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June 17, 2020

Supreme Court of India Rules in Favor of Deloitte & KPMG in IL&FS case

by facelesscompliance in Corporate Law

Supreme Court of India Rules in Favor of Deloitte & KPMG in IL&FS case

Big relief to BSR and Deloitte as SC refuses to stay High Court Order

On 16th June, 2020, the Supreme Court heard the petition to appeal by the Union of India & ANR against the impugned final judgment and order dated 21-04-2020 passed by the High Court of Judicature at Bombay.

In a big relief for audit firms BSR and Associates, and Deloitte Haskins and Sells, both who were former auditors of IL&FS Financial Services, the Supreme Court refused to stay the Bombay High Court order which quashed all prosecution against the firms in the IL&FS scam.

The Apex court bench was headed by Chief Justice S A Bobde and comprising Justices M R Shah and A S Bopanna. It was noted that the court wants to penalize the Centre for the late filing of the petition. The bench also questioned the Ministry of Corporate Affairs (MCA) about the delay in filing the appeal.

The Supreme Court ordered that the order of stay passed by the High Court shall continue. It was also made clear that this order shall not affect any orders granting or refusing bail to any of the accused.

What was the High Court Order?

An investigation/dispute was conducted regarding constant ever greening of debts extended to its subsidiary Companies & third parties/companies by IL & FS Financial Services Limited and the alleged dubious role played by its CA’s i.e company auditors. The Centre with this regard has plead to the NCLT for the removal of the company auditors.

The NCLT, in August last year, found merit in the Centre’s plea, and approved the proposal for removal of both audit firms. The MCA had moved the court seeking this kind of removal and also initiated criminal proceedings against the audit firms for their alleged role in financial irregularities in the IL&FS Group.

BSR, which is part of KPMG India, and Deloitte, moved the High Court last year challenging the plea by the Centre before the tribunal seeking their removal as auditors of IL&FS. And, under section 140(5) of the Companies Act, this kind of removal would also lead to a five year ban on the audit firms. In April, the High Court quashed all prosecution against the two firms, which was pending before the National Company Law Tribunal and a special court in the city, over the allegations of financial irregularities.

Challenging this decision, the firms moved the High Court and submitted before the court that they had already resigned as auditors of IL&FS, and this had happened long before the Centre’s decision seeking their removal. The firms challenged the constitutional validity of section 140 (5) of the Act.

The high court upheld the constitutionality of section 140(5) but said that it will not apply to auditors who have resigned. It was held that NCLT cannot 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 IL&FS

The high court, said that National Company Law Tribunal (NCLT), part of MCA, cannot ban the audit firms for five years.

Report by SFIO

The SFIO had allegedly claimed the BSR and audit firms had acted in breach of auditing standards. However, the investigation by SFIO into affairs of other Companies or into crosslinkages could not have any impact as the there was no endeavour to show that the book entries in relation to it are false and fabricated. It was stated by the High Court that the SIFO report itself indicated need of further investigation into cross-linkages & cross-check of transactions.

Therefore the stay order quashing all prosecution proved to be a huge relief for Deloitte and KPMG in the Infrastructure Leasing & Financial Services (IL&FS) case as no 5 year ban was imposed on them.

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

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