In a major relief to the former Infrastructure Leasing & Financial Services (IL&FS) auditors BSR & Associates (a KPMG-affiliated firm) and Deloitte Haskins and Sells, the Bombay High Court Tuesday quashed criminal prosecution against them before a Special Court in Mumbai.
The court quashed the prosecution based on a criminal complaint filed by the Ministry of Corporate Affairs’ Serious Fraud Investigation Office (SFIO) against auditors, who were accused of connivance in the IL&FS financial fraud case, observing it to be ‘non-maintainable’. The SFIO had filed a complaint on May 30, last year.
In this regard, the Centre has sought a stay for eight weeks before moving the apex court. The high court noted that the interim protection from coercive action granted to auditors will continue during this period.
A bench of Chief Justice Bhushan P Dharmadhikari and Justice Nitin R Borkar passed a judgment through video conference in pleas filed by auditors challenging the Centre’s move seeking a ban on auditing firms for five years. The bench had reserved its judgment for January 13 this year.
While a bench led by Chief Justice Dharmadhikari upheld constitutional validity of section 140 (5) of Companies Act, 2013, the court said that the provision does not apply to auditors who have resigned.
Section 140 of Companies Act deals with the removal and resignation of auditors and sub-section 5 states that if the National Company Law Tribunal (NCLT) is satisfied that any auditor has “directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud”, it may ban such firms from conducting auditing activities for a period of five years.
Earlier, on September 4, last year, the high court had granted interim relief to BSR & Associates from coercive action in the criminal complaint filed by the SFIO before the trial court and also stayed proceedings before the Mumbai Bench of the NCLT initiated by the Centre seeking a five-year ban on the auditing company.
The Supreme Court, on September 26 last year, refused to allow the government to proceed against auditing company BSR for alleged fraudulent misconduct in IL&FS case. The apex court, thereafter, had asked the high court to decide the case in an expedited manner. Thereafter, the high court, on October 17 last year, gave similar relief to another former auditor Deloitte Haskins and Sells which challenged MCA’s decision.
Senior Counsels Darius Khambata and Amit Desai representing BSR and Deloitte respectively, had argued that SFIO’s May 29 order was based on incomplete investigation and subsequent order of NCLT to ban auditors for five years was against the law and the said provision under section 140 (5) of the Companies Law provides change of auditors or removal and does not prescribe ban. Auditors argued that while criminal case can be conducted under different provision of the law, banning auditor firms for five years without trial was arbitrary.
Senior counsel Navroz Seervai and advocate Sujay Kantawala appeared for BSR partner N Sampath Ganesh claimed that the term of auditors had already come to an end and therefore they cannot be banned.
Senior counsel Mukul Rohatgi for BSR had also argued that if Section 140 (5) is invoked, only auditors will face proceedings while directions of the company may not be held liable.
However, senior counsel Aspi Chinoy and advocate Hiten Venegaonkar representing MCA submitted that the probing agency took nearly eight months to prepare ‘final’ report against the auditors and took prompt action, as it was a financial crisis caused by misdemeanour on behald of the IL&FS directors and auditors.
The financial affairs of the IL&FS group came under scrutiny in the year 2018 after it defaulted on short-term and long-term debt obligations allegedly to the tune of Rs 91,000 crore.
The SFIO probe had revealed that auditors colluded with IL&FS Financial Services Ltd (IFIN) executives and concealed information about wrongdoings of the management.
Following SFIO findings, MCA moved a plea before NCLT seeking removal of auditors and a five-year ban for allegedly conniving with the IFIN management.
Thereafter, former IL&FS auditors moved the Bombay High Court challenging the constitutional validity of section 140 (5) of the Companies Act, 2013 and also contested MCA’s move of filing a plea before National Company Law Tribunal seeking a ban on auditors for five years.
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