EXECUTIVE SUMMARY
Compliance to the laws enacted for man results in good governance, whereas its non-compliance can result in offence. To understand the present order of NCLT in the matter of UW International Training & Education Centre for Health Pvt. Ltd.[1] where it has held that the principle of imposition of minimum penalty is non-mandatory in compounding of offences cases, it is necessary to define and understand offense. The term offence has been defined by s 3(38) of General Clauses Act, as “any act or omission made punishable by any law for the time being in force.”
BACKGROUND
Ministry of Companies Affairs (“MCA”) in its notification released on the 1st of June had enforced certain sections of the Companies Act, 2013 (“Act”). Among other vital changes that this particular notification brought forth, an important section relating to s 441-Compounding of Offenses (reproduced below) had also been notified.
(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), any offence punishable under this Act (whether committed by a company or any officer thereof) with fine only, may, either before or after the institution of any prosecution, be compounded by–
(a) the Tribunal; or
(b) where the maximum amount of fine which may be imposed for such offence does not exceed five lakh rupees, by the Regional Director or any officer authorised by the Central Government,
on payment or credit, by the company or, as the case may be, the officer, to the Central Government of such sum as that Tribunal or the Regional Director or any officer authorised by the Central Government, as the case may be, may specify:
Provided that the sum so specified shall not, in any case, exceed the maximum amount of the fine which may be imposed for the offence so compounded:
Provided further that in specifying the sum required to be paid or credited for the compounding of an offence under this sub-section, the sum, if any, paid by way of additional fee under sub-section (2) of section 403 shall be taken into account:
Provided also that any offence covered under this sub-section by any company or its officer shall not be compounded if the investigation against such company has been initiated or is pending under this Act.
(2) Nothing in sub-section (1) shall apply to an offence committed by a company or its officer within a period of three years from the date on which a similar offence committed by it or him was compounded under this section.
Explanation. — For the purposes of this section,–
(a) any second or subsequent offence committed after the expiry of a period of three years from the date on which the offence was previously compounded, shall be deemed to be a first offence;
(b) “Regional Director” means a person appointed by the Central Government as a Regional Director for the purposes of this Act.
(3) (a) Every application for the compounding of an offence shall be made to the Registrar who shall forward the same, together with his comments thereon, to the Tribunal or the Regional Director or any officer authorised by the Central Government, as the case may be.
(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.
(4) The Tribunal or the Regional Director or any officer authorised by the Central Government, as the case may be, while dealing with a proposal for the compounding of an offence for a default in compliance with any provision of this Act which requires a company or its officer to file or register with, or deliver or send to, the Registrar any return, account or other document, may direct, by an order, if it or he thinks fit to do so, any officer or other employee of the company to file or register with, or on payment of the fee, and the additional fee, required to be paid under section 403, such return, account or other document within such time as may be specified in the order.
(5) Any officer or other employee of the company who fails to comply with any order made by the Tribunal or the Regional Director or any officer authorised by the Central Government under sub-section (4) shall be punishable with imprisonment for a term which may extend to six months, or with fine not exceeding one lakh rupees, or with both.
(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.
(7) No offence specified in this section shall be compounded except under and in accordance with the provisions of this section.
By virtue of this short-cut section, lot of litigation can be avoided. It is a settlement process by which the accused pays due charges in lieu of undergoing consequences of lengthy prosecution. Compounding of an offence is a settlement mechanism, by which, the offender is given an option to pay money in lieu of his prosecution, thereby avoiding a prolonged litigation [2]This provision was introduced following the Sachar Committee report[3] as it was 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.
CASE SUMMARY
UW International Training & Education Centre for Health Pvt. Ltd., the petitioner company filed an suo moto application to Delhi NCLT with respect to delay in issue of share certificate to the subscribers of the Company, resulting in non-compliance of the time prescribed under s 56(4)(a) of the Act (reproduced below).
Section 56(4)(a) of the Act
Every company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted—
- within a period of two months from the date of incorporation, in the case of subscribers to the memorandum.
NCLT in its order considered the contention of petitioner company that the said delay was beyond their control and not on account of any malafide intensions. The amount of penalty imposed by NCLT was lesser than that as prescribed under Section 56(6)(reproduced below)of the Act, being the penalty provision for violation of Section 56 of the Act.
Section 56(6)of the Act
Where any default is made in complying with the provisions of sub-sections (1) to (5), the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees.
NCLT, in this case clarifies that the principle of imposing minimum fine prescribed under the Act is not mandatory on compounding cases.
OBSERVATION
The issues before the Hon’ble Tribunal were two:
- Whether NCLT can levy a higher or lower penalty in compounding cases than the penalties as prescribed under the Act?
- What are the guiding principles for imposing penalty in compounding cases?
Delhi NCLT in its Order against application of UW International Training & Education Centre for Health Pvt. Ltd.) held that the sentencing or penalty provisions prescribed under the Act cannot be lowered or altered in cases of prosecution holding the defaulter guilty. However, principle of imposing minimum fine on compounding matters is not mandatory. NCLT noted that compounding of offence can be accepted by a Court even by admonishing the defaulter or issuing a warning. NCLT further noted that the procedural delay of issuance of share certificates cannot be discounted and accordingly imposed a penalty of Rs. 10,000/- on Company and defaulting officers as opposed to penalty prescribed under Section 56(6) of the Act i.e. Rs. 25,000/- to Rs. 5,00,000/- on Company and Rs. 10,000/- to Rs. 1,00,000/- on defaulting officers.
It is pertinent to note that NCLAT in the matter of Viavi Solutions India (P.) Ltd. v. Registrar of Companies, NCT Delhi & Haryana [4]laid down that NCLT is required to notice the relevant factors while compounding any offence, such as gravity of offence, malafide intention, maximum punishment prescribed, report of Registrar of Companies (ROC), period of default, suo moto compounding or after ROC notice / imposition of the punishment / during the pendency of a proceeding, etc. Thus it can be concluded that in suo-moto compounding cases, Tribunal may, based on the aforementioned factors, impose a lower penalty than as prescribed under the penalty provisions of the Act.
[1] Dated 11th May, 2017
[2] Re – Bradford Investments Plc. (No.2), 1991 BCLC 688).
[3] 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.
[4] Dated February 28, 2016
