2016 (10) TMI 1075 - Tri - Companies Law

Related Party transactions - non approval from the Central Government - Held that - Prior approval sought to be obtained from the Central Government is interalia with an object to safeguard the interest of various stakeholders viz shareholders, creditors, suppliers, etc and also to bring in transparency in the corporate dealings with respect to related party transactions. In the present Application, the Applicants have not obtained approval from the Central Government for any of the related party transactions carried out for a period of almost 3.5 years which is mandatorily required as per the law. In the light of aforesaid facts, circumstances and discussions of the case and comments of RoC asking the Tribunal to consider the Application by putting the Applicants to strict proof since the Applicants have not mentioned clearly as to how the offences were made good, and in the interest of justice, the prayer as sought by the applicants is premature and we are not inclined to consider the same at this stage. Therefore, the applicants are directed to approach the Central Government for approval of each of the related party transactions, which were entered with Flyington Frighters Private Limited, in accordance with section 297 of the Companies Act, 1956 and they are at liberty to approach this Tribunal subsequently in accordance with law. Further, we also direct the Registry to forward a certified copy of this Order to the Chairman, SEBI, Mumbai for appropriate action as deem fit in view of the facts of the case and quantum of money involved moreso the Applicant Company being a Listed Company. In terms of above, the present Company Application is disposed off accordingly.

Summary

Issues:
Compounding of offences under Section 297 of the Companies Act, 1956 without prior approval from the Central Government for related party transactions.

Analysis:
1. The Applicants filed an application under Section 621A of the Companies Act, 1956 seeking leniency in compounding offences under Section 297. The Applicant Company, a listed entity, had entered transactions with Flyington Freighters Private Limited without obtaining necessary prior approval from the Central Government as required by law.

2. The ROC report highlighted that the Applicant Company failed to clearly explain how the offences were rectified. The ROC inspection revealed violations of Section 297(1) by the Applicant Company and its Board of Directors, leading to potential penal action under Section 629A of the Companies Act, 1956.

3. Despite the Applicants' claim of filing the application suo-motu, it was noted that they approached the Tribunal only after receiving a show-cause notice from the ROC. The Applicant Company received back the advanced amount from Flyington Freighters Private Limited without charging any interest, causing financial prejudice to the Company and its shareholders.

4. The Tribunal emphasized the importance of transparency in listed companies, especially in disclosing related party transactions to safeguard stakeholders' interests. The Applicants' submission of no subsisting contract with Flyington Freighters Private Limited for the substantial advance amount was deemed imprudent business practice.

5. Considering the need for Central Government approval for related party transactions to ensure transparency and protect stakeholders, the Tribunal directed the Applicants to seek approval retrospectively and approach the Tribunal subsequently. The Registry was instructed to forward the order to SEBI for appropriate action due to the significant amount involved and the Applicant Company's listed status.

This detailed analysis of the judgment from the National Company Law Tribunal, Hyderabad, showcases the legal intricacies surrounding the compounding of offences under the Companies Act, 1956, emphasizing the importance of regulatory compliance and transparency in corporate dealings.