From Penalties to Practices: Lessons Learned from Recent Adjudication Orders

The Ministry of Corporate Affairs, through Gazette Notification No. S.O. 831(E) dated 24.03.2014, has empowered the Registrar of Companies (ROCs) as Adjudicating Officers (AOs) within their respective jurisdictions. This authority is granted under Section 454 of the Companies Act, 2013, read with the Companies (Adjudication of Penalties) Rules, 2014, enabling them to adjudicate penalties arising from violations of the Companies Act, 2013 and rules made thereunder.

In recent years, ROCs/AOs, acting under Section 454, have issued numerous adjudication orders penalizing companies and their officers in default for non-compliance with the Companies Act, 2013 and the rules made thereunder.

Such penalties are often incurred due to either a lack of awareness regarding legal provisions or in absence of guidance for ensuring compliance with corporate laws. However, it's crucial to recognize that inadvertence or lack of knowledge does not absolve companies or their officers from legal repercussions. In such instances, seeking guidance from governance professionals becomes very important.

While the government endeavors to foster a conducive environment for business through initiatives like Ease of Doing Business, it simultaneously upholds the importance of compliance. The government remains resolute in its stance that non-compliance with laws will not be tolerated, emphasizing that ease of doing business does not excuse the non-compliances.

Recent years have seen a surge in adjudication orders against non-compliant companies and their officers, serving as a valuable lesson for both corporate entities and professionals. First of all understanding the concept of "Officer in Default" is very important. As per Section 2(60) of the Companies Act, 2013, an Officer in Default means an individual such as Whole-time Directors (WTDs), Key Managerial Personnel (KMPs) as defined in Section 203, including CEOs, CFOs, CSs, MDs, Managers, and where applicable, directors designated by the Board, or any other person whose directions the Board accustomed to follows.

In recent years, Adjudicating Officers (AOs) have issued numerous adjudication orders against companies and their officers. Below are some of the provisions which AOs have recently adjudicated. Corporates and professionals may refer to these for ensuring full compliance and making their entities fully compliant.

1.?????? Section 184 of the Companies Act, 2013 (Disclosure of Interest by Director):

Section 184 of the Companies Act, 2013 mandates that directors must disclose their interests or concerns in any companies, bodies corporate, firms, or associations of individuals, including their shareholdings, at the first board meeting they attend as directors. This disclosure must also be reiterated at the first board meeting of each financial year, or whenever there is a change in the disclosed information, at the subsequent board meeting following such change, as prescribed by law.

A recent adjudication order issued by the Registrar of Companies, Chandigarh, highlights a case where the directors of a company failed to disclose their interests or concerns in other entities, including their shareholdings, at the initial board meeting held during the financial year 2022-23. Consequently, the directors were found in violation of Section 184 of the Companies Act, 2013. Despite their assertion that the oversight was unintentional and that they rectified the omission by disclosing their interests at the subsequent board meeting, all directors were penalized with a fine of Rs. 100,000/- each, as stipulated under Section 184(4) of the Companies Act, 2013.

Advice: It's imperative for directors to meticulously adhere to the disclosure requirements outlined in Section 184 of the Companies Act, 2013, to avoid potential penalties and legal ramifications. Even inadvertent lapses in compliance can lead to significant consequences. Therefore, directors should prioritize staying informed about their obligations and ensure timely and accurate disclosure of their interests to uphold transparency and regulatory compliance within their organizations.

2.?????? Section 137 of the Companies Act, 2013 (Copy of Financial Statement to be Filed with Registrar):

As per Section 137(1) of the Companies Act, 2013, companies are required to submit copies of their financial statements, including consolidated financial statements if applicable, along with all relevant documents, to the Registrar within thirty days of their annual general meeting. This submission must adhere to the prescribed format and fees.

In a recent adjudication order issued by the Registrar of Companies, Mumbai, highlights a case where a company failed to fulfill this obligation for the financial year 2018-19, thus violating Section 137 of the Companies Act, 2013. Despite being given an opportunity to rectify the filing lapse, the company neither responded to the notice nor complied with Section 137 requirements. Consequently, the Registrar imposed a penalty of Rs. 134,000/- on the company for a delay of 134 days, and Rs. 13,400/- each on its directors for the same delay period.

Advice: It's crucial for companies and their directors to prioritize timely submission of financial statements to avoid penalties and uphold legal compliance. Failure to adhere to regulatory deadlines not only incurs financial penalties but also tarnishes the company's reputation and may lead to further legal consequences. Establishing robust internal processes and regular monitoring can help ensure timely compliance with statutory requirements. Directors should remain vigilant and proactive in fulfilling their obligations to safeguard the interests of the company and its stakeholders.

3.?????? Section 92 of the Companies Act, 2013 (Annual Return):

In accordance with Section 92(1) of the Companies Act, 2013, it is mandated that every company must prepare a return in the prescribed format, detailing the information specified under the same section, as of the conclusion of the financial year. Additionally, as per Section 92(4), the company is obligated to file this return with the Registrar within 60 days from the date of the Annual General Meeting (AGM), or if no AGM is convened, within 60 days from the date on which the AGM should have taken place.

A recent adjudication order issued by the Registrar of Companies, Mumbai, highlights a case wherein a company failed to fulfill this statutory requirement for the financial year 2018-19, thus resulting a violation of Section 92 of the Companies Act, 2013. Despite being provided with an opportunity to rectify the non-compliance, the company neither responded to the notice nor adhered to the stipulations outlined in Section 92.

Consequently, the Registrar of Companies imposed a penalty of Rs. 1,66,200/- on the company and its director.

Advice: Adherence to Section 92 of the Companies Act, 2013 is crucial for maintaining legal compliance and avoiding penalties. Ensure timely preparation and filing of the prescribed return containing the requisite details as mandated by Section 92(1). Remember to file this return with the Registrar within 60 days from the conclusion of the Annual General Meeting or the stipulated timeline if no AGM is held. Neglecting these obligations can result in severe penalties and legal consequences. Regularly monitor compliance deadlines, promptly address any discrepancies, and prioritize timely submission to uphold the integrity of your company's operations and legal standing.

Numerous adjudication orders for non-compliance with various sections of the Companies Act, 2013 are available on the Ministry's website. These include violations of Section 12 regarding the maintenance of a registered office, Section 90 concerning the declaration of beneficial interest, Section 135 addressing Corporate Social Responsibility, Section 118 regarding the maintenance of minutes in accordance with secretarial standards issued by the ICSI, among others. However, it is not possible to cover all such adjudication orders in a single article.

It is incumbent upon the company, its directors, key managerial personnel (KMPs), and professionals to ensure full compliance. Moreover, it is accurate to assert that the costs associated with non-compliance, both in financial and reputational terms, invariably higher than those of compliance.