Yogeshwari Kumari vs The Institute Of Chartered ...
2010 Latest Caselaw 4219 Del

*                 HIGH COURT OF DELHI AT NEW DELHI

                                   Judgment Reserved on: 12th July, 2010

%                        Judgment Pronounced on: 13th September, 2010
+      LPA 455/2010

       YOGESHWARI KUMARI                           ..... Appellant
                  Through: Mr. Vibhu Bhakhru, Mr. A.K. Mishra and
                           Ms. Reshmi Rea Sinha, Advocates.
           versus

       THE INSTITUTE OF CHARTERED
       ACCOUNTANTS OF INDIA & ANR                              ..... Respondents

Through: None.

CORAM:

HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE MANMOHAN

1. Whether reporters of the local papers be allowed to see the judgment?Yes

2. To be referred to the Reporter or not? Yes

3. Whether the judgment should be reported in the Digest? Yes

DIPAK MISRA, CJ

Questioning the legal acceptability and the substantiality of the order dated

19.3.2010 passed by the learned Single Judge in W.P.(C) No.2828/2008, the

present intra-court appeal has been filed under Clause 10 of the Letters Patent.

The appellant is the daughter of late Highness Maharana Bhagwat Singhji Mewar

who was the promoter of two companies, namely, Lake Palace Hotels & Motels

Pvt. Ltd. (LPHM) and Lake Shore Palace Hotels Pvt. Ltd. (LSPH). LSPH holds

49% equity shares in LPHM. The appellant is a shareholder of LSPH as well as

LPHM and, therefore, claims to be interested in the affairs and management of

both the said companies. The respondent no.2, a Chartered Accountant, is the

auditor of LPHM.

2. The appellant - petitioner (hereinafter referred to as „the appellant‟) filed a

Company Petition No.1/1991 in the High Court of Rajasthan at Jodhpur under

Sections 397 and 398 of the Companies Act, 1956 (for short „the 1956 Act‟). On

23.11.1994, the company court appointed Maharaj Kumar Raj Singhji and

Maharaj Kumar Samar Singhji as Directors of LSPH as there was a deadlock in

the Board of Directors of LSPH between its Directors, namely, the appellant and

her brother Sh. Arvind Singh Mewar. The said order came to be assailed before

the Division Bench in three separate appeals and while the matter was pending

before the Division Bench, a settlement was arrived at which was reduced to a

Memorandum of Understanding dated 25.8.1999 and was signed by both of them.

In terms of the settlement arrived at, all the appeals were disposed of. On

12.4.2005, the appellant filed Company Petition No.32/2005 under Sections 397

and 398 of the 1956 Act before the Company Law Board contending, inter alia,

that the appointment of the respondent No.2 as the Director of the company was

contrary to the circular No.14/51/62-PR of the Department of Company Affairs

and sought a declaration that any business conducted at the meeting of the Board

of Directors attended by the respondent No.2 was bad in law and should not be

implemented.

3. The Company Law Board disposed of the petition holding that the

respondent No.2 had been appointed as per the settlement which was accepted by

the High Court of Rajasthan at Jodhpur and, therefore, it was obligatory on the

part of the appellant to approach the High Court. The order passed by the

Company Law Board came to be assailed before the High Court by filing separate

appeals. She also filed two separate company applications.

4. As the facts are unfurled, in September, 2005, the appellant filed a

complaint under Section 21 of the Chartered Accountants Act, 1949 (for brevity

„the CA Act‟) against the respondent No.2 before the Council of the Institute of

Chartered Accountants of India (ICAI) alleging that the respondent No.2 had

violated the code of conduct of Chartered Accountants as formulated by the ICAI

as well as the circular No.14/51/62-PR of the Department of Company Affairs. It

was alleged that the partnership firm of the respondent No.2 was the statutory

auditor of LPHM which was a subsidiary of LSPH and, therefore, while

continuing to be an auditor of LPHM, he could not have acted as a Director of

LSPH. It was urged that the said continuance constituted „professional

misconduct‟ as specified in the First and Second Schedules to the 1956 Act. On

the said complaint, comments were invited by the ICAI from the respondent No.2

and thereafter, a rejoinder was filed by the present appellant. The ICAI in its

meeting dated 10.10.2007 expressed the prima facie opinion that the respondent

No.2 was not guilty of professional or other misconduct.

5. The said order was called in question under Article 226 of the Constitution

of India in the writ court contending, inter alia, that the respondent No.2 was

disqualified in view of Section 226(4) read with Section 226(3)(b) of the 1956

Act. Reliance was placed on Section 2(30) of the 1956 Act which defines

"officers" that includes a Director of a company. It was averred that an officer of

a company cannot be its auditor in terms of Section 226(3) of the 1956 Act. It was

set forth that as the respondent No.2 was disqualified in terms of Section 226(4) of

the 1956 Act, he was disqualified from being appointed as auditor of LSPH by

virtue of being its Director and further he was also disqualified from continuing as

auditor of LPHM which is a subsidiary of LSPH. The order passed by the ICAI

was criticized on the ground that it has erred in forming its prima facie opinion

that the respondent No.2 was not guilty of professional or other misconduct

though the case is covered by Clause (11) of Part I of the First Schedule of the CA

Act. The learned Single Judge, as is manifest from the order, took note of the fact

that the stand of the appellant before the ICAI was that the respondent No.2 stood

disqualified to continue as an auditor of LHPM in view of Clause (11) of Part I of

the First Schedule of the CA Act. The learned Single Judge referred to the said

provision and, after interpreting the same, came to hold that the respondent No.2 is

an auditor of LHPM which is a separate corporate entity although a subsidiary of

LSPH and, therefore, the respondent No.2 is not an auditor of LSPH. Since the

respondent No. 2 is not an auditor of LSPH, there is no bar to be appointed as

Director of LSPH in terms of the proviso to Clause (11). Being of this view, she

concurred with the order passed by the ICAI. Quite apart from the above, the

learned Single Judge referred to the circular of the Department of Company

Affairs and thereafter came to hold that as the appointment of the respondent No.2

as the Director of LSPH is already pending consideration before the High Court of

Rajasthan, the ICAI was not called upon to decide the validity of such

appointment. Thus, on both the scores, the learned Single Judge accepted the

order of the ICAI and did not interfere.

6. We have heard Mr.Vibhu Bhakhru, Mr. A.K. Mishra and Ms. Reshmi Rea

Sinha, learned counsel for the appellant. It is submitted by the learned counsel for

the appellant that the learned Single Judge has fallen into error by not unsettling

the order passed by the ICAI which has failed to take note of the fact that the

respondent No.2 was carrying on dual roles, a Director of a holding company and

the auditor of its subsidiary company. It is urged by them that the order passed by

the learned Single Judge is totally fallacious inasmuch as he has not appreciated

the scope and purport of sub-sections (3) and (4) of Section 226 of the 1956 Act

and the circular No.14/51/62-PR of the Department of Company Affairs. It is

their further submission that when the facts were absolutely clear, it was

obligatory on the part of the learned Single Judge to dislodge the conclusion

arrived at by the ICAI and not to concur with it.

7. First, we shall advert to the finding recorded by the ICAI dealing with

professional misconduct. The case of the appellant, as is evincible before the

ICAI, is that the respondent No.2 stood disqualified to continue as an auditor of

LPHM in view of Clause (11) of Part I of the First Schedule of the CA Act. The

said clause reads as under:

"(11) engages in any business or occupation other than the

profession of chartered accountants unless permitted by the

Council so to engage.

Provided that nothing contained herein shall disentitle a

chartered accountant from being a director of a company,

unless he or any of his partners is interested in such company

as an auditor."

8. The learned Single Judge, in paragraph 13, has held thus:

"13. The substantive portion of Clause 11 is attracted if a

chartered accountant "engages in any business or occupation"

other than "profession of chartered accountants" without the

permission of the council. The appointment as director

of the company, without being its employee or a whole time

director drawing a salary, will not attract the phrase "engages

in any business or occupation". Therefore, upon being

appointed as a non-whole time Director of LSPH,

Respondent No.2 did not commit any professional

misconduct envisaged by the substantive part of Clause 11.

The proviso to Clause 11 states that a chartered

accountant will not be disentitled from being a director of a

company, unless he or any of his partners "is interested in

such company as an auditor". The words „such company‟ in

the above proviso refers to the company in which such

chartered accountant is a director. In the present case it would

refer to LSPH. The proviso requires such Chartered

Accountant to be interested in such company as

„an auditor‟. In other words, Respondent No.2 can be said to

have committed professional misconduct in terms of the

proviso to Clause 11 if he was interested in LSPH "as an

auditor of LSPH" and was appointed as its director. In

other words, the proviso is meant to deal with a situation

where an auditor of a company is subsequently appointed as

its director. As far as the present case is

concerned, this is not the position. Respondent No.2 is an

auditor of LPHM which is a separate corporate entity

although a subsidiary of LSPH. In the considered view of this

Court, since Respondent No.2 is not an auditor of LSPH,

there is no bar to his being appointed as Director of LSPH in

terms of the proviso to Clause 11. Consequently, the ICAI

was not in an error in coming to the prima facie conclusion

that Respondent No.2 was not guilty of any professional

misconduct."

9. We have reproduced the said paragraph to understand and appreciate the

approach of the learned Single Judge. On a perusal of Clause (11), it is quite vivid

that the respondent No.2 was not a whole-time director of LSPH; he was not

engaged in any business or occupation and, therefore, the First part of the Clause

does not get attracted to his case. As far as the proviso is concerned, a Chartered

Accountant is not disentitled from becoming a director of a company. The only

rider is that he should not be interested in such company as an auditor. The terms

which have been laid emphasis upon and correctly so are "such company" and the

respondent No.2 is not the auditor of LSPH. He is the auditor of LPHM which is a

separate corporate entity. Regard being had to the concept of different juris entity

and keeping in view the concept of disqualification which has to be strictly

construed, we are of the considered opinion that the analysis made by the learned

Single Judge is absolutely impeccable.

10. The second aspect that arises for consideration is whether the circular

issued by the Department of Company Affairs has its own connotation. It reads as

follows:

"It is of the view of this Department that it would not be a

desirable practice for a practicing Chartered Accountant „X‟,

who is connected with the managing director of Company, A

or where X acts as auditor of company A, to be on the Board

of Company B or to act or be employed as tax or financial

adviser to company B, where company A and company B are

in the same group, because he may find it difficult to exercise

an independent judgment."

11. On a scanning of the anatomy of the aforesaid circular, it is luculent that a

practising Chartered Accountant who is connected with the management of a

particular company or acts as an auditor of the company should not be employed

as a tax or financial advisor of a company in the same group. Whether the

respondent No.2 could have been so appointed or not regard being had to the

concept of desirability is the subject matter of controversy which is pending for

adjudication before the High Court of Rajasthan. It is worth noting that the

disqualification in terms of Sections 226(3) and 226(4) of the 1956 Act would

depend upon the decision of the Rajasthan High Court. The ICAI ought not to

have ventured into the same and judicial propriety warranted that the learned

Single Judge also should not have entranced into the said arena and rightly he has

not done so.

12. In view of our preceding analysis, we concur with the view expressed by

the learned Single Judge and the inevitable result is the dismissal of the appeal in

limine which we direct.

CHIEF JUSTICE

MANMOHAN, J.

SEPTEMBER 13, 2010 dk