In this article, we will take you through the mandatory provisions under Section 203 of the Companies Act, 2013. According to this section, every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel-
(i) Managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;
(ii) Company secretary; and
(iii) Chief Financial Officer
Failure to comply with these requirements may result in penalties for both the company and the officers in default, as specified under Section 450 of the Companies Act, 2013. Therefore, it is essential to adhere to these provisions to avoid any legal consequences.
Applicable Provisions: -
As per section 203(1) of Companies Act 2013, Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel,
(i) Managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;
(ii) Company secretary; and
(iii) Chief Financial Officer
Provided that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act unless, —
(a) The articles of such a company provide otherwise; or
(b) The company does not carry multiple businesses:
If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel 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.
Facts of the case: -
M/s. Hwaseung IA Automotives Private Limited and its directors filed an appeal against an adjudication order (ADJ 99/203 of 2022-23/1982) issued on September 7, 2022, by the Registrar of Companies, Andhra Pradesh. The order imposed penalties for non-compliance with Section 203 of the Companies Act, 2013, and Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.
The company, incorporated on November 17, 2017, experienced delays in establishing its manufacturing plant and had no commercial operations during the financial years 2017-18 and 2018-19. Consequently, it prioritized appointing a whole-time Company Secretary only after beginning operations in FY 2019-20.
In January 2020, the Ministry of Corporate Affairs amended regulations, raising the threshold for appointing a whole-time Company Secretary to Rs. 10 crores. At that time, the company had a paid-up capital of Rs. 6,47,50,020 and did not anticipate needing further capital during the financial year ending March 31, 2020.
By the end of FY 2020-21, the company’s paid-up capital had increased to Rs. 21,12,70,020. However, the second wave of the COVID-19 pandemic delayed the appointment process in FY 2021-22. A Company Secretary was ultimately appointed on December 7, 2022.
The appeal revolves around the interpretation of compliance requirements for managerial appointments in light of the company's operational status and external circumstances affecting its ability to adhere to regulatory mandates. Penalty Imposed by Registrar of Companies on Company and Officers in Default.
Taking into consideration the facts of the appeal and submissions made by the authorized representative, the penalty imposed by Registrar of Companies is reduced.
Violation of section |
Penalty imposed on company/ directors |
Penalty imposed by ROC |
Revised penalty imposed by RD |
Sec. 203 of the Companies Act, 2013 |
Company |
5,00,000 |
1,50,000 |
|
Director-1 |
50,000 |
1,25,000 |
|
Director-2 |
50,000 |
- |
|
Total |
6,00,000 |
2,00,000 |
Reduction in penalty
The ground stated for the reduction of penalty are as follows:
- That there is second wave of COVID-19 pandemic spread with alarming speed.
Exemption to Startup/ Small Company/OPC under section 446B:
As per sec. 446B of the Companies Act, 2013, if penalty is payable for non-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.
In this case, Section 446B does not apply, as the company does not meet the criteria.
Conclusion
The MCA's decision to support Hwaseung IA Automobiles in India is a clear example of how regulators can adapt to unusual situations. It highlights the need for regulatory bodies to take into account global issues like the COVID-19 pandemic when evaluating how businesses manage their operations and follow rules.
This case sets a new standard for how violations are judged, showing that the importance of complying with all legal provisions, as failure to do so led to significant penalties.