TMI Blog1948 (10) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... ven accused of whom six were directors and one the auditor and they are prosecuted for a similar offence under section 282 of the Indian Companies Act in connection with the balance-sheet for the year ended 31st December, 1939, In C. No. 93 of 1946, again there are nine accused persons of whom eight were the directors and one the auditor and the offence enquired into against them is one under section 282 of, the Indian Companies Act relating to the balance-sheet for the year which ended with 31st December, 1940. Crl. M.P. Nos. 1416, 1418 and 1420 of 1948 have been filed by the auditor-accused in the three calendar cases to quash the charge framed against him in each of them. Crl. M.P. Nos. 1502, 1504 and 1506 of 1948 are by the 2nd accused in all the three calendar cases for quashing the charge framed against him under the same section 282 of the Indian Companies Act. Crl. M.P. Nos. 1565, 1566 and 1567 of 1948 are the three petitions filed by the third accused in all the three calendar cases for quashing the charge framed against him under section 282 of the Indian Companies Act for a similar offence. Crl. M.P. No. 1557 of 1948 is by the 4th and 7th accused respectively in C.C. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fairs of the company had been going on. Ex. P-13 is the report, dated 14th March, 1945, submitted by P.W. 2 and thereafter the matter was referred to the Registrar of Joint Stock Companies for taking action under the appropriate provisions of the Indian Companies Act. The Registrar of Joint Stock Companies after taking necessary legal opinion filed the three complaints out of which the three calendar cases arose under section 237 for offences under section 282 of the Indian Companies Act. After examining the witnesses tendered for the prosecution in all the three cases which were tried together, the learned Sub-Divisional Magistrate has framed the charges which are now sought to be quashed on the ground that the evidence let in does not disclose that any offence has been committed at all. It is unnecessary to set out in any detail what ought to be the contents of a balance-sheet for that matter is statutorily found in section 132 of the Indian Companies Act. The duties of an auditor with respect to the scrutiny of the accounts, etc, of the company are also defined in section 145 of the Companies Act. According to the prosecution, the auditor in these cases in signing the variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of Rs. 28,737 out of the loans advanced in the year 1938 on the security of the produce of grains was outstanding without being guaranteed by any existing security. Similarly on the same date a sum of Rs. 11,454 is seen as outstanding out of the loans on the produce advanced in the year 1939. Likewise a sum of Rs. 36,959 was seen outstanding on 7th April, 1941, out of the produce loans granted in the year 1940. P.W. 2 states that so far as produce loans were concerned he verified all the loans which were in the town and to which he was taken and he treated them as existing assets. He treated as unsecured loans such of them about which there is no evidence that the Nidhi had any control over the produce which formed the primary security. He came to this conclusion as he did not have any evidence that there was any such security and on asking for the records they were not forthcoming. Since there was nothing to show that the original stock was ever replaced, he came to the conclusion that these outstanding loans were unsecured ones on 7th April, 1941. Again he states, that with regard to the produce loans, he examined the promissory notes, pledge chits and appraising forms and foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no pledge in most of the cases and that the Nidhi probably had a floating charge on the produce, if such produce existed at the time of the advance of the loan. Even if it were a floating charge it was obligatory upon the auditor to have ascertained whether in the godown at the time of his report there existed sufficient quantity of produce to cover the amounts lent by the company to any particular individual. Not having made any attempt to ascertain the existence or otherwise of such produce it is not open to the auditor to say that there was no pledge in the real sense of the term and as I have already remarked, in view of the definite admission made by P.W. 2 that he cannot say whether the stock or produce was in existence or not, he is not justified in saying so. This item of charge ought not to have been framed by the lower Court. The auditor was dealing with a set of circumstances in April, 1941, and according to him he makes a report about what should have been done in 1938, 1939 and 1940. In the absence of any verification by the auditor, the charge as regards the unsecured nature of loans being false in the various balance-sheets cannot be sustained. It has not been sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affirms and reiterates what was laid down in the earlier case and observes as follows: "I come now to the real question in this controversy, and that is, whether the appellants have been guilty of any breach of duty to the company. To decide this question it is necessary to consider (1) what their duty was; (2) how they performed it, and in what respects (if any) they failed to perform it. The duty of an auditor generally was very carefully considered by this Court in London and General Bank, (No. 2), In re [1895] 2 Ch. 673 and I cannot usefully add anything to what will be found there. It was there pointed out that an auditor's duty is to examine the books, ascertain that they are right, and to prepare a balance-sheet shewing the true financial position of the company at the time to which the balance-sheet refers. But it was also pointed out that an auditor is not an insurer, and that in the discharge of his duty he is only bound to exercise a reasonable amount of care and skill. It was further pointed out that what in any particular case is a reasonable amount of care and skill depends on the circumstances of that case; that if there is nothing which ought to excite suspicio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t he does not bring into his balance-sheet at face value a debt that is not a good one. At page 509 Pollock, M.R. in confirming the judgment of Romer, J., in the Court of Appeal refers to and and accepts the dictum contained in Kingston Cotton Mill Company (No. 2), In re [1896] 2 Ch. 679, at p. 284 and further observes that in the words of Sargant, L.J., the duty of an auditor is verification and not detection. The learned Master of the Rolls discussed the matter in great detail and came to the conclusion as was done by the Court of Appeal 30 years prior to that date. These principles are so well established in English Courts and have been consistently followed in our Courts that there can be no dispute regarding them. Applying these principles to the facts of the present case, on the evidence of P.W. 2, I am not able to find that the auditor accused in this case has in any way failed to act according to the strict confines of the duty imposed upon him. On the other hand, even according to the evidence of P.W. 2, the auditor has done what is expected of him. The next question is whether the balance-sheets in question have disclosed the nature of the bad and doubtful debts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a sound policy. He has necessarily to admit that he could not attack the bona fides of this policy. Further, two of the balance-sheets in question have a note appended, that accrued interest has not been taken into consideration. In this state of circumstances, it is very difficult to see how any Court can say that either the directors or the auditor have in any way wilfully concealed any material fact about accrued interest from the balance-sheet. In Newton v. Birmingham Small Arms Company Ltd. [1906] 2 Ch. 378 at p. 387, Buckley, J., while discussing a similar matter, observed as follows: "If the balance-sheet be so worded as to shew that there is an undisclosed asset, whose existence makes the financial position better than that shewn, such a balance-sheet will not, in my judgment, be necessarily inconsistent with the Act of Parliament. Assets are often, by reason of prudence, estimated and stated to be estimated, at less than their probable real value. The purpose of the balance-sheet is primarily to shew that the financial position of the company is at least as good as there stated, not to shew that it is not or may not be better. The provision as to not disclosin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o |he shareholders and that the balance-sheet should contain how much money was outstanding as being loans to the directors at the end of a particular year; but, in my opinion, it is unnecessary to show the volume of business transacted with a director or directors, if the loans have been duly repaid within the course of the year. It is just possible, that a director or directors may be doing individually and separately business on a very large scale, and during the course of such business, large amounts may have to be borrowed from a bank, of which he or they happen to be directors; but if the loans are properly paid off during the course of the year and they are not outstanding when the year ends, it is unnecessary to encumber the balance-sheet by showing details of all closed up transactions that had taken place during the intervening period. Such being the case it is not possible to say that any criminal offence has been committed by the directors or the auditor in not mentioning the details of the loans given to the directors. In discussing the general liability of the directors for the so-called false statements referred to in the charge, it is necessary to consider what ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the Board at the meetings of which he attended and it is not proved that he did not do so." It seems to me that these dicta are applicable to the actions of the petitioners herein. The accused in this case are men of position and responsibility and, some of them are, I am given to understand, members of the bar enjoying fairly good practice. One cannot attribute any wilful negligence or dishonesty to men in such positions if they depend upon and trust the permanent officials and the managing director of the company so far as the working of the company is concerned. The prosecution has not been able to show any mala fides or want of good faith on the part of any of these accused. All that might be laid at their door is perhaps the blame if that could be called a blame at all that they placed trust upon the permanent servants of the company. It seems to me that they are not guilty of any false statement of any material particular wilfully made and knowing the same to be false. Even accepting as fully correct and true, the oral and documentary ev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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