Compounding of Offences Under Companies Act 2013
Compounding is a settlement mechanism under the Companies Act 2013 that allows companies and their officers to pay a specified sum to avoid prosecution for procedural violations. It is faster than court proceedings, does not result in criminal conviction, and prevents director disqualification.
What Is Compounding?
Compounding is the process by which a company (or its officers) apply to the appropriate authority - the Regional Director or the NCLT - to pay a sum of money in lieu of criminal prosecution for a violation of the Companies Act 2013. Once an offence is compounded and the amount is paid, the matter is closed and cannot be reopened for prosecution.
It is governed by Section 441 of the Companies Act 2013. Compounding is available only for offences that are punishable with a fine (not imprisonment), or with fine or imprisonment at the court’s discretion. Offences that carry mandatory imprisonment are not compoundable.
Compoundable Offences - Common Examples
- Late filing of annual returns (MGT-7) and financial statements (AOC-4)
- Failure to maintain statutory registers (register of members, register of directors, etc.)
- Delay in filing resolutions (MGT-14)
- Failure to hold AGM within the prescribed time
- Minor disclosure omissions in the Directors’ Report
- Delay in allotment of shares or in filing PAS-3
- Delay in filing DIR-12 on change of directors
- Failure to file DPT-3 within the due date (in certain circumstances)
Non-Compoundable Offences
Certain offences under the Companies Act are too serious to be settled by payment and must be prosecuted. These include:
- Section 447 - Fraud: Any act, omission, concealment, or abuse of position committed with intent to deceive. This is the most serious offence under the Act and carries imprisonment of up to 10 years.
- Falsification or destruction of books of account
- Insider trading and market manipulation under SEBI provisions
- Fraudulent inducement to invest
- Failure to repay deposits accepted from the public
- Second or subsequent offences in certain categories that the Act specifies as non-compoundable on repetition
Compounding Process
Board resolution authorising the application
The Board of Directors passes a resolution acknowledging the default, authorising a director or officer to make the compounding application, and approving payment of the compounding fee.
Determine the appropriate authority
If the maximum penalty for the offence does not exceed ₹25 lakh, the application is made to the Regional Director (RD). If it exceeds ₹25 lakh, or if the company has been prosecuted within three years for a similar offence, the application goes to the NCLT.
File the compounding application
Submit a written application (through Form INC-28 for NCLT orders once made) with: the Board resolution, a statement of the offence and reasons for default, a list of pending MCA filings, and supporting documents.
Appear before the authority
The RD or NCLT may call the applicant for a hearing. In practice, minor technical defaults are often processed on paper without a personal appearance.
Receive the compounding order and pay fees
The authority issues a compounding order specifying the amount to be paid. Payment must be made within the time specified in the order, typically 30 days.
File pending returns
As a condition of compounding, all pending MCA filings must be brought up to date. Compounding does not by itself waive the obligation to file; it only settles the penalty for past default.
Compounding Fees
| Penalty Amount | Authority |
|---|---|
| Maximum penalty up to ₹25 lakh | Regional Director (RD) at the MCA regional office |
| Maximum penalty above ₹25 lakh | National Company Law Tribunal (NCLT) |
The actual compounding fee is determined by the authority within the range of the minimum and maximum penalty prescribed for the offence. For first-time offenders with clean compliance records, the fee is typically set at 25% to 50% of the maximum penalty. Repeat offenders are charged closer to the maximum.
Benefits of Compounding
- Avoids criminal prosecution, trial, and the possibility of imprisonment.
- Prevents the default from resulting in a criminal record for directors and officers.
- Protects directors from disqualification under Section 164 arising from the compounded offence.
- Resolves compliance arrears faster than court proceedings - typically 3 to 6 months.
- Once compounded, the same offence cannot be prosecuted again - it is a final settlement.
- Restores the company to good standing with the MCA, enabling it to file subsequent forms that were blocked.
If the company is also behind on filing annual returns or financial statements, those filings should be completed before or simultaneously with the compounding application. The RD and NCLT view concurrent compliance positively when determining the fee.
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