HOLDING OF DIRECTORSHIP OF COMPANIES IN EXCESS OF THE LIMIT - AN OFFENCE?

[Mr. M. GOVINDARAJAN]

Number of directorship

The company is non existing judicial entity run by the Board of Directors.  The Companies Act, 2013 (‘Act’ for short) provides restriction on the number of companies that a person may have directorship.  Section 165(1) of the act provides that no person, after the commencement of the Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time.  The maximum number of public companies in which a person can be appointed as a director shall not exceed ten.

For reckoning the limit of directorships of twenty companies-

• the directorship in a dormant company shall not be included;
• a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included.

Section 165(5) of the Act provides that no person shall act as director in more than the specified number of companies,-

• after dispatching the resignation of his office as director or non-executive director thereof, in pursuance of clause (b) of sub-section (3); or
• after the expiry of one year from the commencement of this Act,

whichever is earlier.

Punishment

Section 165(6) of the Act provides for punishment in case of contravention of Section 165 of the Act.  The said section provides that if a person accepts an appointment as a director in violation of this section, he shall be liable to a penalty of Rs.2000/- for each day after the first during which such violation continues, subject to a maximum of Rs. 2 lakh. This is with effect from 28.09.2020.

Holding excess directorship - an offence?

In this article we may discussed on the question as to whether  any person holding directorship more than 20 companies as prescribed under Section 165 of the Act, whether such act amounts to contravention of Section 165 and he is liable for punishment.

In B. KANNAN VERSUS THE DEPUTY REGISTRAR OF COMPANIES, TAMIL NADU - 2023 (5) TMI 936 - MADRAS HIGH COURT, a complaint was filed against the petitioner alleging that he has violated the provisions of the Act  under Section 165(5) read with Section 165(6).  The petitioner filed the present writ petition challenging the complaint and prayed for quashing the same.

The petitioner submitted the following before the High Court-

• Out of the 29 companies 5 companies were struck off prior to the filing of the complaint.
• The complaint quotes Section 165(6) of the Act as the penal provision for the violations.
• Section 165(6) of the Act cannot be treated as the penal provision prescribed under section 165(1) and (3) of the Act, since the said section speaks about accepting an appointment.
• Accepting of appointment is different from holding the position of directorship.
• Therefore Section 165(6) of the Act cannot be the penal provision for the above said violations.
• The penal provisions for violation of Section 165(1)(3) and (5) of the Act  would only be under Section 450 of the Act.
• The Companies (Amendment) Act, 2020 which came into effect from 21.12.2020 had reduced the rigor of punishment prescribed under section 165(6) of the Act.
• The violation under section 165(6) of the Act is no longer an offence triable by a Magistrate. 
• Since the rigor of the law has been mollified the beneficial legislation has to be applied in favor of the accused and the existing prosecution also has to be transferred to the in-house adjudication mechanism.
• The intention of the legislature was that the company must be able to do business easily and comply with the requirements and opportunity should be given to the companies to comply with the provisions of the Act and only if they have failed to comply with the direction, it would constitute the offence.

The respondent submitted the following before the High Court-

• The points relating to whether some of the companies were struck off prior to the prosecution are factual in nature and cannot be gone into section 482 CrPC petition.
• The violation alleged in the complaint is holding directorship in excess of the prescribed limit and Section 165(6) if the penal provision for such a violation.
• The subsequent amendments cannot take retrospective effect and the pending prosecutions have to be continued in the same manner as if the amended Act did not come into existence in view of Section 6(A) of the General Clauses Act.

The High Court considered the submissions of the both the parties to the present writ petition.  The High Court observed that the complaint is of the year 2017.  The law [section 165(6)] as stood on the date of complaint for the alleged contravention committed by the petitioner is that if a person accepts an appointment as a director in contravention of sub-section (1) he shall be punishable with fine which shall not be less than Rs.5000/- but which may extend to Rs.25000/-for every day after the first during which the contravention continues.

At the relevant point the contravention was considered as an offence. After amendment to the Act in 2020 the contravention is now liable for penalty by adjudicating officer appointed by the Central Government.  If the contravention is liable for fine, it is triable by a Magistrate.  Penalty in this case is to be imposed by the Adjudicating Authority and hence the contravention is no longer an offence.  The amendment Act not only mollified the punishment prescribed for contravention but also the procedure for determining the penalty.

The High Court found that the Parliament had made amendments for the purpose of ease of doing business and also for reduction of prosecution that are filed in the special Court.  The High Court found that there is no reason why the said amendment cannot be applied in favor of the accused in the pending prosecution.  The accused shall also be entitled to the benefit of Explanation II to section 165(1) of the Act.

The High Court allowed the writ petition.  The High Court directed the complaint in  Additional Chief Metropolitan Magistrate, Economic Offences No.1 at Egmore, Chennai is transferred to the Adjudicating Authority appointed under the Act to adjudicate the contravention committed by the petitioner in terms of section 454 read with section 165(6) of the Act.