2019 (1) TMI 338 - Tri - Companies Law

Authority of statutory auditor to function in the company whose relative or partner is holding any security or interest of the company - Held that - It is recorded that family members of R1 are share holders of the R2 Company whereas Section 141(3)(d) specifically prohibits a statutory auditor whose relative or partner is holding any security or interest of the company - It is amply clear that family members of the statutory auditor of R1 are share holders of R2 company and R1 has issued audit certificate of the company even without examining any Books of Account of the R2 Company which is clear cut violation of the statutory provision of the Section 141(3)(d) of the Companies Act, 2013. The Respondent No. 1 shall immediately cease to function as statutory auditor of Respondent No. 2 Company - Petitioner is permitted to appoint an independent auditor for the Respondent No 2 Company to replace Respondent No 1, in terms of the first proviso to Section 140(5) of the Companies Act, 2013 read with Explanation I thereto. List on 04.02.2019 for final argument.

Summary

Issues Involved:
1. Allegations against the company and its directors.
2. Failure of the statutory auditor to fulfill duties.
3. Violation of statutory provisions under the Companies Act, 2013.
4. Appointment of an independent auditor.

Detailed Analysis:

1. Allegations against the company and its directors:
The complaints raised by Mr. Jagdip H. Vaishhav included several allegations such as the company not being listed on the Pune Stock Exchange, siphoning of investors' money, non-issuance of financial statements since 1995, frequent changes in the registered office, and lack of response to investor complaints. The tribunal noted that many of these allegations were substantiated, including the fact that no registered office of the Respondent No. 2 Company existed, and no books of accounts were produced despite notices and summons being issued. The directors of the company failed to respond to the notices, and the company had not listed on any stock exchange despite assurances in the prospectus dated 10.10.1996. The tribunal also observed that the present directors were dummy/shadow directors of Mr. Arvind Goyak Babulal, the Chairman, who dodged his responsibilities, indicating the attributes of a shell company.

2. Failure of the statutory auditor to fulfill duties:
The statutory auditor, Respondent No. 1, admitted under oath that he had not audited the books of accounts of the company but had signed the auditor's report for the financial years 2014-15 and 2015-16. This admission was corroborated by the Inspecting Officer's reports dated 10.05.2018 and 13.08.2018. The tribunal emphasized that the statutory auditor had failed to exercise his duty and had issued a false certificate claiming to have audited the company's books of accounts.

3. Violation of statutory provisions under the Companies Act, 2013:
The tribunal highlighted the statutory provision under Section 141(3)(d) of the Companies Act, 2013, which prohibits a statutory auditor whose relative or partner holds any security or interest in the company. It was found that family members of the statutory auditor were shareholders of the company, violating this provision. The auditor's failure to examine any books of accounts before issuing the audit certificate was a clear violation of the statutory provisions.

4. Appointment of an independent auditor:
The tribunal ordered that Respondent No. 1 shall immediately cease to function as the statutory auditor of Respondent No. 2 Company. The Petitioner was permitted to appoint an independent auditor to replace Respondent No. 1, in terms of the first proviso to Section 140(5) of the Companies Act, 2013, read with Explanation I thereto. The tribunal directed Respondent No. 1 and Respondent No. 2 to file a parawise counter affidavit/reply within 15 days and serve a copy to the opposite party, with the possibility of filing a rejoinder within the next 15 days. The order was to be communicated immediately to the Union of India, MCA, Petitioner, and Respondents by mail and speed post, with compliance ensured by the Designated Registrar.

Conclusion:
The tribunal's judgment addressed the serious allegations against the company and its directors, the statutory auditor's failure to perform his duties, and violations of statutory provisions. The tribunal's orders aimed to rectify these issues by removing the current statutory auditor and appointing an independent auditor to ensure compliance with the Companies Act, 2013.