LPA 396/2010 Page 1 of 37 * IN THE HIGH COURT OF DELHI AT NEW DELHI + LPA No. 396/2010 Reserved on: 31st May, 2011 % Date of Decision: 30th September, 2011 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA & ORS. ..... Appellants Through: Mr.Arvind K. Nigam, Sr. Adv. with Mr.Amitesh Bakshi and Mr.Raghav Tandon, Advs. Versus P. RAMA KRISHNA & ANR. ..... Respondents Through: Mr. Amar Dave, Ms. Taru Gupta and Ms.Payal Chatterjee, Advs. for R-1. Mr. Mohit Jolly, Adv. for R-2. CORAM: HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE SANJIV KHANNA 1 Whether reporters of the local papers be allowed to see the judgment? 2 To be referred to the Reporter or not? Yes 3 Whether the judgment should be reported in the Digest? Yes SANJIV KHANNA, J. This intra court appeal under Chapter X of the Letter Patents Act has been filed by the Institute of Chartered Accountants of India, the Council and the Disciplinary Committee of the said Institute, Ms. Vandana D. Nagpal, Director (Discipline). The main contesting respondent is P. Rama Krishna, respondent No. 1, who had filed Writ LPA 396/2010 Page 2 of 37 Petition (Civil) NO. 1721/2010, which has been allowed by the learned Single Judge vide judgment dated 16th April, 2010. 2. At the outset, it may be stated that a very limited but an interesting issue arises for consideration in the present appeal. The appellants have substantially accepted the judgment of the learned Single Judge quashing the decision of the Council dated 3rd February, 2010, consequent upon which the communication dated 19th February, 2010, was written to the first respondent. The said communication has also been quashed. As the appellants have accepted the decision to this extent, we need not go into the said factual aspects or merits of the decision of the learned Single Judge. 3. The issue raised in the present appeal involves interpretation of Section 21D of the Chartered Accountants Act, 1949 (CA Act, 1949, for short). In order to appreciate the controversy and in what circumstances interpretation of the aforesaid Section is required, some basic and essential facts may be noticed. 4. Between 3rd and 21st March, 2002, the Department of Company Affairs, Government of India had carried out inspection of books of LPA 396/2010 Page 3 of 37 accounts of Global Trust Bank Limited under Section 209A of the Companies Act, 1956. Affairs of Global Trust Bank Limited were also investigated extensively by a Joint Parliamentary Committee. Accounts of Global Trust Bank Limited were audited by Lovelock & Lewes (L&L, for short), Chartered Accountants, who were also asked to furnish certain details to the Department of Company Affairs and the Reserve Bank of India. 5. On 6th December, 2002, Reserve Bank of India made a complaint to the appellant institute alleging misconduct by the L&L and asking for action to be taken against them. Paragraph 2 of the said letter reads as under:- “2. We have been informed by the Department of Company Affairs (DCA), Government of India that the inspection of the Bank conducted by them under Sec. 209A of Companies Act, 1956 revealed violations of Sec. 227, 228, 292 and 211 of the Companies Act by the Auditors of the Bank. The report contained comments to the effect that though the auditor had certified that the audit report was based on the audit of the book and records of the branches of the bank, they had actually not audited such branch records. Since the Department’s observation effectively amounts to a statement that the certificate furnished by the auditor of the bank books was not correct, we are referring the matter to your Institute for such action as you may consider necessary. The action taken in this regard may kindly be intimated to us in due course.” LPA 396/2010 Page 4 of 37 6. By letter dated 16th December, 2002, the appellant institute informed the Reserve Bank of India that their letter dated 6th December, 2002, had been forwarded to the Disciplinary Committee of the appellant institute for due processing. By another letter dated 29th January, 2003, the appellant institute informed the Reserve Bank of India that they had not received any reference from the Department of Company Affairs and the Reserve Bank of India should arrange for sending such reference together with supporting documents to enable the institute to proceed further. In this letter it was stated as under:- “I take this opportunity to bring to your kind notice that if the RBI desires to lodge a formal complaint in this regard, it may do so in which case the process of delivery of justice is quick. The relative advantage in filing a complaint and the relevant provisions of the Chartered Accountants Act and the Regulations framed thereunder are enclosed for your information please.” 7. A note enclosed with the letter explained relative advantages of a formal 'complaint” as compared to a mere ‘information’ case. This was followed by correspondence between the appellant institute and the Reserve Bank of India. The Department of Company Affairs also wrote one letter dated 14th May, 2003, calling upon the Reserve Bank of India to file a complaint and enclosed therewith a relevant extract from the LPA 396/2010 Page 5 of 37 inspection report. The Reserve Bank of India, however, expressed their reluctance to file a formal complaint and by their letter dated 19th June, 2003, wrote to the appellant institute stating as under:- “In continuation of our letter DBS.ARS.No. 381/08.35.005 /2002-2003 dated December 6, 2002 on the captioned subject, we forward herewith a copy of the extracts of the report of the inspection under Sec 209A of the Companies Act, 1956 received from the Ministry of Finance & Company Affairs, Department of Company Affairs, Government of India, New Delhi. You are requested to examine the matter in the light of the above report and decide whether the audit firm M/s Lovelock & Lewes, Hyderabad, had discharged their duties properly or not. You may also let us know the action taken in this regard at an early date.” 8. The appellant institute by their communication dated 10th July, 2003, to the Reserve Bank of India, recapitulated the background of the matter and stated as under:- “3. Our letter of even number dated 29th January, 2003, through which you were inter alia requested to use your good offices to procure from the DCA relevant details/ supporting documents pertaining to the matter and send to us and also to lodge a formal complaint, if you so desire, in the matter. Since we have not received any formal complaint in this matter, we presume that your present letter of 19th June, 2003, is in response to our letter of 29th January, 2003, whereby you have requested the Institute to deal with the matter only under “information” route and not under the complaint route.” LPA 396/2010 Page 6 of 37 9. This was followed by another detailed communication dated 22nd July, 2004, written by the appellant institute to the Reserve Bank of India. In this letter, it was stated that the institute was in process of reviewing the matter and requested the Reserve Bank of India for help to procure documents from the Department of Company Affairs. The extracts of the report of the Department of Company Affairs were commented upon. 10. By letter dated 26th July, 2004, written by the appellant institute, L&L Chartered Accountants were asked to send their reply along with supporting documents. The said letter is relevant and for the sake of convenience, a portion thereof is reproduced below: “The Reserve Bank of India has drawn our attention towards alleges irregularities in the above audit. We understand that – (a) the audit of Global Trust Bank Limited for the above period was conducted by your firm; (b) for the year ended, 2002, the quantum of gross NPAs reported by the Bank as reflected in the Balance Sheet (audited by you) was reported as Rs.430.34 crores as on 31st March, 2002. The Special Assignment Report submitted by an Independent firm of Chartered Accountants, however, reckoned the gross NPAs of the Bank at Rs.1542.79 crores (the Annual Financial Inspection carried out by the RBI itself identified the NPAs at Rs.1711.93 crores). Thus, the NPAs as reflected in LPA 396/2010 Page 7 of 37 the audited Balance Sheet was alleged to be significantly understated. Consequently, the bank’s financial position was significantly different from that disclosed in the published balance sheet; (c) for the year 2000-01, the Department of Company Affairs carried out an inspection under Section 209A of the Companies Act, 1956 which revealed various irregularities including violation of Sections 227, 228, 292 and 211 of the Companies Act, 1956. (d) Various news items have appeared, copies of some of them are enclosed herewith. You are requested to send your reply to the above stating factual position duly supported by relevant documents. Your reply may reach us at the earliest, in any case, not later than 11th August, 2004 to enable us to consider the matter in terms of the provisions of the Chartered Accountants Act, 1949 and the Regulations framed thereunder.” 11. L&L were asked to submit their reply not later than 11th August, 2004 along with documents to consider the matter in terms of the provisions of CA Act, 1949 and the Regulations. L&L submitted their reply dated 9th August, 2004, along with supporting documents. Thereafter, correspondence was exchanged between the Reserve Bank of India and the Institute of Chartered Accountants asking for documents etc. 12. Provisions of CA Act, 1949, relating to misconduct and the procedure and penalties, underwent substantial modification and LPA 396/2010 Page 8 of 37 amendments by the Chartered Accountants (Amendment) Act, 2006 (hereinafter referred to as the Amendment Act, 2006). 13. Sections 21 and 22 of the unamended CA Act, 1949 read as under:- “21. Procedure in inquiries relating to misconduct of members of institute. (1) Where on receipt of information by, or of a complaint made to, it, the Council is prima facie of opinion that any member of the Institute has been guilty of any professional or other misconduct, the Council shall refer the case to the Disciplinary Committee, and the Disciplinary Committee shall thereupon hold such inquiry and in such manner as may be prescribed, and shall report the result of its inquiry to the Council. (2) If on receipt of such report the Council finds that the member of the Institute is not guilty of any professional or other misconduct, it shall record its finding accordingly and direct that the proceedings shall be filed or the complaint shall be dismissed, as the case may be. (3) If on receipt of such report the Council finds that the member of the Institute is guilty of any professional or other misconduct, it shall record a finding accordingly and shall proceed in the manner laid down in the succeeding sub- sections. (4) Where the finding is that a member of the Institute has been guilty of a professional misconduct specified in the First Schedule, the Council shall afford to the member an opportunity of being heard before orders are passed against him on the case, and may thereafter make any of the following orders, namely: (a) reprimand the member; LPA 396/2010 Page 9 of 37 (b) remove the name of the member from the Register for such period, not exceeding five years, as the Council thinks fit: Provided that where it appears to the Council that the case is one in which the name of the member ought to be removed from the Register for a period exceeding five years or permanently, it shall not make any order referred to in clause (a) or clause (b), but shall forward the case to the High Court with its recommendations thereon. (5) Where the misconduct in respect of which the Council has found any member of the Institute guilty is misconduct other than any such misconduct as is referred to in sub- section (4), it shall forward the case to the High Court with its recommendations thereon. (6) On receipt of any case under sub- section (4) or sub- section (5), the High Court shall fix a date for the hearing of the case and shall cause notice of the date so fixed to be given to the member of the Institute concerned, the Council and to the Central Government, and shall afford such member, the Council and the Central Government an opportunity of being heard, and may thereafter make any of the following orders, namely:-- (a) direct that the proceedings be filed, or dismiss the complaint, as the case may be; (b) reprimand the member; (c) remove him from membership of the Institute either permanently or for such period as the High Court thinks fit; (d) refer the case to the Council for further inquiry and report. (7) Where it appears to the High Court that the transfer of any case pending before it to another High Court, will promote the ends of justice or tend to the general convenience of the parties, it may so transfer the case, subject to such conditions, if any, as it thinks fit to impose, and the High Court to which such case is transferred shall LPA 396/2010 Page 10 of 37 deal with it as if the case had been forwarded to it by the Council. Explanation I.-- In this section" High Court" means the highest civil court of appeal, not including the Supreme court, exercising jurisdiction in the area in which the person whose conduct is being inquired into carries on business, or has his principal place of business at the commencement of the inquiry: Provided that where the cases relating to two or more members of the Institute have to be forwarded by the Council to different High Courts, the Central Government shall, having regard to the ends of justice and the general convenience of the parties, determine which of the High Courts to the exclusion of others shall hear the cases against all the members. Explanation II.-- For the purposes of this section" member of the Institute" includes a person who was a member of the Institute on the date of the alleged misconduct although he has ceased to be a member of the Institute at the time of the inquiry. (8) For the purposes of any inquiry under this section, the Council and the Disciplinary Committee shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908 .), in respect of the following matters, namely:-- (a) summoning and enforcing the attendance of any person and examining him on oath; (b) the discovery and production of any document; and (c) receiving evidence on affidavit. 22. Professional misconduct defined. For the purposes of this Act, the expression" professional misconduct" shall be deemed to include any act or omission specified in any of the Schedules, but nothing in this section shall be construed to limit or abridge in any way the power conferred or duty cast on the Council under sub- section LPA 396/2010 Page 11 of 37 (1) of section 21 to inquire into the conduct of any member of the Institute under any other circumstances. 22A. Appeals. (1) Any member of the Institute aggrieved by any order of the Council imposing on him any of the penalties referred to in sub- section (4) of section 21, may, within thirty days of the date on which the order is communicated to him, prefer an appeal to the High Court: Provided that the High Court may entertain any such appeal after the expiry of the said period of thirty days, if it is satisfied that the member was prevented by sufficient cause from filing the appeal in time. (2) The High Court may, on its own motion or otherwise, after calling for the records of any case, revise any order made by the Council under sub- section (2) or sub- section (4) of section 21 and may-- (a) confirm, modify or set aside the order; (b) impose any penalty or set aside, reduce, confirm, or enhance the penalty imposed by the order; (c) remit the case to the Council for such further inquiry as the High Court considers proper in the circumstances of the case; or (d) pass such other order as the High Court thinks fit: Provided that no order of the Council shall be modified or set aside unless the Council has been given an opportunity of being heard and no order imposing or enhancing a penalty shall be passed unless the person concerned has also been given an opportunity of being heard. Explanation.-- In this section" High Court" and" member of the Institute" have the same meanings as in section 21.] ” 14. Regulations 12 and 13 of the Chartered Accountants Regulations, 1988 (Regulations, for short) read as follows: LPA 396/2010 Page 12 of 37 12 . COMPLAINTS AND ENQUIRIES RELATING TO MISCONDUCT OF MEMBERS.- (1) Subject to the provisions of this regulation, a complaint against a member under section 21 shall be investigated and all other enquiries relating to misconduct of such member shall be held by the Disciplinary Committee: Provided that if the subject matter of a complaint is, in the opinion of the President, substantially the same as or has been covered by any previous complaint or information received, the Secretary shall file the said complaint without any further action and inform the Complainant accordingly. (2) A complaint under section 21 shall be in the appropriate Form duly verified and shall be in triplicate. (3) Such complaint shall contain the following particulars namely: (a) the acts and omission which, if proved, would render the person complained against guilty of professional or other misconduct; (b) the oral and or documentary evidence relied upon in support of the allegations made in the complaint, (4) Every complaint, other than a complaint made by or on behalf of the Central or any State Government, shall be accompanied by a deposit of one hundred rupees which will be forfeited if the Council, after considering the complaint, comes to the conclusion that no prima facie case is made out and moreover that the complaint is either a frivolous one or is made with mala fide intention. (5) The Secretary shall return a complaint which is not in the appropriate Form or which does not contain the aforesaid particulars to the Complainant for representation after removing the objections thereto and within such time as the Secretary may specify. LPA 396/2010 Page 13 of 37 (6) Ordinarily within sixty days of the receipt of a complaint under section 21, the Secretary shall:- (a) if the complaint is against a member, send a copy thereof to such member at his professional address as entered in the Register; (b) if the complaint is against a firm, send a copy thereof to the firm at the address of its head office, as entered in the register of offices and firms, with a notice calling upon the firm to disclose the name of the member who is answerable to the charge of misconduct and requiring it to send a copy of the complaint to him. Explanation - A notice to the firm shall be deemed to be a notice to all the members who are partners or employees of that firm.(7) A member against whom the complaint is made (hereinafter referred to as the Respondent) may, within fourteen days of the service of a copy of the complaint under sub-regulation (6), or within such time as may be extended by the Secretary, forward to the Secretary in triplicate, a written statement in his defence verified in the same manner as the complaint. (8) On receipt of the written statement, if any, the Secretary shall send a copy thereof to the Complainant and the Complainant may, within 14 days of the service of a copy of the written statement, or within such time as may be extended by the Secretary, forward to the Secretary, in triplicate, his rejoinder on the written statement, duly verified in the same manner as the complaint. (9) On receipt of the Complainant's rejoinder, if any, the Secretary shall send a copy thereof to the respondent and the respondent may within 14 days of the service of a copy of the rejoinder, or within such time as may be extended by the Secretary, forward to the Secretary, in triplicate, his comments on the rejoinder, duly verified in the same manner as the complaint. LPA 396/2010 Page 14 of 37 (10) On a perusal of the complaint, the written statement, if any, the Complainant's rejoinder on the written statement, if any, and the respondent's comments on the Complainant's rejoinder, if any, the President may call for such additional particulars or documents connected therewith either from the Complainant or the respondent as he may consider expedient. (11) (i) If on a perusal of the complaint, the written statement, if any, the Complainant's rejoinder to the written statement, if any, and the respondent's comments on the Complainant's rejoinder, if any, and other relevant documents, the Council is prima facie of opinion that the respondent is guilty of professional and or other misconduct, the Council shall cause an enquiry to be made in the matter by the Disciplinary Committee. (ii) If, on the other hand, the Council is prima facie of opinion that the respondent is not guilty of any professional or other misconduct, the complaint shall be filed and the Complainant and the respondent shall be informed accordingly. (12) (i) Any notice issued by the Secretary under this regulation shall be sent to the member or the firm, as the case may be, by registered post with acknowledgement due. (ii) If any such notice is returned unserved with an endorsement to the effect that the addressee had refused to accept the notice, the notice shall be deemed to have been served. (iii) If the notice is returned with an endorsement to the effect that the addressee cannot be found at the address given, the Secretary shall ask the Complainant to supply to him the correct address of the member or the firm, as the case may be. (iv) A fresh notice shall be issued to the member or the firm at the correct address. LPA 396/2010 Page 15 of 37 (13) The provision relating to a notice shall apply 'mutatis mutandis' to a latter. 13. INFORMATION RELATING TO MISCONDUCT OF MEMBERS.- The procedure laid down in sub-regulation (1) and sub- regulations (6) of (13) of regulation 12 shall, so far as may be, apply to an information received under section 21.” 15. Post Amendment Act, 2006, Sections 21 to 21C of the CA Act, 1949, read as under:- “MISCONDUCT 21. Disciplinary Directorate. (1) The Council shall, by notification, establish a Disciplinary Directorate headed by an officer of the Institute designated as Director (Discipline) and such other employees for making investigations in respect of any information or complaint received by it. (2) On receipt of any information or complaint along with the prescribed fee, the Director (Discipline) shall arrive at a prima facie opinion on the occurrence of the alleged misconduct. (3) Where the Director (Discipline) is of the opinion that a member is guilty of any professional or other misconduct mentioned in the First Schedule, he shall place the matter before the Board of Discipline and where the Director (Discipline) is of the opinion that a member is guilty of any professional or other misconduct mentioned in the Second Schedule or in both the Schedules, he shall place the matter before the Disciplinary Committee. (4) In order to make investigations under the provisions of this Act, the Disciplinary Directorate shall follow such procedure as may be specified. LPA 396/2010 Page 16 of 37 (5) Where a complainant withdraws the complaint, the Director (Discipline) shall place such withdrawal before the Board of Discipline or, as the case may be, the Disciplinary Committee,