Introduction: The Ministry of Corporate Affairs has issued an order imposing penalties under Section 454 of the Companies Act, 2013 against WURKNET PRIVATE LIMITED for non-disclosure of Employee Stock Option Plans (ESOP) details. This article provides a detailed analysis of the case, including the background, facts, the company’s response, and the adjudicating officer’s findings.
1. Background and Company Details: WURKNET PRIVATE LIMITED, a Mumbai-based company, faced penalties for violating Section 62(1)(b) of the Companies Act, 2013. The company, registered under the MCA, failed to make required disclosures regarding ESOP in the notice of an Extraordinary General Meeting (EGM) held on 10.04.2021.
2. ESOP Non-Disclosure: The violation was related to Section 62(1)(b) and Rule 12 of the Companies (Share Capital and Debentures) Rules 2014. The company did not include necessary disclosures in the EGM notice, leading to a breach of compliance.
3. Company’s Response and Hearing: The company, represented by Ms. Ashwini Shah, acknowledged the oversight, citing limited legal knowledge as a startup. The company underwent internal due diligence, rectifying the non-compliance by filing a revised form. The representative sought leniency based on the company’s startup status, financial constraints, and a reference to a Supreme Court judgment.
4. Adjudicating Officer’s Findings: The Adjudicating Officer considered the startup status and financial difficulties but emphasized that the legislation did not allow for a penalty lower than the prescribed minimum. The Officer imposed penalties for the violation from April 10, 2021, to July 30, 2021, with a detailed breakdown for the company and two directors.
Conclusion: In conclusion, the Ministry of Corporate Affairs, through the Registrar of Companies, has imposed penalties on WURKNET PRIVATE LIMITED and its directors for failing to disclose ESOP details. Despite considering the company’s startup status and financial challenges, the adjudicating officer enforced penalties as per the statutory provisions. The company is required to pay the penalties within 90 days, failing which legal actions will be initiated.
GOVERNMENT OF INDIA
MINISTRY OF CORPORATE AFFAIRS
OFFICE OF THE REGISTRAR OF COMPANIES
100, “EVEREST”, MARINE DRIVE,
MUMBAI – 400 002
No. ROC(M)/CMCMJN/ADJ-ORDER/5316 To 5318 RD-56
Date :- 17 NOV 2023
Order for Penalty under Section 454 for Contravention of
Section 62(1)(b) of the Companies Act, 2013.
IN THE MATTER OF WURKNET PRIVATE LIMITED
1. Adjudicating Officer: B. Mishra, ICLS, ROC, Mumbai
2. Presenting Officer: Rujuta Bankar, ICLS, AROC, Mumbai
3. Authorized person on behalf of the Company: – Ms Ashwini Shah, partner of HAS & Co. Practicing Company Secretaries
APPOINTMENT OF ADJUDICATING OFFICER: ‑
1. Ministry of Corporate Affairs vide its Gazette Notification A-42011/112/ 2014-Ad.II dated 24.03.2015 appointed the undersigned as Adjudicating Officer in exercise of the powers conferred by section 454 of the Companies Act, 2013 therein after known as Act] read with Companies (Adjudication of Penalties) Rules, 2014 for adjudging penalties under the provisions of this Act.
2. Whereas the Company WURKNET PRIVATE LIMITED [herein after known as Company] is registered with this office under the provisions of Companies Act, 2013 having its registered address at office of the 204, 2nd Floor, Shalaka, Juhu Tara Road, Santacruz (West), MUMBAI, Mumbai City, Maharashtra,400054,India., as per the MCA portal.
FACTS ABOUT THE CASE: –
3. Pursuant to provisions of section 62(1) (b) of Companies Act, 2013, where at any time, a Company having a share capital proposes to increase its subscribed capital by the issue of further shares to employees, such shares shall be offered to employees under such employees’ stock option, subject to special resolution passed by the Company and subject to such condition as may be prescribed. Further, Rule 12 of the Companies (Share Capital and Debentures) Rules 2014, prescribes disclosures to be included in the explanatory statement annexed to the notice of the general meeting circulated for passing of the special resolution for approval of issue of ESOP. The disclosures required to be mentioned as required by Rule 12 were not included in the notice of extra ordinary General Meeting (“EGM”) conveyed on 10.04.2021.
4. While carrying internal due diligence of the company, the Directors were made aware of such non- compliance. After taking note of the same in the board meeting the company decided to file a revised e-form in MGT-14 with the office of Registrar of Companies with complete disclosure which was filed on 30.07.2021 Vide SRN T33194945.
5. Pursuant to Section 62(1)(b) of the Companies Act, 2013 r/ w Rule 12 of the Companies (Share Capital and Debenture) Rules, 2014 the applicant company has failed to make the required disclosure with respect to scheme of Employee Stock option (ESOP) in the notice of the extra Ordinary General Meeting convened on 10.04.2021.
6. RELEVANT SECTIONS OF THE ACT ARE REPRODUCED AS UNDER:-
Section 62 – Further issue of share capital – (1) IA/here at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered-
(a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely: –
(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;
(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;
(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;
(b) to employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed; or
(c) to any persons, if it is authorized by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribed.
(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be dispatched through registered post or speed post or through electronic mode to all the existing shareholders at least three days before the opening of the issue.
(3) Nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company:
Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.
(4) Notwithstanding anything contained in sub-section (3), where any debentures have been issued, or loan has been obtained from any Government by a company, and if that Government considers it necessary in the public interest so to do, it may, by order, direct that such debentures or loans or any part thereof shall be converted into shares in the company on such terms and conditions as appear to the Government to be reasonable in the circumstances of the case even if terms of the issue of such debentures or the raising of such loans do not include a term for providing for an option for such conversion:
Provided that where the terms and conditions of such conversion are not acceptable to the company, it may, within sixty days from the date of communication of such order, appeal to the Tribunal which shall after hearing the company and the Government pass such order as it deems fit.
(5) In determining the terms and conditions of conversion under sub-section (4), the Government shall have due regard to the financial position of the company, the terms of issue of debentures or loans, as the case may be, the rate of interest payable on such debentures or loans and such other matters as it may consider necessary.
(6) Where the Government has, by an order made under sub-section (4), directed that any debenture or loan or any part thereof shall be converted into shares in a company and where no appeal has been preferred to the Tribunal under sub-section (4) or where such appeal has been dismissed, the memorandum of such company shall, where such order has the effect of increasing the authorised share capital of the company, stand altered and the authorised share capital of such company shall stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into.
Section 450 – Punishment where no specific penalty or punishment is provided. — If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be 1 [liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a farther penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person]
Section 446 B
446B. Notwithstanding anything contained in this Act, ifpenalhj is payable for noncompliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.
Explanation. — For the purposes of this section‑
(a) “Producer Company” means a company as defined in clause (I) of section 378A;
(b) “start-up company” means a private company incorporated under this Act or under the Companies Act, 1956 and recognized as start-up in accordance with the notification issued by the Central Government in the Department for Promotion of Industry and Internal Trade.
HEARING AND REPLY OF THE COMPANY
7. Ashwini Shah, Partner of HAS & Co., Practicing Company Secretaries being authorized representative of the Company attended the hearing in person on 16.05.2023.
8. Authorized representative submitted that being a startup company having limited legal and compliance knowledge, they were unaware of the non Further, while carrying out internal due diligence of the company, they were made aware of non-compliance and after taking note of the same in the board meeting decided to file a revised e-form in MGT-14 with the office of Registrar of Companies with complete disclosure which was filed on 30.07.2021 Vide SRN T33194945.
9. She also stated that the Company is a small company as well as registered as a “Startup” and submitted a copy of the Registration certificate. She requested that in terms of section 446B of the Companies Act, 2013, one-half of the total penalty should be levied on the company.
10.She submitted that the Company has not generated any revenue till date and is burdened with substantial accumulated losses. Additionally, the Company has deemed its primary information and technology asset as unrecoverable due to a failed business model. In light of the challenging circumstances and severe financial constraints, it was requested to levy minimum penalty.
11.During the hearing, the authorized representative has cited the order of the Hon’ble Supreme Court in the case of Adjudicating officer v. Bhavesh Prabari (2019) wherein it was held that in fixing penalties for offences under the SEBI Act, the Adjudicating Officer shall not be constrained by the minimum extent of penalty laid in the SEBI Act. The Hon’ble Supreme Court interpreted the SEBI Act as giving discretion to the Adjudicating officer keeping in view the period of default as well as the aggravating and mitigating circumstances. On the basis of this judgement, it was requested that less than minimum penalty as per the discretion of the Adjudicating Officer should be levied.
12. The presenting officer submitted that the ratio of the said judgement is not applicable in the present case. Quoting from para 7 of the judgement,”…
Normally the expression “whichever is less” would connote absence of discretion by prescribing the minimum mandatory penalty, but in the context of Section 15A(a) as it was between 29th October, 2022 till 7th September, 2014, read along with explanation to Section 75(j) added by Act No. 7 of 2017, we would hold the legislative intent was not to prescribe minimum mandatory penalty of Rs. I lakh per day during which the default and failure had continued…”(emphasis supplied), It was submitted that Companies Act 2013, being a special enactment, adjudication is to be conducted as per Section 454 and Rules made thereunder. Further, the presenting officer submitted that Rule 12 of the Companies (Adjudication of Penalties) Rules states that “… in no case the penalty imposed shall be less than the minimum penalty prescribed if any, under the relevant sections of the Act.”
Thus, less than minimum penalty should not be imposed.
13.The Company has Submitted the Certificate of Registration issued by Department of Promotion Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry bearing certificate No. DIPP 49670. Thus, provisions of Section 446B will be applicable to the Company, being a startup recognized by the Government of India.
14. On the issue of whether less than minimum penalty can be levied in the case of adjudication of offences under Section 454 of the Companies Act, 2013, attention is drawn to the proviso to Rule 12 of Companies (Adjudication of Penalties) Rules, 2014 which states that “… in no case the penalty imposed shall be less than the minimum penalty prescribed if any, under the relevant sections of the Act.”
15. The default under section 62(3) is punishable under section 450. In light of the language of Section 450 which prescribes a penalty of Rs.10,000 and in case of a continuing contravention with a further penalty of Rs.1000 per day, a plain reading makes it clear that no discretion has been provided to the Adjudicating Officer by prescribing a fixed penalty.
16. Further, guidance may be taken from The Company Law Committee Report, 2019 wherein Section 450 has been classified as a “Category H” offence and the aim behind decriminalizing it is that procedural, technical, and minor non-compliances ought to be dealt with through civil jurisdiction. The said civil jurisdiction i.e. the in-house Adjudication Mechanism (IAM) is intended to be objective, cost-efficient and time-efficient. By importing a subjective determination which allows the Adjudicating Officer to impose less than minimum penalty, in addition to contravening the statutory bar under Rule 12 of Companies (Adjudication of Penalties) Rules, 2014 will also be against the legislative intent of the Companies (Amendment) Act, 2020. It is therefore the considered view that less than minimum penalty may not be imposed under this section.
17. The period of default is being considered from the date of approval of issue of Employees’ Stock Options till date of suo-moto application for adjudication of default.
18. The Company has failed to make disclosures required by Section 62(1)(b) read with Rule 12 Companies (Acceptance of Deposits) Rules, 2014 and thereby violated the said Section.
19. As admitted by the Company, the detailed disclosure as required by Section 62(1)(b) read with Rule 12 of Companies (Share Capital and Debenture Rules), 2014 was not provided in the notice for EGM held on 10.04.2021. By failing to make the said disclosures, the Company and its Officers in default have violated Section 62(1)(b) punishable under section 450 of the Companies Act, 2013.
20. Having considered the facts and circumstances of the case and after taking into account the factors above, I hereby impose a penalty on Company and its Officers in default, as per Companies (Amendment) Ordinance, 2018, for violation of provisions of Section 450 of the Companies Act, 2013 as per table given below‑
(♦) The period of violation of provisions under Section 62 (1) (b) of the Companies Act, 2013 is from 10-Apr-2021 till 30-July-2021. Delay= 111days.
No. of days of default (♦)
|Penalty imposed on Company/ Director(s)
Penalty in (Rs)
Penalty in (Rs.)
|Penalty Levied in (Rs) [S.450 read with 5.44613]
|1. WURKNET PRIVATE LIMITED (COMPANY)
|111 X 1000 = 1,11,000
|2. VIVAN PURI
|111 X 1000 = 1,11,000
|3. SANJAY DINKAR
|111 X 1000 = 1,11,000
21. I am of this opinion that, the penalty is commensurate with the aforesaid failure committed by every officer of the Company.
22. The Notice shall pay the said amount of penalty through “Ministry of Corporate Affairs” portal and proof of payment be produced for verification within 90 days of receipt of this order.
23. Please note that as per Section 454(8)(i) of the Companies Act, 2013, where company does not pay the penalty imposed by the Adjudicating Officer or the Regional Director within a period of ninety days from the date of receipt of the copy of the order, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.
24. Where an officer of a company who is in default does not pay the penalty within a period of ninety days from the date of the receipt of the copy of the order, such officer shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than twenty five thousand rupees but which may extend to one lakh rupees, or with both.
25. Therefore, in case of default in payment of penalty, prosecution will be filed under Section 454(8)(i) and (ii) of the Companies Act, 2013 at your own costs without any further notice.
Registrar of Companies and Adjudicating