A lack of transparency results in distrust and a deep sense of insecurity – Dalai Lama
It is the cardinal principle of the corporate law that speaks about the concept of corporate governance being the rule of shareholders, for shareholders and by the shareholders.
The provisions of Companies Act 2013 (‘the Act’) being the Magna Carta of the rights of shareholders provides that annual financial statements of a Company shall be submitted to the Ministry of Corporate Affairs (‘MCA’) and be open to all stakeholders for informed decision making. The government recently amended the Act to impose additional fees of Rs. 100 per day for late submission of financial statements and it already provides disqualification of directors for non-compliance under section 92/137 over a period of time.
In this article, we shall examine the legal provisions of requirement of filing of unadopted financials with MCA.
The word “financial statement” is defined in section 2(40) of the act. The documents which are required to be annexed to the Financial Statement are notes forming part of financial statement, Auditor’s Report and Board’s Report as provided under sub-section (7) of section 134.
Section 129(2)of the Act lays a mandatory obligation on part of the Board of Directors of the Company to present the financial statements for relevant financial year before the members at every AGM. Subsequent to its approval by way of an ordinary resolution, the same is filed with the Registrar of Companies (‘ROC’) as duly adopted financial statements in prescribed format under section 137(1) of the Act within 30 days of the date of AGM or the due date of AGM, in case the AGM is not held, whichever is earlier.
So, the term ‘adopted financials’ in general signifies that the shareholders pass an ordinary resolution that they approve and adopt the financial statements presented by the Board. But if the shareholder doesn’t approve the financials they remain as unadopted.
Circumstances which can lead to filing of ‘unadopted financials’
|When AGM was held||If the AGM of the Company was held and convened as per provisions of the Act and financials laid in the AGM for approval, could not be approved by requisite majority of the members.||The unadopted financial statements together with documents required to be annexed therein shall be filed with the Registrar within 30 days from the date of annual general meeting.|
|When AGM was not held||If for any reason the AGM is not held and consequently the financials couldn’t be presented before the shareholders for approval.||The financial statements along with documents required to be attached, with the clarification letter stating reasons for not holding the AGM, is filed with the ROC within 30 days from the last date before which the Annual General Meeting should have been held.|
*In above-stated cases, the respective ROC’s shall take in his records the unadopted financials as provisional till the financial statements are filed with him after their adoption in the adjourned AGM for that purpose.
Q.1 Can unaudited financial statements be filed?
In our opinion, unaudited financial statements cannot be filed with the ROC as section 137 specifies only about filing of adopted and unadopted financial statements. Also, practically while filing e-form AOC-4, no option for filing of financial statements which are in the nature of ‘unaudited’ is provided.
Q.2 Whether AGM stands automatically adjourned if financials are not adopted?
The act does not include any explicit requirements for automatic adjournment of AGM except in the case of lack of Quoram as per section 103. So,if financial remain unadopted at any AGM then the company may explicitly resolve to adjourn the AGM at a future date or sine die in order to comply with the requirements of section 137.
Q.3 What is last date for holding such AGM/adjourned AGM?
The AGM of the Company should be held as per the due dates prescribed in section 96 of the Act. However, the same is silent for due date in case of adjourned AGM.
While the CLB Circular Letter No. 35/9/72-C. L.III Dated February 2, 1974, stipulates an open-ended timeline to hold adjourned AGM, the same was over-ruled by the Hon’ble High Court of Calcutta in the case of Bejoy Kumar Karnani Vs. Assistant Registrar of Companies, 1985 58 Comp Cas 293 Cal. In this case the Hon’ble Court did not accept the contention that an AGM could be adjourned beyond the statutory period limits as laid down in sections 96 of the Act, 2013.
Thus, any adjournment of AGM shall be held in consonance to the time-limit provided under Section 96 of Act, 2013.
Q.4 What if the AGM is not held within prescribed timeline?
In case a company fails to hold an AGM within the stipulated time or extension obtained by it, section 99 of the Act provides an insight to the legislative repercussions that may be imposed on the company and the officer in default for the said non-compliance.
Q.5 Whether financials can be approved in an Extra-ordinary general meeting (EGM)?
Section 137 of the Act specifically mentions the requirement of approval of the annual financials in a duly convened AGM. Also, as per provisions of the act, all typesof businesses can be transacted at an AGM but in case of an EGM, only special business can be transacted and approval of financials is an ordinary business. Therefore, the same cannot be transacted at an EGM.
Q.5 What are the consequences of non-filing of adopted Financial Statements?
Over the past period, non-filing of financials has been viewed as a serious non-compliance. The Company and its officers are liable to penal provisions under section 137 of the act along with disqualification of directors under section 164 of the Act for continuous default of a period of three financial years.
Q.6 Will filing of provisional financials without filing of adopted financials be deemed as non-compliance of section 137 of the Act?
Analyzing section 137(1) of the Act, it could be deduced that the requirement of filing of ‘adopted financial statements’ is a mandatory. Filing of unadopted financials with ROC is only provided to enable timely availability of financial information in public domain for informed decision making by all stakeholders. Hence, filing of unadopted financials which is taken on record by the ROC on a provisional basis cannot be termed as compliance of section 137 of the Act.
Based on the above discussion, it could be concluded that companies are required to file unadopted financials to the ROC along with the prescribed attachments. It is also clear that filing of adopted financials after the filing of unadopted financials would be a mandatory requirement and any avoidance of the same would be a non-compliance under law leading no room for impunity.