COMPOUNDING OF OFFENCE WHEN PROSECUTION IS INITIATED
COMPOUNDING OF OFFENCE
WHEN PROSECUTION IS INITIATED
BACKGROUND:
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
Situation:
If there is any prosecution is pending or running
against the Company for such offence (like: Non appointment of KMP, Women
Director, Independent Director, wrong information in Director Report etc) then
whether company can apply for compounding of such offence.
If we say yes Company can apply for compounding of
offence in such situation then there are two questions arise:
·
Whether
Company can apply while prosecution is still pending against the Company
·
Whether
Company can apply after completion of the prosecution.
Statutory Provisions
Contained Under the Act:
Section 441 of the Companies Act 2013 as amended (the "Companies
Act") has the provision for filing application for the offences to be
compounded. As per section 441 any offence punishable under this Act with fine only, may, either before or after
the institution of any prosecution, be compounded by Tribunal or Regional
Director as per limits.
As per subsection 3 of Section 441
(b) Where any offence
is compounded under this section, whether before or after the
institution of any prosecution, an intimation
thereof shall be given by the company to the Registrar within seven days from
the date on which the offence is so compounded.
(c) Where any offence
is compounded before the institution of any prosecution, no prosecution shall
be instituted in relation to such offence, either by the Registrar 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.
(d) Where the
compounding of any offence is made after the institution of any prosecution, such
compounding shall be brought by the Registrar in writing, to the notice of the
court in which the prosecution is pending 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.
Interpretation Note:
It is clear from the provisions of Section 441 even if the prosecution is
going on or prosecution is completed against company for any offence company
can go for compounding of such offence with NCLT.
There is some latest ruling of NCLT bench regarding compounding of
offences against which prosecution was launched by ROC.
NATIONAL COMPANY LAW TRIBUNAL,
BANGALORE BENCH
Tejas Networks Ltd., In re
Section 149, read with section 172 and section 441, of the Companies Act, 2013 and rule 3 of the
Companies (Appointment of Directors) Rules, 2014 - Directors - Number of -
Applicant-company was required to appoint a woman Director on board by
31-03-2015 –
Company was unable to identify a suitable person to
be appointed as woman Director due to specialized nature of business of company.
ROC instituted prosecution against applicants
company and its officers who were in default before Special Court for Economic
Offence for said violation –
Applicant company however, appointed woman director
belatedly on 16-2-2016 - It was stated by applicants that violation was neither
wilful nor an act of negligence - Subsequently, instant suo-motu application
was filed for compounding said violation.
This Application was filed before the Company Law
Board, Southern Region, Chennai under Section 621A of the Companies Act, 1956
for compounding of offence for violation under section 149(1) of the Companies
Act, 2013 which is punishable under section 172 of the Companies Act, 2013.
The NCLT give decisions that the violation can be
compounded even after prosecution is launched against the Applicants which is
pending before the Special Court for Economic Offence at Bangalore.
NATIONAL COMPANY LAW TRIBUNAL,
HYDERABAD BENCH
Cambridge Technology Enterprises
Ltd., In re
Section 441, read with section 134 of the Companies Act, 2013/Section 621A, read with section 217 of the Companies Act, 1956 – Offences against Act
to be cognizable only on complaint by Registrar, Shareholder or Government –
Pursuant to inspection of books of account and
other records of applicant-company it was alleged by Regional Director that
applicant-company did not follow AS-9 relating to revenue recognition, AS-26
relating to intangible assets; AS-13 relating to Accounting for Investment; and
AS-20 relating to earning per share in preparation of annual accounts as stated
in Director's Responsibility statement,
hence, Board's Report attached to Annual Report for
financial years 2004 to 2009 were not in tune with provision of section
217(2AA) and thus, alleged to have contravened provision of section 217(2AA) –
Company submitted that violation was not
intentional and, in any case, would not cause any prejudice to interest of
members or other creditors –
It was further submitted by company that new
management of company had taken action and implemented polices designed to
prevent any further default –
The company has filed the present
application suo-moto by praying the Tribunal to allow them to
compound the offence alleged to have been committed under section 217(2AA), on
reasonable terms and conditions, as it may deem fit and just.
In the light of the facts and circumstances of the
case and, also in the interest of Justice, NCLT inclined to allow the present
application by exercising the powers conferred under Section 621A of the
Companies Act, 1956, however, subject to payment of compounding fees for the
alleged offence committed U/s. 217(2AA) of the Companies Act, 1956.
Benefits 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 (S.Vishwanath vs State of Kerela)
· No appeal against
order of composition (S V Bagi v. State of Karnataka)
· Avoid harassment due
to appearance before adjudicating officer or special court.
· Compounding
application can be moved even before start of prosecution proceeding which can
otherwise be public whereas the compounding can be under wrap.
· Fine paid in
compounding can be claimed as expenses whereas penalties shall be added to your
income on assessment by tax officials
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.
(Author – CS
DiveshGoyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from
Delhi and can be contacted at csdiveshgoyal@gmail.com)
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 does
not intend to solicit any business or profession.
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