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Offences by Companies under the Companies Act are technical and complex in nature
1. Many of the offences committed by companies under the Companies Act are technical and complex in nature, as has been observed by the Hon'ble Supreme Court of India in its judgement dated 10th May, 2013, while interpreting the provisions of Section 621A of the Companies Act, 1956 for compounding of offences committed under the erstwhile Companies Act, 1956. Its decision in this regard in re: V.L.S. Finance Ltd. v. Union of India &Ors, is relevant, as can be seen from the following excerpts of the said judgement :-
"As observed earlier, the aforesaid enactment was brought in view of the need of leniency in the administration of the Act because a large number of defaults are of technical nature and many defaults occurred because of the complex nature of the provision."
NCLT - A forum for speedy disposal of cases against companies
2. The functioning of the National Company Law Tribunal ('NCLT') in nine cities of India with effect from 1st June, 2016 has been making a significant difference in the prosecution of companies and its directors for non-compliance/violation of the provisions of the Companies Act, be it the erstwhile Act of 1956 (for which cases were already pending before the erstwhile Company Law Board) or under the provisions of the Companies Act, 2013 ("the Act of 2013"). NCLT decisions seem now to be within a specified time frame as envisaged in the NCLT Rules, 2016. In this regard, the decision of the Hyderabad Bench of NCLT, dated 29th August, 2016, in the case of Teamasia Semiconductors (India) Ltd. and its Directors assumes significance because the said NCLT decision clarifies and settles doubts in respect of prosecutions launched by the concerned Registrar of Companies against offending companies and its directors for non-compliance of the provisions of law, especially when complaint cases had been filed before the Magistrate's Court and such cases are pending for adjudication in the court of Special Judge dealing with Economic Offences/ACMM. The question that arose in the aforementioned decision was - whether the concerned Company could make application to the Company Law Board (CLB)/now NCLT for compounding of offences despite the pendency of the prosecution launched against it and its directors in the Court of Special Judge dealing with Economic Offences?
The NCLT's decision dated 29th August, 2016 in the aforesaid Teamasia's case settles the issue and will guide in future applications by companies for compounding of offences. This article highlights the relevant portions of the aforesaid NCLT's judgement for the benefit of corporate entities and professionals associated with it.
Brief Facts of the Case before the Hyderabad Bench of NCLT
3. Brief facts leading to the filing of the aforementioned case are thatan application was initially moved before the Company Law Board, Chennai Bench by the Applicant Company under Section 621A of the erstwhile Companies Act, 1956 ('the Act of 1956'), read with the Regulations 35, 40 and 44 of the erstwhile CLB Regulations, 1991, by praying that the Applicants be permitted to compound their unintended offences, made under Section 149 of the Act of 2013, by imposing minimum consolidated composition fee and to further direct the Registrar of Companies ('ROC'), Telengana and Andhra Pradesh, to withdraw the complaint filed against the Applicants by the ROC in the Hon'ble Court of the Special Judge for Economic Offences-Cum-VIII, AMSJ Court, Nampally, Hyderabad and to relieve the Applicants of all legal consequences arising therefrom.
Provisions of Section 621A of the Act of 1956 are analogous to Section 441 of the Act of 2013, which gives the power to the NCLT for compounding of offence. Though Section 621A of the Act of 1956 was mentioned in the application filed by the Company before the Company Law Board, Chennai, provisions under Section 441 of the Act of 2013 were mentioned in the affidavit dated 16th August, 2016, filed by the Applicants before the NCLT, since the case got transferred to NCLT as a result of the Ministry of Corporate Affairs Notification dated 1st June, 2016, notifying the constitution of the National Company Law Board and its appellate body, the National Company Law Appellate Tribunal ('NCLAT'), thereby transferring cases pending before the concerned CLB Bench to its corresponding NCLT Bench.
Defaulting Company Prosecuted by Court of Special Judge for Economic Offences on ROC Complaint
4. The Show-Cause Notice issued by the ROC, Hyderabad was to the effect that under Section 149 of the Act of 2013, read with Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014 ('the Rules') the notice-company was legally mandated to appoint a Woman Director on its Board of Directors, which, the notice-company failed to do. Therefore, show cause notice was issued as to why penal action under Section 450 of the Act of 2013 should not be initiated against the Applicants for not appointing a Woman Director on its Board of Directors. In its reply dated 26th September 2015 to the ROC, the said Applicant Company stated that it was not carrying on any commercial operations from the year 2000 and that the Company's entire share capital was fully eroded due to past losses and that the Company was proposing to go for winding-up as there was no hope of commencing any commercial activities in the current situation. The ROC, Hyderabad, not being satisfied with the reply filed by the Applicant Company, filed a complaint under Section 450 before the Hon'ble Court of Special Judge for Economic Offences-Cum-VIII, AMSJ Court, Hyderabad, inter alia, charging the Applicants for non-compliance of Section 149 of the Act of 2013, read with Rule 3 of the said Rules. The ROC, Hyderabad, submitted that as per section 172 of the Act of 2013, the maximum amount of fine charged for offences under Section 149 of the Act of 2013 is that every officer of the company who is in default shall be punishable with fine which shall not be less than Rs.50,000/-, but which may extend to Rs.5,00,000/- . After the hearing of the said case on 7th April, 2016, for examination under Section 251 of the Code of Criminal Procedure, the case was thereafter posted for trial on 25th April, 2016.
Applicant-Company Moves CLB/NCLT for Compounding of Offence
5. The Applicant Company submitted an Application before the erstwhile CLB at its Chennai Bench under Section 621A of the Act of 1956 for compounding the offence. The main issue that was to be decided in the Teamasia's case by the NCLT was whether NCLT has the power to allow the Applicants to compound the said offence in question, especially when the prosecution of the Applicants was already initiated by the ROC and was pending at the Court of Special Judge for Economic Offences and that too at an advanced stage.
NCLT Cites Differing Views on Tribunal's Power to Compound Taken by Different Benches of the erstwhile CLB
7. The NCLT Hyderabad Bench made references to similar issues that were raised in the previous case before the Western Region Bench of the erstwhile CLB, in the case of Reliance Industries Ltd. v. Unknown (1998 89 Comp Cases 67 CLB), wherein the CLB had held that the Company Law Board has been vested with the power, authority and jurisdiction to compound the offence. It is only when such compounding is done that the matter can be brought to notice of the Learned Addl. Chief Metropolitan Magistrate, IIIrd Court, Esplanade, Mumbai, for discharging the accused company and its directors. The NCLT Hyderabad Bench, while citing the decision in the aforesaid Reliance Industries' case, noted that the case for compounding was thereafter considered on merits and then the erstwhile Western Region Bench of the erstwhile CLB allowed the compounding of offences, subject to terms and conditions mentioned by the Learned Bench thereunder.
The NCLT Hyderabad Bench, also noted that a differing view on the same issue was taken by the Northern Region Bench of the erstwhile CLB wherein the Learned CLB Member took the stand that where prosecution had already been launched against the applicant-company before the Criminal Court, the applicant had to obtain the prior approval of the said Criminal Court before its application for compounding of offence could be taken up by the Company Law Board. In that case before the Northern Bench of CLB, when the applicant approached the Learned Trial Magistrate, he rejected the request by, inter alia, observing that the Trial Court could not issue any direction to any of the parties to compound the offence.
Matter Referred to Larger Bench of the Erstwhile CLB for Resolution
8. Thereafter the Learned Member of the CLB's Northern Region Benchobserved that since there were two conflicting decisions by the two different CLB Benches on the question of obtaining permission, i.e., whether it is prior to or after compounding application, the said question was to be considered and decided by a larger Bench to be constituted by the Chairman of the erstwhile CLB. Accordingly, a Three-Member CLB Bench was constituted in the case of Hoffland Finance Ltd. v. Unknown (1997 Comp. Cases Vol.90 38). After considering the entire issue and the law on the subject, the said Three-Member CLB Bench vide its order dated 12th May 1997, held the view that the Company Law Board could exercise its powers under Section 621A(1) of the Act of 1956, which was independent of the powers exercised by the Trial Court under Sub-Section 7 of Section 621A of the Act of 1956, and all offences, other than those which are punishable with imprisonment only, or with imprisonment and also fine, can be compounded by the Company Law Board without any reference to sub-Section 7 of Section 621A of the Act of 1956, even in cases where the prosecution is pending in a criminal court.
Delhi High Court Upheld erstwhile CLB Larger Bench's Decision in Hoffland Finance case
9. Another case on the same issue which came up for decision before the Hon'ble Delhi High Court, namely, the case of V.L.S. Finance Ltd. v. Union of India &Ors (123 Comp. Cases 433 Delhi) the Delhi HC dealt with the said issue along with other issues raised therein. The Delhi HC at Paragraph 14 of its judgement dated 5th November, 2003, held as follows:
"It is an accepted position that there is no decision of any High Court or of the Supreme Court on the aforementioned question, except for the aforementioned decision of the Company Law Board in Hoffland Finance Ltd. (supra). I have carefully perused the decision of Hoffland Finance Ltd. (supra) and also considered the arguments of the parties in order to arrive at a just and proper decision in the matter."
On the question whether or not the Company Law Board has the power to compound offences punishable with fine or imprisonment or both without permission of the court, the Delhi HC held that the Company Law Board can compound the offence of the nature prescribed in sub-Section 1 of section 621A of the Act of 1956, either before the institution of the criminal proceeding or even after institution of criminal proceeding and that the said power is not subjected to the provision of sub-Section 7 of Section 621A of the Act of 1956 and that both are parallel powers to be exercised by different authorities who have been empowered under the statute, and that one power is not dependent on the other. Therefore, the Court held that the power exercised by the Company Law Board in compounding the offence, although when prosecution was pending in Trial Court, was legal and valid and no permission of the criminal court was necessary. This decision was upheld by the Hon'ble Supreme Court of India in its judgement dated 10th May, 2013 in re: V.L.S. Finance Ltd. v. Union of India &Ors, wherein the Hon'ble Supreme Court concluded by holding as follows:
"From what we have observed above, we are of the opinion that the power under sub-section (1) and sub-section (7) of Section 621A are parallel powers to be exercised by the Company Law Board or the authorities mentioned therein and prior permission of Court is not necessary for compounding the offence, when power of compounding is exercised by the Company Law Board. In view of what we have observed above, the order impugned does not require any interference by this Court."
Interestingly, in the aforesaid VLS Finance judgement, the Hon'ble Supreme Courthad delineated the various offences and the punishment prescribed therefor under the Companies Act into the following categories:
The Supreme Court then noted that the offence in question in VLS Finance case was under Section 211(7) of the Act of 1956 and held that:
"As we have observed above, the nature of offence for which the accused has been charged necessarily does not invite imprisonment or imprisonment and also fine. Hence, we are of the opinion that the nature of the offence is such that it was possible to be compounded by the Company Law Board."
NCLT Hyderabad Bench holds that the said issue is no longer Res Integra – Holds that NCLT can exercise jurisdiction under Section 441 of the CA of 2013
10. The Hyderabad Bench of the NCLT, in the Teamasia case, referring to the decision of the larger Bench of the erstwhile CLB and the subsequent decision of the Hon'ble Delhi High Court, on the issue of the CLB/NCLT having jurisdiction and power to compound offences, where no fine or imprisonment or both is prescribed under the Act, held that the said subject is no longer res integra and that the NCLT can exercise jurisdiction under Section 621A of the Act of 1956 or its corresponding Section 441 of the Act of 2013. The Hyderabad NCLT further noted that, even though the Applicant had filed under application under Section 621A of the Act of 1956, later on, in their affidavit dated 16th August, 2016, they had mentioned Section 441 of the Act of 2013 and, hence, the Hyderabad Bench of NCLT considered the merits of their said application.
NCLT Hyderabad Bench Notes that Applicant Subsequently Appointed Woman Director, Though After a Delay of 14 Months and Allows Compounding
11. The NCLT in Teamasia case further noted that subsequent to the issue of show-cause notice by the ROC Hyderabad to the Applicant-Company, the Applicant had appointed a Woman Director at its Board Meeting on 1st March, 2016, and had also filed its necessary forms with the ROC on 2nd March, 2016, and, thus, there was a delay of 14 months in appointment of the Woman Director. The NCLT further noted that the Applicant-Company had requested the ROC to exonerate them as the financial position of the Company was not good.
In the facts and circumstances of the case, the Hyderabad Bench of NCLT was satisfied with the reasons furnished by the Applicant-Company for the 14 months' delay in complying with the provision of the Act of 2013 for appointing the Woman Director and, hence, permitted the Applicants to compound the offence in question by taking a lenient view as prayed for by the Applicants and directed the Applicant-Company to pay a compounding fee of Rs.1,00,000/- and its three accused Directors to pay a compounding fee of Rs.50,000/- each and directed them to deposit the same within three weeks. It further directed the ROC that after receipt of the aforesaid compounding fee, the ROC should apprise the Learned Special Judge for Economic Offences-Cum-VIII, AMSJ Court, Hyderabad, for passing appropriate orders in the pending criminal case.
12. The aforesaid decision of the Hyderabad Bench of the NCLT highlights that the authorities are rigorously enforcing the applicable law with regard to appointment of Woman Director on the Board of companies and also that a pragmatic view is being taken by the NCLT to enable the offending companies to make good the offence and to get the matter compounded under Section 441 of the Act of 2013. The speed in decision-making by the NCLT is also noted. The uncertainties which used to prevail in the corporate sector in dealing with prosecutions launched by the ROC get removed faster. Now the corporates can emphasize more on compliance and carry on with their normal business/commercial activities in the right earnest. This decision will also strengthen the thrust of the Government and regulatory authorities on good corporate governance. It is hoped that a significant change will occur, in due course, in the way in which management of the companies functions, when it comes to compliance with the provisions of not only the Act of 2013, but other applicable laws, because now the Board of Directors' Report has to contain a statement about compliances of the applicable laws too.