Compounding of Offence

Section 441 of Companies Act

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Section 441 of Companies Act

Section 3(38) of General Clauses Act, 1987 describes an offence as an act or omission which is considered to be punishable under any of the existent laws. Such offences could either be compoundable or non-compoundable.  In this article, we look at Section 441 of the Companies Act, which consists of provisions pertaining to the compounding of offence.

Compounding of Offences

Compounding of offences is a mechanism wherein the defaulter is reprieved of major legal consequences by affording him/her with the opportunity to remit a sum of money to escape prosecution.

Benefits of the Mechanism

Prosecution of any offence in a criminal court will demand the taxpayer, who could either be a company or an officer, to make an appearance in a criminal court for hearing, along with an advocate. Proceedings in court would understandably take a toll on the defaulter’s time, effort, goodwill and finances. Payment of a specified composition fee would relieve the taxpayer of these painstaking formalities. Moreover, the taxpayer would only be required to remit a compounding fee that would be within the maximum amount of fine limit that can be imposed under the relevant provisions. The taxpayer could also enjoy the following benefits:

  • As compounding would result in the acquittal of the defaulter, he/she would be therefore eligible for the position of a director.
  • Compounding wouldn’t warrant further penalties or prosecution.
  • Order of composition prohibits any further appeals against the offence.
  • Compounding charges could be claimed as expenses.

Enforcement of the Provision

Offences committed under this Act by a company or any other officer, in respect of whom penal charges are imposed, is compoundable. The compounding could take place either before or after the institution of any prosecution. Besides, according to Section 441(6) of the Act, any punishment that is restricted to imprisonment; or imprisonment and fine is compoundable under this section after obtaining the permission of a Special Court.

Non-Compoundable Offenses

Compounding of offences cannot be enforced on the basis of the following circumstances:

  • Any investigation connected to the company is pending to be resolved under the Act.
  • Offense of a similar kind has been committed by the company within a period of three years of the previous offence.

Authorized Personnel

For offences where the penal amount is within a sum of Rs 5,00,000, the Regional Director or an Officer designated by the Central Government would be vested with the adjudicating responsibilities. Compounding responsibilities for offences above this limit would be compounded by the NCLT.

Let’s make it more precise by listing out the offences to be compounded by the respective authorities:

Regional Director/Government Designated Personnel

The following offences can be compounded by the regional director or an officer designated by the Central Government:

  • Failure to meet the demands while commencing the business.
  • Defaults on the rectification of name.
  • Non-compliance with the prescribed provisions while issuing the prospectus.
  • Default in the issue of shares of securities at discount.
  • Non-compliance with provisions pertaining to transfer and transmission of securities.
  • Disobeying the directive of Tribunal for the rectification of the register of members.
  • Mistakes in filing a notice connected with alteration, enhancement or redemption of share capital along with the altered memorandum with the Registrar.
  • Inappropriate procurements by the company.
  • Non-compliance with the regulations provided by the Securities and Exchange Board pertaining to buy back of securities.
  • Default in provisions pertaining to Registration of Charges.
  • Non-maintenance of the register of members, debenture holders or other security holders as per the regulations.
  • Failure to file the necessary declarations.
  • Non-filing of returns pertaining to beneficial interest in any share within the specified time-limit.
  • Certification of annual returns by not conforming to the specifications of the section or the relevant rules.
  • Conducting a meeting by not complying with the regulations specified.
  • Non-compliance with provisions pertaining to the statement which needs to be annexed to the notice.
  • Default pertaining to proxies.
  • Default while inviting a person as proxy.
  • Non-filing of reports of Annual General Meeting (AGM).
  • Default in transferring the sum of accumulated profits to the unpaid account of the dividend and violating provisions of Section 24.
  • Non-filing of financial statements with the ROC.
  • Non-compliance with section 139 to 146.
  • Failure in furnishing Director Identification Number (DIN).
  • A director of a company involved in a directorial role for over 20 companies.
  • Dereliction of duty by a director.
  • Non-compliance with provisions connected to committees such as nomination, remuneration and stakeholders’ relationship committee.
  • Default connected with the procurement of loans and investment.
  • Related party transactions of other companies.
  • Defaults connected with the provisions of this section pertaining to the investment of company held in its name.
  • Default in provisions pertaining to the remuneration of director for loss of office on the event of a transfer of property.
  • Defaults associated with the remittance of managerial remuneration in the event of inadequate profits.
  • Defaults connecting with the appointment of Key Managerial Personnel (KMP).
  • Defaults connected with Secretarial Audit for major companies.
  • Non-filing of information during inspection or inquiry.
  • Removal, transfer or disposal of funds, assets or properties of the company against the directive of the Tribunal.
  • Securities issued, transferred or acted upon against the directive of the Tribunal.
  • Defaults committed between the transferor and transferee company with respect to merger or amalgamation.
  • Non-registration of an offer of schemes which involves the transfer of shares.
  • Defaults committed while altering the memorandum of articles.
  • Any defaults committed by the valuer.
  • Filing applications for removal of a name in certain cases.
  • Default of the official liquidator while forwarding a copy of the order of dissolution of company within the specified timeline.
  • Default in conducting the meeting of the creditors.
  • Failure to formulate a statement of the position of the company’s affairs along with a list of creditors.
  • Default in filing the resolution with the ROC.
  • Failure in publishing the resolution for voluntary termination of the company.
  • Failure to issue notice of appointment of company liquidator to the Registrar.
  • Non-formulation of quarterly statement of accounts by the liquidator during voluntary closure and filing the same with the ROC.
  • Non-compliance with provisions connected with the final meeting and dissolution of the company.
  • Failure or ignorance to provide the necessary assistance.
  • Failure to furnish a statement that the company is in liquidation.
  • Default of the provisions of information connected with a liquidation which is pending.
  • Non-filing of the certified copy of the Tribunal’s order pertaining to dissolution of company void with the Registrar.
  • Non-compliance of the pertinent provisions by a foreign company.
  • Non-furnishing of information or statistics by the companies required by the Central Government.
  • Defaults repeated within a span of three years.
  • Inappropriate withholding of property.
  • Inappropriate usage of the terms “limited” and “private limited”.
  • Failure to remit the penalty imposed by the concerned authority.
  • Holding membership in a company where the specified limit of members has been breached.
  • Non-compliance with the regulations of the Central Government.

National Company Law Tribunal

The offences which can be compounded by NCLT are as follows:

  • Non-compliance of requirements connected with the formation of companies with charitable objects.
  • Non-compliance pertaining to securities handled in stock exchanges.
  • Issue of counterfeit share certificates.
  • Default in publishing the order of confirmation associated with the reduction of share capital.
  • Default pertaining to procurement of loans for the purchase of a company’s own shares.
  • Non-payments of deposits or any interest within the stipulated time.
  • Non-filing of notice or agreement with the ROC.
  • Default in the transfer of the sum of accumulated profits and contravening with other provisions of section 124.
  • Non-disclosures of the auditor pertaining to any fraudulent activities.
  • Non-compliance with the provisions of section 1, which deals with loans, guarantee or security.
  • Non-compliance with the order of the tribunal under this section.
  • Non-compliance with the provisions of this section (excluding sub-section 5).
  • Failure to file quarterly reports or arrange the meeting in the event of closure by company liquidator.

Application for Compounding of Offences

Application for compounding of offences must be filed to the ROC (Registrar of Companies) in Form GNL-1, along with the following documents:

  • Petition in triplicate.
  • Board resolution endorsing the director to file the petition.
  • Affidavit verifying the petition.
  • Memorandum of appearance or Power of attorney.
  • Board resolution which provides the authorization to sign the application/petition.
  • Copies of attested financial statements pertaining to the last three years.
  • Copy of any agreement, if formulated.
  • Evidence which reflects that the offence has been mended.
  • ROC/RD notice (if received).
  • Other documents based on requirements.

Upon receiving the application, the ROC would be forwarding the same to the NCLT or RD, based on the type of offence and penalties imposed. If the offence has been compounded, the ROC will be notified of the same within seven days from the date of compounding. If the offence has been compounded prior to the institution of any prosecution, the concerned authorities would be restricted from the filing of any prosecution.

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