TaxTMI 
TaxTMI 
2019 (7) TMI 1737
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..... Nihar Mody, CS Omkar Deosthale. ORDER Shri V. P. Singh, . MA 2071/2019 has been filed by Union of India, Ministry of Corporate Affairs, seeking direction to implead the proposed Respondent Nos. 321 to 343 in CP No.3638/2018. 2. The applicant contends that due to continuous failure of the Infrastructure Leasing and Financial Services Ltd. (IL&FS) (Respondent No. 1), to service its debt and imminent possibility of contagion effect in the financial market, the Applicant-Petitioner, at the request of Department of Economic Affairs, filed Company Petition No. 3638/2018 under Sections 241 and 242 of the Companies Act, 2013 before this Tribunal inter alia seeking suspension of the then Board of Directors of Respondent No. 1 and further seeking restraint on alienation of moveable and immoveable properties of the respondents named therein during the pendency of investigation into the affairs of Respondent No. 1 and its subsidiaries, which had been ordered to be carried out by the Serious Fraud Investigation Office (SFIO) vide order dated 30/09/2018, under Section 212(1)(a) & (c) of the Companies Act, 2013. The thrust of the aforementioned Petition is still pending 3. The ap....
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....rd of Directors constituted a Committee of Directors ("CoD") which was empowered to take decisions pertaining to the operations of the said Companies, amongst others. The said CoD, in abuse of their powers, through various acts including circuitous transactions increased the debt burden across the Respondent No. 1 group. In other words, the said suspended Directors acted as the controlling will and mind of the Respondent No. 1 group. (b) Further, hefty salaries were drawn by the erstwhile suspended Board of Directors which increased despite the poor financial performance/condition of Respondent No. 1 group that too without proper authorization under law. (c) The intent was to show profitable financials at the holding company and at immediate subsidiary levels by hiding depleted financial conditions, in order to avoid breach of regulatory ceiling of leverage, obtain high credit ratings to access market funds, and reap personal benefits by way of high managerial remunerations; (d) The Respondent No. 1 group procured funds from the market through short term instruments and invested in its group companies by way of giving long term loans and advances, which w....
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....of further respondents in the Company Petition No. 3638/2018, pending before this Tribunal. These respondents were persons named as accused in the SFIO's Interim Report dated 30/11/2018. In addition to the above application, the Applicant-Petitioner simultaneously filed Miscellaneous Application, seeking certain reliefs under Sections 242(4), 246 read with Section 339 of the Companies Act, 2013 against the additional respondents namely Mr. Hari Sankaran, Mr. Arun K. Saha, Mr. Ravi Ramaswami Parthasarthy, Mr. Vibhav Kapoor, Mr. K. Ramachandra, Mr. R.C. Bawa, Mr. Pradeep Puri, Mr. S. Rengarajan and Mr. Mukund Sapre. Interim reliefs were sought by the Applicant-Petitioner against the said respondents inter alia seeking disclosure of moveable and immoveable properties/assets and further restraining them from mortgaging or creating charge or lien or third party interest or in any way alienating, the moveable or immoveable properties owned by them, including jointly held properties. The said application was allowed by this Bench vide order dated 3.12.2018. Interim order was granted against Respondent Nos. 2, 3, 9 and 313 to 318 to disclose their moveable and immoveable properties/assets,....
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....any petition no. 3638 of 2018 in the interest of justice. 10. It is further stated that the persons named in para 12 of the MA participated in the worsening of the financial condition of the IL&FS and therefore, it is imperative that the above named persons may be arrayed as Respondent Nos. 321 to 343 in the original company petition no. 3638/2018 as they are also necessary and proper parties in the matter, being hand glove with the management of the IL&FS Financial Services Limited. 11. It is further stated that the above mentioned additional Respondents are necessary and proper parties to the original company petition and as such, it is essential they be arrayed as Respondent Nos. 321 to 343 in Company Petition No. 3638/2018. 12. It is further stated that it is imperative that immediate action against these persons need to be taken, in order to effectively support the investigation already being carried on into the affairs of Respondent No. 1 and its subsidiary companies, through the Serious Fraud Investigation Office. 13. The applicant contends that impleadment of the proposed Respondents is absolutely necessary to render a complete and effective adjudication on the ....
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....e Haskins & Sells LLP, Lotus Corporate Park, Goregaon (E), Mumbai - 400063. 339 (Proforma respondent) 20. Anuj Rawat At: 404, Bright, City of Joy, ACC Road, Mulund (W), Mumbai - 400080. 340 (Proforma respondent) 21. Payal Mukeshbhai Rathod At: C - 309, Saidham CHSL, Vaisahli Nagar, Dahisar (E), Mumbai - 400068. 341 (Proforma respondent) 22. A P Shah Associates At: 7/11, Kalyan Building, Khadilkar Road, Mumbai - 400004. 342 23. A P Shah At: 7/11, Kalyan Building, Khadilkar Road, Mumbai - 400004. 343 14. Respondent Nos. 321, 324, 325, 326, 327, 335, 337, 338, 339 and 340 have filed their reply against the proposed Impleadment application. 15. Respondent Nos. 324, 337, 338 and 339 have filed their affidavit in reply to the application filed by the Petitioner that M/S. Deloitte Haskin & Sells LLP (hereinafter "DHS LLP") ceased to be the auditor of IL&FS Financial Services Limited ("IFIN") with effect from the date of the Annual General Meeting of IFIN as relevant for the end of the financial year 2017-18, by operation of law, on expiry of the term as the auditors of IFIN in terms of Section 139 of the Companies Act, 2013. It is further state....
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....("Deloitte"). Deloitte had been the long-standing Statutory Auditor of the Company for 9 years and was also Statutory Auditor of several other group entities including of the parent company, Infrastructure Leasing and Financial Services Limited ("IL&FS") (from 2007 till 2017) and of IL&FS Transportation Networks Limited ("ITNL") (for over ten years and up to 2017). 18. It is further contended by the R325, R340 and R327 in their replies that they were not part of the management of any IL&FS group entity, including IFIN, at any point in time. BSR, as the auditor has no role in so far as operations of IFIN are concerned. As an auditor, BSR only audited the financial statements of IFIN, which were prepared by the management of IFIN. BSR as an auditor performed its duties in accordance with applicable audit standards and procedures. Further, the above mentioned proposed respondents could not have taken any decisions in so far as the affairs and operations of IFIN are concerned and hence, it could not have participated in, whether directly or indirectly, any acts of alleged oppression or mismanagement, at the level of Respondent No. 1 or any of its group entities. It is further stated....
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....gorund that as per Section 241(2) of the Companies Act, 2013, Petitioner/Union of India has powers to apply to this Tribunal for an order under Section 241-242 of the Companies Act, 2013 only in the event "it is of the opinion that the affairs of the company are being conducted in a manner prejduicial to public interest.' However, in the present case, the allegations and averments made in the said Application pertain exclusively to past events and there is no allegation or averment Whatsoever with respect to the existing and continuing mismanagement of IFIN as on the date of filing the said Application. 21. On the contrary, the Applicant has acknowledged that vide order dated 01/10/2018, this Hon 'ble Tribunal was pleased to replace the existing board of IFIN with government nominated directors, 'who have been tasked with the orderly resolution of the Respondent no. I and its group companies. In the circumstances, when there is no allegation or averment regarding the affairs of the company 'being conducted in a manner prejudicial to public interest', there is no reasonable basis or justification for impleading the proposed respondents as a party respondents to the C....
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....Directors ("CoD"). It is further stated in the reply that he had never been on the Board of Directors of IL&FS and had no decision or policy making role in the IFIN organization. It is further stated in the reply that the present application is not maintainable. 30. Proposed respondent No.335 in the reply filed has stated that he was appointed as an Independent Director of IL&FS Financial Services Ltd (IFIN) on 31.3.2015 and resigned from that position on 20.9.2018. It is stated in the reply that there is no valid authority on the basis of which, the Petitioner/Regional Director has sought his Impleadment to the Company Petition. It is further stated in the reply that perusal of the SFIO's Report dated 28.5.2019 demonstrates that the SFIO has neither charged him with any wrong doing nor has it recommended any action to be taken against him. As such, no question arises of the petitioner seeking his Impleadment as a Respondent to the petition. 31. Heard the argument of the Ld. Counsel for the Parties and perused the record. Application for Impleadment of the proposed Respondent has been moved by the Union of India Ministry of Corporate Affairs mainly on the ground of two interi....
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.... mismanagement by other Respondents within the framework of Sections 241 and 242 of the Companies Act, 2013 and as such we are unable to accept the submissions made by the learned Counsel for the Appellants that statutory Auditors are necessary parties to the Petition under these provisions". On the basis on above law laid down by the Hon'ble NCLAT, Senior Counsel representing the Auditors has stated that Auditors cannot be necessary party to the Petition filed under section 241-242 of the Companies Act, 2013 relating to the act of oppression and mismanagement. 36. On perusal on the facts of the above mentioned case, it is clear that in the petition filed under Section 214-242, 243 & 244 of the Companies Act, 2013, in the Array of parties, inter alia, the Statutory Auditors- Respondent Nos. 5 & 6 were added. 37. The said Respondents filed I.A. No. 07/2017 to delete them from the array of parties claiming themselves to be only statutory Auditors and that they have already resigned and they are not necessary parties in the Petition. The Tribunal has allowed the application and deleted the Respondent Nos 5 & 6 from array of parties. 38. The fact further shows that there was a....
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....aint shall, unless the Court otherwise directs, be amended in such manner as may be necessary, and amended copies of the summons and of the plaint shall be served on the new defendant and, if the Court thinks fit, on the original defendant. 45. Thus, it is clear that Order 1 Rule 10(2) gives discretion to the court to struck out any of the parties of the case or to add any of the party whose impleadment is necessary in order to enable the court to effectually and completely to adjudicate upon and settle all the questions involved in the suit. After passing such order by the court, Rule 1094) provides that plaint should be amended and copy of the amended plaint to be served. 46. It is also important to point out that Order 1 Rule 3 of CPC provides criteria of persons who may be joined as defendants. It shows that all persons may be joined in one suit as defendants where- (a) any right to relief in respect of, or arising out of, the same act or transaction or series of acts or transactions is alleged to exist against such persons, whether jointly, severally or in the alternative; and (b) if separate suits were brought against such persons, anycommon question o....
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....ng concern. 50. It is important to point out that provision of Class cation suit under Section 245 of the Companies Act, 2013 has been notified after filing of this Petition whereas in a public interest under Section 241(2) of the Companies Act, 2013, Union of India was authorized to initiate action under this Chapter which is also class action suit/petition. 51. In case of Ramesh Hirachand Kundanmal vs. Municipal Corporation of Greater Bombay, Hon'ble Supreme Court has held that "Sub-rule (2) of Rule 10 gives a wide discretion to the Court to meet every case of defect of parties and is not affected by the inaction of the plaintiff to bring the necessary parties on record. The question of impleadment of a party has to be decided on the touchstone of Order 1 Rule 10 which provides that only a necessary or a proper party may be added. A necessary party is one without whom no order can be made effectively. A proper party is one in whose absence an effective order can be made but whose presence is necessary for a complete and final decision on the question involved in the proceeding. The addition of parties is generally not a question of initial jurisdiction of the Court but of a....
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....oterie to conceal material information/facts, and in fraudulently falsifying the books of accounts and thereby financial statements from FY 2011-12 to 2017-18. The auditor knowingly did not report the true state of affairs of the company, particularly negative NOF and negative CRAR, had resulted in the causing loss to creditors of the company who had lent and invested in the NCDs. The end-use certificates for utilization of bank finances are issued by Ajay P Shah, Chartered Accountant without verifying the documents. He stated that the filled format of end use certificates to be signed by him were sent to him on email. Hence, it can be concluded that the end use certificates were tutored by the management of the company. A P Shah had helped the management by issuing the fraudulent end use certificates. "AUDIT COMMITTEE The Audit Committee members were aware of the stressed asset portfolio, the modus operandi used for granting loans to group companies of existing defaulting borrowers in order to prevent their being classified as NPA, non-receipt of the fees and income specially from the group entities, funding of the interest income, funding of its groups ....
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....express such opinion, the auditor is required to obtain reasonable assurance as to whether the financial statements as a whole are free from material misstatements. Reasonable assurance is a high level of assurance. It is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (i.e. the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level. These auditors were responsible for verification, auditing and reporting that the financial statements reveal a true and fair view. During the course of investigation, it was established that auditors of IFIN did not perform their duties diligently. Investigation also revealed that: * The auditors, despite having the knowledge of funding of the defaulting borrowers for principal and interest payments, which was prejudicial to the interest of the company and its creditors, besides having awareness of the impact of the same on the financial statements, the auditor failed to report in the auditor's report for FY 2013-14 and 2017-18 (non compliance of Section 143(1)(a)); * The loans which were tra....
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....ion "Assessing the Environment of the entity" under "Audit of Lending by DHS for last 10 FYs" and "Auditing of Lending by BSR for FY 2017-18".  SA 250 - Consideration of Laws and Regulations in an Audit of Financial Statements is dealt in the Section "Failure to consider the Laws and Regulations of the Auditee"  SA 570 Going Concern is dealt in the section "Auditors Responsibility under Standards of Auditing in Auditing in the Light of RBI Inspection" It is therefore, observed that above mentioned auditors of IFIN did not use professional skepticism to ensure true and fair disclosure of state of affairs of the companies. They in-fact, colluded with officials of the companies in order to conceal their fraudulent activities and thus, they had failed to perform their duties as required from the u/s 143 of the Companies Act, 2013 and, hence, all of them are also liable to be prosecuted for the offence punishable u/S 147 of the Companies Act, 2013. ACCUSED PERSONS Name Years/Period Udayen Sen 2017-18, 2016-17 Kalpesh Mehta 2015-16, 2014-15, 2013-14 Sampath Ganesh 2017-18 Deloitte Haskins and Sells LLP 2017-18, 2....
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....ment of the IFIN for Siva Group of Companies. The management of IFIN in violation of RBI guidelines devised an illegal strategy for IFIN to lend the money to its group company and one of the other modus operandi used by Mr Milind Patel and others, whereby they decided to support group entities by lending through vendors/third parties. 60. Regarding proposed respondent No.322, Mr. Rajesh Kotian, it is stated that he was the Deputy Managing Director in IL&FS Financial Services Ltd and from the SFIO report, it is generated that he was aware of the potential problematic accounts which were getting stressed in the succeeding months from the reports generated through the MIS of the IFIN regarding the fraudulent practices adopted by IFIN in order not to let loan/credit facility be classified as NPA. Investigation revealed that loans were approved by management of IFIN for Siva Group of Companies. IT is further said that lending to the group entity IL&FS Transport Network Ltd was in breach of RBI guidelines, the management of the IFIN devised an illegal strategy for IFIN to lend the money to its group companies and one of the other modus operandi used by Rajesh Kotian and others, whereb....
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....y auditors for IFIN from FY 20078-09 to FY 2017-18. Investigation revealed that the auditor knowingly did not report the true state of affairs of the company, particularly negative NOF and negative CRAR, which has resulted in causing the loss to creditors of the company who had lent and invested in the NCDs. This has led to auditor conniving, colluding with coterie to conceal material information and facts, and in fraudulently falsifying the books of accounts and thereby financial statements from FY 2013-14 to 2017-18. 65. The proposed respondent No.327 BSR and Associates LLP is said to be the Joint Statutory Auditors for IFIN for FY 2017-18. Investigation revealed that the auditor knowingly did not report the true state of affairs of the company, particularly negative NOF and negative CRAR, which has resulted in causing the loss to creditors of the company who had lent and invested in the NCDs. This has led to auditor conniving, colluding with coterie to conceal material information and facts, and in fraudulently falsifying the books of accounts and thereby financial statements from FY 2013-14 to 201718. 66. The proposed Respondent No.328 Surinder Singh Kohli is said to be a....
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....e Chairman of the Siva Group of the Companies, and thus, the controlling the will and the mind of the Siva Group of the companies. His companies borrowed money from the IFIN on several instances. However, during the investigation it was revealed that Srivasankaran had personal relationship with Ravi Parthsarthy and Hari Sankran. Investigation revealed that the management of the IFIN abused their position by giving loans to Siva Group of Companies as some of the Companies of Siva Group had failed to repay the earlier loans granted to them by IFIN. 70. The Proposed Respondent 332, Shahazaad Dalal, was said to be a Non-Executive Director on the Board of Directors of IFIN. The independent Directors and CFO of the Company are appointed with objective to help the company in improving corporate credibility and governance standard but they ignored al alarming indicators and failed to save the interest of the company and its stakeholders by not raising of thes issues in the Board Meetings and remained mute spectator. It is revealed that in connivance with each other, the Independent Directors, Directors, CFO of the IFIN, group CFO abused their positions and used various modus operandi to....
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....rs, CFO of the IFIN, group CFO abused their positions and used various modus operandi to continue lending from IFIN to group entities, by causing wrongful loss to IFIN & its stakeholders such as investors and creditors whose money it was misusing for fraudulent lending, which ultimately resulted in ultimate loss to the company, and its creditors. Investigation further revealed that the Audit Committee members and the Independent Directors, Director, CFO of the IFIN and group CFO of the IL & FS were aware of the stressed asset portfolio, the modus operandi used for granting loans to group companies of existing defaulting borrowers in order to prevent their being classified as NPA. 73. With regard to proposed Respondent No. 335 Mr. Uday Ved, SFIO has stated in its complaint before the Special Court at Mumbai that the independent Directors and CFO of the company are appointed with objective to help the company in improving corporate credibility and governance standard but they ignored al alarming indicators and failed to save the interest of the company and its stakeholders by not raising of these issues in the Board Meetings and remained mute spectator. It is revealed that in conn....
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.... and interest payments, which was prejudicial to the interest of the company and its creditors, besides having awareness of the impact of the same on the financial statements, the auditor failed to report in the Auditors' Report for FY 2013-14 to 2017-18. The loans which were transferred by mere book entry has resulted in considering the old loan as closed and new loans did not require provisioning etc and this was an effort to postpone the provisioning, recognition of NPA. 76. The Proposed Respondent No. 338 Mr. Rakesh Kumar Jain, is said to be the Senior Manager in proposed additional Respondent No 326 and was part of the Engagement Team for the audit of IFIN. The investigation revealed that auditors, along with their engagement team for IFIN, did not perform their duties diligently. The auditors, despite having the knowledge of funding of the defaulting borrowers for principal and interest payments, which was prejudicial to the interest of the company and its creditors, besides having awareness of the impact of the same on the financial statements, the auditor failed to report in the Auditors' Report for FY 2013-14 to 2017-18. The loans which were transferred by mere book ent....
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.... the interest of the company and its creditors, besides having awareness of the impact of the same on the financial statements, the auditor failed to report in the Auditors' Report for FY 2013-14 to 2017-18. The loans which were transferred by mere book entry has resulted in considering the old loan as closed and new loans did not require provisioning etc and this was an effort to postpone the provisioning, recognition of NPA. 80. The Proposed Respondent No.342 A.P. Shah Associates. The Proposed Respondent No.343 A.P. Shah is a partner in A P Shah & Associates, Chartered Accountants had provided the service of End use certification to IFIN over years from 2009-10 onwards. SFIO has stated in its2nd Interim Report dated 28.5.2019 that as per the Standards of Auditing (SA) 500 Audit Evidence, the auditor shall design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. When designing and performing audit procedures, the auditor shall consider the relevance's and reliability of the information to be used as audit evidence. When using information produced by the entity, the auditor shall evaluate wh....