IL&FS: Should Deloitte and BSR be punished? NCLT reserves its order

After hearing Deloitte Haskins and BSR & Associates – auditors of IL&FS, the Mumbai bench of National Company Law Tribunal (NCLT) reserved its order yesterday..NCLT also directed Deloitte Haskins and BSR & Associates to file written submissions of their arguments within two days. Deloitte Haskins and BSR & Associates were opposing the application of Ministry of Corporate Affairs (MCA) to ban them for five years,.Read Also – Explainer: The IL&FS Insolvency case .A division bench of V P Singh and Ravikumar Duraiswamy of NCLT, Mumbai heard the matter on Friday and final arguments were made yesterday..The MCA, under Section 140 (5) of Companies Act, 2013, had moved an application seeking the removal of the auditors and banning them for five years for allegedly conniving with the management of IL&FS Financial Services (IFIN). The MCA had also sought an appointment of statutory auditor on June 10. Section 140(5) empowers NCLT to direct a company to remove or change an auditor acting in a fraudulent manner..Serious Fraud Investigation Office (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. Ministry of Corporate Affairs (MCA) argued that NCLT has a discretionary power to remove and ban Auditors as prime intent and emphasis of section 140 (5) of Companies Act, 2013 is to debar them..What the Government Argued?.Advocate Sanjay Shorey, Director of Legal Prosecution of MCA argued that government auditor can be appointed only after NCLT decides the matter. He said that Deloitte and BSR cease to be auditors only after the court rules on the application of government and the tribunal is competent to debar them at the current stage..He also claimed that application of Government is not a legal fiction as claimed by Respondent Auditors and the Auditors should be punished for it..“The mischief has taken place and auditors will have to run for cover if we reveal their fraudulent acts,” Shorey claimed..What did the Deloitte and BSR Counsel argue?.Earlier, on June 21, Auditors had questioned the NCLT’s jurisdiction and claimed that MCA’s application was not maintainable under Section 140(5) of the Companies Act, 2013. Senior counsel Janak Dwarkadas, appearing for Deloitte, argued that Section 140 (5) of 2013 Companies Act, can be invoked only if Auditors are still continuing and jurisdiction of NCLT is lost once Auditors resign..He said that evidence should establish fraud beyond a reasonable doubt before NCLT passes final order under S. 140 (5) of Companies Act..Dwarkadas argued that the removal of auditors before the expiry of their term itself is a punishment. “Under S. 140 (5), the court can pass an order only to change the auditor but it cannot debar the auditor,” he said..The BSR & Associates submitted that they had already resigned as IL&FS auditors and they cannot be put in the same category as independent directors and senior management. Senior counsel Darius Khambata, appearing for BSR & Associates (KPMG arm) argued that the NCLT cannot pass final order to ban Auditors under Section 140(5) of Companies Act on prima facie evidence of fraud. He said that an auditor, which has already resigned can’t be double punished..Khambata, opposing ban under S. 140 (5), argued that auditor could be punished either under S. 132 (4) (c) or under S. 141(3) of 2013 Companies Act, only after they’ve been established fraud under Section 447, which deals with fine and debarment..In a separate plea made by the government, NCLT on Thursday, July 18, had allowed the government to implead IL&FS auditors based on SFIO probe..MCA had sought impleadment of auditors & others under S. 242 & S. 339, which deal with oppression and mismanagement and S. 339, dealing with liability for fraudulent conduct of business..The Deloitte and BSR have already filed an application to stay that order in NCLAT and it is likely to be heard on Tuesday.