The Companies Act, 2013 is the governing law for companies incorporated in India. It lays down the rules and regulations that companies need to follow while conducting their operations. One of the important provisions of the Companies Act, 2013 is the power to reopen accounts. The power to reopen accounts is a vital tool available to the regulators to ensure compliance with the provisions of the Act.
Overview of Re-Opening of Account of Company
Section 130 of the Companies Act, 2013 provides for the reopening of accounts in certain circumstances. The section allows the Tribunal, the National Company Law Tribunal (NCLT), to order the reopening of accounts if it is satisfied that:
- The financial statements of a company do not represent a true and fair view of its financial position.
- The affairs of the company have been conducted fraudulently.
REOPENING OF ACCOUNTS ON ORDERS OF TRIBUNAL/ COMPETENT COURT
Subsection (1) of Section 130 of the Companies Act,2013 stipulates that a firm may reopen its books of accounts or amend its accounting records only under the instruction of a court of competent jurisdiction or the Tribunal made on the application of specified persons. The terms reopen and recast denote the type of treatment necessary for books of accounts and financial records, respectively. The core meaning remains the same. The facts of each case will determine whether a reopening order will include recasting or vice versa. Furthermore, clauses (90), (13), and (40) of section 2 shall be resorted to for the definitions of Tribunal, Books of Account, and Financial Statements.
AUTHORITY TO MAKE APPLICATION:
The following individuals may file an application with a court of competent jurisdiction or the Tribunal for reopening of books of account or reformulating of accounting records:
- The Central Government
- The Securities and Exchange Commission
- The Income Tax authorities
- Any other statutory regulatory body or authority
- Any person concerned
Reopening of Accounts as per Companies Act, 2013
Why Account Reopening is required?
The financial statements of a company are an important tool for stakeholders to evaluate the financial health and performance of the company. However, there may be instances where the financial statements contain errors or omissions. This can happen due to various reasons such as inadvertent mistakes, misinterpretation of accounting standards, or fraudulent activities. In such cases, account reopening becomes necessary to rectify these errors and ensure that the financial statements are accurate and reliable.
Applicability of Account Reopening
Account reopening provisions under the Companies Act, 2013 are applicable to all companies registered in India. It is mandatory for all companies to prepare and submit their financial statements in accordance with the accounting standards prescribed under the Act. In case of errors or omissions, companies can seek to reopen their accounts.
Grounds for Reopening Accounts as per Companies Act, 2013
- Fraudulent or Misrepresentations: The accounts of a company can be reopened if there is evidence of fraudulent or misrepresentations made by the management in the financial statements.
- Error or Omission: The accounts can be reopened if there is any error or omission in the financial statements which has a material impact on the financial position of the company.
- Court or Tribunal Order: The accounts can be reopened if the court or tribunal orders the same.
- Regulatory Authority: The accounts can be reopened if the regulatory authority orders the same.
The Role and Powers of the Tribunal regarding Re-opening of Accounts of Company
The NCLT plays a crucial role in the account reopening process. The tribunal has the power to direct the company to reopen its accounts and to appoint an auditor to examine the accounts. The auditor must submit a report to the tribunal within a specified time, stating whether the accounts are accurate and complete. The tribunal can then decide whether to accept the report and order the company to rectify any deficiencies.
The Tribunal appointed under the Companies Act, 2013, has wide powers to order the reopening of accounts. The tribunal can order the reopening of accounts if it finds that there are errors, omissions or misstatements in the accounts. The tribunal can also order the reopening of accounts if there is any fraud or misconduct.
The Tribunal can also appoint an auditor to look into the matter and submit a report to the tribunal. The auditor will examine the accounts of the company and report any errors, omissions or misstatements found in the accounts. The auditor will also report any fraud or misconduct found in the accounts.
Procedure for Account Reopening as per Companies Act, 2013
- Board Resolution: The Company’s board of directors must pass a resolution for reopening of accounts. The resolution must specify the reasons for reopening of accounts and the period to which the accounts pertain.
- Tribunal Application: Once the board resolution is passed, the company must file an application with the National Company Law Tribunal (NCLT) for approval of the account reopening. The application must be accompanied by the following documents:
- Board Resolution for account reopening
- Audited financial statements of the relevant period.
- Statement of impact of the errors or omissions on the financial statements
- Statement of reasons for reopening of accounts
- NCLT Approval: The NCLT will examine the application and may seek additional information or clarification from the company. If satisfied, the NCLT will issue an order approving the account reopening.
- Rectification of Accounts: Once the NCLT approval is obtained, the company must rectify the errors or omissions in the financial statements and prepare revised financial statements. The revised financial statements must be audited and certified by the statutory auditor.
- Filing with Registrar: The revised financial statements must be filed with the Registrar of Companies within 30 days of their preparation.
Penalties of Account Reopening under Companies Act, 2013
If the authorities find irregularities or fraud in the company’s accounts, they may take appropriate action against the company and its officers. The consequences of account reopening can be severe, and can include fines, penalties, disqualification of directors, and even imprisonment.
Non-compliance with the tribunal’s order can result in penalties for the company and its officers. The company may be fined, and its officers may face disqualification and even imprisonment. Therefore, it is essential for companies to comply with the tribunal’s order and rectify any deficiencies in their accounts.
FAQs
What does account reopening mean under the Companies Act, 2013?
Account reopening refers to the process of revisiting and revising the financial statements of a company for previous years. This is done to correct any mistakes or to reflect significant new information that affects the financial position of the company.
When can a company reopen its accounts?
A company can reopen its accounts only under specific circumstances, such as:
- If a court or tribunal has passed an order for reopening based on an application made by the Central Government, the Income Tax Authorities, the SEBI, or any other regulatory body.
- If the accounts were prepared in a fraudulent manner or if any transactions were omitted.