The Bombay High Court on Wednesday ordered an interim stay on the ongoing proceedings in the National Company Law Tribunal and Mumbai city sessions court against BSR & Associates for the audit firm’s role in the downfall of IL&FS.
The order came in response to a petition filed by BSR & Associates in August. The court will hear the matter again in four weeks, one of the lawyers involved in the proceedings said.
The SFIO had in May filed a criminal complaint against 30 parties in the IL&FS case, including the former auditors of IL&FS Financial Services. The SFIO accused Deloitte Haskin and Sells and BSR & Associates of colluding with officials of the firm to conceal facts and of “fraudulently falsifying the books of accounts and thereby financial statements from FY2013-14 to 2017-18”.
The audit firms knowingly withheld crucial information which directly led to losses for creditors and investors, the chargesheet said.
Based on the SFIO’s findings, the ministry of corporate affairs had in June filed a petition in the NCLT seeking a ban on the two firms from carrying out audit activities for five years. The petition was filed under Section 140, Subsection 5 of the Companies Act.
Last month, BSR filed a writ petition in the Bombay High Court seeking that the court declare section 140 (5) of the Companies Act unconstitutional. On Wednesday, senior counsel Mukul Rohatgi, appearing for BSR, argued that the government’s action was unwarranted and in violation of Article 21 of the Indian Constitution. Article 21 of the constitution states, “no person shall be deprived of his life or personal liberty except according to a procedure established by law”.
The petition also sought a stay on the ongoing proceedings against BSR in relation to the IL&FS case.
Section 140 of the Company’s Act deals removal and resignation of auditors and sub-section 5 states, “the tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors”.
Rohatgi argued that if Section 140 (5) is invoked, only auditors will face proceedings while directors of the company may not be held liable. Proper legal recourse for all parties involved should be sought under Section 447 of the Companies Act instead.
Legal representatives of the audit firms had earlier challenged the NCLT’s jurisdiction to ban them. The petition was subsequently quashed by the tribunal. Deloitte has since moved the appellate tribunal against the order. The appellate tribunal had last month ordered a stay on the NCLT passing any orders in the matter until the case is resolved in NCLAT.
The financial irregularities in the books of IL&FS came into scrutiny last year, after the company failed to fulfil short-term and long-term debt obligations to the tune of `91,000 crore.
