ASSURING COMPLIANCES AND SOLUTIONS BEYOND CHALLENGE · 2019-03-17 · ASSURING COMPLIANCES AND...

ASSURING COMPLIANCES AND SOLUTIONS BEYOND CHALLENGE

PRACTISING COMPANY SECRETARIES & TRADEMARK AGENTS CHENNAI, BANGALORE & COIMBATORE

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& Case Management

“STUDY OF BALANCE SHEET : FROM THE PERSPECTIVE OF INVESTIGATION

UNDER COMPANIES ACT 2013 ” BY RAGHUNATH RAVI

@ STUDY CIRCLE MEETING, SIRC PREMISES ON FEB 20 2019

PRACTISING COMPANY SECRETARIES & TRADEMARK AGENTS www. ksrandco.in

PROVISIONS IN THE ACT RELATING TO INVESTIGATION

Section 206 - 210 deal with circumstances in which the Central Govt(CG) may order investigation into the affairs of a company : Section 212 deals with SFIO

SECTION 213 DEALS WITH INVESTIGATION INTO COMPANY’S AFFAIRS IN OTHER CASES

SUBJECT FOR DISCUSSION TODAY


PROVISIONS IN THE ACT RELATING TO INVESTIGATION

Section 213 The Tribunal may,— (a) on an application made by— (i) not less than one hundred members or members holding not less than one-tenth of the total

voting power, in the case of a company having a share capital; or (ii) (ii) not less than one-fifth of the persons on the company‘s register of members, in the case

of a company having no share capital, and supported by such evidence as may be necessary for the purpose of showing that the applicants have good reasons for seeking an order for conducting an investigation into the affairs of the company; or

(b) on an application made to it by any other person or otherwise, if it is satisfied that there are circumstances suggesting that— (i) the business of the company is being conducted with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members or that the company was formed for any fraudulent or unlawful purpose;


PROVISIONS IN THE ACT RELATING TO INVESTIGATION …..

(ii) persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii) the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company, order, after giving a reasonable opportunity of being heard to the parties concerned, that the affairs of the company ought to be investigated by an inspector or inspectors appointed by the Central Government and where such an order is passed, the Central Government shall appoint one or more competent persons as inspectors to investigate into the affairs of the company in respect of such matters and to report thereupon to it in such manner as the Central Government may direct;



Power of Tribunal to order investigation is discretionary and it may order investigation if convinced of the existence of any of the grounds specified in 213 (b)

No investigation could be ordered merely because the company has been incurring losses year after year , unless it is linked with fraud mismanagement oppression and the like

The material placed before the Tribunal must be such as to justify an order for deeper probe into the affairs of the company An investigation may seriously damage a company and should not be ordered without proper material gathered in the manner provided

in the Act


PROVISIONS IN THE ACT RELATING TO INVESTIGATION …..some pronouncements

“If a company continues to carry on business and to incur debts at a time when there is to the knowledge of the director no reasonable prospect of the creditor ever receiving payment of those debts, it is in general a proper inference that the company is carrying on business with intent to defraud” “The order(for investigation) does not amount to a finding of fraud. It is to find out what kind of wrong action has led to the company’s ill-fate that the powers under the section are given. The enquiry may reveal that there was no fraud or other similar kind of malfeasance. It would be destroying the beneficial and effective use of the powers given by the section to say that the Board (CLB) must first show that a fraud can clearly be said to have been committed. It is enough that the facts show that it can be reasonable thought that the company's unfortunate position might have been caused by fraud and other species of dishonest action”


PROVISIONS IN THE ACT RELATING TO INVESTIGATION ….. some pronouncements

In the case Incab Industries Ltd., In re. [1996] 23 CLA 245 (CLB) : [1997] 1 Comp L J 156 (CLB) has laid down that if it is established that that the funds have not been properly managed then the matter to be investigated whether the above deeds in particular diversion of funds and wasteful expenditure was intentional and was to benefit to any particular person or persons concerned with the management of the company. In the case of Modi Industries Ltd. v. Union of India 52 Comp Case 589 (Del.) that if the circumstances led to inference that there has been some fraud, misfeasance, breach of trust or misconduct which requires investigation it is not necessary that person concerned should be actually guilty but at least there should seem to be some circumstances which could lead to the inference. In Delhi Flour Mills C. Ltd.,] 45 Comp Cas 33 (Del.) that if the petitioner will prove some instance of malpractice which would raise an inference of dishonesty or malfeasance or misappropriation or some such similar ground which lead to an inference of mismanagement or oppression then the court might consider an order for making an investigation



Thorough scrutiny of Annual Audited Financial Statements (AFS) and the Statutory Returns filed by a company with MCA over a period and where a company is listed in in Stock Exchanges the information available from the websites of such exchanges, would bring out circumstances warranting investigation into the affairs of a company viz.,

Non compliance with the provisions of the Act diversion of funds – mostly to related parties reckless investments in other entities Incomplete / omission of information in the AFS -which are mandatorily required under the legislation Auditors’ report – not recording the findings Views on “ going concern “ – questionable Statutory remittances – default in Current liabilities being in excess of current assets



In most of the cases, diversion of funds to other related entities will be a common feature Therefore the scrutiny of the documents of such related entities, along with those of the company in respect of whom the investigation is sought, will bring to light the full extent of the violation/ non-compliance with the provisions Key to find out the list of entities which are Related Parties – even though not disclosed as such in the AFS- would be:

Schedule of investments in the AFS MCA Data on other directorships – based on DIN of directors Details of shareholders in the company as disclosed in the AFS


PROVISIONS IN THE ACT RELATING TO INVESTIGATION ….. Some of the findings

Loans extended in the guise of trade advance while there is no trading relationship with the other entity Borrowing company showing it as short term loan taken while the other co showing it as trade advance given Expenses shown in the books of one co (A) as payment to the other in the group services rendered by it (B)

B shows the amount as income from services rendered to A but no expenses in relation to that income is shown in its books . (EXPLAIN). CLEAR CASE OF FALSIFIED ACCOUNTS

Suit is filed by foreign supplier for default in payment by a company. The Debtor company mentions in its reply that for the initial supplies in the previous year , it had made the payment . But in the notes on accounts and the Directors’ report the amount spent in foreign exchange is mentioned as NIL



(Transfer of) Shares in the Holding company are registered in the name of the Subsidiary in violation of S 19 of the Act. Fixed Assets includes assets which are paid out of the funds of the company , which do not pertain to the business of the company ,

while such assets are used by a Related party for its business . No fee charged by the former on the latter . Clear case of diversion of funds and ultra vires of the Objects of the company

Investment in /loans to, other entities without compliance with the provisions of the Act The details of investment made by a company as shown its AFS do not match with the details of shareholding in the other companies

(investee companies )



Amount of Receivables shown in the AFS – several times of the amount of sale , year after year Mentioning in the Directors’ Report signed in September, of an event that “had taken place” in October of that year ( This event was

also publicized in Oct – in press!!!) In respect of redemption of preference shares , the required amount is transferred from P&L account to CRR – in the year of redemption

as well as in the following year !!! For the listed company, certificate from CFO is attached to the AFS but remuneration to the CFO is mentioned as “0” !!! Group companies “simply copying” the contents of Directors’ Report of the parent co , which are irrelevant / not applicable to such

companies



Total no of directors being less than the minimum prescribed under its AoA Non- executive director of a listed company who has left the country and is living abroad , exercising full control over the affairs of the

company through appropriate delegation of duties to various operating executives who report to him

on a regular basis. No Managing Director / Manager OR CFO and the certificate under R 17 (8) of LODR being signed by the NED

The Board Meeting for approval of accounts attended by the NED from abroad , through video conferencing- accounts and auditors’

report signed by the NED , directors and auditors in India the same day The Special Resolution u/s 186 of CA 2013 simply seeks approval for making investments/ giving loans of Rs 50 crores without

mentioning the actual aggregate investment+ loans+ guarantees




Common Promoter directors in a number of companies in a Group

among whom funds are transferred without any restriction. Interest

free Loans (unauthorized ) are taken from a company , used for

investment in other companies and those other companies

advance money to the first company as loan ( unauthorized ) & as

Trade Advance to companies which have not reported any

turnover for years

Creditors are not paid, CSR amount not spent, profits falling but

remuneration of directors is increased considerably every year

Guarantees given are not disclosed in the AFS but mentioned as

availed in the AFS of the beneficiary company



Company “had advanced Rs. 20 crores to a vendor. Due to the

demise of the owner of the vendor company, the supply

arrangement could not be consummated. Discussions are on with

the legal heirs for the recovery of the advance. However, as a

matter of prudence the Company has provided for the advance”

The list of subsidiaries/ Associates as shown in Investment

Schedule does not match with those in AOC 1 & MGT9

Dressing up the financial position – non provisioning – for Going

concern status



Company reporting loss , the Networth has become negative (3

times the paid up capital) , no non-current liabilities , current

liabilities =8 times its paid up capital / 90 % of turnover but has

made long term loans and advances of twice its paid up capital.

No borrowings in its books

Non remittance of TDS and Service Tax -aggregate amount

exceeds the Networth of the company

THANK YOU

ASSURING COMPLIANCES AND SOLUTIONS BEYOND CHALLENGE · 2019-03-17 · ASSURING COMPLIANCES AND...

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Transcript of ASSURING COMPLIANCES AND SOLUTIONS BEYOND CHALLENGE · 2019-03-17 · ASSURING COMPLIANCES AND...