Non reflection of NPA assignment in balance sheet of borrower was not misconduct by CA

Non reflection of NPA assignment in balance sheet of borrower not misconduct as it was of no relevance either for true and fair view or disclosure

ABCAUS Case Law Citation:
ABCAUS 2458 (2018) 08 AA

The appellant chartered accountant (CA) was aggrieved by the Report and Order passed by the Disciplinary Committee (DC) of the Institute of Chartered Accountants of India (ICAI) under Section 21B (3) of the Chartered Accountants Act, 1949 (the CA Act) read with Rule 19 (1) of the Chartered Accountants (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 (Misconduct Rules)

The Disciplinary Committee by the impugned order had held the CA guilty of negligence/ failure to obtain sufficient information under Clauses (7) and (8) of Part-I related to “Professional misconduct in relation to chartered accountants in practice” of the Second Schedule to the Chartered Accountants Act, 1949 and awarded punishment of removal of name from the Register of Members for a period of one year and also imposed a fine of Rs. 50,000/-

The chief operating officer (COO) of a Mumbai based company (the Complainant) had filed a complaint in Form-I against the said CA alleging that the complainant was a Reserve Bank of India (RBI) licensed Securitization Company (SR/RC) registered under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The complainant had acquired the entire debts of a company from Axis Bank. Upon assignment under section 5 of the SARFAESI Act, the IARC has become the secured creditors of the borrower company in place of Axis Bank with respect to cash credit and term loan facilities.

The said cash credit and term loan were recognized as secured liabilities of the borrower company every year in their balance sheet. Since, with the assignment of above debts to IARC, IARC become and therefore was to be shown as the “Secured lender” in place of Axis Bank in the financial statements of the Company for the year 2011 onwards in respect of the entire amount of outstanding. However, in spite of the clear statutory provisions in this regard, the CA ignored the same and had instead chosen to allow misrepresenting IARC’s dues at a lower amount and still showing Axis Bank as their secured lender in respect of the various facilities, year after year.

The complainant had thus alleged that the appellant chartered accountant in spite of clearly being in knowledge of facts of the said assignment had misrepresented facts and not disclosed the correct liability of the borrower company with respect to IARC, the disclosure of which was necessary.

The Director (Discipline) formed the Prima Facie Opinion against the appellant CA and placed it before the Disciplinary Committee which finally agreed with the Prima facie Opinion decided to proceed further and ultimately held the Appellant CA guilty of professional misconduct and awarded the impugned punishment.

Before the Appellate Authority the appellant argued that the said technical error in no way affected any right or remedy of the complainant and it was wrong to term the same as material misstatement. No loss whatsoever was caused to the Complainant or to any other person. He further submitted that the true and fair view of the financial statements was also not impaired in any manner. The Appellant has exercised all due care and diligence and cannot be said to be grossly negligent in the conduct of his professional duties and he had obtained sufficient information to warrant the expression of his opinion as given.

The Appellate Authority observed that the appellant, before the Director (Discipline) and subsequently before the Disciplinary Committee had raised all his contentions. However, no suitable rebuttal of the same was given by the Complainant. The Complainant failed to point out as to how the true and fair view was impaired, or how any statutory compliance was violated or how his rights were affected in any manner whatsoever. In fact, the ICAI fairly admitted that there was no charge of impairment of true and fair view of financial statements.

The Appellate Authority opined that the fact of account of borrower company becoming NPA in Axis Bank was also of no relevance for the purpose of audit either for true and fair view or disclosure. Even there was no charge framed on this account.

The Appellate Authority observed that the CA had diligently performed his duties inter-alia when he sent his assistant to Axis Bank to verify the loan amount. The affidavit of said assistant before Disciplinary Committee was not uncontroverted by the Institute or by the Complainant. The examination of Register of Charges maintained by the company was also amounted to proper diligence. Further the borrower company had also confirmed non intimation about the assignment of loan to the appellant which had also not been replied by the Complainant. The verification of pendency of the Charges of Axis Bank against borrower in the records of ROC till date also showed proper and diligent enquiry made by the CA.

Thus the Appellate Authority held that the appellant CA that it may at worst be a technical error and therefore, it could not be said that the due diligence was not exercised or there was any negligence, much less gross negligence.

Regarding the allegation under clause (8) of Part-I of the Second Schedule to the CA Act, the Appellate Authority observed that no case was made out by the Complainant that there was any exception to negate the expression of opinion as no instance was cited by him for the same. Coming to later part of clause as to whether the Appellant had obtained sufficient information to express of an opinion, the Appellant had made various enquiries and obtained the required information and explanations as he considered necessary. No deficiency in the same had been pointed out by the Complainant. Thus there was no substance in this charge.

Accordingly, the Appellate Authority held that the appellant was “Not Guilty” under clause (7) or (8) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949 and set aside the order passed by the Disciplinary Committee of the Institute of Chartered Accountants of India.

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