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Introduction to Case
The judgment in the case law of M/s. Aptean Software Private Limited v. Shri R. Mohan Kumar, Advocate[1] was passed by The National Company Law Tribunal Bengaluru Bench[2]. The case was decided by a bench consisting of Hon’ble Shri Ratakonda Murali, a judicial member and Hon’ble Shri Ashok Kumar Mishra, a technical member. The case was presented by Senior advocate Shri C.K. Nandakumar and Advocate R. Mohan Kumar on behalf of the Petitioner.
Facts in Case
Four Applicants filed an application, where the 1st Applicant was the Company, the 2nd Applicant director is Mr. Hemendra Bupendra, the 3rd Applicant is Mr. Bijal Mahendra Patel and Mr. Kim Leslee Eaton are the 4th Applicant director.
The Company, that was1st Applicant was initially was named as Pivotal Bangalore Software Development Private Limited, was incorporated on 22nd October 2002 under the Companies Act, 1956[3]. After that, the name of the Company was changed twice, it was named CDC Software India Private Limited and then on 7th January 2014 it obtained a fresh certificate of Incorporation and was finally called Aptean Software India Private Limited.
The Company was formed with an aim to carry on software-oriented business, which involved software research, development, and other associated activities. Also, it provided services and activities of designing, making, developing, processing, promoting, producing, using, selling, buying and various other amenities in the sphere of information and communication technology. Some of its services included providing management, advisory consultancy, trainings services and execution of turnkey projects worldwide.
At the time of inception, the Company had two shareholders, Pivotal Corporation and 652072 British Columbia. They were the holders of 9,990 and 10 shares, respectively. However, Aptean group worldwide had restructured their entities in a way that 652072 British Columbia Ltd. merged into Pivotal Corporation. As a result, there was only one member or shareholder in the Company.
Also, allegedly, the Company’s shareholders and its directors and signatories were not notified about this change until the Annual General Meeting for the financial year 2013-2014.
Issue In Case
- Whether as per Section 45 of the Companies Act 1956[4] and Section 3(1)(b) of the Companies Act 2013[5], the minimum required members for a private company are two and when this requirement was not fulfilled by the Company who would be held liable for the debts incurred during that period?
Summary of the judgment
In the given case, the Company infringed certain specifications given in Section 3(1)(b) of the Companies Act 2013[6]. Where the Company failed to sustain the requirement given in the statue of a minimum of two shareholders. However, as soon as the Company was notified about the information of the merger between the two shareholders, it immediately requested for a transfer of share to another entity or person. This was done to sustain the statutory limit as required by the statue. The Company acted immediately and received the share transfer Form, SH-4 duly signed and stamped, and Board passed a resolution on 26th December 2014 to transfer one share to Yaletown Acquiror Sarl from Pivotal Corporation.
The duration between transfer was reported by the Registrar of Companies, Karnataka, Bangalore, as 1350 days from 1st January 2010 to 11th September 2013 and 471 days from 12th September 2013 to 26th December 2014.
As per the provision of Section 45 of the Companies act 1956[7], if a company is reduced below two in case of a private company and it carries on business for six months and above in the same reduced number, every member of that Company will be liable for payment of the debts during that period and they can also be sued accordingly. The punishment for this violation is mentioned under Section 629A of the Companies Act 1956[8], according to which the members can be punished with a fine that may extend to Rs 500 per day for the entire duration.
The court declared that based on the report of Registrar of Companies[9], it concluded that the Company had violated the provisions of Section 12 of the Companies Act 1956 from 1st January 2010 to 11th September 2013 and the provisions of Section 3(1)(b) of the Companies Act 2013 from 12th September 2013 to 26th December 2014.
The report provided that the Applicant Directors of the 1st Applicant Company, that is Mr. Hemendra Bupendra, Mr. Bijal Mahendra Patel and Mr. Kim Leslee Eaton will have to pay the compounding fee that has been imposed on them as Tribunal considered this as a violation of the provision given in The Companies Act 1956 and The Companies Act 2013.
Analysis
The National Company Law Tribunal Bengaluru Bench, in my opinion, was correct in passing the given judgment. The bench has appropriately passed the judgment and along with it explained as well and justified the reasoning behind it.
This case took into account a time period ranging from 2010 to 2017, wherein between this a new period statue that was enforced, the Companies Act 2013, the judgment incorporated both the statues and gave the order in a manner that the provisions in both the statues were satisfied as well as there was no repetition of punishment faced by the applicants.
The contentions were well addressed by the bench. The contention regarding, violation under Section 12 of the Companies Act 1956[10], and therefore there was no need to impose a penalty. In response to this, the bench explained that Section 12 of the Companies Act 1956[11] just provided the provisions for mode of formation of a company, where it is given that for a private company, two or more persons have to be involved. Section 45 of the Companies Act 1956[12] lays down the provision that the members of the Company will be liable ‘if any time’ the number of members is below two. In other words, it is an essential requirement that at all time at least two members should be involved.
Therefore, if we read the two section together, no punishment is to be prescribed and hence the provision given in Section 629A of the Companies Act 1956[13] will apply. The bench with the help of the registrar of companies, Karnataka, Bangalore worked out a systematic calculation, such that the days from the inception of the Company till the date the new statute was enforce, that is from 1st January 2010 to 11th September 2013 were calculated as per Section 629A of the Companies Act 1956, that is Rs. 50/- per day; And from 12th September 2013 to 26th December 2014, the date when two members where officially maintained again, as per Section 450 of the Companies Act 2013, Rs. 100/- per day. As well the compounding fees for the given period.
One of the reasons to appreciate this judgment is the fact that it took into consideration two different acts, i.e. The Companies Act 1956 and The Companies Act 2013 and came up to a solution to the problem by addressing the provisions and satisfying the conditions given in both the acts. While doing so it was ensured that the rights of the Appellants was not infringed, and they were made to pay only the amount outstanding by them and nothing extra.
It was also made clear that these amounts were not inclusive of the repayment of the whole debt incurred by the company during that period, so that there remains no confusion.
Conclusion
It can be concluded from the above judgment that even though there were two different statues, and they provided the punishment for the offence of not maintaining a minimum of two shareholders in a private company, the judiciary reached out a way to accommodate both sections and their provisions. This is because even though the default initiated from 2010 and was still in continuous contravention when the new statue, the Companies Act 2013 was enforced, it went on till 2014. Since Companies Act 1956 was not repealed until 2019, it could not have been excluded while calculating the penalty.
Apart from the penalty, the directors had to be paid the compounding fee as well as cleared the debts that were incurred during that period. The court interpreted this case by using the principle of statutory interpretation of harmonious construction. It is a cardinal rule of construction that is used when in a statue two provisions are in conflict with each other, that both of them should stand together, they are interpreted so that the effect can be given to both.
References:
[1] M/s. Aptean Software Private Limited v. Shri R. Mohan Kumar, Advocate, 2017 SCC Online NCLT 7151.
[2] Civil Petition No. 35/BB/2017. Decided by Hon’ble Shri Ratakonda Murali and Hon’ble Shri Ashok Kumar Mishra.
[3] The Companies Act, 1956, No. 1, (India).
[4] The Companies Act, 1956, No. 1,(India), Section 45: “If at any time the number of members of a company is reduced, in the case of a public company, below seven, or in the case of a private company, below two, and the company carries on business for more than six months while the number is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with fewer than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.”
[5] The Companies Act, 2013, (India), Section 3(1)(b): “Formation of company- (1) A company may be formed for any lawful purpose by—
(b) two or more persons, where the company to be formed is to be a private company;”
[6] Ibid at 6.
[7] Ibid at 5.
[8] The Companies Act, 1956.
[9] Registrar of Companies, Karnataka, Bangalore, Bearing No. ROCB/MMM/Sec.621A/2016, 25th Oct 2016.
[10] Ibid at 13.
[11] Ibid.
[12] Ibid at 5.
[13] Ibid at 11.
