| CASE NAME | The Registrar of Companies, West Bengal vs. Karan Kishore Samtani |
| CITATION | (24.06.2020-NCLAT): MANU/NL/0279/2020 |
| COURT | National Company Law Appellate Tribunal (NCLAT) |
| PETITIONER | The Registrar of Companies, West Bengal |
| RESPONDENTS | Karan Kishore Samtani |
| DECIDED ON | 24 June, 2020 |
INTRODUCTION
The case of The Registrar of Companies, West Bengal v. Karan Kishore Samtani was adjudicated by the National Company Law Appellate Tribunal (NCLAT) on June 24, 2020. The present appeal covers significant issues addressing the legal limits with respect to the number of directorships held by an individual under the Companies Act, 2013 and the compounding of offences for contravening corporate governance. The appeal serves to highlight the “significance of statutory compliance” and the ramifications arising from contraventions to corporate governance. This case deals with the limits on the number of directorships an individual can hold under Section 165 of the Companies Act, 2013, and the compounding of related offences under Section 441. Karan Kishore Samtani was found to be a director in more companies than allowed, prompting the RoC to seek enforcement of statutory penalties. The NCLAT clarified that while the NCLT has discretion in compounding, it cannot go below the minimum penalties prescribed by law. The judgment underscores the importance of strict compliance with corporate governance norms, accountability of directors, and protection of stakeholder interests. It reinforces the principle that statutory limits exist to ensure transparency and integrity in corporate management.
FACTS OF THE CASE
1. Parties Involved
- Appellant: The Registrar of Companies (“RoC”) for the state of West Bengal, represented by Mr. Sumit Kumar Jaiswal, Company Prosecutor. The RoC supervises corporate governance for the state, ensures compliance with the provisions of the Companies Act, and records companies as required by statute.
- Respondent: Karan Kishore Samtani, who was a director in many companies, represented by advocates Dhruv Surana and Ashish Choudhury and in consideration of Mr. Samtani’s involvement as an officer in over 20 companies which violated the legal limitations in the Companies Act.
2. Background of the Case
- The respondent was a director in more than 20 companies until March 31, 2015. This was before enhancing limits under section 165 of the Companies Act which limits individuals from being a director in more than 20 companies and no more than 10 public companies concurrently.
- On December 29, 2015, the respondent resigned from the directorship of Fabius Properties Pvt. Ltd. However, the intimation regarding his resignation was sent to the RoC on February 10, 2016.
- On January 27, 2016, RoC issued a show-cause notice to the respondent stating he was in violatation of section 165(1) of the Companies Act by being a director in over 20 companies concurrently.
3. Admission of Guilt and Compounding Request
- The Respondent accepted his guilt on the breach of directorship limit and gave a representation to the RoC seeking compounding of the offence in accordance with section 441(1) of the Companies Act, which provides a mechanism to compound offences according to the Act.
- The RoC sent the representation to the National Company Law Tribunal (NCLT) along with its report. The NCLT accepted the compounding application and imposed a fee of ₹50,000 on the Respondent. The RoC was aggrieved with the extension of fee so it filed an appeal to the National Company Law Appellate Tribunal (NCLAT) for the NCLT direction being lenient in directing the amount of fee for compounding “being too on the lesser side and completely contradictory to principles laid down in earlier judgements”.
4. Limitation of the Appeal
- The RoC contended that the appeal was filed within the 45 days limitation period which began to run upon receipt of a copy of the impugned order on the 5th day of December, 2018. The NCLAT agreed that the appeal had indeed been filed within limitation and it allowed processing of the appeal.
5. Previous Case References
- The RoC relied on some earlier cases to establish its contention of adhering to minimum penalties on statutory contraventions. The orders in those appeals emphasized that minimum penalties must be enforced to adhere to obtaining corporate governance principles.
ISSUES
- Overbearing Directorship: Did the respondent breach Section 165(1) of the Companies Act by serving as a director for over 20 companies, and what is the consequence of the same?
- Compounding Fees: Was it reasonable to take ₹50,000 as a compounding fee when considered in the context of the minimum penalty mandated in Section 165(6)?
- Law Cases: How useful is it to consider past cases for the purposes of assessing the application of interpreting penalty provisions for a breach of the Companies Act?
- Judicial Discretion: To what extent can the NCLT exercise discretion in penalizing a transgression of the Companies Act, including any factors that would fall within the criteria of being appropriate?
CONTENTIONS
APPELLANT’S CONTENTIONS
- Directorship Limit Violation: The RoC maintained that the respondent violated Section 165(1) of the Companies Act when they acted as a director in excess of 20 companies and, in detection, he was contravening the limitation applied by the statute.
- Minimum Penalty: The appellant noted that the fee as compounded ordered by the NCLT was less than the prescribed minimum penalty of ₹5,000 day which would amount to ₹13,60,000 based on 272 days of violation and was considerably more than the NCLT imposed fee of ₹50,000.
- Judicial Precedents: The RoC used several cases to illustrate that the minimum penalty must be applied in cases where there is contravention. The RoC indicated that the NCLT’s order discounted the violation and more importantly set out a dangerous precedent for future contraventions.
- Increase Penalty: The appellant asked that the NCLAT set aside the NCLT’s order and impose the minimum prescribed penalties as stated in law, but also that the penalties should provide for a deterrent in corporate governance.
RESPONDENT’S CONTENTIONS
- Timing of Resignation: The respondent argued that his resignation from the board was effective within the legally prescribed period; in other words, he did not violate the Act because he resigned, in any event, within the law’s bounds.
- Good Faith: The respondent also argued that he acted in good faith and had no idea of the legal consequences of holding multiple directorships, and that a violation of a law, or a statute, did not constitute negligence to care or a breach of the law.
- Judicial Discretion around Penalty: The respondent’s lawyer suggested that the NCLT had an element of discretion to impose a penalty depending on the case circumstances and that given the breach a nominal fee was borderline acceptable.
- Technical violation: the respondent argued that it was a merely technical violation, that it had no impact upon a stakeholder or public interest in any manner, and that was sufficient reason for a tax penalty.
JUDGMENT
- Violation Establishing: The NCLAT found that pursuant to section 165(1) of the Companies Act the respondent served as a director in excess of 20 companies. The tribunal stated the fundamental importance of complying with a limit to serve as a director to uphold good corporate governance.
- Minimum Penalty upheld: The tribunal held that the NCLT was in error for compounding the penalty at ₹50,000, or below the minimum amount. The NCLAT stated the need to impose a minimum fine of ₹5,000 per day which meant a total of ₹13,60,000 as a penalty for the number of days of violation.
- Judicial discretion: The NCLAT stated that the NCLT has the discretion of imposing the penalty, but it must operate under the veil of the framework set by the statute. The tribunal framed it to the effect that noted NCLT has judicial discretion and could not deviate to impose less than what the statute mandated, the minimum amount of the penalty.
- Final order: The NCLAT ordered that the adjusted amount payable by the respondent was ₹13,10,000 within 60 days and stressed the need for compliance with the statutory provisions. The Registrar of Companies was ordered to ensure compliance with the order.
- Appeal Allowed: The appeal was permitted, and the order of the NCLT was reversed because of the clear mistake which was not to impose a minimum penalty. The NCLAT emphasized the continued observance of the statute in order for integrity of corporate governance to persist.
ANALYSIS OF THE JUDGMENT
Legal Consequences- The decision in this case is to support a rigorous application of corporate governance legislation in India, especially related to directorship thresholds. The NCLAT made it clear that an increase of that threshold requires that directors must comply with duties, which leads to the integrity of the corporate process.
Significance of Corporate Governance- The decision serves to reinforce the importance of corporate governance for providing transparency and accountability within companies. Strict adherence to the limits on directorship ensures that directors do not put themselves in a position of conflicts of interest or unduly influence others at the same time in conducting the affairs of multiple premises.
Consideration of Mitigating factors- The NCLAT dismissed all of the Respondent’s claims of acting in good faith and with no intention of grossly breaching the penalties as part of it’s decision. In delivering the ruling, this particular part gives an important reminder that directors must fiduciary responsibilities to properly identify to the best of their ability and they are expected to be accountable in understanding their legal obligations to the Companies Act to avoid finding themselves in this incident.
CONCLUSION
The case illustrates the need to comply with director limitations and the legal consequences of transgressions to those limitations.
The decision of the Tribunal reasserts the absolute necessity to comply with statutory requirements and the results of exceeding operator limits under the statutory framework of corporate governance. The clarification by the NCLAT of the base penalty finds directors under existing governance standards in India accountable for their actions under the corporate governance regulatory framework.
This case also established a balance around the relationship of strict compliance with statutory requirements while recognizing mitigation. The tribunal’s imposition of the minimum penalty evidenced an effort to apply the law while allowing for mitigation in each case. As corporate governance laws are consistently in a state of evolution, this decision has the potential to inform future enforcement of limits on directors and governing liabilities to enforce compliance with the Companies Act as the law applies if and where they are exceeded.
This case speaks to the overall role of enforcement bodies (and future enforcement), in establishing standards of corporate governance practices and the protections of stakeholder interests through holding directors accountable for their actions within the framework of the statute and statutory limits. This should serve as a to each and every director in India to understand the legal limits under the Companies Act that relates to your role as director of a corporation.
‘This article has been written by Tamanna Jain from University Five Year Law College, University of Rajasthan.’
