[Opinion] The Domino Effect | Failure to Appoint a Director Within Time Leads to Severe Penalties Upon Co. and Its Director

Prof R Balakrishnan – [2023] 155 taxmann.com 633 (Article)

1. Background of the case

The Registrar of Companies of NCT of Delhi and Haryana passed three adjudication orders on 17th October 2023 for multiple defaults/non-compliances committed by M/s. Pantheryx (India) Private Limited is situated at Gurgaon in the state of Haryana. These three orders passed by the Registrar of Companies are arising out of the non-appointment of a director on a board of the company on a timely manner. M/s. Pantheryx (India) Private conducted its first board meeting in the calendar year of 2020 on 27th of January 2020. After this board meeting, due to the resignation of directors, only one director remained on the board which was below the quorum requirement. The company was to appoint another director in a timely manner but the company did not appoint the director till 10th December 2020 and the company finally appointed a director on 11th December 2020 and the quorum was resumed. Due to the non-appointment director in a timely manner, the company could not conduct four meetings in the calendar year which is a mandatory requirement and it could meet the required gap maintained between two successive board meetings. Added to this is the non-compliance of secretarial standard 1 relating to meetings of the board of directors. It is interesting to note that one non-compliance led to the second followed by a third and finally fourth non-compliance.

The company filed a suo-moto application for adjudication praying for the remission of the penalties citing reasons that the company could not comply with the provisions of the Act due to COVID restrictions prevalent across the world, and the company could not get the necessary documentation prepared on time, which has led to the delay in appointment of director for a period of 304 days. The other non-compliances were incidental to the delay in the appointment of the director.

However, the Adjudication Officer/Registrar of Companies followed the procedure of issuing the show cause notice and obtaining the response from the company and later providing an opportunity for a personal hearing and had them represented and finally passed the adjudication orders under the provisions of section 454 of the Companies 2013. The penalty levied by the authorities were towards the delayed appointment of the director on the board, non-conduct of the required minimum board meetings in the calendar year, non-maintenance of the required gap between two successive board meetings and for non-adherence of the secretarial standard-1.

The Registrar of Companies penalized the company for an amount of 3.88 lakh and the director of the company for 1.65 lakh thereby totalling the penalty of 5.53 lakhs in all. Let us go through these cases threadbare and understand the sequences of events that took place in the company followed by action taken by the company and the regulatory actions followed thereafter resulting in the adjudication orders.

2. Provisions relating to the cases discussed under the Companies Act 2013.

The relevant provisions under the Companies Act 2013, relevant to the cases are

(a) section 149 – company to have a board of directors;

(b) section 173 – meetings of board;

(c) section 118 – minutes of proceedings of general meeting, meeting of the board of directors and other meeting and resolutions passed by postal ballot;

(d) secretarial standard -1 read with MCA general circular No. 11 /2020 dated: 24th March, 2020

Click Here To Read The Full Article