Assessment

SIT Suggests Action Against 2675 Directors by MCA ! Why Many of Them Still Get Away !

Posted on by Prashant Thakur
The SIT i.e Special Investigation Team set up to tackle Black money menace has finally have some recommendation under which it has advised Ministry of Corporate Affairs action against 2627 directors of companies who have violated the provision under section 165 of the Companies Act 2013 . It looks assuring for common person that the people involved in black money will get some kind of punishment , a closer look in the law ( Companies Act) seems to suggest that many of them may actually not get hurt at all !

 Basis for Recommendation of Action by MCA

The press release issued on 03/11/2015 states following grounds  on which the Special Investigation Team has recommended action by Ministry of Corporate Affairs against erring 2627 Directors of companies.

The SIT had requested Ministry of Corporate Affairs to provide the following data:

i) Persons who held Directorship in more than one Company

ii) Companies who have the same office address

The data was subsequently provided by the Ministry of Corporate Affairs. From a perusal of data given by the Ministry of Corporate, the following points stand out:

(i) There are 2627 persons holding Directorship in more than 20 Companies in violation of Section 165 of the Companies Act, 2013. It may be mentioned this is also in violation of s. 275 of the erstwhile Companies Act, 1956. The total number of Companies involved is 77696.
(ii) ………….

The SIT has requested Ministry of Company affairs to take necessary action with respect to violation of the Companies Act noted above. The SIT has further requested CBDT, CBEC and Enforcement Directorate to undertake due diligence on the Companies data referred to above.

What law has been violated ?

Section 275 of the erstwhile Companies Act , 1956 provides that a person can not be director in more than twenty companies .
Section 275 in The Companies Act, 1956
275. No person to be a director of more than twenty companies. After the commencement of this Act, no person shall, save as otherwise provided in section 276, hold office at the same time as director in more than twenty companies.
However , section 278 of the Companies Act 1956 provides that the calculation of number of directorship , ceratin types of directorship will not be counted or considered . Read the provision

278. Exclusion of certain directorships for the purposes of sections 275, 276 and 277.

(1) In calculating, for the purposes of sections 275, 276 and 277, the number of companies of which a person may be a director, the following companies shall be excluded, namely:-

(a) a private company which is neither a subsidiary nor a holding company of a public company;
(b) an unlimited company;
(c) an association not carrying on business for profit or which prohibits the payment of a dividend;
(d) a company in which such person is only an alternate director, that is to say, a director who is only qualified to act as such during the absence or incapacity of some other director.
(2) in making the calculation aforesaid, any company referred to in clauses (a), (b) and (c) of sub- section (1) shall be excluded for a period of three months from the date on which the company ceases to fall within the purview of those clauses.
It means that as far as private unlisted companies which are neither subsidiary nor a holding company of a public company , there is absolute no bar u/s 275 of the Companies Act 1956  in number of directorship .

Let us See Section 165 of Companies Act 2013

Section 165 of the Companies Act 2013 has withdrawn the benefits attached to directors of private companies under which the directorship of a private limited comanies and others were not counted as per section 278 . Read the provision below

(1) No person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time:

Provided that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten.

Explanation.— For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included.

 Another important point is that sub-section 165(3) it is provided that a person who is director in more than 20 companies can have to select which 20 companies in which he/she desires to remain director. As stated earlier , the companies act 2013 was made effective from 01/04/2014 . So , one year ends on 31/03/2015.
If any one who has quit the directorship by 31/03/2015 as per the provision u/s 165(3) and remained directors upto 20 companies , shall escape any punishment .

What is the punishment for contravention of nos of directorship ?

Section 165(6) provides fine of minimum  Rs 5,000 & maximum Rs 25,000 per day from the day of contravention.
The provision u/s 165(6) is given below

(6) If a person accepts an appointment as a director in contravention of sub-section (1), he shall be punishable with fine which shall not be less than five thousand rupees but which may extend to twenty-five thousand rupees for every day after the first during which the contravention continues.

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Conclusion on the SIT Recommendation

  1. Those who were directors in private limited companies, no matter how many private limited companies , before 01/04/2014 , will not get any punishment because of section 278 of companies Act 1956.
  2. After , 01/04/2014 , as the new Companies Act became effective, those who quit the directorship before 31/03/2015 and took steps as per section 165(3) , will also not have any problem.
  3. All others may get punishment , if MCA starts action on the advice of SIT

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Prashant Thakur

The author has spent more than 30 years in the field of taxation. Wrote four books -3 on on Indian Tax Law and 1 on US tax law for cryptocurrency. Apart from https:taxworry.com , he also writes on https://irstaxapp.com which is for US tax laws. He is a tech enthusiast and manages a cloud computing company that publishes innovative software.

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