2017 (8) TMI 138 - Tri - Companies Law

Seeking compounding of an offence allegedly committed under Section 297 of the Companies Act, 1956 - Held that - Since the violation pertains to years 2007-2011 therefore the applicable provisions will be under the Companies Act, 1956 and accordingly we are inclined to compound the violation under Section 297 in terms of provisions of Section 621A of the Companies Act, 1956 with the following directions. (a) All the Applicants are directed to pay a sum of ₹ 6,20,000/- (Rupees Six Lakhs Twenty Thousand only) each towards Compounding Fee. The first transaction of the Company under the provisions of Section 297 of the Companies Act, 1956 was on 16.10.2007 and the same was made good on 31.03.2011. (approx 1230 days X ₹ 500 ₹ 6,15,000 5000 6,20,000). (b) All the Applicants are also required to pay the Compounding fee within a period of three weeks from the date of receipt of copy of the order and report compliance of the same to the Registry. (c) All the Applicants are warned to be careful in future and not to repeat any violation of the provisions of the Companies Act or else serious view will be taken by the Tribunal.

Summary

Issues Involved:
1. Prematurity of the compounding application.
2. Related Party Transactions and their approval.
3. Compounding of the alleged offence under Section 621A of the Companies Act, 1956.
4. Applicability of Section 297 of the Companies Act, 1956.
5. Non-receipt of interest on advances given to a related party.
6. Transparency and disclosure in operations of a listed company.
7. Compliance with the provisions of the Companies Act, 1956.

Issue-wise Detailed Analysis:

1. Prematurity of the Compounding Application:
The National Company Law Tribunal (NCLT), Hyderabad Bench initially dismissed the compounding application No. 1/621A/HDB/2016 on 21.10.2016, stating that the relief sought by the Applicants was premature and directed them to approach the Central Government for approval of the Related Party Transactions. However, the Hon'ble National Company Law Appellate Tribunal (NCLAT) on 28.02.2017 directed the NCLT to examine the case under Section 621A of the Companies Act, 1956.

2. Related Party Transactions and Their Approval:
The Applicants, a listed company, engaged in various transactions with M/s. Flyington Freighters Pvt. Ltd. (FFPL) from 16.10.2007 to 31.03.2011. The transactions involved payments for maintenance charges of aircraft and fund transfers totaling ?99,45,98,392.03. The Applicants claimed that these transactions did not fall under the categories specified in Section 297 of the Companies Act, 1956 and that the entire amount was repaid by FFPL, thus making the offence good and eligible for compounding.

3. Compounding of the Alleged Offence under Section 621A of the Companies Act, 1956:
The Applicants sought compounding of the alleged offence under Section 621A, arguing that the offence was committed without mala fide intention and that the entire amount had been repaid. The NCLAT directed the NCLT to consider the compounding application under Section 621A. The Applicants emphasized that no prejudice would be caused to any party if the compounding was allowed.

4. Applicability of Section 297 of the Companies Act, 1956:
The Applicants argued that Section 297 ceased to apply from 01.04.2014, as Section 188 of the Companies Act, 2013 came into force. However, the NCLT noted that the transactions/violations pertained to the years 2007-2011, making Section 297 applicable. The Tribunal found the Applicants' submission that the show cause notice issued under Section 297 was non-est in the eyes of the law to be legally untenable.

5. Non-receipt of Interest on Advances Given to a Related Party:
The Tribunal observed that although the Applicants received back the principal amount of ?99.45 crores from FFPL, no interest was received on the advances. This lack of interest caused substantial loss to the shareholders of the listed company, which had approximately 37,900 shareholders as of 31.03.2011.

6. Transparency and Disclosure in Operations of a Listed Company:
The Tribunal emphasized the importance of transparency and appropriate disclosures in the operations of a listed company. It noted that related party transactions must be regulated to prevent potential conflicts of interest and ensure that decisions do not adversely affect the company's financial health or its shareholders.

7. Compliance with the Provisions of the Companies Act, 1956:
The Tribunal concluded that the violation of Section 297 for the period 2007-2011 should be compounded under Section 621A. The Applicants were directed to pay a compounding fee of ?6,20,000 each, calculated based on the duration of the contravention (1230 days at ?500 per day plus ?5000). The Applicants were also warned to avoid future violations of the Companies Act.

Conclusion:
The Tribunal disposed of the compounding application No. 1/621A/HDB/2016 with the following directions:
- Payment of ?6,20,000 each as compounding fee within three weeks.
- Compliance report to be submitted to the Registry.
- Warning to avoid future violations of the Companies Act.

This judgment underscores the importance of regulatory compliance, transparency, and the responsible conduct of related party transactions in listed companies.