This article is written by Ranojoy Midday, pursuing a Diploma in Business Laws for In-House Counsels from lawsikho.com.

Background

The registration of companies these days has emerged into a quotidian pursuit for millions of entrepreneurs towards incorporating their individual corporate ventures. In that pretext, the need for maintaining the requisite compliances under the Companies Act, 2013 has also transpired the utmost substance. However, a company with its separate legal entity distinct from the members usually imposes its administrative governance to its selected Board of Directors who further elect the shareholders to manage the daily affairs of the company. Therefore, the directors with their individual directorship play a pivotal role in carrying out the management responsibilities and providing a report to the shareholders based on its operations, future growth, and plan and strategies of the company.

Nuances of Director’s Report within the mantle of Directorship

Usually, companies with their objectives defined in the favor of bringing transparency and protection of minority shareholders impose enormous responsibilities towards its directors. In that effect, directors have now been obliged under clause c of Section 134(3) to make a comprehensive Director Responsibility Statement as a part of the Directors report which must be sent to the shareholders and filed with the Ministry of Corporate Affairs and other Government Departments.  Directors while making this comprehensive statement must oblige to a few major factors which call on devising a proper system to ensure compliance of applicable laws. Such a system at the same time must be adequate enough to conduct the company’s operation effectively.

Director’s Test of Compliances under Companies Act, 2013

Referring to the past, the directors used to receive the certificate of statutory compliances from their respective Company Secretaries only but the directors of nowadays are under the prudent intent of legislatures by which they have now been obligated to implement a proper system ensuring the adequacy in its effective operations. However, the Company Secretaries in accordance with Section 205 of the companies act, 2013 are entitled to report to the Board about the compliance of the provisions of the Companies act as well as other laws applicable to the company. With detailed perusal of the above provision, the function of Company Secretary is absolutely detached from the obligation emanating from such expressions like ‘devising proper system’ ensuring ‘adequacy of the system’ along with its ‘effective operation’. To that effect, directors with the help of the management are now under the mandate to discharge the responsibility of devising a proper system for compliance of applicable laws, failing which the directors may not pass the test of compliance under Section 134(5) (f) of the Companies Act, 2013.

Given the utmost significance to the above concern, directors of these days usually follow five of the following essential steps which in the long run immune them from their liability of non-compliance under the Companies Act, 2013. 

Step 1: Maintaining Books of Accounts (S. 128 of Companies Act 2013)

In every company, Books of Accounts and its sheer maintenance usually requires the maintenance of an internal book to record all the specified financial transactions made for every financial year. Section 128 of the Companies Act 2013 mandates such requirements to be properly taken care of by the companies. Prior to the 2013 amendment, Section 209 of Companies Act 1956 had been dealing with the presence of books of accounts to be maintained by all the companies in order to furnish a true and fair view of the affairs of each company or branch office and to provide unbiased specifications of its diverse transactions, the place of keeping and the period for which such books to be kept by the company. In this contextual onset, Section 128 of the amended Act further incorporates the scope of maintaining the books of accounts through the recourse of electronic mode along with the physical mode of keeping. In addition, the new amended act also ensured all the directors of the companies to be provided with the power to inspect the books of accounts of the subsidiaries provided such inspections are duly authorized by the Board of Directors of the companies.

Anatomy of Section 128 of Companies Act, 2013

Given the relevance factor attached to the provision of proper maintenance of books of accounts in a company, the following factors would be of utmost significance:

1. Every company while dealing with the proper keeping of books of accounts must adhere to the maintenance of items that are specified in clause (i) to (iv) of subsection 2(13) which defines “books of accounts” in the following manner;

(13) “books of account” includes records maintained in respect of—

(i) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;

(ii) all sales and purchases of goods and services by the company;

(iii) the assets and liabilities of the company; and

(iv) the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section.

1. Now the question in relation to what is really required to be prepared or kept delineates three major factors such as books of accounts, as stated, defined in clause 2(13), ‘books and papers’ in clause 2(12) and ‘financial statement’ in clause 2(40). ‘Books and papers’ and ‘financial statements’ are the additional ones that are equally important to be prepared or kept along with the ‘books of accounts’ by the companies. Records, books, papers, and financial statements adhering to the specific financial year only must entail all those transactions effected in that particular financial year at the company’s registered as well as branch offices.  
2. On the account of subsection 2 of section 128, the branch office of the company, if any, in India or outside India must prepare or keep the books of accounts in the same manner as prescribed by subsection 1, that too in relation to the transaction effected at the said branch office. In addition, the proper summarised version of the return must be furnished periodically by the branch office to the company at its registered office or any other place as specified by the Board.
3. The books of accounts must be prepared on an accrual basis with an aim to give a true and fair view of the affairs of the company and, if needed, such books can also be kept in the electronic modes in accordance with the second proviso to clause 128(1). Nevertheless, the available physical avenues for keeping such books of accounts and other relevant papers lie in the Registered Office or any other place in India with the approval of the Board of Directors. Intimation of the said decision must be given in the prescribed form to the Registrar of Companies within 7 days of such decision. 
4. Subsection 6 of the above section further talks about those persons such as Managing Director, Whole Time Director, Chief Financial Officer and any other person of the company who has been given the responsibility to take all reasonable as well as prudent steps to secure compliance by the company with the requirement of maintenance of books of accounts, etc. In contravention of any findings which relates to the non-compliance of the said provision, these officials shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or both. 

Evidentiary Value of Books of Accounts

Given the scope of admissibility of the books of account in the court of law, the infamous nomenclature of Section 34 of the Evidence Act can be of utmost significance. As per this section, all entries in the books of accounts having been regularly kept in the course of business can be of relevance upon contingencies when they refer to a matter into which the court has to inquire in order to substantiate the entries in the document because the lawmaker believes that the mere statement alone shall not be sufficient evidence to charge any person with liability. For further clarity, let us try to grasp this concept with the help of various legal jurisprudence by the apex court of law.

In the judgment of Nishant Construction Pvt. Ltd vs. ACIT (ITAT Ahmedabad); ITA. No: 1502/AHD/2015 the Income Tax Appellate Tribunal (ITAT) took various aspects into consideration relating to the admissibility of books of accounts as laid down by the Supreme Court of India in its diverse landmark judgments in order to come to its own verdict in the said concern. Let us take an in-depth observation of all the major judgments that ITAT had referred to:

1. In the case of Common Cause (A Registered Society) and Others vs. Union of India and Others; Writ Petition Civil Appeal No. 505 of 2015 the apex court has, inter alia, observed that the mere reading of Section 34 of the Evidence Act revolves around its two major divisions. The first part of it delineates the concept of making relevant entries in the proper books of accounts in order for such accounts to be regularly kept in the course of business. This practice further makes these entries admissible as relevant evidence in the court of law but such statements made therein shall not alone be sufficient evidence to charge any person with liability. Hence, the perusal of this section further enlightens the fact that while the first part of this section speaks of the relevancy of the entry, the second part negatively deals with the evidentiary value for charging a person with liability. Given the said plot, the court felt the necessity of ascertaining whether the entries in the document fulfil the requirements of the above section so as to be admissible in evidence and if this question is answered in the affirmative then only its probative value need to be assessed.
2. The Hon’ble Supreme Court in the case of Central Bureau of Investigation (CBI) vs V.C. Shukla & Ors; 1998 (3) SCC 410 has also laid down principles with respect to the evidentiary value of regular books of accounts. The apex court while dealing with such admissibility took reference of Beni v. Bisan Dayal; A.I.R 1925 Nagpur 445 where the court had been adhesive to the mere wordings of the Section 34 which defines that the entries in books of accounts can no way be by themselves sufficient to charge any person with liability. The court further clarifying its stance mentioned that a man cannot be allowed to make evidence for himself on the basis of what he chooses to write in his own books in absence of the parties. Therefore, the valid testification in the eyes of law must be in place through ensuring an independent evidence for the transaction to which the entries relate and in contingencies of failing to do so, the party can never plead relief for those entries to support his claim against another. In addition, the court had also referred to Hira Lal v. Ram Rakha; A.I.R. 1953 Pepsu 113 in which the High Court set aside the contention that the books of accounts having been proved to be regularly kept in the ordinary course of business doesn’t really suffice the fact that all the entries therein should be considered to be relevant on that basis. The court further reiterated the rule as laid down in Section 34 of the act which inter alia refers that the entries in the books of account regularly kept in the course of business are relevant whenever they refer to a matter in which the Court has to enquire was subject to the salient proviso that such entries shall not alone be sufficient evidence to charge any person with liability. It is, therefore, not enough to merely substantiate the entries in the accounts to be correct on the genesis of the fact that the books of accounts are regularly being kept in the course of the business. Thus, it is further incumbent upon the person relying upon those entries to prove that they were in accordance with facts.

Step 2: Board Meetings (S. 173 of Companies Act, 2013)

Directors of the company during a calendar year are obligated under Section 173 of the Companies Act, 2013 to conduct the board meetings on a regular basis and the decisions made thereunder to be diligently recorded. As per sub-section 1 of this section, the first meeting of the Board of Directors must be held within thirty (30) days of the date of its incorporation and thereafter hold such meetings four times in a calendar year and the responsibility of its proper execution lies in the hands of Directors only. The maximum gap between two such meetings must not exceed 120 days which means one meeting must be conducted in each quarter. There is no bar in the time and place though for conducting such meetings, it can be done anywhere at any time even on Sundays as well.

Sub-section 2 of Sec. 173 further looks after the participation of directors in the board meetings in which the directors have been given the liberty to present themselves in the meeting either in person or through video conference or any audio visual means through which their participation with proper time and date can be recorded as well as recognised for future use.

From a director’s perspective, the biggest concern in holding such meetings is the setting up of quorum in accordance with the Section 174 of the Companies Act, 2013 which obligates such quorum to be comprised with at least 2 directors and 1/3rd of the total directors whichever is higher [S. 174(1)]. Quorum usually in its literal term signifies the least number of directors whose presence is a must for holding such meetings. In case the number of directors gets reduced below the quorum mandates as specified by the Act for such board meetings, the continuing directors or the directors shall be liable to act in favor of increasing the number of directors [S.174(2)]. Given the said context, the judgment of Balakrishna v Balu Subudhi; AIR 1949 Pat 184 would be of great substance as it defined that the quorum during the board meeting was required at every stage. Where the number of directors was reduced below the quorum, the directors could not act. In addition, the court in the case of Re, Plymoth Breweries v Penwill; {1967} 111 SJ  715 held that where a person was aggrieved on account of lack of quorum and challenged the validity of the meeting, he had to take legal action within a reasonable time. On the contrary, when the number of interested directors as per sub-section 2 of Section 184 of the Companies Act, 2013 exceeds or gets equal to two-thirds of the total strength of the Board of Directors, the number of disinterested directors being present at the meeting with not less than two in numbers shall be the quorum during such time [S.174(3)].

At the same time, furnishing notice for the said meeting mentioning the date and purpose must be executed to all the directors at least 7 days in advance from the date of such meeting [S. 173(3)]. Moreover, the decisions of such meetings of directors must also be notified to all those directors who were absent from it. And in case, the person responsible for notifying the same defaults from doing his part of the duty, he or she must be liable to be penalised. In the said context, the judgment of A. Chettiar v. Kaleeswarar Mills Ltd; [1956], AIR 1957 Mad 309 gave us the sought-after clarity as the court in the above matter reiterated that the compliance with the law can only be ascertained when directors are properly notified. Post such meetings, the discussion held in the meeting must be drafted and recorded in the form of ‘Minutes of Board Meeting’ and maintained at the Registered Office of the Company [S. 118(1)]. The director, in addition, shall be required to disclose the number of meetings held in each financial year in the Director’s report [S. 134(4)].

Step 3: Company Filings

As far as certain filings of the company documents are concerned, Directors play a pivotal role in this regard. This is usually the responsibility of directors to ensure the required filing of the information is made to the Registrar of Companies in its prescribed form and time limit laid down by the Companies Act, 2013. The Financial Statements in accordance with Section 129 (financial statement) and Section 137 (copy of financial statement to be filed with registrar) of the Companies Act, 2013 must be required to file every year accompanied by Directors Report under Sub-clause 3 and 4 of Section 134, Auditors Report under Section 134(2) and other documents to the Registrar within 30 days of the date of Annual General Meeting (AGM) or Shareholder’s Meeting. In addition, the company is also obligated under Section 129(3), 137 of The Companies Act, 2013 read with Rule 12 of the Company (Accounts) Rules, 2014 to file the Annual Return governed under Section 92 of the Companies Act, 2013 read with Rule 11 of the Companies (Management and Administration) Rules, 2014 every year disclosing details of its shareholders, directors, etc. to the Registrar within 60 days from the date of AGM. Further, in case of any event taking place within the company such as allotment of shares or any increase in authorized capital, such events must be intimated to the Registrar of Companies along with all the others. 

However, Section 164(2)(a) of the Companies Act 2013 deals with penal consideration with an extent to disqualification of a director in relation to his company having failed to file the financial statements or annual returns, for any three consecutive years. In such scenarios, this would result in disqualification of company’s directors for the period of next 5 years. In the said context, our hon’ble High Courts have many times clarified the position on disqualification of directors examining the most important issue that is whether the disqualification of directors under Section 164(2) of the Act is to be applied retrospectively or prospectively. In order to have clarity on this, we must stress upon the rulings of these following cases:

In Yashodhara Shroff v. Union of India: W.P. No. 52911/2017, the court had further made a distinction in between the Section 274(1)(g) of the 1956 Act and Section 164(2) of the 2013 Act. Here is the representation of the ruling excerpts for your better understanding;

“149. The other important distinction between Section 274(1)(g) of the Act and Section 164(2) of the Act is that the latter Section applies to both private as well as public companies. Whereas, Section 274(1)(g) of 1956 Act applied only to public companies. That means for the first time, the disqualification in the form of an ineligibility under Section 164(2) of the Act is also applicable to private companies. When for the first time under the Act the disqualification of a director of a private company is stipulated under the Act in the form of Section 164(2), the said provision must be given only a prospective operation.”

In Gaurang Balvantlal Shah v. Union of India: Manu/GJ/1278/2018, the court have further reiterated the said issues and assured the following excerpts;

“Such provision of disqualification for the director of a company – public or private company, has been incorporated for the first time in Section 164(2) of the Act of 2013. Such being the case, the said provision has to be construed as having prospective effect. If retrospective effect is given to it, that would destroy, alter and affect the right of the Directors of private companies existing under the Act of 1956.”

In the recent judgment of Mukut Pathak and Ors. v. Union of India and anr: W.P.(C) 9088/2018 & CM Appln. No.35006/2018; the court with reference to the above judgements came to the following conclusion with respect to the retrospective nature of Section 164(2) and 167(1)(a) of the Companies Act 2013; 

“113. As discussed above, the Scheme of Section 164(2) and Section 167(1)(a) of the Act was materially amended by the Companies Amendment Act, 2018 by introduction of the provisos to Section 164(2) and Section 167(1)(a) of the Act with effect from 07.05.2018. All directors who incur disqualification under Section 164(2) of the Act after the said date, would also cease to be directors in other companies (other than the defaulting company) on incurring such disqualification. However, the operation of the provisions to Section 164(2) and Section 167(1)(a) of the Act cannot be read to operate retrospectively. The proviso to Section 167(1) of the Act imposes a punitive measure on directors of defaulting companies. Such being the nature of the amendment, the same cannot be applied retrospectively. It is well settled that the Statute that impairs an existing right, creates new disabilities or obligations – otherwise than in regard to matters of procedure – cannot be applied retrospectively unless the construction of the Statute expressly so provides or is required to be so construed by necessary implication. Therefore, the office of a director shall become vacant by virtue of Section 167(1)(a) of the Act on such director incurring the disqualifications specified under Section 164(1) of the Act.”

Step 4: Financial Statement and Statutory Audit

As per Section 129 (financial statement), Section 137 (copy of financial statement to be filed with registrar), and Section 134 (Financial Statement, Board’s Report) of the Companies Act 2013, maintenance of financial statements is indeed a major concern for most companies and its directors in order to give a true and fair view of company affairs complying with the accounting standards notified by the central government under Section 133 of the Companies Act. These financial statements are combined with the balance sheet, profit and loss account, cash flow statement, and various notes thereon which usually get into motion with the approval of the Board through the signature of Directors on its behalf. These documents further get audited by the Statutory Auditor who gets appointed in compliance with the Section 139 of the Companies Act, 2013 by the Board of Directors in the first AGM held within 30 days from the date of incorporation of the company. And considering the tenure of such an auditor, it is said to be 5 consecutive years from the year of joining.

In order to bring clarity in the Auditing concept among all, the Gujarat High Court in its Rajkot Engineering Association … vs Union of India And Ors. (1987) 1 GLR 3, 1986 162 ITR 28 Guj had referred to passage of the book “The External Audit-1 concept and techniques” by Rodnev J. Anderson, in which the following expression was given;

“Auditing is the process of examining evidence regarding a report, statement or other assertion to determine its correspondence to established criteria. The audit of a set of financial statements investigates whether these statements reflect underlying business transactions following existing criteria for financial statement preparation. A tax auditor checks a tax return to determine whether it reflects the taxpayer’s tax liability in accordance with legislative rules. A government auditor may audit a government department report to see whether it properly records that department’s authorised activities in accordance with prescribed recording procedures. An internal auditor may examine operational evidence to determine whether the assertion by a corporate department that prescribed operating procedures have been followed is in accordance with the observed. There must be some report statement or assertion presented by one party presumably for use by a second party. There must be some established criteria, some yardstick or set of ground rules, known to all parties, as to how such a report, statement or assertion is supposed to be prepared. There must be a third party, the auditor, who examines evidence and forms an objective opinion as to whether the report, statement or assertion indeed meets these criteria. Each of these different type of audit (external, internal, governmental) fulfils a necessary and important social function…”

Step 5: Statutory Registers & Recordings  

When it comes to maintaining various Statutory Registers and Records under the Companies Act 2013 and its rules framed therein delineates the documents like Register of Members (Section 88, Subsection 1 & Rule 3 under format MGT-1), Register of Debenture holders (Section 88, Subsection 1 & Rule 4 under format MGT-2), Index of Members & Debenture-Holders (Section 88, Subsection 2 & Rule 6), Register & Index of Beneficial Owner (Section 88, Subsection 3), Foreign Register of Members, Debenture Holders, Other Security Holders or Beneficial Owners Residing Outside India (Section 88, Subsection 4 & Rule 7), Registers of Renewed & Duplicate Share Certificates (Section 46, Subsection 3 & Rule 6 under format SH-2), Registers of Renewed & Duplicate Share Certificates (Section 46, Subsection 3 & Rule 6 under format SH-3), Registers of Employee Stock Option (ESOP) (Section 62 & Rule 12), Registers of Securities Bought Back (Section 68 under format SH-10), Registers of Deposits (Section 73 & Rule 14), Registers of Charges (Section 85 under format CHG-7), Register of Directors & Key Managerial Personnel (Section 170 & Rule 17), Registers of Loan & Guarantee (Section 186, Subsection 9 & Rule 12), Registers of Investments of The Company not held in its own name (Section 187 & Rule 12 under format MBP-3), Register of Contracts & Arrangements in which Directors are interested (Section 189 & Rule 62), etc become the prominent aspects to consider. In addition, incorporation related documents of the company such as resolutions of the meetings, minutes of the meetings, etc shall duly be preserved by the Company for the required time period laid down by Companies Act, 2013. The Directors in this regard is the sole person to ensure all the maintenance of registers and records in terms of fulfilling the requirements.

Apart from the above steps, there are some basic compliances a director must ensure:

• Every Director of a Company must resort to some disclosure with regards to his interest in other companies, bodies corporate, firms, an association of Individuals every year through a declaration in writing to the company in a specified format (Form MBP 1).
• In addition, the intimation of the director’s disqualification to the company must also be conveyed every year through the specified form (Form DIR 8).
• The Directors with his corporate identity number (CIN) must ensure the company’s name and address along with the other essential details to be displayed outside of every office or place in which the business of the company is carried on.
• The intimation of particulars of any charge created or attaching to the property acquired by the company must be conveyed in a prescribed form to the Registrar of Companies within 30 days of such creation or acquisition of property by the Director.

Conclusive Findings

On the said pretext of such concern, it becomes imperative for directors to understand all their roles and responsibilities in the company in line with ensuring that the Company complies with all such obligations that are to be statutorily maintained by law and the decisions taken by them are in the best interest of such Company. In addition, the Companies Act, 2013 with time has manifested the responsibilities of Directors that too keeping a blind eye on the fact whether they belong to a small private company or a listed one. Given the said context, the 2013 Act, at the one hand, further stressed heavily upon the reporting of various compliances and on the other magnifies the penalties attached therein for the event of non-compliances of any. Hence, this literature provided above has been prepared to give you a ballpark idea how important the discussed requirements are in order to ensure taking correct steps and timely compliances without any levy of interest or penalty. At the same time, we must not overlook that the responsibility of a company to comply with all the rules and regulations provided in the Companies Act, 2013 is not only a mere one-time thing, rather it assures continuous affairs for the company. Therefore, the directors under the mantle of their directorship must strictly adhere to the said prerequisites.

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