A Single Judge Bench of Justice Ansul was hearing a petition seeking quashing of the order dated August 2, 2016, passed by the Special Judge, Economic Offences, Patna, taking cognizance against the petitioner under Section 233 of the Companies Act, 1956, for alleged contravention of Section 227(3)(d) of the Act.

The petitioner, Subodh Kumar Goel, was the statutory auditor of M/s Geeta Steels Tubes Private Limited and was functioning through M/s Subodh Goel and Company, Chartered Accountants. The Registrar of Companies, Bihar and Jharkhand, had instituted a complaint alleging that the petitioner failed to comply with the requirements under Section 227(3)(d) concerning compliance of the company's accounts with prescribed accounting standards.

The allegations arose from an inspection of the company's books and records, which raised issues concerning depreciation on fixed assets, accounting for disposal of fixed assets and disclosure of managerial remuneration. The complaint alleged that the petitioner had failed to qualify the audit report in respect of these matters.

The Special Judge took cognizance under Section 233 of the Companies Act, 1956, on August 2, 2016. The petitioner subsequently approached the High Court, which stayed further proceedings in the complaint case on September 24, 2018. During the pendency of the proceedings, the petitioner approached the Regional Director, Eastern Region, Ministry of Corporate Affairs, Kolkata, seeking compounding of the offence under Section 441 of the Companies Act, 2013.

The Registrar of Companies forwarded the application along with a report specifically mentioning the pending criminal prosecution and raised no objection to compounding. By an order dated October 19, 2022, the Regional Director compounded the offence concerning contravention of Section 227 of the Companies Act, 1956, upon payment of ₹30,000. The petitioner deposited the amount in the Central Government account.

The High Court noted that the compounding order had neither been stayed nor set aside by any competent authority or court and therefore remained operative. Examining whether the prosecution could continue despite compounding, the Court referred to the Supreme Court's decision in V.L.S. Finance Ltd. v. Union of India, (2013) 6 SCC 278, which recognised that an offence under the Companies Act could be compounded even after criminal prosecution had been instituted. Holding that the compounding of the underlying contravention had extinguished the foundation of the prosecution, the Court observed:

“The principle laid down in the aforesaid judgment applies with greater force to the facts of the present case. The prosecution against the petitioner is not for some independent act apart from the alleged contravention of Section 227. The complaint itself is expressly described as a complaint under Section 233 for contravention of Section 227(3)(d) of the Companies Act, 1956. The Regional Director has thereafter expressly compounded the offence relating to the contravention of Section 227 of the same Act. Thus, the foundation of the prosecution has ceased to survive.”

The Bench further noted that Section 441(3)(d) of the Companies Act, 2013, provides that where compounding takes place after institution of prosecution, the Registrar must communicate that fact in writing to the court concerned, whereupon the company or officer whose offence has been compounded shall be discharged. On the effect of the Registrar's failure to communicate the compounding order, the Court observed:

“In the present case, the record does not establish that the Registrar communicated the order of compounding to the learned Special Judge. However, that procedural circumstance cannot result in continuation of a prosecution in respect of an offence which has already been compounded by the competent statutory authority. More so, the criminal proceeding has remained stayed by this Court since 24.09.2018. The absence of a subsequent order by the learned Special Judge, in these circumstances, cannot keep alive a prosecution whose underlying offence has ceased to be available for adjudication.”

The Court emphasised that the compounding had not taken place in ignorance of the criminal proceedings, since the Registrar's report before the Regional Director had expressly referred to the pending prosecution. It further held that continuation of the criminal proceedings would serve no useful purpose and would be contrary to the statutory consequence attached to compounding.

Accordingly, the High Court allowed the petition and quashed the order dated August 2, 2016, taking cognizance under Section 233 of the Companies Act, 1956, against Subodh Kumar Goel.

Appearance:

For the Petitioner: Mr. Mohit Agarwal, Advocate; Mr. Aman Kumar, Advocate

For the Opposite Parties: Mr. Sri Bharat Bhushan, APP