-NCLT orders recasting of financial statements of ILFS
By Smriti Wadehra (firstname.lastname@example.org)
As the first instance of regulatory recasting of financial statements, the National Company Law Tribunal, Mumbai has directed the reopening of the books of accounts of IL&FS Group (‘Company’) and some of its subsidiaries. The rationale behind such direction is that the Tribunal considers that the accounts of the Company and its specific subsidiaries are fraudulently prepared in the last five years and are not reliable.
The ruling may be a trailblazer as there may be several instances in future of either voluntary recasting or regulatory recasting of financial statement. This article is a general discussion of the law and the global practice in this regard.
Provisions of Law
Sections 130 and 131 of Companies Act, 2013 (‘CA, 2013’) deals with re-opening and revision of accounts of companies. One of the major difference between the two is that the former section can be enforced by an order of any Court or NCLT based on an application made by any authority. On the other hand, the latter section provides for voluntary revision in the accounts of the company if there is any inconsistencies as per law by making an application to the Tribunal.
Both these sections were notified by the Ministry on 1st June, 2016. The concept of re-opening and revisiting the financial statements was introduced for the first time in India by 2013 Act as there was no corresponding section in the Companies Act, 1956 Act (‘Erstwhile Act’). Though, there was no corresponding section under the Erstwhile Act for re-opening the books of accounts of the Company, there were various department circulars dealing with the issue of re-opening of accounts after their adoption by members in the general meeting. The department circulars on the subject provided that in case of technical requirements or requirement of any specific law, the company can be directed to re-open its books of accounts subject to the condition that the shareholders approve the said event in the general meeting. The list of department circulars is enlisted in the table mentioned at the end of this write up.
Difference between Section 130 and 131 of the CA, 2013.
The difference between the two sections can be presented as below:
|Sl. No.||Basis of difference||Provisions of section 130 of the Companies Act, 2013||Provisions of section 131 of the Companies Act, 2013|
|1.||Applicant||The accounts of the company can re-opened only when an application is made by any statutory regulatory authority to the Tribunal.||If the company is of the view that financial statement and Board’s report do not comply with the provisions of Act, it may apply for revision of accounts to the Tribunal.
|2.||Grounds for revision||The accounts of the company can be reopened under this section if:
a) the accounts are prepared in fraudulent manner; or
b) affairs of the Company are mismanaged during the said period for which the financial statements seem to be unreliable.
|The accounts of the Company can be revised if the following is not prepared as per the provisions of section 129 and 134 of the CA, 2013 :
a) Financial statements
b) Board’s report
|3.||Financial Year for which revision can be made.||Reopening of books of accounts can be made for the maximum period of up to eight preceding financial years.||The application for revising the financial statement can be made for a maximum period of for three preceding financial years.
|4.||Number of times application can be made||No such restriction||The revision of financial statements can be prepared or filed only once in a financial year.|
|5.||Element of fraud||Element of fraud is necessary for section 130 of the CA, 2013.
|No such thing|
Background of Section 130 and 131 of the CA, 2013
The Companies Act, 2013 was introduced by way of Companies Bill, 2011, which was first introduced on 3rd August, 2009 as the Companies Bill, 2009. Further, based on the report of the Standing Committee on 31st August, 2010, the Government withdrew the Bill and re-introduced the Companies Bill, 2011 (‘Bill, 2011’) on 14th December, 2011. Based on the recommendations of the Standing Committee the revised Bill was introduced in the year 2011. Even though, the report of the Standing Committee did not recommend for enforcement of any section for reopening or revision of the financial statements by the companies, Bill, 2011 introduced the new provisions in under the CA, 2013.
The rationale behind such inclusion of provision for re-opening of accounts was that the present law i.e. Erstwhile Act was silent with respect to re-opening or recasting of accounts. However, in cases of fraud or mismanagement, re-opening or recasting of accounts becomes important for reflecting true and fair view of the accounts. This section was introduced after the occurrence of the Satyam case in India, where recasting of accounts was mandated. The text of Para II(6) of the Committee report is reproduced below:
“The change proposes to provide procedural requirement in respect of revision in accounts in certain cases. The present law is silent in respect of re-opening or re-casting of accounts. In certain cases, particularly, in cases relating to fraud, there may be need to reopen/ re-cast accounts to reflect true and fair accounts. In case of Satyam case, such recasting was ordered by Court. The provisions in the Bill mandate such re-opening on the order of Court or Tribunal. In other cases the re-opening is being permitted, through order of Tribunal, with adequate safeguards.”
Further, in case of revision of accounts the Bill permitted that for specific purposes the companies may revise their financial statements subject to the condition that approval of the Tribunal is obtained. The proposal for introduction of section 130 and 131 of the Bill was accepted by the Ministry on 1st June, 2016 where the section were notified for the first time under CA, 2013.
To summarize, we may conclude that the provisions of these two sections provides that companies may revisit their financial statements in two situations:
- In cases where the company receives any application or order from any regulatory authority for the accounts being fraudulent or the company being mismanaged; or
- Voluntarily by the companies in cases any revision is required in the statements and Board’s Report of the Company after making an application to the Tribunal.
In this regard, we would specifically like to point out that the provisions of this section provided that the court or Tribunal may give opportunity to any concerned authority of being heard. However, the Standing Committee suggested that as principle of natural justice all concerned parties like the Company or Auditor/ Chartered Accountant or any other concerned person should also be given an opportunity of being heard. Accordingly, the Companies (Amendment) Act, 2017 amended the provisions of proviso to section 130(1) of the Act to specifically include ‘any other person concerned’ to be entitled to receive notice from court or Tribunal and that of having an opportunity of being heard.
Even though, the provisions of section 130 of the CA, 2013 is a couple year old, however, the Government till date never ordered for re-opening of books of accounts of any company. However, for the first time in India, the National Company Law Tribunal of India, Mumbai Bench has invoked its powers under section 130 of the Act and ordered reopening of books of the Company and its two listed subsidiaries namely ITNL and IL &FS Financial Services for the past five years.
In this regard, the Serious Fraud Investigation Office (SFIO) and Institute of Chartered Accountants of India (ICAI) initiated investigation against the Company. Before analyzing the matter further, we have to first understand the power of SFIO to investigate the affairs of the Company.
Power of SFIO to investigate
The provisions of section 212 of the CA, 2013 provides:
“(1) Without prejudice to the provisions of section 210, where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company by the Serious Fraud Investigation Office—
(a) on receipt of a report of the Registrar or inspector under section 208;
(b) on intimation of a special resolution passed by a company that its affairs are required to be investigated;
(c) in the public interest; or
(d) on request from any Department of the Central Government or a State Government, the Central Government may, by order, assign the investigation into the affairs of the said company to the Serious Fraud Investigation Office and its Director, may designate such number of inspectors, as he may consider necessary for the purpose of such investigation.”
As mentioned above, the provisions of section 212 of the CA, 2013 provides that SFIO shall investigate the affairs of the company if Government opines that the affairs of the company is required to be investigated. Accordingly, in the case of the Company, the Government had directed SFIO to investigate the affairs of the Company. The SFIO has also provided its report to the Government based on its investigation.
The Government ordered for re-opening of accounts of IL&FS and its two listed companies i.e. ITNL and IL&FS Financial Services after the analyzing the reports received from SFIO and ICAI respectively. However, presently, the Government, do not confirm that the auditors of the Company and the directors were involved in the mismanagement of the accounts of Company and accordingly, has ordered for re-opening of the accounts. Further, the Government has received no objection from all the authorities whom notices were served for the purpose of reopening of accounts. Accordingly, in this regard, NCLT directed to appoint an independent chartered accountant to restate the accounts and revise the balance sheets.
It is important to mention that the provisions of the CA, 2013 is being amended day-by-day to make the provisions of law more stringent for the statutory auditors considering their responsibilities. With the enforcement of the provisions of NFRA and subsequent application of section 130 of the CA, 2013 it can be interpreted that auditors are under the radar of investigation. Though, the provisions of NFRA has been enforced the same is not completely functional, accordingly, in the present case, ICAI has conducted the investigation along with SFIO.
As mentioned earlier, it is the first time in India that NCLT has ordered for re-opening of accounts under this Act. However, the same is not the case outside India i.e. there are many companies outside India who have re-casted their financial statements:
|Sl. No.||Financial Year||Country||Company/Corporation||Reason for recasting/reopening|
|1.||2017-18||USA||Loop Industries Inc.
|Restated its previously issued consolidated financial statements for the fiscal year ended February 28, 2017 to correct an error in the accounting for stock-based compensation and consequently adjusting its consolidated balance sheet and statement of shareholders’ equity in the quarterly periods ended May 31, 2017 and August 31, 2017.|
|2.||2017-18||USA||Kellogg Company||As the Pension and Cash Flow ASUs are required to be adopted on a retrospective basis and the Company elected to adopt the Revenue Recognition ASU on a full retrospective basis. Accordingly, the Company opted for recasting its statements|
|3.||2005-06||USA||Time Warner Inc.||To comply with the Commission’s rules which require the most recently filed annual financial statements be recast to reflect any subsequent changes in accounting principles|
|4.||2017-18||USA||Graham Holdings Co (GHC)
|To reflect New FASB Guidance|
|5.||2016-17||USA||Northrop Grumman Corporation||For adoption of Accounting Standards Codification (ASC) Topic 606|
|6.||2016-17||USA||IBM||To adopt the new FASB guidance on presentation of net periodic pension and non pension postretirement benefit costs|
|7.||2017-18||Canada||Kingsway Financial Services Inc.||Recasted as per the SEC’s rules applicable to smaller reporting companies.|
|8.||2017-18||USA||Dell Technologies Inc.||To recast the associated financial results as discontinued operations in the Consolidated Statements of Income (Loss).|
|9.||2014-15||USA||Gramin Ltd.||The operating results for the 52-weeks ended December 26, 2015 and December 27, 2014 have been recast to conform to the current year presentation|
As we understand that the Government of India intends to curb the occurrence of fraud and corruption, the sections 130 and 131 of the CA, 2013 seem to be instrumental in achieving this objective to a certain extent as far as the companies are concerned. We will have to wait and see how many companies are obligated / allowed to re-open their accounts as a matter of implementing the aforesaid sections.
Annexure: List of department clarification on reopening of accounts
|Sl. No.||Date of Ministry Circular||Department’s Clarification|
|1.||February, 1977||The department clarified that reopening or rectification of accounts, after adoption at Annual General Meeting cannot be permitted under any circumstances.
|2.||28th July, 1987||Department opined that for meeting technical requirements of taxation laws, the accounts of Company can be reopened.
|3.||13th January, 2003||Department clarified that a Company can reopen and revise its accounts even after their adoption in the AGM in order to comply with technical requirements of any other law to exhibit true and fair view. However, the circular provided that such adoption can occur only when the same is approved by the shareholders in an EGM or subsequent AGM.
|4.||22nd November, 2010||The circular provided that pursuant to the provisions of section 220 of the 1956 Act which lays down the manner in which annual accounts are laid before AGM for adoption by shareholders, a Company cannot lay more than one set of annual accounts for a particular financial year unless it has been reopened or revised at a general meeting as per the circular date 13th January, 2003.