Auditor Penalised under Section 450 for Non-Reporting of SBN Disclosures: ROC Chennai Order Explained

The Registrar of Companies, Chennai (ROC Chennai) passed an adjudication order under Section 454 of the Companies Act, 2013 imposing a penalty under Section 450 on the statutory auditor of CRYO SCIENTIFIC SYSTEMS PRIVATE LIMITED. The penalty arose from the auditor’s failure to comply with the reporting requirement under Section 143(3)(j) read with Rule 11(d) of the Companies (Audit and Auditors) Rules, 2014 concerning disclosures of Specified Bank Notes (SBNs).

1.1 Appointment of Adjudicating Officer

The Ministry of Corporate Affairs, through Gazette Notification No. S.O. 831(E) dated 24/03/2015, appointed the Registrar of Companies as the Adjudicating Officer under Section 454 of the Companies Act, 2013. This notification authorises the ROC to adjudicate penalties as per the Companies (Adjudication of Penalties) Rules, 2014.

In this matter, the ROC Chennai exercised such adjudicatory powers to determine penalty for violations where no specific penalty is prescribed elsewhere in the Act and Section 450 becomes applicable.

1.2 Company under Inquiry

The proceedings relate to CRYO SCIENTIFIC SYSTEMS PRIVATE LIMITED, CIN U36999TN1998PTC039872, a company registered under the Companies Act, 1956/2013 with its registered office at:

NO. 2/628, RAPID NAGAR, KUNRATHUR HIGH ROAD, GERUGAMBAKKAM, CHENNAI GERUGAMBAKKAM SRIPERUMBUDUR KANCHIPURAM TAMIL NADU INDIA 600122

The issue before the Adjudicating Officer did not concern the company’s management directly for penalty in this order, but rather the statutory auditor’s non-compliance with the mandated reporting requirement.

2.1 General Penalty under Section 450

Section 450 of the Companies Act, 2013 provides a residuary penalty mechanism. Where the Act or rules prescribe a requirement but do not specify a separate penalty provision, Section 450 applies.

If a company or any officer of a company or any other person contravenes any provision of the Act or rules, or any condition, limitation or restriction attached to approval/consent/recognition etc., and no separate penalty is provided elsewhere, then:

  • such company and every officer in default, or such other person, is liable to a penalty of ₹10,000, and
  • in case of a continuing contravention, an additional ₹1,000 per day is leviable for each day after the first day of default,
  • subject to a cap of ₹2,00,000 for a company and ₹50,000 for an officer in default or any other person.

In this case, the auditor of the company was treated as the “other person” liable under Section 450 for non-compliance with the audit-reporting requirement.

2.2 Auditor’s Reporting Obligation – Section 143(3)(j)

Section 143(3) specifies what the auditor’s report must contain. Clause (j) provides that:

“The auditor’s report shall also state –
(j) such other matters as may be prescribed.”

The “prescribed” matters are provided in the Companies (Audit and Auditors) Rules, 2014 as amended. For the relevant period, an additional disclosure and reporting requirement was introduced relating to Specified Bank Notes (SBNs) in the backdrop of demonetisation.

2.3 Rule 11(d) – Specified Bank Notes Reporting

Under Rule 11(d) of the Companies (Audit and Auditors) Rules, 2014 (as amended by the Companies (Audit and Auditors) Amendment Rules, 2017), auditors were mandated to comment on whether the company had made the prescribed SBN disclosures.

Further, as per Notification No. S.O. 3407(E) dated 08.11.2016 issued by the Ministry of Finance, Department of Economic Affairs: