Law ignorance is no plea for Bypassing Board Approval on Related Party Transactions - ₹45lac penalty imposed

Key Takeaways:

1. Appointment of Adjudicating Officer by the Ministry of Corporate Affairs to adjudicate penalties under Section 188 of the Companies Act, 2013.

2. Kudos Finance And Investments Private Limited, a registered company, is charged under Section 188(1)(f) for not complying with related party transaction approval requirements.

3. Section 188(1)(f) prohibits companies from entering into any contract or arrangement with a related party regarding their appointment to any office or place of profit without the Board’s consent.

4. An inquiry revealed that the company engaged in a related party transaction without specifying the date of the board meeting approving it, violating Section 188(1)(f).

5. A detailed adjudication process, including the issuance of notices and replies, was carried out, and the company and its officers were given an opportunity to respond.

6. The company’s directors claimed ignorance of legal provisions and assured future compliance.

7. The violation was concluded during the inquiry, and penalties were imposed on the directors involved in the related party transaction.

The Ministry of Corporate Affairs (MCA) didn't pull any punches when it came to enforcing corporate governance rules. They disciplined Kudos Finance And Investments Private Limited for not following Section 188(1)(f) of the Companies Act, 2013. The violation came to light during an inquiry conducted by the Registrar of Companies, Maharashtra, Pune, who was appointed as the Adjudicating Officer under Section 454(1) of the Act.

Violation:

The crux of the matter revolved around the company's failure to obtain board approval for a related party transaction involving the appointment of Pavitra Walvekar as the Chief Executive Officer (CEO). Section 188(1)(f) explicitly prohibits companies from entering into any contract or arrangement with a related party regarding their appointment to any office or place of profit without the consent of the Board of Directors, given by a resolution at a board meeting.

During the inquiry, it was discovered that the company's Annual Return (Form AOC-2) for the financial year 2020-21 mentioned a related party transaction with Pavitra Walvekar as the CEO. However, the date of the board meeting approving this transaction was conspicuously absent, indicating a clear violation of Section 188(1)(f).

Company's Defence

The company and its directors were given ample opportunity to respond to the allegations. In their defense, the directors claimed ignorance of the legal provisions, stating that they were unaware of the requirement to hold a board meeting for approving related party transactions. They assured future compliance but requested exoneration from penalties for the current non-compliance.

The Conclusion

However, the Adjudicating Officer concluded that the violation had been established during the inquiry, and no further physical hearing was required to ascertain the breach. Consequently, substantial penalties were imposed on the directors and employees involved in the related party transaction.

Pavitra Walvekar, Swati Jindal, and Naresh Vigh, who were directors at the time of the violation, were each slapped with a penalty of ₹5 lakh. Audumbar Dattatray Raut, another director, faced an even heftier penalty of ₹25 lakh, likely due to his role or involvement in the transaction.

The Adjudicating Officer deemed the penalties commensurate with the failure committed by the company and its directors. The order directed the directors and employees to pay the penalties individually within 90 days through the online mode on the MCA website. Failure to comply with the order could lead to consequences outlined in Section 454(8)(ii) of the Companies Act, 2013.

FAQs:

Q1. What was the violation committed by Kudos Finance And Investments Private Limited?

A1. The company violated Section 188(1)(f) of the Companies Act, 2013, by entering into a related party transaction involving the appointment of Pavitra Walvekar as CEO without obtaining prior approval from the Board of Directors through a resolution at a board meeting.

Q2.What was the company's defense?

A2.The company's directors claimed ignorance of the legal provisions, stating that they were unaware of the requirement to hold a board meeting for approving related party transactions. They assured future compliance but requested exoneration from penalties.

Q3. What were the penalties imposed on the directors and employees

A3.Pavitra Walvekar, Swati Jindal, and Naresh Vigh were each penalized ₹5 lakh, while Audumbar Dattatray Raut faced a penalty of ₹25 lakh, totaling ₹20 lakh in penalties.

Q4. What were the consequences of non-payment of the penalties?

A4.Failure to pay the penalties within 90 days could lead to consequences outlined in Section 454(8)(ii) of the Companies Act, 2013, which may include further legal action or penalties.

Q5. What was the appeal process available to the company and its directors

A5. The company and its directors had the option to file an appeal against the order within sixty days from the date of receipt, with the Regional Director (Western Region), Ministry of Corporate Affairs, Mumbai, accompanied by a certified copy of the order.