NCLAT upholds NCLT fine of Rs.10 lakh on Hewlett Packard, India over loan to co-subsidiary

NCLAT upholds NCLT fine of Rs.10 lakh on Hewlett Packard, India over loan to co-subsidiary

The matter pertained to a Rs.360 crore loan advanced in 2017

The Chennai bench of the National Company Law Appellate Tribunal (NCLAT) has dismissed an appeal by Hewlett Packard Enterprise India Private Limited, India challenging a Rs.10 lakh compounding fee imposed for non-compliance with Section 185 of the Companies Act, 2013.

The bench of Justice M Venugopal (judicial member) and Shreesha Merla (technical member) upheld a 2018 order of the National Company Law Tribunal (NCLT), Bengaluru.

The NCLT had also imposed an additional Rs.5 lakh compounding fee on HPE India’s Managing Director, Som Prakash Satsangi.

The matter related to a Rs.360 crore loan advanced in 2017 by HPE India, an Indian subsidiary of American IT giant, Hewlett Packard to a fellow subsidiary, Hewlett Packard Enterprise GlobalSoft Private Limited (HPEG).

Both HPE India and HPEG then had a common non-executive, professional director, Kiran Ramaswamy Belavadi, who, in January 2018, resigned from HPEG.

HPE India submitted that the loan was advanced without ill intent in the ordinary course of business and that in January 2018, it was promptly repaid. Therefore, HPE India and its MD filed compounding applications to address any potential non-compliance with the Companies Act.

Section 185 of the Act restricts the scenarios where a company can advance loans, guarantees, etc., to its directors or entities in which the directors are interested.

The 2018 decision of the NCLT to impose ‘high’ compounding fees on both HPE India and its MD was eventually challenged in 2019 before the NCLAT.

On the other hand, the Registrar of Companies (RoC) in Karnataka urged the NCLAT to enhance the fine to Rs.25 lakh under Section 185, as that is the maximum penalty payable for a default.

However, the NCLAT refused to interfere with the NCLT order after noting that the 2018 order was passed while taking a lenient view despite the apparent default continuing for about 160 days. Also, the fine imposed by the NCLT was not excessive. It maintained that the default was admitted by HPE India in its compounding application.

The NCLAT rejected HPE India’s contention that its MD should not be fined as he was not an ‘officer in default’. Therefore, he could not be imposed with a fine under the Act when the loan was advanced.

Thus, while dismissing the appeal, the NCLAT reasoned, “Although the unamended Section 185 of the Companies Act, 2013, had not provided for any penalty/liability/punishment in respect of an ‘officer in default’ of an errant company, one must bear in mind that the ingredients of Section 450 of the Companies Act enjoins upon the authorities to fasten liability on the ‘officer in default’ of the errant company.

While advocate Varuna Bhanrale appeared for HPE India, RoC was represented by advocate Avinash Krishnan Ravi.