2020 (9) TMI 845 - Tri - Companies Law

Company fined for illegal share allotment, directors penalized, Ministry of Corporate Affairs to receive fines

Doha Brokerage And Financial Services Ltd. Versus Registrar Of Companies, Kerala

The High Court found the petitioner company in violation of Section 42(1) of the Companies Act, 1956 for allotting shares to its subsidiary. Each ... Allotment of Shares to Subsidiary Company - membership of Holding Company - violation of provisions of section 42(1) of the Companies Act, 1956 - HELD THAT:- The Bench has gone through the pleadings on record and the submissions made by learned counsel for the petitioner herein and accordingly came to the conclusion that the petitioners/defaulters herein had violated the provisions of section 42(1) of the Act. For such violation the punishment is provided under section 629A of the Companies Act, 1956. The allotment of 1,00,000 equity shares made to its subsidiary company DBFS Derivatives and Commodities Ltd., on April 21, 2007 is hit by section 42(1) of the Companies Act, 1956. Therefore, by each officer in default as members of the board of directors is subjected to a fine of ₹ 5,000 (rupees five thousand only), that too as a deterrent for not repeating the impugned default in future. The imposed remittance shall be made by the petitioner in favour of 'Pay and Accounts Officer, Ministry of Corporate Affairs, Chennai' within three weeks from the date of receipt of this order. Application disposed off. Issues: Violation of Section 42(1) of the Companies Act, 1956Detailed Analysis:1. Violation of Section 42(1) of the Companies Act, 1956:- The case involved a petition filed by a company for violating section 42(1) of the Companies Act, 1956 by allotting 1,00,000 equity shares to its subsidiary company.- The violation was discovered during an appeal process at the High Court, which observed the allotment as non-compliant with the Act.- The relevant legal provision, section 42(1) of the Companies Act 1956, prohibits a body corporate from being a member of its holding company, making any such allotment or transfer of shares void.2. Submissions by the Petitioner:- The petitioner company argued that the violation was unintentional and due to oversight, causing no harm to shareholders or other parties.- They provided details of the allotment, resolutions passed, and steps taken to rectify the issue.- The petitioner sought to compound the violation under section 629A of the Companies Act, 1956, which provides for penalties in case of contraventions without specific punishments elsewhere in the Act.3. Findings and Judgment:- The Tribunal examined the case and confirmed the violation of section 42(1) of the Act by the petitioner.- As per the provisions of the Act, a fine of Rs. 5,000 was imposed on each officer in default, being members of the board of directors, as a deterrent against future violations.- The petitioner was directed to remit the fine to the Ministry of Corporate Affairs within three weeks.- The compounding application was disposed of, subject to the remittance of the fine, and a compliance report was ordered to be filed within four weeks.- The Registrar of Companies was instructed to take further actions as necessary based on the compliance report.In conclusion, the judgment addressed the violation of section 42(1) of the Companies Act, 1956 by the petitioner company, imposed fines on the officers in default, and provided directions for compliance and further actions by the authorities.