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. 2302-2303/2022 and Criminal Appeal No. 2300/2022 have been filed by the Union of India, inter alia, challenging the common judgment and order dated 21.04.2020 passed by the High Court of Bombay in Writ Petition Nos. 4144 & 4145 of 2019 and other companion writ petitions, by which the High Court, though upheld that Section 140(5) of the Act, 2013 is not unconstitutional, has set aside the direction under Section 212(14) of the Act, 2013 dated 29.05.2019 issued by the Union of India to the Serious Fraud Investigation Office (SFIO) and consequently set aside the prosecution lodged by the SFIO vide Criminal Complaint No. CC 20/2019 on the file of Special Court (Companies Act) & Additional Sessions Judge, Greater Mumbai, the Union of India and the SFIO have preferred the present appeals. 1.2 In Criminal Appeal Nos. 2302-2303/2022, the challenge pertains to the auditor of IL&FS Financial Services Limited, namely, BSR & Associates LLP (BSR) and in Criminal Appeal Nos. 2305-2307/2022 and Criminal Appeal No. 2300/2022, the challenge pertains to another auditor of IFIN, namely, Deloitte Haskins & Sells LLP (for short, ‘Deloitte’) and an ex-director of IFIN, namely, Hari Sankaran. 1.3 Criminal Appeal Nos. 2298/2022, 2299/2022 & 2304/2022 have been filed by Deloitte and two of its partners challenging the impugned judgment and order passed by the High Court insofar as it upholds the constitutionality of Section 140(5) of the Act, 2013. 1.4 Civil Appeal Nos. 793/2022, 801/2022 & 877/2022 have been filed by Deloitte and two of its partners challenging the order passed by the National Company Law Appellate Tribunal dated 04.03.2020. Factual Background:
2.The facts leading to the present proceedings in
nutshell are as under:
A series of defaults by the IL&FS Group
Companies, which had an aggregate debt burden of more
than Rs. 91,000 crores, occurred between June to
September, 2018 and threatened to collapse the money
markets of India, added pressure to corporate bond yields
and sparked a sell off in the stock market. The
Department of Economic Affairs, Ministry of Finance
issued an Office Memorandum dated 30.09.2018 in
respect of IL&FS to the Ministry of Corporate Affairs,
Union of India requesting it to take action under the Act,
2013. The Memorandum and Note highlighted that:
(a)the IL&FS Group was struggling with a debt
contagion of approx.. Rs. 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 then existing Board of
Directors of IL&FS with a new Board of Directors. The
new Board of Directors were directed to take charge of
the affairs of the IL&FS. The new Board of Directors of
IL&FS submitted a report dated 30.10.2018 on progress
and way forward with the Ministry of Corporate Affairs
which was in turn filed by the Ministry of Corporate Affairs
with the NCLT on 31.10.2018, pursuant to the order
passed by the NCLT on 01.10.2018.
2.3 Further to the Office Order dated 30.09.2018
directing investigation to be initiated by the SFIO and an
e-mail dated 01.11.2018, SFIO submitted an interim
report in respect of IL&FS and one Employees Welfare
Trust pertaining to the IL&FS Group. It is required to be
noted that the said interim report was submitted as
Ministry of Corporate Affairs called for an “interim report”,
which was called in pursuance to Section 212(11) of the
Act, 2013 which provides that an interim report must be
called for by the Central Government. It is to be noted
that in the interim report itself, it was specifically recorded
that the findings in the interim report are interim findings
and the interim report concluded by setting forth “based
on the above interim findings…” It is also to be noted that
interim report was on the individuals who were in control
of the affairs of the IL&FS Group and the illegalities and
fraud perpetrated by them.
2.4 On the basis of the interim report, the Ministry of
Corporate Affairs filed a Miscellaneous Application in
Company Petition No. 3638/2018 against the erstwhile
Directors of the companies in the IL&FS Group seeking to
implead them in the said proceedings and an order to
attach their immovable/movable properties.
2.5 On the basis of the interim report and a prima facie
opinion of the Institute of Chartered Accountants dated
04.12.2018, the Ministry of Corporate Affairs filed a
petition under section 130 of the Companies Act, 2018
before the NCLT praying inter alia that the books of
accounts of IL&FS, IFIN and IL&FS Transportation
Networks Limited (ITNL) may be re-opened and recast.
Vide order dated 01.01.2019 passed in Section 130
petition, the NCLT directed that the accounts of IL&FS,
IFIN & ITNL for the past 5 financial years be re-opened
and recast on the ground that the affairs of IL&FS, IFIN &
ITNL had been mismanaged casting a doubt on the
reliability of the financial statements/accounts.
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 29.05.2019 by IFIN
where BSR was also represented/present.
2.8 Pursuant to the Office Order dated 30.09.2018,
SFIO submitted the investigation report of IL&FS Financial
Services Limited (SFIO Report).
2.9 The Ministry of Corporate Affairs vide letter dated
29.05.2019 requested the Regional Director (Western
Region) and the SFIO to initiate proceedings/prosecution.
The SFIO was asked to initiate proceedings/prosecution
under Section 447 and other provisions of the Companies
Act, r/w Sections 417, 420 and 120B of the Indian Penal
Code. The Regional Director was asked to institute a
Petition under Section 140(5) of the Act, 2013.
2.10 That thereafter the SFIO filed a criminal complaint
on 30.05.2019 before the Sessions Court (Special Judge
– Companies Act), Mumbai against, amongst others, the
auditors/ex-auditors of IFIN being CC No. 20/2019.
2.11 That thereafter the Ministry of Corporate Affairs filed
a Petition under Section 140(5) of the Act, 2013 dated
10.06.2019, inter alia, against the auditors of the IFIN,
namely, BSR & Deloitte and the engagement partners as well as their team. In the petition under Section 140(5), it
was inter alia prayed to remove BSR as auditors of IFIN;
declare that Deloitte shall be deemed to be removed as
Statutory Auditor for IL&FS for F.Y. 2012-13 to F.Y. 2017-
18; permit the Ministry of Corporate Affairs to appoint an
auditor for IFIN under the first proviso of Section 140(5) of
the Act, 2013; and declare/direct that BSR, its
engagement partners, Deloitte and its engagement
partners shall not be eligible to be appointed as an auditor
for any company for a period of five years under the
second proviso of Section 140(5) of the Act, 2013.
2.12 BSR issued a letter of resignation dated 19.06.2019
to IFIN and simultaneously completed the regulatory
filings pursuant to such resignation.
2.13 BSR and its engagement partners filed a reply
dated 19.06.2019 to Section 140(5) petition before the
NCLT, inter alia, contending that (i) they are not the
auditors for IFIN any longer as they have tendered their
resignation and therefore Section 140(5) is not applicable
to them; and (ii) Section 140(5) does not demonstrate any
case for fraud against BSR.
2.14 Deloitte filed an application dated 19.06.2019
challenging the maintainability of Section 140(5) petition
before the NCLT on the ground that Deloitte is no longer
the auditor for 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.
Submissions on behalf of the Union of India:
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
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
Report demonstrates non-application of mind. Secondly,
that the IFIN SFIO Report was an incomplete report as
investigation had not been completed and therefore
Section 212(14) direction was incompetent. It is
submitted that insofar as the first ground is concerned, the
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 provides for the procedure to remove an
auditor by the company before the expiry of his term.
Sections 140(2) and (3) of the Act deal with resignation of
auditors and Section 140(4) of the Act deals with giving of
special notice at an AGM for appointment of an auditor
other than the retiring auditor and the process in that
regard. It is submitted that if an auditor of a company is
acting directly or indirectly in a fraudulent manner or is
abetting or colluding in fraud with the management of a
company, Section 140(5) of the Act, 2013 empowers
either the Central Government or any person concerned
to approach the NCLT for recourse. Section 140(5) of the
Act also enables the NCLT to take action suo motu
against an auditor who has acted in the aforesaid manner.
It is submitted that in addition, Section 140(5) of the Act,
2013 has also two provisos and two explanations. It is
submitted that therefore as per the first proviso to Section
140(5), on an application made by the Central
Government and if the Tribunal is satisfied that any
change of the auditor is required, the Tribunal shall within
fifteen days of receipt of such application make an order
that the said auditor shall not function as an auditor and
the Central government may appoint another auditor in his
place. It is submitted that second proviso to Section
140(5) of the Act provides that an auditor, whether
individual or firm, against whom final order has been
passed by the Tribunal under section 140(5) 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. It is submitted that therefore merely
because during the pendency of the proceedings under
Section 140(5) of the Act the auditor resigns, the
proceedings under Section 140(5) do not come to an end.
Still and after the final order is passed, in that case, a
further order as per second proviso to Section 140(5) can
be passed to render such a auditor ineligible to be
appointed as an auditor of any company for a period of
five years from the date of passing of the order and even
such auditor shall also be liable for the action under
section 447 of the Companies Act. It is submitted that
therefore the High Court has materially erred in observing
and holding that once the auditor has resigned thereafter
the application 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
1`40(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 before the PSC could present
its report and therefore the 2008 Bill lapsed as per Article
107(5) of the Constitution of India.
ii. Accordingly, the Companies Bill 2009 was
introduced in the Lok Sabha on or about July 15, 2009.
The 2009 Bill too was referred to the PSC. In identifying
the features of the 2009 Bill, the PSC Report of August
2010 notes the salient features as being “the role, rights
and duties of the auditors have been defined so as to
maintain integrity and independence of the audit
process.”
iii. In setting out the guiding principles underlying the
2009 Bill, the PSC, in the Report, notes that, amongst
other principles, the following are the key principles
underlying the 2009Bill:
“Need for sturdy systems, enhanced transparency and
comprehensive disclosures based regime emphasized;
as companies grow, become bigger and globalise with
the number and range of stakeholders increasing by
volumes, necessitating proper checks and balances.
Self-regulation through internal mechanism/procedures,
to be underpinned on strong systems and procedures;
Central Government to step in only when mis-
governance takes place.
In the light of recent experiences in corporate mis-
governance, process of audit and functioning of
auditors to be made more independent and effective;
stringent joint and individual liability prescribed; setting
up of oversight body to set standards and supervise
quality of audit recommended”
iv. Further, the report notes that various suggestions
were made by the PSC during deliberations on the Bill
which were incorporated by the Central Government. On
a reading of these suggestions, it is essential to note that
independence of the auditors was a key point.
v. Crucially, in the Report, the PSC notes that the
2009 Bill incorporates suggestions of the JPC on the 1993
Banking and Securities Market Scam and the 2002 JPC
on the Stock Market Scam. This means that the 2009 Bill
was a culmination of the growing corporate economy and
past experiences of corporate fiascos too. One of the
suggestions were to provide for stricter accountability for
auditors. Moreover, at the foot of the same page, the PSC
notes that the 2009Bill has made the regulatory provisions
and regime more stricter by inter alia providing for making
statutory auditors more accountable by providing for
substantial civil and criminal 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 manner or abetted/colluded in
any fraud, to direct the company to change its auditors.
Suggestions have been made that these provisions
should be modified to clarify to cover act of fraud or
abetment by auditor whether directly or indirectly. It has
also been suggested that the Bill may provide that if
auditor, whether individual or firm, against whom an
order has been passed by the Tribunal under this clause
should not be eligible to be appointed as an auditor of
any company for a period of five years.”
b. The Companies Bill, 2011
i. In view of the recommendations of the Standing
Committee and that of various stakeholders, the Central
Government withdrew the 2009 Bill with a view to
introduce a fresh Bill incorporating the
recommendations of the Standing Committee and
various stakeholders. Consequently, the 2011 Bill was
introduced in the Lok Sabha in December, 2011,
accepting and incorporating most of the
recommendations made by the previous Standing
Committee in respect of the Companies Bill, 2009. This
aspect has been recorded in the Statements of Objects
and Reasons of the Companies Bill, 2011.
ii. At this juncture, it is important to bear in mid that the
suggestion of the Standing Committee to Clause
123(10) of the 2009 Bill (which provides for removal of
an auditor by the NCLT on finding that there is a fraud)
was to:
Make the provision more stringent; and
To provide for consequences for an auditor when
such auditor is found to have been perpetrating a
fraud and is removed by the NCLT for such fraud.
iii. The 2001 Bill consolidates the provisions pertaining to
removal of auditors into one clause namely Clause 140
of the 2011 Bill. Further, the 2011 Bill (like the 2009
Bill) retains the NCLT’s power to remove an auditor
upon finding that the auditor has perpetrated a fraud at
Clause 140(5) of the 2011 Bill. Most pertinently, the
2011 Bill incorporating the recommendations of the
Standing Committee as contained in the Report,
provides for consequences for an auditor who is found
to have perpetrated a fraud by the NCLT and is
removed for such fraud by the NCLT. This has been
done by way of a proviso to Clause 140(5) of the Bill
(particularly the second proviso). The relevant extract
of Section 140(5) of the 2011 Bill is as follows:
“(5) Without prejudice to any action under the
provisions of this 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” includes a firm of auditors”.
iv. Thereafter, in January 2012, the 2011 Bill was
placed before the Standing Committee by the Lok
Sabha. The Standing Committee has prepared and
finalized its report in this regard, and insofar as the
penalty and guiding principles of Clause 140(5) are
concerned, there is no further guidance on the
legislative intent behind the same.
v. In view of the above, the test of Clause 140(5) of
the 2011 Bill has remained unchanged, the same
has been enacted as the present Section 140(5) of
the Companies Act, 2013.
3.6 It is submitted that therefore by way of Companies
Bill, 2009 subsequently introduction the Act, for the first
time it includes an obligation to an auditor to report any fraud detected to the Central Government as per Section
143(12) of the Act and incorporated in the form of the
second proviso to Section 140(5) of the Act a provision to
make an auditor who has been found to have been acting
in a fraudulent manner or colluding from being an auditor
in any company for a period of 5 years. It is submitted
that therefore, the public policy behind Section 140(5) of
the Act is very clear – to prevent an auditor who has been
found to perpetrate fraud or colluding in it in one company
from undertaking any statutory audits for a period of 5
years. Reliance is placed on the decision of this Court in
the case of Devas Multimedia Pvt. Ltd. v. Antrix
Corporation Ltd. & Anr, reported in (2023) 1 SCC 216.
3.7 It is further submitted by Shri Balbir Singh, learned
ASG that Section 140(5) appears in Chapter X of the Act.
It is submitted that Chapter X specifically deals with ‘Audit
and Auditors’. Section 143 of the Act deals with the
powers and duties of the auditors. Sub-section (12) of
Section 143 specifically provides that in the event that the
auditors has reason to believe that an offence of fraud is
being or has been committed in the company, the auditor
shall report the matter to the Central Government. The
detailed procedure is provided under the Rules issued in
this regard.
3.8 It is further submitted that Section 144 of the Act
provides that the auditor cannot provide certain services
and the relevant one for the present matter is
“Management services”. It is submitted that the objective
is that the auditor should function as an independent
person uninfluenced by any of its activities outside the
scope 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 prima facie satisfaction
that a fraud has been perpetrated and when
circumstances warrant the substitution. This is an interim
order and operates akin to a temporary suspension.
3.11 It is submitted that the second proviso to Section
140(5) of the Act which is in the nature of a substantive
provision activates on an order recording the Hon’ble
NCLT’s satisfaction of fraudulent or collusive conduct by
an auditor and his consequent removal from the Company
and debars him from being an auditor in any company for
a period of 5 years. An order under the first proviso is not
the order contemplated under the second proviso to
Section 140(5) of the Act. Thus, if the NCLT finally finds
no grounds to hold that there has been fraudulent conduct
or collusion in fraud, then the auditor who may have been
temporarily suspended under an order under the first
proviso can be re-instated.
3.12 It is submitted that Section 140(5) of the Act
therefore confers power onto the Hon’ble NCLT to
adjudicate on or inquire into the conduct of an auditor and
determine whether the auditor has conducted itself in a
fraudulent manner. This is clear from the operative part of
the provision which mandates the nature of inquiry
required under the section. This is “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.”
3.13 It is submitted that therefore, any final order would
certainly contain either a positive or negative
determination of “fraud” or “fraudulent conduct”. As a
consequence of finding fraud under Section 140(5) of the
Act, the provision illustrates that the finding of
fraud/fraudulent conduct “may” lead to an order directing
change of an auditor. The second proviso further
expressly provides that an auditor “against whom a final
order has been passed” is in-eligible to act as an auditor
of any company for a period of 5 years. Significantly, the
words used in the second proviso to Section 140(5) of the Act is “final order” and not “the auditor so removed” or
“changed auditor”.
3.14 It is submitted that therefore the requirement or
necessity of change of auditor in a company does not
activate/govern the power of the NCLT under Section
140(5) of the Act, 2013. Instead, it is the inquiry into the
fraudulent act by an auditor who abdicates his statutorily
prescribed independent 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 the Act is
fulfilled. This interpretation of Section 140(5) of the Act is,
as per the Respondent’s case, clear from the plain words
of the provision;
b) continuing a proceeding against an auditor under
Section 140(5) of the Act would despite his resignation
would lead to reading in a proviso into Section 140(5) of
the Act which deems his continuance till the culmination of
proceedings under Section 140(5) of the Act;
c) The second proviso to Section 140(5) of the Act
is arbitrary, harsh and burdensome and ought to be read
down. The mandatory ineligibility to act as an auditor for a
period of 5 years ought to be read as for a period up to 5
years to make the provision constitutional.
d) The ineligibility to act as an auditor of any
company prescribed under the second proviso to Section
140(5) of the Act can only extend to the audit partners
concerned and not to the entire firm and the other audit
partners who were not connected with the fraudulent act or
acts.
3.17 Meeting with the aforesaid submissions, it is
submitted as under:
a) Acceptance of Respondent’s contention would mean
that the jurisdiction of a quasi-judicial tribunal can be
overcome merely by an act of a party. More significantly, it
would lead mean that an inquiry into fraudulent conduct
can be disrupted and/or stands satisfied simply by an act
of a party.
b) The entire contention of the provision operating in
terrorem or to incentivize an auditor to resign is untenable.
The consequences of indulging in fraudulent activities
provided for in the Act including but not limited to Section
447 of the Act itself ought to serve as a deterrent and
operate “in terrorem”.
c) The entire construction sought to be attributed to Section
140(5) of the Act by reference to the other provisions of
the Act (as per paragraphs 9.17 (a) and (b) above) is
to turn the provision into a dead letter [See NEPC
Micon Ltd. v. Magma Leasing Limited (1999) 4
SCC 253]. Moreover, the Respondent’s interpretation, if
accepted, would lead to various absurdities. Pertinently,
amongst other reasons:
i. given that it is accepted that the first proviso
provides for a temporary suspension or removal of an
auditor, if an application is filed under the first proviso
and the errant auditor replaced (albeit temporarily), then
an order Second Proviso can never follow. This is
because 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.
iii. the ineligibility to act under Section 140(5) of the
Act is only for acting as an auditor of any company. It
does not stop the auditor concerned from practising as
a chartered accountant generally. The individual or firm
concerned can take up any other activity pertaining to
accounts of the company (which is otherwise barred for
an auditor by virtue of Section 144) such as account
and book keeping service, actuarial service etc or
otherwise. In fact, in the present case, the auditing firms
involved have a very significant part of their business
outside the audit function. The prohibition of 5 years
does not affect their practise as a chartered accountant
or any other area of service; and
iv. the fixed prohibition period of 5 years activates
only in the event of finding of a fraud by the Hon’ble
NCLT in terms of the statutory scheme and public
policy. The principle of proportionality cannot be raised
to a level where the extent of the fraud is required to be
examined. The very deterrent effect of the provision
would get diluted and more importantly, it would amount
to perpetuating the fraud in connection with other
companies.
v. As regards the extent of application of the
ineligibility prescribed under the second proviso to
Section 140(5) of the Act to the firm and individuals, it is
submitted that a close reading of the provisions of the
Act reflects that the legislature considered every aspect
relating to the consequence of Section 140(5) of the
Act. An examination of the second proviso to Section
140(5) of the act shows that the Hon’ble NCLT is
required to give specific findings with regard to fraud
and whether the auditor is a firm or an individual. There
cannot be any presumption that mere finding of fraud in
connection with an individual will automatically
result in the determination of fraud by the firm.
This is also provided under Section 147 of the
Act which is as follows:
(5) Where, in case of audit of a company being
conducted by an audit firm, it is proved that the
partner or partners of the audit firm has or have
acted in a fraudulent manner or abetted or
colluded in any fraud by, or in relation to or by,
the company or its directors or officers, the
liability, whether civil or criminal as provided in
this Act or in any other law for the time being in
force, for such act shall be of the partner or
partners 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 conduct and management of any
company”.
b. Constructing “any other office connected with the
conduct and management of any company”, it would be
necessary to consider the consequential provisions that
were enacted along with Section 241(3) of the Act.
Particularly, Section 243(1A) and Section 243(2) of
the Act.
(1A) The person who is not a fit and proper person
pursuant to sub-section (4A) of section 242 shall
not hold the office of 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
(2) Any person who knowingly acts as a managing
director or other director or manager of a company
in contravention of clause (b) of sub-section (1) or
sub-section (1A), and every other director of the
company who is knowingly a party to such
contravention, shall be punishable with fine which
may extend to five lakh rupees
Clearly, from the words of the consequential provision, it is
clear that the reference in specifically 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 other director such as key
managerial personnel and not an auditor.
c. Moreover, in Section 241(3) of the Act specifically,
the words used are “conduct and management of the
company”. The auditor as the Act sets forth is an
independent examiner of accounts and cannot be said to
be holding an office in the conduct and management of the
company. This would militate against the very fibre of the
Companies Act, 2013.
3.19 Making above submissions, it is submitted that, (i)
Section 140(5) of the Act, 2013 operates to enable a
quasi-judicial tribunal equipped with powers of a civil court
to examine the role of auditors and adjudicate on their
fraudulent conduct and the abdication of their function;
(ii)Section 140(5) is not a provision to merely induce/effect
a change of an auditor who is not resigning. It is intended
as a provision which involves a substantive
determination of fraud so as to isolate or remove an
auditor from the company and from any company that
he/she is auditing. If construed to be a provision only to
induce a change of a recalcitrant auditor, the words
conferring power on the NCLT to inquire into an auditor’s
fraudulent conduct would be rendered 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 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
and filed an application in or about July 2019 challenging
the maintainability of the Union of India’s Petition under
Section 140(5) of the Act. Deloitte who had retired in 2018
also filed maintainability application; and
g) after leave from the Hon’ble Supreme Court, the
Union of India invoked the Hon’ble NCLT’s powers under
the first proviso to Section 140(5) of the Act and an auditor
was appointed for IFIN.
3.21 It is submitted that therefore in the facts and
circumstances of the present case and on true
interpretation of Section 140(5) of the Act, explained
above, the High Court has erroneously quashed the
NCLT’s order upholding the maintainability of Union of
India’s petition under Section 140(5) of the Act, 2013 and
the proceedings under Section 140(5) of the Act, 2013
against the auditors – BSR.
3.22 Given the interpretation of Section 140(5) of the Act
submitted above, it is contended that the act of
resignation of BSR after the filing of the Petition under
Section 140(5) of the Act cannot be held to render the
proceedings under Section 140(5) of the Act as void. The
Hon’ble Bombay High Court’s interpretation would render
any proceedings whether against the company’s
management and / or its auditors for fraud completely
frustrated by mere stratagem of design of a party. Under the circumstances, the Impugned Order passed by the
Hon’ble Bombay High Court is unsustainable and
deserves to be set aside.
3.23 As regards, Deloitte, it is submitted that the Hon’ble
NCLT and the NCLAT have upheld the maintainability of
the Petition under Section 140(5) of the Act. It is
submitted that as set out above, Section 140(5) of the Act
requires the Hon’ble NCLT to satisfy itself that the auditor
of the company, whether directly or indirectly, acted in a
fraudulent manner or abetted or colluded in any fraud. In
order to arrive at a finding in this regard, it is important to
examine the role of both auditors i.e., Deloitte and BSR
especially when both were acting as auditors for the
financial year 2017- 2018. Keeping in mind the
interpretation of the provision set out above, the
satisfaction of the Tribunal may finally result in a change
of auditor i.e., the change of BSR; however, that does not
take 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 Government
and it was improbable for the Central Government to have
applied its mind within such a short period.
It is submitted that the impugned order is incorrect since:
a. The SFIO IFIN Report is a report prepared by the SFIO
on the completion of investigation into IFIN viz. one of the
companies under investigation. The Hon’ble Bombay High
Court has not appreciated the position that:
i. By an order dated September 30, 2018, an
investigation was directed to be conducted by the SFIO
into IL&FS and its subsidiaries (IL&FS Group) which
aggregates to approx. 100-169 entities;
ii. The conduct of affairs of the IL&FS Group which
was set out in the Interim Report of the SFIO dated
November 30, 2018 clearly set forth that there were a
number of interlinkages within the group, routing
transactions etc;
iii. IFIN is one of the subsidiaries in the IL&FS
Group and the financial services arm. It facilitated
borrowings for different group companies in the IL&FS
Group from third party borrowers and at times routed
funding from one group company to another;
iv. Given the nature of interlinkages and overlaps
between different entities in the IL&FS Group, the SFIO
IFIN Report sets out that the SFIO IFIN Report is a report
in respect of IFIN and is a report upon completion of
investigation into IFIN; and
v. Finally, the SFIO IFIN Report sets forth, in
light of the complex structure of the IL&FS Group and the
interlinkages between entities etc, that if any further
instances or transactions are uncovered qua IFIN during
the investigation of the other group companies of IL&FS
then a further report will be filed.
This does not mean that the investigation into IFIN is
incomplete. In fact, even the direction to call for a
further report on certain aspects (which may be
related to third parties) does not detract from the
position that the investigation is complete in all other
respects. The Hon’ble Bombay High Court has failed
to appreciate the purport of the submission and has
fundamentally erred in holding that the SFIO IFIN
Report is incomplete and/or that the investigation
into IFIN is incomplete. In the case at hand, the SFIO
IFIN Report was submitted by the SFIO after a
detailed and extensive investigation of IFIN and the
multiple parties involved. It is submitted that there
were conclusive findings against each 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;
iii. The Respondents’ contentions were self-serving and
contradictory. Particularly, the contention that the Union of
India did not apply its mind given the period of 30 hours
taken to issue the 212(14) Direction is directly contrary to
the contention that the direction (contained in the 212(14)
Direction) to call for a further report demonstrates that
investigation is incomplete. Notwithstanding the fact that
investigation into IFIN is complete, a direction for a further
report on certain aspects could only have been issued
after application of mind.
iv. Legal and factual mala fides has a very high threshold –
one that cannot be met with a surface level contention of
speed of processing.
v. The scope of intervention before a Hon’ble Court with
Writ Jurisdiction would be to determine if there was
sufficiency of material before the authority granting the
direction. In the present case, the SFIO IFIN Report was
before the authority granting the direction to prosecute –
this fact is not disputed. Therefore, it cannot be said that
the relevant materials were not present before the relevant
authority.
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
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 financial statements and
present a rosy picture under section 211 read with
section 628 & Section 129 read with section 448 of the
Act.
It is submitted that the Investigation Report broadly
records that the auditors despite knowledge did not point
out any financial abnormality in the operation of IFIN and
gave an unmodified opinion stating that the financial
statements give a true and fair view in conformity with the
accounting standards and other accounting principles
accepted in India.
3.27 It is submitted that in the Investigation Report, there
are specific findings with respect to auditing of borrowings
and utilisation; audit of non-convertible debentures; audit
of lendings. It is submitted that on the basis of the
findings recorded in the Investigation Report, the auditors
have been charged under Section 447 of the Companies
Act, 2013 and Sections 417, 420 r/w 120B of the IPC. It is
submitted that therefore the High Court has materially
erred in quashing and setting aside the direction issued
under Section 212(14) of the Act and the
complaint/prosecution launched against the auditors.
3.28 Making above submissions, it is prayed to set aside
the judgment and order passed by the High Court by
which the High Court has quashed Section 212(14)
direction and the complaint filed by the SFIO and permit
the trial to continue against the accused arrayed in the
complaint. It is also prayed to set aside the impugned
judgment and order passed by the High Court quashing
and setting aside the order passed by the NCLT/NCLAT
upholding the proceedings under Section 140(5) of the
Act, 2013 and permit/allow the said proceedings to be
proceeded further, so as to allow the NCLT to reach to the
final conclusion so that even further steps can be taken as
per second proviso to Section 140(5) of the Act, 2013.
Submissions on behalf of the opposite parties:
4.While opposing the present appeals, learned senior
counsel appearing on behalf of the BSR has made the
following submissions:
i) It is submitted that in fact the BSR had challenged
the vires of Section 140(5) of the Act, 2013 before the
High Court being violative of Articles 14, 19(1)(g), 20
and 21 of the Constitution of India as well as being
unconstitutional and void. It is submitted that however
the High Court by the impugned judgment and order
while upholding the constitutionality of Section 140(5)
has 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 29.05.2019 under section 212 of the
Act. It is submitted that BSR had also challenged the
jurisdiction of NCLT to pass orders under section
140(5) of the Act, 2013. It is submitted that the NCLT
has not determined the merits of a section 140(5) order
and the NCLT in its first order has only upheld the
maintainability of section 140(5) proceedings. It is
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:
i. Section 140(1) of the Act deals with the
procedure for voluntary auditor by a
company.
ii. 140(2) and (3) deal with the procedure for
resignation of an auditor.
iii. Section 140(4) deals with special notice.
Section 140(5) deals with involuntary
removal by order of NCLT.
iv. The heading of Section 140 of the Act (i.e.,
"Removal, resignation of auditor and giving
of special notice") makes it clear that
Section 140(5) only serves the purpose of
removal of an auditor and is not a
standalone substantive provision to
disqualify auditors. It is well settled that a
heading is a condensed name to collectively
indicate the characteristics of the subject
matter covered by a Section. Reliance is
placed on the decision of this Court in the
case of Raichurmatham Prabhakar v.
Rawatmal Dugar, (2004) 4 SCC 766
(Para14).
vi) It is submitted that Sections 132, 141, 147, 245, and
447 of the Act deal with liability of an auditor in
cases of fraud:
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
offence is the same, i.e., an act involving
the same fraud, the penalty under Sections
140(5) and 141(3)(h) are triggered at
different times. A situation could arise where
a person deemed ineligible under Section
140(5) by way of the NCLT's final order is
subsequently acquitted of the charge of
fraud on the same set of facts under Section
447 of the Act by the criminal court. Further
even where a person is convicted under
Section 447, if he has already suffered the
disqualification under Section 140(5) for 5
years he could face a further ineligibility to
be appointed as an auditor for 10 years.
The total period hence could extend to 15
years.
iii. Section 147(3) imposes financial liability on
auditors by way of refund of remuneration or
even damages where the auditor is
convicted under Section 147(2) of the Act.
Section 147(5) further imposes joint and
several liability on audit firms and partners
in case of criminal liability.
iv. Section 241(3)(a) pertains to the civil
consequence of fraud and concern "any
person concerned in the conduct and
management of the affairs of a company".
This would certainly include auditors who
can be said to be concerned in the conduct
and management of a company's affairs. In
a proceeding under Section 241, the NCLT
will determine: (i) whether there has been
fraud; (ii) who the fraudsters are; (iii) who
connived in or abetted the fraud; and (iv)
whether the parties are fit and proper
persons. The NCLT can decide that an
auditor has connived in fraud and is not a fit
and proper person under Section 242 (4A)
which provides as follows:
"242. Powers of Tribunal. - (1) If, on any
application made under section 241, the
Tribunal is of the opinion-...
(44) At the conclusion of the hearing of the
case in respect of sub-section (3) of section
241, the Tribunal shall record its decision
stating therein specifically as to whether or
not the respondent is a fit and proper person
to hold the office of director or any other
office connected with the conduct and
management of any company."
v. The consequence of holding that a person
is not fit and proper is provided in Section
243 (1A) viz.:
"243. Consequences of termination or
modification of certain agreements – (1A)
The person who is not a fit and proper
person pursuant to sub-section (4A) of
section 242 shall not hold the office of 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, Without prejudice to any liability
including repayment of any debt under this
Act or any other law for the time being in
force, any person who is found to be guilty
of fraud, shall be punishable with
imprisonment for a term which shall not be
less than six months but which may extend
to ten years and shall also be liable to fine
which shall not be less than the amount
involved in the fraud, but which may extend
to three times the amount involved in the
fraud:
Provided that where the fraud in question
involves public interest, the term of
imprisonment shall not be less than three
years.
Explanation. For the purposes of this section-
(i) "fraud" in relation to affairs of a company
or any body corporate, includes any act,
omission, concealment of any fact or abuse
of position committed by any person or any
other person with the connivance in any
manner, with intent to deceive, to gain
undue advantage from, or to injure the
interest of the company or its shareholders
or its creditors or any other person, whether
or not there is any wrongful gain or wrongful
loss:
(ii) "wrongful gain" means the gain by
unlawful means of property to which the
person gaining is not legally entitled,
(iii) "wrongful loss" means the loss by
unlawful means of property to which the
person losing is legally entitled"
vii) It is submitted that Sections 435 to 438 of the
Companies Act provide a procedure in trial by a Special
Court incorporating safeguards of the CrPC. A chart
reflecting the comparative scheme of protections
afforded to parties before the NCLT as opposed to a
prosecution before the Special Court established under
the Act
viii) It is submitted that even if Section 140(5) is not
applicable in a given case due to the retirement or
resignation of an auditor prior to an order being passed,
that will not enable such an auditor to escape the vigour
of law under the Companies Act, 2013, Even if an
auditor resigns, he will nevertheless have to face (a)
prosecution for fraud under Section 447 of the Act; (b)
action before the National Financial Regulatory
Authority; (c) order by the NCLT debarring auditors from
acting as such in respect of any company as well can
be passed under Section 243 (1A) read with Section
241 and 242(4A); and (d) disqualification under Section
141(3)(h) if the auditor is found guilty of fraud. The
consequence 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 to be removed
has ceased to hold that position as no order of change
can be passed once the auditor has resigned. It is
submitted that this is clear from the plain language of
the provision itself.
xi) It is next submitted that under the first proviso to
Section 140(5), when an application under Section 140(5) is filed by the Central Government and if NCLT
is satisfied that a change in auditor is required, then
within 15 days from the date of filing the said
application, NCLT can pass an urgent order that the
auditor will not “function” as an auditor and that the
Central Government may appoint a new auditor to
replace the current auditor. It is submitted that this is in
the nature of a pro tem order pending final order by
NCLT under the operative part of Section 140(5) and to
facilitate the Central Government in appointing an
auditor whilst the existing auditor functioning is
restrained.
xii) It is next submitted that the second proviso to sub-
section 5 of Section 140 contemplates that if a final
order is passed against the auditor, then the auditor will
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. Additionally, the auditor shall also
be liable for action under Section 447 of the Companies
Act. It is submitted that the second proviso does not
contemplate any separate order by NCLT. Instead, it
only provides for an automatic consequence, i.e., five
years ineligibility qua an auditor whether individual or
firm against whom a final order has been passed by the
NCLT. It is submitted that moreover, the entire firm
gets automatically disqualified for the actions of even
one of its partners. There is no discretion provided to
NCLT to alter the period of ineligibility. It is submitted
that the debarment prescribed under the second
proviso is an in terrorem provision imposed by
operation of law, in the event an auditor chooses not to
resign and forces upon himself a final order under the
provision. It is submitted that the plain language of
second proviso is anchored squarely on a final order
being passed under the operative part of Section
140(5).
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
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, would tantamount to prejudicing the defence that
an auditor, in a given case, could take in any other
proceedings. The summary nature in which Section
140(5) aims to determine fraud may lead to a complete
redundancy of all other processes and procedures
provided for under the Companies Act and materially impact an auditor's right to fair trial. As an example, the
determination of guilt under Section 140(5) by way of a
summary procedure could render the process of
defences and appeals provided as a part of the NFRA
process nugatory and a mere formality qua the
auditors.
xvi)It is submitted that It is only when the language of
provisions in a statute are not clear and categorical, the
purpose of the same can be examined by a court to
interpret the provision. It is submitted that the following
principles of law are well settled with regard to the
primacy of plain language interpretation over purposive
interpretation:
i. The courts should now be very reluctant to
hold that Parliament has achieved nothing by
the language it used, when it is tolerably plain
what Parliament wished to achieve. [See Dr.
Jaishri Laxmanrao Patil v. Chief Minister
and Others, (2021) 8 SCC 1 (para 150).
ii. The courts will therefore reject that
construction which will defeat the plain
intention of the legislature even though there
may be some in exactitude in the language
used. [See Jaishri Laxmanrao Patil (supra)
(para 151).
iii. Purposive interpretation can be given only
when there is some ambiguity in the language
of the statutory provisions or it leads to absurd
results. [See State of Maharashtra v. Shri
Vile Parle Kelvani Mandal & Ors. (2022) 2
SCC 725 (para 16).
xvii) It is submitted that in addition, this Court has
time and again upheld the principle of doubtful
penalisation which requires that "if two views and
reasonable constructions can be put on a provision, the
court must lean in favour of construction which exempts
the subject from penalty rather than one which imposes
penalty". Reliance is placed on the decision of this
Court in the cases of SEBI v. Sunil Krishna Khaitan,
(2023) 2 SCC 643 (Para 55) and Tolaram Relumal v.
State of Bombay. (1955) 1 SCR 158 (Para 8).
xviii) It is submitted that NCLT’s jurisdiction under
Section 140(5) of the Act is to direct the removal of a
company’s existing auditor and to allow his 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 resignation.
Such a past auditor can, despite his resignation, be
prosecuted for fraud under Section 447 of the Act.
Therefore, the question of removing the auditor under
Section 140(5) cannot and does not arise.
xxi)It is submitted that the Ministry was aware that an
order under Section 140(5) cannot be passed against a
past auditor except through the device of a deeming
fiction. This is evident from prayers (a), (b) and (c) of
the 140(5) Company Petition sought qua Deloitte in
which Ministry sought a "deemed removal" of Deloitte
even though it had already rotated out as auditor.
Consequently, NCLT could not have gone into the
merits of the 140(5) Company Petition itself as the relief
sought for was beyond NCLT's powers.
xxii) It is submitted that further, the prayers in the
Company Petition sought against BSR became
infructuous with its resignation on 19 June 2019.
Pertinently, no "deemed removal" prayer was sought
against BSR after its resignation. Despite this, NCLT
proceeded to create a deeming fiction so as to clutch at
its jurisdiction to pass an order under Section 140(5)
against BSR.
xxiii) It is then submitted that NCLT, exercising
powers under Section 140(5), cannot direct removal of
past auditors or deem such auditors to have been
removed at a previous date. NCLT, being a creature of
a statute, has to act within the domain prescribed by the law/statutory provision. Thus, NCLT cannot exercise
power which has not been expressly vested in it, by
directing a "deemed change in auditors. Reliance is
placed upon the decisions of this Court in the cases of
B. Himmatlal Agrawal v Competition Commission of
India, AIR 2018 SC 2804 (para 8) and Cellular
Operators Association of India v. Union of India,
(2003) 3 SCC 186 (para 20-21).
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."
xxv) It is submitted that in the present case
although BSR resigned after the filing of the 140(5)
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
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 consequences akin to civil death. It is submitted that
the penalty in the form of automatic disqualification of
auditors and of the entire firm including partners who
may be entirely unconnected and innocent for a pre-
determined period envisaged under Section 140(5) is
highly disproportionate and not the least invasive
method. It is submitted that Section 140(5) creates an
automatic penalty of disqualification, upon summary
adjudication, when such a penalty has already been
provided for under section 141(3)(h) of the Act after
following due process of trial under Sections 435 to 446
of the Act. The same results in contravention of the
principles of double jeopardy and violation of Article
20(2) of the Constitution. It is submitted that
disqualification akin to "civil death" under Section
140(5) impinges upon BSR and its partners'
fundamental right to carry on its profession, as
guaranteed under Article 19(1)(g) of the Constitution.
The same, being unreasonable, does not fall within the
protection of Article 19(6) of the Constitution of India. It
is submitted that applying Section 140(5) in its plain
language i.e., to change of auditors, saves it from the
above serious constitutional infraction without letting
auditors "off the hook" under the Companies Act.
xxviii) It is submitted that the NCLT, vide its first
Order, erroneously upheld its jurisdiction to maintain the
140(5) Company Petition against past auditors of IFIN,
including BSR, by incorrectly creating a deeming fiction,
in absence of any legislation to this effect or the
necessary jurisdiction and power to do so. It is
submitted that the NCLT wrongly assumed jurisdiction
by holding that it was empowered to pass directions for
a deemed change of ex-auditors and therefore the
NCLT’s first order is contrary to Section 140(5) as it was
passed without jurisdiction and based on an incorrect
assumption that the jurisdictional fact that the existing
auditors of the company needed to be "changed"
existed.
xxix) It is submitted that it is trite law that a
"jurisdictional fact' is a sine qua non or the condition
precedent to the assumption of jurisdiction by a court. A
court cannot erroneously assume jurisdiction either by
not deciding the jurisdictional fact or by 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
arise; secondly, the first proviso is only a pro tem
measure pending a jurisdiction order under Section 140(5); thirdly, the NCLT’s second order is not in the
nature of a pro tem order; fourthly, once the
proceedings under section 140(5) of the Act are
initiated, only the Central Government is authorised to
appoint or change the auditors under the first proviso.
Under the first proviso to section 140(5), the power
given to Central Government to appoint an auditor due
to urgency, does not take away the power of the
concerned company to appoint an auditor of its choice;
fifthly, BSR had admittedly already resigned and
vacated its office, as accepted by the Ministry in its
submissions before this Court and this Court noted the
same in the order dated 26.09.2019. It is submitted
that moreover, the Ministry withheld various key facts
from the NCLT at the time of filing.
4.1 Now so far as the direction issued under Section
212(14) and the prosecution under Section 212(15), it is
submitted as under:
i) Section 212(1) provides that the Central
Government may direct the SPIO to investigate into the
affairs of a company inter alia upon a receipt of the
report of the Registrar, on intimation of a special
resolution passed by a company, in public interest or on
request from any Department of the Central
Government or State Government;
ii) Section 212(11) provides that SFIO must submit an
"interim report" to the Central Government, if the SFIO
is directed to do so by the Central Government;
iii) Section 212(12) requires SFIO to submit an
"investigation report" to the Central Government only
upon "completion of the investigation". Therefore, an
"investigation report" cannot be submitted at any time
prior to the completion of the investigation, whereas an
"interim report" under Section 212(11) can be submitted
at any stage;
iv) Under Section 212(14), the Central Government has
been empowered to direct SPIO to initiate prosecution
against a company or its officers, if the Central
Government considers it necessary after examination of
only the "investigation report" issued under Section
212(12), i.e., after completion of the investigation.
Reliance is placed on the decision of this Court in the
case of Serious Fraud Investigation Office v Rahul
Modi (2019) 5 SCC 266 (Para 30);
v) Section 212(14) permits the Central Government to
take 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 legislature has
envisaged two distinct kinds of reports, with its own
specific purpose. The first kind of report is under
Section 212(11). which report is an 'Interim Report' and
can be issued at any point of time during the course of
investigation by the SFIO. The 2nd kind of report is an
'Investigation Report" which can be issued only after
completion of the investigation by the SFIO. Only the
Investigation Report' can be considered by the Central
Government under Section 212(14) for the purposes of
commencement of prosecution. On the other hand, an
action before the NCLT under Section 212(14A) can be
brought on based on either the Investigation Report or
even the Interim Report;
ix) It is further clear that the Central Government, under
Section 212(14) is required to apply its mind, seek legal
opinion (if required) and only thereafter decide whether
or not a sanction order is to be issued, i.e., if in its
opinion prosecution is to be initiated based on the
"Investigation Report'. Further, only such 'Investigation
Report', which is considered by the Central Government
for the initiation of prosecution under Section 212(14),
is to be the police officer's report under Section 173,
CrPC;
x) It is submitted that in the present case, SFIO's 2nd
Interim Report is an "Interim report" and was not issued
upon "completion of the investigation". As such, the 2
Interim Report is not an "investigation report" under
Section 212(12) of the Act and could not have been
considered by the Central Government under Section
212(14) for the purposes of issuing the Sanction Order;
xi) The present case is not a case of
invalidity/irregularity of sanction but a case of no
sanction at all, since the pre-requisite to the sanction,
i.e., a final investigation report, is absent;
xii) As is evident from above, where an investigation
report itself states that the investigation is incomplete or
that further evidence is yet to be collected, then such an
investigation report does not meet the obligatory
requirements of law and cannot be considered a final
investigation report under Section 173(2) of the CrPC.
Reliance is placed on the following decisions in the
cases of P.M.C Mercantile Private Ltd. v. The State
2014(3) MWN (Cr.) 454 (Para 11 and 19); Pravin
Chandra Modi v. The State of Andhra Pradesh, Crl.
App. No. 49, 1964; 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
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 is clear
from a conjoint reading of Sections 212(12), (14) and
(15). Further, though Section 173(8) of the CrPC
contemplates a further investigation after filing of a
report under Section 173(2), it is trite that Section
173(8) does not enable the inspector to submit an
incomplete or preliminary report and later on submit a
final report. Reliance is placed on the following
decisions in the cases of Kamal Lochan Sen v. State
of Orissa (1982) 54 CLT 509 (Para 5) and AV
Dharma Reddy v. State of A.P. & Ors., 2011 CriLJ
185 (Para 5). Therefore, the stratagem adopted by
SFIO and the Ministry in proceeding to act based on an
"interim report" and simultaneously carrying on a further
investigation is illegal;
xvi) Since the investigation itself was not complete and
the 2nd Interim SFIO Report is merely an interim report,
there was no basis for the Ministry to issue a direction
under Section 212(14) to initiate prosecution.
Accordingly, the Sanction Order is ultra yes. It does not
constitute sanction and the prosecution is void ab initio
and a nullity;
xvii) The Sanction Order was passed without
application of mind to the relevant material and
evidence;
xviii) Section 212(14) requires an "examination" by
the Central Government and even contemplates "legal
advice" being taken, if required. The Parliament sets
out a superior degree of care that is required while
passing an order under Section 212(14). Therefore, the
Central Government's decision must be reasoned and
must be made with proper application of mind;
xix) In law, the order of sanction must disclose
both adequacy of material as well as consideration of
the relevant facts, material and evidence by the
sanctioning authority. Reliance is placed on the
decision of this Court in the case of Mansukhbhai
Vithaldas Chauhan v. State of Gujarat (1997) 7 SCC
622 (Paras 17, 18 and 19);
xx) SFIO submitted the 2nd Interim SFIO Report on
28.05.2019. Admittedly, the report comprised of over
32,000 pages, with the body of the report itself forming
approximately 787 pages. The 2 Interim SFIO Report
was allegedly examined by a Processing Officer (Legal
Section), Ministry who had prepared a processing note.
This processing note was allegedly submitted to the
'Senior Officer' on an urgent priority basis. Despite the
above internal processes, Ministry issued the Sanction
Order 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);
xxii) Further, Ministry’s failure to produce any
evidence to demonstrate that its officers independently
applied their minds to the 2nd Interim SFIO Report is
also contrary to the principles relating to duty of
disclosure since disclosure would protect the fairness of
the proceedings and also enhance the transparency of
the process. Reliance is placed upon the decision of
this Court in the case of T.Takano v. SEBI, (2022) 8
SCC 162 (Para 62.3);
xxiii) It is therefore submitted that the Sanction
Order is bad in law and the Bombay High Court rightly
quashed the same;
xxiv) A mandatory prerequisite to jurisdiction is the
existence of a valid sanction. Therefore, the
prosecution becomes incompetent and consequently
the proceedings are vitiated and without jurisdiction
where no valid sanction is granted. Reliance is placed
on the decisions in the cases of Gokulchand
Dwarkadas Morarka v. The King, (1947-48) 75 IA 30;
Yusofalli Mulla Noobbhoy v. The King, 1949 Cri LJ
889 ( Para 15); Mohd. Iqbal Ahmed v. State of
Andhra Pradesh (1979) 4 SCC 172 (Para 3);
xxv) The Sanction Order issued by MCA under
Section 212(14) is invalid and non-est. In such
circumstances, it is submitted that the prosecution
initiated by SFIO is absent any sanction and hence a
nullity and without any jurisdiction.
4.2 Learned counsel appearing on behalf of respondent
No.1 in Criminal Appeal No. 2300/2011 – Hari Sankaran,
in addition, has further submitted that in the present
matter no final investigation report has been filed by the
SFIO qua Hari Sankaran. It is submitted that the second
report is not in the nature of final investigation report qua
Hari Sankaran. It is submitted that since the second
report was not a final investigation report qua Hari
Sankaran, direction for prosecution in question could not
have been issued and therefore consequently the
complaint could not have been filed qua Hari Sankaran.
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.
Analysis and Interpretation of Section 140(5)of the Companies Act, 2013:
5.Section 140(5) of the Act, 2013 titled as “Removal, Resignation of Auditor and Giving of Special Notice” appears 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 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 five years. 5.1 At this stage, it is required to be noted that Section 143 of the Act deals with the powers and duties of the auditors. Sub-section (12) of Section 143 specifically provides that in the event that the auditor has reason to believe that an offence of fraud is being or has been committed in the company, the auditor shall report the matter to the Central Government. The detailed procedure is provided under the Rules issued in this regard. Therefore, a statutory duty is cast upon the auditor to report the matter to the Central Government about the offence of fraud being committed in a company. To see that the auditor is not holding any post in the company and he acts independently, Section 144 of the Act provides that the auditor cannot provide certain services including the management services. The objective seems to be that the auditor should function as an independent person uninfluenced by any of its activities outside the scope of audit services. The auditor is prohibited from providing any management service to the company. Thus, 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. Keeping inb mind the aforesaid provisions and the underlying public policy in the backdrop, Section 140(5) of the Act, 2013 is required to be interpreted and/or considered. 5.2 Section 140(1) of the Act provides for the procedure to remove an auditor by the company before the expiry of his term; section 140(2) and (3) of the Act deal with resignation of auditors and Section 140(4) of the Act deals with giving of special notice at an AGM for appointment of an auditor other than the retiring auditor and the process in that regard. However, Section 140(5) of the Act empowers the Tribunal (NCLT), either suo motu or on an application made to it by the Central Government or by any person concerned, to take action against the auditor who has acted in a fraudulent manner or is abetting or colluding in fraud with the management of a company. If on completion 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 fraud has been perpetrated and when circumstances warrant the substitution. Such an order can be said to be an interim order akin to a temporary suspension during the pendency of the detailed enquiry as provided in Section 140(5) of the Act and before any final order is passed by the Tribunal. 5.3 Second proviso to section 140(5) of the Act further provides that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under section 140(5) 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 of such action under section 447 of the Companies Act. Therefore, as such, second proviso to Section 140(5) can be said to be a substantive provision and it operates on the final order passed by the Tribunal under Section 140(5) (first part). At this stage, it is required to be noted that after taking into consideration the recommendations made by the previous Standing Committee in respect of Companies Bill, 2009 and the recommendations from various stakeholders, the Companies Bill, 2011 came to be introduced. The suggestion of the Standing Committee to clause 123(1) of the 2009 Bill (which provided for removal of an auditor by the NCLT on finding that there is a fraud) was to make the provision more stringent; and to provide for consequences for an auditor when such auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud. The same has been done by way of second proviso to Section 140(5) of the Act, 2013. Therefore, the second proviso to Section 140(5) which, as observed hereinabove, is a substantive provision, is introduced after a detailed analysis and after taking into consideration the recommendations of the Standing Committee and with a view to make the provision more stringent and to provide for consequences for an auditor when such auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud. It is required to be noted that on passing of the final order by the NCLT under first part of section 140(5) and if an auditor is found to have been indulged into fraudulent activities or abetting or colluding in a fraud with the management of the company, consequences provided under the second proviso to section 140(5) shall follow. Therefore, before second 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 also on culmination of the enquiry under section 140(5) proceedings and passing a final order by the Tribunal on the conduct of an auditor, whether such a auditor 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, as provided under the second proviso to section 140(5) of the Act, 2013. Therefore, the enquiry/proceedings initiated under the first part of section 140(5) has to go to its logical end and subsequent resignation and/or discontinuance of an auditor shall not terminate the enquiry/proceedings under section 140(5). If the interpretation given by the High Court that once an auditor resigns, the proceedings under section 140(5) stand terminated and are no longer further required to be proceeded, in that case, an auditor to avoid the final order and the consequence of final order as provided under the second proviso to section 140(5) may resign and avoid any final order by the Tribunal. That cannot be the intention of the legislature. 6.1 As observed hereinabove, the second proviso to section 140(5) of the Act, 2013 is a substantive provision, though it is by way of a proviso, and the same shall operate and/or depend upon the final order to be passed by the Tribunal in the first part of section 140(5). If the interpretation given by the High Court that on subsequent resignation and/or discontinuance of an auditor, proceedings under section 140(5) stand terminated and/or the petition under section 140(5) by the Central Government is no longer maintainable is accepted, in that case, second proviso to section 140(5) would become nugatory and in no case there shall be any action under the second proviso to section 140(5). If such an interpretation, as interpreted by the High Court, is accepted, in that case, the object and purpose of incorporation of second proviso to section 140(5) shall be frustrated. The object and purpose of second proviso to section 140(5), as observed hereinabove, is to make the provision more stringent and to provide for consequences for an auditor when such an auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud. At this stage, it is required to be noted that under the second proviso to section 140(5) on the final order being passed by the Tribunal that the auditor/firm 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, 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 change its auditor as provided in the first part of section 140(5) is only a consequence to the finding recorded by the Tribunal that the auditor has, directly or indirectly, acted in a fraudulent manner. This is the first consequence of the final order under section 140(5) (first part). On passing the final order by the Tribunal that the auditor of a company has, directly or indirectly, acted in a fraudulent manner, the second consequence as mentioned in the second proviso to section 140(5) shall be attracted. Therefore, for any consequence as provided under the second proviso to section 140(5), there shall be a final order by the Tribunal on enquiry as per first part of section 140(5). Therefore, on true interpretation, even on resignation by an auditor of a company even during the enquiry/proceedings under section 140(5) or even prior to that, there shall not be any termination of the proceedings under section 140(5) as observed and held by the High Court. At the cost of repetition, it is observed that in a given case, an auditor, who in fact has, directly or indirectly, acted in a fraudulent manner, to avoid any further consequence under the second proviso to section 140(5), resigns to avoid any consequence under the second proviso to section 140(5), it cannot be permitted.
8.No so far as the submission on behalf of the respective auditors that even if section 140(5) would not have been there, in that case also, no auditor can get away with fraud, abetment of fraud or professional misconduct etc. and for that purpose the reliance placed upon sections 132, 141, 147, 245 and 447 of the Act is concerned, at the outset, it is required to be noted that all the aforesaid provisions and section 140(5) operate in different field. Section 140(5) has been enacted with a special object and purpose, as observed hereinabove. Second proviso to section 140(5) specifically provides that on final order being passed by the NCLT, such an auditor shall not be eligible to become an auditor in any other company for a period of five years. Therefore, merely because the auditor can be removed as an auditor of a company including the other provisions, section 140(5) which has been enacted with a special object and purpose cannot be said to be arbitrary and/or ultra vires.
9.Now so far as the reliance placed upon section 241(3) of the Act and the submission that even in a case 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 other director such as key managerial personnel and not an auditor. The words used in Section 241(3) of the Act are “conduct and management of the company”. As per the Scheme of the Act, 2013, more particularly Chapter X, the auditor acts as an independent examiner of accounts and cannot be said to be holding an office in the conduct and management of the company. Therefore, the submission that what could be achieved under section 140(5) of the Act, 2013 can be achieved by Section 241(3) even after the auditor has resigned has no substance.
10.At this stage, it is required to be noted that in section 140(5), it is specifically mentioned that “without prejudice to any action under the provisions of this Act or any other law for the time being in force”. Therefore, the intention of the legislature while enacting section 140(5) is very clear and the powers conferred upon the Tribunal under section 140(5) shall be without prejudice to any action under the provisions of the Companies Act, 2013 or any other law for the time being in force. Therefore, irrespective of any other provisions of the Act, 2013, the Tribunal is vested with the powers under Section 140(5) of the Act to pass a final order against the auditor on the allegation that such an auditor of the company has, directly or indirectly, acted in a fraudulent manner.
11.For the reasons stated above, the High Court has materially erred in holding that on resignation of auditors – BSR & Deloitte and on appoint of new auditors, application under section 140(5) shall not be maintainable. Consequently, the High Court has erred in setting aside the order(s) passed by the NCLT/NCLAT by which the NCLT/NCLAT held that despite the resignation of the auditors, enquiry/proceedings under Section 140(5) shall be maintainable and/or continued. As observed hereinabove, despite the subsequent resignation of the auditors and/or despite the resignation of an auditor even for the purpose of second proviso to section 140(5), the enquiry/proceedings/application under section 140(5) (first part) shall be maintainable and continued and on the final order being passed by the NCLT, as provided in section 140(5), consequence as provided under the second proviso to section 140(5) shall follow. As neither the NCLT nor the High Court have gone into the merits of the allegations against the respective auditors and the decision of 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 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.
13.Now so far as another submission that section 140(5) is violative of Article 14 of the Constitution of India and discriminates against the auditors unfairly in comparison to similarly placed alleged perpetrators, such as directors, management etc. It is required to be noted that the role of auditors cannot be equated with directors and/or management. Auditors play very important role in the affairs of the company and therefore they have to act in the larger public interest and all other stakeholders including investors etc. Chapter X of the Act specifically for the “Audit and Auditors” looking to the importance of the auditors. Therefore, section 140(5) cannot be said to be discriminatory and/or violative of Article 14 of the Constitution of India.
14.Now so far as the submission that the penalty in the form of automatic disqualification of auditors and of the entire firm including partners and that too for a period of five years to become the auditor of any other company is highly disproportionate is concerned, it is ultimately for the legislature/Parliament to provide the debarment. On the principle of joint and severe liability, the auditors and the entire firm including partners shall be liable and therefore can be subjected to section 140(5) and the consequences mentioned in section 140(5) of the Act, 2013. So far as the submission that the disqualification is akin to civil death and section 140(5) impinges upon BSR and its partners’ fundamental right to carry on its profession, as guaranteed under Article 19(1)(g) of the Constitution is concerned, nobody can be permitted to say that despite acting fraudulently, directly or indirectly, they had a right to continue and/or carrying on their profession. Acting in a fraudulent manner, directly or indirectly, by an auditor is a very serious misconduct and therefore the necessary consequence of indulging into such fraudulent act shall follow. At this stage, it is required to be noted and as observed hereinabove, Section 140(5) of the Act has been 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 direction under section 212(14) terming the same as non-application of mind since it was improbable that report of about 750 pages and 32000 pages of annexures could have been considered in 30 hours. The High Court also observed that the relevant facts and documents to demonstrate application of mind have not been placed on record. With the above conclusion, the High Court has observed that even according to the investigating agency, SFIO Report was an interim report, even asked by the Central Government. 15.2 Now so far as the observations made by the High Court that issuance of the direction to prosecute within 30 hours of the receipt of IFIN SFIO Report demonstrates non-application of mind as it was improbable that report of about 750 pages and 32000 pages of annexures could have been considered in 30 hours is concerned, the observations made by the High Court cannot be accepted. Merely because the direction to prosecute was issued within 30 hours, by that itself, it cannot be presumed that there was a non-application of mind. A detailed note was prepared by the officer which was ultimately placed before the final authority who ultimately took a decision and issued a direction to prosecute. What was required to be considered was, whether there was any material to prosecute or not and whether the direction to prosecute was properly given or not. During the trial, the accused shall be given ample opportunity to put forward their case. Therefore, on the aforesaid ground, the High Court has materially erred in setting aside the direction to prosecute issued under section 212(14) of the Act. Now so far as the observations made by the High Court that the relevant facts and documents to demonstrate application of mind have not been placed on record is concerned, it is required to be noted that a final order to prosecute was placed on record in which it has been specifically mentioned that having gone through the IFIN SFIO Report. 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 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 structure of the IL&FS Group and the interlinkages between entities etc, if any further instances or transactions are uncovered qua IFIN during the investigation of other group companies of IL&FS, then a further report will be filed. Therefore, the High Court has materially erred that the investigation in respect of IFIN is incomplete. It is required to be noted that as such the SFIO had submitted the report after a detailed and extensive investigation of IFIN. There are conclusive findings against each of the writ petitioners including Hari Sankaran pointing out multiple breaches, violations of statutory duties and fraudulent conduct. We are not elaborating the same in detail as the prosecution is yet to take place and the concerned persons are to be tried. The proceedings before the High Court were at the stage of direction under section 212(14) to allow the prosecution and the sanction to prosecute. Ample opportunity shall be available to the concerned accused against whom the prosecution was ordered for the offences punishable under section 447 of the Companies Act and other relevant provisions of the IPC. Therefore, the High Court has erred in setting aside the direction under section 212(14) to prosecute at this stage and on the aforesaid grounds. Conclusion:
16.In view of the above and for the reasons stated above, challenge to the constitutional validity of section 140(5) of the Companies Act, 2013 fails and it is observed and held that section 140(5) is neither discriminatory, arbitrary and/or violative of Articles 14, 19(1)(g) of the Constitution of India, as alleged. The impugned judgment and order passed by the High Court quashing and setting aside the application/proceedings under section 140(5) on 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.
17.In view of the above and for the reasons stated above, the impugned judgment and order passed by the High Court quashing and setting aside the direction under 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. [M.R. SHAH] NEW DELHI; ………………………..J. MAY 03, 2023. [M.M. SUNDRESH]