What is Annual Compliance?
Annual compliance refers to the set of required documents and information that every registered business must submit to the relevant government authorities on an annual basis.
These submissions are essential for ensuring that the business operates in accordance with the law, maintains transparency in its operations, and properly manages its financial affairs.
For businesses in India, annual compliance is governed by the Companies Act, 2013 and is monitored by the Registrar of Companies (RoC) under the Ministry of Corporate Affairs (MCA). For Limited Liability Partnerships (LLPs), annual filings are required under the Limited Liability Partnership Act, 2008 along with the rules established under this act.
Examples of annual compliance include:
Filing of the Annual Return (Form MGT-7) as mandated by Section 92 of the Companies Act, 2013.
Filing of Financial Statements (Form AOC-4) as required by Section 137 of the Companies Act, 2013.
For LLPs: Filing of the LLP Annual Return (Form 11) and the Statement of Accounts & Solvency (Form 8).
These filings typically need to be completed within a specific timeframe, generally within 30 to 60 days after the Annual General Meeting or the end of the financial year.
Why is Timely Filing Important?
Timely filing is crucial for several reasons:
It helps the company remain in good standing and ensures its legal status as an active entity.
It promotes transparency for shareholders, creditors, and government regulators.
It safeguards the personal liability of the directors and partners.
Missing the filing deadline can result in financial penalties and may even lead to the closure of the business.
MCA Notification on Companies (Adjudication of Penalties) Amendment Rules, 2024
The Ministry of Corporate Affairs (MCA) issued a notification, G.S.R. 476(E), dated August 5, 2024, introducing the Companies (Adjudication of Penalties) Amendment Rules, 2024.These amendments aim to introduce an e-adjudication system to improve the process of handling penalties under the Companies Act, 2013.
This system covers all steps involved, such as sending notices, submitting replies or documents, presenting evidence, conducting hearings, allowing witnesses to participate, making decisions, and paying fines. The new rules will come into effect from September 16, 2024. Key Provisions of the Amendment: The main change introduced by this notification is the requirement to use an electronic platform for all matters related to penalty adjudication. The e-adjudication platform: A new Rule 3A has been added to the Companies (Adjudication of Penalties) Rules, 2014.
This rule mandates that all processes, including the sending of notices, filing of documents, holding of hearings, presence of witnesses, issuance of orders, and payment of penalties, must be conducted electronically through an e-adjudication platform established by the central government.
Notice Delivery: In cases where an email address is not available, the adjudicating officer is required to deliver the notice by post to the last known address and also maintain a digital record of this on the platform. If no address is available, the notice will be uploaded directly onto the e-adjudication platform. The introduction of the e-adjudication platform is expected to enhance the efficiency, transparency, and accessibility of corporate regulatory procedures in India. By shifting the entire process online, the amendment is likely to reduce delays and make it easier for all parties involved.
Consequences of Late or Non-Filing of Annual Compliance
(A) Financial Penalties (Extra Fees)
Section 403 of the Companies Act, 2013 outlines that late submission of documents can be rectified with an additional charge.
The MCA imposes a fee of INR 100 per day for each form that is submitted after the due date. There is no upper limit on this penalty and it continues until the issue is resolved.
Reference: Section 403, Companies Act, 2013.
(B) Penalties on the Company
Failure to file the Annual Return (MGT-7):
Fine: INR 50,000 to INR 5,00,000.
Failure to file the Financial Statements (AOC-4):
Fine: INR 1,000 per day of default, with a maximum fine of INR 10,00,000.
Reference:
Section 92(5) & Section 137(3), Companies Act, 2013.
(C) Penalties on Directors / Partners
For companies:
Non-filing of Annual Return: Fine of INR 50,000.
Non-filing of Financial Statement: Fine of INR 25,000 to INR 5,00,000, or imprisonment for up to six months in severe cases.
For LLPs:
Non-filing of Form 11 or 8: Penalty of INR 100 per day, with no maximum limit.
Reference:
Section 92(5), Section 137(3), Companies Act, 2013.
Section 74, LLP Act, 2008.
(D) Loss of Good Standing / Defaulting Status
The MCA marks the company as a defaulting entity. This public record can damage the company's reputation with financial institutions, investors, and clients. It is given under MCA Master Data (Status shown as “Active – Non-Compliant”).
(E) Legal Action by Registrar of Companies (RoC)
The RoC may take legal measures against the company and its directors due to continued non-compliance. In severe cases, criminal charges can be pursued. Reference: Section 206 & 207, Companies Act, 2013.
(F) Disqualification of Directors
If a company fails to file annual returns or financial statements for three consecutive financial years, the directors may be disqualified for a period of five years.
During this time, they are not allowed to serve in any company.
Reference: Section 164(2), Companies Act, 2013.
(G) Strike-off / Closure of Company
Section 248 of the Companies Act, 2013 provides the RoC with the authority to remove the company’s name from the Register of Companies if there is consistent non-compliance.
Once this occurs, the company is no longer recognized as a legal entity.
Conclusion
In summary, not submitting annual compliance documents on time can create major and long-term issues for any business. A small delay in filing annual reports or financial statements can quickly lead to serious legal and financial consequences. Companies and Limited Liability Partnerships are legally required to submit their compliance paperwork by specific deadlines, and missing these dates can result in hefty late fees. In addition to financial problems, repeated non-compliance can put the company and its key members, such as directors or designated partners, at risk of legal penalties, being barred from managing the company, or even facing legal proceedings in severe cases. It also damages the business's reputation with regulatory bodies, banks, investors, and customers since non-compliance is publicly listed on the MCA database. If a company continues to ignore compliance rules, the Registrar of Companies may remove its name from the register, effectively shutting down its legal existence. For directors, failing to ensure compliance over an extended period can also result in being disqualified from managing any other company for five years. Hence, annual compliance is not just a regular task but a legal obligation that keeps the company operational, shields its directors from legal issues, and maintains the company's position in the business environment. To prevent these problems, businesses should ensure they meet compliance deadlines, establish systems to monitor them, or seek expert assistance to handle the filings promptly.
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