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2026 Supreme(Online)(NCLT) 2827
NATIONAL COMPANY LAW TRIBUNAL
Union Of India Ministry Of Corporate Affairs – Appellant
Versus
Netwealth Agrotech India Limited – Respondent
CP - 2996/2019
To pass an order under Section 140(5) of the Companies Act, 2013, a demonstrable intent to commit fraud or collude is essential; mere professional negligence or contravention of standards without such intent is insufficient.
Headnote:(A) Companies Act, 2013 - Section 140(5), Section 141(3)(g), Section 143, Section 146, Section 447/448, Section 137, Section 139, Section 58A (1956 Act) - Chartered Accountants Act, 1949 - Clause (8) and (11) of Part I of the First Schedule - Chartered Accountants Regulations, 1988 - Regulation 190A, Appendix 9 - Information Technology Act, 2000 - Section 42.
(B) Companies Act, 2013 - Section 140(5) - Threshold for action against auditor - An order under Section 140(5) requires a demonstrated intent on the part of the auditor to act fraudulently or to abet or collude in fraud; mere negligence or contravention of professional standards, without proof of intent to deceive or gain undue advantage, is insufficient for such an order. (Paras 5.8, 5.22, 5.25)
(C) Companies Act, 2013 - Section 140(5) - Maintainability - The Supreme Court in Union of India v. Deloitte Haskins and Sells LLP (2023) held that proceedings under Section 140(5) are maintainable even after the resignation of the auditor. (Para 5.11)
(D) Companies Act, 2013 - Section 141(3)(g) - Disqualification - A person in full-time employment elsewhere is not eligible for appointment as auditor; the exact nature of employment (teaching) must be determined to assess eligibility. (Paras 5.9, 5.10)
Facts of the case:
The Union of India petitioned under Section 140(5) against a statutory auditor for his role in attesting financial statements of a company alleged to have defrauded investors. The auditor was appointed in April 2018 and signed balance sheets for earlier financial years (2012-2017) with purported ante-dates. The company had not held AGMs since 2013, and two sets of financial statements were filed—one (the '1st Set') without audit reports or notes, and another (the '2nd Set') with them. The auditor claimed the 1st Set was filed by an employee misusing his digital signature. The inspection report recommended fraud action under Sections 447/448.
Findings of Court:
The court found that the auditor failed to exercise due care and followed improper audit procedures, but the necessary elements for an order under Section 140(5) were not met. The fraud by the company occurred before the auditor was appointed. There was no evidence of the auditor's intent to deceive or collude with the directors. The financial statements were attested after the fraud and did not mislead investors during the collection period. No discrepancy was found in the financial numbers. Therefore, a Section 140(5) order could not be passed. The matter was referred to the ICAI for disciplinary proceedings.
Issues: The main issues were whether the auditor had acted fraudulently or colluded in fraud to warrant action under Section 140(5), and whether his appointment and subsequent actions were lawful.
Ratio Decidendi: The court ruled that for an order under Section 140(5), a demonstrable intent to commit fraud or collude is essential; an auditor's negligent or unprofessional conduct, without such intent, does not justify a Section 140(5) order but may lead to other proceedings. Attestation of financial statements after the fraud cannot automatically impute intent to the auditor. Result : CP No. 2996/2019 is disposed of. The Registry is directed to send a copy of the order to the Disciplinary Committee of the ICAI. The petitioners are at liberty to approach the Tribunal if a Special Court finds conclusive proof of fraud and the auditor's knowledge.
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| 1. petition under section 140(5) of the companies act, 2013 seeking removal of statutory auditor, alleging fraudulent filing of financial statements. (Para 1) |
ORDER
1. This petition is filed under Section 140(5) of the Companies Act, 2013 by the Union of India, Ministry of Corporate Affairs through Registrar of Company, Pune against the Respondent No.1, Mr. Dattatray Maruti Khune seeking following reliefs:
a) Direct that the Respondent No.1 shall immediately cease to function as statutory auditor of Respondent No.2 Company.
b) Direct that the Respondent No.1 and his proprietorship firm shall not be eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of order, in terms of second proviso to Section 140(5) of the Companies Act, 2013, read with Explanation I thereto.
c) Pass any other order(s) as deemed fit and proper under the circumstances by the Hon’ble Tribunal.
2. Brief Facts
2.1. That, Mr. Dattatray Maruti Khune i.e. Respondent No.1 is a Chartered Accountant in terms of Section 2(1)(b) of the The Chartered Accountants Act, 1949 and the Proprietor of D.M. Khune & Co., & was appointed as the Statutory Auditor of M/s Networth Agrotech India Limited (Respondent No. 2), a public limited company incorporated on 01.06.2011 under the Companies Act, 1956 and having registered office at Pune. The Respondent No.1 submitted audit report to the financial statements of the Respondent no. 2 for the financial years 2012-2013, 2013-14, 2014-15, 2015-16 and 2016- 2017. It is stated that, no requisite form was filed with RoC Pune for appointment of the auditor, neither by the Company nor by the auditor.
2.2. On the basis of a complaint received from Mr. Sachin Rasal and other investors alleging, inter alia, fraudulent activities of the Company, the Ministry of Corporate Affairs vide letter No. 815/2016/CL-II (WR) dated 08.07.2016 ordered an inspection in the affairs of Respondent No. 2 under Section 206(5) read with Section 207 of the Companies Act, 2013. Pursuant thereto, the inspection was duly carried out and the Inspecting Officer submitted his Inspection Report dated 23.03.2017, which was thereafter placed before the Regional Director (Western Region), Mumbai, and duly forwarded to the Ministry.
2.3. The ministry vide letter No. 1/29/2017- CL-II (WR) dated 08.05.2017 directed the petitioner to re-examine non-fulfillment of duties by the auditor and to submit a supplementary report. Accordingly, the Supplementary Inspection Report dated 25.01.2019 was submitted by the Inspecting Officer ("IO"). During the course of the supplementary inspection, the IO re-examined the matter in detail and observed from the MCA portal that the Company had filed the financial statements of the Respondent no. 2 for the financial years 2012-2013, 2013-14, 2014-15, 2015-16 and 2016-2017 (bearing the signatures of Respondent Statutory Auditor as well as one director of Respondent Company) (hereinafter 1st Set") on 30.04.2018, i.e. subsequent to the submission of the Inspection Report by the then IO, Dr. Amol Shinde, the then Deputy Registrar of Companies, Pune, however the said financial statements didn’t contain the Auditor’s Report thereon and the notes to accounts forming part of such financial statements. Upon examination, the first set of financial statements of the Respondent no. 2 for the financial years 2012-2013, 2013-14, 2014-15, 2015-16 and 2016-2017, so filed, were found to be forged and fabricated. The IO accordingly decided to summon the Directors of the Company as well as the Statutory Auditor who had signed the Balance Sheets, for the purpose of verifying the facts.
2.4. Pursuant thereto, the first auditor of the Company, Mr. Sagar Dharmavat, appeared before the IO on 08.10.2018 in response to a summons issued on 03.10.2018 and recorded his statement. The Directors of the Company, namely, Mr. Machindra Baban Mundhe, Mr. Ram Devidas Aute, Mr. Vikas Bhaurao Falake, Mr. Umrao Vasantrao Gilbile,
