The National Company Law Tribunal (NCLT) on Friday dismissed the plea made by the former auditors of IL&FS group, Deloitte Haskin & Sells and BSR & Associates, challenging the tribunal’s jurisdiction to ban them. This would mean the NCLT could ban the two firms from practising auditing activities for five years. The development is a major setback for both firms. Arguments on this matter will now be heard on September 5.
On June 8, the ministry of corporate affairs had filed a petition with the NCLT seeking to ban Deloitte and BSR for five years under Section 140 (5) of the Companies Act. The petition followed a criminal complaint filed by the Serious Fraud Investigation Office (SFIO) based on its investigation into the financial affairs of the IL&FS group.
In its plea to the NCLT, the government stated that the investigation by the SFIO revea-led that “the auditors knowingly did not report the true state of affairs of the company”.
Following the government’s petition, the legal counsel for Deloitte and BSR filed pleas challenging the jurisdiction of the NCLT to ban the auditors under Section 140 (5) of the Companies Act. Senior counsel Janak Dwarkadas, representing Deloitte, had earlier argued that Deloitte cannot be banned under Section 140 (5) of the Companies Act as it only seeks to “change” existing auditors of a company, while Deloitte had already resigned as the auditor to IL&FS.
Senior advocate Darius Khambata, representing BSR & Associates, supported this argument and said that Section 140 (5) is meant to be applied to an auditor who refuses to resign, and cannot be applied to former auditors.
The government’s legal counsel, Sanjay Shorey had counter-argued that the government sought “deemed removal” of the auditors. He also argued that the tribunal must “look at the spirit of the law along with the text”. Shorey had further stated that in case there is an allegation of fraud, consequences must follow. Section 140 of the Companies Act deals with the 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”.
“We note the NCLT’s ruling, which is unfortunate. We will review the order and decide on a course of action shortly. DHS LLP remains committed to high standards of audit quality and ethical conduct in its professional practice. The firm has faith in the regulatory and judicial processes and will continue to cooperate fully with the authorities,” a Deloitte spokesperson said.
The next logical step for the auditors would be to challenge the NCLT’s order in the appellate tribunal, lawyers said on the condition of anonymity. The SFIO, in its complaint filed in May, said the audit firms knowingly withheld crucial information, including the negative net owned fund and credit adequacy ratio of IFIN, which directly led to losses for creditors and investors.
The tribunal last month also allowed the government’s petition to freeze the assets of the auditors. The order has since been challenged in the appellate tribunal, slated to be heard on August 19.
The financial affairs of the IL&FS group came into scrutiny last year after it defaulted on short-term and long-term debt obligations to the tune of Rs 91,000 crore.
