Consequences of exercising borrowing power before filing the declaration of commencement of business – A Case Study

1. Financial statements and their filing with the Registrar of Companies

Every company incorporated under the Companies Act is required to prepare its financial statements, get the same audited and thereafter along with the board report containing the particulars, are required to get it approved by the shareholders of the company. Thereafter, the company is required to submit the same to the Registrar of Companies in the specified format in the stipulated period of time. In case, financial statements are not adopted for some reason, the Companies Act 2013, spells out the procedure for filing unadopted financial statements as well.

Financial statements basically consist of the balance sheet at the end of the financial year, a profit and loss account or in the case of a company carrying on any activity, not for profit, an income and expenditure account for the financial year along with auditors’ report and cash flow statement for the financial year amongst few other things. As per Section 137 of the Companies Act 2013, read with Rule 12 of Companies (Accounts) Rules 2014, the financial statements are required to be filed in the prescribed form AOC-4 XBRL by every company annually within the prescribed time limit along with all the mandatory attachments.

2. Relevant provisions of the Companies Act

The following are the relevant provisions under the Companies Act 2013 on this matter.

Section 137(1):- A copy of the financial statements, including consolidated financial statement, if any, along with all the documents which are required to be or attached to such financial statements under this Act, duly adopted at the annual general meeting of the company, should be filed with the Registrar of Companies within thirty days of the date of the annual general meeting in such manner, with such fees or additional fees as may be prescribed:

Sub-section 40 of section 2 of the Companies Act, 2013

Financial statement in relation to a company, includes-

(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv);

Provided that the financial statement, with respect to One Person Company (OPC), small company and dormant company, may not include the cash flow statement.

3. Penal provisions for default/ violation

Section 137(3): If a company fails to file a copy of the financial statements under sub-section (1) or sub-section (2), as the case may be, before the expiry of the period specified therein,

(a) the company shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees and

(b) the managing director and the chief financial officer of the company, if any, and, in the absence of the managing director and the chief financial officer, any other director who is charged by the board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be liable to a penalty of ten thousand rupees and in case of continuing failure with further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of fifty thousand rupees.

4. Consequences of default/violation – action from the Regulator

To understand the consequences of any default in complying with the section 137(1) of the Companies Act 2013 relating to filing of the copy of financial statements with the Registrar of Companies, let us go through one of the decided case law on this matter very recently – during the month of October 2022 – by the Registrar of Companies of Ahmedabad.

5. The relevant case law on this matter

We shall go through a case law relating an adjudication order passed by the Registrar of Companies, Gujarat, Dadra & Nagar Haveli on 18th October 2022 in the matter of M/s Rudmksh Synthetic Private Limited bearing no.No.ROC-GJ/25/ADJ/ order u/s 454/STA V/2021-22 / 5217 to 22 in the matter of Adjudication of Penalty under section 454(3) of the Companies Act 2013, read with Rule 3 of the Companies (Adjudication of penalties) Rules, 2014 for violation of section 137 read with rules made thereunder.

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