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Petitioner had no locus to challenge auction sale as she failed to participate in auction process and deposit whole amount: HC
In the instant case, a secured asset was auctioned for Rs. 3.61 crores. The petitioner was aware of the auction but did not participate. She later claimed that bank officials misled her about the property's value. The petitioner filed her application/objections before the Recovery Officer, Debt Recovery Tribunal (DRT), increasing the bid amount to Rs 4.33 crore, but the Recovery Officer rejected objections filed by the petitioner and confirmed the sale of the subject property in favour of respondent nos.2 & 3/auction purchasers.
The petitioner filed an appeal before the DRT and claimed to have deposited a total sum of Rs. 4.33 crores to show her bona fide. The DRT reversed the order and directed the Recovery Officer to fix a date for conducting inter se bidding between the petitioner and auction purchasers.
Aggrieved by the said order, auction purchasers filed an appeal before the DRAT, which was allowed vide the impugned order and, thus, confirming the sale of the subject property in favour of auction purchasers.
It was noted that if one were to apply an interpretation of Rules 60 & 61 of the Income-Tax Act, 1961, then the application filed suffered from the vice of being time-barred and non-compliant with the mandatory condition of deposit of Reserve Price.
The High Court observed that the application was barred by delay and laches and was also not maintainable due to the lack of mandatory deposit as per the scheme of Rules 60 and 61 of the Second Schedule to the Income-tax Act, 1961.
The High Court, further observed that the petitioner appeared to be a third party who did not participate in the auction process, subsequently made her offer, and did not deposit the whole amount. Therefore, the petitioner had no locus to file any such application or objection.
The High Court held that the question of whether the petitioner had offered a higher price and whether it could be a ground to interdict sale confirmation etc., was inconsequential and held untenable. Thus, there was no reason to interfere with the impugned order passed by the DRAT.
ROC penalizes Co., WTD, CFO & CS for failing to address audit objections on Internal Financial Controls in Board Report
1. Background of the case
The Board's Report is an important document prepared by the company every year and attached along with the financial statements. It discloses the details of the company's affairs as to what happened during the financial year that has ended to its stakeholders. As per the provisions of sub-section (3) (f) of section 134 of the Companies Act, 2013, the section states that there shall be attached to statement laid before a company's annual general meeting, a report by the company's board of directors, which shall include explanations or comments by the board on every qualification, reservation or adverse remark or disclaimer made (i) by the auditor in his report and (ii) by the company secretary in practice in his secretarial audit report.
In this case, a company named M/s. Spacenet Enterprises India Limited from the state of Telangana Directors failed to address an audit objection regarding internal financial controls in their Board's Report for the financial year 2020-2021, which was discovered by the inspecting officials from the office of the Registrar of Companies. This being the violation of the Companies Act, the Registrar of Companies, Hyderabad of Telangana, issued an adjudication order against M/s. Spacenet Enterprises India Limited for violating Section 134(3)(f) of the Companies Act, 2013, after following the required procedure on this matter.
Though the company attributed this omission to oversight, which led to the issuance of an adjudication notice following a personal hearing, the Registrar of Companies, after evaluating the case, imposed penalties upon the company Rs. 3,00,000 and Rs. 50,000 each on the officers in default – i.e. whole-time director, chief financial officer and upon the company secretary. Let us go through this case in detail so that we can understand the facts and circumstances that led to the violation and the consequent action by the regulators to address the violation.
2. Relevant Provision relating to this case under the Companies Act 2013
The relevant provisions pertaining to this case are spelt out in chapter IX of the Companies Act 2013, under the headings accounts of companies under the provisions of section 134 of the Act pertaining to financial statements, board reports etc. The relevant extracts of these sections and rules are as given below for ready reference.
3. Consequences of default/violation
To understand the consequences of any default / non-compliance while complying with the
provisions of section 134 (3) (f) of the Companies Act 2013 relating to financial statements, board reports, etc. – especially with reference to offering explanations and comments to be provided by the board of directors in the board report on the qualification made by the statutory auditors in his report, let us go through the decided case law by the Registrar of Companies of
Telangana on this matter on 16th July 2024 relating to M/s. Spacenet Enterprises India Limited.
4. The relevant case law on this matter
We shall go through the adjudication order passed by the Registrar of Companies, Hyderabad of Telangana on 16th July 2024 adjudication order bearing F.No/ROC/HYD/ Spacenet/ ADJ/S.134/2024-25/901 -adjudication under section 134 (3) (f) of the Companies Act 2013 in the matter of M/s.Spacenet Enterprises India Limited.
5. Company details
M/s. Spacenet Enterprises India Limited is a listed public company incorporated effective from 28th May 2010 under the provisions of the Companies Act 1956, having its registered office at Plot No.114, Survey No.66/2, Raidurgam Gachibowli, Prasanthhills, Navkhalsa, Seril ingampally, Rangareddi, Hyderabad in the state of Telangana. The company currently have eight directors on its board, and one of them is a whole-time director, the company also has a chief financial officer and a company secretary in whole-time employment. The company is engaged in the trading of commodities and information technology-related services.
5.1 Financial and other details of the company
The financial and other details of M/s Spacenet Enterprises India Limited for the immediate financial year ended as on 31st March 2023, as available on the Ministry of Corporate Affairs portal is as stated below:
6. Facts of the case
The following were the events that took place in relation to this case.
(a)?The inspecting officials from the Registrar of Companies carried out enquiries under the instruction of the Government of India, upon the company calling for information under the provisions of section 206(4) of the Companies Act 2013.
(b)?During the course of an enquiry, the inspecting officials observed from the audit report attached to the financial statements of the company for the financial year ended on 31st March 2021 that the auditors had an audit objection relating to the company's internal financial controls.
(c)?The company did not address the audit objection and had not explained or provided any explanation in the board report of the company issued by the company for the same period, i.e., the year ended on 31st Match 2021.
With the above observation, the Registrar of Companies had a reason to believe that the company had violated the provisions of section 134(3)(f) of the Companies Act 2013 and therefore, the company and its directors and KMPs were liable for penal action under the provisions of section 134(8) of the Companies Act 2013.
7. Action taken by the Registrar of Companies - issue of adjudication notice
The Registrar of Companies/Adjudication Officer issued an adjudication notice to the company and its directors/KMPs to show cause as to why penal action cannot be taken for the above said violation committed by the company vide its adjudication notice dated 20th October 2023 and directed the company and its directors/KMPs to provide the necessary explanation.
8. Response from the company to the notice issued by the Adjudication Officer
The company and its officers in default had filed their reply for the adjudication notice issued by the Adjudication officer on 21st May 2024, and the same was received by the officer of the Registrar of Companies on 24th May 2024. The company attributed that the default had happened due to oversight and hence the omission in addressing the audit objection in the internal control related issues.
9. Issue of personal hearing notice
After having received the reply from the company, in the interest of natural justice, before adjudicating the penalty for the violation committed by the company, the Registrar of Companies/Adjudication Officer issued a personal hearing notice dated 12th June 2024 to the company and its directors and KMPs directing them to appear before him for a hearing on 26th June 2024.
10. On the day of the personal hearing
As authorized by the company, a practising company secretary appeared before the Registrar as a representative of the company and its directors and KMPs and made the submissions during the time of the personal hearing. The practising company secretary reiterated the reason for the default due to oversight, as stated in the reply letter of the company dated 21st May 2024. In addition to the above, the authorised representative also brought to the notice that one of the directors named as a defaulting officer in the show cause notice had expired. He submitted the death certificate as desired by the Adjudication officer.
11. Conclusion reached by the Registrar of Companies
The Registrar of Companies, who is also the Adjudicating Officer, having gone through the reply provided by the company and also considering the submissions made by the authorized representative during the personal hearing, had come to the conclusion that the company and its directors/KMPs had violated provisions of section 134 (3) (f) of the Companies Act 2013 and as such they are liable to be penalized as provided under the provisions of section 134 (8) of the Companies Act 2013 by not addressing the objections raised by the auditor in their audit report.
12. The adjudication order passed by the Registrar of Companies/Adjudicating Officer
The Registrar of Companies/Adjudication Officer, after having considered the facts and circumstances of the case and after taking into account the various factors, in exercise of the powers vested upon him under section 454(1) & (3) of the Companies Act 2013 imposed the penalty upon the company and its directors and its KMPs for the violation of section 134(3)(f) of the Companies Act 2013, as prescribed under section 134(8) of the Companies Act 2013.
The details of the penalty imposed on the company and directors/KMPs in default are shown in the table below:
(a)?The order stated that the pointed amount of penalty imposed shall have to be paid online by using the website mca.gov.in (Misc. head) within 90 days of receipt of this order and intimation was required to be sent to the office of the Registrar of Companies with the proof of penalty paid.
(b)?The order brought to the notice of the company that an appeal against this order may be filed with the Regional Director (SER), Ministry of Corporate Affairs, 3rd Floor, Corporate Bhavan, Bandlaguda, Nagole, Hyderabad, Telangana, within a period of sixty days from the date of receipt of this order, in Form ADJ [available on Ministry website mca.gov.in) setting forth the grounds of appeal and the appeal shall have to be accompanied by a certified copy of this order. [Section 454(5) & 454(6) of the Act read with Companies (Adjudication of Penalties) Rules, 2014].
(c)?The order invited the attention of section 454 (8) of the Companies Act 2013 in the event of non-compliance with this order, as stated below.
Section 454 (8) (i) provides that where the company fails to comply with the order made under sub- section (3) or sub-section (7), as the case may be within a period of ninety days from the date of the receipt of the copy of the order, the company shall be punishable with fine, which shall not be less than twenty five thousand rupees but which may extend to five lakh rupees.
Section 454 (8) (ii) In case where an officer of a company or any other person who is in default fails to comply with the order made under sub-section (3) or sub-section (7), as the case may be within a period of ninety days from the date of the receipt of the copy of the order, such officer shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both."
13. Despatch of the order
The order was sent by the Registrar of Companies in terms of the provisions of sub-rule (9) of Rule 3 of Companies (Adjudication of Penalties) Rules 2014 as amended by Companies (Adjudication of Penalties) Amendments Rules 2019 to the company and to its whole-time director, chief financial officer and the company secretary and also to the Regional Director, (SER) Ministry of Corporate Affairs, at Hyderabad.
14. Complete order for reading
The readers may like to read the complete order passed by the Registrar of Companies, Hyderabad of Telangana on 16th July 2024 adjudication order bearing F.No/ROC/HYD/Spacenet/ADJ/S.134/2024-25/901-adjudication under section 134 (3) (f) of the Companies Act 2013 in the matter of M/s.Spacenet Enterprises India Limited and the relevant website https://www.mca.gov.in/content/mca/global/en/data-and-reports/rd-roc-info/roc adjudication-orders.html (order uploaded at the website under ROC of Hyderabad on 30th August 2024 under caption Adjudication order dated 16.07.2024 for the violation of section 134 of the Companies Act 2013, in the matter of M/s. Spacenet Enterprises India Limited)
15. Conclusion
As discussed elsewhere in this case law, sub-section (3) section 134 of the Companies Act 2013 requires that the board report shall include explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report and by the company secretary in practice in his secretarial audit report. In view of the above, the board of directors have to state in their board report.
As a matter of good corporate governance practice, if there are no qualifications, reservations or adverse remarks made by the statutory auditors/secretarial auditors in their respective reports, a statement to this effect should be given in the board's report.
In case of qualifications, adverse remarks, or observations in the auditors' report, then the detailed explanation for all the observations and qualifications given by the auditor in his audit report and in the notes attached to the financial statements, including the reasons for such material deviations and reasons that led to such deviations. If the auditors' report involves a debatable point on which differences of opinion have arisen, the board should give a full explanation about the same in its report. The board's report may also contain a confirmation of the follow-up action taken by the directors on the qualifications made in accounts for previous years.
If the company fails to address the auditors' qualifications, observations, and adverse remarks in their board report, as seen in this case, the regulator will initiate penal actions, and the company has to face the consequences and end up paying severe amounts of penalty. In this case, the Adjudication officer levied a total penalty of Rs. 4,50,000 upon the company, its whole-time director, chief financial officer and the company secretary. In view of this, it is important for the company to go through the auditors' report and offer the necessary explanations and comments in cases where the audit reports contain adverse comments, disqualifications, observations, etc.
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