The VakilKaro Brief The Update Rajasthan High Court upheld penalty for failure to properly constitute the Nomination and Remuneration Committee despite later compliance. The later appointment of a non-executive director did not erase or nullify that past non-compliance.
Fixing It Later Won’t Save You
Regulatory violations can’t be undone just by correcting them later, compliance must exist when required.
Key Takeaways
- The VakilKaro Brief The Update Rajasthan High Court upheld penalty for failure to properly constitute the Nomination and Remuneration Committee despite later compliance.
- The issue arose because the company did not have a non-executive director on its board, which is a mandatory requirement for the proper constitution of the NRC under Section 178 of the Companies Act, 2013.
- Issue Before the Court The key question was whether subsequent compliance- appointment of a non-executive director and reconstitution of the committee- could cure an earlier violation of statutory requirements.
- The later appointment of a non-executive director did not erase or nullify that past non-compliance.
- In simple terms, the Court made it clear that “late compliance is still non-compliance for the period of default.” Penalty and Judicial Approach On the issue of penalty, the Court refused to interfere.
The VakilKaro Brief
The Update
Rajasthan High Court upheld penalty for failure to properly constitute the Nomination and Remuneration Committee despite later compliance.
The Impact
Clarifies that post-facto corrections do not wipe out statutory violations under company law.
The Action
Companies must ensure timely compliance with board composition requirements to avoid penalties.
Background of the Case
The case involved a company that failed to properly constitute its Nomination and Remuneration Committee (NRC) for the financial year 2022–23. The issue arose because the company did not have a non-executive director on its board, which is a mandatory requirement for the proper constitution of the NRC under Section 178 of the Companies Act, 2013.
The Registrar of Companies issued a show cause notice, and the company admitted the non-compliance. However, it argued that the defect had been rectified later by appointing a non-executive director and reconstituting the committee.
Despite this, the Adjudicating Authority imposed a penalty of Rs. 7 lakhs under Section 454(3), which was later upheld by the Regional Director. The company then approached the Rajasthan High Court challenging the penalty.
Issue Before the Court
The key question was whether subsequent compliance- appointment of a non-executive director and reconstitution of the committee- could cure an earlier violation of statutory requirements.
Court’s Reasoning
The High Court took a strict view of compliance.
It held that the violation had already occurred during the financial year 2022–23 when the committee was not constituted as per law. The later appointment of a non-executive director did not erase or nullify that past non-compliance.
The Court emphasized that statutory requirements must be fulfilled at the relevant time. Compliance achieved at a later stage cannot retrospectively validate an earlier defective position.
In simple terms, the Court made it clear that “late compliance is still non-compliance for the period of default.”
Penalty and Judicial Approach
On the issue of penalty, the Court refused to interfere.
It noted that penalties imposed under Section 454 are based on the discretion and satisfaction of the adjudicating authority. Courts generally do not interfere unless the penalty is arbitrary, unreasonable, or based on irrelevant factors.
In this case, the company failed to show any such defect in the decision-making process. The penalty was also not found to be disproportionate to the violation.
As a result, the writ petition was dismissed.
Key Takeaway
This judgment sends a clear compliance message to companies.
Corporate governance requirements, especially relating to board composition and committees, are not procedural formalities. They must be complied with strictly and on time.
Correcting mistakes later may help in future compliance, but it does not protect against penalties for past violations.
Conclusion
The ruling reinforces a fundamental principle of regulatory law- timing matters as much as compliance itself.
For companies, the takeaway is straightforward. Governance structures must be in place when required, not after a violation is detected. Otherwise, penalties are almost inevitable.
ABOUT VAKILKARO
Vakilkaro provides simplified insights on legal and regulatory developments affecting businesses in India. The platform helps professionals stay updated on Corporate Laws, taxation, insolvency and compliance matters.
Official External Resources
Use these primary/official sources to verify rules, forms, fees, timelines and regulatory updates before publication.
Frequently asked questions
Penalty for NRC Non-Compliance Upheld Despite Later Correction: Rajasthan HC+
The VakilKaro Brief The Update Rajasthan High Court upheld penalty for failure to properly constitute the Nomination and Remuneration Committee despite later compliance. The later appointment of a non-executive director did not erase or nullify that past non-compliance.