2025 (7) TMI 491 - HC - Companies Law

Directors' compounding fine reduced from Rs. 1.5 lacs to Rs. 1 lac under sections 159/162/220(3) Companies Act 1956

Delhi HC reduced compounding fine from Rs. 1.5 lacs to Rs. 1 lac each for two petitioners charged under sections 159/162/220(3) of Companies Act, 1956. ... Exercise of jurisdiction to further reduce the compounding fine of Rs.1.5 lacs imposed on each of the Petitioners - compounding of the offences u/s 159/162/220(3) of Companies Act, 1956 - Petitioners were not the Directors at the time of alleged offence as they had already filed the resignations with the Board of Directors - HELD THAT:- In the case of M/s Instrumentation Laboratory India Pvt. Ltd. vs. Union of India & Anr. [2017 (5) TMI 994 - DELHI HIGH COURT], Coordinate Bench of this Court while considering the similar facts, had observed that while exercising the discretion, not only it must be reasonable and fair in the given circumstances but also must satisfy the doctrine of proportionality which involves balancing test and necessity test. The balancing test permits scrutiny of excessive onerous penalties or infringement of rights or interest and manifest balance of relevant considerations. The necessity test requires infringement of human rights to the least restrictive alternative. In Halsbury’s Laws of England (4th Edn.), Reissue, Vol. 1(1), it was stated that the Court would quash exercise of discretionary power, in which there is no reasonable relationship between the objective which is sought to be achieved and the means used to that end or where punishments imposed by administrative bodies or inferior courts are wholly out of proportion to the relevant misconduct. As per the prosecution, there was default in filing the Balance Sheet and Profit & Loss Account for the financial year 2010-11 and 2012-13. The fine that could be imposed for non-compliance of Section 220 of the Act, is upto Rs. 500 per day. ROC had imposed fine @ Rs. 500 per day for 3835 days which came to Rs. 19,17,500/- - It is pertinent to observed that the offence committed is of not submitting the Balance Sheet, Profit & Loss Account and Annual Returns, which is essentially a crime committed by the Company on which the fine of Rs. 1,50,000/- has already been imposed. The two Directors had been made liable being the Officers-in-charge and responsible for the affairs of the Company. Considering that the compounding fine which may be imposed by the Court while permitting compounding, is in sole discretion of the Court, which has already been exercised by Ld. ASJ in his Order dated 04.08.2014 by reducing the compounding fine to Rs. 1,50,000/-. However, considering the long litigation at the advance stage of the two Petitioners, the compounding fine is reduced to Rs. 1,00,000/- each - Petition disposed off. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in the judgment include:(a) Whether the cost imposed on the Petitioners for non-appearance before the Court was justified and if such cost could be waived.(b) Whether the Petitioners, having allegedly resigned as Directors of the Company prior to the period of default, could be held liable as 'Officers in default' under the Companies Act, 1956 for non-filing of statutory documents.(c) Whether the imposition of the compounding fine on the Petitioners was appropriate, particularly in light of their claim that they had ceased to be Directors before the period of default and that the default was attributable to the new management.(d) The extent and exercise of the Court's discretion in modifying or reducing the compounding fine imposed under the Companies Act, considering principles of proportionality and the factual matrix.2. ISSUE-WISE DETAILED ANALYSIS(a) Waiver of Cost Imposed for Non-AppearanceRelevant legal framework and precedents: Section 528 of the Bhartiya Nagrik Suraksha Sanhita, 2023, read with Section 482 Cr.P.C., empowers the Court to impose or waive costs for procedural defaults.Court's interpretation and reasoning: The Court noted that the Petitioners' counsel was unable to appear due to being engaged before another Bench on a Company matter. The non-appearance was neither intentional nor mala fide.Key evidence and findings: The Petitioners' counsel's explanation was accepted as genuine and not willful neglect.Application of law to facts: Given the bona fide reason for non-appearance, the Court exercised its discretion to waive the cost of Rs. 25,000/- per person imposed earlier.Treatment of competing arguments: No contrary submissions warranted maintaining the cost.Conclusion: The cost imposed was set aside, and the application disposed of accordingly.(b) Liability of Petitioners as Directors for Non-Filing of Statutory DocumentsRelevant legal framework and precedents: Sections 159, 156, 210(3), 220(1), and 220(3) of the Companies Act, 1956, define the duties of Directors and penalties for non-compliance. The term 'Officer in default' includes Directors responsible for compliance. The judgment referenced Hindustan Steel Ltd. vs. State of Orissa (1969) 2 SCC 627, which held that penalty imposition must consider bona fide belief and technical breaches.Court's interpretation and reasoning: The Court examined the Petitioners' claim of resignation in June 2011 and the assertion that the new management was responsible for defaults in 2012-13. However, the official records (Form DIR-12) showed resignation only filed with ROC in June 2015, contradicting the Petitioners' claim.Key evidence and findings: The absence of Board acceptance or minutes regarding resignation in 2011, and the delayed filing with ROC, meant the Petitioners remained Directors during the default period. The Court held that the Petitioners were liable as Officers in default for the defaults committed during their tenure.Application of law to facts: The statutory framework imposes liability on Directors until resignation is officially recorded. The Petitioners' failure to ensure formal acceptance and filing meant they remained liable.Treatment of competing arguments: The Petitioners' argument that the defaults were committed by new management was rejected due to lack of formal resignation and continued statutory responsibility.Conclusion: The Petitioners were rightly held liable as Officers in default for the defaults in filing statutory documents.(c) Appropriateness of Compounding Fine Imposed on PetitionersRelevant legal framework and precedents: Section 621A(6) of the Companies Act allows compounding of offences with payment of a fine, subject to Court's discretion. The Court referred to Viavi Solutions Pvt. Ltd. vs. ROC (2017) for factors to consider while imposing compounding fines, including gravity of offence, intent, financial condition, and public interest. The Court also cited M/s Instrumentation Laboratory India Pvt. Ltd. vs. Union of India & Anr. (2017) emphasizing proportionality and reasonableness in exercising discretion.Court's interpretation and reasoning: The Court acknowledged that the Petitioners filed the compounding application with bona fide intent to resolve the matter. The initial fine imposed by the ACMM was Rs. 2 lacs each, reduced to Rs. 1.5 lacs by the Sessions Judge. The Petitioners sought waiver or further reduction, citing financial hardship and lack of direct responsibility.Key evidence and findings: The Court noted the total statutory fine calculated by ROC was Rs. 59,51,500/-, while the compounding fine was Rs. 1,50,000/- each, which was proportionate and significantly less than statutory penalties. The Petitioners' financial difficulties and senior citizen status were considered mitigating factors.Application of law to facts: The Court applied the balancing test and necessity test for proportionality, concluding that the imposed fine was reasonable but warranted some reduction due to prolonged litigation and Petitioners' circumstances.Treatment of competing arguments: The Respondent argued the fine was proportionate and the Petitioners' claim of expectation of nominal fine was incorrect. The Court found the Respondent's position justified but allowed some leniency.Conclusion: The Court reduced the compounding fine from Rs. 1,50,000/- to Rs. 1,00,000/- each, directing balance payment within 15 days, balancing fairness and proportionality.3. SIGNIFICANT HOLDINGS'The Petitioners had themselves filed an Application dated 14.12.2016 before the Ld. ACMM seeking compounding of the offence wherein it is specifically stated that they were the Directors of the Company. It was further stated by them that they had given their resignation on 08.06.2011 and submitted it to the Board of Directors, though it was never filed with the ROC. It is their own case that their resignation was forwarded to ROC in June, 2015 along with the Resignation Letters of the same day thereby belying the contention that they had ceased to be the Officers of the Company in 2011.''The core question in the present Petition is whether there exist circumstances where the discretion may be exercised to further reduce the compounding fine of Rs.1.5 lacs imposed on each of the Petitioners.''While exercising the discretion, not only it must be reasonable and fair in the given circumstances but also must satisfy the doctrine of proportionality which involves balancing test and necessity test. The balancing test permits scrutiny of excessive onerous penalties or infringement of rights or interest and manifest balance of relevant considerations. The necessity test requires infringement of human rights to the least restrictive alternative.''The total fine amount that was imposed on the Petitioners and the Company was of Rs. 59,51,500/-, while the compounding amount imposed by the Court is Rs. 1,50,000/- which comes to Rs. 12.6 per day.''Considering that the compounding fine which may be imposed by the Court while permitting compounding, is in sole discretion of the Court, which has already been exercised by Ld. ASJ in his Order dated 04.08.2014 by reducing the compounding fine to Rs. 1,50,000/-. However, considering the long litigation at the advance stage of the two Petitioners, the compounding fine is reduced to Rs. 1,00,000/- each.'Core principles established include:- Directors remain liable as 'Officers in default' until resignation is formally accepted and recorded with the ROC.- Compounding fines must be imposed proportionately, considering the nature of offence, intent, financial condition, and public interest.- The Court's discretion in imposing or modifying compounding fines must adhere to the doctrine of proportionality, balancing competing interests and ensuring the least restrictive alternative.- Bona fide conduct and prolonged litigation may justify reduction of compounding fines, but cannot absolve liability entirely.Final determinations:- The cost imposed for non-appearance was waived.- The Petitioners were held liable as Directors during the default period due to non-filing of resignation with ROC.- The compounding fine of Rs. 1.5 lacs each was reduced to Rs. 1 lac each considering proportionality and hardship.- The Petitioners were directed to pay the balance fine within 15 days.