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. where it has held that the principle of the imposition of minimum penalty is non-mandatory in the compounding of offences cases, it is necessary to define and understand the offence. The term offence has been defined by s 3(38) of the 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.

By virtue of this short-cut section, a 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 prolonged litigation. This provision was introduced following the Sachar Committee report as 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 the bewildering complexity of the provisions.

Case Summary

UW International Training & Education Centre for Health Pvt. Ltd., the petitioner company filed a 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).

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:

1. Whether NCLT can levy a higher or lower penalty in compounding cases than the penalties as prescribed under the Act?
2. What are the guiding principles for imposing penalty in compounding cases?

Delhi NCLT in its Order against the 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, the principle of imposing a 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 the 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 laid down that NCLT is required to notify the relevant factors while compounding any offence, such as the gravity of the offence, malafide intention, maximum punishment prescribed, report of Registrar of Companies (ROC), a 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.