Special Courts and the Trial of Offences

Note the exception. Section 452, wrongful withholding of property by an officer or employee, is left out.

Section 435(2): two kinds of court. A Special Court shall consist of:

• (a) a single judge holding office as Sessions Judge or Additional Sessions Judge, in the case of offences punishable under this Act with imprisonment of two years or more; and
• (b) a Metropolitan Magistrate or a Judicial Magistrate of the First Class, in the case of other offences,

appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working.

The dividing line is two years' imprisonment, and the concurrence of the Chief Justice is the safeguard of judicial independence in the appointment.

What they try, and how: section 436

Section 436(1)(a): exclusive jurisdiction. All offences specified under section 435(1) shall be triable only by the Special Court established or designated for the area in which the registered office of the company is situated; where there is more than one such court, by the one the High Court concerned specifies.

Section 436(1)(b) and (c): custody. Where an accused is forwarded to a Magistrate under section 167(2) or (2A) of the Code of Criminal Procedure, 1973, that Magistrate may authorise detention for not more than fifteen days in the whole if he is a Judicial Magistrate, and seven days in the whole if he is an Executive Magistrate; and where he considers further detention unnecessary he shall forward the person to the Special Court having jurisdiction. The Special Court then has the same powers under section 167 as a Magistrate having jurisdiction to try the case.

Section 436(1)(d): cognizance without committal. A Special Court may, on a police report of the facts or on a complaint, take cognizance without the accused being committed to it for trial.

Section 436(2): joinder. When trying an offence under this Act, a Special Court may also try any other offence with which the accused may, under the Code of Criminal Procedure, 1973, be charged at the same trial.

Section 436(3): summary trial. The Special Court may, if it thinks fit, try summarily any offence under this Act punishable with imprisonment for a term not exceeding three years.

First proviso: on conviction in a summary trial, no sentence of imprisonment exceeding one year shall be passed.

Second proviso: where at the commencement or in the course of a summary trial it appears that a sentence exceeding one year may have to be passed, or that summary trial is otherwise undesirable, the Special Court shall, after hearing the parties, record an order to that effect, recall any witnesses already examined, and hear or rehear the case under the regular procedure.

Appeal, revision and procedure: sections 437 and 438

Section 437. The High Court may exercise all the powers conferred by Chapters XXIX and XXX of the Code of Criminal Procedure, 1973, that is appeal and revision, as if a Special Court within its jurisdiction were a Court of Session trying cases there.

Section 438. Save as otherwise provided in this Act, the Code of Criminal Procedure, 1973 applies to proceedings before a Special Court, which is deemed to be a Court of Session or the court of a Metropolitan Magistrate or Judicial Magistrate of the First Class, as the case may be; and the person conducting the prosecution is deemed to be a Public Prosecutor.

Non-cognizable, and who may complain: section 439

Section 439(1). Notwithstanding the Code of Criminal Procedure, 1973, every offence under this Act, except the offences referred to in section 212(6), shall be deemed to be non-cognizable.

Section 212(6) covers the gravest offences, including fraud under section 447 investigated by the Serious Fraud Investigation Office; everything else is non-cognizable, so there is no arrest without warrant and no investigation without an order.

Section 439(2): who may set the law in motion. No court shall take cognizance of any offence under this Act alleged to have been committed by a company or any officer of it, except on the complaint in writing of the Registrar, a shareholder or a member of the company, or a person authorised by the Central Government.

First proviso: the court may take cognizance of offences relating to issue and transfer of securities and non-payment of dividend on the written complaint of a person authorised by the Securities and Exchange Board of India.

Second proviso: the sub-section does not apply to a prosecution by a company of any of its officers.

Section 439(3). Where the complainant is the Registrar or a person authorised by the Central Government, his presence before the court is not necessary unless the court requires his personal attendance.

Section 439(4) and the Explanation. Sub-section (2) does not apply to any action taken by the liquidator in respect of an offence relating to Chapter XX or any other winding up provision; and the liquidator is not deemed an officer of the company for the purposes of sub-section (2).

Until the Special Court exists: section 440

Any offence triable by a Special Court shall, until one is established, be tried by the Court of Session, or the court of a Metropolitan Magistrate or a Judicial Magistrate of the First Class, exercising jurisdiction over the area, notwithstanding the Code of Criminal Procedure, 1973; and nothing in the section affects the High Court's power under section 407 of the Code to transfer any case or class of cases.

Compounding: section 441

Section 441(1): who may compound, and what. Notwithstanding the Code of Criminal Procedure, 1973, any offence punishable under this Act, whether committed by a company or an officer, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may, either before or after the institution of any prosecution, be compounded by:

• (a) the Tribunal; or
• (b) where the maximum fine does not exceed twenty-five lakh rupees, by the Regional Director or any officer authorised by the Central Government,

on payment or credit to the Central Government of such sum as the Tribunal or the Regional Director may specify.

Three provisos. The sum specified shall not exceed the maximum fine for the offence compounded. In fixing it, any additional fee paid under section 403 shall be taken into account. And no offence shall be compounded if an investigation against the company has been initiated or is pending under this Act.

Section 441(2) and the Explanation: the three year bar. Sub-section (1) does not apply to an offence committed by a company or its officer within three years from the date on which a similar offence committed by it or him was compounded. A second or subsequent offence committed after that three years is deemed to be a first offence. "Regional Director" means a person appointed as such by the Central Government.

Section 441(3): the procedure.

• (a) every application is made to the Registrar, who forwards it with his comments to the Tribunal or the Regional Director;
• (b) where an offence is compounded, the company shall intimate the Registrar within seven days;
• (c) where compounding is before prosecution, no prosecution shall be instituted in relation to that offence by the Registrar, a shareholder or an authorised person; and
• (d) where it is after prosecution, the Registrar shall bring it in writing to the notice of the court, and on that notice the company or officer shall be discharged.

Section 441(4) and (5): making good the default. In compounding a default in filing, registering, delivering or sending any return, account or document to the Registrar, the Tribunal or Regional Director may order any officer or employee to file it, on payment of the fee and the additional fee under section 403, within a specified time; and failure to comply doubles the maximum fine for the offence proposed to be compounded.

Section 441(6) and (7). Any offence punishable with imprisonment only, or with imprisonment and also with fine, shall not be compoundable; and no offence specified in the section shall be compounded except under and in accordance with it.

Mediation: section 442

Section 442(1). The Central Government shall maintain a Mediation and Conciliation Panel of experts with prescribed qualifications, for mediation between the parties during the pendency of any proceedings before the Central Government, the Tribunal or the Appellate Tribunal.

Section 442(2) and (3). Any party may apply, in the prescribed form and on the prescribed fee, for a reference to the Panel, and the authority shall appoint one or more experts from it; and the authority may also refer a matter suo motu.

Section 442(4), (5) and (6). The fee and terms of the experts are prescribed; the Panel shall follow the prescribed procedure, dispose of the matter within three months of the reference and forward its recommendations; and any party aggrieved by the recommendation may file objections to the referring authority.

The prosecution: sections 443 to 446

Section 443. The Central Government may appoint company prosecutors, generally or for a case or class of cases in a local area, for the conduct of prosecutions arising out of this Act; they have all the powers and privileges of Public Prosecutors appointed under section 24 of the Code of Criminal Procedure, 1973.

Section 444. The Central Government may direct a company prosecutor, or authorise any other person by name or office, to present an appeal from an order of acquittal passed by any court other than a High Court, and such an appeal is deemed to have been validly presented.

Section 445. Section 250 of the Code of Criminal Procedure, 1973 applies mutatis mutandis to compensation for accusation without reasonable cause before the Special Court or the Court of Session.

Section 446. A court imposing a fine may direct that the whole or part of it be applied towards the costs of the proceedings, or towards a reward to the person on whose information the proceedings were instituted.

Fixing the punishment: sections 446A and 446B

Section 446A: five factors. The court or Special Court, in deciding the amount of fine or imprisonment, shall have due regard to:

• (a) the size of the company;
• (b) the nature of the business carried on by the company;
• (c) injury to public interest;
• (d) the nature of the default; and
• (e) repetition of the default.

Section 446B: lesser penalties for the smallest companies. Notwithstanding anything in the Act, where a penalty is payable for non-compliance by a One Person Company, a small company, a start-up company or a Producer Company, or by any of its officers in default or any other person in respect of it, the penalty shall be not more than one-half of that specified, subject to a maximum of two lakh rupees for the company and one lakh rupees for an officer in default or other person.

The Explanation defines a Producer Company by reference to section 378A(l), and a start-up company as a private company incorporated under this Act or the Companies Act, 1956 and recognised as a start-up under the notification of the Department for Promotion of Industry and Internal Trade.

A worked example

Airoli Instruments Limited has failed to file its annual return for two years, and its managing director is separately alleged to have fraudulently removed the company's stock during a winding up, an offence under section 336 punishable with three to five years' imprisonment and fine.

Which court. Both offences are triable only by the Special Court for the area in which the registered office is situated. The section 336 offence, punishable with imprisonment of two years or more, goes before a Special Court consisting of a Sessions Judge or Additional Sessions Judge; the filing default, punishable with less, before a Metropolitan Magistrate or Judicial Magistrate of the First Class: sections 435(2) and 436(1)(a).

Who may complain. Only the Registrar, a shareholder or member, or a person authorised by the Central Government, by complaint in writing: section 439(2). A rival company cannot start the prosecution. But the liquidator's action in respect of a winding up offence is outside sub-section (2) altogether: section 439(4).

Investigation. Every offence under the Act except those referred to in section 212(6) is non-cognizable, so the police cannot arrest without warrant on the filing default: section 439(1).

The Registrar's attendance. Where the Registrar is the complainant, his presence at the trial is not necessary unless the court requires it: section 439(3).

Summary trial. The filing default, punishable with less than three years, may be tried summarily, but no sentence exceeding one year may be passed in such a trial; and if it appears that a longer sentence may be needed, the court records an order, recalls the witnesses already examined and rehears the case regularly: section 436(3).

Compounding the filing default. It is not punishable with imprisonment only, nor with imprisonment and also fine, so it may be compounded. If the maximum fine does not exceed twenty-five lakh rupees, the Regional Director or an officer authorised by the Central Government may compound it; otherwise the Tribunal. The application goes to the Registrar, who forwards it with his comments; the sum specified may not exceed the maximum fine, and any additional fee paid under section 403 is taken into account. Compounded before prosecution, no prosecution may be instituted; compounded after, the Registrar tells the court and the accused is discharged. The company must intimate the Registrar within seven days: section 441.

And the Tribunal or Regional Director may order an officer to actually file the return, on payment of the fee and additional fee, within a specified time; failing which the maximum fine doubles: section 441(4) and (5).

What cannot be compounded. The section 336 offence carries imprisonment and also fine, so by section 441(6) it is not compoundable at all. Nor could the filing default have been compounded if an investigation against the company had been initiated or were pending, or if a similar offence had been compounded within the last three years.

Mediation. While an oppression petition between the same parties is pending before the Tribunal, either party may apply for a reference to the Mediation and Conciliation Panel, or the Tribunal may refer it suo motu; the Panel must dispose of the matter within three months and forward its recommendations, to which a party may file objections: section 442.

Sentence. On conviction the court, in fixing the fine or imprisonment, must have due regard to the size of the company, the nature of its business, injury to public interest, the nature of the default and its repetition: section 446A. If the company were a One Person Company, small company, start-up or Producer Company, any penalty would be halved, subject to two lakh rupees for the company and one lakh for an officer in default: section 446B.

An acquittal. If the managing director is acquitted, the Central Government may direct a company prosecutor or authorise another person to appeal against the acquittal, the court not being a High Court: section 444. And if the prosecution was launched without reasonable cause, section 250 of the Code of Criminal Procedure, 1973 applies and compensation may be ordered: section 445.

The fine. The court may direct that the whole or part of the fine be applied towards the costs of the proceedings or as a reward to the informant: section 446.

Distinctions that carry marks

What this does NOT mean

It does not mean every offence goes before a Sessions Judge. Only those punishable with imprisonment of two years or more; the rest go before a Magistrate.

It does not mean anybody may prosecute. A court takes cognizance only on the written complaint of the Registrar, a shareholder or member, or an authorised person, with the SEBI, company and liquidator exceptions.

It does not mean any offence may be compounded. Offences punishable with imprisonment only, or with imprisonment and also with fine, are not compoundable, and compounding is barred where an investigation is initiated or pending or where a similar offence was compounded within three years.

It does not mean compounding wipes out the default. The Tribunal or Regional Director may order the return or document actually to be filed, and non-compliance doubles the maximum fine.

It does not mean a summary trial can impose any sentence. No sentence of imprisonment exceeding one year may be passed in a summary trial.

It does not mean the smallest companies escape. Section 446B halves the penalty, subject to a maximum of two lakh rupees for the company and one lakh rupees for an officer in default.

Quick revision

• 435: the Central Government may establish or designate Special Courts for speedy trial of offences under the Act, except section 452; a Sessions Judge or Additional Sessions Judge for offences punishable with imprisonment of two years or more, a Metropolitan Magistrate or Judicial Magistrate of the First Class for the rest, appointed with the concurrence of the Chief Justice of the High Court.
• 436: such offences are triable only by the Special Court for the area of the registered office; a Magistrate to whom an accused is forwarded under section 167 of the Code of Criminal Procedure, 1973 may detain him for fifteen days if judicial, seven if executive, and shall then forward him to the Special Court; the Special Court may take cognizance without committal, may try other offences jointly, and may try summarily anything punishable with not more than three years, with no sentence above one year in a summary trial and a rehearing where a longer sentence may be needed.
• 437 and 438: the High Court has appeal and revision powers as if the Special Court were a Court of Session; the Code of Criminal Procedure, 1973 applies, the Special Court being deemed a Court of Session or Magistrate's court, and the prosecutor a Public Prosecutor.
• 439: every offence is non-cognizable except those in section 212(6); cognizance only on the written complaint of the Registrar, a shareholder or member, or a person authorised by the Central Government, with provisos for SEBI's authorised person in securities and dividend matters and for a company prosecuting its own officer; the Registrar's presence is not necessary unless required; and the liquidator's winding up actions are outside sub-section (2), he not being an officer for its purposes.
• 440 and 441: until a Special Court exists, the Court of Session or Magistrate tries the offence, the High Court's transfer power under section 407 of the Code being preserved; and offences not punishable with imprisonment only or with imprisonment and fine may be compounded by the Tribunal, or by the Regional Director where the maximum fine is not more than twenty-five lakh rupees, on payment to the Central Government of a sum not exceeding the maximum fine, taking into account additional fees under section 403, not where an investigation is initiated or pending, and not within three years of a similar offence being compounded; applications go through the Registrar with his comments, intimation within seven days, no prosecution if compounded before, discharge if after; the authority may order the document to be filed, failing which the maximum fine doubles; and imprisonment offences are not compoundable.
• 442: a Mediation and Conciliation Panel maintained by the Central Government, referable on a party's application or suo motu in any proceeding before the Central Government, the Tribunal or the Appellate Tribunal, disposing of the matter within three months and forwarding recommendations, to which objections may be filed.
• 443 to 446: company prosecutors with the powers of Public Prosecutors under section 24 of the Code; the Central Government may direct an appeal against an acquittal by any court other than a High Court; section 250 of the Code applies to accusation without reasonable cause; and a fine may be applied to the costs of the proceedings or a reward to the informant.
• 446A and 446B: punishment is fixed with regard to the size of the company, the nature of its business, injury to public interest, the nature of the default and its repetition; and a One Person Company, small company, start-up company or Producer Company, its officer in default or any other person, pays not more than one-half of the specified penalty, subject to two lakh rupees for the company and one lakh rupees for an officer or other person.

Test yourself

1. How is a Special Court constituted? Of a single judge holding office as Sessions Judge or Additional Sessions Judge for offences punishable under the Act with imprisonment of two years or more, and of a Metropolitan Magistrate or a Judicial Magistrate of the First Class for other offences; appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge is working: section 435(2).

2. Who may complain of an offence under the Act? No court may take cognizance except on the complaint in writing of the Registrar, a shareholder or a member of the company, or a person authorised by the Central Government; with provisos allowing a person authorised by the Securities and Exchange Board of India to complain of offences relating to issue and transfer of securities and non-payment of dividend, and excepting a prosecution by a company of its own officers: section 439(2). The sub-section does not apply to the liquidator's actions in winding up matters.

3. Which offences may be compounded, and by whom? Any offence punishable under the Act not being one punishable with imprisonment only, or with imprisonment and also with fine, by the Tribunal, or, where the maximum fine does not exceed twenty-five lakh rupees, by the Regional Director or an officer authorised by the Central Government: section 441(1) and (6).

4. When may an offence not be compounded even though it is otherwise compoundable? Where an investigation against the company has been initiated or is pending under the Act; and where the offence was committed within three years from the date on which a similar offence by the same company or officer was compounded: third proviso to section 441(1) and section 441(2).

5. What are the limits of a summary trial before a Special Court? It may be used for any offence punishable with imprisonment for a term not exceeding three years; no sentence of imprisonment exceeding one year may be passed on conviction; and where it appears that a longer sentence may be required or summary trial is otherwise undesirable, the court must record an order, recall witnesses already examined, and hear or rehear the case under the regular procedure: section 436(3).

6. What must a court consider in fixing punishment, and what relief have small companies? The size of the company, the nature of the business, injury to public interest, the nature of the default and its repetition: section 446A. A One Person Company, small company, start-up company or Producer Company, its officer in default or any other person, is liable to a penalty of not more than one-half of that specified, subject to a maximum of two lakh rupees for the company and one lakh rupees for the officer or other person: section 446B.