ROC Delhi & Haryana issues Penalty Orders for Non-Approval of Related Party Transactions by Board and Audit Committee

Provisions Involved:

Section 118 (1) of Companies Act, 2013 states every company shall cause minutes of the

• proceedings of every general meeting of any class of shareholders or creditors,
• every resolution passed by postal ballot, and
• every meeting of its Board of Directors,

to be prepared and signed in a prescribed manner and kept within thirty days of the conclusion of
every such meeting or passing of resolution by postal ballot.

Section 189 (1) of Companies Act, 2013 states every company shall keep one or more registers giving
separately the particulars of all contracts or arrangements to which sub-section (2) of section 184 (i.e.,
disclosure of interest by directors) or section 188 (i.e., related party transactions) applies, in a prescribed
manner and after entering the particulars, such register shall be placed before the next meeting of
the Board and signed by all the Directors present at the meeting.

Facts of the Case:

• For Violation of Section 118 (1)-

• During the Inspection ordered by MCA (Ministry of Corporate Affairs), while perusing the minutes of the Board Meeting, the Inquiry Officer (I.O.) observed that the subject company (Lava International Limited) has not placed the related party transactions before the Audit Committee meeting held on December 31, 2018 for approval in compliance of section 118(1) of the Act read with (r/w) Secretarial Standard -1 (SS-1) issued by Institute of Company Secretaries of India (ICSI).
• On February 14, 2023 Show Cause Notice (SCN) was issued to the subject company and its officers in default who have not complied with the section 118 of the Act r/w SS-1. Also, they were now liable for penalties under section 118 (11) of the Act.
• Penalty of Rs. 25,000 was imposed on the subject company and a Penalty of Rs. 5,000 each was imposed on its 6 officers who are in default for violation of section 118 (1) amounting to Rs. 55,000 in total.

• For Violation of Section 189 (1)-

• During the inspection ordered by MCA, while perusing the minutes and statutory registers for the financial year 2017-18 to 2019-20, I.O observed that the subject company has made entries of sale-purchase from related parties in the said register. However, the same was neither placed nor signed by the board of directors in compliance of section 189 (1) of the Act.
• On February 14, 2023 SCN was issued to the subject company and to its every director who has not complied with the section 189(1) of the Act. Also, they were now liable for penalties under section 189 (6) of the Act. Order of Penalty for Violation of Section 118 (1) and Section 189 (1) of the Companies Act, 2013 in the matter of LAVA INTERNATIONAL LIMITED
• Penalty of Rs. 25,000 each was imposed on 9 directors of the company who are in default for violation of section 189 (1) amounting to Rs. 2,25,000 in total.

Decision:

• On Violation of Section 118 (1) And Section 189 (1)-

• The benefit of Section 446B (i.e., lesser penalties for certain companies) would not be applicable on the company as it does not get covered under the purview of small company as defined u/s 2(85) of the Act.
• The said amount of penalty shall be paid through online by using the website www.mca.gov.in in favor of “Pay & Accounts Officer, Ministry of Corporate Affairs, New Delhi”, payable at Delhi, within 90 days of receipt of the order, and intimate the MCA with proof of penalty paid.
• Appeal against this order may be filed with the Regional Director (Northern Region), Ministry of Corporate Affairs, New Delhi within a period of sixty days from the date of receipt of the order, in Form ADJ [available on www.mca.gov.in] setting forth the grounds of appeal and shall be accompanied by a certified copy of the order.
• Lava International Limited was also invited to provide attention to Section 454(8) (i.e., adjudication of penalties) of the Act in the event of non-compliance of this order.

SW Remarks: The above 2 sections [118 (1) & 189 (1)] of Companies Act, 2013 should be properly followed by each and every company (i.e., company should place the related party transactions
before the Audit Committee and should place the entries of sale-purchase from related parties in front
of directors and get it signed by them) to avoid penal implications.

Ankit Sawhney, Audit Associate, SW India