REGISTRAR OF COMPANIES Vs. P ARUNAJATAI

JUDGEMENT

(1.) THIS is a reference under Section 21 of the Chartered Accountants Act, 1949 by the Council of the Institute of Chartered Accountants, which found the respondent guilty of professional misconduct, namely, gross negligence in the conduct of professional duties. The respondent is a chartered accountant at Madras who commenced practising as an auditor in the year 1931. After a few years of practice he left the profession and took up war service. That was during the years 1944 to 1946. On being discharged from the service he was employed in one of the several of the companies promoted by the late Dr. Alagappa Chettiar a prominent businessman and a great philanthropist of his time. But the respondent did not continue there for any length of time; he reverted to his profession as auditor in 1951. It is stated on his behalf that he has not been very successful in the profession either. His previous association with Dr. Alagappa Chettiar presumably secured for him a place as an auditor in the Alagappa Textiles (Cochin) Ltd. , for the years 1954, 1955 and 1956. Alagappa Textiles (Cochin) Ltd. was registered on 23-11-1943. The respondent does not appear to have been connected with it in any way till he was actually appointed as auditor of the company for the year 1954. Till then audit was conducted by other auditors. Audit for the years 1954, 1955 and 1956 of Alagappa Textiles (Cochin) Ltd. , was completed by the respondent on 26-9-1955. 5-11-1955 and 25-8-1957 respectively; he appended to the balance sheets of these years a clean certificate in the usual form, namely, that he had examined the balance sheet and obtained all information and explanations required and that in his opinion the balance sheet and profit and loss accounts were drawn up in conformity with the law and that the balance sheet exhibited a true and correct view of the state of the company's affairs and that the books of account had been kept by the company as required by the Indian companies Act. All was however not well with the Alagappa Textiles (Cochin) Ltd. Several of the financial transactions and those involving large amounts were closely inter-linked with several other companies promoted by the late Dr. Alagappa Chettiar whose death in April 1957 brought about repurcussion. The financial condition of Alagappa Textiles (Cochin) Ltd. was apparently in a mess and in September 1958 the Central Government appointed an Inspector to investigate the affairs of the company. The Inspector submitted his report in the following year and it disclosed Inter alia that the respondent did not carry out a proper audit after due verification of assets and liabilities and that the balance sheets and certificates appended thereto did not contain the necessary information. The registrar of Companies, Kerala State, thereupon laid a complaint to the Council of institute of Chartered Accountants, charging the respondent with professional misconduct. On the basis of the several instances of remissness in the performance of his duties, eight charges were framed against the respondent by the Council of Chartered Accountants; but the former denied all of them. An enquiry was then conducted by the Disciplinary Committee of the Institute of chartered Accountants. It submitted its Report, which was accepted by the Council of the Institute, that the respondent was guilty of six out of the eight charges laid against him holding that he was guilty of gross negligence in the conduct of his professional duties in that he did not carry out a proper and complete audit after making a proper verification of the assets and liabilities.

(2.) IT must, however, be pointed out at the outset that we are not concerned in the present case whether the persons in management of the company were guilty of any malpractice in relation to the transactions entered into by them. There is nothing to show on the materials placed before us (and indeed this has been conceded) that the respondent was at any time aware of the somewhat questionable financial dealings on behalf of the company by those in management. The only charge against the auditor is that he was guilty of gross negligence in the discharge of his duties as auditor in having appended an unqualified and clean report to the balance sheet for the three years in question. The Disciplinary committee of the Council in a carefully prepared report has dealt with the several charges laid against the respondent and Mr. Swaminathan who appears on his behalf did not contest the propriety of the conclusion arrived at by the Committee. But learned counsel has contended that the findings arrived at by the Disciplinary committee as accepted by the Council did not reveal any moral turpitude on the part of the respondent but at its worst the case was one of inefficiency on the part of the auditor which does not merit any severe punishment. It is, therefore, necessary to examine briefly the charges which have been held to be proved against the respondent.

(3.) THE first charge relates to the balance sheet of the year 1955. A sum of Rs. 11,90,081-5-7 was written off in the profit and loss account of the company for the year ended 31st December 1956. The actual resolution of the Board of directors writing off the amount in question was passed after the close of the year, on 25th May, 1957. The sum in question consists of six items, namely: (1) Rupees 10,000 due from Indo-Agencies; (2) Rs. 75000 due from alagappa Estates Ltd. , (3) Rs. 22,162-0-9 due from Umayal Weaving establishment Ltd. , (4) Rs. 57,062-14-7 due from Vijayakumar Trading corporation; (5) Rs. 6,18,890-15-4 due from Alagappa Corporation Ltd. (in liquidation) and (5) Rs. 40,6958-6-11 due from Ramal and Company limited, managing agents of Alagapoa Textiles Limited. It is not disputed that the late Dr. Alagappa Chettiar was the promoter and the moving spirit in all the debtor companies aforesaid and that he had the real and controlling voice therein.