COMPOUNDING- UNDER COMPANIES ACT 2013
COMPOUNDING under
companies act- 2013
Compounding of
offences is yet regularized by Section 621A of Companies Act, 1956 as new
section 441 under Companies Act, 2013 is not yet notified.
The
compounding provision in the Act were inserted by the Companies Amendment Act,
1988 on the recommendation of the [1]SACHAR 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 provisions[2].
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 / officer-in-default to avail
peace and honorable discharge and avoid cumbersome trial
Benefits:
Prosecution
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Compounding
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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.
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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.
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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 offence[3].
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.
Note:
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 offences. A compoundable offence is
always a lesser degree offence 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 party can compound an offence. Not even the public
prosecutor has the power to compound 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:
UNDER
COMPANEIS ACT, 2013: SECTION 441(1) (B)
Power of
Regional Director:
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).
UNDER
COMPANEIS ACT, 1956: SECTION 621A
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:
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.
v Interval between Two Same Offences for Compounding:
[7]Any
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.
List of Offences
which Can’t be Compounded:
The third proviso of Section 441 provides 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:-
§ Offences
punishable with fine only.
§
Offences punishable with imprisonment or with
fine, or with both, (compounded with the permission of count)
§
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.
Compounding
means acquittal:-
As
per section 320 of Criminal Procedure Code, composition will have the effect 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 become
ineligible to be appointed as a director.
No penalty
or prosecution after compounding:-
In P P Varkey V. STO (1999) 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.
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 nor assessee can challenge the compounding order. Department cannot
reopen the matter on the reason that actual suppression was much higher.
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).
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.
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 permission of Special Court, in accordance with the procedure laid down in
Code of Criminal Procedure for compounding of offences. However, any offence
which is punishable under this Act with imprisonment only or with imprisonment
and also with fine shall not be compoundable.
Special
Court:
Special
Court shall be established by Central Government under Section 435(1). Until a
Special Court is established, be
tried by a Court of Session exercising jurisdiction over the area,
notwithstanding anything contained in the Code of Criminal Procedure.
Process
of Compounding:
In case of Application
by Company
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Calling of Board Meeting
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Company
will call the Board Meeting as per Companies Act, 2013 and SS-1.
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Calculate the amount of offence
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Board
will calculate the amount of the penalty as per the relevant section.
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Holding of Board Meeting
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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.
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Preparation of Compounding Application
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Company
will prepare the application of compounding (The application is to be made on
the lines of the procedure laid down in the CLB Regulations, 1991, duly
accompanied by an affidavit by the Company or its officers making the
application.)of offence along with the relevant documents.
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Filling of Form with ROC
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Procedure for making application:
As
per sub-section 3(a) of Section 441, every application of compounding of
offence shall be made to the Registrar of Companies, who, in turn, shall
forward the same along with his comments to the NCLT or RD or any other
officers, as may be authorized by the Central Government for the purpose of
adjudication.
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Filing of e-form with ROC
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Application for compounding shall be submitted
electronically in e-form GNL-1. This form will be forwarded by ROC to
NCLT/Regional Director as applicable.
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Hearing before Authority
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There is no specific provision in the Act,
normally, NCLT/Regional Director will give personal hearing and then pass a
speaking order giving reasons. The hearing can be attended by
Director/secretary/ officer of Company or by authorized representative like
advocate or a practicing CA/ CMA/ CA.
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LEGAL
PRECEDENTS
Before ordering
composition of the offence, the Regional Director or the Company Law Board is
required to follow the rules of natural justice, by giving an opportunity of
hearing to the company, the officer in-default, the Registrar or any other
complainant, including any shareholder or SEBI or an officer of the Central
Government who might have been authorized the Act.
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Order by Authority/ Filling of Order with ROC
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Where any offence is compounded under this
section, whether before or after the institution of any prosecution,
intimation thereof shall be given by the Company to the Registrar within 7
days from the date on which the offence is so compounded. Section 441(3)(b)
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Payment of amount of order by Company
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After the order, the compounding fees should be
paid in appropriate account by way of challan and receipt challan should be
produced to one compounding authority.
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List of
Offences Compounded by RD/NCLT
Offences compoundable by Regional Director
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Offences compoundable by the NCLT
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11(2)- Failure complying with the requirements relating to
Commencement of business.
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8(11)- default in
complying with the requirements relating to formation of companies
with charitable objects etc.
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16(3)- Default in complying with the
directions issued under sub-section (1) relating to rectification
of name of company
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40(5)- Default in
complying with the provisions of this section relation to securities to
be dealt in the stock exchanges
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26(9)- Contravention of provisions relating to issue of a
prospectus
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46(5)- Fraudulently
issuing duplicate share certificates by a company
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53(3)- Violation of provisions relating to
issue of shares at discount
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66(11)- Default in
publishing the order of confirmation of the reduction of share
capital by the Tribunal
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56(6)- Failure to comply with the provision relating to transfer and
transmission of securities under sub- section (1) to (5)
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67(5)- Default in
provisions relating to purchase by company or
loans by company for purchase
of its own shares
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59(5)- Default in complying with the order of Tribunal
relating to rectification of register of members
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74(3)- Failure to repay
the deposit or part thereof or any interest thereon within the time specified
or such further time as may be allowed by the Tribunal
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64(2)- Default in filing a notice related to alteration, increase
or redemption of share capital along with the altered memorandum
with the Registrar
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117(2)- Failure
in filing with the Registrar the copy of notice or agreement within
stipulated time
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67(5)- Contravening provisions relating to purchase by
company or loans by company for purchase of its own
shares
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124(7)- Default in
transfer of amount of accumulated profits to unpaid dividend account
and violating other provisions of section 124
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68(11)- Failure in complying with the provisions of this section
or any regulation made by the Securities and
Exchange Board relating
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143(15)- Failure of
auditor to intimate to Central Government regarding fraud against the company
by officers or employees
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86- Contravention of any provision relating to
Registration of Charges (Chapter VI)
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185(2)- Contravention
of the provisions of sub- section (1) relating to loans,
guarantee or security
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88(5)-Failure to maintain register of
members/debenture-holders/other security holders as prescribed
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245(7)- Committing
default in complying with the order of Tribunal under this section.
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89(5)-Failure to file declaration not holding beneficial interest in any
share
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314(8)- Default in
complying with the provisions of this Section except
sub-section (5).
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89(7)-Failure to file return relating to beneficial
interest in any share before the expiry of the time specified UIS 403(1)(i)
proviso
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316(2) -
Failure to send quarterly report on winding up and call meeting by
company liquidator
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92(6)- If a company secretary in practice
certifies the annual return otherwise than in
conformity with the requirements of this section or the
rules made there under
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99-Default in holding a meeting of the company as u/s
96, I97, I98 or in complying with any directions of the Tribunal
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102(5)- Default in complying with the provisions of this
section relating to statement to be annexed to notice
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105(3)- If default is made in complying with sub-section (2) relating
to proxies
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105(5)- If invitations to appoint as proxy a person
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or one of a number of persons specified in the invitations are issued
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121(3)-Failure to file Report on annual General meeting.
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124(7)- Failure to transfer the amount of
accumulated profits to unpaid dividend account
and violating other provisions of section 124
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137(3)-Failure to file financial statements with the
Registrar
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140(3)-Non-Compliance by auditor of sub-section
(2) relating to filing of resignation information
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147(1)-Failure of company to comply with provisions of sections 139 to
146 with regard to auditors
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157(2)-Failure to furnish DIN to Registrar
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165(6)- Acting as a director of more than 20 companies
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166(7)- Default in complying with the provisions of
this section
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relating to directors duties
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172- Contravention of then provisions of Chapter XI
relating to appointment and qualifications of directors
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178(8)- Default in complying with the provisions of section
177 & of this section relating to Committees like Nomination,
Remuneration and Stakeholders Relationship Committee
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188(5)(ii)- Related party transaction in case of other company
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186(13)- Contravention of the provisions of this section
relating to loans and investment
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187(4)- Contravention of the provisions of this section
relating to investment of company held in its name
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191(5)- Contravention of the provisions of this section
relating to payment to director for loss of office in connection with
transfer of property
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197(15)- Contravention of the provisions of this
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section relating to managerial remuneration
in case of absence or inadequacy of profits.
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203(5)- Contravention of the provisions of this section
relating to appointment of Key Managerial personnel
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204(4)- Contravention of the provisions of this section
relating to Secretarial Audit for bigger companies.
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206(7)- Failure to furnish any information during inspection or inquiry
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221(2)- Any removal, transfer or disposal of
funds, assets, or properties of the company in
contravention of the order of the Tribunal under
sub-section (1)
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222(2)- Securities in any company are issued/ transferred/acted upon in
contravention of an order of the Tribunal under sub- section (1)
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232(8)- Contravention of the provisions by the
transfer and transferee company in case of merger or
amalgamation
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238(3)-Failure to register the offer of
Schemes involving transfer of shares.
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242(8)- Contravention of the order of Tribunal
relating to alterations in memorandum or articles
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247(3)(Proviso)- Contravention of the provisions of this section
by the valuer
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249(2)- Filing of application in restricted
cases for removal of name
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302(4)- default by official liquidator in forwarding a copy
of the order of dissolution of company by tribunal within the
period specified in sub-section (3)
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306(5)- Default in calling the meeting of the creditors;
to prepare a statement of the position of the company's affairs along with a
list of creditors, estimated amount of claim and filing the resolution with
Registrar
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307(2)- Default in publication of resolution to wind up
voluntarily
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312(2)- Failure to give notice of appointment of Company
Liquidator to Registrar
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314(5)-Failure to prepare quarterly statement of accounts by
company liquidator in voluntary winding up and file with the Registrar under
sub-section (5).
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318(8)- Failure to complying with the provisions of this
section relating to final meeting and dissolution of
company
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342(6)- Failure or neglect to give assistance required under subsection
(5)
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344(2)- Failure to give statement that the company
is in liquidation
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348(6)- Contravention of the provisions of information as to pending
liquidation
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356(2)- Failure to file certified copy of the order
of Tribunal relating to dissolution of company void with the
Registrar
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392- Contravention of the provisions of Chapter XXII by a foreign
company
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405(4)- Failure to furnish information or statistics
etc. by the companies required by the Central Government
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No specific penalty or punishment is provided in the Act
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Repeated default within 3 years
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452(1)- Punishment for wrongful withholding of property
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453- Improper use of the words "limited" and "private
limited"
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454(8)- Failure to pay the penalty imposed by the
adjudicating officer or Regional Director
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464(3)- Being a member of a company formed
exceeding certain numbers
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469(3)- Contravention of the Rules framed by Central Government
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CASE
STUDIES:
No Penalty
or Prosecution after Compounding: In following Cases:
PP Varkey V. STO(1999) 114STC251(Ker HC),
It
was held that once offence is compounded, penalty or prosecution proceedings
can’t be taken for same offence.
S Viswanathan V. State of Kerala(1999) 113 STC
182 (Ker HC DB)
It
was held that once the matter is compounded, neither department nor assessee
can challenge the compounding order. Department can’t reopen the matter on the
reason that actual suppression was much higher.
No appeal
against order of composition:
S V Bagi V. State of Karnataka (199) 87 STC
138
A
person having agreed to the composition of offence is not entitled to challenge
the said proceeding by filing appeal.
Offence can
be compounded only when there is no fraud:
Reliance Industries Ltd.(1997) 24 CLA 234
(CLB),
The Company issued duplicate share when, in fact, original shares were in its possession. The offence was compounded as it was not with intention to defraud.
[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.
[3]
- Reliance Industries, in re-(1997) 24 CLA 214 (CLB).
_________________________________________________________________________________
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION. This is only a knowledge sharing initiative and author do not intend to solicit any business or profession.
[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
[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.
[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.
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