On July 9, 2024, the Regional Director of the Western Region at the Ministry of Corporate Affairs, Mumbai, issued a critical ruling on the appeal filed by Khed Developers Limited. This case centers around the company’s failure to establish a compliant Audit Committee, resulting in a significant financial penalty. The appeal, challenging an earlier adjudication order, sought to overturn a ₹12 lakh fine imposed for contraventions of the Companies Act, 2013.
Detailed Analysis
Background of the Case
Khed Developers Limited and several of its officers faced a penalty due to non-compliance with Section 177 of the Companies Act, 2013, read with Rule 4 of the Companies (Appointment of Directors) Rules, 2014. The Registrar of Companies, Pune (RoC Pune), had earlier imposed a penalty totaling ₹12 lakh on the company and its officers for not constituting a proper Audit Committee, which is mandated for companies of certain sizes and classifications.
The Adjudication Order
On February 26, 2024, RoC Pune issued an adjudication order imposing penalties on Khed Developers and its Key Managerial Personnel (KMP) for the period during which the non-compliance occurred. The penalty breakdown was as follows:
- Khed Developers Limited: ₹5,00,000
- Praful Pramod Chepe (CEO): ₹1,00,000
- Rajeev Gopinath Shende (Director): ₹1,00,000
- Chandrakant Sonaba Bhalekar (Director): ₹1,00,000
- Santosh Kaluram Shinde (Director): ₹1,00,000
- Venkata Krishna Mogalapalli (Director): ₹1,00,000
- Shyam Bhaskar Deshpande (Director): ₹1,00,000
- Mahesh Dnyanoba Morampalle (Company Secretary): ₹1,00,000
Grounds for Appeal
Khed Developers filed an appeal under Section 454(5) of the Companies Act, 2013, arguing several points:
1. Non-Continuing Default: The company asserted that the default had been rectified and compliance with Section 177 was restored.
2. Financial Constraints: They argued that the penalty imposed was burdensome due to their limited financial resources, with the company relying solely on interest income.
3. Personal Hardship: Some officers, being senior citizens or retired, claimed they lacked the financial means to pay the penalty.
4. Legal and Procedural Issues: The appeal included references to various legal provisions and circulars, arguing that Independent Directors and Non-KMPs should not be held liable.
Hearing and Decision
During the hearing on July 3, 2024, Vishal N. Salunke, representing Khed Developers, reiterated the appeal’s arguments but admitted the contravention. He contended that Independent Directors should not be penalized, a point which was not previously raised. The Regional Director noted that while the contraventions were admitted, the appeal did not present sufficient grounds for overturning the penalty.
The Regional Director’s ruling upheld the original adjudication order, confirming the penalties imposed. It was determined that the contraventions were clear, and the penalty was consistent with the provisions of Section 178(8) of the Companies Act, 2013.
BEFORE THE REGIONAL DIRECTOR, WESTERN REGION
MINISTRY OF CORPORATE AFFAIRS, MUMBAI
Order No. Khed Developers/177/F94447265/2023-24/5599 Dated: 9 JUL 2024
APPEAL UNDER 454(5) OF COMPANIES ACT, 2013 AGAINST ORDER PASSED FOR OFFENCES COMMITTED UNDER SECTION 177 OF THE COMPANIES ACT, 2013 READ WITH RULE 4 OF THE COMPANIES (APPOINTMENT OF DIRECTORS) RULES, 2014.
In the matter of KHED DEVELOPERS LIMITED & ORS
| 1. | Khed Developers Limited. | Company |
| 2. | Praful Pramod Chepe | CEO |
| 3. | Rajeev Gopinath Shende | Director |
| 4. | Chandrakant Sonaba Bhalekar | – Director |
| 5. | Shyam Bhaskar Deshpande | Director |
| 6. | Venkata Krishna Mogalapalli | Director |
| 7. | Santosh Kaluram Shin.de | – Director |
| 8. | Mahesh Dnyanoba Morampalle | Company Secretary |
… Appellants
Through: Vishal N. Salunke, Practicing Company Secretary.
HON’BLE REGIONAL DIRECTOR (WESTERN REGION)
ORDER
Appeal under sub-Section (5) of Section 454 of the Companies Act, 2013 (Act) r/w the Companies (Adjudication of Penalties) Rules, 2014 (Rules) has been filed by Khed Developers Limited (Company) having CIN U70102PN2008PLC131478 and, its Officers, against Order No. RoCP/ ADJ/177/23-24/ KI1ED/13/ 6/3101 dated 26/02/2024 (ROC Order) of Registrar of Companies, Pune for violating provisions of Section 177 of the Act read with Rule 4 of the Companies (Appointment of Directors) Rules, 2014.
2. The appeal lies within the jurisdiction of the Regional Director, Western Region, Ministry of Corporate Affairs, Government of India.
3. The Registrar of Companies, Pune (RoC Pune) vide Adjudication Order dated 26/02/2024 imposed penalty under Section 178(8) of the Act on KMP who is in default for the period from 21/12/2020 till the date of cessation of KMP i.e. 15/06/2022 arid in absence of the KMP from 16/06/2022 till 12/12/2022, the penalty has been imposed on all directors who are in default for not constituting proper ‘Audit Committee’ consisting of a minimum of three directors with Independent Directors forming a majority as per Section 177 of the Act as under:
| Penalty imposed on Company / Director (s) | Designation | Date of Appointment and Cessation | Period of Default | Maximum penalty imposed u/s.178 (In Rs.) |
| Khed Developers Limited | – | – | 21/12/2020 to 12/12/2022 | 5,00,000 |
| Praful Pramod Chepe | CHO (KMP) | 29/09/2018 to 15/06/2022 | 21/12/2020 to 15/06/2022 | 1,00,000 |
| Rajeev Gopinath Shende | Director | 31/12/2021 to till date | 16/06/2022 to 12/12/2022 | 1,00,000 |
| Chandrakant Sonaba Bhalekar | Director | 24/06/2011 to 16/03/2023 | 16/06/2022 to 12/12/2022 | 1,00,000 |
| Santosh Kaluram Shinde | Director | 31/12/2021 to till date | 16/06/2022 to 12/12/2022 | 1,00,000 |
| Venkata Krishna Mogalapalli | Director | 31/12/2021 to 30/08/2022 | 16/06/2022 to 30/08/2022 | 1,00,000 |
| Shyam Bhaskar Deshpande | Director | 31/12/2021 to 30/ 08/ 2022 | 16/06/2022 to 30/08/2022 | 1,00,000 |
| Mahesh Dnyanoba Morampalle | CS | 17/08/2020 to till date | 21/12/ 2020 to 12/12/2022 | 1,00,000 |
| TOTAL | 12,00,000 | |||
4. Appellants have filed Form-ADJ vide SRN F94447265 dt. 12/04/2024. As per provisions of sub-Section (6) of Section 454, every appeal under sub-section (5) shall be filed within sixty (60) days from the date on which the copy of the order made by the adjudicating officer is received by the aggrieved person. On examination of the application/appeal, it is seen that the said application/appeal has been filed within 60 days from the date of passing of the adjudication order.
5. Grounds of Appeal & Relief sought:
a) The default is not continuing as on the date of Appeal and the Appellants have adhered to the provisions of Section 177 of the Act.
b) The company was not able to find the appropriate candidate due to which company failed to appoint second Independent Director and could not constitute a proper Audit Committee.
c) Company’s operating expenses are met from interest income from the fixed deposit with banks and company has not been generating any operating income.
d) The shareholders being the farmer, mobilizing any financial assistance is not possible to meet this kind of penalty.
e) Some of the Officers arc senior citizens / retired from the services having no financial resources to meet any kind of penalty.
f) That the order passed by Adjudicating Officer may set aside.
g) Waive of the penalty imposed on the company and its directors.
6. The company vide Addendum Application dt.27/06/2024 has stated as follows:
a) The company has relied upon definition of Officer in default as defined under Section 2(59) and Section 2(60) of the Act.
b) The company has also relied upon General Circular No.1/2020 dt.02/03/ 2020 issued by the Ministry of Corporate Affairs wherein, clarification on prosecutions filed or internal adjudication proceedings initiated against Independent Director, Non-promoters and Non-KMP Non-Executive Directors were given.
c) Section 149(2) is a non obstante clause which provides that the liability of Independent Director or Non-Executive Director not being promoter or Key Managerial Personnel would be only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he has acted diligently.
d) The responsibility of the Non-Executive Directors, ordinarily arise in cases, where there arc no WTDs and KMPs.
e) All care must be taken to ensure that civil or criminal proceedings are not unnecessarily initiated against the Independent Directors or Non-Executive Directors, unless sufficient evidence exists to the contrary.
f) During the period from 16/06/2022 till 12/12/2022 i.e. after the resignation of Mr.Praful Chepe as CEO and CFO of the company till the appointment of current Whole-time Director and Chief Financial Officer on 13/12/2022, Mr. Mahesh Morampalle was acting as the Whole-time Company Secretary (KMP). Therefore, KMP in that period shall alone be held liable as the vacancy in the office of other KMPs.
g) Taking into consideration the above facts, the Independent Director and Non-Executive Directors (non-promoter) should not be held liable, and their penalty be waived.
7. The matter was posted for hearing as per Section 454(5) r/w Section 454(7) of the Act on 03/07/2024. Vishal N. Salunke, Practicing Company Secretary appeared on behalf of Appellants as their authorized representative. The authorized representative reiterated the submission made by the applicants in their application and have admitted the contravention of Section 177 & 178 of the Companies Act, 2013. The authorized representative has further argued that Sh. Rajeev Gopinath Shende is an independent director and not involved/having knowledge of such default, therefore, he should not be penalized in adjudication proceedings of ROC, Pune. I lowever, he has admitted that the same has not been raised while adjudication proceedings nor pleaded in appeal (adjudication) but submitted during argument.
8. The Company Secretary of the company also appeared and failed to explain as to how the Independent Director is discharging his duties under company law to ensure corporate governance and compliance of law by the company through officer/CS/authorized person and having no knowledge of the default of Section 177 & 178 of the Act. Thus, this argument is not accepted by Appellate Authority as Independent Director has also failed to discharge his duty to ensure compliance of Law at Board Level by ensuring that Executive Director/CS/In-charge Director shall place confirmation of compliance of Law at Board Meeting for information of the Board.
9. That the punishment for contravention of section 177 is prescribed under section 178(8) of the Companies Act, 2013 which states that “In case of any contravention of the provisions of Section 177, the company shall be liable to a penalty of Five lakh rupees and every officer of the company who is in default shall be liable to a penalty of one lakh rupees.”
10. Facts of the Case:
a) It is seen from MCA-21 records that the paid-up share capital of the company is Rs.571,081,974/- during the Financial Year from 01/ 04/ 2014 to 31/03/2022 and thus it is mandatory to constitute Audit Committee consisting of a minimum of three directors with Independent Directors forming a majority as per Section 177 of the Act.
b) However, as per the records it is observed that from 14/12/2016 to 12/12/2022, the company had only one Independent Director as against minimum number of two Independent Directors as required by 149(4) of the Act and Rule 4 of the Companies (Appointment of Directors) Rules, 2014 and the company has defaulted in appointment of Independent Directors on board and failed to constitute proper Audit Committee on board as per Section 177 of the Act read with Rule 4 of the Companies (Appointment of Directors) Rules, 2014. Thus, the company and its officers have violated the provisions of Section 177 of the Act read with Rule 4 of the Companies (Appointment of Directors) Rules, 2014 and are liable for penal action under Section 178(8) of the Act.
c) The penalty has been imposed on KMP who is in default for the period from 21/12/2020 till the date of cessation of KMP i.e. 15/06/2022 and in absence of the KMP from 16/06/2022 till 12/12/2022, the penalty has been imposed on all directors who are in default under Section 2(60) of the Act.
d) However, the said offence is ad judicable w.e.f. 21/12/2020.
In view thereof, there is no inherent defect in the Adjudication Order dt. 26/02/2024 and the same is in accordance with the provisions of the Act.
11. Taking into consideration the Adjudication Order of the Registrar of Companies, Pune; submissions made by the Appellants in their application, oral submissions of authorized representative during the hearing; I am of the considered view that there is no merit in the appeal, and accordingly, the Adjudication Order dated 26/02/2024 passed by ROC, Pune is ‘Confirmed’.
12. In view of the above, the present appeal is dismissed with directions to the appellants to pay penalty imposed by the Registrar of Companies, Pune vide Adjudication Order dt. 26/02/2024 within 90 days, failing which, Registrar of Companies, Pune, is directed to file prosecution under Section 454(8) of the Companies Act, 2013.
A copy of this order shall be published on the website of the Ministry of Corporate Affairs as per Rules.
Signed and sealed on 08th Day of July 2024.
(SANTOSH KUMAR)
REGIONAL DIRECTOR
WESTERN REGION, MUMBAI
