SC ruling on whether rendering the provisions of Section 140(5) of Companies Act, 2013 become nugatory on auditor resignation on non reporting of fraud
The provisions of Section 140(5) of the Companies Act, 2013 dealing with Removal, Resignation of Auditor and Giving of Special Notice appears in Chapter X of the Act which deals with Audit and Auditors. Also Section 143(12) provides that in the event an auditor has reason to believe that an offence or fraud is being or has been committed in a company then the auditor has to report this to central government. Moreover Section 144 provides that an auditor cannot provide management services to the company. Section 140(5) has to be thus interpreted in the light of these provisions. As per first proviso to Section 140(5), NCLT as a preliminary measure, has the power to order change of auditor on an application made by the Central Government and further if upon final enquiry it is found so, NCLT can order that such Auditor shall not act as auditor of any company for five years.
The Supreme Court in this case was dealing with a situation where upon reference having been made by the Central Government, Deloitte resigned as auditor and thus argued that the proceedings as per second proviso to Section 140(5) do not survive as the purpose of Section 140(5) was achieved.
However, the Supreme Court dismissed these arguments by saying that subsequently resignation of an auditor cannot terminate proceedings u/s second proviso to 140(5) when such auditor has directly or indirectly acted in a fraudulent manner.
The 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.
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.
Also the court brushed aside arguments regarding the violation of Article 14 and 19(1)(g) of the Constitution of India. Moreover, the arguments that there were other provisions in the Companies Act dealing with the same were also dismissed.
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