CS Professional · Compliance Management, Audit and Due Diligence

Non-Compliances, Penalties and Adjudications for CS Professional

This chapter covers what happens when a company or its officers break the Companies Act, 2013: the penalty or punishment, who decides it, and how the default is remedied. You solve questions by naming the provision, applying it to the facts, and concluding on the penalty, forum and remedy.

What this chapter covers

This chapter follows one line of thought. A default occurs. The Act attaches a consequence, which is either a monetary penalty or a punishment such as fine or imprisonment. Then you ask who decides it: an adjudicating officer for penalties, or a Special Court for offences. Finally you ask how the default can be closed: through rectification, compounding or condonation.

The legal anchors in the text are few but important. Section 446B gives lesser penalties for One Person Companies, small companies, start-up companies and Producer Companies. Section 454 deals with adjudication of penalties. Sections 435 and 436 deal with establishing Special Courts and the offences they try. Learn these closely. For other penalty amounts, state the rule in plain words and give a section number only when you are sure of it.

This chapter links to the rest of Paper 3. Compliance Management teaches what you must do. This chapter teaches what it costs when you do not. In Audit and Due Diligence, the same consequences become findings and risks that you report. Answers in this paper are written and case-based, so you will be asked to advise a company on its exposure, the forum and the way out.

Paper 3 carries 100 marks, with 40 for Compliance Management and 60 for Audit and Due Diligence, and you must score at least 40% in the paper to pass. This chapter supports both parts. Case questions often end with 'advise the company', and the answer depends on penalty, forum and remedy. The rules are precise, with fixed limits, time periods and authorities, so a prepared student can score reliably. The chapter is also useful in practice, because a Company Secretary is expected to know the cost of a default before it happens.

Non-Compliances, Penalties and Adjudications: topics in the order to study them

1Non-Compliance and Consequences under Companies ActStart here to see the whole picture: default, consequence, forum and remedy.
2Penalties and Punishments under Companies Act 2013You need the difference between a penalty and a punishment before learning who imposes each.
3Lesser Penalties for OPCs and Small Companies (Sec 446B)It modifies the penalty rules just learned, so study it right after them.
4Adjudication of PenaltiesSection 454 shows how a penalty is actually imposed, appealed and enforced.
5Special Courts and Offences Tribunal ProcedureOffences go to a different forum from penalties, so contrast it with adjudication.
6Compounding of Offences and Condonation of DefaultLast, learn how defaults and offences are settled, as it ties the earlier topics together.

How to prepare Non-Compliances, Penalties and Adjudications

Treat the chapter as a process, not a list of facts. Build one flow in your head and attach each rule to it.

Draw a flow from default to consequence to forum to remedy. Keep it on one page.
Learn the difference between a penalty and a punishment, and who deals with each.
Study Section 446B closely. Note who it covers, the 'not more than one-half' limit and the caps of ₹2,00,000 for a company and ₹1,00,000 for an officer in default or other person.
Study Section 454 in order: appointment, order, hearing, appeal and non-compliance with the order. Note the appeal period of sixty days and the ninety-day compliance period.
Study Sections 435 and 436: who forms a Special Court, what it tries, and the summary trial limits.
Practise case answers in the format provision, facts, conclusion, with a drafting or compliance point at the end.
Revise the compounding and condonation topic by listing what can be settled, who settles it and what the company must do.

Common mistakes in Non-Compliances, Penalties and Adjudications

Treating every default as an offence for the Special Court.
Fix: Ask first whether the provision imposes a penalty or a punishment. Penalties go to the adjudicating officer; offences go to the Special Court.
Applying Section 446B to every small business.
Fix: Check that the company is a One Person Company, small company, start-up company or Producer Company before applying the lesser penalty.
Stating the Section 446B relief as exactly half the penalty.
Fix: Write that the penalty is not more than one-half of the specified penalty, subject to the caps for the company and for the officer or other person.
Mixing up the appeal and compliance periods under Section 454.
Fix: Remember sixty days to file an appeal with the Regional Director and ninety days to comply with the order.
Giving a conclusion without the remedy or the forum.
Fix: End each case answer with who decides, what the company should rectify and any compliance step to take.
Quoting section numbers or amounts from memory when unsure.
Fix: State the rule in plain words if you are not certain of the section. A correct rule without a number scores better than a wrong number.

Last-day revision: Non-Compliances, Penalties and Adjudications

Flow: default, consequence, forum, remedy.
Section 446B covers One Person Companies, small companies, start-up companies and Producer Companies.
Under Section 446B, the penalty is not more than one-half of the specified penalty.
Section 446B caps: ₹2,00,000 for a company and ₹1,00,000 for an officer in default or any other person.
Section 454: the Central Government appoints adjudicating officers not below the rank of Registrar.
The adjudicating officer must give a reasonable opportunity of being heard before imposing a penalty.
Appeal against an adjudicating officer's order goes to the Regional Director, within sixty days of receiving the order.
The Regional Director may confirm, modify or set aside the order appealed against.
Failure to comply with the order within ninety days attracts a fine for the company of ₹25,000 to ₹5,00,000.
For an officer or other person in default, the same failure attracts imprisonment up to six months, or fine of ₹25,000 to ₹1,00,000, or both.
Section 435: Special Courts are established; a Sessions Judge or Additional Sessions Judge sits for offences punishable with imprisonment of two years or more.
Section 436: a Special Court may try in a summary way offences punishable with imprisonment up to three years, but cannot sentence beyond one year in that trial.

Non-Compliances, Penalties and Adjudications practice questions

Non-Compliances, Penalties and Adjudications in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Non-Compliances, Penalties and Adjudications: frequently asked questions

What is the difference between a penalty and a punishment under the Companies Act?

A penalty is imposed by an adjudicating officer under Section 454 after hearing the party. A punishment, such as imprisonment or fine for an offence, is dealt with by the Special Court. Always identify which one the provision gives before naming the forum.

Who gets lesser penalties under Section 446B?

One Person Companies, small companies, start-up companies and Producer Companies, along with their officers in default and other persons in respect of such companies. The penalty is not more than one-half of the specified penalty, up to ₹2,00,000 for a company and ₹1,00,000 for an officer or other person.

Where can you appeal against an adjudicating officer's order?

You can appeal to the Regional Director having jurisdiction. The appeal must be filed within sixty days of receiving the order. The Regional Director may confirm, modify or set aside the order after hearing the parties.

Can a Special Court try an offence summarily?

Yes, under Section 436 it may try in a summary way an offence punishable with imprisonment up to three years. In a summary trial it cannot pass a sentence of imprisonment beyond one year. If a longer sentence may be needed, it must record an order and proceed with a regular trial.