MCA imposes penalty for holding directorships in violation of Section 165

In recent times, regulatory compliance within the corporate landscape has become increasingly stringent. The Ministry of Corporate Affairs (MCA) in India, entrusted with overseeing corporate governance and ensuring statutory compliance, has been steadfast in its efforts to uphold the integrity of corporate entities. One such significant regulation is Section 165 of the Companies Act, 2013, which sets limits on the number of directorships an individual can hold concurrently. This provision aims to prevent overextension of directors’ responsibilities and safeguard against potential conflicts of interest. In a recent adjudication order by the Registrar of Companies (ROC), Tamil Nadu, we witness the enforcement of penalties against a director found in violation of Section 165, shedding light on the consequences of non-compliance in corporate governance.

Appointment of Adjudicating Officer:

The Ministry of Corporate Affairs, through a Gazette Notification, appoints adjudicating officers to preside over cases of alleged violations under the Companies Act, 2013. These officers exercise powers conferred by relevant sections of the Act and associated rules. In the case at hand, the Registrar of Companies, Chennai, assumes the role of the adjudicating officer.

Company and Director Profile:

Mr. B. Kannan, holding a Director Identification Number (DIN), stands accused of contravening Section 165 of the Companies Act, 2013. Operating from his address in Coimbatore, Mr. Kannan’s directorship activities across multiple companies have come under scrutiny.

Legal Framework:

Section 165 of the Companies Act, 2013, delineates the permissible number of directorships an individual can hold concurrently. Notably, the provision restricts the number of directorships to twenty companies, with a further limitation on the number of directorships in public companies. Violation of this section incurs penalties as delineated in Sub-section 6, which stipulates a daily fine for each day of non-compliance.

Facts of the Case:

The ROC Chennai, upon investigation, found Mr. B. Kannan holding directorships in excess of the statutory limits specified in Section 165. A detailed tabulation of the companies and corresponding appointment dates underscores the extent of the violation. Despite issuance of a Show Cause Notice and subsequent legal proceedings, Mr. Kannan’s contravention persisted.

Adjudication Hearing:

Following a legal process that included hearings and submissions from both parties, Mr. Kannan admitted to the violation and expressed willingness to accept the prescribed penalty. This acknowledgment paved the way for the adjudicating officer to assess the quantum of penalty warranted.

Decision and Penalty Imposition:

Based on the evidence presented and Mr. Kannan’s admission of guilt, the adjudicating officer concluded that the director had indeed breached Section 165 of the Companies Act, 2013. A penalty of Rs. 2,00,000 (Rupees Two Lakhs) was imposed, in line with the provisions of Sub-section 6 of the Act. This penalty reflects the cumulative duration of the violation and serves as a deterrent against future infractions.

Compliance and Appeal Mechanism:

Mr. Kannan is instructed to remit the imposed penalty through the designated online portal within ninety days. Failure to comply with this directive may result in further penalties or legal consequences as outlined in the Companies Act, 2013. Additionally, provision for appeal exists, allowing aggrieved parties to challenge adjudication orders before the Regional Director, Ministry of Corporate Affairs, within a specified timeframe.

Conclusion:

The adjudication order against Mr. B. Kannan underscores the MCA’s commitment to upholding regulatory standards and enforcing corporate governance norms. By penalizing violations of Section 165, the authorities seek to instill accountability among directors and promote transparency in corporate practices. This case serves as a reminder to corporate entities and directors alike of the importance of adhering to statutory provisions and fostering a culture of compliance within the corporate ecosystem.

*****

GOVERNMENT OF INDIA
MINISTRY OF CORPORATE AFFAIRS
OFFICE OF REGISTRAR OF COMPANIES, TAMIL ANDAMAN & NICOBAR ISLANDS, CHENNAI
II FLOOR, C- WING SHASTRI BHAVAN 26, HADDOWS ROAD NUNGAMBAKKAM, CHENNAI-6

F.NO.ROC/CHN/KANNAN /ADJ/S.165/2024 DATE; 20 MAR 2024

ADJUDICATION ORDER UNDER SECTION 165 OF THE COMPANIES ACT, 2013 IN THE MATTER OF MR..B.KANNAN (DIN:05149913)

1. Appointment of Adjudicating Officer:-

The Ministry of Corporate Affairs vide its Gazette Notification No. A-42011/112/2014-Ad.II, dated 24.03.2015 has appointed Registrar of Companies, Chennai as Adjudicating Officer in exercise of the powers conferred by section 454(1) of the Companies Act, 2013 (hereinafter referred as Act or Companies Act, 2013) r/w Companies (Adjudication of Penalties) Rules, 2014 for adjudging penalties under the provisions of this Act.

2. Company: –

Whereas, Mr. B. Kannan hereinafter referred as the Director under the Companies Act, 2013 having Director Identification Number (DIN)- 05149913 and having his address at 130, Plot No. 5, Surendra Nagar, 1st Cross Street, Adambakkam, Chennai 600088 now residing at B-7, Swagath NRI Apartments, Visuwasapuram, Sarvanampatti, Coimbatore-641035.

3. Section and Penal Provision as per Companies Act, 2013

Section 165 of the Companies Act, 2013- Number of Directorships provides –

1) No person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time:

Provided that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten.

6) If a person accepts an appointment as a director in violation of this section, he shall be liable to a penalty of two thousand rupees for each day after the first during which such violation continues, subject to a maximum of two lakh rupees.

4. Facts about the case:

That as per the records of ROC Chennai it is noticed that the Mr. B Kannan ( DIN 05149913) holding directorship of companies incorporated under the Companies Act, in excess of the limits prescribed under the provisions of Section 165 of the Companies Act, 2013.

Whereas, Shri. B. Kannan was holding directorship in the following 29 companies as tabular below:

(i) Whereas, the ROC Chennai had issued Show Cause Notice to Shri. B .Kannan U/s.165 of the Companies Act, 2013 on 23.02.2016. After that filed a complaint in EOCC No.46 /2016 before the Court of Additional Chief Metropolitan Magistrate Economic Offences, Egmore, Chennai.

(ii) Whereas, Mr. B. Kannan had filed a petition before the Hon’ble High Court of Madras in CRL 0.P No. 2735 of 2017 to quash the complaint filed in EOCC No. 46 of 2016. Further, the penal provisions of Section 165 of the Companies Act, 2013 has been amended and substituted with penalty provision as per the Companies (Amendment)Act, 2019.

(iii) Whereas, the Hon’ble High Court of Madras vide Order dated 04.01.2023 passed an Order that “the complaint in EOCC No.46 of 2016 Add. Chief Metropolitan Magistrate Economic Offence No. 1 at Ego more Chennai is transferred to the adjudicating authority appointed under the Companies Act to adjudicate the contravention committed by the petitioner in terms of Section 454 r/w 165(6) of the Companies Act, 2013‘.

5. Adjudication Hearing:

Pursuant to the order of the Hon’ble High Court, Madras, the Adjudicating Authority has issued Notice of Hearing on 12.02.2024 by fixing the hearing on 19.02.2024 at 12:30 PM. Pursuant to the said notice fixing the date of hearing on 19.02.2024, Mr. B. Kannan has appeared in person before the undersigned and made submissions that ” the said violation may be adjudicated and accepted to pay the penalty as prescribed under Section 165(6) of the Companies Act, 2013“.

6. Decision

Having considered the facts and circumstances of the case and after taking into account the factors above, it is concluded that Shri. B. Kannan was holding directorships in more than 20 (twenty) companies before the Commencement of this Act i.e, 01.04.2014. Further, as per Section 165(3) — “any person holding office as director in companies more than the limits as specified in sub-section (1) immediately before the commencement of this Act shall, within a period of one year from such commencement i.e 01.04.2015, (a) choose not more than the specified limit of those companies in which he wishes to continue to hold the office as director; (b) resign his office as director in the other remaining companies; and (c) initiate the choice made by him under clause (a), to each of the companies in which he was holding the office of director before such commencement and to the Registrar having jurisdiction in respect of each such company. However, it is observed that Mr. B. Kannan was holding the directorship of more than 20 companies w.e.f 18.07.2013, after commencement of the Act within one year i.e, from 01.04.2015 and reduced it to 20 or below 20 companies on 28.06.2017 as per the table mentioned in Para 4. So, there is a contravention of provision of Section 165 for a period of 820 Days from 01.04.2015 to 28.06.2017. This resulted in violation of the provisions of Section 165 of the Companies Act, 2013.

Accordingly, I am inclined to impose a penalty as prescribed under Sub-section 6 of Section 165 of the Companies Act, 2013. The details of the penalty imposed on the director as shown in the below table:

Therefore, in view of the above said violation, in exercise of the powers vested to the undersigned under Section 454(1) & (3) of the Companies Act, 2013 a penalty of Rs.2,00,000/- (Rupees Two Lakhs) on the Director under Section 165(6) of the Companies Act, 2013.

7. The said amount of penalty shall be paid online by using the website www.mca.gov.in(Misc. head) within 90 days of receipt of this order and intimate this office with proof of penalty paid.

8. Whereas Appeal against this order may be filed with the Regional Director (SR), Ministry of Corporate Affairs, 5th Floor, Shastri Bhavan, 26 Haddows Road, Chennai-600006, Tamil Nadu within a period of sixty days from the date of receipt of this order, in Form ADJ [available on Ministry website mca.gov.in] setting forth the grounds of appeal and shall be accompanied by a certified copy of this order. [Section 454(5) & 454(6) of the Act read with Companies (Adjudicating of Penalties) Rules, 2014].

9. Your attention is also invited to section 454(8) of the Act in the event of non-compliance of this order, “(8)(i) Where company fails to comply with the order made under sub­section (3) or sub-section (7), as the case may be within a period of ninety days from the date of the receipt of the copy of the order, the company shall be punishable with fine which shall not be less than twenty five thousand rupees but which may extend to five lakh rupees.

(ii) Where an officer of a company or any other person who is in default fails to comply with the order made under sub-section (3) or sub-section (7), as the case may be within a period of ninety days from the date of the receipt of the copy of the order, such officer shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.”

(B. SRIKUMAR,ICLS)
REGISTRAR OF COMPANIES
TAMILNADU, CHENNAI.
ADJUDICATING OFFICER