The Supreme Court on Tuesday gave a huge relief to Deloitte & BSR and Associates. The Serious Fraud Investigation Office (SFIO) prosecuted these firms. Additionally, other investigative and regulatory agencies also prosecuted them. These prosecutions relate to the IL&FS scam which unravelled in June 2019.
The Bombay HC had quashed all prosecutions against these two firms vide an order dated 21.04.2020. The Ministry of Corporate Affairs (MCA) appealed to the SC against the HC order. However, the SC refused to stay the order of the High Court.
ILFS Scam and the Alleged Role of Deloitte Haskins and BSR
As many as half a dozen investigative and regulatory agencies in India were probing the audit firms Deloitte and BSR and Co. They were under scrutiny for alleged financial discrepancies at Infrastructure Leasing and Financial Services Ltd. (IL&FS). In September 2018, a major financial service provider faced a debt crisis. That is when the role of these two auditors came into the picture.
Since then, agencies like the SFIO and the National Financial Regulatory Authority. (NFRA) started probing the alleged scam. In all these investigations, the allegations are the same; which are that auditors failed to raise red flags about the ‘evergreening’ of certain accounts and that they handed out evergreen loans.
They also charged the audit firms with concealing information. This was because they did not report misstatements in the accounts of IFIN. IFIN is a non-banking financial company under IL&FS. However, Deloitte had vacated it’s office as the Auditor for IL&FS on account of rotation at the end of FY 2017-18.
Petition Filed by MCA in the NCLT against the Audit Firms
In June 2019, the Ministry of Corporate Affairs had filed a petition in the National Company Law Tribunal (NCLT). The petition sought a 5-year ban on the two auditors. It alleged them of violating Section 140(5) of the Companies Act, 2013 (herein, ‘the Act’).
Section 140(5) of the Act provides that an order passed by the NCLT may remove the auditor of a company. The section also provides that by the final order of the Tribunal, an auditor will not be eligible to be appointed as an auditor of any other company for a period of five years. Additionally, the section states that the auditor will be liable for prosecution u/s 447 of the Act.
Counsels appearing on behalf of the audit firms had contented that the NCLT does not have jurisdiction to ban the audit firms. However, the NCLT had rejected this argument, stating that they in fact do. Deloitte then moved to the appellate tribunal i.e. National Company Law Appellate Tribunal (NCLAT) against the order.
The appellate tribunal in August 2019 ordered a stay on the NCLT from passing any further orders in the matter till the case is resolved in the NCLAT. Following the order of the NCLAT, the NCLT adjourned its proceedings against the auditors’ sine die.
BSR files Writ Petition in Bombay HC challenging Constitutionality of Section 140(5) of Companies Act, 2013
In August 2019, BSR filed a writ petition in the Bombay HC seeking the court to declare Section 140(5) of the Companies Act unconstitutional. Senior Advocate Mukul Rohatgi appeared for BSR. He argued that the government’s actions against the auditors are in violation of Article 21 of the Constitution.
The audit firm also argued that Section 140(5) of the Act violates Article 19(1)(g) of the Constitution. Article 19(1)(g) guarantees the right to practice any profession. In September 2019, the Bombay HC granted an interim stay on the ongoing proceedings against BSR & Associates in the NCLT.
Bombay High Court Order Quashing All Proceedings Against Auditors
Later, on 21st April this year, the Bombay HC quashed all proceedings against the audit firms. The Court also upheld the Constitutional Validity of Section 140(5) of the Companies Act, 2013. In the order in N. Sampath Ganesh v. Union of India and Ors., the HC brought to the public sphere the poor quality of investigations conducted by the SFIO.
The HC also observed that the order of the Central Government to lodge prosecution was given with “non-application of mind”. As a result, this order for prosecution was declared void by the HC. The SFIO had prepared a 32,000-page report on the role of the auditors in the scam. This report was alleged to have been examined in about 30 hours. It was thus argued that there was non-application of mind on the part of the MCA. The High Court gave 8 weeks’ time to the MCA to file an appeal in the Supreme Court.
Appeal to the Supreme Court
After the Ministry of Corporate Affairs filed an appeal in the SC against the Bombay HC in N. Sampath Ganesh v. Union of India and Ors., the SC refused to grant the stay. The bench comprised of CJI S.A. Bobde and Justices MR Shah and AS Bopanna. The bench questioned the government’s delay in filing the appeal. Furthermore, the bench stated that it was not inclined to stay the order of the High Court.
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