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Companies Law - Case Laws
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2023 (12) TMI 1153
Oppression and Mismanagement - Regarding implementation of the Resolution Plan is pending for adjudication - Sections 388B, 397, 398, 401, 402 and 408 of the Companies Act, 1956 - HELD THAT:- There is no dispute that the Appellant has filed the application no. 03 of 2014 for seeking various reliefs which is already mentioned herein before but this is also not in dispute that while the application was pending, an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 filed by the Canara Bank as the financial creditor against M/s Deccan Chronicle Holdings Limited (Corporate Debtor therein) which was assigned CP No. 41/7/HDB/2017 has been admitted vide order dated 05.07.2017 and the Adjudicating Authority has initiated the CIRP proceedings. It is also not in dispute that the said CIRP proceedings have reached to the stage of consideration of Resolution Plan.
In such circumstance, once the Company against which the aforesaid application has been filed by the appellant on the allegation that there is mismanagement in the company and fraud has been played by the persons in control of the company, has gone into CIRP and, moratorium is imposed on Section 14 and the reins of the Companies are handed over to the IRP, the present application by itself does not survive as no relief be granted in the said application.
Thus, no error has been made by the Ld. Tribunal in dismissing the application as such. The appeal is thus found to be without merit and is hereby dismissed.
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2023 (12) TMI 1152
Restoration of the name of the Company in the Register maintained by the Registrar of Companies - HELD THAT:- Since the Company Agerson Telecommunications Pvt. Ltd. is having substantial assets and liabilities, it cannot be said that the Company is not carrying on any business for operations - In spite of present Order, the RoC shall be free to take any other steps, punitive or otherwise, under the Act for non-filing/late filing of statutory returns/documents against the Company and Directors.
The Impugned Order dated 24.09.2021, passed by the National Company Law Tribunal, New Delhi, Bench – V is set aside - The name of the Appellant Company is restored to the Register of Companies subject to the compliances imposed - appeal allowed.
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2023 (12) TMI 1151
Locus to maintain the appeal - Board of Directors of LITL illegally reconstituted in the absence of IDBI having attended the meeting - Appellants not heard before passing the Impugned directions - undergoing change in the management, pursuant to the approval of the Acquisition Plan - HELD THAT:- In the instant case LITL in whose name the Shares still stood, is a `person aggrieved’ as the admitted fact is that second tranche of consideration for the transfer of Shares remained unpaid. There are no hesitation to hold that the Appellant’s legal rights have been affected and hence, falls within the ambit of the definition of `person injured or damaged in a legal sense’. Therefore, it is observed that the Appellants Appeal is maintainable, specifically having regard to the fact that the Second Appellant M/s. KRS Erectors has purchased the First Appellant Company as a `Going Concern’ on an `as is where is basis’ and is a `person aggrieved’ as its `pecuniary interest’ is directly affected.
Appellants are aggrieved parties as the title of the CCPS still stands in their name and not hearing the Appellants and giving such directions would construe violation of Principles of Natural Justice. Needless to add, the Second Appellant/M/s. KRS Erectors Private Limited, which is the Company having acquired the First Appellant Company as a `going concern’ is an ‘aggrieved party’ and it has the locus to file this Appeal.
It is the main case of the Respondent that the subject 42,00,00,000 CCPS falls outside the scope of the approved Acquisition Plan. It is the case of the Appellants that Clause 5.10 of the Acquisition Plan makes it clear that unearned receivables pertaining to the period prior to the initiation of the CIRP other than those specified which are realised after the approval of the Resolution Plan shall be shared equally between the First Appellant and the stakeholder - It is not in dispute that in the Register of Members of the Sixth Respondent Company shows that 42,00,00,000 CCPS were held in the name of the First Appellant. The case of the Respondent that the second tranche of consideration was not paid as contemplated under the SPA dated 30.03.2012 only because the Appellant had failed to obtain the approval of the lenders and the payment was conditional to the approval, cannot be sustained as a ground for the said directions as the fact remains that the said Agreement was admittedly amended from time to time on account of non-approval of the lenders and the balance consideration for the said 42,00,00,000 CCPS was not paid and hence, the question of the contract having been concluded and the Shares thereafter being held in trust by LITL does not arise. If the terms of the Agreement have been adhered to, then the question of the Shares being held in trust by LITL would come into the picture.
The sum and substance of Clause 3.2(ii)(c) of the SPA is that LITL shall arrange the necessary approvals from the Lenders in whose favour such shares are pledged or Non-Disposal Undertaking is created; REPL shall accede under the terms of the financing documents as may be required by the Lenders and that LITL shall get dematerialisation of these shares, until such time, the said shares would be held in trust by LITL for REPL, however, in the books of the Company, the name of LITL shall continue as holder of these shares.
It is seen from the record that the subject CCPS do not form part of the Assets of the `Process Document’ and neither fall in the exclusions list and when the Shares are still in the name of the First Appellant Company which were required to be transferred to REPL subject to the amount received and receipt of approvals from the lenders of Lanco Anpara, we are of the view that the subject CCPS could not have been transferred without the payment being received and also without the consent of the Monitoring Committee of the Second Appellant Company - The conduct of the Respondents in transferring the shares during the pendency of the Appeal specifically when the matter was being heard at length due to the chequered history and the fact that the Impugned Order did not reflect the factual matrix, is not appreciated.
Though initially, it was opined that this matter be sent back to the Adjudicating Authority for hearing afresh, keeping in view that substantial time has been spent before this Tribunal in understanding the factual matrix of the matter and the matter was heard at length over a considerable period of time, and having regard to the fact that IBC is a time bound process, it is held that the Appeal itself be decided.
The Impugned Order passed by the Adjudicating Authority is set aside and any actions taken by the Respondents during the pendency of the Appeal are rendered otiose - appeal allowed.
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2023 (12) TMI 1019
Power of the SFIO to Investigate Offences under the IPC - Powers of SFIO restricted to investigate offences under the Companies Act only - Further Investigation by the SFIO.
Power of the SFIO to Investigate Offences under the IPC - HELD THAT:- The heading of Section 219 of the Act reflects that the said provision relates to role of certain ‘related’ companies, which has surfaced during the course of investigation being conducted under Section 212 or other provisions of the Act and therefore, approval would be required in terms of Sections 219(a), (b) and (c) of the Act. The provision of Section 219(d) of the Act has to be construed by applying the rule of ejusdem generis - In the present case, it is reasonable to construe the aforesaid clauses (a), (b) and (c) of Section 219 of the Act as constituting a distinct category or class, i.e., ‘related companies’. The language and the object behind the aforesaid clauses is with respect to investigation of affairs of a company other than the company for which investigation has been ordered under Section 212 of the Act. In that context, clause (d) of Section 219 of the Act will apply to a ‘Managing Director’ or ‘Manager’ or ‘Employee’ of the company referred to in clauses (a), (b) and (c) of the said Section.
Section 219(a), (b) or (c), comes across role of Managing Director, Manager or employee of the said ‘related’ companies, then no prior approval for investigation would be required. In other words, protection has been given only to the Managing Director or Manager or employee of the company being investigated under Section 212 of the Act and not for the Managing Director or Manager or Employee of the companies being investigated under Section 219 (a), (b) or (c) of the Act. The aforesaid position is not acceptable - In the considered opinion of this Court, once an approval has been given under Section 212 of Act to investigate into the affairs of a company, the same would also relate to a Managing Director or Manager or Employee of the said company. The pre-condition of a prior approval under Section 219 of the Act applies to related companies and their Managing Director, Manager or employees as provided for in the said Section.
It is an admitted case that petitioner no. 3 was mentioned in the original order dated 03.05.2016 issued by the MCA under Section 212 of the Act. So far as petitioner no. 2 is concerned, it is the case of the SFIO that since the affairs of the company were not being investigated, therefore, no approval was required in terms of Section 219(a) of the Act - It is a matter of record that subsequent sanction has been obtained from the Central Government before filing the complaint by the SFIO in terms of Section 212(14) of the Act. Petitioner no. 2 is being prosecuted for a single transaction, as explained above. It is always open for petitioner no. 2, during the course of trial, to demonstrate that prejudice leading to a miscarriage of justice has been caused on account of not obtaining approval under Section 219(c) of the Act.
Powers of SFIO restricted to investigate offences under the Companies Act only - HELD THAT:- It is pertinent to note that Section 4(2) of the CrPC provides that investigation into offences under other statutes, like the present Act, shall be done in accordance with the CrPC unless the statute provides for otherwise. Section 212(15) of the Act provides that an investigation report filed before the learned Special Court shall be treated as a report filed by a police officer under Section 173 of the CrPC - the investigation report within the scheme of the Act will be treated as a police report, therefore, the officer filing the said report shall also be considered an officer in charge of a police station, although not specifically provided for in the said Act. The said position is further fortified by the fact that if power has been given to the learned Special Court under Section 436(2) of the Act to try offences other than those under the Act, then the power of the SFIO to investigate into such offences cannot be restricted. If during course of investigation under the present Act, the concerned Investigating Officer comes across commission of offences punishable under the IPC or any other law relating to the transactions being investigated, then the same cannot give rise to distinct proceedings. Such investigation can be carried out under Section 4(1) of the CrPC. If the report which is subsequently filed is to be treated as a police report under Section 173(2) of the CrPC, then the officer is to be considered to be vested with powers of an ‘officer in charge of a police station’.
From a conjoint and harmonious reading of the aforesaid provisions of the CrPC and the present Act, it cannot be said that the SFIO is barred from investigating an offence under the IPC.
Further Investigation by the SFIO - HELD THAT:- It is further pertinent to note that this Court has perused the record and does not find any document to show that after the learned Special Court has taken cognizance on 20.09.2022, the petitioners herein have been asked to join any further investigation by the SFIO.
The present petition is dismissed.
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2023 (12) TMI 1013
Oppression and mismanagement - Application for continuation of interim stay dismissed - appointment of a Chief Operating Officer - Article 69 of the Articles of Association of the Respondent No. 1 Company requiring unanimous consent of all directors - appointment of more than 1 (one) director on the board of Respondent No. 1 Company - Appointing an independent director on the board - Removing Respondent Nos. 4 to 6 from the Board of Directors of the Respondent No.1 Company and directing Respondent No. 2 Company to nominate 1 (one) person after providing and obtaining approvals of the credentials of such person - restraint from interfering with the day-to-day functioning and management of the affairs of the Respondent No. 1 Company - ensuring clear separation between the persons nominated on the board of the Respondent No. 1 Company or any other person having access to Respondent No. 1 Company and its information - Restraining Respondent Nos. 2 to 9, their principals/directors, their promoters, managers, assigns, successors-in-interest, licensees, franchisees, sister concerns, representatives, servants, distributors, agents, etc. and/or any person or entity acting for them from entering into any contract of supply/ services or otherwise with the Respondent No.1 Company - Section 241 & 242 of the Companies Act, 2013.
HELD THAT:- It is needless to mention that the main petition filed under Section 241 and 242 of the Act is pending for hearing on 01.02.2024. It is also borne out from the record that initially when stay was granted on 04.09.2023 it was observed that if the board of directors takes a decision to appoint Shri MSM Mujeebur Rahuman as COO, the said decision shall be kept in abeyance till 12.09.2023 and then the Appellant chose to file the application bearing I.A. No. 263 of 2023 in which the only prayer made is for extension of the order dated 04.09.2023. It is pertinent to mention that this order was extended by the Tribunal up to 28.11.2023 but by that time the appeal was filed not only the order became inoperative but also the Respondents appointed Dr. MSM Mujeebur Rahuman as COO who is working as such and no application has been filed until now about his act and conduct.
It is also a matter of fact that the Tribunal fixed the case for hearing on 05.12.2023 i.e one after the order dated 28.11.2023 was passed for the purposes of hearing the main petition in terms of the observation made in para 49 which is mentioned hereinabove, however, instead of arguing the case on merit itself on 05.12.2023 the Appellant got the main petition adjourned for 01.02.2024 on the pretext that the appeal has been filed which was only against an interim order.
In such a situation, where the court has to thoroughly scan voluminous record and also interpret various articles of the AoA, it would be just and expedient if the main petition itself is heard and decided, as proposed by the Tribunal who has rightly not made any observation about the interpretation of Article 69 which is the main plank of the argument of the Appellant in the interim application and the main petition, therefore, this appeal is disposed off with liberty to the Appellant to file an appropriate application before the Tribunal for preponement of the hearing from 01.02.2024 to an early date by making reference to Para 49 of the impugned order and in case any such application is filed, the Tribunal shall consider the said request and prepone the date of hearing and decide the main petition filed by the Appellant as early as possible.
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2023 (12) TMI 790
Seeking permanent prohibitory injunctions restraining the defendant (including his attorneys, assigns, successors-in-interest, agents, authorized persons or anyone acting for and/or on his behalf) from alienating, transferring, selling, creating any encumbrance, third-party rights or any other interest of any kind - Order XXXIX Rule 1 and 2 of the Code of Civil Procedure, 1908.
Documentation issued in respect of the transfer of shares to the Defendant - delivery of the shares and the subsequent conduct of the parties - HELD THAT:- Any entry in the register of shareholders of a company is statutorily required to be authenticated in the manner prescribed in the aforesaid rule. There is a statutory presumption that such authentication was carried out in the present case, during which process, there is no plea of any doubt being expressed or any objection being raised by the plaintiff or any other person as to the inclusion of the defendant in the register of members of the concerned company - the transfer of shares in favour of the defendant and the subsequent inclusion of the defendant in the register of members of the plaintiff was pursuant to a statutorily recognised process. For the purpose of the present application, there can be no presumption against the validity of the transfer in favour of the defendant pursuant to a statutorily mandated process, especially when the execution of “Form SH-4” by the plaintiff is admitted and it is not the case of the either of the parties that the concerned company has not adhered to the provisions of under the Companies (Management and Administration) Rules, 2014 and the Companies (Share Capital and Debentures) Rules, 2014.
In MANECKJI PESTONJI BHARUCHA AND OTHERS VERSUS WADILAL SARABHAI AND COMPANY AND OTHERS [1926 (3) TMI 1 - MADRAS HIGH COURT], the Privy Council was concerned with a situation where blank transfer Forms had been executed by the registered holders of shares of a company.
Admittedly, in all these agreements, to which both the plaintiff and the defendant were parties, the defendant was represented to be as a shareholder of the concerned company. It is completely untenable for the plaintiff to suggest that the defendant was wrongly portrayed as a shareholder in all these agreements or that the plaintiff was “induced” to sign these agreements.
There is no merit in the contention of the plaintiff that the contract for sale of shares did not fructify in the sense contemplated under the Sale of Goods Act, 1930, and/or that title therein did not pass to the defendant.
This Court is not inclined to grant an interim injunction in favour of the plaintiff/applicant, as prayed for. However, considering that the shares of the defendant in question are subject matter of the present suit and considering that the plaintiff has also made an alternative prayer seeking damages, it is directed that in case, the defendant proposes to transfer/deal with/alienate the shares in question, prior intimation with regard to any such proposed transaction(s) together with details thereof, shall be provided to the Court.
Application disposed off.
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2023 (12) TMI 789
Execution of mutual will revoking earlier mutual wills - refusal to grant injunction against BCL as being the third party to the testamentary suit - The core of the dispute is the will executed by PDB which has given rise to a spate of litigation before this court and even after the lapse of more than 18 years after the demise of PDB, the litigation has not seen the end of the day.
Powers of Probate Court under Section 247, Succession Act - Question of title - HELD THAT:- It is well-settled that a Probate Court or a Letters of Administration Court cannot finally adjudicate issues of title. It is purely within the domain of a competent Civil Courts to decide such issues. However, in order to decide an application under Section 247, Succession Act, the Probate Court may very well decide, prima facie, the extent of the Estate of the deceased. For such purpose, the Probate Court can definitely decide, although tentatively, as to the extent of the property of the deceased. Such adjudication on the Estate of the deceased, however, does not tantamount to a final adjudication of the title over the property.
In KANWARJIT SINGH DHILLON VERSUS HARDYAL SINGH DHILLON AND ORS. [2007 (10) TMI 675 - SUPREME COURT] the Hon’ble Supreme Court held that it is well settled law that the functions of a probate court are to see that the will executed by the testator was actually executed by him in a sound disposing state of mind without cohersion or undue influence and the same was duly attested. It was therefore not competent for the probate court to determine whether the person had or had not the authority to dispose of the suit properties which he purported to have bequeathed by his will. The probate court is also not competent to determine the question of title to the suit properties nor will it go into the question whether the suit properties bequeathed by the will were joint ancestor’s properties or acquired properties of the testator.
Powers of Probate Court under Section 247, Succession Act - Third party injunction - HELD THAT:- This sub issue relates to third party injunctions which can be further sub-divided and the power of the court to grant injunction is also required to be considered. In Nirod Barani Debi Versus Chamatkarini Debi [1914 (1) TMI 1 - CALCUTTA HIGH COURT], the Hon’ble Division Bench held that it is essential for application of Order 39 Rule 1 CPC that the property dispute in the suit is in danger of being wasted, damaged or alienated by a party of wrongfully suit in execution of a decree. Consequently, the application for injunction must satisfy the court that the proceedings is a suit in which there is property in dispute and the property is in danger of being wasted, damaged or alienated. It was further held that the question, consequently, arises whether the proceedings for the probate of a will or for letters of administration may rightly be held to be a suit in which property is in dispute. In the opinion of the court, the answer was in the negative.
While considering whether the companies can be joined as the party defendant, the court held that the noticee companies can neither be joined as a party defendant nor can any order of restrain be passed against such companies who is not a party to the proceedings. Further the court held that it cannot extend its jurisdiction to a person who is not a party to the present proceedings. Further the probate court cannot extend the jurisdiction over a person or entity who is not a party to the proceedings. Further it was held that since the noticee company being not the party to the proceedings no order can be passed against it.
Extent of PDB Estate - Only shares or ‘controlling interest’ - HELD THAT:- To decide the extent of the Estate of the deceased, the court has to ascertain the powers which could be exercised by the deceased testatrix herself. The powers of the probate court while appointing an administrator pendent lite (APL) are co-extensive with the powers of the testator/testatrix. As a necessary corollary, the powers of an APL formed by the probate court cannot exceed such limits - With regard to the shares in several companies, PDB’s powers were restricted to her ownership of the particular shares in different companies as mentioned in the affidavit-of-assets. In such context, the expression ‘controlling interest’ should not be confused with ‘personal influence’ of the testatrix. Whatever might have been the “personal influence” of the deceased testatrix, the same was intangible and restricted to herself. The charisma or personal influence of the deceased might have helped her in carrying out her will in the affairs of the companies, but do not comprise of tangible incidents of her property or Estate - it cannot be said that her personal influence is, in any manner, a part of the Estate.
The Probate Court can direct the APL, personally or through its appointees, to register itself or its agents as members of the companies in the capacity of owners of the shares actually owned by PDB in such companies. Upon such registration, the APL and/or its nominees would function as shareholders in such companies and have all the incidental rights and controlling power which PDB would have had by virtue of such shareholdings, including voting rights, participation rights in decision-making processes and meetings, etc. However, the Probate Court cannot go an inch further than that in interfering with the business of the companies.
If the promoter hold majority shares then they are several remedies prescribed under the Companies Act to enforce the decision which by not approving the decision of the Board of Directors and they may also initiate process of removal of the Directors and appointment of the Directors of their choice in the place of the main directors. But no such step can be taken without following provisions of the Companies Act. That the court in a probate proceeding cannot pass any directions encroaching upon the jurisdiction of the Board of Directors or taking over of the manufacturing units by purchasing its shares. Further the court categorically held that the APL should be made agree so that the APL can exercise its power of control over the management of BCL by following provisions prescribed under the Companies Act and in case APL fails to discharge its duties, probate court can pass necessary directions upon APL for taking steps in accordance with law. Further the probate court at best can pass necessary directions upon APL to initiate appropriate proceedings before the appropriate forum for seeking appropriate reliefs and in accordance with law and it is only that appropriate forum which can pass appropriate order after adjudicating the rights of the parties including that of a stranger. Thus, it is clear that it is extent of the shareholding which enables the shareholders to control the company and any other interpretation will fall foul of the definition of control as defined under Section 2(27) of the Act.
Extent of PDB Estate - ‘Controlling interest’ meaning - HELD THAT:- Controlling interest in the present context, can only mean the incidental rights, including voting rights, rights of participation in shareholders’ meetings and other decision-making processes which PDB would have had by virtue of her shareholdings in the respective companies.
Extent of PDB Estate - Whether the issue of extent of Estate barred by res judicata and/or barred by estoppel against HVL - HELD THAT:- An adjudication in a probate proceeding or a letters of administration proceeding cannot be viewed through the myopic lens of res judicata between the parties. Even if an issue is decided finally between HVL and Birla faction, the same does not operate against a Probate Court while adjudicating issues, since the final judgment of a Probate Court would not be restricted to the parties but would operate against the world at large - Hence, the Probate Court’s decisions cannot be decided from the limited perspective of res judicata or estoppel between the parties. Thus, the Probate/Letters of Administration Court has an additional responsibility to independently weigh evidence and adjudicate carefully on all issues before it, prima facie or final. Viewing from such perspective, the question of res judicata or estoppel between the parties cannot restrain the Probate Court from independently assessing the question of extent of Estate of the deceased testatrix.
None of the previous adjudications pertained to a final decision on the application under Section 247 of the Succession Act. Since this Court is sitting in appeal over a final decision by the learned Single Judge on the application under Section 247 of the Succession Act, by operation of the principles of Order XLI of the Code of Civil Procedure, the Appellate Court has equivalent powers of finally deciding the said application, co-equal with the learned Single Judge which was deciding the same. Hence, while finally deciding the application for appointment of Administrator Pendente Lite, this Court is not fettered by previous observations by different interlocutory courts at different points of time.
APL (Administrator Pendente Lite) powers - How far APL can interfere in Company affairs - HELD THAT:- The charter of the APL under Section 247 of the Indian Succession Act is to protect and preserve the interest of the estate and can deal with the same, short of distributing the same - the testamentary court, in the present case, can and should clothe the APL with the powers to enlist themselves as members of the companies where the testatrix PDB held shares, in the capacity of shareholder, and also exercise each and every power, including voting rights, associated with shareholding.
APL (Administrator Pendente Lite) powers - Whether APL decisions have to be unanimous or majority view prevails - HELD THAT:- The theory of referring to the court each and every day-to-day decision in the functioning of the APL as a shareholder/member of the companies is not workable. Conflict is a foregone conclusion in the present composition of the APL, since there has not been a single meeting of the APL in recent past where there has been unanimity among all three members. Of course, major decisions (to be decided by the third member) are to be referred to the testamentary court for formal orders/decisions - In any event, since the APL is not an adjudicatory authority and cannot act so, there does not arise any question of the testamentary court delegating its powers to it. The APL shall strictly act in accordance with the observations above, limited to its role as shareholder with ancillary functions including voting rights, which are to be used judiciously to protect and preserve the interest of the estate during pendency of the Letters of Administration suit.
The order of the learned Single Judge is modified to the above extent. Liberty is given to the APL and the parties to approach the testamentary court taking up the letters of administration suit if need be and where there are serious doubts - Application disposed off.
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2023 (12) TMI 788
Oppression & mismanagement - removal of Petitioner No. 1 from the directorship of the Respondent No. 1 Company - Section 241 & 242 of the Companies Act, 2013 - HELD THAT:- The Impugned Order was passed by the Tribunal on 13.10.2020, whereas later in 2021 the landmark Judgment on oppression & mismanagement covering several issues including quasi-partnership aspects was passed by the Hon’ble Supreme Court of India in case of Tata Consultancy [2021 (3) TMI 1181 - SUPREME COURT] and obviously the Tribunal did not have the benefit of clear rulings given in the Tata Consultancy.
It was held in the said case that The architecture of Sections 241 and 242 does not permit the Tribunal to read into the sections, a power to make an order (for reinstatement) which is barred by law vide Section 14 of the Specific Relief Act, 1963 with or without the amendment in 2018. Tribunal cannot make an order enforcing a contract which is dependent on personal qualifications such as those mentioned in Section 149(6) of the Companies Act, 2013 - Tata Consultancy Judgement has given clear rulings which are required to be followed by all the Courts/ Tribunals.
It is already noted that the judgment of Tata Consultancy came after passing the Impugned Order by the Tribunal as such the Tribunal interpreted the facts and law in the original application without wisdom of Tata Consultancy judgment.
The Tribunal will have to re-examine the original petition in light of the judgement of Hon’ble Supreme Court of India in case of Tata Consultancy as prima-facie, the Tribunal has taken stand not in accordance with the Tata Consultancy judgments which dealt with various issues as in present case like what are instance of oppression & mismanagement, removal and subsequent reinstatement of Director, quasi-partnership character of the Company etc.
The Impugned Order is set aside and case remanded back to the Tribunal to have a fresh look on the merit after hearing both the Parties in view of the judgment of the Hon’ble Supreme Court of India given in Tata Consultancy - matter on remand.
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2023 (12) TMI 753
Constitutional Validity of Clause (d) of the proviso to Rule 5 of the West Bengal Excise (Change in Management) Rules, 2009 - Intelligible differentia - Changes in the Board of Directors - change in management or not - petitioners argue that clauses (d) and (e) of the proviso to Rule 5(1) of the 2009 Rules violates Article 14 of the Constitution of India since a separate mechanism has been provided for a private limited company for exemption from payment of license fees under Rule 5(1).
Whether death of a Director and consequent appointment of another director to the Board would amount to a “change in management” under The West Bengal Excise (Change in Management) Rules, 2009? - HELD THAT:- Apointment of new directors either by reason of death of an existing director or in the usual course of business, without any impact to the shareholding pattern or membership of the Company, does not amount to any “change in management” since there is no transfer or movement of the shares in the company. Induction of a new director into the Board would also not fall within the meaning of the expression “transferee”. In other words, a “change in management” of a Company should be of a nature so as to determine the ordinary Excise License in terms of Rule 4(2) and result in a “proposed transferee” in terms of Rule 4(3). The usual fitness and eligibility criteria for holding an excise license would come with consideration only after there is a structural change in the company.
The classification made under Clause (d) and (e) of the proviso to Rule 5(1) is not founded on intelligible differentia and does not have a rational nexus to the object of the 2009 Rules.
Whether clause (d) to the proviso to Rule 5 of the 2009 Rules is discriminatory and offends the right of the petitioner no. 1 to equal treatment under Article 14 of the Constitution of India? - HELD THAT:- There is also no rationale disclosed for making two separate groups from the (hitherto) general head of “company” in clauses (d) and (e) of the proviso to Rule 5(1). The offending proviso has carved out different provisions for levy of fees and exemption from payment of license fees pursuant to change in management for private and public limited companies - Creating two distinct groups and bestowing a larger zone of exemption for one of the two groups must be supported by intelligible differentia in the creation of the two groups. The 2009 Rules does not satisfy this test.
What is intelligible differentia? - HELD THAT:- The test of intelligible differentia is vital to the constitutional charter of equality since creating groups is antithetical to equality. The distinguishing markers is the differentiator which justifies classification with or without those markers. It is of utmost importance that groups or classifications promote equality by way of intervention and do not undermine the same - The State’s power to take the vision of Article 14 forward cannot be done through random classifications where persons inside the class do not have homogeneous or defining features which distinguishes them from those who are outside the classification. The word “intelligible differentia” underscores classification which is based on comprehensible differences as opposed to arbitrary groupings without comprehensible differences.
What is rational nexus to the object? - HELD THAT:- The larger zone of exemption for a Public Limited Company from payment of license fee pursuant to change of management should have had a comprehensible connection to the object of the 2009 Rules in terms of determination of the earlier Excise License and grant of a new Excise License to the “proposed transferee”. The disparity in the scope of exemption for a Private and a Public Limited Company or, in other words, reducing the area of exemption for a Private Limited Company does not preserve the object of the 2009 Rules. The link between the classifications created under clauses (d) and (e) of the proviso to Rule 5(1) thus snaps and is broken in the attempt to connect it to the object of the 2009 Rules - the differentia made for classifying Private and Public Limited Companies under two separate groups under clauses (d) and (e) of the proviso to Rule 5(1) does not have an intelligible basis. The differentia for the classification do not also have a rational nexus to the object of the 2009 Rules.
Article 14 prohibits unequal treatment of equals – and vice-versa - HELD THAT:- The proposition that Article 14 prohibits unequal treatment of persons similarly-situated is too well-settled to merit a detailed discussion. The 2009 Rules clearly indicates that private limited companies and public limited companies are similarly-situated and have been treated as such in Rule 4(2). Therefore, clauses (d) and (e) of the proviso to Rule 5(1) violates the constitutional guarantee of equality by creating two separate groups/classifications for the purpose of exemption from payment of license fees.
STATE OF ANDHRA PRADESH & ORS. VERSUS NALLAMILLI RAMI REDDI & ORS. [2001 (8) TMI 1396 - SUPREME COURT] spoke of permissible classification where the law will not be viewed as discriminatory if there is uniformity in each group. The Supreme Court made room for fortuitous circumstances arising out of peculiar situations where some persons included in a class may get an advantage over the others and a classification would thus be justified unless it is arbitrary. In the present case, of private limited and public limited companies within the context of change in management and the consequent exemption from payment of license fees is undoubtedly an instance where the differentia is neither real nor substantial and the rational nexus thereof to the object of the Rules is wholly absent.
The absence of Intelligible Differentia and a Rational Nexus to the object of the 2009 Rules Impacts the Constitutional Validity of clause (d) of the Proviso to Rule 5(1) of the 2009 Rules.
The inevitable conclusion must be that clause (d) of the proviso to Rule 5(1) of the 2009 Rules offends Article 14 of the Constitution in terms of equal treatment of a Private Limited Company when compared to the right conferred to a Public Limited Company. The petitioners have made out a case for a declaration that clause (d) of the proviso to Rule 5(1) of the 2009 Rules is ultra vires to the Constitution of India.
Application disposed off.
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2023 (12) TMI 487
Professional Misconduct - failure to disclose material facts known to him, which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement, where he is concerned with that financial statement in a professional capacity - failure to report material misstatements known to him to appear in a financial statement with which the EP is concerned in a professional capacity - failure to exercise due diligence, and being grossly negligent in the conduct of professional duties - failure to obtain sufficient information which is necessary for the expression of an opinion, or its exceptions are sufficiently material to negate the expressions of an opinion - failure to invite attention to any material departure from the generally accepted procedures to audit applicable to the circumstances - penalties and sanctions.
HELD THAT:- The EP has made a series of serious departures from the Standards and the Law, in the conduct of the audit of DHFL for FY 2017-18. Based on the discussion, it is proved that EP had issued an unmodified opinion on the Financial Statements without any basis. The poor quality of the audit, incomplete documentation and attempt to mislead through baseless replies further compound the professional misconduct on the part of the EP. He demonstrated a lack of awareness and disregard for the mandatory provisions of the SAS and the law throughout the replies. Based on the discussion and analysis, it is concluded that the EP has committed Professional Misconduct as defined in the Act, as below:
a. CA Jignesh Mehta committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 5 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant is guilty of professional misconduct when he "fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity".
This charge is proved as the EP failed to disclose in his report the material non-compliances of the Company regarding branch audits, consolidated financial statements and ICFR as explained in sections D. 1, D.2 and D.7 above.
b. CA Jignesh Mehta committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 6 of Part I of the Second Schedule of the Chartered Accountants Act) 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant is guilty of professional misconduct when he "fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity".
This charge is proved as the EP failed to disclose in his report the material noncompliances of the Company regarding branch audits and consolidated financial statements as explained in sections D. 1 and D.2 above.
c. CA Jignesh Mehta committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 7 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant is guilty of professional misconduct when he "does not exercise due diligence or is grossly negligent in the conduct of his professional duties".
This charge is proved as the EP, conducted the Audit of a Public Interest Entity in total disregard of his statutory duties, evidenced by multiple critical omissions and violations of the standards. The instances of failure to conduct the audit in accordance with the SAS and applicable regulations, and failure to report the material misstatements in the financial statements and non-compliances made by the Company are as explained in Paras D. 1 to D.8 above.
d. CA Jignesh Mehta committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 8 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant is guilty of professional misconduct when he "fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion".
This charge is proved as the EP failed to conduct the audit in accordance with the SAS and applicable regulations as well as due to his total failure to report the material misstatements and non-compliances made by the Company in the financial statements as explained in Paras D. 1 to D.8 above.
e. CA Jignesh Mehta committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 9 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant is guilty of professional misconduct when he "fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances".
This charge is proved since the EP failed to conduct the audit in accordance with the SAS as explained in Paras D. 1 , D.3, D.4, D.5 and D.8 above but falsely reported in his audit report that the audit was conducted as per SAS.
Thus, it is concluded that the charges of professional misconduct in the SCN, as detailed above, stand proved based on the evidence in the Audit File, the audit reports on the standalone financial statements and consolidated financial statements for the FY 2017-18 dated 30th April 2018, the submissions made by the EP, the audited financial statements of DHFL and other material on record.
Sanctions and penalties - HELD THAT:- The professional misconduct has been detailed and proven on various counts in the body of this Order. Considering the nature and seriousness of violations and principles of proportionality, sanctions ordered as follows:
a. Imposition of a monetary penalty of Rupees Five Lakh upon CA Jignesh Mehta.
b. In addition, CA Jignesh Mehta has been debarred for Ten years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.
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2023 (12) TMI 322
Transfer of winding up proceedings - whether this court in exercise of its jurisdiction under the said proviso to Section 434(1)(c) of the Companies Act should transfer the winding up application to the NCLT? - HELD THAT:- The only conclusion that can be drawn is that there is no credible hope of revival of the company and that it would suit the interest of all stakeholders and of the public if its liquidation was speedily carried out. Thus the learned judge ought not to have passed the impugned order relegating this matter to the tribunal.
It is directed that the winding up proceedings to be conducted and concluded as early as possible - the impugned order set aside.
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2023 (12) TMI 321
Validity of summons issued by the Serious Fraud Investigation Office [SFIO] - initiation of an investigation under Section 212 of the Companies Act, 2013 - appointment of an Investigating Officer.
The challenge is essentially based on the contention of the petitioners that since proceedings under the erstwhile Companies Act, 1956 (2013 Act) had been initiated prior to the enforcement of Section 212 of the 2013 Act, the respondents stand denuded of jurisdiction to initiate proceedings afresh under Section 212.
HELD THAT:- The powers conferred upon the Central Government to direct an investigation into the affairs of a company was predicated upon the submission of a report by the RoC in terms as contemplated under Section 234(6). On the receipt of such a report, the Union Government stood empowered to commence an investigation into the affairs of a company and to appoint Inspectors in connection therewith. The investigation under Section 212 of the 2013 Act, on the other hand, is not by the Union Government but by the SFIO. It becomes pertinent to note that the SFIO itself came to be constituted pursuant to the provisions contained in Section 211. In fact, even before the said provision came to be engrafted and enforced, the SFIO appears to have been constituted pursuant to the resolution of the Union Government dated 02 July 2003.
As is manifest from a conjoint reading of Sections 211 and 212, the power of investigation which was originally exercisable by the Union Government was ultimately and in terms of Sections 211 and 212 placed in the hands of the SFIO. The SFIO is envisaged to be a body duly constituted for the purposes of carrying out investigations into the affairs of companies. Regard must be had to the fact that while the erstwhile provisions empowered the Union to investigate into the affairs of a company through investigators, the new regime saw the constitution of the SFIO and an investigation being undertaken by it in accordance with Sections 212 and 213 of the 2013 Act - the SFIO as an investigating arm of the Union was not even envisaged or contemplated under the 1956 Act. The continuance of Sections 234 and 235 till their ultimate repeal would thus be liable to be viewed as regulating the investigating power of the Union Government through Investigators only.
The Union Government in terms of the 2013 Act is now empowered to commence an investigation into the affairs of a company either on the receipt of a report of a Registrar or on intimation of a special resolution passed by a company or in public interest. The SFIO is a specialized body which has come to be established for the purposes of investigating frauds relating to companies. SFIO as an independent investigating arm was not even contemplated under Sections 234 or 235 of the 1956 Act. As is evident from a reading of those provisions, the power to investigate as embodied in Section 235 was one liable to be exercised only by the Union Government itself albeit acting through Inspectors that it may have appointed - Since the SFIO itself came to be constituted only pursuant to the provisions of Section 211, the investigation by that body was in no manner trammelled or eclipsed by the continued existence of Sections 234 and 235 of the 1956 Act.
The investigation which commenced pursuant to the order of 14 December 2018 passed by the SFIO, was thereafter modified in terms of the corrigendum dated 06 November 2019, when AIRL was deleted from that investigation. The position which therefore emerges is that the investigation as envisaged under Section 235 had commenced only against AIRL and it is the said investigation alone which would fall within the safe harbour as constructed in terms of Section 212(16). 50. Since the investigation which commenced on 05 November 2012 cannot possibly be countenanced as extending to the other writ petitioners, the challenge as laid, cannot be sustained.
Petition dismissed.
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2023 (12) TMI 320
Professional misconduct - Role of NFRA V/s ICAI on disciplinary matters of Chartered Accountants - Retrospective V/s prospective applicability of provisions as contained in Section 132 of Companies Act, 2013 as well as NFRA Rules, 2018 - Violation of Principle of natural justice w.r.t. separate division of NFRA - Role of Statutory Auditors of the Company V/s Statutory Auditors of the Branches of the company - Are Standards of Auditing (SA) mandatory or Advisory or to be treated as guidance notes to Auditors - What is professional misconduct for member of ICAI and legal provisions - True intent of Standard of Audits and other related standards relevant for audit and issue regarding alleged violation by the Appellants herein - Alleged violation of the Code of Ethics issued by ICAI and impact on Appeals before this Appellate Tribunal - Excessive V/s adequate imposition of penalties on Appellants, herein - Can automatic stay is triggered on deposit of 10% of penalty and appeal is made before NCLAT.
Role of NFRA V/s ICAI on disciplinary matters of Chartered Accountants - HELD THAT:- After going through provision of Chartered Accountant Act, 1949 and Companies Act, 2013 it becomes clear that disciplinary jurisdiction over the Chartered Accountants remain with both the ICAI and NFRA on concurrent basis. However, on carefully reading it reveals that NFRA has superior and overriding powers in matters relating to professional misconduct of the Chartered Accountants in terms of Section 132 of Companies Act, 2013 - On a pointed query to the Appellants to confirm our understanding, the Learned Counsel for the Appellant confirmed that both the ICAI and NFRA have jurisdiction over Chartered Accountant Act, 1949 - it is observed that for all matters, by default, ICAI has disciplinary jurisdiction over Chartered Accountant. However, it is required to be clearly understood that in term of Companies Act, 2013 and NFRA Rules, 2018 over important and serious matters especially involving large alleged accounting or financial frauds, or matters of public interest, etc., NFRA suo-moto can initiate investigation or take for investigating and ICAI will cease to exercise such disciplinary jurisdiction - NFRA has been consciously and deliberately given superior authority over ICAI on oversight of auditors and in disciplinary matters as stipulated in Section 132 of Companies Act, 2013.
Retrospective V/s prospective applicability of provisions as contained in Section 132 of Companies Act, 2013 as well as NFRA Rules, 2018 - HELD THAT:- After taking into consideration the background for forming NFRA, the judgment of the Apex Court, proven scams, need to restore shaken confidence of public and investors at large and prevent any adverse impact on Indian economy, it is held that NFRA has clear and required retrospective jurisdiction over the alleged offences by delinquent Chartered Accountants for period prior to formation of NFRA or prior to coming into effect relevant portion of Section 132 of Companies Act, 2013.
Violation of Principle of natural justice w.r.t. separate division of NFRA - HELD THAT:- Prior to amendment in Rule 2(g) of NFRA Rules 2018, the “division” was not defined but Ministry of Corporate Affairs vide amendment dated 13.11.2018 on NFRA Rule, 2018 specified as to what constitute “division” under Rule 2(g). We note that the Respondent used the division as stipulated in the Companies Act, 2013 and NFRA Rules, 2018, hence there has been no violation of principles of natural justice. This fact was also fairly conceded by the Appellant also during final stage of hearing.
Role of Statutory Auditors of the Company V/s Statutory Auditors of the Branches of the company - HELD THAT:- The role of branch auditor, though limited primarily to the branch, however, is critical for overall audit of the company and the Auditors of the Branch cannot absolve his responsibilities - the fact cannot be overlooked that the allegations of fraud involving Rs. 31,000 Crores by the DHFL including banking fraud of about 3,700 Crores by Directors of DHFL happened and the Auditors clearly failed in their duties.
Are Standards of Auditing (SA) mandatory or Advisory or to be treated as guidance notes to Auditors - HELD THAT:- According to Section 143 (9) of the Companies Act, 2013 every auditor “shall” comply with auditing standard. Section 143 (10) of Companies Act, 2013 further empowers Central Government to prescribe the Standards of Auditing (SAs) as recommended by ICAI in consultation and after examination of the recommendation made by NFRA. As per the proviso to Section 143 (10) until any auditing standard are notified, any standard or standards of auditing specified by ICAI shall be deemed to be auditing standard - the Accounting Standards and Auditing Standards have been defined in the Companies Act, 2013 and both sets of standards are to be mandatorily followed by all stakeholders including the companies and the Chartered Accountants. Thus, the Appellants as Auditors were duty bound to follow these standards which they alleged to have been breached in respect of SA 210, SA 230, SA 315, SA 320, SA 330, SA 700 along with few other paragraphs of other SAs and Section 143(8) of the Companies Act, 2013 - the SAs are mandatory and not as advisory or a guidance note to auditors.
What is professional misconduct for member of ICAI and legal provisions - HELD THAT:- There is no bar on ICAI or NFRA to restrict investigation of professional misconduct covered only under Section 22 of the Chartered Accountants Act, 1949. The powers are far more and wider and any conduct which makes auditor of unbecoming of such profession will make him liable for suitable investigation and if found guilty may face punishment as per law - NFRA derives the power regarding disciplinary action on professional or other misconduct of the members of ICAI under Section 132 (4) (c) of the Companies Act, 2013 - NFRA has far more powers and authority for professional misconduct of members of ICAI in comparison to powers and authority of ICAI itself.
True intent of Standard of Audits and other related standards relevant for audit and issue regarding alleged violation by the Appellants herein - HELD THAT:- Standards on Quality Control (SQC) are for ensuring quality by firms that performs audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements. SQC requires that the firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards, regulatory, legal requirements, and that reports issued by the firm or engagement partner(s) are appropriate in the circumstances. SQC is for enhancing the quality of audit.
Alleged violation of the Code of Ethics issued by ICAI and impact on Appeals before this Appellate Tribunal - HELD THAT:- Violation of Code of Ethic will hold the Auditor to be liable for the penalty as stipulated in Section 132 of the Companies Act, 2013 - It is clear from ICAI Code of Ethics, 2009 that it is responsibility of the auditors to ascertain and ensure compliance with the provision of law is applicable and therefore, the Respondent has correctly pointed out that it is incumbent on the part of Auditors to verify the relevant record of the company to ascertain whether the company has complied with the provisions regarding appointment and other relevant issues rather than accepting the statements of the company that they have complied with - It is undisputed fact that the Appellants themselves did not verify if DHFL followed correct procedures for appointment of Branch Auditors before the Appellants accepted the same. The submissions of the Appellants are therefore not convincing.
Excessive V/s adequate imposition of penalties on Appellants, herein - HELD THAT:- NFRA applied the principle of proportionality and imposed minimal permissible penalty i.e., a monetary fine of Rs. 100,000 and the Appellants have been barred from practicing for a period of one year which is 10% of max. penalty permissible - The need to deter fraud or collusive behaviour and reckless behaviour of the Auditors and repercussions of negligent audits are quite evident - the penalty as imposed by NFRA on all four Appellants were imposed as deterrent, perhaps keeping in mind all facts, including limited role as branch auditors. This cannot be considered excessive after all; it is fact that there has been fraud in DHFL of Rs. 31,000 Crores and Auditors can’t pretend to be ignorant of what was happening.
Can automatic stay is triggered on deposit of 10% of penalty and appeal is made before NCLAT - HELD THAT:- This Appellate Tribunal observes that the averments of the Appellants regarding interpretation of Rule 11 & 12 of NFRA Rules, 2018 are not correct as this Appellate Tribunal has discussed at length the interpretation of Rule 11&12 of NFRA Rules, 2018 and clarified that mere filing of appeal does not affect the order on debarment with respect to compliance of Rule 12.
Final Conclusions - It is of utmost importance that Auditors realise their responsibilities which is necessary not only to the company but also to the public. In view thereof, giving effect to the Impugned Orders which highlights the professional misconduct and other misconduct on the part of the appellant vis-à-vis a public listed company become quintessential so as to make public aware and enable them to make informed and sound financial decisions and investments. Any deviation to this will only result is catastrophic effect on economy of the nation and cause immense prejudice and harm to the public, shareholders and various stakeholders such as banks, lenders, and creditors. NFRA, as an independent audit regulator has been entrusted by the Parliament after great debate for protecting public interest including of the creditors by exercising effective oversight over accounting and auditing functions.
There are no error in the Impugned Orders of NFRA as challenged - appeal dismissed.
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2023 (12) TMI 319
Professional Misconduct - Jurisdiction of NFRA - failure to exercise due diligence, and being grossly negligent in the conduct of professional duties - failure to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion - failure to invite attention to any material departure from the generally accepted procedures to audit applicable to the circumstances - sanctions and penalties.
Jurisdiction of NFRA - HELD THAT:- From the specific wordings of Section 132 and Rule 10, it is clear that NFRA has the sole and exclusive jurisdiction to initiate proceedings in cases of professional misconduct committed in earlier years too or else it would lead to an anomalous situation of a regulatory gap where any misconduct committed before the formation of NFRA will go unpunished. The law enabling investigation into professional and other misconduct, being in existence in the period before 2018, cannot be said to be retrospective and NFRA jurisdiction is established for implementing the process of investigation into misconduct committed in the past as well. Thus, the challenge to the jurisdiction of NFRA with respect to misconduct committed before 2018 does not stand - NFRA has the requisite jurisdiction to monitor compliance with accounting standards, monitor and enforce compliance with the SAS and to investigate matters of professional misconduct of Chartered Accountants falling under the NFRA domain.
Charges of Professional Misconduct - HELD THAT:- The EQCR Partner did not perform his duties as per the Standards and the Law in conducting the Engagement Quality Control Review of the statutory audit of DHFL FY 2017-18. Based on the discussion and analysis, we conclude that the EQCR Partner has committed Professional Misconduct as defined in the Act, as below:
i. CA Amit Vinay Chaturvedi committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 7 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant is guilty of professional misconduct when he "does not exercise due diligence or is grossly negligent in the conduct of his professional duties".
This charge is proved, as the EQCR Partner failed to conduct the review in accordance with the SAS and applicable regulations. He failed to notice and document the serious omissions and commissions by the ET that led to the issue of a baseless audit report by the EP, as explained in paras 28 to 35 above.
ii. CA Amit Vinay Chaturvedi committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 8 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant is guilty of professional misconduct when he "fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion"
This charge is proved, as the EQCR Partner failed to conduct the review in accordance with the SAS and applicable regulations. He failed to notice and document the serious omissions and commissions by the ET that led to the issue of a baseless audit report by the EP, as explained in paras 28 to 35 above
iii. CA Amit Vinay Chaturvedi committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 9 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant is guilty of professional misconduct when he “fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances”.
This charge is proved since the EQCR Partner failed to conduct the review in accordance with the SA 220 and SQC-I as explained in Paras 28 to 35 above but falsely certified that he had performed the review as per SAS.
Thus, it is concluded that the charges of professional misconduct in the SCN, as detailed above, stand proved based on the evidence in the Audit File, the audit reports on the standalone financial statements and consolidated financial statements for the FY 2017-18 and the submissions made by the EQCR Partner.
Sanctions and penalties - HELD THAT:- Considering the nature and seriousness of violations and principles of proportionality, we, in the exercise of powers under Section 132 (4) (c) of the Companies Act, 2013, following is being imposed:
(i) Imposition of a monetary penalty of Rupees Five Lakh upon CA Amit Vinay Chaturvedi,
(ii) In addition, CA Amit Vinay Chaturvedi is debarred for Five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.
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2023 (12) TMI 187
Rectificatory jurisdiction - Willful violation of Orders of Hon'ble Company Law Board - transfer of shares - rectification of Register of Members of Respondent No. 1 Company - whether the rectificatory jurisdiction under Section 59 of the Act, which is summary in nature can be exercised where there are contested facts and disputed questions?
HELD THAT:- Since, the Tribunal has relied upon the decision in the case of Ammonia Supplies [1998 (9) TMI 427 - SUPREME COURT] and IFB Agro [2023 (1) TMI 257 - SUPREME COURT] which has also been relied upon by Counsel for the Respondent, therefore, it would be apt to deal with two decisions to find out as to whether these decisions would apply? In the case of Ammonia Supplies, Section 155 of the Act of 1956 was in question which deal with the power of company court to rectify the register of members maintained by a company. The word ‘rectification’ has been defined as something what ought to have been done but by error not done and what ought not to have been done was done requiring correction. In this case, the question was framed as to whether in the proceedings under Section 155 of the Act of 1956, the court has exclusive jurisdiction in respect of all the matters raised herein or has only summary jurisdiction? The Hon’ble Supreme Court held that the company court under Section 155 has to adjudicate in the facts and circumstance whether the dispute raised really pertains to rectification or under the garb of rectification questions of fact involving contentious issues are raised and if dispute found to be relating to the peripheral field of rectification, then the company court under Section 155 will have exclusive jurisdiction but if finding is otherwise then the civil court’s jurisdiction is not excluded.
In the case of IFB Agro, the Hon’ble Supreme Court was considering the question in regard to the scope of the rectificatory jurisdiction of the NCLT under Section 59 of the Act and was called upon to determine the appropriate forum for adjudication and determination of violations of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations 1997 and Securities and Exchange Board of India (prohibition of insider trading) Regulations 1992 framed under the Securities and Exchange Board of India Act, 1992. It was held that under Section 59 of the Act, in view of the Ammonia Supplies (Supra) the jurisdiction is summary in nature and not intended to be exercised where there are contested facts and disputed questions and in regard to the second issue it was held that transactions falling within the jurisdiction of Regulatory bodies created under a statute must necessarily be subjected to their ex-ante scrutiny, enquiry and adjudication.
Thus, once the legislature has created a complete bar of the jurisdiction of the Civil Court by enacting Section 430 in the Act as per which no civil court shall have the jurisdiction to entertain any suit or proceedings in respect of any matter which the Tribunal or Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no civil court has the jurisdiction to grant injunction in respect of any action taken or to be taken in pursuance of any power conferred by or under the act or any other law for the time being in force by the Tribunal or Appellate Tribunal, there is no shred of doubt that the jurisdiction to decide the rectificatory jurisdiction under Section 59 of the Act shall be available to be exercised even where there are contested facts and disputed questions and regard may be had to the decision in the case of Shashi Prakash Khemka [2019 (2) TMI 971 - SUPREME COURT] as decided by the Hon’ble Supreme Court while referring to Section 430 of the Act.
The impugned order set aside - appeal allowed.
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2023 (11) TMI 1219
Admission of Section 7 Application filed by the Financial Creditor - investment made by the Financial Creditor in the Corporate Debtor by means of Share Subscription-cum- Shareholders Agreements, Binding Term Sheet as well as Consent Terms - financial debt in default - HELD THAT:- The Hon'ble Supreme Court in Pioneer Urban Land and Infrastructure Limited and Anr. vs. Union of India and Ors. [2019 (8) TMI 532 - SUPREME COURT] had occasion to consider the concept of 'financial debt' and the meaning of the 'financial debt' as contained in the IBC.
The ratio of the judgment of the Hon'ble Supreme Court is that sub- clause (f) of Section 5(8) would subsume within it amounts raised under transactions which are not necessarily loan transactions so long as they have the commercial effect of a borrowing. In paragraph 76, the Hon'ble Supreme Court had quoted with approval the meaning of expression "borrow" and "commercial" from Collins English Dictionary. The condition which is essentially required to be fulfilled is disbursement against the consideration for the time value of money. On coming to sub-clause (f), the transaction has to have a commercial effect of a borrowing.
It is already noticed the facts and sequence of events of the present case, from which it is clear that Corporate Debtor has time and again acknowledged the debt. It is found that transactions between the parties including the Agreement, Supplementary Agreement and Binding Term Sheet, clearly indicate that there was a debt, due and payable, which debt was in the nature of 'financial debt'. It is further noticed that in the present Appeal, the Appellant has taken several opportunities to make payment to the Corporate Debtor to liquidate his debt, which could not be done by the Appellant. The above is also clear acknowledgement of debt and default on the part of the Corporate Debtor. The Adjudicating Authority has not committed any error in admitting Section 7 Application.
There are no good ground to interfere with the impugned order admitting Section 7 Application. The Appeal is dismissed.
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2023 (11) TMI 1173
Professional Misconduct - Chartered Accountant (CA) - Failure to report non-consolidation of subsidiary - Failure to prepare audit documentation - Failure to report issues related to disclosure of Credit Risk Exposure - Failure to plan the audit of Financial Statements - Failure to perform Analytical Procedures - Failure to determine Materiality - Failure to perform risk assessment procedures and response to such risks - Failure to obtain Sufficient Appropriate Audit Evidence (SAAE) - Failure to prepare documentation regarding Auditor’s responsibilities relating to fraud in an Audit of Financial Statements - Failure to communicate with Those Charged with Governance (TCWG) - Failure to report non-disclosure of Related Party Loans on gross basis - Failure to report non-disclosure of Trade Payable covered under the Micro, Small and Medium Enterprises Development Act, 2006 - Failure to report full particulars of loan to Related Party - Failure to report non-disclosure of Material Information relating to pledge of fixed deposits - Penalty and Sanctions.
Failure to report non-consolidation of subsidiary - HELD THAT:- In the qualified opinion by the EP, when there was sufficient basis for an adverse opinion, was without due diligence and without obtaining sufficient appropriate audit evidence, and thus the EP failed to comply with Para 8 of SA 705 - the EP too during personal hearing has acknowledged this lapse.
Failure to prepare audit documentation - HELD THAT:- The Executive Counsel to the Financial Reporting Council (FRC), the UK Audit Regulator, in the matter pertaining to Deloitte LLP and John Charlton in the audit of Mitie Group plc. for the year ended 31 March 2016, imposed a financial sanction of Two Million Pounds, a published statement in the form of severe reprimand against Deloitte and a financial sanction of 65,000 Pounds and a published statement in the form of a severe reprimand against Charlton besides other things, for breach of ISA 230 as they failed to adequately document the audit work papers.
Failure to report issues related to disclosure of Credit Risk Exposure - HELD THAT:- There is no evidence in the Audit File of the Letter of Credit stated as security for the secured Trade Receivables. There is no evidence of receipts from M/s. Tecnimont after 31.03.2017 and no ageing analysis of the Trade Receivables performed by the EP. In the absence of such evidence, the reply of the EP seems an afterthought and is not acceptable. It is evident that the EP’s conclusion about the credit risk being low was not based on sound documented analysis. In light of the above, we find that the EP was negligent in not reporting the non-disclosure of trade receivables in accordance with Para 35M and 35N of Ind AS 107, not obtaining external confirmation as per SA 505 and not exercising due care in the audit of Trade Receivables.
Failure to plan the audit of Financial Statements - HELD THAT:- Failure to make an appropriate audit plan has been viewed seriously by other regulators as well. For example, PCAOB, the US Regulator, charged L.L. Bradford & Company, LLC (the "Firm") for its failure to develop an appropriate audit plan for the audit of Web:XU Inc.'s ("WebXU") and concluded that the "the Firm violated PCAOB rules and auditing standards with respect to an audit and a quarterly review of one issuer audit client. Specifically, the Firm in conducting its audit of the financial statements of WebXU for the year ended December 31, 2011, failed to properly assess the risks of material misstatement. As a result, the Firm failed to properly identify significant risks in connection with the 2011 WebXU audit. The Firm also failed to properly establish an overall strategy for the audit and develop an audit plan that included planned risk assessment procedures and planned responses to the risks of material misstatement.
Failure to perform Analytical Procedures - HELD THAT:- It is evident that the Audit File does not evidence any analytical procedures performed, which proves that the EP failed to design and perform analytical procedures and enquire with the management regarding fluctuations in the figures from previous FY - It is concluded that the EP has violated Para 3(b) and Para 6 of SA 520.
Failure to determine Materiality - HELD THAT:- The EP’s assertion that nothing has been set out to indicate or prove that alleged misstatements have significantly impacted the usability of Financial Statements is false and misleading. Examination of the Audit File revealed that EP did not even determine materiality or performance materiality in the audit of Financial Statements of MIIL - it is emphasised that materiality is one of the most important concepts in the audit of Financial Statements. Where material information is omitted or misstated, the Financial Statements will not be in compliance with the requirements of the SAs and therefore of the Law as Section 143(9) of the Companies Act, 2013 requires the auditors to comply with the SAs - As there is no working paper in the Audit File evidencing determination of materiality by the EP, it is concluded that the EP has failed to adhere to the mandatory requirements of determining Materiality in accordance with SA 320 and falsely stated in his report that he had conducted the audit in accordance with the SAs specified under Section 143(10) of the Act.
Failure to perform risk assessment procedures and response to such risks - HELD THAT:- It is observed from the Audit File and the reply submitted, that the EP has failed to identify and document the applicable financial reporting framework where he is found wanting with non-identification of Ind AS 101, an Ind AS having most critical impact on the financial statements for the year ending 31.03.2017 under investigation - it is noted that a number of errors in the financial statements and non-compliances of Ind ASs by the Company, which the EP has failed to identify and appropriately modify his audit report. As a result, there are a number of fundamental fatal lapses in the audit work which render the audit of financial statements for FY 2016-17 unreliable.
Failure to obtain Sufficient Appropriate Audit Evidence (SAAE) - HELD THAT:- There is no evidence at all of work done in this fundamental audit area. In the light of the EP’s failure to adhere to the requirements of SAs and failure to report non-compliance of Ind AS and Companies Act, 2013 provisions, it is concluded that the EP has been grossly negligent in his professional duties and has failed to obtain SAAE in critical areas of audit mentioned above, thereby violating SA 200.
Failure to prepare documentation regarding Auditor’s responsibilities relating to fraud in an Audit of Financial Statements - HELD THAT:- There is no evidence in the Audit File that the EP had identified and assessed the risks of material misstatement to comply with the requirements of Para 16 of SA 240 where Auditor is required to perform the procedures as mentioned in Paragraphs 17 to 24 of SA 240, to obtain information for use in identifying the risks of material misstatement due to fraud. Further, the EP failed to evaluate whether the information obtained from other risk assessment procedures and related activities performed indicates that one or more fraud risk factors are present and therefore did not comply with Para 24 of SA 240 - it is nowhere documented in the Audit File whether EP had inquired from the company’s staff in respect of internal control processes or observed the staff performing the controls. The reply is an afterthought to mislead NFRA and hide his deficiencies in conduct of audit. In the light of above, we conclude that the EP failed to comply with the requirements of Para 16 and 24 of SA 240.
Failure to communicate with Those Charged with Governance (TCWG) - HELD THAT:- EP has failed to exercise due diligence and was grossly negligent in not identifying and communicating with TCWG and consequently, failed to comply with the requirements of SA 260 and SA 265.
Failure to report non-disclosure of Related Party Loans on gross basis - HELD THAT:- combined reading of various prescriptions of Ind AS 24 in Para 18, Para 20, Para 21 and Para 24, shows that they require the entities to disclose Related Party Transactions (RPT) on gross basis, since the overarching objective of Ind AS 24 is to disclose information that is relevant to understand the effect on financial position as well as profit or loss of the entity. For example, outstanding receivables and payables to a related party, though arising from transactions in earlier years would affect the financial position or nature of its assets and liabilities. Further, disclosure of RPTs on a net basis would obscure the extent (volume) of quantitative effect of RPTs on the financial performance and cash flows of the entity, if they have been squared off or netted before the year end - it is found that the EP has erred by failing to exercise due professional care by not reporting such non-disclosure.
Failure to report non-disclosure of Trade Payable covered under the Micro, Small and Medium Enterprises Development Act, 2006 - HELD THAT:- The EP has failed to address the non-disclosure in respect of MSME and explain its impact on the Financial Statements. The EP also failed to state his opinion on the Financial Statements, taking into account the inappropriate disclosure. In view of this, we conclude that the EP failed to report the non-disclosure of the amount of principal and interest outstanding as required under the Micro, Small and Medium Enterprises Development Act, 2006 during the year as per Schedule III of the Companies Act, 2013.
Failure to report full particulars of loan to Related Party - HELD THAT:- As Related Party Transactions are often prone to misuse, including diversion of funds and therefore a material area of audit and subject to stricter legal scrutiny, the EP was required to be more cautious and exercise professional skepticism in this sensitive area of audit - It is concluded that this is a clear case of afterthought, and the EP has failed in his attempt to cover up for his nonchalant attitude by not performing the duties of a statutory auditor of a PIE.
Failure to report non-disclosure of Material Information relating to pledge of fixed deposits - HELD THAT:- EP submits that he cannot be held responsible when both external and internal audit evidence gathered reflected that there was no lien on the fixed deposit - In view of the explanation and workpapers submitted by the EP, the charge is dropped.
Penalty and Sanctions - HELD THAT:- Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed, is evident from the fact that a minimum punishment is laid down by the law - Considering the fact that professional misconducts have been proved and considering nature of violations and principles of proportionalities, in exercise of powers vested under Section 132(4) (c) of the Companies Act,2013, it is ordered that:
(a) Imposition of monetary penalty of Rs.5,00,000 (Rupees Five Lakhs Only) upon CA Nilesh Chheda.
(b) In addition, CA Nilesh Chheda is debarred for 5 (Five) years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of Financial Statements or internal audit of the functions and activities of any company or body corporate.
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2023 (11) TMI 969
Oppression and mismanagement - Reduction of shareholding of the Appellant No. 1 - sale of properties of the Respondent NO. 1 Company without the consent of the Appellant No. 1 - jurisdictional error - mutual settlement of disputes between parties - HELD THAT:- The Tribunal passed the impugned order after duly considering that the jurisdiction of the Tribunal cannot be invoked for giving effect to a compromise between the parties. The impugned order does not suffer from any jurisdictional error and the Tribunal, by passing of the impugned order, ensured that there is no multiplicity of proceedings between the parties. The Tribunal comprehensively dealt with the issues mentioned in the Company Petition. The impugned order was passed on the ground that the parties had already mutually settled their disputes. In view of the mutual settlement, the Company Petition ought to have been dismissed which the Tribunal rightly did by way of the impugned order.
The Appellants’ contention that till the amounts mentioned in the minutes dated 31.05.2018 are not paid, there is a continuous cause of oppression and mismanagement is completely misconceived and unsustainable. The Tribunal and this Appellate Tribunal are not the appropriate forums for adjudicating as to whether the parties have acted in terms of the compromise deed dated 11.04.2018 and whether the alleged minutes dated 31.05.2018 are binding or not - The Hon’ble High Court being seized of the matter, the present Appeal is liable to be dismissed. Further, it has been rightly noted by the tribunal that in the light of the compromise deed dated 11.04.2018, if at all there is any remedy available to the Appellant then it is before the Hon’ble Punjab & Haryana High Court and Civil court at Gurugram.
Thus, the Tribunal while passing the impugned order had rightly taken note of the fact that in view of the settlement between the parties, the said allegations cannot be gone into further and in the circumstances in view of the compromise arrived at outside the Tribunal and nothing survives in the Company Petition.
Appeal dismissed.
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2023 (11) TMI 688
Seeking for restoration of the name of the Company Garg Medical Solutions Private Limited in the register maintained by the Registrar of Companies (RoC) - HELD THAT:- The said Company was struck off on 08.08.2018. The Appellant had complied with the statutory filing for the Financial Year 2016-17 and statutory filing for Financial Year 2017-18 was not due. The said Company had outstanding payable to three Creditor totalling to Rs.21 Lakhs/-. The said Company is also owing one Immovable Property.
In Calcutta Rubber Factory Pvt. Ltd. & Ors. Vs. Registrar of Companies, Delhi and Haryana, 2019 [2019 (12) TMI 342 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL NEW DELHI] it was held that restoration of the Company was considered just and equitable on the grounds that the Company is having Assets.
In the present case, the Company had complied with the statutory filings till Financial Year 2016-17 and the statutory filings for Financial Year 2017-18 were not due as on the date of striking off of the Company. The Company is having assets and liabilities. It owns one property and has liability to repay credits of Rs.21 Lakhs/- Since the Company has substantial assets and liabilities, it cannot be said that the Company is not carrying on any business for operations.
The impugned order set aside - The name of the Appellant Company is restored to the Register of Companies subject to the compliances imposed - appeal allowed.
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2023 (11) TMI 529
Refusal of registration of shares of the Respondents - ambit of Section 111A of Companies Act - sufficient cause for refusal to register shares or not - NCLAT directed the appellant to register the shares of respondents - HELD THAT:- The interpretation of the expression ‘sufficient cause’ in the context of refusal by a Company to register shares has to be pragmatic, reasonable and in consonance with the purpose of the legislation. Moreover, it has to be kept in mind that the legislature deliberately used the expression “sufficient cause” in proviso to Section 111A (2) as against the expression “contravention of any of the provision of law” used in proviso to Section 111A (3) of the Companies Act, 1956.
In the opinion of the Court, the import of the expression ‘sufficient cause’ cannot be reduced to mean only violation or contraventions of law. Any mala fide transfer done with the intention of obstructing the functioning of the company can also constitute sufficient cause for refusing the registration of transfer of shares.
In the case at hand, Respondent No. 4 was associated with the Appellant company in the past. Respondent No. 1 is stated to be his wife while Respondent No. 5 is his daughter. On the other hand, Respondent Nos. 2 and 3 are alleged to be relatives of the Ex-statutory director of the Appellant company. The Respondents have filed multiple complaints against the Appellant company to various statutory authorities - the allegation of the Appellant company is that the Respondents seek to cause hurdles in the way of bona-fide corporate decisions taken by the Appellant Company. The Respondents have chosen not to appear before this Court to rebut the allegation of the Appellant.
These facts constitute ‘sufficient cause’ and the Appellant company has rightly refused to register the shares of the Respondents - Appeal allowed.
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