NCLAT Upheld Prosecution of Director for Inter-corporate Loan Violations and Failing to Seek Compounding of Offence

Case Details: Neelam Dhawan v. Registrar of Companies - [2024] 158 taxmann.com 1 (NCLAT-Chennai)

Judiciary and Counsel Details

• • M. Venugopal, Judicial Member & Ms Shreesha Merla, Technical Member
  • Ms Varuna Bhanrale, Adv. for the Appellant.
  • Avinash Krishnan Ravi, Adv. for the Respondent.

Facts of the Case

The Board of Directors of Company ‘H’ including the appellants granted approval for the advancement of an Inter Corporate Loan (ICL) to Company `G’, a fellow subsidiary company of ‘H’. During the time of advancement of the loan appellant no. 2 was a common director in ‘H’ and ‘G’.’H’ filed an application under Section 185 of the Companies Act, 2013.

The NCLT vide impugned order levied a compounding fee for non-compliance of Section 185 on ‘H’ and its managing director. Also, the NCLT directed the Registrar of Companies (RoC) to prosecute two directors i.e. the appellants during the defaulting period as they had not made an application for compounding of offence.

Thereafter, the appellants preferred instant appeal on being dissatisfied with the impugned order and contended that the loan was promptly repaid by ‘G’ and the appellant no. 2 had resigned from the board of ‘G’ and because of the repayment of the loan and discontinuance of appellant as a common director of the board of `G’, any potential non-compliance by `H’ under unamended Section 185 even it had taken place was rectified.

Further, the appellants contended that the directors or the other officers of the defaulting company could not be held liable for non-compliance by the company under unamended Section 185 as loans fall under one of the exceptions of unamended Section 185.

It was noted that amendment to section 185 (2) had not created a new wrong or new offence but a new penalty for future cases and appellants as directors of ‘H’ came within the ambit of officers as per section 2 (59).

NCLAT Held

Thus NCLAT held that approval in respect of advancing of loan to `G’ in a board meeting of ‘H’ violated Section 185. Also since appellants had not filed application during the defaulting period for compounding of an offence, direction issued in the impugned order was free from any legal Infirmities.