RoC Orders: 10 Lakh Penalty for Non-Compliance with Secretarial Standards, Many Other Cases of Heavy Penalties

Hello everyone. As a new-year initiative, I have decided to write more in the form of LinkedIn articles and lesser posts, unless the length of the matter does not warrant so. I also finalized a calendar for Linkedin posts which you can see here. This post is pursuant to that only.

I have observed a sudden jump in number of adjudication orders that have been uploaded recently on the MCA website. This can be due to several reasons. Broadly and prima facie, it may indicate that the activity or if we may call so – the crackdown has increased recently. Plus this RoC Adjudication Order is surely an eye opener due to the sheer quantum of money - nearly Rs 1 crore - paid as penalty due to a procedural non - compliance. This is also corroborated by some unofficial channel checks that I have done recently.

Or it may be that many orders were waiting to be uploaded and have been added all at once. But if that was the case, the dates tell a different story. Whatever be the case, what cannot be denied is that the penalties on non-compliant companies are really increasing. The genesis of it varies – for instance, a Sec. 12 non-compliance is usually detected by the RoC during a Sec. 206 (Power to call for information) inquiry. In many instances, Companies voluntarily approach the RoC for adjudication. This is helpful as the earlier one approaches, the lesser are the adjudicated penalties.

To be honest, many, if not all of the usual complaints that compliance professionals had regarding CA 2013 have been addressed through subsequent and frequent amendments by the MCA. Fines have been replaced with penalties. Prosecution is replaced by adjudication. Whatever still seems draconian will remain on the statute book unless struck down by a Court (which is a rare possibility) or toned down by the government (for instance, the letter head part of Sec. 12).

Anyways, enough with this long prologue. I read through some of the recent adjudication orders. Unlike my last article, there is no need of an introduction to the legislative framework of RoC Adjudication Orders here as I expect the reader to be familiar with it. If not, do indicate in comments.

Coming back to the topic, I observe that except a few unique non compliances, most adjudications in the two months catered to four distinct buckets– (i) Sec. 12 non-compliance (ii) Using funds before filing of PAS forms (this is the flavor of the season (iii) Failure to file resolutions (MGT-7) (iv) Non -compliance with annual filing requirements or Secretarial Standards. Below are the anonymized version of the RoC Orders passed recently. Here is a roundup of some of the major recent orders:

Section 12 Non-Compliance:

On the face of it, Sec. 12 of the Companies Act, 2013 appears to be self-explanatory. There is hardly any confusion that can arise here. Yet, more than a half of adjudication orders are found to be dealing with Sec. 12. Sometimes, the non-compliance appears to be purely innocent. The other instance, it is done purposefully by some unscrupulous elements.

The first case is quite usual one yet interesting. A Private Limited company applied for adjudication after it noticed that the letter sent to Regional Director was on a letter head not bearing the Company Identification Number. A penalty of Rs 94000 was imposed.

In the second case, a creditor – being a sole proprietorship - lodged a complaint with the Registrar of Companies that a Company owed it more than Rs 2 lakhs. The authority dispatched a notice which came unanswered with the remark “addressee left”. Naturally, the RoC came to the conclusion that there was a non-compliance with Sec. 12(8) which requires a Company to maintain a registered office. The matter was adjudicated and a penalty of Rs 5 lakhs (1 lakh on Company and 1 lakh X 4 Directors = 5 lakhs) was imposed. Truly a management lapse.

Secretarial Standards are Also Laws and Have to be Complied With

There are two recent orders where a blatant violation of Secretarial Standards has been observed. ?

In one case, the board of a Company strangely approved the financials through a Circular Resolution! Secretarial Standard 1 prescribes that a Company shall not approve the financials through a CR. The RoC noticed that the resolution was approved through circular resolution and hence imposed a cumulative penalty of Rs 30000 on the company and the Whole Time Director. In my opinion, this provision is a bit redundant and must be relooked by the ICSI. There can be lot of debates on the merits and demerits of this, but my opinion says that imposing such a burden through a Secretarial Standard is not the best form of law making.

In another case, a hefty total penalty of Rs 10 lakhs was imposed on Company for its failure to maintain distinct books of Minutes. The non-compliance was with respect to Ss. 118(1), 118(10) r/w Rule 25(a) of the Companies (Management and Administration) Rules, 2015. The Company failed to maintain distinct Minutes books. The non-compliance lasted for 4 financial years. I wonder if PCS would also get a letter from the RoC as he may have certified total compliance.

Many Instances of Not Filing MGT-14 Detected

If there is one trend that is crystal clear, it is that the RoC is frowning on non-filing of MGT-14 forms. I had posted about this last week. In two instances, hefty penalties were imposed for cases relating to the last 3-4 financial years.

In the first case, a heavy penalty of Rs 10 lakhs+ was imposed on private company as it failed to file a special resolution relating to issuance of irredeemable preference shares. The paid up capital of the Company is Rs 21.95 lakhs, so the penalty translates to the half of that (at least in optical terms, this is huge)

In another case, the total penalty on a second company was determined to be Rs 12 lakhs but reduced to 3 lakhs. The failure to file was for form MGT-14 relating to appointment of a Managing Director in the year 2015. The application was voluntary.

As I have been saying, knowledge and reading of RoC Orders is a must for all corporate professionals. So keep reading and enlightening yourself. Thanks for reading.

All the above orders are anonymized versions of the real orders passed by the RoC. As usual, these are for educational and awareness purpose only. All views are strictly personal and of the author only.?Hero image taken from Wikipedia pursuant to its creative commons license.