(1) Every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding
(h) penalty or punishment imposed on the company, its directors or officers and details of compounding of offences and appeals made against such penalty or punishment;
Further sub-rule (1) of Rule 11 of the Companies (Management and Administration) Rules, 2014 prescribes the “format” of the annual return in Form MGT-7. However, the electronic version of the said form was not available for a long time. Finally, MCA for the first time came up with the electronic version of MGT-7 on 25th September, 2015 and further revised the format and came up with another version on October 8, 2015.
Now, inspite of several revisions in the e-form, several point are left unclarified by the MCA. One of the points of clarification was point XII of the form MGT-7 which deals with- Penalty and Punishment – Details Thereof.
Unresolved issues pertaining to ‘penalties/punishment’ in e-form MGT-7
1. There are two expressions used in point XII of e-form MGT-7 – ‘Penalties and Punishments’. What do the two mean and how are they different?
a. Penalties are penalties as in sec 42, 60, 91, 94, 111, 118, 119, 132, 136, 173 etc.
b. Punishment refers to punishment by way of fine or imprisonment.
Apart from the sections mentioned above, there are several sections of the Act that imposes ‘penalty’ for any non-compliance or any default under the relevant provisions of the Act. The matter goes for adjudication, where the adjudicating officer decides the penalty to be imposed. ‘Fine’ or ‘penalty’ though may sound similar yet are different from each other. Fine can be imposed only by a Court of law whereas penalty may be imposed by way of adjudication.
2. Does the return cover penalties/punishments under all laws or Companies Act?
a) The Annual Return is a return made under the provisions of the Companies Act. There are numerous laws pertaining to the functioning of a company. These laws may be financial sector laws, corporate laws, taxation laws, or merely operational laws.
b) Prima facie, not only does the clause in question refer to the prosecution of the company, it refers to a prosecution of the company, its directors, as well as “officers”. The expression “officer” has been interpreted in very wide sense under Section 2 (59) of the Companies Act, 2013 which states that:
“Officer” includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act.
Further, Section 2 (60) defines the term “officer who is in default”. As per the Section “officer who is in default” for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—
(i) whole-time director;
(ii) key managerial personnel;
(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;
(iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;
(v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;
(vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;
(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer;
Note that there is a distinction between the expression “officer in default” and merely “officer” and the latter word is very wide in its meaning.
If the expression was to refer to prosecution or compounding under any laws, not only of the company but all its officers, the company faces a formidable task of collecting information from thousands of its officers, and putting all that information on its annual return.
c) Strictly speaking if one of the officers parks a car in a no parking zone, or jumps the traffic signal, and the traffic officer compounds the offence on payment of a fee of Rs: 100, that is a compounding. Such offences and the penalties/prosecutions therefor may be completely irrelevant to the working of the company. The annual return is an annual dossier on the functioning of the company. Non compliances or consequences in respect thereof under different laws are taken care of by those laws. It is not for the Companies Act to travel into a domain occupied by other legislations and report the compliance thereunder in its annual return. In any case, a company cannot be expected to assimilate information from all its officers about penalties and compounding under all relevant laws.
d) Another point supporting the view expressed above is that point XII of form MGT-9 (which is nothing but an extract of e-form MGT-7) also asks for information regarding Penalties / Punishment/ Compounding of Offences to be stated. This point specifically contains a column which asks for prescribing ‘Section of the Companies Act’ under which the company/director/officer in default is penalized or punished. Hence where the extract itself only requires Penalties / Punishment/ Compounding of Offences under Act, 2013 to be stated, one can conclude that an elaborate format of the same will also be on similar lines. Consequently, disclosure in point XII of E-form MGT 7 will also require only such Penalties / Punishment/ Compounding of Offences to be stated which fall under Act, 2013.
In the webinar conducted by The Institute of Company Secretaries of India (ICSI) on 9th October, 2015 it was informed that companies are required to disclose all the Penalties / Punishment/ Compounding of Offences which are imposed on the company/director/officer in default under all relevant laws. However we humbly disagree with the views expressed in the webinar as already expressed above.
(Author is Manager at Vinod Kothari & Co. and can be reached at [email protected])