Non-appointment of Internal Auditor by Company: MCA Imposes Penalty

Background of Non-appointment of Internal Auditor

Sector 113 Gatevida Developers Private Limited (hereinafter known as ‘Company’) bearing CIN U45202DL2011PTC277182 is a company registered with the office of Registrar of Companies, Delhi, under the provisions of the Companies Act, having its registered address at Plot no. 5, J block, Community Centre, Rajouri Garden, New Delhi, New Delhi- 110027. This case highlights the non-appointment of internal auditor and the associated compliance implications.

Provisions under Companies Act, 2013 and Internal Audit Compliance

Section 138 Companies Act and Rule 13 of Companies (Accounts) Rules, 2014

As per section 138 of the Companies Act, 2013, certain companies are required to appoint an internal auditor, who shall either be a chartered accountant, cost accountant, or other professional approved by the Board, to ensure proper internal audit compliance.

Rule 13 prescribes the class of companies required to appoint an internal auditor: Every private company having:

• Turnover of two hundred crore rupees or more in the preceding financial year, or
• Outstanding loans/borrowings from banks or financial institutions exceeding one hundred crore rupees at any point of time during the preceding financial year.

Section 450 Companies Act: Penalty for Non-compliance

If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.

Facts of the Case on Non-appointment of Internal Auditor

The Company filed an application with the Registrar of Companies Delhi vide Form GNL-1 dated 08.02.2024 regarding Adjudication of penalties u/s 138 of the Act.

As per the financial statements for F.Y. 2021-2022, the turnover of the company was Rs. 288.92 crore and as per the provision of Section 138 r/w Rule 13(1)(c) of Companies (Accounts) Rules, 2014, company was required to appoint Internal Auditor for F.Y. 2022-23 but the company has submitted that inadvertently it did not appoint any Internal Auditor for F.Y. 2022-23. However, the company could appoint Internal Auditor for F.Y. 2023-24 on 30.01.2024, in this regard an e-form MGT-14 was filed by the company dated 01.02.2024.

A clarification letter was sent to company vide letter date 12.03.2024 to which a reply has been received on 13.03.2024 wherein inter-alia it is admitted that though M/S. Mahajan & Aibara was serving as an internal auditor in the Company in FY 2022-23, the Board of Directors had not appointed it in the Board Meeting as per the requirements of Section 138 of the Act.

Accordingly, a show cause notice was issued on 22.03.2024 for the default u/s 138 of the Act r/w rule 13 of Companies (Accounts) Rules, 2014, in response to which a reply was received vide email dated 25.03.2024 wherein the default u/s 138 was admitted and it was requested that penalties be imposed with a lenient view.

Order passed by Adjudicating Officer:

Having considered the facts and circumstances of the case and after taking into account the factors above, the adjudicating officer held;

• That the default u/s 138 of the Act has been admitted due to non-appointment of internal auditor by the Board. There is no penal provision specified for non­compliance u/s 138. Hence, company and its officers in default are liable for penalties in terms of provisions of section 450 of the Act.
• That the subject company does not get covered under the purview of small company as defined u/s 2(85) of the Act. Hence, the benefit of section 446B would not be applicable on the company.
• The details of the penalty imposed on the company and officers in default are shown in the table below

Source:

The complete text of the Order No. ROC/D/Adj/138/Sector 113 Gatevida/2089-2095 may be viewed here.