The role of Books of Account while dealing with mismanagement under section 397 of Companies Act, 1956?

The provisions of Companies Act, 1956 makes it very clear that every company should maintain proper books of accounts and should record all the transactions of the Company pertaining to sales, purchases, expenses, receipts, liabilities and Assets. Not only recording the transactions, every Company is also supposed to maintain the documentary proof in support of the transactions as per law. Based on the records maintained by the Company and as per the requirement of the Companies Act, 1956, every Company presents its Annual Accounts before the Shareholders in the AGM and thereafter the Annual Accounts are filed with the Registrar of Companies. The principles, filing and disclosure requirements of a Company while maintaining, presenting and filing its Accounts depend upon the kind of the Company. The Institute of Chartered Accountants of India (ICAI) is a statutory body discharging various important functions for the benefit of the public at large and the industry. The ICAI prescribes various standards and when these standards prescribed by the ICAI are made mandatory, then, the companies should follow the standards while presenting its Accounts. Now, the standards prescribed by the ICAI have the statutory force and every company should follow the standards. The important standard being the Accounting Standards (AS). The Accounting Standards (AS) prescribed by the ICAI deals with the principles to be followed and the disclosure requirements for various business organizations and companies. While there is no exception per se when it comes to following the principles, the disclosure requirements are mandatory only to certain companies like listed public companies or the companies exceeding prescribed turnover etc. The disclosure requirement is mandatory as prescribed by the ICAI in its Standard itself.

Theoretically, it may all appear to be very simple, but, when an Auditor takes the responsibility of auditing the books of accounts, there tend to be many difficulties in the course and the complications in the auditing process were exposed in 'Satyam case'. It is also true that many companies neglect the accounting requirements, recording the transactions and maintaining the books of Accounts. In many cases, there may not be any proof in support of a transaction recorded by the Company and shown in the Annual Accounts.

Many closely held companies, private companies and small concerns do not strictly follow the accounting requirements and as such it is very easy to allege some irregularity in these companies. When there are differences between or among the groups in a Company, one group will try to trouble the other by seeking various reliefs before the Company Law Board under section 397/398 of the Companies Act, 1956 alleging oppression and mismanagement. It is very easy for a minority group or the shareholder who has the knowledge of all internal affairs of the Company to allege mismanagement in the Company. Not only pleading mismanagement in the Company, the Petitioner, at times, may press for perusal of all the Books of Accounts maintained by the Company and also may insist for appointment of Independent Auditor.

The evidentiary value of Books of Accounts in a proceeding under section 397/398 of the Companies Act, 1956 is a complicated issue to deal with. At times, the Books of Accounts can be taken as an evidence under section 397/398 of the Companies Act, 1956 and at times, despite the irregularities in the Books of Accounts maintained by the Company, the Petitioners under section 397/398 of the Companies Act, 1956 may not qualify to get the relief as prayed for taking other evidence, circumstances and law into consideration. It is true that establishing a case for mismanagement is very easy for a minority group in a private company or a closely held company if he or they have the knowledge of internal affairs. It is really a complicated issue to deal with.

While the Company Law Board has the powers to direct the parties before it to produce the Books of Accounts and other evidence in their custody, in my opinion, it may not be correct to completely depend upon the Books of Accounts maintained by the Company while deciding a petition under section 397/398 of the Companies Act, 1956. It is not the law that a Company to be wound-up if they failed to maintain the Books of Accounts as per the requirement and only consequences will follow. While it is true that there should not be any lenience towards the companies if they do not maintain the proper accounts, it is also not correct to allow a group to take advantage of the knowledge of the internal affairs of the Company and seek drastic measures from the Company Law Board under section 397/398 of the Companies Act, 1956.

To conclude, in my opinion, based on the law laid-down by the constitutional courts form time to time, an irregularity in maintaining books of accounts will not ipso facto lead to a conclusion that there exist a case of mismanagement under section 397 of the Companies Act, 1956 unless other events and circumstances prove to be so.

Note: the views expressed are my personal.