2010 (9) TMI 217 - HC - Companies Law

Whether the learned Single Judge has fallen into error by not unsettling the order passed by the ICAI which has failed to take note of the fact that the respondent No.2 was carrying on dual roles, a Director of a holding company and the auditor of its subsidiary company? Whether the circular issued by the Department of Company Affairs has its own connotation? Held that - On a perusal of clause (11), it is quite vivid that the respondent No.2 was not a whole-time director of LSPH; he was not engaged in any business or occupation and, therefore, the First part of the clause does not get attracted to his case. As far as the proviso is concerned, a Chartered Accountant is not disentitled from becoming a director of a company. The only rider is that he should not be interested in such company as an auditor. The terms which have been laid emphasis upon and correctly so are such company and the respondent No.2 is not the auditor of LSPH. He is the auditor of LPHM which is a separate corporate entity. Regard being had to the concept of different juris entity and keeping in view the concept of disqualification which has to be strictly construed, we are of the considered opinion that the analysis made by the learned Single Judge is absolutely impeccable. On a scanning of the anatomy of the aforesaid circular, it is luculent that a practising Chartered Accountant who is connected with the management of a particular company or acts as an auditor of the company should not be employed as a tax or financial advisor of a company in the same group. Whether the respondent No.2 could have been so appointed or not regard being had to the concept of desirability is the subject-matter of controversy which is pending for adjudication before the High Court of Rajasthan. It is worth noting that the disqualification in terms of sections 226(3) and 226(4) of the 1956 Act would depend upon the decision of the Rajasthan High Court. The ICAI ought not to have ventured into the same and judicial propriety warranted that the learned Single Judge also should not have entranced into the said arena and rightly he has not done so. Appeal dismissed.

Summary

Issues:
1. Legal acceptability and substantiality of the order dated 19-3-2010 passed by the learned Single Judge in W.P.(C) No.2828/2008.
2. Appointment of respondent No.2 as Director of the company and its legality.
3. Allegations of professional misconduct against respondent No.2 under the Chartered Accountants Act, 1949.
4. Interpretation of clauses in the CA Act and circulars issued by the Department of Company Affairs.
5. Disqualification of respondent No.2 as an auditor and director of the company.

Issue 1:
The appellant challenged the legal acceptability and substantiality of an order dated 19-3-2010 passed by a Single Judge in W.P.(C) No.2828/2008, leading to an intra-court appeal under clause 10 of the Letters Patent. The appellant, daughter of a prominent figure, questioned the affairs of two companies, LPHM and LSPH, where respondent No.2, a Chartered Accountant, served as an auditor of LPHM. The history of legal battles and appointments of directors added complexity to the case.

Issue 2:
The appellant filed Company Petitions under sections 397 and 398 of the Companies Act, 1956, raising concerns about the appointment of respondent No.2 as a Director, citing violations of circulars and seeking declarations of illegality. The Company Law Board and High Court were involved in subsequent appeals and applications challenging the appointment and related decisions.

Issue 3:
Allegations of professional misconduct were raised against respondent No.2 under the Chartered Accountants Act, 1949, for holding dual roles as a director and auditor. The Institute of Chartered Accountants of India (ICAI) prima facie found no misconduct, leading to a challenge under Article 226 of the Constitution of India in the writ court.

Issue 4:
Interpretation of clauses in the CA Act and circulars from the Department of Company Affairs was crucial. The Single Judge analyzed clause (11) of the First Schedule of the CA Act, determining that respondent No.2's roles did not constitute professional misconduct. The circular's implications regarding the desirability of certain appointments were also discussed.

Issue 5:
The disqualification of respondent No.2 as an auditor and director of the company was a central point of contention. The Single Judge's decision to uphold the ICAI's findings and dismiss the appeal was based on the interpretation of relevant legal provisions and the specific roles held by respondent No.2 in different corporate entities.

This judgment delves into complex legal issues surrounding corporate governance, professional conduct, and the interpretation of statutory provisions and circulars. The court meticulously analyzed the roles and disqualifications of the parties involved, ultimately upholding the decisions of the Company Law Board and the ICAI. The detailed examination of the clauses in the CA Act and the circular from the Department of Company Affairs provided a solid legal foundation for the judgment. The case highlights the importance of legal clarity and adherence to professional standards in corporate structures, emphasizing the need for strict interpretation of disqualification criteria for auditors and directors.