In a significant ruling delivered on April 27, 2026, the Bombay High Court slashed a ₹64 lakh penalty imposed by an Adjudicating Officer under the Companies Act, 2013, to ₹16 lakhs. The court’s message is unambiguous: a penalty imposed without genuine consideration of proportionality, and multiplied mechanically across every director on a board, is arbitrary and constitutionally unsound.
The Facts in Brief
NSJL Nidhi Ltd[i] uploaded sixteen returns of allotment in Form PAS-3 between February 2019 and January 2021. The company signed the main form, which contains an affirmation clause confirming the correctness of all attachments but did not separately certify the accompanying list of allottees as required under Rule 12(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014. The reason was purely practical: scanned, signed annexures were too large to upload to the MCA server.
An Adjudicating Officer treating this as a default under Section 39(5) of the Companies Act imposed a penalty of ₹1 lakh per return and then multiplied it by four (the company plus three directors), arriving at a total of ₹64 lakhs. Not a rupee less, not a factor considered.
Question of law
The court framed the case around two questions: first, whether any penalty was attracted at all; and second, whether the quantum was lawful. On the first question, the court held that the dual-certification requirement in Rule 12(2) is not a mere formality the same signatory who signs Form PAS-3 must also certify the attached list separately. The affirmation clause in the form, while constituting substantial compliance, does not erase the specific obligation in subordinate legislation. A default existed.
It was on the second question that the court’s analysis proves most consequential.
Proportionality Is Not Optional – It Is Constitutionally Mandated
The Adjudicating Officer had invoked Rule 3(12) of the Companies (Adjudication of Penalties) Rules, 2014 which lists seven factors that must be applied when assessing the quantum of penalty. These include the size of the company, the nature of its business, injury to public interest, nature and repetition of the default, disproportionate gain, and investor or creditor loss. The order then proceeded to apply none of them.
Instead, the AO simultaneously characterised Section 39(5) as both a fixed penalty provision (under Rule 3(13)) and a minimum penalty provision (under the proviso to Rule 3(12))- an internal contradiction the court did not hesitate to call out as absurd.
The court drew directly on the Supreme Court’s trilogy on Section 15-A of the SEBI Act, a provision worded identically to Section 39(5). In SEBI v. Bhavesh Pabari (2019) 5 SCC 90, a three-judge bench settled a longstanding debate: such provisions are neither fixed nor minimum penalty clauses. Aggravating and mitigating circumstances must always be weighed. Because Section 2(95) of the Companies Act designates the SEBI Act as cognate legislation, this ruling applies squarely to Section 39(5).
“The reading of Section 39(5) as a stipulation that does not permit the Adjudicating Officer to exercise adjudicatory discretion to examine the nature, the gravity, and the impact of the default is an unreasonable reading of the provision, which would render it unconstitutional.”
The Problem of Unreasonable Multiplication
AO imposed maximum penalty under section 39(5) separately on each director, treating Section 2(60)(iii) of the Companies Act as a licence to do so. That sub-clause provides that where no officer-in-default has been specifically designated and there are no key managerial personnel, all directors are treated as officers in default.
The court rejected the AO’s interpretation as unreasonable on three grounds:
- Section 2(60)(iii) speaks to who is liable – it says nothing about multiplying the quantum of penalty by the number of directors.
- Section 2(60)(vi) imposes a separate, more nuanced test for individual director liability: the director must have been aware of the contravention by virtue of Board proceedings and participated without objection or must have consented or connived in it. The order contained no analysis of this whatsoever.
- The correct approach is to make the company and its directors jointly and severally liable not to multiply the penalty additively per head. The distinction matters enormously: joint and several liability preserves the deterrent effect without creating a punitive multiplier that bears no relation to the gravity of the default.
The court illustrated the absurdity plainly: if the company had ten directors, the AO’s approach would have resulted in a penalty ten times the statutory ceiling for a single default. The penalty would scale with board size, not with culpability.
Penalty: before and after
| Original order ₹64 lakhs 16 returns × ₹1 lakh × 4 persons (company + 3 directors) — each penalised separately | Modified by High Court ₹16 lakhs 16 returns × ₹1 lakh — payable jointly and severally by the company and all directors |
What This Means in Practice
For adjudicating officers: Rule 3(12) is not a checklist to cite and set aside. Each of its seven factors must be genuinely examined and reflected in the order. An order that invokes the rule but applies none of its factors is vulnerable to being set aside.
The ‘whichever is less’ formulation in Section 39(5) does not create a mandatory minimum that forecloses discretion, it sets a ceiling, not a floor.
For company directors: Section 2(60)(iii) does not automatically expose every director to a full, separate penalty for every default. Individual liability under Section 2(60)(vi) requires specific findings of awareness and participation or consent. Directors should ensure that Board minutes and internal processes clearly document their involvement or lack thereof in matters that may later be characterised as defaults.
For companies: The Companies Act’s penalty framework, read correctly alongside the Bhavesh Pabari line of authority, demands proportionality. Where a default is genuine but minor, a tempered penalty not the ceiling multiplied across every board member is what the law contemplates.
“A disproportionate penalty on the wrong premise that the penalty provision entails a minimum penalty, and in the same breath also a fixed penalty; and then multiplying the penalty by the sheer number of directors who happen to occupy the Board of the Company, is wholly arbitrary.”
[i] N.S.J.L Nidhi Ltd v. Regional Director (Wr), Ministry of Corporate Affairs | WP No. 10782 of 2024 | Somasekhar Sundaresan J.