The Bombay High Court (HC) on Tuesday quashed prosecution against Deloitte Haskin & Sells and BSR & Associates, the former auditors of IL&FS Financial Services (IFIN).
The ruling comes as a huge relief for the two audit firms which moved court last year against the government’s moves to ban them from auditing activities for five years and initiate criminal proceedings against them.
Trouble for Deloitte and BSR began last year after the Serious Fraud Investigation Office’s (SFIO) investigation into IFIN’s financial affairs found that the auditors did not fulfil their role in highlighting material facts and information which was concealed from investors and creditors.
A division bench of Chief Justice Bhushan Dharmadhikari and Justice Nitin Borkar on Tuesday ruled that the provisions under which the government sought to ban the two firms can only be applied to existing auditors of a company.
BSR & Associates became an auditor to IFIN in November 2017, and jointly audited the company with Deloitte till March 2018. BSR was the sole auditor for IFIN till June 2019, after which it resigned.
Following the SFIO probe, the government had in May 2019 initiated criminal proceedings in the Bombay City Sessions Court against the former auditors of IFIN. In August 2019, BSR & Associates had filed a petition against the government’s plea to ban the auditors of IL&FS for a period of five years. BSR had also contended that courts could not initiate criminal proceedings against the audit firm based on interim investigations. Deloitte later joined the proceedings at the Bombay HC. The HC on Tuesday quashed the prosecution of BSR and Deloitte based on the criminal complaint.
Given the current COVID-19-related disruptions, the government sought an 8-week stay before moving the Supreme Court, which was allowed. The interim protection from coercive action given to auditors will continue until then.
The government last year had also moved the National Company Law Tribunal (NCLT) seeking to ban the firms from auditing practices for five years, citing section 140 (5) of the Company’s Act. Section 140 of the Company’s Act deals with the change of auditors of a company, while sub-section 5 deals with removal of auditors who “directly or indirectly acted in a fraudulent manner or abetted or colluded in any fraud”.
The audit firms had argued that the government’s move to ban the auditors under section 140(5) was unconstitutional, since it did not apply to former auditors of any company. Bombay HC had in September last year granted interim stay on all proceedings against the two audit firms. While the Bombay HC on Tuesday upheld the constitutionality of 140(5), it said it could not be applied against former auditors.