Bombay High Court grants interim relief to KPMG arm BSR & Associates in IL&FS case

Granting temporary relief to BSR & Associates (a KPMG arm), the former auditors of IL&FS, the Bombay High Court passed an order staying further proceedings at the Mumbai Bench of the National Company Law Tribunal (NCLT). The Ministry of Corporate Affairs (MCA) had filed an application under S. 140 (5) of the Companies Act, 2013, seeking a five-year ban on BSR & Associates..Moreover, the Court has also directed no coercive action shall be taken against BSR & Associates in the criminal complaint filed by the Serious Fraud Investigation Office (SFIO) against IL&FS before the trial court till further orders..A Division Bench of Justices Ranjit More and NJ Jamadar was hearing a plea filed by BSR & Associates challenging the maintainability of the MCA’s application before the NCLT Mumbai Bench seeking a ban on Deloitte and KPMG for five years..On Wednesday, Senior Counsel and former Attorney General for India Mukul Rohatgi, appearing for BSR, argued that Section 140(5) was ultra vires the Constitution of India..Section 140 of the Companies Act deals with the removal and resignation of auditors. Sub-section 5 states:.“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.”.While challenging the constitutionality of Section 140(5), Rohatgi further submitted that under the second proviso to the Section, on a plain reading, the auditor will be liable for “action” under Section 447 of the Act. This would be in breach of Article 21 of the Constitution of India, he stated..Rohatgi argued that if Section 140(5) is invoked, only auditors will face proceedings while directors of the company may not be held liable. Proper legal recourse for all parties involved can be sought under Section 447 of the Companies Act instead, he said..Rohatgi also argued that Section 140(5) of the Companies Act is not invoked for banning auditors, but for removing or changing them..He stated that pending the proceedings under Section 140 (5) of the Act, BSR & Associates had tendered its resignation as the statutory auditor of IL&FS Financial Service Limited (IFIN). This resignation has been accepted by the company, and therefore, the proceedings under S. 140(5) are not maintainable..He went on to contend that SFIO merely acted upon an ‘interim report’, not a final report..“SFIO had filed a 32,000-page report and action was taken immediately on the next day. It is not normal. Even habeas corpus petitions are not decided in this manner,” Rohatgi argued..BSR and Deloitte had earlier challenged the NCLT’s jurisdiction to ban them. The petition was subsequently dismissed by the tribunal..It was submitted that Deloitte has since moved the appellate tribunal against the order. The NCLAT had, last month, directed the NCLT not to pass any orders in the matter until the case is resolved by it. However, it allowed NCLT to conduct proceedings against the auditors until then..Senior Counsel Navroz Seervai, along with advocate Sujay Kantawala, appeared for the petitioner Sampath Ganesh, who is a Partner at BSR. Seervai claimed that the plea under S. 140(5) of the Companies Act was unsustainable, as the term of auditors came to an end by operation of law. Seervai also argued that the NCLT is not competent to hear challenges to SFIO sanction..Senior Counsel Aspi Chinoy, appearing for respondent MCA, argued that the auditors are guilty of negligence and abetting fraud. Their case is meant to confuse and create a fog so that the proceedings against them are stopped, he contended..Moreover, Chinoy submitted that the word “action” under the second proviso to S. 140(5) means “prosecution” under Section 447 of the Companies Act and therefore, there is no merit in the contention of the petitioner..Chinoy further submitted that the resignation by the auditor would not absolve him of the proceedings before NCLT. He also pointed out that Deloitte has moved the NCLAT in appeal and that similar recourse should have been taken by BSR..Chinoy went on to submit that the government took prompt action, as it was a financial crisis caused by the misdemeanor of the directors and the auditors..Advocate Hiten Venegaonkar, counsel for SFIO submitted that report of the investigation agency was indeed final. He said,.“Only when the central government asks us to submit an interim report, then we submit such report but that stage never came in this case. We have arrested two people on the basis of the report and they are currently in jail.”.The Bench noted that the issue also requires consideration in light of Section 132(4B), under which the auditor can be debarred for a period of 6 months to 10 years, and Section 141 (3) (h) of the Act, which provides for disqualification for a period of 10 years from the date of conviction for fraud..The High Court has deferred the hearing to October 3..The SFIO probe had revealed that the auditors colluded with IFIN executives and concealed information about the wrongdoings of the management despite having full knowledge of the affairs at IL&FS..Following the SFIO findings, the MCA, under Section 140(5) of Companies Act, 2013, had moved an application seeking the removal of the auditors, and a five-year ban for allegedly conniving with the management of IFIN. The MCA had also sought the appointment of a statutory auditor on June 10..The Sessions Court of Mumbai on June 6 had admitted the charge sheet filed by the SFIO against 30 entities in the IFIN fraud case. The charge sheet, filed on May 30, named several members of the former top management of IL&FS including Former CEO and Managing Director Ramesh Bawa and former Vice-President of IFIN Hari Sankaran..MCA had argued that the NCLT has a discretionary power to remove and ban auditors, as the prime intent and emphasis of Section 140 (5) is to debar such auditors..The financial transactions of the IL&FS group came under the scrutiny of the SFIO last year after the group defaulted on debt worth Rs. 91,000 crore..Senior Advocate Navroz Seervai, along with Advocate Sujay Kantawala and AZB & Partners Partner V.P. Singh and team Aditya Mehta, Aditya Jalan, Raghav Seth, Anshula Laroiya, Aman Sharma, Samarth Luthra, and Vanya Chhabra represented BSR & Associates.Senior Advocates Mukul Rohatgi and Darius J. Khambata along with Zal Andhyarujina, AZB Partner V.P. Singh and team Aditya Jalan, Raghav Seth, Anshula Laroiya, Aman Sharma, Samarth Luthra, and Vanya Chhabra appeared for Sampath Ganesh..Senior Advocate Aspi Chinoy, along with Cyril Amarchand Mangaldas team Ashish Mehta, Animesh Bisht, Aditya Sikka, Saloni Kapadia, and Drishti Das appeared for MCA..H.S. Venegaonkar along with Ajay L. Bhise and Pradeep Yadav represented SFIO..Read the Order: