2024 (12) TMI 165 - NFRA - Companies Law

Professional misconduct - failure to disclose complete information about revenue earned from related parties - determination of related party status under Section 2(76) of the Companies Act, 2013 - HELD THAT - It is proved that CA Lavitha Shetty committed professional misconduct of failure to exercise due diligence in the conduct of her professional duties by not providing complete information about revenue earned by her from related parties of MACEL. This professional misconduct is defined in para 7 of part I of second schedule of the Chartered Accountants Act 1949. CA Lavitha Shetty vide our Orders dated 13.04.2023 and 25.04.2023 is sanctioned. However, the misrepresentation of facts during those proceedings cannot be overlooked. CA Lavitha Shetty has misrepresented the facts relating to revenue earned by her from MACEL and its related parties and this information was crutial in evaluation of her independence in this matter. It is also found that misleading the regulator leads to interference with the statutory functions of the regulator. Having already penalised her, it is found that in these proceedings a token penalty would be appropriate given the facts and circumstances of the current professional misconduct. Accordingly, in exercise of powers under section 132(4)(c) of the Act, imposition of monetary penalty of Rs One lakh only upon CA Lavitha Shetty imposed.

Issues:
1. Failure to disclose complete information about revenue earned from related parties.
2. Determination of related party status under Section 2(76) of the Companies Act, 2013.
3. Allegation of professional misconduct against CA Lavitha Shetty.

Analysis:

Issue 1: Failure to disclose complete information about revenue earned from related parties
The judgment pertains to a Show Cause Notice (SCN) issued to CA Lavitha Shetty, the statutory auditor of Mysore Amalgamated Coffee Estates Limited (MACEL), for not disclosing complete information about revenue earned from related parties. Despite being asked to provide details of revenue earned from various related companies, CA Lavitha Shetty initially disclosed revenue from only one related party. Subsequently, it was discovered that she had not disclosed revenue from four other related parties, leading to the issuance of the SCN. CA Lavitha Shetty contended that the non-disclosed companies did not meet the definition of related parties as per Section 2(76) of the Act. However, the authority found that these companies did indeed fall within the definition of related parties, and CA Lavitha Shetty's failure to disclose complete information constituted professional misconduct.

Issue 2: Determination of related party status under Section 2(76) of the Companies Act, 2013
The judgment delves into the detailed analysis of related party relationships as defined under Section 2(76) of the Act. It was established that certain companies were related parties of MACEL based on shareholding patterns, common directorships, and control relationships. The judgment highlights instances where common directors and substantial shareholdings linked various entities, establishing them as related parties under the Act. CA Lavitha Shetty's arguments regarding the technical interpretation of related party definitions were refuted, emphasizing the practical influence and control exercised by certain individuals over multiple entities. The judgment underscores the importance of considering substance over form in determining related party relationships.

Issue 3: Allegation of professional misconduct against CA Lavitha Shetty
The judgment concludes that CA Lavitha Shetty committed professional misconduct by failing to exercise due diligence in disclosing complete information about revenue earned from related parties of MACEL. This failure was deemed a violation of professional duties, as auditors are obligated to provide accurate and comprehensive information as part of their professional responsibilities. Despite previous sanctions imposed on CA Lavitha Shetty for deficiencies in audit performance, the authority found that the misrepresentation of facts during the current proceedings warranted a monetary penalty of Rs One lakh under Section 132(4)(c) of the Act. The judgment emphasizes the significance of transparency and integrity in professional conduct, highlighting the repercussions of misleading regulatory authorities.

In conclusion, the judgment addresses the issues of incomplete disclosure of revenue earned from related parties, determination of related party status under the Companies Act, and the allegation of professional misconduct against CA Lavitha Shetty, ultimately imposing a monetary penalty for the identified violations.

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