JOINT APPLICATION FOR COMPOUNDING OF OFFENCES: REVISITING THE DECISION IN PAHUJA TAKII SEED

[Mansi Gupta is a third-year student at the National Law School of India University, Bengaluru]


Introduction


Compounding is a settlement mechanism provided under S.441 Companies Act, 2013 (CA 2013) and is a deemed admission of guilt by the defaulting parties in lieu of being discharged from prosecution. Notably, in VLS Finance Ltd. v. UOI, the Supreme Court (SC) stated that the intention behind the insertion of this Section was to provide respite to the companies who, often, inadvertently failed to comply with the technical requirements provided in the act. In line with the Ease of Doing Business, this provision provides for compounding of less-serious offences which are punishable with either fine or imprisonment.


On the other hand, the Companies Bill, 2011 introduced S. 451 providing for twice the amount of fine in case of repeated offence within three years, in addition to any imprisonment prescribed for the offence. Hence, the two sections seem to have a contradictory purport as S. 441 seeks to reduce the social litigation costs by following out-of-court settlement and ensuring self-reporting while S.451 is retributive in purport, serving as a deterrent against the repetition of offences by companies and officers.


The Quandary in Pahuja Takii Seeds


The National Company Law Appellate Tribunal (“NCLAT”) in the case of Pahuja Takii Seeds v. ROC, Delhi and Haryana was faced with the question- can a company, along with its officers, file a joint application under Section 441, for compounding of the same offence committed in different years? Allowing the appeal, NCLAT ruled that there is no bar under S.441 for filing a joint application for same offences committed during subsequent years within a span of three years. The moot point arose in relation to Section 451, CA 2013 which states that the fine should be doubled if the offence is repeated within a period of three years.


Here the Court faced the dilemma of interpreting S.451 in light of S.441. The Court reconciled the two provisions and stated that the first offence should mandatorily be compounded for the application of S.451. In this paper, the author posits that NCLAT wrongly interpreted the combined effect of Ss. 441 and 451 for joint compounding of offences committed within three years. The current interpretation waters down the rigorous punishment envisaged by the legislature for repeated offences under S. 451.


Erroneous Interpretation


While ruling on compounding, the courts seem to take a lenient view generally as can be seen In Re Reliance Industries. In Pahuja Takii too, the Court followed suit and relied on S.151, CPC i.e., inherent power to do justice and on Section 424 of the CA 2013 to maintain that, in absence of a specific bar, it has the power to regulate its own procedure. It, thus, allowed for joinder in absence of any bar to the contrary. However, this gives rise to the issue of reconciling S.441 and S.451. On a plain reading of S.441(2) and S.451, two things which could be stated regarding the same offence repeated in the span of three years are - first, that under S.441(2), the second or subsequent offence shall not be compounded; and second, as per S.451, the fine for the second offence shall necessarily be double.


Now, for interpreting the ‘second offence’ under S.451, the Court relies upon the explanation to S.441(2) which merely states that any second or subsequent offence committed after the period of three years on which the offence was ‘previously’ compounded, shall be deemed to be the first offence. Trying to resolve interpretive ambiguity regarding punishment under S.451 if there is a joint application for compounding, the Court ruled that for application of this provision, the first offence committed by the Company or its members shall necessarily be compounded. This does not seem reasonable as the Court relies on an irrelevant clause altogether (explanation to S.441(2)) to derive specific meaning. It did not consider the possibility of a common situation where an entity must not have applied for compounding and commits the offence repeatedly. The companies, thus, would be able to evade the application of the higher punishment altogether. The question of application of S.451 in such cases then becomes an anomaly.


This legislative intention becomes evident from the insertion of S.454A through the Companies (Amendment) Act, 2019. This Section reads similar to S.451 but applies to in-house adjudication mechanisms. The provision unambiguously states that when the company or members who have been punished for its first default, commits a second default, then the fine should be twice. The Ministry of Corporate Affairs in its report also stated that there is a need for stiffer penalties in case of repeated defaults. Hence, the Court faltered over the literal interpretation of the provisions and provided the companies scope for misuse.


Compounding: Effective Compliance Programme?


According to the doctrine of respondeat superior, public companies are subjected to criminal liability for the offences committed by their managers. However, Arlen argues that crimes by companies are effectively agency costs. This is because there is a divergence of interests of managers and the shareholders of the company. The agents with a view to achieving personal benefits including increased job security or promotions, commit crimes such as presenting a ‘rosy picture’ of financial statements and manipulate accounts. Agency costs also arise because there is informational asymmetry and coordination costs as the shareholders do not have effective oversight over the directors.


The in-house adjudication mechanism or governance strategies might be useful, but the need of judicial oversight over the process cannot be compromised. This necessitates regulatory strategies for protecting the interests of shareholders and general welfare. Compounding of offences is one such regulatory approach which seeks enforcement of rules and effectively balances criminal sanctions and efficiency in adjudication. As can be noticed from the CA 2013 and specified in Viavi Solutions India Pvt. Ltd., these are minor offences usually committed unintentionally and are meant to protect the society from impending major crimes.


Additionally, as Kraakman argues, public enforcement of rules suffers from limitation to the extent that enforcers might lack the incentive to initiate proceedings against private players unless there is a pressing need. Therein, lies the need for private enforcement which means that companies should ensure an effective compliance programme and ex-post mechanism of self-report detected wrongdoing. This effectively aids in prosecuting individual culprits.


Conclusion


Most offences under CA 2013 not only punish the company but also its officers as it is crucial for reducing the agency costs mentioned above. Unless the agents of the company are personally sanctioned for the crime, it is impossible to achieve deterrence. In this light, compounding is an effective measure to bring into light such offences due to the motivation of lesser punishment and avoiding higher trial costs. Curiously, the present trends of amendments also indicate the inclination for decriminalization of offences committed by companies and their officers. However, to prevent the pendulum from swinging too far, the legislature also introduced stringent penalty provisions for companies as well the agents such as S.451.


The effectiveness of this increased fine as punishment is not within the scope of the paper, but the contention is that the judiciary cannot without due regard to the legislative intent reduce the gravity of the punishment provided as was done in this case. The judges need to employ their discretion granted for compounding of offences within the bounds of their powers. Hence it can be concluded that even if the company or its officers make good the defaults so committed, the Court cannot arbitrarily free the defaulters of the separate punishment envisaged.

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