Company Fails to Obtain Shareholders' Approval for Major Related Party Transactions: MCA imposes penalty

In the recent order of adjudication passed by the Ministry of Corporate Affairs ( MCA ) Registrar of Companies, a penalty of Rs. 10 lakhs was imposed on a private limited company and its directors because the company failed to obtain shareholders' approval for major related party transactions.

This company has been registered under the Companies Act, 2013, and the authorised capital of the company is Rs. 2 crores.

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The inquiry found that the company engaged in related party transactions with Kangyin Electronics Private Limited under Section 188 of the Companies Act, 2013, with only Board approval. However, as per Rule 15(3)(a) of the Companies (Meetings of Board and its Powers) Rules, 2014, transactions exceeding 10% of turnover require shareholder approval via an ordinary resolution. The company failed to obtain this approval while conducting transactions exceeding the threshold.

A Show Cause Notice was issued on 04.06.2024 for non-compliance with Section 184(1) of the Companies Act, 2013. In response, the company stated on 29.06.2024 that shareholder approval wasn’t required since the transactions were conducted in the ordinary course of business and at arm’s length. However, this explanation was not accepted. After reviewing the case, penalties have been imposed on the company and its directors for failing to comply with Section 188(1).

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This order was issued by Seema Rath, Registrar of Companies & Adjudicating Officer

Uttar Pradesh, Kanpur. In this order, the penalty was imposed on both the company and its directors.

The order also contained that the notice must pay the penalty individually via e-payment on the MCA website under "Pay Miscellaneous Fees" within 90 days, and an appeal can be filed with the Regional Director (Northern Region), Ministry of Corporate Affairs, within 60 days using Form ADJ, along with a certified copy of this order.

To Read the full text of the Order CLICK HERE

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