Prof R Balakrishnan – [2024] 169 taxmann.com 654 (Article)
1. Background of the case
This is a case in which a former chief financial officer (KMP) of M/s Gwalior Smart City Development Corporation Limited has been penalized by the Registrar of Companies/Adjudication Officer of Gwalior as the concerned chief financial officer (KMP) was holding office in more than one company in violation of section 203 (3) of the Companies Act 2013.
The Registrar of Companies, Gwalior issued an order penalizing the former chief financial officer (CFO) of M/s. Gwalior Smart City Development Corporation Limited, for holding office in more than one company, which violated the provisions of section 203(3) of the Companies Act 2013. The violation occurred when the chief financial offer of M/s. Gwalior Smart City Development Corporation Limited, also became a director in M/s. Causebox Consulting Private Limited without obtaining prior permission from the board of the company in which he was serving. The company initiated a departmental inquiry against the chief financial officer and terminated his services. The former chief financial officer defended himself by stating that he was not aware of the requirement to seek approval from the board to holda directorship in another company.
However, the Adjudicating Officer concluded that the former chief financial officer being the KMP, was liable for the violation and imposed a penalty of Rs. 50,000 upon him for the violation pursuant to section 203(5) of the Companies Act 2013. Let us go through this case in order to understand the provisions of the Companies Act 2013 on this matter and the consequences of default, which resulted in a penalty upon the person who committed the offence.
2. Relevant provisions of the Companies Act 2013 pertaining to this case
Section 203 relating to appointment of KMP of the Companies Act 2013 is the relevant provision pertaining to this case and the extract of relevant portion is reproduced below: –
Section 203 (3) of the Companies Act 2013 states that a whole-time KMP shall not hold office in more than one company except in its subsidiary company at the same time.
The first proviso to section 203(3) states that nothing contained in this sub-section shall disentitle a KMP from being a director of any company with the permission of the board.
The second proviso to section 203(3) states that whole-time KMP holding office in more than one company at the same time on the date of commencement of this Act, shall, within a period of six months from such commencement, choose one company, in which he wishes to continue to hold the office of KMP.
The third proviso of 3 of section 203(3) of the Companies Act 2013 inter-alia states that a company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company and such appointment or employment is made as approved by a resolution made or approved by a resolution passed at a meeting of the board with the consent of all the directors present at the meeting and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then in India.
3. Penal Provisions for default (if any) committed by the company
As per section 203(5) of the Companies Act 2013, any company that is mandatorily required to appoint a chief financial officer and company secretary, if don’t appoint, such company shall be liable to a penalty of five lakh rupees and every director and KM of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees
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