Union of India v. Deloitte Haskins and Sells LLP

Supreme Court's Ruling on Auditors' Resignation and NCLT Proceedings under Section 140(5) of the Companies Act, 2013

Case Background

Initiation: The Ministry of Corporate Affairs (MCA), based on a report from the Registrar of Companies under Section 208 of the Companies Act, 2013, directed the Serious Fraud Investigation Office (SFIO) to investigate the affairs of Infrastructure Leasing & Financial Services Limited (IL&FS) and its subsidiaries, including IL&FS Financial Services (IFIN).

SFIO Investigation: SFIO submitted its investigation report on IFIN, which led to the filing of a criminal complaint on May 30, 2019, before the Sessions Court (Special Judge - Companies Act) against, among others, the auditors and ex-auditors of IFIN.

Proceedings Under Section 140(5)

MCA's Petition: MCA filed a petition under Section 140(5) of the Companies Act, 2013, against the auditors of IFIN, specifically BSR & Associates LLP (BSR) and Deloitte Haskins and Sells LLP (Deloitte), along with their engagement partners and team members. The petition sought:

- The removal of BSR as auditors of IFIN.

- Declaration that Deloitte be deemed removed as statutory auditor for FY 2012-13 to FY 2017-18.

- Permission for MCA to appoint new auditors for IFIN under the first proviso of Section 140(5).

A declaration that BSR, its engagement partners, Deloitte, and its engagement partners be ineligible to be appointed as auditors for any company for five years under the second proviso of Section 140(5).

Challenges by Deloitte and BSR

Applications to NCLT: Both Deloitte and BSR filed applications challenging the maintainability of the Section 140(5) petition on the grounds that they were no longer auditors for IFIN.

NCLT's Order: The National Company Law Tribunal (NCLT) upheld the maintainability of the petition.

High Court Proceedings

Writ Petitions: BSR filed a writ petition before the High Court challenging the vires (legal validity) of Section 140(5), the directions issued, and the NCLT's order.

High Court's Decision: The High Court upheld the validity of Section 140(5) but ruled that once the auditors had resigned, Section 140(5) proceedings were no longer maintainable. The court stated that the petition filed by the Union of India under Section 140(5) had been satisfied by the auditors' resignation, setting aside the NCLT's order.

Supreme Court's Judgment

Interpretation of Section 140(5):

The Supreme Court held that proceedings initiated under Section 140(5), whether by the Tribunal suo motu or on an application by the Central Government or any concerned person, must reach their logical conclusion.

It emphasized that irrespective of whether the auditor has resigned during such proceedings, a final order must be passed by the Tribunal to determine if the auditor had acted in a fraudulent manner, directly or indirectly.

Implications of High Court's Interpretation:

The Supreme Court observed that if the High Court's interpretation—that proceedings under Section 140(5) terminate automatically upon an auditor's resignation—were accepted, it could allow auditors to strategically resign to avoid adverse rulings and consequences outlined in the second proviso to Section 140(5).

Such an interpretation could undermine the accountability of auditors, enabling them to escape the repercussions of fraudulent activities.

Final Holding:

The Court underscored that an auditor involved in fraudulent activities should not be allowed to evade the statutory consequences by merely resigning.

The Tribunal must continue and conclude the proceedings to ensure that any fraudulent conduct by auditors is addressed and penalized as per the provisions of the Companies Act, 2013.

Key Takeaways

Enforcement of Auditor Accountability: This judgment reinforces that auditors cannot use resignation as a tactic to escape accountability and legal proceedings under Section 140(5) of the Companies Act, 2013.

Mandate for Final Orders: Tribunals must ensure that inquiries into auditors' conduct are concluded with a final order, regardless of any resignations during the process.

Deterrent Against Fraud: The ruling aims to deter auditors from engaging in fraudulent activities by ensuring that they cannot avoid statutory consequences through resignation.

This landmark decision upholds the principles of accountability and transparency in corporate governance, emphasizing that auditors must face the consequences of their actions to maintain trust in the financial reporting and auditing processes.

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Article Compiled by:-

~Neel Lakhtariya 

+91 9582627751

(LegalMantra.net Team)

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