Inquiries Under Section 83 & 88 Of The Maharashtra Co-operative operative Societies Act 1961 BY CA. B. B. MANE 132 Certificate Course in Audit of Co-op Banks & Societies 1 1
Sections and Rules under which Inquires are conducted The MCS Act 1960 and The MCS Rules1961 1. Section 83 Inquiry by Registrar 2. Rule 71 Procedure and principles for the conduct inquiry and inspection- 3. Section 88 Power of Registrar to Assess damages against delinquent promoters, etc. 4. Rule 72 Procedure for assessing damages against delinquent promoters etc. under section 88 2 2
Nature of Inquiry under Section 83 An enquiry is of the constitution, working and financial conditions of Society Sec 83 inquiry may be order by registrar on his own motion and should be ordered on the application of one-third members of society. It is administrative nature inquiry of society and not individuals. Tirath Singh v Poona Contractors Co-op Bank 1970CTD 278-B 3 3
Who can conduct inquiry U/s 88 & 83 of MSC Act 1960 a) Registrar himself; or b) Person authorized by him. 4 4
Qualification of authorized officer (Inquiry Officer) circular No. ADM/184(Su) Dt. 2-12-1963. 1963. i. He should be held an post not lower in rank that is District Dy Registrar, Dy Collector, or Civil Judge ii. iii. If above persons are not available than the person to be selected should possess legal qualification and background, which will help him to take judicious view. The character, moral background and reputation should indicate capacity to give judgment without fear or favour. 5 5
Basis on which Registrar can order inquiry U/s 88 of MCS Act1960 a. Auditor s report; or b. An authorized person s inquiry report U/s 83; or c. An authorized person s inspection report U/s84; or d. Liquidator s report U/s 105; or e. Otherwise, i.e. any other departmental report; or any other information which registrar may have in possession. 6 6
Registrar should satisfy on the basis of report, that any persons who has taken part in the 1) Organization; or 2) Management or 3) Winding up; of society and who have taken such part, within period of 5 years prior to commencement of audit or inquiry, inspection, winding up of society; (such person may be deceased / past / present officer of society) Such persons should have a)misapplied or b)retained or c)he has became liable or accountable for i. Any money; or ii. Property; and such person has been guilty of Misfeasance; or Breach of trust; in relation to Society 7 7
Procedure to be adopted while conducting enquiries A. Enquiry Procedure most of the time is prescribed by the statute under which enquiry is ordered. B. Enquiry officer has to follow stringent tests laid down by Evidence Act, to accept any material as evidence. C. Enquiry officer more particularly in case of Quasi- Judicial inquiry will have to work as a Court and he requires to give reasonable opportunity to prove the persons his/her/its point of view against whose enquiry has ordered. D. Inquiry order some time has to be pronounced. E. Inquiry officer need to act in different role as investigator, judge, expert and pleader while conducting inquiry 8 8
Procedure to be adopted while conducting enquiries F. There is no standard format of enquiry report, however one needs to cover following points i. Procedure adopted while conducting enquiry ii. Reasons to frame opinion in respect of framing of charges sheet or to carry any act like enquiring any person or investigating activity and its relevance. iii. iv. Inquiry officer also required to state in brief why particular procedure has been adopted to conduct enquiry. Inquiry officer needs to maintain diary, which will establishes how evidence has been collected and which chronological order has followed by Inquiry officer. 9 9
Procedure to be adopted while conducting inquiries v. Even inquiry officer needs to give reasons, if any person who has named in inquiry order and if inquiry officer is of opinion that such person s name to be excluded from inquiry. vi. Inquiry officer should analysis arguments of attorneys and advocates and give reasoning for acceptance or non acceptance of arguments. vii. Inquiry officer should take precaution to obtain proper power of attorney from authorized representative, advocates, Chartered Accountants those who are appearing before Inquiry officer 10 10
Negligence by itself does not constitute misconduct. However, gross negligence in the performance of duties is misconduct even though it may not involve mens rea. Recording of Statement of Witnesses: The Enquiry officer need not record the evidence of the witnesses as in regular courts, Sukh Dev Viswanth Berge Vs. Food Corporation of India., 1989(2) LLJ 277(Bom). The Rules of making of a memorandum of the substance of what the witness deposes and such memorandum shall be written and signed. However it is advisable to record in detail the statement of witnesses examined before the enquiry officer to avoid accusation of bias, malafides. The General principal of Law of Burden of proof is basic principal which an enquiry officer has to follow. 11 11
MISFESANCE Improper performance of some lawful Act, In other words it means misconduct, delinquency and breach of duty resulting loss to the Institution (Delinquency means neglect of duty or wrong doing or misdeed) LOSSES Proceeding Under Section 88 have to be ordered when losses are actually incurred by a Society and not on losses may occur depending on some future events. Losses to society must be direct one and not remote one. BREACH OF TRUST Violation or non-performance of duty imposed by law on a person standing in a fiduciary relation to another. 12 12
Kumari Jethi T. Sipahimalani vs The Maharashtra State.. (1974) 76 BOMLR 179 Section 88 can be invoked by the Registrar only when he comes to the conclusion prima facie that the persons concerned with the management or organisation of the society had "misapplied or retained, or become liable or accountable for, any money or property of the society or has been guilty of misfeasance or breach of trust in relation to the society" and every such person, who according to the Registrar is liable, should contribute such sum to the Society by way of compensation in regard to the appropriation, or retention or misfeasance or breach of trust. Having regard to the General Body Resolutions passed in the present case in exercise of its plenary powers under Section 72, the Registrar had no power to come to such a conclusion. 13
Misfeasance & Negligence case Law It appears to us that the Tribunal was completely wrong in not examining the profitability and/or advisability of the transaction of October 3, 1951 and arriving at its finding regarding negligence and misfeasance of the petitioner. Without examining first these questions the Tribunal should not have proceeded to hold that the petitioner was guilty of misfeasance. Gangadhar Dattatraya Sule vs The C.K.P. Co-Operative Credit... AIR 1973 Bom 186, (1972) 74 BOMLR 814 14 14
MISAPPLICATION Using the money of the society in a manner not warranted by the law or rules made under the Act or by the bye-laws of the society. RETENTION Retention is an act of retaining or withholding or keeping for oneself. In such a case the property may not be misapplied but it is kept by the person for his own use in his own custody unlawfully. REASONABLE OPPORTUNITY Reasonable opportunity implied: - 1) One is person against whom the charges are leveled should be informed about the details of charges. 2) Reasonable time is given to him to put forth his say about the charges leveled against him for submitting his explanation against charges. The reasonable opportunity means real and adequate opportunity. 15 15
Misapplication & Breach of Trust Case law It could not be said that honorarium paid was misapplication when it was granted by the General Body in exercise of its powers. It could not also be said that it was retained illegally by petitioner No. 6 or any one else, or any of them had become liable or accountable for any money or property of the society or has been guilty of misfeasance or breach of trust in relation to the society. The Registrar could not have, therefore, directed the enquiry under Section 88. In the facts and circumstances of this case, the Inquiry Officer could not have framed any charges in this case. Kumari Jethi T. Sipahimalani vs The Maharashtra State (1974) 76 BOMLR 179 B. Mane & Co., Chartered Accountants Ph. (020) 2687 3684 (M) 9422308272 16
Kisanlal S/O Dagdulal Rathi vsthe State Of Maharashtra CRIMINAL WRIT PETITION NO. 922 OF 2008 There cannot be two opinion about the legal proposition that when the FIR does not indicate any material about complicity of the petitioners, then the same may be quashed in the exercise of writ jurisdiction under Article 227 of the Constitution. The civil dispute cannot be ordinarily allowed to be converted into criminal action. At the same time, it is well settled that if on same set of facts, civil wrong as well as criminal wrong is shown to have been committed, then the mere existence of civil remedy is not a ground for quashing the FIR.. B. Mane & Co., Chartered Accountants Ph. (020) 2687 3684 (M) 9422308272 17
Kisanlal S/O Dagdulal Rathi vsthe State Of Maharashtra CRIMINAL WRIT PETITION NO. 922 OF 2008 For the reasons stated hereinabove, I am of the opinion that there is some material, which may not be sufficient enough to immediately reach conclusion of the guilt, but has some potentiality to indicate connivance of the petitioners with the Directors and officials of the CPCO Bank for creating the loan documents with oblique intention to misappropriate the amounts. It cannot be overlooked that the financial bunglings of the concerned Directors, officials and such borrowers have ultimately brought severe financial crisis to the discredit of the CPCO Bank. Considering these aspects, I do not find any substantial reason to interfere with the FIRs at the premature stage. 18
Case Laws of FIR In "R. Kalyani v. Janak C. Mehta and others" (2009) 1 SCC 516, the Apex Court held that where the allegations do not show that the property was entrusted with the appellant or otherwise had dominion over it, or any criminal breach of trust was committed, the quashing of the FIR would be proper and need not be interfered with. In "Mahesh Chaudhary v. State of Rajasthan and another" (2009) 4 SCC 439, the Apex Court held that ( 28 ) dispute being primarily of a civil nature by itself is not a ground to quash the proceedings because in cases of forgery and fraud, there would always be some element of civil nature. The evidence pertaining to charge of conspiracy is yet to be collected. 19
Charge sheet should include following things: - Details of charges leveled. Specific allegations against each of the individual, one who has charge-sheeted. How misfeasance or nonfeasance has led to a loss. The amount of loss should clearly indicated. 20 20
List of Documents and Records to be maintained by Inquiry Officer 1. Copy of Order of Appointment of inquiry officer, 2. Copy appointment acceptance/rejection letter, 3. Copy of summons issued to principal officer, 4. Working papers of prima-facie Inquiry, 5. Any other Inquiry report or Special audit report, audit report or liquidator s report, or inspection report or any other report on which basis inquiry has been institute. 6. List of delinquents along with their address. 21 21
List of Documents and Records to be maintained by Inquiry Officer 7) List of all relatives of decease delinquent who have inherited property of delinquent. 8) Copies of show cause notices issued to delinquents. 9) Replies received from delinquents to show cause notice. 10) List of delinquents to be prepared and maintained on whom charges are framed. 11) Copies of charges framed to be maintained. 12) List of witnesses. 13) Replies received from delinquents to charges. 22 22
List of Documents and Records to be maintained by Inquiry Officer 14) Analysis of Arguments of attorneys and advocates and reasoning of acceptance or non acceptance of arguments. 15) Relevant laws and other statutory circulars etc., should be kept in separate file. 16) Notes, noting of important points to be verified subsequently, come across during hearing. 17) Preparation of Enquiry Report 23 23
U/s 89 Of MCS ACT 1960 Power to enforce, attendance etc., The registrar or the person authorized by him, when acting under section 83, 84 or 88 shall have the power to summon and enforce the attendance of any person 4 [and examining him on oath or affirmation or by affidavit] or to compel the production of any document or other material object by the same means and in the same manner as is provided in the case of a Civil Court under the Code of Civil Procedure, 1908. 24 24
Elements of fraud Common law fraud has nine elements: 1. a representation of an existing fact; 2. its materiality; 3. its falsity; 4. the speaker's knowledge of its falsity; 5. the speaker's intent that it shall be acted upon by the victim; 6. plaintiff's ignorance of its falsity; 7. plaintiff's reliance on the truth of the representation; 8. victim's right to rely upon it; and 9. consequent damages suffered by victim. 25 25
Ingradience of Financial Enquiries 1) One needs to find out who was rightful person who is authorized to utilize funds and its purpose for which same has been sanctioned. 2) What are duties cast upon the persons or organization who are dealing with funds? 3) In case of Financial enquiry Inquiry officer needs to interpret financial records, before accepting any financial records as a part of enquiry material and its relevance and creditability to be tested. 4) Inquiry officer need to give reasonable opportunity to concern person to prove or to allow any other interpretation of records by record keeper to prove his view. 26 26
Ingradience of Financial Enquiries 5) Inquiry officer in case of financial enquiry require to understand prevalent commercial practice in the country, trade or activity to be enquired. 6) Enquiry reports and/or order in case of financial enquiry needs to be Judicious. 7) Inquiry officer can accept oral evidence/information but it requires to be passed through or stringent test of Evidence Act. 27 27
To The Principal Officer DRAFT OF SUMMONS / /20.. USA/INQ./1/20..-20.. Ref.: - Registrar of Co-operative Societies Order No. 100 / NESS / NEYAMAN / INQUIRY / 88 / 20.., Dated / /20 Sir, As an Inquiry Officer, appointed by the Registrar of Cooperative Society, Delhi, by his order dated / /20 Issued Under Section 88 of The Maharashtra Co-operative Societies Act, 1960, to assess damages and to pronounce final order of recovery of damages with interest from delinquent persons. Whereas your attendance is necessary, you are hereby required to produce documents and papers as listed below, and give information before me on the day of 20.. at :.. am/pm in the forenoon/afternoon at our/ your office. If you are fail to comply with this order without lawful excuse, 28 28
you will be subject to the consequences of non-attendance laid down in Rule 12 of order XVI of Code of Civil Procedure, 1908. GIVEN under my hand and the seal of an Enquiry Officer, this day of 20 SD/- (U. S. Know) (Inquiry Officer) Copy to: - The Inquiry officer appointing authority. Enclosed List of Documents to be produced. 1. Names of directors alongwith present address for the period 19..-20.. 2. An expenses details of Purchases of lime, Mill Sanitation Material and advances., etc., stated in above referred order issued by inquiry officer appointing authority. 3. An audit report alongwith Balance Sheet, Profit & Loss Accounts for period as stated above. 29 29
TALANT & TACT Talent knows what to do, Tact knows how to do, Talent makes man respectable, Tact makes man acceptable. Talent is wealth Tact is ready money Don t waste time learning the tricks of trade, Instead learn the trade. GOOD INQUIRY OFFICER IS ONE, WHO HAS EAGLE S EYE, LION S HEART AND HAVE RIGHT COMBINATION OF TALENT & TACT 30 30
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