2025 (2) TMI 964 - HC - Companies Law

Violation of Section 197 (3) 197 (9) of Companies Act and Rule 7 (2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 - effect of amendment to Section 197 (15) of the Companies Act 2013 which substituted the expression punishable with fine with penalty - retrospective effect to offenses allegedly committed before the amendment came into force or not - HELD THAT - The provisions contained in Section 197 (15) was amended vide Companies (Amendment) Act 2019 by Central Act No. 22/2019. A bare perusal of the amendment Act is sufficient to come to the conclusion that Section 197 (15) has been substituted by the amended provisions. In this context in the absence of anything to the contrary in the amendment the substitution of Section 197 (15) vide amendment w.e.f. 02.11.2018 would relate back to the date of original provision of the year 2013 and in the light of the undisputed fact that the alleged offences are said to have been committed in the year 2016 it is opined that the amended provision of Section 197 (15) would not apply even in relation to the offences said to have been committed in the year 2016. Under these circumstances having regard to the amendment to Section 197 (15) vide amended Act 2019 Central Act No. 22/2019 w.e.f 02.11.2018 the impugned proceedings as against the petitioner clearly are not maintainable and same deserves to be quashed. Conclusion - The amendment to Section 197 (15) of the Companies Act 2013 applies retrospectively thereby affecting the maintainability of proceedings initiated under the pre-amendment provisions. The complaint and order of cognizance against the petitioner on the file of the Special Court for Economic Offences Bengaluru are hereby quashed - Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

a. Whether the amendment to Section 197 (15) of the Companies Act, 2013, which substituted the expression "punishable with fine" with "penalty," applies retrospectively to offenses allegedly committed before the amendment came into force.

b. Whether the proceedings initiated against the petitioner under the pre-amendment provisions of Section 197 (15) are maintainable given the amendment.

2. ISSUE-WISE DETAILED ANALYSIS

Issue a: Retrospective Application of the Amendment to Section 197 (15)

- Relevant legal framework and precedents: The amendment to Section 197 (15) of the Companies Act, 2013, was brought into effect by the Companies (Amendment) Act, 2019, effective from 02.11.2018. The amendment replaced the provision for punishment with a fine with a penalty structure. The petitioner argued that this amendment should apply retrospectively, based on precedents such as Commissioner of Central Excise and Service Tax Vs. Fosroc Chemicals (India) P. Ltd. and Government of India Vs. Indian Tobacco Association, which discuss the retrospective nature of amendments made by substitution.

- Court's interpretation and reasoning: The Court considered the principle that when a legislative amendment substitutes a provision, it is generally intended to be read as if the altered words had been written into the original Act from its inception. The Court noted that the amendment did not introduce a substantive change that would impose a new penalty or create a new offense but merely altered the mode of penalty.

- Key evidence and findings: The Court found that the amendment to Section 197 (15) was intended to be retrospective, as it was a substitution rather than a repeal and reenactment. The Court relied on the absence of any express provision indicating a contrary intention in the amendment.

- Application of law to facts: The Court applied the principle of beneficial construction, which suggests that amendments that mitigate the severity of the law should be applied retrospectively to benefit the accused.

- Treatment of competing arguments: The respondent argued that the amendment should not apply retrospectively as the alleged offenses occurred before the amendment. However, the Court found this argument unpersuasive, given the nature of the amendment.

- Conclusions: The Court concluded that the amendment to Section 197 (15) should apply retrospectively, covering the period during which the alleged offenses were committed.

Issue b: Maintainability of Proceedings Under Pre-Amendment Provisions

- Relevant legal framework and precedents: Prior to the amendment, Section 197 (15) stipulated punishment with a fine for contraventions. The amendment replaced this with a penalty structure, altering the nature of the contravention from an offense to a penalized act.

- Court's interpretation and reasoning: The Court reasoned that since the amendment was retrospective, the proceedings under the pre-amendment version of Section 197 (15) were not maintainable. The Court emphasized that the amendment sought to ease the regulatory burden and promote ease of doing business by shifting certain contraventions to an in-house adjudication process.

- Key evidence and findings: The Court noted that the amendment was part of a broader legislative intent to reduce the number of prosecutions for technical or procedural lapses, as reflected in the Statement of Objects and Reasons for the amendment.

- Application of law to facts: By applying the retrospective amendment, the Court found that the proceedings initiated under the old provisions were no longer applicable.

- Treatment of competing arguments: The respondent's argument that the proceedings should continue under the old provisions was rejected, as the Court found the amendment to be clarificatory and retrospective.

- Conclusions: The Court concluded that the proceedings against the petitioner under the pre-amendment provisions of Section 197 (15) were not maintainable and should be quashed.

3. SIGNIFICANT HOLDINGS

- The Court held that the amendment to Section 197 (15) of the Companies Act, 2013, applies retrospectively, thereby affecting the maintainability of proceedings initiated under the pre-amendment provisions.

- The Court stated: "The substitution of Section 197 (15) vide amendment w.e.f. 02.11.2018 would relate back to the date of the original provision of the year 2013."

- The Court quashed the complaint dated 18.06.2022 and the order of cognizance dated 22.06.2022 against the petitioner, as the proceedings were not maintainable under the amended provision.

- The Court preserved the respondent's right to take appropriate action in accordance with Section 454 of the Companies Act, which provides for an adjudication process for penalties.