CA held guilty of misconduct being engaged in business as director. Director simplicitor explained

CA held guilty of misconduct being engaged in business as director. Difference between director simplicitor and director involved in business activities of  company

ABCAUS Case Law Citation:
ABCAUS 3003 (2019) (06) AA

An appeal had been filed by the Appellant Chartered Accountant before the Appellate Authority (AA) against the Order passed by the Board of Discipline (BOD) of the Institute of Chartered Accountants of India (ICAI).

The BOD had held the Appellant guilty of Professional Misconduct under item (11) of Part–I and Other Misconduct under Item (2) of Part–IV of the First Schedule to the Chartered Accountants Act, 1949, (the Act) and the Appellant was awarded punishment of removal of his name from the Register of Members for a period of one month and also imposed a penalty of Rupees One Lakh.

As per the report of the Board of Discipline, the Appellant was held guilty of professional misconduct on account of his engagement as a Director of a Private Limited Company without taking the permission of the Council and was further held guilty of other misconduct for his actions against the CA Firm in which the Appellant was partner and against his other partners in the firm, which brought disrepute to the profession and institute at large.

In brief, the charges against the appellant CA were as under:

(i) The Appellant had been creating several hurdles in the smooth functioning of the firm CA Firm right from the year in which the firm was reconstituted last, i.e. 2000 by demanding enhancement of his share of profit from 5% to 20%; initiating steps for dissolution of the firm, filing baseless and frivolous complaints against firm / partners in Police Stations, Civil Courts and High Court; not signing the cheques of the firm for many years etc.

(ii) The Appellant had written threatening letter to some of the clients of the firm who were handled by another partner and also published a notice in newspaper when the said partner served a retirement notice on the firm.

(iii) In the matter of arbitration award of the firm, the Hon‟ble Bombay High Court passed strictures against the Appellant, struck down the arbitration award and levied costs on the Appellant and the Appellant paid the costs and not preferred any appeal against the said orders.

(iv) The Appellant had promoted a private limited company along with his son and was its director and held 90% of equity by himself and signed important documents of the company such as Directors Report and Financial Statements in his capacity as Director for which he has not taken the permission of ICAI.

Before the AA, the appellant submitted that he did occupy the position of a Director of the company from the inception. However, he submitted that being a Director of the company in itself did not tantamount to misconduct more so when Clause 11 of the First Schedule to the Act allows a Chartered Accountant to be a Director of a company. He submitted that whatever documents he had signed during his Directorship as a Director, they did not reflect that he was engaged in the day-to-day business activities of the company and he was, therefore, merely a Simplicitor Director on the Board of the Company.

The AA opined that a Director who is not involved in day to day business of the company but who participates in the Board meetings and even receives remuneration for such participation and takes part in policy decisions but does not execute the decisions, is a Director not doing the business of the Company, but is a Director simplicitor. Such a Director would not be said to be involved in the business of the company. However, a person being a Director of the Company if operates the accounts of the company and executes the business of the company or participates in other activities of the company apart from attending Board Meetings and signing the statutory documents as required to be signed by a Director, then such a Director shall be considered as a Director involved in the business of the Company.

The AA observed that the Appellant had signed the Memorandum of Association and Annual Reports of the company. All these documents and connected activities and the fact that the other directors were his own children and students and not having adequate experience in running the company showed that the Appellant was actively involved in the business activities of the company. Further, the very fact that the Appellant had taken initiative to promote the company with himself as the main promoter and Director of the company with 90% of shareholding, confirmed beyond any doubt that the company was promoted by him as his new business. Hence, he should have taken the permission of ICAI.   

The AA explained that settled law is that what cannot be done directly, cannot be done indirectly. If a CA cannot indulge in business directly, he cannot indulge in business indirectly through a company. The sole purpose of prohibiting a CA from indulging in business activities simultaneously with carrying on his profession of CA shall stand defeated if it is considered that a CA can form a company, can become director of a company and can do all activities as a director without being designated as a Managing Director or Whole-time Director. If it is held that a director having invested 90% of the capital and authorized to sign the Accounts, Directors Report etc., without there being a full time MD/ Whole-time Director and without any experienced Directors to run the company, was not actively involved in the business of the company, that would be travesty of justice.

The AA stated that a line has to be drawn between a director simplicitor and a director actively involved in the business activities of a company and opined that a Director who attends Board Meetings for taking policy decisions, advising a company on the issue of compliance of laws and even signs only those statutory documents which he is duty bound to sign as a director, would not be a director involved in the business of the company but would be a director performing statutory duties but not a Director who has incorporated the company with 90% of equity held by himself, authority to act on behalf of the company as a signatory to Annual Reports, resulting into promotion of the business of the company and corresponds with different persons on behalf of the company, would be a director involved in the business affairs of the company, even if he was not a whole time director or managing director.

In view of the above, the AA held that the appellant was actually involved in the business of the company and he formed this company along with his family members in order to venture into a new business apart from the profession of chartered accountancy. The Appellant did indulge in the business without the permission of the Council. He was, therefore, rightly held guilty of professional misconduct by the Board of Discipline.

The AA noted the contents of the threatening letter written by the Appellant to various clients of the firm handled by the said retiring partner. The letter clearly indicated the malafide intentions of the Appellant.

The AA opined that writing of this kind of threatening letters by a CA certainly brings disrepute to the profession of Chartered Accountancy and its body, ICAI. A letter of this kind written by a Chartered Accountant makes him unbecoming of a Chartered Accountant. Therefore, it was held that the BOD had rightly held the Appellant guilty of other misconduct under item (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949

Accordingly, the AA dismissed the appeal filed by the appellant.

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