[Opinion] RD Absolves NEDs RoC Penalties, Pins Blame on MD and CFO for Company Defaults

Prof R Balakrishnan – [2023] 151 taxmann.com 195 (Article)

1. Background of the case

This particular case recognizes that the non-executive directors should not be levied penalty when the company is having its managing director and other KMPs who are looking after the day-to-day affairs and activities of the company. As per the Ministry of Corporate Affairs circular issued way back in March 2020 also, a non-executive director (NED) should be held liable only in respect of any contravention of any provisions of the Companies Act 2013 which had taken place with his/her knowledge (attributable through board processes) and where he/she has not acted diligently, or with his/her consent or connivance – otherwise, the NEDs are not liable.

In this particular case, the Registrar of Companies of Vijayawada levied heavy penalties on the company and its managing director, its non-executive directors (four of them) and also on the chief financial officer of the company of an amount of Rs. 5 lacs each (totalling to Rs 35 lacs). In the appeal decided by the Regional Director of South Eastern Region, the non-executive directors were totally exonerated from the penalty holding that they are not responsible for the day to day affairs of the company and they cannot be held liable when the company have the managing directors and KMPs who are responsible for the day-to-day activities and affairs of the company.
Let us go through the case in detail in order to understand the rationale behind the order passed by the Regional Director of South Eastern Region.

Company details

2. M/s. Devi Aquatech Private Limited was incorporated on 19th March 2014 under the provisions of the Companies Act 2013 having its registered office at D.No. 6-21-7, East Point Colony, Vishakhapatnam in the state of Andhra Pradesh. The company falls under the jurisdiction of the Registrar of Companies of Andhra Pradesh and the office of the Registrar is situated at Vijayawada. The company is currently having five directors on its board one of them being a managing director. The company also have a chief financial officer in whole time employment. The company is manufacturing food products and beverages.

3. Default committed by the company

As per the adjudication order passed by the Registrar of Companies of Vijayawada, M/s. Devi Aquatech Private Limited had failed to fill up the casual vacancy of the company secretary who resigned effective from 1st June 2019 within the specified period of six months’ time. Hence the office of the whole time company secretary was lying vacant beyond 6 month’s which means contravening the provisions of section 2023 of the Companies Act 2013. The Registrar of Companies held the company, its directors and the chief financial officer for violation of the provisions of section 203 of the Companies Act 2013 read with Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 and levied a penalty on them as per the table below for the violation.

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