Patna HC Quashes Company Auditor’s Prosecution After ₹30,000 Compounding Of Alleged Companies Act Violation

In brief

The question

Whether the criminal prosecution under Section 233 of the Companies Act, 1956 could continue after the underlying Section 227 contravention had been compounded by the competent authority.

The court held

The Court answered the issues in the petitioner’s favour and allowed the application.

It also directed

It quashed the 2 August 2016 cognizance order and the criminal proceedings arising from the complaint insofar as they concerned Subodh Kumar Goel.

The Court made clear that it had not determined the merits of the original accounting allegations.

01Facts

The petitioner was the statutory auditor of M/s. Geeta Steels Tubes Private Limited.

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The Registrar of Companies filed a complaint alleging that he had failed to report matters concerning depreciation, disposal of fixed assets, and managerial remuneration, contrary to Section 227(3)(d) of the Companies Act, 1956.

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On 2 August 2016, the Special Judge, Economic Offences, Patna took cognizance under Section 233 of that Act and directed summons to issue.

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While the petitioner’s challenge to that order was pending, the Regional Director, acting on an application under Section 441 of the Companies Act, 2013, compounded the offence relating to the Section 227 contravention after the petitioner paid a compounding fee of Rs. 30,000.

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The High Court had stayed the criminal proceedings from 24 September 2018.

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02Issues

i.Whether the criminal prosecution under Section 233 of the Companies Act, 1956 could continue after the underlying Section 227 contravention had been compounded by the competent authority.

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ii.Whether the absence of proof that the Registrar had notified the Special Judge of the compounding prevented the prosecution from being quashed.

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03Law Applied

Section 227(3)(d) of the Companies Act, 1956 imposes the relevant audit-reporting requirement, and Section 233 was the provision under which the complaint was brought for its alleged contravention.

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The Court relied on V.L.S. Finance Ltd. v. Union of India, (2013) 6 SCC 278, which held that compounding under Section 621A(4)(d) of the 1956 Act may occur after prosecution has begun and that, once the compounding is brought to the criminal court’s notice, the company or officer in relation to whom the offence was compounded is to be discharged.

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It also applied Section 441(3)(d) of the Companies Act, 2013, which provides for notice to the court of post-prosecution compounding and discharge of the company or officer concerned.

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Provisions in the judgment · 1 · Linked ones open on LawLens

Companies Act, 2013 Section 441

04Reasoning

The complaint alleged no independent offence separate from the Section 227 contravention, and the Regional Director’s operative order expressly compounded that contravention after the Registrar had reported the pending prosecution.

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Applying V.L.S. Finance and Section 441(3)(d), the Court held that the prosecution’s foundation no longer survived.

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Although the record did not show that the Registrar had notified the Special Judge, that procedural omission did not justify continuing a prosecution for an offence already compounded by the competent authority; the proceedings had also remained stayed since 2018.

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The Court therefore did not address the merits of the original accounting allegations.

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