Union of India and Another Vs Deloitte Haskins and Sells LLP & Anr (Supreme Court of India)
Second proviso to section 140(5) of Companies Act further provides that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under section 140(5) shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable of such action under section 447 of the Companies Act. Therefore, as such, second proviso to Section 140(5) can be said to be a substantive provision and it operates on the final order passed by the Tribunal under Section 140(5) (first part). At this stage, it is required to be noted that after taking into consideration the recommendations made by the previous Standing Committee in respect of Companies Bill, 2009 and the recommendations from various stakeholders, the Companies Bill, 2011 came to be introduced. The suggestion of the Standing Committee to clause 123(1) of the 2009 Bill (which provided for removal of an auditor by the NCLT on finding that there is a fraud) was to make the provision more stringent; and to provide for consequences for an auditor when such auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud. The same has been done by way of second proviso to Section 140(5) of the Act, 2013. Therefore, the second proviso to Section 140(5) which, as observed hereinabove, is a substantive provision, is introduced after a detailed analysis and after taking into consideration the recommendations of the Standing Committee and with a view to make the provision more stringent and to provide for consequences for an auditor when such auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud. It is required to be noted that on passing of the final order by the NCLT under first part of section 140(5) and if an auditor is found to have been indulged into fraudulent activities or abetting or colluding in a fraud with the management of the company, consequences provided under the second proviso to section 140(5) shall follow. Therefore, before second proviso of section 140(5) is attracted, there must be a detailed enquiry against an auditor of a company as per first part of section 140(5) and there must be a finding arrived at by the NCLT that the auditor of a company has, 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.
By the impugned judgment and order, though the High Court has upheld the vires of Section 140(5) of the Act, 2013, however, the High Court has held that once the auditor resigns as an auditor or is no more an auditor on his resignation, thereafter Section 140(5) proceedings are no longer maintainable as the petition filed by the Union of India under section 140(5) has been satisfied by the subsequent resignation of the auditor. The view taken by the High Court is absolutely erroneous and is unsustainable. Subsequent resignation of an auditor after the application is filed under section 140(5) by itself shall not terminate the proceedings under section 140(5). Resignation and/or removal of an auditor cannot be said to be an end of the proceedings under section 140(5). There are further consequences also on culmination of the enquiry under section 140(5) proceedings and passing a final order by the Tribunal on the conduct of an auditor, whether such a auditor has, 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, as provided under the second proviso to section 140(5) of the Act, 2013. Therefore, the enquiry/proceedings initiated under the first part of section 140(5) has to go to its logical end and subsequent resignation and/or discontinuance of an auditor shall not terminate the enquiry/proceedings under section 140(5). 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 further 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.
As observed hereinabove, the second proviso to section 140(5) of the Act, 2013 is a substantive provision, though it is by way of a proviso, and the same shall operate and/or depend upon the final order to be passed by the Tribunal in the first part of section 140(5). If the interpretation given by the High Court that on subsequent resignation and/or discontinuance of an auditor, proceedings under section 140(5) stand terminated and/or the petition under section 140(5) by the Central Government is no longer maintainable is accepted, in that case, second proviso to section 140(5) would become nugatory and in no case there shall be any action under the second proviso to section 140(5). If such an interpretation, as interpreted by the High Court, is accepted, in that case, the object and purpose of incorporation of second proviso to section 140(5) shall be frustrated. The object and purpose of second proviso to section 140(5), as observed hereinabove, is to make the provision more stringent and to provide for consequences for an auditor when such an auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud. At this stage, it is required to be noted that under the second proviso to section 140(5) on the final order being passed by the Tribunal that the auditor/firm has, 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, he/it shall not be eligible to be appointed as an auditor of any company for a period of five years. The word “any” used in the second proviso to section 140(5) is significant. On the final order being passed by the Tribunal, such an auditor not only shall be removed or changed as an auditor of a company, but such an auditor/firm shall also be ineligible to be appointed as an auditor of any other company for a period of five years.7. Therefore, on true interpretation and scheme of Section 140(5) of the Act, 2013, once the enquiry/proceedings is/are initiated under first part of section 140(5) of the Act, either suo motu by the Tribunal or on an application made to it by the Central Government or by any person concerned, it must come to its logical end and irrespective of the fact whether during such enquiry/proceedings the auditor has resigned or not, there must be a final order to be passed by the Tribunal on whether such an auditor has, in fact, directly or indirectly, acted in a fraudulent manner or not. Direction to the company to change its auditor as provided in the first part of section 140(5) is only a consequence to the finding recorded by the Tribunal that the auditor has, directly or indirectly, acted in a fraudulent manner. This is the first consequence of the final order under section 140(5) (first part). On passing the final order by the Tribunal that the auditor of a company has, directly or indirectly, acted in a fraudulent manner, the second consequence as mentioned in the second proviso to section 140(5) shall be attracted. Therefore, for any consequence as provided under the second proviso to section 140(5), there shall be a final order by the Tribunal on enquiry as per first part of section 140(5). Therefore, on true interpretation, even on resignation by an auditor of a company even during the enquiry/proceedings under section 140(5) or even prior to that, there shall not be any termination of the proceedings under section 140(5) as observed and held by the High Court. At the cost of repetition, it is observed that in a given case, an auditor, who in fact has, directly or indirectly, acted in a fraudulent manner, to avoid any further consequence under the second proviso to section 140(5), resigns to avoid any consequence under the second proviso to section 140(5), it cannot be permitted.
No so far as the submission on behalf of the respective auditors that even if section 140(5) would not have been there, in that case also, no auditor can get away with fraud, abetment of fraud or professional misconduct etc. and for that purpose the reliance placed upon sections 132, 141, 147, 245 and 447 of the Act is concerned, at the outset, it is required to be noted that all the aforesaid provisions and section 140(5) operate in different field. Section 140(5) has been enacted with a special object and purpose, as observed hereinabove. Second proviso to section 140(5) specifically provides that on final order being passed by the NCLT, such an auditor shall not be eligible to become an auditor in any other company for a period of five years. Therefore, merely because the auditor can be removed as an auditor of a company including the other provisions, section 140(5) which has been enacted with a special object and purpose cannot be said to be arbitrary and/or ultra vires.
Conclusion:
In view of the above and for the reasons stated above, challenge to the constitutional validity of section 140(5) of the Companies Act, 2013 fails and it is observed and held that section 140(5) is neither discriminatory, arbitrary and/or violative of Articles 14, 19(1)(g) of the Constitution of India, as alleged. The impugned judgment and order passed by the High Court quashing and setting aside the application/proceedings under section 140(5) on the ground that as the auditors have resigned and therefore thereafter the same is not maintainable is hereby quashed and set aside. Consequently, the impugned 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 Act, 2013 is held to be maintainable even after the resignation of the concerned auditors and now the NCLT therefore to pass a final order on such application after holding enquiry in accordance with law and thereafter on the basis of such final order, further consequences as provided under the second proviso to section 140(5) shall follow. However, it is made 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 Act, 2013.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
1. This batch of Criminal Appeals/Civil Appeals raise common question(s) of law pertaining to the interpretation of Section 140(5) of the Companies Act, 2013 (hereinafter referred to as the ‘Act, 2013’) and the Investigation Report dated 28.05.2019 (hereinafter referred to as the ‘IFIN SFIO Report’) in respect of IL&FS Financial Services Limited (hereinafter referred to as the ‘IFIN’).
1.1 Criminal Appeal Nos. 2305-2307/2022, Criminal Appeal Nos. 2302-2303/2022 and Criminal Appeal No. 2300/2022 have been filed by the Union of India, inter alia, challenging the common judgment and order dated 21.04.2020 passed by the High Court of Bombay in Writ Petition Nos. 4144 & 4145 of 2019 and other companion writ petitions, by which the High Court, though upheld that Section 140(5) of the Act, 2013 is not unconstitutional, has set aside the direction under Section 212(14) of the Act, 2013 dated 29.05.2019 issued by the Union of India to the Serious Fraud Investigation Office (SFIO) and consequently set aside the prosecution lodged by the SFIO vide Criminal Complaint No. CC 20/2019 on the file of Special Court (Companies Act) & Additional Sessions Judge, Greater Mumbai, the Union of India and the SFIO have preferred the present appeals.
1.2 In Criminal Appeal Nos. 2302-2303/2022, the challenge pertains to the auditor of IL&FS Financial Services Limited, namely, BSR & Associates LLP (BSR) and in Criminal Appeal Nos. 2305-2307/2022 and Criminal Appeal No. 2300/2022, the challenge pertains to another auditor of IFIN, namely, Deloitte Haskins & Sells LLP (for short, ‘Deloitte’) and an ex-director of IFIN, namely, Hari Sankaran.
1.3 Criminal Appeal Nos. 2298/2022, 2299/2022 & 2304/2022 have been filed by Deloitte and two of its partners challenging the impugned judgment and order passed by the High Court insofar as it upholds the constitutionality of Section 140(5) of the Act, 2013.
1.4 Civil Appeal Nos. 793/2022, 801/2022 & 877/2022 have been filed by Deloitte and two of its partners challenging the order passed by the National Company Law Appellate Tribunal dated 04.03.2020.
Factual Background:
2. The facts leading to the present proceedings in nutshell are as under:
A series of defaults by the IL&FS Group Companies, which had an aggregate debt burden of more than Rs. 91,000 crores, occurred between June to 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. The Department of Economic Affairs, Ministry of Finance issued an Office Memorandum dated 30.09.2018 in respect of IL&FS to the Ministry of Corporate Affairs, Union of India requesting it to take action under the Act, 2013. The Memorandum and Note highlighted that:
(a)the IL&FS Group was struggling with a debt contagion of approx.. Rs. 91,000 crores across the IL&FS Group against Rs. 6950 crores in equity share capital and reserves a leverage of at least 13 times. Moreover, in the year 2017-18, the IL&FS Group has shown a loss of Rs. 2670 crores;
(b)this debt contagion, prima facie, was on account of inter alia failure of corporate governance across the IL&FS Group and window dressed accounts; and
(c) any further defaults would be catastrophic for the well-being of the financial markets and the economy.
2.1 In parallel, the Ministry of Corporate Affairs, upon receipt of a report from the Registrar of Companies under Section 208 of the Act, 2013, directed the SFIO to investigate into the affairs of IL&FS and its subsidiaries.
2.2 The Ministry of Corporate Affairs filed a Company Petition on 01.10.2018 being Company Petition No. 3638/2018 against IL&FS and its the then existing Board of Directors before the National Company Law Tribunal (NCLT) seeking, amongst others, the removal of the then existing Board of Directors of IL&FS and the appointment of a new Board of Directors in place and instead thereof. The NCLT passed an interim order on the same date, i.e., 01.10.2018 superseding the then existing Board of Directors of IL&FS with a new Board of Directors. The new Board of Directors were directed to take charge of the affairs of the IL&FS. The new Board of Directors of IL&FS submitted a report dated 30.10.2018 on progress and way forward with the Ministry of Corporate Affairs which was in turn filed by the Ministry of Corporate Affairs with the NCLT on 31.10.2018, pursuant to the order passed by the NCLT on 01.10.2018.
2.3 Further to the Office Order dated 30.09.2018 directing investigation to be initiated by the SFIO and an e-mail dated 01.11.2018, SFIO submitted an interim report in respect of IL&FS and one Employees Welfare Trust pertaining to the IL&FS Group. It is required to be noted that the said interim report was submitted as Ministry of Corporate Affairs called for an “interim report”, which was called in pursuance to Section 212(11) of the Act, 2013 which provides that an interim report must be called for by the Central Government. It is to be noted that in the interim report itself, it was specifically recorded that the findings in the interim report are interim findings and the interim report concluded by setting forth “based on the above interim findings…” It is also to be noted that interim report was on the individuals who were in control of the affairs of the IL&FS Group and the illegalities and fraud perpetrated by them.
2.4 On the basis of the interim report, the Ministry of Corporate Affairs filed a Miscellaneous Application in Company Petition No. 3638/2018 against the erstwhile Directors of the companies in the IL&FS Group seeking to implead them in the said proceedings and an order to attach their immovable/movable properties.
2.5 On the basis of the interim report and a prima facie opinion of the Institute of Chartered Accountants dated 04.12.2018, the Ministry of Corporate Affairs filed a petition under section 130 of the Companies Act, 2018 before the NCLT praying inter alia that the books of accounts of IL&FS, IFIN and IL&FS Transportation Networks Limited (ITNL) may be re-opened and recast. Vide order dated 01.01.2019 passed in Section 130 petition, the NCLT directed that the accounts of IL&FS, IFIN & ITNL for the past 5 financial years be re-opened and recast on the ground that the affairs of IL&FS, IFIN & ITNL had been mismanaged casting a doubt on the reliability of the financial statements/accounts.
2.6 The auditors of IFIN (BSR & Deloitte) were given notice of Section 130 petition who opposed the said petition. Order dated 01.01.2019 passed by the NCLT was challenged by one of the ex-directors of IFIN before the National Company Law Appellate Tribunal, New Delhi (NCLAT), which dismissed the appeal vide order dated 31.01.2019. Order dated 31.01.2019 passed by the NCLAT was appealed before this Court. Vide order dated 04.06.2019, this Court dismissed the civil appeal filed by the said ex-director. Thus, this Court upheld initiation of the proceedings by the Ministry of Corporate Affairs under section 130 of the Companies Act, 2018.
2.7 The Reserve Bank of India (RBI) initiated an inspection of the IL&FS and IFIN under Section 45N of the RBI Act, 1934. Pursuant to the investigation/inspection, the RBI submitted an investigation/inspection report dated 22.03.2019 to IFIN. IFIN thereafter issued a notice dated 13.05.2019 under Section 140(1) of the Act, 2013 inter alia on BSR seeking to remove them as auditors. BSR filed a written response to the notice served by IFIN under Section 140(1) of the Act, 2013 denying the allegations in the notice. A hearing was held on 29.05.2019 by IFIN where BSR was also represented/present.
2.8 Pursuant to the Office Order dated 30.09.2018, SFIO submitted the investigation report of IL&FS Financial Services Limited (SFIO Report).
2.9 The Ministry of Corporate Affairs vide letter dated 29.05.2019 requested the Regional Director (Western Region) and the SFIO to initiate proceedings/prosecution. The SFIO was asked to initiate proceedings/prosecution under Section 447 and other provisions of the Companies Act, r/w Sections 417, 420 and 120B of the Indian Penal Code. The Regional Director was asked to institute a Petition under Section 140(5) of the Act, 2013.
2.10 That thereafter the SFIO filed a criminal complaint on 30.05.2019 before the Sessions Court (Special Judge – Companies Act), Mumbai against, amongst others, the auditors/ex-auditors of IFIN being CC No. 20/2019.
2.11 That thereafter the Ministry of Corporate Affairs filed a Petition under Section 140(5) of the Act, 2013 dated 10.06.2019, inter alia, against the auditors of the IFIN, namely, BSR & Deloitte and the engagement partners as well as their team. In the petition under Section 140(5), it was inter alia prayed to remove BSR as auditors of IFIN; declare that Deloitte shall be deemed to be removed as Statutory Auditor for IL&FS for F.Y. 2012-13 to F.Y. 201718; permit the Ministry of Corporate Affairs to appoint an auditor for IFIN under the first proviso of Section 140(5) of the Act, 2013; and declare/direct that BSR, its engagement partners, Deloitte and its engagement partners shall not be eligible to be appointed as an auditor for any company for a period of five years under the second proviso of Section 140(5) of the Act, 2013.
2.12 BSR issued a letter of resignation dated 19.06.2019 to IFIN and simultaneously completed the regulatory filings pursuant to such resignation.
2.13 BSR and its engagement partners filed a reply dated 19.06.2019 to Section 140(5) petition before the NCLT, inter alia, contending that (i) they are not the auditors for IFIN any longer as they have tendered their resignation and therefore Section 140(5) is not applicable to them; and (ii) Section 140(5) does not demonstrate any case for fraud against BSR.
2.14 Deloitte filed an application dated 19.06.2019 challenging the maintainability of Section 140(5) petition before the NCLT on the ground that Deloitte is no longer the auditor for IFIN. BSR and its engagement partners also filed an application challenging the maintainability of Section 140(5) petition before the NCLT on the ground that BSR is no longer the auditor for IFIN.
2.15 After hearing the auditors (BSR & Deloitte) on the applications challenging the maintainability of Section 140(5) petition, the NCLT passed an order upholding the maintainability of Section 140(5) petition. That thereafter, the BSR filed a writ petition before the High Court, inter alia, challenging the vires of Section 140(5) of the Act, 2013; the directions issued and the order of the NCLT upholding the maintainability of Section 140(5) petition.
2.16 By the impugned judgment and order, though the High Court has upheld the validity of Section 140(5) of the Act, 2013, the High Court has interpreted section 140(5) of the Act, 2013 and has set aside the order passed by the NCLT upholding the maintainability of Section 140(5) petition and has quashed Section 140(5) petition and has set aside/quashed the directions issued by the Ministry of Corporate Affairs and the SFIO and also has quashed/set aside criminal proceedings instituted by the SFIO. Hence, the present appeals.
Submissions on behalf of the Union of India:
3. Shri Balbir Singh, learned Additional Solicitor General of India appearing on behalf of the Union of India has vehemently submitted that in the impugned judgment and order the High Court has misinterpreted Section 140(5) of the Act, 2013, though the High Court has upheld the constitutionality of the said provision.
3.1 It is submitted that as regards the interpretation of Section 140(5) of the Act, 2013, the High Court has explained the legislative intent as being to induce/effect a change of an auditor in a company where there is a suspected fraud. It is submitted that thereafter the High Court has erroneously proceeded to hold that the intention behind Section 140(5) of the Act, 2013 is only to break the collusion between the auditor and the company. It is submitted that accordingly, the High Court erroneously holds that if the unholy bond between the auditor and company is broken, either by removal or resignation, then Section 140(5) of the Act, 2013 fulfils its purpose. It is submitted that according to the High Court, Section 140(5) of the Act is only attracted when despite the petition by the Central Government, an auditor sets up a defence and opposes the petition frivolously and thus invites a final order as set forth in the second proviso to Section 140(5) of the Act, 2013. It is submitted that on this basis, the High Court proceeded to hold that the petition filed by the Union of India under Section 140(5) of the Act, 2013 has been satisfied by the subsequent resignation of the auditor and therefore the petition under Section 140(5) of the Act, 2013 filed by the Union of India is no longer maintainable. It is submitted that the High Court erroneously proceeded to quash Section 140(5) petition and the order passed by the NCLT, Mumbai upholding its maintainability.
3.2 Now insofar as quashing and setting aside the criminal proceedings, it is submitted that the respondents assailed Section 212(14) direction on two grounds. Firstly, on the ground that the issuance of the direction to prosecute within 30 hours of receipt of the IFIN SFIO Report demonstrates non-application of mind. Secondly, that the IFIN SFIO Report was an incomplete report as investigation had not been completed and therefore Section 212(14) direction was incompetent. It is submitted that insofar as the first ground is concerned, the High Court erroneously holds that there is non-application of mind since it was improbable that a report of about 750 pages and 32000 pages of annexures could have been considered in 30 hours. Further, the High Court erroneously holds that the relevant facts and documents to demonstrate application of mind have not been placed on record. It is submitted that while doing so, the High court also holds that the existence of a valid sanction can be appreciated in a writ Court and need not wait trial.
3.3 As regards the IFIN SFIO Report, it is submitted that the High Court holds summarily and without even going into the same and erroneously holds that the SFIO Report is incomplete and lacking and therefore Section 212(14) direction is incorrect and/or invalid.
3.4 On interpretation of Section 140(5) of the Act, 2013, Shri Balbir Singh, learned ASG has taken us to the legislative history and legislative intent of Section 140(5) of the Act, 2013. It is submitted that Section 140 of the Act, 2013 is titled as “Removal, resignation of auditor and giving of special notice”. It appears in Chapter X of the Act which is titled as “Audit and Auditors”. Section 140(1) of the Act, 2013 provides for the procedure to remove an auditor by the company before the expiry of his term. Sections 140(2) and (3) of the Act deal with resignation of auditors and Section 140(4) of the Act deals with giving of special notice at an AGM for appointment of an auditor other than the retiring auditor and the process in that regard. It is submitted that if an auditor of a company is acting directly or indirectly in a fraudulent manner or is abetting or colluding in fraud with the management of a company, Section 140(5) of the Act, 2013 empowers either the Central Government or any person concerned to approach the NCLT for recourse. Section 140(5) of the Act also enables the NCLT to take action suo motu against an auditor who has acted in the aforesaid manner. It is submitted that in addition, Section 140(5) of the Act, 2013 has also two provisos and two explanations. It is submitted that therefore as per the first proviso to Section 140(5), on an application made by the Central Government and if the Tribunal is satisfied that any change of the auditor is required, the Tribunal shall within fifteen days of receipt of such application make an order that the said auditor shall not function as an auditor and the Central government may appoint another auditor in his place. It is submitted that second proviso to Section 140(5) of the Act provides that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under section 140(5) shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under Section 447. It is submitted that therefore merely
because during the pendency of the proceedings under Section 140(5) of the Act the auditor resigns, the proceedings under Section 140(5) do not come to an end. Still and after the final order is passed, in that case, a further order as per second proviso to Section 140(5) can be passed to render such a auditor ineligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and even such auditor shall also be liable for the action under section 447 of the Companies Act. It is submitted that therefore the High Court has materially erred in observing and holding that once the auditor has resigned thereafter the application under section 140(5) of the Act shall not be maintainable and/or is not required to be proceeded further.
3.5 Thereafter, Shri Balbir Singh, learned ASG has taken us and referred to the legislative history of Section 1`40(5) of the Act as under:
Legislative History of Section 140(5) of the Act, 2013
Around August 2004, the Government initiated the process of review of the Companies Act, 1956 and drafting of a new Companies Bill to replace the Companies Act, 1956. A concept paper was published on the website of the Ministry of Corporate Affairs on which various comments were received. An expert committee was also constituted by the Ministry of Corporate Affairs under the chairmanship of Dr. J.J. Irani, to make recommendations on provisions of company law.
a. Companies Bill 2008 and the Companies Bill 2009
i. After considering the report of the J.J. Irani Committee, the Ministry prepared the Companies Bill, 2008 and introduced the same before the Lok Sabha on October 23, 2008. The 2008 Bill was referred to the Department related Parliamentary Standing Committee (PSC) on Finance for their examination. However, the Lok Sabha was dissolved before the PSC could present its report and therefore the 2008 Bill lapsed as per Article 107(5) of the Constitution of India.
ii. Accordingly, the Companies Bill 2009 was introduced in the Lok Sabha on or about July 15, 2009. The 2009 Bill too was referred to the PSC. In identifying the features of the 2009 Bill, the PSC Report of August 2010 notes the salient features as being “the role, rights and duties of the auditors have been defined so as to maintain integrity and independence of the audit process.”
iii. In setting out the guiding principles underlying the 2009 Bill, the PSC, in the Report, notes that, amongst other principles, the following are the key principles underlying the 2009Bill:
“Need for sturdy systems, enhanced transparency and comprehensive disclosures based regime emphasized; as companies grow, become bigger and globalise with the number and range of stakeholders increasing by volumes, necessitating proper checks and balances.
Self-regulation through internal mechanism/procedures, to be underpinned on strong systems and procedures; Central Government to step in only when mis-governance takes place.
In the light of recent experiences in corporate mis-governance, process of audit and functioning of auditors to be made more independent and effective; stringent joint and individual liability prescribed; setting up of oversight body to set standards and supervise quality of audit recommended”
iv. Further, the report notes that various suggestions were made by the PSC during deliberations on the Bill which were incorporated by the Central Government. On a reading of these suggestions, it is essential to note that independence of the auditors was a key point.
v. Crucially, in the Report, the PSC notes that the 2009 Bill incorporates suggestions of the JPC on the 1993 Banking and Securities Market Scam and the 2002 JPC on the Stock Market Scam. This means that the 2009 Bill was a culmination of the growing corporate economy and past experiences of corporate fiascos too. One of the suggestions were to provide for stricter accountability for auditors. Moreover, at the foot of the same page, the PSC notes that the 2009Bill has made the regulatory provisions and regime more stricter by inter alia providing for making statutory auditors more accountable by providing for substantial civil and criminal liability for auditors.
vi. The Report clearly demonstrates that there was a long discussion on the role, responsibility, duties and regulation of auditors and the regulatory and enforcement provisions. Particularly, the Report records that various suggestions were received to make the provisions pertaining to audit and auditors more stringent. Significantly, it was suggested that Clause 123(10) of the 2009 Bill (which provides for removal of an auditor by the NCLT on finding that there is a fraud and corresponds to Section 140(5) of the Act) should be made more stringent and should contemplate that an auditor removed by the Tribunal should not be eligible to be appointed as an auditor of any company for a period of 5 years. The relevant extracts are as follows:
“34.Suggestions have been received by the Committee that there is a need to make provisions relating to Audit and Auditors more stringent such as following:-
(d) Suitable penalty may be provided in case of contravention of these provisions.
(e) (i) Clause 123(10) of the Bill empowers the Tribunal, if it is satisfied that the auditor of a company has acted in a fraudulent manner or abetted/colluded in any fraud, to direct the company to change its auditors. Suggestions have been made that these provisions should be modified to clarify to cover act of fraud or abetment by auditor whether directly or indirectly. It has also been suggested that the Bill may provide that if auditor, whether individual or firm, against whom an order has been passed by the Tribunal under this clause should not be eligible to be appointed as an auditor of any company for a period of five years.”
b. The Companies Bill, 2011
i. In view of the recommendations of the Standing Committee and that of various stakeholders, the Central Government withdrew the 2009 Bill with a view to introduce a fresh Bill incorporating the recommendations of the Standing Committee and various stakeholders. Consequently, the 2011 Bill was introduced in the Lok Sabha in December, 2011, accepting and incorporating most of the recommendations made by the previous Standing Committee in respect of the Companies Bill, 2009. This aspect has been recorded in the Statements of Objects and Reasons of the Companies Bill, 2011.
ii. At this juncture, it is important to bear in mid that the suggestion of the Standing Committee to Clause 123(10) of the 2009 Bill (which provides for removal of an auditor by the NCLT on finding that there is a fraud) was to:
