Compounding of Delayed AGMs through the National Company Law Tribunal (NCLT)
Riteek Baheti
Associate Member, Institute of Company Secretaries of India (ICSI) LL.B.
Proprietor, Riteek Baheti & Associates
(Kolkata-based Practicing Firm)
Registered Valuer, Insolvency and Bankruptcy Board of India (IBBI)
(Security or Financial Assets Valuation Specialist)
Introduction
The Annual General Meeting (AGM) is a critical compliance requirement for companies as stipulated under the Companies Act, 2013. It offers an opportunity to shareholders to review financial performance, approve dividends, and discuss key corporate matters. However, due to various factors such as financial difficulties, managerial inefficiencies, or unforeseen circumstances, companies may fail to convene the AGM within the prescribed timeframe. This non-compliance can lead to penalties and legal consequences. In such cases, companies may avail themselves of compounding through the National Company Law Tribunal (NCLT) to mitigate the penalties and regularize the delay.
Rules Governing Compounding of Offenses
Compounding of offenses under the Companies Act 2013 is governed by Section 441. The following rules apply:
- The Companies (Compounding of Offences) Rules, 2014, lay down the procedure for compounding non-compliances.
- Rule 3 specifies that offenses punishable only by a fine can be compounded.
- Rule 4 states that an application for compounding must be made to the Registrar of Companies (ROC) or the NCLT, depending on the penalty amount.
- Rule 7 requires companies to comply with the compounding order and submit proof of compliance to the authorities.
- Companies (Management and Administration) Rules, 2014, further specify procedural aspects of AGM defaults and their resolutions.
Legal Framework for AGM Compliance
Under Section 96 of the Companies Act, 2013, every company, except a One Person Company (OPC), must hold an AGM within six months from the end of the financial year. The gap between two AGMs should not exceed fifteen months. For newly incorporated companies, the first AGM must be conducted within nine months from the close of the first financial year.
Failure to adhere to these timelines results in a breach of statutory compliance. Under Section 99 of the Act, if a company fails to hold an AGM within the prescribed period, it may face penalties:
- The company may be fined up to ₹100,000.
- Officers responsible for non-compliance may face an additional fine of ₹5,000 per day for the default duration.
Companies can opt for the compounding of offenses through the NCLT to avoid prolonged legal issues and financial burdens
Understanding Compounding of Offenses
Compounding refers to the settling of a default by paying a penalty rather than undergoing prolonged litigation. It is an alternative dispute resolution mechanism that helps companies resolve non-compliance efficiently. The process is governed under Section 441 of the Companies Act, 2013, which allows companies to apply for the compounding of offenses that are not punishable by imprisonment.
NCLT has jurisdiction over serious offenses where the penalty exceeds ₹5 lakh, while the Regional Director (RD) can handle cases with penalties below this threshold. Since delayed AGMs attract financial penalties and not imprisonment, they qualify for compounding.
Procedure for Compounding Delayed AGM through the NCLT
The process of compounding involves multiple steps, ensuring that the company takes corrective actions while seeking legal relief. The steps include:
1. Board Resolution
- The company must pass a board resolution authorizing an officer to file the compounding application with the NCLT.
2. Filing an Application with the NCLT
- The company needs to submit an application using form NCLT-1 along with supporting documents such as:
▪ Details of the AGM default and reasons for the delay.
▪ Financial statements and annual reports.
▪ Board resolution authorizing the application.
▪ Affidavit from directors regarding the corrective measures taken.
3. Hearing Before the NCLT
- The NCLT will review the application and may ask for explanations regarding the non-compliance.
- The tribunal ensures that the default was not intentional or fraudulent.
- If satisfied, the NCLT may approve the compounding by imposing a reasonable penalty.
4. Payment of Penalty
- Upon receiving the NCLT order, the company must remit the penalty amount to the Ministry of Corporate Affairs (MCA) within the specified timeline.
- Proof of payment must be submitted to the NCLT and MCA for recordkeeping.
5. Compliance and Regularization
- Post-compounding, the company must ensure timely AGMs in the future to avoid recurring penalties.
- The compliance status is updated in the MCA records.
Benefits of Compounding a Delayed AGM
- Avoidance of Litigation: Companies can resolve non-compliance without prolonged court proceedings through compounding.
- Reduction of Financial Liability: A single compounded penalty is more cost-effective than facing heavy fines accumulating over time.
- Restoration of Good Standing: Companies that comply with regulatory requirements regain credibility and trust among investors and stakeholders.
- Avoidance of Director Disqualifications: Continued non-compliance can lead to the disqualification of directors under Section 164 of the Act. Compounding helps prevent such repercussions.
Conclusion
Holding an AGM on time is essential for corporate governance and statutory compliance. However, in cases of unavoidable delays, companies can seek compounding through the NCLT to regularize their compliance and minimize legal penalties. The process not only provides relief but also encourages companies to adhere to future timelines, ensuring smooth corporate operations.
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