2025 (5) TMI 943 - HC - Companies Law

Non compliance of section 143 of the Companies Act - violation of Accounting Standard resulting - name of transacting related party and description of relationship between the parties is not mentioned in Annual / Audit Report - partner or partners of the audit firm has or have acted in fraudulent manner or abetted or colluded in any fraud by or in relation to or by the company or its directions or officers - HELD THAT - According to prosecution not naming relationship between relative attracts offence. Noticably definition of relative is given in Accounting Standard 18. It defines related party and related party transaction as above. When degree of relative is specifically defined in clause 10.9 in column of relative there is no requirement of mentioning degree of relative separately or to say relationship of Priyavratra Mafatlal individual having significant influence separately. Thus prosecution against petitioner is found to be malicious and deserves to be quashed. While examining the questioned complaint in light of aforesaid law this Court is of the opinion that petitioner who has been joined in individual capacity without joining M/s. Deloitte Haskins as accused is not needed to be send for facing trial. Thus the petitions are allowed. The Criminal Complaint dated 14.02.2018 bearing Criminal Enquiry No.147 of 2018 in Criminal Case No.25079 of 2018 and Criminal Complaint dated 14.02.2018 bearing Criminal Enquiry No.162 of 2018 in Criminal Case No.25087 of 2018 pending before the learned Additional Chief Metropolitan Magistrate Ahmedabad as well as all consequential proceedings initiated in pursuance thereof are hereby quashed and set aside qua the applicant. Direct service is permitted.

The core legal questions considered in this judgment include:

1. Whether a partner of an audit firm can be prosecuted in his personal capacity for alleged violations under the Companies Act, 2013, without arraigning the audit firm itself as an accused.

2. Whether the allegations against the individual petitioner are sufficiently specific and establish personal liability or merely amount to vicarious liability.

3. Whether the alleged non-disclosure of the precise relationship of a related party in the financial statements constitutes a criminal offence under Sections 143 and 147 of the Companies Act, 2013, read with Accounting Standard 18.

4. Whether the criminal complaints filed against the petitioner are maintainable or constitute an abuse of the process of law warranting quashing under inherent powers of the Court.

Issue-wise detailed analysis:

1. Personal Liability of Audit Partner vs. Audit Firm Liability

The relevant legal framework includes Sections 143 and 147 of the Companies Act, 2013. Section 143 outlines the duties and responsibilities of auditors, while Section 147 prescribes penalties for failure to comply with Section 143. Particularly, Section 147(5) states that if an audit firm's partner is found to have acted fraudulently or colluded in fraud, both the firm and the concerned partner may be held jointly and severally liable.

The Court noted that the show cause notice was issued to the audit firm (M/s. Deloitte Haskins and Sells) and not to the individual partner (petitioner). The prosecution, however, was launched against the petitioner in his personal capacity without including the audit firm as an accused. The Court emphasized that for criminal liability to attach to an individual partner, it must be proved that the partner acted fraudulently or colluded in fraud. Absent such proof, personal prosecution is not tenable.

Precedents relied upon include the Apex Court's decision in Sharad Kumar Sanghi v. Sangita Rane, which held that vague allegations without specific averments of personal involvement cannot sustain criminal proceedings against an individual director or partner. The Court further cited the principle that vicarious liability arises only if the statute explicitly provides for it and the complaint must contain requisite allegations to attract such liability.

The Court applied these principles to the facts and found that the complaint failed to specify how the petitioner was personally involved in the alleged offence. Consequently, prosecution against the petitioner alone without arraigning the audit firm was held to be unsustainable.

2. Sufficiency and Specificity of Allegations Against the Petitioner

The Court examined the complaint and the show cause notice, noting that the allegations pertained primarily to the audit firm's failure to disclose the nature of related party transactions as required under Accounting Standard 18 and Sections 129 and 133 of the Companies Act.

The Court referred extensively to the Apex Court's ruling in Narendra Kumar A Baldota v. State of Karnataka, which underscored that criminal proceedings against company officials require the Magistrate to record satisfaction of a prima facie case against them in their individual capacity. Mere official designation without specific role or conduct attributed is insufficient.

Further, the Court reiterated the requirement that the company or firm must be arraigned as an accused before individual officers or partners can be prosecuted for offences committed by the company or firm.

The Court found the allegations against the petitioner to be vague and lacking any specific role or fraudulent conduct attributed to him personally. The complaint did not meet the threshold of "sufficient ground for proceeding" as mandated by law.

3. Nature of the Alleged Offence: Non-Disclosure of Related Party Relationship

Accounting Standard 18 defines related parties, related party transactions, and the nature of relationships that must be disclosed in financial statements. The complaint alleged that the audit report mentioned a related party by name but failed to describe the relationship, thereby violating disclosure requirements.

The Court analyzed the relevant clauses of Accounting Standard 18, noting that the definition of "relative" includes specific family members expected to influence or be influenced by the individual. The audit report's reference to the related party as a "relative of individual having significant influence" was found to be consistent with the standard, which does not require detailed description of the degree of relationship beyond that.

Accordingly, the Court held that the alleged omission did not constitute a criminal offence under the Companies Act, and the prosecution based on such omission was unwarranted.

4. Abuse of Process and Quashing of Criminal Proceedings

The Court invoked its inherent powers under Section 482 of the Code of Criminal Procedure to quash the criminal complaints against the petitioner. It relied on established principles that criminal proceedings should not be initiated as a matter of course and that the Court must prevent abuse of process where allegations are vague, unsubstantiated, or amount to harassment.

Precedents such as G. Sagar Suri v. State of UP were cited, emphasizing that criminal law is not a shortcut for civil remedies and that the Court must exercise caution before allowing prosecution to proceed.

The Court concluded that the prosecution against the petitioner was malicious and constituted an abuse of the process of law, particularly as the audit firm was not made a party to the proceedings.

Significant holdings include the following verbatim excerpts:

"In order to bring partner or partner of the partnership firm within outline of civil or criminal liability, it has to be proved that they have acted in fraudulent manner or colluded in any fraud. If it is not proved then partner cannot be held for punishment under section 139 to 146 of Companies Act."

"When a complainant intends to proceed against the Managing Director or any officer of a company, it is essential to make requisite allegation to constitute the vicarious liability."

"Summoning of an accused in a criminal case is a serious matter. Criminal law cannot be set into motion as a matter of course. The order of the Magistrate summoning the accused must reflect that he has applied his mind to the facts of the case and the law applicable thereto."

"The definition of relative is given in Accounting Standard 18... When degree of relative is specifically defined... there is no requirement of mentioning degree of relative separately or to say relationship of [the related party] separately."

"Jurisdiction under Section 482 of the Code has to be exercised with great care... Criminal proceedings are not a short cut of other remedies available in law."

Core principles established:

Personal criminal liability of audit firm partners requires proof of fraudulent conduct or collusion in fraud; mere association with the firm is insufficient.
Vicarious liability of company officials or partners must be expressly provided by statute and supported by specific allegations in the complaint.
Criminal proceedings cannot be initiated against individuals in their official capacity without specific role or conduct attributed to them.
Non-disclosure of the degree of relationship of a related party, where the related party is identified as a relative under Accounting Standard 18, does not constitute a criminal offence.
The Court's inherent power under Section 482 CrPC should be exercised to prevent abuse of process and quash proceedings lacking prima facie merit.

Final determinations on each issue:

The prosecution against the petitioner in his personal capacity without including the audit firm as an accused is not maintainable.
The allegations against the petitioner are vague and insufficient to establish personal liability or fraudulent conduct.
The alleged non-disclosure of the relationship in the audit report does not amount to a criminal offence under the Companies Act and Accounting Standard 18.
The criminal complaints and consequent proceedings against the petitioner are quashed as an abuse of process of law.

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