Challenging Excise Department’s Notice for Public Limited Company’s Change in Management via Director Rotation in West Bengal[1]
It is a common occurrence in West Bengal for companies to find themselves the subjects of show cause notices which often allege carrying out an unauthorised ‘Change in Management’ without the taking prior government approval, thereby being threatened to pay huge financial penalties.
Often, these notices fail to appreciate the nuances inherent in the normal workings of companies, erroneously conflating routine changes within the board of directors with a substantive alteration in management. Despite explicit exemptions provided within the regulatory framework, such nuances are often disregarded, necessitating a meticulous defence rooted in the provisions delineated within the West Bengal Excise (Change in Management) Rules, 2009 (the “WB Excise Rules“).
Before we delve into the defences, it is imperative to examine the relevant statutory provisions.
Rule 3(1)(d) of the WB Excise Rules which defines ‘Change in Management’:
“In case of Public Limited Company, any change in Directorship other than the appointment cessation of Independent Directors within the meaning of 149 of the Companies Act, 2013, or any change of shareholding amongst shareholders beyond 10% of the existing shareholding pattern.”
Rule 5(1)(e) of the WB Excise Rules regarding the payment of fees for change in management:
“(1) After getting approval of the State Government or the Excise Commissioner, as the case may be, the Collector shall allow change in management of a license after realizing the registration fee for initial grant of license similar to the one applicable for grant of a new excise license of the same category, of the same local area. The Collector shall also record such change in the concerned licence.
Provided that no registration fee for initial grant of license of license shall be payable for change in management in case of:
(e) death or change in management in the usual course of business of a club or a public limited company incorporated under the Companies Act, 1956;”
The term “usual course of business” as mentioned in the abovementioned Rule 5(1)(e) of the WB Excise Rules may be explained to be a continuous and regular activity that is conducted in a normal and organized manner. It encompasses ongoing operations related to a company and considers several factors such as precedence, periodicity and uniformity, meaning that the activity must have been conducted earlier, must be of continuous nature, and must be consistent with past history and patterns. In the context of a public limited company, the expiry of term by rotation and subsequent reappointment of directors is a standard practice in the usual course of business in accordance with the provisions of the Companies Act, 2013, specifically being sub-sections (6) and (7) of Section 152 of the Companies Act, 2013 in respect of retirement of directors by rotation.
Section 152 of the Companies Act, 2013 regarding Appointment of Directors:
“(6)(a) Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company shall—
(i) be persons whose period of office is liable to determination by retirement of directors by rotation; and
(ii) save as otherwise expressly provided in this Act, be appointed by the company in general meeting.”
“(6)(c) At the first annual general meeting of a public company held next after the date of the general meeting at which the first directors are appointed in accordance with clauses (a) and (b) and at every subsequent annual general meeting, one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office.”
“(6)(e) At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by appointing the retiring director or some other person thereto.”
“(7)(b) If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting…”
A bare perusal of the abovementioned provisions of the Companies Act, 2013 clearly indicates that the retirement of directors of a public limited company by rotation is a mandatory requirement, and their appointment on the happening of such retirement is a standard practice therefore making it in the ordinary and usual course of business. Furthermore, in the absence of the vacancy of the retired directors being filled up, the retiring directors are automatically deemed to have been reappointed. Therefore, in an alternate scenario, where no action would have been taken to reappoint directors, they would anyway have been deemed to be reappointed by virtue of the provisions of the Companies Act, 2013.
In the light of the abovementioned provisions, the alleged ‘Change in Management’ caused by such routine reappointments is incorrect as these reappointments are in accordance with the provisions of the Companies Act, 2013, thereby falling within the proviso of Rule 5(1)(e) of the WB Excise Rules.
In light of these statutory and regulatory provisions, the public limited company in question is well within its rights to challenge the validity of the show cause notice issued by the Excise Department particularly regarding routine director rotations causing alleged management changes and may request its withdrawal forthwith.
[1] Trisha Agarwala, Associate, Fox & Mandal, Kolkata
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