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.
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 in The Companies Act, 1956275. 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.
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.
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Section 165 of the Companies Act 2013 has withdrawn the benefits attached to directors of private companies under which the directorship of a private limited comanies and others were not counted as per section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.
What is the punishment for contravention of nos of directorship ?
(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.
Conclusion on the SIT Recommendation
- 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.
- 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.
- All others may get punishment , if MCA starts action on the advice of SIT