2023 (8) TMI 1614 - AT - Companies Law

Seeking to Compound the Offence u/s 185 of the Companies Act 2013 - prayed for an Imposition of Minimum Compounding Fees - advancement of an inter-corporate loan by Hewlett Packard Enterprise India Private Limited (HPE) to Hewlett Packard Enterprise GlobalSoft Private Limited (HPEG) - Violation of Section 185 of the Companies Act in respect to the Inter-Corporate Loan or not - HELD THAT - The 1st Respondent / Registrar of Companies Bengaluru had addressed a Letter dated 23.10.2018 to the 2nd Respondent / Company stating that the Compounding Application filed for Violation under Section 185 of the Companies Act was examined and further that Mr. Neelam Dhawan and Mr. Kiran Ramaswamy Belavadi the Appellants (in the instant Appeal) were also Officers in Default for the said Violation during the relevant period and they had not filed any Application to Compound the said Offence. The 2nd Respondent was directed by the 1st Respondent in the Letter dated 23.10.2018 to submit an Affidavit and Application in respect of the Appellants / Directors directly to the National Company Law Tribunal Bengaluru Bench within 15 days thereof failing which necessary Prosecution will be launched as per the Orders / Directions of the concerned Compounding Authority. In the instant Appeal the Appellants have come out with a plea that the Prohibition under the Unamended Section 185 of the Companies Act does not get attracted because of the Loans falls under one of the exceptions of the Unamended Section 185 of the Companies Act. Further the 2nd Appellant had resigned from the Board of HPEG on 05.01.2018 and the Loan was repaid by M/s. HPEG on 09.01.2018. Going by the definition of the term Officer and Officer who is in Default as mentioned in Sub-section 59 and 60 (2) of the Companies Act 2013 unerringly points out that the Appellants as Directors of the 2nd Respondent / Company were coming within the ambit of Officers as per Section 2 (59) of the Companies Act 2013 of the 2nd Respondent / Company- It cannot be brushed aside that Section 450 of the Companies Act 2013 enjoins the Statutory Authorities to fix Liability of the Officer in Default of the Offending Company. In the present case the Appellants have not filed a Petition for Compounding and in this regard the direction issued by the Tribunal to prosecute the Appellants cannot be found fault with as opined by this Tribunal - As per the Letter of the 1st Respondent / RoC Bengaluru dated 23.10.2018 the Two Directors have not filed the Application during the Defaulting Period and they are the Appellants in the instant TA No. 128 of 2021 (Comp. App (AT) No. 67 of 2019 on the file of the Principal Bench). Therefore the direction issued by the Tribunal in the impugned order dated 20.12.2018 in CP No. 615 / BB / 2018 to Prosecute the Appellants / Directors for not applying for Compounding of an Offence in terms of the Provisions of the Companies Act 2013 and the Rules made thereunder is free from any Legal Infirmities. Conclusion - The directors are liable for violations of Section 185 of the Companies Act 2013. The amendments introducing new penalties do not absolve directors of liability for past violations. Appeal dismissed.

ISSUES PRESENTED and CONSIDERED

The core issues considered in this judgment include:

Whether the advancement of an inter-corporate loan by Hewlett Packard Enterprise India Private Limited (HPE) to Hewlett Packard Enterprise GlobalSoft Private Limited (HPEG) constituted a violation of Section 185 of the Companies Act, 2013.
Whether the appellants, as directors of HPE, were liable for the non-compliance with Section 185 under the unamended provisions of the Companies Act, 2013.
Whether the amendments to Section 185 of the Companies Act, 2013, which introduced new penalties, could be applied retrospectively to impose liability on the appellants.
Whether the appellants were denied a fair opportunity to present their case, thereby violating principles of natural justice.
Whether the National Company Law Tribunal's (NCLT) order directing prosecution against the appellants was legally valid.

ISSUE-WISE DETAILED ANALYSIS

1. Violation of Section 185 of the Companies Act, 2013

Relevant legal framework and precedents: Section 185 of the Companies Act, 2013, prohibits companies from advancing loans to directors or to any other person in whom the director is interested, unless certain conditions are met. The appellants argued that the loan was advanced in the ordinary course of business and at an interest rate not lower than the Reserve Bank of India's prescribed rate, thus falling under the exceptions provided in the unamended Section 185.
Court's interpretation and reasoning: The Tribunal noted that the loan was advanced to a company where a common director existed, which constituted a violation of Section 185. The Tribunal found that the appellants, as directors, were responsible for the contravention.
Key evidence and findings: The Tribunal considered the minutes of the board meeting where the loan was approved and the subsequent repayment of the loan by HPEG. The Tribunal also noted the resignation of the common director from HPEG.
Application of law to facts: The Tribunal applied the provisions of Section 185 and concluded that the loan transaction did not meet the exceptions and thus constituted a violation.
Treatment of competing arguments: The appellants argued that the loan was not prohibited under the unamended Section 185, and even if it was, they were not liable as directors for the company's non-compliance. The Tribunal rejected these arguments, emphasizing the directors' role in approving the loan.
Conclusions: The Tribunal concluded that there was a violation of Section 185, and the directors were liable for the non-compliance.

2. Liability of Directors under the Unamended and Amended Section 185

Relevant legal framework and precedents: The appellants cited case law to argue that substantive law changes, such as the amendment to Section 185, should not be applied retrospectively unless expressly stated.
Court's interpretation and reasoning: The Tribunal held that the amendments introduced new penalties for future cases but did not create a new offence. The Tribunal applied the residuary provisions of Section 450 of the Companies Act, 2013, to affix liability on the directors.
Key evidence and findings: The Tribunal considered the timeline of the loan transaction and the subsequent amendment to Section 185, which came into effect after the loan was repaid.
Application of law to facts: The Tribunal determined that the directors were liable under the unamended Section 185, as the liability existed at the time of the loan transaction.
Treatment of competing arguments: The appellants argued against retrospective application of the amended section. The Tribunal found that the liability for the violation existed under the unamended section and was enforceable.
Conclusions: The Tribunal concluded that the directors were liable for the violation under the unamended Section 185, and the amendments did not apply retrospectively to absolve them of liability.

3. Fair Opportunity and Principles of Natural Justice

Relevant legal framework and precedents: The appellants cited principles of natural justice, arguing they were not given a fair opportunity to present their case.
Court's interpretation and reasoning: The Tribunal held that the appellants were given sufficient opportunity to present their case, and the proceedings were conducted fairly.
Key evidence and findings: The Tribunal noted that the appellants were aware of the proceedings and had the opportunity to respond to the allegations.
Application of law to facts: The Tribunal applied the principles of natural justice and found that the appellants were not denied a fair hearing.
Treatment of competing arguments: The appellants argued that they were not heard adequately. The Tribunal found that the procedural requirements were met.
Conclusions: The Tribunal concluded that there was no violation of natural justice principles, and the appellants had a fair opportunity to present their case.

SIGNIFICANT HOLDINGS

Core principles established: The Tribunal reinforced the principle that directors are liable for violations of Section 185 of the Companies Act, 2013, and that amendments introducing new penalties do not absolve directors of liability for past violations.
Final determinations on each issue: The Tribunal dismissed the appeal, upholding the NCLT's order to prosecute the appellants for non-compliance with Section 185 and imposing fines on the company and its managing director.

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