25 July 2009

Anand Wadadekar: Going Concern

If a Company's net worth is eroded 100% and the auditors have commented in their report that its not a going concern or the going concern concept is questioned,
1) what the Directors should do and how much they will be responsible if there is no willful fraud or action which contributed to the situation?
2) Is the compulsory winding up the last route left for directors?
3) Will the officer in default be also liable? If yes, how and to what extent? 
4) if the directors keep the company going even after the audit report, will the directors be liable for continuing trading while insolvent?
Assuming SICA is not applicable.
Waiting for inputs from elite professionals of the group. Your response will be highly appreciated.

1 comment:

  1. Anonymous2:43 PM

    1 There is no bar to the directors to continue with the business even if the net worth has been fully eroded. Directors should find ways and means to bring the company back on rail. However, they would need to intimate the BIFR which would ask the company for its proposal how it would carry on its business and how much funds it would need reasonably to turn around from red into black or to revive the company. 2 Company winding up is the last resort but that situation would arise only when all options to bring the sick company would be exhausted. 3 An auditor would be liable for any professional misconduct under the Chartered Accountants' Act, 1949 or under any other law in case he has not properly evaluated whether the accounts have been prepared by the Board of Directors (i) maintainig a going-concern assumption or (ii) this assumption has not been found by the Board to be acceptable and the accounts have been prepared overriding it. Notes to the Accounts must in either way bring out whether the Accounts have been prepared on going-concern basis or otherwise. In case the auditor agrees with either of the two bases used in the preparation of accounts, auditors' report may not bear any qualification or adverse remark. In case the auditor does not agree that going concern assumption remains valid, he would need to qualify his report with estimated impact on the valuation of assets and liabilities and on overstatement or understatement of income and expenses, and on the results and reserves besides whether the accounts give a true and fair view. It is also possible for the auditor to give a disclaimer of opinion saying that he is unable to express his opinion if the going concern assumption followed or not followed by the company, is right or not. 4 If the directors continue trading even after the auditors' report, to my knowledge, there is no bar to doing this and director would not be held responsible so long as the Board is acting collectivly in good faith in conformity with all applicable laws. SICA and BIFR procedures would give a more precise answer to this query. 5 For a bankrupt company, I am sure stringent regulations would be applicable and the company should take prior approvals of the authorities before committing to any major expenditure or any major or exceptional business or operational commitment. If need be, a prior independent legal opinion should be obtained to protect the actions of the directors, its officers and the company and all important and controversial matters be placed at the Board meetings or the company in general meeting.


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