2018 (12) TMI 177 - AT - Companies Law

Direction of re-audit of the accounts - allegation of Oppression and Mismanagement - Held that - When the audit had taken place, without finding at least prima facie from the record that there was error in the audit or that it had not been properly done, directing re-audit was not correct. We are not impressed by the arguments of the learned counsel of the Respondents that only because the notice and agenda for that EOGM dated 07. 12. 2017 used the word appointment and not approval , the appointment should be treated as on 07. 12. 2017. The law requires and the Board Meeting dated 01. 11. 2017 in which the appointment was done shows that the appointment was done on 01. 11. 2017 which was subject to the approval of the general body. Respondents is raising various grievances regarding the accounts. We find that the grievances being raised may be raised at the time of final hearing of the Company Petition. Learned counsel for the Appellant is submitting that because of the present Impugned Order the Respondent is raising contentions and disputes even with regard to the subsequent Audit of 2017-18 claiming that unless 2016-17 gets settled, the accounts of 2017-18 cannot be looked into. A litigation may remain pending for years and dispute relating to Accounts of a particular year may be raised. It does not mean that for years to come finalization of Accounts should be kept suspended or in doubts. For the above reasons, the Appeal is allowed. The Impugned Order directing re-audit of the accounts is quashed and set aside. The Respondent would be at liberty to question the audit done of 2016-17 at the time of final hearing of the Company petition. The accounts of subsequent Financial Years may be settled but would be subject to the decision of the Company Petition. Disposed off accordingly. No Costs.

Issues Involved:
1. Legality of the appointment of the Statutory Auditor.
2. Validity of the audit conducted by the newly appointed Auditor.
3. Interpretation of Section 139(8) of the Companies Act, 2013.
4. Direction for re-audit of the accounts by the NCLT.

Issue-wise Detailed Analysis:

1. Legality of the appointment of the Statutory Auditor:
The Respondent (original Petitioner) challenged the appointment of the Statutory Auditor M/s Shah & Bhatt, CA, claiming it was bad in law and sought to restrain them from auditing. The NCLT examined the resolutions passed by the Board of Directors on 01.11.2017 and the EOGM on 07.12.2017. It was noted that the Board of Directors recommended the new Auditor's name, which was approved in the EOGM. The NCLT concluded that the procedure under Section 139(8) was followed correctly, and there was no illegality in appointing M/s. Shah & Bhatt as the new Auditors.

2. Validity of the audit conducted by the newly appointed Auditor:
The Respondent disputed how the new Auditor could finalize the accounts for the Financial Year 2016-17 in one day after their appointment was approved on 07.12.2017. The NCLT found it implausible that the audit of the entire year could be completed within a few hours on the same day. The Appellants argued that the new Auditor had been working on the audit since their appointment on 01.11.2017, subject to the approval of the general body, and thus there was no error in the auditing process.

3. Interpretation of Section 139(8) of the Companies Act, 2013:
The NCLT interpreted Section 139(8) to mean that the Board of Directors could only recommend the name of the Auditor, and the actual appointment would be done by the general body. The Appellants contended that the Board of Directors had the authority to fill the casual vacancy by appointing the Auditor, which would then be subject to approval by the general body. The Tribunal clarified that the Board of Directors had the power to fill the vacancy within 30 days, and such appointment needed to be approved by the general body within three months.

4. Direction for re-audit of the accounts by the NCLT:
The NCLT directed a re-audit of the accounts, doubting the correctness of the audit conducted by M/s. Shah & Bhatt. The Appellants argued that without any prima facie evidence showing errors or improper conduct in the audit, the direction for re-audit was unwarranted. The Tribunal agreed with the Appellants, stating that the re-audit could not be directed based on mere surmises without material evidence indicating flaws in the initial audit.

Conclusion:
The Tribunal found substance in the Appellants' submissions and quashed the NCLT's order directing re-audit. The Tribunal held that the audit conducted by M/s. Shah & Bhatt was valid and that the Respondent could question the audit during the final hearing of the Company Petition. The accounts of subsequent Financial Years could be settled but would remain subject to the decision of the Company Petition. The appeal was allowed, and the impugned order was set aside. No costs were awarded.

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