IL&FS: Bombay HC Grants Interim Stay On MCA's Proceedings Before NCLT Seeking A 5 Yr Ban On Accounting Firm BSR [Read Order]

Division bench of Justice Ranjit More and Justice NJ Jamadar directed the Serious Fraud Investigation Office (SFIO) not to take any coercive action against BSR.

Case Background

As reported earlier, Ministry of Corporate Affairs sought disqualification of 5 years for both Deloitte and BSR due to alleged violations of accounting standards while working for IL&FS Financial Services (IFIN).

Deloitte was the sole auditor of IFIN for 10 years, between 2007 to 2017. From the financial year 2017-18, BSR was appointed as a joint statutory auditor of IFIN along with Deloitte.

On September 30, 2018, Ministry of Corporate Affairs directed SFIO to initiate investigation into IL&FS and its subsidiaries. In May 2019, IFIN issued a notice to BSR under S.140(1) of the Companies Act for their removal as auditors. Subsequently, on May 24, 2018, BSR filed its reply and on May 28, SFIO placed its report before MCA.

The very next day, MCA issued a sanction order against BSR directing the initiation of (i) an action under section 140(5) of the Act (ii) prosecution under sections 143 and 147 of the Act and (iii) prosecution under sections 417, 420 read with 120 of the Indian Penal Code, 1860.

Finally, MCA moved NCLT seeking BSR's removal as IFIN's statutory auditor and a ban on the accounting firm for five years. In June, BSR resigned as the statutory auditor. Thereafter, BSR filed an application before NCLT challenging the maintainability of the company petition filed by MCA.

On August 9, 2019 BSR's application was dismissed by NCLT, which held that MCA's petition was maintainable. This order was challenged by BSR before the High Court.

Submissions and Order

Senior Advocates Mukul Rohatgi and Navroz Seervai appeared on behalf of the petitioners, whereas Union of India was represented by Senior Advocate Aspi Chinoy. Hiten Venegaokar appeared for SFIO, APP FR Shaikh for the State.

Rohatgi submitted that sub-section (5) of section 140 of the Act provides for three consequences, first removal of the auditor; second debarring such auditor for the five years; and lastly action under section 447 of the Act. However, BSR tendered their resignation on June 19, 2019, which was accepted by IFIN and in the circumstances, the proceedings under section 140(5) of the Act are not maintainable, Rohatgi said.

Whereas, Chinoy argued that resignation by the auditor simplicitor will not absolve them and still the proceedings under sub-section (5) of section 140 of the Act can be continued.

Rohatgi referred to the sanction order and informed the bench that SFIO's report was submitted on May 28, 2019 and on the very next day, the sanction order was issued by Union Ministry of Corporate Affairs. This report by SFIO runs into 32,000 pages and Union of India could not have applied its mind to this voluminous material within such a short span of time and issued a sanction order, Rohatgi asserted.

"This issue, in our prima facie opinion, also requires to be dealt with elaborately. The matter thus warrants a response from Respondent No. 1 and Respondent No. 2. We find that arguable points are raised which require detailed deliberation and consideration", Court observed before deferring the hearing to October 3.

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