NCLAT upholds withdrawal of secretarial audit directions for non-operational company under Section 420(2) Companies Act
The NCLAT dismissed an appeal challenging NCLT's withdrawal of earlier directions for conducting a secretarial audit. The tribunal held that the impugned order was merely a continuation of previous directions and not a review/recall under Section 420(2) of Companies Act 2013. The NCLAT found the withdrawal justified as the Practicing Company Secretary's report confirmed no financial statements were filed with ROC during 2015-2023, indicating the company was non-operational. Without basic compliance parameters being met, conducting a secretarial audit would serve no purpose. The appeal was dismissed as lacking merit.
The core legal questions considered by the Tribunal in this appeal revolve around the interpretation and application of Section 420(2) of the Companies Act, 2013, particularly whether the impugned order dated 02.04.2025 constituted an impermissible review or recall of earlier orders passed by the National Company Law Tribunal (NCLT), Chennai Bench, or whether it was a valid continuation and compliance with those orders. The issues also include the necessity and validity of conducting a Secretarial Audit of the Respondent Company for the period 2015-2023, in light of the company's operational status and statutory compliance.
The first issue concerns the scope and limitation of the power of the Tribunal under Section 420(2) of the Companies Act, 2013, which restricts the Tribunal's power to review or recall an order to rectifying mistakes apparent on the face of the record, and does not envisage re-examination of merits or revisiting an order once passed on merits. The appellant contended that the impugned order violated this statutory bar by effectively reviewing or recalling the earlier orders dated 19.04.2023 and 07.06.2023, which had directed the appointment of a Practicing Company Secretary (PCS) to conduct a Secretarial Audit for the specified period.
The Tribunal analyzed the orders dated 19.04.2023 and 07.06.2023 and found that these orders were procedural directions aimed at enabling scrutiny of the company's financial statements and share capital status by appointing a PCS to conduct a Secretarial Audit. The order of 19.04.2023 directed the Respondent Company to appoint a PCS within seven days to complete the audit by 30.05.2023 and file the report before the Tribunal. The subsequent order of 07.06.2023 was passed due to non-compliance by Respondent No.3 and resulted in the Tribunal itself appointing a PCS to conduct the audit. These orders were not final determinations mandating that the audit must be completed regardless of circumstances but were conditional directions to facilitate fact-finding.
Turning to the impugned order dated 02.04.2025, the Tribunal observed that this order did not review or recall the earlier orders but was an outcome of the report and findings of the PCS appointed pursuant to those orders. The PCS report and evidence on record revealed that the company had been non-operational since 2015, had no business activity, had not maintained books of accounts, and had not filed statutory financial returns with the Registrar of Companies (ROC). Consequently, conducting a Secretarial Audit for the period 2015-2023 was deemed futile and unnecessary. The Tribunal emphasized that the impugned order was a reasoned conclusion based on the factual matrix and the PCS's confirmation, rather than an impermissible review or recall of prior orders.
The appellant's argument that the impugned order was contrary to the statutory bar under Section 420(2) was rejected on the ground that the order was a continuation and compliance with the earlier directions, not a recall or review. The Tribunal underscored that the statutory provision does not prohibit the Tribunal from passing subsequent orders in the same proceeding that are necessitated by developments in facts or evidence. The impugned order was thus within the Tribunal's jurisdiction and consistent with the procedural framework.
Regarding the necessity of the Secretarial Audit, the Tribunal found that the absence of any financial statements filed with the ROC and the company's defunct status negated the requirement for such an audit. The appellant failed to produce any material to establish that the company was operational or had submitted financial statements during the relevant period. The Tribunal held that mere pleadings or counter-affidavits could not substitute for evidence and judicial scrutiny. The PCS's report was treated as credible and conclusive on the operational status of the company.
The Tribunal also addressed the appellant's contention that the Secretarial Audit was mandated by the earlier orders and could not be dispensed with. It clarified that the earlier orders did not fix an unalterable mandate to conduct the audit irrespective of the factual scenario. The impugned order was an exercise of judicial discretion based on the PCS's findings, which rendered the audit unnecessary. This approach was consistent with principles of reasonableness and avoidance of futile exercises.
In conclusion, the Tribunal dismissed the appeal, holding that the impugned order was a judicious and lawful order passed in compliance with the directions contained in the earlier orders. The appeal was found to lack merit, and all interlocutory applications were closed accordingly.
The significant holdings established by the Tribunal include the following:
"The impugned order dated 02.04.2025 is an order in continuation to the directions issued on 19.04.2023 and 07.06.2023 and does not amount to review or recall of earlier orders so as to bring it within the ambit of restrictions imposed by Section 420(2) of the Companies Act, 2013."
"Where the basic parameters for conducting a Secretarial Audit are not satisfied, including non-filing of financial statements and non-operation of the company, the Tribunal may dispense with the conduct of such audit."
"The report of the Practicing Company Secretary, confirming the non-operational status of the company and absence of statutory filings, is a credible piece of evidence which justifies the Tribunal's decision to not proceed with the Secretarial Audit."
"Pleadings or counter-affidavits without judicial scrutiny and appreciation of evidence cannot be exclusively relied upon to mandate continuation of a Secretarial Audit."
"The statutory bar under Section 420(2) of the Companies Act, 2013, limits the power of the Tribunal to review or recall orders to rectifying mistakes apparent on the face of the record and does not preclude the Tribunal from passing subsequent orders necessitated by developments in facts or evidence."
These holdings affirm the principle that procedural directions by the Tribunal are subject to modification based on evolving factual circumstances and that the Tribunal's discretion to dispense with futile processes is an inherent aspect of judicial administration under the Companies Act, 2013.
TaxTMI 
AI Drafter ✕
TaxTMI 
