Court clarifies conditions for reopening of accounts

By Deepak Sabharwal, Deepak Sabharwal & Associates
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A Supreme Court bench comprising justices Indu Malhotra and MR Shah has held that the observations made by the National Company Law Tribunal (NCLT) while making an order under sections 241 and 242 of the Companies Act, 2013, can be said to be relevant for making an order under section 130 the act.

The NCLT can make an order to reopen accounts under section 130 of the act if either one of two conditions precedent is satisfied.

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Deepak Sabharwal
Managing partner
Deepak Sabharwal & Associates

In the case Hari Sankaran v Union of India, brought by Infrastructure Leasing & Financial Services Limited (IL&FS), the Supreme Court allowed the reopening of the books of accounts and recasting financial statements of IL&FS, IL&FS Financial Services and IL&FS Transportation Networks for the last five years.

The central government had filed an application with the National Company Law Appellate Tribunal, under sections 241 and 242 of the act, for reopening and recasting of the accounts on the grounds of mismanagement by the board of IL&FS, alleging that the affairs of the company were being run in a manner prejudicial to public interest.

Counsel for the appellant submitted that the conditions laid down in section 130(1) and 130(2) of the act had not been complied with by the tribunal and sufficient opportunity had not been given to the appellant to advance argument in violation of the principles of natural justice. Under the section, the accounts of a company can be reopened and recast only if the earlier accounts were prepared in a fraudulent manner and the affairs of the company were mismanaged during the period.

The appellant’s counsel submitted that there was no specific finding by the tribunal that either the earlier accounts were prepared in a fraudulent manner, or the affairs of the company were mismanaged. Thus it could not be said that conditions precedent to pass an order of reopening of accounts were satisfied.

However, counsel for the respondents submitted that while exercising powers under section 130 of the act, there may not be a final conclusion or opinion that the earlier accounts were prepared in a fraudulent manner or the affairs of the company were mismanaged during the period.

The tribunal had taken note of the preliminary report submitted by the Institute of Chartered Accountants of India (ICAI) that noted that the earlier accounts were being prepared in a fraudulent manner. On a fair reading of section 130 of the act, if the tribunal is satisfied that either of the conditions precedent is satisfied, it would be justified in making the order under section 130. In the order the tribunal made a specific observation with respect to mismanagement of the affairs of the company, and even with respect to the relevant earlier accounts prepared in a fraudulent manner, according to the respondent’s counsel.

The Supreme Court observed that the tribunal may, under section 130 of the act, pass an order for reopening of accounts if it is of opinion that, 1) the earlier accounts were prepared in a fraudulent manner, or 2) the affairs of the company were mismanaged during the period casting a doubt on the reliability of the financial statements. Thus, the tribunal would be justified in passing the order under section 130 of the act upon fulfillment of either of the said two conditions.

In view of this legal position, in addition to the reports of the Serious Fraud Investigation Office, which was investigating the affairs of the company, and the ICAI, and the observations made by the tribunal, the Supreme Court observed that it cannot be said that the conditions precedent are not satisfied.

The bench rejected the contention that the three provisions, viz., section 130, sections 211/212 and sections 241/242, operate in different fields and circumstances and they are in different chapters and, therefore, any observation made while making the order, with respect to a particular provision may not be considered while making the order under the relevant provisions.

In view of the judgment, it is evident that companies now need to be cautious while preparing and managing their accounts as it is always open to the tribunal to make an the order to reopen the books of account and to recast the financial statements of the company.

Deepak Sabharwal is the managing partner of Deepak Sabharwal & Associates.

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