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2020 (4) TMI 644
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....anav Badheka, Ms.Rhishika Harish, Rahul Dwarkadas, Ms. Prachi Dhanani, Ms.Rohini Jaiswal, Ms. Juhi Bahirwani i/by Veritas Legal for the Petitioner in WP No.5023/2019. Mr. Robin Jaisinghani i/by Dastur Kalambi & Associates for the petitioner in WP No.5035/2019. Mr. Amit Desai, Sr. counsel & Mr. Gopalakrishna Shenoy i/b Dastur Kalambi & Associates for petitioner in WP 5036/2019. Adv.Aabad Ponda a/w Vikran Negi, Ekta Tyagi, Pratik Thakkar, Bhomesh & Anjali Shah i/b DSK Legal for petitioner in WP 5263/2019. Mr. Aspi Chinoy, Senior Advocate a/w Mr. Animesh Bisht, Mr.Aditya Sikka, Adv. Ashish Mehta Saloni Kapadia, Ms.Drishti Das, i/b Cyril Amarchand Mangaldas, for Respondent no.1 in WP Nos.4144/2019, 4145/2019, 5023/2019,5035/2019, 5036/2019 and 5263/2019. Shri H.S.Venegaokar a/w Sneha Prabhu and Ajay Bhise for TR.No. 2 SFIO. JUDGMENT (Per B.P. Dharmadhikari, CJ.): 1. A prayer made under S. 140(5) of the Companies Act,2013 or 2013 Act against the statutory auditors by the Union of India through Ministry of the Corporate Affairs (MCA) in an investigation/dispute regarding constant evergreening of debts extended to its subsidiary Companies & third parties/companies by IL & FS Financi....
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....onnection with Company Petition No. 2062 of 2019 under section 140(5) of the Companies Act, 2013 for appointment of statutory auditors for IL & FS Financial Services Limited ("IFIN") under first proviso to section 140(5) of the Companies Act,2013. This application was moved by the Union of India through its Ministry of Corporate Affairs, the NCLT has found that under section 140(5) only, the Union of India is authorized to appoint or change the auditor. The auditor appointed by the Company IFIN namely Mukund M. Chitale & Co. (MMC) has been treated as appointment of statutory auditors under section 140(5) by NCLT on 18.10.2019. 4. The other order or direction challenged in this group of petitions is dated 29/5/2019. By this order, the Assistant Director, Legal and Prosecution has asked the SFIO to file complaint ie prosecution under S. 212(14) of 2013 Act by 30/05/2019 without fail and to submit compliance report. 5. In Criminal Writ Petition No. 5023 of 2017, the petitioner DeoLitte Haskins & Sells (LLP) has questioned the constitutionality of section 140(5) supra and also prays to quash and set aside the criminal complaint Case No. 20 of 2019 initiated against it. 6. Writ Petit....
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....s not eligible to be appointed as an auditor of any company for the period of five years from the order passed by NCLT in view of serious fraud committed which required intervention of the MCA to prevent the destabilization impact on the company at the request of the department of Economic Affairs and sought debarment for the period of five years. Similar relief was sought for against the other respondents i.e. applicants mentioned supra. 13. The maintainability of these proceedings was questioned on various grounds including contention that when the statutory auditor had factually ceased to be company auditor ie CA of the particular company and another auditor namely M/s.M.M. Chitale & Co. had stepped into the shoes and assumed that responsibility, provisions of section 140(5) could not have been invoked. We are required to refer to this contention and other allied grounds little later in the body of this judgment. NCLT has by impugned order rejected these objections and held Company Petition No. 2062 of 2019 presented by Union of India to be maintainable. 14. In this connection only on 30/09/2018 the Union of India through its Ministry of Corporate Affairs appointed inspectors ....
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....2 of 2019, Company Appeal No. 223 of 2019 and Company Appeal No. 224 of 2019. In those appeals, NCLAT permitted NCLT to proceed with the hearing of the petition to restrain it from passing any order against the appellants before it. 17. After filing of the Company Petition No.2062 of 2019, respondent no.2 therein viz. M/s. BSR and Associates who were statutory auditors for IFIN for the year 2019-20 resigned on 19/6/2019. Respondent nos. 2 and 5 in Company Petition No. 2062 of 2019 moved High Court in Criminal Writ Petition No.4144 of 2019 (present petition) as also Criminal Writ Petition No.4145 of 2019 challenging the vires of section 140(5). High Court on 4/9/2019 while issuing notice passed the following order : "14. In above circumstances, we defer the hearing on the writ petitions. Stand over to 3rd October, 2019. Till next date, by way of ad-interim relief we pass the following order : * The Respondents and/or their agents and/or their servants are restrained from continuing any further proceedings qua the petitioners under Section 140(5) of the Act in Company Petition No. 2062 of 2019. No coercive action shall be taken qua the Petitioners in Criminal Complaint filed ....
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....ution of the High Court order dated 4/9/2019 and action of respondents in moving the application in very same proceedings which were stayed because of liberty given by the Hon'ble Apex Court is unwarranted. The NCLT could not have proceeded further and allowed that application. 21. Attention of the Court is invited to provisions of section 140 of 2013 Act to show that it appears in a chapter which does not deal with the discipline and therefore, punishment to be inflicted upon the auditors. Removal in the said chapter is termination simplicitor without casting any stigma and therefore, it cannot be seen as disqualification. Contention is disqualification envisaged under section 140(5) operates only against the recalcitrant auditors who do not abide by the orders passed by the NCLT or defy the procedure. It is therefore, a sanction to guarantee the procedural discipline thereunder or the orders passed by NCLT under that section. Second proviso to section 140(5) cannot be seen as 'stand alone' provision. Such treatment extended to that sub section would vitiate the entire scheme of the chapter of Companies Act and also the purpose of section 140. 22. Our attention is drawn to the f....
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.... officer under S.173 of Cr.P.C. The provisions of section 212(11) contemplates even an interim report, but no prosecution can be initiated on the basis of such interim reports. 25. Provisions of section 223(4) and (5) are relied upon to show that these provisions which permit inspection of documents or accounts are not attracted where section 212 of Companies Act is invoked. Section 435(1) of the Companies Act prescribes prosecution before Special Court and under section 436 and 438(1), provisions of Cr.P.C. regulate that prosecution. 26. This elaborate procedure which results in conviction of the auditor and his disqualification for the period of two terms is relied upon to point out how section 140 cannot be understood to contain the scheme for disqualification or debarment of the auditor. Even sections 141 and 142 of the said Act are relied upon for this purpose. It is submitted that section 140 therefore is summary procedure which is not aimed at fastening any guilt upon the auditor but only for his removal during further proceedings so that the concerned company can substitute him by new auditor and its functioning can continue smoothly. 27. Mr. Khambata states that the pet....
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....ad. He has relied upon Modern Dental College and Research Centre and Ors. vs. State of Madhya Pradesh and Ors. : (2016) 7 Supreme Court Cases 353 paragraph 59 to 65 to point out the need of balancing rights & obligations and to adopt doctrine of proportionality in said matters. He contends that if only object behind enacting section 140(5) is removal of said company auditor, mandatory civil death becomes disproportionate and unwarranted. 30. He adds that it also constitutes double jeopardy. Gagan Harsh Sharma and Anr. vs. State of Maharashtra: 2019 Cri. L. J. 1398 is relied upon for this purpose. 31. He submits that when the petitioner applied for documents to find out truth in defence that the report submitted by the SFIO is not an interim report and that before directing him to institute prosecution, the Central Government had applied its mind duly on 29.5.2019 to the said report; those documents were not made available and they also did not get opportunity to cross examine. According to him in proceedings before NCLT there is no scope for such cross examination. To explain relevance of the need to supply documents and to cross examine witnesses he cites P. Sanjeeva Rao vs. Sta....
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....law. He relies upon sections 132 and 447 of 2013 Act to urge that section 140(5) must be understood in the light of this provision. 36. The procedure for dealing with the Company Auditor who has committed professional misconduct is relied upon by him with submission that National Financial Reporting Authority (NFRA for short) has a detailed procedure in this respect and therefore adequate safeguards for CA. He submits that there if misconduct is established and company auditor is punished, that order is stayed automatically for period of 30 days to enable him to avail remedy of appeal to NCLAT. 37. Rules framed under Chartered Accountancy Act 1949 are also relied upon for this purpose. He states that section 21(2) and section 21(A) (2) deal with minor as also major professional misconducts and lay down the procedure therefor. He has invited our attention to section 21 (A) (3), 21(B) and section 22 to show that there is uniformity and established procedure to deal with such misconduct. Rule 9 of Rules framed under Chartered Accountants Act for said purpose is also relied upon. 38. He contends that when misconduct is looked into by NFRA or by the Institute of Chartered Accountants....
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....ich might have accrued to one of the directors. 44. Rakesh Kumar Paul vs. State of Assam (2017) 15 SCC 67. paragraphs 11, 16, 28, 29, 32,38 and 39 are relied upon by him to submit that the steps hurriedly taken to defeat the provisions regarding default bail are mala fide and illegal. Kamlapati Trivedi vs. State of West Bengal: (1980) 2 SCC 91, paragraph 50 and 52 are relied upon to state that the cognizance can be taken only of complete investigation. 45. Advocate Desai while advancing the arguments on 17/12/2019 stated that the sanction granted on 29/5/2019 to launch prosecution is vitiated. He handed over to court a copy of Company Application No.2017/2019 moved before the NCLT by the Union of India to show that there in paragraph 15, the Union of India (MCA) has submitted on 8/6/2019 that the investigation was incomplete. Because respondents realized the impact of section 4(2) of Cr.P.C. on their action and on section 212 of the Companies Act, they have taken a plea that the investigation is complete by way of afterthought. Section 212(12) of the Companies Act envisages final report and therefore, it is deviation from Cr.P.C. Unlike Cr.P.C. the Companies Act does not co....
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....of Chartered Accountants Of India vs. L.K. Ratna & Others. (1986) 4 SCC 537 para 18 is also cited by him to point out how it considers the case of damage of reputation. 51. The Judgment of Supreme Court of United States in the case of Hudsun Vs. United States followed by the Supreme Court of India is also relied upon by him to urge that article 20 of the Constitution or section 26 of the General Clauses Act does not require that both actions must be under the criminal law. To support this, he also relies upon the history and object behind section 140(5) explained by respondent no.1 in paragraph 5 of its reply affidavit. 52. On 18/12/2019, Advocate Desai submitted that the question whether such debarment of company auditor constitutes penalty or not is answered by the United States Supreme Court in Hudsun Vs. United States (supra) and he also points out the reply affidavit in Writ Petition No. 4145 of 2019 particularly paragraph 17 to 19. 53. To stress the Indian Law on the point, he draws support from AIR 1953 SC 325 : Maqbool Hussain Versus State of Bombay, paragraph 3, 11 and 17, (2015) 3 SCC 779 : Union of India and another Vs. Purushottam, paragraphs, 7,8 and 9. The later ju....
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....e of Assam:(2017) 15 SCC 67 to show how the provision in relation to default bail is dealt by Hon'ble Apex Court. He claims that it is important part of right of liberty and has highlighted its breach in the present matter by acting upon the interim report. Kamlapati Trivedi vs. State of West Bengal: (1980) 2 SCC 91 is also strongly relied upon by him to urge that law permits cognizance to be taken only if investigation is complete and not before that. 60. Our attention is invited to Company Application No. 2070/2019 preferred by Union of India before NCLT to point out that on 8/6/2019 also the fact that investigation is not complete, has been accepted. 61. Respondent realized impact of section 4(ii) of Cr.P.C. on section 212 of Companies Act,2013 and special provision therein regarding completion of investigation and therefore in order to defeat it, they have decided to act upon interim report. He contends that section 212 (12) also envisages final report only. It is further submitted that if report under section 212 (14) is received, it is open to the Central Government to order further investigation by SFIO. 62. State of Punjab and Anr. vs. Gurdial Singh and Ors.: (1980) 2 SC....
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....s based on same report, application of mind thereafter, same witnesses and same evidence. 67. Learned Senior Advocate states that while examining the concept of double jeopardy, punishments under both these provisions are not required to be same. Section 141 (1) (h) prescribes debarment for 10 years while punishment under section 140(5) is of debarment for 5 years. 68. Practitioners like auditor, Chartered Accountant, advocate and professionals constitute a class by themselves. Hon'ble Apex Court has considered the civil death which they suffer because of debarment and has prescribed the standard or requirement of proof beyond reasonable doubt in disciplinary matters. Proceedings for debarment are therefore criminal in nature. 69. An Advocate vs. Bar Council of India -1989 (supp) 2 SCC 25 is relied upon to show that proceedings are quasi criminal in nature and accordingly standards and procedure relevant in criminal jurisprudence are required to be used while debarring the auditors also. For Article 20 of the Constitution of India and S. 26 of General Clauses Act, nature of proceeding is irrelevant. (1998) 4 SCC 409- Supreme Court Bar Association vs. UOI & another and Institute ....
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....gment of this court reported at (2017) 3 Mah.L.J. 929 : Tulsi Dass S/O. Suraj Prakash Vs. Union OF India and Ors. para 29 is relied upon to show that even in departmental enquiries, because of Article 21, this principle has been extended. 75. With the leave of the Court, Advocate Dwarkadas submits that the debarment under section 140(5) cannot be seen as interim or protem measure because there is no power to pass final orders in relation to it in the scheme of section 140. He submits that the auditor needs to be removed by the company while debarment as the punishment is to be imposed by some other authority. 76. Appearing for the petitioners in WP No. 5035 of 2019 Advocate Robin Jaisinghani submitted that the petitioners are partners in the firm Deloite which has independently filed another petition. 77. He adopted the arguments advanced by others but clarified that this partner has also questioned the order of NCLT before the appellate tribunal and hence, the question raised in Writ Petition is only about the constitutional validity of section 140(5) of Companies Act and about violation of Article 14 and 21 of the Constitution of India. 78. To add to the arguments already adv....
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....th debarment under section 140(5) suffers deemed convict under these schedules and therefore, can be punished directly by the Institute of the Chartered Accountants. He argues that this amendment is high handed and unconstitutional. Rule 34 and rule 51 of the NCLT Rules is relied upon to show that while proceeding against the company auditor, NCLT has been permitted to evolve its own procedure. Thus there is no pre-set or well established procedure and company auditors can be subjected to different procedures as per its whim by NCLT. Such a provision needs to be struck down on account of procedural inequality. He draws support from AIR 1952 SC 75 : The State of West Bengal Vs. Anwar Ali Sarkar and another, paragraph nos. 20(1), 38 and para 45. To explain the importance of the procedure in such matters and relevance of Article 21 of the Constitution of India, he draws support from the observations of the Hon'ble Apex Court in paragraph 21 and 266 in AIR 1950 SC 27 : A.K. Gopalan Vs. State of Madras. 82. Advocate Ponda appearing for the petitioner Director in WP No. 5263 of 2019 submits that the said petitioner is not concerned with the provisions of section 140 of the Companies Act....
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.... power is being abused to illegally detain the petitioner Director in Jail. 86. Adv. Ponda has taken us through various judgments to substantiate his contentions. 87. For the convenience of the Court learned Senior Advocate Chinoy handed over written submission. Orally he has submitted that second proviso to section 140(5) is not intended to prompt or aimed at inducing the CA-company auditor to resign. It is a substantive provision essentially intended to see that said auditor who is found involved in fraud or has colluded for that purpose with directors or officers of company, should not continue to monitor accounts of any company atleast for next 5 years. He submits that first proviso to that section can be seen as an interim measure because there action is envisaged within 15 days of receipt of application and hence, consequential final order is also envisaged in second proviso. Said auditor against whom final order has been made therefore can not be reappointed for next 5 years as auditor in the company. This provision is remedial as also preventive in nature and must be construed accordingly to further its object. 88. Accordingly, he has relied upon judgment of Hon'ble Apex....
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....High Court under Companies Act 1950 were essentially civil in nature and proceedings before NCLT are also civil proceedings. They are distinct from trial of offence under section 435 and 436 of the Companies Act 2013. He contends that merely because the company auditor cannot be reappointed for period of 5 years, the proceedings under section 140(5) do not become either criminal or quasi criminal. He states that judgment of Hon'ble Apex Court in An Advocate vs. Bar Council of India -1989 (supp) 2 SCC 25 considers proceeding under section 35 of Advocates Act where right to practice the profession as advocate is taken away. He claims that barring Chartered Accountant from acting and practicing for short duration does not make proceedings in NCLT, a criminal proceeding. He relies upon Director of Enforcement vs. M.C.T.M. Corp. (P) Ltd. - (1996) 2 Supreme Court Cases 471 for this purpose. 93. Sr. Advocate also states that judgment reported at An Advocate vs. Bar Council of India -1989 (supp) 2 SCC 25 supra has been rendered without looking into the larger Bench judgment reported at P.J. Ratnam vs. D. Kanikram-AIR 1964 SC 244, and other judgments like S.A. Venkataraman vs. Union Of Ind....
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....ting our attention to judgment of Bombay High Court reported in the case of Sales Tax Practioners Association of Maharashtra and ors. vs. State of Maharashtra. 2008 SCC Online Bom 337, paragraph 12 and Deputy Secretary to the Government Vs. S.N. Das Gupta -AIR 1956 CAL 4. Thus, according to him, stand that role of Company Auditor must be seen as subordinate or secondary to role of Director of Company or Officers of Company is itself erroneous. He also invited our attention to provisions contained in Section 243 (1) (A) and 242 (4) (A) to show that in similar circumstances, the Director of the company also cannot hold office. 100. While dealing with the challenge in Writ Petition No. 4145 of 2019 to order dated 9/8/2019 passed by the NCLT, learned senior counsel points out that the petitioner has resigned as an auditor 9 days after the NCLT issued notice to it. The Union of India filed Company Petition No.2062 of 2019 for his removal under section 140(5) and for further action as per its proviso, on 9/6/2019 which came to be admitted by the NCLT on 10/6/2019. It was to be placed again on 21/06/2019 and on 10/06/2019, advocate for the BSR was present before the NCLT. On 19/06/2019, ....
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....he order of NCLT dated 09/08/2019 is just and valid. It has given appropriate reasons for holding that the resignation submitted after filing of the proceedings by UOI cannot be used to defeat the scheme of section 140(5) which is preventive as also remedial in nature. The purpose of the said provision is to deny to the company auditor involved in fraud or collusion, further participation in the affairs of company or in audit work. This object would be defeated if by submitting resignation such auditor is permitted to continue with that work. He further submits that after passing of the final order, as envisaged in second proviso, the company auditor cannot be reappointed to undertake audit work of any company. This object also will be defeated if the interpretation of petitioner is accepted. The strategy adopted by the petitioners is against the public interest and should not be countenanced to. 105. While dealing with the order dated 18/10/2019 by NCLT under first proviso to section 140(5), learned senior counsel submits that the contention about the NCLT loosing jurisdiction since M/s. BSR Associates had resigned and IFIN accepted that resignation and appointed M/s. M. Chitale ....
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....s have not pointed out to this court lack of material before the first respondent so as to vitiate the order dated 29/05/2019. He contends that this mere hypothetical contention that the report could not have been looked into within 30 hours, is liable to be rejected. 109. Shri Chinoy adds that even otherwise, no Government sanction is as such required to initiate action under section 140(5) of the Companies Act, 2013. 110. Advocate Venegaonkar, appearing for SFIO who is respondent no. 2 in all the writ petitions, invites attention to the prayer clause (iic) added by amendment in WP No. 4145 of 2019 to urge that there prayer is to quash and set aside the Criminal Case No.20 of 2019 instituted by SFIO before the competent court. 111. According to him, this prayer and writ petition is not maintainable to that extent as that court ie trial court has still not taken cognizance and the process has still not been issued. He submits that after report to police or Investigating Officer and till accrual of right, if any in favour of the accused, the matter proceeds through three stages. He has relied upon (2014) 3 SCC 92 : Hardeep Singh Vs. State of Punjab and Ors. to demonstrate t....
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....in relation to IFIN only. He placed heavy reliance on certain paragraphs in the said report for this purposes. He further adds that this report has been prepared on "stand alone" basis and needs to be appreciated accordingly. Learned counsel states that the effort to demonstrate that the report is interim or incomplete, cannot succeed. Nine points identified by investigation in paragraph 1 and 4 of the said report are also read out to the court. 115. In this backdrop, he submits that the said report is not under section 173 of Cr.P.C. and the deeming fiction under section 212(15) in 2013 Act is only for the limited purpose i.e. for the purposes of framing of the charge. This limited fiction cannot be enlarged further. He draws support from (1998) 6 SCC 183 : State Bank of India Vs. D. Hanumantha Rao and another paragraph 5. 116. Dealing with the issue of sanction/direction under section 212(14) he submits that in all the petitions filed before this court, the grounds assailing it show that the same accept existance of order/sanction dated 28/05/2019. In view of this position and as such document exists, all grounds raise the questions of facts and therefore, cannot be considered ....
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....graphs 1, 2 and 5 thereof. 121. Advocate Khambata has in rejoinder submitted that the efforts made by the petitioner BSR to procure the directions under section 212(14) have not succeeded and despite directions of this Court, the SFIO has not filed any affidavit asserting that his report is a final report. The assertion of the petitioner on oath therefore has not been rebutted. He submits that the negligence even of the highest degree does not tantamount to fraud under section 447 of 2013 Act and this aspect has been lost sight by SFIO as also by the Central Government. Petitioner, therefore, demanded email dated 07/03/2019 but it has not been supplied. Hence, the adverse inference that it contains direction of central Government to SFIO as per section 212(11) needs to be drawn. He relies upon (1973) 3 SCC 581 : Union of India and Ors. Vs. Messrs. Rai Singh Dev Singh Bist and Ors (paragraph 6). 122. He also reads out certain portions of the said report to show that the report itself points out need for the further investigation. There is express observation to that effect and respondents have not filed any reply on oath to urge that the said investigation has not been undertaken.....
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.... the Companies Act 2013 to urge that ingredients of fraud as specified therein are not even examined by respondents. The report submitted by SFIO contains some exculpatory material that has not been perused. Annual report on IFIN itself shows that it was given time till 31/3/2019. In this situation neither SFIO nor the Central Government has considered its impact. Processing note as alleged therefore becomes important. He also invited our attention to reply filed by respondents to show that there is no inference of collusion in it and above aspects have been overlooked. The fact that SFIO asked RBI to hold internal inquiry has also been ignored. According to him, this implies some participation in collusion even by RBI officers. In this situation, the petitioner who worked as Chartered Accountant for about 4 months could not have been seen as involved in any fraud. Section 212(14) makes provision for legal advise and respondents ought to have procured it in present facts. 127. While dealing with contention of advocate Venegaonkar that challenge to prosecution is premature, he distinguishes judgments relied upon by advocate Venegaonkar with submission that even those judgments supp....
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....0/2019 dated 29/11/2019 are pressed into service for this purpose. He also adds that since writ of prohibition has been sought the said objection is relevant. He cites Isha Beevi on behalf of the minor Umaiben Beevi and Others vs. The Tax Recovery Officer and Addl. P.A. to Collector, Quilon and Ors.:(1976) 1 Supreme Court Cases 70, (paragraph 5) in support. Lastly, he relies upon Bengal Immunity Company Limited vs. State of Bihar and Ors.: AIR 1955 SC 661, (paragraph 8) to urge that all orders passed in said matters by NCLT can be assailed before this Court since constitutional validity has been questioned. 132. He submits that before the petitioner became auditor, RBI had already entered into correspondence with IFIN and this correspondence was going on for 2 years. Annual report contains necessary disclosures and as such; taking action against petitioner under section 140(5) is unwarranted. Our attention is invited to scheme of section 241, 242 and 243 of Companies Act 2013 to urge that the action is possible if very higher degree of implicating material exists and only after rigorous preconditions are complied with. The adverse order against the director therefore cannot be obt....
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....llate Side Rules, Company Court Rules and NCLT Rules guided High Court while functioning under Companies Act,1956 and as such, there was established procedure. 136. He further added that first proviso to section 140(5) cannot be seen as an interim measure. He has pointed out object which prompted the parliament to incorporate section 140(5) and relies upon the discussion on purpose of criminal justice, punishments in chapter dealing with administration of justice, contained in SALMOND on Jurisprudence. 137. According to him proviso to 140(5) militates with Limited Liability Partnership Act and therefore it needs to be construed properly in the wake of substantive provision in S. 140(5). 138. He further argues that the contention that second proviso is lenient since the CA is not debarred from continuing with ongoing work of other companies and has been disqualified only for fresh term or continuation; is erroneous since the stigma cast is final and cannot be avoided anywhere. The punishment possible after full trial under section 447 is imposed highhandedly and unilaterally under S. 140(5) with undue haste. Once order is passed by NCLT, other companies of repute may be induced t....
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....1996) 6 Supreme Court Cases 627 to demonstrate that in such matters before NCLT, required standard of proof is beyond reasonable doubt only. These standards are applicable even in matters pertaining to professional misconduct. 145. Advocate Desai has cited Prahlad Saran Gupta vs. Bar Council of India and Another: (1997) 3 Supreme Court Cases 585, paragraph 9); Pawan Kumar Sharma vs. Gurdial Singh:(1998) 7 Supreme Court Cases 24, (paragraph 7); H.V. Panchaksharappa vs. K. G. Eshwar: (2000) 6 Supreme Court Cases 721, (paragraph 6), Bhupinder Kumar Sharma vs. Bar Association, Pathankot: (2002) 1 Supreme Court Cases 470, State of Punjab vs. Davinder Pal Singh Bhullar and Ors.: (2011) 14 Supreme Court Cases, paragraph Nos.107 to 111 and Nirmala J. Jhala vs. State of Gujrat and Another:(2013) 4 Supreme Court Cases 301, (paragraph 11 to 17) to demonstrate that when question is of misconduct by professionals, higher degree of proof is always envisaged and it is not preponderance of probability. He states that An Advocate vs. Bar Council of India -1989 (supp) 2 SCC 25(paragraph 4) also follows same law. Pandurang Dattatraya Khandekar vs. Bar Council of Maharashtra, Bombay and Ors. (c....
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....attention to section 22 and Schedule III of the Chartered Accountants Act 1949 with its section 8 to show that removal of name of Chartered Accountant from roll of Chartered Accountant is nothing but death penalty. 149. He has relied upon K.C. Sareen vs. CBI, Chandigarh (2001) 6 SCC 584 (paragraph 12 to 14) to show that Hon'ble Apex Court does not stay conviction and how conviction affects carrier of a person. For latter proposition, he also takes help of Sanjay Dutt vs. State Of Maharashtra (2009) 5 SCC 787. 150. To explain what constitutes prejudice, he takes help of M.S. Sheriff vs. State of Madra AIR 1954 SC 397 He submits that in such matters under section 140(5) issue of embarrassment to Chartered Accountant proceeded against definitely arises. He draws support from Capt. M. Paul Anthony vs. Bharat Gold Mines. (1999) 3 SCC 679 He further submits that Union of India and Another vs. Purushottam (cited supra) by Advocate Chinoy does not look into professional misconduct and it deals with departmental proceedings. 151. Advocate Robin Jaisinghani has in rejoinder submitted that NCLT has no fixed procedure and in its absence prejudice caused is apparent. Suraj Mall Mohta and Co.....
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.... 155. Advocate Khambata in Criminal Writ Petition No. 4145 of 2019 also submitted brief written note to distinguish the judgment reported at (2007) 8 SCC 559. Carona Ltd. vs. Parvthy Swaminathan & Sons relied upon by the MCA and to urge that events like resignation subsequent to filing of S. 140(5) proceedings must be taken note of. 156. Senior Advocate Mr. Seerwai also gave brief note in Criminal Writ Petition No. 4144 of 2019 in rejoinder. 157. Because some judgments were cited while advancing arguments in rejoinder, Advocate Chinoy has also submitted written submissions in rejoinder. He has explained the same in brief and contended that the steps taken need to be understood in the context in which the same became necessary. He also explained the purpose and object of the proceedings. He submitted that the alleged admissions of Government cannot be seen as final and determinative. On incomplete investigation, he has reiterated his contentions and submitted that the final report submitted by the SFIO here may be followed by further final report. For that purpose he has drawn support from PMC Mercantile Pvt. Ltd, vs. State(2014) 3 MWN (Criminal) 454 (paragraph 11 and 18). 158. ....
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....ion 140(5) cannot be eclipsed by substantive part of section 140(5). He adds that the NCLT Rules 2016 contain sufficient procedure for conducting the matter against the auditor/company under section 140(5). 163. Lastly he has relied upon some judgments in effort to show how Article 20(2) of the Constitution of India is not relevant in the present matter. At the end of his written note, he has again reiterated the defences in brief. 164. Before proceeding with the discussion, we find it suitable to enumerate the questions which arise for determination. Those questions are. A. Whether S. 140(5) of 2013 Act is unconstitutional? --. Whether it is bad as it singles out only the Company Auditors and excludes the directors or the office bearers of the companies from its scope? - Whether it is arbitrary since it does not carry adequate procedural safeguards as contained in Indian Chartered Accountants Act or in S. 132 of the 2013 Act? B -- Whether it violates the principle of double jeopardy? C. Whether other prayers in these writ petitions can be entertained if the answer to any of the above questions is in negative? i.e. whether the petitions are maintainable as the alternate....
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....ay be prescribed. (3) The National Financial Reporting Authority shall consist of a chairperson, who shall be a person of eminence and having expertise in accountancy, auditing, finance or law to be appointed by the Central Government and such other members not exceeding fifteen consisting of part-time and full-time members as may be prescribed: Provided that the terms and conditions and the manner of appointment of the chairperson and members shall be such as may be prescribed: Provided further that the chairperson and members shall make a declaration to the Central Government in the prescribed form regarding no conflict of interest or lack of independence in respect of his or their appointment: Provided also that the chairperson and members, who are in full-time employment with National Financial Reporting Authority shall not be associated with any audit firm (including related consultancy firms) during the course of their appointment and two years after ceasing to hold such appointment. (4) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall- (a) have the power to investigate, either suo mo....
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....*] (7) 3[* * *] (8) 3[* * *] (9) 3[* * *] (10) The National Financial Reporting Authority shall meet at such times and places and shall observe such rules of procedure in regard to the transaction of business at its meetings in such manner as may be prescribed. (11) The Central Government may appoint a secretary and such other employees as it may consider necessary for the efficient performance of functions by the National Financial Reporting Authority under this Act and the terms and conditions of service of the secretary and employees shall be such as may be prescribed. (12) The head office of the National Financial Reporting Authority shall be at New Delhi and the National Financial Reporting Authority may, meet at such other places in India as it deems fit. (13) The National Financial Reporting Authority shall cause to be maintained such books of account and other books in relation to its accounts in such form and in such manner as the Central Government may, in consultation with the Comptroller and Auditor-General of India prescribe. (14) The accounts of the National Financial Reporting Authority shall be audited by the Comptroller and Auditor-General of India ....
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....(iii) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representation in writing to the company (not exceeding a reasonable length) and requests its notification to members of the company, the company shall, unless the representation is received by it too late for it to do so,- (a) in any notice of the resolution given to members of the company, state the fact of the representation having been made; and (b) send a copy of the representation to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representation by the company, and if a copy of the representation is not sent as aforesaid because it was received too late or because of the company's default, the auditor may (without prejudice to his right to be heard orally) require that the representation shall be read out at the meeting: Provided that if a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the Registrar: Provided further that if the Tribunal is satisfied on an application either of the company or of any other aggrieved person that the rights conferred by this sub-section are ....
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....lenge in the writ-petitions. They submit that if the S. 140(5) is held constitutional, the other prayers must be allowed to be looked into by the NCLAT where one of the petitioners has already approached. In Whirlpool Corporation vs. Registrar of Trade Marks, Mumbai and Ors. (supra) Hon. Apex Court in para 15 has observed that when vires of an enactment are challenged, the writ petition is maintainable. Similarly Isha Beevi on behalf of the minor Umaiben Beevi and Others vs. The Tax Recovery Officer and Addl. P.A. to Collector, Quilon and Ors.:(paragraph 5) and Bengal Immunity Company Limited vs. State of Bihar and Ors.: , (paragraph 8) disclose that all orders passed in the matter by NCLT can be assailed before this Court since constitutional validity has been questioned. 168. In Competition Commission of India vs. Bharti Airtel Limited and Ors (2019) 2 SCC 521, in para 119, the Apex Court relies on Carona Ltd. Apex Court holds (SCC pp. 569 & 571, paras 26-28 & 36) that the fact as to "paid-up share capital" of rupees one crore or more of a company is a "jurisdictional fact" and in absence of such fact, the court has no jurisdiction to proceed on the basis that the Rent Act is no....
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....633 where in paragraph 8, the Constitution Bench points out that in order to pass the test of permissible classification, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes persons or things that are put together from others left out of the group, and (2) that the differentia must have a rational relationship to the object sought to be achieved by the statute in question. Hon. Apex court holds that condition 2 above was clearly not satisfied in case before it. The object sought to be achieved by the Rajasthan Jagirdars' Debt Reduction Act,1957, was to reduce the debts secured on jagir lands which had been resumed under the provisions of the Rajasthan Land Reforms and Resumption of Jagirs Act. The Jagirdar's capacity to pay debts had been reduced by the resumption of his lands and the object of the Act was to ameliorate his condition. The fact that the debts were owed to a Government or local authority or other bodies mentioned in the impugned part of Section 2(e) had no rational relationship with this object sought to be achieved by the Act. Further, no intelligible principle underlies the ex....
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....w. 174. We also note that Hon. Apex Court in Nathi Devi vs. Radha Devi Gupta. (2005) 2 SCC 271 para 13 & 14, states that the Legislature inserts every part of statute with a purpose & the legislative intention is that every part thereof should be given effect to. If the words used are capable of only one construction, it is not open to court to adopt any other hypothetical construction on the ground that it finds it more consistent with the alleged object and policy of the Act. 175. Shri Khambatta has relied upon (1991) 3 SCC 442 Tribhovandas Haribhai Tamboli vs. Gujrat Revenue Tribunal & another which in paragraph 8 points out the effect of a proviso which excluded the lands held on lease from the local authority from application of Bombay Tenancy & Agricultural Lands Act, 1948. (1975) 2 SCC 791. Carew and Company vs. Union of India, 4 judges bench of Hon. Apex Court explains how an undertaking for the purposes of Monopolies & Restrictive Trade Practices Act, 1969 needs to be understood is also cited. There the Hon. Court in para 24 to 28 states that if two views are possible, one which advances the remedy and suppresses the evil must be adopted. 176. Shri Seervai relied upon (....
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....the composition would show, is a High-Powered Committee, which has been authorised to adjudge all aspects. I may hasten to add that I am not at all delving into the sphere of suitability of a candidate or the eligibility, for in the case at hand the issue in singularity pertains to total non-compliance with the statutory command as envisaged under Section 85(5). 49. It is seemly to state that the aforementioned provision employs the term "recommendation". While dealing with the concept of recommendation, a three-Judge Bench of this Court in A. Panduranga Rao v. State of A.P.28 has stated that the literal meaning of the word "recommend" is quite simple and it means "suggest as fit for employment". In the present case the Selection Committee as per the provision was obliged to satisfy itself when the legislature has used the word "satisfied". It has mandated the Committee to perform an affirmative act. There has to be recording of reasons indicating satisfaction, may be a reasonable one. Absence of recording of satisfaction is contrary to the mandate/command of the law and that makes the decision sensitively susceptible. It has to be borne in mind that in view of the power conferre....
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....the interests of the general public, .....-. 60. Section 18-AA(1)(a), in terms, requires that the satisfaction of the Government in regard to the existence of the circumstances or conditions precedent set out above, including the necessity of taking immediate action, must be based on evidence in the possession of the Government. If the satisfaction of the Government in regard to the existence of any of the conditions, (i) and (ii), is based on no evidence, or on irrelevant evidence or on an extraneous consideration, it will vitiate the order of "take-over", and the court will be justified in quashing such an illegal order on judicial review in appropriate proceedings. Even where the statute conferring the discretionary power does not, in terms, regulate or hedge around the formation of the opinion by the statutory authority in regard to the existence of preliminary jurisdictional facts with express checks, the authority has to form that opinion reasonably like a reasonable person. 61. While spelling out by a construction of Section 18-AA(1)(a) the proposition that the opinion or satisfaction of the Government in regard to the necessity of taking immediate action could not be th....
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....s of Section 3(2)(e) of the Indian Electricity Act 9 of 1910 as amended by the U.P. Act 30 of 1961, where the language used is similar to Section 10(3)(c) of the Passports Act, this Court held that when the Government exercises its power on the ground that it "deems such supply necessary in public interest" if challenged, the Government must make out that exercise of the power was necessary in the public interest. The Court is not intended to sit in appeal over the satisfaction of the Government. If there is prima facie evidence on which a reasonable body of persons may hold that it is in the public interest to supply energy to consumers the requirements of the statute are fulfilled. "In our judgment, the satisfaction of the Government that the supply is necessary in the public interest is in appropriate cases not excluded from judicial review." The decisions cited are clear authority for the proposition that the order passed under Section 10(3)( c ) is subject to a limited judicial scrutiny. An order under Section 10(3)( c ) though it is held to be an administrative order passed on the subjective satisfaction of the authority cannot escape judicial scrutiny. The Attorney-General f....
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....ould be defeatism to take the view that in our country men would not be available to work these powers smoothly and in the best interests of the people and without producing friction. I sincerely hope that what has happened will never happen again and our Constitution will be worked by the different organs of the State amicably, wisely, courageously and in the spirit in which the makers of the Constitution expected them to act." 184. Observations of Hon. Apex Court in Subhash Popatlal Dave vs. Union of India (2014) 1 SCC 280 show that. "35. This Court consistently held that preventive detention "does not partake in any manner of the nature of punishment" but taken "by way of precaution to prevent mischief to the community" 14. Therefore, necessarily such an action is always based on some amount of "suspicion or anticipation". Hence, the satisfaction of the State to arrive at a conclusion that a person must be preventively detained is always subjective. Nonetheless, the legality of such subjective satisfaction is held by this Court to be amenable to the judicial scrutiny in exercise of the jurisdiction conferred under Articles 32 and 226 of the Constitution on certain limited g....
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.... S. 140(5) is not the same as in S. 132 of the 2013 Act. 186. We find the arguments by the petitioners on classification between the Company Auditors on one hand & the Directors or Officers of the company on the other hand misconceived because of unique position of CA qua the Company and status of the Directors or the office bearers of such Company. The directors or the officers of such company must identify themselves with its affairs while the CA has to be aloof & neutral. 187.- In A.N. Parsuraman and another vs. State of Tamilnadu - (1989) 4 SCC 683, in para 8, the Hon. Apex Court finds that the executive was given wide discretion in the matter of choice of competent authority in picking and choosing an institution for exemption from the Tamilnadu Private Educational Institutions (Regualation) Act, 1966. It can not be said about S. 140(5) where the power to order the change to CA is conferred upon NCLT - a quasi-judicial Tribunal which has to follow the 2017 Rules. There the norms for refusing or grant of permission were also not prescribed and every thing depended upon the executive's whim & caprice. Here, NCLT has to be "satisfied" and then only it "may" order the compan....
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....the blow suffered by the initial decision, it is difficult to contemplate complete restitution through an appellate decision. And, therefore, there is manifest need to ensure that there is no breach of fundamental procedure in the original proceeding, and to avoid treating an appeal as an overall substitute for the original proceeding. 190. Opportunity to Cross-Examine and supply of Documents is also a relevant facet. Adv. Khambatta has relied upon (2012) 7 SCC 56. P. Sanjeeva Rao vs. State of Andhra Pradesh and (2010) 6 SCC 1- Sidartha Vashissht vs. State (NCT of Delhi) to press imporatnce of supplying the documents & of cross-examination in such matters. As we find debarment or disqualification under S.140(5)- second proviso, getting attached automatically due to the statutory scheme, we find this argument unwarranted at this stage. NCLT has its own Rules & rule 34 also enables it to devise suitable procedure to meet the principles of natural justice. 191. To understand why doctrine of double jeopardy is not attracted, difference between the disqualification & punishment also need to be briefly stated. Disqualification is generally for a fixed term prescribed by the Legislation....
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....ion may also be additionally provided for in same law or other law. 193. We find that the Companies Act, 2013 sets out one more disqualification for the Chartered Accountant who has volunteered & become a Company Auditor. When there are already provisions therein for disciplinary action and for offences, this measure for disqualification needs to be strictly construed in the perspective in which it finds place in the scheme of 2013 Act. The Companies Act, 2013 itself contains a provision like S. 132 for disciplinary proceedings against such CAs in appropriate cases. Not only this the criminal prosecution is also prescribed vide its S. 447. But considering the important position which such CA ie company auditor occupies, in deserving cases, the Parliament has found it necessary to provide for his immediate removal. It is like an employer suspending the employee whenever the facts warrant it. It may also be compared with a private litigant replacing his lawyer if he doubts anything. Vide S.140(5), an interim arrangement has been made and the Company can be asked to change such company auditor ie CA. 194. Obviously such a direction can be opposed by the company or the concerned audi....
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....ns of the company in NCLT nugatory. Because of this salutary object in adding S. 140(5) to the 2013 Act, procedure as elaborate as followed by NFRA is not prescribed there. Though NCLT Rules give same powers as NFRA to NCLT, very rarely there should be or would be an occasion to take recourse to it as any self respecting CA or Company will find themselves not free to raise frivolous or false pleas in defence and the selfesteem would force them to honorably part company with each other. 197. In the light of the above, we find it appropriate to mention the relevant findings which crystalize out of our deliberations in the matter. I. Thus one can not overlook the fact that the Parliament in 2013 Act made provision for NFRA to consider the cases of professional misconduct and for a criminal trial under its S. 447, an agency like NCLT formed under S. 408 has been given a power to issue a direction to change the CA. It is also apparent that NCLT has not been given power to debar or disqualify or impose any punishment on such CA. II.. Proviso to S. 132(4)(a) of 2013 Act shows that after NFRA initiates investigation into the professional misconduct, the Institute of Chartered Accounta....
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....& also available to CA when NCLT initiates the exercise towards directing the company to change him. XII. In legal disputes or controversies, NCLT is better placed or then superior authority in the scheme of 2013 Act when compared with NFRA. Purpose of this power given to it is not to expose the CA to one more disciplinary measure. The power under S.140(5) is more of curative nature. XIII. When the 2013 Act recognizes ICA (Institute of the Chatered Accountants) as the disciplinary body to regulate the profession of CA and its power to punish erring CA, and then gives power to NFRA to proceed against CA in specified cases as also to punish, it is difficult to hold that very same power can be read in S. 140(5) with NCLT. The Parliament can not be presumed to have created multiple agencies with same power. However as NCLT steps in to break the unholy nexus between the company & CA, the Parliament has felt need to give effect to it immediately. Parliament has therefore restricted the debarment only in matters where the CA does not realize this and forces the NCLT to pass the final orders. XIV. S. 132 of 2013 Act deals with the professional misconduct and not with criminal offence....
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....herefore must be executable (executory) and if the CA has already ceased to be such CA, that final order can not be passed as he can not be or need not be changed. XXII. If despite such CA ceasing to be the CA of concerned Company, need for passing of a final order to change him is read into scheme of S. 140(5), it would overlook the absence of need to pass final order and violate its language. NCLT has been given the discretion whether to pass that final order or not, even after reaching the "satisfaction" and legislative wisdom behind it will be lost. It will introduce a discordant note in the scheme of S. 140 itself. XXIII. Second proviso speaks of a "final order" and question is whether it needs to be construed in contradistinction with first proviso which contemplates passing of an urgent order within 15 days on application of Central Government prohibiting the "suspect auditor " to continue with audit work thereby enabling the Central Government to substitute him. This order under first proviso, according to the respondent Union of India is an interim order. According to UOI, the words "final order" in second proviso are to be understood with reference to this "interim" o....
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....lluded together and hence, the company may not remove him under S.140(1) & CA may not resign under S.140(2). Thus NCLT may also force such unwilling partners to part company in appropriate cases. XXXI. Threat of disqualification is only to expedite the change of CA as the "satisfaction" which triggers said jurisdiction is of a superior authority like NCLT. Intention is not to punish, but to prohibit a CA with prima facie dubious record to continue and to see that concerned Company appoints another CA of its choice as per law. XXXII. "Satisfaction" of NCLT which triggers direction to change CA under section 140(5) is not of same standard as required by the words "where professional or other misconduct is proved" in S. 132 which exposes the CA to punishment for professional misconduct. XXXIII. Proof under S. 132(4)(c) obliges a finding reached in adherence to well settled principles & after due procedure which can be objectively evaluated. "Satisfaction" under S. 140(5) may not warrant that exercise & that higher dgree of application of mind & proof. Said "satisfaction" has to be the subjective satisfaction of the NCLT. XXXIV. As such "satisfaction" is reached by the superior....
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....not mean "shall". Only situation in which the final order may not be passed is ceasing of the subject CA as company auditor of that particular company. XXXVII. Second proviso to S. 140(5) needs to be construed in this background. It accepts the fact that NCLT may not be required to pass "final order" in all cases. It therefore only operates when NCLT after giving an opportunity to effect change, is required to pass final order against CA ie over-rule his objection & direct the Company before it to change him. If this hearing and order is avoided, said second proviso will never be attracted at all. This debarment is a more stringent measure since it is qua all other companies and not restricted to one company before NCLT. Additionally, such final order also exposes him to possibility of prosecution under S. 447. XXXVIII. In suitable cases, even after such change of CA, the earlier CA, Company its directors or the officers can be proceeded against under S. 132, S.447 or Chartered Accountants Act or the other provisions of the Companies Act. Therefore only S. 140(5) begins with words "without prejudice to the other provisions". XXXIX.- The second proviso warrants debarment for a....
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....inal order of changing the CA. Parliament has devised a mechanism to expedite that action and chosen to fasten the disqualification & its period, both statutorily, without leaving any scope for discretion in any body. It therefore is not like a punishment which can be imposed at the end of the disciplinary proceedings for an established professional misconduct or for a proved criminal offence, at he end of trial. There the disciplinary authority or the Court has choice to select the nature or quantum of punishment. XLV. It is obvious that as CA is not to be dealt with or punished under S. 140(5), he is being replaced only in case of a company where the NCLT is satisfied about the need to replace. While devising a mechanism to accelerate the change, the Parliament could not have forced companies not party before NCLT to change such CA and it could not have ordered CA to give up all existing assignments. Therefore only the debarment or disqualification is for future ie it does not unnecessarily disturb the existing arrangements between such CA and his other client companies. This scheme evolved by the parliament therefore can not be assailed on the ground that it does not disassoci....
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.... its excess and also it can not assume the jurisdiction by taking recourse to the deeming fiction about the Company Auditor continuing in office and available for disqualification of debarment despite being rotated out or having resigned, also appears to be well founded. Judgment of Hon. Apex Court in B. Himmatlal Agrawal vs. Competition Commission of India - 2018 SCC online SC 574 in para 8 supports this contention. LI. The very fact that subjective satisfaction reached by NCLT is not expected by the Parliament to always translate itself into an order of change of CA, points out the necessity to consider the intervening events like the resignation of subject CA. If conduct which led NCLT to reach its satisfaction are only determinative & liability on the CA gets fastened on said date, there was no reason for the Parliament to confer such discretion. Contentions revolving round the date of initiation of that action by NCLT, rights getting crystallized on that date and relevance or otherwise of events like resignation subsequent thereto and all case-law cited by the respective parties, therefor, with respect, does not call for appreciation here. LII. Similarly the argument of th....
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.... appropriate prayers & demand such opportunity as felt fit by him. Grievance about the difference in procedure prescribed for misconducts in 2013 Act or the Chartered Accountants Act on one hand and the procedure under S. 140(5) on the other hand, therefore is misconceived. The CA aggrieved by denial of any opportunity, can always point out the prejudice suffered. We therefore do not find it necessary to dwell upon the details of other procedures including the charts comparing it made available by the Petitioners to drive home their contention. Contention that High-Court while functioning as company court had the statutes like CPC, Company Court Rules or the Appellate Side Rules to guide it while NCLT does not have the same, is not at all relevant. Suraj Mall Mohta and Co. vs. A. V. Visvanatha:(supra-paragraph Nos.2, 14 and 15) relied upon by Advocate Robin Jaisinghani to highlight importance of uniform procedure is also not attracted here since the cases of tax evaders under different sections of the Income Tax Act are dealt with in that precedent. Art. 14 is held to warrant same procedure and rules of evidence for all tax evaders. Here the object under S. 140(5) is entirely diffe....
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....l on it. NCLT proceeding as if the debarment is the object behind S. 140(5) and using the theory of deemed continuation of the CA though he had been rotated out or resigned, therefore is an error apparent which must be corrected in exercise of its extraordinary jurisdiction by this Court. 198. Discussion undertaken by us & our findings supra show the object behind enacting S.140(5) of 2013 Act. It is sufficient to see that effort to work out inconsistency between S. 140(5) of 2013 Act & the Limited Liability Partnership Act, 2008 by one of the petitioners can not be countenanced. The petitioners themselves point out that the Company Law Committee set up by MCA in its report issued on 14.11.2019 explained that debarment of a firm has to be an exception rather than a rule. 199. The submissions on double jeopardy that the other proceeding need not be before the court of law, judgment of Hon'ble Apex Court reported at Maqbool Hussain Versus State of Bombay and Union of India and another Vs. Purushottam wherein the Hon'le Apex Court also United States Supreme Court Judgment in Hudson vs. United States are not relevant since the debarment in question does not operate on fraud or on any....
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....n as quasi-criminal. 201. Normally as per S. 210 of 2013 Act, the investigation into affairs of the company can be conducted by the Central Government through the Inspectors appointed by it. For the present controversy following sections in the 2013 Act assume importance. Section-211. Establishment of Serious Fraud Investigation Office.- (1) The Central Government shall, by notification, establish an office to be called the Serious Fraud Investigation Office to investigate frauds relating to a company: Provided that until the Serious Fraud Investigation Office is established under sub-section (1), the Serious Fraud Investigation Office set up by the Central Government in terms of the Government of India Resolution No. 45011/16/2003-Adm-I, dated 2nd July, 2003 shall be deemed to be the Serious Fraud Investigation Office for the purpose of this section. (2) The Serious Fraud Investigation Office shall be headed by a Director and consist of such number of experts from the following fields to be appointed by the Central Government from amongst persons of ability, integrity and experience in,- (i) banking; (ii) corporate affairs; (iii) taxation; (iv) forensic audit; (v)....
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.... investigation in the manner and follow the procedure provided in this Chapter; and submit its report to the Central Government within such period as may be specified in the order. (4) The Director, Serious Fraud Investigation Office shall cause the affairs of the company to be investigated by an Investigating Officer who shall have the power of the inspector under Section 217. (5) The company and its officers and employees, who are or have been in employment of the company shall be responsible to provide all information, explanation, documents and assistance to the Investigating Officer as he may require for conduct of the investigation. (6) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), [offence covered under Section 447] of this Act shall be cognizable and no person accused of any offence under those sections shall be released on bail or on his own bond unless- (i) the Public Prosecutor has been given an opportunity to oppose the application for such release; and (ii) where the Public Prosecutor opposes the application, the court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence a....
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....entral Government. (13) Notwithstanding anything contained in this Act or in any other law for the time being in force, a copy of the investigation report may be obtained by any person concerned by making an application in this regard to the court. (14) On receipt of the investigation report, the Central Government may, after examination of the report (and after taking such legal advice, as it may think fit), direct the Serious Fraud Investigation Office to initiate prosecution against the company and its officers or employees, who are or have been in employment of the company or any other person directly or indirectly connected with the affairs of the company. (15) Notwithstanding anything contained in this Act or in any other law for the time being in force, the investigation report filed with the Special Court for framing of charges shall be deemed to be a report filed by a police officer under Section 173 of the Code of Criminal Procedure, 1973 (2 of 1974). (16) Notwithstanding anything contained in this Act, any investigation or other action taken or initiated by Serious Fraud Investigation Office under the provisions of the Companies Act, 1956 (1 of 1956) shall contin....
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....en the Central Government calls for the interim investigation report, there is nothing in S. 212(14), which prohibits the Central Government from considering it. VIII. Though our attention has been drawn to the portions of report which states that investigation into affairs of other companies or into cross-check or cross linkages in their accounts is still not over, that by itself does not mean that said report is incomplete & not conclusive on any facet of the crime. If there are large number of accounts/entries to be verified, a report after investigation into some entries stating that the fraud has been committed, can not be viewed as incomplete or inconclusive. If such few instances of fraud are sufficient to support the charge, such report, though not prepared after completing the investigation into all affairs of the company, can still be looked into by the Central Government under S.212(14). IX. The Petitioners urge that the report is inconclusive &further investigation is bound to impact or negate the conclusions recorded therein. The contents of the said report show that findings therein may be contingent upon the verification of cross linkages of other group companies....
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....ho is alleged to have prepared a processing note. XV. Superior nature of responsibility cast upon that officer/authority & degree of care to be taken is demonstrated by the provision made by the Parliament for obtaining the legal advise before taking such decision on the report of the SFIO. XVI. It therefore follows that "report" perused by the Central Government and persuading it to issue the "direction", therefore only must be filed for framing of charges. XVII. Respondent SIFO admits that the Court has not taken cognizance of the report. In these facts, if cognizance is not taken, the Court may not have power to remand & the detention of the Petitioner director may not be legal. However, in present matter, we are not required to answer this question. XVIII. CrPC is made applicable to the proceeding before the Court & if in absence of cognizance, there is no such proceeding, S. 167 may not apply to investigation if chapter XIV in 2013 Act contains completes code on the investigation. Arguments on default bail by petitioner director therefore may be misconceived. However, we are leaving this issue open in present matter. XIX. As the respondents do not plead on affidavit ....
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.... and the prosecution has to fall to ground. 1948 ILR 316 PC-Gokulchand Morarka vs. King Emperor at pages 326 & 328 are also relied upon to urge that the sanction is a condition precedent for prosecuting the petitioners. If sanction is defective, the trial court does not become a court of competent jurisdiction. Support is also drawn from AIR 1949 PC 264. Yusofalli Mulla vs. King Emperor para 15. (1979) 4 SCC 172. Mohd. Iqbal Ahmed vs. State of A.P. para 3 to urge that case without proper sanction is void ab initio, (2000) 8 SCC 500- Abdul Wahab Ansari vs. State of Bihar, para 7 & 8 which is case of no sanction, (2005) 8 SCC 370-State of Karnataka vs. Nagrajaswamy, para 15 & 19 reaching same view independently, are also pressed into service. Division Bench judgment of this Court in 2017 SCC online Bom 9434-Ashok Chavan vs. His excellency Shri Ch. Vidyasagar Rao relying upon this law and considering the order in review granting sanction particularly paragraphs 63 to 66 & 68 is also relied upon. Paragraphs 38,39, 45, 47 & 48 in (2007) 1 SCC 1 Praksh Singh Badal vs. State of Punjab & Haryana is also explained with contention that in matter before us, no distinction can be made between ....
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....tiated on the basis is therefore void and unsustainable. 208. Adv. Ponda for the petitioner Director has submitted that the sanction or approval sought by SFIO is not to the final report but to an interim report and this step by SFIO as also respondent no. 1 Union of India through MCA is fraud on S. 212 (12) & (14). The fact that a report has been prepared by SFIO and made over to the MCA is not in dispute. Respondent no. 1 Union of India claims that it has considered it and directed SFIO to lodge the prosecution. This direction dated 29.5 2019 is also on record. 209. Report made over to UOI by SFIO does not label itself as an interim report and on record, there is copy of one more report also prepared by SFIO which expressly puts a label as "interim report" on said report. S. 212 (11) empowers central government to requisition & obliges SFIO to submit "interim report". No arguments have been advanced before us on the purpose behind this power and what the central government can do with it. The central government may appreciate the progress made or developments seen in SFIO's report. There appears to be no bar for central government to treat it in terms of S. 212(14) and proc....
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....he respondents argue otherwise. SFIO states that description of his report by MCA does not estopp him from urging that it is not an interim report and from placing the truth before any Court or Tribunal. 211. Above rather confusing state of affairs shows the unwillingness on part of the respondents to bring on record the best evidence viz. material which will result in clarifying the facts and instead, an attempt to project the same using some adjudicatory principles. It is humanly impossible to read & appreciate such a large report of the SFIO, apply mind & give the appropriate directions within 30 hours. Respondent 1 UOI claims that two officers independently & separately read all these papers running into about 756 + 32,000/ pages and applied mind to it within 30 hours. Assistance of a processing note prepared for that purpose was also taken. In absence of such processing note & the responsible affidavit of the concerned competent person/s, it is difficult to accept this submission. 212. Even the contention that the reference in pleadings to report of SFIO as an "interim" one is an inadvertent error or a loose description, is not supported by any responsible affidavit. 213. R....
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....t is seen that such proceedings before the special court commence here after the directions u/s. 212 (14) to SFIO when SFIO files a report in such special court. This report shall be after completion of investigation by SFIO. Such report shall make out a case for framing of charge. CrPC applies to proceedings before the Court and there is no express provision extending it to the investigation by SFIO in Chapter XIV of 2013 Act. 216. Chapter XIV in 2013 Act deals with Inspection, Inquiry & Investigation. Powers conferred thereunder to call for information, to inspect books & conduct inquiries, search & seizure, power to investigate under S. 210 and 213 into affairs of Company, Establishment of SFIO and his procedure, procedure & power of Inspectors under S. 217, seizure u/s. 220, provision for freezing of assets and imposition of restrictions upon securities, investigation to continue though steps towards voluntary winding up are initiated and other sections show the complete scheme which may not have been required if CrPC was to fully apply. S. 212(2) gives primacy & exclusive powers to SFIO and restrains all other agencies from proceeding further with any such investigation. Spec....
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....and the accused is entitled to be released on bail, if he is prepared to and furnishes the bail as directed by the Magistrate.' (Uday Mohanlal case12, SCC p. 473, para 13)" 38. This Court also dealt with the decision rendered in Sanjay Dutt9 and noted that the principle laid down by the Constitution Bench is to the effect that if the charge-sheet is not filed and the right for "default bail" has ripened into the status of indefeasibility, it cannot be frustrated by the prosecution on any pretext. The accused can avail his liberty by filing an application stating that the statutory period for filing the charge-sheet or challan has expired and the same has not yet been filed and therefore the indefeasible right has accrued in his or her favour and further the accused is prepared to furnish the bail bond." This judgment or other judgments like State of Uttar Pradesh Vs. Lakshmi Brahman and another, : Raj Kishore Prasad Vs. State of Bihar and anr., Hardeep Singh Vs. State of Punjab , A.S. Gaurava and anr. Vs. S.N. Thakur and anr & Brahman & another vs. State (supra) need not be dealt with in present matter. 219. To evaluate the arguments on non-application of mind by the Central Go....
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....ja vs. State of Gujrat (supra) is the case where the DSP did not exercise the jurisdiction vested in him by the statute and did not grant approval to the recording of information under TADA in exercise of his discretion but it was found to be a clear case of exercise of power on the basis of external dictation. 221. Mansukhlal Vithaldas Chauhan vs. State of Gujrat, paragraphs 17 to 19 show the effect of non-application of mind and how it vitiates the sanction itself and the consequential prosecution has to fall to ground. The sanctioning authority has to consider the entire relevant material which implies application of mind. Its order must disclose that exercise. This exercise can be proved by extrinsic evidence by producing all files before the Court in support of the fact that entire relevant material was then placed before the sanctioning authority. The discretion or freedom with said authority to reach its decision independently can not be encroached upon. 222. We need not dilate more on this aspect since the rival arguments on status of SFIO's report itself show the absence of application of mind to relevant facets having bearing on it. The direction by the Central Gove....
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....hence, prayer cl. (a) is rejected. B. Company petition no. 2062 of 2019 filed by Union of India (MCA) before NCLT on 10th June 2019 is held not tenable qua these petitioners after M/s BSR resigned as statutory auditors of IFIN on 19/06/2019. C. Order dated 09/08/2019 passed by the NCLT rejecting the objection of the petitioner dated 14/07/2019 is quahed & set aside to that extent. MA 2505 & 2506 of 2019 filed by these Petitioners in NCLT are accordingly allowed. D. Direction under S. 212(14) of the Companies Act, 2013 dated 29/05/2019 issued by respondent no. 1 Union of India to respondent no. 2 SFIO is unsustainable and it is quashed & set aside. The consequential prosecution lodged by the respondent no. 2 SFIO vide Cr. Complaint no. CC 20 of 2019 on the file of Special Court (Companies Act) and Additional Sessions Judge, Greater Mumbai; is therefore not maintainable and it is also quashed & set aside. E. Petitions are partly allowed & disposed of. Rule made absolute accordingly with no orders as to costs. WPs 5023, 5035 & 5036 OF 2019. A. S. 140(5) of the Companies Act, 2013 is not unconstitutional and hence, prayer cl. (a) is rejected. B. Direction under S. 212(14) of the....