Case Law Details
N Sampath Ganesh Vs Union Of India (Bombay High Court)
Conclusion: Bombay High Court had upheld the constitutional validity of Section 140(5) of the Companies Act but held that it would not apply to auditors who had resigned and also squashed the prosecution or the criminal complaints filed by the Serious Fraud Investigation Office (SFIO) against the erstwhile auditors of Infrastructure Leasing and Financial Services Ltd (IL&FS) and its non-bank lending arm for alleged collusion in falsifying books terming it to be’ bad in law’.
Held: A prayer made under S. 140(5) of the Companies Act,2013 Act against the statutory auditors by the Union of India through Ministry of the Corporate Affairs (MCA) in an investigation/dispute regarding constant ever-greening of debts extended to its subsidiary Companies & third parties/companies by IL & FS Financial Services Limited (hereinafter referred to as “IFIN”) and alleged dubious role played by its CAs ie company auditors before National Company Law Tribunal ie NCLT and orders passed therein. Union of India was sought a declaration under section 140(5) that the Deloitte Haskins be deemed to be removed as statutory auditor of IL & FS (IFIN) Financial Services Limited for the year 2012-13 to Financial Year 2017-18 in the light of its vacation of the office on rotation at the end of Financial year 2017-18.It also requested for declaration that M/s. BSR & Associates ceased to be statutory auditors of IL & FS (IFIN) with immediate effect. Permission was also sought to appoint independent auditor for IL & FS (IFIN) so as to replace M/s. BSR & Associates in terms of first proviso to section 140(5) of the Companies Act read with explanation (ii) thereto. Union of India also sought relief in terms of the said second proviso read with explanation (I) that Deloitte Haskins was not eligible to be appointed as an auditor of any company for the period of five years from the order passed by NCLT in view of serious fraud committed which required intervention of the MCA to prevent the destabilization impact on the company at the request of the department of Economic Affairs and sought debarment for the period of five years. Similar relief was sought for against M/s. BSR & Associates. Union of India through its Ministry of Corporate Affairs 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.Auditors contended that when the statutory auditor had factually ceased to be company auditor ie 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. They had challenged the central government’s move to bar them for five years, and the SFIO’s decision to initiate criminal proceedings invoking Section 447 of the Companies Act, among others. High Court quashed the criminal complaint against Deloitte Haskins & Sells and BSR Associates, an affiliate of KPMG, filed by Serious Fraud Investigation Office (SFIO) terming it to be “bad in law”. However, the court upheld the constitutional validity of Section 140 (5) of the Companies Act 2013, it said that it was not applicable to auditors who have already resigned. BSR & Associates resigned in June 2019, while Deloitte’s term ended in 2018.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
1 A prayer made under S. 140(5) of the Companies Act,2013 or 2013 Act against the statutory auditors by the Union of India through Ministry of the Corporate Affairs (MCA) in an investigation/dispute regarding constant ever-greening of debts extended to its subsidiary Companies & third parties/companies by IL & FS Financial Services Limited (hereinafter referred to as “IFIN”) and alleged dubious role played by its CAs ie company auditors before National Company Law Tribunal ie NCLT and orders passed therein, gives rise to the present bunch of petitions. Petitioners state that said S. 140(5) is unconstitutional and in any case, can not be invoked against the ex-statutory auditors. In WP 5263 of 2019, direction to lodge prosecution issued under S.212(14) of 2013 Act is questioned. Since only law points are argued, we need not refer to the facts which are not crystallized as yet.
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