Failure in constitution or delay in reconstitution of audit committee.u/s 177(1) under CA 2013

Failure in constitution or delay in reconstitution of audit committee.u/s 177(1) under CA 2013. Non-compliance of Section Contravention of Section 177(1) of the Companies Act, 2013
This case focuses on penalties imposed under Section 454 of the Companies Act, 2013 for violating Section 178(8) of the Act. The violation involves non-compliance with Section 177, which governs the structure and functioning of Audit Committees in public companies. Jainam Broking Limited is the main company involved in this proceeding, along with its officers found at fault.
The adjudication order shows how regulatory authorities enforce corporate governance standards by requiring listed and public companies to meet statutory obligations related to board committees. It also highlights the consequences of repeated violations under the Companies Act, 2013.
Facts
The facts of the present case reveal that Jainam Broking Limited, originally incorporated as a private limited company, was converted into a public limited company on 09 November 2021, thereby attracting the mandatory compliance obligations under Section 177 of the Companies Act, 2013, including the constitution of an Audit Committee. However, from 09 November 2021 to 12 September 2023, the company failed to comply with the said provision, resulting in the initiation of separate adjudication proceedings and the imposition of a penalty. Subsequently, during the period from 01 August 2024 to 12 November 2024, the company again defaulted in ensuring compliance with Section 177, thereby committing a repeated violation. Consequent to these lapses, the company filed an application under the e-Adjudication mechanism, vide SRN N29231016, pursuant to Section 454 of the Act, wherein it admitted the non-compliance and sought appropriate resolution of the matter.
An e-hearing was conducted on 02 May 2025, wherein the representatives of the company and its officers appeared and presented their submissions. In defense, it was contended on behalf of the company that the two instances of non-compliance arising under the same statutory provision ought not to be treated as distinct contraventions attracting multiple penalties. It was further argued that the alleged lapse pertains solely to non-disclosure or delay in the constitution of the Audit Committee, which, in substance, constitutes a single violation under Section 177(1) of the Companies Act, 2013, and therefore should not be subjected to penal consequences more than once.
Issues

Did Jainam Broking Limited’s non-compliance with Section 177 constitute separate defaults for two different time periods?

Could penalties be imposed twice under Section 177(8) for repeated violations by the same company and its officers?

How much penalty is owed by the company and officers under Section 454 read with Section 177(8)?

Relevant provision of the law 
Section 177- Section 177 of the Companies Act, 2013 requires listed public companies and certain prescribed public companies to form an Audit Committee of at least three directors, with a majority being independent. The committee’s role includes reviewing auditors and financial statements, approving related party transactions, scrutinizing loans and investments, and overseeing internal controls and risk management. Companies must also set up a vigil mechanism for reporting fraud or misconduct. Non-compliance attracts penalties of up to Rs.5,00,000 on the company and Rs.1,00,000 on each officer in default.
Findings and Reasoning of the Adjudicating Officer
Upon consideration of the submissions made, the provisions of Section 177 of the Companies Act, 2013, and the material available on record, the Adjudicating Officer observed that the requirement to constitute an Audit Committee under Section 177 is a continuing statutory obligation. Each period of default is therefore to be construed as an independent contravention. In the present case, the company and its officers admitted non-compliance during two distinct time frames, viz., 09 November 2021 to 12 September 2023 and 01 August 2024 to 12 November 2024. Separate show cause notices had already been issued in respect of these defaults, and penalties for the first defaulting period had been duly imposed.
With respect to the subsequent default, it was noted that the company and its officers continued to remain non-compliant. The contention of the company that two defaults under the same statutory provision should not invite multiple penalties was rejected, as the obligation under Section 177 is ongoing and any failure in a subsequent period constitutes a fresh violation. At the same time, the Adjudicating Officer clarified that the provisions of Section 454A of the Act, dealing with repeated defaults and enhanced penalties, were not attracted in the present case, since both instances of non-compliance were brought within the ambit of the same adjudication application. Accordingly, liability for penalties under Section 177(8) was upheld.
Order
In exercise of the powers conferred under Section 454 of the Companies Act, 2013, read with the Companies (Adjudication of Penalties) Rules, 2014, the following order is passed:

Penalty on the Company

Jainam Broking Limited: Rs.5,00,000 (Rupees Five Lakh only).

Penalty on Officers in Default

Dishant Milanbhai Parikh: Rs.1,00,000 (Rupees One Lakh only).

Mittal Narendrabhai Shah: Rs.1,00,000 (Rupees One Lakh only).

Vidhi Dishant Parikh: Rs.1,00,000 (Rupees One Lakh only).

Milan Suresh Parikh: Rs.1,00,000 (Rupees One Lakh only).

Rectification

The company is directed to rectify the default and ensure compliance with Section 177 forthwith. Penalties imposed herein shall be remitted within a period of ninety (90) days from the date of receipt of this order.

Mode of Payment

Penalties shall be paid through the MCA’s e-Adjudication portal. Officers in default shall remit the penalty amounts from their personal sources of income.

Right to Appeal

Any person aggrieved by this order may prefer an appeal before the Regional Director (North-West Region), Ahmedabad, under Section 454(5) and (6) of the Act, within sixty (60) days from the date of receipt of this order, in the prescribed manner.

Consequences of Non-Payment

In case of failure to pay the penalty within the stipulated period, the company and officers in default shall be liable for further action under Section 454(8) of the Act.

Final Note of the Article
The present adjudication highlights the strict and continuous nature of compliance obligations under Section 177 of the Companies Act, 2013. The conversion of Jainam Broking Limited into a public company imposed upon it the statutory duty to constitute an Audit Committee and ensure its functioning in line with the law. Its failure to comply during two separate periods constituted independent contraventions, for which penalties were duly imposed on both the company and its officers under Section 177(8), read with Section 454. The defense of “single violation” was rightly rejected, as obligations under Section 177 are ongoing and each lapse gives rise to a fresh default. While enhanced penalties under Section 454A were not attracted since both defaults were adjudicated together, the order reinforces the principle that repeated non-compliance will not be condoned. The decision underscores the importance of maintaining corporate governance standards and serves as a reminder that public companies and their officers remain personally accountable for ensuring compliance with statutory requirements. 
Download MCA Adjudication Order

Non-compliance of Section Contravention of Section 177(1) of the Companies Act, 2013

This case focuses on penalties imposed under Section 454 of the Companies Act, 2013 for violating Section 178(8) of the Act. The violation involves non-compliance with Section 177, which governs the structure and functioning of Audit Committees in public companies. Jainam Broking Limited is the main company involved in this proceeding, along with its officers found at fault.

The adjudication order shows how regulatory authorities enforce corporate governance standards by requiring listed and public companies to meet statutory obligations related to board committees. It also highlights the consequences of repeated violations under the Companies Act, 2013.

Facts

The facts of the present case reveal that Jainam Broking Limited, originally incorporated as a private limited company, was converted into a public limited company on 09 November 2021, thereby attracting the mandatory compliance obligations under Section 177 of the Companies Act, 2013, including the constitution of an Audit Committee. However, from 09 November 2021 to 12 September 2023, the company failed to comply with the said provision, resulting in the initiation of separate adjudication proceedings and the imposition of a penalty. Subsequently, during the period from 01 August 2024 to 12 November 2024, the company again defaulted in ensuring compliance with Section 177, thereby committing a repeated violation. Consequent to these lapses, the company filed an application under the e-Adjudication mechanism, vide SRN N29231016, pursuant to Section 454 of the Act, wherein it admitted the non-compliance and sought appropriate resolution of the matter.

An e-hearing was conducted on 02 May 2025, wherein the representatives of the company and its officers appeared and presented their submissions. In defense, it was contended on behalf of the company that the two instances of non-compliance arising under the same statutory provision ought not to be treated as distinct contraventions attracting multiple penalties. It was further argued that the alleged lapse pertains solely to non-disclosure or delay in the constitution of the Audit Committee, which, in substance, constitutes a single violation under Section 177(1) of the Companies Act, 2013, and therefore should not be subjected to penal consequences more than once.

Issues

Did Jainam Broking Limited’s non-compliance with Section 177 constitute separate defaults for two different time periods?
Could penalties be imposed twice under Section 177(8) for repeated violations by the same company and its officers?
How much penalty is owed by the company and officers under Section 454 read with Section 177(8)?

Relevant provision of the law

Section 177- Section 177 of the Companies Act, 2013 requires listed public companies and certain prescribed public companies to form an Audit Committee of at least three directors, with a majority being independent. The committee’s role includes reviewing auditors and financial statements, approving related party transactions, scrutinizing loans and investments, and overseeing internal controls and risk management. Companies must also set up a vigil mechanism for reporting fraud or misconduct. Non-compliance attracts penalties of up to Rs.5,00,000 on the company and Rs.1,00,000 on each officer in default.

Findings and Reasoning of the Adjudicating Officer

Upon consideration of the submissions made, the provisions of Section 177 of the Companies Act, 2013, and the material available on record, the Adjudicating Officer observed that the requirement to constitute an Audit Committee under Section 177 is a continuing statutory obligation. Each period of default is therefore to be construed as an independent contravention. In the present case, the company and its officers admitted non-compliance during two distinct time frames, viz., 09 November 2021 to 12 September 2023 and 01 August 2024 to 12 November 2024. Separate show cause notices had already been issued in respect of these defaults, and penalties for the first defaulting period had been duly imposed.

With respect to the subsequent default, it was noted that the company and its officers continued to remain non-compliant. The contention of the company that two defaults under the same statutory provision should not invite multiple penalties was rejected, as the obligation under Section 177 is ongoing and any failure in a subsequent period constitutes a fresh violation. At the same time, the Adjudicating Officer clarified that the provisions of Section 454A of the Act, dealing with repeated defaults and enhanced penalties, were not attracted in the present case, since both instances of non-compliance were brought within the ambit of the same adjudication application. Accordingly, liability for penalties under Section 177(8) was upheld.

Order

In exercise of the powers conferred under Section 454 of the Companies Act, 2013, read with the Companies (Adjudication of Penalties) Rules, 2014, the following order is passed:

Penalty on the Company
- Jainam Broking Limited: Rs.5,00,000 (Rupees Five Lakh only).
Penalty on Officers in Default
- Dishant Milanbhai Parikh: Rs.1,00,000 (Rupees One Lakh only).
- Mittal Narendrabhai Shah: Rs.1,00,000 (Rupees One Lakh only).
- Vidhi Dishant Parikh: Rs.1,00,000 (Rupees One Lakh only).
- Milan Suresh Parikh: Rs.1,00,000 (Rupees One Lakh only).
Rectification
- The company is directed to rectify the default and ensure compliance with Section 177 forthwith. Penalties imposed herein shall be remitted within a period of ninety (90) days from the date of receipt of this order.
Mode of Payment
- Penalties shall be paid through the MCA’s e-Adjudication portal. Officers in default shall remit the penalty amounts from their personal sources of income.
Right to Appeal
- Any person aggrieved by this order may prefer an appeal before the Regional Director (North-West Region), Ahmedabad, under Section 454(5) and (6) of the Act, within sixty (60) days from the date of receipt of this order, in the prescribed manner.
Consequences of Non-Payment
- In case of failure to pay the penalty within the stipulated period, the company and officers in default shall be liable for further action under Section 454(8) of the Act.

Final Note of the Article

The present adjudication highlights the strict and continuous nature of compliance obligations under Section 177 of the Companies Act, 2013. The conversion of Jainam Broking Limited into a public company imposed upon it the statutory duty to constitute an Audit Committee and ensure its functioning in line with the law. Its failure to comply during two separate periods constituted independent contraventions, for which penalties were duly imposed on both the company and its officers under Section 177(8), read with Section 454. The defense of “single violation” was rightly rejected, as obligations under Section 177 are ongoing and each lapse gives rise to a fresh default. While enhanced penalties under Section 454A were not attracted since both defaults were adjudicated together, the order reinforces the principle that repeated non-compliance will not be condoned. The decision underscores the importance of maintaining corporate governance standards and serves as a reminder that public companies and their officers remain personally accountable for ensuring compliance with statutory requirements.