Mukesh Maneklal Choksi vs Union Of India & Anr

1

NATIONAL COMPANY LAW APPELLATE TRIBUNAL NEW DELHI COMPANY APPEAL (AT) NO.89 OF 2019 (ARISING OUT OF JUDGEMENT AND ORDER DATED 06.02.2019 PASSED BY THE NATIONAL COMPANY LAW TRIBUNAL, MUMBAI BENCH IN CP NO.4365/140(5)/MB/2018) In the matter of: Mukesh Maneklal Choksi, 101, Mickey's Heritage, 7th Road, TPS-III, above HDFC Bank, Santacruz (East) Mumbai 400055 Appellant

Vs

1. Union of India, Ministry of Corporate Affairs, Through Regional Director, (Western Region), 100, Everest, 5th Floor, Marine Drive, Mumbai 400002

2. Zen Shaving Limited, Anmol CHS-C Wing, Flat No.1602, SV Road, Goregaon (West), Mumbai 400062 Respondent

Mr. Nesar Ahmed, PCS, Mr. Rohit Chaudhary, Advocate for the appellant. Mr. C. Balooni, Asstt. Director for R1.

JUDGEMENT

(17th FEBRUARY, 2020)

JUSTICE JARAT KUMAR JAIN, MEMBER (JUDICIAL)

The appellant, Mukesh Maneklal Choksi, filed this appeal against the

order dated 06.02.2019 passed by National Company Law Tribunal, (in brief

'NCLT') in CP No.4365/140(5)/MB/2018.

2. The brief facts of this case are that M/s Zen Shaving Ltd, Respondent

No.2 herein, incorporated on 07.03.1995 under the Companies Act, 1956. On

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10.10.1996, Respondent No.2 company came out with initial public offer and

issued prospectus to raise public funds. On 12.03.2014 the appellant was

appointed statutory auditor of the Respondent No.2 company. The appellant

issued auditor report for the financial year 2014-15 and 2015-16 on 5.9.2015

and 5.9.2016 respectively. On 20.3.2017 Respondent No.1 herein through

Ministry of Corporate Affairs ordered inspection of Respondent No.2 company

on the basis of complaint received from Jagdip H Vaishnav against

Respondent No.2 company inter alia alleging syphoning of investors' money

and also about irregularities in statutory compliances including non-listing of

company with Pune Stock Exchange, non-issuance of financial statements

after 1995. On 10.5.2018 the Inspecting Officers of Respondent No.1

submitted its inspection report wherein it was highlighted that many times

notices were sent to Respondent No.2 company through post but postal

articles were returned with endorsement "Left". On 13.8.2018 Inspecting

Officer furnished supplementary inspection report to Respondent No.1.

3. Respondent No.1 through MCA addressed a letter to the Regional

Director, Western Region and forwarded inspection report of Respondent No.2

company, with a direction to take action under Section 140(5) of the

Companies Act, 2013 (hereinafter referred to as the "Act"). On the basis of

the inspection report, Asstt. Registrar of Companies, Maharashtra, Mumbai

filed a Special Company Case No.34 of 2018 before the City Civil & Sessions

Court under Section 447 of the Act against the appellant for providing clean

audit reports to Respondent No.2 company for the financial year 2014-15 and

2015-16. On 26.11.2018 Respondent No.1 through the office of Regional

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Director, Western Region, filed Company Petition No.4365/140(5)/MB/2018

before the National Company Law Tribunal, Mumbai Bench (hereinafter

referred to as NCLT) under Section 140(5) of the Act. On 3.1.2019 NCLT

passed ad interim order whereby it was directed that the appellant shall cease

to act as statutory auditor of Respondent No.2 company and further permitted

Respondent No.1 to appoint an independent auditor for Respondent No.2

company.

4. After hearing the parties NCLT vide order dated 6.2.2019 directed that

appellant shall not be eligible to be appointed as an Auditor of any company

for a period of five years and also directed to refund the remuneration received

by him during the period he acted as Auditor, back to the Respondent No.2

company. It is also directed that the auditor shall also be liable for action

under Section 447 of the Act.

5. Being aggrieved with this order the appellant filed the present appeal.

6. Learned counsel for the appellant filed written submissions and

submitted that Second proviso to sub-section (5) of Section 140(5) of the Act

was enforced w.e.f. 1.6.2016. From this date the NCLT was conferred with

the jurisdiction to exercise powers under Second Proviso to sub-section (5) of

Section 140 of the Act. Therefore, the NCLT cannot invoke the jurisdiction for

the offence relating to financial years 2014-15 and 2015-16. It is further

submitted that above referred provision is a penal provision and cannot be

invoked retrospectively. Article 20(1) of the Constitution provides that no

person shall be convicted of any offence except for violation of law in force at

the time of the commissioning of the act charged as an offence, nor be

Company Appeal (AT) No.89/2019 4

subjected to a penalty greater than that which might have been inflicted under

the law in force at the time of commission of the offence.

7. It is further submitted that the appellant was appointed as an Auditor

of Respondent No.2 company for the financial year 2014-15 and 2015-16.

During this period the company had not carried on any business activity.

Previous auditor of the Respondent No.2 company i.e. SM Bhatt & Associates

CAs (outgoing auditors) issued a letter dated 10.3.2014 to the appellant

stating that they had certified balance sheets and Profit & Loss Account of the

company for the year ending on 31st March, 2013 on the basis of information

given to them that there were no business transactions during the year. They

have also clarified that Respondent No.2 company was not carrying on any

business since many years and no books of accounts were produced before

them for the purpose of audit. After considering the fact that the previous

auditor had also adopted the same process the appellant has prepared the

audit report for the financial year 2014-15 and 2015-16.

8. It is also submitted that Inspecting Officer before recording appellant's

statement has not provided the material documents, therefore, the appellant

answered the questions as per the knowledge. Thus the reasonable

opportunity has not been given to the appellant and the statement recorded

by the Inspecting Officer cannot be used against the appellant.

9. Learned counsel for the appellant submits that Respondent No.1 except

filing the inspection report has not placed on record any evidence to prove

that the appellant directly or indirectly acted in a fraudulent manner or

colluded in any fraud by or in relation to the company or its directors or its

officers. The funds collected through initial public offer by the

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promoters/directors have already been siphoned off by them and in the

financial year 2014-15 and 2015-16 Respondent No.2 has not carried out any

business. The NCLT without giving any finding in this regard punished the

appellant which is a major punishment without evidence.

10. Learned counsel for the appellant further submits that NCLT before

passing the order that the appellant would be ineligible to be appointed as an

auditor of the company has not given reasonable opportunity to put up his

defence and solely gives his findings on the report of Inspecting Officer. The

appellant has not committed any act, omission or concealed any fact in any

manner with intent to deceive or gain undue advantage from Respondent No.2

and its stakeholders.

11. Learned counsel for the appellant submits that due to financial

hardship the appellant could not engage counsel and did not file a formal

reply to the company petition. However, he has filed an affidavit dated

18.1.2019 with the Respondent No.1 stating that he accepted the interim

order passed by NCLT. He did not expect that any further adverse order to

be passed against him. The appellant being a senior citizen and is a sole

bread earner for his family, hence taking sympathetic view impugned order

be set aside.

12. Learned counsel for the Respondent No.1 has also filed the written

submissions and submits that the appellant has accepted the interim order

passed by the NCLT, hence on this ground alone appeal may be dismissed.

Inspecting Officers conferred with the powers of Civil Court under Section

207(3) of the Act, therefore, during the inspection he has recorded the

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statement of appellant and appellant admitted that he has not called for any

books of accounts and statutory register from the company and not audited

the books of accounts of the company. It was found during the inspection

that the company has defaulted/siphoned off funds, in such a situation it was

duty of the statutory auditor to point it out and highlight the frauds

committed by the company and its directors. However, the appellant being a

statutory auditor fails to do so.

13. It is also submitted that as per appellant he has received a letter from

earlier statutory auditor that Respondent No.1 was not maintaining any books

of accounts. However, such letter has not been brought to the notice of

Inspecting Officer nor before the NCLT. This letter was produced before this

Appellate Tribunal. At this stage the appellant may not be allowed to raise

new submissions. The appellant has specifically admitted that the

Respondent No.1 has not produced any accounts books and without the

accounts books he has prepared the audit report and has given a conclusion

report. It seems that he is actively colluded with the Management of the

company in perpetrating frauds. The appellant has failed to discharge his

duty as statutory auditor. The impugned order is well reasoned order. Hence

the appeal may be dismissed.

14. Respondent No.2 company is unrepresented.

15. Having considered the submissions on behalf of the parties we have

perused the record.

16. The findings of the NCLT is based on the report of Inspecting Officer,

hence firstly we would like to refer the allegations raised in the complaint by

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Mr. Jagdip H. Vaishnav and findings of Inspecting Officer in his report which

are as under:-

i) shares are not listed at Pune Stock Exchange.

ii) Siphoning of investors money.

iii) Company has not issued financial statement after 1995.

iv) Company changes registered office frequently.

v) No company representatives attends calls given by ROC Mumbai.

vi) Investors are complaining about serious irregularities but do not get

any response from regulators, investigating agency.

17. Pursuant to inspection, the Inspecting Officer has submitted an

inspection report dated 10.5.2018 and supplementary inspection report dated

13.8.2018 wherein it is stated that:

1. Many of the allegations raised by the complainant, Mr. Jagdip H.

Vaishhav, are true due to the sheer fact that no registered office fo the

Respondent No.2 company, existed.

2. No books of accounts of the Respondent No.2 company were produced

to the Inspecting Officer despite notices and summons being issued to

the R2 company, its directors and statutory auditors.

3. The Director/Managing Director at the helm of affairs failed to respond

to the notices issued by the Inspecting Officer.

4. The R2 company came out with Initial Public Officer(IPO) and issued

prospectus to raise public funds on 10.10.1996. Thereafter the team

of directors has completely changed. The Initial Promoters of the Company Appeal (AT) No.89/2019 8

Company are not involved in the affairs of the Company after

29.09.2005. The R2 company is not listed on any stock exchange

despite the assurances given in the Prospectus dated 10.10.1996.

5. The date or retirement of Shri Ketan A Gaglani, Managing Director who

was involved in the day to day affairs of the Respondent No.2

company since18.12.1995 (the company was incorporated on

07.03.1995) had retired on 29.09.2005.

6. The present directors, who took over the affairs of the R2 company

since 04.10.2014, are not traceable.

7. The present directors of the R2 company are dummy/shadow

directors of Mr. Arvind Goyal Babulal, the Chairman of the R2

company, who dodged his responsibilities to assist in the inspection.

8. All the commonly known attributes of a shell company exist in the case

of R2 company under inspection.

9. Mr Arvind Goyal Babulal, the Chairman of the R2 company, regarding

provisions of Section 2(60)(v) of the Companies Act, 2013, is the

"officer in default."

10. The actions of the company and its directors prove that all the

allegations raised are true and correct."

18. The Respondent company came up with an initial public offer vide

prospectus dated 10.10.1996 with issue of 3955000 equity shares of Rs.10/-

each as per aggregating Rs.39550000/-. As per the statement made in the

prospectus the shares of Respondent Company were to be listed on Pune,

Vadodara and Ahmedabad Stock Exchange. However, it has been noted by

the Inspecting Officer that the company is not listed in any of the Stock

Company Appeal (AT) No.89/2019 9

Exchange. In the report the details of funds collected and siphoned off has

been mentioned. As per report before public issue loans and advances as on

31st March, 1996 amounting to Rs.33,14,592/- and post public issue the said

amount is tremendously increased to Rs.3,41,04,407/- as on 31st March,

2016. The Respondent company has diverted funds to loans and advances.

Apart from this the Respondent Company has used public issue proceeds to

write off more than Rs.15.33 lakhs as expenses pertaining to capital issue,

prospectus and registration fee/expenses etc.

19. It is clear that the directors of Respondent No.2 company have not spent

public issue money for the purpose for which the public issue was made, have

not met the promise made in the prospectus, have diverted the funds and

thus the prospectus dated 10.10.1996 issued by the Respondent company

contains false and misleading promises. In the report, it is also found that

the earning per share basic/diluted for 31.3.2014, 31.3.2015 and 31.3.2016

is Rs.0.00055, company has enjoyed all the benefits given by the government

for 12 years from the date of public issue and there is clear cut indication that

the respondent company is heading for salvation.

20. It is clear that in the terms of provisions of Section 62(1) of the

Companies Act, 1956 the persons who are authorised to issue or prospectus

of the public/persons to subscribe for shares in/or debentures of the

company shall be liable to pay compensation to every person who subscribes

any shares in/or debentures of the company on the faith of prospectus for

any loss or damage. It is also found that the company came out with Initial

Public Offer and issued prospectus to raise public funds on 10.10.1996.

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Thereafter the team of directors has completely changed. The initial

promoters of the company are not involved in the affairs of the company

subsequent to 29.9.2005 the directors who took over the affairs of the

company since 4.10.2004 are not traceable. The present directors of the

company are apparently dummy/shadow directors. Mr. Arvind Goyal Babu

Lal, the chairman of the company who dodged his responsibility to assist in

the inspection.

21. Thus it is apparent that Inspecting Officer could not trace out the

directors who have actually defraud the shareholders and for last many years

the company is not carrying out any business. In this background we have

considered the submission of appellant. The appellant was appointed as an

Auditor on 12.3.2014 and he has issued audit report for the financial year

2014-15 and 2015-16. During this period the company has not carried out

any business activity. Previous auditor of the company i.e. SM Bhatt and

Associates issued letter dated 10.3.2014 to the appellant stating that they

have certified balance sheets and profit and loss account of the company for

the year ending on 31.3.2013 on the basis of information given to them that

there were no business transactions during the year. Appellant submitted

that he adopted the same process and prepared the audit reports for the

Financial Years 2014-15 and 2015-16. It is true that during the audit he has

not called for any books of accounts and statutory register from the company.

However, he has signed audit report of the company for the relevant period.

Only on this ground it cannot be inferred that the appellant being an auditor

acted in a fraudulent manner or abated or colluded in any fraud by or in

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relation to the company or its directors. It is apparent from the report of the

Inspecting Officer that the funds collected by IPO has already been siphoned

off by the earlier directors and the directors who are looking to the affairs of

the company till 2004 are not traceable.

22. We have carefully examined the balance sheets and financial

statements for the financial year 2014-15 and 2015-16 which shows that the

company has not carried out any business. We have also found that the

respondent company has not filed any statements before the ROC since its

incorporation. However, the ROC has not taken any action against the

company and its directors. We have also seen that the directors have siphoned

the money between 1996 to 2004. However, the inspection was ordered on

20th March, 2017 and the report submitted on 10.5.2018 and supplementary

report on 13.8.2018 and the Inspecting Officer is unable to trace out real

culprits i.e. the then directors.

23. Now we have considered the legal issue raised in this appeal is that

NCLT has passed the order against the appellant under 2nd proviso to sub-

Section (5) of 140 of the Act which came into force on 1.6.2016. However, the

appellant issued report for the FY 2014-15 and 2015-16 i.e. prior to the

provision came into force. Therefore, NCLT cannot invoke jurisdiction

retrospectively.

24. The appellant was appointed on 12.3.2014 as statutory auditor of the

Respondent No.2 company. The appellant issued audit report for the

Financial Year 2014-15 and 2015-16 on 5.9.2015 and 05.09.2016

respectively. The appellant has issued the audit report for the FY 2015-16 on

Company Appeal (AT) No.89/2019 12

5.9.2016 before that the 2nd proviso to sub-section (5) of Section 140 of the

Act came into force with effect from 1.6.2016. Hence NCLT can exercise the

powers in above referred provision.

25. We are of the view that the act of the appellant is certainly a negligent

act but there is no material on record to infer that he has acted fraudulently

and colluded with the directors of the company in relation to affairs of the

company or he has misused his position as statutory auditor of the company.

26. We are of the considered view that the findings of the NCLT are not

sustainable in law as well as in facts. Therefore, the appeal is hereby allowed

and the impugned order is set aside. However, no order as to cost.

(Justice Jarat Kumar Jain) Member (Judicial)

(Mr. Balvinder Singh) Member (Technical)

(Dr.Ashok Kumar Mishra) Member (Technical) New Delhi Bm

Company Appeal (AT) No.89/2019