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April 24, 2020

Win for Deloitte, BSR in IL&FS case in Bombay HC, Three Interesting Facts of Order

by facelesscompliance in Compliance Law, Corporate Law

Win for Deloitte, BSR in IL&FS case in Bombay HC, Three Interesting Facts of Order of 198 Pages

A prayer made under S. 140(5) of the Companies Act, 2013 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 and alleged dubious role played by its CAs ie company auditors was challenged the order passed by the National Company Law Tribunal, Mumbai Bench in Bombay High Court

1) What NCLT order was and what Bombay Hight Court Order?

Deloitte Haskins was not eligible to be appointed as an auditor of any company for the period of five years NCLT order said

There are total three proceedings that can be initiated against the auditor for debarment i.e. one by the Institute of Chartered Accountant, other under section 447 of the Companies Act and the third under section 140(5) of the Companies Act. The investigation report received by the Ministry of Corporate Affairs shows that recommendation of removal can be acted upon if it is issued against existing auditor. The high court upheld the constitutionality of section 140(5) but said that it will not apply to auditors who have resigned

NCLT does not & can not inquire into a professional misconduct by the CA as it is not conferred with power to choose the nature of punishment or its quantum. Its only role is to examine the need to change that CA. NCLT has NOT been given power to debar or disqualify or impose any punishment on such CA. Functions entrusted to NCLT are dispute resolution & not governance.

BSR, part of KPMG had challenged the constitutionality of the section since when the government moved to the NCLT under Section 140 (5) to remove auditors, it had already resigned from the company and it had argued that how the government can remove a person who has already left the position.  NCLT can only ban existing auditors and lacks the jurisdiction to ban them as they are no longer auditors of IFIN.

The high court, which was pronouncing the order through video conferencing, said that National Company Law Tribunal (NCLT), part of MCA, cannot ban the audit firms for five years

2) What NFRA or ICAI did?

Bombay HC Order that NCLT only role is to examine the need to change the CA. To Punish CA only ICAI or NFRA has power. Once NFRA comes to picture ICAI has no Power to Punish CA. After NFRA initiates investigation into the professional misconduct, the Institute of Chartered Accountants looses that jurisdiction. The punishment imposed by NFRA, CA can appeal to NCLAT and not to NCLT.

Bombay HC said only NFRA or ICAI can ban CA not NCLT, NCLT do not have jurisdiction to “remove and ban” the auditors even if they have rotated out or resigned.

Question Remains Why NFRA or ICAI did not Act ? Govt dint knew NCLT has no power?

3) Serious Fraud Investigation Office (SFIO) dint apply mind

SFIO, after a nine-month probe, concluded that the auditors allegedly colluded with the management of IL&FS Financial Services and falsified the books of accounts and the financial statements between 2013 and 2018. It filed a criminal complaint against certain partners and officials of the audit firms, alleging fraud under the company law and criminal conspiracy under the Indian Penal Code.

The interim report submitted by SFIO which runs into 752 pages and which has more than 36,000 pages annexures, has been alleged to be examined in about 30 hours by Union of India and filing of prosecution has been ordered. Petitioners submit that this shows non application of mind.

Union of India claims that two officers independently & separately read all
these papers running into about 756 + 32,000/ pages and applied mind to it within 30 hours.

It is humanly impossible to read & appreciate such a large report of the SFIO, apply mind & give the appropriate directions within 30 hours : HC

There is no endeavour to show that the book entries in relation to it are
false, fabricated and the investigation by SFIO into affairs of other Companies or into crosslinkages can not have any impact. The SIFO report itself indicates need of further investigation into cross-linkages & cross-check of transactions says HC

Question arises why there was no cross-linkages & cross-check of transactions by SIFO?

4) Will Govt Challenge to SC?

The court has given eight weeks’ time to the Ministry to challenge the ruling in the Supreme Court.

Question remains will government challenge to SC

(The author CA Chirag Chauhan is special invitee & his views are personal. To reach him you can drop email at chirag@cachauhan.in)