This was a Compounding Application filed before the National Company Law Tribunal, Mumbai Bench on 23rd of February 2017 and the same has been forwarded to the RoC, Mumbai for its report and the said report has been filed to NCLT, Mumbai on 21st March, 2017. This Application dealt with the violation of Section 149 of the Companies Act, 2013 by the Company.
The Applicants in their applications stated that the Company was not able to appoint an Independent Director from 31st March 2015 to 28th January 2016 and from 31st March 2015 to 2nd March 2016 pursuant to Section 149 of the Companies Act, 2013. There is delay of 303 days for appointment of another director. In that way, the Company has violated the provisions contained in Section 149 of the Companies Act, 2013.
Further it is stated that, pursuant to Section 177 of the Companies Act, 2013, the Company was unable to formulate Audit Committee form 31st March, 2015 to 2 March, 2016. There is delay of 337 days for the Constitution of Audit Committee as per requirement of S. 177 of the Act.
Further it has been stated that, pursuant to Section 178 of the Companies Act, the Company was unable to formulate the Nomination and Remuneration Committee from 31 March, 2015 to 2 March, 2016. There is also delay of 337 days for the Constitution of Nomination and Remuneration Committee.
Therefore, it is evident that the Applicant Company committed the default under the provisions of Section 149, Section 177 and Section 178 of the Companies Act, 2013. The Ld. RoC has also reported that the Applicant Company has claimed that they had complied with the provisions of said sections of the Companies Act, 2013 and made default good by informing the RoC respectively on 5 February, 2016, 21 March, 2016 and 31 March, 2016. However, they claimed that they have filed the Compounding Application so as to put the matter to rest.
Topics Covered in this article
FACTS OF THE CASE
As per the Applicant’s own submissions made in the Compounding Application filed by them for violation of Section 149, Section 177, Section 178 of the Companies Act, 2013, the Applicant has committed default as follows:—
- That the Company was required to appoint two Independent Directors pursuant to S. 149 of the Companies Act, 2013 read with clause (iii) of rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 and also to constitute an Audit Committee and Nomination and Remuneration Committee pursuant to S. 177, 178 read with clause (iii) of Rule 6 of the Companies (Meeting of Board & its Powers) Rules, 2014 with effect from 31st March, 2015 as the Company’s outstanding loans was exceeded Rs. 50 Crores in terms of the Audited Financial Statements for the Financial Year ended 31st March, 2014
ii) That there was delay in appointment of the Independent Directors of the Company in terms of provisions of S. 149 of the Act and rules made thereunder and consequently delay in constitution/re-constitution of Audit Committee and Nomination and Remuneration Committee in terms of S. 177 & 178 of the Act, respectively.
The Company has made good the default by appointment of two Independent Directors namely Mr. Rahish Ahmed with effect from 29th January, 2016 and Mr. Sanjeev Wadhwa with effect from 3rd March, 2016.
Whereas, the Company has constituted/re-constituted the above said committees on 6th February, 2016 in compliances of the Act effective from 3rd March, 2016 and the said contravention was also made good.
This bench has perused the records and accordingly, the Applicant has violated the provision under S. 149, S. 177, and S. 178 of the Companies Act, 2013. The Registrar of Companies, Maharashtra, Mumbai, has submitted its Reports vide his letters to National Company Law Tribunal, Mumbai Bench and the same has been treated as Compounding Application. The punishment for violation of S. 149 is provided under Section 450 and the punishment for violation of S. 177 and S. 178 is provided under S. 178(8) of Companies Act, 2013. The relevant sections are as follows:—
- Section 450 of the Companies Act, 2013:-
If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made there under, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.
- Section 178(8) of the Companies Act, 2013:-
In case of any contravention of the provisions of section 177 and this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both”.
Let’s take the other Sections of the Companies which the Company violated:-
- Section 149 of the Companies Act, 2013:-
Company to have Board of Directors
This Section talks about the mandatory requirement of having Board of Directors consisting of directors in its sub-clause (1) only, let’s take a look specifically at Section 149(1):-
(1) Every company shall have a Board of Directors consisting of individuals as
directors and shall have—
- a minimum number of three directors in the case of a public company,
two directors in the case of a private company, and one director in the case
of a One Person Company; and
- a maximum of fifteen directors;
- Section 177 of the Companies Act, 2013:-
- The Board of Directors of every listed company and such other class or
classes of companies, as may be prescribed, shall constitute an Audit Committee.
- The Audit Committee shall consist of a minimum of three directors with
independent directors forming a majority:
Provided that majority of members of Audit Committee including its Chairperson shall
be persons with ability to read and understand, the financial statement.
- Every Audit Committee of a company existing immediately before the
commencement of this Act shall, within one year of such commencement, be
reconstituted in accordance with sub-section (2).
- Every Audit Committee shall act in accordance with the terms of reference
specified in writing by the Board which shall, inter alia, include,—
- the recommendation for appointment, remuneration and terms of
appointment of auditors of the company;
(ii) review and monitor the auditor’s independence and performance, and effectiveness of audit process;
(iii) examination of the financial statement and the auditors’ report thereon;
(iv) approval or any subsequent modification of transactions of the company with related parties;
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it is necessary;
(vii) evaluation of internal financial controls and risk management systems;
(viii) monitoring the end use of funds raised through public offers and related matters.
- The Audit Committee may call for the comments of the auditors about
internal control systems, the scope of audit, including the observations of the
auditors and review of financial statement before their submission to the
Board and may also discuss any related issues with the internal and statutory
auditors and the management of the company.
- The Audit Committee shall have authority to investigate into any matter in
relation to the items specified in sub-section (4) or referred to it by the Board
and for this purpose shall have power to obtain professional advice from
external sources and have full access to information contained in the records
of the company.
- The auditors of a company and the key managerial personnel shall have a \
right to be heard in the meetings of the Audit Committee when it considers
the auditor’s report but shall not have the right to vote.
- The Board’s report under sub-section (3) of section 134 shall disclose the
composition of an Audit Committee and where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons therefor.
- Every listed company or such class or classes of companies, as may be
prescribed,shall establish a vigil mechanism for directors and employees to
report genuine concerns in such manner as may be prescribed.
- The vigil mechanism under sub-section (9) shall provide for adequate
safeguards against victimisation of persons who use such mechanism and
make provision for direct access to the chairperson of the Audit Committee
in appropriate or exceptional cases:
Provided that the details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.
3. Section 178 of the Companies Act, 2013:-
Nomination and Remuneration Committee and Stakeholders Relationship Committee
(1)The Board of Directors of every listed company and such other class or
classes of companies, as may be prescribed shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors:
Provided that the chairperson of the company (whether executive or non-executive)
may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.
(2) The Nomination and Remuneration Committee shall identify persons who are
qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall carry out evaluation of every director’s performance.
(3) The Nomination and Remuneration Committee shall formulate the criteria for
determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees.
(4) The Nomination and Remuneration Committee shall, while formulating the policy
under sub-section (3) ensure that—
(a) the level and composition of remuneration is reasonable and sufficient to
attract, retain and motivate directors of the quality required to run the company
(b) relationship of remuneration to performance is clear and meets appropriate
performance benchmarks; and
(c) remuneration to directors, key managerial personnel and senior management
involves a balance between fixed and incentive pay reflecting short and long-term
performance objectives appropriate to the working of the company and its goals:
Provided that such policy shall be disclosed in the Board’s report.
(5) The Board of Directors of a company which consists of more than one thousand
shareholders, debenture-holders, deposit-holders and any other security holders at any
time during a financial year shall constitute a Stakeholders Relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the Board.
(6) The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company.
(7) The chairperson of each of the committees constituted under this section or, in his
absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.
(8) In case of any contravention of the provisions of section 177 and this section, the
company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees,or with both:
Provided that non-consideration of resolution of any grievance by the Stakeholders
Relationship Committee in good faith shall not constitute a contravention of this section.
CONTENTION OF THE APPLICANT
From the side of the Applicant, Ld. Practicing Company Secretary had appeared and explained that inadvertently the Applicants could not fulfil the conditions laid down under said Sections of the Companies Act, 2013, although the Applicants were willing to comply with the provisions of the Companies Act, 2013 bonafidely. Ld. Representative of the Applicant also stated that the aforesaid violation was unintentional and without any wilful or malafide intention.
During the adjudication of the Petition/Application it was observed that, this Compounding Application is in respect of the ‘Private Limited Company’. However, the violation u/S. 149, S. 177 and S. 178 of the Companies Act, 2013 are found to be applicable in respect of “Public unlisted Companies” only. Hence, a query was raised that, this petition/application is not sustainable in eyes of law being filed by the ‘Private Limited Company’. For clarification notices were issued to the Applicants as well as to the RoC to clarify the legal position in this regard. The report of the RoC, wherein it is clarified, as under:
Regarding the position of the company being a private limited company or public limited company:—
Sand Land Real Estates Pvt. Ltd. was originally incorporated on 25.2.2010 as a private Limited Company, however, as per the annual return filed for the first year 2010-2011 (for the AGM held on 22.8.2011) it was disclosed by the Company before ROC that the existing individual shareholder has transferred his shares (7400 Nos. of equity shares equivalent to 74% of paid up equity share capital of Sand Land Real Estates Pvt. Ltd.) to a public limited company (MIS Axiom Cordages Limited) vide share transfer dated 10.8.2010. Such shareholding found to be the same even as per latest annual return filed before ROC for the latest year 2015-2016. Subsequent to such share transfer date 10.8.2010, this company has become subsidiary of such public company.
In terms of section 3(1)(iv)(c) of the Companies Act, 1956, this company was a public company w.e.f. 10.8.2010 as it has become subsidiary of a public company, though the name of the company continues to contain the word ‘private’, however, the company could have converted itself formally into a public company by change of name as it has by operation on law has already become a public company with effect from 10.8.2010 itself. Similarly, in terms of section 2(71) of the Companies Act, 2013 (enforced with effect from 12.9.2013), this company shall be deemed to be a public company for the purposes this Act even where such subsidiary company continues to be a private company in its articles. Accordingly, and in view of the above legal position, this company remain as subsidiary to a public company and hence remained as public company during the period of default in this specific case.
Regarding applicability of section 149, 177, and 178 of the Companies Act, 2013 to this company:-
(Sand Land Real Estates Pvt. Ltd.) was/is a subsidiary of a public company, as explained in para Nos. 2 and 3 above, and hence it shall be deemed to be public company for the purposes of the Companies Act, 2013, in terms of section 2(71) of the Companies Act, 2013. All the sections 149(4), 177(1), and 178(1) of the Companies Act, 2013 are also applicable to the public companies apart from listed companies, provided they satisfy any of the 3 conditions as detailed separately in Annexure A, Annexure B and Annexure C respectively. This Company being a public company for the purposes of Companies Act, 2013 and as it is meeting the requirement of conditions of applicability as detailed in Rules, is required to comply with section 149(4), 177(1) and 178(1) of the Companies Act, 2013 read with Rules.
8. This Bench has gone through the Application of the Applicants and the Report submitted by the Registrar of Companies, Maharashtra, Mumbai and also the submissions made by the Ld. Representative for the Applicant at the time of hearing and noted that Application made by the Applicant for compounding of offence committed under S. 149, S. 177 and S. 178 of the Companies Act, 2013, merits consideration.
On examination of the circumstances as discussed above, a compounding fee of Rs. 5000/- by each applicant who is in default, for violation of S. 149 punishable u/S. 450, shall be sufficient as a deterrent for not repeating the impugned default in future. However, in respect of the violation of S. 177 and S. 178 wherein the punishment is provided u/S. 178(8), a compounding fee of Rs. 5000/- by each applicant who is in default, shall be sufficient as a deterrent for not repeating the impugned default in future.
The imposed remittance shall be paid byway of Demand Draft drawn in favour of “Pay and Accounts Officer, Ministry of Corporate Affairs, Mumbai”.
This Compounding Application is, therefore, disposed of on the terms directed above with a rider that the payment of the fine imposed be made within 15 days on receipt of this order. Needless to mention, the offence shall stand compounded subject to the remittance of the fine imposed. A compliance report, therefore, shall be placed on record. Only thereafter the Ld. RoC shall take the consequential action.
In this application, the National Company Law Tribunal took into consideration the violations which the Company in this case committed and also the reasons of the commitment of the violence was also given analysis by the NCLT, the NCLT after taking the facts, reasons and proper Sections of Companies Act, 2013 into consideration analysed that the Company violated the Sections 149, 177 and 178 of the Companies Act, 2013 by not appointing the Independent Director, not formulating the Audit Committee in the Company and by not formulating the Nomination and Remuneration Committee for a considerable point of time. Therefore, Court after analysing the elements stated in the Compounding application found the existence of the violation of aforesaid sections by the Company. Therefore, the NCLT gave order accordingly to pay the fine for this violation and then dispose off the Compounding Application.
This was a clear case dealing with the Compounding application where the application itself was sufficient to come to the conclusion of the case. The Company accepted its mistake by filing the Compounding Application in the NCLT and therefore, was in a situation to get paid a fine for the violations committed.
 M/s Sand Land Real Estates Pvt. Ltd., In Re.
 Registrar of Companies.
 National Company Law Tribunal.
 The Companies Act, 2013.
 The Companies Act, 2013, s. 450.
 The Companies Act, 2013, s. 178(8).
 The Companies Act, 2013, s. 149.
 The Companies Act, 2013, s. 149(1).
 The Companies Act, 2013, s. 177.
 The Companies Act, 2013, s. 134(3).
 The Companies Act, 2013, s. 177(9).
 The Companies Act, 2013, s. 178.