Union of India and another Vs Deloitte Haskins and Sells LLP & Anr

Case snapshot

Sections / provisions: 140(5)

Questions before the Court / Tribunal

• Companies Act section 140(5): whether auditor can escape statutory consequences by resigning after allegations of fraud-related failure.
• What factual, statutory and procedural conditions control the relief?
• How does the operative order apply to the parties and the challenged proceeding?

Material facts and procedural background

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 Deloitte was the sole auditor and for the year when the audit was jointly performed by BSR; f)after the Petition was filed, BSR tendered its resignation Criminal Appeal Nos.2305-2307/2022 Etc. Page 34 of 103

submitted that therefore the submissions on behalf of the respondents do not go into the merits at all. iv) Now so far as on interpretation and applicability of section 140(5) of the Act, 2013, learned counsel appearing on behalf of the respective respondents – original writ petitioners has taken us to the scheme of regulation of Auditors under the Companies Act and has taken us to the various provisions relating to the regulation of Auditors under the Companies Act, more particularly Sections 132, 141, 147, 245, 447 and Sections 435 to 438 of the Companies Act. It is submitted that the Act provides a holistic scheme for regulation and punishment of Auditors, all of which have been different functions and purpose and with such matrix of sections, no auditor can get away with fraud, abetment of fraud, professional misconduct etc. It is submitted that therefore no auditor can escape by way of resignation or termination of tenure due to efflux of time. v) It is submitted that a plain reading of Section 140 as a whole shows:

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 summary proceeding, for determination of a serious offence of fraud and consequence of mandatory disqualification with grave Criminal Appeal Nos.2305-2307/2022 Etc. Page 63 of 103

4.3 Making above submissions and relying upon the aforesaid decisions, it is prayed by the learned counsel appearing on behalf of the original writ petitioners to dismiss the present appeals and uphold the impugned judgment and order passed by the High Court.

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 serious offence of fraud and consequence of mandatory disqualification with grave consequences akin to civil death. The aforesaid has no substance. As observed hereinabove, NCLT shall exercise the quasi-judicial powers under section 140(5) with all the powers akin to civil court. Ample opportunity shall be given by the NCLT before passing any final order.

Appellant / assessee submissions

3. Shri Balbir Singh, learned Additional Solicitor General of India appearing on behalf of the Union of India has vehemently submitted that in the impugned judgment and order the High Court has misinterpreted Section 140(5) of the Act, 2013, though the High Court has upheld the constitutionality of the said provision.

3.1 It is submitted that as regards the interpretation of Section 140(5) of the Act, 2013, the High Court has explained the legislative intent as being to induce/effect a change of an auditor in a company where there is a suspected fraud. It is submitted that thereafter the High Court has erroneously proceeded to hold that the intention behind Section 140(5) of the Act, 2013 is only to break the collusion between the auditor and the company. It is submitted that accordingly, the High Court erroneously Criminal Appeal Nos.2305-2307/2022 Etc. Page 12 of 103

holds that if the unholy bond between the auditor and company is broken, either by removal or resignation, then Section 140(5) of the Act, 2013 fulfils its purpose. It is submitted that according to the High Court, Section 140(5) of the Act is only attracted when despite the petition by the Central Government, an auditor sets up a defence and opposes the petition frivolously and thus invites a final order as set forth in the second proviso to Section 140(5) of the Act, 2013. It is submitted that on this basis, the High Court proceeded to hold that the petition filed by the Union of India under Section 140(5) of the Act, 2013 has been satisfied by the subsequent resignation of the auditor and therefore the petition under Section 140(5) of the Act, 2013 filed by the Union of India is no longer maintainable. It is submitted that the High Court erroneously proceeded to quash Section 140(5) petition and the order passed by the NCLT, Mumbai upholding its maintainability.

3.2 Now insofar as quashing and setting aside the criminal proceedings, it is submitted that the respondents assailed Section 212(14) direction on two grounds. Firstly, on the ground that the issuance of the direction to prosecute within 30 hours of receipt of the IFIN SFIO Criminal Appeal Nos.2305-2307/2022 Etc. Page 13 of 103

Revenue / respondent submissions

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: Criminal Appeal Nos.2305-2307/2022 Etc. Page 31 of 103

3.25 Now so far as the submission on behalf of the respondents that before the NCLT the SFIO IFIN Report was referred to as second interim report and therefore the SFIO IFIN Report being an interim report, 212(14) direction could not have been issued as the Act does not contemplate issuance of a direction under Section 212(14) of the Act on the basis of an interim report, it is submitted by Shri Balbir Singh, learned ASG that as per section 212(11) of the Act, 2013, during the

course of investigation, the Central Government has been empowered to call for an interim report. It is submitted that the SFIO has not been empowered to submit an interim report without a request for an interim report from the Central Government. It is submitted that the Central Government vide letter dated 03.11.2018 specifically directed the SFIO to submit an interim report. Pursuant to this, the SFIO submitted an interim report dated 30.11.2018. The Interim Report, on a bare perusal, records that it is an interim report, records the Central Government’s request for an interim report and classifies its findings as interim findings. It is submitted that this is completely different from the SFIO IFIN Report which classifies itself as an Investigation Report under 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 Criminal…

submitted that therefore the submissions on behalf of the respondents do not go into the merits at all. iv) Now so far as on interpretation and applicability of section 140(5) of the Act, 2013, learned counsel appearing on behalf of the respective respondents – original writ petitioners has taken us to the scheme of regulation of Auditors under the Companies Act and has taken us to the various provisions relating to the regulation of Auditors under the Companies Act, more particularly Sections 132, 141, 147, 245, 447 and Sections 435 to 438 of the Companies Act. It is submitted that the Act provides a holistic scheme for regulation and punishment of Auditors, all of which have been different functions and purpose and with such matrix of sections, no auditor can get away with fraud, abetment of fraud, professional misconduct etc. It is submitted that therefore no auditor can escape by way of resignation or termination of tenure due to efflux of time. v) It is submitted that a plain reading of Section 140 as a whole shows:

Court / Tribunal analysis and reasoning

xiii)It is submitted that it is settled law that proceedings which may result in disqualification would be of a quasi- criminal nature and have to be strictly construed. Since Section 140(5) results in a disqualification 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 Criminal Appeal Nos.2305-2307/2022 Etc. Page 56 of 103

xxiv) It is submitted that in Pasupuleti Venkateswarlu v. Motor & General Traders, (1975) 1 SCC 770, this Court held that a proceeding may not be maintainable by reasons of a post filing event. This Court observed "If a fact, arising after the lis has come to court and has a fundamental impact on the right to relief for the manner of moulding it, is brought diligently to the notice of the tribunal, it cannot blink at it or be blind to events which stultify or render inept the decrotal remedy."

Operative decision and relief

15.3 Now so far as another ground on which the direction/sanction to prosecute has been set aside by the High Court, namely, that it was an incomplete investigation report and therefore on such an incomplete investigation report, no direction/sanction to prosecute could have been issued is concerned, at the outset, it is required to be noted that the High Court has not properly appreciated that the SFIO IFIN Report was a report 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 ground that as the auditors have resigned and therefore thereafter the same is not maintainable is hereby quashed and set aside. Consequently, the impugned judgment and order passed by the High Court quashing and setting aside the NCLT order holding that even after the resignation of the auditors, the proceedings under section 140(5) shall be maintainable is hereby quashed and set aside. The application/proceedings under section 140(5) of the Act, 2013 is held to be maintainable even after the resignation of the concerned auditors and now the NCLT therefore to pass a final order on such application after holding enquiry in accordance with law and thereafter on the basis of such final order, further consequences as provided under the second proviso to section 140(5) shall follow. However, it is made clear that we have not expressed anything on merits on the allegations against the concerned auditors and it is ultimately for the NCLT/Tribunal to pass a final order on the application filed by the Central Government under section 140(5) of the Act, 2013.

Section 212(14) of the Companies Act, 2013 dated 29.05.2019 issued by the Union of India to SFIO is hereby quashed and set aside. The impugned judgment and order passed by the High Court quashing and setting aside the prosecution lodged by the SFIO vide Criminal Complaint CC No.20/2019 on the file of Special Court (Companies Act) and Additional Sessions Judge, Greater Mumbai is also hereby quashed and set aside. Now the said Criminal Complaint CC No. 20/2019 be proceeded further by the concerned Trial Court in accordance with law and on its own merits.

18. Accordingly, in view of the above, the appeals filed by the Union of India, viz., Criminal Appeal Nos. 2305- 2307/2022; 2302-2303/2022; and 2300/2022 are allowed and Criminal Appeal Nos. 2298/2022, 2299/2022 and 2304/2022, as also, Civil Appeal Nos.793/2022; 801/2022 and 877/2022 filed by the Deloitte and its partners are hereby dismissed.

Ratio and legal principle

• The packaged judgment addresses Companies Act section 140(5): whether auditor can escape statutory consequences by resigning after allegations of fraud-related failure. The precise proposition must be read with the Court/Tribunal's reasoning and operative directions.
• Reliance depends on matching the statutory version, jurisdiction, procedural stage and material evidence recorded in the judgment.

Why this judgment matters

This decision is relevant to practitioners and affected parties dealing with companies act section 140(5): whether auditor can escape statutory consequences by resigning after allegations of fraud-related failure. Its value lies in showing how the adjudicating forum connected the applicable rule to the proved facts and procedural posture.

Practitioner action points

• Match the statutory version, jurisdiction, procedural stage and decisive evidence before relying on the result.
• Verify current appellate, review and SLP history and any later amendment or controlling authority.
• Attach the complete judgment to the working paper or filing and cite the paragraph/page supporting the proposition.

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Section / provision impact

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