NCLT paves way for termination of Zen Shaving auditor due to 'shell company' reports

In a rare move, the National Company Law Tribunal (NCLT) has allowed the removal of the statutory auditor of a company following a plea by the Corporate Affairs Ministry. The case pertains to Mumbai-based Zen Shaving Ltd (Respondent 2) and its auditor Mukesh Maneklal Choksi (Respondent 1). An inspection by the ministry found that all the commonly known attributes of a shell company were existing in the case of Zen Shaving.

Among others, the company came out with an initial public offer and issued prospectus to raise public funds in October 1996 but is not listed on any stock exchange despite assurances given in the prospectus. Against this backdrop, the ministry moved the NCLT seeking removal of the company's statutory auditor and appointment of an independent auditor. A senior official said this was the first time that a provision of the Companies Act was being invoked to remove statutory auditor of a firm.

In a nine-page order, the tribunal noted that the family members of the auditor are also shareholders of the company, "whereas Section 141(3)(d) specifically prohibits a statutory auditor whose relative or partner is holding any security or interest of the company". The section is under the Companies Act, 2013.

The tribunal noted that the statutory auditor had issued audit certificate of the company even without examining any books of account. "... the respondent No. 1 shall immediately cease to function as statutory auditor of Respondent No. 2 company," the order dated January 3 said. Besides, the ministry has been permitted to appoint an independent auditor for the company. The tribunal has listed the matter for final argument on February 4.

(With inputs from agencies.)