AI Structured Summary
Not yet generated for this judgment
Judgment
Venkatadri, J.—This is a revision petition preferred by the Union of India represented by the Department of Company Law Administration,
Ministry of Commerce and Industry, u/s 22-A(2) of the Chartered Accountants Act, 1949. The petition is against the order passed by the Council
of the Institute of Chartered Accountants of India, New Delhi, that the first respondent herein was not guilty of any professional or other
misconduct u/s 21 of take Chartered Accountants Act of 1949. In doing so, the Council of the Institute dissented from the finding of the
Disciplinary Committee that the first respondent was grossly negligent in the performance of his duties as an auditor.
The first respondent is a Chartered accountant. In the course of audit of the Little''s Oriental Balm and Pharmaceuticals Ltd., Madras, he
checked, verified and approved the balance-sheet of the company as on 31-12-1951 the payment of remuneration to Messrs. Oakley Bowden
and Co., as managing agents of the Little''s Oriental Balm and Pharmaceuticals Ltd. Alter a period of six years, the Registrar of Companies,
Madras, sent a letter calling upon him to explain the failure on his part to detect the continuance in office of Messrs. Oakley Bowden and Co. Ltd.,
as managing agents of Mess is Little''s Oriental Balm and Pharmaceuticals Ltd. beyond the stipulated period without any further agreement and
also the failure to point out to the shareholders the irregularity in regard to the payment of remuneration to the said managing agents for the period
in question. The auditor sent his reply. Though it was difficult for him to recall the events that took place at the time of the audit and to remember
the circumstances under which he audited the affairs of the company, yet he was able to send an explanation to the best of his ability from the
papers available with him. He stated that the renewal of a managing agency agreement was generally a matter of course, unless either party had
given notice to the other of its intention to the contrary, at the time of the expiry of the agreement. In the instant case the agreement was being
renewed from time to time since the inception of the company in 1920 and there was no indication that it was not to be renewed. There was not
the slightest suspicion that the agreement had expired, as the managing agents were attending to the day to day business and affairs of the company
and were operating on the bank accounts of the company as usual. The company was accepting those services through its directors by their
general conduct and also by their resolutions ratifying the transactions and dealings of the Managing agents. In his report to the shareholders of the
company on the accounts for the year ending with 31-12-1951, he had drawn the attention of the Secretary of the Company, who was also the
Secretary of the managing agency carrying on the day to day business and affairs of the company to get the ratification of the transactions and
dealings by the directors of the company. He also recorded his doubt as to whether there was compliance of the Articles of Association as to the
management of the company with which was tied up the remuneration of the managing agents. The Registrar of Companies was not satisfied with
this explanation submitted by the auditor, and thereupon, the Company Law Administration through its Deputy Secretary laid information to the
Secretary of the Institute of Chartered Accountants of India to take such action as the Council of the Institute might think fit. Thereupon, the
Institute of Chartered Accountants of India sent a copy of the communication received from the Department of Company Law Administration to
the auditor and called upon him to send his written statement. The first respondent herein filed his written statement reiterating what he had stated in
his explanation to the Registrar of Companies. He further stated in the written statement that there was a provision in the Articles of Association of
the Company that the Managing Agency should be entrusted to Messrs. Oakley Bowden and Co., and that they were to be vested with powers of
management and were not to be removed from office otherwise than by their resignation, or for misconduct, insolvency or any special resolution of
the company. Messrs. Oakley Bowden and Co., were appointed as the Managing Agents off the company, Little''s Oriental Balm and
Pharmaceuticals Ltd. The company used to enter into agreement with the managing agents in regard to their remuneration once in ten years. The
first of such a resolution was passed in the year 1920, which was renewed in 1930 and again renewed in the year 1941. The last resolution passed
in 1941 was followed by art Extraordinary Resolution dated 10-7-1945, in which it was resolved to execute an agreement for the continuance of
the managing agency. The auditor further stated-
If I had the slightest doubt then of any irregularity in the continuation in office of the Managing Agents, I would have drawn the attention to it in my
report to the share-holders in the same way as I had done in regard to even smaller matters......In any event an error or difference of opinion
regarding the application or interpretation of the relevant provisions, I submit, cannot be a matter calling for any action.
The respondent had taken a stand both in his letter of the explanation to the Registrar as well as in the written statement that even though the
managing agency expired in the year 1951, still their continuance in office was not opposed to any of the provisions of the Indian Companies Act
relating to managing agents, for, according to the auditor, under the Articles of Association of the Company, the managing agents were not to be
removed from office otherwise than by resignation or for misconduct, insolvency or any special resolution of the company,
In the enquiry held before the Disciplinary Committee the members found that the managing, agency terminated on 31-12-1950 and thereafter
the continuation of the managing agency was contrary to the provisions of Section 87-B of the Companies Act, there being no resolution of the
company in a General Body meeting, and that the respondent was, therefore, grossly negligent in the performance of his duties as an auditor of the
company in not reporting to the shareholders the fact that remuneration was paid to the managing agents who were not holding, office in
accordance with law. With these findings., the members of the Disciplinary Committee submitted their report to the Council of the Institute of
Charter, ed Accountants of India. While considering the said, report, the Council of the Institute of Chartered Accountants came to the conclusion
that it was not a case of gross negligence, and it was clear that the payment made to the managing agents who were not holding office in
accordance with law could not be noticed even by the directors of the company, and therefore they reversed the finding of the Disciplinary
Committee and held that the respondent, auditor was not guilty of any professional or other misconduct u/s 21 of the Chartered Accountants Act
of 1949. It is against this order of the Council the Union of India represented by the Company Law Administration has preferred this revision
petition.
It was seriously contended that the first respondent was grossly negligent in the conduct of the professional duties, and that it was the duty of the
first respondent to verify in the course of audit whether the continuance in office of the managing agency was in accordance with law, and that he
failed to bring, to the attention of the share holders the propriety of payment of remuneration to the said managing agents and that the auditor failed
to keep in view the wide duties and responsibilities of the auditor,
Ever since companies came into existence in the business world, the duties of an auditor have been explained from time to time by the House of
Lords and the Courts of Appeal in England. The earliest and the leading case on this subject of the duties of an auditor is the case of In re London
and General Bank, 1895 2 Ch 673 Lord Justice Lindley recorded his valuable opinion in regard to the duties of an auditor in the following words
at page 683 :
.....he must be honest, i.e., he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes
that what he certifies is true. What is reasonable care in any particular case must depend upon the circumstances of that case. Where there is
nothing to excite suspicion very little inquiry will be reasonably sufficient, and in practice I believe businessmen select a few cases at haphazard, see
that they are right, and assume that others like them are correct also. Where suspicion is aroused more care is obviously necessary, but. still, an
auditor is not bound to exercise more than reasonable care and skill, even in a case of suspicion, and he is perfectly justified in acting on the
opinion of an expert where special knowledge is required......
Again, in the year 1896, the same noble Lord reiterated his opinion in the case of In re Kingston Cotton Mill Co., 1896 2 Ch 279 :
The duty of an auditor generally was very carefully considered by this Court in In re London and General Bank and I cannot usefully add anything
to what will be found there. It was there pointed out that an auditor''s duty is to examine the books..... But it was also pointed out that an auditor is
not an insurer, and that in the discharge of his duty he is only bound to exercise a reasonable amount of care and skill, It was further pointed out
that what in any particular case is a reasonable amount of care and skill depends on the circumstances of that case; that if there is nothing which
ought to excite suspicion, less care may properly be considered reasonable than could be so considered if suspicion was or ought to have been
aroused. These are the general principles which have to be applied to cases of this description protest, however, against the notion that an auditor
is bound to be suspicious as distinguished from reasonably careful. To substitute the one expression for the other may easily lead to serious error.
It may be useful to state also the opinion of another noble Lord in the same case, Lord Justice Lopes at page 288:
It is the duty of an auditor to bring to bear on the work he has to perform that skill, care and caution which a reasonably competent, careful, and
cautious auditor would use. What is reasonable skill, care and caution must depend on the particular circumstances of each case. An auditor is not
bound to be a detective, or as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a
watch-dog, but not a blood-hound. He is justified in believing tried servants of the company in whom confidence is placed by the company. He is
entitled to assume that they are honest, and to rely upon their representations, provided he takes reasonable care. IE there is anything calculated to
excite suspicion he should probe it to the bottom; but in the absence of that kind he is only bound to be reasonably cautious and careful. The duties
of auditors must not be rendered too onerous. Their work is responsible and laborious and the remuneration moderate.
Now, I have to examine and consider whether the first respondent discharged the duties as an auditor with reasonable amount of care and skill,
and whether there was anything to excite suspicion in the course of audit. The respondent was an auditor of this company at least for the three
years prior to 1951. He says in his explanation that he was aware of the Articles of Association of the company. Under the Articles of Association
of the company, the Managing agents are not liable to be removed except for resignation, misconduct, insolvency or special resolution. He was
aware of the agreements passed from time to time with regard to their remuneration once in ten years, beginning from 1920. He audited the
accounts ok the company for the years 1949, 1950 and 1951. Evidently, neither was he aware that the managing agency agreement expired in the
year 1950 itself, nor he cared to verify whether the managing agency agreement was still in force or whether the directors themselves were aware
that the continuance of the managing agency after the expiry of the term was contrary to law. In those circumstances, according to Delvin J. in
Roper v. Taylor''s Central Garages, 1951 2 T L R 284 .
The case of shutting the eyes is actual knowledge in the eye of the law, the case of merely neglecting to make enquiries is not knowledge at all......
Even before the Disciplinary Committee, the first respondent through his counsel stated that at the time of the passing of the 1951 accounts, he did
not remember to have seen the managing agency agreement and could not assert that he saw it. But, unhesitatingly he admitted :
It is an error of judgment, if it is an error of judgment. I have proceeded on footing that they were validly in office especially in view of the fact that
they had been rendering services as before all through the years. Therefore, if there was suspicion that they were not validly in office that year, it
never occurred to me.
On the face of this explanation offered by the first respondent, is it possible for me to say that, as per the provisions of Section 21(5) and Section
22-A or the second schedule part I, R. (5), the respondent, a chartered accountant in practice, shall be deemed to be guilty of professional
misconduct if he failed to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary
to make the financial statement not misleading. Neither the Registration of Companies nor the Deputy Secretary to the Government of India who
laid the information to the Council of the Institute of Chartered Accountants, has ever said in clear and explicable terms that the auditor was aware
of the material fact that the Managing Agents'' term expired, at the time of the audit and still he approved the remuneration paid to them and that he
did not disclose that fact in the financial statement. Absolutely there is no material in the record; nor any attempt has been made by Government to
prove that he was aware of such a document at the time of the audit and yet he failed to discharge the duties of an auditor. The first respondent has
been charged of professional misconduct. It is a serious charge. It is the duty of the concerned authorities to place sufficient material and also to
adduce sufficient legal evidence to prove that he committed the offence with which he has been charged, namely, that he failed to disclose a
material fact known to him. The members of the Disciplinary Committee themselves did not give a definite finding that he was aware of such a
material fact at the time of audit. What they say in their report is that he was grossly negligent in not verifying at the time of audit whether the
managing agents'' agreement was still in force or not.
The learned author Charlesworth on Negligence"" has described various degrees of negligence as gross negligence, ordinary negligence and
slight negligence. ""Negligence"" means carelessness and these expressions, according to the author, mean gross carelessness, ordinary carelessness
and slight carelessness respectively. In the same book, Rolfe B. has been quoted as saying that he ''''could see no difference between negligence
and gross negligence, that it was the same thing with the addition of a vituperative epithet"" he was using negligence in the sense, of breach of duty to
take care and his criticism was justified. The learned author further says :
That is not to say, however, that the expression ""gross negligence,"" has always the same meaning as ''negligence.'' It is an expression in regular use
among lawyers, and to deny it a meaning would be pedantic. It is intended to denote a high degree of careless conduct, and in this sense it is of
considerable practice utility.
In Bentecoat v. London District Auditor, 1951 2 K. B. 759 their Lordships of the Court of Appeal had discussed what is negligence and what is
gross negligence. Lynskey J. observed :
Negligence is well known and well defined. A man is either guilty of negligence or he is not guilty of negligence. Grass negligence is not known to
the English common law so far as civil proceedings are concerned, and one has only to consider the phrase in criminal cases, particularly in cases
of motor manslaughter. In the ordinary case in civil proceedings, either a man is guilty of negligence or he is not.
Lord Goddard C. J. observed at p. 768 as follows :
The use of the expression ''gross negligence'' is always misleading. Except in the one case of the law relating to manslaughter, the words ''gross
negligence'' should never be used in connexion with any matter to which the common law relates, and for this reason negligence is a breach of duty.
If there is a duty and there has been breach of it which causes loss, it matters not whether it is a venial breach or a serious one; a breach of a legal
duty in any degree which causes loss is actionable. The question whether it is venial or gross is quite immaterial. The expression ''crassa negligentia''
which is found in the books has generally been used by equity judges in considering cases relating to the degree of duty owed by directors.
Therefore the finding that the first respondent was grossly negligent in the performance of duties as an auditor of the Company in not reporting to
the shareholders the fact that remuneration was paid to the managing agents who were not holding office, has no meaning in the circumstances of
the case, for, it cannot be said that the respondent either wilfully shut his eyes or purposely abstained from ascertaining or wilfully abstained from
knowing whether the managing agents'' agreement was in force or not at the time of audit. It cannot also be said that he ''deliberately refrained from
making inquiries the results of which he might not care to have'' 1951 2 T L R 284. Nor can it be said, as observed by Lord Goddard, Chief
Justice in Taylor v. Kenyon, 1952 2 All E R 726, that ""he refrained from getting information which he did not want to get"". Nor did he adopt an
attitude of mental indifference aptly described as I don''t care attitude''. In the King (Kennedy) v. Browne, 1907 2 K B 505, Lord O''Brien Chief
Justice, while considering the word ''negligence'' made the following observation :
The word ''negligence'' is associated in the section with the word ''misconduct'' and involves, I think, some element of moral culpability .... Mere
imprudence is not enough, want of judgment is not enough, grave error of judgment is not enough.
At the worst, the respondent may be guilty of an excusable error of judgment, and the error is not very serious in its consequences. The audit took
place in the year 1952. The Registrar of Companies called upon the auditor on 1-8-1957 to explain the alleged irregularity in regard to the
payment of remuneration, and the information was laid by the Deputy Secretary to the Government of India to the Secretary of the Institute of
Chartered Accountants of India at the end of the year 1957, and the termination of the proceedings against the auditor was in the month of
September 1959. It shows that there was inordinate delay on the part of the authorities in bringing home the guilt on the auditor. While dealing with
a case under the Chartered Accountants Act, 1949 Rajamannar C. J. and Venkatarama Aiyar J. in the Institute of Commr. of Income Tax,
Madras Vs. G.M. Dandekar of M.K. Dandekar and Co., Chartered Accountants, Madras, have observed :
.....We think it is necessary to comment on the inordinate delay in the institution of these proceedings .... It is essential that charges or this kind
should be made with promptitude.
It will also be useful in this connection to refer to the observations of Mukharji J. of the Calcutta High Court in a case of reference under
Chartered Accountants Act Kishorilal Dutta Vs. P.K. Mukherjee, :-
No doubt, u/s 21 of the Chartered Accountants Act) the Council may move on receipt of information and receipt of the complaint and there is no
question of any limitation as to when it can receive such complaint but it should be impressed that while the Council can act on any information or
oh any complaint, it is elementary precaution and wisdom not to move by any and every kind of complaint or information however frivolous it may
be. Great are the responsibilities on the Council and the Disciplinary Committee in this respect and they must not so act as to become a convenient
tool and an engine of oppression against the members of the profession. They must act with responsibility. That is why Section 21 imposes a
preliminary duty on the Council to form a prima facie opinion before proceeding further. It will be a misfortune for the profession of the Chartered
Accountants in India, if the Council chooses to let loose the whole machinery of Disciplinary Committee on any complaint or any information
received by it, however old and however stale and whatever its source without examining it with at least some care to see if a prima facie case.
exists or not.
With respect, I agree with these observations.
In the result, the civil revision petition fails and it is dismissed, but in the circumstances without costs.