What if the number of directors falls below the minimum?

What if the number of directors falls below the minimum?. Companies and their directors for failing to maintain the minimum number of directors as required by the Companies Act, 2013
The Companies Act, 2013 sets up a clear structure for corporate governance and regulatory compliance for companies in India. One important part is Chapter XI (Appointment and Qualifications of Directors), which outlines the rules for eligibility, appointment, duties, and the minimum number of directors needed on the board.
Section 149(1)(a) states that every public company must have at least three directors on its board. A private company needs at least two directors, while a one-person company must have one director. This requirement is essential for effective oversight, accountability, and diverse input in decision-making. It stops power from being concentrated in the hands of a few and promotes good corporate governance.
In this case, VMS TMT Limited, a deemed public company established in 2013, did not meet this requirement. After two directors resigned, the board was left with only two members. As a result, the company violated Section 149(1)(a) for 83 days. While this breach was temporary, it still went against the law.
The Registrar of Companies (ROC) in Ahmedabad examined the issue and started adjudication proceedings. After reviewing the situation, the Adjudicating Officer found that the company and its officers were at fault and held them responsible under Section 172 of the Act. Both the company and its directors faced financial penalties.
This case reinforces that complying with the Companies Act is serious business. Even short lapses can lead to penalties. It emphasizes that directors must fulfill their responsibilities carefully and ensure the company follows governance rules at all times.
Background of the Case
Incorporation and Initial Board Composition  
VMS TMT Limited, a deemed public company, was incorporated in 2013. The board of directors included four individuals:

Amin Jaka

Varun Jain

Vaibhav Jain

Sajidbhai I. Jaka

At incorporation, this setup met the requirement in Section 149(1)(a) of the Companies Act, 2013. This section mandates that every public company must have at least three directors. With four directors, the company surpassed the minimum requirement, ensuring effective oversight, decision-making, and adherence to corporate governance rules.
On 01 March 2014, Mr. Amin Jaka and Mr. Sajidbhai I. Jaka resigned from the board. This change reduced the board to only two members, Mr. Varun Jain and Mr. Vaibhav Jain. 
This situation led to a shortfall in the statutory requirement, as a public company must have at least three directors. Consequently, starting 02 March 2014, VMS TMT Limited became non-compliant with Section 149(1)(a). This non-compliance was not just a minor issue; it represented a serious breach of corporate governance rules that affected the decision-making process outlined in the Companies Act, 2013.
The issue was resolved when the company appointed Mr. Manojkumar Jain as a director on 25 May 2014. This action raised the board's strength back to three directors, bringing the company back into compliance with the legal requirement. However, the period from 02 March 2014 to 24 May 2014, totaling 83 days, remained a time of non-compliance. Although the company later corrected the issue, the delay amounted to a violation that led to legal proceedings and penalties under Section 172 of the Companies Act, 2013.
Legal Provisions

Section 149(1)(a), Companies Act, 2013: This section requires every public company to have at least three directors on its board. It is an important part of Chapter XI (Appointment and Qualifications of Directors). This rule helps ensure proper governance, collective decision-making, and accountability within the company.

Section 172, Companies Act, 2013 : Section 172 outlines penalties for not following the rules in Chapter XI when no specific punishment is stated. According to this section, the company and every officer in default must pay a penalty of Rs.50,000. If the failure continues, an additional Rs.500 is added for each day. The maximum penalty is Rs.3,00,000 for the company and Rs.1,00,000 for each officer in default.

Section 454, Companies Act, 2013: This provision gives the Adjudicating Officer the power to make decisions and impose penalties for violations of the Companies Act. It sets up the legal process for starting proceedings and enforcing compliance.

Companies (Adjudication of Penalties) Rules, 2014: These rules lay out the procedures for handling penalties. They cover issuing notices, conducting hearings, submitting representations, and collecting penalties. The rules ensure a fair and organized process for enforcement under Sections 172 and 454 of the Companies Act, 2013.

Facts in Issue

Non-Compliance with Minimum Director Requirement: VMS TMT Limited, a deemed public company formed in 2013, started with four directors: Mr. Amin Jaka, Mr. Varun Jain, Mr. Vaibhav Jain, and Mr. Sajidbhai I. Jaka. This setup met the requirements of Section 149(1)(a) of the Companies Act, 2013, which states that public companies must have at least three directors to ensure proper oversight, participation, and accountability.On 01 March 2014, two directors, Mr. Amin Jaka and Mr. Sajidbhai I. Jaka, resigned. This left only two directors, Mr. Varun Jain and Mr. Vaibhav Jain, causing the company to fall short of the required number of directors. As a result, the company could not comply with the law.

Period and Nature of Non-Compliance: The reduced number of directors continued from 02 March 2014 to 24 May 2014, a total of 83 days. Even though this was a temporary issue, the company violated Section 149(1)(a) throughout this time. This situation raises the question of whether a brief failure to comply with statutory requirements leads to penalties under Section 172 of the Companies Act, 2013.

Rectification and Steps Taken: The company later appointed Mr. Manojkumar Jain as a director starting on 25 May 2014, bringing the board back to the minimum required strength of three directors. Though this corrective action addressed future non-compliance, the prior period of default remained an important concern since the law does not differentiate between temporary and extended violations when it comes to liability.

Legal Issues Arising from the Facts
The case raises these issues for consideration:

Whether VMS TMT Limited, being a deemed public company, failed to maintain the minimum number of directors as mandated under Section 149(1)(a) of the Companies Act, 2013?”

Whether a temporary default lasting 83 days attracts monetary penalties under Section 172 of the Companies Act, 2013, against the company and its officers?

What is the appropriate penalty for the company and its defaulting directors, considering the length of the default, any corrective actions taken, and the limits set by the Companies Act, 2013?

Adjudication Proceedings before the Competent Authority
After the discovery of default by VMS TMT Limited, the Registrar of Companies in Ahmedabad started legal proceedings under Section 454 of the Companies Act, 2013, and the Companies (Adjudication of Penalties) Rules, 2014. These rules allow the Adjudicating Officer to investigate defaults and impose penalties in accordance with the law.
In response to this, the directors and the company submitted a suo motu application. They acknowledged the default and explained the period of non-compliance. This admission by the company and its senior management was considered during the hearing.
A hearing date was scheduled for 07 May 2025. This gave the company and its directors the chance to make written and oral statements, explain the reasons for the default, and present any mitigating circumstances. During the hearing, the Adjudicating Officer noted that the non-compliance had been resolved by appointing Mr. Manojkumar Jain as director on 25 May 2014. This brought the board back to the required minimum number.
Despite the company’s efforts to remedy the situation, the Adjudicating Officer observed that the default persisted for 83 days, which violated Section 149(1)(a) of the Companies Act. The officer stressed that occasional lapses cannot be ignored and that Section 172 requires penalties for even minor defaults. Therefore, the proceedings focused not only on recognizing the improvements made but also on determining the liability of the company and its directors during the time when they did not meet statutory requirements.
The adjudication process ultimately balanced the acknowledgment of the company’s efforts to improve with the necessity of maintaining compliance with legal standards. This ensured that corporate governance and accountability were upheld properly.
Order and Penalty Imposed
After a careful review of the facts, submissions from the company and its directors, along with the relevant sections of the Companies Act, 2013, the Adjudicating Officer imposed the following penalties:

Entity / Officer

Penalty Imposed

Maximum Limit

VMS TMT Limited (Company)

Rs.92,000

Rs.3,00,000

Mr. Varun Manojkumar Jain (DIN: 03502561)

Rs.92,000

Rs.1,00,000

Mr. Vaibhav Manojkumar Jain (DIN: 06544985)

Rs.92,000

Rs.1,00,000

Total Penalty: Rs.2,76,000  
Directions of the Adjudicating Officer

The penalty must be paid within 90 days after receiving the order through the Ministry of Corporate Affairs’ e-Adjudication portal.

The directors who are in default are personally responsible for paying the penalty from their own income or sources.

An appeal may be filed with the Regional Director in Ahmedabad within 60 days, using Form ADJ, along with a certified copy of this order.

Failing to pay the penalty on time will lead to additional penalties under Section 454(8) of the Companies Act, 2013.

This order shows that even temporary non-compliance with legal provisions, despite efforts to remedy the situation, leads to penalties and emphasizes the personal responsibility of directors under the Companies Act.
Analysis of the Order
This case highlights several key aspects of corporate governance and compliance under the Companies Act, 2013:

Strictness of Statutory Requirements. The requirement to maintain a minimum number of directors in a public company is not just a formality; it is a mandatory provision. The law does not allow for temporary lapses.

Limited Consideration of Suo Motu Disclosure. Even though the company and directors voluntarily admitted the default, the adjudicating officer imposed penalties. Voluntary disclosure may reduce adverse findings but does not eliminate liability.

Quantum of Penalty. The penalties imposed were based on the period of default, which was 83 days. The officer did not impose the maximum penalty but ensured that the punishment was sufficient.

Individual Liability of Directors. The order stressed that directors must pay penalties personally, feature Responsibility.

Corporate Governance Lessons. Companies must make timely appointments after resignations to avoid falling below statutory thresholds.

Final Note of the Article
The decision in ROC Ahmedabad v. VMS TMT Limited & Others reaffirms that meeting board composition requirements under Section 149(1)(a) of the Companies Act, 2013 is essential and cannot be negotiated. Even though the company had a short default period of 83 days, it and its directors had to pay a total penalty of Rs.2,76,000.
The order highlights these key points:

Non-compliance, even if fixed later, brings penalties.

Voluntary or self-reported disclosure does not remove liability.

Directors and officers in default are personally responsible for ensuring compliance with the law.

This case serves as an important reference for companies and directors. It underscores the need for timely action, diligence, and a proactive stance on corporate governance and compliance with regulations.
Download MCA Adjudication Order

Companies and their directors for failing to maintain the minimum number of directors as required by the Companies Act, 2013

The Companies Act, 2013 sets up a clear structure for corporate governance and regulatory compliance for companies in India. One important part is Chapter XI (Appointment and Qualifications of Directors), which outlines the rules for eligibility, appointment, duties, and the minimum number of directors needed on the board.

Section 149(1)(a) states that every public company must have at least three directors on its board. A private company needs at least two directors, while a one-person company must have one director. This requirement is essential for effective oversight, accountability, and diverse input in decision-making. It stops power from being concentrated in the hands of a few and promotes good corporate governance.

In this case, VMS TMT Limited, a deemed public company established in 2013, did not meet this requirement. After two directors resigned, the board was left with only two members. As a result, the company violated Section 149(1)(a) for 83 days. While this breach was temporary, it still went against the law.

The Registrar of Companies (ROC) in Ahmedabad examined the issue and started adjudication proceedings. After reviewing the situation, the Adjudicating Officer found that the company and its officers were at fault and held them responsible under Section 172 of the Act. Both the company and its directors faced financial penalties.

This case reinforces that complying with the Companies Act is serious business. Even short lapses can lead to penalties. It emphasizes that directors must fulfill their responsibilities carefully and ensure the company follows governance rules at all times.

Background of the Case

Incorporation and Initial Board Composition

VMS TMT Limited, a deemed public company, was incorporated in 2013. The board of directors included four individuals:

Amin Jaka
Varun Jain
Vaibhav Jain
Sajidbhai I. Jaka

On 01 March 2014, Mr. Amin Jaka and Mr. Sajidbhai I. Jaka resigned from the board. This change reduced the board to only two members, Mr. Varun Jain and Mr. Vaibhav Jain.

This situation led to a shortfall in the statutory requirement, as a public company must have at least three directors. Consequently, starting 02 March 2014, VMS TMT Limited became non-compliant with Section 149(1)(a). This non-compliance was not just a minor issue; it represented a serious breach of corporate governance rules that affected the decision-making process outlined in the Companies Act, 2013.

The issue was resolved when the company appointed Mr. Manojkumar Jain as a director on 25 May 2014. This action raised the board's strength back to three directors, bringing the company back into compliance with the legal requirement. However, the period from 02 March 2014 to 24 May 2014, totaling 83 days, remained a time of non-compliance. Although the company later corrected the issue, the delay amounted to a violation that led to legal proceedings and penalties under Section 172 of the Companies Act, 2013.

Legal Provisions

Section 149(1)(a), Companies Act, 2013: This section requires every public company to have at least three directors on its board. It is an important part of Chapter XI (Appointment and Qualifications of Directors). This rule helps ensure proper governance, collective decision-making, and accountability within the company.
Section 172, Companies Act, 2013 : Section 172 outlines penalties for not following the rules in Chapter XI when no specific punishment is stated. According to this section, the company and every officer in default must pay a penalty of Rs.50,000. If the failure continues, an additional Rs.500 is added for each day. The maximum penalty is Rs.3,00,000 for the company and Rs.1,00,000 for each officer in default.
Section 454, Companies Act, 2013: This provision gives the Adjudicating Officer the power to make decisions and impose penalties for violations of the Companies Act. It sets up the legal process for starting proceedings and enforcing compliance.
Companies (Adjudication of Penalties) Rules, 2014: These rules lay out the procedures for handling penalties. They cover issuing notices, conducting hearings, submitting representations, and collecting penalties. The rules ensure a fair and organized process for enforcement under Sections 172 and 454 of the Companies Act, 2013.

Facts in Issue

Non-Compliance with Minimum Director Requirement: VMS TMT Limited, a deemed public company formed in 2013, started with four directors: Mr. Amin Jaka, Mr. Varun Jain, Mr. Vaibhav Jain, and Mr. Sajidbhai I. Jaka. This setup met the requirements of Section 149(1)(a) of the Companies Act, 2013, which states that public companies must have at least three directors to ensure proper oversight, participation, and accountability.On 01 March 2014, two directors, Mr. Amin Jaka and Mr. Sajidbhai I. Jaka, resigned. This left only two directors, Mr. Varun Jain and Mr. Vaibhav Jain, causing the company to fall short of the required number of directors. As a result, the company could not comply with the law.
Period and Nature of Non-Compliance: The reduced number of directors continued from 02 March 2014 to 24 May 2014, a total of 83 days. Even though this was a temporary issue, the company violated Section 149(1)(a) throughout this time. This situation raises the question of whether a brief failure to comply with statutory requirements leads to penalties under Section 172 of the Companies Act, 2013.
Rectification and Steps Taken: The company later appointed Mr. Manojkumar Jain as a director starting on 25 May 2014, bringing the board back to the minimum required strength of three directors. Though this corrective action addressed future non-compliance, the prior period of default remained an important concern since the law does not differentiate between temporary and extended violations when it comes to liability.

Legal Issues Arising from the Facts

The case raises these issues for consideration:

Whether VMS TMT Limited, being a deemed public company, failed to maintain the minimum number of directors as mandated under Section 149(1)(a) of the Companies Act, 2013?”
Whether a temporary default lasting 83 days attracts monetary penalties under Section 172 of the Companies Act, 2013, against the company and its officers?
What is the appropriate penalty for the company and its defaulting directors, considering the length of the default, any corrective actions taken, and the limits set by the Companies Act, 2013?

Adjudication Proceedings before the Competent Authority

After the discovery of default by VMS TMT Limited, the Registrar of Companies in Ahmedabad started legal proceedings under Section 454 of the Companies Act, 2013, and the Companies (Adjudication of Penalties) Rules, 2014. These rules allow the Adjudicating Officer to investigate defaults and impose penalties in accordance with the law.

In response to this, the directors and the company submitted a suo motu application. They acknowledged the default and explained the period of non-compliance. This admission by the company and its senior management was considered during the hearing.

A hearing date was scheduled for 07 May 2025. This gave the company and its directors the chance to make written and oral statements, explain the reasons for the default, and present any mitigating circumstances. During the hearing, the Adjudicating Officer noted that the non-compliance had been resolved by appointing Mr. Manojkumar Jain as director on 25 May 2014. This brought the board back to the required minimum number.

Despite the company’s efforts to remedy the situation, the Adjudicating Officer observed that the default persisted for 83 days, which violated Section 149(1)(a) of the Companies Act. The officer stressed that occasional lapses cannot be ignored and that Section 172 requires penalties for even minor defaults. Therefore, the proceedings focused not only on recognizing the improvements made but also on determining the liability of the company and its directors during the time when they did not meet statutory requirements.

The adjudication process ultimately balanced the acknowledgment of the company’s efforts to improve with the necessity of maintaining compliance with legal standards. This ensured that corporate governance and accountability were upheld properly.

Order and Penalty Imposed

After a careful review of the facts, submissions from the company and its directors, along with the relevant sections of the Companies Act, 2013, the Adjudicating Officer imposed the following penalties:

Entity / Officer	Penalty Imposed	Maximum Limit
VMS TMT Limited (Company)	Rs.92,000	Rs.3,00,000
Mr. Varun Manojkumar Jain (DIN: 03502561)	Rs.92,000	Rs.1,00,000
Mr. Vaibhav Manojkumar Jain (DIN: 06544985)	Rs.92,000	Rs.1,00,000

Total Penalty: Rs.2,76,000

Directions of the Adjudicating Officer

The penalty must be paid within 90 days after receiving the order through the Ministry of Corporate Affairs’ e-Adjudication portal.
The directors who are in default are personally responsible for paying the penalty from their own income or sources.
An appeal may be filed with the Regional Director in Ahmedabad within 60 days, using Form ADJ, along with a certified copy of this order.
Failing to pay the penalty on time will lead to additional penalties under Section 454(8) of the Companies Act, 2013.

Analysis of the Order

This case highlights several key aspects of corporate governance and compliance under the Companies Act, 2013:

Strictness of Statutory Requirements. The requirement to maintain a minimum number of directors in a public company is not just a formality; it is a mandatory provision. The law does not allow for temporary lapses.
Limited Consideration of Suo Motu Disclosure. Even though the company and directors voluntarily admitted the default, the adjudicating officer imposed penalties. Voluntary disclosure may reduce adverse findings but does not eliminate liability.
Quantum of Penalty. The penalties imposed were based on the period of default, which was 83 days. The officer did not impose the maximum penalty but ensured that the punishment was sufficient.
Individual Liability of Directors. The order stressed that directors must pay penalties personally, feature Responsibility.
Corporate Governance Lessons. Companies must make timely appointments after resignations to avoid falling below statutory thresholds.

Final Note of the Article

The decision in ROC Ahmedabad v. VMS TMT Limited & Others reaffirms that meeting board composition requirements under Section 149(1)(a) of the Companies Act, 2013 is essential and cannot be negotiated. Even though the company had a short default period of 83 days, it and its directors had to pay a total penalty of Rs.2,76,000.

The order highlights these key points:

Non-compliance, even if fixed later, brings penalties.
Voluntary or self-reported disclosure does not remove liability.
Directors and officers in default are personally responsible for ensuring compliance with the law.