1. Compounding of Offences :
1.1 In the last Issue we examined the penalties and
prosecution prescribed under the Companies Act, 1956. One of the remedies
against prosecution prescribed in the Act is ‘compounding of offences’.
For certain offences, compounding is possible, whereas for some other offences,
compounding is not possible. Compounding refers to a process whereby for an
offence in respect of which prosecution is launched against the
directors/officers, the authority only levies a monetary penalty. ‘Compounding’
is also known as ‘composition of offences’. ‘Composition’ means a compromise and
means condonation of an offence in exchange for money. In other words,
punishment and prosecution/imprisonment is converted into a fine. The Act
expressly deals with compounding in S. 621A.
1.2 S. 621A overrides anything contained in the Code of
Criminal Procedure. It applies to offences committed by a company or its
officers. In Usha (India) Ltd., In re, 85 Comp. Cases, 581 (CLB),
it was held that the presence of a non-obstante clause in S. 621A
overrides the Cr.PC. Thus, the jurisdiction granted to the CLB in regard to
compounding is independent of any provision in the Cr.PC. Even if a matter lay
before the High Court for quashing the criminal proceedings, it had nothing to
do with compounding. Compounding proceedings are independent of any criminal
proceedings for the same alleged offence.
However, two types of offences are not compoundable.
These are :
(a) For which the punishment is imprisonment only; and
(b) For which the punishment is imprisonment and
fine.
Thus, the Act deems these two types of offences as serious
and hence, no compounding is prescribed. In addition to the above two
categories, compounding cannot be done for a subsequent same offence committed
within 3 years. In other words, a repeat offence committed after 3 years of
compounding of the offence is treated as a new offence.
1.3 The sum payable for compounding cannot exceed the maximum
fine imposable.
2. Procedure :
2.1 The procedure for compounding is as follows :
(a) It can be done at any stage — before or after launch of
proceedings. There are several cases when after being issued ‘Show Cause’
notice companies voluntarily go in for compounding out of abundant caution to
buy peace and avoid litigation. Thus, like anticipatory bail, anticipatory
compounding is possible. Compounding of offences acts as a bar against
prosecution if it is done before the institution of the prosecution —
Reliance Industries Ltd., In re, 89 Comp. Cases 465 (CLB). It should
however, be borne in mind that the power to compound offences vested in the
CLB is a discretionary power — Ritesh Polyesters Ltd., 123 Comp. Cases
348 (CLB). Thus, it is not an automatic privilege granted by merely applying
for compounding. If a prosecution has
ended in a conviction and if the accused has ap-pealed against the punishment,
he may yet file a compounding application while the appeal is pending and if
he is successful, he would not have to suffer the sentence awarded —
Chottey Singh v. State of UP, 1980 Cr. LJ 583 (All).
(b) The appropriate authority for compounding is the
Company Law Board. However, in cases where the maximum fine does not exceed Rs.
50,000, the Regional Director is also empowered to compound. Thus, the RD can
only compound those offences where the punishment is only by way of a fine.
The Companies Amendment Act, 2002 proposes to substitute the appropriate
authority with the Central Government. However, the official date for this
change has not yet been notified.
(c) The application for compounding should be made to the
ROC who would then forward the same to the CLB/RD along with his comments. As
per Rule 20B of the Companies (Central Government’s General Rules and Forms,
1956) the application to the ROC should be made in e-Form 61.
The Company Law Board Regulations, 1991 state that an
application to CLB should be filed in Form No. 3 of the said Regulations. The
detailed application as per these Regulations should be attached to the e-Form
61. However, no such Form has been prescribed for an application to the RD.
The Company Law Board Regulations, 1991 do not state whether the Form should
be filed separately for each of the notices and hence, it is possible to file
a consolidated Form No. 3 for a company and all its directors/officers.
(d) Further, the Section also empowers the Court to
compound any offence which is compoundable by the CLB/RD. Further, while
allowing a compounding application, the Court has to follow the procedure laid
down under the Cr.PC. Thus, there is a concurrent jurisdiction for compounding
with the CLB and the Court. However, the procedure under Cr.PC laid down
u/s.621A(7) is not applicable when the compounding application is made before
the CLB. The CLB is not bound to follow any procedure, nor does it have to
obtain the permission of the Court at any stage. An appeal lies against its
order to the High Court. Thus, there is an option to a party to get
compounding done by the Criminal Court with the prior sanction of the Court or
get it done by the CLB without any prior permission and without following any
procedure — Hoffland Finance Ltd., In re, 90 Comp. Cases, 38 (CLB).
This view was also upheld by the Delhi High Court in the case of VLS
Finance Ltd. v. UOI, 123 Comp. Cases 433 (Del.) wherein it held the
compounding powers of the CLB u/s.621A(1) and of the Court u/s.621(7) are
parallel and one power is not dependent upon the other. The CLB can compound
even if the prosecution is pending in a Criminal Court.
(e) The compounding application should be in detail and
should lay down for each allegation — the facts, allegation and submissions.
Chartered Accountants are familiar with filing paper books before the ITAT and
they may use similar formats before the CLB.
2.2 In addition, the following guidelines issued by the DCA
are also relevant :
(a) The CLB/RD may ask for any officer to file a return or other documents within a specified time and non-compliance of this order is a punishable offence with fine of up to Rs.50,000 and/or a term of up to 6 months.
(b) More than one offence under one charging Section can be compounded at a time.
(c) In the case of a company, the composition fee shall be paid from its own funds while in the case of directors it shall be paid from director’s personal funds.
2.3 In the case of offences committed by a company fits directors when the company is under Court-approved liquidation, the DCA’s views as regards compounding applications are as follows:
a) There is no bar to any compounding application by the directors merely because the company is in winding-up.
b) Such compounding application for the directors does not require the prior approval of the Company Court.
c) However, compounding of proceedings against a company will not be permissible in view of S.446.
3. CLB’s order:
3.1 If the CLBdeems the case as fit for compounding, then it would pass an order to that effect. Some of the factors considered by the CLB include:
a) While compounding offences, it would consider the nature of the offence and the financial position of the company as well as the continuance of the default while determining the composition fee. It would ensure that having compounded the offence the same violation does not continue. It would also consider whether the application is an anticipatory one or in response to a prosecution being launched. In the case of Otto Burlingtons Mail Order P. Ltd., In re., 96 Comp. Cases, 525(CLB),the CLB considered all these factors while dealing with a compounding application for failure to obtain the Central Government’s approval u/s. 297. It observed that since the default was for several days, the penalty was large. Further, the offence was not a continuing one. Lastly,it was a voluntary application without fear of a prosecution. Hence, the CLB allowed the compounding application.
d) Similarly,in the case of First Leasing Co. of India Ltd., 42 SCL 65 (CLB), the application was allowed since the company had rectified the defaults u/s.211, u/s.217 and u/s.295, and had inadvertently committed the offences.
c) In a case where the company did not attach the balance sheet of the subsidiary along with the holding company due to non-finalisation of the subsidiary’s accounts and there was no willful omission, the CLB compounded the offence – Shaw Wallace and Co. Ltd., (2000) CLC 2008 (CLB).
d) However, in the case of General Produce Company Ltd. In re, 81 Comp. Cases 570 (CLB), since the accounts were not filed, delay was not rectified, company’s registered address was incorrect, directors stated that they were not directors and yet they signed compounding applications, the CLB rejected the compounding applications.
e) In a violation u/s.297, the quantity of goods involved in contracts with interested directors was negligible and hence, compounding was allowed with going into the merits of the case – Dintex Dyechem Lid., 104 Comp. Cases 735 (CLB).
3.2 If the CLB does not pass a speaking and reasoned order, but merely permits the composition on payment of a fee, the question which arises is whether such an order can be challenged before the High Court as being bad in law. The Delhi High Court had an occasion to deal with such a matter in the case of VLS Finance Ltd. v. UOI, 123 Comp. Cases 433 (Del.) wherein it held the if the order indicates that the provisions of S. 621A were followed and if after being satisfied with the facts and circumstances, the CLB exercises the power vested in it by S. 621A, then merely because they have not given reasons for their conclusion, cannot be a ground for challenging the order.
3.3 Once compounding is done, either the prosecution cannot be launched or if it has been launched, it cannot be continued further and the accused is discharged. There is an automatic vacation of prosecution.
3.4 An appeal lies against the CLB’s order to the High Court. A shareholder is also entitled to file an appeal against the CLB’s order and it is not correct to say that he has no locus standi in such an order. He can file a complaint before a Court u/ s.621 regarding the offence and hence, he is also entitled to appeal against the CLB’s Order – VLS Finance Ltd. v. UOI, 123 Comp. Cases 433 (Del.).
4. Role of CAs:
4.1 Compounding is an avenue which companies should pursue to avoid litigation and prosecution. Chartered Accountants can play a very active role in guiding their clients on the process and benefits of compounding.
