In Re: Shruti Power Projects Private Limited

The case discusses the need to keep a check on the activities of a company is very important to save oneself from situation of crisis. The Companies Act 2013 provides for mandatory constitution of Audit committee to keep a check on the activities of company
Estimated Reading Time: 11 minutes

Introduction

The need to keep a check on the activities of a company is very important to save oneself from a situation of crisis. The Companies Act 2013 provides for the mandatory constitution of the Audit committee to keep a check on the activities of the company. Another feature of the Companies Act 2013 is that it empowers the Company Law Board to compound offenses in regard to the company. However, it doesn’t grant Board the power to compound offenses where the punishment involved is imprisonment. This has been a topic of discussion among legal fraternity inclusive of the Shruti Power case.

The judgment in In Re: Shruti Power Projects Private Limited[1] discusses those two very important aspects of Indian company law : the need to constitute audit committee under section 177 of the Companies Act, 2013[2] and the compounding of offences under Section 441 of the Companies Act, 2013.[3]Matters arising from both of these provisions are adjudicated by Company Law Tribunals.

Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014 also provides for constituting an Audit committee. The present judgment throws light on the importance of Audit committee and the consequences faced in case a company contravenes the provisions of Companies Act, 2013 with regard to Audit committees.

Facts

The first Petitioner, Shruti Power Projects Private Limited, was a public company covered by Section 2(71) of Companies Act, 2013. The first petitioner didn’t constitute an Audit Committee within a year from the enactment of the Companies (Meetings of Board and its Powers). The Company also failed to appoint independent directors. The prescribed time for appointment of the Audit committed was 31st March, 2015. The first Petitioner finally constituted the Audit committee on 1st October, 2015. The Board appointed two independent director and Smt. Nisha Bhavin Shah as Non-executive director. Subsequently, on 14th September 2016 the petitioner filed an application before the Registrar of Companies which was then forwarded and it was registered by the Registry of Tribunal as ‘C.P. No. 5 of 2017.’

The petitioners (Shruti Power Projects Private Limited, its Managing Director and Director) filed a petition under Section 441 of the Companies Act, 2013 and Section 621A of the Companies Act, 1956. It was filed for compounding of the violation of the Section 177(1) of the Companies Act, 2013.The Ahmedabad Tribunal directed the Company to deposit Rs. 1 lakhs and passed no order against the other two petitioners.[4]

Issues

The issue faced by the Court was the compounding of violation of Section 177(1) of the Companies Act, 2013.[5]The major aspect of discussion is the analysis of sections 177 and 441[6] of the Companies Act, 2013 and their impact on powers of Company Law Tribunals.

Contentions

The petitioners admitted that they have violated Section 177(1) of the Companies Act, 2013[7] by not forming the Audit Committee for the company. However, they emphasized that even if it was delayed they complied with the mandate of the Section 177(1) of the Companies Act, 2013.[8]They also contended that no similar offences had been committed in the last three years. Therefore, they argued that the Tribunal compounded their offences.

Court decision and judgment

The Tribunal firstly analyzed the section 177(1) of the Companies Act, 2013[9], averments of the petitioners and observed that the petitioners had violated the provisions as they hadn’t constituted the Audit Committee within the prescribed time. It also explored the Rule 6 of the Companies (Meeting of Board and its powers) Rules, 2014.[10]However, it also kept in mind that later the petitioners had constituted the Audit Committee on 1st October, 2015.[11]

The presiding judge then examined the Section 178 of the Companies Act, 2013 which provided for the punishment in case of contravention of any provision mentioned in Section 177 of the Companies Act, 2013.The Judge observed that the company could be punished by fine extending from one lakh rupees up to five lakh rupees. However, the officers of the company could be punished with imprisonment which could be extended to one year along with fine extending from 25,000 Rupees to 1,00,000 Rupees or with both.[12]

Regarding Section 441 of the Companies Act 2013, the Tribunal observed that it could compound the violation of Section 177(1) of the 2013 Act for petitioner Company only. However, for petitioner no. 2 and 3 the tribunal observed that it didn’t have power to do so they could be punished with imprisonment and fine both.[13]

The Tribunal then considered the time period of default which was during the financial year 31st March 2015. It observed that section 178 came into force on 1st April 2014, section 441 was brought in effect from 1st June 2016 and Section 177 came into force on 1st April 2014. Therefore, the Tribunal decided that it had to adopt the procedure given in Section 441 of the Companies Act 2013 to compound the violation of Section 177(1) and punishment for company was provided in Section 178(8) of the 2013 Act.

The Tribunal therefore, directed the petitioner company to deposit one lakh rupees within 3 weeks from the date of order. In case of default on the side of company, the Registrar of Companies was directed to take adequate action against the petitioner company. However, the Tribunal didn’t pass any order regarding petitioners no. 2 (Managing Director of Company) and petitioner no. 3 (Director of the Company).[14]

Analysis

The judgment in Shruti power was remarkable because of its peculiar observation that the Tribunal didn’t have the power to compound the violation of Section 177(1) of the Companies Act, 2013 in respect of petitioner no. 2 and 3. It was correct decision in Shruti power and was in consonance with law. To understand the importance of the judgment, it is important to examine the concerned provisions in depth.

Sections 138-146 of the Companies Act, 1913[15] talked about the role of auditors in a company though it didn’t particularly state the mandatory constitution of the Audit committee. The Companies Act, 1956 for the first time come up with the mandatory requirement of the constitution of an Audit committee for a public company. It was to be jointly read with Clause 49 of the Listing Agreement.[16]Similarly, Section 177 of the Companies Act 2013[17] corresponds to Section 292A of the Companies Act 1956.[18]It is to be read with Rule 6 of the Companies (Meetings of Board and its powers) Rules, 2014.[19]

However, there are several differences between the Companies Act 2013 and that of the 1956 Act, which are as follows-

  1. Audit Committee under Act of 1956 required the attendance of chairman and AGM whereas it is not so in the Act of 2013.
  2. Under the Act of 1956, the Auditors didn’t have right to vote whereas the auditors have voting rights under Act of 2013.
  3. Section 177 includes every listed company, all public company with paid up capital of Rs. 10 crores or more, all public companies having turnover of Rs. 100 crores or more and all public companies having an aggregate, outstanding loans or borrowings or deposits exceeding Rs. 50 crores whereas Section 292A requires only public company having paid up capital not less than Rs. 5 crores to constitute the Audit Committee.[20]

Section 177 was amended in the year 2015 by which the Audit committee was granted the power to give omnibus approval for related party transactions to ease the flow of business. The 2017 Amendment[21] the words “every listed company” was substituted by “every public listed company” in Section 177(1) of the Companies Act, 2013. The Ministry of Corporate Affairs through a notification dated 12th June 2014 inserted in Rule 6 of the Companies (Meetings of Board and its members) Rules, 2014 the provision that the public companies which were earlier exempted from the constitution of audit committee now need to compose it within 1 year of commencement of these rules.[22]

Sub-section (8) of Section 178 provides for punishment in case there is violation of Section 177 of the Companies Act 2013. It prescribes fine for company and imprisonment or fine or both for any officer of the Company.[23]

Audit committee plays a very important role in reporting about financial matters of the company. It ensures a system of check and balance on the company and thus maintains transparency in the system. Main functions of the Audit committee includes- a) to investigate into matters ordered by Board b) discuss about internal affairs c) to complete financial statements, financial reporting process and system of internal accounting and financial authority d) to independently review the audit process e) to uphold the interest of public. [24]

The companies’ act, 2013 lay down provision for vigil mechanism. Section 177(9) of the act, 2013 along with regulation 22 of SEBI listing Obligation Regulation, 2015 deals with whistleblowing provisions. This mechanism enables a company to set up a process which encourages and promotes ethical corporate behavior by rewarding employees for their integrity and for providing valuable information to the management on deviant practices being adopted in the company.[25] Rule 7(1) of the Companies (Meetings of Board and its Powers) Rules, 2014 expounds the mandate to establish vigilance mechanism to report concerns and grievances of employees. The vigilance mechanism keeps a check on the activities of company and ensures that the public in general is not defrauded. This is one of the most significant features of the Companies Act, 2013. However, in India the feature of whistleblowing has not been very effective as compared to US and UK due to inadequate protection provided to whistleblowers and ineffective mechanism to reduce such fraudulent activities. The Indian mechanism to protect whistleblowers is still in an e arly stage and needs a lot of stringent regulations to ensure safety of whistleblowers[26]

This reinforces the significance of constitution of Audit Committee in a company.  It is to be kept in mind that the Audit Committee works for the welfare of employees, directors and also citizens. Therefore, it becomes all the more necessary to punish if any company violates Section 177 of the Companies Act 2013.

Section 621-A of the Companies Act, 1956 provided penalty for situations where it was not provided in any otherprovision of the Act. Section 441 of the Companies Act 2013 corresponds to Section 621-A. Section 441 was amended in the year 2017 which substituted the words “not being an offence punishable with imprisonment only, or punishable with imprisonment and also with fine” for the words “with fine only.”[27] The 2019 Amendment Act made two changes namely substituted “does not exceed five lakh rupees” with “does not exceed twenty five lakh rupees” and sub-section(6) was substituted as “Notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.”[28] Earlier, permission of special court was required for compounding of any offence punishable with imprisonment but now it is no such permission is mandatory.[29] Compounding of an offence means the offender has a choice to pay money in lieu of his prosecution and thus save inconvenience in form of prolonged litigation.

It is relevant to also look at some of the important cases to get a better understanding of the power of Company law Board in compounding offences. In Re: Hoffland Finance Limited,[30] it was held that the exercise of powers by Company Law Board under Section 621(A) is independent of exercise of powers by the court under sub-section (7) and all offences other than those which are punishable with imprisonment only or with imprisonment and also fine, can be compounded by the Board even in cases where prosecution is pending in criminal court.[31]Similar approach was adopted in the case of In Re: ICOMM Tele Limited[32] In the case of In Re: Bhanuenergy Industrial Development,[33] the two-judge while deciding the petition under Section 441 of the Act 2013 for compounding of offences under Sections 149, 177, 178 and 450 held that the company’s offences can be compounded but the Board didn’t have power to compound offences for officers of company as punishable with imprisonment.One major case which also followed the same principle is In Re: Sand Land Real Estates Private Limited[34] where an application was filed for compounding the default under Section 177 of the 2013 Act. It was held that the company had to pay certain amount as fine and comply with the provisions of Section 177.

Conclusion

In light of the above-mentioned decisions and legislative provision, it can be said that the judgment in Shruti Power is good law and correct. It is in accordance with the valid law. This approach was also followed in a recent decision in Pahuja Takil Seed Limited and others v. Registrar of Companies, NCT of Delhi[35] where the Board examined the section 441 of the Companies Act, 2013[36] and reached the same decision that is compounding of offences against company but refrained to rule anything in regard to directors of company. However, the author is of the opinion that it will be more prudent to expand the power of Board such that it can compound the offences of directors of company as well. If implemented, it will tremendously reduce the burden of courts and provide a relief to the parties by cutting short the prolonged delay in litigation. Nevertheless it can only be made possible through a legislative change.

This judgment in Shruti Power also emphasized the mandatory requirement of each company to constitute an Audit Committee. The audit committee is an important organ of the company which keeps in the account of the activities of the company. The need to secure its independence is very important. This judgment highlighted the same. Therefore, to benefit the public and security of employees’ constitution of the audit committee is the need of the hour.


[1]In Re: Shruti Power Projects Private Limited,[2017]143SCL145.

[2] Companies Act 2013, Section 177.

[3] Companies Act 2013, Section 442.

[4]In Re: Shruti Power Projects Private Limited,[2017]143SCL145.

[5]Supra 2.

[6]Supra 3.

[7]In Re: Shruti Power Projects Private Limited,[2017]143SCL145.

[8]Id.

[9]Id.

[10] Companies (Meeting of Board and its Powers) Rules 2014, Rule 6.

[11]In Re: Shruti Power Projects Private Limited,[2017]143SCL145.

[12][2017]143SCL145.

[13]In Re: Shruti Power Projects Private Limited,[2017]143SCL145.

[14]Id.

[15] Companies Act 1913, Sections 138-146.

[16] Listing Agreement 1913, Clause 49.

[17]Supra 2.

[18] Companies Act 1956, Section 292A.

[19]Supra 8.

[20]Tripti Chugh, Audit Committee: A Keystone to Corporate Governance, Taxguru, 2017. https://taxguru.in/company-law/audit-committee-a-keystone-to-corporate-governance.html (visited on 26th June 2020, 13:06 ).

[21]http://www.nfcg.in/UserFiles/THE-COMPANIES-AMENDMENT-ACT-2017.pdf(visited on 26th June 2020,15:10).

[22]Tripti Chugh, Audit Committee: A Keystone to Corporate Governance, Taxguru, 2017. https://taxguru.in/company-law/audit-committee-a-keystone-to-corporate-governance.html (visited on 26th June 2020, 13:06).

[23]http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf (visited on 26th June, 15:20).

[24]Tripti Chugh, Audit Committee: A Keystone to Corporate Governance, Taxguru, 2017. https://taxguru.in/company-law/audit-committee-a-keystone-to-corporate-governance.html (visited on 26th June 2020, 13:06).

[25]Palak Dheer, Section 177: Audit Committee, The Company Ninja, 2020 https://thecompany.ninja/section-177-audit-committee/ (visited on 26th June 2020, 16:00).

[26] Nikhil Varshney and Riddhima P. Murjani, Whistleblowing Regime in The US and the UK: The Way Ahead for India, CNLU LJ (6) [2016-17] 107.

[27]http://www.mca.gov.in/Ministry/pdf/CAAct2017_05012018.pdf (visited on 26th June 2020, 16:20).

[28]http://www.mca.gov.in/Ministry/pdf/AMENDMENTACT_01082019.pdf (visited on 26th June 2020, 16:28).

[29]http://www.mca.gov.in/Ministry/pdf/NotificationCompanies(Amendment)Ordinance_05112018.pdf (visited on 26th June 2020, 12:10)

[30] (1997) 90 Comp Cas 38 (CLB).

[31]Id.

[32]In Re: ICOMM Tele Limited,2016 SCC NCLT 34.

[33]In Re: Bhanuenergy Industrial Development, 2017 SCC NCLT 11213.

[34]In Re: Sand Land Real Estates Private Limited, 2017 SCC NCLT 10892.

[35]Pahuja Takil Seed Limited and others v. Registrar of Companies, NCT of Delhi,2018 SCC NCLAT 553.

[36] Companies Act 2013, Section 441.

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