LEGAL ISSUE: Whether the Company Law Board can compound offences punishable under Section 211(7) of the Companies Act, 1956 without the permission of the court when prosecution is pending.
CASE TYPE: Company Law
Case Name: V.L.S. Finance Ltd. vs. Union of India & Ors.
Judgment Date: May 10, 2013
Introduction
Date of the Judgment: May 10, 2013
Citation: (2013) INSC 341
Judges: Chandramauli Kr. Prasad, J., V.Gopala Gowda, J.
Can the Company Law Board (CLB) compound an offense under the Companies Act, 1956, even when a criminal court is already hearing the case? This is the core question the Supreme Court of India addressed in this case. The court clarified the powers of the CLB and the criminal courts regarding compounding of offenses. The judgment was delivered by a two-judge bench comprising Justice Chandramauli Kr. Prasad and Justice V. Gopala Gowda.
Case Background
The Registrar of Companies, NCT of Delhi and Haryana, filed a complaint against M/s. Sunair Hotels Ltd. (the Company) and its Chairman-cum-Managing Director, S.P. Gupta. The complaint alleged that the Company’s balance sheet for 1995-96 incorrectly included land worth Rs. 21 crores as a fixed asset. The land was actually held under a license from the New Delhi Municipal Corporation, with only an annual license fee being paid. The complainant argued that this misrepresentation violated Section 211(7) of the Companies Act, 1956.
Before the criminal court could proceed, the Company and its Managing Director applied to the Company Law Board (CLB) to compound the offense. The CLB allowed the compounding of the offense against the Managing Director upon payment of Rs. 1,000 for each offense each year.
Timeline
| Date | Event |
|---|---|
| 1995-96 | M/s. Sunair Hotels Ltd. allegedly misrepresented land in its balance sheet. |
| Registrar of Companies filed a complaint in the Court of Chief Metropolitan Magistrate, Tis Hazari. | |
| August 9, 2000 | Company Law Board allowed the compounding of the offense. |
| November 5, 2003 | Delhi High Court dismissed the appeal against the Company Law Board order. |
| May 10, 2013 | Supreme Court of India dismissed the appeal. |
Course of Proceedings
The Company Law Board (CLB) allowed the compounding of the offense, stating that its powers under Section 621A(1) of the Companies Act, 1956 were independent of the criminal court’s powers. The CLB held that it could compound offenses even when a prosecution was pending, without needing prior permission from the court.
V.L.S. Finance Ltd. appealed this decision to the Delhi High Court, arguing that the power to compound offenses lay with the criminal court, not the CLB. The High Court dismissed the appeal, holding that both the CLB and the criminal court had parallel powers to compound offenses. The High Court stated that the CLB could compound offenses before or after the institution of criminal proceedings, and that this power was not subject to Section 621A(7) of the Act.
Legal Framework
The case revolves around Section 211(7) and Section 621A of the Companies Act, 1956.
Section 211(7) of the Companies Act, 1956 states:
“If any such person as is referred to in sub-section (6) of section 209 fails to take all reasonable steps to secure compliance by the company, as respects any accounts laid before the company in general meeting, with the provisions of this section and with the other requirements of this Act as to the matters to be stated in the accounts, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both:
Provided that in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of this section and the other requirements aforesaid were complied with and was in a position to discharge that duty:
Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.”
Section 621A of the Companies Act, 1956, as it stood at the relevant time, deals with the composition of certain offenses. It allows the Company Law Board or the Regional Director to compound certain offenses, subject to specific conditions.
Section 621A(1) of the Companies Act, 1956 states:
“Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), any offence punishable under this Act whether committed by a company or any officer thereof, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may, either before or after the institution of any prosecution, be compounded by- (a) the Company Law Board; or (b) where the maximum amount of fine which may be imposed for such offence does not exceed five thousand rupees, by the Regional Director, on payment or credit, by the company or the officer, as the case may be, to the Central Government of such sum as that Board or the Regional Director, as the case may be, may specify: Provided that the sum so specified shall not, in any case, exceed the maximum amount of the fine which may be imposed for the offence so compounded: Provided further that in specifying the sum required to be paid or credited for the compounding of an offence under this sub-section, the sum, if any, paid by way of additional fee under Sub-section (2) of Section 611 shall be taken into account.”
Section 621A(7) of the Companies Act, 1956 states:
“Notwithstanding anything contained in the Code of Criminal Procedure, 1973,- (a) any offence which is punishable under this Act with imprisonment or with fine, or with both, shall be compoundable with the permission of the Court, in accordance with the procedure laid down in that Act for compounding of offences; (b) any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.”
Arguments
The appellant, V.L.S. Finance Ltd., argued that the Company Law Board (CLB) had no jurisdiction to compound an offense punishable under Section 211(7) of the Companies Act, 1956, because the punishment included imprisonment. They contended that only the criminal court had the power to compound such offenses.
The respondent, the Union of India, and the Company and its Managing Director, argued that imprisonment was not a mandatory punishment under Section 211(7). They submitted that the CLB had the authority to compound the offense. They also pointed out that the appellant had not raised this argument before the CLB.
The Supreme Court noted that the appellant’s argument was a pure question of law that could be addressed even if it was raised for the first time before the court.
| Party | Main Submission | Sub-Submissions |
|---|---|---|
| V.L.S. Finance Ltd. (Appellant) | Company Law Board (CLB) has no jurisdiction to compound offenses under Section 211(7). |
|
| Union of India & M/s. Sunair Hotels Ltd. (Respondents) | Company Law Board (CLB) has the authority to compound the offense. |
|
Issues Framed by the Supreme Court
The Supreme Court framed the following issue:
- Whether the Company Law Board has the jurisdiction to compound an offense punishable under Section 211(7) of the Companies Act, 1956, which provides for imprisonment or fine or both?
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues:
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether the Company Law Board has the jurisdiction to compound an offense punishable under Section 211(7) of the Companies Act, 1956, which provides for imprisonment or fine or both? | Yes | Section 211(7) provides for imprisonment or fine or both, not imprisonment only. Section 621A(1) allows the CLB to compound offenses not punishable with imprisonment only or with imprisonment and fine. The CLB’s power is parallel to that of the court, and does not require prior permission from the court. |
Authorities
The Court considered the following legal provisions:
- Section 211(7) of the Companies Act, 1956: This section specifies the punishment for failing to comply with accounting standards, including imprisonment or fine or both.
- Section 621A of the Companies Act, 1956: This section deals with the composition of certain offenses, allowing the CLB or Regional Director to compound offenses.
Judgment
The Supreme Court held that the Company Law Board (CLB) had the jurisdiction to compound the offense under Section 211(7) of the Companies Act, 1956.
The Court noted that Section 211(7) allows for punishment with imprisonment or fine or both. It is not an offense punishable with imprisonment only or with imprisonment and also with fine. Therefore, Section 621A(1) of the Companies Act, 1956, allows the CLB to compound such offenses.
The Court also held that the powers of the CLB under Section 621A(1) and the criminal court under Section 621A(7) are parallel. The CLB can compound offenses before or after the institution of any prosecution, while the criminal court can compound offenses only after the institution of prosecution.
The Court stated that the CLB does not need prior permission from the court to compound an offense. Both Section 621A(1) and Section 621A(7) start with a non-obstante clause, giving them overriding effect over other provisions.
The following table shows how each submission made by the parties was treated by the Court:
| Submission | Court’s Treatment |
|---|---|
| The Company Law Board has no jurisdiction to compound an offense punishable under Section 211(7) of the Companies Act, 1956, because the punishment included imprisonment. | Rejected. The Court held that imprisonment is not mandatory under Section 211(7), and the CLB has the power to compound offenses not punishable with imprisonment only or with imprisonment and fine. |
| Only the criminal court had the power to compound such offenses. | Rejected. The Court held that the CLB and the criminal court have parallel powers to compound offenses. |
| Imprisonment is not a mandatory punishment under Section 211(7). | Accepted. The Court agreed that Section 211(7) provides for imprisonment or fine or both. |
| The Company Law Board has the authority to compound the offense. | Accepted. The Court held that the CLB has the power to compound offenses under Section 621A(1) of the Companies Act, 1956. |
| Section 621A(7) confers jurisdiction on the court to accord permission for compounding of the offence. | Rejected. The Court held that the powers of the CLB under Section 621A(1) and the criminal court under Section 621A(7) are parallel. |
The following table shows how each authority was viewed by the court:
| Authority | Court’s View |
|---|---|
| Section 211(7) of the Companies Act, 1956 | The Court interpreted this section to mean that the offense is punishable with imprisonment or fine or both, not imprisonment only. |
| Section 621A of the Companies Act, 1956 | The Court interpreted this section to mean that the CLB has the power to compound offenses not punishable with imprisonment only or with imprisonment and fine. The powers of the CLB and the court are parallel. |
The court observed that “From a plain reading of Section 621A(1) it is evident that any offence punishable under the Act, not being an offence punishable with imprisonment only or with imprisonment and also with fine, may be compounded either before or after the institution of the prosecution by the Company Law Board”.
The court further observed that “Both sub-section (1) and sub-section (7) of Section 621A of the Act start with a non-obstante clause. As is well known, a non-obstante clause is used as a legislative device to give the enacting part of the section, in case of conflict, an overriding effect over the provisions of the Act mentioned in the non-obstante clause.”
The court also stated that “The legislature in its wisdom has not put the rider of prior permission of the court before compounding the offence by the Company Law Board and in case the contention of the appellant is accepted, same would amount to addition of the words “with the prior permission of the court” in the Act, which is not permissible.”
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the interpretation of Section 621A(1) of the Companies Act, 1956. The court emphasized that the provision explicitly allows the Company Law Board (CLB) to compound offenses that are not punishable with imprisonment only or with imprisonment and fine. The court also noted that Section 211(7) provides for punishment with imprisonment or fine or both, not imprisonment only.
The Court also considered the legislative intent behind Section 621A, which was to provide leniency in the administration of the Act, given that many defaults are technical in nature. The non-obstante clauses in both Section 621A(1) and Section 621A(7) were also key factors in the Court’s reasoning, establishing that the CLB’s power to compound offenses was not dependent on the court’s permission.
| Reason | Percentage |
|---|---|
| Interpretation of Section 621A(1) | 40% |
| Nature of punishment under Section 211(7) | 30% |
| Legislative intent behind Section 621A | 20% |
| Non-obstante clauses in Section 621A(1) and (7) | 10% |
| Category | Percentage |
|---|---|
| Fact | 20% |
| Law | 80% |
Logical Reasoning
Key Takeaways
- The Company Law Board (CLB) can compound offenses punishable under Section 211(7) of the Companies Act, 1956.
- The CLB’s power to compound offenses is independent of the criminal court’s power, and it does not require prior permission from the court.
- Section 621A(1) of the Companies Act, 1956 allows the CLB to compound offenses not punishable with imprisonment only or with imprisonment and fine.
- The criminal court also has the power to compound offenses under Section 621A(7) of the Companies Act, 1956, but only after the institution of prosecution.
Directions
No specific directions were given by the Supreme Court in this judgment.
Development of Law
The ratio decidendi of this case is that the Company Law Board (CLB) has the power to compound offenses punishable under Section 211(7) of the Companies Act, 1956, without needing permission from the criminal court. This clarifies the parallel powers of the CLB and criminal courts. This judgment does not change the previous position of law but clarifies the scope of powers of CLB and criminal courts.
Conclusion
The Supreme Court upheld the Delhi High Court’s decision, affirming that the Company Law Board (CLB) has the authority to compound offenses under Section 211(7) of the Companies Act, 1956, without prior permission from the criminal court. This judgment clarifies the powers of the CLB and the criminal courts regarding the compounding of offenses under the Companies Act, 1956.