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TMI BlogENTITLEMENT OF A CHARTERED ACCOUNTANT TO BECOME A DIRECTOR OF A COMPANYX X X X Extracts X X X X X X X X Extracts X X X X ..... ENTITLEMENT OF A CHARTERED ACCOUNTANT TO BECOME A DIRECTOR OF A COMPANY - By: - Mr. M. GOVINDARAJAN - Corporate Laws / IBC / SEBI - Dated:- 8-2-2011 - - Chartered Accountants are the members of the Institute of Chartered Accountants of India and governed by the Chartered Accountants Act, 1949. Part I of the First Schedule to the Chartered Accountants Act, 1949 ( Act for short) describes the disqualifications to continue as an auditor of a company. Clause (11) reads as engages in any business or occupation other than the profession of Chartered Accountants unless permitted by the council so to engage. Provided that nothing contained herein shall disentitle a Chartered Accountant from being a director of a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany, unless he or any of his partners is interested in such company as an auditor . The above said clause has been referred in the case law Yogeshwari Kumari V. Institute of Chartered Accountants of India and another (2011) 100 CLA 131 (Del). In this case the appellant is the daughter of late Highness Maharana Bhagwar Singhji Mewar who was the promoter of two companies, namely, Lake Palace Hotels Motels (P) Ltd ( LPHM for short) and Lake Shore Palace Hotels (P) Limited ( LSPH for short). The appellant is the shareholder of both the companies. The respondent No. 2 is the Chartered Account who is the auditor of LPHM. The appellant filed a company petition under Sections 397 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 398 before the High Court of Rajasthan atJodhpur. On 23.11.1994 the company court appointed Maharaj Kumar Raj Singhji and Maharaj Kumar Samar Singhji as directors of LSPH as there was a deadlock in the Board of Directors of LSPH between its directors. The said order was challenged. However a settlement was arrived at which was reduced to a memorandum of understanding dated 25.08.1999 and was signed by both of the directors namely the appellant and her brother Shri Arvind Singh Mewar which was accepted by the High Court of Rajasthan. The appellant filed company petition under Sections 397 and 398 of the Companies Act, 1956 before the Company Law Board contending that the appointment of the respondent No.2 as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Director of the company was contrary to the Circular No.14/51/62-PR of the Department of Company Affairs and sought a declaration that any business conducted at the meeting of the Board of directors attended by the respondent No. 2 was bad in law and should not be implemented. The CLB disposed the petition holding that the respondent No.2 has been appointed as per the settlement that was accepted by the High Court of Rajasthan. The CLB further held that it was obligatory on the part of the appellant to approach the High Court in this regard. This order has been challenged by the appellant before the High Court in yet another separate appeal. During September, 2005 the appellant file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a complaint under Sec. 21 of the Chartered Accountants Act, 1949 against the respondent No. 2 before the Council of the Institute alleging that the respondent No.2 had violated the code of conduct of Chartered Accountants as formulated by the ICAI as well as the Circular No. 14/51/62-PR of the Department of Company Affairs. It was further alleged that the partnership firm of the respondent No.2 was the statutory auditor of LPHM which was a subsidiary of LSPH and, therefore, while continuing to be an auditor of LPHM, he could not have acted as a director of LSPH. It was urged that the said continuance constituted professional misconduct as specified in the I and II schedules to the Act. The Institute, after inviting comments from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondent No.2, held that the respondent No.2 was not guilty of professional or other misconduct. The said order of ICAI was challenged in the writ petition. The appellant contended the following: The respondent No.2 was disqualified in view of Section 226(4) read with Sec. 226(3)(b) of the Companies Act; Sec. 2(30) of the Companies Act defines the term officer s that includes a director of a company; Therefore an officer of a company cannot be its auditor in terms of Sec. 226(3) of the Act; The respondent No.2 was disqualified from being appointed as auditor of LSPH by virtue of being his director and further he was also disqualified from continuing as auditor of LPHM which is a subsidiary of LSPH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; The order passed by ICAI was wrong since the case is covered by clause (11) of Part I of the First Schedule to the CA Act; The Single Judge held that the respondent No. 2 is an auditor of LHPM which is a separate corporate entity although a subsidiary of LSPH and, therefore, the respondent No.2 is not an auditor of LSPH. Since the respondent No.2 is not an auditor of LSPH, there is no bar to be appointed as director LSPH in terms of the proviso to clause (11). The Court thus concurred the decision taken by the Institute. However when referring to the circular of the Department of Company Affairs the Single Judge held that as the appointment of the respondent No.2 as the director of LSPH is pending consideration before the High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court of Rajasthan, the ICAI was not called upon to decide the validity of such appointment. In the present petition the appellant contended that the Single Judge has fallen into error by not unsettling the order passed by the ICAI which has failed to take not of the fact that the respondent No.2 was carrying on dual roles, a director of a holding company and the auditor of a subsidiary company. Further the Single Judge has not appreciated the scope and purport of sub sections (3) and (4) of Sec. 226 of the 1956 Act and the Circular No. 14/51/6-2PR of the Department of Company Affairs. When the facts were absolutely clear, it was obligatory on the part of the Single Judge to dislodge the conclusion arrived at by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ICAI and not to concur with it. The Court held that on a perusal of clause (11), it is quite clear that the respondent No.2 was not a whole time director of LSPH. He was not engaged in any business or occupation and, therefore the first part of the clause (11) does not get attracted to his case. As far as the proviso is concerned a Chartered Accountant is not disentitled from becoming a director of a company. The only rider is that he should not be interested in such company as an auditor. The terms which have been laid emphasis upon and correctly so are such company and the respondent No.2 is not the auditor of LSPH. He is the auditor of LPHM which is a separate corporate entity. Regard being had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the concept of different juris entity and keeping in view the concept of disqualification which has to be strictly construed, the Court is of the considered opinion that the analysis made the Single Judge is absolutely impeccable. The Court analyzed the circular of Department of Company Affairs. The said circular provides It is the view of this department that it would not be a desirable practice for a practicing Chartered Accountant X, who is connected with the managing director of company, A or where X acts as auditor of company A, to be on the Board of Company B, or to act or be employed as tax or financial adviser to company B, where company A and company B are in the same group, because he may find it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difficult to exercise an independent judgment. The Court held that a practicing Chartered Accountant who is connected with the management of a particular company or acts as an auditor of the company should not be employed as a tax or financial adviser of a company in the same group. Whether the respondent No.2 could have been so appoint or not regard being had to the concept of desirability is the subject matter of controversy which is pending for adjudication before the High Court of Rajasthan. It is worth noting that the disqualification in terms of Sec. 226(3) and 226(4) of the Companies Act, 1956 would depend upon the decision of the Rajasthan High Court. The ICAI ought not to have ventured into the same a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd judicial propriety warranted that the Single Judge also should not have entranced into the said arena and rightly he has not done so. The appeal was dismissed in limine with the above directions. - Reply By MOHAN S as = The Article is quite interesting but it appears the article is incomplete and is not concluded. Kindly publish the full text. Dated: 11-2-2011 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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