Process for Compounding and Adjudication Under the Companies Act 2013

Process for Compounding and Adjudication Under the Companies Act 2013. Compounding - The Basics
Compounding means to settle a matter by money, payment, and other liability. In common parlance, it means settling a debt or another matter in exchange of money or for another consideration. Compounding of an offense gives an option to the offender to pay money instead of pursuing a lengthy prosecution and helps save the time of courts, tribunals, and the people involved. 
Genesis, Background and Advantages of Compounding 
Origin : The original Companies Act did not contain provisions on compounding. It was the Sachar Committee which recommended the inclusion of compounding procedures and accordingly the Companies Amendment Act, 1988 was passed, which was later amended by the Companies (Amendment) Act, 2000. The Committee observed most defaults in compliance of the Act were due to ignorance as well as the complex nature of provisions. It was observed that most offenses are of technical nature. 
Key Advantages: Being a summary proceeding, the process of compounding is much faster than regular adjudication of corporate offenses. It also reduces the burden on courts, and saves crucial time of not just the courts but also the company and its officers in default. 
Compounding of an offense under Section 441 
Section 441 of the Companies Act, 2013 deals with compounding of offenses which was notified on June 1, 2016. Compoundable offenses are those which can be made by paying a fee decided by the NCLT. 
Meaning of “offense” -  As per Section 3(38) of the General Clauses Act, 1897 “Offense” shall mean any act or omission made punishable by any law for the time being in force.” The offenses can be of several types: 
Continuing Offense - Non-appointment of CS, Non-holding of AGM, Holding directorship in companies more than prescribed, etc 
One time offense: Non-holding of Board Meeting in a quarter by a listed company. 
Annual Offences - Disclosure in Board Report, Financial Statement, etc
Subsequent offenses - A subsequent offense committed after the expiry of 3 years from the date of compounding is deemed to be a first offense. 
Nature of offenses, which can be compounded

Not all categories of offenses under the Companies Act may be compounded. Only the offenses that are punishable with “fine only”, may be compounded by the NCLT/ RD /any officer authorized by the Central Government, as the case may be.

Offenses punishable with “fine or imprisonment or both” or “fine or imprisonment” can be compounded by NCLT.

Nature of offenses, which cannot be compounded
The following categories of offenses cannot be compounded:

Offense punishable with “imprisonment only”; or

Offense punishable with “imprisonment and fine”; or

Where investigation has been initiated or is pending against the company.

A crucial point of distinction that bars compounding lies in the word “AND” (imprisonment and fine) 
In M/s. Cinepolis India Pvt Ltd & Ors. v. Registrar of Companies (Company Appeal (AT) No.137 of 2017, NCLAT ruled that offenses that are punishable by 'imprisonment only” cannot be compounded in light of the restriction placed by Section 441(6). However, when the offense is punishable by both 'imprisonment or fine or both' the NCLT shall act as per the procedure laid down in clause (6) of Section 441 by taking permission of the special court. 
Procedure for Compounding Of Offense
The process is as mentioned below for compounding an offense under Section 441 of Act, 2013.

Calling of Board Meeting.

Determine the offense and calculate the fine to be paid by the company and/or officer in default as per the relevant section

Pass the following resolutions :

File an application for compounding of offense.

Authorize the director or any officer of the company to sign and submit the application on behalf of the company.

Appoint professionals (lawyer/CS/CA) to appear before the authority.

Prepare the compounding application in triplicate. Application to be accompanied with:

Affidavit verifying the application.

Memorandum of appearance or Power of Attorney.

Copy of notice from Registrar of Company (RoC) if any

Other necessary documents

File e-form GNL-1 attaching the application along with prescribed fee with RoC [Rs.1000/- as per NCLT Rules, 2016].

Form GNL-1 can be used for compounding of maximum 8 persons excluding the company. If the number of persons is greater than 8, then additional details can be provided in optional attachment. Further, the following attachments are also required to submit with e-Form GNL-1.

Joint application of company and officer in default is allowed

Deliver sufficient number of hard copies of the compounding application to ROC

Based on the amount of fine, ROC forwards the application to the NCLT or Regional Director with his comments

Personal Hearing before NCLT or RD.

Payment of fees for compounding within the time period mentioned.

Compounding fine shall not exceed the maximum fine imposed for the offense so compounded.

Passing of order by NCLT or RD.

Intimation of order of NCLT or RD to RoC within 7 days of receipt of order [Form INC 28]

Filing of compounding application 
An application for compounding can be filed either before or after the initiation of the prosecution. An intimation must be given by the company to the registrar within 7 days from the date on which the offense is so compounded. The compounding application must contain:

General details of the company, such as registered office address, incorporation details etc

Facts of the case, nature of offense and period of default

Relevant section that has been violated

Fine prescribed

Details of how the default has been made good, indicating the date on which the default has been made good

Adjudication - Process and Penalties under Companies Act, 2013
Adjudication refers to the process of initiating an enquiry, issuing notices and bringing penal action for offenses committed under the Companies Act, 2013 or its rules, by following the regular route of action and legal proceedings.

For the process of adjudication, the Central Government may appoint any of its officers, not below the rank of Registrar, as Adjudicating Officers for adjudicating penalty under the provisions of the Act.

Jurisdiction of Adjudication officer - MCA has vide Notification No. S.O. 831(E) dated 24.03.2015 appointed various ROCs as adjudicating officers for adjudging penalties in their respective jurisdiction.

Section 454(3) adjudicating officer can impose penalty on non-compliance or default under the provisions of Companies Act, 2013 and direct such Company, or officer who is in default, or any other person, as the case may be to rectify the default, wherever he considers fit.

In case the default relates to non-compliance of Section 92(4) (Filing of Annual Returns) or Section 137 (1) or (2) (Filing of financial statements with the Registrar) and such default has been rectified either prior to, or within 30 days of, the issue of notice by the Adjudicating officer, no penalty shall be imposed in this regard and all the proceedings under this section in respect of such default shall be deemed to be concluded.
Steps involved in Adjudication of an Offense  
Issue of Show Cause Notice

Issue of show cause notice to company and officer in default

The adjudicating officer issues a notice to the company and every officer in default, to show cause why a penalty may not be imposed.

The notice also indicates the nature of non-compliance or default under the Act, alleged to have been committed, the relevant penal sections and the maximum penalty which may be imposed.

The company has between 15 and 30 days to service the show cause, and extension is possible if the officer is satisfied that sufficient cause existed for not responding to the notice within time.

Opportunity of being heard 
Under Section 454(4) of the Companies Act, 2013, the adjudicating officer shall give every officer in default, a reasonable and adequate opportunity of being heard, before the imposing penalty. 
Enquiry and Notice for Hearing 
If the adjudicating officer, after receiving the reply, is of the opinion that physical appearance is required, he shall issue a notice within a period of 10 working days from date of receipt of such reply. Provided that, if any person to whom notice is issued desires to make oral representation, the Adjudicating officer would allow the same. 
Passing of the order 
The Adjudicating Officer would pass an order within 30 days of expiry of the period of show cause (or the extended period), where physical presence is not required, or 90 days from issue of notice where any person has appeared before the Adjudicating Officer. Every such order would be dated and signed. 
If any person fails, neglects or refuses to appear before the adjudicating officer, the adjudicating officer may impose a penalty in the absence of such person after recording the reasons for doing so.
Penalty would be based on the following factors:

Size of the Company

Nature of business carried on by the Company

Nature and gravity of offense, and whether act was intentional or not

Injury to public interest?

Period of default and whether the defaulter has made good the default

Financial conditions of the company and defaulter

Whether offense was continuous or one time

Whether the act of defaulter is prejudicial to members

Nature of default and whether repetition of the default

The amount of disproportionate gain or unfair advantage, wherever quantifiable

Loss caused to an investor or group of investors or creditors

The penalty so determined, cannot be less than the minimum penalty prescribed under the act, which must be paid through the Ministry of Corporate Affairs.

Failure to comply with compounding order
If an employee or officer of the company fails to comply with the order made by the tribunal or regional director, then under section 441(5), the maximum amount of fine for the offense proposed to be compounded under this section shall be twice the amount provided in the corresponding section in which punishment of such offense is provided. 
the applicants promptly took all reasonable steps to ensure that the provisions contained in Section 233B of the Companies Act, 1956 are duly complied and the 
Landmark case laws and judicial interpretation of Compounding 
In NIF Private Limited vs Central Government through the Office of Regional Director (N.R.) & Registrar of Companies, the purported offense (under Section 233B, Companies Act, 1956) had occurred due to technical reasons and was not attributable to any wilful negligence and connivance on the part of the Directors and Key Managerial Personnel (KMP) of the Company.
Grounds taken by the applicants for successful compounding the offense:

The applicants convinced the tribunal that it was beyond the reasonable control of the Applicants, the error had been regularized and made good and, therefore, the Applicants deserve to be condoned.

They also stated that being a ‘Private Limited Company’ owned and controlled by a family managed Board of Directors, no public interest is involved.

No one will be prejudiced by composition and it would be just and equitable if the offenses are compounded.

The applicants have already, on their part, taken all reasonable steps in order to ensure that the default is not committed in future.

The applicant Company along with co applicants have explained such that in respect of the purported default they promptly took all reasonable steps to ensure compliance of the statutory provisions under Section 233B of the Companies Act, 1956.

The reasons for such default occurred were beyond the control of the applicants.

In the matter of Carpet Export Promotion Council, In re, reported in (2017) 136 CLA 309 (NCLT) Allahabad Bench has made such observation;
Where the reasons explained by the petitioner company appear to be reasonable, plausible and are sufficient to grant leave for compounding of offenses relating to delay in filing Annual Return under section 441 and the Registrar of Companies has also recommended for compounding/Composition of offense, the Company Petition is to be allowed leave to be granted.
Whether the tribunal can refuse relief and on what grounds? 
Claro Consultancy (P.) Ltd. NCLT, New Delhi observed that where law provides for compounding of the offenses, relief should be granted by the courts in the normal course unless legally impermissible. The same should not be withheld on arbitrary grounds would in itself be a travesty of justice.
Where petition for compounding of offenses is vehemently opposed by the office of the SFIO who fail to show any involvement of the petitioners, and merely make vague and general averments, despite various opportunities given to them, and further fail to satisfy the Bench as to how compounding of the present offenses would prejudicially affect the alleged other cases, the petition for compounding of offense has to be allowed when the petitioner’s claim that the default has been made good has not been repudiated by the SFIO or the ROC. 
Tribunal has discretion to refuse relief under section 621A but refusal to compound offenses has to be for just and valid reasons and not based on a mere bogie by the Department.
In Shri. Abdul Qadir Versus Registrar of Companies, Tamil Nadu, Chennai (2018 SCC OnLine NCLT 3282), the director committed an offense of contravention of the provisions of section 165 holding the position of director, in more than 20 companies. The bench took a lenient view and allowed the compounding of the offenses under section 441 of the Companies Act, 2013 for violation of provisions of section 165. 
Difference between Adjudication and Compounding of an Offense 
The most crucial difference between Adjudication (under Section 454) and Compounding (under Section 441) is that a person may voluntarily apply for settling an offense under compounding. Adjudication refers to the regular process of issuing a notice, hearing and passing an order for penalty under relevant provisions of the act. 
Penalty - In case of compounding, the compounding authority has the discretion to impose a lesser amount as fine. However, in case of adjudication, the penalty is fixed as per the relevant section and rules. 
While compounding is possible for offenses that only carry a monetary penalty, and not imprisonment, Adjudication is the sole process by which an offense that contains imprisonment as a punishment be carried out. The law believes such offenses carrying penal action of imprisonment to be more serious, and hence, a lesser sentence by way of compounding is disallowed. 
Appeal - While appeals against an adjudication order are allowed to be made to the Regional Director, there is no process of appeal for a compounding order. 
Legal planning for compounding of offenses can help your business not just save money and time but also reduce the risk of larger penalties and fines at a later stage. Consult with our qualified lawyers and company secretaries at Compliance Calendar to get specific advice on the suitability, implications and filing process for compounding existing or potential litigation against your company and directors.

Compounding - The Basics

Compounding means to settle a matter by money, payment, and other liability. In common parlance, it means settling a debt or another matter in exchange of money or for another consideration. Compounding of an offense gives an option to the offender to pay money instead of pursuing a lengthy prosecution and helps save the time of courts, tribunals, and the people involved.

Genesis, Background and Advantages of Compounding

Origin : The original Companies Act did not contain provisions on compounding. It was the Sachar Committee which recommended the inclusion of compounding procedures and accordingly the Companies Amendment Act, 1988 was passed, which was later amended by the Companies (Amendment) Act, 2000. The Committee observed most defaults in compliance of the Act were due to ignorance as well as the complex nature of provisions. It was observed that most offenses are of technical nature.

Key Advantages: Being a summary proceeding, the process of compounding is much faster than regular adjudication of corporate offenses. It also reduces the burden on courts, and saves crucial time of not just the courts but also the company and its officers in default.

Compounding of an offense under Section 441

Section 441 of the Companies Act, 2013 deals with compounding of offenses which was notified on June 1, 2016. Compoundable offenses are those which can be made by paying a fee decided by the NCLT.

Meaning of “offense” - As per Section 3(38) of the General Clauses Act, 1897 “Offense” shall mean any act or omission made punishable by any law for the time being in force.” The offenses can be of several types:

Continuing Offense - Non-appointment of CS, Non-holding of AGM, Holding directorship in companies more than prescribed, etc

One time offense: Non-holding of Board Meeting in a quarter by a listed company.

Annual Offences - Disclosure in Board Report, Financial Statement, etc

Subsequent offenses - A subsequent offense committed after the expiry of 3 years from the date of compounding is deemed to be a first offense.

Nature of offenses, which can be compounded

Not all categories of offenses under the Companies Act may be compounded. Only the offenses that are punishable with “fine only”, may be compounded by the NCLT/ RD /any officer authorized by the Central Government, as the case may be.
Offenses punishable with “fine or imprisonment or both” or “fine or imprisonment” can be compounded by NCLT.

Nature of offenses, which cannot be compounded

The following categories of offenses cannot be compounded:

Offense punishable with “imprisonment only”; or
Offense punishable with “imprisonment and fine”; or
Where investigation has been initiated or is pending against the company.

A crucial point of distinction that bars compounding lies in the word “AND” (imprisonment and fine)

In M/s. Cinepolis India Pvt Ltd & Ors. v. Registrar of Companies (Company Appeal (AT) No.137 of 2017, NCLAT ruled that offenses that are punishable by 'imprisonment only” cannot be compounded in light of the restriction placed by Section 441(6). However, when the offense is punishable by both 'imprisonment or fine or both' the NCLT shall act as per the procedure laid down in clause (6) of Section 441 by taking permission of the special court.

Procedure for Compounding Of Offense

The process is as mentioned below for compounding an offense under Section 441 of Act, 2013.

Calling of Board Meeting.
Determine the offense and calculate the fine to be paid by the company and/or officer in default as per the relevant section
Pass the following resolutions :

File an application for compounding of offense.
Authorize the director or any officer of the company to sign and submit the application on behalf of the company.
Appoint professionals (lawyer/CS/CA) to appear before the authority.

Prepare the compounding application in triplicate. Application to be accompanied with:

Affidavit verifying the application.
Memorandum of appearance or Power of Attorney.
Copy of notice from Registrar of Company (RoC) if any
Other necessary documents

File e-form GNL-1 attaching the application along with prescribed fee with RoC [Rs.1000/- as per NCLT Rules, 2016].
Form GNL-1 can be used for compounding of maximum 8 persons excluding the company. If the number of persons is greater than 8, then additional details can be provided in optional attachment. Further, the following attachments are also required to submit with e-Form GNL-1.
Joint application of company and officer in default is allowed
Deliver sufficient number of hard copies of the compounding application to ROC
Based on the amount of fine, ROC forwards the application to the NCLT or Regional Director with his comments
Personal Hearing before NCLT or RD.
Payment of fees for compounding within the time period mentioned.
Compounding fine shall not exceed the maximum fine imposed for the offense so compounded.
Passing of order by NCLT or RD.
Intimation of order of NCLT or RD to RoC within 7 days of receipt of order [Form INC 28]

Filing of compounding application

An application for compounding can be filed either before or after the initiation of the prosecution. An intimation must be given by the company to the registrar within 7 days from the date on which the offense is so compounded. The compounding application must contain:

General details of the company, such as registered office address, incorporation details etc
Facts of the case, nature of offense and period of default
Relevant section that has been violated
Fine prescribed
Details of how the default has been made good, indicating the date on which the default has been made good

Adjudication - Process and Penalties under Companies Act, 2013

Adjudication refers to the process of initiating an enquiry, issuing notices and bringing penal action for offenses committed under the Companies Act, 2013 or its rules, by following the regular route of action and legal proceedings.

For the process of adjudication, the Central Government may appoint any of its officers, not below the rank of Registrar, as Adjudicating Officers for adjudicating penalty under the provisions of the Act.
Jurisdiction of Adjudication officer - MCA has vide Notification No. S.O. 831(E) dated 24.03.2015 appointed various ROCs as adjudicating officers for adjudging penalties in their respective jurisdiction.
Section 454(3) adjudicating officer can impose penalty on non-compliance or default under the provisions of Companies Act, 2013 and direct such Company, or officer who is in default, or any other person, as the case may be to rectify the default, wherever he considers fit.

Steps involved in Adjudication of an Offense

Issue of Show Cause Notice

Issue of show cause notice to company and officer in default
The adjudicating officer issues a notice to the company and every officer in default, to show cause why a penalty may not be imposed.
The notice also indicates the nature of non-compliance or default under the Act, alleged to have been committed, the relevant penal sections and the maximum penalty which may be imposed.
The company has between 15 and 30 days to service the show cause, and extension is possible if the officer is satisfied that sufficient cause existed for not responding to the notice within time.

Opportunity of being heard

Under Section 454(4) of the Companies Act, 2013, the adjudicating officer shall give every officer in default, a reasonable and adequate opportunity of being heard, before the imposing penalty.

Enquiry and Notice for Hearing

If the adjudicating officer, after receiving the reply, is of the opinion that physical appearance is required, he shall issue a notice within a period of 10 working days from date of receipt of such reply. Provided that, if any person to whom notice is issued desires to make oral representation, the Adjudicating officer would allow the same.

Passing of the order

The Adjudicating Officer would pass an order within 30 days of expiry of the period of show cause (or the extended period), where physical presence is not required, or 90 days from issue of notice where any person has appeared before the Adjudicating Officer. Every such order would be dated and signed.

If any person fails, neglects or refuses to appear before the adjudicating officer, the adjudicating officer may impose a penalty in the absence of such person after recording the reasons for doing so.

Penalty would be based on the following factors:

Size of the Company
Nature of business carried on by the Company
Nature and gravity of offense, and whether act was intentional or not
Injury to public interest?
Period of default and whether the defaulter has made good the default
Financial conditions of the company and defaulter
Whether offense was continuous or one time
Whether the act of defaulter is prejudicial to members
Nature of default and whether repetition of the default
The amount of disproportionate gain or unfair advantage, wherever quantifiable
Loss caused to an investor or group of investors or creditors
The penalty so determined, cannot be less than the minimum penalty prescribed under the act, which must be paid through the Ministry of Corporate Affairs.

Failure to comply with compounding order

If an employee or officer of the company fails to comply with the order made by the tribunal or regional director, then under section 441(5), the maximum amount of fine for the offense proposed to be compounded under this section shall be twice the amount provided in the corresponding section in which punishment of such offense is provided.

the applicants promptly took all reasonable steps to ensure that the provisions contained in Section 233B of the Companies Act, 1956 are duly complied and the

Landmark case laws and judicial interpretation of Compounding

In NIF Private Limited vs Central Government through the Office of Regional Director (N.R.) & Registrar of Companies, the purported offense (under Section 233B, Companies Act, 1956) had occurred due to technical reasons and was not attributable to any wilful negligence and connivance on the part of the Directors and Key Managerial Personnel (KMP) of the Company.

Grounds taken by the applicants for successful compounding the offense:

The applicants convinced the tribunal that it was beyond the reasonable control of the Applicants, the error had been regularized and made good and, therefore, the Applicants deserve to be condoned.
They also stated that being a ‘Private Limited Company’ owned and controlled by a family managed Board of Directors, no public interest is involved.
No one will be prejudiced by composition and it would be just and equitable if the offenses are compounded.
The applicants have already, on their part, taken all reasonable steps in order to ensure that the default is not committed in future.
The applicant Company along with co applicants have explained such that in respect of the purported default they promptly took all reasonable steps to ensure compliance of the statutory provisions under Section 233B of the Companies Act, 1956.
The reasons for such default occurred were beyond the control of the applicants.

In the matter of Carpet Export Promotion Council, In re, reported in (2017) 136 CLA 309 (NCLT) Allahabad Bench has made such observation;

Where the reasons explained by the petitioner company appear to be reasonable, plausible and are sufficient to grant leave for compounding of offenses relating to delay in filing Annual Return under section 441 and the Registrar of Companies has also recommended for compounding/Composition of offense, the Company Petition is to be allowed leave to be granted.

Whether the tribunal can refuse relief and on what grounds?

Claro Consultancy (P.) Ltd. NCLT, New Delhi observed that where law provides for compounding of the offenses, relief should be granted by the courts in the normal course unless legally impermissible. The same should not be withheld on arbitrary grounds would in itself be a travesty of justice.

Where petition for compounding of offenses is vehemently opposed by the office of the SFIO who fail to show any involvement of the petitioners, and merely make vague and general averments, despite various opportunities given to them, and further fail to satisfy the Bench as to how compounding of the present offenses would prejudicially affect the alleged other cases, the petition for compounding of offense has to be allowed when the petitioner’s claim that the default has been made good has not been repudiated by the SFIO or the ROC.

Tribunal has discretion to refuse relief under section 621A but refusal to compound offenses has to be for just and valid reasons and not based on a mere bogie by the Department.

In Shri. Abdul Qadir Versus Registrar of Companies, Tamil Nadu, Chennai (2018 SCC OnLine NCLT 3282), the director committed an offense of contravention of the provisions of section 165 holding the position of director, in more than 20 companies. The bench took a lenient view and allowed the compounding of the offenses under section 441 of the Companies Act, 2013 for violation of provisions of section 165.

Difference between Adjudication and Compounding of an Offense

The most crucial difference between Adjudication (under Section 454) and Compounding (under Section 441) is that a person may voluntarily apply for settling an offense under compounding. Adjudication refers to the regular process of issuing a notice, hearing and passing an order for penalty under relevant provisions of the act.

Penalty - In case of compounding, the compounding authority has the discretion to impose a lesser amount as fine. However, in case of adjudication, the penalty is fixed as per the relevant section and rules.

While compounding is possible for offenses that only carry a monetary penalty, and not imprisonment, Adjudication is the sole process by which an offense that contains imprisonment as a punishment be carried out. The law believes such offenses carrying penal action of imprisonment to be more serious, and hence, a lesser sentence by way of compounding is disallowed.

Appeal - While appeals against an adjudication order are allowed to be made to the Regional Director, there is no process of appeal for a compounding order.

Legal planning for compounding of offenses can help your business not just save money and time but also reduce the risk of larger penalties and fines at a later stage. Consult with our qualified lawyers and company secretaries at Compliance Calendar to get specific advice on the suitability, implications and filing process for compounding existing or potential litigation against your company and directors.