Tribunal Upholds Jurisdiction in Financial Offenses Case

The Tribunal found that the National Company Law Tribunal (NCLT) had jurisdiction to exercise powers for offenses related to financial years 2014-15 and 2015-16, as the appellant issued the audit report for FY 2015-16 after the relevant provision came into force. The inspection report revealed fraudulent activities by the directors of Respondent No.2 company, including diversion of funds collected through an IPO. While the appellant's auditing was deemed negligent, there was no evidence of fraud or collusion. The Tribunal held that the appellant was not afforded a fair opportunity to defend himself, ultimately setting aside the impugned order.

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Issues Involved:
1. Jurisdiction of NCLT under Section 140(5) of the Companies Act, 2013.
2. Allegations of fraudulent activities and siphoning of funds by the directors of Respondent No.2 company.
3. Role and liability of the appellant as the statutory auditor for the financial years 2014-15 and 2015-16.
4. Procedural fairness and opportunity to the appellant to defend himself.

Issue-wise Detailed Analysis:

1. Jurisdiction of NCLT under Section 140(5) of the Companies Act, 2013:
The appellant contended that the Second Proviso to sub-section (5) of Section 140 of the Companies Act, 2013 was enforced from 1.6.2016, and thus, NCLT did not have the jurisdiction to exercise powers for offences related to financial years 2014-15 and 2015-16. The appellant argued that the provision is penal and cannot be applied retrospectively, citing Article 20(1) of the Constitution. However, the Tribunal found that the appellant issued the audit report for FY 2015-16 on 5.9.2016, after the provision came into force on 1.6.2016, thus conferring jurisdiction on NCLT.

2. Allegations of fraudulent activities and siphoning of funds by the directors of Respondent No.2 company:
The inspection report highlighted several allegations, including non-listing of shares, siphoning of investors' money, non-issuance of financial statements post-1995, frequent changes in the registered office, and lack of response to regulatory calls. The report detailed how funds collected through the IPO were diverted to loans and advances and used to write off significant expenses. The directors responsible for these actions were not traceable, and the current directors were deemed dummy/shadow directors. The initial promoters were no longer involved post-2005, and the company exhibited characteristics of a shell company.

3. Role and liability of the appellant as the statutory auditor for the financial years 2014-15 and 2015-16:
The appellant was appointed as the statutory auditor on 12.3.2014 and issued audit reports for FY 2014-15 and 2015-16. The previous auditor had also certified balance sheets based on the information that there were no business transactions. The appellant followed the same process without calling for books of accounts or statutory registers. The Tribunal acknowledged that while the appellant's actions were negligent, there was no evidence to suggest he acted fraudulently or colluded with the company's directors. The funds were siphoned off by earlier directors, and the appellant's audit reports were based on the lack of business activity during his tenure.

4. Procedural fairness and opportunity to the appellant to defend himself:
The appellant argued that he was not given a reasonable opportunity to defend himself as he did not receive material documents before his statement was recorded by the Inspecting Officer. The appellant also claimed financial hardship prevented him from engaging counsel and filing a formal reply. Despite accepting the interim order, he did not anticipate further adverse action. The Tribunal noted that the appellant was not provided with adequate opportunity to defend himself and that the Inspecting Officer's report alone could not substantiate the allegations of fraud against him.

Conclusion:
The Tribunal concluded that the findings of the NCLT were not sustainable in law or facts. The appellant's actions were deemed negligent but not fraudulent. The appeal was allowed, and the impugned order was set aside, with no order as to costs.

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