thereafter.

An interesting observation of the NCLT Bench at New Delhi in In Re: UW International Training and Education Centre for Health Pvt. Ltd.[12] begs mention at this stage. In this case (decided after the NCLAT decision in Viavi), the RoC, in its report had recommended a fine of the minimum amount prescribed by the provision in question, as the amount payable for compounding of the offence. The NCLT opined that “The calculation recommended by the RoC is by way of imposition of penalty on prosecution holding the defaulter guilty. Under such circumstances, the sentencing provided under the Act cannot be below the minimum. However, the principle of imposing minimum fine on compounding matters is not mandatory, as compounding of an offence can be accepted by a Court even by admonishing the defaulter or issuing a warning”.

In Deccan Chronicle Holdings Limited & Ors. v. Registrar of Companies, Hyderabad[13] the NCLAT considered an appeal from a decision of the NCLT Hyderabad Bench rejecting an application for compounding of the offence under Section 297 of the Companies Act, 1956. In case of a Company having a paid up share capital of Rupees One Crore or more, the said provision mandated previous approval of the Central Government for entering into any contracts in which the Directors of the Company were interested. The offence having been committed, an application for compounding came to be filed. The NCLT rejected the application as premature, on the ground that the approval of the Central Government had not been taken for the contract in question prior to filing of the application for compounding. The NCLAT reversed the decision of the NCLT while observing: “In these cases, as it is admitted that while entering into interested transaction prior approval of the Central Government as required under sub-section (1) of Section 297 of Companies Act 1956 has not obtained, the question of obtaining post facto approval does not arise. Once it is alleged and accepted that the company or directors (appellants herein) have made interested party transaction without prior approval of the Central Government, which attracts penal action, the petition under Section 621A of the Act 1956 (now Section 441 of the Act 2013) is maintainable. The Tribunal cannot abdicate its power and jurisdiction of condonation of punishment, if permitted under law by asking the party to obtain the approval of the Central Government.”

In In Re: Reddy Veeranna Constructions Pvt. Ltd. & Ors.[14], the Bengaluru Bench of the NCLT compounded the offence of delay in holding of an AGM upon payment of 10% of the total penal amount as compounding fee. The NCLT found merit in the submission of the Company that the delay was due to change in the software program in the accounts department and delay in the functional process of software installed during the financial year and also recruitment related issues.

In APC Credit Rating Pvt. Ltd. v. ROC, NCT of Delhi and Haryana[15] the NCLAT was called upon to examine whether the NCLT was empowered to review its decision rendered under Section 441 of the Act. In this case, the applications for compounding filed by the Appellant therein was dismissed by the NCLT. The Appellant therein preferred applications under Rule 154 of the NCLT Rules 2016 praying for a review of the decisions on the ground that the NCLT had failed to consider the NCLAT decision in Viavi (supra). The applications for review also came to be rejected for lack of jurisdiction.

The NCLAT upheld the orders of the NCLT while holding that Rules 11, 154 and 155 of the NCLT Rules relied upon by the Appellant did not confer a power of review on the NCLT. Further, it was held that the case also did not fall in the category of ‘mistake apparent on the face of the record’ which is the basis for exercise of power under Section 420(2) of the Act by the NCLT.