2023 (8) TMI 1615 - AT - Companies Law

Prayer for admission of petition - compounding of offences - advancement of an inter-corporate loan - violation of Section 185 of the Companies Act r/w. Section 441 of the Companies Act 2013 - HELD THAT - In the instant case it cannot be forgotten that the Appellant Suo moto voluntarily had sought Compounding of the Non-compliance / Violation of the Statutory Mandate enshrined in Section 185 of the Companies Act 2013 by filing a Petition before the Tribunal for Compounding of the Offence. It is to be remembered that in Law a Company is a Separate Juristic Entity vis- -vis its Directors and therefore can neither claim Reliefs nor Plead on their behalf. As such the Appellant / Managing Director of 2nd Respondent / Company to the extent of claiming Reliefs for its Erstwhile Directors is not maintainable in Law as opined by this Tribunal. The Appellant Company / a subsidiary of a Foreign Company the Company and the Directors are expected to comply with the provisions of Law true letter and spirit. In fact the Company and its Directors are liable for the relevant period to the maximum Fine of Rs.25, 00, 000/- in terms of Section 185 of the Companies Act 2013. 50. In the light of foregoing deliberations on a careful consideration of contentions advanced on behalf of the respective sides taking into account of the facts and circumstances of the present case in a holistic and conspectus manner keeping in mind that the Default remained for one year and six days this Tribunal comes to a consequent conclusion that in as much as the Appellant is liable for the Violations and Non-compliances committed by it by means of Section 185 of the Companies Act 2013 the impugned order dated 20.12.2018 in CP No. 615 / BB / 2018 passed by the National Company Law Tribunal Bengaluru Bench to the extent of imposing Compounding Fee on the Appellant and its Directors and Prosecution against Former Directors is free from any Legal Infirmities. Conclusion - The Appellant Company / a subsidiary of a Foreign Company the Company and the Directors are expected to comply with the provisions of Law true letter and spirit. In fact the Company and its Directors are liable for the relevant period to the maximum Fine of Rs.25, 00, 000/- in terms of Section 185 of the Companies Act 2013. Appeal dismised.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

1. Whether the Appellant, in his capacity as Managing Director, is liable for non-compliance with Section 185 of the Companies Act, 2013, concerning the advancement of an inter-corporate loan.

2. Whether the impugned order imposing a compounding fee on the Appellant and directing prosecution against former directors is valid and sustainable under the law.

3. Whether the amended Section 185 of the Companies Act, 2013, which imposes liability on every officer in default, applies retrospectively to the Appellant's case.

4. Whether the principles of natural justice were violated in the proceedings before the National Company Law Tribunal (NCLT), Bengaluru Bench.

ISSUE-WISE DETAILED ANALYSIS

1. Liability under Section 185 of the Companies Act, 2013:

Legal Framework and Precedents: Section 185 of the Companies Act, 2013, prohibits companies from advancing loans to directors or any other person in whom the director is interested, except in certain circumstances. The unamended version did not impose liability on officers in default, which was introduced in the amendment effective from 07.05.2018.

Court's Interpretation and Reasoning: The Tribunal interpreted that the Appellant, as the Managing Director, was liable for the non-compliance with Section 185, as the loan was advanced in violation of the statutory mandate.

Key Evidence and Findings: The loan of INR 3,604,000,000 was advanced to a fellow subsidiary, Hewlett Packard Enterprise GlobalSoft Pvt. Ltd., without adhering to the exceptions provided in the unamended Section 185.

Application of Law to Facts: The Tribunal found that the Appellant, being a director at the time of the loan advancement, was liable for the contravention of Section 185, despite the Appellant's contention that he was not an officer in default.

Treatment of Competing Arguments: The Appellant argued that the loan fell under exceptions and that the amended section should not apply retrospectively. The Tribunal dismissed these arguments, emphasizing the liability of directors under the Companies Act.

Conclusions: The Tribunal concluded that the Appellant was liable for the violations and upheld the imposition of the compounding fee.

2. Validity of the Impugned Order:

Legal Framework and Precedents: The Tribunal examined whether the order imposing fees and directing prosecution was consistent with the Companies Act and principles of natural justice.

Court's Interpretation and Reasoning: The Tribunal reasoned that the impugned order was valid as it was based on a clear contravention of Section 185, and the proceedings provided adequate opportunity for representation.

Key Evidence and Findings: The Appellant had filed for compounding the offence, acknowledging the contravention, which justified the Tribunal's order.

Application of Law to Facts: The Tribunal applied the law prospectively, holding the Appellant and directors accountable for the period of default.

Treatment of Competing Arguments: The Appellant's reliance on precedents for procedural fairness and retrospective application was considered but found inapplicable.

Conclusions: The Tribunal concluded that the impugned order was legally sound and did not violate any principles of natural justice.

3. Retrospective Application of Amended Section 185:

Legal Framework and Precedents: The amendment to Section 185, effective from 07.05.2018, imposes liability on officers in default, which the Appellant argued should not apply retrospectively.

Court's Interpretation and Reasoning: The Tribunal interpreted that the amendment did not apply retrospectively to the Appellant's case, as the loan was advanced before the amendment.

Key Evidence and Findings: The Tribunal noted the Appellant's role and the timing of the loan advancement, which predated the amendment.

Application of Law to Facts: The Tribunal applied the unamended Section 185, holding the Appellant liable under the provisions applicable at the time of the loan.

Treatment of Competing Arguments: The Appellant's argument on the prospective nature of substantive law was acknowledged but deemed irrelevant to the liability under the unamended section.

Conclusions: The Tribunal upheld the liability under the unamended Section 185, dismissing the retrospective application argument.

4. Principles of Natural Justice:

Legal Framework and Precedents: The principles of natural justice require fair hearing and opportunity to present one's case, as emphasized in various precedents cited by the Appellant.

Court's Interpretation and Reasoning: The Tribunal found that the proceedings before the NCLT provided sufficient opportunity for the Appellant to present his case and respond to allegations.

Key Evidence and Findings: The Appellant was represented by a Practicing Company Secretary, and there was no evidence of procedural unfairness.

Application of Law to Facts: The Tribunal applied the principles of natural justice, ensuring that the Appellant was heard and his submissions considered.

Treatment of Competing Arguments: The Appellant's claims of procedural unfairness and lack of opportunity were addressed and found unsubstantiated.

Conclusions: The Tribunal concluded that the principles of natural justice were not violated, and the proceedings were conducted fairly.

SIGNIFICANT HOLDINGS

Core Principles Established: The Tribunal reaffirmed the liability of directors under Section 185 of the Companies Act, 2013, for non-compliance with statutory mandates, emphasizing that procedural fairness was maintained throughout the proceedings.

Final Determinations on Each Issue: The Tribunal dismissed the appeal, upholding the compounding fee and prosecution directions, finding no legal infirmities in the impugned order.

Verbatim Quotes of Crucial Legal Reasoning: The Tribunal noted, "In light of foregoing deliberations, on a careful consideration of contentions advanced, on behalf of the respective sides, taking into account of the facts and circumstances of the present case, in a 'holistic and conspectus manner', keeping in mind that the 'Default', remained for one year and six days, this 'Tribunal', comes to a consequent conclusion, that in as much as the 'Appellant', is liable for the 'Violations', and 'Non-compliances' committed by it, by means of Section 185 of the Companies Act, 2013, the 'impugned order', dated 20.12.2018, in CP No. 615 / BB / 2018, passed by the 'National Company Law Tribunal', Bengaluru Bench, to the extent of 'imposing Compounding Fee' on the 'Appellant' and its 'Directors', and 'Prosecution' against 'Former Directors', is free from any 'Legal Infirmities'."