2021 (8) TMI 124 - AT - Companies Law

Seeking an Order directing a Forensic Audit caused in respect of the affairs and accounts of the 1st Respondent Company as well as the Respondent No. 7 and present a report - HELD THAT - Without expressing any opinion in regard to the merits of the Appeal, keeping in view the facts and circumstances of the case and the serious allegations of irregularities alleged by the Appellants and also having regard to the fact that no Statutory Audit has been done for the years 2018-19 and 2019-20; the RoC letter detailed in the Impugned Order, that the Forensic Audit is being sought for by shareholders who own a substantial 49.4% of the shares, we are of the considered view that a Forensic Audit in respect of the affairs and accounts of the Company Account with effect from Financial Year 2017-18 is necessary in the larger interest of the Company. The Forensic Auditors Report will helpful to decide the veracity of the allegations of Oppression, Mismanagement and Financial irregularities. The Independent Chairperson Mr. E. Selvaraj is directed to appoint a Forensic Accountant before 20th August, 2021 for conducting a Forensic Audit for the Financial Years 2017-18 to 2020-21, in respect of the affairs and accounts of the Respondent Company. The Forensic Accountant shall submit the Report in a sealed cover to the Appellate Tribunal, within a period of three months from the date of appointment. The fees of the Forensic Accountant shall be borne by the Company. Application allowed.

Summary

Issues:
- Request for a forensic audit of a company's affairs and accounts.
- Allegations of financial irregularities, fraud, and mismanagement.
- Opposition to the forensic audit by the company and certain respondents.
- Arguments for and against the need for a forensic audit.
- Appointment of an Independent Chairman to manage the company.
- Decision on ordering a forensic audit.

Analysis:

The Appellants sought a forensic audit of the company's affairs and accounts, alleging financial irregularities and fraud by the Second and Third Respondents, involving misappropriation, false statements, and selective billing. They highlighted discrepancies in audited financial statements and the failure to deposit daily cash collections in the bank, emphasizing the need for a forensic audit to uncover irregularities.

The Respondents, particularly Respondents 1 & 3, opposed the forensic audit, citing previous audits conducted under the supervision of Independent Chairmen and Chartered Accountants. They argued that the current management was capable and that a forensic audit would disrupt operations and harm the company's reputation, especially during the pandemic. They contended that the allegations were part of previous proceedings and aimed at delaying the case.

Respondents 2, 4, 6 & 7 echoed similar objections, emphasizing that the company's accounts were properly maintained, and audits were thorough. They opposed the forensic audit, stating that the current management had majority shareholder support and had been appointed following due procedures under the Companies Act, 2013.

The Fifth Respondent supported the need for a forensic audit, alleging mismanagement and gross irregularities by the company's management. They argued that previous audits had raised more questions than answers and that a forensic audit was essential to expose fraud and malfeasance. They highlighted the NCLT's findings and the need for action by the RoC, supporting the Appellants' call for a forensic audit.

The Tribunal, after considering all submissions, appointed an Independent Chairman to manage the company and ordered a forensic audit for the financial years 2017-18 to 2020-21. The decision was based on serious allegations of irregularities, the absence of recent statutory audits, and the substantial shareholder support for the forensic audit. The Forensic Accountant was directed to submit a report within three months, with costs to be borne by the company, to investigate the alleged oppression, mismanagement, and financial irregularities thoroughly.