Auditor Cannot Be Debarred For 5 Years Under Section 140 (5) Of The Companies Act 2013 In Absence Of Evidence : NCLAT

The NCLAT has set aside an order passed by NCLT in a matter relating to debarring of an auditor for a period of 5 years. The court while allowing the appeal held that though he was negligent, there was no material on record to infer that the auditor had acted fraudulently or misused his position as a statutory auditor,

The Appellant was appointed as the statutory auditor in 2014 of Zen Shaving Ltd and had challenged an order passed by the NCLT, Mumbai Bench for invocation of Section 140 (5) of the Companies Act 2013, debarring him to be appointed as an auditor for a period of five years and refund of the remuneration received for the period.

Zen Shaving Ltd was incorporated in 1995 and came out with an initial public offer in 1996. The earlier promoters/directors who were looking after the affairs of the company till 2004 siphoned off funds collected through the IPO and were not traceable. On the basis of a complaint to the Ministry of Corporate Affairs in 2017, the inspecting officer in his report highlighted that many notices were sent to the company but postal were returned as the company had changed its address and he could not trace the directors who had committed the said defraud. The inspection report further stated that no material documents were produced before the appellant and all questions were answered by him as per his knowledge.

The outgoing auditors had certified financial statements for the year ending on 31st March, 2013 on the basis of information given to them that the company had no books of accounts and had not carried out any business activities. The appellant also followed the same process and issued the auditors report for the FY 2015-16 on 5.9.2016. Since the 2nd proviso to sub-section (5) of Section 140 of the Act came into force with effect from 1.6.2016, the court held that NCLT could exercise the powers in the said provision.

The Bench held that whilst it was the duty of the statutory auditor to bring forth the frauds committed by the company and its directors, there was no material on record to infer that the auditor had acted fraudulently and/or colluded with the directors in relation to affairs of the company or misused his position as statutory auditor.

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