Compounding of Offences under the Companies Act: Procedure and Practice

When a company or its officers default under the Companies Act, 2013, for example by filing a return late, not holding a meeting on time or not complying with a statutory requirement, the consequence today is either a penalty imposed through adjudication, or, for offences that still carry a fine, prosecution. Compounding is the procedure by which an offence punishable with fine can be settled by paying an amount fixed by the authority, without a criminal trial.

This article explains which offences can be compounded, how compounding differs from adjudication, the procedure, and the points that decide whether an application succeeds, with reference to companies in Kerala.

Adjudication or compounding: which applies?

Amendments in 2019 and 2020 moved a large number of procedural defaults out of the criminal process. The position now is broadly:

Type of default	How it is dealt with	Authority
Defaults that attract only a monetary penalty (most procedural defaults)	Adjudication of penalty under section 454	Registrar of Companies as adjudicating officer; appeal to the Regional Director
Offences punishable with fine only, or with fine or imprisonment or both	Compounding under section 441, or prosecution	Regional Director, or the NCLT, depending on the amount of fine
Offences punishable with imprisonment only, or with imprisonment and fine	Not compoundable; prosecution	Special Court

The first step in any default is to identify which provision applies and what it is now punishable with, because the same section may have been amended. A default that has become a penalty is not compounded; it is adjudicated. See adjudication proceedings under the Companies Act.

Who compounds the offence

• Regional Director: where the maximum fine for the offence does not exceed ₹25 lakh. For companies in Kerala, this is the Regional Director (South-Western Region), Bengaluru.
• National Company Law Tribunal: where the maximum fine exceeds ₹25 lakh. For Kerala, this is the NCLT Kochi Bench.

The application is filed through the Registrar of Companies, Ernakulam, who forwards it with a report on the default.

When compounding is not available

• Where the offence is punishable with imprisonment only, or with imprisonment and fine.
• Where the same or a similar offence committed by the company or officer was compounded within the preceding three years.
• Where an investigation has been initiated or is pending against the company under the Act, in the circumstances provided in section 441.
• Where the default continues: compounding settles a past default, so the underlying requirement (for example, the filing or the meeting) should be made good before or along with the application.

Procedure

1. Make good the default: file the overdue form, hold the meeting, or rectify the non-compliance, with additional fees where applicable.
2. Board resolution: authorising the application and a person to sign and appear, for the company and, where applicable, for officers in default.
3. Application in Form GNL-1: filed on the MCA portal, addressed to the Regional Director or the NCLT, with the facts of the default, the period, the reasons, the steps taken to make it good, whether any previous offence has been compounded, and whether prosecution has been launched.
4. Registrar’s report: the Registrar examines the application and forwards it with a report.
5. Hearing: the Regional Director or the NCLT hears the applicants, usually in person or through an authorised representative, and passes an order fixing the compounding amount.
6. Payment and filing: the amount is paid within the time allowed, and the order is filed with the Registrar in the prescribed form.

Each officer in default and the company are separate applicants, and a separate amount is fixed for each. Compounding can be applied for before prosecution is launched or while it is pending. Where prosecution has been launched, the court is informed of the order, and the proceedings are closed.

What decides the outcome

• Accurate statement of facts: the application should state the default precisely, with dates, and not understate it. Inconsistencies between the application and the Registrar’s records are a common reason for adverse orders.
• Reasons for the default: genuine reasons, such as illness, disputes between directors, loss of records or reliance on a professional who failed to file, supported by documents, carry weight.
• Rectification: an application made after the default has been fully made good is viewed more favourably.
• Size of the company and gravity of the default: the authority considers whether the default caused loss or prejudice to anyone, and the size of the company.
• Representation: a well-prepared hearing file, with a chronology, supporting documents and a short written submission, makes the hearing efficient. See preparing a hearing file.

Common defaults that lead to compounding

• Failure to comply with provisions on board meetings, general meetings or financial statements that carry a fine
• Non-compliance with provisions on related party transactions, loans and investments, and deposits, depending on the section involved
• Defaults found during inspection by the Registrar, or reported by the auditor

Because penalties and offences have been reclassified, the specific section should always be checked against the current text of the Act before deciding between adjudication and compounding.

Compounding under other laws

• LLPs: offences under the LLP Act, 2008 punishable with fine can be compounded by the Central Government (through the Regional Director); many defaults are now dealt with by adjudication of penalty.
• FEMA: contraventions of FEMA, such as delayed reporting of foreign investment, are compounded by the Reserve Bank of India under a separate procedure. See consequences of non-compliance under FEMA.

Frequently asked questions

Is compounding an admission of guilt?

Compounding settles the offence by payment of the amount fixed, and no further proceedings are taken for it. It is not a conviction. The company and officers should, however, be accurate in the facts they state in the application.

How long does compounding take?

It depends on the workload of the Registrar and the Regional Director or NCLT. Applications are usually decided within a few months, and a complete application with the default rectified moves faster.

Can the compounding amount be reduced?

The authority fixes the amount within the maximum fine for the offence, considering the facts. A clear explanation of the reasons for the default and the steps taken to correct it is the most effective way to obtain a reasonable amount.

ചുരുക്കം (Summary in Malayalam)

കമ്പനി നിയമപ്രകാരമുള്ള പല സാങ്കേതിക വീഴ്ചകളും ഇപ്പോൾ ROC മുഖേനയുള്ള പിഴ നിർണയത്തിലൂടെയാണ് (adjudication) കൈകാര്യം ചെയ്യുന്നത്. പിഴ മാത്രം ശിക്ഷയുള്ളതോ പിഴയോ തടവോ ശിക്ഷയുള്ളതോ ആയ കുറ്റങ്ങൾ കോമ്പൗണ്ട് ചെയ്യാം. പരമാവധി പിഴ ₹25 ലക്ഷം വരെയുള്ളവ റീജിയണൽ ഡയറക്ടറും (കേരളത്തിന് ബെംഗളൂരു) അതിൽ കൂടുതലുള്ളവ NCLT-യും (കൊച്ചി ബെഞ്ച്) ആണ് കോമ്പൗണ്ട് ചെയ്യുന്നത്. GNL-1 ഫോമിൽ അപേക്ഷ നൽകണം. അപേക്ഷയ്ക്ക് മുമ്പ് വീഴ്ച പരിഹരിക്കുന്നതും കൃത്യമായ വസ്തുതകൾ നൽകുന്നതും പ്രധാനമാണ്.

This article gives a general overview of compounding of offences under the Companies Act, 2013. Provisions, forms and procedures are revised from time to time; for accurate and current requirements, refer to the Act as amended and the MCA portal. The article is not advice on any particular case.