CA Guity of Professional misconduct in case of wrong reporting in respect of Sec 185 of Companies Act

Wrong reporting in respect of Section 185 of the Companies, Act, 2013 – Obligation lies on Respondent being the statutory auditor to report compliance of the provisions of Section 185 which he failed to do so – Held, Respondent is GUILTY of professional misconduct falling within the meaning Clause (5) & (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949.

Held: In the instant case, the charge against the Respondent was that being statutory auditor of lending Company he had wrongly reported that the Company did not violate the provisions of Section 185 of Companies Act, 2013 while the Company had granted loans to Borrower Company in whom directors were interested. The Committee observed that it is an admitted fact that loan was given by the lender Company to Borrower Company and these companies were having Common directors. As per clause (c) to the Explanation to section 185 (1) which states that “For the purposes of this section, the expression “to any other person in whom director is interested” means— (c) “any private company of which any such director is a director or member” and borrower Company being a Private Limited Company has two of its Directors which are also Directors of lending Company. Therefore, there is an obligation on the part of auditor as per the requirement of clause 3(iv) of Companies Audit Report Order, 2016 (CARO 2016) to report as to whether the provisions of Section 185 and 186 were complied with or not. Further, it is observed by the Committee that the intent of the legislature by incorporating a rigid Section 185 of the Companies Act, 2013 or Section 295 of the earlier Companies Act, 1956 was to ensure that Directors do not surpass their fiduciary duty towards the Company for their personal benefits. The Committee noted that the Respondent was required to give a qualified opinion whereas he has given incorrect statement by mentioning that “In respect of loans, investments, guarantees and security, the provision of section 185 & 186 has been complied with”. In view of the noted facts, the Committee held that the Respondent is GUILTY of professional misconduct falling within the meaning Clause (5) & (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

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