Expert Advisory Committee

3.2 Query:

Whether brother of director’s wife can be appointed as auditor of the company.

1.ABC Ltd. is a Public Limited Company, of which, Mr. Y is the Chairman-Cum-Managing Director. Mr. X is a chartered accountant carrying on the profession of accountancy. Mr. X is Mr. Y’s wife’s brother.

2.The querist has stated that section 314 prohibits appointment of a relative of director to an office of profit. The word ‘relative’ has been defined in section 6 as listed in Schedule I-A. The entry ‘wife’s brother’ is not found in the schedule.

3.The querist has mentioned that Schedule I-A mentions son’s wife as a relative, it does not mention the reverse relationship ‘husband’s father’ as relative. If A is related to B’s son’s wife, B, who is A’s husband’s father is not related to A in the manner indicated in Schedule I-A.

4.The querist has informed that in Ramaiya’s Guide to the Companies Act (Eleventh Edition, 1988) the following discussion on the subject is found on page 66. On a reference made by the Indian Banks’ Association as regards the scope of the relationship listed in Schedule I-A, the Ministry of Law, Department of Company Affairs, have stated that “section 6(c) of the Companies Act does not cover reciprocal relationships in the reverse direction” in the case of any of the ‘relatives’ enumerated in the schedule except those expressly included in the schedule ‘itself’. That is to say, according to their view, while a son-in-law (daughter’s husband) or daughter-in-law (son’s wife) is a relative of a father-in-law or mother-in-law, the father-in-law or mother-in-law is not a relative of the son-in-law or daughter-in-law as this reciprocal relationship is not expressly included in the list in Schedule I-A. So also while a person’s sister’s husband is his relative, he himself cannot be treated as a relative of his sister’s husband, because the latter relationship does not find mention in Schedule I-A. Similarly, in the case of the other relationships enumerated in the Schedule, the relationships in the reverse direction are not to be recognised so as to constitute the parties as relatives except where such reverse relationships are expressly included in the Schedule itself.

5.The querist has stated that as per the code of conduct published by the Institute the member should disclose his interest in the report when his or his partner’s relative have substantial interest in the company. The world relative has been defined in Appendix No. 10 of the Chartered Accountants Regulations. The said definition does not cover wife’s brother.

6. The querist has sought the opinion of the Expert Advisory Committee as to whether Mr. X can accept the appointment as auditor of M/s. ABC Ltd., or not.

Opinion May 6, 1994

1. The Committee notes section 6 of the Companies Act, 1956, which states as below:

“A person shall be deemed to be a relative of another, if and only if –

(a) they are members of a Hindu undivided family, or

(b) they are husband and wife, or

2. The Committee also notes that Schedule IA to the Companies Act, 1956, contains the entry ‘sister’s husband’, but it does not contain the entry ‘wife’s brother’ in the list of relatives. The Committee is accordingly of the view that Mr. X (Mr. Y’s wife’s brother) is not a relative of Mr. Y in terms of section 6 of the Companies Act, 1956. However, Mr. Y (Mr. X’s sister’s husband) would be a relative of Mr. X under section 6.

3.The Committee further notes the notification reproduced at Appendix no. (17) of the Chartered Accountants Act, 1949 (1989 Edition) on page 55, which states, inter alia, as under:

“…..a member of the Institute shall be deemed to be guilty of professional misconduct, if he expresses his opinion on financial statement of any business or enterprise in which one or more persons who are his ‘relatives’ within the meaning of section 6 of the Companies Act, 1956 have either by themselves or in conjunction with such member a substantial interest unless he discloses the interest also in his report.

For this purpose the expression ‘Substantial Interest’ shall have the same meaning as is assigned thereto under Explanation 3 to section 13 of the Income-tax Act, 1961.” (Emphasis supplied by the Committee)

4.On the basis of the above, the Committee is of the opinion that Mr. X, not being a relative of Mr. Y in terms of section 6 of the Companies Act, 1956, can accept the appointment as auditor of M/s. ABC Limited, provided he is otherwise qualified to be so appointed, e.g., under section 226 and 224 (1B) etc. However, since Mr. Y, the director of the said company, is a relative of Mr. X in terms of the section 6, Mr. X shall be deemed guilty of professional misconduct if he fails to make appropriate disclosures as required by the notification reproduced at para 3 above.

5.The Committee may incidentally mention that section 314 of the Companies Act, 1956, does not prohibit, as stated by the querist in para 2 of the query, appointment of a ‘relative’ of director to an office or place of profit in the company. It only provides that if the remuneration for holding such office or place exceeds the prescribed sum, the appointment should be approved by a special resolution, and in certain cases also by the Central Government.

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