REPORTABLE IN THE SUPREME COURT OF INDIA CRIMINAL/CIVIL APPELLATE JURISDICTION CRIMINAL APPEAL NOS.2305-2307 OF 2022 Union of India and Another… Respondents Versus Deloitte Haskins and Sells LLP & Anr…. Respondents WITH CRIMINAL APPEAL NOS. 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. 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.
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 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. 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. 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. 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. 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. 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. 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. 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.
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. 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. It is submitted that Section 140 of the Act, 2013 is titled as “Removal, resignation of auditor and giving of special notice”. It is submitted that second proviso 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.
5 Thereafter, Shri Balbir Singh, learned ASG has taken us and referred to the legislative history of Section 140(5) of the Act as under: Legislative History of Section 140(5) of the Act, 2013 Around August 2004, the Government initiated the process of review of the Companies Act, 1956 and drafting of a new Companies Bill to replace the Companies Act, 1956. Irani Committee, the Ministry prepared the Companies Bill, 2008 and introduced the same before the Lok Sabha on October 23, 2008. Accordingly, the Companies Bill 2009 was introduced in the Lok Sabha on or about July 15, 2009. 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. 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. 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. 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. 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 perpetrated a fraud and is removed by the NCLT for such fraud. 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
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. 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. 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.
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 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. 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. 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.
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. 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”. the ineligibility to act under Section 140(5) of the Act is only for acting as an auditor of any company. 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.
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. 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. (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. 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. 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. 21
Also Read: https://newslaw.in/case-type/criminal/analysis-of-bail-granting-criteria-in-criminal-cases/
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. 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. 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. SFIO IFIN Report is an incomplete report/report on an incomplete investigation and therefore the 212(14) Direction could not be given. 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.
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. 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. 25 No 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.
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.
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 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 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. 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 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.
Section 140(5) deals with involuntary removal by order of NCLT. 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. 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”). 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 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”. 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….” 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. 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. 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. 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.
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. 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. 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. 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. [See Jaishri Laxmanrao Patil (supra) (para 151).
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. 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. 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. 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. 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 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. 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. 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. 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”.
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. 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’. 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 requirements of law and cannot be considered a final investigation report under Section 173(2) of the CrPC. Accordingly, given the language of paras 1.5 and 4.126.1 of the 2nd Interim SFIO Report, that report could never be treated as an investigation report under Section 212(12); xiii) Even while examining the 2nd Interim Report, the MCA was of the view that the 2nd Interim Report was not a complete investigation report with respect to IFIN. 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. 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 2 Interim SFIO Report was allegedly examined by a Processing Officer (Legal Section), Ministry who had prepared a processing note. 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. 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. 2 Learned counsel appearing on behalf of respondent No.1 in Criminal Appeal No 2300/2011 –
Case Title: UNION OF INDIA Vs. DELOITTE HASKINS AND SELLS LLP (2023 INSC 484)
Case Number: Crl.A. No.-002305-002307 / 2022
