ICAI Found CA Guilty of wrongly reporting that Company did not violate Section 185 in CARO

The Disciplinary Committee of ICAI has found guilty for wrongly reported that the Company had not violated the provisions of Section 185 of Companies Act, 2013 while the Company had granted loans to Borrower Company in whom directors are interested.

The Committee noted that in the present case, Medilux Laboratories Pvt. Ltd. (hereinafter referred to as “Lending Company“) had advanced loans to Kaizen Global (India) Services Pvt. Ltd (hereinafter referred to as a “Borrower Company“). The Complainant along with one more person were common Directors in both lending and borrower Companies. The Respondent was a Statutory Auditor of lending Company for the financial year 2016-17.

Finding

The Committee noted that the Respondent’s Counsel submitted that there was ambiguity in understanding newly introduced section 185 of the Companies Act, 2013 and hence disclosure under CARO was result of difference of Opinion. The Respondent’s Counsel further submitted that there is the cardinal principle of interpretation of the statute that says that no part of the statute can be rendered redundant along with constructive interpretation so that this section, as well as other section, exist (Section 185 and section 186 in the present case). He further mentioned that the Respondent in Annexure ‘A’ of his report under clause (iii) had given complete disclosure (page C-’11 of prima-facie opinion).

The Committee noted that under clause (iii) of Annexure ‘A’ of audit report, disclosure made by the Respondent was related to separate section viz. section 189 of the Companies Act, 2013 whereas the alleged default 1s in respect of section 185 of the Companies Act, 2013. Hence the plea of disclosure by the Respondent under separate Clause is riot tenable.

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.

Looking into transaction between the Companies, the Committee was of view that loan given by M/s. Medilux Laboratories Pvt. Ltd. to M/s. Kaizen Global Services Pvt Ltd was attracting provisions of Section 185 of the Companies Act, 2013 since both the Companies had common Directors (W-97 & W-97 A).

The Committee observed that Section 185 introduced in the Companies Act, 2013 was intended for absolute prohibition for Companies from advancing any loan etc. to Directors. of such Company or any 9ther person in whom the Director(s) is/are interested. Accordingly, it is observed 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 benefit.

The Committee noted that the Respondent was required to give 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.” (W-12).

The Committee noted that the Respondent was not only negligent in his professional duties but also failed to disclose a material fact known to him in financial statement. Accordingly the Committee hold him Guilty of Professional Misconduct falling under Items (5) and (7) of Part – I of Second Schedule of the Chartered Accountant Act, 1949.

Conclusion

In view of the above findings stated in above paras vis a vis material on record, in the considered opinion of the Committee, the Respondent is GUILTY of Professional Misconduct falling within the meaning of Item (5) and (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949.

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