In relief to BSR and Deloitte, Supreme Court refuses to stay Bombay HC judgment

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Published: June 17, 2020 1:20 AM

While seeking response from the two auditing firms, the top court clarified, “this order shall not affect any orders granting or refusing bail to any of the accused”.

A bench led by Chief Justice SA Bobde continued the HC’s interim order that had stayed the criminal prosecution proceedings initiated against the firms and other accused for eight weeks.A bench led by Chief Justice SA Bobde continued the HC’s interim order that had stayed the criminal prosecution proceedings initiated against the firms and other accused for eight weeks.

In a relief to former auditors of IL&FS Financial Services — BSR & Associates LLC and Deloitte Haskins and Sells — the Supreme Court on Tuesday refused to stay a Bombay High Court judgement that quashed criminal prosecution initiated against the two firms over the allegations of financial irregularities.

A bench led by Chief Justice SA Bobde continued the HC’s interim order that had stayed the criminal prosecution proceedings initiated against the firms and other accused for eight weeks.

While seeking response from the two auditing firms, the top court clarified, “this order shall not affect any orders granting or refusing bail to any of the accused”. It also slammed the government for the delay in filing the appeals.

Challenging the HC order of April 21 that quashed criminal prosecution initiated against the two firms, solicitor-general Tushar Mehta, appearing for the ministry of corporate affairs (MCA), argued that a criminal complaint cannot be quashed solely on the ground that the underlying direction to prosecute was issued in an expeditious manner. This tantamounts to penalizing the government for acting expeditiously and constitutes a dangerous precedent, he added.

The government stated that the HC had incorrectly quashed the prosecution proceedings against persons who compromised the erstwhile management of IFIN, the NBFC arm of IL&FS, and its auditors who are accused of various fraudulent acts which led to defaults jeopardising its largely public debt of more than Rs 16,000 crore, and a wider financial markets contagion.

It further submitted that the HC order proceeded on a “hyper-technical” ground and “erroneous conclusions” that the direction to prosecute issued by the central government on the basis of a detailed Serious Fraud Investigation Office (SFIO) investigation report was granted with promptitude, thereby demonstrating non-application of mind.

The appeal also stated that the HC interpreted Section 140(5) of the Companies Act 2013 in a manner which would enable auditors (who are complicit in a fraud) to defeat a provision providing for their inability to act as auditors in any company merely because they have submitted their resignations as statutory auditors during the course of proceedings against them under Section 140(5) of the Act. It added that the HC’s order 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 financial affairs of IL&FS Group came under scrutiny in 2018 after it defaulted on short-term and long-term debt obligations to the tune of Rs 91,000 crore. IL&FS Financial Services (IFIN) was audited by BSR, a KPMG-affiliated firm, in FY19 and jointly by BSR and Deloitte in FY18. Deloitte was the sole auditor of the firm in FY16 and FY17.

The SFIO had last year in May filed a criminal complaint against 30 parties in the IL&FS case, including Deloitte Haskin & Sells LLP and BSR & Associates. It accused these auditors of colluding with officials of IFIN to conceal facts and fraudulently falsifying the books of accounts, and thereby financial statements from FY14 to FY18.

Based on the SFIO’s findings, the MCA in June last year had moved the NCLT seeking a five-year on ban on the auditors for failing to red flag problems in IFIN. However, the 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.

BSR and Deloitte then moved the Bombay HC against the ban and also against criminal proceedings initiated against them. The HC in April upheld the constitutional validity of Section 140 (5), but quashed the prosecution of both firms on the grounds that the provisions under which the government sought to ban the two firms can only be applied to existing auditors of a company, and not former auditors.

The HC also rejected the criminal complaint by the SFIO filed before a special court, terming it “bad in law” and “non-application of mind.” The SFIO had claimed BSR and some other audit firms had acted in breach of auditing standards and that they had failed to detect financial inconsistencies at IL&FS.

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