[Opinion] Consequences of Failing to Appoint an Independent Director Under the Companies Act, 2013
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- Last Updated on 18 October, 2023
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[2023] 155 taxmann.com 323 (Article)
1. Background of the case
The Registrar of Companies of Jaipur passed an adjudication order during the month of April 2023 penalizing the company, its managing director and company secretary to the tune of Rs. 5 lakh for the failure to appoint independent directors in the company as required under the provisions of section 149(4) of the Companies Act 2013 red with Rule 4 of Companies (Appointment of Directors and Qualifications) Rules 2014. The company did not appoint independent directors in the company for the period 19th November 2019 till 15th April 2021 and the appointment of independent directors were done by the company effective from 15th April 2021 thereby causing a delay of 513 days in making the appointment of the independent directors. The above was the violation of the provisions of section 149 (4) of the Companies Act 2013 and the company. its managing director and company secretary who were in default attracted the penal provisions as per section 172 of the Companies Act 2013. The Registrar of Companies by following the adjudication procedure, imposed penalty upon the company, its managing director and the company secretary to a tune of Rs. 5 lakh. Let us try to understand the detail of this case threadbare in order to understand the rationale behind levying the penalty by the regulators.
2. Provisions relating to the cases discussed under the Companies Act 2013
The following are the relevant provisions under the Companies Act 2013, relevant to the cases which are dealt below.
| Companies Act 2013 Chapter XI – Appointment and Qualifications of Directors Section 149 – Company to have board of directors |
|
| Section | Provision |
| 149 (4) | Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies. |
| Explanation | Explanation.—For the purposes of this sub-section, any fraction contained in such one-third number shall be rounded off as one. |
| Companies (Appointment of Directors and Qualifications) Rules 2014 Rule 4 – Number of Independent Director |
|
| Rule 4 (1) | The following class or classes of companies shall have at least two directors as independent directors |
| Rule 4 (1)(i) | the public companies having pad up share capital of ten crore rupees or more; or |
| Rule 4 (1) | the public companies having turnover of one hundred crore rupees or more; or |
| Rule 4 (1) (iii) | the public companies which have, in aggregate, outstanding loans, debentures and deposits exceeding fifty crore rupees. |
| Proviso | Provided that in case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it; |
| Proviso | Provided further that any intermittent vacancy of an independent director shall be filled up by the board at the earliest but not later than immediate next board meeting or three months from the date of such vacancy, whichever is late; |
| Proviso | Provided also that where a company ceases to fulfil any of three conditions laid down in sub rule (1) for three consecutive years, it shall not be required to company with these provisions until such time as it meets any of such conditions. |
| Explanation | Explanation – For the purposes of this rue, it is here by clarified that the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account. |
| Proviso | Provided that a company belonging to any class of companies for which a higher number of independent directors has been specified in the law for the time being in fore shall comply with the requirements specified in such law. |
| Companies Act 2013 Chapter XI – Appointment and Qualifications of Directors Section 172 – Penalty |
|
| Penalty provision for non-compliance/default | |
| 172 | If a company contravenes any of the provisions of this Chapter and for which no specific punishment is provided therein, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees. |
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