Old Board Approval Won’t Save You You can’t run years of related party transactions on a 5-year-old resolution. The VakilKaro Brief The Update ROC Bangalore imposed ₹20 lakh penalty on directors for conducting large related party transactions without proper approvals.
Old Board Approval Won’t Save You
You can’t run years of related party transactions on a 5-year-old resolution. MCA just made that painfully clear.
Key Takeaways
- Old Board Approval Won’t Save You You can’t run years of related party transactions on a 5-year-old resolution.
- The VakilKaro Brief The Update ROC Bangalore imposed ₹20 lakh penalty on directors for conducting large related party transactions without proper approvals.
- The Action Ensure fresh approvals, proper disclosures, and documentation for all related party transactions every year.
- Facts of the Case The company had been carrying out multiple related party transactions over several financial years.
- Issue Involved The main issue was whether continuing related party transactions on the basis of old board approvals is valid under The Companies Act, 2013.
The VakilKaro Brief
The Update
ROC Bangalore imposed ₹20 lakh penalty on directors for conducting large related party transactions without proper approvals.
The Impact
Using outdated board resolutions and incomplete disclosures makes transactions non-compliant under Section 188.
The Action
Ensure fresh approvals, proper disclosures, and documentation for all related party transactions every year.
Facts of the Case
The company had been carrying out multiple related party transactions over several financial years. These included purchases, sales, advances, and service transactions with entities under common control and with directors themselves.
The issue started when the Registrar of Companies examined disclosures made in AOC-2 and financial statements. It was found that the company was relying on board resolutions passed way back in 2015–2017 to justify transactions carried out even in later years like 2018–2022.
There were also serious gaps in disclosures. The AOC-2 forms did not contain proper details such as terms of contracts, nature of transactions, or justification for arm’s length pricing. The company simply stated that transactions were at arm’s length without supporting evidence.
Issue Involved
The main issue was whether continuing related party transactions on the basis of old board approvals is valid under The Companies Act, 2013.
Another issue was whether lack of proper disclosure and failure to prove arm’s length nature would render such transactions non-compliant.
ROC Findings and Order
The ROC took a strict view. It held that related party transactions require continuous oversight and fresh approvals, especially when they are substantial or recurring.
Relying on resolutions passed years ago without obtaining annual or omnibus approvals was considered a clear violation of Section 188 read with Section 184.
The ROC also noted that the volume of transactions was significant, in some cases exceeding prescribed thresholds. This made compliance requirements even stricter, not relaxed.
Since the company failed to justify that transactions were at arm’s length and also failed to provide proper disclosures, the transactions were treated as unauthorized.
Adding to this, none of the directors responded to notices or appeared for hearing. This led to an ex-parte order.
A penalty of ₹5 lakh was imposed on each of the four directors, totaling ₹20 lakh.
Key Legal Principles
This case reinforces that related party transactions are not a one-time compliance. They require ongoing approval and monitoring.
Board approvals must be current and relevant. Old resolutions cannot be stretched indefinitely to cover future transactions.
Disclosure is equally important. Forms like AOC-2 must clearly mention terms, nature, and value of transactions. Simply stating “arm’s length” is not enough.
The case also shows that failure to respond to regulatory notices can directly lead to ex-parte penalties.
Practical Implications
This hits directly at how many companies casually handle related party transactions.
If your company is doing recurring transactions with group entities or directors, you cannot rely on past approvals. Each year or cycle requires fresh validation.
Documentation is key. You should be able to prove pricing, terms, and justification for each transaction. Otherwise, even genuine transactions can be treated as violations.
Also, ignoring notices from ROC is a serious mistake. Once the matter goes ex-parte, the chances of defending your position drop significantly.
Conclusion
The message from this case is blunt.
Related party transactions are high-risk from a compliance perspective. If not handled properly, they can attract heavy penalties and regulatory action.
Approvals must be timely, disclosures must be complete, and documentation must be solid. Otherwise, even routine business transactions can turn into costly legal problems.
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₹20 Lakh Penalty for Related Party Transactions Without Approval: MCA Action+
Old Board Approval Won’t Save You You can’t run years of related party transactions on a 5-year-old resolution. The VakilKaro Brief The Update ROC Bangalore imposed ₹20 lakh penalty on directors for conducting large related party transactions without proper approvals.