The Patna High Court has held that once the alleged violation under Section 227(3)(d) of the Companies Act, 1956 was compounded by the competent authority, the very foundation of prosecution under Section 233 ceased to survive. The Court quashed criminal proceedings initiated against auditor Subodh Kumar Goel for alleged non-compliance with accounting standards under the Companies Act, 1956.
The alleged offence had already been compounded by the Regional Director, Eastern Region, Ministry of Corporate Affairs under Section 441 of the Companies Act, 2013 on payment of a compounding fee of Rs. 30,000. The Court held that the prosecution under Section 233 was entirely based on the alleged contravention of Section 227(3)(d). Therefore, once that contravention stood compounded, the prosecution could not continue.
Relying on V.L.S. Finance Ltd. v. Union of India [(2013) 6 SCC 27]8, the Court reiterated that offences under the Companies Act can be compounded even after institution of prosecution and such compounding carries the consequence of discharge of the concerned officer or company. The Court clarified that it was not examining the merits of the allegations relating to accounting standards, depreciation, fixed assets or managerial remuneration, as those issues became academic after compounding of the offence.
Briefly, the case concerned Subodh Kumar Goel, who was the statutory auditor of M/s. Geeta Steels Tubes Private Limited through his audit firm, M/s. Subodh Goel and Company. The Registrar of Companies, Bihar and Jharkhand filed a complaint alleging that while conducting the audit, the petitioner failed to comply with the requirements of Section 227(3)(d) of the Companies Act, 1956 regarding reporting on compliance with prescribed accounting standards. The allegations arose from an inspection of the company’s books, which identified issues relating to depreciation on fixed assets, accounting treatment of disposal of assets, and disclosure of managerial remuneration.
Based on the complaint, the Special Judge, Economic Offences, Patna, on Aug 02, 2016, took cognizance of offences under Section 233 of the Companies Act, 1956 and summoned the petitioner. The proceedings were subsequently stayed by the Patna High Court in 2018.
During the pendency of the case, the petitioner applied for compounding of the alleged offence before the Regional Director, Eastern Region, Ministry of Corporate Affairs under Section 441 of the Companies Act, 2013. The Registrar of Companies forwarded the application without objection and specifically informed the authority that prosecution on the same allegations was already pending. By order dated Oct 19, 2022, the Regional Director compounded the offence upon payment of Rs. 30,000, and the amount was duly deposited by the petitioner.
A Single Judge Bench of Justice Ansul observed that the prosecution under Section 233 of the Companies Act, 1956 was entirely founded on the alleged contravention of Section 227(3)(d). Once the competent authority had compounded the very contravention forming the basis of the prosecution, the foundation of the criminal case itself ceased to exist.
Relying on the Supreme Court’s decision in V.L.S. Finance Ltd. v. Union of India [(2013) 6 SCC 278], the Court noted that statutory compounding can take place even after institution of prosecution. In such circumstances, the competent court is required to discharge the company or officer concerned after being informed of the compounding order.
The High Court further observed that although the record did not show that the Registrar had formally communicated the compounding order to the trial court, such a procedural lapse could not justify continuation of a prosecution for an offence that had already been compounded by the competent statutory authority. The Court emphasized that the compounding order remained valid and had not been challenged or set aside by any authority.
The Court also noted that the compounding authority was fully aware of the pending criminal prosecution when it passed the compounding order. Therefore, the compounding was not granted in ignorance of the ongoing proceedings. After the offence stood compounded, it became unnecessary for the High Court to examine the merits of the allegations regarding accounting standards, depreciation, fixed assets, or managerial remuneration.
