2025 (2) TMI 1118 - HC - Companies Law

Company penalty upheld under Section 454(3) for non-compliance with managerial personnel appointment requirements despite COVID relief consideration

Kusum Industrial Gases Ltd. & Ors. Versus Office of the Registrar of Companies & Anr.

The HC dismissed a petition challenging penalty imposed under Section 454(3) of Companies Act, 2013 for non-compliance with Section 203(4) regarding ... Levy of penalty u/s 454 (3) of the Companies Act, 2013 read with Rule 3 of the Companies (Adjudication of Penalties) Rules, 2014 amended by the Companies (Adjudication of Penalties) Rules, 2019 - non compliance of the provision of Section 203 (4) of the Companies Act, 2013 read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 - whether the authority could have applied its discretion while adjudicating the default on the part of the petitioners? HELD THAT:- In Apex Traders [2024 (5) TMI 1525 - CALCUTTA HIGH COURT] the Court interpreted the expression ‘liability’ used in Section 203 (5) of the Companies Act, 2013. The Court was of the opinion that the language of Section 203 (5) confirms discretion on the Registrar of Companies to impose penalty. Such discretion also includes the converse, that is, the discretion not to impose penalty or to impose lesser penalty. The liability has been found to be subject to adjudication by the Registrar of Companies. Such discretion associates with it, responsibility of the adjudicating authority to consider any mitigating or alleviating circumstances which might have visited the Company for not adhering to the statutory provision. The Hon’ble Supreme Court in the matter of Chairman, SEBI [2006 (5) TMI 191 - SUPREME COURT] interpreted the words ‘shall be liable’ under the SEBI Act and the regulations framed thereunder and held the same as mandatory provision for imposition of monetary penalties for breaches or non-compliance with the provisions of the Act and the regulations - The Court clearly laid down that penalty is attracted as soon as the contravention of the statutory obligation contemplated by the Act and the regulations are established and intention of the parties committing such violation becomes wholly irrelevant. Once contravention is established, the penalty is to follow. The Court was of the view that the power to impose penalty would be severely curtailed if the presence of mens rea is to be considered. The same would set the stage for various market players to violate statutory regulations with impunity and subsequently claim ignorance of law or lack of mens rea to escape imposition of penalty. Imputing mens rea against the plain language of the statute would frustrate the entire purpose and the object of the Act to secure strict compliance of the statutory provisions. Whether the authority could have exercised discretion in fixing the quantum of penalty and whether the quantum of penalty imposed is proper or not? - HELD THAT:- Section 203(5) of the Companies Act, 2013 lays down that if the Company contravenes the provisions of the Section, the Company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees. Every Director in default shall be punishable with fine which may extend to fifty thousand rupees and where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues. In the instant case, the contravention continued for years together. The adjudicating authority gave benefit to the Company for the COVID period and calculated the fine. The authority exercised its discretion in doing so. Such exercise of discretion does not appear to be illegal, erroneous or arbitrary, requiring interference. Hence, the Court is not inclined to interfere with the same. Petition dismissed. ISSUES PRESENTED and CONSIDEREDThe primary issue considered in this judgment is whether the adjudicating authority and the appellate authority erred in imposing a penalty on the petitioners for non-compliance with Section 203 of the Companies Act, 2013. Specifically, the question is whether the authorities should have exercised discretion in determining the quantum of penalty, given the petitioners' circumstances and alleged mitigating factors.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework involves Section 203 of the Companies Act, 2013, which mandates the appointment of a whole-time Company Secretary. Section 454(3) of the Companies Act, 2013, and Rule 3 of the Companies (Adjudication of Penalties) Rules, 2014 (as amended in 2019) provide the basis for imposing penalties for non-compliance. The Court also referenced precedents such as the Apex Traders case and the Supreme Court's ruling in Chairman, SEBI vs. Shriram Mutual Fund, which clarified the non-requirement of mens rea for civil penalties.Court's Interpretation and ReasoningThe Court interpreted Section 203(5) of the Companies Act, 2013, as providing discretion to the Registrar of Companies to impose penalties. However, the Court emphasized that once a contravention is established, the imposition of a penalty is mandatory, as clarified by the Supreme Court in the SEBI case. The Court found that the adjudicating authority did consider the mitigating circumstances, such as the COVID period, when calculating the penalty.Key Evidence and FindingsThe evidence showed that the petitioners failed to appoint a whole-time Company Secretary until January 2, 2023, despite the statutory requirement. The petitioners argued that they faced difficulties in finding a suitable candidate, but the Court noted that the statutory obligation was clear and had been in place since 2014.Application of Law to FactsThe Court applied the legal principle that penalties for statutory violations are mandatory and do not require proof of mens rea. The Court found that the petitioners' admission of non-compliance justified the penalty imposed by the adjudicating authority. The Court also noted that the adjudicating authority exercised discretion in calculating the penalty by considering the COVID period.Treatment of Competing ArgumentsThe petitioners argued that the authorities acted mechanically and failed to consider their mitigating circumstances. They relied on a coordinate Bench decision in the Apex Traders case, which set aside a similar penalty. The respondents countered that the statutory requirement is mandatory and does not differentiate between small and large companies. The Court sided with the respondents, emphasizing the mandatory nature of the penalty once a violation is established.ConclusionsThe Court concluded that the petitioners' failure to appoint a whole-time Company Secretary constituted a clear violation of the Companies Act, 2013. The adjudicating authority's decision to impose a penalty was justified, and the quantum of the penalty was not arbitrary, given the discretion exercised in considering the COVID period.SIGNIFICANT HOLDINGSThe Court held that the imposition of penalties under the Companies Act, 2013, does not require proof of mens rea, following the precedent set by the Supreme Court in the SEBI case. The Court stated, 'Penalty is attracted as soon as the contravention of the statutory obligation contemplated by the Act and the regulations are established and intention of the parties committing such violation becomes wholly irrelevant.'The Court also affirmed that the adjudicating authority has discretion in determining the quantum of penalty but not in deciding whether to impose a penalty once a violation is established. The Court found no error in the adjudicating authority's exercise of discretion, noting that the penalty calculation took into account the COVID period.In dismissing the writ petition, the Court reinforced the principle that statutory obligations must be strictly complied with, and penalties serve as an effective deterrent to ensure compliance.