THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER XXVIII

Special Courts

Sections 435–446

For Judicial Service Aspirants & Law Students

RJS • DJS • PCS-J • HJS • UPJS • BJS • MPCJ

Special Courts • Compounding • Mediation Panel • Proportionality

— Enriched with landmark judgments and illustrative case law —

Chapter XXVIII — Special Courts

The Companies Act, 2013 imposes a vast array of criminal and civil liabilities — from small procedural defaults to serious offences of fraud carrying imprisonment of up to ten years. Chapter XXVIII of the Act (Sections 435 to 446) deals with the courts that try these offences: the Special Courts for serious offences, the Metropolitan/Judicial Magistrates of First Class for other offences, the procedural framework for such trials, and the specific mechanism of 'compounding' of offences — a valuable tool for dispute resolution without a contested trial.

Chapter XXVIII represents a significant institutional innovation over the 1956 Act. Under the earlier regime, company-law offences were prosecuted in ordinary criminal courts — which, burdened with general criminal dockets, rarely gave such matters priority. The 2013 Act creates specialised Special Courts with dedicated company-law jurisdiction, significantly enhancing the speed and quality of corporate criminal adjudication. Section 447 (Punishment for Fraud), though located in Chapter XXIX, is the sister provision most frequently tried in Special Courts.

Section 435 — Establishment of Special Courts

(1) Constitution

The Central Government may, for the purpose of providing speedy trial of offences under this Act, by notification, establish or designate as many Special Courts as may be necessary. A Special Court shall consist of —

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

Who shall be 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. This stepped structure distributes the judicial workload by the seriousness of the offence — Session-level Judges for the major crimes (including Section 447 fraud), Magistrate-level officers for lesser infractions.

(2) Location and Jurisdiction

A Special Court shall try offences referred to in sub-section (1) within such local limits of jurisdiction as the Central Government may, after consultation with the High Court, specify by notification. The Central Government has notified numerous Special Courts across India — typically one or more in each major city hosting a Registrar of Companies office. Trials are held at the location where the offence was committed or where the company's registered office is situated.

Section 436 — Offences Triable by Special Courts

(1) Exclusive Jurisdiction

Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (now the Bharatiya Nagarik Suraksha Sanhita, 2023) —

1. All offences specified under sub-section (1) of section 435 shall be triable only by the Special Court established or designated for the area in which the registered office of the company in relation to which the offence is committed, or where there are more Special Courts than one for such area, by such one of them as may be specified in this behalf by the High Court concerned;Where a person accused of, or suspected of the commission of, an offence under this Act is forwarded to a Magistrate under sub-section (2) or sub-section (2A) of section 167 of the Code of Criminal Procedure, 1973, such Magistrate may authorise the detention of such person in such custody as he thinks fit for a period not exceeding fifteen days in the whole where such Magistrate is a Judicial Magistrate and seven days in the whole where such Magistrate is an Executive Magistrate;Where such Magistrate considers that the detention of the person accused or suspected of the commission of the offence is unnecessary, he shall order such person to be forwarded to the Special Court having jurisdiction;The Special Court may exercise, in relation to the person forwarded to it under clause (c), the same power which a Magistrate having jurisdiction to try a case may exercise under section 167 of the Code of Criminal Procedure, 1973 in relation to an accused person who has been forwarded to him under that section.

(2) Special Court as Court of Session

Save as otherwise provided in this Act, the Code of Criminal Procedure, 1973 shall apply to the proceedings before a Special Court and for the purposes of the said provisions, the Special Court shall be deemed to be a Court of Session and the person conducting a prosecution before a Special Court shall be deemed to be a Public Prosecutor. This elevation of the Special Court to Session Court status — with corresponding procedural rights and public prosecutor involvement — is a critical feature that ensures procedural parity with ordinary Session-level trials.

Section 437 — Appeal and Revision

The High Court may exercise, so far as may be applicable, all the powers conferred by Chapters XXIX and XXX of the Code of Criminal Procedure, 1973 (now the BNSS, 2023) on a High Court, as if a Special Court within the local limits of the jurisdiction of the High Court were a Court of Session trying cases within the local limits of the jurisdiction of the High Court.

This ensures that the entire supervisory framework of the CrPC/BNSS — appeals to the High Court, revisional jurisdiction under Sections 397 and 401 (now Sections 438 and 442 of BNSS, 2023), reference to the High Court on questions of law, inherent powers under Section 482 (now Section 528 BNSS) — all apply to orders passed by Special Courts.

Section 438 — Application of Code of Criminal Procedure, 1973 to Proceedings before Special Court

Save as otherwise provided in this Act, the provisions of the Code of Criminal Procedure, 1973 shall apply to the proceedings before a Special Court and, for the purposes of the said provisions, the Special Court shall be deemed to be a Court of Session or the court of Metropolitan Magistrate or a Judicial Magistrate of the First Class, as the case may be, and the person conducting a prosecution before a Special Court shall be deemed to be a Public Prosecutor.

This section reinforces Section 436(2) and extends its principle — ensuring that all procedural aspects (filing of FIR / complaint, investigation, charge-sheet, framing of charges, trial procedure, examination of witnesses, rights of the accused, sentencing) follow the familiar CrPC/BNSS framework. Company-law offences are thus tried as ordinary criminal offences, with the specialisation coming only from the subject-matter expertise of the Special Court judges.

Section 439 — Offences to be Non-Cognizable

Notwithstanding anything in the Code of Criminal Procedure, 1973, every offence under this Act except the offences referred to in sub-section (6) of section 212 shall be deemed to be non-cognizable within the meaning of the said Code. This means that the police cannot arrest an accused without a warrant and cannot investigate the offence without a magistrate's order.

No court shall take cognizance of any offence under this Act which is alleged to have been committed by any company or any officer thereof, except on the complaint in writing of the Registrar, a shareholder or a member of the company, or of a person authorised by the Central Government in that behalf. Provided that the court may take cognizance of offences relating to issue and transfer of securities and non-payment of dividend, on a complaint in writing, by a person authorised by the Securities and Exchange Board of India.

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, where the complainant under sub-section (2) is the Registrar or a person authorised by the Central Government, the presence of such officer before the Court trying the offences shall not be necessary unless the court requires his personal attendance at the trial.

Exceptions — Section 212(6) Cognizable Offences

Section 212(6) — which deals with SFIO-investigated offences carrying fraud punishment under Section 447 — carves out an exception. These offences are cognizable and non-bailable, with twin bail conditions (public prosecutor's opportunity + court satisfaction of non-guilt and non-recidivism). The rationale is that serious frauds with SFIO involvement require active police powers, including arrest without warrant.

Section 440 — Transitional Provisions

Any offence committed under this Act, which is triable by a Special Court shall, until a Special Court is established, be tried by a Court of Session or the Court of Metropolitan Magistrate or a Judicial Magistrate of the First Class, as the case may be, exercising jurisdiction over the area, notwithstanding anything contained in the Code of Criminal Procedure, 1973. Provided that nothing contained in this section shall affect the powers of the High Court under section 407 of the Code to transfer any case or class of cases taken cognizance by a Court of Session or of Metropolitan Magistrate or a Judicial Magistrate of the First Class to another Court for trial.

This transitional provision ensured continuity during the phased rollout of Special Courts. Until a Special Court is notified and functional in a given jurisdiction, the pre-existing criminal courts continue to exercise jurisdiction over company-law offences. As Special Courts have now been largely established across India, the application of this section has progressively diminished.

Section 441 — Compounding of Certain Offences

(1) General Rule

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence punishable under this Act (whether committed by a company or any officer thereof), not being an offence punishable with imprisonment only, or punishable with imprisonment and also with fine, may, either before or after the institution of any prosecution, be compounded by —

• The Tribunal; or
• Where the maximum amount of fine which may be imposed for such offence does not exceed twenty-five lakh rupees, by the Regional Director or any officer authorised by the Central Government,

On payment or credit, by the company or, as the case may be, the officer, to the Central Government of such sum as that Tribunal or the Regional Director or any officer authorised by the Central Government, as the case may be, may specify. Provided that the sum so specified shall not, in any case, exceed the maximum amount of the fine which may be imposed for the offence so compounded.

Structure of Compounding Jurisdiction

What 'Compounding' Means

Compounding is a settlement mechanism by which the accused — after acknowledging the default — pays a penalty determined by the Tribunal or Regional Director, and thereby closes the criminal proceeding without a contested trial. The compounded penalty cannot exceed the maximum statutory fine. Upon payment, any pending prosecution is quashed and the accused is deemed to have discharged the offence. This is a valuable tool for addressing technical / unintentional defaults without the burden of a full criminal trial.

Excluded Offences

The section excludes offences punishable 'with imprisonment only' or 'with imprisonment and also with fine' — meaning that serious fraud-type offences cannot be compounded; they must go to trial and yield to punishment if guilt is established. This preserves the deterrent force of criminal prosecution for genuinely serious wrongdoing, while offering compounding as a practical alternative for lesser infractions.

Procedure for Compounding

Every application for the compounding of an offence shall be made to the Registrar who shall forward the same, together with his comments thereon, to the Tribunal or the Regional Director or any officer authorised by the Central Government, as the case may be. Where any offence is compounded under this section, whether before or after the institution of any prosecution, an intimation thereof shall be given by the company to the Registrar within seven days from the date on which the offence is so compounded.

Where any offence is compounded before the institution of any prosecution, no prosecution shall be instituted in relation to such offence, either by the Registrar or by any shareholder of the company or by any person authorised by the Central Government against the offender in relation to whom the offence is so compounded.

Post-Institution Compounding

Where the compounding of any offence is made after the institution of any prosecution, such compounding shall be brought by the Registrar in writing, to the notice of the court in which the prosecution is pending and on such notice of the compounding of the offence being given, the company or its officer in relation to whom the offence is so compounded shall be discharged.

Restrictions on Repeat Compounding

Any offence which is punishable under this Act, with imprisonment or fine, or with imprisonment or fine or with both, shall be compoundable with the permission of the Special Court, in accordance with the procedure laid down in that Act for compounding of offences. Any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.

Further, any second or subsequent offence committed after the expiry of a period of three years from the date on which the offence was previously compounded, shall be deemed to be a first offence. This ensures that companies and officers cannot serially exploit the compounding mechanism — repeated defaults within three years will be treated as aggravated and subject to enhanced sanctions.

Section 442 — Mediation and Conciliation Panel

The Central Government shall maintain a panel of experts to be called as the Mediation and Conciliation Panel consisting of such number of experts having such qualifications as may be prescribed for mediation between the parties during the pendency of any proceedings before the Central Government or the Tribunal or the Appellate Tribunal under this Act.

Any of the parties to the proceedings may, at any time during the proceedings before the Central Government or the Tribunal or the Appellate Tribunal, apply to the Central Government or the Tribunal or the Appellate Tribunal, as the case may be, in such form along with such fees as may be prescribed, for referring the matter pertaining to such proceedings to the Mediation and Conciliation Panel. The Central Government or the Tribunal or the Appellate Tribunal, as the case may be, may suo motu, before the disposal of such proceedings, refer any matter pertaining to such proceedings to the panel.

The Mediation and Conciliation Panel shall follow such procedure as may be prescribed and dispose of the matter referred to it within a period of three months from the date of such reference and forward its recommendations to the Central Government or the Tribunal or the Appellate Tribunal, as the case may be. Any party aggrieved by the recommendation of the Mediation and Conciliation Panel may file objections to the Central Government or the Tribunal or the Appellate Tribunal, as the case may be.

The introduction of this statutory mediation and conciliation framework (effective from 2016) was a significant ADR innovation — encouraging parties to resolve company-law disputes through non-adversarial means. The scheme is administered under the Companies (Mediation and Conciliation) Rules, 2016.

Section 443 — Power of Central Government to Appoint Company Prosecutors

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the Central Government may appoint (generally, or for any case, or in any case, or for any specified class of cases in any local area) one or more persons, as company prosecutors for the conduct of prosecutions arising out of this Act; and the persons so appointed as company prosecutors shall have all the powers and privileges conferred by that Code on Public Prosecutors appointed under section 24 of that Code.

This power allows the Central Government to appoint specialised company prosecutors — lawyers with particular expertise in company law — rather than relying on the general Public Prosecutor cadre. For Section 447 (fraud) cases and SFIO-led prosecutions, this specialisation is particularly valuable.

Section 444 — Appeal Against Acquittal

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the Central Government may, in any case arising under this Act, direct any company prosecutor or authorise any other person either by name or by virtue of his office, to present an appeal from an order of acquittal passed by any court, other than a High Court, and an appeal presented by such prosecutor or other person shall be deemed to have been validly presented to the appellate court.

This ensures that the State can challenge an acquittal in a company-law prosecution in the same manner as in an ordinary criminal case — critical to maintaining the credibility and deterrent effect of corporate criminal liability.

Section 445 — Compensation for Accusation Without Reasonable Cause

The provisions of section 250 of the Code of Criminal Procedure, 1973 shall apply mutatis mutandis to compensation for accusation without reasonable cause before the Special Court or the Court of Session. Section 250 CrPC (now Section 272 BNSS, 2023) empowers the court to award compensation to an accused who has been wrongly prosecuted — typically from the complainant. Extension of this principle to company-law proceedings is a protection against vexatious or malicious prosecutions.

Section 446 — Application of Fines

The Court imposing any fine under this Act may direct that the whole or any part thereof shall be applied — (a) in or towards payment of the costs of the proceedings; or (b) in or towards the payment to the person, on whose information or at whose instance the fine is recovered, of a reward of such amount as it may think fit, not exceeding, in any case, ten per cent of the fine. This is an incentive-based provision — permitting informant/whistle-blower rewards of up to 10% of the recovered fine. In practice, this is rarely invoked, but it reinforces the legitimacy of private enforcement through complaints.

Section 446A — Factors for Determining Level of Punishment (Inserted by 2019 Amendment)

The court or the Special Court, while deciding the amount of fine or imprisonment under this Act, shall have due regard to the following factors, namely: —

• Size of the company;
• Nature of business carried on by the company;
• Injury to public interest;
• Nature of the default; and
• Repetition of the default.

This provision, inserted by the Companies (Amendment) Act, 2019, codified what had been a long-standing judicial principle — that corporate criminal punishment must be proportionate to the offence and the offender's circumstances. Small companies with genuine technical defaults now have statutory backing for leniency, while repeat offenders and large-scale frauds attract enhanced sanctions.

Section 446B — Lesser Penalties for OPCs, Small, Start-ups and Producer Companies (Inserted by 2019 Amendment)

Notwithstanding anything contained in this Act, if penalty is payable for non-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of ₹2 lakh in case of a company and ₹1 lakh in case of an officer who is in default or any other person, as the case may be.

This is a significant compliance-relief provision for smaller entities. The underlying policy is to reduce the regulatory burden on MSMEs, OPCs, start-ups, and producer companies — recognising that strict application of full corporate-level penalties could be disproportionate and disruptive for these entities.

Case Law — Interpretation and Application

Practical Issues and Compliance Strategy

(i) Choosing Compounding vs. Trial

For genuine technical defaults, compounding is almost always advisable — it saves legal costs, avoids reputational damage, and closes the matter quickly. For contested defaults where the facts or law are disputed, trial may be preferable — though defendants should weigh the cost and time of litigation against the risk of conviction.

(ii) Serial Defaults and the 3-Year Rule

Officers who are repeat defaulters should be particularly wary — compounding within 3 years of a previous compounding deems the second offence 'repeat' and may attract enhanced sanctions. Consistent compliance is the best safeguard.

(iii) Informant Rewards and Whistle-blowers

Under Section 446(b), informants may receive up to 10% of fines recovered. Though rare, this represents a statutory basis for whistle-blower rewards and complements the vigil mechanism under Section 177.

(iv) SFIO Cases

Offences investigated by SFIO — typically serious frauds under Section 447 — are tried by Special Courts with enhanced procedural rigour, including the twin bail conditions under Section 212(6). These cases warrant specialised criminal-defence expertise.

(v) ADR under Section 442

For civil proceedings before the Tribunal or Central Government that are amenable to resolution, the Mediation and Conciliation Panel offers a cost-effective alternative. Parties should consider invoking it early, particularly in oppression & mismanagement disputes, compromises & arrangements, and related-party claims.

Evolving Trends

• Digitisation of Special Courts — e-filing, virtual hearings, and electronic evidence management are progressively being rolled out in major Special Courts post-COVID;
• Stricter Prosecution of Section 447 Fraud — SFIO's scale-up and dedicated Section 447 cases have increased in recent years, with notable convictions in matters involving shell companies, fund diversion, and misrepresentation;
• Enhanced Compounding Scope — the Companies (Amendment) Act, 2020, moved many minor defaults from criminal penalty to civil penalty (in-house adjudication), reducing the burden on Special Courts and reserving them for more serious matters;
• Increasing Use of Mediation — the Mediation and Conciliation Panel has seen growing utilisation, particularly in shareholder disputes and inter-corporate commercial disagreements;
• Proportionality Jurisprudence — the 2019 amendments (Sections 446A and 446B) have been invoked by several High Courts to reduce excessive penalties on smaller entities, marking a welcome corrective to the earlier 'one-size-fits-all' approach.