IMPLICATIONS OF NON-COMPLIANCE BY PRIVATE COMPANY

Company Compliance

Every company incorporated under the Companies Act 2013 needs to oblige with all the laws, rules and regulations enacted thereunder. Compliance is an on-going process and the responsibility of which is cast upon the top management of the company.

Compliance requirement though cumbersome comes with benefits such as:

  • Saving cost by avoiding heavypenalties and fines.
  • Building Brand Image and Goodwill.
  • Enhancing the creditworthiness of the company.
  • Steering clear of litigation.
  • Protecting interest of shareholders, investors, stakeholders and the company.

It is a shield to deter fraudsters and scammers from making wrongful gains at the cost of genuine stakeholder’s and investor’s interest.

Thus, the cost of compliance and monetary fines is increasing to become more stringent.

Penalties for non-compliance depend upon the nature of contravention/offense.

Under the Companies Act 2013, offences can be classified as under:

  1. Based upon kind of punishment:

These cover offences punishable with:

  1. Fine OR Imprisonment
  2. Fine AND Imprisonment
  3. Fine ONLY
  1. Based upon cognizance:

Cognizable offences are offences where an arrest is made without warrant.

Non cognizable offences are offences where an arrest cannot be made without warrant.

  1. Availability of Bail:

Certain offences are bailable and others require mandatory judicial custody.

COMPOUNDING OF OFFENCES:

‘To compound’ means to settle a matter by monetary payment in lieu of other punishment.

The Companies Act, 2013 has given the authority of compounding of offences to the Regional Director and the National Company Law Tribunal as the case may be.

All offences that are not mandatorily punishable with imprisonment can be compounded. Ergo, all offences which are mandatorily punished with imprisonment are not eligible for compounding.

Once an offence is compounded, the company and its officers in default cannot be held liable for prosecution with respect to the same violation.

PENALTIES UNDER THE COMPANIES ACT, 2013:

The following table lists out penal provisions for contravention of certain mandatory compliances by a private limited company:

Various
Non-Compliances
Penalties
Non-Disclosure of Interest by Directors If any director of the Company fails to disclose his/her interest in other entities in form MBP-1, such director shall be liable to a penalty of Rs. 1,00,000/-.
Non-filing of Resolutions and AgreementsIf the company fails to file the resolution or the agreement required to be filed under clause (a), (b), (c), (d), (f) and (h) of Section 117(3), within 30 days of passing of such resolution in Form No. MGT-14, together with the explanatory statement then, such company shall be liable to a penalty of Rs. 10,000/-and in case of continuing failure, with further penalty of Rs. 100/- for each day, during which such failure continues, subject to a maximum of Rs. 2,00,000/- and every officer of the company who is in default including liquidator of the company, if any, shall be liable to a penalty of Rs. 10,000/- and in case of continuous failure, with further penalty of Rs. 100/- for each day after the first during which such failure continues, subject to maximum penalty of Rs. 50,000/-.
Non-filing of Return of Unsecured Loan and DepositsIf the company defaults in filing form DPT-3, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 5,000/- and where the contravention is a continuing one, with a further fine which may extend to Rs. 500/- for every day after the first day during which the contravention continues.
Non-Compliance of DIR-3 KYCThe DIN of such a director cannot be used for filing of forms until yearly KYC is done. DIR-3 KYC filed after 30th September will attract a fee of Rs. 5,000/-.
Non-compliance of holding Annual General Meeting (AGM)If any default is made in holding annual general meeting of the company in accordance with section 96, 97 or 98 or in complying with any directions of the Tribunal, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 1,00,000/- and in the case of a continuing default, with a further fine which may extend to Rs. 5,000/- for every day during which such default continues.
Non-appointment of AuditorIn case of contravention of section 139 to 146 (both inclusive), the company shall be punishable with a fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/- and every officer in default shall be punishable with a fine which shall not be less than Rs. 10,000/- but which may extend to Rs. 1,00,000/-.
Non-filing of Financial StatementsIf the company fails to file form AOC-4 then the company shall be liable to a penalty of Rs. 10,000/- and in case of continuing failure with a further penalty of Rs. 100/- for each day during which the failure continues but maximum penalty of Rs. 2,00,000/-.
MD and CFO of the company or any other director who is charged by the Board with the responsibility, and, in the absence of any such director, all the directors of the company, shall be liable to a penalty of Rs. 10,000 and in case of continuous failure, with further penalty of Rs. 100/- for each day after the first day during which such failure continues, subject to maximum penalty of Rs. 50,000/-.
Non-filing of Annual ReturnIf the company fails to file form MGT-7 then apenalty of Rs.10,000/- shall be levied on the company and its every officer who is in default.
In case of continuing failure,a further penalty of Rs. 100/- will be levied for each day during which such failure continues, subject to a maximum penalty of Rs. 2,00,000/- in case of company and Rs. 50,000/- in case of officer in default.
Non-filing of Half yearly return in respect of outstanding payments to Micro or Small (MSME) EnterprisesIf the company fails to file form MSME-1 or knowingly furnishes any information or statistics which is incorrect or incomplete, the company and every officer of the company who is in default shall be punishable with fineofRs. 25,000/-.
In case of continuing failure, a further penalty of Rs. 1,000/- will be levied for each day during which such failure continues, subject to a maximum penalty of Rs. 3,00,000/-.
Non-maintenance of Minutes of meetingsIf the company fails to maintain minutes of the meetings, such company shall be liable to a penalty of Rs. 25,000/- and every officer of the company who is in default shall be liable to a penalty of Rs. 5,000/.

Disqualification of Directors:

In addition to the above, Section 164 (2) provides that the director of any company which has not filed financial statements or annual returns for a continuous period of 3 financial years will be disqualified as a director and cannot act in such capacity not just on behalf of the defaulting company but also for every other company on the board of which such person serves as a director for a period of next 5 years.

Beginning from September 2017, the Ministry of Corporate Affairs has published a list of disqualified directors time to time thereby strictly enforcing the provisions of The Companies Act, 2013.

Thus, the Ministry of Corporate affairs has cast the responsibility of compliance upon the directors making it vital for them to adhere to the provisions of law in letter and spirit.

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