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2023 (5) TMI 204
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....ngh, A.S.G. Mr. Aditya Sikka, Adv. Mr. Naman Tandon, Adv. Mr. Samarvir Singh, adv. Mr. Kanu Agarwal, Adv. Mr. Vikash Jha, Adv. Vasudha Vijayshree, Adv. Ritu Anand, Adv. Pratyush Srivastava, Adv. Ms. Sansriti Pathak, Adv. Ms. Bani Dikshit, Adv. Mr. Arvind Kumar Sharma, AOR Mr. Chandra Prakash, AOR Ms. Anannya Ghosh, AOR Mr. Mahesh Agarwal, Adv. Mr. Rishi Agrawala,, Adv. Mr. Rahul Dwarkadas, Adv. Ms. Prachi Dhanani, Adv. Ms. Rishika Harish, Adv. Ms. Niyati Kohli, Adv. Ms. Juhi Bahirwani, Adv. Mr. Pratham Vir Agarwal, Adv. Ms. Rohini Jaiswal, Adv. Ms. Manavi Agarwal, Adv. Mr. E. C. Agrawala, AOR Mr. Aaditya Aniruddha Pande, AOR Mr. Sachin Patil, AOR Ms. Misha Rohatgi, AOR JUDGMENT M. R. SHAH, J. Appeals under consideration: 1. This batch of Criminal Appeals/Civil Appeals raise common question(s) of law pertaining to the interpretation of Section 140(5) of the Companies Act, 2013 (hereinafter referred to as the 'Act, 2013') and the Investigation Report dated 28.05.2019 (hereinafter referred to as the 'IFIN SFIO Report') in respect of IL&FS Financial Services Limited (hereinafter referred to as the 'IFIN'). 1.1 Criminal Appeal Nos. 2305-2307/2022, Criminal Appeal Nos. 230....
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.... 91,000 crores across the IL&FS Group against Rs. 6950 crores in equity share capital and reserves a leverage of at least 13 times. Moreover, in the year 2017-18, the IL&FS Group has shown a loss of Rs. 2670 crores; (b) this debt contagion, prima facie, was on account of inter alia failure of corporate governance across the IL&FS Group and window dressed accounts; and (c) any further defaults would be catastrophic for the well-being of the financial markets and the economy. 2.1 In parallel, the Ministry of Corporate Affairs, upon receipt of a report from the Registrar of Companies under Section 208 of the Act, 2013, directed the SFIO to investigate into the affairs of IL&FS and its subsidiaries. 2.2 The Ministry of Corporate Affairs filed a Company Petition on 01.10.2018 being Company Petition No. 3638/2018 against IL&FS and its the then existing Board of Directors before the National Company Law Tribunal (NCLT) seeking, amongst others, the removal of the then existing Board of Directors of IL&FS and the appointment of a new Board of Directors in place and instead thereof. The NCLT passed an interim order on the same date, i.e., 01.10.2018 superseding the th....
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..... 2.6 The auditors of IFIN (BSR & Deloitte) were given notice of Section 130 petition who opposed the said petition. Order dated 01.01.2019 passed by the NCLT was challenged by one of the ex-directors of IFIN before the National Company Law Appellate Tribunal, New Delhi (NCLAT), which dismissed the appeal vide order dated 31.01.2019. Order dated 31.01.2019 passed by the NCLAT was appealed before this Court. Vide order dated 04.06.2019, this Court dismissed the civil appeal filed by the said ex-director. Thus, this Court upheld initiation of the proceedings by the Ministry of Corporate Affairs under section 130 of the Companies Act, 2018. 2.7 The Reserve Bank of India (RBI) initiated an inspection of the IL&FS and IFIN under Section 45N of the RBI Act, 1934. Pursuant to the investigation/inspection, the RBI submitted an investigation/inspection report dated 22.03.2019 to IFIN. IFIN thereafter issued a notice dated 13.05.2019 under Section 140(1) of the Act, 2013 inter alia on BSR seeking to remove them as auditors. BSR filed a written response to the notice served by IFIN under Section 140(1) of the Act, 2013 denying the allegations in the notice. A hearing was held on 29.05.2....
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....or IFIN. BSR and its engagement partners also filed an application challenging the maintainability of Section 140(5) petition before the NCLT on the ground that BSR is no longer the auditor for IFIN. 2.15 After hearing the auditors (BSR & Deloitte) on the applications challenging the maintainability of Section 140(5) petition, the NCLT passed an order upholding the maintainability of Section 140(5) petition. That thereafter, the BSR filed a writ petition before the High Court, inter alia, challenging the vires of Section 140(5) of the Act, 2013; the directions issued and the order of the NCLT upholding the maintainability of Section 140(5) petition. 2.16 By the impugned judgment and order, though the High Court has upheld the validity of Section 140(5) of the Act, 2013, the High Court has interpreted section 140(5) of the Act, 2013 and has set aside the order passed by the NCLT upholding the maintainability of Section 140(5) petition and has quashed Section 140(5) petition and has set aside/quashed the directions issued by the Ministry of Corporate Affairs and the SFIO and also has quashed/set aside criminal proceedings instituted by the SFIO. Hence, the present appeals. Subm....
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....e High Court erroneously holds that there is non-application of mind since it was improbable that a report of about 750 pages and 32000 pages of annexures could have been considered in 30 hours. Further, the High Court erroneously holds that the relevant facts and documents to demonstrate application of mind have not been placed on record. It is submitted that while doing so, the High court also holds that the existence of a valid sanction can be appreciated in a writ Court and need not wait trial. 3.3 As regards the IFIN SFIO Report, it is submitted that the High Court holds summarily and without even going into the same and erroneously holds that the SFIO Report is incomplete and lacking and therefore Section 212(14) direction is incorrect and/or invalid. 3.4 On interpretation of Section 140(5) of the Act, 2013, Shri Balbir Singh, learned ASG has taken us to the legislative history and legislative intent of Section 140(5) of the Act, 2013. It is submitted that Section 140 of the Act, 2013 is titled as "Removal, resignation of auditor and giving of special notice". It appears in Chapter X of the Act which is titled as "Audit and Auditors". Section 140(1) of the Act, 2013 pro....
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....lication under section 140(5) of the Act shall not be maintainable and/or is not required to be proceeded further. 3.5 Thereafter, Shri Balbir Singh, learned ASG has taken us and referred to the legislative history of Section 140(5) of the Act as under: Legislative History of Section 140(5) of the Act, 2013 Around August 2004, the Government initiated the process of review of the Companies Act, 1956 and drafting of a new Companies Bill to replace the Companies Act, 1956. A concept paper was published on the website of the Ministry of Corporate Affairs on which various comments were received. An expert committee was also constituted by the Ministry of Corporate Affairs under the chairmanship of Dr. J.J. Irani, to make recommendations on provisions of company law. a. Companies Bill 2008 and the Companies Bill 2009 i. After considering the report of the J.J. Irani Committee, the Ministry prepared the Companies Bill, 2008 and introduced the same before the Lok Sabha on October 23, 2008. The 2008 Bill was referred to the Department related Parliamentary Standing Committee (PSC) on Finance for their examination. However, the Lok Sabha was dissolved ....
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....nal liability for auditors. vi. The Report clearly demonstrates that there was a long discussion on the role, responsibility, duties and regulation of auditors and the regulatory and enforcement provisions. Particularly, the Report records that various suggestions were received to make the provisions pertaining to audit and auditors more stringent. Significantly, it was suggested that Clause 123(10) of the 2009 Bill (which provides for removal of an auditor by the NCLT on finding that there is a fraud and corresponds to Section 140(5) of the Act) should be made more stringent and should contemplate that an auditor removed by the Tribunal should not be eligible to be appointed as an auditor of any company for a period of 5 years. The relevant extracts are as follows: "34. Suggestions have been received by the Committee that there is a need to make provisions relating to Audit and Auditors more stringent such as following:- (d) Suitable penalty may be provided in case of contravention of these provisions. (e) (i) Clause 123(10) of the Bill empowers the Tribunal, if it is satisfied that the auditor of a company has acted in a fraudulent man....
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....s Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors: Provided that if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Central government may appoint another auditor in his place: Provided further that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447. Explanation - For the purposes of this Chapter the word "auditor" ....
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.... of audit services. The auditor is prohibited from providing any management service to the Company. It is submitted that the prohibition and restriction created under Section 144 of the Act is primarily to protect the interest of the Company in question and other stakeholders such as lenders and investors and the public at large. 3.9 It is submitted that keeping these provisions and the underlying public policy in the backdrop, Section 140 (5) of the Act, 2013 is to be considered. It is submitted that the plain words of Section 140(5) of the Act, 2013 provide for the NCLT to, either suo motu or on an application made by the Central Government/any person concerned, inquire into/examine the conduct of an auditor or his involvement in a fraud and reach a satisfaction as regards the auditors fraudulent conduct. The provision further prescribes that the satisfaction of the Hon'ble NCLT "may" finally result in a change of an auditor. 3.10 It is submitted that the first proviso to Section 140(5) of the Act is contemplated as an interim or pro-term measure to prevent an existing auditor from continuing and substitute him with an auditor nominated by the Central Government based on a ....
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....ent role and responsibilities and colludes with the management or otherwise perpetrates a fraud. It is submitted that the essence of the provision/section is determination of fraudulent conduct of the auditor. The consequent "removal" contemplated by Section 140(5) of the Act, 2013 is not just as acting as an auditor in one company or the company concerned but from any company for a period of five years. 3.15 It is submitted that therefore the interpretation of Section 140(5) of the Act, 2013 made by the High Court in the impugned judgment and order is just contrary to the object and purpose of enactment of Section 140(5) of the Act, 2013 and, as such, is contrary to the said provision. 3.16 Shri Balbir Singh, learned ASG has submitted that during the course of arguments, the submissions made on behalf of the respondents are as under: a) Section 140(5) of the Act, in light of the other provisions of the Act, is only to incentivize a recalcitrant auditor into resigning. Therefore, if an auditor resigns after the filing of a Petition under Section 140(5) of the Act but before the Hon'ble NCLT pronounces an order on that Petition, the purpose behind Section 140(5) of th....
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....ecause the errant auditor cannot, as on date of the final order, be said to be the auditor of a company due to the first proviso order. ii. there exists no reason for Section 140(5) of the Act to operate in terrorrem or to induce a recalcitrant auditor to resign. This is so since the first proviso to Section 140(5) of the Act operates immediately to effect a change of the auditor/remove the existing auditor after filing of a Petition by the Central Government under Section 140(5) of the Act. In other words, the first proviso would thus be rendered redundant if the intention behind Section 140(5) of the Act is to induce an auditor into resigning. d) The ineligibility to act as an auditor for any company for a period of 5 years cannot be read down to mean "for a period "up to five years". This is so since: i. apprehension or misuse of the provision in future cannot be ground to test the constitutional validity of the provision. [See Madras Bar Association v. Union of India 2021 SCC Online SC 463 (para 101-102)] ii. fraud vitiates everything and the punishment mandates in the statute cannot be varied by examining the length and breadth of the fraud.....
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....s concerned of the audit firm and of the firm jointly and severally. Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable. 3.18 Now so far as the submission on behalf of the respondents that once an auditor resigns, the provisions of Section 140(5) of the Act would cease to apply. Instead, the auditor concerned can be proceeded against under Section 241(3) of the Act and the proceedings pursuant to Section 241(3) of the Act would lead to the same result and the auditor would be held not to be 'fit and proper person' to be appointed in any other office connected with the conduct and management of any company. It is submitted that: a. Section 241(3) and its consequential provisions were introduced with effect from 14.8.2019, which authorized the Central Government to apply to the Tribunal with a request to declare that the persons mentioned in Section 241(3) of the Act are 'not fit and proper persons to hold the office of director or any other office connected with condu....
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....ndered meaningless; (iii) the second proviso to Section 140(5) of the Act is essentially remedial and preventive, though it might incidentally also have a punitive effect. The public purpose / object of the second proviso to Section is clearly to protect companies from being prejudicially affected, by debarring such an auditor, who has been held to have acted fraudulently, from being appointed as an auditor of any company. 3.20 It is submitted that in the facts of the present case, it is pertinent to note that: a) Deloitte was the statutory auditor of IFIN from 2008 till 2018. Deloitte retired by efflux of time in 2018; b) BSR was appointed as the joint statutory auditor in 2017; c) both Deloitte and BSR jointly conducted the statutory audit of IFIN for the Financial Year 2017-2018; d) the Petitioner i.e., the Union of India filed the Petition under Section 140(5) of the Act against both BSR and Deloitte on June 1, 2019. BSR was the statutory auditor at that time. e) this Petition is based on the SFIO IFIN Report which alleges that both auditors i.e., Deloitte and BSR acted in a fraudulent manner. This includes the period when Deloitt....
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....e away the powers given to the Hon'ble NCLT in terms of Section 140(5) of the Act to inquire into the fraud qua Deloitte as well and if found record a satisfaction of fraud against Deloitte in its final order. Therefore, in the facts of this case, the final order and therefore the second proviso can operate against Deloitte and BSR. 3.24 Now so far as quashing and setting aside Section 212(14) direction by the Ministry of Corporate Affairs and the Criminal Complaint filed by the SFIO and the IFIN SFIO Report, it is submitted that the Bombay High Court has, in the Impugned Order, set aside/quashed the 212(14) Direction and the Criminal Complaint and the SFIO IFIN Report on the ground that: a. SFIO IFIN Report is an incomplete report/report on an incomplete investigation and therefore the 212(14) Direction could not be given. The alleged basis of this finding is: (i) a singular paragraph in the SFIO IFIN Report; and (ii) the 212(14) Direction which calls for a further report on certain aspects itself demonstrates that the investigation is incomplete; and b. The 212(14) Direction was given within 30 hours of placing the SFIO IFIN Report before the Central Governme....
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.... auditor/CA pointing out multiple breaches, violations of statutory duties and fraudulent conduct with respect to inter alia functioning of auditors at the relevant point of time. b. The Bombay High Court has proceeded to accept the surface level argument of the respondents that the 212(14) direction was issued within 30 hours which demonstrates non-application of mine without considering the following: i. The 212(14) direction itself demonstrates application of mind from the fact that the direction requests the SFIO to prosecute additional persons whose involvement was discernible from a reading of the SFIO IFIN Report. This would have been possible only if the SFIO IFIN Report had been considered. In fact, the 212(14) Direction also rectifies a typographical error by the SFIO in the charging section applied in the SFIO IFIN Report; ii. The affidavit in reply of the UOI before the Hon'ble High Court provided an explanation/justification for the time taken to process and also set out the process leading up to the 212(14) Direction. As against the Respondent's surface level allegation, the Union of India provided a clear, transparent and cogent response; ....
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.... Section 212(12) of the Act, sets out the detailed and extensive investigation conducted and records conclusive findings against each of the Respondents in the present case. It is submitted that therefore, the stray references to the SFIO IFIN Report as an interim report cannot be accepted to classify the report as an Interim Report. It is submitted that in fact, the only reason for such reference was since the investigation into the affairs of other subsidiaries in the IL&FS Group (apart from IFIN) is on-going. It is submitted that in fact the said position has been appreciated by the Bombay High Court in the impugned order in paragraph numbers 202(VIII) and 202(XII). 3.26 Thereafter, Shri Balbir Singh, learned ASG has taken us to the findings recorded in the SFIO IFIN Report. It is submitted that based on the findings in the Investigation Report, auditors have been charged with: a. fraud under Section 447 of the Act for colluding with the management of IFIN and falsifying the books of accounts; b. failure in discharging duties under section 143 & 147 of the Act ; and c. suppression of information/ facts to hide the true and fair account of the financ....
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.... read down Section 140(5) of the Act, 2013. ii) It is submitted that by the impugned judgment and order, the High Court has held that the object of Section 140(5) is to remove an auditor who has neither been removed by the company, nor resigned. It is further observed that the role of the NCLT under Section 140(5) is only to examine the need to change a company's auditor and not to punish or debar the auditor. It is submitted that rejecting the Ministry's submission that the NCLT can pass an order to debar an auditor for 5 years under section 140(5) of the Act, the High Court has held that the NCLT's order under section 140(5) can only be for change of auditor of the company. It is further observed and held that the consequences of debarment in the second proviso automatically follow upon such change and NCLT does not have any discretion in it. iii) It is submitted that before the High Court, the BSR also challenged two orders of the NCLT, namely, order dated 09.08.2019 and order dated 18.10.2019. Both these orders were passed by the NCLT purportedly under section 140(5) of the Act in proceedings commenced pursuant to the Ministry's sanction and directions dated 2....
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.... i. Section 132 provides for the constitution of the National Financial Reporting Authority ("NFRA"). NFRA has been given ample power (including the powers of civil court) under Section 132 to impose penalty or punishment on an auditor (including debarring the auditor) to the auditors professional or other misconduct. The explanation under Section 132 provides for the terms "professional or other misconduct" to have the same meaning as prescribed under the Chartered Accountants Act, 1949 ("CA Act"). The meaning of "professional or other misconduct" entails a very wide scope as evinced from Schedule I and II of the CA Act. Therefore, if auditors are guilty of fraud or abetting in fraud, they are certainly guilty of professional misconduct, for which powers are vested with the NFRA to disqualify, suspend etc. ii. Section 141(3)(h), which specifically deals with eligibility of auditors, provides for the ineligibility for appointment of an auditor in case such person is convicted of an offence involving fraud. Section 141(3)(h) disqualifies the auditor for 10 years from the date of conviction for an offence involving fraud. Pertinently, while the underlying offen....
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....f a director or any other office connected with the conduct and management of the affairs of any company for a period of five years from the date of the said decision: Provided that the Central Government may, with the leave of the Tribunal, permit such person to hold any such office before the expiry of the said period of five years...." If a person is found not to be a fit and proper person, under Section 243 (1A), the NCLT can order that such person "shall not hold any office connected with the conduct or management of any company for 5 years. vi. Section 245(1)(g)(ii) also provides for damages or compensation to be ordered against auditors, including an audit firm, by way of a class action suit for "Improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct. Section 245(2) permits the NCLT to impose "any suitable action" vii. Section 447 pertains to the criminal consequences of fraud. Section 447 prescribes a punishment for the offence of 'fraud, the offence itself is created by way of an explanation appended to the said section. Section 447 of the Act provides: "447....
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....onsequence of each of these proceedings is grave for the auditor, including debarment, and the auditor does not escape punishment. ix) It is submitted that the operative part of Section 140(5) empowers NCLT to direct a company to "change" its auditor. NCLT can exercise this power if it is satisfied that ah auditor is guilty of acting in a fraudulent manner or in abetting or colluding in a fraud and has neither resigned nor been removed by the company. It is submitted that therefore the order that NCLT can pass under the operative part of Section 140(5) is against the company and not the auditor. It is an order to the company to change its auditor and no other order. It is submitted that the word "change" has been held to mean "replace with or exchange for another" and "the substitution of one thing for another". x) It is submitted that as per the non-obstante clause provided in Section 140(5), it is clear that the NCLT can direct the company and no one else to remove the auditor. The non-obstante clause needs to be read with the term "change" as provided therein. It is submitted that Section 140(5) of the Act cannot apply in circumstances where the auditor sought ....
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....on of an auditor, proceedings thereunder would be quasi-criminal in nature. Disqualification of a professional is akin to a death penalty. The standard of proof is therefore satisfaction beyond reasonable doubt. Reliance is placed upon the decision of this Court in the case of An Advocate v. Bar Council of India (1989) Supp 2 SCC 25 (Para 4(1) & (11) and ICAI v. LK Ratna & Ors. (1986) 4 SCC 537 (para 18). xiv)It is submitted that the Act needs to be read and interpreted in a holistic manner. Under the scheme of the Act, it is Section 447 which specifically provides for punishment for fraud. Section 140(5) is not a provision to punish or penalize an auditor. By treating Section 140(5) instead of Section 447 as a provision to punish for fraud, Ministry and NCLT failed to follow the well settled rule of interpretation that something may be done only in the manner prescribed by the law and in no other manner. Reliance is placed upon the decision of this Court in the case of Dharani Sugars and Chemicals Ltd. v. Union of India, (2019) 5 SCC 480 (para 55). xv) It is further submitted that expanding the scope and purpose of Section 140(5) to include punishment for fraud, ....
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....substitution by the Central Government. It is submitted that it is not possible to remove any person/firm from a position which whey are not holding. Accordingly, an order directing removal of BSR who had already resigned as auditor of IFIN would only be possible by way of a legal fiction of treating BSR as continuing to remain IFIN's auditor. xix)It is next submitted that Section 140(5) of the Act does not create any legal fiction by which an auditor who has resigned would continue to be treated as an auditor. A deeming fiction can only be created by the legislature. In fact, courts and tribunals do not have the power to create a deeming fiction by judicial interpretation when the statute does not provide for it. Reliance is placed upon the decisions of this Court in the cases of Bhuwalka Steel Industries Ltd & Anr v. UOI, (2017) 5 SCC 598 (Para 38) and Sant Lal Gupta v. Modern Cooperative Housing Society Ltd., (2010) 13 SCC 336 (Para 14). xx) It is submitted that the need for a deemed removal of a past auditor does not arise, since the very purpose and object of Section 140, i.e., removal and change of auditors, has been satisfied by the auditor's resignatio....
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....petition, the resignation rendered the petition infructuous since the reliefs sought for could no longer be granted under Section 140(5) and indeed the purpose underlying Section 140(5) stood accomplished by such resignation. xxvi) It is submitted that reading in an implied prohibition against an auditor from resigning after the commencement of proceedings under Section 140(5) would be contrary to the plain language of the section and would require it to be re-written. Such an implied provision would also be contrary to the object of Section 140(5) as it would mean that the provision ensures that an auditor against whom allegations of fraud have: been made continues as auditor and is not permitted to resign. This would lead to an anomalous situation of compelling the continuance of an auditor, despite him having committed a fraud until the NCLT passes a final order or an interim order under the first proviso to Section 140(5). xxvii) It is further submitted by the learned counsel appearing on behalf of the original writ petitioners that Section 140(5) is excessive and manifestly arbitrary as it provides unguided and untrammelled powers to NCLT and that too in a su....
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.... erroneously deciding it. Reliance is placed upon the decisions of this Court in the cases of Carona Ltd. v. Parvathy Swaminathan & Sons, (2007) 8 SCC 559 (Para 27, 28, 36) and Arun Kumar v. Union of India, (2007) 1 SCC 732 (Para 74-76). It is submitted that this Court has clearly laid down that the foundational fact must be established before a presumption is made. Reliance is placed on the decision of this Court in the case of Balram Garg v. SEBI, (2022) 9 SCC 425 (Para 45 and 51). xxx) It is further submitted that even the NCLT's second order on the application filed by the Ministry for the appointment of MMC as the statutory auditor of IFIN under the first proviso to Section 140(5) is wholly without jurisdiction. It is submitted that once the BSR resigned as an auditor, there was no question of invoking first proviso to section 140(5) of the Act. xxxi) It is submitted that statutory auditor appointment application was clearly contrary to law, without jurisdiction and could not have been under the first proviso to Section 140(5) since firstly, Section 140(5) itself did not apply to the past auditors, and hence no question of invoking the first proviso could ari....
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....ake legal advice when examining the "investigation report", which itself gives colour to the word "examination" and shows that the Central Government is to properly apply its mind to the "investigation report" before directing initiation of prosecution, Le, not to do so mechanically or for collateral purposes; vi) Section 212(14A) provides that where the report under Section 212(11) or 212(12) stated that fraud has taken place and has been taken advantage of by a director, key managerial personnel or other officer, the Central Government may file an application before the NCLT for appropriate orders for disgorgement of asset and for holding such person liable personally; vii) Under Section 212(15), it is only the "investigation report" (submitted only upon completion of the investigation which is filed with the Special Court is deemed to be police officer's report under Section 173 of the Criminal Procedure Code, 1973. (CHPC) Significantly, Section 212(15) is a deeming fiction that is limited to only making investigation report under Section 212(12), to be the police officer's report under Section 173, CrPC; viii) It is therefore clear that the le....
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....964; Hari Chand & Ram Pal v. State Crl. Misc. (M) 99 & 111 of 1977 ( Para 14). Accordingly, given the language of paras 1.5 and 4.126.1 of the 2nd Interim SFIO Report, that report could never be treated as an investigation report under Section 212(12); xiii) Even while examining the 2nd Interim Report, the MCA was of the view that the 2nd Interim Report was not a complete investigation report with respect to IFIN. Accordingly, the Ministry had directed the SFIO to carry out further investigation on aspects which were already covered in the 2nd Interim Report; xiv) Further, the Ministry and the SFIO, despite being afforded ample opportunity, did not place on record any affidavit or argument to explain Para V of the Sanction Order or that the investigation was complete and that the 2nd Interim Report was not treated by the Ministry as an interim report. The SFIO cannot avoid the consequences of not having filed an affidavit, stating on oath, that the investigation was not complete. This is a question of fact; xv) Section 212(12), does not permit initiation of prosecution based on a report which is issued till such time investigation has been completed. This....
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....er on 29.05.2019 (i.e., within one day). It is pertinent to note that a copy of the said processing note was not placed before the Bombay High Court or provided to BSR despite repeated requests for inspection vide emails dated 01.10.2019, 10.10.2019, and 14.10.2019. The Bombay High Court, in these circumstances, was correct to draw adverse inference since Ministry and SFIO failed to demonstrate due application of mind through any document or affidavit; xxi)Given the voluminous nature of the 2nd Interim SFIO Report and the internal processes in place, it was impossible for Ministry to examine and apply its mind to the 2nd Interim SFIO Report (as required under Section 212(14) of the Act) within one day before it issued the Sanction Order. The events described above clearly show that the Sanction Order was granted in haste, without application of mind and for extraneous consideration. As such, the proceedings following such Sanction Order also stand vitiated. Reliance is placed upon the decisions of this Court in the cases of K.K Mishra v. State of Madhya Pradesh, (2018) 6 SCC 676 (Para 18) and Anirudhsinhji Karansinhji Jadeja v. State of Gujarat (1995) 5 SCC 302 (Para 15); ....
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....rs in Chapter X of the Act which is titled as "Audit and Auditors". Therefore, Chapter X is a special provision under the new Act with respect of "Audit and Auditors". It cannot be disputed that the auditor plays a very important role so far as the affairs of any company are concerned and therefore he should be independent and above board. Companies Act, 2013 is the result of the culmination of detailed study after taking into consideration the Parliamentary Standing Committee on Finance Report as well as the recommendations of the Standing Committee by introducing Companies Bill, 2009 and Companies Bill, 2011. When the earlier Companies Bill, 2009 was introduced, it was a culmination of the growing corporate economy and past experiences of corporate fiascos too and one of the suggestions were to provide for stricter accountability for auditors. There was a long discussion on the role, responsibility, duties and regulation of auditors and the regulatory and enforcement provisions. Various suggestions were received to make the provisions pertaining to Audit and Auditors more stringent. It was suggested on Clause 123(10) of the 2009 Bill which provides for removal of an auditor by th....
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....tion of an enquiry it is found by the Tribunal that an auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may by order direct the company to change its auditors. Therefore, powers of the NCLT in first part of Section 140(5) is quasi-judicial in nature and the Tribunal would have the powers of a civil court to examine the role of auditors and adjudicate on their fraudulent conduct and abdication of their function. The first proviso to Section 140(5) confers power upon the Tribunal on the application made by the Central Government and if the Tribunal is satisfied that any change of the auditor is required, to remove such auditor and/or pass an order that such an auditor shall not function as an auditor (within 15 days of receipt of such application) and the Central Government may appoint another auditor in his place. Thus, the powers under the first proviso to Section 140(5) can be said to be interim or pro tem measure to prevent an existing auditor from continuing and substitute him with an auditor based on a prima facie satisfaction that a frau....
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....d proviso of section 140(5) is attracted, there must be a detailed enquiry against an auditor of a company as per first part of section 140(5) and there must be a finding arrived at by the NCLT that the auditor of a company has, directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers. 6. By the impugned judgment and order, though the High Court has upheld the vires of Section 140(5) of the Act, 2013, however, the High Court has held that once the auditor resigns as an auditor or is no more an auditor on his resignation, thereafter Section 140(5) proceedings are no longer maintainable as the petition filed by the Union of India under section 140(5) has been satisfied by the subsequent resignation of the auditor. The view taken by the High Court is absolutely erroneous and is unsustainable. Subsequent resignation of an auditor after the application is filed under section 140(5) by itself shall not terminate the proceedings under section 140(5). Resignation and/or removal of an auditor cannot be said to be an end of the proceedings under section 140(5). There are further consequences al....
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.... indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, he/it shall not be eligible to be appointed as an auditor of any company for a period of five years. The word "any" used in the second proviso to section 140(5) is significant. On the final order being passed by the Tribunal, such an auditor not only shall be removed or changed as an auditor of a company, but such an auditor/firm shall also be ineligible to be appointed as an auditor of any other company for a period of five years. 7. Therefore, on true interpretation and scheme of Section 140(5) of the Act, 2013, once the enquiry/proceedings is/are initiated under first part of section 140(5) of the Act, either suo motu by the Tribunal or on an application made to it by the Central Government or by any person concerned, it must come to its logical end and irrespective of the fact whether during such enquiry/proceedings the auditor has resigned or not, there must be a final order to be passed by the Tribunal on whether such an auditor has, in fact, directly or indirectly, acted in a fraudulent manner or not. Direction to the company to ch....
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....ase where the auditor resigns, the auditor concerned can be proceeded against under section 241(3) of the Act and therefore the proceedings pursuant to section 241(3) of the Act would lead to the same result and the auditor would be held 'not to be a fit and proper person' to be appointed in any other office connected with the conduct and management of any company is concerned, at the outset, it is required to be noted that Section 241(3) of the Act speaks about the concerned company and not any other company. Section 241(3) of the Act has been introduced w.e.f. 14.08.2019 which authorises the Central Government to apply to the Tribunal to declare that the persons mentioned in section 241(3) of the Act are "not fit and proper persons" to hold the office of a director or any other office connected with the conduct and management of any company. Section 241(3) of the Act is required to be read along with Sections 243(1A) and 243(2). On a conjoint reading of the aforesaid provisions, it is clear that the reference specifically in Section 241(3) of the Act to "any other office connected with the conduct and management of any company" means those akin to manager, managing director or ot....
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.... the NCLT and the High Court is on the maintainability of the proceedings under section 140(5) after resignation of the auditors, we refrain from considering anything on merits of the allegations against the auditors as the allegations of fraud etc. are yet to be considered by the Tribunal on merits in an application under Section 140(5) made by the Central Government. 12. Now so far as challenge to the vires of Section 140(5) of the Act is concerned, at the outset, it is required to be noted that the High Court, as such, has upheld the constitutional validity/vires of section 140(5) against which the BSR has not filed any special leave petition. Even otherwise on merits also, when some of the writ petitioners have challenged the impugned judgment and order passed by the High Court on constitutional validity/vires of Section 140(5), we are of the opinion that section 140(5) cannot be said to be excessive and/or manifestly arbitrary, as contended. It was the case on behalf of the original writ petitioners on the constitutionality/vires of section 140(5) that section 140(5) is excessive and arbitrary as it provides unguided and untrammelled powers to NCLT for determination of a se....
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.... enacted with the specific object and purpose as referred to hereinabove and the same has been enacted after due deliberations and taking into consideration the recommendations of the Standing Committee as well as the respective stakeholders. Therefore, taking into consideration the object and purpose for which section 140(5) of the Act is enacted, the same cannot be said to be arbitrary, excessive and violative of Article 14 of the Constitution of India and/or violative of fundamental rights guaranteed under Article 19(1)(g) of the Constitution of India, as alleged. 15. Now far as quashing and setting aside section 212(14) direction by the High Court by its impugned judgment and order is concerned, it appears that the High Court has set aside 212(14) direction mainly on two grounds, firstly, that the direction to prosecute was issued within 30 hours of report of the IFIN SFIO Report which demonstrates non-application of mind and secondly on the ground that IFIN SFIO Report was an incomplete report as investigation had not been completed and therefore 212(14) direction was incompetent. 15.1 From the reasoning of the High Court, it appears that the High Court has set aside the....
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....t prepared by the SFIO on the completion of the investigation into the IFIN - one of the companies under investigation. It is required to be noted that by an order dated 30.09.2018, an investigation was directed to be conducted by the SFIO into IL&FS and its subsidiaries, which comprise of approximately 100-160 entities. So far as the IFIN is concerned, it was one of the subsidiaries in the IL&FS group and the financial services arm. It is the case on behalf of the Central Government that so far as the SFIO IFIN Report is concerned, it is a record in respect of IFIN, upon completion of investigation into IFIN. Merely because so far as the investigation with respect to other subsidiary companies of IL&FS group is concerned, the same might have been going on, cannot be a ground to observe that at this stage so far as the IFIN is concerned the report was incomplete report and for which the investigation was going on. The High Court has not properly appreciated the aforesaid and has wrongly treated the report as an interim report so far as the IFIN is concerned. At this stage, it is required to be noted that in the SFIO IFIN Report itself, it is observed that in light of complex struct....