[Opinion] ROC Penalizes Company & Directors for Non-Appointment of CS & CFO, Directs Compounding for Prior Period

Prof R Balakrishnan – [2024] 169 taxmann.com 197 (Article)

1. Background of this case

This particular case which is being examined is, in respect of an unlisted public company in which the appointment of chief financial officer and company secretary both in whole time employment was not done though, the company was mandatorily required to appoint both the position (being KMPs), since the company was the unlisted entity requiring these appointments under the framework of the law. As per the Companies Act 2013, every listed company and every other public company having a paid-up share capital of ten crore rupees or more are required to appoint a chief financial officer and also a company secretary besides chief executive officer/managing director as key managerial personnel (KMP). It may be noted that a chief financial officer and a company secretary who is appointed as key managerial personnel shall not hold office in more than one company except in the subsidiary company at the same time.

M/s.Virupaksha Organics Limited based out of Hyderabad, failed to appoint the company secretary right from the year 25th March 2006 to 31st January 2021. Similarly, the company also not appointed chief financial officer form 1st April 2014 to 25th May 2021. The non-compliance in respect of the company secretary appointment amounted to 5416 days and in case of chief financial officer, the delay amount to 2610 days. The company filed an adjudication application suo-moto and the Registrar of Companies, after following the due procedure of law decided to adjudicate the matter.

While adjudicating the matter, the Registrar of Companies of Hyderabad levied penalty for the non-compliance committed by the company from 2nd November 2018 – the effective date on which the decriminalization was notified by the Ministry of Corporate Affairs as per the Companies (Amendment) Act 2019. Accordingly, the order levied the penalty for non-¬complying with provisions of section 203 of the Companies Act 2013 with effect from 2nd November 2018 and levied a penalty of Rs. 79.40 lakh upon the company and its directors.

In respect of non-compliance committed by the company for the period 25th March 2006 and 1st November 2018 under section 383A (1) of the companies Act 1956 and also under section 203 of the Companies Act 2013, the Registrar of Companies directed the company to file the compounding application with the appropriate authority since the violation was compoundable before the amendment came into force.

While passing the order, the Registrar of Companies/Adjudication Officer spelled out that with regard to the violation under section 383A (1) of the Companies Act 1956 from period 25th March 2006 till 1st November 2018 since the violation was compoundable, an appropriate compounding application be moved/filed by the company and its directors before the competent Compounding Authority.

The Registrar of Companies/Adjudication Officer imposed the penalty between the period 2nd November 2018 till 31st January 2021 (822 days) since the Adjudication Officer considered that the default in complying with provisions of section 203 of the Companies Act 2013 was enforceable with effect from 2nd November 2018 only as per the Companies (Amendment) Act 2019. Accordingly, the order levied the penalty for non-¬complying with provisions of section 203 of the Companies Act 2013 with effect from 2nd November 2018.

This is an interesting case to be understood since the adjudication order, passed by the Registrar of Companies of Hyderabad under section 454 of the Companies Act, 2013 cited prolonged periods of non-compliance with the appointment of key managerial personnel as stipulated under the Act and bifurcated the non-compliance into two parts i.e. one part which was called for compounding and the other part where adjudication order was passed. Let us go through this case in detail, in order understand the facts of the case, occurrence of non-compliance and the rationale behind the adjudication order passed by the Registrar of Companies.

2. Relevant provisions of the Companies Act 2013 pertaining to this case (Section 203. Appointment of Key Managerial Personnel)

In pursuant to section 203(1) of the Companies Act 2013, every company belonging to such class or classes of companies as may be prescribed under Rule 8 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules 2014 shall have the following whole time key managerial personnel: –

1. Managing director or chief executive officer or manager in their absence a whole-time director.
2. Company secretary and
3. Chief financial officer.

The prescribed companies for the appointment of whole-time key managerial personnel as above are that of every listed company and every other public company having a paid-up share capital of ten crore rupees or more.

3. Penal Provisions for default (if any) committed by the company

As per section 203(5) of the Companies Act 2013, any company which is mandatorily required to appoint a chief financial officer and company secretary, if don’t appoint, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees

The penal provisions would operate in respect of both positions individually i.e. penalty would be levied separately for default in each case.

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