Delhi High Court: In the case relating to PNB-Nirav Modi scam, the Single Judge Bench of Yashwant Varma, J., has upheld the power of the Institute of Chartered Accountant of India (‘The Institute’) to proceed suo motu and unhindered by the absence of a written complaint or allegation submitted, under Section 21 of the Chartered Accountants Act, 1949.
However, the Court did not render any opinion on the merits of the charges which stood against the petitioners, who have assailed the validity of the show cause notice issued by the Disciplinary Directorate and sought quashing of the disciplinary proceeding initiated against them.
Factual Matrix of the case
The Mumbai zonal office of Punjab National Bank (‘PNB’) lodged three separate criminal complaints in 2018 against the firms connected with the fugitive Nirav Modi who had defrauded PNB. Upon the filing of these complaints, various newspapers carried articles exposing the fraud and liability detected at PNB. It was alleged by the petitioner that relying on such publications, a show cause notice was issued asserting that the news reports indicate that the Joint Secretary Auditors had not complied with the Standards on Auditing (‘SA’) and accordingly called the petitioner to show cause why disciplinary proceedings must not be initiated against them.
The Institute had initiated suo motu disciplinary proceedings against the members of different chartered accountancy firms which were appointed as Joint Statutory Auditors of PNB for conducting limited review and annual audit for the financial year 2017-2018.
Issue:
Whether the Institute could be recognized to have a suo motu power to initiate disciplinary proceedings against its members?
Court Observation, Analysis and Findings
Governing Principles of Limited Review Report
The Court said that the Limited Review Report was tendered after the Joint Statutory Auditors had been apprised by PNB of the incident of fraud.
The policy framed by PNB in respect of materiality to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (‘2015 Regulation’) and more particularly Part B of Schedule III in Para 5A deals with any other information/event in relation to major development that is likely to affect business. It is perhaps with reference to Para 5A that PNB appears to have advised the Joint Statutory Auditors of there being no requirement of mentioning or recording the loss suffered by it as a result of the incidents which occurred at its Brady House branch.
Semantic Connotation under Section 21
The Court noted that the word ‘information’ under section 21 was clearly amplified by the prefix ‘any’ which indicates the intent of the legislature to treat the word information as being of the wildest amplitude. The Court defined the expression ‘information’ to mean instruction or knowledge derived from an external source concerning facts or particulars.
Complaint on the other hand was understood to mean and include providing of information with respect to a grievance of injustice suffered or injury borne by an individual.
The Institute’s power to initiate suo mot proceedings
The Court said that the entities being empowered to exercise suo motu, rested on the language of the statutory provisions which governed the exercise of jurisdiction. The Court found that it could also proceed based on cogent information that may be either gathered or may come to light from an external source.
The Court opined that “Section 21 does empower the Institute to proceed suo motu and unhindered by the absence of a written complaint or allegation that may be submitted. A written complaint or allegation in writing cannot, in any manner, be understood to be a pre-requisite or a sine qua non for the initiation of action under Section 21.”
The Court said that the material need not necessarily be in the written or be interpreted as being confined to something which an individual may choose to bring to the notice of the Institute.
The Court took note of the provisions of the 2022 Amending Act which were yet to be enforced and opined that “the insertion of the word “suo motu” in Section 21 in terms of the provisions of the 2022 Amending Act cannot be readily understood or accepted to be the act of the Legislature in supplying an omission or a specific conferral of a power.”
Application of Rule 7
The Court held that a Rule cannot possibly be understood or held to be determinative of the scope or content of a provision placed in the parent enactment. They essentially supplement and are ancillary to the principal provisions contained in the Act. They cannot possibly be interpreted in a manner which would either scuttle the parent provision or extract or delete something therefrom.
Terminology ‘Information’
The Court noted that it would be wholly incorrect to accept the contention that the initiation of the enquiry was based simply on news reports. As has been averred on behalf of the respondents, the news report only brought certain facts relating to a financial scam which had occurred in PNB to the notice of the respondents. The matter thereafter appears to have been scrutinised in further detail with appropriate information being gathered from PNB and the LRR also being carefully examined. Action which was initiated and the material which was treated as ‘information’ for the purposes of Section 21 was not based on mere newspaper reports.
“What appears to have transpired is of the news reports merely acting as a catalyst for the Institute to delve deeper into the massive fraud which had occurred and to examine whether any member had failed to abide by the SA’s which applied.”, observed the Court.
Prefix ‘Any’
The Court further takes into consideration the significance of the prefix ‘any’ to the word ‘information’ as occurring in Section 21 of the Act. The Court said that “It appears to be a conscious attempt by the authors of the statute to confer an expansive meaning upon the word and not confine or whittle it down to the rigours and formality that may be attached to a written complaint that may be received by the Institute.” If Section 21 were narrowly construed as suggested by the petitioners, it would clearly undermine the duty and obligation of the Institute to examine cases of professional misconduct and restrict it to being able to initiate action against a member dependent upon whether it had received written information or complaints.
Conclusion
The Court went on to say that the power of an authority to proceed of its own motion or initiative would principally have to be evaluated bearing in mind the language of the statute and the nature of the power that may stand conferred upon such a body.
Therefore, Section 21 of Chartered Accountants Act, 1949 does empower the Institute to proceed suo motu and unhindered by the absence of a written complaint or allegation that may be submitted. A written complaint or allegation in writing cannot, in any manner, be understood to be a pre-requisite or a sine qua non for the initiation of action under Section 21.
Viewed in that light, the Court was of the firm opinion that the Institute did have the requisite information as contemplated by Section 21 and which justified the initiation of the enquiry against the petitioners and accordingly dismissed all the petitions without rendering any opinion on the merits of the charges against the petitioners.
[CA Sanjay Jain v. Institute of Chartered Accountants of India, 2022 SCC OnLine Del 4469, decided on 16-12-2022]
Advocates who appeared in this case :
For the Petitioner- Senior Advocate Sudhir Nandrajog;
Advocate Sunita Sharma;
Advocate Sunita Sharma;
Advocate Deepak Verma;
Advocate Dhiraj Abraham Philip;
Advocate Uttam Datt;
Advocate Sonakshi Singh;
Advocate Kumar Bhaskar;
For the Respondent- Senior Advocate Ramji Srinivasan;
Advocate Pooja M. Saigal;
Advocate Simrat Singh Pasay;
Advocate Shruti Pandey;
Advocate Megha Dugar.