TMI Blog2016 (12) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... ting shares. (5) Contribution of ₹ 2,25,00,000/- as promoters contribution by Ritesh Exports was not examined, similarly routing of ₹ 22,00,000/- through M/s Pratha Investments (owned by the wife of the respondent and being managed by the respondent himself) to the promoters Sri Deepak Agarwal and Sri Ritesh Agarwal, who allegedly contributed ₹ 10,50,000/- each was also not examined. Thus, the said investment of Rs . 22,00,000/- by Sri Deepak Agarwal and Sri Ritesh Agarwal was only a book entry without actual receipt of consideration. The companys money was divered and was brought back as contribution by the promoters. The professional misconduct attributed to the respondent is grave and serious in nature which affects public confidence, and their faith in the integrity and impartiality of the Chartered Accountants and the Institute of which they are members. A false certification by the respondent has enabled the promoters of the company to squander public money, on inducing the general public to subscribe to the share capital of the company. Taking a lenient view, or exonerating such professionals, would encourage others to indulge in similar acts, and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e promoters contribution had been received by the company. The certificate of the Auditor is as under: We the statutory Auditors of Ritesh Polysters Limited, Secunderabad, hereby certify and confirm that as per the books of accounts maintained by the company, the company has received ₹ 225 lakhs (Rupees Two crores twenty five lakhs only) as share application money towards 15,00,000/- equity shares of ₹ 10/- each at a premium of ₹ 5/- per share from the promoters, directors, their friends and associates as on 9th June 1995. The details of promotes contribution of ₹ 225 lakhs (Rupees two hundered and twenty five lakhs only), as per the books of accounts maintained by the company is as follows: Name of the Share Holder No. of shares Amount Ritesh Exports Ltd. 6,00,000 90,00,000 Surender Kumar Agarwal 5,22,500 78,37,500 Roop Rekha Agarwal 2,37,500 35,62,500 Deepak Agarwal 70,000 10,50,000 Ritesh Agarwal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above said letter from SEBI, the Institute addressed letter dated 28.07.2005 to the respondent alleging that the amount received towards contribution was only ₹ 35 lakhs, but the respondent had certified that ₹ 225 lakhs was received by the company towards promoters contribution, and the cheques issued against the balance amount had bounced. However, shares for ₹ 225 lakhs were allotted to the promoters by the company. The respondent was called upon to disclose the name(s) of the member (s), answerable to the charge of misconduct, as per Regulation 12 (6) of the Chartered Accounts Regulations, 1988 (for short, hereinafter referred to as Regulations), and to forward the letter to him/them with a request to submit his/their written statement (s) in his/their defence, in triplicate, as required under Regulation 12(7) read with Regulation 13 of the Regulations specifying the manner in which they had to submit their defence. In response to the letter dated 28.07.2005 of the Institute, the respondent submitted his reply dated 05.08.2005 admitting that he, as the Proprietor of M/s M.Gang Company, had issued the certificate dated 09.06.1995 stating that the promoter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Council of the Institute accepted the findings of the disciplinary committee and recommended that this Court impose the punishment of removal of his name from the Register of Members, for a period of 3 years, on the respondent, after following the procedure prescribed under the Act and the Regulations. During hearing, Sri C.V. Rajeeva Reddy, learned counsel for the Institute, while stating the facts of the case, contended that the misconduct attributed against the respondent is serious in nature, and is against public interest, since M/s Ritesh Polyster Limited had invited applications, for allotment of shares to the public, for several crores of rupees, but only ₹ 35,00,000/- was received by the Company towards promoters contribution, as against ₹ 225 lakhs. Though the promoters did not contribute the amount, they were allotted shares for ₹ 225 Lakhs. The certificate issued by the respondent made the public believe that the promoters had contributed ₹ 225 lakhs to the share capital of the company, and the respondent was liable for a severe punishment. Learned Counsel has placed reliance on several judgments, which we will discuss at the appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot guilty. The points which arise for consideration are as follows: (1) Whether in a reference made to this Court, and in exercise of the powers conferred by Section 21 (5) and (6) of the Chartered Accountants Act, 1949, the High Court can re- appreciate the evidence on record, and re-examine the conclusions arrived at by the Institute? (2) Whether the Institute has violated Regulations 16(2) and 16(5) of the Regulations and, if so, whether the entire proceedings are vitiated? (3) Whether these disciplinary proceedings are quasi- judicial and quasi criminal in nature and, if so, what is the standard of proof applicable to such disciplinary proceedings against a professional? (4) Whether the act attributed to the respondent, of having issued a certificate confirming receipt of contribution of ₹ 225.00 lakhs from the promoters, amounts to gross negligence; if so, whether such an act would fall within the ambit of Clause (7) of Part 1 of the Second Schedule read with Sections 21 and 22 of the Chartered Accountants Act, 1949? (5) Whether the alleged act committed by the respondent is wilful and deliberate or amounts to culpable negligence constituting gross negl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendations thereon. Section 21(6) of the Act: On receipt of any case under sub- section (4) or sub-section (5), the High Court shall fix a date for the hearing of the case and shall cause notice of the date so fixed to be given to the member of the Institute concerned, the Council and to the Central Government, and shall afford such member, the Council and the Central Government an opportunity of being heard, and may thereafter make any of the following orders, namely:- (a) direct that the proceedings be filed, or dismiss the complaint, as the case may be; (b) reprimand the member; (c) remove him from membership of the Institute either permanently or for such period as the High Court thinks fit; (d) refer the case to the Council for further inquiry and report. The power conferred on this Court, by Section 21(6) of the Act, enables it to direct the proceedings to be filed, or to dismiss the complaint, as the case may be; reprimand the member; remove him from the membership of the Institute either permanently or for such period as it thinks fit; or to refer the case to the Council for further inquiry and report. The power conferred on this Court, in dealing with a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act, it should then refer the matter to this Court for a penalty to be imposed. On a reference made by the Institute, this Court can exercise the power conferred under Section 21(6) of the Act. In such a reference, the jurisdiction and powers of the High Court, while dealing with cases under sub-sections (2) (3) and (4) of Section 21 of the Act, are limited. The Calcutta High Court took the view that, even if a wider construction is put on the material words used in Sections 21 and 22, they would not be justified in passing any orders against the respondent in the proceedings, because the finding which had been referred to the High Court was only one, and that was that the respondent was guilty of professional misconduct in the narrow sense of the term. In other words, the High Court was of the view that, if a wider construction is placed on the material words of the Section, it would be making out a new case on the reference, and the Court would not be justified in adopting such a course. The Apex Court, in B. Mukherjea (referred supra), held that the view of the Calcutta High Court was not well- founded. Section 21(2) lays down the procedure to be followed by the High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reafter, submits a report of the result of the inquiry to the Council. The Disciplinary Committee is merely a Committee of the Institute, with its functions specifically limited by the provisions of the Act. As a subordinate body, it reports to the Council, the governing body. The report will contain a statement of the allegations, the defence entered by the member, a record of evidence and the conclusions upon that material. The conclusions are the conclusions of the Committee. They are only tentative. They cannot be regarded as 'findings'. The Disciplinary Committee is not vested by the Act with power to render any findings. It is the Council which is empowered to find whether the member is guilty of misconduct. Both Section 21(2) and Section 21(3) are clear as to that. If, on receipt of the report, the Council finds that the member is not guilty of misconduct, Section 21(2) requires it to record its finding accordingly, and to direct that the proceedings shall be filed or the complaint shall be dismissed. If, on the other hand, the Council finds that the member is guilty of misconduct, Section 21(3) requires it to record a finding accordingly, and thereafter to proceed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the report of the Disciplinary Committee. It provided an in-built mechanism under which the Council itself was required to examine the case of the professional or other misconduct of a member of the Institute or associate member, taking the aid of the report submitted by the Disciplinary Committee, the evidence adduced before the Committee, and the explanation offered by the delinquent member. The entire material constitutes the record of the proceeding before the Council to reach a finding whether or not the delinquent member had committed professional or other misconduct. Otherwise, the primacy accorded to the report of the Disciplinary Committee would attain finality, denuding the Council of the power of discipline over the members of the Institute, and that would have a deleterious effect on the maintenance of discipline among the members or associate members of the Institute. The Division Bench of this Court in Council of the Institute of Chartered Accountants of India v. G.Pattabhi Rama Charya held that, in exercise of the jurisdiction under Section 21 of the Act, the High Court would take action against the Member only if it accepts the finding recorded by the Counci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court can come to any independent conclusion based on the material notwithstanding the findings recorded by the Council and the recommendations made for imposing penalty or punishment. In The Council of the Institute of Chartered Accountants of India v. Shri Dilip Kumar De the High Court of Calcutta, while deciding the case of misconduct of a Chartered Accountant, considered the scope of a reference, and the powers vested in the Court in a reference made to it. The Calcutta High Court concluded that the powers of the High Court are wider in view of the scheme for disposal of cases relating to misconduct, and it was apparent that, even in cases of misconduct of a lesser degree specified in the First Schedule to the Act, once a member was found guilty by the Council, based on an enquiry by the Disciplinary Committee, the law did not authorize the Council to totally exonerate such a person, and at least a penalty in the form of reprimand must be imposed as provided in Sub-section (4) of Section 21 of the Act. If the member is found to be not guilty on enquiry, even in cases of misconduct specified in the Second Schedule to the Act, the law did not require approval of such finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers extending to removal from membership of the institute either permanently or for a specified period. It may direct the proceedings to be filed or dismiss the complaint. This enables the Court to examine the nature of misconduct alleged, and the facts and circumstances brought on record in connection therewith against the delinquent. There is a serious responsibility on the Court, a duty to itself, to the profession, and to the whole of the community to be careful not to accredit any person as worthy of the public confidence who cannot establish his right to that credential. However, when an important statutory body like the Council finds a member of the institute guilty of misconduct, and forwards the case to the High Court with its recommendation under Section 21(5) of the Act, its findings, based on the material on record, would ordinarily not be disturbed unless found to be unjust, unwarranted or contrary to law. The Gujarat High Court further held that the Council is one such representative body charged with the responsibility of ensuring discipline and ethical conduct amongst its members, and to impose appropriate punishment on members who are found to have indulged in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute, contended that, in the absence of a prescribed procedure to be followed by the disciplinary committee, the Institute can adopt its own procedure and, accordingly, they followed a fair procedure, and recorded their findings mostly based on the admissions made by the respondent in the questionnaire. Therefore, on this ground, the disciplinary proceedings cannot be set at naught. It is apposite to extract Regulation Nos. 16(2) and (5) for better appreciation. Regulation 16: (1).. (2) Where the finding of the Disciplinary Committee is that the respondent is guilty of professional and or other misconduct, a copy of the report of the Disciplinary Committee shall be furnished to the respondent and he shall be given the opportunity of making a representation in writing to the Council. (3).. (4).. (5) The finding of the Council shall be communicated to the complainant and the respondent. Clause (2) of Regulation 16 obligated the Disciplinary Committee to furnish a copy of its report to the respondent to enable him to submit a representation in writing to the Council. Though the learned counsel for the respondent pointed out non-compliance, he did not bring any mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity was given to the respondent to explain the circumstances in which the certificate was issued by him. During questioning, the President of the Committee put a specific question What do you want to say in your defence?, then the respondent gave the following answer: I gave a certificate on 9th June, 1995 and on that date the cheques were deposited and because the cheques could not cleared on that day and subsequently I appeared before the SEBI they told me that you should have subsequently withdrawn the certificate if you had come to know that the cheques are not cleared. I told them that is the work of Merchant Bank and they are monitoring the day to day movement of the funds. I cannot go and monitor the day to day movement of the funds in their Company and based on their track record whatever cheques they have earlier deposited got cleared that is only one time that ₹ 37 lacs cheques not cleared. That was the only plea which I took before the SEBI and I also taking before the Disciplinary Committee. Similarly several questions were put to the respondent who answered all the questions put to him. As questions were put to him, nothing prevented the respondent from exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to indicate that one subject resembles another, with which it is compared, in certain characteristics, but there are intrinsic and material differences between them. During a civil or equity trial, a court may act as if it were a criminal case to punish a person for contempt of court. In some cases, a court may impose asset forfeiture or another penalty. For example, a court has the right to punish actions or omissions of a party in a child support case as if they were a criminal, penalizing the parent with a sentence of jail term. Quasi-criminal proceedings include a wide variety of matters, including prosecution for a violation of the law or ordinance, psychiatric matters, motor vehicle law, status offences, family court actions, and equity proceedings such as a Writ. In criminal cases, generally, Courts try cases following the prescribed procedure, and impose punishment either of a sentence or a fine or both, but in disciplinary proceedings, more particularly under the Act, the punishment which may be imposed is not a jail term or fine like any other criminal proceeding. The punishment which may be imposed under Section 21 of the Act, if the respondent is found guilty of mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions complaint , guilty of any professional or other misconduct , Disciplinary Committee , inquiry and the nature of the punishment provided to be imposed by the Council or the High Court as the case may be against a member who is found to be guilty of any professional or other misconduct would indicate and leave no doubt in our minds that the proceeding initiated against a member in inquiries relating to misconduct is akin to though not in fact a criminal prosecution. At every stage, the statute provides for a reasonable opportunity of being heard to the delinquent member of the Institute against whom disciplinary proceedings have been initiated. Principles of natural justice must be followed by the Inquiry Authority, the Council as well as the High Court and the evidence has to be recorded by the Disciplinary Committee. The Council and the Disciplinary Committee are empowered with the same powers as are vested in the Civil Court for summoning and enforcing the attendance of any person and examining him on oath, the discovery and production of any document, and receiving evidence on affidavit. The member against whom a complaint is lodged or a charge is framed is permitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge of professional misconduct against Advocate under the Advocates Act. It is not in dispute that, even in disciplinary proceedings, there should be some evidence to prove the charge. Although the charges in a departmental proceedings are not required to be proved like a criminal trial, i.e., beyond reasonable doubt, the enquiry officer should, after analysing the evidence on record, determine whether, on the preponderance of probabilities, the charge is proved. While doing so, he cannot take into consideration irrelevant facts, and refuse to consider relevant facts, and shift the burden of proof on to the charged officer. The Enquiry Officer cannot also reject relevant testimony of witnesses on the basis of surmises and conjectures. A charge in a departmental proceedings, as held in M.V.Bijlani v. Union of India AIR 2006 SC 3475, is not required to be proved beyond reasonable doubt like in a criminal trial, but should be proved on a preponderance of probabilities. In A, pleader v. Judges of the High Court of Madras AIR 1930 PC 144 the Privy Council held that the evidence should be carefully taken and judged according to the ordinary standards of proof. A Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Enclosed), the bank book showing receipt of the payments (in the form of Cheques deposited) into the State Bank of Mysore State Bank of Mysore And the bank deposit slip counterfoils duly bearing the bank acknowledgments of the cheques deposited. As alleged by SEBI as to why we have not verified the Bank Statement Regarding Realization of the cheques we once again reiterate that as upto 9th June 1995 no cheques of the promoters had bounced and hence we had no reason to believe that any cheques issued by the promoters could bounce. As you will be aware that the certificate issued by us clearly states as under:- We the Statutory Auditors of Ritesh Polyesters Limited, Secunderabad, hereby certify and confirm that as per books of Accounts maintained by the Company the Company has received ₹ 2,25,00,00 as share application money from promoters, directors, their friends and Associates as on 9th June 1995. Hence it has been wrongly alleged by SEBI that we have given a false certificate and aided and abetted the Promoters in fraudulent activities by giving a false certificate. It has been wrongly alleged by SEBI that Promoters Contribution only ₹ 35 Lakhs was receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u had come to know that the cheques are not cleared. I told them that is the work of Merchant Bank and they are monitoring the day to day movement of the funds. I cannot go and monitor the day to day movement of the funds in their Company and based on their track record whatever cheques they have earlier deposited got cleared that is only one time that ₹ 37 lacs cheques not cleared. That was the only plea which I took before the SEBI and I also taking before the Disciplinary Committee. Both during investigation by SEBI, and in the enquiry by the Committee, there are clear and unequivocal admissions by the respondent regarding his professional lapse in issuing a certificate certifying that the Promoters had contributed ₹ 2,25,00,000/- for allotment of shares, and to have confirmed receipt of money towards 15,00,000 equity shares of ₹ 10/- each at a premium of ₹ 5/- per share. He also admitted to have issued a certificate without qualifying it as subject to realisation of the Cheques deposited. These admissions suffice to show the lapses on the part of the respondent. Though the amount received towards the capital contribution of the promoters was only & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 5/- per share from the promoters, directors, their friends and associates as on 9th June 1995. The respondent certified that an amount of Rs . 2,25,00,000/- was received by the company towards promoters contribution, though the amount received towards promoters contribution was only ₹ 35,00,000/- and the cheques issued against the balance amount had bounced. However, shares worth ₹ 2,25,00,000/- was allotted to the promoters by the company. On being asked by SEBI of the basis on which he had given the certificate regarding receipt of promoters contribution in full, the respondent replied that he had verified the bank book maintained by the Company, wherein they had shown receipt of the above cheques, he did not expect that the cheques issued by the promoters would bounce, and he had issued the certificate keeping in view the track record of the promoters. Admissions are of two types, one is judicial admission and another is evidentiary admission. Admissions are not conclusive proof, but the admissions estop the person who made such admission. When a judicial admission is made in the pleadings or in any document regarding a particular fact in issue, such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be in writing; and the admission is more satisfactory if a body entrusted with statutory functions takes necessary precautions when its decision is mainly to depend upon such admission. If the above principle, laid down by the Supreme Court, is applied to the facts of the present case, the admissions made by the respondent, which are extracted in the earlier paragraphs, suffice to conclude that there is a clear professional lapse on the respondents part as he failed to issue a qualified certificate that receipt of the amount was subject to realisation of the cheques. In view of the law declared by the Supreme Court in the decisions referred supra, we have no hesitation to hold that admission is the best piece of evidence since the respondent failed to explain under what circumstances such admission was made. Accordingly, the point is held in favour of the Institute, and against the respondent. POINT Nos: 4, 5 and 7: The genesis, for the Institute to conduct an enquiry against the respondent, is the investigation report of SEBI in relation to the certificate attached to the prospectus, wherein the respondent had certified that the promoters had contributed ₹ 225 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,000 shares were reserved for promoters, their relatives and friends on a firm allotment basis at ₹ 10/- per share with a premium of ₹ 5/- per share; the total contribution, by the promoters, was Rs . 2,25,00,000/- which was required to be credited before the opening of public issue; and the respondent had certified receipt of the same. SEBI addressed a letter dated 28.06.2000 to the Company to furnish details of the promoters contribution. In response thereto, vide letter dated 05.07.2000, the Company submitted details of the promoters contribution as follows: Name of the Promoter Cheque No. Contribution Date Drawn on Ritesh Exports Ltd 441810 400000 8/6/95 State Bank of Patiala 441811 450000 8/6/95 State Bank of Patiala 441812 450000 8/6/95 State Bank of Patiala 441813 450000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 508991 390000 9/6/95 State Bank of Patiala 508992 390000 9/6/95 State Bank of Patiala 508993 390000 9/6/95 State Bank of Patiala 508994 390000 9/6/95 State Bank of Patiala 508995 450000 9/6/95 State Bank of Patiala 508982 200000 9/6/95 State Bank of Patiala 508983 550000 9/6/95 State Bank of Patiala Smt. Roop Rekha Agarwal 417280 2739500 9/6/95 State Bank of Patiala Sh.Ritesh Agarwal 819066 150000 9/6/95 State Bank of Patiala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above details from State Bank of Patiala, SEBI again addressed a letter to Company to clarify how the promoters had contributed money for allotment of 15,00,000 shares. By letter dated 17.06.2002, the Company submitted that three cheques worth ₹ 71,79,500/- were returned unpaid for certain reasons, but the company received the amount thereafter on different dates during 1995-96. From the details furnished by Company, it came to light that cheques worth ₹ 49,90,000/-, issued by Sh.Surendra Agarwal towards promoters contribution, had bounced. Against this an amount of ₹ 44,65,000/- was stated to have been brought on different dates between 14.06.1995 and 26.03.1996. Similarly, Ms.Roop Rekha Agarwal had issued a cheque for ₹ 27,39,500/- towards promoters contribution, which was also dishonoured by the payee bank. Against this an amount of Rs .27,67,750/- was stated to have been brought on different dates between 02.08.1995 and 31.01.1996. Thus, the Company is stated to have received ₹ 31,50,000/- as investments before 01.06.1995 from Ritesh Exports Limited, ₹ 18,97,500/- from Sh.Surendra Kumar Agarwal and ₹ 8,23,000/- from Smt.Roop Rekha Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Deepak Agarwal and Shri Ritesh Agarwal gave this money back to the Company as promoters contribution. The payments made by the promoters were only book entries, and no amount was actually paid by the promoters towards their contribution to the capital of the Company. SEBI addressed a letter to Shri Lohia to submit the bank statement of Shri Surendra Kumar Agarwal to find out the truth regarding the alleged contribution made by Shri Surendra Kumar Agarwal, but to no avail. The investigation by SEBI disclosed that only ₹ 22,00,000/- was received from Ritesh Exports and Rs . 13,00,000/- from Shri Surendra Kumar Agarwal, as promoters contribution, one day prior to the issue, instead of the ₹ 2,25,00,000/- shown to have been received by the company in the certificate issued by the respondent. It is evident that the company had allotted shares worth ₹ 2,25,00,000/- to the promoters when it has actually received only ₹ 35,00,000/-. In the prospectus of the company, it is specifically mentioned that the amount mentioned in D above will be brought in by the promoters before the date of opening of the public issue, and the same shall be certified with a cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04 and 05.08.2005 that it was merely a professional lapse on his part in not qualifying the certificate with the caption cheques are subject to realisation. While admitting his professional lapse in issuing such a certificate, the respondent contended that he did not indulge in any fraudulent transactions, and requested that his professional lapse be ignored, and all further proceedings be dropped. In this context it is necessary to note that SEBI issued a circular directing companies to annex a certificate, either from a Chartered Accountant or a Company Secretary in practice, to the effect that the promoters contribution, including premium, had been brought in its entirety, in advance before the public issue opened; the certificate should be forwarded to SEBI at least one day prior to the date of opening of the issue; and the certificate should be accompanied by a list of names and addresses of friends, relatives and associates who have contributed to the promoters quota, along with the amount of subscription made by each of them. It is in compliance with the circular instructions issued by SEBI, that the respondent issued the certificate certifying that the promoters contribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t figures fell for consideration, and it was held that the auditors were liable to the company towards dividends, cost of recovering the excess tax, and any tax not recovered. London General Bank (No. 2), In re [1895] 2 Ch. 673 a similar question regarding the Auditors liability came up for consideration, and the Court concluded that, although it was not the duty of the Auditors of a company appointed under the Companies Act, 1879 to consider whether its business is prudently or imprudently conducted, it is their duty to consider and report to the shareholders whether the balance-sheet exhibits a correct view of the state of the companys affairs, and the true financial position of the company at the time of the audit. They must ascertain this by examining the books of the company, and must take reasonable care that what they certify as to the companys financial position is true. And except in very special cases it is their duty to place before the shareholders the necessary information as to the true financial position of the company, and not merely to indicate the means of acquiring it. Similarly In Re Kingston Cotton Mills Co. (No. 2), In re [1896] 2 Ch. 279, the Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which had appointed him to perform the auditing. The contributors to the Provident Fund had a beneficial interest in the Fund and the primary object of auditing the Fund was to appraise them of the true financial position of the accounts and investments made from time to time. Respondent No. 1 therefore owed a duty to the contributors to the Provident Fund for making a true report to them of the financial position. In other words, the auditing was intended for protection of the beneficiaries and the Auditor was expected to examine the accounts maintained by the trustees with a view to inform the beneficiaries of the true financial position. The Auditor is, in such a case, under a clear duty towards the beneficiaries to probe into the transactions and to report on their true character. In our opinion, the legal position of the Auditor in the present case is similar to that of the Auditor under the Indian Companies Act, 1956. In such a case the audit is intended for the protection of the shareholders and the Auditor is expected to examine the accounts maintained by the Directors with a view to inform the shareholders of the true financial position of the Company. The Directors occ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... large, as it is largely on the basis of this certificate that the general public subscribe to the shares of the company. Reckless certification by an Auditor, which has resulted in the public being misled into subscribing to the shares of the company in the public issue, would undoubtedly amount to gross negligence. Large sections of society rely on the certification by the Chartered Accountants for taking many vital decisions. It is imperative that utmost care and caution is exercised in issuing such certificates, and the objectivity, integrity, reliability and credibility of the information therein is ensured. Of late, several instances have come to light where, due to the erroneous/ambiguous advice tendered by Chartered Accountants, borrowal accounts have had to face quick mortality resulting in huge losses for banks and financial institutions. To ensure public faith and protect gullible small investors from being cheated of their life savings, the Institute should ensure that its members possess competence of a high order, their character is above board, and their integrity beyond reproach. Chartered Accountants are responsible to the public for their actions, as heavy reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per Section 65 of the Companies Act, 1956, a statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included inter alia in the prospectus itself, or is contained in any report or memorandum appearing on the face thereof or by reference incorporated therein or issued therewith and where the omission from a prospectus of any matter is calculated to mislead, the prospectus shall be deemed, in respect of such omission, to be a prospectus in which an untrue statement is included. The liability accrues where any person subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of an untrue statement included therein. A representation in the prospectus regarding contribution of the promoters, if found untrue, may well result in the general public being mislead into seeking allotment shares based on such misrepresentation. The certification by the statutory auditor has resulted in the general public, who reposed faith on his statement, being mislead into subscribing to the shares of the company placing faith on such a certificate. The f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way the power conferred or duty cast on the Council under sub-section (1) of Section 21 to inquire into the conduct of any member of the Institute under any other circumstances. Thus, the definition of professional misconduct is wider. The Second Schedule, read with Section 21(5) and 22 of the Act, prescribes several acts which would fall within the ambit of professional misconduct. They are: (1) (2) (3) (4) . (5) fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary to make the financial statement not misleading; (6) fails to report a material mis-statement known to him to appear in a financial statement with which he is concerned in a professional capacity; (7) is grossly negligent in the conduct of his professional duties; (8) fails to obtain sufficient information to warrant the expression of an opinion or his exceptions are sufficiently material to negate the expression of an opinion; (9) (10) Part II of the Second Schedule specifically refers to professional misconduct, in relation to members of the Institute, generally requiring action by a High Court. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough he was required to verify receipt of payment for allotment of shares to the promoters, the respondent disowned his responsibility, and blindly certified and confirmed receipt of ₹ 2,25,00,000/- towards promoters contribution. The respondent, as a statutory Auditor of the company, must be presumed to aware of his obligations to the general public who, relying on his certification, had invested in the share capital of the company despite which he issued the certificate based on the alleged reputation of the promoters, a factor wholly irrelevant for issuing such a certificate. Sri C.V. Rajeeva Reddy, learned counsel for the Institute, would contend that issue of such certificate directly attracts Clause (7) of Part I of the Second Schedule i.e. gross negligence of a member of the Institute in the conduct of his professional duties. He relied on several judgments of various High Courts, and the Supreme Court, in Deputy Secretary to the Government of India, Ministry of Finance (Department of Economic affairs), v. S.N.Das Gupta AIR 1956 Cal. 414; Council of the Institute of Chartered Accountants of India v. V.I.Oommen AIR 1996 AP 254; Council of the Institute of Chartered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof.. But it is still true that most courts consider that gross negligence falls short of a reckless disregard of the consequences, and differs from ordinary negligence only in degree, and not in kind. Similarly, in Law Lexicon by P.Ramanatha Aiyar the word gross negligence is defined as follows: Gross negligence, sometimes called wilful blindness is the same thing as negligence, with the additional of a vituperative epithet. The term gross neglect means and involves a failure on the part of a person to take such reasonable precautions against the risk of an innocent person being deceived in the circumstances of the particular case. Gross negligence means some culpable default, not arising merely from want of foresight or mistake of judgment. Negligence marked by total or nearly total disregard for the rights of others and by total or nearly total indifference to the consequences of an act. For an act of negligence to constitute gross negligence, it must be in reckless disregard of a legal duty and of the consequences to another party, or wilful or voluntary or wanton omission. Negligence is the failure to take reasonable care as an ordinary prudent man, depen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e inflation in the price, but had no notice of the dishonesty of Meiters report. He committed a great fraud, but how could the directors find that out? He had a good position in the city and had been abroad. In March,Hoffman was sent out, with a marked prospectus to report critically on the property, and in April he cabled very satisfactory and his letter, received on May 31,said get transfer through, and the board could not then repudiate or refuse to make further payments. Where a company is formed, as here, to carry out a particular contract, and they carry it out without knowledge of any wrong, they are not guilty of negligence. The principle of Overend Gurney Co. v. Gibb [1872] LR 5 and New Mashonaland Exploration Co., In re [1892] 3 Ch. 577 applies, and the 1st case shows that the company in this case had notice from the prospectus of the increase in price. The Directors had acted based only on Meiters report, they had given the statement in the prospectus inviting subscription of capital to the company. Therefore, no knowledge was attributable to the Directors, and they were found not guilty. In the same judgment the Chancery Division observed that the Director could re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tern Railway Company (referred supra), is negligence which is far beyond any negligence or culpable negligence. In the present case the respondent, as the statutory Auditor, was under an obligation to ascertain actual receipt of cash for allotment of shares and, instead, he issued the certificate without qualifying that receipt of ₹ 2,25,00,000/- was by way of cheques and was subject to realisation. The respondent stated that he had issued the certificate without any qualification based on the track record and reputation of the promoters, though he was well aware that the certificate, was the basis on which contribution of capital was invited from the public at large. Such callousness of the respondent, in issuing the certificate, would undoubtedly amount to gross negligence or culpable negligence since the respondent as an Auditor could not be unaware of the consequences of such a mis-statement in the certificate issued by him. Sri Ashok Anand Kumar, Learned counsel for the respondent, would contend that the act of the respondent, at best, amounts to negligence, but not gross negligence. He would draw the attention of this court to Institute of Chartered Financial Analyst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supports the contention urged on behalf of the Institute. Sri Ashok Anand Kumar, learned counsel for the respondent, contends that failure to rise to the expected level of efficiency, in discharging professional duties, cannot be regarded as misconduct, treating such failure as gross negligence in the discharge of duty; at best, it is merely a failure of the respondent to qualify the certificate; in the facts of the present case, failure of the respondent to verify actual receipt of cash for allotment of shares is merely a failure to rise to the expected level of efficiency in the discharge of his professional duties; it does not amount to gross negligence; and is merely a bonafide mistake or error. In support of his contention, he placed reliance on the judgment of the Calcutta High Court in Council of the Institute of Chartered Accountants of India v. Somnath Basu AIR 2007 Cal. 29. In the said judgment, the Calcutta High Court held that failure to rise to the expected level of efficiency in discharging professional duties cannot be regarded as misconduct treating such failure as a negligent act in the conduct of professional duties. It is not the case of the Institute that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d sanctity is attached to certification done by a Chartered Accountant. Hallmark of the profession is the expertise possessed by its members, in the matters of accountancy and auditing amongst others. Correctness is a matter of rule in a certificate issued by a Chartered Accountant. He is supposed to have tested correctness of the figures certified. If he puts his signature, without proper verification, in any certificate, it certainly is a serious matter. Such conduct does not befit a Chartered Accountant, and is unbecoming of him. In such a case, he fails to do what is the minimum required to be done by him. He does something in the pursuit of his profession which is not only unethical, but also disgraceful or dishonourable. In B. Ram Goel (supra) the Delhi High Court defined the expression professional misconduct as follows: Professional misconduct has been defined in Section 22 of the Act. Intendment and object of the Act is to maintain standard of the profession at a high level, and consequently a code of conduct has been prescribed. Misconduct implies failure to act honestly and reasonably either according to the ordinary and natural standard, or according to the stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mproper conduct. In usual parlance, misconduct means a transgression of some established and definite rule of action, where no discretion if left, except what necessity may demand and carelessness, negligence and unskillfulness are transgressions of some established, but indefinite, rule of action, where some discretion is necessarily left to the actor. Misconduct is a violation of definite law; carelessness or abuse of discretion under an indefinite law. Misconduct is a forbidden act; carelessness, a forbidden quality of an act, and is necessarily indefinite. Misconduct in office may be defined as unlawful behaviour or neglect by a public officer, by which the rights of a party have been affected. In the aforesaid decision, the Supreme Court held that the conduct of a constable possessing a service revolver, found to be heavily drunk while roaming in the market on duty, and to have abused the medical officer at the time of medical examination, would amount to conduct unbecoming of a constable, and that meant that he was unsuitable to discharge his duties as a police constable. In S.N.Das Gupta (referred supra) the Supreme Court, after considering the duties of an auditor, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to the affairs of the company which has come to his knowledge and which it is material for the shareholders to know; if an Auditor does not do what it is his duty to do, it is no defence for him to say in a disciplinary proceeding, started under the Chartered Accountants Act, that he had told the shareholders that he had not done it. The lapse is constituted by his failure to perform a duty without which an audit is meaningless and it is not excused by giving information of the omission to the share-holders. The reason is that the object of the Act is to ensure in public interest that those who practise the profession of Auditors shall perform, in their actual practice, at least the essential duties of an audit and shall bring to bear on their work attention to matters to which their duty requires them to pay attention, and the examination of accounts involves thorough and exhaustive testing of every account in the general ledger. If such negligence would cause no damage to anyone, such negligence cannot be termed as gross negligence within the definition of Section 22 of the Act. The law declared in the above judgment cannot be applied to the present facts of the case since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh for allotment of shares to the promoters worth ₹ 2,25,00,000/-, issued the certificate confirming receipt of such amount. Such an act of the respondent would amount to gross negligence as held by the Division Bench of the Calcutta High Court (referred supra). Sri Ashok Anand Kumar, learned counsel for the respondent, has drawn our attention to The Council of Institute of Chartered Accountants of India v. Shrui K.Venkatacharyulu (unreported judgment of this Court in C.A. Referred Case No.123 of 2000 dated 03.09.2014) wherein the Division Bench of this Court held that misconduct can be attributed to a Chartered Accountant mostly when he has resorted to certain acts knowing fully well that the same is contrary to law. An opinion formed by him, which ultimately turns out to be not correct, cannot be treated as an act of misconduct. The law laid down by the Division Bench of this Court is that, in order to find a person guilty of professional misconduct, he must resort to certain acts knowing fully well that the same is contrary to law. As discussed in the earlier paragraphs, the respondent issued the certificate without ascertaining whether the cheques would be honoured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional wrong doing or deliberate violation of a rule or standard of behaviour is nothing but transgression of a definite rule of action, which amounts to misconduct of a professional advocate. In Baldev Singh Gandhi v. State of Punjab (2002) 3 Supreme Court Cases 667 the Apex Court examined the scope of misconduct and held that misconduct has not been defined in the Act. The word misconduct is the antithesis of the word conduct. Thus, ordinarily, the expression misconduct means wrong or improper conduct, unlawful behaviour, misfeasance, wrong conduct and misdemeanour etc. There being different meanings of the definition of misconduct, the Court should consider the expression misconduct with reference to the subject and the context wherein the said expression occurs. Thus, from the principles laid down in the above judgment, misconduct has to be considered in the facts and circumstances of the case, and is not a principle of universal application. Coming back to the facts of the present case, it is evident that the allotment of shares of ₹ 2.25 crores to the promoters was fraudulent, and without receipt of contribution from them and, on the basis of the cheques issued by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares to the promoters worth ₹ 2,25,00,000/-, and the cheques issued by the promoters bounced later. (2) Respondent issued a certificate without qualifying that allotment of shares to the promoters was subject to realisation of cheques. (3) The respondent did not verify the individual bank accounts of the promoters to ascertain whether there was sufficient balance in their account to ensure that the cheques would be honoured, by the payee bank, on its presentation. (4) Respondent failed to verify actual receipt of cash while allotting shares. (5) Contribution of ₹ 2,25,00,000/- as promoters contribution by Ritesh Exports was not examined, similarly routing of ₹ 22,00,000/- through M/s Pratha Investments (owned by the wife of the respondent and being managed by the respondent himself) to the promoters Sri Deepak Agarwal and Sri Ritesh Agarwal, who allegedly contributed ₹ 10,50,000/- each was also not examined. Thus, the said investment of Rs . 22,00,000/- by Sri Deepak Agarwal and Sri Ritesh Agarwal was only a book entry without actual receipt of consideration. The companys money was divered and was brought back as contribution by the promoters. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chancery Division etc., and have held that issue of the certificate, confirming receipt of ₹ 2,25,00,000/- by the company towards promoters contribution just one day prior to opening of the public issue, without verifying actual receipt of consideration for such allotment of shares worth Rs . 2,25,00,000/- (15,00,000 shares), is in violation of the respondents professional duties as the Statutory Auditor of the company, and amounts to gross negligence and professional misconduct. Sri Ashok Anand Kumar, Learned Counsel for the respondent, would contend that principles of natural justice were not followed, and sufficient opportunity was not afforded to the respondent. We must express our inability to agree as we have perused the records and are satisfied that reasonable opportunity was afforded to the respondent, at every stage, strictly adhering to the procedural provions of the Statute and the Regulations. Sri Ashok Anand Kumar, Learned counsel for the respondent, would contend that the charges are vague, and do not afford any opportunity to the respondent to defend himself by filing an appropriate reply; and, on the strength of such vague charges, the respondent cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd this Court, while exercising power under Section 21(5) of the Act, should not take a lenient view against the statutory Auditor of the company who has indulged in a Corporate fraud to the detriment of the public at large. On the other hand, Sri Ashok Anand Kumar, Learned Counsel for the respondent, would submit that the incident took place in the year 1995, almost 21 years has since elapsed, and therefore a lenient view should be taken. The professional misconduct attributed to the respondent is grave and serious in nature which affects public confidence, and their faith in the integrity and impartiality of the Chartered Accountants and the Institute of which they are members. A false certification by the respondent has enabled the promoters of the company to squander public money, on inducing the general public to subscribe to the share capital of the company. Taking a lenient view, or exonerating such professionals, would encourage others to indulge in similar acts, and completely erode the faith of the general public in the impartiality and integrity of the members of the Institute, and bring the Institute itself into disrepute. The Council of the Institute has recommen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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