NCLAT upholds NCLT fine of ₹10 lakh on Hewlett Packard Enterprise India over 2017 loan to co-subsidiary

The Chennai bench of the National Company Law Appellate Tribunal (NCLAT) recently dismissed an appeal by Hewlett Packard Enterprise India Private Limited (HPE India) challenging a ₹10 lakh compounding fee imposed for non-compliance with Section 185 of the Companies Act, 2013..The NCLAT bench of Judicial Member Justice M Venugopal and Technical Member Shreesha Merla upheld a 2018 order of the National Company Law Tribunal (NCLT), Bengaluru in this regard.Notably, in the same order, the NCLT had also imposed an additional ₹ 5 lakh compounding fee on HPE India’s Managing Director (MD), Som Prakash Satsangi..The matter concerns a ₹360 crore loan advanced in 2017 by HPE India, an Indian subsidiary of American IT giant, Hewlett Packard Enterprise Company to a fellow subsidiary, Hewlett Packard Enterprise GlobalSoft Private Limited (HPEG).At the time, both HPE India and HPEG had a common non-executive, professional director, Kiran Ramaswamy Belavadi. Belavadi resigned from HPEG on January 5, 2018.HPE India submitted that the loan was advanced without ill intent in the ordinary course of business and that it was promptly repaid on January 9, 2018.Therefore, HPE India and its MD filed compounding applications to address any potential non-compliance with Section 185 of the Companies Act. Section 185 restricts the scenarios where a company can advance loans, guarantees etc. to its directors or entities in which the directors are interested in.The 2018 decision of the NCLT to impose “high” compounding fees on both HPE India and its MD was eventually challenged before the NCLAT in 2019.On the other had, the Registrar of Companies (RoC) at Karnatakaurged the NCLAT to enhance the fine to ₹ 25 lakh which is the maximum penalty payable for a default under Section 185..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. The fine imposed by the NCLT cannot be said to be an excessive or an exorbitant one, the NCLAT held.It also noted that the default has effectively been admitted by HPE India in its compounding application.Further, it rejected HPE India’s contention that its MD ought not to be fined as he was not an “officer in default” who could be imposed with a fine under the Companies Act when the loan was advanced.“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, 2013, enjoins upon the `Authorities concerned’, to fasten `liability’ on the `Officer in Default’ of the `errant Company’,” the NCLAT reasoned.The appeal was, therefore, dismissed.Advocate Varuna Bhanrale appeared for HPE India while the RoC was represented by advocate Avinash Krishnan Ravi..[Read NCLAT Judgment]