Background

In the matter of Union of India vs Deloitte Haskins the Central government’s IL&FS Financial Services Ltd.’s former auditors BSR & Associates and Deloitte Haskins and Sells are the subject of a National Company Law Tribunal appeal that is contesting a Bombay High Court judgement that bars all prosecution. The Serious Fraud Investigation Office (SFIO) complaint against Deloitte Haskins & Sells and KPMG arm BSR & Associates in connection with the Infrastructure Leasing & Financial Services (IL&FS) financial fraud case was dismissed by the High Court, which also affirmed the legality of Section 140(5).

Observation of Court 

The High Court erred in concluding that the National Company Law Tribunal’s (NCLT) Section 140(5) proceedings against the auditor will stop as a result of the auditor’s departure, according to the Supreme Court panel of Justices MR Shah and MM Sundresh. An auditor’s subsequent retirement after the application has been submitted under section 140(5) alone shall not end the procedures pursuant to section 140(5). When the investigation under section 140(5) processes concludes, there are additional implications.

The Court indicated that if such a stance is taken, auditors will resign whenever they are subject to proceedings and that the legislators could not have intended for this to happen. At the risk of repetition, it should be noted that it is not acceptable for an auditor to resign to avoid any consequences under the second proviso of section 140(5) if they have engaged in fraudulent behaviour, whether directly or indirectly.

The apex court noted that Section 140(5) of the law’s legislative intent is extremely clear that the NCLT has the authority to determine whether the auditor behaved fraudulently, regardless of the other provisions of the Act. The second proviso to section 140(5)’s object and purpose is to make the provision tougher and to clarify the implications for an auditor who is discovered to have been committing fraud and is fired by the NCLT as a result. It further stated that Section 140(5) cannot be argued to be an excessive or arbitrary use of NCLT’s authority to determine offences of a serious nature and that NCLT must provide an adequate opportunity before making a final decision.

The bench emphasised this Section 140(5), which was enacted with a specific intent and purpose, cannot be deemed to be arbitrary or outside the bounds of the law just because the auditor can be fired from their position as an auditor of a firm along with the other provisions. The bench concluded that Section 140(5) is constitutionally valid because there is no manifest arbitrary exercise of power, which would violate Articles 14 and 19 of the Indian Constitution. It must be made clear that the function of auditors cannot be compared to that of directors and management. The Act’s Chapter X is dedicated to the Audit and Auditors and examines the significance of the auditors.

Recommendation and Suggestion

The bench made the suggestion that Parliament should choose the length of the penalty, which would automatically disqualify auditors, the entire company, and any partners who participated in fraud and stock price manipulation.