Safiya Malik

The Calcutta High Court recently upheld the imposition of penalties on a corporate entity for failing to comply with statutory obligations under the Companies Act, 2013. The court rejected the challenge raised by the company and its directors against the penalties imposed for their non-compliance with the mandatory requirement to appoint a whole-time Company Secretary.

The matter pertains to a corporate entity incorporated under the Companies Act, 1956, which had been in operation for several decades. The entity, a publicly listed company, failed to appoint a whole-time Company Secretary in compliance with Section 203 of the Companies Act, 2013. This statutory provision mandates specific classes of companies to appoint a whole-time Company Secretary, and failure to comply attracts penalties under Section 454(3) of the Companies Act, 2013, read with the Companies (Adjudication of Penalties) Rules, 2014 and its subsequent amendments.

The adjudicating authority issued notices to the company and its directors in September 2022, stating the violation and requiring them to provide explanations. The notice detailed the statutory contraventions, specifically pointing out the prolonged failure to appoint a whole-time Company Secretary and the absence of any justifiable grounds for non-compliance. The company, despite multiple extensions and opportunities, failed to respond to the notices adequately.

On multiple occasions, the company requested additional time, citing difficulties in recruiting a qualified candidate. The directors of the company stated that they had made several attempts to fill the position but were unsuccessful in securing a suitable individual. The company ultimately appointed a whole-time Company Secretary on January 2, 2023, but did not inform the Registrar of Companies (ROC) until June 2023. This delay in compliance formed the crux of the penalty imposition.

Further complicating the matter, the appointed Company Secretary resigned from the position on May 1, 2024, necessitating another appointment. Despite previous lapses in compliance, the company moved swiftly to fill the vacancy, appointing a replacement with effect from May 1, 2024. However, by this time, the adjudicating authority had already issued its penalty order, citing a failure to comply with the statutory requirements for an extended period.

Following due process, the adjudicating authority imposed a penalty of INR 20 lakh, divided among the company and its directors. The penalty was broken down as follows: INR 5 lakh on the company and INR 5 lakh each on three directors, as provided under Section 203(5) of the Companies Act. The statutory appeal against this order was subsequently dismissed by the Regional Director (Eastern Region), Ministry of Corporate Affairs, Kolkata, leading to the present writ petition.

The court, after examining the submissions, statutory provisions, and precedents, noted that the petitioners failed to comply with an explicit statutory mandate. The judgment stated: "The fact that the petitioners did not appoint a whole-time Company Secretary in accordance with the statutory provision is not disputed. It is admitted that prior to January 2, 2023, the company did not have a whole-time Company Secretary." The court stated that the adjudicating authority had followed due process, providing multiple opportunities for the petitioners to present their case.

The court examined the argument presented by the petitioners that the penalty imposed was excessive and arbitrary. The petitioners cited mitigating factors, including their genuine attempts to hire a Company Secretary and the financial limitations faced by the company. They also referred to a precedent from a coordinate bench in Apex Traders and Exporters Ltd. v. The Registrar of Companies, West Bengal, where the court had found that adjudicating officers had discretion in determining penalties.

However, the court distinguished this ruling, observing that the earlier decision was passed ex parte, without the respondents' arguments being considered. The judgment in the present case stated: "In the absence of any real consideration worth the name of the mitigating circumstances of the Company and the small size of the Company, including its number of shareholders and share capital, the coordinate bench had directed reconsideration. The facts of the present case, however, differ significantly, as the petitioners were given ample opportunity and the authorities have recorded the reasons for penalty calculation."

Citing the Supreme Court's ruling in Chairman, SEBI v. Shriram Mutual Fund & Anr., the court noted: "Mens rea is not an essential ingredient for contravention of the provisions of a civil Act. Penalty is attracted as soon as contravention of the statutory obligation is established, and therefore, the intention of the parties committing such violations becomes immaterial." The court further observed that once a statutory contravention is established, penalties must follow as per the prescribed framework, and discretionary leniency is not warranted unless explicitly provided by law.

Additionally, the court considered whether the quantum of penalty imposed was appropriate in the given circumstances. It observed that Section 203(5) of the Companies Act prescribes a minimum penalty amount, with an upper limit based on the severity and duration of the contravention. The adjudicating authority had exercised discretion in calculating the penalty, factoring in the COVID-19 pandemic as a period of exemption and adjusting the fine accordingly.

The court upheld the adjudication and appellate orders, affirming the imposition of penalties. The judgment recorded: "The ratio laid down in Chairman, SEBI (supra) leaves no doubt in the mind of the court that there is no scope to avoid or waive penalty once a violation in the statutory provision is detected as the Companies Act, 2013 does not provide for any mens rea to justify the default." While acknowledging that mitigating factors could be considered in determining the quantum of penalties, the court found that the adjudicating authority had already accounted for certain periods, such as the COVID-19 pandemic, in its calculations.

The petitioners' claim of financial hardship and lack of commercial activity did not sway the court’s decision. The judgment stated that compliance with statutory requirements is mandatory for all companies, regardless of their financial condition. The court held that the penalty imposed was within the statutory framework and justified given the length of non-compliance.

Consequently, the writ petition was dismissed in its entirety, with the court concluding that there was no illegality or procedural irregularity in the orders passed by the adjudicating and appellate authorities.

Case Title: Kusum Industrial Gases Ltd. & Ors. v. Office of the Registrar of Companies & Anr.

Case Number: WPO No. 848 of 2024

Bench: Justice Amrita Sinha

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