2017 (12) TMI 1854 - HC - Indian Laws

Validity and legality of dues diligence certificate based on which the housing loan was extended by bank - whether the aim of these papers were to cheat the bank or not - role of an Auditor in case of verifying credential of the proposed borrower - HELD THAT - The perusal of the Due Diligence certificate given by the petitioner indicates at the bottom, that Bank Statement of the applicant not been submitted. Which means that, the Indian Bank which has sought the professional assistance of the petitioner had not furnished adequate document of its borrower but for sake of record had requested the petitioner to provide due diligence certificate - This observation of this Court emanates from the verification of the documents relied by the prosecution which is found in the file of the document 16. The petitioner herein has received the request from the Indian Bank for due diligence certificate on 29.08.2013. The petitioner has handed over the certificate on 22.09.2013 with information that on his verification, he has found that the applicant is a proprietor of MMM enterprise located at No.44, Alapakkam main road, Maduravoyal and dealing with old scarp materials. While the bank officials have not been prosecuted for extending the loan, despite the receipt of CIBIL report, indicating the loans availed by the borrower Murugan and his actual bank balance on date of sanctioning loan, the petitioner herein who has discharged his professional duty based on the documents given by the Bank Official cannot be suspected for being party to the crime and put to the ordeal of prosecution. In this case, the records relied by the prosecution as against the petitioner herein is the statement of LW.16 Malliga Rani, Branch Manager that she sanctioned loan to Murugan based on the due diligence certificate given by the Audit/petitioner herein. When the record indicates that they have obtained CIBIL report rating of the borrower before advancing the loan and despite adverse information they have extended loan, her statement does not appears to be correct or true. Therefore it is very clear from the statement of LW.16 that they have over looked the relevant materials which were available with them before granting loan. To make proper assessment and appraisal or to seek expert opinion the Bank should have furnished the CIBIL report to the Auditor. Without furnishing relevant documents but expecting the auditor to do the job of deductive, does not fall within the scope and ambit of Auditors profession. The material relied by the prosecution does not indicates any primafacie evidence against the petitioner to suspect that he had knowledge about the fabricated Statement of account or he had been privy to the alleged conspiracy with the builder, borrower and the Bank officials. The Due Diligence Certificate issued by the petitioner herein based on the documents given by the Bank for his perusal, does not reveal any suppression of facts or dereliction of duty or culpable state of mind to cheat the Bank. Petition allowed.

Summary

Issues Involved:
1. Validity of the criminal prosecution against the petitioner.
2. Role and responsibility of the petitioner as a Chartered Accountant.
3. Allegations of conspiracy and issuance of a false Due Diligence Certificate.
4. Verification of documents and due diligence by the petitioner.
5. Role of the bank officials in the loan sanctioning process.
6. Legal precedents regarding the liability of professionals.

Detailed Analysis:

1. Validity of the criminal prosecution against the petitioner:
The petitioner, a Chartered Accountant, sought to quash the criminal prosecution against him on the grounds that his professional duties were performed based on the documents provided by the Indian Bank. He argued that his role was limited to verifying the credentials of a loan applicant and issuing a Due Diligence Certificate based on the provided documents. The petitioner contended that the Trial Court did not properly appreciate the documents before taking cognizance of the offence, which per se is bad in law and requires interference by the superior court under its inherent power.

2. Role and responsibility of the petitioner as a Chartered Accountant:
The petitioner emphasized that his professional duty was to verify the financial details provided by the loan applicant through the bank. He argued that he was not expected to conduct a forensic audit or detect forgery in the documents. The petitioner issued the Due Diligence Certificate based on the documents furnished by the bank, and such acts done in the course of his professional duty do not attract any penal provision.

3. Allegations of conspiracy and issuance of a false Due Diligence Certificate:
The prosecution alleged that the petitioner colluded with other accused and issued a false Due Diligence Certificate, which induced the bank to sanction a housing loan to the borrower based on fabricated documents. The petitioner argued that there was no evidence to indicate that he aided or abetted the other accused and that he had no contact or privy to the borrower, having a professional contract only with the Indian Bank.

4. Verification of documents and due diligence by the petitioner:
The petitioner claimed that he verified the documents provided by the bank and issued the Due Diligence Certificate after due verification. However, the prosecution argued that the petitioner failed to exercise reasonable application of mind and colluded with other accused by issuing a false certificate without verifying the genuineness of the documents. The court observed that the petitioner had failed to notice the superimposition in the fabricated bank statement, which could have been detected with better alacrity.

5. Role of the bank officials in the loan sanctioning process:
The court noted that the bank officials, who were responsible for sanctioning the loan, were not prosecuted despite having received a CIBIL report indicating the borrower's actual creditworthiness and bank balance. The court found that the bank officials failed to forward the CIBIL report to the petitioner for verification and overlooked relevant materials before granting the loan. The court held that the petitioner, who discharged his professional duty based on the documents provided by the bank, could not be suspected of being a party to the crime.

6. Legal precedents regarding the liability of professionals:
The court referred to several judicial pronouncements, including the Supreme Court's observation in Central Bureau of Investigation, Hyderabad versus K. Narayana Rao, which highlighted that professionals, such as lawyers and auditors, are only expected to exercise reasonable care and skill in their duties. The court emphasized that an auditor is not bound to be a detective and is justified in believing the representations of trusted servants of the company, provided he takes reasonable care.

Conclusion:
The court concluded that the material relied upon by the prosecution did not indicate any prima facie evidence against the petitioner to suspect that he had knowledge of the fabricated statement of account or that he was privy to the alleged conspiracy. The Due Diligence Certificate issued by the petitioner based on the documents given by the bank did not reveal any suppression of facts or dereliction of duty. Consequently, the court quashed the case against the petitioner and allowed the Criminal Original Petition, closing the connected miscellaneous petition.