TMI Blog1956 (4) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... ents of the company were another company, called Parry Co., Ltd. At the time the Indian Companies Act was amended in 1936, the managing agents were already holding their office under an agreement which would not expire till the 15th of January, 1957. Nevertheless, in 1946, the managed company came to think that in view of the expansion of its activities in recent years, it would be advantageous to conclude a fresh agreement with the managing agents for a fixed period. With that end in view, the company issued a circular letter to its shareholders, dated the 30th of April, 1946, in which it was stated that it was proposed to enter into a fresh agreement with the managing agents for a fixed period of twenty years from the 7th of June, 1946, "on exactly the same terms as to remuneration as they are at present receiving." The circular letter then proceeded to state what the existing terms as to remuneration were and the same were set out as follows: "( a )an allowance of Rs. 5,000 per mensem; ( b )A commission of 10 per cent. on the net annual profits of the company as defined in section 87C(3) of the Indian Companies Act, 1913; ( c )the following commissions in respect of sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a total of Rs. 74,666. The selling commission earned by them under the third sub-paragraph of paragraph 3 of the agreement was Rs. 35,400. It will be seen that the amount shown in the profit and loss account as paid to the managing agents on account of their remuneration included only the sum paid to them on the monthly salary basis and the sum due to them as percentage of the profits earned by the company. The sum of Rs. 35,400, paid to them as selling commission, was not shown as a part of the remuneration paid to them as managing agents. Nor was that sum shown on the right-hand side of the profit and loss account as an item of expenditure, either separately or as included in the selling expenses. On the other hand, what was done was that before arriving at the amount transferred to the profit and loss account from the trading account, the selling commission paid to the managing agents was first deducted out of the gross receipts and it was only the figure arrived after making the deduction which was shown as the profit on trading. From the profit and loss account one would not know that this sum of Rs. 35,400 had at all been a part of the receipts of the company from the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agents for their services as managing agents or as commission paid to them for services of other kinds or as an item of expenditure in regard to sales outside the Madras City. The result was that the shareholders had been kept from the knowledge of how much their managing agents were actually costing them and also kept from the knowledge of what expenses were being incurred in making and effecting the sales outside the Madras City. The complainant stated that in view of such suppression of a material fact in the profit and loss account, the auditors had been guilty of misconduct in not reporting the non-disclosure of the payment of the selling commission to the shareholders, but in reporting on the other hand that the accounts were correct and had been prepared in accordance with law. "The auditors," he said "had failed in their duty all these years to bring this fact to the knowledge of the shareholders by giving misleading reports every year and certifying wrongly that the accounts were in conformity with the law." He added that "on the other hand, the auditors, Messrs. Lovelock and Lewes in clear negligence of their duties as auditors and with a desire to accommodate the managin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regards the allegation that the selling commission paid to the managing agents had not been disclosed even as an item of expenditure and that it had not been shown as a part of the gross income, the respondent gave no specific answer in his written statement. He only stated that he did not admit the correctness of the unpublished trading accounts of the company annexed to the complainant's petition. The written statement ended with the observation that the complainant must have been aware, at all material times, that the managing agents had been receiving a selling commission in respect of sales effected through their own branches outside the Madras City and that, in any event, the auditors as a firm of chartered accountants had acted bona fide, being guided by the legal opinion obtained by them on the subject. The enquiry came to be held on the 30th of November, 1954, by a Disciplinary Committee consisting of five members. It appears that, on an earlier date, the enquiry against Mr. Niyogi and Mr. Gibb had already been held by a smaller Disciplinary Committee and the complainant had then attended. He was not present when the enquiry against the respondent was held. The Commit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct involved, in certain respects at least, a complete change of front. In substance, the respondent was no longer stating that he had been guided by the legal opinion which his firm had received in 1937, but his contention was that he had acted on his own opinion of that opinion. He had construed the opinion for himself, had also construed the managing agency agreement on his own account and he had arrived at the conclusion that, under the agreement, the office of selling agents was a separate office held by the managing agents, for which they were to be separately remunerated. If that construction of the agreement was correct, the respondent pleaded that he had acted in accordance with the true view of the law, as elucidated by the legal opinion received by his firm in 1937 and also by certain observations of the Saklatvala Committee which reported in the same year. If his construction of the agreement was not correct, he claimed that, nevertheless, he should be treated as having acted bona fide and in that connection he relied upon another opinion received by his firm in the year 1953, which also according to him, supported the view he had taken. Proceeding next to the charge a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er provisions through the letter 'C' as it was in the circular letter. The Disciplinary Committee failed to be unanimous. The President, Mr. Mody, and two other members, Mr. Sastri and Mr. Raiji, held that the respondent had not been guilty of either of the two forms of misconduct charged against him. One member, Mr. Rajam Aiyar, held that he had been guilty of both the forms of misconduct. The fifth member, Mr. Nargolwala, would give the respondent the benefit of doubt with respect to the first charge, but he held that he had been guilty of the misconduct charged under the second count. While holding the respondent guilty of the second charge, Mr. Nargolwala added that he was prepared to accept the position that there had been no mala fides on the part of the respondent and that his omission to report on the non-disclosure of the selling commission as an item of expenditure involved no moral turpitude. The reports of the Disciplinary Committee were considered by the Council of the Institute who found the respondent guilty of both the charges. Their findings are expressed as follows: "The respondent failed to report on ( i ) the non-compliance of section 132(3) and regula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all. It may be said that cases of professional misconduct do not differ essentially from cases of offences. Two tests, however, must be looked for. Is the offence or misconduct created for the first time by the Act concerned and, secondly, does the Act contain any indication that activities of the kind mentioned are intended to be covered by its provisions, whenever they may have been done? In the present case, whether acts of the types charged against the respondent would amount to misconduct under the prior law cannot be said for certain, because the Auditors Certificate Rules, which constituted the prior law, left it to the Central Government to determine in each case whether a particular conduct on the part of an auditor was or was not professional misconduct. As to indications in the Act itself regarding its retrospective operation, I shall presently examine its provisions. I may state, however, that in spite of the ordinary and I might almost say cardinal rule of construction that statutes, particularly statutes creating liabilities ought not to be so construed as to give them a retrospective operation unless there is a clear provision to that effect or a necessary inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as the other and ought not to be entrusted with a licence." MELLOR J. who agreed with the learned Chief Justice observed as follows: "It appears to me to be the general object of this statute that there should be restraints as to the persons who should be qualified to hold licences, not as a punishment, but for the public good, upon the ground of character. And accordingly by this clause, instead of leaving open the inquiry as to character, it is enacted, that if a man has been convicted of felony, it shall not be necessary for the Justices further to inquire into his character; but they shall not grant him a licence." To the same effect, more or less, were the observations of ARCHIBALD J. while LUSH J. dissented. It is true that the learned Judges also construed the words of the Act and extracted from them an intention to operate retrospectively, but the principle which was laid down regarding the construction of statutes which are designed to protect the public from the activities of undesirable persons would seem to me to be applicable to the construction of the Chartered Accountants Act. This Act also is designed to protect the public from unscrupulous, negligent or dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave effect "notwithstanding anything contained in section 4". Section 4 deals with classes of persons who are entitled to have their names entered in the Institute's register. With regard to classes enumerated under items ( ii ) to ( vi ), it is arguable that no one belonging to any of these classes would be entitled to make an application for an entry of his name in the register immediately at the commencement of the Act, because, before they could become so eligible, the Institute would have to make certain rules or prescribe certain matters which would necessarily take some time. In the case of such persons, therefore, there will be an interval between the commencement of the Act and the time when they might apply for the registration of their names and it is arguable that item ( v ) of section 8 can be given a workable construction, if it is read as contemplating convictions suffered prior to the entry of a man's name in the register, but after the commencement of the Act. But the position with regard to persons enumerated under item ( i ) of section 4 is entirely different. They, as would appear from sub-sections (2) and (4) of the section, are intended to have their names imm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same section 8. Item ( vi ) of section 8 provides that notwithstanding anything contained in section 4, a person shall not be entitled to have his name entered in or borne on the register if he "has been found on inquiry to have been guilty of conduct which renders him unfit to be a member of the Institute." The item uses the expression, "conduct which renders him unfit to be a member of the Institute" which has been used throughout the Act to describe compendiously and at the same time comprehensively types of conduct which the Act regards as misconduct. It, therefore, covers all kinds of misconduct which the Act treats as constituting disqualification for membership of the Institute. Reading item ( vi ) of section 8 with section 20(1)( c ), the terms of which I have already read, it will appear that if after a person's name has been entered in the register, it is found that at the time his name was so entered, he was subject to the disability mentioned in item ( vi ) of section 8, the Council may remove his name. It is true that the condition which is described in item ( vi ) of section 8 and, in fact, in all the items of the section, is described as a disability both by sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... misconduct committed whether before or after the Act, provided the person concerned is found to have been guilty of it. It does not, therefore, appear to me to be material that the respondent signed the impugned profit and loss account in May, 1947, and the date when he did so will not exclude the operation of the Act against him. In the end Dr. Pal conceded that he realised that these were difficulties in the way of accepting "his" contention. Coming now to the merits of the case. Dr. Pal made it clear to us that he did not wish to contend for the purposes of this case that the profit and loss account had been prepared in accordance with either section 132(3) of the Indian Companies Act, 1913, or regulation 107 of Table A. His sole contention would be, he submitted, that even assuming that the profit and loss account had not been prepared in accordance with the directions contained in the Companies Act, as truly construed, still, his client could not be held to have been guilty of misconduct, because he had acted according to an honest understanding of the Act and an honest interpretation of the agreement, in aid of which he had drawn upon the legal opinion obtained by his firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g paid to the managing agents by way of their remuneration so that they might see if the managing agency was costing too much and if the company was carrying too heavy a load. It was also material, because section 132(3) regards the disclosure of the remuneration, provided it is remuneration contemplated by the sub-section, to be material. Translated into terms of the facts of the case, the charge under item ( o ) would mean that the respondent failed to disclose the payment of the selling commission which was a material fact and which had not been disclosed in the profit and loss account, but disclosure of which was necessary so that the profit and loss account might not mislead the shareholders by making it appear that the managing agents had received a smaller payment than had actually been made to them. Similarly translated into the concrete facts of the case, the charge under item ( p ) would mean that the respondent failed to report the misstatement in the profit and loss account regarding the gross income, such misstatement being an under-statement of the real gross income, caused by a prior deduction of the selling commission in the trading account which was not made known ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent took it upon himself to say that, in that passage, Messrs. Orr Dignam Co., had merely stated that where there was a separate agreement the matter was beyond all doubt, but it did not mean that in order to take remuneration paid for services rendered in another capacity outside remuneration paid to managing agents, as such, a separate agreement was essential. This view the respondent claimed to have formed on his own account, although he protested repeatedly before the Committee that he was only a chartered accountant and not a lawyer. Be that as it may, the legal opinion on which the respondent relied would put any one on enquiry as to whether the separate agreement referred to in it could be an agreement contained in the same document as embodied in the managing agency agreement or whether it would have to be an agreement by a separate deed. That question also the respondent answered for himself and he appears to have concluded that a separate deed was not essential. The last portion of the fourth paragraph of the opinion he ignored altogether. There, the solicitors said that if the managing agents were paid a commission on sales or, as the case might be, as remuneration, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement, and since it also envisaged the possibility that a commission on sales might be included in the managing agency remuneration, if the holding of a selling agency was a part of the managing agency agreement, it was sufficient to put anyone on enquiry as to what the true character of the agreement in the present case was. A person, conscious that he was only an auditor and not a lawyer, as the respondent asserted of himself, might be expected, upon a perusal of the legal opinion, to think of submitting the managing agency agreement to the legal advisers in order to obtain their opinion as to whether it contained any separate agreement regarding the selling agency or whether the agreement for holding the selling agency was a part of the managing agency agreement. The respondent, however, did not feel the necessity of obtaining any opinion on the agreement, but proceeded to construe it himself. I do not think that much turns on the circumstances that the circular letter issued in 1946 stated that the appointment of the managing agents under the proposed agreement would be on exactly the same terms as to remuneration as they had been then receiving, because as Mr. Nargolwala corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managing agents' remuneration which clearly shows that the directors considered this to have been paid for services rendered other than as managing agents." The above amounts to saying that it would be superfluous to refer to the directors, because their view of the agreement was reflected in the manner in which they had presented the accounts and since they were the persons who had arranged the terms of the agreement, they would know best what the agreement meant. In putting forward that defence, the respondent appears to me to have said that because the directors did not show the selling commission as a part of the managing agency remuneration, he concluded that the agreement treated the selling agency agreement as a separate one and because the directors were one of the immediately contracting parties, he thought he was entitled to accept their interpretation of the agreement as evidenced by the manner in which they had presented the accounts. It appears to me that no auditor can take up an attitude of that kind without repudiating his statutory responsibility as an auditor. An auditor is placed by the shareholders to look into the accounts of a company and to report to them w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gulation should be accepted. Having said so much, the solicitors guarded themselves by saying that they could not give any assurance as regards what interpretation would be put upon the expression "gross income", if the matter was contested in courts. There is clearly nothing in that legal opinion on which one could rely and the reliance which the respondent placed was really upon the view accepted and acted on by his own interpretation. In fact, he refers also to the practice which, according to him, had already been in vogue for over eighteen years when he signed the impugned profit and loss account. The view accepted and acted on by the accountants is said to be that the expression "gross income" in regulation 107 is synonymous with "gross profit". It is not perhaps without significance that the respondent has nothing to say as regards the propriety of the procedure of deducting the selling commission from the receipts from sales behind the screen, as it were, and presenting only the resultant figure in the published accounts, as if that represented the real receipts from the sales and as if no expenditure had been incurred or made. If, as the respondent appears to have contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t leads to. One can understand it being said that the business of selling in the branch offices run by the managing agents themselves, was solely their concern and the company was concerned with only the total amount that came into its hands from the managing agents as payments on account of the goods sold through the agencies. In such a case, there would be no expenditure at all incurred by the company and one could understand the selling commission or any expenditure at all not being shown in the company's accounts. In the present case, however, quite inconsistently, some expenditure has been shown on the left-hand side and it is nobody's case, not even the respondent's, that the company was concerned only with the lump amount handed over by the managing agents to the company, as the principal, as the company's share of the profits earned in the branches kept by the managing agents. The most extraordinary statement made by the respondent in connection with the charge under regulation 107 is that apart altogether from whether the accounts did in fact conform to the requirements of the regulation, since he had established that the selling commission need not be disclosed as manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sclosed either separately or at least as a part of the expenses, if the clear words of the regulation were not to be disregarded. I am not, however, proceeding on the construction of the words of the regulation, but on the manner in which the respondent, on his own showing, handled and dealt with the matter. The broad and simple position with regard to this profit and loss account appears to me to have been that the payment of the selling commission was completely blacked out. One could not see it, either as a part of the managing agency remuneration, or as an item of expenditure on the sales or as a part of the receipts from the sales. The respondent's case as regards the omission on his part to make any report regarding the payment of this commission has already been stated. Mr. Meyer contended that in the facts proved in the case, both the charges had been amply established. His submission was that for the purpose of seeing whether a charge of misconduct had been established or not, all that it was necessary to see was whether conduct of the types specified had in fact taken place. If it had taken place, misconduct was established. The question of bona fides would, according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission by the directors. On that point again, there is the difficulty that the complainant withdrew the allegation that the respondent had acted with a desire to accommodate the managing agency and the directors in regard to their concealing the payment of the commission. Speaking for myself, I am inclined to think that in a case of professional misconduct charged against an accountant or a lawyer, the fact that the complainant withdraws a particular allegation cannot always be decisive or a reason for not pursuing an enquiry, for the object of such proceedings is to test the fitness of the person concerned, in the public interest, to exercise his profession. The fact, however, remains in the present case that not only was the allegation withdrawn, but there has also been no further enquiry and, therefore, we have no right to assume that what was alleged against the respondent actually happened. It is in view of the nature of the charges framed that we find it difficult to take any action in the matter. Mr. Meyer himself frankly conceded that since the allegation of deliberate accommodation of the directors and the managing agents in the matter of concealing the payment of the sell ..... X X X X Extracts X X X X X X X X Extracts X X X X
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