CS Rashmi H
Reopening of accounts/ Recasting of Financial statements Vs Voluntary revision of financial statements and board report
Section 130 and 131 of the Companies Act, 2013 (The Act) are very crucial and new concepts in the Act. While under the section 131, the board of directors have an option to revise the financial statements or the Directors report (Hereinafter referred to as report) in respect of any 3 immediate preceding financial years due to non-compliance under section 129 or 134 of the Companies Act,2013 with permission of the National Company Law Tribunal (Hereinafter referred as tribunal).Whereas under section 130 of the Act, the court or the tribunal are empowered to order the company to reopen the books of accounts prepared earlier or recast the financial statements (to the extent of immediate preceding 8 financial years), in case the accounts are prepared in a fraudulent manner or affairs of the company are mismanaged and cast a doubt on the reliability of financial statements. Both the sections are discussed below:
Section 130: Re-opening of accounts on court’s/tribunal’s orders.
Company cannot re-open its books of accounts or recast it’s financial statement e.g. to change the values in the financial statements according to current value, unless the Central government, income tax authorities or the Securities and Exchange Board or any other statutory body or authority or any concerned person makes an application to the appropriate court or the tribunal and an order is made by the court or tribunal that the:
(1) Relevant accounts were prepared in fraudulent[i] manner; or
(2) The affairs of the company were mismanaged[ii], creating a sense of doubt on the reliability of the financial statements.
The Court or Tribunal need to give a notice to Income tax authorities, Securities and Exchange board of India (SEBI) and other concerned person before passing any order under this section.
Accounts so revised or re-cast pursuant to the order of court or tribunal will be final.
In general, the court or Tribunal can pass an order for re-opening of books of account relating to a period not earlier than eight financial years immediately preceding the current financial year.
However, in case a company was issued an order by the central government under the provisions of sub-section (5) of section 128 for keeping books of accounts for a period longer than 8 years, the Central government may order to re-open the financial statements for such longer period.
The Act is silent if the company has to file revised AOC-4 and MGT-7 forms with respect to books of accounts re-opened or financial statements re-cast pursuant to order of the tribunal. It is assumed that revised annual filings is to be made available to the Registrar of Companies.
Section 131: voluntary revision of financial statements or Board’s report:
If the directors of the company feel that the financial statements or the Board’s report are not in compliance with the provisions of section 129 and 134 of the Act, they may prepare a revised financial statement or a revised report in respect of any three preceding financial years, immediate to the current financial year after obtaining the approval of tribunal with regard to the application made by the board of directors with respect to such revision.
Such revised financial statement or report cannot be prepared or filed more than once in a financial year. The Board of directors in their report prepared for the relevant year must provide detailed reasons for such revision in the financial statement or report. The revision must be confined to the correction in the financial statement or report not in accordance with the provisions of section 129 or section 134 of the Act respectively.
The Central government may exercise the following powers in relation to revised financial statement or a revised boards report and may in particular:
(a) Make different provisions according to which the previous financial statement or report are replaced or supplemented by a document indicating the corrections to be made.
(b) Make provisions with respect to the functions of the company’s auditor in relation to the revised financial statement or report;
(c) Require the directors to take such take necessary steps.
Procedure to be followed for making revision of financial statements or Board’s report by the board of directors:
1. Decision to be taken by the board to make application for revision of financial statements or report and pass necessary board resolution.
2. Director’s to make an application with the tribunal within 14 days of making such decision. In case majority of the directors are auditors are changed immediately before taking decision to file an application, such details must be disclosed in the application.
3. Advertise the petition 14 days prior to hearing in an English and vernacular language circulating in the district where the registered office of the company is situated as per rule 35 of National Company law Tribunal,2016.
4. Provide the following details in the application:
a. Period of financial year to which accounts are related to.
b. Name and contact details of Managing Director, Chief financial officer, Directors, Company Secretary and officer of the company responsible for making such books of accounts and financial statement.
c. Name and contact details of auditor or former auditor who audited such accounts.
d. Board resolution
e. Grounds for making revision in the financial statement and report.
5. The Tribunal shall pass necessary orders after hearing the auditor including former auditor, if necessary. A certified true copy of order passed by the tribunal shall be filed in form INC-28 within 30 days of making such order.
6. Call a general meeting and publish reasons for change in the financial statements in an English and vernacular newspaper.
The shareholders are to be provided with the revised financial statement, statement of directors and the statement of auditors for making the decision to adopt the revised financial statement.
7. Upon receipt of approval from the shareholders, revised financial statement of auditors or report of Board must be filed with the Registrar of Companies(ROC) within 30 days from the date of approval.
Conclusion: It is worth to take note that section 131 is a voluntary decision taken by the board of directors to revise the financial statements and Director’s report, and the ultimate power to make such order for revision rests in the hands of the tribunal. An order made by the court or tribunal to re-file or re-cast the books of accounts or financial statements pursuant to an application made by the SEBI, income tax authorities or any other concerned are strict orders, mandatory in nature.
If a company is in receipt of order under section 130, it may cause damage to the image of the company, leading to serious consequences creating a doubt on the running of the company. The decision to revise the financial statement or report is a corrective measure taken by the board of directors to rectify non-compliances in the financial statements and boards report, would be an appreciated step towards good corporate governance.
Section 130 is to be exercised by the regulatory (Court or Tribunal) alone, upon receipt of application by the statutory authorities or any other concerned person with an element of fraud during the preparation of books of accounts or mismanagement in the affairs of the company, creating a doubt about the reliability of the financial statements. comparatively application under section 131 is to be confined to board of directors of the company, no person other than board has the power to revise the financial statements or report even if there are omissions, commissions, incorrect or incomplete facts in the financial statement, or the report prepared earlier.
Case law for illustrating section 130 of the Act:
Hari Sankaran Vs. Versus Union of India & Others-Respondents (Supreme Court of India) on 4th June, 2019
Background of the case:
IL&FS is a core investment company and systemically important Non−Banking Finance Company duly approved under the Reserve Bank of India Act, 1931. The appellant has filed the current appeal in the supreme court aggrieved by the order of Honourable National Company Law Appellate Tribunal, New Delhi(NCLAT) who confirmed the order passed of National Company Law Tribunal, Mumbai Bench (NCLT) by which the learned tribunal allowed the application filed by the Central government under section 130(1) and 130(2) of the Act and permitted re-opening and re-casting of accounts of IL&FS, IL&FS Financial Services Limited (hereinafter referred to as the “IFIN”) and IL&FS Transportation Networks Limited (hereinafter referred as the “ITNL”) for the last five years. Appellant is the Vice−President/Director of IL&FS who has been suspended as the Director of IL&FS and its group companies.
The central government filed an application before the tribunal on 01.10.2018, under section 241(Oppression and mismanagement) seeking relief for mismanagement caused by the board of directors of the company who are conducting affairs of the company prejudicial to the interest of the company along with the report submitted by Serious Fraud Investigation Office (SFIO), Registrar of Companies (ROC) and ICAI report.
The tribunal considered the views of the central government and held that the affairs of the company are conducted in a manner prejudicial to the interest of the company and allowed the interim prayer to suspend the current board of directors. Tribunal further directed the new board to hold meeting, manage the company and to conduct the business as per Memorandum and Articles of Association (MOA and AOA).
Further the Union of India sought for permission to re-open and re-cast the books of accounts for a period of 5 years from 2012-13 to 2017-18. Tribunal vide its order dated 01.01.2019 allowed the application. The appellant is the suspended director who filed an appeal before the appellate tribunal and filed an appeal in the Supreme Court too.
The appellant’s counsel relied on the judgement in Mannalal Khetan v. Kedar Nath Khetan (1977) 2 SCC 424 and in the case of Swadeshi Cotton Mills v. Union of India (1981) 1 SCC 664 and elaborated that the appellant is not provided with enough time to file a reply to the order of honourable tribunal.
Relying upon the above decisions of this Court, it is submitted that when the Statute provides that things are required to be done in a particular manner, it ought to have been done in the same manner as provided under the Statute.
The supreme court considered the following material on record based the facts provided earlier:
As per section 211 of the Act, the Central government is empowered under to establish Serious Fraud Investigation office (SFIO) to investigate into affairs of the company in public interest. Investigation by SFIO is under process. In the preliminary SFIO report, there are specific findings with respect to mismanagement of the affairs and preparation of fraudulent accounts of the aforesaid companies.
ICAI also had conducted an enquiry into the accounts and submitted in their preliminary report that “accounts for the past five years have been prepared in a fraudulent and negligent manner by the erstwhile auditors”.
The Registrar of Companies (ROC) under section 206 has investigated into affairs of the company and concluded that the company is mismanaged with governance and risk management issues by raising short term and long-term loans with the public sector banks and financial institutions. Financial statements are window dressed and there is mismatch in the cash flows, Lack of liquidity and other issues are not revealed in the financials. Inter-corporate borrowings are not repaid. The value of intangible assets being 18000 crore was increased to 20,000 crore creating doubt on the correctness of the financial statements.
Subsection (2) of 241 provides that the government may itself apply to the tribunal for appropriate orders if it feels that affairs of the company are being conducted in a manner prejudicial to the interest of the public.
The central government after taking into account such reports provided by the SFIO, ICAI, ROC made an application to the tribunal after issuing notice to all concerned authorities like income tax authorities, SEBI and even the erstwhile directors of the company and other two group companies. The tribunal has passed orders considering all the above relevant factors and being conscious of section 130 of the Act has passed an order for re-opening books of account for last 5 years. The learned tribunal has passed necessary orders for suspension of the board of directors with a clear picture of the company’s standing.
The court further observed the following:
a) Affairs of the company were mismanaged during the relevant period casting doubt on reliability of financial statements and hence condition under section 130(1) were fulfilled. Under section 130(1) of the Act, two conditions are there and in between the word ‘or’ is present, which means either of the conditions must be fulfilled. Here the second part seems to be invoked, considering larger public interest tribunal is justified in passing such orders.
b) Section 241, 130 are to be read together while passing any order.
c) The learned counsel for the appellant appeared before the appellate tribunal and presented his views, hence the principles of natural justice are not being violated.
d) Central government has provided notice to all the concerned authorities before making such application and the phrase any other person is not defined in the section, the suspended directors placed their grievance which was considered by the tribunal.
e) The ordered passed by the tribunal to suspend the directors was an interim order, not challenged by anyone is considered to be final.
Considering all the above facts, the court allowed application under section 130 to re-open books of accounts for a period of 5 years.
Case law for illustrating section 131 of the Act:
Regional Director, Southern Region,
Ministry of Corporate Affairs, ROC, Tamil Nadu-Appellant
Versus
Om Shakthy Agencies (Madras) Pvt. Ltd.-Respondent
Background:
An application under Section 131 of the Companies Act, 2013 was filed by M/s. Om Shakthi Agencies (Madras) Pvt. Ltd. before the Tribunal for rectification of the financial statement. Pursuant to order dated 07.02.2018, the registry was ordered to send notices to the Regional director (RD), income tax authorities and Register of companies(ROC) and the same was directed to the learned counsel for the respondent.In the said case, the Central Government was not impleaded as party-respondent, but the appellant – Regional Director, Southern Region of the Ministry of Corporate Affairs, Chennai and Registrar of Companies, Tamil Nadu impleaded as respondents.
Tribunal passed the following orders in relation to such application.
Till date no objection has been filed by the RD, ROC and the IT Authorities. In spite of availing the opportunities, the Counsel for the IT Department has not filed the objections even after passing the conditional order that the right of filing the objections shall stand forfeited. It appears from the conduct of the RD, ROC and IT Authorities that they are not interested to file the objections. Therefore, their right of filing the objections stands forfeited.
Tribunal thus passed an order to revise the financial statements.
This appeal was filed by the appellant. The learned counsel for the appellant stated that the tribunal has not impleaded Central government and while the respondent said that the regional director, Chennai does not have any power to pass an order on behalf of central government.
Section 130(3) reads as follows:
The Central Government may make rules as to the application of the provisions of this Act in relation to revised financial statement or a revised director’s report and such rules may, in particular —
(a) make different provisions according to which the previous financial statement or report are replaced or are supplemented by a document indicating the corrections to be made;
(b) make provisions with respect to the functions of the company’s auditor in relation to the revised financial statement or report;
(c) require the directors to take such steps as may be prescribed.”
Clause (3) therein makes it clear that the Central Government is empowered to make rules as to the application of the provisions of the Act to revise the financial statement or a revised director’s report and making different provision’s according to which previous financial statements or reports are replaced or are supplemented by the documents and to make further provisions with respect to the functions of the company’s auditor.
In the present case, we find that the Tribunal not only failed to notice the aforesaid provision but on wrong presumption forfeited the right of the appellant to file the reply, which was uncalled for.
NCLAT set aside the order passed by the tribunal and allowed the applicant to implead central government and then pass necessary orders.
[i] The definition of fraud as per explanation to section 447 is as follows:
“fraud” in relation to affairs of a company or anybody corporate , includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;
Thus fraud includes any act of omission, concealment of any fact and includes abuse of position by any person alone or with the others who is secretly involved with the first person, with an intention to deceive(to keep the truth secret) or to gain some advantage from the company or shareholders or creditors.
[ii] Companies Act, 2013 does not define the term mismanagement, instead the term oppression and mismanagement is defined as:
(1) Any member of a company who complains that—
(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or
(b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors , or manager, or in the ownership of the company’s shares , or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members, may apply to the Tribunal , provided such member has a right to apply under section 244, for an order under this Chapter.
Mismanagement as per oxford dictionary means to deal with or manage something badly. In the context of the company, it refers to act of a director, or any person in a company which is not in the interest of the members or interest of the company. Mismanagement also includes change bought in either by alteration of Board of directors, alteration in share capital or any change which is against the interest of the creditors, members, or the company.
Very interesting information. Because of the case laws mentioned, the importance of section and even compliances are more clearer.