It added that the HC's interpretation would render the provision “toothless and would give a right to an errant auditor to avoid the due process of law simply by resigning”.
The Supreme Court on Thursday refused to allow the government to proceed against auditing company BSR & Associates LLP, a KPMG-affiliated firm, for alleged fraudulent misconduct in the Infrastructure Leasing & Financial Services (IL&FS) case.
The financial affairs of the IL&FS group came under scrutiny last year after it defaulted on short-term and long-term debt obligations to the tune of Rs 91,000 crore.
The Serious Fraud Investigation Office (SFIO) in May filed a criminal complaint against 30 parties in the IL&FS case, including Deloitte Haskin & Sells LLP and BSR & Associates.
In its complaint, SFIO accused these auditors of colluding with officials of IL&FS Financial Services to conceal facts and fraudulently falsifying the books of accounts and thereby financial statements from FY14 to FY18.
A Bench led by Justice UU Lalit refused to stay the September 4 interim order of the Bombay High Court that restrained the ministry of corporate affairs from taking coercive action against auditing firm BSR before the NCLT and a Mumbai special court dealing with the Infrastructure Leasing & Financial Services (IL&FS) scam. Disposing of the two appeals filed by the ministry of corporate affairs and IL&FS seeking a stay on the HC’s order, the apex court asked the HC to decide the case expeditiously and start hearing from October 3. It also gave liberty to the government to approach the National Company Law Tribunal, Mumbai Bench, for the appointment of new auditors. The former IL&FS auditors — Deloitte and BSR — can also file their objections to the government’s plea for new auditors before the tribunal.
IL&FS Financial Services (IFIN), which is being investigated by multiple agencies for alleged financial irregularities, was audited by BSR in FY19 and jointly by BSR and Deloitte in FY18. Deloitte was the sole auditor of the firm in FY16 and FY17. An auditor found guilty of professional misconduct can be disqualified for a period of six months to 10 years.
Challenging the HC order, the government and IL&FS in their respective appeals stated that the reviewing of the sanction to prosecute the auditors by the HC was contrary to the apex court’s law laid down in a catena of cases where it was held that the invalidity or legality of sanction has to be raised during the trial and not at the very threshold.
“The interpretation of Section 140(5) of the Companies Act on which the impugned order proceeds erroneously suggest that an errant auditor who may be involved in a fraud can escape his consequential ineligibility to act as an auditor for any company for a period of 5 years merely by resigning during the pendency of an action…,” the MCA said.
It added that the HC’s interpretation would render the provision “toothless and would give a right to an errant auditor to avoid the due process of law simply by resigning”.
However, BSR said an auditor cannot be removed if he has already resigned.
Based on the SFIO’s findings, the MCA in June had moved the NCLT seeking a five-year on ban on former IL&FS auditors — Deloitte Haskin & Sells LLP and BSR — for failing to red flag problems in IFIN. However, NCLT on August 9 rejected the auditors’ pleas challenging the jurisdiction of the tribunal to ban them and allowed the government’s proposed removal as auditors of IFIN — a position BSR had already resigned from — for alleged role in financial irregularities in the firm. The HC, on appeal by BSR & Associates and N Sampath Ganesh, a partner with the firm, had ruled in favour of auditors.