Case Law Details
Deloitte Haskins & Sells LLP. Vs Union of India (NCLAT)
Conclusion: Various acts of IL&FS like over borrowing were prejudicial to the public interest which had cascading impact on various sectors of the economy and the red signals were raised against the IL&FS by the country and even by the department of economic affairs of the country, therefore, before passing any appropriate order in public interest and to save the economy of the Country from collapse, if the Tribunal was of the opinion that it required to give appropriate hearing to the concerned parties, including those who audited ‘IL&FS’ and/ or those who have managed or were concerned with ‘IL&FS’ or its Group Companies, it could not be held to be illegal.
Held: Infrastructure Leasing and Financial Services Limited’ (‘IL&FS’), was a company incorporated under the Companies Act, 1956. Over the years the IL&FS had inducted institutional shareholders to include Life Insurance Corporation of India (LIC), ORIX Corporation- Japan (ORIX), State Bank of India and Abu Dhabi Investment Authority. Besides the above, the ‘IL&FS Employees Welfare Trust’ also held significant shares in 1st Respondent. The company admitted total debt across the IL&FS Group was approximately Rs. 91,000 crore as on March 31, 2018 and the company had not even been making enough profits to take care of its interest expense leading to the default. It had to be kept in mind that out of the Rs. 91,000 crore debt obligations of the IL&FS, Rs. 57,000 crore had been borrowed from the Public Sector Banks. That subsequent to spreading defaults by the IL&FS Group, credit rating agencies CARE and ICRA had downgraded the credit rating of the IL&FS. The over exposure of loans and borrowings had been without prudent commercial practices and without any application of mind by the management of IL&FS over the several years. IL&FS and Ors. members of the Board of Directors, Promoters, Auditors, etc. were privy to the inner working of their respective businesses, and as such–could not evade responsibility for the fraudulent activities, misfeasance, persistent negligence and continuous defaults in carrying out their duties. The only question arose in these appeals was as to whether this Appellate Tribunal should interfere with the impugned order dated 9th August, 2019 whereby Auditors had been impleaded as party of IL&FS. Assessee contended that Tribunal had no jurisdiction to pass orders against an auditor under Section 241 or Section 242 of the Companies Act, 2013. An auditor was not involved in the management of the affairs of a company and, therefore, could not be covered within the ambit of Sections 241 and 242 of the Companies Act, 2013. It was held that as rules of natural justice were to be followed, if any order was passed against one or other, including investigation, it was always open to the Tribunal to ask such party to be impleaded. Tribunal was empowered to pass order under Section 242 of the Companies Act, 2013 in a petition under Section 241(2) if it forms opinion that the affairs of the company have been conducted in a manner prejudicial to the public interest. Once such opinion is formed by the Tribunal, it may pass any order as it deem fit and proper. The allegations showed that the ‘IL&FS Group Companies’ had suffered majority debt obligation of ‘IL&FS’. Rs. 57,000 Crores out of Rs.91,000 Crores, was from public sector banks and institutions. The ‘Life Insurance Corporation of India’, ‘State Bank of India’, ‘Central Bank of India’ besides ‘UTI AMC’ etc. in whose favour the fund was payable could not be paid. There were number of funds including ‘Army Pension Fund’, ‘Provident Fund’ etc. who had invested in the Group Companies will suffer. In effect, the public in general might suffer as the ‘Army Pension Fund’, ‘Provident Fund’ etc. were not the Government money but of the public in general. Department of Economic Affairs which was responsible for the financial stability of economy and in the Country too had raised Red Signals of the likely collapse of ‘IL&FS’ and had expressed its deep concern on the impact of Indian Economy. If Tribunal was of the opinion that it required to give appropriate hearing to the concerned parties, including those who audited ‘IL&FS’ and/ or those who had managed or were concerned with ‘IL&FS’ or its Group Companies, it could not be held to be illegal.
FULL TEXT OF ORDER OF NATIONAL COMPANY LAW APPELLATE TRIBUNAL, DELHI
The Central Government on its opinion that the affairs of ‘Infrastructure Leasing and Financial Services Limited’ (“IL&FS”) and its Group Companies are conducted in a manner prejudicial to the public interest applied to the National Company Law Tribunal (“Tribunal” for short), Mumbai Bench, Mumbai for issuance of orders and directions as sought for and as the Tribunal deemed fit.
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