2020 (2) TMI 819 - AT - Companies Law

Oppression and Mismanagement - siphoning of funds - allegation that shares are not listed at Pune Stock Exchange, Siphoning of investors money, Company has not issued financial statement after 1995, Company changes registered office frequently - HELD THAT - t is clear that in the terms of provisions of Section 62(1) of the Companies Act, 1956 the persons who are authorised to issue or prospectus of the public/persons to subscribe for shares in/or debentures of the company shall be liable to pay compensation to every person who subscribes any shares in/or debentures of the company on the faith of prospectus for any loss or damage. It is also found that the company came out with Initial Public Offer and issued prospectus to raise public funds on 10.10.1996. Thereafter the team of directors has completely changed. The initial promoters of the company are not We have carefully examined the balance sheets and financial statements for the financial year 2014-15 and 2015-16 which shows that the company has not carried out any business. We have also found that the respondent company has not filed any statements before the ROC since its incorporation. However, the ROC has not taken any action against the company and its directors. We have also seen that the directors have siphoned the money between 1996 to 2004. However, the inspection was ordered on 20th March, 2017 and the report submitted on 10.5.2018 and supplementary report on 13.8.2018 and the Inspecting Officer is unable to trace out real culprits i.e. the then directors. NCLT has passed the order against the appellant under 2nd proviso to sub- Section (5) of 140 of the Act which came into force on 1.6.2016. However, the appellant issued report for the FY 2014-15 and 2015-16 i.e. prior to the provision came into force. Therefore, NCLT cannot invoke jurisdiction retrospectively - The appellant was appointed on 12.3.2014 as statutory auditor of the Respondent No.2 company. The appellant issued audit report for the Financial Year 2014-15 and 2015-16 on 5.9.2015 and 05.09.2016 respectively. The appellant has issued the audit report for the FY 2015-16 on 5.9.2016 before that the 2nd proviso to sub-section (5) of Section 140 of the Act came into force with effect from 1.6.2016. Hence NCLT can exercise the powers in above referred provision. The act of the appellant is certainly a negligent act but there is no material on record to infer that he has acted fraudulently and colluded with the directors of the company in relation to affairs of the company or he has misused his position as statutory auditor of the company - the findings of the NCLT are not sustainable in law as well as in facts. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Jurisdiction of NCLT under Section 140(5) of the Companies Act, 2013.
2. Allegations of fraudulent activities and siphoning of funds by the directors of Respondent No.2 company.
3. Role and liability of the appellant as the statutory auditor for the financial years 2014-15 and 2015-16.
4. Procedural fairness and opportunity to the appellant to defend himself.

Issue-wise Detailed Analysis:

1. Jurisdiction of NCLT under Section 140(5) of the Companies Act, 2013:
The appellant contended that the Second Proviso to sub-section (5) of Section 140 of the Companies Act, 2013 was enforced from 1.6.2016, and thus, NCLT did not have the jurisdiction to exercise powers for offences related to financial years 2014-15 and 2015-16. The appellant argued that the provision is penal and cannot be applied retrospectively, citing Article 20(1) of the Constitution. However, the Tribunal found that the appellant issued the audit report for FY 2015-16 on 5.9.2016, after the provision came into force on 1.6.2016, thus conferring jurisdiction on NCLT.

2. Allegations of fraudulent activities and siphoning of funds by the directors of Respondent No.2 company:
The inspection report highlighted several allegations, including non-listing of shares, siphoning of investors' money, non-issuance of financial statements post-1995, frequent changes in the registered office, and lack of response to regulatory calls. The report detailed how funds collected through the IPO were diverted to loans and advances and used to write off significant expenses. The directors responsible for these actions were not traceable, and the current directors were deemed dummy/shadow directors. The initial promoters were no longer involved post-2005, and the company exhibited characteristics of a shell company.

3. Role and liability of the appellant as the statutory auditor for the financial years 2014-15 and 2015-16:
The appellant was appointed as the statutory auditor on 12.3.2014 and issued audit reports for FY 2014-15 and 2015-16. The previous auditor had also certified balance sheets based on the information that there were no business transactions. The appellant followed the same process without calling for books of accounts or statutory registers. The Tribunal acknowledged that while the appellant's actions were negligent, there was no evidence to suggest he acted fraudulently or colluded with the company's directors. The funds were siphoned off by earlier directors, and the appellant's audit reports were based on the lack of business activity during his tenure.

4. Procedural fairness and opportunity to the appellant to defend himself:
The appellant argued that he was not given a reasonable opportunity to defend himself as he did not receive material documents before his statement was recorded by the Inspecting Officer. The appellant also claimed financial hardship prevented him from engaging counsel and filing a formal reply. Despite accepting the interim order, he did not anticipate further adverse action. The Tribunal noted that the appellant was not provided with adequate opportunity to defend himself and that the Inspecting Officer's report alone could not substantiate the allegations of fraud against him.

Conclusion:
The Tribunal concluded that the findings of the NCLT were not sustainable in law or facts. The appellant's actions were deemed negligent but not fraudulent. The appeal was allowed, and the impugned order was set aside, with no order as to costs.