[Opinion] Caught in the Act | ROC Fines Company and Its Directors for Undisclosed ‘Related Party Transactions’ in Board’s Report
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- Last Updated on 24 July, 2024
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Prof R Balakrishnan – [2024] 164 taxmann.com 521 (Article)
1. Background of this case
This case is pertaining to an order issued by the Registrar of Companies of Chennai against the company Bluemax Capital Solution Private Limited penalizing the company and its directors of the company for violating the provisions of section 134(3)(h) of the Companies Act 2013 read with Rule 8 of the Companies (Accounts) Rules 2014 for the non-disclosure of the mandated disclosure of related party transactions in the AOC-2 form as part of the board of directors’ report consecutively for a period of three years. In the company’s board report, the board of directors are required to make the disclosure relating to the particulars of contracts/arrangements entered into by the company with related parties referred to in sub-section (1) of section 188 of the Companies Act 2013, including certain arm’s length transactions under third proviso thereto under clause (h) of sub-section (3) of section 134 of the Companies Act 2013 read with Rule 8(2) of the Companies (Accounts) Rules 2014 and also furnish the particulars in the form AOC-2.
The Registrar of Companies detected the violation committed by the company and its directors through an inspection conducted under the provisions of section 206(5) of the Companies Act 2013. During the inspection, the Registrar of Companies observed that the company had not disclosed the required details of the related party transactions entered into by the company in the AOC-2 form and also in the board report. The board report stated that there had been no related party transaction and that the AOC-2 form was not applicable. However, in the notes to the balance sheet, the details of related party transactions were finding the place disclosing the details under the head “Other Long-Term Liabilities” for the financial years 2015-16; and 2016-17 and also for financial year 2017-18, and disclosed the ‘Dues to Directors and others’ and provided the respective figures for all the three financial years.
Under the provisions of the Companies Act 2013, it is a legal requirement to make the disclosure on the related party transactions in the board report of a company whereas in this case the board report contained the wrong disclosure. Since the company and its directors failed to make the disclosure on the related party transactions, the Adjudication officer followed the due process of law and levied a penalty aggregating to a total amount of Rs. 13.50 lakh upon the company and its directors. To understand the issue involved in this case, the legal provisions, and the consequences of non-compliance, let us go through the order passed by the Registrar of Companies of Chennai on 30th April 2024.
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. Further, in chapter XII of the Companies Act 2013, under the headings related party transactions under the provisions of section 188 of the Companies Act 2013, read with the Rule 8 of the Companies (Accounts) Rules 2014.
The relevant extracts of these sections and rules are as given below for ready reference.
| Companies Act 2013 Chapter IX – Accounts of Companies Section 134. Financial statement, Board’s report, etc. |
|
| Section | Provision |
| 134 (3) | There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include— |
| 134 (3)(h) | particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed form. |
| Companies Act 2013 Chapter XII – Meetings of Board and its Powers Section 188. Related Party Transactions |
|
| 188 (1) | Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to |
| 188 (1)(a) | sale, purchase or supply of any goods or materials; |
| 188 (1) (b) | selling or otherwise disposing of; or buying, property of any kind; |
| 188 (1) (c) | leasing of property of any kind; |
| 188 (1) (d) | availing or rendering of any services; |
| 188 (1) (e) | appointment of any agent for purchase or sale of goods, materials, services or property; |
| 188 (1) (f) | such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and |
| 188 (1) (g) | underwriting the subscription of any securities or derivatives thereof; of the company. |
| The Companies (Accounts) Rules 2014 Rule 8. Matters to be included in the board report |
|
| Rule | Provision |
| 8 (2) | The Report of the Board shall contain the particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the Form A0C-2 |
| Penal section for non-compliance/default if any | |
| 134 (8) | If a company is in default in complying the provisions of this section, the company shall be liable to a penalty of three lakh rupees and every officer who is in default shall be liable to a penalty of fifty thousand rupees. |
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