CA
Tax Tutor
A

Section 86 — Punishment for Contravention

Think of Section 86 as the penalty backstop for the entire Registration of Charges chapter. After all the rules on when to register a charge, how to register it, and what happens if you miss the deadline — this section answers the final question: what does it cost you if you mess up?

There are two levels of punishment, and the distinction matters enormously in the exam.

Level 1 — Simple default (sub-section 1): If a company fails to comply with any provision under Chapter VI (Registration of Charges — Sections 77 to 87), the company pays ₹5 lakh as a penalty, and every officer in default pays ₹50,000. Notice the word default here — this covers honest mistakes, missed deadlines, procedural slip-ups. No intent is needed. The Registrar can impose this penalty directly under the adjudication route.

Level 2 — Willful fraud (sub-section 2): This is where things get serious. If any person willfully furnishes false or incorrect information, or knowingly suppresses material information that was required to be registered under Section 77, they are pushed straight to Section 447 — Fraud. Section 447 carries imprisonment of up to 10 years plus a fine that can go up to three times the amount involved. This is not a penalty — it is a criminal prosecution. The key trigger words are willfully and knowingly — deliberate wrongdoing, not an innocent error.

This section is asked frequently as a 4-mark question where students must distinguish between the two sub-sections or calculate total penalties. Remember: the company and each defaulting officer are penalised separately — penalties are not shared. Also note that sub-section 2 references Section 77 specifically (creation/modification of charge), not the entire chapter.

📊 Worked example

Example 1 — Calculating total penalty for a default

Rajesh & Co. Pvt. Ltd. creates a charge on its factory worth ₹2 crore but fails to register it with the Registrar within the prescribed time. The default is discovered during a routine inspection. The company has 3 officers in default (CFO, Company Secretary, and Director).

Working:

  • Penalty on company = ₹5,00,000
  • Penalty on CFO = ₹50,000
  • Penalty on CS = ₹50,000
  • Penalty on Director = ₹50,000
  • Total penalty on officers = ₹1,50,000
  • Total penalty = ₹5,00,000 + ₹1,50,000 = ₹6,50,000

Final Answer: The total penalty payable is ₹6,50,000.

---

Example 2 — Fraud vs. simple default

Ms. Iyer, CFO of Horizon Textiles Ltd., deliberately files a charge registration form showing the charge amount as ₹30 lakh instead of the actual ₹3 crore, to conceal the true extent of borrowing from the Registrar.

Working:

  • This is not a procedural default — Ms. Iyer knowingly furnished incorrect information required under Section 77.
  • Section 86(2) applies → Ms. Iyer is liable under Section 447 (Fraud).
  • Penalty under Section 86(1) does NOT apply here; the fraud route supersedes it.

Final Answer: Ms. Iyer faces prosecution under Section 447 — imprisonment up to 10 years and/or a fine up to 3× the amount involved. This is a criminal offence, not a civil penalty.

⚠️ Common exam mistakes

  • Students apply a flat ₹5,50,000 penalty (adding ₹5L + ₹50K together without separating company from officer). Wrong — the ₹5 lakh is on the company alone, and ₹50,000 falls on each defaulting officer separately. Always count the officers.
  • Students confuse sub-section 1 and sub-section 2 by saying both lead to the same penalty. Wrong — sub-section 1 is a civil penalty under adjudication; sub-section 2 escalates to Section 447 (fraud/criminal) only when there is willful false information or knowing suppression.
  • Students write that sub-section 2 covers the entire Chapter VI. Wrong — sub-section 2 specifically mentions Section 77 (creation/modification of charge), not the full chapter. Keep the reference precise in your answer.
  • Don't forget the word 'every' in sub-section 1. If the exam gives you 4 defaulting officers, all 4 pay ₹50,000 each — the penalty is per officer, not per company.
  • Students treat this section as standalone without linking it to Section 447. In a theory question asking about consequences of fraud in charge registration, you must cite both Section 86(2) and Section 447 to get full marks.
📖 Bare Act text — Section 86, Companies Act 2013 (click to expand)
(1) If any company is in default in complying with any of the provisions of this Chapter, the company shall be liable to a penalty of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees. (2) If any person willfully furnishes any false or incorrect information or knowingly suppresses any material information, required to be registered in accordance with the provisions of section 77, he shall be liable for action under section 447.
Test yourself
Practice questions on this section, AI-graded with citations.
⚡ Practice now →