RE-OPENING OF COMPAY’S BOOKS OF ACCOUNTS

[Mr. M. GOVINDARAJAN]

Re-opening of books of accounts

A company shall not re-open its books of account and not recast its financial statements. Section 130 of the Companies Act, 2013 (‘Act’ for short) allows to re-open the books of accounts of a company by the order of National Company Law Tribunal (‘NCLT’ for short). If the earlier accounts of the company are prepared in a fraudulent manner or the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of the financial statements, then the Central Government, Income Tax Department, Securities and Exchange Board of India and any other regulatory bodies may file an application before the NCLT. The Tribunal shall give notice to the Central Government, the Income-tax authorities, the Securities and Exchange Board or any other statutory regulatory body or authority concerned or any other person concerned. The NCLT shall take into consideration the representations, if any, made by that Government or the authorities, Securities and Exchange Board or the body or authority concerned or the other person concerned before passing any order under this section. The Accounts so revised or recast based on the order of NCLT shall be final. NCLT shall not made an order in respect of re-opening of books of account relating to a period earlier than 8 financial years immediately preceding the current financial year.

In HARI SANKARAN VERSUS UNION OF INDIA & OTHERS - 2019 (6) TMI 332 - SUPREME COURT , the alleged company is IL&FS, which has 348 group companies. IL&FS is a core investment company and non-banking financial company approved by Reserve Bank of India.  Before the Supreme Court the appellant contended that the order of the NCLT is against to the provisions of Section 130 of the Act and the principles of Natural Justice was breached since the appellant has not been given reasonable opportunity of being heard by the NCLT. The appellant prayed the Supreme Court to quash the order of NCLT and confirmed by the Appellate Tribunal. The Central Government supported the findings of the NCLT which was confirmed by the Appellate Tribunal.

The Central Government filed an application before NCLT under Section 241 and 242 of the Act alleging the mismanagement of the company and prayed the NCLT to suspend the directors of the company and to appoint a new set of directors to run the affairs of the company is affording to the provisions of the Act. The NCLT found that the management of the company is responsible for the negligence and incompetence. The NCLT suspended the Board of Directors according to the provisions of the Act and appointed a new Board of Directors to run the affairs of the company and group company.

Section 212 (1) (c) of the Act was invoked for the investigation of the affairs of the company. The Investigation was carried out by Serious Fraud Investigation Office (‘SIFO’ for short). SFIO conducted an enquiry and submitted an interim report to the Central Government on 30.11.2018 in which it was reported that the affairs of the companies were mis-managed and the affairs of the company were conducted against public interest.

The Registrar of Companies (‘RoC’ for short) also conducted an enquiry under Section 206 of the Act. The Registrar of Companies prima facie concluded that there was a mis-management in the company and the company was showing a rosy picture by camouflaging its financial statements. The RoC raised a serious doubt about the correctness of the financial statements. The Institute of Chartered Accountants of India submitted a report dated 03.12.2018 before the NCLT indicating that there was mismanagement in the affairs of the company

The income tax and SEBI and other regulators were issued with the notice, who raised no objections in this case. Therefore, being satisfied with the provisions of section 130 of the Act the Central Government filed a petition before the NCLT for the re-opening and re-casting of the accounts of the company for 5 years from the year 2012-13 to 2017 – 18.

The petition was objected by the suspended directors. After hearing the parties, the NCLT passed the order permitting the Government to re-open and re-cast the accounts of the company and its other companies. The suspended director filed appeal before the Appellate Tribunal which confirmed the order of the NCLT. The suspended director then filed appeal before the Supreme Court.

The Supreme Court analyzed the facts and circumstances of the case and observed the following-

• The NCLT is conscious of the provisions of section 130 of the Act and more particularly, the conditions precedent to be complied with while directing the re-opening of the books of accounts and re-casting the financial statements of the company.
• The NCLT has also considered the preliminary submitted by submitted by the SFIO, Institute of Chartered Accountants of India and the observations made by them in their report.
• The NCLT passed the impugned order only after satisfying that the conditions precedent invoking Section 130 of the Act are satisfied.
• As per Section 130 of the Act the NCLT may pass an order of re-opening of accounts if the Tribunal is of the opinion that-

• the relevant accounts were prepared in a fraudulent manner; or
• the affairs of the company were mismanaged during the relevant period casting a doubt on the reliability of the financial statements.

Therefore, Supreme Court held that the order passed by the NCLT is justified in passing the order under Section 130 of the Act and in the larger interest of public and when thousands of public money is involved.  The Supreme Court further observed that the suspended directors opposed the application filed by the Union of India under section 130 of the Act and also appeared before NCLT. Therefore, the Supreme Court held that the suspended directors were heard and given reasonable opportunities. As such the principles of Natural Justice have been followed.

The Supreme Court held that the order passed by the Tribunal under Section 130 of the Act does not suffer from any illegality and the same is passed in the larger public interest, we have considered the order passed by the learned Tribunal under Section 130 of the Act on merits.

Can erstwhile directors of the company make representation under Section 130 of the Companies Act?

In the petition filed by the Central Government before the Tribunal alleging the mismanagement of company under section 241 and 242 of the Act, the Central Government prayed for the suspension of the Directors of the Company and to appoint a new Board of Directors. The NCLT on consideration of the materials and facts on record suspended the Directors of the company and constituted a new Board of Directors. The NCLT held that the suspended directors hence forth shall not represent the company as a Director and shall also not exercise any powers as a director in any manner before any authority as well. The suspended director filed an appeal before the Appellate Tribunal against the order of NCLT and also filed appeal before the Supreme Court against the order of the Appellate Tribunal which confirmed the order of NCLT. The Supreme Court observed that the Board of Directors may have a grievance on the order passed by the NCLT. The Supreme Court held that the erstwhile directors cannot represent the company as they are suspended pursuant to the earlier order passed under Section 242 of the Act. Therefore, the erstwhile directors of the company cannot make representation under Section 130 of the Act.