P M HEGDE Vs. STATE

JUDGEMENT

(1.) THIS case has been referred to us under the Chartered accountants Act, 1949. It arises out of a complaint dated 4th April, 1951, made by the Registrar of Companies, Bombay, against the respondent, a chartered accountant, to the Council of the Institute of Chartered Accountants of India, that as the auditor of the Rural Bank of india Ltd. , Karwar, he was guilty of professional misconduct. On receipt of the complaint, the Secretary to the Council forwarded a copy of it to the respondent who filed a written statement on 7th May, 1951. There was an inquiry by the Disciplinary Committee. The Committee reported that the respondent was guilty of gross negligence in the discharge of his duties. The findings of the council, on a consideration of the report of the Disciplinary Committee, are as follows : "shri P. M. Hegde had failed to discharge his duty to the shareholders :- (1) by not verifying the cash on hand at the head office on the date of the balance-sheet in each of the years in question; (2) by not reporting to the shareholders on the non-compliance of the provisions of Section 101 (2-B) of the Indian Companies act; and (3) by not making proper enquiries regarding the financial position of Best Security Trust Ltd. with a view to satisfying as to its capacity for making large investments and verifying the fact whether the fixed deposit receipts of that company held as security by the bank were worth their face value and were sufficient cover for the loans; and therefore he was guilty of gross negligence in the discharge of his duties as auditor of Rural Bank of India Ltd. , Karwar. " * The events which led up to the complaint are as follows :

(2.) THE Rural Bank of India Ltd. was incorporated on 10th july, 1944, with its head office at Karwar. THE prospectus inviting applications for shares from the public was filed on 10th August, 1944. THE certificate for the commencement of business was issued on 13th October, 1944, after the bank had filed a statement with the Registrar of Companies, Bombay, under Section 103 of the Indian Companies Act, along with a statement under section 277 (1) of the Act. It was stated that 29, 502 shares of Rs. 10 each were subscribed for, and the first allotment of shares had been made on 6th october, 1944. Out of these, 12, 500 shares were allotted to one K. G. Shaw, and 15, 000 shares to one Mascarenhas, and 19, 933 shares to a limited company called Best Security Trust Ltd. One Mr. P. X. Gracious, who was the promoter of the bank, was also appointed its managing director. He also happened to be the general manager of the Best Security Trust Ltd. , which had its registered office at his residence. THE respondent was the auditor of the bank from august, 1944, and made reports on the balance sheets of the bank as on 31st october, 1945, 31st December, 1946, 31st December, 1947, 31st December, 1948, and 31st December, 1949. THE report attached to each of these balance sheets was more or less as prescribed in Section 145 (2) of the Indian Companies Act, with the further statement that the cash and securities had been verified by him. THE Registrar of Companies, Bombay, suspected that all was not well with the affairs of the bank, made enquiries, and on the information furnished in response to his inquiries, he came to the opinion that the affairs of the bank were in an unsatisfactory state, and hence he submitted a report to the government of Bombay in pursuance of Section 137 (5) of the Indian Companies act. He suggested that Messrs. D. B. Kulkarni and Co. , Registered Accountants, belgaum, may be appointed inspectors to properly examine the accounts of the bank. THEreupon, the Government of Bombay appointed the said Messrs. D. B. Kulkarni and Co. as inspectors for the purpose of investigating the affairs of the bank since its inception and registration in 1944. Messrs. Kulkarni and co. , made an investigation in pursuance of the direction from Government and sent a report on 13th March, 1949, in which they pointed out that several irregularities and violations of mandatory and other provisions of law had occurred. THE managing director, Mr. P. X. Gracious, made several admissions on which mainly the report of Messrs. Kulkarni was based. Mr. Gracious admitted inter alia that he did not receive actual cash from all the share applicants including the large amounts due for the shares allotted to Mr. Shaw and Mr. Mascarenhas and to the Best Security Trust Ltd. He also admitted that imaginary deposits were created in the books of the Best Security Trust Ltd. , that no such deposits had ever been received, and these imaginary deposits were made use of for the purchase of shares of the bank. It was also not disputed that the bank had on several occasions debited to the accounts of certain persons loans which were bogus. THE Best Security Trust Ltd. had been utilised to "window-dress" most of the bogus entries. THE Government wanted further information on some matters, and Messrs. Kulkarni and Co. made a further report on 12th October, 1950. THEreupon, the Government of Bombay permitted the Registrar of Companies, Bombay, to lodge a complaint against the respondent on 4th April, 1951, as already mentioned. THE complaint unfortunately does not appear to have been drafted as a complaint directed against the auditor. It recites the various irregularities and even frauds which had been discovered by Messrs. Kulkarni and Co. and winds up in the following manner :- "i submit that the frauds have been so primitive and glaring that it is difficult to conceive that the auditor failed to see them. THE only other alternative conclusion would be that the auditor may have connived at these frauds, and may have been wilfully a party to certifying false accounts from 1945 to 1949. " *

(3.) IT is now admitted that the company did contravene the above provision. IT is not as if the respondent was unaware of the fact. He conceded that he had noticed this defect at the time of the audit and even asked the managing director to explain. The explanation given was that the schedule bank was 100 miles away, that it could be reached only by bus, and that within a week the certificate to commence business would be obtained. Even assuming that the managing director did give this explanation, it was the duty of the respondent to have mentioned that there was non-compliance with the statutory direction. IT was not in his power to accept the explanation given by the managing director. Indeed, if as a reasonable man he had not been convinced by his explanation, and we think as a reasonable man he should not have been, the very failure to deposit the moneys should have roused his suspicion, and very probably a searching inquiry would have revealed the fact which was revealed at the inquiry made by Messrs. Kulkarni and Co. , namely, that the major allottees of the shares had not paid a pie for the large number of the shares allotted to them.