Court reduces penalty from Rs. 64 lakhs to Rs. 1 lakh per default, emphasizing the need for proportionality and judicial discretion.
In a significant ruling, the Bombay High Court, presided over by Mr. Justice Somasekhar Sundaresan, has modified the penalty imposed on N.S.J.L Nidhi Ltd and its directors from Rs. 64 lakhs to Rs. 1 lakh per default, payable jointly and severally. The court found the original penalty imposed by the Adjudicating Officer under Section 39(5) of the Companies Act, 2013, to be arbitrary and excessive.
The case revolved around the company's failure to certify annexures to sixteen returns of allotment of securities, leading to the imposition of the hefty penalty. The court noted that Section 39(5) of the Companies Act does not impose a fixed or minimum penalty, but rather allows for discretion based on the gravity and impact of the default, as guided by Rule 3(12) of the Companies (Adjudication of Penalties) Rules, 2014.
Justice Sundaresan emphasized that the Adjudicating Officer should have considered mitigating factors, such as the absence of aggravating circumstances and the nature of the default being technical. The court highlighted that the affirmation in Form PAS-3, which includes a clause certifying the completeness and correctness of the list of allottees, should have been considered in determining the penalty.
Furthermore, the court criticized the mechanical approach of multiplying the penalty by the number of directors without analyzing their individual roles and responsibilities, which led to an arbitrary and unconstitutional outcome. The judgment aligns with the Supreme Court's interpretation of similar provisions in the SEBI Act, reinforcing that discretion must be exercised in penalty adjudication.
The Bombay High Court's decision underscores the importance of proportionality and judicial discretion in penalty imposition, ensuring that penalties are reasonable and constitutionally valid. The court ordered the modified penalty to be paid within three weeks of the judgment's publication.
Bottom line:-
Section 39(5) of the Companies Act, 2013 does not impose a fixed or minimum penalty; the quantum of penalty must be adjudicated proportionately, considering the factors stipulated in Rule 3(12) of the Companies (Adjudication of Penalties) Rules, 2014.
Statutory provision(s): Companies Act, 2013 Section 39(5), Companies (Adjudication of Penalties) Rules, 2014 Rule 3(12), Companies Act, 2013 Section 2(60)
