Case title:
Union of India vs Deloitte Haskins and Sells Llp
Date of Order:
3 May 2023
Bench:
Hon'ble Mr.Shah and Hon'ble Mr. Sundresh, jj
Parties:
Appellant- Union of India & Anr
Respondent- Deloitte Haskins and Sells Llp & Anr
SUBJECT
The Companies Act, 2013 is an Act of Parliament enacted to frame and regulates laws related to companies. Section 2(20) of the Act defines companies. According to this section, a company means a company incorporated under this Act or any previous company law.
IMPORTANT PROVISIONS
- Section 140(5) of the Companies Act, 2013
- Section 208 of the Companies Act, 2013
- Section 212(11) of the Companies Act
OVERVIEW
- IL&FS Group Companies bear a serious burden of more than Rs. 91,000 crores between June and September 2018. This had a significant impact on India's money markets.
- An office memorandum was issued dated 30.09.2018 by the Department of Economic Affairs, Ministry of Finance. It urged the Ministry of Corporate Affairs, Union of India to take action under the Companies Act, 2013.
- The memorandum pointed out that the companies suffered a loss of Rs. 2670 crores in 2017-18, and any more defaults would be fatal for the stability of the Indian economy.
- Meanwhile, the Serious Fraud Investigation Office (SFIO) was directed by the Ministry of Corporate Affairs to conduct an investigation into the IL&FS Group based on a report from the registrar of the company under Section 208 of the Companies Act.
- A Company Petition was instituted against IL&FS before the National Company Law Tribunal (NCLT) by the Ministry of Corporate Affairs. The petition sought the removal of the company's board of directors.
- NCLT passed an interim order, substituting the existing board of directors for replacement.
- The SFIO passed an interim order in respect of IL&FS and one Employees Welfare Trust about the IL&FS Group. This order was called upon by the Ministry of Corporate Affairs as per section 212(11) of the Companies Act.
- A Miscellaneous Application in Company Petition was then filed by the Ministry, seeking to implead the company directors and to attach their immovable/movable properties.
- The Ministry also filed a petition with the NCLT under Section 130 of the Act to reopen the company's books and accounts. The petition was approved, and the books and accounts for the past 5 years of the company were reopened.
- IFIN auditors (BSR & Deloitte) vehemently opposed this petition.
- Later on, the Reserve Bank of India investigated the group and submitted an investigation/inspection report to IFIN.
- Thereafter, the IFIN issued a notice seeking to remove BSR as auditors.
- Ministry of Corporate Affairs filed a Petition under Section 140(5) of the Act dated 10.06.2019, seeking to remove BSR & Deloitte as IFIN auditors.
- Following this, BSR resigned from IFIN as auditors and acknowledged that the petition against them was no longer applicable.
- BSR & Deloitte filed an application challenging the maintainability of the petition under Section 140(5) of the Act. The NCLT upheld the petition.
- BSR then filed a petition before the High Court. The high court quashed the NCLT order which upheld the maintainability of the Section 140(5) petition.
- Dissatisfied with the High Court decision, the Union of India approached the Supreme Court of India through the present appeal.
ISSUE RAISED
- Can the auditor of a company, charged under Section 140(5) of the Companies Act, 2013 for non-reporting fraud in the company, avoid charges by resigning from the company and rendering Section 140(5) invalid?
ARGUMENTS ADVANCED BY THE APPELLANT
- Additional Solicitor General of India, Shri Balbir Singh represented the Union of India.
- The counsel contended that the High Court had made a mistake by interpreting Section 140(5) wrongly. The High Court held this section is only intended to break the bond between the auditor and the company.
- It was submitted that the public policy behind Section 140(5) of the Act is to prevent an auditor who has been found to have engaged in fraud in one company from undertaking statutory audits for 5 years.
- It was further submitted that misinterpretation or misuse of the provision cannot be grounds to test the constitutional validity of the provision.
ARGUMENTS ADVANCED BY THE RESPONDENT
- The senior counsel representing the respondents, Mr. Hari Sankaran contended that no final investigation report had been filed by the SFIO in the present case.
- It was submitted that the NCLT had not determined the merits of the section 140(5) order.
- It was further submitted that the role of the NCLT under Section 140(5) is only to decide when a company's auditor change is necessary. It is not to punish or debar the auditor.
JUDGEMENT ANALYSIS
- The Hon’ble Supreme Court of India quashed and set aside the high court order which rendered the petition under section 140(5) not maintainable.
- The bench consisting of Mr. Shah and Mr. Sundresh, JJ held that the mere resignation of the auditor from the company wouldn’t terminate the criminal proceedings against him under section 140(5) for fraud.
- Section 140(5) of the Act allows the NCLT to take action against an auditor who has engaged in fraud in the company.
- The NCLT has all powers to order the company to change its auditors if they’re guilty of fraud. The court considered this a quasi-judicial power of the NCLT.
- The Supreme Court upheld the constitutional validity of Section 140(5) and held that it does not violate Articles 14, 19(1) (g) of the Constitution of India.
CONCLUSION
This case signaled that merely upon the resignation of the auditor, section 140(5) wouldn't become nugatory. The decision passed by the High Court of Bombay in this case was erroneous and a result of the narrow interpretation of the provisions of the Companies Act, 2013. The Supreme Court ruled that no provision in the Companies Act was discriminatory or against the Constitution.
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