IL&FS Crisis: Deloitte Haskins and Sells challenges validity of S.140(5) of Companies Act before Bombay HC

Former IL&FS auditor Deloitte Haskins and Sells, accused of connivance in the IL&FS crisis, has moved the Bombay High Court on Thursday challenging the constitutional validity of Section 140 (5) of the Companies Act, 2013 and the Ministry of Corporate Affairs (MCA) plea at NCLT seeking a ban on auditors for five years..The move comes after the BSR & Associates, another former auditor of the IL&FS Financial Services Limited, had moved the Bombay High Court challenging the validity of section 140(5) and maintainability of the MCA’s application before NCLT..Granting interim relief to BSR, the High Court, on September 4 had stayed proceedings before NCLT under Section 140 (5) of Companies Act. The Court had 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..Senior Counsel Amit Desai, appearing for Deloitte submitted that while his plea is on admitted facts similar to that of BSR & Associates matter, it is on the different question of law and requested the Court that he be heard at length..In this regard, the Court noted that it will hear Deloitte’s plea along with on-going BSR matter and directed the Additional Solicitor General (ASG) Anil Singh to argue on the constitutional validity of the provision of the Companies Act invoked by MCA on the next date of hearing..However, Special Counsel Aspi Chinoy, appearing for MCA contended that since the Central Government is already a party to the matter, there was no need for issuance of separate notice to the ASG..Aspi Chinoy also argued that the criminal plea of BSR be dismissed since NCLT proceedings under Section 140(5) of the Companies Act would not come under the criminal writ jurisdiction of the High Court. The National Company Law Appellate Tribunal (NCLAT) is an appropriate platform to deal with this plea, Chinoy said..In view of this, BSR & Associates (a KPMG arm) resumed its arguments before the Bombay High Court on Thursday. Senior Counsel Darius Khambata, appearing for BSR began his arguments stating that the source of all the actions initiated by MCA was sanction order issued by Serious Fraud Investigation Office (SFIO) on May 29 under Section 212 of the Companies Act. He contended that based on the said order, the MCA had initiated proceedings before NCLT for banning auditors..In light of this, BSR argued that the May 29 order of SFIO was on the basis of incomplete investigation and subsequent order of NCLT to ban auditors for five years under Section 140(5) of the Companies Act is ultra vires since it prescribes a change of auditors or removal..BSR further submitted that while criminal prosecution can be conducted under section 447 of the Companies Act, banning auditor firms for five years without any trial is arbitrary..Khambata further argued,.“On the face of it, the SFIO report is incomplete. Moreover, the action was taken immediately a day after 32,000 pages were filed by SFIO, which is suspicious. There is no provision of trial before NCLT and proceedings under Section 140 (5) are decided summarily. This is like a civil death in a summary trial.”.In light of this, BSR brought nearly eight cartons of SFIO report to produce before the court..To this, Chinoy submitted that the government took prompt action, as it was a financial crisis caused by the misdemeanor of the directors and the auditors..Moreover, Khambata submitted that there is an ipso facto provision for punishment of up to 10 years for conviction after completion of a criminal proceeding under Section 447 of the Companies Act..After Justice More inquired if the NCLT order under Section 140 (5) can only be challenged before NCLAT, Khambatta submitted that since the BSR has challenged the constitutional validity of the very provision of Companies Act, it cannot be entertained by NCLAT and High Court will be competent to deal with the plea..In view of this, Senior Counsel Khambata went on to submit,.“My client would not be absolved of criminal proceedings under section 447 and other relevant sections. However, the NCLT has no vires to put a five-year ban on the firm since Section 140 (5) only provides removal or change of an auditor by the Central Government. Moreover, BSR had resigned as an auditor after Financial Year 2018.”.Khambata referred to several High Court and Supreme Court judgments in support of his claims. Khambata is likely to continue his arguments on the next date of hearing..Thereafter, senior advocate Amit Desai will begin his arguments on Deloitte’s plea followed by a reply of ASG Singh and Special Counsel Aspi Chinoy appearing for the Central Government..While an interim relief will continue till further orders, the Court has posted the matter for continued hearing on October 16..The Serious Fraud Investigation Office (SFIO) probe had revealed that auditors colluded with IL&FS Financial Services Ltd ( 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..Veritas Legal is advising Deloitte while AZB & Partners is advising BSR & Associates in the dispute.