Reviving a Defaulting Company: Compounding and Condonation

Short answer: Compounding of offences is a process under Section 441 of the Companies Act, 2013, allowing a company or its officers to settle a default by paying a penalty instead of facing prosecution in a court. It is a legal shortcut to regularise compliance for certain punishable offences. This is different from condonation of delay, which is seeking permission to file a document after its due date has passed.

What is compounding of an offence?

Compounding is a settlement mechanism for breaches of the Companies Act, 2013. When a company or its officers commit an offence that is punishable only with a fine, they can apply to have the offence compounded. This means they admit the default, pay a compounding fee determined by the authorities (like the Regional Director or NCLT), and in return, the authorities agree not to initiate criminal prosecution for that specific default.

What is condonation of delay?

Condonation of delay is the process of seeking forgiveness for not filing a specific form or application with the Registrar of Companies (ROC) within the prescribed time. Under Section 460 of the Companies Act, 2013, the Central Government (power often delegated) can condone the delay, allowing the ROC to accept and process the belated document. This is not for an offence, but for a procedural lapse in filing timelines.

What is the difference between compounding and condonation?

The primary difference is that compounding deals with an offence punishable with a fine, whereas condonation deals with a delay in filing. Compounding avoids prosecution, while condonation simply allows a late filing to be accepted. Often, a company might need to do both: first, get the delay in filing a form condoned, and then, if the non-filing also constitutes a separate offence (like not holding an AGM), compound that offence.

Feature	Compounding of Offence	Condonation of Delay
Purpose	To settle an offence punishable with a fine and avoid prosecution.	To seek permission for a late filing of a document or application.
Governing Section	Section 441, Companies Act, 2013	Section 460, Companies Act, 2013
Subject Matter	An act of commission or omission that is an offence.	A procedural delay in filing with the ROC.
Authority	Regional Director (RD) or National Company Law Tribunal (NCLT).	Central Government (powers delegated to RD in many cases).
Outcome	Immunity from prosecution for the specific offence.	Acceptance of the late-filed document by the ROC.
Prerequisite	The default must be made good before applying.	The application is made to enable the filing.

Which offences can be compounded?

An offence under the Companies Act, 2013 can be compounded if it is punishable with a fine only. The authority to compound depends on the maximum fine that can be imposed:

• Regional Director (RD): Where the maximum fine does not exceed ₹25 lakh.
• National Company Law Tribunal (NCLT): Where the maximum fine exceeds ₹25 lakh.

However, some offences cannot be compounded at all:

1. Offences punishable with imprisonment only, or with both imprisonment and a fine.
2. If the same offence, committed by the same company or officer, was compounded within the last three years.
3. If the investigation against the company has been initiated or is pending.

What is the procedure for compounding an offence?

First, the default must be rectified. For example, if annual returns were not filed, they must be filed with the applicable late fees before a compounding application can be made. The general steps are:

1. Quantify the Default: Identify the specific sections of the Companies Act that have been violated.
2. Make Good the Default: Complete the pending compliance, such as filing forms AOC-4 and MGT-7, along with additional fees.
3. Convene a Board Meeting: Pass a resolution to authorise a director to file the compounding application and bear the related expenses.
4. Prepare the Application: The application is filed in Form GNL-1 with the ROC, along with the prescribed fee.
5. Forwarding by ROC: The ROC forwards the application with their comments to the compounding authority (RD or NCLT).
6. Hearing: The company or its authorised representative appears before the authority to present the case.
7. Compounding Order: The authority passes an order specifying the compounding fee to be paid.
8. Payment: The company pays the fee within the time stipulated in the order and files proof of payment with the ROC.

Worked example

XYZ Tech Pvt. Ltd., a Bengaluru-based startup, failed to file its financial statements (AOC-4) and Annual Return (MGT-7) for the financial year 2024-25. The due date was in October/November 2025. They realise their mistake in September 2026.

Step 1: Make the Default Good

• The company first prepares its financial statements and annual return for FY 2024-25.
• They file Form AOC-4 and Form MGT-7 with the ROC. Since the filing is delayed by almost a year, they pay the standard ROC fee plus an additional late filing fee of ₹100 per day, per form. Let's assume the delay is 300 days.
• Late Fee = 300 days * ₹100/day * 2 forms = ₹60,000.
• This payment only covers the late filing fee; it does not absolve the offence.

Step 2: Identify the Offence

• The failure to file these forms is an offence under Section 137 (for AOC-4) and Section 92 (for MGT-7). These sections prescribe penalties for the company and officers in default.

Step 3: Initiate Compounding

• The Board of Directors passes a resolution to apply for compounding.
• They file Form GNL-1 with the ROC, attaching a detailed application explaining the reason for the delay (e.g., oversight, director's health issues) and requesting the offence be compounded.

Step 4: Hearing and Order

• The application is forwarded to the Regional Director (as the penalty is likely under ₹25 lakh).
• The RD hears the company's representative. Considering the facts, the RD passes an order imposing a compounding fee. This fee could be, for instance, ₹50,000 on the company and ₹20,000 on each of the two directors.
• Total Compounding Fee: ₹50,000 + (₹20,000 * 2) = ₹90,000.

Step 5: Final Compliance

• The company pays the ₹90,000 fee within the time mentioned in the order.
• They file a copy of the order and proof of payment with the ROC.
• The default is now regularised, and the company and its directors are protected from prosecution for this specific failure.

Common mistakes

1. Ignoring ROC Notices: Many companies ignore initial notices, letting a simple default escalate into a major compliance issue. Addressing defaults proactively is always cheaper and less stressful.
2. Confusing Late Fees with Compounding: Paying the additional fee on MCA for late filing of forms does not mean the offence is settled. Compounding is a separate, formal process to avoid prosecution.
3. Applying for Compounding Without Rectifying the Default: The authorities will not entertain a compounding application unless the underlying default (e.g., the pending filing) has been made good.
4. Assuming All Offences are Compoundable: Trying to compound an offence punishable with imprisonment is futile. Serious offences involving fraud are non-compoundable.
5. Failing to Pay the Compounding Fee on Time: The compounding order is binding. Failure to pay the fee within the specified period renders the order void and can lead to the authorities initiating prosecution.

How SP & SC helps

Navigating corporate defaults requires careful legal and procedural handling. At SP & SC, we assist companies in rectifying past non-compliances from start to finish. We conduct a thorough compliance audit to identify all defaults, advise on whether compounding or condonation is the appropriate remedy, draft and file all necessary applications including Form GNL-1, and represent your company before the ROC, Regional Director, and NCLT. Our goal is to regularise your compliance status efficiently and protect your directors from potential prosecution. For a comprehensive review of your company's compliance, see our Annual Filings service.

Frequently asked questions

H3: How much is the compounding fee?

The compounding fee is not fixed. It is determined by the NCLT or RD based on the gravity of the offence, the duration of the default, the company's size, and any mitigating factors presented. The fee cannot exceed the maximum penalty prescribed for that offence under the Companies Act.

H3: Can an offence be compounded more than once?

No. If a company or officer compounds a specific offence, they cannot compound the same offence again for a period of three years from the date the previous compounding order was passed. A repeat offence within this period will likely lead to prosecution.

H3: What happens after a compounding order is passed?

Once the company pays the compounding fee as per the order, the offence is settled. The ROC is informed, and no further prosecution can be initiated by the Registrar for that specific default. The company and its officers receive immunity from legal proceedings concerning the compounded offence.

H3: Is compounding an admission of guilt?

Yes, filing a compounding application is considered an implicit admission of having committed the default. The process is designed for those who acknowledge their non-compliance and wish to settle the matter without going through a full-fledged prosecution.

H3: What if I can't pay the compounding fee on time?

If the compounding fee is not paid within the period specified in the order, the compounding order becomes void. This means the immunity from prosecution is lost, and the ROC is free to initiate legal proceedings against the company and its officers for the original default.

Get a fixed-fee quote

Facing a default notice from the ROC? Unsure about your company's compliance history? Share your documents with us, and we will provide a written fixed-fee quote for resolving the matter, end to end. Contact SP & SC or WhatsApp us at +91 90356 74566 to regularise your company's legal standing.