The Companies Act, 2013 (‘the Act’) was enacted with the aim of overhauling corporate governance and streamlining company law in India. However, like any vast regulatory statute, the Act envisages several obligations for companies, directors, and officers. Non-compliance with these obligations may result in penal consequences. But in reality, strict implementation of such provisions could interfere with corporate operations and put stakeholders under undue legal costs. A practical method for resolving them without requiring drawn-out prosecution is the compounding of offences.
This guide provides a detailed legal examination of compounding of offences under the Companies Act, 2013, examining its legislative framework, scope and limitations, the procedural contours governing such compounding, the class of persons liable, and practical considerations.
What is ‘Compounding’?
In legal parlance, compounding refers to the process by which a person or entity who has committed an offence agrees to pay a penalty or fine instead of facing prosecution. In reality, it is a compromise or settlement permitted under law, particularly for technical or procedural violations, provided such violations are not grave or malicious in nature.
Section 359 of the Bharatiya Nagarik Suraksha Sanhita (BNSS), 2023, governs the procedure for criminal cases unless otherwise provided. Compounding is recognised both under BNSS and various special legislations, including the Companies Act, 2013. Under corporate law, compounding seeks to decriminalise minor contraventions, ensuring compliance without invoking criminal litigation.
Advantages of Compounding an Offence
Compounding an offence has a lot of advantages, such as:
- Avoids protracted litigation and court proceedings.
- Reduces legal expenses for the company and officers.
- Prevents criminal prosecution and conviction.
- Facilitates quicker compliance regularisation.
- Minimises reputational harm to the company.
- Enables efficient closure of inadvertent defaults.
- Preserves managerial time and business focus.
- Eliminates the stigma of a criminal trial.
Statutory Basis for Compounding under the Companies Act, 2013
The substantive provisions relating to compounding are provided under Section 441 of the Companies Act, 2013, which came into force on 12 September 2013. The section lays down that:
“Any offence punishable under this Act (whether committed by a company or any officer thereof) not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any prosecution, be compounded…”
Thus, the fundamental principle is that only offences punishable with “fine only” or “imprisonment or fine” are compoundable under the Act. Offences punishable with imprisonment only or imprisonment and fine are non-compoundable.
Scope of Compoundable Offences
1. Offences punishable with a fine only
These constitute most procedural or technical breaches, such as:
- Failure to file certain resolutions or returns (e.g., under Section 117).
- Non-maintenance of statutory registers (e.g., Sections 88, 92).
- Delays in the annual filing of financial statements.
These offences are compoundable by the Regional Director (RD) or Registrar of Companies (RoC).
2. Offences punishable with a fine or imprisonment
Certain offences under the Act are punishable with “imprisonment or fine or both”, such as:
- Contravention of Section 73 (prohibition on acceptance of deposits).
- Violations involving fraud reporting under Section 143.
These can be compounded only by the National Company Law Tribunal (NCLT), as per Section 441(1)(b) of the Companies Act, 2013.
3. Authorities are empowered to compound
Section 441 of the Companies Act, 2013, distinguishes the jurisdiction for compounding based on the quantum of fine:
- Where the maximum amount of fine which may be imposed for an offence does not exceed ₹25 lakh, the power of compounding lies with the Regional Director or any officer authorised by the Central Government (Section 441(1)(a)).
- Where the fine exceeds ₹25 lakh, the power of compounding is vested in the NCLT (Section 441(1)(b)).
- The Registrar of Companies can receive and forward compounding applications, but is not statutorily empowered to compound offences (except under delegated authority in limited cases).
Compounding: Before vs. After Prosecution
Compounding can take place either before or after the initiation of prosecution. However, where the prosecution has already been initiated, the court’s permission is mandatory for compounding.
Section 441(6), which states:
“Any offence which is compounded under this section shall be deemed to have been compounded within the meaning of Section 320 of the Code of Criminal Procedure, 1973.”
Furthermore, if the offence is compounded after prosecution has commenced, the Registrar is obliged to inform the court, and upon such intimation, the accused shall be discharged (Section 441(7)).
Procedure for Compounding
The following steps outline the procedural framework for compounding:
Step 1: Identify the Offence
The company/officer identifies a non-compliance or default that is compoundable under Section 441 of the Companies Act, 2017.
Step 2: Board Resolution
A Board resolution is passed authorising a director/company secretary to file the compounding application.
Step 3: File the Application
An application is filed in e-Form GNL-1 with the jurisdictional RoC. This includes:
- Facts of the case
- Nature of default
- Reasons for delay or non-compliance (if they exist)
- Prayer for compounding
The application is supported by the attested affidavit of the director of the company.
Step 4: Examination by Authorities
- For fines up to ₹25 lakh, the RoC forwards the application to the Regional Director.
- For fines exceeding ₹25 lakh, the RoC sends the matter to the NCLT.
Step 5: Hearing and Order
- The authority may summon the applicants for a hearing.
- Upon satisfaction, an order of compounding is passed, prescribing the amount to be paid as a compounding fee.
Step 6: Payment and Compliance
- The applicant must deposit the amount within the specified time (usually 7–15 days).
- Proof of payment is submitted, and the offence is deemed to be compounded.
Who Can Be Held Liable?
One of the most crucial aspects of compounding under company law is determining who may be held accountable for the offence. Section 441 uses the language “any offence committed by a company or any officer thereof,” which is broad enough to encompass multiple stakeholders.
- Company as a legal entity
The company itself can be held liable and can apply for compounding, particularly where the default pertains to filing obligations or procedural lapses.
- Directors and key managerial personnel (KMPs)
Where the offence results from decisions or action or inaction by the board or senior management, the directors, executive or non-executive, may be held liable. This includes:
- Managing Director
- Whole-time Directors
- Chief Financial Officer
- Company Secretary
Whether a non-executive or independent director is liable depends on their involvement in the day-to-day affairs of the company and whether they were “in charge of and responsible to the company.”
- Officers in default
As defined under Section 2(60) of the Act, “officer who is in default” includes:
- Any person who, under the immediate authority of the Board, is responsible for the conduct of business
- Company secretary
- Persons with whose instructions the Board acts
Thus, individual accountability is determined based on the function performed and the specific provisions under which the default has occurred.
Decriminalisation and Recent Developments
The Ministry of Corporate Affairs (MCA), in line with the ‘Ease of Doing Business’ agenda, has made concerted efforts to reduce criminal prosecutions for minor corporate offences:
- The Companies (Amendment) Act, 2020, which shifted several offences from criminal to civil liabilities.
- Over 40 sections were amended to convert imprisonment-based penalties to monetary fines, thus widening the scope of compounding.
The Company Law Committee (2022) further recommended rationalisation of penalties, proposing that technical defaults be subjected to in-house adjudication instead of criminal proceedings.
Offences Not Eligible for Compounding
Certain offences remain outside the ambit of compounding:
- Offences involving fraud under Section 447.
- Offences involving imprisonment only (e.g., suppression of material facts).
- Repetitive non-compliances where the authority deems the conduct to be intentional or habitual.
Furthermore, the Central Government may refuse compounding in public interest, especially where there is evidence of wilful concealment or gross negligence.
Comparison with Adjudication of Penalties (Section 454)
While compounding involves the settlement of an offence, adjudication under Section 454 relates to the imposition of a penalty by the adjudicating officer (usually the RoC) for specific defaults.
- Compounding is a quasi-judicial settlement, whereas adjudication is administrative in nature.
- Compounding extinguishes prosecution; adjudication does not.
- Compounding requires application by the defaulter, while adjudication can be suo motu initiated by the MCA.
However, both are alternative compliance mechanisms that promote settlement over litigation.
FAQs
1. What does it mean to compound an offence under the Companies Act, 2013?
It refers to a formal process through which a company or its officers acknowledge an offence and agree to pay a prescribed sum of money instead of undergoing prosecution before a criminal court.
2. Are all corporate violations eligible for settlement through monetary means?
No, only those offences that do not involve fraud, deceit, or public interest harm and are punishable with a fine or a fine plus imprisonment may be settled through this route.
3. Who can be held accountable for legal contraventions by a company?
Liability may rest upon the company itself as a juristic person, as well as on individuals such as directors, key managerial personnel (KMP), company secretaries, or officers-in-default, depending on the nature of the breach.
4. Is it mandatory to admit guilt while opting for a compounding offence?
No. While admission of guilt is not a formal requirement, the applicant must acknowledge the facts constituting the default and agree to rectify it by paying the prescribed amount.
5. What is the role of the Regional Director (RD) in resolving such matters?
The RD adjudicates matters involving lower monetary penalties. Where the statutory fine exceeds ₹25 lakhs, the authority to approve the resolution lies with the National Company Law Tribunal (NCLT).
6. How is the amount to be paid calculated in these matters?
The amount is generally not less than the minimum fine prescribed under the Companies Act, 2013, for the concerned offence, and it may increase based on factors such as past violations, duration of non-compliance, and nature of default.
7. Can a director who has resigned still be made accountable for a past default
Yes. If the violation occurred during the tenure of the director, they may still be liable despite having resigned, as resignation does not absolve past statutory responsibilities.
8. Can a company withdraw its application after submission?
No, specific provision permits withdrawal once the application is made. The competent authority may, however, allow discontinuance before final orders if appropriate reasons are recorded.
9. Are there any offences that cannot be resolved through this process?
Yes, serious breaches involving fraud, misstatement, or those punishable with mandatory imprisonment cannot be addressed through monetary resolution and must go through the criminal justice process.
10. Is this route available for offences under other corporate laws?
No. It applies only to violations of provisions under the Companies Act, 2013. Other legislation, such as SEBI regulations or FEMA, has separate frameworks.
