Section 204 Secretarial Audit Violation: Penalty Reduced to ₹32 Lakh

In a significant ruling, the Regional Director (Eastern Region) of the Ministry of Corporate Affairs has reduced the penalty imposed on M/s. Welter Securities Limited and its directors for violations under Section 204 of the Companies Act, 2013. The penalty was revised to ₹32 lakh, down from the earlier ₹48 lakh imposed by the Registrar of Companies (ROC), West Bengal.

The case, heard on June 25, 2024, concerned non-compliance with Section 204, which mandates secretarial audits for certain categories of companies. The appeal, filed by the company and its directors, sought relief from the penalties imposed by the ROC through its adjudication order dated March 21, 2023.

Background of the Case

M/s. Welter Securities Limited, based in Kolkata, suo motu reported its default by filing Form GNL-2 in September 2022. Following this, the ROC issued a notice on January 10, 2023, and conducted a hearing on January 18, 2023. The ROC found the company and its directors liable for non-compliance over six financial years, from FY 2016–17 to FY 2021–22.

Initially, the ROC imposed a total penalty of ₹48 lakh, including penalties on the company and its directors. A corrigendum issued on March 21, 2023, reaffirmed the penalties, which were calculated as follows:

• ₹12 lakh on the company
• ₹12 lakh each on two directors
• ₹10 lakh on one director
• ₹2 lakh on another director

Grounds for Appeal

The appellants argued that the penalties were excessive, especially given the company’s negligible turnover and financial losses. They contended that, under the Companies Act, only the Managing Director should be deemed the “officer in default” when the company has one in place.

It was further submitted that during the periods when no Managing Director was appointed, all directors could be held responsible. The appellants requested a reconsideration, highlighting the disproportionate financial burden imposed by the penalties.

Order of the Appellate Authority

The Regional Director reviewed the submissions and the company’s records. The appellate authority modified the penalty as follows:

Key Considerations in the Ruling

The appellate authority considered:

• The presence of a Managing Director during certain periods, limiting the liability of other directors.
• The company’s financial condition, including its low turnover and operational losses.
• Provisions under Section 454(7) of the Companies Act, allowing for modification of penalties in appropriate cases.

Based on these factors, the total penalty was revised to ₹32 lakh.

Payment Terms and Further Action

The company and its directors are required to pay the penalty within 90 days of receiving the order. Failure to comply will result in enforcement actions under Section 454(8)(i) and (ii) of the Companies Act.

Conclusion

This case highlights the provisions of Section 204 and the adjudication process under the Companies Act, 2013. The revised penalties reflect a balanced approach by the appellate authority, taking into account the financial condition of the company and the roles of its directors. 

Application No. RD/ER/01/Appeal/23/7388-94

BEFORE THE REGIONAL DIRECTOR, EASTERN REGION
MINISTRY OF CORPORATE AFFAIRS, KOLKATA.

IN THE MATTER OF

THE COMPANIES ACT, 2013

-AND-

IN THE MATTER OF

M/S. WELTER SECURITIES LIMITED
91, NETAJI SUBHASH ROAD,
KOLKATA – 700001, WEST BENGAL, INDIA

-AND-

IN THE MATTER OF

Appeal under section 454 of The Companies Act, 2013 against the penalty order dated 21/03/2023 of Registrar of Companies, West Bengal passed for violations of the provisions of section 204 of the Companies Act, 2013.

-AND-

IN THE MATTER OF:

1. M/S. WELTER SECURITIES LIMITED
91, NETAJI SUBHASH ROAD,
KOLKATA – 700001, WEST BENGAL, INDIA

2. SARVESH KUMAR SHARMA (CFO)

3. VIJAY AGARWAL (MANAGING DIRECTOR)

4. MOHINI AGARWAL (DIRECTOR)

5. ASHOK KUMAR SHARMA (MANAGING DIRECTOR)

…………………. APPELLANTS

Date of Hearing : 25/06/2024

Present : Jatin Gupta, Practicing Company Secretary and Authorised Representative

ORDER

1. The present appeal under section 454 of the Companies Act,2013 read with the provisions of the Companies (Adjudication of Penalties) Rules, 2014 was filed vide Form ADJ bearing SRN no. F61493615 dated 23/05/2023 by the aforesaid appellants against the penalty order dated 21/03/2023 under section 204 of the Adjudicating Authority i.e. Registrar of Companies, West Bengal communicated to the appellants vide letter no. ROC/ADJ/2023/048314/penalty order/ 2373 dated 21/03/2023.

2. The Company suo moto filed GNL 2 Form for Adjudication of penalties u/s 454 of the Companies Act, 2013 for the default committed under 204 of the said Act and communicated to Registrar of Companies, West Bengal through e-mail dated 09.09.2022. The office of the Registrar of Companies, West Bengal had issued a hearing notice vide letter no. ROC/ADJ/2023/048314 dated 10.01.2023 for violation of section 204 of the Act to the Company and its Officers scheduling a physical hearing on 18.01.2023. The Registrar of Companies had passed the Adjudication order dated 22.02.2023 imposing penalty on the Directors/KMP of the Company. Pursuant to the aforesaid adjudication order dated 22.02.2023 imposing penalty, the Registrar of Companies observed that the penalty imposed on the Directors/KMPs were wrongly calculated due to inadvertent clerical error and hence after that the Registrar of Companies issued corrigendum orders bearing nos. ROC/LEGAL/ADJ/2023/048314/PENALTY ORDER/2371 TO 2375 dated 21.03.2023.

3. Considering the facts and circumstances of the case, the Adjudicating Authority had imposed Penalty for violation of section 204 of the Act as under:-

4. Having considered the facts and circumstances of the case, ROC, West Bengal imposed a penalty of Rs. 12,00,000/- (Rupee Twelve lacs Only) on the concerned Company and Rs. 12,00,000/- (Rupees Twelve lacs Only) on each of the 2 (two) Directors and Rs 10,00,000/- (Ten lacs only) on one director and Rs 200000/-(two lacs only) on one director in default under Section 204 of the Act, and thus in Total Rs. 48,00,000/- (Rupees Forty eight lacs Only) for failure to make compliance of the Act u/ s. 204 of the Act.

5. The appeal was heard on 25/06/2024 The Authorized Representative was asked to make submission regarding infirmity if any in the order of Registrar of Companies. The Authorised Representative had submitted that the Applicant Company is having a negligible amount of turnover and is making losses for most of the period of alleged default. Mr. Vijay Agarwal worked as Managing Director during the period 22.04.2019 to 24.04.2021. And upon the resignation of Mr. Vijay Agarwal as Managing Director w.e.f. 24.04.2021, Mr Ashok Kumar Sharma was appointed as Managing Director w.e.f 24.04.2021. The appellant further submitted that the Company has appointed Managing Director w.e.f. 22nd April, 2019, therefore since Financial Year 2018-19 the other Directors on the Board should not have been penalised as per the provisions of the Section 204 in correct interpretation of Officer in default and such a relief ought to have been considered by Registrar of Companies, West Bengal during adjudication and since ROC, WB failed to consider the same may be considered in present appeal by the appellate Authority otherwise the same results in severe hardship for the appellants.

6. Based on the submissions made by the Authorised Representative and after verifying the Directorship of the Company from the signatory details of the portal, the Appellate Authority is of the view that the Company is having Managing Director in the Board for some part of the period of violation i.e. for the financial year 2018-19 onwards and as per the definition of officer in default, under the Act, the MD only should be termed as ‘Officer in default’ for the period when the Company is having a M.D. Since the Company is having a Managing Director, for the default committed during the said period the Managing Director is only liable along with Company. The period for which there is no Managing Director, all the Directors are liable along with the Company in the instant matter. The Appellate Authority is also of view that AOC 4 XBRL for F.Y 2022 vide SRN F92195585 has been filed in the portal on 14.02.2024 as such the Company Committed default for the F.Y 2021-2022 by not filing within the period prescribed. In view of the above, the order of ROC is modified as cogent ground was made out by Authorised Representative. The undersigned by virtue of the power vested in Regional Director under section 454(7) of the Companies Act, 2013 read with the Companies (Adjudication of Penalties) rules, 2014 modifies the order of the Registrar of Companies, West Bengal dated 21/03/2023 as under:

Considering the facts and circumstances of the case and after taking into account the factors above, the appellate authority impose a penalty of of Rs. 12,00,000/- (Rupee Twelve lacs Only) on the concerned Company and Rs. 400000/- (Rupees Four lacs Only) on each of the 2(two) Directors i.e. Mr Sarvesh Kumar Sharma and Smt Mohini Agarwal and Rs 8,00,000/-(Eight lacs only) on one Managing Director i.e. Shri Vijay Agarwal and Rs 4,00,000/-( four lacs only) on other Managing Director i.e. Shri Ashok Kumar Sharma as the officer in default under Section 204 of the Act, in Total Rs.32,00,000/- (Rupees Thirty Two lacs Only) for failure to make compliance of the Act u/ s. 204 of the Act during the relevant period of default.

7. The Directors/Officers of the company shall pay the amount of penalty from out of their own pockets. The amount of penalty shall be paid within a period of 90 days from the date of receipt of the copy of the order. Further, if the Company and its Directors fail to deposit the penalty amount within the prescribed time limit, action under section 454(8)(i) and (ii) of the Companies Act, 2013 shall be initiated against the Company and its Directors.

8. Hence the instant Appeal stands disposed of accordingly.

(P. Sridhar)
REGIONAL DIRECTOR (ER)

Signed this the 28th day of November, 2024.