New Delhi, May 4 In a setback to international auditors firms Deloitte and KPMG-affiliate BSR Associates, the Supreme Court on Wednesday set aside a Bombay High Court order, which quashed prosecution against Deloitte Haskin and Sells and BSR and Associates, the former auditors of IL&FS Financial Services (IFIN).
The top court stressed that auditors play a very important role in the affairs of a company and have to act in the larger public interest, adding that an auditor acting in a fraudulent manner, directly or indirectly, is a very serious misconduct.
However, the top court said the automatic disqualification of auditors and of the entire firm, including partners, for a period of five years to become the auditor of any other company is highly disproportionate and it is ultimately for the legislature/Parliament to provide the debarment.
A bench headed by justices M.R. Shah and M.M. Sundresh said: “So far as the submission that the disqualification is akin to civil death and Section 140(5) (Companies Act, 2013) impinges upon BSR and its partners’ fundamental right to carry on their profession, as guaranteed under Article 19(1)(g) of the Constitution is concerned, nobody can be permitted to say that despite acting fraudulently, directly or indirectly, they had a right to continue and/or carrying on their profession”.
The top court held that the resignation by the auditors does not mean they are not answerable to the courts and tribunals for the accounts statements they had signed during their tenure.
The bench said the judgment and order passed by the high court quashing and setting aside the NCLT order holding that even after the resignation of the auditors, the proceedings under Section 140(5) shall be maintainable is hereby quashed and set aside.
“The application/proceedings under Section 140(5) of the Companies Act, 2013 is held to be maintainable even after the resignation of the concerned auditors and now the NCLT therefore is to pass a final order on such application after holding inquiry in accordance with the law and thereafter on the basis of such final order, further consequences as provided under the second proviso to Section 140(5) shall follow,” it said.
However, the top court made it clear that “we have not expressed anything on merits on the allegations against the concerned auditors and it is ultimately for the NCLT/tribunal to pass a final order on the application filed by the Central government under Section 140(5) of the Companies Act, 2013”.
The bench said, “If the interpretation given by the high court that once an auditor resigns, the proceedings under Section 140(5) stand terminated and are no longer required to be proceeded, in that case, an auditor to avoid the final order and the consequence of final order as provided under the second proviso to Section 140(5) may resign and avoid any final order by the Tribunal. That cannot be the intention of the legislature.”
The bench stressed, “An auditor acting in a fraudulent manner, directly or indirectly, is a very serious misconduct and therefore the necessary consequence of indulging in such fraudulent act shall follow.”
It was argued that Section 140(5) is violative of Article 14 of the Constitution of India and discriminates against the auditors unfairly in comparison to similarly-placed alleged perpetrators, such as directors, management etc.
Justice Shah, who authored the 103-page judgment on behalf of the bench, said it is required to be noted that the role of auditors cannot be equated with directors and/or management.
“Auditors play a very important role in the affairs of the company and therefore they have to act in the larger public interest and all other stakeholders including investors etc.,” said Justice Shah.
He said the high court has materially erred in holding that on resignation of auditors � BSR & Deloitte – and on appointment of new auditors, application under Section 140(5) shall not be maintainable.
“Consequently, the high court has erred in setting aside the order(s) passed by the NCLT/NCLAT by which the NCLT/NCLAT held that despite the resignation of the auditors, inquiry/proceedings under Section 140(5) shall be maintainable and/or continued,” said the bench.
The bench noted that it was the case on behalf of the original writ petitioners on the constitutionality/vires of Section 140(5) that Section 140(5) is excessive and arbitrary as it provides unguided and untrammelled powers to the NCLT for determination of a serious offence of fraud and consequence of mandatory disqualification with grave consequences akin to civil death.
“The aforesaid has no substance. As observed hereinabove, NCLT shall exercise quasi-judicial powers under Section 140(5) with all the powers akin to a civil court. Ample opportunity shall be given by the NCLT before passing any final order,” observed the bench.
The bench added: “Now so far as the submission that the penalty in the form of automatic disqualification of auditors and of the entire firm, including partners, and that too for a period of five years to become the auditor of any other company is highly disproportionate is concerned, it is ultimately for the legislature/Parliament to provide the debarment.”
It noted that on the principle of joint and severe liability, the auditors and the entire firm including partners shall be liable and therefore can be subjected to Section 140(5) and the consequences mentioned in Section 140(5) of the Companies Act, 2013.
“Taking into consideration the object and purpose for which Section 140(5) of the Act is enacted, the same cannot be said to be arbitrary, excessive and violative of Article 14 of the Constitution and/or violative of the fundamental rights guaranteed under Article 19(1)(g) of the Constitution, as alleged,” noted the bench.
The top court delivered the judgment on an appeal by the Ministry of Corporate Affairs (MCA) against a 2020 order of the Bombay High Court granting relief to the two audit firms. The firms had moved the high court against the government’s decision to ban them from auditing activities for five years.
The high court had said that the National Company Law Tribunal (NCLT) cannot ban the audit firms for five years and the provisions under which the government sought to ban the two firms can only be applied to the existing auditors of a company. The government moved the apex court challenging the high court order.
The case is connected to a series of defaults by the IL&FS Group companies, which had an aggregate debt burden of more than Rs 91,000 crore, occurred between June and September, 2018 and threatened to collapse the money markets of India, added pressure to corporate bond yields and sparked a sell off in the stock market.
Eventually, the government took over the troubled infrastructure lending conglomerate.
-IANS
(sumit saxena can be contacted at sumit.s@ians.in)