In the Companies Act 2013, India’s parliament incorporated a provision allowing for the “compounding” of offenses. “Compounding” is a way for an accused violator to avoid litigation. It is a settlement process by which the accused pays a fee instead of undergoing prosecution. In the following guest post, Umesh Pratapa takes a look at the Companies Act’s compounding provisions, and examines the question of the availability of D&O for amounts paid in a compounding process. I would like to thank Umesh for his willingness to allow me to publish his article here. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Umesh’s guest post.
The primary idea behind incorporation of provisions relating to compounding of offences under Companies Act 2013 is to fast track settlement of cases where payment by the wrong doer brings the litigation to close. In fact, it is meant to avoid litigation.
Before we understand the applicability of coverage for compounding, it is necessary to look at some of the terms and legal provisions connected with it.
Section 3(38) of the General Clauses Act, 1897 defines ‘offence’ as ‘any act or omission made punishable by any law for the time being in force.’ The Code of Criminal Procedure, 1973 also defines offence on similar lines. Compounding of an offense in the context of law means an amicable settlement for the purpose of averting prosecution for an offense.
The word ‘Compounding’ is not defined under Companies Act, 2013 or in the erstwhile Companies Act, 1956. But, the intent can be understood from a reading of Section 441 under the Companies Act, 2013 (which can be found here):
Compounding of certain offences:
(1)Notwithstanding anything contained in the Code of Criminal Procedure, 19Sub-section (1)(a) and (b)73, any offence punishable under this Act (whether committed by a company or any officer thereof) with fine only, may, either before or after the institution of any prosecution, be compounded by—
(a) the Tribunal; or
(b) where the maximum amount of fine which may be imposed for such offence does not exceed five lakh rupees, by the Regional Director or any officer authorised by the Central Government,
on payment or credit, by the company or, as the case may be, the officer, to the Central Government of such sum as that Tribunal or the Regional Director or any officer authorised by the Central Government, 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 403 shall be taken into account:
Provided also that any offence covered under this sub-section by any company or its officer shall not be compounded if the investigation against such company has been initiated or is pending under this Act.
(2) Nothing in sub-section (1)shall apply to an offence committed by a company or its officer within a period of three years from the date on which a similar offence committed by
it or him was compounded under this section.
Explanation.—For the purposes of this section,—
(a) any second or subsequent offence committed after the expiry of a period of three years from the date on which the offence was previously compounded, shall be deemed to be a first offence;
(b) “Regional Director” means a person appointed by the Central Government as a Regional Director for the purposes of this Act.
(3) (a) Every application for the compounding of an offence shall be made to the Registrar who shall forward the same, together with his comments thereon, to the Tribunal or the Regional Director or any officer authorised by the Central Government, as the case may be.
(b) Where any offence is compounded under this section, whether before or after the institution of any prosecution, an intimation thereof shall be given by the company to the Registrar within seven days from the date on which the offence is so compounded.
(c) Where any offence is compounded before the institution of any prosecution, no prosecution shall be instituted in relation to such offence, either by the Registrar or by any shareholder of the company or by any person authorised by the Central Government against the offender in relation to whom the offence is so compounded.
(d) Where the compounding of any offence is made after the institution of any prosecution, such compounding shall be brought by the Registrar in writing, to the notice of the court in which the prosecution is pending and on such notice of the compounding of the offence being given, the company or its officer in relation to whom the offence is so compounded shall be discharged.
(4) The Tribunal or the Regional Director or any officer authorised by the Central Government, as the case may be, while dealing with a proposal for the compounding of an offence for a default in compliance with any provision of this Act which requires a company or its officer to file or register with, or deliver or send to, the Registrar any return, account or other document, may direct, by an order, if it or he thinks fit to do so, any officer or other employee of the company to file or register with, or on payment of the fee, and the additional fee, required to be paid under section 403, such return, account or other document within such time as may be specified in the order.
(5) Any officer or other employee of the company who fails to comply with any order made by the Tribunal or the Regional Director or any officer authorised by the Central Government under sub-section (4)shall be punishable with imprisonment for a term which may extend to six months, or with fine not exceeding one lakh rupees, or with both.
(6)Notwithstanding anything contained in the Code of Criminal Procedure, 1973,—
(a) any offence which is punishable under this Act, with imprisonment or fine, or with imprisonment or fine or with both, shall be compoundable with the permission of the Special 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.
(7) No offence specified in this section shall be compounded except under and in accordance with the provisions of this section.
Let us now examine the availability of coverage under D&O policy.
Compounding involves payment of a fine. When compounding is done, prosecution is converted into monetary fine i.e. condonation of prosecution by imposing certain amount. Here, compounding will have the effect of acquittal of wrongdoer. Thus, when an offence is compounded, the person is deemed to be acquitted. In reference to Companies Act 2013, he does not become ineligible to be appointed as a director.
While it is not an inbuilt coverage, fines and penalties can be covered under a D&O policy by suitably modifying the definition of loss or in other appropriate manner. Reproduced below is one of the definitions as found in the policy wording.
“Loss also includes civil and administrative fines and penalties, awarded against Insured Persons, to the extent such are insurable by law, and the multiplied portion of multiple damages”
To the understanding of the author of this article, there is no law in India including Companies Act, 2013 which declares any fine and penalty as uninsurable. The other question that arises is whether Companies Act, 2013 prohibits indemnification for compounding. The answer seems to a be “No” in view of the fact Sec.201 which was there in earlier act prohibiting indemnification till the accused is acquitted does not find place in the Companies Act, 2013 in any form. Sec 201 of the Companies Act, 1956 is reproduced as under:
Section 201(1) in The Companies Act, 1956:
“(1) Save as provided in this section, any provision, whether contained in the articles of a company or in an agreement with a company or in any other instrument, for exempting any officer of the company or any person employed by the company as auditor from, or indemnifying him against, any liability which, by virtue of any rule of law, would otherwise attach to him in respect of any negligence, default, misfeasance, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void; Provided that a company may, in pursuance of any such provision as aforesaid indemnify any such officer or auditor against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or discharged or in connection with any application under section 633 in which relief is granted to him by the Court.”
Sec 197 of Companies Act, 2013, reproduced below, is considered to be the corresponding section of Sec 201 Companies Act 1956.
Section 197(13) of Companies Act, 2013:
“(13) Where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel:
Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration.”
Surprising as it seems, there appears to be no section in the Companies Act 2013 which prohibits indemnification of any nature leave alone for issues like compounding.
It needs to be clearly understood that as in the case of other payments, prior approval of insurance company is a prerequisite for claiming this loss. One of the policy wordings is reproduced below. Provision relating to non-admission of liability is present in all policy forms, while the language may vary from insurer to insurer.
“The Insured shall not admit or assume any liability, enter into any settlement agreement, or consent to any judgment without the prior written consent (which shall not be unreasonably delayed or withheld) of the Insurer. Only liabilities, settlements and judgments resulting from claims defended in accordance with this policy shall be recoverable as a loss under this policy”
Whilst on the subject of compounding, it is good for the directors to seek, in their letter of appointment, appropriate and adequate indemnity provisions – indemnity against all losses and expenses incurred by them in relation to the discharge of their duties unless such loss/ expense is caused by their own deliberate and malicious actions. It pays to be explicit and have more inclusive provisions.
To summarise, prima facie compounding of offences is covered when D&O liability insurance policy is extended to cover fines and penalties subject to other terms and conditions of the policy. This is applicable in respect of indemnification to directors and officers and not to the company. But, it is necessary for insureds to obtain prior approval of insurer before they initiate the process of compliance with regard to compounding.
Currently an independent consultant pursuing interest in liability insurance.
Disclaimer: The information contained and ideas expressed in this article represent only a general overview of subjects covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisors regarding specific coverage and/or legal issues.