NCLT Mumbai Orders ICAI Action Against Networth Agrotech Auditor Over Backdated Attestation of Financial Statements

The National Company Law Tribunal (NCLT) at Mumbai has recently directed disciplinary action by the Institute of Chartered Accountants of India against former Networth Agrotech India Ltd statutory auditor Dattatray Maruti Khune.

It refused, at this stage, to hold that his irregular attestation of the company's backdated financial statements amounted to fraud warranting his removal and debarment.

Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar held that the government had failed, at this stage, to establish the necessary ingredients for action under Section 140(5) of the Companies Act.

“To establish an intent, the knowledge of perpetration of fraud and the possibility of deception of stake holders is sine qua non, however, no material, except the facts of his appointment in contravention of provisions of Companies Act and Code of Conduct issued by the Regulator (ICAI), has been placed on record by IO to evidence such knowledge or deception. Hence, we are of considered view that the necessary ingredients of Section 140(5) of the Companies Act, 2013 are not met at this stage,” the tribunal observed.

The Bench, however, held that Khune had failed to exercise due care and diligence while acting as auditor and could face regulatory action for professional misconduct.

“Nonetheless, the manner in which he has discharged his function as statutory auditor after his appointment cannot be held to be bona-fide and in accordance with the professional conduct, an auditor is required to discharge his duties,” the tribunal said.

It added: “In our considered view, the allegations against the Respondent No. 1 are primarily in relation to contravention of provisions of Companies Act and reflects disregard to the accepted audit procedures and practices, for which, a disciplinary proceeding by the regulator i.e. Institute of Chartered Accountants of India be initiated and the RoC may take appropriate proceeding in relation to the contravention of various provision as well as IO report.”

The case arose from a petition filed by the Union of India through the Registrar of Companies, Pune. It sought directions that Khune cease functioning as a statutory auditor and be debarred from auditing companies for five years under Section 140(5).

The proceedings arose from allegations that Networth Agrotech collected around ₹3.5 crore from investors between 2012 and 2014 through schemes involving plot allotments and promised interest if plots were not allotted.

Following investor complaints, the Ministry of Corporate Affairs ordered an inspection into the company's affairs on July 8, 2016. A supplementary inspection later alleged that two sets of financial statements for FY 2012-13 to 2016-17 had been created and produced. It also alleged that Khune had failed to follow proper audit procedures.

Referring to the definition of fraud in the Explanation to Section 447 of the Companies Act, the tribunal said fraudulent conduct requires intent to deceive, gain undue advantage, or injure stakeholders.

“It is clear from the plain reading of said definition that there has to be an intent to deceive or to gain undue advance or to injure the interests,” the tribunal said.

The tribunal noted that Khune attested to the financial statements in 2018, around four years after the alleged fraud by the company. It said no material had been placed on record to show that those financial statements induced investors to part with money. It also said no material had been placed on record to show that Khune knew of the alleged fraud at the time.

“It is not the case that such financial statements led the investors to believe the affairs of the company in the position in contrast to reality, more so when those financial statement were not in existence when the investor deposited their money with the Respondent Company,” the tribunal observed.

Holding that the threshold for action under Section 140(5) was not met at this stage, the tribunal disposed of the petition. It granted liberty to the government to approach it again if the Special Court returns a conclusive finding on fraud in the company's affairs and Khune's knowledge of it.