The Bombay High Court on Tuesday has quashed the prosecution initiated by Ministry of Corporate Affairs against DeoLitte Haskins & Sells LLP & BSR and Associates LLP both former auditors of IL & FS Financial Services Limited.
The petitioners filed writ petitions challenging the constitutional validity of section 140(5) of Companies Act, 2013 and objected to the maintainability of the company petition filed under section 140(5) of the Companies Act2013 by Ministry of Corporate Affairs before the National Company Law Tribunal, Mumbai Bench on the grounds that the petitioners have already tendered resignation as statutory auditors of the Company and thus, proceedings under section 140(5) do not survive, which the NCLT had dismissed.
Section 140(5) of the companies act 2013 says: –
“Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors:”
The petitioners said that when the statutory auditor had factually ceased to be company auditor i.e. CA of the particular company and another auditor namely M/s. M.M. Chitale & Co. had stepped into the shoes and assumed that responsibility, provisions of section 140(5) could not have been invoked against the ex-chartered accountants.
They also challenged the order of Union of India through its Ministry of Corporate Affairs, in which the UOI had appointed inspectors with the Director SFIO to inquire into the affairs of the company namely Infrastructure Leasing and Financial Services Limited and its subsidiary companies. The inspectors were given time of three months to submit the report to Central Government.
The SFIO accordingly submitted a report which was looked into by the Union of India, Ministry of Corporate Affairs (MCA) and in exercise of the powers available to it under section 212 (14) of the Companies Act, 2013, it directed the SFIO and Regional Director (Western Region) to proceed further, wherebythis communication recommends prosecution of petitioners under various provisions and SFIO has been directed to file a complaint by next day without fail and to submit the compliance report.
Section 212 (14) of the Companies Act, 2013 says that on receipt of the investigation report, the Central Government may, after examinationof the report (and after taking such legal advice, as it may think fit), direct the Serious Fraud Investigation Office to initiate prosecution against the company and its officers or employees, who are or have been in employment of the company or any other person directly or indirectlyconnected with the affairs of the company.
Darius J. Khambata, Senior Adcocate for the petitioners said that High Court has granted interimrelief and stayed the proceedings before NCLT. The said orderwas questioned unsuccessfully before the Supreme court.When the Apex Court was disposing of the SLP, according to petitioners at eleventh hour, some documents were shown to Apex Court with submission that the MMC had declined to accept the responsibility and leave was sought to move appropriate application before NCLT to appoint new auditor. Apex Court granted that leave. He further submitted that grant of this leave by the Apex Court and dismissal of the SLP cannot be construed as dilution of the High Court order and action of respondents in moving the application in very same proceedings which were stayed because of liberty given by the Apex Court is unwarranted. The NCLT could not have proceeded further and allowed that application.
Navroz Seervai, Senior Advocate said that removal of any company auditor results in irrevocable and irreparable damageto his reputation and the consequences resulting from said removal are very drastic for company auditor, his firm and also for his family. He also said that the jurisdictional fact that company auditor to be substituted must be “in office” has been lost sight of whereas the petitioners have already tendered resignations. He also states that when Hon’ble Apex Court has refused to intervene in SLP, prayers made by Government could not have been entertained in very same matter before NCLT. According to him the date on which MCA-Ministry of Corporate Affairs moved application before NCLT, there was no need for Central Government to do it and there was no power with it to appoint company auditor for IFIN.
The court’s attention was drawn to the communication which says that debarment i.e. punishment to said auditor is real but hidden motive. There are total three proceedings that can be initiated against the auditor for debarment i.e. one by the Institute of Chartered Accountant, other under section 447 of the Companies Act and the third under section 140(5) of the Companies Act. The investigation report received by the Ministry of Corporate Affairs shows that recommendation of removal can be acted upon if it is issued against existing auditor. The law makes distinction between auditors who are retired and those who are existing auditors.
The case was heard by the division bench comprising of Chief Justice B.P. Dharmadhikari & Justice Nitin R. Borkar who observed that confusing state of affairs shows the unwillingness on part of the respondents to bring on record the best evidence viz. material which will result in clarifying the facts and instead, an attempt to project the same using some adjudicatory principles. It is humanly impossible to read & appreciate such a large report of the SFIO, apply mind & give the appropriate directions within 30 hours. Central government claims that two officers independently & separately read all these papers running into about 756 + 32,000/ pages and applied mind to it within 30 hours. Assistance of a processing note prepared for that purpose was also taken. In absence of such processing note & the responsible affidavit of the concerned competent person/s, it is difficult to accept this submission.
Therefore, the court held that the section 140(5) is not unconstitutional, hence, petitioner’s prayer was rejected and direction under section 212(14) of the Companies Act, 2013 issued by Union of India to SFIO is unsustainable and it is quashed & set aside. The consequential prosecution lodged by the SFIO on the file of Special Court (Companies Act) and Additional Sessions Judge, Greater Mumbai is therefore not maintainable and it is also quashed & set aside. Thus the writ petition was allowed partly.
-India Legal Bureau