N.S.J.L Nidhi Ltd Throu. Its Rohit K Bhamburdekar and Ors v. The Regional Director (Wr) Ministry Of Corporate Affair And Anr.

What happened

Between 10 February 2019 and 26 January 2021 the company uploaded sixteen returns of allotment in Form PAS-3, and said it could not upload the scanned certified annexures because the files were too large, so it uploaded soft copies of the lists without a separate certification. Rule 12(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 requires the list of allottees attached to Form PAS-3 to be certified by the signatory as being records of the company, while the form itself carries a declaration that the attachments are true, correct and complete and the list of allottees is correct. By order of 11 October 2023 the Adjudicating Officer under the Companies Act imposed a total penalty of Rs. 64 lakhs under section 39(5), treating Rs. 1,000 a day as a minimum capped at Rs. 1 lakh for each default, on the company and each of its directors, and invoked both rule 3(12) and rule 3(13) of the Adjudication Rules without applying any factor. The petitioners said no penalty arose because of the affirmation clause. The Regional Director said the penalty was a statutory minimum and that every director was an officer in default under section 2(60)(iii) as no officer in default had been designated.

Questions before the court

• Is section 39(5) of the Companies Act a fixed or minimum penalty leaving no discretion to the Adjudicating Officer, and was a penalty of Rs. 64 lakhs, multiplied by the number of directors, valid?

Why the court ruled this way

Section 2(38) and the construction of undefined expressions in the Act allow the cognate SEBI Act to be used, and section 15A of that Act, read earlier with section 15J, used the same expression 'liable to a penalty' with a per-day rate capped by 'whichever is less', so the Supreme Court's reasoning in Roofit Industries, Siddharth Chaturvedi and finally Bhavesh Pabari applies, holding that such a provision is neither a fixed nor a minimum penalty and that a mechanical reading would be arbitrary (paragraphs 17 to 23, 27 to 36, 38 to 40). The Adjudication Rules, in rule 3(12), require due regard to the size of the company, the nature of its business, injury to public interest, the nature and repetition of the default, any gain and any loss, which are illustrative and the proviso on minimum penalty has no application, and the order invoked both rules 3(12) and 3(13) without applying any (paragraphs 24 to 26, 36 to 39). On the merits, the rule 12(2) certification is separate and reiterative, so the PAS-3 affirmation is substantial compliance that dilutes the gravity but does not efface the default, and the Court did not decide whether the officer could impose no penalty (paragraphs 41 to 45). Multiplying the penalty by the number of directors treated section 2(60)(iii) as a licence and ignored section 2(60)(vi), and sections 454(3) and 454A show that the scheme has a remedial element, so the quantification was arbitrary (paragraphs 46 to 49).

Controlling point

The order was right to find a default under section 39(5) but wrong to treat the provision as a minimum and a fixed penalty and to multiply it by the number of directors.

Order and next steps

The penalty is modified into a joint and several liability of the company and its directors, re-computed in respect of each return of allotment uploaded without the dual certification, and payable within three weeks of upload of the judgment on the Court's website.

Practical implications

A company or officer facing an adjudication penalty under section 39(5), or another per-day-and-cap penalty in the Companies Act, can cite this judgment to require the Adjudicating Officer to record reasons on the rule 3(12) factors and to seek a joint and several, rather than multiplied, penalty.

Limits of this ruling

• The judgment dealt with a technical default without aggravating factors and did not decide whether an Adjudicating Officer may impose no penalty, which provision of the Act is truly a fixed-penalty provision, or how penalty should be set for a grave violation.