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TMI Blog1964 (1) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... ified and approved the balance-sheet of the company as on 31-12-1951 the payment of remuneration to Messrs. Oakley Bowden and Co., as managing agents of the Little's Oriental Balm and Pharmaceuticals Ltd. Alter a period of six years, the Registrar of Companies, Madras, sent a letter calling upon him to explain the failure on his part to detect the continuance in office of Messrs. Oakley Bowden and Co. Ltd., as managing agents of Mess is Little's Oriental Balm and Pharmaceuticals Ltd. beyond the stipulated period without any further agreement and also the failure to point out to the shareholders the irregularity in regard to the payment of remuneration to the said managing agents for the period in question. The auditor sent his reply. Though it was difficult for him to recall the events that took place at the time of the audit and to remember the circumstances under which he audited the affairs of the company, yet he was able to send an explanation to the best of his ability from the papers available with him. He stated that the renewal of a managing agency agreement was generally a matter of course, unless either party had given notice to the other of its intention to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd. The company used to enter into agreement with the managing agents in regard to their remuneration once in ten years. The first of such a resolution was passed in the year 1920, which was renewed in 1930 and again renewed in the year 1941. The last resolution passed in 1941 was followed by art Extraordinary Resolution dated 10-7-1945, in which it was resolved to execute an agreement for the continuance of the managing agency. The auditor further stated- If I had the slightest doubt then of any irregularity in the continuation in office of the Managing Agents, I would have drawn the attention to it in my report to the share-holders in the same way as I had done in regard to even smaller matters......In any event an error or difference of opinion regarding the application or interpretation of the relevant provisions, I submit, cannot be a matter calling for any action. 3. The respondent had taken a stand both in his letter of the explanation to the Registrar as well as in the written statement that even though the managing agency expired in the year 1951, still their continuance in office was not opposed to any of the provisions of the Indian Companies Act relating to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... England. The earliest and the leading case on this subject of the duties of an auditor is the case of In re London and General Bank, 1895 2 Ch 673 Lord Justice Lindley recorded his valuable opinion in regard to the duties of an auditor in the following words at page 683 : .....he must be honest, i.e., he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true. What is reasonable care in any particular case must depend upon the circumstances of that case. Where there is nothing to excite suspicion very little inquiry will be reasonably sufficient, and in practice I believe businessmen select a few cases at haphazard, see that they are right, and assume that others like them are correct also. Where suspicion is aroused more care is obviously necessary, but. still, an auditor is not bound to exercise more than reasonable care and skill, even in a case of suspicion, and he is perfectly justified in acting on the opinion of an expert where special knowledge is required...... 7. Again, in the year 1896, the same noble Lord reiterated his opinion in the case of In re Kingston Cotton Mill Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of audit. The respondent was an auditor of this company at least for the three years prior to 1951. He says in his explanation that he was aware of the Articles of Association of the company. Under the Articles of Association of the company, the Managing agents are not liable to be removed except for resignation, misconduct, insolvency or special resolution. He was aware of the agreements passed from time to time with regard to their remuneration once in ten years, beginning from 1920. He audited the accounts ok the company for the years 1949, 1950 and 1951. Evidently, neither was he aware that the managing agency agreement expired in the year 1950 itself, nor he cared to verify whether the managing agency agreement was still in force or whether the directors themselves were aware that the continuance of the managing agency after the expiry of the term was contrary to law. In those circumstances, according to Delvin J. in Roper v. Taylor's Central Garages, 1951 2 T L R 284 . The case of shutting the eyes is actual knowledge in the eye of the law, the case of merely neglecting to make enquiries is not knowledge at all...... Even before the Disciplinary Committee, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. The learned author Charlesworth on Negligence has described various degrees of negligence as gross negligence, ordinary negligence and slight negligence. Negligence means carelessness and these expressions, according to the author, mean gross carelessness, ordinary carelessness and slight carelessness respectively. In the same book, Rolfe B. has been quoted as saying that he ''could see no difference between negligence and gross negligence, that it was the same thing with the addition of a vituperative epithet he was using negligence in the sense, of breach of duty to take care and his criticism was justified. The learned author further says : That is not to say, however, that the expression gross negligence, has always the same meaning as 'negligence.' It is an expression in regular use among lawyers, and to deny it a meaning would be pedantic. It is intended to denote a high degree of careless conduct, and in this sense it is of considerable practice utility. In Bentecoat v. London District Auditor, 1951 2 K. B. 759 their Lordships of the Court of Appeal had discussed what is negligence and what is gross negligence. Lynskey J. observed : Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associated in the section with the word 'misconduct' and involves, I think, some element of moral culpability .... Mere imprudence is not enough, want of judgment is not enough, grave error of judgment is not enough. At the worst, the respondent may be guilty of an excusable error of judgment, and the error is not very serious in its consequences. The audit took place in the year 1952. The Registrar of Companies called upon the auditor on 1-8-1957 to explain the alleged irregularity in regard to the payment of remuneration, and the information was laid by the Deputy Secretary to the Government of India to the Secretary of the Institute of Chartered Accountants of India at the end of the year 1957, and the termination of the proceedings against the auditor was in the month of September 1959. It shows that there was inordinate delay on the part of the authorities in bringing home the guilt on the auditor. While dealing with a case under the Chartered Accountants Act, 1949 Rajamannar C. J. and Venkatarama Aiyar J. in the Institute of Commr. of Income Tax, Madras v. G. M. Dandekar, [1952] 22 ITR 235 (Mad) have observed : .....We think it is necessary to comment on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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