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Introduction: The recent case before the Regional Director, South East Region, Ministry of Corporate Affairs, Hyderabad, involving Vishnupriya Hotels and Resorts Private Limited, highlights a significant reduction in penalties. This article provides an in-depth analysis of the case, exploring the details of the adjudication order and the implications for companies facing non-appointment of Company Secretaries (CS).

Detailed Analysis: The appeal, filed under section 454(5) of the Companies Act, 2013, focused on non-compliance with Section 203 read with Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. The Registrar of Companies, Andhra Pradesh, had levied a substantial penalty of Rs. 15,00,000 for the failure to appoint a Company Secretary.

The company’s defense centered around its financial struggles, emphasizing losses incurred over the preceding eight financial years. The management argued that, due to adverse economic conditions exacerbated by the Covid-19 pandemic, finding a suitable person for merger, amalgamation, or disposal proved challenging.

Despite acknowledging the default, the Regional Director intervened in the adjudication order. The reduction in penalties was justified based on the following grounds:

(a) The company’s history of financial losses, indicating the challenging economic environment. (b) The management’s genuine attempt to close the company over the past four years, hindered by pandemic-related difficulties. (c) Ongoing efforts by the management to find a suitable party for the company’s disposal.

Considering these factors, the Regional Director reduced the penalty to 15%, amounting to Rs. 75,000 each for the company and its two directors. The article emphasizes the significance of the decision and its alignment with the principles of justice.

Conclusion: In conclusion, the case of Vishnupriya Hotels and Resorts Private Limited serves as a notable precedent where the Ministry of Corporate Affairs intervened to reduce penalties in recognition of challenging economic conditions. This decision underscores the importance of considering contextual factors when imposing penalties for non-compliance. Companies facing similar situations can draw insights from this case, emphasizing the need for a nuanced approach in regulatory actions. The reduced penalty reflects a balanced decision that aligns with the evolving dynamics of the business landscape.

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F.No:9/06/ADJ/Sec.203 of 2013/Andhra Pradesh/RD(SER)/2024
Before the Regional Director, South East Region
Ministry of Corporate Affairs, Hyderabad
In the Matter of Companies Act, 2013 /6945

In the Matter of Vishnupriya Hotels and Resorts Private Limited

1. M/s. Vishnupriya Hotels and Resorts Private Limited
2. Kotu Sarat Kumar, Managing Director
3. Bhavani Kotu, Director

Appellants

Date of hearing : 02.02.2024
Present : Mr. P Sriram, PCS

ORDER

This is an appeal filed under section 454(5) of the Companies Act, 2013 by the above appellants in e-form ADJ vide SRN F89519516 dated 05.01.2024 against the adjudication order F No. ROC (V)/ADJ (454)/SEC203(5)/CPPL/2022-23/763 dated 15.11.2023 under section 454 passed by the Registrar of Companies, Andhra Pradesh for default in compliance with the requirements of Section 203 read with Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

2. Registrar of Companies in his order of adjudication has stated that the company failed to appoint Company Secretary since the applicable provisions of the Act came into force i.e. 02.11.2018 to till date despite paid up capital has exceeded the prescribed limit as stated in the provisions of Section 203(1) of the Companies Act, 2013. Hearing was held before Registrar of Companies on 30.10.2023 and after hearing the authorized representative had levied a penalty of Rs.5,00,000/- each on the Company and 2 directors i.e., Mr. Kotu Sarat Kumar and Ms. Bhavani Kotu (total aggregating to Rs.15,00,000/-).

3. An opportunity of being heard was given to the Appellants on 02.02.2024. The authorized representative Mr. P Sriram, Practicing Company Secretary appeared on behalf of the appellants and reiterated the submissions made in the appeal and from The appeal field by the company it has been stated that the financial statements/ Annual Returns of preceding Eight Financial Years of the Company (from FY 2014-15 to till now) that the company is not doing any business activities and generating any income and thereby incurring huge losses with the present establishment which resulted eroding of the shareholders funds. Due to the above prevailing situation, the management of the company was in view that the company be dosed since 4 years but due to Covid pandemic and post Covid situation, the company was unable to search for a suitable person either in the form of merger/amalgamation or any other method as allowed by the law of the land for disposal of the Company at the earliest. The Management of the Company firmly decided that the company be closed within the next 2 to 3 months and for this, the Management is constantly striving for searching a suitable party. The prevailing financial situation of the company, the company was able to appoint a Company Secretary as the Company could not even afford the same in line with the high expectations of the Company Secretaries which will further result very hardship to the Company’s liquidity and financial position with its existing establishment and limited resources and negative net worth of shareholders funds.

4. Though there is a default committed, there is a ground in interfering with the impugned adjudication order of Registrar of Companies to the extent of reducing the quantum of penalty due to the following reasons:

(a) the financial statements/ Annual Returns of preceding Eight Financial Years of the Company (from FY 2014-15 to till now) that the company is not doing any business activities and generating any income and thereby incurring huge losses with the present establishment which resulted eroding of the shareholders funds.

(b) Due to the above prevailing situation, the management of the company was in view that the company be closed since 4 years but due to Covid pandemic and post Covid situation, the company was unable to search for a suitable person either in the form of merger/amalgamation or any other method as avowed by the law of the land for disposal of the Company at the earliest.

(c) The Management of the Company firmly decided that the company be dosed within the next 2 to 3 months and for this, the Management is constantly striving for searching a suitable party.

(d) The prevailing financial situation of the company, the company was able to appoint a Company Secretary as the Company could not even afford the same in line with the high expectations of the Company Secretaries which will further result very hardship to the Company’s liquidity and financial position with its existing establishment and limited resources and negative net worth of shareholders funds.

Taking into consideration the facts of the appeal and submissions made by the authorized representative. I deem it would meet the end of justice if the penalty imposed by Registrar of Companies is reduced to 15% i.e., Rs.75,000/- each for the Company and 2 directors i.e., Mr. Kotu Sarat Kumar and Ms. Bhavani Kotu (total aggregating to Rs.2,25,000/-). The appellants are directed to comply with this order and also provisions of Section 454(8) of the Companies Act, 2013 read with Companies (Adjudication of Penalties) Rules, 2014.

5. Accordingly, penalty was paid by the Company and 2 directors i.e., Mr. Kotu Sarat Kumar and Ms. Bhavani Kotu amounting to Rs.75,000/- each (total aggregating to Rs.2,25,000/-) vide SRN’s X67178541, X67180810 and X67182071 dated 10.02.2024 respectively. Accordingly, this order is issued to the Appellants with a copy to Registrar of Companies, Andhra Pradesh and Joint Secretary, E-Governance Cell, Ministry of Corporate Affairs, New Delhi for information and necessary action.

Issued under my hand and section this the 19th day of February 2024.

(DR. RAJ SINGH)
REGIONAL DIRECTOR (SER)
HYDERABAD

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