V.L.S Finance Ltd. v. Union of India

Read this case analysis to learn how the Supreme Court interpreted the old provision of Companies Act 1956 and how the same stand in relation to the latest Companies Act 2013.
CITATION(2013) 6 SCC 278
COURTSupreme Court of India
JUDGES/CORAMJustice C.K. Prasad and Justice V.G. Gowda
DATE OF JUDGEMENT10.05.2013

Introduction

The present case pertains to the power of the Company Law Board to compound an offence under the old Companies Act. The Apex Court made some stark observations regarding the Board’s powers as well as regarding the interpretation of a statute.

Facts

The facts of the case are as follows: Originally, the Registrar of Companies, NCT of Delhi and Haryana had filed a complaint in the Court of Chief Metropolitan Magistrate, Tis Hazari, alleging that the balance sheet of M/s. Sunair Hotels Ltd., showed land worth Rs. 21 crores as its fixed asset even though the same had been taken from NDMC on license. This was punishable under Section 211(7) of the Companies Act, 1956. However, before the Court could proceed with the complaint, the Company filed an application before the Company Law Board for compounding the offence. This was granted by the Board.  Aggrieved by this, the appellant preferred Company Appeal before the High Court. It contended that the power of compounding could be exercised by the criminal court only. The appeal was dismissed by the High Court and thus, the appellant approached the Supreme Court.

Issues

The main issues in the case were:

  1. Whether the Company Law Board has the power to compound the offence under Section 211(7) of the Companies Act.
  2. Whether the Board has to take the permission of the Court before compounding such an offence.

Summary of court decision and judgment

The High Court dismissed the appeal and held that while under Section 621A (7), the Court has the power to compound an offence, the Company Law Board can also compound an offence of the nature prescribed under sub-section (1) either before the institution of the criminal proceeding or even after institution of the criminal proceeding and the said power is not subject to the provisions of sub-section (7).

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The Supreme Court made the following observations:

  1. The Companies Amendment Act, 1988 inserted Section 621A because it was felt that leniency is required in the administration of the provisions of the Act particularly penalty provisions because a large number of defaults were of technical nature and arose out of ignorance on account of bewildering complexity of the provisions.
  2. Under section 211(7), imprisonment is not mandatory, and the accused can be let off by imposition of fine only. Section 621A (1) excludes such offences which are punishable with imprisonment only or with imprisonment and also with fine. Thus, all other offences may be compounded by the Board; offence under Section 211(7) can therefore be compounded by the Board.
  3. Both sub- section (1) and sub-section (7) of Section 621A of the Act start with a non-obstante clause. Usually, the power to compound is given to criminal courts under the Code of Criminal Procedure but in view of the non-obstante clause, this power can be exercised by the court or the Company Law Board. The Board may exercise its power either before or after the institution of any prosecution whereas the criminal court has no power to accord permission for composition of an offence before the institution of the proceeding.
  4. “It is also a cardinal rule of interpretation that words, phrases and sentences are to be given their natural, plain and clear meaning. When the language is clear and unambiguous, it must be interpreted in an ordinary sense and no addition or alteration of the words or expressions used is permissible.”

The Court thus dismissed the appeal.

Analysis

The concept of compounding was included in the Companies Act, 1956 as a measure to avoid long drawn process of prosecution and to save cost and time. Thus, Section 621A was inserted in the Act on the recommendation of the Sachar Committee. The Act has since been replaced by the Companies Act, 2013. The new Act provides for compounding under Section 441. The Section gives the power of compounding to NCLT/Regional Director/person authorised by the Central Government. 441(3) further provide that the following offences can’t be compounded by the Company or its officer:

  1. In case either the investigation has been initiated or is pending.
  2. In case similar offence committed by it has been compounded and period of three years has not expired.
  3. Any offence which is punishable under this Act with imprisonment only or with imprisonment and also with the fine; cannot be compounded; 
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Conclusion

Both the Companies Act, 1956 and the Company Law Board stand ineffective. The Act was replaced by the Companies Act, 2013, and the Board was replaced by the National Company Law Tribunal. However, the essence of Section 621A has been preserved and embodied in Section 441 of the new Act. The new section also has a similar limitation with regard to offences punishable with imprisonment only or with imprisonment and also fine and thus, the present judgment is still relevant. Further, the observations of the Court with respect to the interpretation of statutes still hold good in law.