Penalty imposed by NFRA: CA Auditor can continue to audit after filing of appeal by depositing 10% of penalty amount

The National Company Law Appellate Tribunal (NCLT) in the matter of Harish Kumar T. K. Versus National Financial Reporting Authority (NFRA) has said that in case a monetary penalty has been imposed on the Auditor, and auditor after having deposited the monetary penalty or has filed an Appeal with 10% deposit can continue discharging its functions, subject to any decision taken by the company or body corporate.

The Appellant in Company Appeal (AT) No.68 of 2023 – Mr. Harish Kumar T.K., is a qualified Chartered Accountant. The Appellant’s Firm was engaged for conducting of Branch Audit by two appointment letter dated 27.08.2014 for its Firm at Kannur, Kotayyam Thiruvananthapura, Thrissur, Calicut and Kochi Branches. The Appellant being Partner of the Firm was assigned with the Audit work by the Firm for the Branches of the Company at Thrissur Kotayyam and Coimbatore. In the subsequent Financial Years 2015-16, 2016-17, 2017-18 and 2018-19 also, the Firm received similar appointment letter from the Company.

For each of the Financial Years, The Appellant conducted Branch Audit for the Kottayam, Thrissur and Coimbatore Branches of DFL and submitted Audit Reports in respect of the same. The Appellant received a Show Cause Notice dated 07.12.2022 from NFRA. The Appellant replied to the Show Cause Notice. The Show Cause Notice was decided by NFRA vide its order dated 13.04.2022, imposing penalties under Section 132(4)(c) of the Companies Act, 2013.

The learned Counsel for the Appellant relying on Rule 12 of the 2018 Rules, submits that when Appeal challenging the impugned penalty order has been filed within 30 days from the date of order, after depositing the 10% of the penalty amount as required by Rule 12, sub-rule (1), the consequence of said filing of the Appeal and deposit of 10% penalty amount is that no further action can be taken by the Authorities under Rule 12, sub-rule (2), (3) and (4).

It is submitted that object of Rule 12, sub-rule (1) is to give protection to those Chartered Accountants, who have filed Appeal within 30 days and have deposited the 10% penalty amount. The result is that no action is required to be taken as per Rule 12, sub-rule (2) and the Authority is not to communicate the companies or body corporate where the Appellant was functioning to appoint a new Auditor in accordance with the provisions of the Act. The consequence is that the Chartered Accountant is entitled to continue to discharge his functions in the company or body corporate, which functions, he was discharging prior to passing of the impugned order. It is submitted that similar consequence should ensue even if when an order of debarment is passed under Section 132(4)(c). The submission is that all the sub-rules of Rule 12 have to be conjointly read. It is submitted that after filing of the Appeal and deposit of 10% of penalty, the Chartered Account needs to be protected with regard to further adverse action, which is the object and purpose of Rule 12. The submission is that after filing of the Appeal and deposit of 10% of penalty, further proceedings as contemplated in Rule 12 regarding the intimation cannot take place.

Shri Zoheb Hossain, learned Counsel appearing for the Respondent opposing the submission of learned Counsel for the Appellant(s) contends that all sub-rules of Rule 12 contain different provisions and have to be given meaning and purpose. It is submitted that consequence of filing of Appeal and deposit of 10% of penalty under Rule 12, sub-rule (1) is that no action as contemplated by Rule 12, sub-rule (2) shall take place. However, requirement under sub-rules (2), (3) and (4) shall not be dispensed with, which are independent provisions and need to be complied with. It is submitted that Rule 12, sub-rule (3), which require order to be sent to every company or body corporate in which the Auditor is functioning as Auditor, is an independent from Rule 12, sub-rules (1) and (2) and even if the Appeal has been filed with deposit of 10% penalty amount, requirement as contemplated under Rule12, sub-rule (3) has to be complied with. It is submitted that sub-rule (4) of Rule 12 contains an independent provision, that is in case Auditor is debarred from practice and order under sub-rule (2) of Rule 12 is passed, order shall be sent to every company or body corporate, in which the Auditor is functioning as Auditor and every such company or body corporate shall appoint a new Auditor in accordance with the provisions of the Act. It is submitted that in case of debarment, requirement under Rule 12, sub-rule (4) has to take place despite filing of an Appeal as per Rule 12, sub-rule (1). The learned Counsel for the Respondent submits that the penalty as contemplated by Section 132, sub-section (4), (c) consist of penalties under two heads, i.e., head (A) and head (B). It is submitted that 2018 Rules has been framed to give effect to the provisions of Section 132(4) and Rules cannot envisage any kind of embargo on the provisions of Section 132(4) of only on filing of Appeal. Rules cannot stay any action contemplated under the statute when no such intention is decipherable from the Rules.

NCLT Order:

We have considered the submissions of learned Counsel for the parties and have perused the record.

Section 132 of the Companies Act, 2013 deals with ‘Constitution of National Financial Reporting Authority’. Sub-rule (4), (c) provides:

“132 (4) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall—

(c) where professional or other misconduct is proved, have the power to make order for—

(A) imposing penalty of— 84

(I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and

(II) not less than ten lakh rupees, but which may extend to ten times of the fees received, in case of firms;

(B) debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority.

Explanation.—For the purposes of this sub-section, the expression “professional or other misconduct” shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949 (38 of 1949).”

The present are cases where penalty under Section 132(4)(c) has been imposed, both under head (A) and head (B). For example in Company Appeal (AT) No.68 of 2023, the Appellant has been imposed a monetary penalty of Rs.1 lakh and further been debarred for one year.

Now we come to the Rule 12, which is subject matter of the consideration. Rule 12 of 2018 Rules provides as follows:

“12. Manner of enforcement of orders passed in disciplinary proceedings.─ (1) Where the order passed under rule 11 relates to imposition of a monetary penalty on any auditor, the auditor shall deposit the amount of penalty with the Authority within thirty days of the order:

Provided that where the auditor prefers an appeal against the order of the Authority, it shall deposit ten per cent. of the amount of the monetary penalty with the Appellate Tribunal.

(2) If, within thirty days of the order passed under rule 11, the auditor neither pays the penalty nor appeals against the order, the Authority shall, without prejudice to any other action, inform about such non-compliance to every company or body corporate (including those not covered by rule 3) in which the auditor is functioning as auditor and every such company or body corporate shall appoint a new auditor in accordance with the provisions of the Act.

(3) Where the order passed under rule 11 imposes a penalty on the auditor or debars the auditor from practice, the order shall be sent to every company or body corporate in which the auditor is functioning as auditor.

(4) Where the order passed under rule 11 debars the auditor from practice or the order under sub-rule (2) is passed, the order shall be sent to every company or body corporate (including those not covered by rule 3) in which the auditor is functioning as auditor and every such company or body corporate shall appoint a new auditor in accordance with the provisions of the Act.”

Rule 12, sub-rule (1) confines to “order passed under Rule 11 relates to imposition of a monetary penalty on any auditor”. Proviso of Rule 12, sub-rule (1) thus relates to only a case where imposition of monetary penalty has been imposed. Rule 12, sub-rule (1) can have no application in a case where penalty of debarment has been imposed. Expression ‘debarment’ has consciously been not included in Rule 12, sub-rule (1) whereas sub-rules (3) and (4) use expression ‘debars’. Thus, rulemaking Authority was well aware that Rule 12 provides for both monetary penalty as well as debarment.

We may also refer to Rule 11, sub-rules (6) and 7) in this context, which is to the following effect:

“11(6) The order disposing of a show-cause notice may provide for-

(a) no action;

(b) caution;

(c) action for imposing penalty against auditor under sub-clause (A) of clause (c) of sub-section (4) of section 132 or for debarring the auditor from engaging as such under sub-clause (B) of clause (c) of sub-section (4) of section 132 or both.

(7) The order passed under sub-rule (6) shall not become effective until thirty days have elapsed from the date of issue of the order unless the Division states otherwise in the order along with the reason for the same.”

The submission which has been pressed before us that on filing of Appeal within 30 days and deposit of 10% penalty amount, neither proceedings under Rule 12, sub-rule (2) shall take place nor any intimation shall be sent to the company or body corporate where the Auditor was working in case of debarment.

When we read Rule 12, sub-rule (3), it uses expression imposition of penalty or debars the Auditors from practices. Sub-rule (3) requires sending of the order to every company or body corporate in which the Auditor is functioning as Auditor. Sub-rule (3) of Rule 12 is, thus, independent provision. Thus, Rule 12, sub-rule (2) provides that action against Auditor in event the Appeal is filed under Rule 12, sub-rule (1), after depositing the 10% penalty amount, the consequences as contemplated under Rule 12, sub-rule (2) shall not take place. Thus, in case when an Appeal is filed with deposit of 10% of penalty, it is not obligatory to the company or body corporate to appoint a new Auditor as required by sub-section (2) of Rule 12. However, sub-rule (1) and (2) are only confine to cases where only monetary penalty has been imposed. These two sub-rules have no application with regard to cases where penalty of ‘debarment’ has been imposed. Omission of ‘debarment’ in sub-rules (1) and (2) are with the purpose and object.

The learned Counsel for the Respondent has placed reliance on judgment of Hon’ble Supreme Court in (2010) 7 SCC 530 – Mohd. Alauddin Khan vs. Karam Thamarjit Singh where Hon’ble Supreme Court while considering the principle of statutory construction has noted the principle that express inclusion of one thing is the exclusion of all others. In paragraph 24 of the judgment, following has been held:

“24. As the principle of statutory construction, expressio unius est exclusio alterius states, the express inclusion of one thing is the exclusion of all others. In this case, the specific inclusion of a condition for filing a recriminatory petition under Section 97 of the Act, namely, that a declaration that the election petitioner or any other candidate is the returned candidate should be filed, excludes its filing in all other cases. Simply put, Section 97 of the Act bars filing of a counterclaim by way of a recrimination petition when an election petition is filed without seeking for a declaration that the election petitioner or any other candidate is the returned candidate. In such a case, the application of Order 8 Rule 6-A would not be permissible, as permitting the same would amount to allowing indirectly, what is prohibited by law to be done directly. It is settled law that whatever is prohibited by law to be done directly cannot be allowed to be done indirectly. The decision of the Court in Jagir Singh v. Ranbir Singh [(1979) 1 SCC 560 : 1979 SCC (Cri) 348] may be referred to, wherein it was held thus : (SCC p. 565, para 5)

“5. … We do not think that it is permissible to do so. What may not be done directly cannot be allowed to be done indirectly; that would be an evasion of the statute. It is a ‘well-known principle of law that the provisions of an Act of Parliament shall not be evaded by shift or contrivance’ (per Abbot, C.J. in Fox v. Bishop of Chester [(1824) 2 B&C 635 : 107 ER 520] ). ‘To carry out effectually the object of a statute, it must be construed as to defeat all attempts to do, or avoid doing, in an indirect or circuitous manner that which it has prohibited or enjoined.’ (Maxwell, 11th Edn., p. 109)””

Applying the above statutory principle and construction, it is clear that inclusion of expression ‘monetary penalty’ in sub-rule (1) of Rule 12, clearly indicates that the Rule 12, sub-rules (1) and (2) are not attracted in case penalty of ‘debarment’ has been passed. The requirement of sub-rule (3) is independent from sub-rule (2) and has to be complied in every case where penalty is imposed or Auditor is debarred. Further, sub-rule (4) makes it clear that in a case, which is covered by Rule 12, sub-rule (2) or when Auditor is debarred by an order passed under Rule 11, order shall be sent to every company or body corporate in which the Auditor is functioning as Auditor and such company or body corporate shall appoint new Auditor in accordance with the provisions of the Act. Thus, consequence of sub-rule (4), Rule 12 is that when procedure under Rule 12, sub-rule (2) has been initiated, company or body corporate has to appoint a new Auditor, the clear intendment is that in case of a debarment, the Auditor is not entitled to continue to discharge his functions and a new Auditor as contemplated is to be appointed.

We may further notice Rule 11, sub-rules (6) and (7), which provides that the orders passed under sub-rules (6) and (7) shall not become effective until thirty days have elapsed from the date of issue of the order unless the Division states otherwise in the order along with the reason for the same. Present are cases where the orders were not to become effective until thirty days have elapsed. There is purpose and reason for providing the thirty days period. Thirty days period is provided for Auditors against whom orders have been passed to wound up their affairs in company or body corporate where they have been functioning.

However, we hasten to add that when order passed under Section 132(4)(c) is challenged by filing an Appeal, it is for the Appellate Court to consider as to whether the implementation of the order impugned is to be stayed or not. It is, thus, clear that unless any interim order is obtained in an Appeal, filed challenging the order passed under Section 132(4)(c), the Auditor against whom order of debarment has been passed, ceases to function after expiry of thirty days from the order, unless order indicate otherwise. As observed above, this consequence will not ensue where there is only order of monetary penalty and either monetary penalty has been deposited by the Auditor or Appeal has been filed with 10% deposit. In a case where punishment is only of monetary penalty, the information of said order has also to be sent to the company or body corporate where the Auditor is functioning as required by Rule 12, sub-rule (3) and it is for company or body corporate to chose its further action. The provisions of the statute read with Rule 12, do not indicate that in case of monetary penalty only, it is obligatory on the company or body corporate to appoint a new Auditor. Meaning thereby that in case of monetary penalty the Auditor, after having deposited the monetary penalty or has filed an Appeal with 10% deposit can continue discharging its functions, subject to any decision taken by the company or body corporate.

In view of the foregoing discussions and conclusion, we are of the view that filing of the Appeal by the Appellant(s) with deposit of 10% of the penalty shall have no effect on the order of ‘debarment’ passed against the Appellant(s) under Section 132(4)(c) and under head (B). Order of ‘debarment’ shall continue to operate unless an order is passed by the Appellate Tribunal.

We have not heard the learned Counsel for the Appellant(s) on the merits of challenge to the impugned order. We deem it fit and appropriate to give an opportunity to the Appellant(s) to make their submissions on the merit and this Tribunal after hearing the Appellant(s) as well as Respondents shall take appropriate decision on the application filed for the interim relief in each of the Appeal(s). The Appellate Tribunal being re-opening after summer vacation on 3rd July, 2023, we direct that all these Appeal(s) be listed for admission and consideration of application for interim relief on 3rd July, 2023.

The following penalties have been imposed on the Appellant by the NFRA, paragraphs 46 and 47 are to the following effect:

“46. Considering the fact that profession misconducts have been proved and considering the nature of violations and principles of proportionality and keeping in mind the deterrence, proportionality, signalling value of the sanctions and time required for improvement in knowledge gaps we, in the exercise of powers under Section 132(4)(c) of the Companies Act, 2013, proceed to order the following sanctions:

i. Imposition of monetary penalty of Rs.100,000 (One Lakh) upon CA Harish Kumar T K;

ii. CA Harish Kumar T K is debarred for one year from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.
Company Appeal (AT) Nos.68, 87 to 94 of 2023 6

47. This order will become effective after 30 days from the date of issue of this order.”

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