1. This is a revision petition preferred by the Union of India represented by the Department of Company Law Administration, Ministry of Commerce and Industry, Under Section 22-A(2) of the Chartered Accountants Act, 1949. The petition is against the order passed by the Council of the Institute of Chartered Accountants of India, New Delhi, that the first respondent herein was not guilty of any professional or other misconduct Under Section 21 of take Chartered Accountants Act of 1949. In doing so, the Council of the Institute dissented from the finding of the Disciplinary Committee that the first respondent was grossly negligent in the performance of his duties as an auditor.
2. The first respondent is a Chartered accountant. In the course of audit of the Little's Oriental Balm and Pharmaceuticals Ltd., Madras, he checked, verified and approved the balance-sheet of the company as on 31-12-1951 the payment of remuneration to Messrs. Oakley Bowden and Co., as managing agents of the Little's Oriental Balm and Pharmaceuticals Ltd. Alter a period of six years, the Registrar of Companies, Madras, sent a letter calling upon him to explain the failure on his part to detect the continuance in office of Messrs. Oakley Bowden and Co. Ltd., as managing agents of Mess is Little's Oriental Balm and Pharmaceuticals Ltd. beyond the stipulated period without any further agreement and also the failure to point out to the shareholders the irregularity in regard to the payment of remuneration to the said managing agents for the period in question. The auditor sent his reply. Though it was difficult for him to recall the events that took place at the time of the audit and to remember the circumstances under which he audited the affairs of the company, yet he was able to send an explanation to the best of his ability from the papers available with him. He stated that the renewal of a managing agency agreement was generally a matter of course, unless either party had given notice to the other of its intention to the contrary, at the time of the expiry of the agreement. In the instant case the agreement was being renewed from time to time since the inception of the company in 1920 and there was no indication that it was not to be renewed. There was not the slightest suspicion that the agreement had expired, as the managing agents were attending to the day to day business and affairs of the company and were operating on the bank accounts of the company as usual. The company was accepting those services through its directors by their general conduct and also by their resolutions ratifying the transactions and dealings of the Managing agents. In his report to the shareholders of the company on the accounts for the year ending with 31-12-1951, he had drawn the attention of the Secretary of the Company, who was also the Secretary of the managing agency carrying on the day to day business and affairs of the company to get the ratification of the transactions and dealings by the directors of the company. He also recorded his doubt as to whether there was compliance of the Articles of Association as to the management of the company with which was tied up the remuneration of the managing agents. The Registrar of Companies was not satisfied with this explanation submitted by the auditor, and thereupon, the Company Law Administration through its Deputy Secretary laid information to the Secretary of the Institute of Chartered Accountants of India to take such action as the Council of the Institute might think fit. Thereupon, the Institute of Chartered Accountants of India sent a copy of the communication received from the Department of Company Law Administration to the auditor and called upon him to send his written statement. The first respondent herein filed his written statement reiterating what he had stated in his explanation to the Registrar of Companies. He further stated in the written statement that there was a provision in the Articles of Association of the Company that the Managing Agency should be entrusted to Messrs. Oakley Bowden and Co., and that they were to be vested with powers of management and were not to be removed from office otherwise than by their resignation, or for misconduct, insolvency or any special resolution of the company. Messrs. Oakley Bowden and Co., were appointed as the Managing Agents off the company, Little's Oriental Balm and Pharmaceuticals Ltd. The company used to enter into agreement with the managing agents in regard to their remuneration once in ten years. The first of such a resolution was passed in the year 1920, which was renewed in 1930 and again renewed in the year 1941. The last resolution passed in 1941 was followed by art Extraordinary Resolution dated 10-7-1945, in which it was resolved to execute an agreement for the continuance of the managing agency. The auditor further stated-
'If I had the slightest doubt then of any irregularity in the continuation in office of the Managing Agents, I would have drawn the attention to it in my report to the share-holders in the same way as I had done in regard to even smaller matters......In any event an error or difference of opinion regarding the application or interpretation of the relevant provisions, I submit, cannot be a matter calling for any action.'
3. The respondent had taken a stand both in his letter of the explanation to the Registrar as well as in the written statement that even though the managing agency expired in the year 1951, still their continuance in office was not opposed to any of the provisions of the Indian Companies Act relating to managing agents, for, according to the auditor, under the Articles of Association of the Company, the managing agents were not to be removed from office otherwise than by resignation or for misconduct, insolvency or any special resolution of the company,
4. In the enquiry held before the Disciplinary Committee the members found that the managing, agency terminated on 31-12-1950 and thereafter the continuation of the managing agency was contrary to the provisions of Section 87-B of the Companies Act, there being no resolution of the company in a General Body meeting, and that the respondent was, therefore, grossly negligent in the performance of his duties as an auditor of the company in not reporting to the shareholders the fact that remuneration was paid to the managing agents who were not holding, office in accordance with law. With these findings., the members of the Disciplinary Committee submitted their report to the Council of the Institute of Charter, ed Accountants of India. While considering the said, report, the Council of the Institute of Chartered Accountants came to the conclusion that it was not a case of gross negligence, and it was clear that the payment made to the managing agents who were not holding office in accordance with law could not be noticed even by the directors of the company, and therefore they reversed the finding of the Disciplinary Committee and held that the respondent, auditor was not guilty of any professional or other misconduct Under Section 21 of the Chartered Accountants Act of 1949. It is against this order of the Council the Union of India represented by the Company Law Administration has preferred this revision petition.
5. It was seriously contended that the first respondent was grossly negligent in the conduct of the professional duties, and that it was the duty of the first respondent to verify in the course of audit whether the continuance in office of the managing agency was in accordance with law, and that he failed to bring, to the attention of the share holders the propriety of payment of remuneration to the said managing agents and that the auditor failed to keep in view the wide duties and responsibilities of the auditor,
6. Ever since companies came into existence in the business world, the duties of an auditor have been explained from time to time by the House of Lords and the Courts of Appeal in England. The earliest and the leading case on this subject of the duties of an auditor is the case of In re London and General Bank, 1895 2 Ch 673 Lord Justice Lindley recorded his valuable opinion in regard to the duties of an auditor in the following words at page 683 :
'.....he must be honest, i.e., he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true. What is reasonable care in any particular case must depend upon the circumstances of that case. Where there is nothing to excite suspicion very little inquiry will be reasonably sufficient, and in practice I believe businessmen select a few cases at haphazard, see that they are right, and assume that others like them are correct also. Where suspicion is aroused more care is obviously necessary, but. still, an auditor is not bound to exercise more than reasonable care and skill, even in a case of suspicion, and he is perfectly justified in acting on the opinion of an expert where special knowledge is required......'
7. Again, in the year 1896, the same noble Lord reiterated his opinion in the case of In re Kingston Cotton Mill Co., 1896 2 Ch 279 :
'The duty of an auditor generally was very carefully considered by this Court in In re London and General Bank and I cannot usefully add anything to what will be found there. It was there pointed out that an auditor's duty is to examine the books..... But it was also pointed out that an auditor is not an insurer, and that in the discharge of his duty he is only bound to exercise a reasonable amount of care and skill, It was further pointed out that what in any particular case is a reasonable amount of care and skill depends on the circumstances of that case; that if there is nothing which ought to excite suspicion, less care may properly be considered reasonable than could be so considered if suspicion was or ought to have been aroused. These are the general principles which have to be applied to cases of this description protest, however, against the notion that an auditor is bound to be suspicious as distinguished from reasonably careful. To substitute the one expression for the other may easily lead to serious error.'
8. It may be useful to state also the opinion of another noble Lord in the same case, Lord Justice Lopes at page 288:
'It is the duty of an auditor to bring to bear on the work he has to perform that skill, care and caution which a reasonably competent, careful, and cautious auditor would use. What is reasonable skill, care and caution must depend on the particular circumstances of each case. An auditor is not bound to be a detective, or as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watch-dog, but not a blood-hound. He is justified in believing tried servants of the company in whom confidence is placed by the company. He is entitled to assume that they are honest, and to rely upon their representations, provided he takes reasonable care. IE there is anything calculated to excite suspicion he should probe it to the bottom; but in the absence of that kind he is only bound to be reasonably cautious and careful. The duties of auditors must not be rendered too onerous. Their work is responsible and laborious and the remuneration moderate.'
9. Now, I have to examine and consider whether the first respondent discharged the duties as an auditor with reasonable amount of care and skill, and whether there was anything to excite suspicion in the course of audit. The respondent was an auditor of this company at least for the three years prior to 1951. He says in his explanation that he was aware of the Articles of Association of the company. Under the Articles of Association of the company, the Managing agents are not liable to be removed except for resignation, misconduct, insolvency or special resolution. He was aware of the agreements passed from time to time with regard to their remuneration once in ten years, beginning from 1920. He audited the accounts ok the company for the years 1949, 1950 and 1951. Evidently, neither was he aware that the managing agency agreement expired in the year 1950 itself, nor he cared to verify whether the managing agency agreement was still in force or whether the directors themselves were aware that the continuance of the managing agency after the expiry of the term was contrary to law. In those circumstances, according to Delvin J. in Roper v. Taylor's Central Garages, 1951 2 T L R 284 .
'The case of shutting the eyes is actual knowledge in the eye of the law, the case of merely neglecting to make enquiries is not knowledge at all......'
Even before the Disciplinary Committee, the first respondent through his counsel stated that at the time of the passing of the 1951 accounts, he did not remember to have seen the managing agency agreement and could not assert that he saw it. But, unhesitatingly he admitted :
'It is an error of judgment, if it is an error of judgment. I have proceeded on footing that they were validly in office especially in view of the fact that they had been rendering services as before all through the years. Therefore, if there was suspicion that they were not validly in office that year, it never occurred to me.'
On the face of this explanation offered by the first respondent, is it possible for me to say that, as per the provisions of Section 21(5) and Section 22-A or the second schedule part I, R. (5), the respondent, a chartered accountant in practice, shall be deemed to be guilty of professional misconduct if he failed to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary to make the financial statement not misleading. Neither the Registration of Companies nor the Deputy Secretary to the Government of India who laid the information to the Council of the Institute of Chartered Accountants, has ever said in clear and explicable terms that the auditor was aware of the material fact that the Managing Agents' term expired, at the time of the audit and still he approved the remuneration paid to them and that he did not disclose that fact in the financial statement. Absolutely there is no material in the record; nor any attempt has been made by Government to prove that he was aware of such a document at the time of the audit and yet he failed to discharge the duties of an auditor. The first respondent has been charged of professional misconduct. It is a serious charge. It is the duty of the concerned authorities to place sufficient material and also to adduce sufficient legal evidence to prove that he committed the offence with which he has been charged, namely, that he failed to disclose a material fact known to him. The members of the Disciplinary Committee themselves did not give a definite finding that he was aware of such a material fact at the time of audit. What they say in their report is that he was grossly negligent in not verifying at the time of audit whether the managing agents' agreement was still in force or not.
10. The learned author Charlesworth on Negligence' has described various degrees of negligence as gross negligence, ordinary negligence and slight negligence. 'Negligence' means carelessness and these expressions, according to the author, mean gross carelessness, ordinary carelessness and slight carelessness respectively. In the same book, Rolfe B. has been quoted as saying that he ''could see no difference between negligence and gross negligence, that it was the same thing with the addition of a vituperative epithet' he was using negligence in the sense, of breach of duty to take care and his criticism was justified. The learned author further says :
'That is not to say, however, that the expression 'gross negligence,' has always the same meaning as 'negligence.' It is an expression in regular use among lawyers, and to deny it a meaning would be pedantic. It is intended to denote a high degree of careless conduct, and in this sense it is of considerable practice utility.'
In Bentecoat v. London District Auditor, 1951 2 K. B. 759 their Lordships of the Court of Appeal had discussed what is negligence and what is gross negligence. Lynskey J. observed :
'Negligence is well known and well defined. A man is either guilty of negligence or he is not guilty of negligence. Grass negligence is not known to the English common law so far as civil proceedings are concerned, and one has only to consider the phrase in criminal cases, particularly in cases of motor manslaughter. In the ordinary case in civil proceedings, either a man is guilty of negligence or he is not.'
Lord Goddard C. J. observed at p. 768 as follows :
'The use of the expression 'gross negligence' is always misleading. Except in the one case of the law relating to manslaughter, the words 'gross negligence' should never be used in connexion with any matter to which the common law relates, and for this reason negligence is a breach of duty. If there is a duty and there has been breach of it which causes loss, it matters not whether it is a venial breach or a serious one; a breach of a legal duty in any degree which causes loss is actionable. The question whether it is venial or gross is quite immaterial. The expression 'crassa negligentia' which is found in the books has generally been used by equity judges in considering cases relating to the degree of duty owed by directors.'
Therefore the finding that the first respondent was grossly negligent in the performance of duties as an auditor of the Company in not reporting to the shareholders the fact that remuneration was paid to the managing agents who were not holding office, has no meaning in the circumstances of the case, for, it cannot be said that the respondent either wilfully shut his eyes or purposely abstained from ascertaining or wilfully abstained from knowing whether the managing agents' agreement was in force or not at the time of audit. It cannot also be said that he 'deliberately refrained from making inquiries the results of which he might not care to have' 1951 2 T L R 284. Nor can it be said, as observed by Lord Goddard, Chief Justice in Taylor v. Kenyon, 1952 2 All E R 726, that 'he refrained from getting information which he did not want to get'. Nor did he adopt an attitude of mental indifference aptly described as I don't care attitude'. In the King (Kennedy) v. Browne, 1907 2 K B 505, Lord O'Brien Chief Justice, while considering the word 'negligence' made the following observation :
'The word 'negligence' is associated in the section with the word 'misconduct' and involves, I think, some element of moral culpability .... Mere imprudence is not enough, want of judgment is not enough, grave error of judgment is not enough.'
At the worst, the respondent may be guilty of an excusable error of judgment, and the error is not very serious in its consequences. The audit took place in the year 1952. The Registrar of Companies called upon the auditor on 1-8-1957 to explain the alleged irregularity in regard to the payment of remuneration, and the information was laid by the Deputy Secretary to the Government of India to the Secretary of the Institute of Chartered Accountants of India at the end of the year 1957, and the termination of the proceedings against the auditor was in the month of September 1959. It shows that there was inordinate delay on the part of the authorities in bringing home the guilt on the auditor. While dealing with a case under the Chartered Accountants Act, 1949 Rajamannar C. J. and Venkatarama Aiyar J. in the Institute of Commr. of Income Tax, Madras v. G. M. Dandekar, : 22ITR235(Mad) have observed :
'.....We think it is necessary to comment on the inordinate delay in the institution of these proceedings .... It is essential that charges or this kind should be made with promptitude.'
11. It will also be useful in this connection to refer to the observations of Mukharji J. of the Calcutta High Court in a case of reference under Chartered Accountants Act Kishorilal v. P. K. Mukherjee, : AIR1964Cal131 :-
'No doubt, Under Section 21 of the Chartered Accountants Act) the Council may move on receipt of information and receipt of the complaint and there is no question of any limitation as to when it can receive such complaint but it should be impressed that while the Council can act on any information or oh any complaint, it is elementary precaution and wisdom not to move by any and every kind of complaint or information however frivolous it may be. Great are the responsibilities on the Council and the Disciplinary Committee in this respect and they must not so act as to become a convenient tool and an engine of oppression against the members of the profession. They must act with responsibility. That is why Section 21 imposes a preliminary duty on the Council to form a prima facie opinion before proceeding further. It will be a misfortune for the profession of the Chartered Accountants in India, if the Council chooses to let loose the whole machinery of Disciplinary Committee on any complaint or any information received by it, however old and however stale and whatever its source without examining it with at least some care to see if a prima facie case. exists or not.'
With respect, I agree with these observations.
12. In the result, the civil revision petition fails and it is dismissed, but in the circumstances without costs.