IL&FS Case: MCA Proceedings In NCLT For 5 Year Ban On Auditors Challenged By KPMG's Arm In Bombay HC

In major development coming from the corporate sector, BSR and Associates, an associate of KPMG has challenged an order of the National Company Law Tribunal's Mumbai bench whereby an application filed by BSR along with Deloitte questioning the maintainability of Corporate Ministry's petition seeking disqualification of both the auditors for 5 years was rejected.

BSR's challenge came up for hearing on Thursday before the bench of Justice Ranjit More and Justice NJ Jamadar and has been adjourned till September 4 to enable the petitioner to carry out few amendments  in the petition.

Ministry of Corporate Affairs has sought disqualification of 5 years for both Deloitte and BSR due alleged violations of accounting standards while working for IL&FS Financial Services (IFIN). Deloitte was the sole auditor of IFIN in 2016 and 2017. Whereas it was audited jointly by BSR and Deloitte in financial year 2018, in 2019, IFIN was audited solely by BSR and Associates.

In the petition that runs into over 2000 pages, NCLT's order dated August 9 has been challenged and vires of Section 140(5) of the Companies Act 2013 have been challenged. Major contentions in the said petition are-

"Section 140(5) creates summary mechanism for adjudication of fraudulent conduct, abetment, collusion and fraud without any guidance and grants untrammelled powers to the Tribunal for determining guilt, violating Article 14 of the Constitution.

It applies unfair treatment to auditors as compared to the similarly placed alleged perpetrators of the fraud. Even the penalty for auditors envisaged under Section 140(5) of the act is highly disproportionate.

The said disqualification under S.140(5) impinges upon petitioner's fundamental right to carry on its profession as guaranteed under Article 19(1)(g) of the Constitution.", the petition states.

Case So Far

In May 2019, Ministry of Corporate Affairs decided to initiate action against BSR for alleged violations in audit of IFIN. Pursuant to this, the Serious Fraud Investigation Office (SFIO) filed a complaint against BSR. On June 10, the said ministry filed a company petition before NCLT seeking a disqualification of 5 years against the auditors under Section 140(5). Nine days later, BSR & Associates tendered its resignation as statutory auditor of IFIN.

Thereafter, both auditors filed an application before NCLT, Mumbai bench challenging the maintainability of corporate ministry's action against them. Both auditors had argued that NCLT does not have jurisdiction to impose such a ban on them. The Tribunal rejected the said applications refusing any relief to the auditors in an order dated August 9.

A battery of Senior Advocates appeared on behalf of both the auditors led by Janak Dwarkadas, Amit Desai, Darius Khambata and Mustafa Doctor.

NCLT rejected the application challenging maintainability and noted the Tribunal had jurisdiction to hear the said petition. The order states-

"Thus, keeping in consideration of the legislative intent and creative interpretation of second proviso to Sub-section (5) of Sec 140 of the Companies Act 2013 empowers the Central Govt to order the company to change its auditor in case Central Govt is satisfied that the auditor of a company has acted in a fraudulent manner or abetted or colluded in any fraud."