[Opinion] False Disclosure in Board’s Report on Related Party Transactions Results in Penalties for the Company and Its Directors
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- Last Updated on 30 April, 2024
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Prof R Balakrishnan – [2024] 161 taxmann.com 732 (Article)
1. Background of the case
The Registrar of Companies of Coimbatore passed an adjudication order on 28th March 2014 in respect of M/s Martin Multi Projects Private Limited for the violation of section 134(3)(h) of the Companies Act 2013 and penalized the company and its directors to a tune of Rs.3 lakh (being a small company).
The gist of the case is that the company had filed its annual financial statements for the financial years 2018-19 and 2019-20 in the AOC-4 XBRL format with the Ministry of Corporate Affairs portal. As per the annual financial statements, the company had entered into contracts or arrangements with the related parties and also made the required disclosures in the notes forming part of the financial statements. However, in the board report for these two financial years, the company made the disclosure stating that the company did not enter into any contract or arrangements with the related parties which was quite contrary to the disclosure made in the annual financial statements resulting that the company had made a false disclosure in its board report on this matter i.e. disclosure on related party transactions.
Realizing the default committed, the company filed the suo-moto adjudication application with the Registrar of Companies. The Registrar of Companies, after having given an opportunity in the interest of natural justice, by following the legal procedure, passed the adjudication order. Let us go through this case in detail in order to understand the provisions of the Companies Act 2013 read with the relevant rules and consequences of default/non-compliance.
2. Disclosure in the board report
For the information of the readers, it could be noted that in the board report of the company under the column “Particulars of Contracts or Arrangements with Related Parties”, the companies, by and large, make the following disclosures. (an illustration of disclosure)
| Disclosure –illustration (cases where AOC-2 is not attached ) |
| Under the Companies Act 2013, all contracts/arrangements/transactions entered into by the company during the financial year ended …………….month/date/year……….with related parties were on an arm’s length basis and were in the ordinary course of business. Moreover, none of the transactions were material in nature, and therefore, members’ approval was not required to be obtained, in accordance with the Policy of the company on the materiality of related party transactions. Thus, provisions of Sections 134(3) (h) and 188(1) of the Companies Act 2013 and Rule 8(2) of the Companies (Accounts) Rules 2014 are not applicable to the Company and therefore, Form No. AOC-2 has not been attached. |
| Additional disclosures (as per SEBI LODR) |
| In compliance with the requirements laid down in the SEBI Listing Regulations, all related party transactions were placed before the independent directors who were members of the audit committee for approval. Prior omnibus approval of the independent directors who were members of the audit committee had been obtained for transactions which were foreseeable and of a repetitive nature. All transactions entered into with the related parties are presented to the audit committee by way of a statement giving details of all transactions. The policy on the materiality of related party transactions and dealing with related parties as approved by the board has been uploaded on the company’s website at https:// ………………………………….. Your directors draw the attention of the members to note ………… attached to the financial statement which sets out related party disclosures |
| Disclosure –illustration (listed entity) (cases where AOC-2 is attached ) |
| During the financial year …………..pursuant to section 177 of the Companies Act 2013 and Regulation 23 of the SEBI (Listing Obligation and Disclosure Requirements) Regulations 2015 all related party transactions were placed before the audit committee for approval. During the year under review, the company has not entered into related party transactions in excess of the limits specified under Regulation 23 of the SEBI (LODR) Regulations 2015.
All related party transactions entered during the year were entered in the ordinary course of business and on an arm’s length basis. As required under the Act, the prescribed form AOC-2 is a part of this annual report.
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