Section 221
Duty
of officer to make disclosure of payments
[1966]
36 COMP.CAS. 7 (MAD)
Nagmani Transports Private Ltd.
V.
RAMAKRISHNAN, J.
CRIMINAL REVISION
CASE NOS.1263 AND 1264 OF 1964
CRIMAINAL REVISION
PETITION NOS.1237 AND 1236 OF 1964
AUGUST
20, 1965
JUDGMENT
There are six
petitioners in these revision cases. The first petitioner, Nagamani Transports,
is a private limited company, and petitioners Nos. 2 to 6 are its directors.
The second petitioner is the husband of the third petitioner. The fourth
petitioner is their daughter and the sixth petitioner is the fourth
petitioner's husband. The fifth petitioner is a third party. On the allegation
that they failed to furnish to the Registrar of Companies copies of the annual
return for the year ending September 30, 1962, and thereby contravened section
159 read with section 162 of the Companies Act, they were prosecuted before the
Sixth Presidency Magistrate, Saidapet, Madras. On the further allegation that
they failed to furnish to the Registrar of Companies copies of the
balance-sheet for the year ending September 30, 1962, amounting to a
contravention of section 221 read with section 223 of the Companies Act they
were also prosecuted before the same magistrate. These criminal complaints were
numbered as C.Cs.Nos. 900 and 899 of 1964 respectively. The accused pleaded
that the company had become defunct but as there was no proof of that fact the
learned Magistrate found them guilty and in each of the cases fined each of the
accused Rs.100. The accused have filed the present revision cases.
The second
petitioner died after the revision cases were filed.
Learned
counsel for the petitioners urged as a preliminary ground that the offences in
question were committed in Tiruchi district where the head office of the
company is situate, and not in
A decision of
the Calcutta High Court, Debendra v. Registrar of Joint Stock Companies ([1917]
22 C.W.N. 96), dealing with the earlier Companies Act was cited before me. In
that case there was default in filing the balance-sheet before the Registrar
whose office was at
I therefore
confirm the convictions of the petitioners in both the cases but the fine
levied appears to be excessive, especially as the second accused, the principal
man concerned is dead, I reduce the fine to Rs.40 in the case of each accused
in each of the cases, in default to simple imprisonment to one month each. With
this modification the revisions are dismissed.
Time to pay
the fine, three months.
Sections 224 & 227
Auditor
[1955] 25 COMP CAS 53 (
HIGH COURT OF
Council of The
v.
Jnanendra
Nath Saikia
RAM LABHAYA AND DEKA JJ.
MAY 20, 1954
D.N.
Dedhi, for the Union of
Kironmoy Lahiri, for the Council.
J.N. Saikia, in Person.
Ram Labhaya J.—This is
a case for orders of this court under section 21 of the Chartered Accountants
Act, 1949. The respondent is a chartered accountant practising at Jorhat. He
was appointed auditor by the Golaghat Bijuli Supply Company Ltd. for the year
ending June 30, 1950. Mr. Majumdar, another chartered accountant, complained
that in accepting the appointment, the respondent had contravened the
provisions of clauses (h) and (i) of the schedule to the Chartered Accountants
Act, 1949. The Secretary of the Council, on receiving the complaint, asked the
respondent to put in his written statement. Having obtained the written
statement from him, he placed the matter before the Council in its meeting held
on September 16, 1950.
The Council decided to have an enquiry made by the
Disciplinary Committee, as contemplated by section 21 of the Chartered
Accountants Act, 1949. A meeting of the Disciplinary Committee was held on
November 21, 1952. The parties were heard. The report of the Committee was that
the first charge disclosed in the complaint was not proved. The second charge
which involved the violation of clause (i) of the schedule was found to have
been proved. The Council adopted the report of the Committee. The finding has
been referred to this court in compliance with the provisions contained in
section 21, clause (2), for orders of this court.
According to the provisions contained in the schedule to
the Act [vide clause (i)] a chartered accountant is to be deemed guilty of
conduct rendering him unfit to be a member of the Institute if he accepts an
appointment as auditor of a company without first ascertaining from it whether
the requirements of section 144 of the Companies Act, 1913, as respects the
appointment of auditors have been duly complied with. The second charge in the
complaint against the respondent was that he accepted the appointment in
violation of the requirements of clause (i) without satisfying himself whether
the requirements of section 144 of the Companies Act had been fulfilled.
The facts of the case are admitted. There is no dispute
about them. In the first ordinary general meeting of the company, an auditor
was appointed. The complainant, Mr. Majumdar, was the auditor. In the second
annual general meeting no auditor at all was appointed. The meeting was held on
March 7, 1950. The company informed the respondent by their letter on September
26, 1951, that he had been appointed auditor for the year ending June 30, 1950.
The respondent, by his letter, dated October 23, 1951, enquired from the
company before accepting the appointment whether notice of his nomination as
auditor had been given by the company to the retiring auditor as well as to the
members. The company informed the respondent by their letter, dated October 26,
1951, that no auditor had been appointed at the previous annual general
meeting. He was, however, assured that in the meeting of the directors of the
company held on September 22, 1951, a resolution was passed appointing the
respondent auditor of the company and that notice of the appointment would be
sent to Mr. Majumdar. On this assurance, he accepted the appointment and
audited the accounts. His defence before the Disciplinary Committee was that he
accepted the appointment under the impression that it was a case of casual
vacancy, and that the appointment was being made under section 144, clause (8),
and not clause (4).
Section 144(1) provides that no person shall be appointed
or act as an auditor of a company other than a private company, not being the
subsidiary company of a public company, unless he holds a certificate from the
Central Government entitling him to act as an auditor of companies. Clause (3)
of the section provides that every company shall at each annual general meeting
appoint an auditor or auditors to hold office until the next annual general
meeting. Clause (4) provides that if an appointment of an auditor is not made
at an annual general meeting, the Central Government may, on the application of
any member of the company, appoint an auditor of the company for the current
year, and fix the remuneration to be paid to him by the company for his
services.
The requirement of section 144(3) is mandatory. The company
has to appoint at its annual general meeting an auditor for the ensuing year.
It is admitted that this appointment was not made. The company, therefore,
failed to comply with the requirements of section 144, clause (3). There can be
no controversy about it. The respondent could not fail to realise that the
company had failed in its obvious statutory duty. He was informed that he was
being appointed by the directors. His case before the Disciplinary Committee
and before us was that he bona fide believed that the directors were filling a
casual vacancy under clause (8).
This clause provides that the directors may fill any casual
vacancy in the office of auditor, but while any such vacancy continues, the
surviving or continuing auditor (if any) may act. It is clear from the language
of this clause that a casual vacancy is a vacancy of a temporary nature which
may occur during the currency of the year after an appointment is made by the
company at its annual general meeting. The appointment of the auditor enures
only for a year. A casual vacancy, therefore, will be a temporary vacancy for a
part of the year. It is, therefore, provided that if there is any casual
vacancy, this may be filled by the directors, but the surviving or continuing
auditor also has the authority to act.
A casual vacancy, therefore, is not a vacancy created by
any deliberate omission on the part of the company to appoint an auditor in its
annual general meeting. The failure on the part of the company and its
directors to comply with the requirement of clause (3), section 144, is easily
distinguishable from a casual vacancy, which may be filled under clause (8).
The contention of the respondent that it was a casual vacancy has obviously got
no merit. The respondent is a young man ; he has just entered the profession ;
this was probably his first case. He got his certificate only a week before. He
was lacking ,in experience, but even so, it does not seem probable that he felt
convinced that it was a case of casual vacancy.
His bona fides are to a certain extent open to question. He
probably deceived himself in his own interest by stretching clause (8) to such
an extent that it yielded a meaning in his favour. This appears to be likely, but considering his youth and
want of experience, one may not altogether exclude the possibility of a
misapprehension about the legal position. It is possible that he believed
genuinely that the company had not contravened any provision of the law when
its board of directors had offered the appointment to him after informing the
retiring auditor, but even his honest belief is no answer to the charge, though
his misapprehension may serve as an extenuating circumstance justifying lenient
treatment that may be meted out to him.
In these circumstances, although
the charge (2) is proved, the transgression on his part is not such as to
justify a finding that the respondent has been guilty of such conduct which
renders him unfit to be a member of the Institute. We do not think that the
punishment need take any serious form. A mere warning should be enough, in the
circumstances of the case, as recommended by the Council. The respondent is
warned. He should realise the very responsible duties of his office and avoid
being guilty of similar contraventions of the law in future, which, if
repeated, would attract severe penalties. We make no order as to costs.
Deka J.—I agree.
[1949] 19 COMP. CAS. 159 (MAD.)
GOVINDA
MENON, J.
Cr.
M.Ps Nos. 1416, 1418, 1420, 1502, 1504, 1506, 1557, 1559, 1560, 1561, 1565 to
1567 of 1948
OCTOBER
1, 1948
V. Rajagopalachari, K.V. Ramachandra
Aiyar, K.S. Champakesa Aiyangar, K.S. Desikan, and N. Rajagopala Aiyangar, for
the Petitioner.
Assistant
Public Prosecutor (A.S. Sivakaminathan), for the Crown.
These
groups of applications arise out of three calendar cases Nos. 91, 92 and 93 of
1946 on the file of the Sub-Divisional Magistrate, Kumbakonam. In C.C. No. 91
of 1946 there are nine accused, of whom eight were the directors of a banking
company known by the name of the Sankara Ramanuja Siddantha Paripalana Nidhi,
Limited, Kumbakonam, and they are being prosecuted for an offence under Section
282 of the Indian Companies Act for having wilfully made certain statements
false in material particulars knowing the same to be false, in the balance-sheet
of the company for the year ended 31st December, 1938. The remaining accused
was an auditor of the said company. In C.C. No. 92 of 1946 there are seven
accused of whom six were directors and one the auditor and they are prosecuted
for a similar offence under Section 282 of the Indian Companies Act in
connection with the balance-sheet for the year ended 31st December, 1939, In C.
No. 93 of 1946, again there are nine accused persons of whom eight were the
directors and one the auditor and the offence enquired into against them is one
under Section 282 of, the Indian Companies Act relating to the balance-sheet
for the year which ended with 31st December, 1940. Crl. M.P. Nos. 1416, 1418
and 1420 of 1948 have been filed by the auditor-accused in the three calendar
cases to quash the charge framed against him in each of them. Crl. M.P. Nos.
1502, 1504 and 1506 of 1948 are by the 2nd accused in all the three calendar
cases for quashing the charge framed against him under the same Section 282 of
the Indian Companies Act.
Crl.
M.P. Nos. 1565, 1566 and 1567 of 1948 are the three petitions filed by the
third accused in all the three calendar cases for quashing the charge framed
against him under Section 282 of the Indian Companies Act for a similar
offence. Crl. M.P. No. 1557 of 1948 is by the 4th and 7th accused respectively
in C.C. No. 91 of 1946 for quashing the charge framed against them for the
offence under the provisions of Section 282 of the Indian Companies Act. Crl.
M. P. No. 1559 of 1948 is by the 4th accused in C.C. No. 93 of 1946 for
quashing a similar charge and Crl. M.P. Nos. 1560 and 1561 of 1948 are by the
same individual who was the 5th and 6th accused respectively in C.C. Nos. 92
and 93 of 1946 for quashing similar charges framed against him.
As
all these petitions are connected and intertwined with each other and they
arise out of similar transactions it will be more profitable and convenient to
deal with all of them by the same, order. In fact the learned counsel appearing
in these, various cases have agreed on the main outlines of their arguments and
the leading argument was by Mr. V. Rajagopalachari on behalf of the
auditor-accused in the miscellaneous petitions. The other learned counsel while
adopting in all essential aspects the arguments of Mr. V. Rajagopalachari have
placed before the Court certain further arguments relating to each of the
director-petitioners separately. It will be, therefore, useful to give a brief
resume of the genesis of the transaction which culminated m the proceedings against
the Nidhi concerned of which the various accused were the directors and the
auditor.
The
Sankara Ramanuja Sidhantha Paripalana Nidhi, Limited, Kumbakonam, was a limited
liability company doing banking business and incorporated under the Indian
Companies Act. During the relevant dates the various accused persons were
respectively the directors of the company. In April, 1941, the business of the
company was suspended and on 9th January, 1942, as a result of the order passed
by this Court in Q.P. No. 202 of 1941 it was ordered to be Compulsorily wound
lip. In the meanwhile on 5th October, 1941, an interim auditor had been
appointed to scrutinise the accounts of the company and he had submitted his
report, Ex. P-13, on 5th November, 1941. After the winding up of the company
and the Official Receiver taking charge of its business, a misfeasance summons
under Section 235 of the Indian Companies Act by application No. 2337 of 1944
had been taken out and P.W. 2 in the lower Court was appointed auditor to scrutinise
the accounts, the balance-sheets and the various other documents relating to
the working of the company and submit a report regarding the way in which the
affairs of the company had been going on. Ex. P-13 is the report, dated 14th
March, 1945, submitted by P.W. 2 and thereafter the matter was referred to the
Registrar of Joint Stock Companies for taking action under the appropriate
provisions of the Indian Companies Act. The Registrar of Joint Stock Companies
after taking necessary legal opinion filed the three complaints out of which
the three calendar cases arose under Section 237 for offences under Section 282
of the Indian Companies Act. After examining the witnesses tendered for the
prosecution in all the three cases which were tried together, the learned
Sub-Divisional Magistrate has framed the charges which are now sought to be
quashed on the ground that the evidence let in does not disclose that any
offence has been committed at all.
It is unnecessary to set out in any detail what ought
to be the contents of a balance-sheet for that matter is statutorily found in
Section 132 of the Indian Companies Act. The duties of an auditor with respect
to the scrutiny of the accounts, etc, of the company are also defined in
Section 145 of the Companies Act. According to the prosecution, the auditor in
these cases in signing the various balance-sheets wilfully made false
statements in material particulars knowing the same to be false and the same is
the gravamen of the complaint against the directors also. It becomes,
therefore, necessary to consider whether there were false statements of
material particulars wilfully made by the accused knowing them to be false. If
all or any of these ingredients do not exist the accused cannot be held guilty
of an offence under Section 282 of the Indian Companies Act. The arguments of
the learned counsel ranged over a wide field regarding the duties and powers of
an auditor and the responsibilities of an ordinary director in a banking
company for demonstrating that there is no title of evidence regarding any of
the ingredients necessary for an offence under Section 282 of the Indian
Companies Act. The counsel for the petitioners invited my attention to the
evidence especially of P.Ws. 1 and 2. The other witnesses examined, namely,
P.Ws. 3 to 5, are merely format proving the various documents filed in the
lower Court. The charges
framed deal with three different matters each of which according to the
prosecution makes the accused persons guilty of the offence under Section 282.
The
first of them is that there are defects and omissions in the classification of
loans and securities and their verification. This is explained by elaborating
that in the balance-sheets of the three years, loans which according to the
auditor were unsecured had not been specifically mentioned as such. Secondly,
in these balance-sheets the debts have not been separately demarcated as good,
bad or unrealizable. Thirdly, the balance-sheets did not disclose what were the
amounts borrowed by the directors from the company or advanced to the directors
during the course of the respective years and lastly, it is stated that the
accrued but unrealized interest on the various loans has not been disclosed as
an asset. The contention of the Public Prosecutor is that these matters have to
be specifically and clearly shown in the balance-sheet and the failure to do so
would make the petitioners guilty of the offence complained against.
I shall deal with each of these heads separately and
in seriatim. Ex. P-2 is the report of the auditor, P.W. 2, and the evidence of
the witness is based entirely upon this document. In Schedule 33 at page 154 of
Ex. P-2 it is stated on 7th April. 1941, a sum of Rs. 28,737 out of the loans
advanced in the year 1938 on the security of the produce of grains was
outstanding without being guaranteed by any existing security. Similarly on the
same date a sum of Rs. 11,454 is seen as outstanding out of the loans on the
produce advanced in the year 1939. Likewise a sum of Rs. 36,959 was seen outstanding
on 7th April, 1941, out of the produce loans granted in the year 1940. P.W. 2
states that so far as produce loans were concerned he verified all the loans
which were in the town and to which he was taken and he treated them as
existing assets. He treated as unsecured loans such of them about which there
is no evidence that the Nidhi had any control over the produce which formed the
primary security. He came to this conclusion as he did not have any evidence
that there was any such security and on asking for the records they were not
forthcoming. Since there was nothing to show that the original stock was ever
replaced, he came to the conclusion that these outstanding loans were unsecured
ones on 7th April, 1941. Again he states, that with regard to the produce
loans, he examined the promissory notes, pledge chits and appraising forms and
found them satisfactory so far as the documents were concerned. He inspected
the physical stocks in the bank, but he did not contact any person who had
taken loans on security of stocks outside the town and did not verify those
stocks as he was told by the clerk Krishnamachari that there was no necessity
to do so but he did not take a statement from the clerk. P.W. 2 also stated
that he cannot say that the stock or produce was not in existence on the dates
of the balance-sheets in question and the reports of the auditors on those
balance-sheets are not correct. In view of this state of evidence, it is
impossible to say that the produce loans outstanding are unsecured. P.W. 2
admits that he did not inspect the various places where produce was stored or
stocked to satisfy himself about their existence or not. Unless it is shown by
the prosecution that the produce as such did not exist and that the loans were
falsely entered as secured, a crimina Court will not be justified in framing a
charge on this evidence. In fact after the admission by P.W. 2 that he could
not say that the stock or produce was not in existence on the dates of the
balance-sheets in question or that the report of the auditor on those
balance-sheets was not correct the lower Court had no Jurisdiction to frame a
charge that the produce loans were unsecured. It is not shown that on the date
of the balance sheets the produce did not exist as I have stated already. It
was the duty of P.W. 2 before he submitted his report containing the allegation
that the produce loans were unsecured to have examined at least one or two of
such borrowers and ascertain whether on the date of his investigation the
security of the produce did or did not exist. The learned Public Prosecutor
invites my attention to paragraph 20 of the report, Ex. P. 2, wherein it is
stated by P.W. 2 that in the case of produce loans there is no positive
evidence that there was a pledge in the real sense of the word, the Nidhi
having full possession of the produce. It is also stated that there is no
evidence that there was any inspection as to the continued existence of the
produce in good condition and the auditor simply came to the conclusion that
because paddy stocked in one and the same place without any movement or other
interference for more than a year and a half would not be in good condition, it
is necessary to infer that there was no pledge in most of the cases and that
the Nidhi probably had a floating charge on the produce, if such produce
existed at the time of the advance of the loan. Even if it were a floating
charge it was obligatory upon the auditor to have ascertained whether in the
godown at the time of his report there existed sufficient quantity of produce
to cover the amounts lent by the company to any particular individual. Not
having made any attempt to ascertain the existence or otherwise of such produce
it is not open to the auditor to say that there was no pledge in the real sense
of the term and as I have already remarked, in view of the definite admission
made by P.W. 2 that he cannot say whether the stock or produce was in existence
or not, he is not justified
in saying so. This item of charge ought not to have been framed by the lower
Court. The auditor was dealing with a set of circumstances in April, 1941, and
according to him he makes a report about what should have been done in 1938,
1939 and 1940. In the absence of any verification by the auditor, the charge as
regards the unsecured nature of loans being false in the various balance-sheets
cannot be sustained. It has not been shown that the statements in the
balance-sheets are in any respect false, and much less false to the knowledge
of the auditor and the directors.
Before
discussing the legality and validity of the other charges framed against the
petitioners it is necessary to advert without much elaboration to the powers
and duties of an auditor of a company as well as the directors of such an
institution. Section 145 of the Indian Companies Act, as referred to already,
is a statutory enactment defining the powers of an auditor. This provision is
to a large extent based upon the observations and dicta contained in the
well-known decisions of the English Courts. In In re
"It
is no part of an auditor's duty to give advice, either to directors or
shareholders, as to what they ought to do. An auditor has nothing to do with
the prudence or imprudence of making loans with or without security. It is
nothing to him whether the business of a company is being conducted prudently
or imprudently profitably or unprofitably, It is nothing to him whether
dividends are properly or improperly declared, provided he discharges his own
duty to the shareholders. His business is to ascertain and state the true
financial position of the company at the time of the audit, and his duty is
confined to that. But then comes the question, how is he to ascertain that
position? The answer is, by examining the books of the company. But he does not
discharge his duty by doing this without inquiry and without taking any trouble
to see that the books themselves show the company's true position. He must take
reasonable care to ascertain that they do so. Unless he does this his audit
would be worse than an idle farce. Assuming the books to be so kept as to show
the true position of a company, the auditor has to frame a balance-sheet
shewing that position according to the books and to certify that the balance
sheet presented is correct in that sense. But his first duty is to examine the
books, not merely for the purpose of ascertaining what they do shew, but also
for the purpose of satisfying himself that they shew the true financial
position of the company."
This
case has been considered in Kingston Cotton Mill Company (No. 2), In re and Lindley,
L.J., in the Court of Appeal affirms and reiterates what was laid down in the
earlier case and observes as follows: "I come now to the real question in
this controversy, and that is, whether the appellants have been guilty of any
breach of duty to the company. To decide this question it is necessary to
consider (1) what their duty was; (2) how they performed it, and in what
respects (if any) they failed to perform it. The duty of an auditor generally
was very carefully considered by this Court in
The
company's articles of association contain special regulations relating to
auditors: see articles 129-140; but they do not impose upon the auditors any
more onerous duties than those I have already mentioned."
The
learned Lord Justices in the Court of Appeal accepted the arguments of Mr.
Haldane, as he then was, that a mere error of judgment on the part of an
auditor is not enough. Lopes, L.J., also considers this question in the same
strain as Lindley, L.J., and observes' at page 288 in
Both
these cases were again considered in very great detail in City Equitable Fire
Insurance Co., In re. At page 483
Romer, J., as he then was, refers in detail to the observations of Lindley,
L.J., that an auditor has nothing to do with the prudence or imprudence of
making loans with or without security. He must, of course, take care that he
does not bring into his balance-sheet at face value a debt that is not a good
one. At page 509 Pollock, M.R. in confirming the judgment of Romer, J., in the
Court of Appeal refers to and accepts the dictum contained in Kingston Cotton
Mill Company (No. 2), In re and further
observes that in the words of Sargant, L.J., the duty of an auditor is
verification and not detection. The learned Master of the Rolls discussed the
matter in great detail and came to the conclusion as was done by the Court of
Appeal 30 years prior to that date. These principles are so well established in
English Courts and have been consistently followed in our Courts that there can
be no dispute regarding them. Applying these principles to the facts of the
present case, on the evidence of P.W. 2, I am not able to find that the auditor
accused in this case has in any way failed to act according to the strict
confines of the duty imposed upon him. On the other hand, even according to the
evidence of P.W. 2, the auditor has done what is expected of him.
The
next question is whether the balance-sheets in question have disclosed the
nature of the bad and doubtful debts of the company. According to the articles
and memorandum of association as well as the evidence before the lower court
the Sankara Ramanuja Siddhantha Paripalana Nidhi is a banking company in
accordance with the provisions of Section 277F of the Indian Companies Act.
P.W. 1 in his cross-examination admits that the Nidhi is doing banking
business. Form F which shows the necessary and essential requisites of the
balance-sheet of a banking company has been amended by Act XXX of 1943 as a
result of the observations in some of the decisions of the Bombay High Court.
Before
the amendment there was a notification dated 16th January, 1937, by the
Government of India in the same terms as is now
contained in Act No. XXX of 1943 directing alteration in the Form F, Schedule
III. That being the case and since it is admitted that this is a banking
company in the balance-sheet of which it is not necessary to show such debits I
do not think that there was any wilful omission in the balance-sheet so far as
this item is concerned.
The next point for
consideration is whether it is obligatory to show in the balance-sheet what
exactly would be the accrued interest in a particular year. Schedule 14 of Ex.
P-2 at page 81 contains according to P.W. 2, the amount of accrued interest for
the years 1933 to 1940. It is found therefrom that the balance-sheets of the
concerned years, namely, 1938 to 1940, do not show that any interest accrued
was taken credit of for determining the dividends payable to the shareholders.
In this connection it is necessary to consider the admissions made by P.W. 2 in
his cross-examination. He says:—
"Accrued interest on
book debts need not be shown separately and practice varies. Till the end of
1935 the Nidhi took credit for all interest accrued on debts. Then they made a
change of policy and wanted to adopt the goal of cash basis for interest
receipts. This basis is sound for the distribution of profits."
Later on, he further admits
that the shareholders were informed that the accrued interest on certain loans
were not to be taken credit for unless actually credited, and this statement is
reiterated in every balance-sheet till 31st December, 1939. Again this
admission goes on to state that it is well known to the shareholders and the
public that all accrued interest were not taken to the balance-sheet though P.
W. 2 states that in his opinion it is not a sound policy. He has necessarily to
admit that he could not attack the bona fides of this policy. Further, two of
the balance-sheets in question have a note appended, that accrued interest has
not been taken into consideration. In this state of circumstances, it is very
difficult to see how any Court can say that either the directors or the auditor
have in any way wilfully concealed any material fact about accrued interest
from the balance-sheet. In Newton v. Birmingham Small Arms Company Ltd., Buckley,
J., while discussing a similar matter, observed as follows:—
"If the balance-sheet be so worded as to shew that
there is an undisclosed asset, whose existence makes the financial position
better than that shewn, such a balance-sheet will not, in my judgment, be
necessarily inconsistent with the Act of Parliament. Assets are often, by
reason of prudence, estimated and stated to be estimated, at less than their
probable real value. The purpose of the balance-sheet is primarily to shew that
the financial position of the company is at least as good as there stated, not to shew that it is not or may not
be better. The provision as to not disclosing the internal reserve fund in the
balance-sheet is not, I think, necessarily fatal to these special
resolutions."
Later
on the learned Judge observes that if the auditor reports to the shareholders
that in the balance-sheet there was such a reserve fund, that would be
sufficient. In this case, the note appended showing that the accrued interest
has not been taken into consideration in fixing the dividend, is sufficient to
bring home to the shareholders the existence of such an asset. I am decidedly
of opinion that this item of charge has necessarily no basis whatever.
It
has then to be considered whether the fact that the loans taken by the
directors in any particular year, if the same had been paid off during the
course of the same year, should be specifically and separately mentioned in the
balance-sheet. It is not disputed that there is a statement in the
balance-sheet regarding loans taken by the directors in a given year
outstanding at the end of each year; and it is admitted, that whatever was
outstanding at the end of the year by way of loans to the directors has been
mentioned in each year's balance-sheet, P.W. 2, again, admits in
cross-examination:—
"I
do not think the balance-sheet is falsified by the non-mention in the
balance-sheet of the volume of loans issued to the directors at any time during
the year. I do not think the omission is due to mala fides but it was due to
ignorance."
In
addition he agrees:—
"that
the balance-sheet is not a history of individual transactions closed during the
year, except those of the directors whose history must be mentioned in the
balance-sheet even if the transaction is closed. Loans to directors ought not
to be entered in the left hand column and it is not brought into the total and
its non-mention will not affect the correctness of the balance-sheet."
My
attention has not been drawn by the learned Public Prosecutor to any provision
of law or any observation in a decision to the effect, that the loans taken by
a director, in a particular year, which were repaid by him before the end of
the year, should be mentioned as a separate item in the balance-sheet even
though the business had been closed. It is no doubt necessary, in order that
the balance-sheet may be a true and correct one, that all the necessary
information regarding the financial status of the company and its working has
to be given to |he shareholders and that the balance-sheet should contain how
much money was outstanding as being loans to the directors at the end of a
particular year; but, in my opinion, it is unnecessary to show the volume of business transacted with a director or directors,
if the loans have been duly repaid within the course of the year. It is just possible,
that a director or directors may be doing individually and separately business
on a very large scale, and during the course of such business, large amounts
may have to be borrowed from a bank, of which he or they happen to be
directors; but if the loans are properly paid off during the course of the year
and they are not outstanding when the year ends, it is unnecessary to encumber
the balance-sheet by showing details of all closed up transactions that had
taken place during the intervening period. Such being the case it is not
possible to say that any criminal offence has been committed by the directors
or the auditor in not mentioning the details of the loans given to the
directors.
In discussing the general
liability of the directors for the so-called false statements referred to in
the charge, it is necessary to consider what exactly the legal position of the
directors is, vis-a-vis the company, with regard to the criminal liability for
their actions. In a recent case reported in Pullin Chandra Daw v. Emperor
Chakravarthi, J., referred to the decision of the Privy Council reported in
Srinivas Mall v. Emperor, where their
Lordships quoted with approval the proposition laid down in an earlier case
that:—
"Unless the statute,
either clearly or by necessary implication, rules out mens rea as a constituent
part of a crime a person should not be found guilty of an offence against the
criminal law unless he has got a guilty mind."
The learned Judge after
quoting this passage observes as follows:—
"Be that as it may, it
appears to us that the language used by Section 282 itself does import an
element of mens rea when it speaks of the relevant statement being known to be
false."
The decision in City
Equitable Fire Insurance Company, In re, discusses
the meaning of the term "wilful" in relation to the actions of the
directors of a company. In Doss v. Connell, in
considering whether in the circumstances of a particular case the directors
were guilty of wilful negligence Leach, C.J., and Varadachariar, J., have
followed the dictum of Romer, J., in City Equitable Fire Insurance Company, In
re,
regarding the duties of directors and as to what amounts to wilful negligence.
In adverting to the question whether a director is justified in trusting the
officials of the company this Court referred to the observations of Lindley,
M.R., in In re National Bank of Wales Limited, in the
following terms:—
"Business
cannot be carried on upon principles of distrust. Men in responsible positions
must be trusted by those above them, as well as those below them, until there
is reason to distrust them. We agree that care and prudence do not involve
distrust; but for a director acting honestly himself to be held legally liable
for negligence, in trusting the officers under him not to conceal from him what
they ought to report to him, appears to us to be laying too heavy a burden on
honest businessmen."
They
have also relied upon the observations of Lord Davey in Dovey v. Cory:—
"I
think the respondent was bound to give his attention to and exercise his
judgment as a man of business on the matters which were brought before the
Board at the meetings of which he attended and it is not proved that he did not
do so."
It
seems to me that these dicta are applicable to the actions of the petitioners
herein. The accused in this case are men of position and responsibility and,
some of them are, I am given to understand, members of the bar enjoying fairly
good practice. One cannot attribute any wilful negligence or dishonesty to men
in such positions if they depend upon and trust the permanent officials and the
managing director of the company so far as the working of the company is
concerned. The prosecution has not been able to show any mala fides or want of
good faith on the part of any of these accused. All that might be laid at their
door is perhaps the blame—if that could be called a blame at all—that they
placed trust upon the permanent servants of the company. It seems to me that
they are not guilty of any false statement of any material particular wilfully
made and knowing the same to be false. Even accepting as fully correct and
true, the oral and documentary evidence placed before the lower Court, I do not
think that there are any materials, whatever, on which the charges can be framed
under Section 282 of the Indian Companies Act. This is a case of entire absence
of evidence and the learned Sub-Divisional Magistrate was not justified in
framing charges on the materials placed before him.
I
would, therefore, quash all the charges and discharge the accused in the
various petitions.
[1955] 25 COMP CAS 413 (
HIGH COURT OF
Deputy Secretary to the Government
of
Ministry of Finance
(Department of
Economic Affairs)
v.
S.N. Das Gupta.
CHAKRAVARTTI, C.J., AND LAHIRI, J.
AUGUST 1, 1955
Meyer, for
the Institute.
Sen, for the Respondent.
Chakravartti C.J.—The respondent, Shri, S.N. Das Gupta, is a Fellow of the Institute of Chartered Accountants and practises his profession in Calcutta. For the years 1942, 1943 and 1944 he was the auditor of the Aryan Bank Limited, which has since gone into liquidation and in fact acted as such auditor. The reports he made were in terms of the usual formula, but those for the first two years were made subject to special reports. After the failure of the bank, certain criminal proceedings were commenced against its managing director, the director in charge, the secretary and another director, which resulted, in the end, in the conviction of the first two accused persons of conspiracy to falsify the accounts of the bank and of publication of false balance sheets. In those criminal proceedings, the respondent was a prosecution witness and it appears that not only the records of the bank, but his personal papers as well were seized in the course of the investigation. The criminal proceedings terminated with the appellate judgment of this High Court, given in August, 1952.
On the 4th of February, 1954, one Shri B.K. Kaul, Deputy Secretary to the Government of India, Ministry of Finance, Department of Economic Affairs, addressed a letter to the Secretary of the Institute in which he stated that the balance sheets and the profit and loss accounts of the Aryan Bank Limited for the years 1942, 1943 and 1944 did not exhibit a true and correct view of the state of the bank's affairs and he asked that such action as the Institute might deem fit might be taken against the respondent. According to the informant, the bank had resorted to manipulation of accounts on an extensive scale during the period covered by the respondent's audit. As instances, he alleged that in 1943, the bank had purported to allot a prodigious number of shares to certain concerns in which the managing director or his relatives were interested and this it had done not on receipt of any actual payment in cash, but by opening fictitious loan accounts in the names of the allottees or non-existent persons and showing the money as paid out of such loans. In the same year, the bank had purported to pay a large sum to one A.C. Chakraborty, one of its directors, as commission in respect of the sale of those very shares. In 1944, the bank had shown in its fixed deposit ledger certain large sums as received on fixed deposit on a single day from certain concerns in which the managing director was interested, but the cash book of the bank did not show any corresponding entries on the relevant date. It was also alleged that on a certain date in 1944, the cash book showed a cash balance of about Rs. 5,00,000, although the actual balance on that date was a little over Rs. 1,000 only.
On receipt of the complaint, the Institute issued the usual notice
to the respondent who filed his written statement in due course. With respect
to the issue of the shares, his defence was that he had examined the relevant
books and papers and found them to be in order and it was not possible for him,
nor was it his duty as a statutory auditor, to do more or investigate whether
the allottees were relatives of the managing director or concerns in which he
was interested or whether they existed in fact. If loans had been granted to
shareholders, there was nothing per se illegal in such transactions. As regards
the fixed deposit receipts, the respondent pleaded that the entries in the
fixed deposit ledger, which was only a subsidiary book, could not be decisive,
because the entries might be wrong; but if the general ledger was tallied with
the cash book, the deposits would be
found to have been actually made, It might also be that the entries in the fixed deposit ledger related only to renewals. As to
the payment of a commission to A.C. Chakraborty, the respondent pointed
out that in 1943 there was no director of the bank of that name at all, but, in
any event, payment of a commission to a
director for the sale of shares was not illegal, if the same was permitted by
the articles of association. As regards the cash balance on a certain
date in 1944, the respondent pleaded that an auditor
was concerned only with the cash balance on the day of the closing of the
accounts, but it was not his duty to check and certify the cash balance on any
particular day in the middle of the year. While taking these specific pleas,
the respondent also stated that he had been unable to obtain his papers
from the courts and the police within the short time given to him and he had, therefore, been compelled to rely entirely
on his memory.
After the respondent had filed his written statement, the matter was referred by the Institute to the Disciplinary Committee for an enquiry. The Committee treated the complaint as one alleging that the respondent had been grossly negligent in the performance of his professional duties as auditor of the bank in respect of the years mentioned in the complaint. It will be noticed that although the actual items of specific information which the informant had given related only to the years 1943 and 1944, the enquiry covered 1942 as well.
At the enquiry,
the Disciplinary Committee had to contend against the difficulty that
practically none of the records of the bank was made available to them. Besides
the balance sheets and the profit and loss accounts for the years in question
and two special reports made by the respondent in respect of the years
1942 and 1943, they had before them only the share allotment register for 1943,
the articles of association and certain share
application forms produced by the court liquidator. The only other papers they
had before them were certain personal files of respondent which were produced
by the Police Officer who had investigated the criminal charges against the
directors and the secretary.
I find it
impossible not to remark that in certain respects the enquiry can hardly be
said to have been satisfactory. Besides making a complaint, the Central
Government took no part in the proceedings and gave assistance to the Committee
whether by producing any papers or by calling any witnesses. They did not
produce even the cash book which was obviously available to them and on which
two of the items of information were based. It is not easy to see why the
Committee did not direct the Central Government to appear before them like any
other complainant and prove their case. The complaint itself cannot be said to
have been drawn up and presented with the care one might expect, because while
purporting to attach a statement said to have been submitted by A.C.
Chakraborty in. respect of his commission, it attached a piece of paper
which contained at the
bottom the letters "Sd.", but against those letters no name or
signature of anybody. The Committee again made no attempt to ascertain whether
the special reports made by the respondent had been actually placed before the
shareholders, nor did they refer to the articles of association which had been
produced before them and see whether the articles imposed any specific duties
on the respondent in addition to the statutory duties, although they could not
have exempted him from his statutory duties and liabilities. Lastly, the
Committee appear to have allowed themselves to be almost obstructed by the
respondent's representative, another
auditor named Shri J.B. Maulik, who not only made his submissions
to the Committee which he was entitled to do, but also took up the question as
to matters of fact addressed by the Committee to the respondent and answered
them himself as if he was the witness. These defects, I must hasten to add, do
not affect in any manner the findings arrived at by the Committee on the
materials before them and a word of praise is due to the admirable report in
which they have given the reasons for their findings.
It will be convenient to clear the ground by stating first the
matters of which the Committee have not found the respondent guilty. In so far
as the complaint was based on certain alleged manipulations of the accounts of
the bank in respect of loans, overdrafts and fixed deposits, the Committee have
pointed out that an audit, particularly a bank audit is concerned with
verification and not investigation and that an auditor cannot be expected to
deduct deep-laid plots of fraud conceived and carried out by dishonest
directors, unless he has some information before him which excites or ought to
excite his suspicion. In the case before them, the books and records of the
bank were not available and therefore the Committee were not in a position to
say whether there was anything in them which ought to have caused some
suspicion to the respondent and put him on further enquiry beyond the matters
which he had himself admitted in the course of his evidence to be of a doubtful
nature.
The facts found by the Committee against the respondent may now be stated. The balance sheets in question were consolidated balance sheets for the head office of the bank as also its branches. The reports made by the respondent in respect of the years 1942 and 1943 were in the form of a certificate, merely answering the four questions specified in section 145(2) of the Indian Companies Act in the affirmative and they were subject in each case to a special report. The Committee appear to have proceeded on the basis that the special reports were actually placed before the shareholders. As regards 1942, the special report stated specifically that the respondent had not audited the accounts of the branches, but certified returns made by the branch managers had been incorporated in the balance sheets. Then occurred the following sentence:
"All the loans and overdrafts of branches are shown in the balance sheet as good."
Questioned as to what that sentence meant, the respondent stated
that he had added it, because he had some doubt as to some of the loans. In the
next place, the balance sheet
showed a cash balance of Rs. 2,21,276-13-5 of which Rs. 1,95,253-9-4 was cash
in hand and the rest was in banks in current
accounts, but with regard to which the respondent stated in his special report
that he had not verified the cash in hand by counting, but it had been
certified by the management. That statement was prefaced by the following remark:
"Thus huge amount of cash has always been kept in hand at Head Office."
Questioned next as to why he had not verified the cash, the
respondent replied that his impression was that it was not essential, though in
his written statement he had made an exception in respect of the cash balance
at the date of the closing of accounts. Questioned as to why he had not
included the branches in his remark, although his case was that the cash in
hand was not only cash of the head office but also of the branches, the
respondent made no reply and when it was pointed out to him that he appeared to
have been slightly critical of the bank keeping such huge balance in hand, then
also he remained silent.
As regards the loans which were shown in the balance sheet as fully secured, the special report contained the following sentence:
"These have been granted to eight parties against the fixed deposit receipts of debtors."
The respondent was unable to explain why he had thought it necessary to include that sentence in his report, since there was nothing unusual in granting loans against the bank's own fixed deposit receipts; but if, on the other hand, he felt that there was something unusual in the transaction, why he had not enquired into the matter further. No answer was given. Then as regards the year 1943, the special report with regard to that year did not specifically state that the respondent had not audited the accounts of the branches, but it stated that the balance sheet and profit and loss accounts of the branches prepared by the chief accountant of the bank from returns as certified by the respective agents of the branches, had been incorporated in the books of the bank, which implied that the respondent had not personally checked the branch accounts. In fact, the respondent did not check the accounts of the branches for any year, as he admitted in course of his evidence. The balance sheet for the year 1943 showed a cash balance of Rs. 3,85,943-5-2, of which Rs. 3,62,749-6-2 was cash in hand. The special report for the year 1943 did not state specifically that the respondent had not verified the cash, but it stated that the cash balance had been certified by the management. In the course of his evidence, the respondent admitted that he had not actually verified the cash. Then there was a general statement in the special report to the following effect:
"The remarks given on the last account generally holds goods for the year under review."
When asked what that statement meant and what information was
intended to be conveyed by it to the shareholders and that if the respondent
had thought that certain of the entries in the balance sheet were not well
founded, whether this was adequate information, the respondent gave no answer
and had to admit that the statement really meant nothing at all or could mean anything. Lastly, as to the year
1944, there was no special report for that year and
the certificate, which I may call the main report, was unqualified. The report
itself stated that as regards the branches, the balance sheets and profit and
loss accounts as certified by the branches as well as by the managing director,
had been incorporated in the balance sheet and profit and loss account of the
head office and it was the latter which the respondent had audited. The balance
sheet for the year 1944 showed a cash balance of Rs. 46,15,212-7-10½ of
which Rs. 16,82,461-2-5 was cash in hand. The respondent's evidence was that of the latter amount, the cash in hand at the head
office was Rs. 73,827 which had been checked, though not by himself but by his
assistants who were Matriculates or Intermediate pass and had been in his employment
for three of four years. The cash at the branches had not been checked by any
one. The respondent also stated that although the major
part of the investments was shown as made by the branches and kept there and
although the major part of the cash in hand was shown as held by the branches,
that fact did not arouse any suspicion in his mind. He claimed that except that
the cash in hand at the head office in respect of the years 1942 and
1943 had not been verified, the accounts of the head office
had been properly audited and when it was pointed out to him that his personal
files produced by the police did not contain any trace of any audit notes which
he claimed he had maintained, he replied that those might have been mislaid. He
gave a similar reply when it was pointed out to him that his personal files did
not also contain any certificate from the management as regards the existence
of the cash in hand. When asked how he could have signed the balance sheet and
the profit and loss account for the year 1944 in April, 1945, when some
of the letters of confirmation from the banks, to which enquiries had been
addressed, had been received in May or June, the
respondent appears to have replied that he had checked the cash by reference to
pass books. When it was pointed out to him that such a thing was impossible, he
made no reply.
On the above facts the Committee held that in examining the
balance sheet it was the duty of the respondent to verify the cash in hand and
that by failing to do so in
respect of the years 1942 and 1943 he had failed to discharge
the duty which lay on him under the law and the approved audit procedure. The
fact that he had stated in the special report that he had not personally
verified the cash could not absolve him from his statutory liability. The
Committee held further that if the respondent felt some doubt as to some of the
loans, overdrafts and fixed deposits, as he said he had felt and if he found it
necessary to qualify his reports by certain reservations made in the special
reports, he should have expressed himself unequivocally on the suspected items
instead of making cryptic statements which might mean anything or nothing. It
was further held that his duty was to give information and not merely means of
information. The Committee also held that the alleged verification of the cash
in hand at the end of the year 1944 was falsified by the fact that the
confirmation letters from other banks had been
received after the respondent hand already signed the report. In conclusion,
the Committee summarised their findings in the following language:
"We have come to the conclusion that the respondent was grossly negligent in the discharge of his duties as auditor of the bank, in that he failed (1) to verify the cash on hand at head office on the 31st December, 1942, and the 31st December, 1943, (2) to draw the attention of the shareholders to the weakness of the bank in clear terms, in respect of the years 1942 and 1943, and (3) to bring to bear on his work that skill and diligence in the performance of his duties which was required of him as an auditor of the bank for the years 1942, 1943 and in particular for the year 1944."
The conclusions of the Disciplinary Committee have been confirmed by
the Council of the Institute and those have been forwarded to this court for consideration under section 21 (1) and
section 21 (3) of the Chartered Accountants Act.
I must point out that the second finding does not appear to be
wholly consistent with the first and the third and, in any event, it is ' not
accurately expressed. Negligence in respect of carrying out that work of audit
is one thing, negligence in giving full information to the shareholders is
another. The Committee have found the respondent guilty of both, but if the
respondent failed to verify the cash in hand in respect of two of the years and also failed generally in respect of
all the three years and to perform his duties as
auditor with due diligence and skill as found by the Committee that finding
means that the respondent failed to inform himself of the true position
of the bank by checking the accounts and asking for explanations
and information in a proper manner. If so, he could not, at the same
time, be charged with having failed to draw the attention of the shareholders
to the weakness of the bank in the years 1942 and 1943, because such a charge
pre-sup-poses that the weakness was known to him and
that he was convinced of it. What the Committee really meant was perhaps that
since the respondent had admittedly felt some doubt as to some of the entries
in the balance-sheet, it was his duty to communicate his doubt to the
shareholders in specific terms and with the reasons therefor and that in that
regard he had failed to perform his duty.
On
behalf of the Institute, Mr. Meyer contended that the findings arrived at by the Disciplinary Committee and confirmed by the Council
of the Institute were clearly right and his further submission was that
inasmuch as the misconduct found was of a kind which the Act itself had named
as misconduct which would render a Chartered Accountant unfit to be a member
of the Institute, this Court could only direct the removal of the respondent's name from the rolls. On behalf of the
respondent, Mr. Sen did not dispute the factual part of the findings, but he
contended on various grounds that they did not establish negligence. He
submitted further that, in any event, the court was not. bound to impose
the maximum penalty of removal from the rolls, but
might pass any other order.
Before considering whether the respondent has been guilty of
negligence in the discharge of his duties as auditor, it is necessary to see
what the duties of a statutory auditor are. The statute, which in this case is
the Indian Companies Act, offers
little guidance. All that section 145(2), so far as
is material, says is:
(2) "The auditors shall make a report to the members of the
company on the accounts examined
by them, and on every balance-sheet and profit and
loss account laid before the company in general meeting during their tenure of
office, and the report shall state:
(a) Whether or not they have obtained all the information and
explanations they have required;
and (c) Whether or not such balance-sheet exhibits a
true and correct view of the state of the company's affairs according to the
best of their information and the explanations given to them and as shown by
the books of the company."
Clauses (b) and (d) of the sub-section which require the auditors
to say whether the balance sheet
and the profit and loss account have, been drawn up
and the books of the company kept in accordance with law, may be left out of
account for the present purpose. It will be seen that the Act says nothing as
to what the auditor is to do in the course of his audit in order to form an
opinion on the affairs of the company, except that it is indirectly suggested
that he must call for information and explanations. The details of what he must
do have therefore to be collected from certain general rules which have been
held to govern the duties of auditors and those rules are derived from the
ordinary law and the terms under which auditors are employed. In the
case of a company, the terms are to be found in the
Articles of Association, but such terms, while they may lay down the duties of
the auditor more specifically or even provide an immunity for him in respect of
certain matters, cannot exempt him from any statutory duty or liability. We
have referred in this case to the Articles of Association, but we do not think
that they really add anything to the duties imposed by the statute. Article 99
undoubtedly says that once in every year the accounts of the company shall be
examined and the correctness of the balance-sheet and the profit and
loss account ascertained by one or more auditor/auditors—a provision which
might be thought to go a little beyond section 145(2)(c) but article 100
further says that the rights and duties of the
auditor appointed at the ordinary general meeting of the company shall
be regulated by sections 144 and 145 of the Indian Companies Act. We are, therefore, thrown back on the Act and the general
rules.
The duties of a statutory auditor under the general rules will be
understood better if we remember the place of an auditor in the scheme of the
Companies Act. A joint stock company carries on business with capital furnished by persons who buy its shares. The
owners of the capital are, however, not in direct
control of its application which is left to the executive of the company,
composed of the directors and the superior officers. It is true that the
directors are chosen by the shareholders, but once chosen they move away to the
eminence and isolation of the Board and are left to carry on the
administration of the company according to their
discretion and without any reference to the shareholders. In those
circumstances, some arrangement is obviously called for by which those who
provide the capital may know periodically what is being done with their
money, how the affairs of the company stand and what the present value of their investments is. The Companies Act,
therefore, provides for the employment of an auditor who is the servant of the
shareholders and whose duty it is to examine the affairs of the company on
their behalf at the end of a year and report to them what he has found. That
examination by an independent agency such as the auditor is practically the
only safeguard which the shareholders have against the enterprise being carried
on in an unbusiness-like way or their money being misapplied or misappropriated without their knowing anything about it.
The Act provides the safeguard in two forms. It makes it the duty of the
auditors to give an expression of opinion on certain specified matters of a
vital character and it makes him liable, along with the directors, for
misfeasance, if he fails to perform his duties as required by law and the
approved audit procedure.
What exactly are the details of the duty which an auditor has to
perform? I may point out that although the details of the duties of an auditor
are not specified in section
145(2) of the Indian Companies Act, the scope of the enquiry
to be made by him and the nature of the facts which he has to certify have been
held to be indicated. He has to ascertain and report not merely whether the
balance sheet exhibits the true state of the company's affairs as shown in the
books of the company but also whether the books of the company themselves
exhibit the true state of the company's affairs. "The words as
shown by the books of the company seem to me," observed Rigby L.J. in the
case of In re London and General Bank (No. 2), "to be
introduced to relieve the auditors from any responsibility
as to the affairs of the company being kept out of the books and concealed from
them, but not to confine it to a mere statement of the correspondence of the
balance sheet with the entries in the books." See In re London and General
Bank (No. 2).
The observation was made with reference to section 7 of the English
Companies Act of 1879, but the provision contained in sub-section (6) of that section was in all material respects the same
as the provision contained in section 145(2)(c) of the Indian Companies
Act. Indeed the relevant provision in the Company Law
of England has remained the same through successive statutes, though it has
been somewhat elaborated and it is that provision which has been adopted by the
Indian Act. It is now well settled that it is the duty of an -auditor to verify
not merely the arithmetical accuracy of the balance sheet but its
substantial accuracy and to see that it includes the
particulars required by the articles and the statute and contains a correct representation of the state of the company's affairs.
(See Halsbury's Laws of England, Hailsham Edition, Vol. 5, page 285).
Next as to the
method the auditor must follow. He must of course examine the books of the
company to see what they contain, but he must also ask for further
information and for explanations when such are required. In performing that
function, he is required on the one hand to employ reasonable skill and care,
but on the other hand, he is not required to do more.
He is not required to begin with suspicion and to proceed in the manner of
trying to detect a fraud or a lie, unless some information has reached him
which excites suspicion or ought to excite suspicion in a professional man of
reasonable competence. An auditor's duty is to see what the state of the
company's affairs actually is and whether it is reflected truly in the accounts
of the company upon which the balance sheet and the profit and loss
account are based, but he is not required to perform
the functions of a detective. As has been said, he is a watch-dog but not a
bloodhound and, as the same thing has been said without the aid of a metaphor,
his duty is verification and not detection, although in performing the duty of
verification, he must employ reasonable care and skill. What is reasonable care
and skill must depend on the circumstances of each case. Where there is nothing
to excite suspicion and there is an atmosphere of complete confidence, based on
the record of continued success in financial matters, less care and less
severity of scrutiny may be considered reasonable, whereas reasonable care and
skill may be regarded as not exercised when, in spite of the presence of
unusual features in the accounts or other Prima facie reasons for
believing that the affairs of the company may not be
in order, the examination is perfunctory and not sufficiently detailed. One
aspect of the question of reasonable care and skill is whether the auditor may
properly rely on the statements of director-in-charge or the managing director,
but that again must depend on the circumstances of each case and on the nature
of the subject-matter which requires explanation. The information and
explanations must necessarily come from the management and, except in the case
of matters which are capable of direct verification, it may not be improper for
an auditor to accept their statements when they are persons of accepted
competence and integrity, when there is nothing unusual in the accounts and when
the subject-matter is such that were the auditors to verify the result
themselves, they would have to tally a multitude of entries in several linked
accounts. If in such circumstances, that is to say, when the subject-matter
is one which is not capable of direct verification and when to verify properly the result presented in the balance sheet, it
would require investigation rather than checking and where there is nothing at all to excite suspicion, if
in relying upon the statements in such circumstances, the auditor is himself
deceived, he will not be held to have failed in the discharge of his duties. In
the next place, in judging whether an auditor exercised reasonable care and
skill, it will not be correct to proceed on matters which have subsequently
transpired, but one must have oneself in the position of the auditor as it was
when he audited the accounts and see how the matters appeared or ought to have
appeared to a man of reasonable care and skill. Provided the auditor exercises
reasonable care and skill, he will be regarded as having discharged his duty
properly, even if his certificate turns out to be inaccurate, either as to the
true position of the affairs of the company or as to the correctness of the
balance sheet in relation to the books. He is, as has been said, not an insurer
and does not guarantee the absolute accuracy of what he certifies. But if he
does not take reasonable care and skill before he comes to believe that what he
certifies is true or even when he generally displays the highest degree of care
and skill but falls short of the strict duty of an auditor even in one
instance, he must be held to have been negligent, if not worse.
The audit with which we are concerned in the present case is the
audit of a banking company. Such an audit has been called a balance sheet
audit, meaning thereby that it is primarily confined to the verification of the
existence of assets shown in the balance sheet, because on account of the multitudinous character of the transactions
of a bank, it is not ordinarily possible to examine
everyone of them, nor is it usually done except with reference to matters, if
any, which provoke enquiry. But the existence of the assets must be
strictly verified, cash in hand by actual counting, cash in banks by reference
to the pass book or letters of confirmation, securities by inspection and uncashed cheques by presenting them for being cashed.
In the case of securities, it has been said that if some of them are said to be
in the hands of a third party, the auditor has to see whether the alleged
custodian is a party in whose hands the securities might normally be placed
under the approved commercial practice or in the ordinary course of the bank's
business, and if that condition is satisfied and the party is also a trustworthy
party, the auditor may accept a certificate from him instead of verifying the
existence of the securities by actual inspection. But verification of the
existing assets in some satisfactory form is essential.
So much as to the scope of an audit and the manner of making it.
The next duty of an auditor is to make a report to the shareholders. I doubt if
the Act intends that a report may be a mere certificate- to the effect that the
auditor has been satisfied as to
the particular matters specified in section 145(2).
Such a certificate conveys nothing to the shareholders beyond an assurance that, in the opinion of the auditor, the books of
the company are in order and the position of the company is as stated in the
balance sheet. Such an assurance can hardly serve the purpose of giving
adequate information to the shareholders as to the state of the company's
affairs, because most of the items in a-balance sheet are generally of an
omnibus character—large sums being shown under a general or composite
heading. Unless the composition of those sums are
explained by the auditor's report and where the sums or sums of loans or
liabilities, the nature of the investment or of the debt is fully
explained, it is difficult to see how the. shareholders
are enlightened. Be that as it may as to the general duty of the auditor in
regard to his report, it has been said that his duty is to give information and
not merely means of information. In other words, he must communicate facts so
that, on those facts, the shareholders may judge the position for themselves
and not merely throw out hints which might put the shareholders on enquiry and
induce them to take steps for ascertaining what the facts were or which
might be missed by the shareholders altogether. When
the facts are such as to cause a doubt in the mind of the auditor as to the
accuracy of certain entries in the balance sheet or they are such that, if
disclosed, they would show the balance sheet in a different light, those facts
must be conveyed to the shareholders. They cannot be suppressed, nor can doubt
or dissent be expressed, but the reasons therefor withheld. In India, the Act
deals with the last matter in subsection (2A) of section 145 which says
that where any of the matters referred to in sub-section
(2) is answered in the negative or with a qualification, the report shall state
the reasons for such answer. Vis-a-vis the shareholders, the auditor holds a
position of trust and it is his bounden duty to honour that trust by being
candid with the shareholders and telling them frankly and fully everything with
regard to the affairs of the company which has come to his knowledge and which
it is material for the shareholders to know. It is only fair to add that there
may be circumstances in which it will not be to the interest of the
shareholders themselves that all the information regarding the company should
be included in a public and printed document like the auditor's report. To give
an instance, a foreign company may invade the market so long occupied by the
products of a home company and may suffer loss in the course of the
competition. If the home company has also suffered loss, it will obviously not
be prudent to state that fact in the published report of the auditor, because
it might encourage the foreign company to persist in the adventure, whereas in
the absence of information about the home company's loss, it might have
withdrawn from the trade rivalry. It has been said that, in such cases, the
auditor may make a confidential report to the shareholders and tell them where
it is to be found. But whether or not an auditor conveys all material
information in his public report or in a report confidentially made, him duty
it is to make a full, careful and truthful report, in default of which he must be held to have failed in the discharge of his
obligations.
The principles which I have tried to summarise have been laid down
in certain authoritative pronouncements of English courts. They are also
subscribed to by the members of the profession, as would appear from text books
on auditing and as it transpired in the course of the trial of Mr. Morland, the
auditor of the Royal Mail Steam Packet Company, who was prosecuted along with
Lord Kylsant, Chairman of the Board, in respect of one of the balance sheets.
(See the evidence of Lord Plender and other distinguished auditors, including
the President of the Incorporated Society of Accountants, in the account of
trial in Butterworth's Notable British Trials Series). In the argument before
us, reference was made to the cases of In re London and General Bank (No. 2) and In re
Kingston Cotton Mills Company (No. 2), of which
the former was referred to as the leading case. But a
fuller statement is to be found in the subsequent case of In re City Equitable
Fire Insurance Company Limited, not cited
at the Bar, where the judgments spread over a hundred
pages and all the previous decisions are reviewed. The case is very near to the
present case on the facts, the only difference being that after the
liquidation of the bank and the conviction of the
managing director the auditor was proceeded against for misfeasance and not in
the disciplinary jurisdiction.
I may now take up the findings made against the respondent. With
regard to the first of them
which relates to the failure to verify the cash in respect of the years 1942
and 1943, Mr. Sen contended that since the respondent stated
in his special report that he had not verified the cash, he had absolved
himself from liability. I am afraid the argument was entirely misconceived. The
respondent is not being proceeded against under the criminal law, nor
for misfeasance; and the particular finding does not relate
to his failure to give information to the shareholders or to concealment of
anything, but to his failure to perform one of the essential duties of an
auditor. The fact that he did not conceal the omission from the shareholders is
not therefore material. If an auditor does not do what it is his duty to do, it
is not defence for him to say in a disciplinary proceeding started under the
Chartered Accountants Act that he had
told the shareholders that he had not done it. The lapse is constituted by his
failure to perform a duty without which an audit is meaningless and it
is not excused by giving information of the omission to the shareholders. The reason is that the object of the Act is to ensure in public
interest that those who practise the profession of auditors shall perform in
their actual practice at least the essential duties of an audit and shall bring
to bear on their work attention to matters to which their duty requires them to
pay attention. If Mr. Sen's arguments were correct, an auditor might do nothing
at all, nor even look into the accounts and yet say with complete immunity in
his report to the shareholders that he had done nothing and assumed no
responsibility whatever for any inaccuracy or untruth in the balance-sheet or
profit and loss account. The absurdity of such a contention, if advanced, would
be obvious. It was next contended by Mr. Sen that the respondent did pay
attention to the matter of the cash in hand and that he was entitled to be
content with the certificate of the management. No such certificate was
traceable among the personal files of the respondent and it is not known who
had given him the certificate which he had accepted. But assuming that there
was a certificate and that it was the managing director or the director in
charge who had given it, even then the respondent failed in his duty in not
verifying the cash himself. Authorities, both legal and professional, are
unanimous that in a bank audit, the cash balance claimed by the management must
be verified by the auditor, because otherwise the management might remove the
greater part of the funds and show them falsely as lying in hand in cash and
thereby relieve themselves of the necessity of even making up accounts, showing
the disposition of the money. Among the duties of an auditor which Lindley L.
J. enumerated in the
case of In re London and General
Bank (No. 2)
and which he found the auditor concerned in that case had performed, was the actual counting of cash. The authoritative
work of Dicksee to which the Disciplinary Committee have referred states that
"the audit of a bank balance sheet involves the thorough examination and
exhaustive testing of every account in the general ledger, the counting of
balance of cash in hand,..." I need not quote the rest. A certificate from
the management can obviously be no substitute for such verification. The whole
object of an audit is an examination of what the management have done and if
the statements of the very persons who constitute the management were to be
accepted in all matters, even in matters capable of direct verification,
an audit would be, in the words of Lindley L.J., "an idle farce." Mr. Sen referred to the decision in the case
of In re Kingston Cotton Mill Company (No. 2) in aid of
his contention that the respondent had not been
negligent in the discharge of his duties by accepting the certificate of the
management. I do not think that the case is of any assistance to him. It was a
case where the stock-in-trade of a Cotton Mill Company, as shown in the balance
sheet, had been accepted by the auditors on the certificate of the manager and
they had stated in their balance sheet that they were accepting the
figure "as per manager's certificate." The
stock-in-trade was shown not by quantity but in value and the actual
fact was that the manager who had, up to the time of the audit, been regarded as a man of acknowledged competence and a
high degree of integrity, had systematically manipulated the accounts and
overstated the value of the stock-in-trade. The auditors had taken the figure
from a stock journal which contained several accounts, each one of which showed
the stock-in-trade in that account and the total of such accounts was taken as
the resultant stock-in-trade which was shown in the balance sheet. The auditors
had checked whether the sum total of the figures shown under each of the
contributory accounts agreed with the figure inserted in the balance sheet, but
having done so, they did not go further and examine into the contributory
accounts themselves. It was in those circumstances that the Court of Appeal
held that it was no part of the duty of an auditor to take stock and since
there was nothing to excite suspicion at the time of the audit, since the
manager was a man of accepted competence and integrity up to that time and
since to ascertain the real figure of the stock-in-trade the auditors would
have to compare an enormous number of books and also take into account the
wastage in the process of manufacture of yarn from cotton as well as
fluctuations of prices in the market, it could not be said that they had been
negligent in accepting the certificate of the manager. I do not think that a
decision that an auditor is not bound to take stock and that he is entitled to
rely upon the certificate of a manager of accepted integrity in respect of the
value of the stock-in-trade when there is nothing to excite suspicion, is any
authority for holding that, likewise, an auditor may even in respect of cash in
hand merely accept the certificate of the management and refrain from
counting the cash himself. A nearer case is the case
of the City Equitable Fire Insurance Co., to which 1
have already referred. There, a sum shown in the balance sheet as cash in hand
included an amount in the hands of the company's brokers, the major part of
which had already been earmarked for transmission to America for use in
connection with a branch which the company owned at
Brazil. The auditors had called for and seen a letter from the brokers in which
they had admitted that they were
holding this amount and they passed the entry in the balance sheet, although
the amount was in the hands of the brokers. The Court of Appeal held that the amount
was not really cash in hand but it was in the nature of an amount lying in the hands of the brokers or a debt due from
them and that since there was no question of the solvency of the brokers and
since the auditors had every reason to believe that if the company called for a
cheque from the brokers, it would be forthcoming the error the auditors had
committed was only an error of misdescription. They however added that even if
it was negligence, it might be disregarded, since it had caused no damage to
any one. It will, however, be found that although, in that case, an amount
which was not cash in hand was described in the balance sheet as such, the
auditors made all the requisite enquiries which would be appropriate to the
case of money held by a third party, as in fact the amount in question really
was, but even then the court did not say without qualification that the conduct
of the auditors did not amount to negligence. That case also, in my view, would
not support a claim that an auditor can omit to verify cash actually in hand
and accept instead a certificate from the management. In my view, the first
item of negligence found by the Council is amply established.
Proceeding to
the next second item, I have already pointed out that it is inconsistent with
the first and the third and that the negligence which can be properly charged
against the respondent is not that he failed to inform the shareholders of the
weakness of the bank's position, but that he failed to inform them clearly and
directly of his doubts and the facts by which those doubts had been caused. As
to this item of negligence, little need be said. In respect of the year
1942, the auditor admittedly felt some doubt as to
some of the loans and overdrafts granted by the branches. He must also have had
some reason for stating specifically that certain secured loans shown in the
balance sheet had been granted against fixed deposit receipts held by the
borrowers, because unless some reason existed, it is not possible to see why he
should have thought it necessary to draw attention to what were
perfectly normal transactions. In respect of the year 1943 as well, he must have felt the same uneasiness as in respect
of the previous year, because the statement in the special report in
respect of 1943 imports all the criticism he had made in the special report for
1942. The remark included in the special report for 1943 cannot be explained on
any other hypothesis. In spite of having felt these doubts and such uneasiness,
the respondent did not inform the shareholders
frankly and directly what the facts were which had caused misgivings in
his mind, but he chose to employ some euphemistic or enigmatical language which
might or might not be taken by the shareholders to be of any significance and
which certainly Conveyed no
definite information. On such conduct of the respondent
two explanations are possible. Either he knew that some of the debts, were bad
and some of the so called secured loans were not genuine, but he did not wish
to inform the shareholders of the fact but wanted, at the same time, to provide
for his own safety and therefore he inserted certain cryptic remarks in
his special report; or he was careless and neglected
to give the shareholders the information which it was his duty to give. The
Council of the Institute has adopted the more charitable explanation and found
the respondent guilty only of negligence. In my view, that finding also is
amply justified.
I may add at this stage one word as to the case of In re London
and General Bank (No. 2) which also
was relied on by Mr. Meyer as an authority on this
point. That case has got to be carefully read. It appears that in that case the
auditors had carried out a thorough examination of the loans and securities
which constituted the principal asset of the bank and they had come to be of
the view that the nature of those loans and securities was extremely
unsatisfactory and that the prospect of their realisation was problematic. In
that view, they may submit a detailed report to the board of directors and in
the statutory report which they originally prepared, they used the following
language: "The value of the assets as shown on the balance sheet is
dependent upon realisation. And on this point we have reported specifically to
the board." Ultimately they were persuaded by the chairman of the board of
directors of the company to omit the last sentence and the report went only
with the statement that "the value of the assets as shown on the balance
sheet was dependent upon realisation." With reference to the charge that
the auditors had failed give full information to the shareholders,
Lindley, L. J. observed that if the auditors had laid
before the shareholders the balance sheet and profit and loss account,
accompanied by a certificate in the form in which they first prepared it, they
would perhaps have done enough under the peculiar circumstances of that case.
The learned Lord Justice proceeded to utter a warning that if, even in such
circumstances, an auditor chose to give means of information rather than
information, he would do so at his own risk, because he might be held
judicially to have failed to discharge his duty. But the fact remains that in
the opinion of the learned Lord Justice, a reference to the confidential
report, if included in the statutory report, might have absolved the auditor
from responsibility in the circumstances of the case. In the
present case, the statutory report did contain a reference to the special report and the negligence which can be
charged against the respondent must be on the basis that unlike the case of
London General Bank (No, 2) even the
special report in this case did not give adequate information.
The decision thus is not a direct authority on this point, as Mr. Meyer
contended.
The third item
in the findings is a general one and finds the respondent guilty of failing to
perform his duties in respect of all the three years with the requisite
skill and diligence. It is impossible to read the evidence of the respondent
without feeling convinced that the finding is entirely justified. His personal files did not contain any audit notes or
memoranda of queries or certificates or explanations. But the fact that
the file had been in the custody of the police
enabled him to say that the relevant papers might have been mislaid. It is
regrettable that the Committee did not ask the investigating Police Officer to
produce the search list which might have shown whether any other papers had also
been seized. But since they did not do so, it is not possible to draw any
inference against the respondent from the absence of any audit notes in his
personal file, but the other facts referred to by the Disciplinary Committee
remain. To refer to them would be only to repeat the facts which have
already been stated. It will be recalled that
although he felt some doubt as to some of the loans and overdrafts, he
did not take any further steps or make any further enquiry and although he
commented even in respect of the year 1942 on the unusual
fact that the bank was holding such a large amount in cash, he did not verify
the cash even in subsequent years, although the cash in hand swelled in
1943 to Rs. 3,62,749-6-2 and in 1944 to Rs. 16,82,461-2-5. Throughout he seems to have maintained an attitude of
passivity and incuriosity. Similarly, the very unusual fact that the major part
of the investments was said to have been made by the branches and to have been
kept there, and the major part of the cash also was said to lie in the
branches, did not move him to any further enquiry. The peak of negligence was
reached when he signed the report for 1944 in anticipation of letters of confirmation from the banks in respect of the cash said to
be lying with them. Mr. Sen contended that the amounts lying in current
accounts might be checked from the pass books and amounts lying in fixed
deposit might be checked from the fixed deposit receipts. But there must have
been some reason why, in spite of those materials being available to him, if
they were available, the respondent asked for letters of confirmation. Why,
having felt the necessity of confirmation and asked for it, he should have
hurried to certify the balance sheet before the confirmation was received, was not explained. In
my view, the third item of negligence has also been established.
Before
we proceed to consider what order we ought to make, I desire to refer to one matter. Admittedly, the respondent did not
examine the accounts of any of the branches in any of the years and he accepted
the certificates of the different branch managers or balance sheets and profit
and loss accounts prepared by the chief accountant at the head office from the
returns made by the branch managers. The Indian Companies Act provides
in section 145(3) that if a banking company has branch banks beyond the limits of India, it shall be sufficient if the
auditor is allowed access to such copies of and extracts from the books and
accounts of any such branches as have been transmitted to the head office of
the company in India. It will be noticed that no similar exception is made with
respect to branches in India and that even in respect of branches outside
India, a reference to copies of or extracts from the accounts is made
necessary. It is therefore a question whether an auditor of a banking company
in India can be said to have performed his duties properly, if, in
respect of branch offices, he merely accepts the
returns of the branch managers and does not even call for relevant extracts
from the books and accounts, so that he might make some kind of a personal
examination. As this matter was not gone into by the Institute, it must await
consideration in a future case when it arises.
It remains to consider what order we should make against the respondent. Mr. Meyer referred to the decision, in the matter of J.K. Ghose and contended that S.R. Das Gupta J. and myself had already held in that case that where the misconduct found was, according to the Act, itself a misconduct which rendered a person unfit to be a member of the Institute, the High Court had no option but to order the name of the offender to be struck out from the rolls. It was pointed out that the misconduct found in the present case was under item (q) of the Schedule which sets out the acts or omissions which render a chartered accountant unfit to be a member of the Institute. On behalf of the respondent, Mr. Sen contended that the effect of our decision was not as claimed by Mr. Meyer and, further that even where the misconduct found was one of the types of misconduct named in the Act as misconduct which rendered a chartered accountant unfit to be a member of the Institute, the High Court was not bound to direct his name to be struck out from the rolls, but might impose any lesser penalty which it might consider sufficient in the circumstances of the case. In support of the latter proposition, Mr. Sen referred us to the decisions in S. G. Mandre, In re, In re W.G. Ambekar, and The Council of Institute of Chartered Accountants v. Rajamany.
In
the case of J.K. Ghose to which
Mr. Meyer referred, the present point was not
decided. The question for decision in that case was whether the Act at all
contemplated misconduct less than misconduct rendering a chartered
accountant unfit to be a member of the Institute and whether for such misconduct, the High Court could impose a penalty
of lesser gravity than removal of the offender's name from the Membership
Register. Incidentally, certain observations as to the scope of certain
sections were made, but the present point was not decided. That decision,
therefore, does not conclude the matter. The decisions of the Bombay, Madras
and Nagpur High Courts relied on by Mr. Sen, certainly support his contention,
but with great respect, I have not found much assistance in the reasons given
by them in overcoming the difficulty which, to my mind, is created by certain
sections of the Act.
The draftsmanship of the sections which deal with misconduct and
disciplinary action is extremely clumsy. It would appear that before adopting
the words "conduct which will render a person unfit to be a member of the
Institute", the Legislature did not take their measure and after
introducing them in several sections, it failed to co-ordinate the provisions
made, so that it is impossible to read the words as bearing a consistent or
intelligible meaning. The words first appear with a slight variation in section
20(2) of the Act, but that section is not the first in order of time. The section first in order of time
is section 21(1) which says that if on receipt of
information or a complaint, the Council comes to be of opinion that a member of
the Institute has been guilty of conduct which, if proved, will render him
unfit to be a member of the Institute, it shall cause an enquiry to be made.
Similarly, where a complaint is made against a member of the Institute by or on
behalf of the Central Government, an enquiry shall be directed. Pausing here
for a moment, I may point out that the first part of the section hardly makes
any sense, because some conduct remains to be proved and, if proved, will lead
to a certain consequence, it is impossible to see how the Council can, at the
stage of the complaint, be of opinion that the member complained against has
been guilty of it. Obviously, what the draftsman wanted to say is that
if the Council finds that the conduct alleged against
a member is such that, if proved, it will render him unfit to be a member of
the Institute, it will direct an enquiry. Be that as it may, on reading the
section, one would naturally ask what kind of conduct would render a chartered
accountant unfit to be a member of the Institute. That question is answered by
section 22 which says that "the expression 'conduct' which, if proved,
will render a person unfit to be a member of the Institute shall be
deemed to include, any act or omission specified in
the schedule."The acts or omissions specified in the schedule thus all
constitute conduct which will render a person unfit to be a member of the
Institute though, since the section uses the word "include" there may
be other such acts and omissions. The schedule sets out twenty-six items, twenty-five
of which name certain acts or omissions, but the twenty-sixth is of a residuary
character and provides for other acts or omissions as may be specified by the
Council of the Institute by a notification in the Gazette of India. It is
important to note the opening words of the Schedule which read thus:
"A chartered accountant shall be deemed to be guilty of conduct rendering him unfit to be a member of the Institute, if he—"
Then follows an enumeration of the acts or omissions contemplated.
The result is that by the words of section 22 and the opening words of the
schedule, the Act enjoins that if a chartered accountant does any of the acts
or be gulity of any of the omissions mentioned in the Schedule, he must be
deemed to have rendered himself unfit to be a member of the Institute. In the light of these provisions,
section 21(3) assumes a somewhat strange hue. It says
that after the finding of the Council has been forwarded to the High Court and
after the High Court has given an opportunity to the Council, the member
concerned and the Central Government to be heard, it ''may pass such final
orders on the case as it thinks fit," if it does not refer it back to the
Council for further enquiry. Therefore, even where the Council finds that a
member has been guilty of one or more of the acts or omissions enumerated in
the schedule and even where the High Court accepts such findings, the High
Court may make any order it deems fit and not necessarily an order for
the removal of the member's name from the rolls. The language of section 21(3)
is capable of no other meaning. But a strange anomaly
results from the section when it is read with section 22 and the schedule, to
which I have already referred. Those provisions declare that certain acts or
omissions, if committed by a chartered accountant, will render him unfit to be
a member of the Institute and indeed the acts or omissions are set out as
illustrations of conduct which will bring on unfitness. Read with those
provisions, the effect of section 21(3) is that the High Court may, on
the one hand, find a person guilty of conduct which,
according to the statute itself, renders him unfit to be a member of the
Institute and yet may, at the same time, keep him on as a member and inflict on
him some punishment less severe than expulsion from membership. These
provisions lead to the result that the moment the
High Court find a chartered accountant guilty of one or more of the acts or
omissions enumerated in the Schedule, it finds him necessarily to be
unfit to be a member of the Institute, because the statute says so, but, on the
other hand, the High Court is given the liberty not to remove the member
concerned from membership, if it so pleases, although he
has been found to be unfit to be a member. The High Court may thus find the
offender at once unfit and fit. This odd position has been created, because
when enacting section 21(3), the Legislature obviously remembered
that there might be degrees of the same offence, meriting different
punishments, but they forgot it while enacting section 22 and the Schedule and
made a provision in absolute terms, declaring that certain acts or omissions
would per se render a chartered accountant unfit to remain a member. However,
in spite of the anomaly, the clear language of section 21(3) cannot be
disregarded and it must be held that, so far as that section
is concerned, it gives to the High Court an unqualified liberty to pass any
order it likes even if the act or omission found against a chartered accountant
may be such as, under the provisions of the Act itself, renders him unfit to be
a member of the Institute. The only difficulty in adopting that construction is
caused by the terms of section 20(2) to which I may now turn. That sub-section
reads as follows:
"The Council shall remove from the register the name of any member who has been found by the High Court to have been guilty of conduct which renders him unfit to be a member of the Institute."
If the words "conduct which renders him unfit to be a member
of the Institute" be taken in the sense of the definition sections, it
must follow that once the High Court has found that a chartered accountant has
been guilty of one of the enumerated acts or omissions, the Council must remove
his name from the register. It is to be noticed that section 20(2) does not say
"if the High Court holds him to be unfit to be a member of the
Institute," or "if the High Court directs his name to be struck
out", but says if he
"has been found by the High Court to have been guilty of conduct which renders him unfit to be a member of the
Institute." As I have said, if one takes the language of this sub-section
in the sense which the definition sections give to it, it is impossible to come
to any other conclusion than this, that the moment any of the specified acts or
omissions is found against a chartered accountant, his name can no longer
remain on the rolls. No room is left for the High Court, after it has found one
or more of such acts or omissions to exercise any discretion with respect to
the penalty. But the words of section 21(3) to which I have already
referred are there. In my view, the only way in which
section 20 (2) can be reconciled with section 21(3) is by reading the
former as referring not to the finding of any act or
omission, but referring to the order may by the High Court or to put it
in another way, by reading the words "found by the High Court to have been guilty of conduct which renders him unfit to be a
member of the Institute" as meaning not "found by the High Court to
have committed one or other of the acts or omissions which under the statute
renders a chartered accountant unfit to be a member of the
Institute," but as meaning "held by the
High Court to be unfit to be a member of the Institute." It is
useless to pretend that this construction of the section does not, in view of the definition sections, involve some
straining of its language in order to make it yield a different meaning, but I
think that for the sake of consistency as also for the sake of conformity with
good reason, it ought to be so construed, and taken as referring to the
actual order made by the High Court in exercise of
its discretion on its own view of the fitness of the chartered accountant to
remain a member of the Institute, rather than to the finding of some act or
omission carrying with it the liability for removal from membership under the
provisions of the Act. This construction satisfies good reason, for otherwise
the only penalty would be the maximum one for acts or omissions enumerated in
the schedule, whenever found against a chartered accountant, regardless of the
nature of the act or omission in a particular case and the degree of
culpability involved. I would accordingly hold that even where a chartered
accountant is found guilty of one or more of the acts or omissions specified in
the Schedule as instances of conduct which will render a chartered accountant
unfit to be a member of the Institute, the High Court is not bound to impose
the maximum penalty of removal from the rolls, but is entitled to impose a
lesser penalty in its discretion.
It only remains to consider what order we should pass against the
respondent. There can be no question that auditors occupy an essential position
in the commercial life of a country. The accountability to them is a potent inducement
to honest and business-like conduct on the part of the directors of joint stock companies. On the
other hand, their intergrity and the care and skill
which, it is assumed, they will bring to bear on their work, are almost
the only guarantees which the shareholders have that they
will be kept informed periodically of the true state of the affairs of the
company in which they have invested their money. An auditor who pays more
regard to his fees or patronage from the directors than to his duty to the
shareholders or who construes his duty to the shareholders too narrowly, does a positive disservice, not only to the
shareholders who employed him, but to the
cause of joint stock enterprise in the country in general. He does so, because
by not bringing to the notice of the shareholders matters which it is material
for them to know and leaving the directors free to deal with the funds and the
business of the company as they choose, he makes it possible for them to bring
the company to ruin and thereby he contributes to the destruction of public
confidence in joint stock enterprise. It is, therefore, not possible to regard
the lapse of the respondent too lightly. We have given this matter our careful
consideration and we think that, in all the circumstances of the case, the
ends, of justice will not be served, unless the penalty imposed be substantial.
We direct that the respondent be suspended from the membership of
the
Each party to bear its own costs.
Lahiri J.—I agree.
HIGH COURT OF
D.A. DESAI J.
COMPANY
APPLICATION NO. 190 OF 1976 IN COMPANY PETITION NO. 57 OF 1976 CONNECTED WITH
COMPANY APPLICATION NO. 74 OF 1976.
DECEMBER 24, 1976
B.R. Shah for the Official
Liquidator.
K.S.
Nanavati for the Directors.
D.A. Desai J.—This summons is taken out by the liquidator, Bhavnagar Vegetable
Products Ltd. (in liquidation), representing the court to direct the directors
of the company to sign and authenticate the audited balance-sheet and profit
and loss account as required by section 215 of the Companies Act and to give
necessary authentication of certificates of basic data and particulars entered
into accounts and also the information and explanations as required in the
draft report and the letter dated 29th November, 1976, of the auditors. Further
direction sought was that Tungabhadra Industries Ltd. (sponsor for short) and
Dena Bank, United Commercial Bank, State of
The company was ordered to
be wound up by an order made by this court on 15th September, 1976. In an
appeal preferred against the order of winding up the company, stay of operation
of the order was granted but I was informed that the stay is vacated.
Therefore, at present, there is no stay of the winding-up order. This court
made an order on 7th May, 1976, directing the liquidator to appoint auditors to
audit the books of account of the company so as to be able to arrive at a
reasonable clear picture of the state of affairs of the company. In order to
satisfy the requirements of the proviso to section 391(2), it was necessary to
have the latest balance-sheet and profit and loss account of the company and,
therefore, the direction was given that M/s. Kantilal Patel and Company,
chartered accountants, be appointed to audit the books and submit a report
showing the position of the company as on 31st December, 1975. The auditors
have prepared a draft report and in the course of auditing, they came across
certain things for which they want the explanation of the directors who are
responsible for the same and are not offering explanation. A letter dated 29th
November, 1976, annexure "A" to the affidavit in support of the
summons by which the auditors requested the liquidator that steps should be
taken for authentication of the statement of account prepared by them by the
directors and secretary of the company as well as authentication of the certificates
of the basic data and particulars entered into the accounts. The draft also
sought certain information which the auditors requested the liquidator to
furnish. Thereafter, the liquidator took out the present summons. It has been
served upon the directors, the petitioning-creditor, the sponsor of the scheme
and various banks who claim to be the creditors of the company.
Mr. A.H. Mehta, learned
advocate who appeared for director No. 5— Indrajit Jamnadas Thakkar, No.
14—Navinchandra Gaurishankar Vyas and No. 16—Nissarhusein Abdulhusain Merchant,
led on behalf of the objecting directors and most of bis arguments were adopted
by others who raised objection to the summons being granted. It is, therefore,
necessary to dispose of the objections raised by Mr, Mehta.
In respect of the first
contention, Mr. Mehta contended that this court has no jurisdiction under
sections 215 and 217 calling upon the directors to sign and authenticate the
audited balance-sheet and profit and loss account nor even the court has power
to direct the directors to appear before the auditors and submit explanation
sought by the auditors. In short, the objection was that section 215 does not
confer any power on the court to give such direction.
For the purpose of the
present direction, it may be assumed that those who object to the summons were
the directors of the company because it is in their capacity as directors that
they are being called upon to do various things by the liquidator. The question
that would then arise is whether those who are directors can be called upon by
the court to do various things as prayed for by the liquidator in the summons.
This would necessarily require examining the duties of the director. It is now
indisputable that directors stand in fiduciary position with the company. Apart
from various statutory liabilities which they undertake on becoming directors,
this is the position which is beyond controversy that directors stand in
fiduciary position in relation to the company. This is a position of utmost trust. Professor Gower in his
Principles of Modern Company Law, 3rd edition,
after referring to the articles styled "fiduciary relationship" and
"the director as trustee", has observed that the correct position of
a director has been settled by Romer J. when he said that the directors are
agents of the company and are in fiduciary relationship to their principal, the
company. The duties of good faith which this fiduciary relationship imposes are
virtually identical with those imposed on trustees and, to this extent, the
description "trustee" still has validity. It is this duty of a
director which must be kept in view before deciding whether they can be asked
to do what the liquidator wants them to do.
However, at the inception,
it would be necessary to refer to some of the statutory provisions with respect
to the duty of the directors. Section 209 provides that every company shall
keep proper books of account with respect to various things mentioned in that
section. Section 209A requires the books of account, other books and papers of
the company to be kept open for inspection during business hours by the
Registrar of Companies or by such officer of the Government as may be
authorised by the Central Government in this behalf. Section 210(1) imposes an
obligation on the board of directors of the company to lay a balance-sheet as
at the end of the period specified in this behalf and profit and loss account
for that period before every general meeting of the company held in pursuance
of section 166. On a combined reading of these sections, it is crystal clear
that the company must maintain books of account, that the books of account are
open for inspection by the Registrar without any previous intimation and that
at the end of the financial year, the balance-sheet and profit and los3 account
is to be prepared and it is to be laid before the general meeting. That duty is
cast on the board of directors. In order to discharge the last duty, viz.,
getting prepared the statements of account, balance-sheet and profit and loss
account, it will be the duty of the directors to see that regular books of
account of the company are kept. That would again be the duty of the board of
directors. If they are required to maintain books of account, it would be their
duty to see that correct and regular books of account are kept, They should
exercise such care and skill and such degree of supervision as would enable
them to see that provisions of section 209 onwards are faithfully and
effectively carried out. If any director neglects to provide for maintenance of
books of account for the whole year, I fail to see how at the end of the year,
they would be able to carry out the obligations and duties imposed on them by
section 210(1). Balance-sheet and profit and loss account can be prepared or
compiled on the basis of the accounts maintained during the year. It is no
argument that only if a general meeting is to be convened and at such general
meeting, a statement has to be produced that accounts are required to be
maintained and as there is no question of calling the general meeting because
the company is ordered to be wound up, and, therefore, section 210 does not
come into play. Now, can one look forward to the end situation that just before
the time the general meeting is to be convened, the company would be wound up
and, therefore, the directors were free from the liability of keeping accounts.
It is, therefore, indisputable that the board of directors has to make
necessary arrangements for maintaining and keeping regular books of account
which should be available for inspection and which should be according to the
prescribed standard and on the basis of which the balance-sheet and profit and
loss account will be prepared by the board of directors.
Now, section 224 imposes a
duty on the company to appoint, at each annual general meeting, auditor or
auditors to hold office from the conclusion of the meeting until the conclusion
of the next annual general meeting. Duty to appoint auditors is thus statutory.
Section 226 prescribes qualifications of auditors. Then comes section 227 which
is material. It provides that every such auditor of a company shall have a
right of access at all times to the books and accounts and vouchers of the
company whether kept at the head office or elsewhere and shall be entitled to
require from the officers of the company such information and explanations as
the auditor may think necessary for the performance of his duties as auditor.
An auditor thus enjoys a statutory right to call for explanations from officers.
Expression "officer" is defined in section 2(30) to include any
director, managing agent, secretaries and treasurers.........., etc. Now, if I
remove the word "officer" from section 227 and read the word
"directors", then section 211 will read "..............the
auditors shall be entitled to require from the directors of the company such
information and explanations as the auditors may think necessary for the
performance of his duties as auditor". It thus becomes a statutory duty of
the directors to keep the accounts or arrange to maintain the accounts of the
company, to prepare balance-sheet and profit and loss account and before it can
be so done, to offer explanations and information called for by the auditors.
Mr. Mehta does not dispute
this position but his contention was that this obligation is imposed upon the
directors of a company which is functioning and if the company is ordered to be
wound up and the liquidator steps in, the directors cease to enjoy the status
of directors and hence could not be asked to discharge a function which they
were b and to discharge if they continued to be directors. If that were to be
so, it would only mean that the provisions onwards from section 433 of the
Companies Act would be rendered totally nugatory. Once a winding-up order is
made, the board disappears. But the obligations and liabilities incurred during
the period the company functioned are not discharged on the making of a
winding-up order. If accounts are kept for a financial year and they are
examined either by the auditor appointed at the general meeting or appointed by
the court but the accounts relate to the period when board of directors was in
charge of the company, then notwithstanding the winding-up order, directors are
liable to render explanation. Mr. Mehta's argument comes to this that if the
accounts are being audited by the auditors for the period for which there were
some directors, the duty of the directors under section 227 came to an end as
soon as a winding-up order is made. If this company was functioning and there
was no winding-up order, under section 227 the auditors would have a right to
call upon the directors to submit explanations. If a winding-up order
intervenes, the position in law in this behalf does not undergo change.
Directors may cease to enjoy power, but obligations and liabilities incurred
during the period they were directors do not evaporate with the passing of the
winding-up order. In fact they can be enforced at the hands of the liquidator.
This is the scheme of the winding-up provisions of the Companies Act.
Mr. Mehta had an extreme
argument to offer in this connection. He said that if directors had committed
any offence, they should be prosecuted but the liquidator cannot call them to
offer explanation. I have not been able to fully grasp the meaning of this
submission. I would prosecute.
There would be no
hesitation in doing so. But that does not put an end to the liability to give
explanation. The argument is that if cailed upon to explain, they will be
squarely bound by the explanation which may hamper their defence in the
prosecution that may be launched against them. That was Mr. Mehta's passing
apprehension. But the argument which in terms was posed is that the various
provisions herein discussed do not confer any power on the court to call upon
the directors to explain something which happened during the period they were
directors because the auditors appointed by the court and not one appointed by
general meeting seeks their explanation. Fact situation is slightly different
though I do not propose to rest this order on that position. Auditors appointed
by the general meeting disclosed their disinclination to audit accounts.
Therefore, the court appointed the auditor. But the irrefutable and important
fact is that the auditor has audited accounts for the period when there was a
board of directors. And directors of such board are called upon to render
explanation when they were in office. Accounts are required to be maintained
statutorily. The duty to explain arises under the statute. Vacation of the
office of director does not ipso facto bring to an end the liability to offer
explanation which was statutorily placed there under section 227. Therefore,
there is no substance in the contention of Mr. Mehta that the court cannot call
upon the directors to appear before the chartered accountants and auditors
appointed by the court to submit explanations on the questions and queries
raised by them.
There is one apprehension
of Mr. Mehta against which I would like to guard. He said that the direction
sought is a composite direction. He is right. He says that, by composite
direction, the directors are called upon to appear before the auditors, give
explanations, sign the accounts and authenticate the certificates. He says that
after offering explanations, the auditors may prepare same accounts and/or
other accounts and the directors cannot be asked to sign the same. At present,
I propose to confine myself to one part of the prayer, viz., to appear before
the auditors and to submit explanations. Authentication will come at a later
stage. Under this guise, the directors cannot be allowed to escape. Therefore,
I confine my attention in this summons to that part of the prayer by which the
directors are called upon to give explanations in respect of queries and points
raised by the auditors in their draft report submitted by them to the
liquidator. To that, there cannot be much objection, viz., that the director is
being called upon to be a party to a document to which he does not subscribe.
If there is statutory liability to sign, I will examine it later on. For the
present, I will grant a part of the prayer in the summons.
Mr. A.L. Shah, learned
advocate on behalf of director No. 3—Ahmedhusen Abdulhusen Merchant—urged that
A A. Merchant resigned from the office of director with effect from 1st
October, 1974. Mrs. K. A. Mehta on behalf of director No. 7—Mohmedhusein
Abdulhusen Merchant—stated that he resigned in June, 1975. Mr. D.U. Shah,
learned advocate for director No. 6 —Mohmedhusein Noormohmed Merchant—and No.
8—Fidahusen Noor-mohmed Merchant, urged that they were minority directors since
1971 and they did not participate in the management of the office and resigned
from the office of directors on 4th October, 1974. Their resignations were
accepted on 30th April, 1975. Miss S.M. Madan, learned advocate on behalf of
director No. 10—Sultanali Kasamali Ladiwala—urged that the director, S.K.
Ladiwala, resigned from the office of the director on 9th December, 1975. All
these advocates invited me to hold that they are not liable to give any
explanation as sought by the auditors.
In order to dispose of this
summons, it is necessary to state that the relevant period for which accounts
are prepared commence from 1st November, 1974, and ends on 31st December, 1975.
If anyone who was a director daring this relevant period, he must give
explanation. If he is a minority director and did not participate in the
management, that would be his answer. Resignation of a director becomes
effective from the day on which it is accepted. If any other construction is to
be accepted, the result would be that all of them can walk out on the day
preceding the date on which the accounting year comes to a close and on the
last day they would pocket the balance in their hands and nothing can be done
to them because they cannot be asked to explain. The period for which the
accounts are compiled ipso facto determine the liability of the directors to
explain things arising from the accounts for the period and would fasten upon
those persons who during the period, for long or for short, for a day or for a
month, were directors. Mr. D.U. Shah pointed out that directors Nos. 6 and 8
were minority directors since 1971 and they were not participating in the
management. It may be true. But it cannot dispose of the liability if till
April, 1975, viz., the date of resignation, the public register of the company
showed them as directors. It is true that they may give an explanation that as
they were not participating in the management, they cannot offer any
explanation. If this statement is correct, the answer is to be accepted. But,
can it be an argument that because during a part of the period for which
accounts are compiled, a person walked out from the office of the director, his
liability to explain statutorily cast under section 227(1) would be discharged
or he would be freed from the liability ? It cannot be so. Therefore, all these
gentlemen who said that they have resigned but appear to have been on the
public register of this company as directors for some period of time out of the
period for which the accounts are compiled by the auditors and explanations are
sought, they would be liable to answer. Mr. G.N. Shah, learned advocate for
directors No. 2— Dhirajlal Babubhai Sanghvi, No. 4—Kiritkumar Ratilal Gandhi
and No. 9—Nagardas Ranchhoddas Sanghvi, stated that keeping open all the
contentions, they agree to appear before the chartered accountants to offer
whatever explanation they can offer after taking inspection of the books if they
want to take and then submit statement of concurrence in respect of statement
of affairs filed by the other directors. There is no other contention on his
behalf.
Accordingly, this summons
is granted in respect of prayer (a) to the effect that the directors shown at
serial Nos. 2 to 16 should appear before the chartered accountants within a
period of three weeks from to-day according to the date appointed by the
chartered accountants and to offer explanations in respect of queries raised by
the chartered accountants in the draft report submitted by them to the
liquidator in respect of the accounts of the company for the period November 1,
1974, to December 31, 1975. Summons is also granted in terms of prayer (b) that
all of them are called upon to submit in writing their acceptance of the
inventory of the stock and goods made by M/s. General Superintendence Company (
[2005] 62 SCL 610 (
HIGH COURT OF
v.
Hindusthan Club Ltd.
KALYAN JYOTI SENGUPTA, J.
GA NO. 4408 IN CS NO. 326 OF 2004
APRIL 29, 2005
Section 274 of the Companies Act, 1956 - Directors - Disqualification of - Whether in view of non-filing of declaration prescribed in statutory form [vide section 274(1)(g)] by any of directors seeking appointment and reappointment, said director is not automatically disqualified; before a person is declared to be disqualified by auditor or any other person, a view has to be formed whether grounds mentioned in section 274 have been proved without any doubt - Held, yes
Section 274 of the Companies Act, 1956 - Directors - Disqualification of - Plaintiffs were members of defendant-club which invited nomination of members for election of office bearers and executive committee members from amongst them - Plaintiffs and other members filed their nominations but election officer held all of them to be invalid on ground that same were not accompanied by mandatory declaration under section 274(1)(g) - Whether since rules for election of office bearers and members of executive committee of defendant-club were framed when provisions of Act were not in existence, decision of club for cancellation of nominations on ground of non-filing of statutory declaration under section 274(1)(g), in prescribed form, was not in accordance with rules of club - Held, yes - Whether however, since club was in real sense a limited company and there were members, who were also directors of other public limited companies, declaration was required to be filed by any of members, who was appointed by an election of club, immediately after having been appointed and in default, his election would be illegal - Held, yes
Section 227 of the Companies Act, 1956 - Auditors - Powers and duties of - Whether auditor cannot submit a report about disqualification of directors under section 274(1)(g) on basis of statement supplied by company alone; he has to examine and even he has to make an independent enquiry about collected materials from other sources to submit such report - Held, yes
FACTS
The plaintiffs were members of defendant No. 1-club, which issued a notice of annual general meeting in terms of its rules and regulations to conduct certain business including holding of election for its office bearers and executive committee members from amongst its members. It, accordingly, invited nominations for the same. Printed copies of the annual accounts along with the auditors’ report were circulated amongst the members. In the said report, it was stated that none of the committee members was disqualified from being appointed as committee member in terms of section 274(1)(g). The plaintiffs, accordingly, filed their nomination papers along with other candidates. After scrutiny, certain nominations, including those of the plaintiffs, were found valid and their names were published on the club’s notice board. However, thereafter, all of a sudden, an undated erratum was put up on the notice-board stating that there had been an omission in some clause of the auditor’s report and such omission purported to show that the nomination of some members including that of plaintiffs were declared invalid. The election officer reported to the president/honorary secretary and the candidates of the club that as all the nominations received by the club were not accompanied by the mandatory declaration under section 274(1)(g), all the nominations were invalid.
On writ, the plaintiffs challenged the aforesaid decision of the election officer contending that section 274(1)(g) came into being subsequently in the statute book whereas the election rules were framed long time back and, as such, the same had no application in respect of the club. The defendant, contested suit contending, inter alia, that the Court had no territorial jurisdiction to entertain the suit as entire cause of action had arisen outside the territorial jurisdiction of the Court.
HELD
The contention of the plaintiffs that section
274(1)(g) came into being subsequently in the statute book whereas the election
rules were framed long time back and as such, the same had no application in
respect of the club could not be accepted, for any statutory amendment is to
take effect and to be applied the moment it is given effect to or
retrospectively as the intention of the Legislature will command. [
Moreover, that any rules or bye-laws of any club are
always subject to the laws framed by the sovereign authority, is the basic
principle of good governance. Therefore, the provision of the said section was
applicable to the defendant-club. [
As regards the jurisdiction of the Court, it appeared
that the suit had been filed on obtaining the leave under clause 12 of the
letters patent. No application had been made for revocation of leave under
clause 12 on the letters patent. However, it cannot be the law that unless such
an application is made, the Court will not examine the question of
jurisdiction; rather it is the duty of the Court to examine at the threshold,
if such plea has been raised by the contesting party. [
According to the plaintiffs, their rights had been
affected because the auditors’ report was prepared and furnished and the same
was done within the territorial jurisdiction of the Court. A part of the cause
of action was certainly related to furnishing of the report by the auditors and
the remaining part of the cause of action was related to the decision of the
club authority whereby the plaintiffs’ rights were denied. Therefore, if the
bundle of facts constituting the cause of action was deeply considered, then the
publication of report by the auditor was certainly one part of the cause of
action. [
Therefore, the High Court had jurisdiction to
entertain, try and determine the suit as leave under clause 12 of the letters
patent had been granted and so long such leave was not revoked subsequently by
the Court, jurisdiction to try the instant suit would remain with the Court. [
From a careful examination of the rules for election
of office bearers and members of executive committee, it appeared that in order
to hold the nomination papers filed by the members valid, the filing of the
declaration in the prescribed form under the Companies Act, read with Companies
[Disqualification of Directors under section 274(1)(g) of the Companies Act,
1956] Rules, 2003, was not required. Those rules were framed when the
provisions of the Act were not in existence. Hence, validity of a nomination
had to be adjudged in the context and in reference to the said rules which
prescribed the eligibility criteria for filing a nomination. A member, who had
paid his or her dues to the club for the bills sent to him or her prior to the
date of circular inviting nominations, was treated to be eligible to file and
in case of default, the nominations should be held to be invalid. Another
aspect to be noted was that a member could not file any nomination for
more than one post of the office bearer or of executive committee member. [
At the time of filing of the nominations, only the
said conditions were required to be examined by the election officers and/or
club authority and no other matter was required to be looked into. [
Accordingly, the decision of the club for cancellation
of the nomination on the ground of non-filing of the statutory declaration in
the prescribed form was not in accordance with the rules of the club. There was
no warrant to declare the same being invalid on that ground. [
As regards the question as to whether the declaration form under the provisions of rule 9 of the Rules read with the Act was required to be filed or not, admittedly the club was in the real sense a limited company and admittedly, there were members who were also the directors of other public limited companies. Therefore, at the time of the appointment or reappointment whether by election or otherwise of the members of the Executive Committee or the office bearers, filing of the declaration in the prescribed form was a must. The language of section 274(1), read with the Rules in that regard, is mandatory and one cannot escape from those provisions. Accordingly, any of the members, who was appointed by an election of the club immediately after being elected, would file the said declaration. It was not necessary that at the time of filing of nomination, such declaration was required to be furnished but that must be done immediately after having been elected and in default, his election would be illegal and he could not be appointed under the law. [Para 23]
As regards the question of the correctness of the auditors’ report, it is the duty of the auditors to submit a report amongst others about disqualification of any of the directors or members under the provisions of section 227(3)(f). [Para 24]
In the instant case, the auditor had submitted the report by way of correction subsequently. It seemed that he had submitted the report on the basis of the statement and information supplied by the secretary of the club. From a careful perusal of section 227, which provides for the power and duties of the auditors, it appears that the auditor cannot submit a report on the basis of the statement supplied by the company alone. He has to examine and even he has to make an independent enquiry about the collected materials from other sources to submit a report regarding clause (f) of sub-section (3) about the disqualification of the directors under section 274(1)(g). One cannot conclusively come to a decision of fact finding that in view of non-filing of declaration prescribed in the statutory form by any of the directors seeking appointment and reappointment, the said director is automatically disqualified. Section 274 provides the grounds when a director can be said to be disqualified. Before a person is declared to be a disqualified by an auditor or any other person, it has to be found whether the grounds mentioned in section 274 have been proved without any doubt. Naturally, the auditor concerned has to collect materials. In the instant case, no such materials had been collected. Moreover, before reporting a particular person as being disqualified, an auditor must seek for the views and/or representation of the director concerned or any of the persons as to whether he was a director of the defaulting company as mentioned in section 274. Auditor’s report really affects a particular person’s right as his civil right or status is necessarily declared in a negative way by the auditor by his fact finding. The rules of natural justice demand that before a person’s right is affected, he/she should be given opportunity to explain his or her position. [Para 26]
In the instant case, the auditor initially had not followed the said procedure. However, at the same time, procedure is nowhere provided in the Act or the Rules. He had proceeded bona fide and according to his own interpretation and judgment; it could not be held that the auditor had done any mala fide act in the matter. [Para 27]
Therefore, decisions of the club authority cancelling the nomination and deferring the annual general meeting as well as the election was not valid and not in consonance with the club rules. Therefore, the club authority was to be directed to proceed with the holding of annual general meeting and election on the basis of the nominations, which had already been filed. However, immediately after election, it had to be ascertained whether the declaration in the prescribed statutory forms had been furnished by the elected candidates or not. [Para 28]
Bhaskar Sen, Debal Banerjee, P.C. Sen and S.B. Mukherjee for the Appearing Parties.
JUDGMENT
1. This motion has been taken out for interlocutory relief of order of prohibitory injunction restraining the defendants and each of them and/or by their servants and agents or assigns or otherwise from denying, the plaintiffs or any of them the right as nominees and to contest election for the post of Executive Committee members at the AGM [Annual General Meeting] of the company scheduled to be held on 18 December 2004, and for mandatory injunction commanding the defendants to permit the plaintiffs and each of them to contest the election for the posts of the Executive Committee members of the company to be held on 18 December, 2004 and also for appointment of an independent person to conduct or supervise or oversee the annual general meeting of the defendant No. 1 to be held on 18 December, 2004. This application has arisen out of a suit for declaration that the plaintiffs are, and each of them is entitled to be, eligible for contesting the election for the post of Executive Committee member of the company at the AGM of the company scheduled to be held on 18 December, 2004 and for other appropriate consequential reliefs.
1.1 The short facts of the case are stated hereunder. The plaintiffs and each of them are undisputedly permanent members of the defendant No. 1, club. In terms of the rules and regulations of the club - each and every year annual general meeting and the election of the Executive Committees are held, and from and amongst them office bearers of the club for the next year are selected. By notice dated 9 November, 2004 -annual general meeting of the defendant No. 1 was convened and to be held on 18 December, 2004 to transact the following business :
"(i) To receive, consider and adopt the audited balance sheet as at 31st March 2004 and the profit and loss account for year ended on the date and reports of the Committee and auditors thereon.
(ii) To appoint auditors for the year 2004-05 and fix their remuneration.
(iii) Election and balloting.
(iv) To announce the results of the election of the office bearers and Committee Members.
On the same date, a circular was issued inviting proposals/nominations for election of the office bearers and the Executive Committee members for the year, 2004-05. In terms of the club Executive Committee appoint honorary Election Officer for conducting election. In terms of the notice, the nominations were to reach at the office of the club at 7 p.m. on 26th November, 2004 and the last date of withdrawal was up to 7 p.m. on 29 November, 2004. On the same date printed copies of the annual accounts of the club along with the auditors’ report were circulated amongst the members of the club. In the auditors’ report accompanying the circular, it was stated that none of the Committee members is disqualified as on 31 March, 2004 from being appointed as Committee members in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956. Plaintiffs duly filed their nomination papers for contesting the election along with other candidates. After scrutiny, 36 nominations including those of the plaintiffs for election as Committee members for the above year were found valid - and such names were published on the notice board of the club. After declaring the nominations to be valid all of a sudden on 7 December, 2004 an undated erratum was put up on the notice board of the club stating that there has been an omission in clause 4(e) of the auditors’ report and such omission purported to show that the nomination of 12 members including the plaintiffs were declared invalid. This erratum was not considered at any meeting of the Committee members nor was it placed at any meeting of the Committee members. On 13 December, 2004—all the plaintiffs filed Form DD-A and obtained receipts of the same. In spite of the aforesaid fact and compliance of all the requirements—the Election Officer reported to the President/honorary Secretary and the candidates of the club that as all the nominations received by the club up to 26 November, 2004 were not accompanied by the mandatory declaration under section 274(1)(g) of the Companies Act, all the nominations were invalid."
2. In the body of the plaint and petition, I find the plaintiffs have challenged the aforesaid decision of the Election Officer.
3. At the interim stage, the plaintiffs obtained an interim order on 17 December, 2004 passed by the Hon’ble Justice Subhro Kamal Mukherjee staying the operation of the decision of the Election Officer dated 15 December, 2004 rejecting the nomination papers of the candidates for election of the office bearers at the annual general meeting and restrained the club from holding election of office bearers until further orders.
3.1 This interim order was not appealed against and the same is still valid and subsisting.
4. Mr. S.B. Mukherjee, learned senior counsel appearing for the plaintiffs/petitioners, contends that the subsequent decision of the Election Officer is illegal, invalid and arbitrary as after scrutinising all the nomination papers including those of the plaintiffs and after having found the same being valid, it was not open to them to cancel the same on the plea as mentioned in the subsequent notice. In the relevant Rules, nowhere it provides that each and every candidate has to file declaration in Form DD-A under the provision of section 274, sub-section (1), of the Companies Act, 1956. The relevant clause only says that nomination papers are to be scrutinised and validity has to be ascertained and nothing else. The aforesaid section 274, sub-section (1), clause (g), of the Companies Act, 1956 came into being subsequently in the statute book whereas the election rules were framed long time back, as such, he contends the same has no application in this club. I am unable to accept this contention of Mr. S.B. Mukherjee as this provision will not be applicable in this club for any statutory amendment is to take effect and to be applied the moment it is given effect to or retrospectively as the intention of the Legislature will command.
5. Moreover, that any rules or bye-laws of any club are always subject to the laws framed by the sovereign authority is the basic principle of good government. Therefore, I hold that this provision of this section is applicable in this club.
6. His next contention is that the subsequent erratum of the auditors in its report is a manipulated one and the same will appear from the following facts, viz., the report is dated 9 November, 2004. The auditor is certifying that none of the Committee members was disqualified as on 31st March, 2004 of the aforesaid section. The nominations were invited to be filed by a circular letter issued by the Committee on 9 November, 2004 by 26 November, 2004. Therefore, on 9 November, 2004, which is the date of the Auditors’ report, the nominations had not been filed. The ground for rejection of the nomination papers was that the same was not accompanied by declaration under section 274(1)(g). In this background, it is difficult to imagine how could the auditors on 9 November, 2004, say, that these members were disqualified when the nomination papers had not been filed at all. In other words, he contends, the first portion of the Auditors’ report does not tally with the latter portion because the disqualification requires a certificate from the auditor as of the last date of the financial year, that is to say, on 31 March, 2004. Moreover, even on 29 November, 2004—the nomination for election was found to be valid and the purported rejection was on 15 December, 2004. He further submits that filing of declaration in the above form is one thing and holding directors’ disqualification under the aforesaid section is another thing.
7. In any view of the matter—when the requisite declaration in Form DD-A was filed long before holding of the meeting on 18 December, 2004 — it was not open for the Election Officer to cancel all the nominations. Such a decision smacks of something other than bona fides and lawful decision. He contends that requirement of filing declaration in the above form is applicable to those directors who are the directors of the public company. Under such circumstances, he submits that this decision should be set aside and the club should be directed to hold the annual general meeting which has been suspended and to hold election by appointing an independent person as an Election Officer and to observe and supervise the same.
8. Mr. P.C. Sen, learned senior counsel appearing for the defendant Nos. 1, 2 and 3, submits, firstly, that this court has no territorial jurisdiction to entertain, try and determine the instant suit in view of the fact that the entire cause of action as pleaded in the plaint has arisen outside the territorial jurisdiction of this court. The respondent No. 1 club, is situated at 4/1, Sarat Bose Road, Calcutta-700020 outside the territorial jurisdiction of this Court. He contends that the nominations filed by the respective candidates, including the plaintiffs, have lawfully and rightly been rejected by the Election Officer. He contends that in order to contest the election, a candidate must file a valid nomination under the club rules. According to him, the validity pertains also to compliance of the provisions of section 274(1)(g) of the Companies Act, 1956 read with rule 9 of the Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2003. Under this provision, it is obligatory for every director in a public company registered under the Companies Act, 1956, to file Form DD-A as prescribed under the rules before he is appointed or reappointed as a director of the company. The defendant club is a company and the office bearers and the members of the Executive Committees are in real sense directors of the company. None of the plaintiffs has filed such declaration form as reported by the auditor as on 31 March, 2004. The eligibility or other qualification for the election has to be determined as on the last date of nominations, i.e., 26 November, 2004, as it is the cut off date for determination of valid nominations under section 274(1)(g) of the Companies Act, 1956 read with the said Rules. Those members who have fulfilled above criteria are only eligible to offer themselves for reappointment as directors. Hence, their nominations were clearly invalid and the plaintiffs/petitioners having failed to comply with the statutory mandatory Rules are disqualified themselves for reappointment as directors.
9. As regard the publication of list of valid nomination on the notice board on 26 November, 2004 is concerned, he submits that this list was published inadvertently. No vested right has accrued to the plaintiffs/petitioners by reason of this publication of list inasmuch as there cannot be any estoppel against the statute. So the plaintiffs cannot take advantage of the legal wrong. The majority of the plaintiffs/petitioners in particular, the plaintiffs/petitioner Nos. 1, 2, 3, 4, 9 and 10 are directors in other several public/private limited companies, and as such, it is expected of them to have knowledge of requirements of various important provisions of Companies Act, 1956. Most of the plaintiffs/petitioners have been serving in the Executive Committee of the club for last several years. So, it is expected that each of them is aware of the need of compliance of various provisions of the Companies Act, 1956 including section 274(1)(g) thereof. When the plaintiffs/petitioners failed to give their declarations under section 274(1)(g) of the Companies Act, 1956, they forfeited their right for nomination for reappointment as directors and/or to continue any further. Lastly, he argued that this application and the suit filed by the plaintiffs/petitioners are mala fide as they have not made eight candidates, viz., Sri Hari Prasad Kanoria, Sri Vinit Mehta, Sri Vijay Kumar Chandak, Sri Mahabir Prasad Saraf, Sri Radheshyam Banka, Sri Radheshyam Tulsian, Sri Subir Poddar and Sri Suryakant M. Damani parties to the suit, although they had filed declaration and had qualified to be valid candidates.
10. Mr. Sen submits that, apart from deciding the issue raised in the application, for future guidance, this court should give a declaration and/or opinion as to whether the plaintiffs/petitioners are entitled to be nominated as elected Executive Committee members of the club in view of the violation/non-compliance of section 274(1)(g) of the Companies Act, 1956 read with rule 9 of the Companies [Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956] Rules, 2003 on/or before the cut-off date for filing nominations dated 26 November, 2004.
11. Mr. Debal Banerjee, learned senior counsel appearing for the defendant No. 4, Mr. Bijoy Kumar Sharma, being the auditor contends that the allegation made against this defendant by the plaintiff is not only baseless and unjust vilification but the same is also unfortunate as this defendant for a long time while working as auditor in various organizations has acquired a great reputation. As a professional man, his client has bona fide made audit under the provision of section 227 of the Companies Act, 1956. He is obliged to submit a report faithfully amongst others whether any of the directors has been qualified under clause (g) of sub-section (1) of section 274 of the said Act or not. He submitted the audit report and this was placed in the 19th meeting of the Executive Committee for the year, 2003-04 on 9 November, 2004 in which the plaintiff No. 1 amongst others was a participant. In this meeting, all the members of the Executive Committee duly accepted correctness of the report filed by this defendant. Upon scrutiny, this defendant found that there has been no filing of the statutory declaration in a prescribed form by the plaintiffs or any of them as on 31 March, 2004; so, under the statute, he is duty bound to report and inform the members of the company. If he does not do so, then as a professional man he would be committing legal misconduct. Therefore, his client is entitled to be compensated for the damages done to his reputation and mind. Therefore, complaint against him shall be expunged and this petition shall be dismissed as against his client.
12. Mr. Bhaskar Sen, learned senior counsel appearing on behalf of the some of the candidates, who have filed nominations have made application for addition of party. Such application should be dealt with before the application is heard out and judgment is rendered for his clients’ interests are also seriously affected by the decision of the club authority cancelling the nominations. He claims that his clients duly filed the nominations along with the declaration in the statutory form. Therefore, there was no justification going by the club’s policy and rules to cancel the nomination of his clients. He, therefore, submits that the club authority should be directed to proceed with the election immediately.
13. I have heard the learned counsel for the parties and I have gone through the petitions and other materials placed before me. In this interlocutory application, the first point has been taken regarding jurisdiction of this court. I have examined the copy of the plaint filed in the suit. It appears that the suit has been filed on obtaining the leave under clause 12 of the letters patent. No application has been made for revocation of leave under clause 12 on the letters patent. However, it cannot be the law unless such application is made, the court will not examine the question of jurisdiction, rather it is the duty of the court to examine at the threshold, if such plea has been raised by the contesting party. But at this stage, this plea is to be examined only looking at the plaint unless the defendant, raising question of jurisdiction, has supplied an unimpeachable document and materials for rendering a decision on this issue.
14. Here, Mr. Sen merely raises the point that no part of the cause of action has arisen within the territorial jurisdiction of this court, even going by the disclosure of the jurisdictional fact in the plaint. I have seen the plaint. The plaintiff has pleaded in paragraph 5 that the Auditors’ report to the members included in such annual general report is made over to the company on/or about 9 November, 2004. Such Auditors’ report is stated to have been prepared at 6, Old Post Office Street, Calcutta-700001 within the aforesaid jurisdiction. In the suit, the plaintiffs have claimed declaration that they are eligible for contesting the election for the post of Executive Committee members of the company at the annual general meeting of the company. According to the plaintiffs, their rights have been affected because of the auditors’ report prepared and furnished and the same was done at 6, Old Post Office Street, Calcutta within the aforesaid jurisdiction. So, in my view, the part of cause of action is certainly related to furnishing of the report by the auditors and the remaining part of the cause of action is related to the decision of the club authority whereby the plaintiffs’ rights were denied. Therefore, if this bundle of facts constituting the cause of action are deeply considered, then I think the aforesaid publication of report by the auditor is certainly one part of the cause of action.
15. I, therefore, hold that this court has jurisdiction to entertain, try and determine the suit as leave under clause 12 of the letters patent having been granted and so long such leave is not revoked subsequently by the court, jurisdiction to try this suit remains with the court.
16. On merit, the points involved in this matter are that, firstly, whether the Election Officers going by the provisions of the election rules have lawfully cancelled all the nominations or not; secondly, whether non-filing of the statutory declaration in the Form DD-A in terms of rule 9 renders the members of the club ineligible to contest the election for formation of the Executive Committee or not; thirdly, whether the report furnished by the auditors subsequently by way of erratum is correct or acceptable on the facts and circumstances of this case.
17. Mr. Mukherjee contends that in the election rule, nowhere it is provided that a candidate has to file a declaration in the prescribed form to contest the election by filing nomination. I think in this context, it is necessary to set out the relevant portion of the rules for election of the office bearers and members of the Executive Committee of the club;
"2. A permanent member who has paid his or her dues to the club for bills sent to him/her prior to the date of circular inviting nomination will, only be entitled to propose or second or to offer himself or herself as a candidate. All such payments should be made before exercising such rights.
3. A permanent member may send one or more nominations but the same candidate cannot stand for more than one post of the office bearers or Executive Committee member.
5.
(a) Scrutiny of proposals : The Election Officer shall scrutinise the nominations received as a list of valid nominations will be displayed on the notice board of the club, at least before two weeks of the date of annual general meeting;
(b) If the number of the candidates for the office bearers and the members of the Executive Committees is equal to the office bearers and members to be elected, the ballot papers will not be issued and those candidates would be considered having duly been elected;
(c) If the number of candidates for the post of any office bearer and/or members of the Executive Committees exceed the number of the elected members, then election shall be held by ballot only for such post for which the numbers so exceed."
18. From careful examination of the aforesaid rules, it appears to me, as right submitted by Mr. Mukherjee, that in order to hold the nomination papers filed by the members being valid, the filing of the declaration in the prescribed Form DD-A under the Companies Act, read with rules, is not required. These rules were framed when the provision of the aforesaid Companies Act, and rules above were not in existence. According to me, validity of a nomination has to be adjudged in the context and in reference to the rules 2 and 3. The rule prescribes the eligibility criteria for filing nomination. A member who has paid his or her dues to the club for the bills sent to him or her prior to the date of circular inviting nominations is treated to be eligible to file and in case of default, the nominations should be held to be invalid. Another aspect is that a member cannot file any nomination intending to stand for more than one post of the office bearers of Executive Committee member.
19. At the time of filing of the nominations only the aforesaid conditions are required to be examined by the Election Officers and/or club authority and no other thing is required to be looked into.
20. Unlike the appointment and re-appointment of the directors in the limited company under the companies laws, here, the appointment is not made under the provisions of the Companies Act. It is done by the election. If a particular candidate is not elected by the members, question of the appointment or re-appointment does not and cannot arise if such appointment is to be made within clause (c) of rule 5. However, in the event of the members or the office bearers are deemed to have been elected by virtue of the provision of rule 5(b)—then on the date of filing of nomination such declaration form may be necessary.
21. It appears to me from the records that the number of candidates who filed nominations far exceeds the number of the members of the Executive Committee and the office bearers. Therefore, election was and still is required to be held.
22. Accordingly, I hold that the decision of the club for cancellation of the nomination on the ground of non-filing of the statutory declaration in the prescribed Form is not in accordance with the rules of the club. There was no warrant to declare the same being invalid on that ground.
23. Now the question comes whether the Declaration Form under the provisions of rules 9 read with the said Act is required to be filed or not. Admittedly, this club is in real sense a limited company and admittedly, as it appears that there are members who are also the directors of other public limited companies. Therefore, at the time of the appointment or re-appointment whether by election or otherwise of the members of the Executive Committee or the office bearers, filing of the declaration in the prescribed form is a must. The language of section 274, sub-section (1), read with the rules in this regard, are mandatory and one cannot escape from these provisions. Accordingly, I hold agreeing with the argument of Mr. Sen that any of the members who is appointed by an election of this club immediately after being elected shall file the aforesaid declaration. It is not necessary that at the time of filing of nomination, such declaration is required to be furnished but this must be done immediately after having been elected, in default, his election will be illegal and he cannot be appointed under the law.
24. Now coming to the question of the correctness of the Auditors’ report I am of the view that it is the duty of the auditors to submit a report amongst others about disqualification of any of the directors or members under the provision of section 227, sub-section (3), clause (f).
25. As rightly argued by Mr. Banerjee, it is statutory duty of the auditor to submit such report. The auditor being the chartered accountant cannot ignore the aforesaid mandatory provision of law.
26. In this case, I find the auditor has submitted the report by way of correction subsequently. It seems to me that he has submitted report on the basis of the statement and information supplied by the Secretary of the club. From the careful perusal of section 227 of the said Act which provides the power and duties of the auditors, it appears to me that the auditor cannot submit a report on the basis of the statement supplied by the company alone. He has to examine and even he has to make an independent enquiry about the collected materials from other sources to submit a report regarding clause (f) of sub-section (3) about the disqualification of the directors under section 274(1)(g). In my view, one cannot conclusively come to a decision of fact finding that in view of non-filing of declaration prescribed in the statutory Form by any of the directors seeking appointment and reappointment, the said director is automatically disqualified. Section 274 provides the grounds when a director can be said to be disqualified. Before a person is declared to be a disqualified by auditor or any other person—it [a view] has to be formed whether the grounds mentioned in section 274 have been proved without any doubt. Naturally, the auditor concerned has to collect materials. In this case I do not find any such materials having been collected. Moreover, I think, before reporting a particular person being disqualified—an auditor must seek for the views and/or representation of the director concerned or any of the persons as to whether he was a director of the defaulting company as mentioned in section 274. In my considered opinion, Auditor’s reports really affect a particular person’s right as his civil right or status is necessarily declared in a negative way by the auditor by its fact finding. The rules of natural justice demand that before a person’s right is affected he/she should be given to explain his or her position.
27. In this case, I find the auditor initially has not followed the aforesaid procedure. However, at the same time, I observe this procedure is nowhere provided in the Act or Rules. He has proceeded bona fide and according to his own interpretation and judgment I cannot hold that the auditor has done any mala fide act in this matter. It appears that Mr. Mukherjee’s client has already filed the declaration in the prescribed statutory form after the cut off date but long before election.
28. Under such circumstances, I am of the prima facie view that decisions of the club authority cancelling the nomination and deferring the annual general meeting as well as the election is not valid and not in consonance with the club rules. Therefore, I direct the club authority to proceed with the holding of annual general meeting and election on the basis of the nominations, which have already been filed. However, immediately after election, it has to be ascertained whether the declaration in the prescribed statutory Forms have been furnished by the elected candidates or not. It will be open for the club to update the election rule in consonance with the company laws and Rules framed thereunder.
29. In order to ensure fair and free election before holding annual general meeting, I appoint Mr. Samit Pani Brahmachari, Advocate, IB, Old Post Office Street, Calcutta, as a Special Officer who is to supervise the election and will see the annual general meeting and elections are held in accordance with the club rules and observation made by me. After election and annual general meeting are held — the Special Officer shall stand discharged. He shall be paid initial remuneration of 600 GMs. by the defendant club. He shall submit a report of compliance of the aforesaid orders to this court.
30. Cost, costs in the cause.