Case Law Details
LEGISLATIVE INTENT
The auditor appointed under Section 139 may be removed from the office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government on that behalf. Provided that before taking any action under this sub-section, the auditor concerned shall be given a reasonable opportunity of being heard. The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the registrar and in the case of companies referred in sub-section (5) of Section 139, the auditor shall also file such statement with the Comptroller and Auditor General of India indicating the facts and other reasons as may be relevant with regard to his resignation (Section 140(2). Without prejudice to any action under the provisions of any Act or any other law for the time being in force, the tribunal either suo motu or an application made to it by central government or by any person concerned, if it is satisfied whether the auditor of the company whether directly or indirectly acted in a fraudulent manner or colluded in any fraud or in relation to its company or its director or officers, it may by order direct the company to change its auditor (Section 140(5).
ANALYSIS
The Supreme Court in “Union of India v. Deloitte Haskins and Sells LLP and Another” has clarified the position of law relating to the appointment of auditors and the contention of the law that whether we can initiate any proceedings after the resignation of an auditor and also clarified the constitutionality of Section 140(5) of the Act. 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. Thereafter, BSR filed a writ petition before the High Court of Bombay (“High Court”) inter alia challenging the constitutionality of Section 140(5) of the Companies Act and challenging the maintainability of the Petition. The High Court upheld the constitutionality of Section 140(5) of the Companies Act, however, it set aside the order of NCLT to the extent it had held that the Petition was maintainable against the auditors, primarily on the ground that once the auditor resigns as an auditor or is no more an auditor on his resignation, the proceedings against such auditors stands terminated. The Supreme Court in “Devas Multimedia vs Antrix Corporation” has explained the scope of Section 140(5) and held that public policy behind this section is to prevent an auditor who has done fraud and to disqualify him for a period of five years. The Bombay High Court held in its clear terms that the proceedings cannot be initiated after the resignation of an auditor which was reversed by the supreme court in his final observations that Chapter X of the Companies Act is a special provision through which the legislators intended to make the provisions for the auditors more stringent and for removal of auditor by the NCLT where there is a fraud committed by such auditor and contemplated that such auditor shall not be eligible to be appointed as an auditor of any company for a period of five years.
The Supreme Court further observed that the power of NCLT under Section 140(5) of the Companies Act is quasi-judicial in nature and it would have the power of a civil court to examine the role of the auditors and adjudicate on their role, more particularly whether it was fraudulent or not. The first proviso to Section 140(5) of the Companies Act provides power to the NCLT to, suo-moto or an application made by the central government, remove such auditor and appoint a new auditor. The measure was in the nature of pro-tem or interim order, based upon the NCLT’s satisfaction that there is a fraud that has been perpetrated and the circumstance requires substitution of the auditor.
The Supreme Court observed that the second proviso to Section 140(5) of the Companies Act was a substantive provision which gets triggered automatically when a final order has been passed by the NCLT after a detailed enquiry to the effect 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 director or officers. To the corollary, it also observed that the High Court had erred in its interpretation of Section 140(5) of the Companies Act when it held that the proceedings under the section was not maintainable once the auditor had resigned or was no more an auditor for any reason. The Supreme Court also cautioned that such interpretation would have the consequence where every auditor would resign in order to save itself from the stringency of Section 140(5) of the Companies Act and continue perpetrating fraud.
With regards to the constitutionality of Section 140(5) of the Companies Act, the Supreme Court observed that the provision was not discriminatory against the auditors since the role of an auditor is vital in the affairs of the company and therefore, they have to act in larger public interest. In so far as the contention that the ‘automatic effect’ of penalty envisaged under the section was concerned and the contention that it was highly disproportionate, Supreme Court took the view that it was for the legislative wisdom to decide upon the quantity of penalty and how it would take effect. The Supreme Court also observed that Section 140(5) of the Companies Act did not fall within the purview of Article 19 of the Constitution since an auditor’s and its partners’ fundamental right to carry on its profession could not be permitted where it had acted fraudulently, whether directly or indirectly. Such a fraudulent act was a serious misconduct which has to be dealt with sternly and therefore, automatic penalty under Section 140(5) of the Companies Act was a natural consequence of indulging in such misconduct.
CONCLUSION
The Apex Court is silent on the contention that what will happen to the single auditor who resigns after acting in a fraudulent manner and will he be disqualified for a period of five years. If not regulated properly, the provision can become a ruse for the Government to fix responsibility in such circumstances without proper enquiry.
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