ICAI Can Initiate Suo Motu Disciplinary Proceedings Against CAs: Delhi HC

The Delhi High Court recently held that the Institute of Chartered Accountants of India (ICAI) has the power to initiate suo motu disciplinary proceedings against its members even in absence of a written complaint [CA Sanjay Jain v Institute of Chartered Accountants of India & Ors].

The writ petitions in the present case emanate from disciplinary proceedings initiated by the Institute against the petitioners who are its members and were employed with firms which were appointed as Joint Statutory Auditors of the Punjab National Bank in the Nirav Modi Case.

The challenge essentially arises from the suo moto initiation of proceedings by the Institute with it being principally contended that neither the Act nor the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 empower the Institute to draw proceedings on its own motion.  

The second principal ground of attack to the proceedings initiated by the Institute is based on the contention that the initiation of action under the Rules was clearly based on various news articles which appeared in the print and visual media platforms. Those reports, it would be pertinent to note, related to what is now infamously known as the Nirav Modi Scam which unfolded at the Brady Branch of the PNB. The petitioners would contend that those newspaper reports, for reasons which shall stand elaborated hereinafter, cannot constitute “information” on the basis of which disciplinary proceedings could have been initiated.

 As the mega scam was unfolding, PNB is stated to have lodged three separate criminal complaints against petitioner CAs who were employed with firms which were appointed as Joint Statutory Auditors of the Punjab National Bank to conduct a limited review of its financial statements. 

These CAs and CA firms were booked for fraud amounting to Rs.6498.20 crores, Rs. 9.10 crores and Rs. 4886.72 crores 

Upon these complaints being filed, various newspapers carried articles exposing t.he scam detected at PNB and the liability suffered by PNB being quantified at Rs.11,400 crores. 

As a consequence, ICAI issued show cause notices to the petitioners soon after the news broke of the fugitive businessman Nirav Modi having defrauded the banks of nearly ₹12,000 crores. The allegations were that these auditors had not complied with various standards on auditing.

Appearing on behalf of the petitioners learned counsel. Nandrajog firstly assailed the assumption of jurisdiction by the Institute purporting to act in the exercise of suo moto powers. Drawing the attention of the Court to Section 21 of the Act, Nandrajog firstly submitted that on an ex facie reading of the said provision, it would be evident that no power to initiate disciplinary proceeding suo moto stands specifically conferred upon the Institute. Learned Senior Counsel submitted that Section 21 confers a power on the Institute to try and investigate a matter on receipt of any information or complaint. According to learned Senior Counsel, the meaning to be ascribed to the word ―information‖ would have to necessarily be gathered from the manner in which it has been treated and explained under the Rules since the Act fails to independently define the said expression.

Taking the Court through the provisions pertaining to the registration of a complaint and the treatment of information contained in Chapter II of the Rules, it was submitted that Rules 3 and 7 contemplate and envisage information being provided or a complaint being submitted in writing. The submission essentially was that since both a complaint under Rule 3 and information under Rule 7 is envisaged to be material that may be submitted to the Institute in writing against a member, this would establish that neither the Act nor the Rules contemplate a suo moto power being exercised by the disciplinary authority. 21. Elaborating on the aforesaid issue, Nandrajog submitted that in terms of Rule 3, a complaint against a member or a firm has to be filed in Form-I before the Directorate. That complaint has to be duly accompanied with the requisite fee as prescribed. The complaint once received in the Directorate is thereafter to be duly registered in accordance with the procedure prescribed in Rule 5. Insofar as information is concerned.

The Delhi High Court was of the view that ICAI’s essential purpose is performing the Accountancy function and keeping the public interest in mind. The first fundamental question which arises for consideration is whether the Institute can be recognised to have the authority to initiate disciplinary proceedings suo moto. In order to frame an answer to the aforesaid question which stands posited, 

The court went on to consider the argument of the petitioners that the proceedings which were initiated by the Institute cannot be said to be based on ―information, as contemplated under the Act  Nandrajog, had contended that as would be evident from the show cause notice which came to be issued on 21 February 2018, the Directorate rested its opinion to commence disciplinary proceedings solely on various news reports which had come to be published in connection with the financial scam which had occurred in PNB. At this juncture it is pertinent to note that Srinivasan, learned Senior Counsel, had argued that the aforesaid submissions are addressed overlooking the fact that the Institute had not commenced proceedings against the petitioners based on news reports alone. According to Srinivasan, the newspaper reports only constituted the trigger for the initiation of proceedings. 

Srinivasan had laid great stress upon the provisions of which obliged the Joint Statutory Auditors to undertake the review independently and objectively and the requirement to make ―a critical assessment, with a questioning mind, of the validity of evidence, obtained 

According to Srinivasan, if that were to be accepted as being the procedure to be adopted, the very purpose of a limited review would stand defeated. 

The court was of the view of that aforesaid recordal of facts would clearly establish that the action which was initiated and the material which was treated as ―information‖ for the purposes of Section 21 was not based on mere newspaper reports. In fact, those reports could not have possibly and on their own constituted material at all since they did not carry any allegation against the petitioners here. What appears to have transpired is of the news reports merely acting as a catalyst for the Institute to delve deeper into the massive fraud which had occurred and to examine whether any member had failed to abide by the SAs‘ which applied. It was the material recorded and encompassed in the letter of 13 March 2018 which would constitute the foundation for testing the argument of the petitioner whether there was ―information‖ which merited further enquiry. 

After considering the arguments, Justice Varma held that news reports merely acted as a catalyst for the ICAI to delve deeper into the massive fraud which had occurred and to examine whether any member had failed to abide by the standards on auditing which applied.

“Viewed in that light the Court is of the firm opinion that the Institute did have the requisite information as contemplated by Section 21 and which justified the initiation of the enquiry against the petitioners in the facts of the present case,” the Court said.

The argument that the ICAI had never acted suo motu prior to these proceedings was also rejected by the court observing that the mere fact that a particular power was not exercised in the past cannot be determinative of the question whether that power stands conferred or exists, it added.

Dismissing the petitions, the court said that the ICAI is entitled to proceed and it is open for it to give effect to the final orders which were kept in a sealed cover.