Supreme Court of India
UNION OF INDIA AND ANOTHERversusDELOITTE HASKINS AND SELLS LLP & ANR
- Citation
- 2023 INSC 484
- Decided
- 3 May 2023
- Disposal
- Disposed off
- Bench
- M R SHAH
Holding
Proceedings under s.140(5) are maintainable even after an auditor's resignation, and s.140(5) is constitutionally valid and not arbitrary or discriminatory.
Summary
The Supreme Court examined whether proceedings under Section 140(5) of the Companies Act, 2013 can continue after an auditor resigns, and whether the provision is constitutionally valid. The Court held that the NCLT's enquiry under Section 140(5) must run to its logical end irrespective of the auditor's resignation, and that the second proviso, which bars the auditor from being appointed for five years, is a substantive provision. The Court also rejected the High Court's view that the provision is arbitrary, discriminatory, or violative of Articles 14 and 19(1)(g) of the Constitution. Additionally, the Court quashed the High Court's order setting aside the Ministry's direction under Section 212(14) and the related prosecution, finding that the SFIO report was a completed investigation and the direction was not a product of non‑application of mind. Consequently, the Union of India's appeals were allowed, while the appeals of Deloitte Haskins & Sells LLP and its partners were dismissed.
Issues considered
- The maintainability of proceedings under s.140(5) of the Companies Act, 2013 after the auditor's resignation
- The constitutional validity of s.140(5) vis‑à‑vis Articles 14 and 19(1)(g) of the Constitution
- The effect and applicability of the second proviso to s.140(5) concerning debarment of auditors
- The validity of the direction issued under s.212(14) of the Companies Act based on the SFIO report
Legislation cited
- Companies Act, 2013s. 130, s. 132, s. 140(5), s. 141(3)(h), s. 143(12), s. 144, s. 147, s. 212(11), s. 212(12), s. 212(14), s. 241(3), s. 243(1A), s. 243(2), s. 447
Subjects
auditauditor resignationCompanies Act 2013Section 140(5)NCLTdebarment of auditorsconstitutional validitySection 212SFIO reportfraudcorporate governance
Judgment
[2023] 5 S.C.R. 949 949
UNION OF INDIA AND ANOTHER A
V.
DELOITTE HASKINS AND SELLS LLP & ANR.
(Criminal Appeal Nos.2305-2307 of 2022)
MAY 03, 2023 B
[M. R. SHAH AND M. M. SUNDRESH, JJ.]
Companies Act, 2013 – s.140(5) – Analysis and Interpretation
of – Maintainability of proceedings u/s.140(5) after resignation of
the auditors – s.140(5) empowers the Tribunal (NCLT), either suo
C
motu or on an application made to it by the Central Government or
by any person concerned, to take action against the auditor who
has acted in a fraudulent manner or is abetting or colluding in
fraud with the management of a company – If on completion of an
enquiry it is found by the Tribunal that an auditor of a company
has, whether directly or indirectly, acted in a fraudulent manner or D
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 – By the impugned judgment, the High Court
held that once the auditor resigns as an auditor or is no more an
auditor on his resignation, thereafter s.140(5) proceedings are no
E
longer maintainable – Whether after resignation of the auditors,
proceedings u/s.140(5) are maintainable – Held: The view taken by
the High Court is absolutely erroneous and is unsustainable –
Application / proceedings u/s.140(5) of the Act, 2013 is maintainable
even after the resignation of the concerned auditors – Enquiry/
proceedings initiated under the first part of s.140(5) has to go to its F
logical end and subsequent resignation and/or discontinuance of
an auditor shall not terminate the enquiry/proceedings u/s.140(5)
– If interpretation given by High Court that once an auditor resigns,
proceedings u/s.140(5) stand terminated and are no longer further
required to be proceeded, in that case, an auditor to avoid the final
G
order and the consequence of final order as provided under the
second proviso to s.140(5) may resign and avoid any final order by
the Tribunal – That cannot be the intention of the legislature – NCLT
to pass final order on such application after holding enquiry in
accordance with law and thereafter on basis of such final order,
H
949
950 SUPREME COURT REPORTS [2023] 5 S.C.R.
A further consequences as provided under second proviso to s.140(5)
shall follow.
Companies Act, 2013 – s.140(5) – Constitutional validity of
– s.140(5) empowers the Tribunal (NCLT), either suo motu or on an
application made to it by the Central Government or by any person
B concerned, to take action against the auditor who has acted in a
fraudulent manner or is abetting or colluding in fraud with the
management of a company – If on completion of an enquiry it is
found by the Tribunal that an 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
C or officers, it may by order direct the company to change its auditors
– Held: s.140(5) is neither discriminatory, arbitrary and/or violative
of Arts. 14, 19(1)(g) of the Constitution – NCLT exercises quasi-
judicial powers u/s.140(5) with all the powers akin to civil court –
Ample opportunity is given by NCLT before passing any final order
D – Plea that s.140(5) discriminates against the auditors unfairly in
comparison to similarly placed alleged perpetrators, such as
directors, management etc. not tenable, as the role of auditors cannot
be equated with directors and/or management – Acting in a
fraudulent manner, directly or indirectly, by an auditor is a very
serious misconduct and therefore the necessary consequence of
E indulging into such fraudulent act shall follow – Merely because
the auditor can be removed as an auditor of a company under the
other provisions, s.140(5) which has been enacted with a special
object and purpose cannot be said to be arbitrary and/or ultra vires
– Constitution of India – Arts. 14 and 19(1)(g).
F Companies Act, 2013 – s.140(5), first proviso – Powers under
the first proviso to s.140(5) – Nature of – Held: It can be said to be
interim or pro tem measure to prevent an existing auditor from
continuing and substitute him with an auditor based on a prima
facie satisfaction that a fraud has been perpetrated and when
G circumstances warrant the substitution – Such an order can be said
to be an interim order akin to a temporary suspension during the
pendency of the detailed enquiry as provided in s.140(5) and before
any final order is passed by the Tribunal.
Companies Act, 2013 – s.140(5), second proviso – Object
H and purpose of – When attracted –– Held: The object and purpose
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 951
AND SELLS LLP
of second proviso to s.140(5) is to make the provision more stringent A
and to provide for consequences for an auditor when such an auditor
is found to have been perpetrating a fraud and is removed by the
NCLT for such fraud – Before second proviso of s.140(5) is attracted,
there must be a detailed enquiry against an auditor of a company
as per first part of s.140(5) and there must be a finding arrived at
B
by the NCLT that the auditor of a company has, 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.
Companies Act, 2013 – s.140(5) – Powers conferred upon
the Tribunal u/s.140(5) – If without prejudice to any action under
the provisions of the Act, 2013 or any other law for the time being C
in force – Held: Irrespective of any other provisions of the Act,
2013, the Tribunal is vested with powers u/s.140(5) to pass a final
order against the auditor on the allegation that such an auditor of
the company has, directly or indirectly, acted in a fraudulent manner.
Companies Act, 2013 – s.212(14) – Quashing and setting D
aside of s.212(14) direction issued by Union of India to Serious
Fraud Investigation Office (SFIO), by the High Court –
Consequently prosecution lodged by SFIO set aside – High Court
set aside the s.212(14) direction mainly on two grounds, firstly, that
the direction to prosecute was issued within 30 hours of report of E
the SFIO Report which demonstrates non-application of mind and
secondly on ground that SFIO Report was an incomplete report as
investigation had not been completed and therefore s.212(14)
direction was incompetent – Held: Merely because the direction to
prosecute was issued within 30 hours, by that itself, it cannot be
presumed that there was a non-application of mind – What was F
required to be considered was, whether there was any material to
prosecute or not and whether the direction to prosecute was properly
given or not – High Court also did not properly appreciate that the
SFIO Report was a report prepared on completion of investigation
into IFIN – one of the companies under investigation – IFIN was G
one of the subsidiaries in the IL&FS group and the financial services
arm – Merely because investigation with respect to other subsidiary
companies of IL&FS group might have been going on, cannot be a
ground to observe that so far as IFIN was concerned the report
was incomplete – High Court materially erred that investigation in
H
952 SUPREME COURT REPORTS [2023] 5 S.C.R.
A respect of IFIN was incomplete – Proceedings before the High Court
were at the stage of direction u/s.212(14) to allow the prosecution
and the sanction to prosecute – Ample opportunity was available to
the concerned accused – Therefore, High Court erred in setting
aside the direction u/s.212(14).
B Companies Act, 2013 – Chapter X – Audit and Auditors –
Held: Role of auditors cannot be equated with directors and/or
management.
Words and Phrases – Word “any” used in second proviso to
s.140(5) of the Act, 2013 – Meaning – Under second proviso to
C s.140(5), on the final order being passed by the Tribunal that the
auditor/firm has, 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, he/it shall not be eligible to be appointed
as an auditor of any company for a period of five years – Held:
The word “any” is significant – On the final order being passed by
D the Tribunal, such an auditor not only shall be removed or changed
as an auditor of a company, but such an auditor/firm shall also be
ineligible to be appointed as an auditor of any other company for a
period of five years – Companies Act, 2013 – s.140(5).
Disposing of the appeals, the Court
E
HELD:1. The powers of the NCLT in first part of Section
140(5) of the Companies Act, 2013 is quasi-judicial in nature and
the Tribunal would have the powers of a civil court to examine
the role of auditors and adjudicate on their fraudulent conduct
and abdication of their function. The powers under the first proviso
F to Section 140(5) can be said to be interim or pro tem measure to
prevent an existing auditor from continuing and substitute him
with an auditor based on a prima facie satisfaction that a fraud has
been perpetrated and when circumstances warrant the
substitution. Such an order can be said to be an interim order
G akin to a temporary suspension during the pendency of the
detailed enquiry as provided in Section 140(5) of the Act and
before any final order is passed by the Tribunal. [Para 5.2][1005-
D-G]
2. As such, second proviso to Section 140(5) can be said to
be a substantive provision and it operates on the final order
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 953
AND SELLS LLP
passed by the Tribunal under Section 140(5) (first part). The A
second proviso to Section 140(5) was introduced after detailed
analysis and after taking into consideration recommendations of
the Parliamentary Standing Committee and with a view to make
the provision more stringent and to provide for consequences
for an auditor when such auditor is found to have been
B
perpetrating a fraud and is removed by the NCLT for such fraud.
On passing of the final order by the NCLT under first part of
section 140(5) and if an auditor is found to have been indulged
into fraudulent activities or abetting or colluding in a fraud with
the management of the company, consequences provided under
the second proviso to section 140(5) shall follow. Therefore, C
before second proviso of section 140(5) is attracted, there must
be a detailed enquiry against an auditor of a company as per first
part of section 140(5) and there must be a finding arrived at by
the NCLT that the auditor of a company has, directly or indirectly,
acted in a fraudulent manner or abetted or colluded in any fraud
D
by, or in relation to, the company or its directors or officers. [Para
5.3][1006-A-G]
3. Subsequent resignation of an auditor after the application
is filed under section 140(5) by itself shall not terminate the
proceedings under section 140(5). Resignation and/or removal
of an auditor cannot be said to be an end of the proceedings under E
section 140(5). There are further consequences also on
culmination of the enquiry under section 140(5) proceedings and
passing a final order by the Tribunal on the conduct of an auditor,
whether such a auditor has, directly or indirectly, acted in a
fraudulent manner or abetted or colluded in any fraud by, or in F
relation to, the company or its directors or officers, as provided
under the second proviso to section 140(5) of the Act, 2013.
Therefore, the enquiry/proceedings initiated under the first part
of section 140(5) has to go to its logical end and subsequent
resignation and/or discontinuance of an auditor shall not terminate
the enquiry/proceedings under section 140(5). If the G
interpretation given by the High Court that once an auditor
resigns, the proceedings under section 140(5) stand terminated
and are no longer further required to be proceeded, in that case,
an auditor to avoid the final order and the consequence of final
order as provided under the second proviso to section 140(5) H
954 SUPREME COURT REPORTS [2023] 5 S.C.R.
A may resign and avoid any final order by the Tribunal. That cannot
be the intention of the legislature. [Para 6][1007-A-D]
4. The second proviso to section 140(5) of the Act, 2013 is
a substantive provision, though it is by way of a proviso, and the
same shall operate and/or depend upon the final order to be
B passed by the Tribunal in the first part of section 140(5). If the
interpretation given by the High Court that on subsequent
resignation and/or discontinuance of an auditor, proceedings under
section 140(5) stand terminated and/or the petition under section
140(5) by the Central Government is no longer maintainable is
accepted, in that case, second proviso to section 140(5) would
C become nugatory and in no case there shall be any action under
the second proviso to section 140(5). If such an interpretation,
as interpreted by the High Court, is accepted, in that case, the
object and purpose of incorporation of second proviso to section
140(5) shall be frustrated. The object and purpose of second
D proviso to section 140(5) is to make the provision more stringent
and to provide for consequences for an auditor when such an
auditor is found to have been perpetrating a fraud and is removed
by the NCLT for such fraud. Notably, under the second proviso
to section 140(5) on the final order being passed by the Tribunal
that the auditor/firm has, directly or indirectly, acted in a fraudulent
E manner or abetted or colluded in any fraud by, or in relation to,
the company or its directors or officers, he/it shall not be eligible
to be appointed as an auditor of any company for a period of five
years. The word “any” used in the second proviso to section
140(5) is significant. On the final order being passed by the
F Tribunal, such an auditor not only shall be removed or changed
as an auditor of a company, but such an auditor/firm shall also be
ineligible to be appointed as an auditor of any other company for
a period of five years. [Para 6.1][1007-E-H; 1008-A-B]
5. On true interpretation and scheme of Section 140(5) of
G the Act, 2013, once the enquiry/proceedings is/are initiated under
first part of section 140(5) of the Act, either suo motu by the
Tribunal or on an application made to it by the Central
Government or by any person concerned, it must come to its
logical end and irrespective of the fact whether during such
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 955
AND SELLS LLP
enquiry/proceedings the auditor has resigned or not, there must A
be a final order to be passed by the Tribunal on whether such an
auditor has, in fact, directly or indirectly, acted in a fraudulent
manner or not. Direction to the company to change its auditor as
provided in the first part of section 140(5) is only a consequence
to the finding recorded by the Tribunal that the auditor has, directly
B
or indirectly, acted in a fraudulent manner. This is the first
consequence of the final order under section 140(5) (first part).
On passing the final order by the Tribunal that the auditor of a
company has, directly or indirectly, acted in a fraudulent manner,
the second consequence as mentioned in the second proviso to
section 140(5) shall be attracted. Therefore, for any consequence C
as provided under the second proviso to section 140(5), there
shall be a final order by the Tribunal on enquiry as per first part
of section 140(5). Therefore, on true interpretation, even on
resignation by an auditor of a company even during the enquiry/
proceedings under section 140(5) or even prior to that, there
D
shall not be any termination of the proceedings under section
140(5) as observed and held by the High Court. In a given case,
an auditor, who in fact has, directly or indirectly, acted in a
fraudulent manner, to avoid any further consequence under the
second proviso to section 140(5), resigns to avoid any
consequence under the second proviso to section 140(5), it cannot E
be permitted. [Para 7][1008-C-G]
6.1. No so far as the submission that even if section 140(5)
would not have been there, in that case also, no auditor can get
away with fraud, abetment of fraud or professional misconduct
etc. and for that purpose the reliance placed upon sections 132, F
141, 147, 245 and 447 of the Act is concerned, it is required to be
noted that all the aforesaid provisions and section 140(5) operate
in different field. Merely because the auditor can be removed as
an auditor of a company including the other provisions, section
140(5) which has been enacted with a special object and purpose
cannot be said to be arbitrary and/or ultra vires. [Para 8][1008- G
H; 1009-A, B-C]
6.2. As per the Scheme of the Act, 2013, more particularly
Chapter X, the auditor acts as an independent examiner of
accounts and cannot be said to be holding an office in the conduct
H
956 SUPREME COURT REPORTS [2023] 5 S.C.R.
A and management of the company. Therefore, the submission that
what could be achieved under section 140(5) of the Act, 2013 can
be achieved by Section 241(3) even after the auditor has resigned
has no substance. [Para 9][1009-G-H]
6.3. In section 140(5), it is specifically mentioned that
B “without prejudice to any action under the provisions of this Act
or any other law for the time being in force”. Therefore, the
intention of the legislature while enacting section 140(5) is very
clear and the powers conferred upon the Tribunal under section
140(5) shall be without prejudice to any action under the
provisions of the Companies Act, 2013 or any other law for the
C time being in force. Therefore, irrespective of any other
provisions of the Act, 2013, the Tribunal is vested with the powers
under Section 140(5) of the Act to pass a final order against the
auditor on the allegation that such an auditor of the company has,
directly or indirectly, acted in a fraudulent manner. [Para 10][1010-
D A-C]
7. Section 140(5) cannot be said to be excessive and/or
manifestly arbitrary, as contended. It was the case on behalf of
the original writ petitioners on the constitutionality/vires of
section 140(5) that section 140(5) is excessive and arbitrary as it
E provides unguided and untrammelled powers to NCLT for
determination of a serious offence of fraud and consequence of
mandatory disqualification with grave consequences akin to civil
death. The aforesaid has no substance. NCLT shall exercise the
quasi-judicial powers under section 140(5) with all the powers
akin to civil court. Ample opportunity shall be given by the NCLT
F before passing any final order. [Para 12][1011-A-C]
8. Insofar as the submission that section 140(5) is violative
of Article 14 of the Constitution of India and discriminates against
the auditors unfairly in comparison to similarly placed alleged
perpetrators, such as directors, management etc. is concerned,
G it is required to be noted that the role of auditors cannot be
equated with directors and/or management. Auditors play very
important role in the affairs of the company and therefore they
have to act in the larger public interest and all other stakeholders
including investors etc. Chapter X of the Act specifically for the
H “Audit and Auditors” looking to the importance of the auditors.
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 957
AND SELLS LLP
Therefore, section 140(5) cannot be said to be discriminatory A
and/or violative of Article 14 of the Constitution of India. [Para
13][1011-C-E]
9. It was submitted that penalty in the form of automatic
disqualification of auditors and of the entire firm including partners
and that too for a period of five years to become the auditor of B
any other company is highly disproportionate. However, it is
ultimately for the legislature/Parliament to provide the debarment.
On the principle of joint and severe liability, the auditors and the
entire firm including partners shall be liable and therefore can be
subjected to section 140(5) and the consequences mentioned in
section 140(5) of the Act, 2013. Nobody can be permitted to say C
that despite acting fraudulently, directly or indirectly, they had a
right to continue and/or carrying on their profession. Acting in a
fraudulent manner, directly or indirectly, by an auditor is a very
serious misconduct and therefore the necessary consequence of
indulging into such fraudulent act shall follow. Section 140(5) of D
the Act has been enacted with the specific object and purpose
and the same has been enacted after due deliberations and taking
into consideration the recommendations of the Standing
Committee as well as the respective stakeholders. Therefore,
taking into consideration the object and purpose for which section
140(5) of the Act is enacted, the same cannot be said to be arbitrary, E
excessive and violative of Article 14 of the Constitution of India
and/or violative of fundamental rights guaranteed under Article
19(1)(g) of the Constitution of India, as alleged. [Para 14][1011-
E-H; 1012-A-C]
10.1. The High Court set aside the direction under section F
212(14) terming the same as non-application of mind since it was
improbable that report of about 750 pages and 32000 pages of
annexures could have been considered in 30 hours. The
observations made by the High Court cannot be accepted. Merely
because the direction to prosecute was issued within 30 hours, G
by that itself, it cannot be presumed that there was a non-
application of mind. A detailed note was prepared by the officer
which was ultimately placed before the final authority who
ultimately took a decision and issued a direction to prosecute.
What was required to be considered was, whether there was any
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958 SUPREME COURT REPORTS [2023] 5 S.C.R.
A material to prosecute or not and whether the direction to
prosecute was properly given or not. During the trial, the accused
shall be given ample opportunity to put forward their case.
Therefore, on the aforesaid ground, the High Court has materially
erred in setting aside the direction to prosecute issued under
section 212(14) of the Act. [Paras 15.1 and 15.2][1012-F-H; 1013-
B
A-B]
10.2. The High Court has not properly appreciated that the
SFIO Report was a report prepared on the completion of the
investigation into the IFIN – one of the companies under
investigation. IFIN was one of the subsidiaries in the IL&FS
C group and the financial services arm. Merely because so far as
the investigation with respect to other subsidiary companies of
IL&FS group is concerned, the same might have been going on,
cannot be a ground to observe that at this stage so far as the
IFIN is concerned the report was incomplete report and for which
D the investigation was going on. The High Court materially erred
that the investigation in respect of IFIN is incomplete. The
proceedings before the High Court were at the stage of direction
under section 212(14) to allow the prosecution and the sanction
to prosecute. Ample opportunity shall be available to the
concerned accused against whom the prosecution was ordered
E for the offences punishable under section 447 of the Companies
Act and other relevant provisions of the IPC. Therefore, the High
Court has erred in setting aside the direction under section
212(14). [Para 15.3][1013-D, E-F, H; 1014-B-C]
11. The challenge to the constitutional validity of section
F 140(5) of the Companies Act, 2013 fails. Section 140(5) is neither
discriminatory, arbitrary and/or violative of Articles 14, 19(1)(g)
of the Constitution of India, as alleged. The impugned judgment
and order passed by the High Court quashing and setting aside
the application/proceedings under section 140(5) on the ground
G that as the auditors have resigned and therefore thereafter the
same is not maintainable is hereby quashed and set aside.
Consequently, the impugned judgment and order passed by the
High Court quashing and setting aside the NCLT order holding
that even after the resignation of the auditors, the proceedings
under section 140(5) shall be maintainable is hereby quashed
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UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 959
AND SELLS LLP
and set aside. The application/proceedings under section 140(5) A
of the Act, 2013 is held to be maintainable even after the
resignation of the concerned auditors and now the NCLT therefore
to pass a final order on such application after holding enquiry in
accordance with law and thereafter on the basis of such final order,
further consequences as provided under the second proviso to
B
section 140(5) shall follow. [Para 16][1014-D-G]
Devas Multimedia Pvt. Ltd. v. Antrix Corporation Ltd.
& Anr. (2023) 1 SCC 216; An Advocate v. Bar Council
of India (1989) Supp 2 SCC 25 : [1988] 3 Suppl. SCR
361; ICAI v. LK Ratna & Ors. (1986) 4 SCC 537 : [1986]
3 SCR 1049; Dharani Sugars and Chemicals Ltd. v. C
Union of India (2019) 5 SCC 480 : [2019] 6 SCR 307;
SEBI v. Sunil Krishna Khaitan (2023) 2 SCC 643;
Tolaram Relumal v. State of Bombay [1955] 1 SCR 158;
Bhuwalka Steel Industries Ltd & Anr v. UOI (2017) 5
SCC 598 : [2017] 2 SCR 993; Sant Lal Gupta v. D
Modern Cooperative Housing Society Ltd. (2010) 13
SCC 336 : [2010] 13 SCR 621; B. Himmatlal Agrawal
v. Competition Commission of India AIR 2018 SC 2804:
[2018] 4 SCR 496 ; Cellular Operators Association of
India v. Union of India (2003) 3 SCC 186 : [2002] 5
Suppl. SCR 222; Pasupuleti Venkateswarlu v. Motor E
& General Traders (1975) 1 SCC 770 : [1975] 3 SCR
958; Carona Ltd. v. Parvathy Swaminathan & Sons
(2007) 8 SCC 559 : [2007] 10 SCR 656; Arun Kumar
v. Union of India (2007) 1 SCC 732 : [2006] 6 Suppl.
SCR 290; Balram Garg v. SEBI (2022) 9 SCC 425; F
Serious Fraud Investigation Office v Rahul Modi (2019)
5 SCC 266 : [2019] 5 SCR 91; Mansukhbhai Vithaldas
Chauhan v. State of Gujarat (1997) 7 SCC 622 : [1997]
3 Suppl. SCR 705; K.K Mishra v. State of Madhya
Pradesh (2018) 6 SCC 676 : [2018] 5 SCR 315;
Anirudhsinhji Karansinhji Jadeja v. State of Gujarat G
(1995) 5 SCC 302 : [1995] 2 Suppl. SCR 637; T.
Takano v. SEBI (2022) 8 SCC 162 and Mohd. Iqbal
Ahmed v. State of Andhra Pradesh (1979) 4 SCC 172:
[1979] 2 SCR 1007 – referred to.
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960 SUPREME COURT REPORTS [2023] 5 S.C.R.
A P.M.C Mercantile Private Ltd. v. The State 2014 (3)
MWN (Cr.) 454; Kamal Lochan Sen v. State of Orissa
(1982) 54 CLT 509; AV Dharma Reddy v. State of A.P.
& Ors. 2011 CriLJ 185 – referred to.
Yusofalli Mulla Noobbhoy v. The King 1949 Cri LJ 889
B and Gokulchand Dwarkadas Morarka v. The King,
(1947- 48) 75 IA 30- referred to.
Case Law Reference
(2023) 1 SCC 216 referred to Para 3.6
C [1988] 3 Suppl. SCR 361 referred to Para 4(xiii)
[1986] 3 SCR 1049 referred to Para 4(xiii)
[2019] 6 SCR 307 referred to Para 4(xiv)
(2023) 2 SCC 643 referred to Para 4(xvii)
D [1955] 1 SCR 158 referred to Para 4(xvii)
[2017] 2 SCR 993 referred to Para 4(xix)
[2010] 13 SCR 621 referred to Para 4(xix)
[2018] 4 SCR 496 referred to Para 4(xxiv)
E [2002] 5 Suppl. SCR 222 referred to Para 4(xxiv)
[1975] 3 SCR 958 referred to Para 4(xxiii)
[2007] 10 SCR 656 referred to Para 4(xxix)
[2006] 6 Suppl. SCR 290 referred to Para 4(xxix)
F (2022) 9 SCC 425 referred to Para 4(xxix)
[2019] 5 SCR 91 referred to Para 4.1(iv)
[1997] 3 Suppl. SCR 705 referred to Para 4.1(xix)
[2018] 5 SCR 315 referred to Para 4.1(xxi)
G
[1995] 2 Suppl. SCR 637 referred to Para 4.1(xxi)
(2022) 8 SCC 162 referred to Para 4.1(xxii)
[1979] 2 SCR 1007 referred to Para 4.1(xxiv)
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 961
AND SELLS LLP
CRIMINAL/CIVIL APPELLATE JURISDICTION : Criminal A
Appeal Nos.2305-2307 of 2022.
From the Judgment and Order dated 21.04.2020 of the High Court
of Judicature at Bombay in CRLWP Nos.5023, 5035 and 5036 of 2019.
With
B
Criminal Appeal Nos.2302-2303 of 2022, Civil Appeal Nos.793 of
2022, Criminal Appeal No.2298 of 2022, Civil Appeal No.801 of 2022,
Criminal Appeal No.2299 of 2022, Civil Appeal No.877 of 2022, Criminal
Appeal Nos.2300 And 2304 of 2022
Balbir Singh, Sanjay Jain, ASGs, Balasubramanian, Arvind Datar, C
V. Giri, Kapil Sibal, Mukul Rohatgi, Darius Khambata, Neeraj Kishan
Kaul, Siddharth Dave, Sr. Advs., Naman Tandon, Samarvir Singh, Aditya
Sikka, Kanu Agarwal, Himanshu Gupta, Vikash Kumar Jha, Ms. Ritu
Anand, Ms. Vasudha Vijaysheel, Adhiraj Singh Chauhan, Ms. Padmaja
Sharma, Ms. Neela Kedar Gokhale, Ms. Sanskriti Pathak, Ms. Bani
Dikshit, Arvind Kumar Sharma, Rajat Nair, Bhuvan Kapoor, Anukalp D
Jain, Deepabali Dutta, Pratyush Shrivastava, Ms. Misha Rohatgi Mohta,
Ms. Suveni Bhagt, Ms. Ayushi Sharma, Nakul Mohta, Nischaya Nigam,
Mahesh Agarwal, Rishi Agrawala, Rahul Dwarkadas, Ms. Prachi
Dhanani, Ms. Rishika Harish, Ms. Niyati Kohli, Ms. Juhi Bahirwani,
Pratham Vir Agarwal, Ms. Rohini Jaiswal, Ms. Manavi Agarwal, E. C. E
Agrawala, V.P. Singh, Aditya Jalan, Ms. Anannya Ghosh, Raghav Seth,
Ms. Bhagya K. Yadav, Ms. Vanya Chabra, Anant Mishra, Ms. Shreya
Chaudhary, Brian Moses, Ms. Aakanksha Kaul, Adit Khorana, Ms. Vidhi
Thakur, Prastut Dalvi, Chandra Prakash, Bharat Bagla, Siddharth
Dharmadhikari, Aaditya Aniruddha Pande, Ms. Kirti Dadheech, Sachin
Patil, Advs. for the appearing parties. F
The Judgment of the Court was delivered by
M. R. SHAH, J.
Appeals under consideration:
1. This batch of Criminal Appeals/Civil Appeals raise common G
question(s) of law pertaining to the interpretation of Section 140(5) of
the Companies Act, 2013 (hereinafter referred to as the ‘Act, 2013’)
and the Investigation Report dated 28.05.2019 (hereinafter referred to
as the ‘IFIN SFIO Report’) in respect of IL&FS Financial Services
Limited (hereinafter referred to as the ‘IFIN’). H
962 SUPREME COURT REPORTS [2023] 5 S.C.R.
A 1.1 Criminal Appeal Nos. 2305-2307/2022, Criminal Appeal Nos.
2302-2303/2022 and Criminal Appeal No. 2300/2022 have been filed by
the Union of India, inter alia, challenging the common judgment and
order dated 21.04.2020 passed by the High Court of Bombay in Writ
Petition Nos. 4144 & 4145 of 2019 and other companion writ petitions,
by which the High Court, though upheld that Section 140(5) of the Act,
B
2013 is not unconstitutional, has set aside the direction under Section
212(14) of the Act, 2013 dated 29.05.2019 issued by the Union of India
to the Serious Fraud Investigation Office (SFIO) and consequently set
aside the prosecution lodged by the SFIO vide Criminal Complaint No.
CC 20/2019 on the file of Special Court (Companies Act) & Additional
C Sessions Judge, Greater Mumbai, the Union of India and the SFIO have
preferred the present appeals.
1.2 In Criminal Appeal Nos. 2302-2303/2022, the challenge
pertains to the auditor of IL&FS Financial Services Limited, namely,
BSR & Associates LLP (BSR) and in Criminal Appeal Nos. 2305-2307/
D 2022 and Criminal Appeal No. 2300/2022, the challenge pertains to another
auditor of IFIN, namely, Deloitte Haskins & Sells LLP (for short,
‘Deloitte’) and an ex-director of IFIN, namely, Hari Sankaran.
1.3 Criminal Appeal Nos. 2298/2022, 2299/2022 & 2304/2022 have
been filed by Deloitte and two of its partners challenging the impugned
E judgment and order passed by the High Court insofar as it upholds the
constitutionality of Section 140(5) of the Act, 2013.
1.4 Civil Appeal Nos. 793/2022, 801/2022 & 877/2022 have been
filed by Deloitte and two of its partners challenging the order passed by
the National Company Law Appellate Tribunal dated 04.03.2020.
F Factual Background:
2. The facts leading to the present proceedings in nutshell are as
under:
A series of defaults by the IL&FS Group Companies, which had
an aggregate debt burden of more than Rs. 91,000 crores, occurred
G
between June to September, 2018 and threatened to collapse the money
markets of India, added pressure to corporate bond yields and sparked a
sell off in the stock market. The Department of Economic Affairs, Ministry
of Finance issued an Office Memorandum dated 30.09.2018 in respect
of IL&FS to the Ministry of Corporate Affairs, Union of India requesting
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 963
AND SELLS LLP [M. R. SHAH, J.]
it to take action under the Act, 2013. The Memorandum and Note A
highlighted that:
(a) the IL&FS Group was struggling with a debt contagion of
approx.. Rs. 91,000 crores across the IL&FS Group against
Rs. 6950 crores in equity share capital and reserves a
leverage of at least 13 times. Moreover, in the year 2017- B
18, the IL&FS Group has shown a loss of Rs. 2670 crores;
(b) this debt contagion, prima facie, was on account of inter
alia failure of corporate governance across the IL&FS
Group and window dressed accounts; and
(c) any further defaults would be catastrophic for the well- C
being of the financial markets and the economy.
2.1 In parallel, the Ministry of Corporate Affairs, upon receipt of
a report from the Registrar of Companies under Section 208 of the Act,
2013, directed the SFIO to investigate into the affairs of IL&FS and its
subsidiaries. D
2.2 The Ministry of Corporate Affairs filed a Company Petition
on 01.10.2018 being Company Petition No. 3638/2018 against IL&FS
and its the then existing Board of Directors before the National Company
Law Tribunal (NCLT) seeking, amongst others, the removal of the then
existing Board of Directors of IL&FS and the appointment of a new E
Board of Directors in place and instead thereof. The NCLT passed an
interim order on the same date, i.e., 01.10.2018 superseding the then
existing Board of Directors of IL&FS with a new Board of Directors.
The new Board of Directors were directed to take charge of the affairs
of the IL&FS. The new Board of Directors of IL&FS submitted a report F
dated 30.10.2018 on progress and way forward with the Ministry of
Corporate Affairs which was in turn filed by the Ministry of Corporate
Affairs with the NCLT on 31.10.2018, pursuant to the order passed by
the NCLT on 01.10.2018.
2.3 Further to the Office Order dated 30.09.2018 directing
G
investigation to be initiated by the SFIO and an e-mail dated 01.11.2018,
SFIO submitted an interim report in respect of IL&FS and one Employees
Welfare Trust pertaining to the IL&FS Group. It is required to be noted
that the said interim report was submitted as Ministry of Corporate Affairs
called for an “interim report”, which was called in pursuance to Section
212(11) of the Act, 2013 which provides that an interim report must be H
964 SUPREME COURT REPORTS [2023] 5 S.C.R.
A called for by the Central Government. It is to be noted that in the interim
report itself, it was specifically recorded that the findings in the interim
report are interim findings and the interim report concluded by setting
forth “based on the above interim findings…” It is also to be noted that
interim report was on the individuals who were in control of the affairs
of the IL&FS Group and the illegalities and fraud perpetrated by them.
B
2.4 On the basis of the interim report, the Ministry of Corporate
Affairs filed a Miscellaneous Application in Company Petition No. 3638/
2018 against the erstwhile Directors of the companies in the IL&FS
Group seeking to implead them in the said proceedings and an order to
attach their immovable/movable properties.
C
2.5 On the basis of the interim report and a prima facie opinion of
the Institute of Chartered Accountants dated 04.12.2018, the Ministry
of Corporate Affairs filed a petition under section 130 of the Companies
Act, 2018 before the NCLT praying inter alia that the books of accounts
of IL&FS, IFIN and IL&FS Transportation Networks Limited (ITNL)
D may be re-opened and recast. Vide order dated 01.01.2019 passed in
Section 130 petition, the NCLT directed that the accounts of IL&FS,
IFIN & ITNL for the past 5 financial years be re-opened and recast on
the ground that the affairs of IL&FS, IFIN & ITNL had been mismanaged
casting a doubt on the reliability of the financial statements/accounts.
E 2.6 The auditors of IFIN (BSR & Deloitte) were given notice of
Section 130 petition who opposed the said petition. Order dated
01.01.2019 passed by the NCLT was challenged by one of the ex-
directors of IFIN before the National Company Law Appellate Tribunal,
New Delhi (NCLAT), which dismissed the appeal vide order dated
F 31.01.2019. Order dated 31.01.2019 passed by the NCLAT was appealed
before this Court. Vide order dated 04.06.2019, this Court dismissed the
civil appeal filed by the said ex-director. Thus, this Court upheld initiation
of the proceedings by the Ministry of Corporate Affairs under section
130 of the Companies Act, 2018.
G 2.7 The Reserve Bank of India (RBI) initiated an inspection of
the IL&FS and IFIN under Section 45N of the RBI Act, 1934. Pursuant
to the investigation/inspection, the RBI submitted an investigation/
inspection report dated 22.03.2019 to IFIN. IFIN thereafter issued a
notice dated 13.05.2019 under Section 140(1) of the Act, 2013 inter
alia on BSR seeking to remove them as auditors. BSR filed a written
H response to the notice served by IFIN under Section 140(1) of the Act,
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 965
AND SELLS LLP [M. R. SHAH, J.]
2013 denying the allegations in the notice. A hearing was held on A
29.05.2019 by IFIN where BSR was also represented/present.
2.8 Pursuant to the Office Order dated 30.09.2018, SFIO submitted
the investigation report of IL&FS Financial Services Limited (SFIO
Report).
2.9 The Ministry of Corporate Affairs vide letter dated 29.05.2019 B
requested the Regional Director (Western Region) and the SFIO to initiate
proceedings/prosecution. The SFIO was asked to initiate proceedings/
prosecution under Section 447 and other provisions of the Companies
Act, r/w Sections 417, 420 and 120B of the Indian Penal Code. The
Regional Director was asked to institute a Petition under Section 140(5) C
of the Act, 2013.
2.10 That thereafter the SFIO filed a criminal complaint on
30.05.2019 before the Sessions Court (Special Judge – Companies Act),
Mumbai against, amongst others, the auditors/ex-auditors of IFIN being
CC No. 20/2019. D
2.11 That thereafter the Ministry of Corporate Affairs filed a
Petition under Section 140(5) of the Act, 2013 dated 10.06.2019, inter
alia, against the auditors of the IFIN, namely, BSR & Deloitte and the
engagement partners as well as their team. In the petition under Section
140(5), it was inter alia prayed to remove BSR as auditors of IFIN; E
declare that Deloitte shall be deemed to be removed as Statutory Auditor
for IL&FS for F.Y. 2012-13 to F.Y. 2017-18; permit the Ministry of
Corporate Affairs to appoint an auditor for IFIN under the first proviso
of Section 140(5) of the Act, 2013; and declare/direct that BSR, its
engagement partners, Deloitte and its engagement partners shall not be
eligible to be appointed as an auditor for any company for a period of F
five years under the second proviso of Section 140(5) of the Act, 2013.
2.12 BSR issued a letter of resignation dated 19.06.2019 to IFIN
and simultaneously completed the regulatory filings pursuant to such
resignation.
G
2.13 BSR and its engagement partners filed a reply dated
19.06.2019 to Section 140(5) petition before the NCLT, inter alia,
contending that (i) they are not the auditors for IFIN any longer as they
have tendered their resignation and therefore Section 140(5) is not
applicable to them; and (ii) Section 140(5) does not demonstrate any
case for fraud against BSR. H
966 SUPREME COURT REPORTS [2023] 5 S.C.R.
A 2.14 Deloitte filed an application dated 19.06.2019 challenging
the maintainability of Section 140(5) petition before the NCLT on the
ground that Deloitte is no longer the auditor for IFIN. BSR and its
engagement partners also filed an application challenging the
maintainability of Section 140(5) petition before the NCLT on the ground
that BSR is no longer the auditor for IFIN.
B
2.15 After hearing the auditors (BSR & Deloitte) on the applications
challenging the maintainability of Section 140(5) petition, the NCLT passed
an order upholding the maintainability of Section 140(5) petition. That
thereafter, the BSR filed a writ petition before the High Court, inter
alia, challenging the vires of Section 140(5) of the Act, 2013; the directions
C issued and the order of the NCLT upholding the maintainability of Section
140(5) petition.
2.16 By the impugned judgment and order, though the High Court
has upheld the validity of Section 140(5) of the Act, 2013, the High
Court has interpreted section 140(5) of the Act, 2013 and has set aside
D the order passed by the NCLT upholding the maintainability of Section
140(5) petition and has quashed Section 140(5) petition and has set aside/
quashed the directions issued by the Ministry of Corporate Affairs and
the SFIO and also has quashed/set aside criminal proceedings instituted
by the SFIO. Hence, the present appeals.
E Submissions on behalf of the Union of India:
3. Shri Balbir Singh, learned Additional Solicitor General of India
appearing on behalf of the Union of India has vehemently submitted that
in the impugned judgment and order the High Court has misinterpreted
Section 140(5) of the Act, 2013, though the High Court has upheld the
F constitutionality of the said provision.
3.1 It is submitted that as regards the interpretation of Section
140(5) of the Act, 2013, the High Court has explained the legislative
intent as being to induce/effect a change of an auditor in a company
where there is a suspected fraud. It is submitted that thereafter the High
G Court has erroneously proceeded to hold that the intention behind Section
140(5) of the Act, 2013 is only to break the collusion between the auditor
and the company. It is submitted that accordingly, the High Court
erroneously holds that if the unholy bond between the auditor and
company is broken, either by removal or resignation, then Section 140(5)
of the Act, 2013 fulfils its purpose. It is submitted that according to the
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 967
AND SELLS LLP [M. R. SHAH, J.]
High Court, Section 140(5) of the Act is only attracted when despite the A
petition by the Central Government, an auditor sets up a defence and
opposes the petition frivolously and thus invites a final order as set forth
in the second proviso to Section 140(5) of the Act, 2013. It is submitted
that on this basis, the High Court proceeded to hold that the petition filed
by the Union of India under Section 140(5) of the Act, 2013 has been
B
satisfied by the subsequent resignation of the auditor and therefore the
petition under Section 140(5) of the Act, 2013 filed by the Union of India
is no longer maintainable. It is submitted that the High Court erroneously
proceeded to quash Section 140(5) petition and the order passed by the
NCLT, Mumbai upholding its maintainability.
3.2 Now insofar as quashing and setting aside the criminal C
proceedings, it is submitted that the respondents assailed Section 212(14)
direction on two grounds. Firstly, on the ground that the issuance of the
direction to prosecute within 30 hours of receipt of the IFIN SFIO Report
demonstrates non-application of mind. Secondly, that the IFIN SFIO
Report was an incomplete report as investigation had not been completed D
and therefore Section 212(14) direction was incompetent. It is submitted
that insofar as the first ground is concerned, the High Court erroneously
holds that there is non-application of mind since it was improbable that a
report of about 750 pages and 32000 pages of annexures could have
been considered in 30 hours. Further, the High Court erroneously holds
that the relevant facts and documents to demonstrate application of mind E
have not been placed on record. It is submitted that while doing so, the
High court also holds that the existence of a valid sanction can be
appreciated in a writ Court and need not wait trial.
3.3 As regards the IFIN SFIO Report, it is submitted that the
High Court holds summarily and without even going into the same and F
erroneously holds that the SFIO Report is incomplete and lacking and
therefore Section 212(14) direction is incorrect and/or invalid.
3.4 On interpretation of Section 140(5) of the Act, 2013, Shri Balbir
Singh, learned ASG has taken us to the legislative history and legislative
intent of Section 140(5) of the Act, 2013. It is submitted that Section 140 G
of the Act, 2013 is titled as “Removal, resignation of auditor and giving
of special notice”. It appears in Chapter X of the Act which is titled as
“Audit and Auditors”. Section 140(1) of the Act, 2013 provides for the
procedure to remove an auditor by the company before the expiry of his
term. Sections 140(2) and (3) of the Act deal with resignation of auditors H
968 SUPREME COURT REPORTS [2023] 5 S.C.R.
A and Section 140(4) of the Act deals with giving of special notice at an
AGM for appointment of an auditor other than the retiring auditor and
the process in that regard. It is submitted that if an auditor of a company
is acting directly or indirectly in a fraudulent manner or is abetting or
colluding in fraud with the management of a company, Section 140(5) of
the Act, 2013 empowers either the Central Government or any person
B
concerned to approach the NCLT for recourse. Section 140(5) of the
Act also enables the NCLT to take action suo motu against an auditor
who has acted in the aforesaid manner. It is submitted that in addition,
Section 140(5) of the Act, 2013 has also two provisos and two
explanations. It is submitted that therefore as per the first proviso to
C Section 140(5), on an application made by the Central Government and
if the Tribunal is satisfied that any change of the auditor is required, the
Tribunal shall within fifteen days of receipt of such application make an
order that the said auditor shall not function as an auditor and the Central
government may appoint another auditor in his place. It is submitted that
second proviso to Section 140(5) of the Act provides that an auditor,
D
whether individual or firm, against whom final order has been passed by
the Tribunal under section 140(5) shall not be eligible to be appointed as
an auditor of any company for a period of five years from the date of
passing of the order and the auditor shall also be liable for action under
Section 447. It is submitted that therefore merely because during the
E pendency of the proceedings under Section 140(5) of the Act the auditor
resigns, the proceedings under Section 140(5) do not come to an end.
Still and after the final order is passed, in that case, a further order as
per second proviso to Section 140(5) can be passed to render such a
auditor ineligible to be appointed as an auditor of any company for a
period of five years from the date of passing of the order and even such
F
auditor shall also be liable for the action under section 447 of the
Companies Act. It is submitted that therefore the High Court has
materially erred in observing and holding that once the auditor has resigned
thereafter the application under section 140(5) of the Act shall not be
maintainable and/or is not required to be proceeded further.
G 3.5 Thereafter, Shri Balbir Singh, learned ASG has taken us and
referred to the legislative history of Section 1‘40(5) of the Act as under:
Legislative History of Section 140(5) of the Act, 2013
Around August 2004, the Government initiated the process of
H review of the Companies Act, 1956 and drafting of a new
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 969
AND SELLS LLP [M. R. SHAH, J.]
Companies Bill to replace the Companies Act, 1956. A concept A
paper was published on the website of the Ministry of Corporate
Affairs on which various comments were received. An expert
committee was also constituted by the Ministry of Corporate
Affairs under the chairmanship of Dr. J.J. Irani, to make
recommendations on provisions of company law.
B
a. Companies Bill 2008 and the Companies Bill 2009
i. After considering the report of the J.J. Irani Committee, the
Ministry prepared the Companies Bill, 2008 and introduced
the same before the Lok Sabha on October 23, 2008. The
2008 Bill was referred to the Department related Parliamentary C
Standing Committee (PSC) on Finance for their examination.
However, the Lok Sabha was dissolved before the PSC could
present its report and therefore the 2008 Bill lapsed as per
Article 107(5) of the Constitution of India.
ii. Accordingly, the Companies Bill 2009 was introduced in the D
Lok Sabha on or about July 15, 2009. The 2009 Bill too was
referred to the PSC. In identifying the features of the 2009
Bill, the PSC Report of August 2010 notes the salient features
as being “the role, rights and duties of the auditors have been
defined so as to maintain integrity and independence of the
audit process.” E
iii. In setting out the guiding principles underlying the 2009 Bill,
the PSC, in the Report, notes that, amongst other principles,
the following are the key principles underlying the 2009Bill:
“Need for sturdy systems, enhanced transparency and F
comprehensive disclosures based regime emphasized; as
companies grow, become bigger and globalise with the
number and range of stakeholders increasing by volumes,
necessitating proper checks and balances.
Self-regulation through internal mechanism/procedures, to
G
be underpinned on strong systems and procedures; Central
Government to step in only when mis-governance takes
place.
In the light of recent experiences in corporate mis-
governance, process of audit and functioning of auditors to
H
970 SUPREME COURT REPORTS [2023] 5 S.C.R.
A be made more independent and effective; stringent joint
and individual liability prescribed; setting up of oversight
body to set standards and supervise quality of audit
recommended”
iv. Further, the report notes that various suggestions were made
B by the PSC during deliberations on the Bill which were
incorporated by the Central Government. On a reading of these
suggestions, it is essential to note that independence of the
auditors was a key point.
v. Crucially, in the Report, the PSC notes that the 2009 Bill
C incorporates suggestions of the JPC on the 1993 Banking and
Securities Market Scam and the 2002 JPC on the Stock Market
Scam. This means that the 2009 Bill was a culmination of the
growing corporate economy and past experiences of corporate
fiascos too. One of the suggestions were to provide for stricter
accountability for auditors. Moreover, at the foot of the same
D page, the PSC notes that the 2009 Bill has made the regulatory
provisions and regime more stricter by inter alia providing for
making statutory auditors more accountable by providing for
substantial civil and criminal liability for auditors.
vi. The Report clearly demonstrates that there was a long
E discussion on the role, responsibility, duties and regulation of
auditors and the regulatory and enforcement provisions.
Particularly, the Report records that various suggestions were
received to make the provisions pertaining to audit and auditors
more stringent. Significantly, it was suggested that Clause
F 123(10) of the 2009 Bill (which provides for removal of an
auditor by the NCLT on finding that there is a fraud and
corresponds to Section 140(5) of the Act) should be made more
stringent and should contemplate that an auditor removed by
the Tribunal should not be eligible to be appointed as an auditor
of any company for a period of 5 years. The relevant extracts
G are as follows:
“34.Suggestions have been received by the Committee that
there is a need to make provisions relating to Audit and
Auditors more stringent such as following:-
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UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 971
AND SELLS LLP [M. R. SHAH, J.]
(d) Suitable penalty may be provided in case of A
contravention of these provisions.
(e) (i) Clause 123(10) of the Bill empowers the Tribunal, if
it is satisfied that the auditor of a company has acted in a
fraudulent manner or abetted/colluded in any fraud, to direct
the company to change its auditors. Suggestions have been B
made that these provisions should be modified to clarify to
cover act of fraud or abetment by auditor whether directly
or indirectly. It has also been suggested that the Bill may
provide that if auditor, whether individual or firm, against
whom an order has been passed by the Tribunal under this
clause should not be eligible to be appointed as an auditor C
of any company for a period of five years.”
b. The Companies Bill, 2011
i. In view of the recommendations of the Standing Committee
and that of various stakeholders, the Central Government D
withdrew the 2009 Bill with a view to introduce a fresh Bill
incorporating the recommendations of the Standing
Committee and various stakeholders. Consequently, the 2011
Bill was introduced in the Lok Sabha in December, 2011,
accepting and incorporating most of the recommendations
made by the previous Standing Committee in respect of the E
Companies Bill, 2009. This aspect has been recorded in the
Statements of Objects and Reasons of the Companies Bill,
2011.
ii. At this juncture, it is important to bear in mid that the
suggestion of the Standing Committee to Clause 123(10) of F
the 2009 Bill (which provides for removal of an auditor by
the NCLT on finding that there is a fraud) was to:
• Make the provision more stringent; and
• To provide for consequences for an auditor when such
G
auditor is found to have been perpetrating a fraud and is
removed by the NCLT for such fraud.
iii. The 2001 Bill consolidates the provisions pertaining to
removal of auditors into one clause namely Clause 140 of
the 2011 Bill. Further, the 2011 Bill (like the 2009 Bill) retains
H
972 SUPREME COURT REPORTS [2023] 5 S.C.R.
A the NCLT’s power to remove an auditor upon finding that
the auditor has perpetrated a fraud at Clause 140(5) of the
2011 Bill. Most pertinently, the 2011 Bill incorporating the
recommendations of the Standing Committee as contained
in the Report, provides for consequences for an auditor who
is found to have perpetrated a fraud by the NCLT and is
B
removed for such fraud by the NCLT. This has been done
by way of a proviso to Clause 140(5) of the Bill (particularly
the second proviso). The relevant extract of Section 140(5)
of the 2011 Bill is as follows:
“(5) Without prejudice to any action under the provisions
C of this Act or any other law for the time being in force,
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
D 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:
Provided that if the application is made by the Central
Government and the Tribunal is satisfied that any change
E of the auditor is required, it shall within fifteen days of
receipt of such application, make an order that he shall
not function as an auditor and the Central government
may appoint another auditor in his place:
Provided further that an auditor, whether individual or
F firm, against whom final order has been passed by the
Tribunal under this section shall not be eligible to be
appointed as an auditor of any company for a period of
five years from the date of passing of the order and the
auditor shall also be liable for action under section 447.
G Explanation – For the purposes of this Chapter the word
“auditor” includes a firm of auditors”.
iv. Thereafter, in January 2012, the 2011 Bill was placed before
the Standing Committee by the Lok Sabha. The Standing
Committee has prepared and finalized its report in this
regard, and insofar as the penalty and guiding principles of
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 973
AND SELLS LLP [M. R. SHAH, J.]
Clause 140(5) are concerned, there is no further guidance A
on the legislative intent behind the same.
v. In view of the above, the test of Clause 140(5) of the 2011
Bill has remained unchanged, the same has been enacted
as the present Section 140(5) of the Companies Act, 2013.
3.6 It is submitted that therefore by way of Companies Bill, 2009 B
subsequently introduction the Act, for the first time it includes an obligation
to an auditor to report any fraud detected to the Central Government as
per Section 143(12) of the Act and incorporated in the form of the second
proviso to Section 140(5) of the Act a provision to make an auditor who
has been found to have been acting in a fraudulent manner or colluding C
from being an auditor in any company for a period of 5 years. It is
submitted that therefore, the public policy behind Section 140(5) of the
Act is very clear – to prevent an auditor who has been found to perpetrate
fraud or colluding in it in one company from undertaking any statutory
audits for a period of 5 years. Reliance is placed on the decision of this
Court in the case of Devas Multimedia Pvt. Ltd. v. Antrix Corporation D
Ltd. & Anr, reported in (2023) 1 SCC 216.
3.7 It is further submitted by Shri Balbir Singh, learned ASG that
Section 140(5) appears in Chapter X of the Act. It is submitted that
Chapter X specifically deals with ‘Audit and Auditors’. Section 143 of
the Act deals with the powers and duties of the auditors. Sub-section E
(12) of Section 143 specifically provides that in the event that the auditors
has reason to believe that an offence of fraud is being or has been
committed in the company, the auditor shall report the matter to the
Central Government. The detailed procedure is provided under the Rules
issued in this regard. F
3.8 It is further submitted that Section 144 of the Act provides
that the auditor cannot provide certain services and the relevant one for
the present matter is “Management services”. It is submitted that the
objective is that the auditor should function as an independent person
uninfluenced by any of its activities outside the scope of audit services. G
The auditor is prohibited from providing any management service to the
Company. It is submitted that the prohibition and restriction created under
Section 144 of the Act is primarily to protect the interest of the Company
in question and other stakeholders such as lenders and investors and the
public at large.
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974 SUPREME COURT REPORTS [2023] 5 S.C.R.
A 3.9 It is submitted that keeping these provisions and the underlying
public policy in the backdrop, Section 140 (5) of the Act, 2013 is to be
considered. It is submitted that the plain words of Section 140(5) of the
Act, 2013 provide for the NCLT to, either suo motu or on an application
made by the Central Government/any person concerned, inquire into/
examine the conduct of an auditor or his involvement in a fraud and
B
reach a satisfaction as regards the auditors fraudulent conduct. The
provision further prescribes that the satisfaction of the Hon’ble NCLT
“may” finally result in a change of an auditor.
3.10 It is submitted that the first proviso to Section 140(5) of the
Act is contemplated as an interim or pro-term measure to prevent an
C existing auditor from continuing and substitute him with an auditor
nominated by the Central Government based on a prima facie satisfaction
that a fraud has been perpetrated and when circumstances warrant the
substitution. This is an interim order and operates akin to a temporary
suspension.
D 3.11 It is submitted that the second proviso to Section 140(5) of
the Act which is in the nature of a substantive provision activates on an
order recording the Hon’ble NCLT’s satisfaction of fraudulent or collusive
conduct by an auditor and his consequent removal from the Company
and debars him from being an auditor in any company for a period of 5
E years. An order under the first proviso is not the order contemplated
under the second proviso to Section 140(5) of the Act. Thus, if the NCLT
finally finds no grounds to hold that there has been fraudulent conduct or
collusion in fraud, then the auditor who may have been temporarily
suspended under an order under the first proviso can be re-instated.
F 3.12 It is submitted that Section 140(5) of the Act therefore confers
power onto the Hon’ble NCLT to adjudicate on or inquire into the conduct
of an auditor and determine whether the auditor has conducted itself in
a fraudulent manner. This is clear from the operative part of the provision
which mandates the nature of inquiry required under the section. This is
“directly or indirectly, acted in a fraudulent manner or abetted or colluded
G in any fraud by, or in relation to, the company or its directors or officers.”
3.13 It is submitted that therefore, any final order would certainly
contain either a positive or negative determination of “fraud” or
“fraudulent conduct”. As a consequence of finding fraud under Section
140(5) of the Act, the provision illustrates that the finding of fraud/
H fraudulent conduct “may” lead to an order directing change of an auditor.
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 975
AND SELLS LLP [M. R. SHAH, J.]
The second proviso further expressly provides that an auditor “against A
whom a final order has been passed” is in-eligible to act as an auditor of
any company for a period of 5 years. Significantly, the words used in the
second proviso to Section 140(5) of the Act is “final order” and not “the
auditor so removed” or “changed auditor”.
3.14 It is submitted that therefore the requirement or necessity of B
change of auditor in a company does not activate/govern the power of
the NCLT under Section 140(5) of the Act, 2013. Instead, it is the inquiry
into the fraudulent act by an auditor who abdicates his statutorily
prescribed independent role and responsibilities and colludes with the
management or otherwise perpetrates a fraud. It is submitted that the
essence of the provision/section is determination of fraudulent conduct C
of the auditor. The consequent “removal” contemplated by Section 140(5)
of the Act, 2013 is not just as acting as an auditor in one company or the
company concerned but from any company for a period of five years.
3.15 It is submitted that therefore the interpretation of Section
140(5) of the Act, 2013 made by the High Court in the impugned judgment D
and order is just contrary to the object and purpose of enactment of
Section 140(5) of the Act, 2013 and, as such, is contrary to the said
provision.
3.16 Shri Balbir Singh, learned ASG has submitted that during the
course of arguments, the submissions made on behalf of the respondents E
are as under:
a) Section 140(5) of the Act, in light of the other provisions of the
Act, is only to incentivize a recalcitrant auditor into resigning.
Therefore, if an auditor resigns after the filing of a Petition under
Section 140(5) of the Act but before the Hon’ble NCLT F
pronounces an order on that Petition, the purpose behind Section
140(5) of the Act is fulfilled. This interpretation of Section 140(5)
of the Act is, as per the Respondent’s case, clear from the plain
words of the provision;
b) continuing a proceeding against an auditor under Section 140(5) G
of the Act would despite his resignation would lead to reading in a
proviso into Section 140(5) of the Act which deems his continuance
till the culmination of proceedings under Section 140(5) of the
Act;
H
976 SUPREME COURT REPORTS [2023] 5 S.C.R.
A c) The second proviso to Section 140(5) of the Act is arbitrary,
harsh and burdensome and ought to be read down. The mandatory
ineligibility to act as an auditor for a period of 5 years ought to be
read as for a period up to 5 years to make the provision
constitutional.
B d) The ineligibility to act as an auditor of any company prescribed
under the second proviso to Section 140(5) of the Act can only
extend to the audit partners concerned and not to the entire firm
and the other audit partners who were not connected with the
fraudulent act or acts.
C 3.17 Meeting with the aforesaid submissions, it is submitted as
under:
a) Acceptance of Respondent’s contention would mean that the
jurisdiction of a quasi-judicial tribunal can be overcome merely by
an act of a party. More significantly, it would lead mean that an
D inquiry into fraudulent conduct can be disrupted and/or stands
satisfied simply by an act of a party.
b) The entire contention of the provision operating in terrorem or
to incentivize an auditor to resign is untenable. The consequences
of indulging in fraudulent activities provided for in the Act including
E but not limited to Section 447 of the Act itself ought to serve as a
deterrent and operate “in terrorem”.
c) The entire construction sought to be attributed to Section 140(5)
of the Act by reference to the other provisions of the Act (as per
paragraphs 9.17 (a) and (b) above) is to turn the provision into a
F dead letter [See NEPC Micon Ltd. v. Magma Leasing Limited
(1999) 4 SCC 253]. Moreover, the Respondent’s interpretation, if
accepted, would lead to various absurdities. Pertinently, amongst
other reasons:
i. given that it is accepted that the first proviso provides for a
temporary suspension or removal of an auditor, if an application
G
is filed under the first proviso and the errant auditor replaced
(albeit temporarily), then an order Second Proviso can never
follow. This is because the errant auditor cannot, as on date of
the final order, be said to be the auditor of a company due to
the first proviso order.
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 977
AND SELLS LLP [M. R. SHAH, J.]
ii. there exists no reason for Section 140(5) of the Act to operate A
in terrorrem or to induce a recalcitrant auditor to resign. This
is so since the first proviso to Section 140(5) of the Act operates
immediately to effect a change of the auditor/remove the
existing auditor after filing of a Petition by the Central
Government under Section 140(5) of the Act. In other words,
B
the first proviso would thus be rendered redundant if the intention
behind Section 140(5) of the Act is to induce an auditor into
resigning.
d) The ineligibility to act as an auditor for any company for a
period of 5 years cannot be read down to mean “for a period “up
to five years”. This is so since: C
i. apprehension or misuse of the provision in future cannot be
ground to test the constitutional validity of the provision. [See
Madras Bar Association v. Union of India 2021 SCC Online
SC 463 (para 101-102)]
D
ii. fraud vitiates everything and the punishment mandates in
the statute cannot be varied by examining the length and breadth
of the fraud.
iii. the ineligibility to act under Section 140(5) of the Act is only
for acting as an auditor of any company. It does not stop the E
auditor concerned from practising as a chartered accountant
generally. The individual or firm concerned can take up any
other activity pertaining to accounts of the company (which is
otherwise barred for an auditor by virtue of Section 144) such
as account and book keeping service, actuarial service etc or
otherwise. In fact, in the present case, the auditing firms involved F
have a very significant part of their business outside the audit
function. The prohibition of 5 years does not affect their practise
as a chartered accountant or any other area of service; and
iv. the fixed prohibition period of 5 years activates only in the
event of finding of a fraud by the Hon’ble NCLT in terms of G
the statutory scheme and public policy. The principle of
proportionality cannot be raised to a level where the extent of
the fraud is required to be examined. The very deterrent effect
of the provision would get diluted and more importantly, it would
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978 SUPREME COURT REPORTS [2023] 5 S.C.R.
A amount to perpetuating the fraud in connection with other
companies.
v. As regards the extent of application of the ineligibility
prescribed under the second proviso to Section 140(5) of the
Act to the firm and individuals, it is submitted that a close reading
B of the provisions of the Act reflects that the legislature
considered every aspect relating to the consequence of Section
140(5) of the Act. An examination of the second proviso to
Section 140(5) of the act shows that the Hon’ble NCLT is
required to give specific findings with regard to fraud and
whether the auditor is a firm or an individual. There cannot be
C any presumption that mere finding of fraud in connection with
an individual will automatically result in the determination of
fraud by the firm. This is also provided under Section 147 of
the Act which is as follows:
(5) Where, in case of audit of a company being
D conducted by an audit firm, it is proved that the partner
or partners of the audit firm has or have acted in a
fraudulent manner or abetted or colluded in any fraud
by, or in relation to or by, the company or its directors
or officers, the liability, whether civil or criminal as
E provided in this Act or in any other law for the time
being in force, for such act shall be of the partner or
partners concerned of the audit firm and of the firm
jointly and severally.
Provided that in case of criminal liability of an audit
F firm, in respect of liability other than fine, the concerned
partner or partners, who acted in a fraudulent manner
or abetted or, as the case may be, colluded in any fraud
shall only be liable.
3.18 Now so far as the submission on behalf of the respondents
G that once an auditor resigns, the provisions of Section 140(5) of the Act
would cease to apply. Instead, the auditor concerned can be proceeded
against under Section 241(3) of the Act and the proceedings pursuant to
Section 241(3) of the Act would lead to the same result and the auditor
would be held not to be ‘fit and proper person’ to be appointed in any
other office connected with the conduct and management of any
H company. It is submitted that:
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 979
AND SELLS LLP [M. R. SHAH, J.]
a. Section 241(3) and its consequential provisions were introduced A
with effect from 14.8.2019, which authorized the Central
Government to apply to the Tribunal with a request to declare that
the persons mentioned in Section 241(3) of the Act are ‘not fit
and proper persons to hold the office of director or any other
office connected with conduct and management of any company”.
B
b. Constructing “any other office connected with the conduct and
management of any company”, it would be necessary to consider
the consequential provisions that were enacted along with Section
241(3) of the Act. Particularly, Section 243(1A) and Section 243(2)
of the Act.
C
(1A) The person who is not a fit and proper person pursuant
to sub-section (4A) of section 242 shall not hold the office
of a director or any other office connected with the conduct
and management of the affairs of any company for a period
of five years from the date of the said decision
D
(2) Any person who knowingly acts as a managing director
or other director or manager of a company in contravention
of clause (b) of sub-section (1) or sub-section (1A), and
every other director of the company who is knowingly a
party to such contravention, shall be punishable with fine
which may extend to five lakh rupees E
Clearly, from the words of the consequential provision, it is clear
that the reference in specifically Section 241(3) of the Act to
“any other office connected with the conduct and management
of any company” means those akin to manager, managing director
or other director such as key managerial personnel and not an F
auditor.
c. Moreover, in Section 241(3) of the Act specifically, the words
used are “conduct and management of the company”. The auditor
as the Act sets forth is an independent examiner of accounts and
cannot be said to be holding an office in the conduct and G
management of the company. This would militate against the very
fibre of the Companies Act, 2013.
3.19 Making above submissions, it is submitted that, (i) Section
140(5) of the Act, 2013 operates to enable a quasi-judicial tribunal equipped
with powers of a civil court to examine the role of auditors and adjudicate H
980 SUPREME COURT REPORTS [2023] 5 S.C.R.
A on their fraudulent conduct and the abdication of their function; (ii)Section
140(5) is not a provision to merely induce/effect a change of an auditor
who is not resigning. It is intended as a provision which involves a
substantive determination of fraud so as to isolate or remove an auditor
from the company and from any company that he/she is auditing. If
construed to be a provision only to induce a change of a recalcitrant
B
auditor, the words conferring power on the NCLT to inquire into an
auditor’s fraudulent conduct would be rendered meaningless; (iii) the
second proviso to Section 140(5) of the Act is essentially remedial and
preventive, though it might incidentally also have a punitive effect. The
public purpose / object of the second proviso to Section is clearly to
C protect companies from being prejudicially affected, by debarring such
an auditor, who has been held to have acted fraudulently, from being
appointed as an auditor of any company.
3.20 It is submitted that in the facts of the present case, it is
pertinent to note that:
D a) Deloitte was the statutory auditor of IFIN from 2008 till
2018. Deloitte retired by efflux of time in 2018;
b) BSR was appointed as the joint statutory auditor in 2017;
c) both Deloitte and BSR jointly conducted the statutory audit
E of IFIN for the Financial Year 2017-2018;
d) the Petitioner i.e., the Union of India filed the Petition under
Section 140(5) of the Act against both BSR and Deloitte on
June 1, 2019. BSR was the statutory auditor at that time.
e) this Petition is based on the SFIO IFIN Report which alleges
F that both auditors i.e., Deloitte and BSR acted in a fraudulent
manner. This includes the period when Deloitte was the sole
auditor and for the year when the audit was jointly performed
by BSR;
f) after the Petition was filed, BSR tendered its resignation
G and filed an application in or about July 2019 challenging the
maintainability of the Union of India’s Petition under Section
140(5) of the Act. Deloitte who had retired in 2018 also filed
maintainability application; and
g) after leave from the Hon’ble Supreme Court, the Union of
H India invoked the Hon’ble NCLT’s powers under the first
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 981
AND SELLS LLP [M. R. SHAH, J.]
proviso to Section 140(5) of the Act and an auditor was A
appointed for IFIN.
3.21 It is submitted that therefore in the facts and circumstances
of the present case and on true interpretation of Section 140(5) of the
Act, explained above, the High Court has erroneously quashed the
NCLT’s order upholding the maintainability of Union of India’s petition B
under Section 140(5) of the Act, 2013 and the proceedings under Section
140(5) of the Act, 2013 against the auditors – BSR.
3.22 Given the interpretation of Section 140(5) of the Act submitted
above, it is contended that the act of resignation of BSR after the filing
of the Petition under Section 140(5) of the Act cannot be held to render C
the proceedings under Section 140(5) of the Act as void. The Hon’ble
Bombay High Court’s interpretation would render any proceedings
whether against the company’s management and / or its auditors for
fraud completely frustrated by mere stratagem of design of a party.
Under the circumstances, the Impugned Order passed by the Hon’ble
Bombay High Court is unsustainable and deserves to be set aside. D
3.23 As regards, Deloitte, it is submitted that the Hon’ble NCLT
and the NCLAT have upheld the maintainability of the Petition under
Section 140(5) of the Act. It is submitted that as set out above, Section
140(5) of the Act requires the Hon’ble NCLT to satisfy itself that the
auditor of the company, whether directly or indirectly, acted in a fraudulent E
manner or abetted or colluded in any fraud. In order to arrive at a finding
in this regard, it is important to examine the role of both auditors i.e.,
Deloitte and BSR especially when both were acting as auditors for the
financial year 2017- 2018. Keeping in mind the interpretation of the
provision set out above, the satisfaction of the Tribunal may finally result F
in a change of auditor i.e., the change of BSR; however, that does not
take away the powers given to the Hon’ble NCLT in terms of Section
140(5) of the Act to inquire into the fraud qua Deloitte as well and if
found record a satisfaction of fraud against Deloitte in its final order.
Therefore, in the facts of this case, the final order and therefore the
second proviso can operate against Deloitte and BSR. G
3.24 Now so far as quashing and setting aside Section 212(14)
direction by the Ministry of Corporate Affairs and the Criminal Complaint
filed by the SFIO and the IFIN SFIO Report, it is submitted that the
Bombay High Court has, in the Impugned Order, set aside/quashed the
H
982 SUPREME COURT REPORTS [2023] 5 S.C.R.
A 212(14) Direction and the Criminal Complaint and the SFIO IFIN Report
on the ground that:
a. SFIO IFIN Report is an incomplete report/report on an
incomplete investigation and therefore the 212(14) Direction
could not be given. The alleged basis of this finding is: (i) a
B singular paragraph in the SFIO IFIN Report; and (ii) the 212(14)
Direction which calls for a further report on certain aspects
itself demonstrates that the investigation is incomplete; and
b. The 212(14) Direction was given within 30 hours of placing
the SFIO IFIN Report before the Central Government and it
C was improbable for the Central Government to have applied
its mind within such a short period.
It is submitted that the impugned order is incorrect since:
a. The SFIO IFIN Report is a report prepared by the SFIO on the
completion of investigation into IFIN viz. one of the companies
D under investigation. The Hon’ble Bombay High Court has not
appreciated the position that:
i. By an order dated September 30, 2018, an investigation was
directed to be conducted by the SFIO into IL&FS and its
subsidiaries (IL&FS Group) which aggregates to approx. 100-
E 169 entities;
ii. The conduct of affairs of the IL&FS Group which was set
out in the Interim Report of the SFIO dated November 30,
2018 clearly set forth that there were a number of interlinkages
within the group, routing transactions etc;
F
iii. IFIN is one of the subsidiaries in the IL&FS Group and the
financial services arm. It facilitated borrowings for different
group companies in the IL&FS Group from third party
borrowers and at times routed funding from one group company
to another;
G iv. Given the nature of interlinkages and overlaps between
different entities in the IL&FS Group, the SFIO IFIN Report
sets out that the SFIO IFIN Report is a report in respect of
IFIN and is a report upon completion of investigation into IFIN;
and
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 983
AND SELLS LLP [M. R. SHAH, J.]
v. Finally, the SFIO IFIN Report sets forth, in light of the A
complex structure of the IL&FS Group and the interlinkages
between entities etc, that if any further instances or transactions
are uncovered qua IFIN during the investigation of the other
group companies of IL&FS then a further report will be filed.
This does not mean that the investigation into IFIN is incomplete. B
In fact, even the direction to call for a further report on certain
aspects (which may be related to third parties) does not detract
from the position that the investigation is complete in all other
respects. The Hon’ble Bombay High Court has failed to appreciate
the purport of the submission and has fundamentally erred in holding
that the SFIO IFIN Report is incomplete and/or that the investigation C
into IFIN is incomplete. In the case at hand, the SFIO IFIN Report
was submitted by the SFIO after a detailed and extensive
investigation of IFIN and the multiple parties involved. It is
submitted that there were conclusive findings against each auditor/
CA pointing out multiple breaches, violations of statutory duties D
and fraudulent conduct with respect to inter alia functioning of
auditors at the relevant point of time.
b. The Bombay High Court has proceeded to accept the surface
level argument of the respondents that the 212(14) direction was
issued within 30 hours which demonstrates non-application of mind E
without considering the following:
i. The 212(14) direction itself demonstrates application of mind
from the fact that the direction requests the SFIO to prosecute
additional persons whose involvement was discernible from a
reading of the SFIO IFIN Report. This would have been F
possible only if the SFIO IFIN Report had been considered. In
fact, the 212(14) Direction also rectifies a typographical error
by the SFIO in the charging section applied in the SFIO IFIN
Report;
ii. The affidavit in reply of the UOI before the Hon’ble High G
Court provided an explanation/justification for the time taken
to process and also set out the process leading up to the 212(14)
Direction. As against the Respondent’s surface level allegation,
the Union of India provided a clear, transparent and cogent
response;
H
984 SUPREME COURT REPORTS [2023] 5 S.C.R.
A iii. The Respondents’ contentions were self-serving and
contradictory. Particularly, the contention that the Union of India
did not apply its mind given the period of 30 hours taken to
issue the 212(14) Direction is directly contrary to the contention
that the direction (contained in the 212(14) Direction) to call
for a further report demonstrates that investigation is incomplete.
B
Notwithstanding the fact that investigation into IFIN is complete,
a direction for a further report on certain aspects could only
have been issued after application of mind.
iv. Legal and factual mala fides has a very high threshold –
one that cannot be met with a surface level contention of speed
C of processing.
v. The scope of intervention before a Hon’ble Court with Writ
Jurisdiction would be to determine if there was sufficiency of
material before the authority granting the direction. In the
present case, the SFIO IFIN Report was before the authority
D granting the direction to prosecute – this fact is not disputed.
Therefore, it cannot be said that the relevant materials were
not present before the relevant authority.
3.25 Now so far as the submission on behalf of the respondents
that before the NCLT the SFIO IFIN Report was referred to as second
E interim report and therefore the SFIO IFIN Report being an interim
report, 212(14) direction could not have been issued as the Act does not
contemplate issuance of a direction under Section 212(14) of the Act on
the basis of an interim report, it is submitted by Shri Balbir Singh, learned
ASG that as per section 212(11) of the Act, 2013, during the course of
F investigation, the Central Government has been empowered to call for
an interim report. It is submitted that the SFIO has not been empowered
to submit an interim report without a request for an interim report from
the Central Government. It is submitted that the Central Government
vide letter dated 03.11.2018 specifically directed the SFIO to submit an
interim report. Pursuant to this, the SFIO submitted an interim report
G dated 30.11.2018. The Interim Report, on a bare perusal, records that it
is an interim report, records the Central Government’s request for an
interim report and classifies its findings as interim findings. It is submitted
that this is completely different from the SFIO IFIN Report which
classifies itself as an Investigation Report under Section 212(12) of the
Act, sets out the detailed and extensive investigation conducted and
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 985
AND SELLS LLP [M. R. SHAH, J.]
records conclusive findings against each of the Respondents in the present A
case. It is submitted that therefore, the stray references to the SFIO
IFIN Report as an interim report cannot be accepted to classify the
report as an Interim Report. It is submitted that in fact, the only reason
for such reference was since the investigation into the affairs of other
subsidiaries in the IL&FS Group (apart from IFIN) is on-going. It is
B
submitted that in fact the said position has been appreciated by the
Bombay High Court in the impugned order in paragraph numbers
202(VIII) and 202(XII).
3.26 Thereafter, Shri Balbir Singh, learned ASG has taken us to
the findings recorded in the SFIO IFIN Report. It is submitted that based
on the findings in the Investigation Report, auditors have been charged C
with:
a. fraud under Section 447 of the Act for colluding with the
management of IFIN and falsifying the books of accounts;
b. failure in discharging duties under section 143 & 147 of the Act
D
; and
c. suppression of information/ facts to hide the true and fair account
of the financial statements and present a rosy picture under section
211 read with section 628 & Section 129 read with section 448 of
the Act.
E
It is submitted that the Investigation Report broadly records that
the auditors despite knowledge did not point out any financial abnormality
in the operation of IFIN and gave an unmodified opinion stating that the
financial statements give a true and fair view in conformity with the
accounting standards and other accounting principles accepted in India.
3.27 It is submitted that in the Investigation Report, there are F
specific findings with respect to auditing of borrowings and utilisation;
audit of non-convertible debentures; audit of lendings. It is submitted
that on the basis of the findings recorded in the Investigation Report, the
auditors have been charged under Section 447 of the Companies Act,
2013 and Sections 417, 420 r/w 120B of the IPC. It is submitted that G
therefore the High Court has materially erred in quashing and setting
aside the direction issued under Section 212(14) of the Act and the
complaint/prosecution launched against the auditors.
3.28 Making above submissions, it is prayed to set aside the
judgment and order passed by the High Court by which the High Court H
986 SUPREME COURT REPORTS [2023] 5 S.C.R.
A has quashed Section 212(14) direction and the complaint filed by the
SFIO and permit the trial to continue against the accused arrayed in the
complaint. It is also prayed to set aside the impugned judgment and
order passed by the High Court quashing and setting aside the order
passed by the NCLT/NCLAT upholding the proceedings under Section
140(5) of the Act, 2013 and permit/allow the said proceedings to be
B
proceeded further, so as to allow the NCLT to reach to the final conclusion
so that even further steps can be taken as per second proviso to Section
140(5) of the Act, 2013.
Submissions on behalf of the opposite parties:
C 4. While opposing the present appeals, learned senior counsel
appearing on behalf of the BSR has made the following submissions:
i) It is submitted that in fact the BSR had challenged the vires of
Section 140(5) of the Act, 2013 before the High Court being
violative of Articles 14, 19(1)(g), 20 and 21 of the Constitution of
D India as well as being unconstitutional and void. It is submitted
that however the High Court by the impugned judgment and order
while upholding the constitutionality of Section 140(5) has read
down Section 140(5) of the Act, 2013.
ii) It is submitted that by the impugned judgment and order, the
E High Court has held that the object of Section 140(5) is to remove
an auditor who has neither been removed by the company, nor
resigned. It is further observed that the role of the NCLT under
Section 140(5) is only to examine the need to change a company’s
auditor and not to punish or debar the auditor. It is submitted that
rejecting the Ministry’s submission that the NCLT can pass an
F order to debar an auditor for 5 years under section 140(5) of the
Act, the High Court has held that the NCLT’s order under section
140(5) can only be for change of auditor of the company. It is
further observed and held that the consequences of debarment in
the second proviso automatically follow upon such change and
G NCLT does not have any discretion in it.
iii) It is submitted that before the High Court, the BSR also
challenged two orders of the NCLT, namely, order dated
09.08.2019 and order dated 18.10.2019. Both these orders were
passed by the NCLT purportedly under section 140(5) of the Act
in proceedings commenced pursuant to the Ministry’s sanction
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 987
AND SELLS LLP [M. R. SHAH, J.]
and directions dated 29.05.2019 under section 212 of the Act. It is A
submitted that BSR had also challenged the jurisdiction of NCLT
to pass orders under section 140(5) of the Act, 2013. It is submitted
that the NCLT has not determined the merits of a section 140(5)
order and the NCLT in its first order has only upheld the
maintainability of section 140(5) proceedings. It is submitted that
B
therefore the submissions on behalf of the respondents do not go
into the merits at all.
iv) Now so far as on interpretation and applicability of section
140(5) of the Act, 2013, learned counsel appearing on behalf of
the respective respondents – original writ petitioners has taken us
to the scheme of regulation of Auditors under the Companies Act C
and has taken us to the various provisions relating to the regulation
of Auditors under the Companies Act, more particularly Sections
132, 141, 147, 245, 447 and Sections 435 to 438 of the Companies
Act. It is submitted that the Act provides a holistic scheme for
regulation and punishment of Auditors, all of which have been D
different functions and purpose and with such matrix of sections,
no auditor can get away with fraud, abetment of fraud, professional
misconduct etc. It is submitted that therefore no auditor can escape
by way of resignation or termination of tenure due to efflux of
time.
E
v) It is submitted that a plain reading of Section 140 as a whole
shows:
i. Section 140(1) of the Act deals with the procedure for
voluntary auditor by a company.
ii. 140(2) and (3) deal with the procedure for resignation F
of an auditor.
iii. Section 140(4) deals with special notice. Section 140(5)
deals with involuntary removal by order of NCLT.
iv. The heading of Section 140 of the Act (i.e., “Removal,
G
resignation of auditor and giving of special notice”) makes
it clear that Section 140(5) only serves the purpose of
removal of an auditor and is not a standalone substantive
provision to disqualify auditors. It is well settled that a
heading is a condensed name to collectively indicate the
characteristics of the subject matter covered by a H
988 SUPREME COURT REPORTS [2023] 5 S.C.R.
A Section. Reliance is placed on the decision of this Court
in the case of Raichurmatham Prabhakar v.
Rawatmal Dugar, (2004) 4 SCC 766 (Para14).
vi) It is submitted that Sections 132, 141, 147, 245, and 447 of the
Act deal with liability of an auditor in cases of fraud:
B i. Section 132 provides for the constitution of the National
Financial Reporting Authority (“NFRA”). NFRA has
been given ample power (including the powers of civil
court) under Section 132 to impose penalty or
punishment on an auditor (including debarring the auditor)
C to the auditors professional or other misconduct. The
explanation under Section 132 provides for the terms
“professional or other misconduct” to have the same
meaning as prescribed under the Chartered Accountants
Act, 1949 (“CA Act”). The meaning of “professional or
other misconduct” entails a very wide scope as evinced
D from Schedule I and II of the CA Act. Therefore, if
auditors are guilty of fraud or abetting in fraud, they are
certainly guilty of professional misconduct, for which
powers are vested with the NFRA to disqualify, suspend
etc.
E ii. Section 141(3)(h), which specifically deals with eligibility
of auditors, provides for the ineligibility for appointment
of an auditor in case such person is convicted of an
offence involving fraud. Section 141(3)(h) disqualifies
the auditor for 10 years from the date of conviction for
F an offence involving fraud. Pertinently, while the
underlying offence is the same, i.e., an act involving the
same fraud, the penalty under Sections 140(5) and
141(3)(h) are triggered at different times. A situation
could arise where a person deemed ineligible under
Section 140(5) by way of the NCLT’s final order is
G subsequently acquitted of the charge of fraud on the
same set of facts under Section 447 of the Act by the
criminal court. Further even where a person is convicted
under Section 447, if he has already suffered the
disqualification under Section 140(5) for 5 years he could
H face a further ineligibility to be appointed as an auditor
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 989
AND SELLS LLP [M. R. SHAH, J.]
for 10 years. The total period hence could extend to 15 A
years.
iii. Section 147(3) imposes financial liability on auditors by
way of refund of remuneration or even damages where
the auditor is convicted under Section 147(2) of the Act.
Section 147(5) further imposes joint and several liability B
on audit firms and partners in case of criminal liability.
iv. Section 241(3)(a) pertains to the civil consequence of
fraud and concern “any person concerned in the conduct
and management of the affairs of a company”. This
would certainly include auditors who can be said to be C
concerned in the conduct and management of a
company’s affairs. In a proceeding under Section 241,
the NCLT will determine: (i) whether there has been
fraud; (ii) who the fraudsters are; (iii) who connived in
or abetted the fraud; and (iv) whether the parties are fit
and proper persons. The NCLT can decide that an auditor D
has connived in fraud and is not a fit and proper person
under Section 242 (4A) which provides as follows:
“242. Powers of Tribunal. - (1) If, on any application
made under section 241, the Tribunal is of the opinion-
... E
(44) At the conclusion of the hearing of the case in
respect of sub-section (3) of section 241, the Tribunal
shall record its decision stating therein specifically as to
whether or not the respondent is a fit and proper person
to hold the office of director or any other office F
connected with the conduct and management of any
company.”
v. The consequence of holding that a person is not fit and
proper is provided in Section 243 (1A) viz.:
G
“243. Consequences of termination or modification of
certain agreements – (1A) The person who is not a fit
and proper person pursuant to sub-section (4A) of
section 242 shall not hold the office of a director or any
other office connected with the conduct and
management of the affairs of any company for a period H
990 SUPREME COURT REPORTS [2023] 5 S.C.R.
A of five years from the date of the said decision: Provided
that the Central Government may, with the leave of the
Tribunal, permit such person to hold any such office
before the expiry of the said period of five years....”
If a person is found not to be a fit and proper person,
B under Section 243 (1A), the NCLT can order that such
person “shall not hold any office connected with the
conduct or management of any company for 5 years.
vi. Section 245(1)(g)(ii) also provides for damages or
compensation to be ordered against auditors, including
C an audit firm, by way of a class action suit for “Improper
or misleading statement of particulars made in his audit
report or for any fraudulent, unlawful or wrongful act or
conduct. Section 245(2) permits the NCLT to impose
“any suitable action”
D vii. Section 447 pertains to the criminal consequences of
fraud. Section 447 prescribes a punishment for the
offence of ‘fraud, the offence itself is created by way
of an explanation appended to the said section. Section
447 of the Act provides:
E “447, Without prejudice to any liability including
repayment of any debt under this Act or any other law
for the time being in force, any person who is found to
be guilty of fraud, shall be punishable with imprisonment
for a term which shall not be less than six months but
which may extend to ten years and shall also be liable to
F fine which shall not be less than the amount involved in
the fraud, but which may extend to three times the
amount involved in the fraud:
Provided that where the fraud in question involves public
interest, the term of imprisonment shall not be less than
G three years.
Explanation. For the purposes of this section-
(i) “fraud” in relation to affairs of a company or any
body corporate, includes any act, omission, concealment
of any fact or abuse of position committed by any person
H
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or any other person with the connivance in any manner, A
with intent to deceive, to gain undue advantage from, or
to injure the interest of the company or its shareholders
or its creditors or any other person, whether or not there
is any wrongful gain or wrongful loss:
(ii) “wrongful gain” means the gain by unlawful means B
of property to which the person gaining is not legally
entitled,
(iii) “wrongful loss” means the loss by unlawful means
of property to which the person losing is legally entitled”
vii) It is submitted that Sections 435 to 438 of the Companies Act C
provide a procedure in trial by a Special Court incorporating
safeguards of the CrPC. A chart reflecting the comparative scheme
of protections afforded to parties before the NCLT as opposed to
a prosecution before the Special Court established under the Act
viii) It is submitted that even if Section 140(5) is not applicable in D
a given case due to the retirement or resignation of an auditor
prior to an order being passed, that will not enable such an auditor
to escape the vigour of law under the Companies Act, 2013, Even
if an auditor resigns, he will nevertheless have to face (a)
prosecution for fraud under Section 447 of the Act; (b) action E
before the National Financial Regulatory Authority; (c) order by
the NCLT debarring auditors from acting as such in respect of
any company as well can be passed under Section 243 (1A) read
with Section 241 and 242(4A); and (d) disqualification under
Section 141(3)(h) if the auditor is found guilty of fraud. The
consequence of each of these proceedings is grave for the auditor, F
including debarment, and the auditor does not escape punishment.
ix) It is submitted that the operative part of Section 140(5)
empowers NCLT to direct a company to “change” its auditor.
NCLT can exercise this power if it is satisfied that ah auditor is
guilty of acting in a fraudulent manner or in abetting or colluding G
in a fraud and has neither resigned nor been removed by the
company. It is submitted that therefore the order that NCLT can
pass under the operative part of Section 140(5) is against the
company and not the auditor. It is an order to the company to
change its auditor and no other order. It is submitted that the word
H
992 SUPREME COURT REPORTS [2023] 5 S.C.R.
A “change” has been held to mean “replace with or exchange for
another” and “the substitution of one thing for another”.
x) It is submitted that as per the non-obstante clause provided in
Section 140(5), it is clear that the NCLT can direct the company
and no one else to remove the auditor. The non-obstante clause
B needs to be read with the term “change” as provided therein. It is
submitted that Section 140(5) of the Act cannot apply in
circumstances where the auditor sought to be removed has ceased
to hold that position as no order of change can be passed once the
auditor has resigned. It is submitted that this is clear from the
plain language of the provision itself.
C
xi) It is next submitted that under the first proviso to Section 140(5),
when an application under Section 140(5) is filed by the Central
Government and if NCLT is satisfied that a change in auditor is
required, then within 15 days from the date of filing the said
application, NCLT can pass an urgent order that the auditor will
D not “function” as an auditor and that the Central Government
may appoint a new auditor to replace the current auditor. It is
submitted that this is in the nature of a pro tem order pending final
order by NCLT under the operative part of Section 140(5) and to
facilitate the Central Government in appointing an auditor whilst
E the existing auditor functioning is restrained.
xii) It is next submitted that the second proviso to sub-section 5 of
Section 140 contemplates that if a final order is passed against
the auditor, then the auditor will not be eligible to be appointed as
an auditor of any company for a period of five years from the
F date of passing of the order. Additionally, the auditor shall also be
liable for action under Section 447 of the Companies Act. It is
submitted that the second proviso does not contemplate any
separate order by NCLT. Instead, it only provides for an automatic
consequence, i.e., five years ineligibility qua an auditor whether
individual or firm against whom a final order has been passed by
G the NCLT. It is submitted that moreover, the entire firm gets
automatically disqualified for the actions of even one of its partners.
There is no discretion provided to NCLT to alter the period of
ineligibility. It is submitted that the debarment prescribed under
the second proviso is an in terrorem provision imposed by operation
H of law, in the event an auditor chooses not to resign and forces
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 993
AND SELLS LLP [M. R. SHAH, J.]
upon himself a final order under the provision. It is submitted that A
the plain language of second proviso is anchored squarely on a
final order being passed under the operative part of Section 140(5).
xiii) It is submitted that it is settled law that proceedings which
may result in disqualification would be of a quasi-criminal nature
and have to be strictly construed. Since Section 140(5) results in B
a disqualification of an auditor, proceedings thereunder would be
quasi-criminal in nature. Disqualification of a professional is akin
to a death penalty. The standard of proof is therefore satisfaction
beyond reasonable doubt. Reliance is placed upon the decision of
this Court in the case of An Advocate v. Bar Council of India
(1989) Supp 2 SCC 25 (Para 4(1) & (11) and ICAI v. LK Ratna C
& Ors. (1986) 4 SCC 537 (para 18).
xiv) It is submitted that the Act needs to be read and interpreted
in a holistic manner. Under the scheme of the Act, it is Section
447 which specifically provides for punishment for fraud. Section
140(5) is not a provision to punish or penalize an auditor. By treating D
Section 140(5) instead of Section 447 as a provision to punish for
fraud, Ministry and NCLT failed to follow the well settled rule of
interpretation that something may be done only in the manner
prescribed by the law and in no other manner. Reliance is placed
upon the decision of this Court in the case of Dharani Sugars E
and Chemicals Ltd. v. Union of India, (2019) 5 SCC 480 (para
55).
xv) It is further submitted that expanding the scope and purpose
of Section 140(5) to include punishment for fraud, would
tantamount to prejudicing the defence that an auditor, in a given F
case, could take in any other proceedings. The summary nature
in which Section 140(5) aims to determine fraud may lead to a
complete redundancy of all other processes and procedures
provided for under the Companies Act and materially impact an
auditor’s right to fair trial. As an example, the determination of
guilt under Section 140(5) by way of a summary procedure could G
render the process of defences and appeals provided as a part of
the NFRA process nugatory and a mere formality qua the auditors.
xvi) It is submitted that It is only when the language of provisions
in a statute are not clear and categorical, the purpose of the same
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994 SUPREME COURT REPORTS [2023] 5 S.C.R.
A can be examined by a court to interpret the provision. It is submitted
that the following principles of law are well settled with regard to
the primacy of plain language interpretation over purposive
interpretation:
i. The courts should now be very reluctant to hold that
B Parliament has achieved nothing by the language it used,
when it is tolerably plain what Parliament wished to
achieve. [See Dr. Jaishri Laxmanrao Patil v. Chief
Minister and Others, (2021) 8 SCC 1 (para 150).
ii. The courts will therefore reject that construction which
C will defeat the plain intention of the legislature even
though there may be some in exactitude in the language
used. [See Jaishri Laxmanrao Patil (supra) (para
151).
iii. Purposive interpretation can be given only when there
D is some ambiguity in the language of the statutory
provisions or it leads to absurd results. [See State of
Maharashtra v. Shri Vile Parle Kelvani Mandal &
Ors. (2022) 2 SCC 725 (para 16).
xvii) It is submitted that in addition, this Court has time and again
E upheld the principle of doubtful penalisation which requires that
“if two views and reasonable constructions can be put on a
provision, the court must lean in favour of construction which
exempts the subject from penalty rather than one which imposes
penalty”. Reliance is placed on the decision of this Court in the
cases of SEBI v. Sunil Krishna Khaitan, (2023) 2 SCC 643
F (Para 55) and Tolaram Relumal v. State of Bombay. (1955) 1
SCR 158 (Para 8).
xviii) It is submitted that NCLT’s jurisdiction under Section 140(5)
of the Act is to direct the removal of a company’s existing auditor
and to allow his substitution by the Central Government. It is
G submitted that it is not possible to remove any person/firm from a
position which whey are not holding. Accordingly, an order directing
removal of BSR who had already resigned as auditor of IFIN
would only be possible by way of a legal fiction of treating BSR
as continuing to remain IFIN’s auditor.
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 995
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xix) It is next submitted that Section 140(5) of the Act does not A
create any legal fiction by which an auditor who has resigned
would continue to be treated as an auditor. A deeming fiction can
only be created by the legislature. In fact, courts and tribunals do
not have the power to create a deeming fiction by judicial
interpretation when the statute does not provide for it. Reliance is
B
placed upon the decisions of this Court in the cases of Bhuwalka
Steel Industries Ltd & Anr v. UOI, (2017) 5 SCC 598 (Para
38) and Sant Lal Gupta v. Modern Cooperative Housing Society
Ltd., (2010) 13 SCC 336 (Para 14).
xx) It is submitted that the need for a deemed removal of a past
auditor does not arise, since the very purpose and object of Section C
140, i.e., removal and change of auditors, has been satisfied by
the auditor’s resignation. Such a past auditor can, despite his
resignation, be prosecuted for fraud under Section 447 of the Act.
Therefore, the question of removing the auditor under Section
140(5) cannot and does not arise. D
xxi) It is submitted that the Ministry was aware that an order
under Section 140(5) cannot be passed against a past auditor
except through the device of a deeming fiction. This is evident
from prayers (a), (b) and (c) of the 140(5) Company Petition
sought qua Deloitte in which Ministry sought a “deemed removal” E
of Deloitte even though it had already rotated out as auditor.
Consequently, NCLT could not have gone into the merits of the
140(5) Company Petition itself as the relief sought for was beyond
NCLT’s powers.
xxii) It is submitted that further, the prayers in the Company Petition F
sought against BSR became infructuous with its resignation on 19
June 2019. Pertinently, no “deemed removal” prayer was sought
against BSR after its resignation. Despite this, NCLT proceeded
to create a deeming fiction so as to clutch at its jurisdiction to pass
an order under Section 140(5) against BSR.
G
xxiii) It is then submitted that NCLT, exercising powers under
Section 140(5), cannot direct removal of past auditors or deem
such auditors to have been removed at a previous date. NCLT,
being a creature of a statute, has to act within the domain
prescribed by the law/statutory provision. Thus, NCLT cannot
H
996 SUPREME COURT REPORTS [2023] 5 S.C.R.
A exercise power which has not been expressly vested in it, by
directing a “deemed change in auditors. Reliance is placed upon
the decisions of this Court in the cases of B. Himmatlal Agrawal
v Competition Commission of India, AIR 2018 SC 2804 (para
8) and Cellular Operators Association of India v. Union of
India, (2003) 3 SCC 186 (para 20-21).
B
xxiv) It is submitted that in Pasupuleti Venkateswarlu v. Motor
& General Traders, (1975) 1 SCC 770, this Court held that a
proceeding may not be maintainable by reasons of a post filing
event. This Court observed “If a fact, arising after the lis has
come to court and has a fundamental impact on the right to relief
C for the manner of moulding it, is brought diligently to the notice of
the tribunal, it cannot blink at it or be blind to events which stultify
or render inept the decrotal remedy.”
xxv) It is submitted that in the present case although BSR resigned
after the filing of the 140(5) petition, the resignation rendered the
D petition infructuous since the reliefs sought for could no longer be
granted under Section 140(5) and indeed the purpose underlying
Section 140(5) stood accomplished by such resignation.
xxvi) It is submitted that reading in an implied prohibition against
an auditor from resigning after the commencement of proceedings
E under Section 140(5) would be contrary to the plain language of
the section and would require it to be re-written. Such an implied
provision would also be contrary to the object of Section 140(5)
as it would mean that the provision ensures that an auditor against
whom allegations of fraud have: been made continues as auditor
F and is not permitted to resign. This would lead to an anomalous
situation of compelling the continuance of an auditor, despite him
having committed a fraud until the NCLT passes a final order or
an interim order under the first proviso to Section 140(5).
xxvii) It is further submitted by the learned counsel appearing on
G behalf of the original writ petitioners that Section 140(5) is
excessive and manifestly arbitrary as it provides unguided and
untrammelled powers to NCLT and that too in a summary
proceeding, for determination of a serious offence of fraud and
consequence of mandatory disqualification with grave
consequences akin to civil death. It is submitted that the penalty
H in the form of automatic disqualification of auditors and of the
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 997
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entire firm including partners who may be entirely unconnected A
and innocent for a pre- determined period envisaged under Section
140(5) is highly disproportionate and not the least invasive method.
It is submitted that Section 140(5) creates an automatic penalty
of disqualification, upon summary adjudication, when such a
penalty has already been provided for under section 141(3)(h) of
B
the Act after following due process of trial under Sections 435 to
446 of the Act. The same results in contravention of the principles
of double jeopardy and violation of Article 20(2) of the Constitution.
It is submitted that disqualification akin to “civil death” under
Section 140(5) impinges upon BSR and its partners’ fundamental
right to carry on its profession, as guaranteed under Article 19(1)(g) C
of the Constitution. The same, being unreasonable, does not fall
within the protection of Article 19(6) of the Constitution of India.
It is submitted that applying Section 140(5) in its plain language
i.e., to change of auditors, saves it from the above serious
constitutional infraction without letting auditors “off the hook” under
D
the Companies Act.
xxviii) It is submitted that the NCLT, vide its first Order, erroneously
upheld its jurisdiction to maintain the 140(5) Company Petition
against past auditors of IFIN, including BSR, by incorrectly creating
a deeming fiction, in absence of any legislation to this effect or
the necessary jurisdiction and power to do so. It is submitted that E
the NCLT wrongly assumed jurisdiction by holding that it was
empowered to pass directions for a deemed change of ex-auditors
and therefore the NCLT’s first order is contrary to Section 140(5)
as it was passed without jurisdiction and based on an incorrect
assumption that the jurisdictional fact that the existing auditors of F
the company needed to be “changed” existed.
xxix) It is submitted that it is trite law that a “jurisdictional fact’ is
a sine qua non or the condition precedent to the assumption of
jurisdiction by a court. A court cannot erroneously assume
jurisdiction either by not deciding the jurisdictional fact or by G
erroneously deciding it. Reliance is placed upon the decisions of
this Court in the cases of Carona Ltd. v. Parvathy Swaminathan
& Sons, (2007) 8 SCC 559 (Para 27, 28, 36) and Arun Kumar
v. Union of India, (2007) 1 SCC 732 (Para 74-76). It is submitted
that this Court has clearly laid down that the foundational fact
must be established before a presumption is made. Reliance is H
998 SUPREME COURT REPORTS [2023] 5 S.C.R.
A placed on the decision of this Court in the case of Balram Garg
v. SEBI, (2022) 9 SCC 425 (Para 45 and 51).
xxx) It is further submitted that even the NCLT’s second order
on the application filed by the Ministry for the appointment of
MMC as the statutory auditor of IFIN under the first proviso to
B Section 140(5) is wholly without jurisdiction. It is submitted that
once the BSR resigned as an auditor, there was no question of
invoking first proviso to section 140(5) of the Act.
xxxi) It is submitted that statutory auditor appointment application
was clearly contrary to law, without jurisdiction and could not
C have been under the first proviso to Section 140(5) since firstly,
Section 140(5) itself did not apply to the past auditors, and hence
no question of invoking the first proviso could arise; secondly, the
first proviso is only a pro tem measure pending a jurisdiction order
under Section 140(5); thirdly, the NCLT’s second order is not in
the nature of a pro tem order; fourthly, once the proceedings under
D section 140(5) of the Act are initiated, only the Central Government
is authorised to appoint or change the auditors under the first
proviso. Under the first proviso to section 140(5), the power given
to Central Government to appoint an auditor due to urgency, does
not take away the power of the concerned company to appoint an
E auditor of its choice; fifthly, BSR had admittedly already resigned
and vacated its office, as accepted by the Ministry in its submissions
before this Court and this Court noted the same in the order dated
26.09.2019. It is submitted that moreover, the Ministry withheld
various key facts from the NCLT at the time of filing.
F 4.1 Now so far as the direction issued under Section 212(14) and
the prosecution under Section 212(15), it is submitted as under:
i) Section 212(1) provides that the Central Government may direct
the SPIO to investigate into the affairs of a company inter alia
upon a receipt of the report of the Registrar, on intimation of a
G special resolution passed by a company, in public interest or on
request from any Department of the Central Government or State
Government;
ii) Section 212(11) provides that SFIO must submit an “interim
report” to the Central Government, if the SFIO is directed to do
so by the Central Government;
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UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 999
AND SELLS LLP [M. R. SHAH, J.]
iii) Section 212(12) requires SFIO to submit an “investigation A
report” to the Central Government only upon “completion of the
investigation”. Therefore, an “investigation report” cannot be
submitted at any time prior to the completion of the investigation,
whereas an “interim report” under Section 212(11) can be
submitted at any stage;
B
iv) Under Section 212(14), the Central Government has been
empowered to direct SPIO to initiate prosecution against a
company or its officers, if the Central Government considers it
necessary after examination of only the “investigation report”
issued under Section 212(12), i.e., after completion of the
investigation. Reliance is placed on the decision of this Court in C
the case of Serious Fraud Investigation Office v Rahul Modi
(2019) 5 SCC 266 (Para 30);
v) Section 212(14) permits the Central Government to take legal
advice when examining the “investigation report”, which itself
gives colour to the word “examination” and shows that the Central D
Government is to properly apply its mind to the “investigation
report” before directing initiation of prosecution, Le, not to do so
mechanically or for collateral purposes;
vi) Section 212(14A) provides that where the report under Section
212(11) or 212(12) stated that fraud has taken place and has been E
taken advantage of by a director, key managerial personnel or
other officer, the Central Government may file an application before
the NCLT for appropriate orders for disgorgement of asset and
for holding such person liable personally;
vii) Under Section 212(15), it is only the “investigation report” F
(submitted only upon completion of the investigation which is filed
with the Special Court is deemed to be police officer’s report
under Section 173 of the Criminal Procedure Code, 1973. (CHPC)
Significantly, Section 212(15) is a deeming fiction that is limited to
only making investigation report under Section 212(12), to be the G
police officer’s report under Section 173, CrPC;
viii) It is therefore clear that the legislature has envisaged two
distinct kinds of reports, with its own specific purpose. The first
kind of report is under Section 212(11). which report is an ‘Interim
Report’ and can be issued at any point of time during the course
H
1000 SUPREME COURT REPORTS [2023] 5 S.C.R.
A of investigation by the SFIO. The 2nd kind of report is an
‘Investigation Report” which can be issued only after completion
of the investigation by the SFIO. Only the Investigation Report’
can be considered by the Central Government under Section
212(14) for the purposes of commencement of prosecution. On
the other hand, an action before the NCLT under Section 212(14A)
B
can be brought on based on either the Investigation Report or
even the Interim Report;
ix) It is further clear that the Central Government, under Section
212(14) is required to apply its mind, seek legal opinion (if required)
and only thereafter decide whether or not a sanction order is to
C be issued, i.e., if in its opinion prosecution is to be initiated based
on the “Investigation Report’. Further, only such ‘Investigation
Report’, which is considered by the Central Government for the
initiation of prosecution under Section 212(14), is to be the police
officer’s report under Section 173, CrPC;
D x) It is submitted that in the present case, SFIO’s 2nd Interim
Report is an “Interim report” and was not issued upon “completion
of the investigation”. As such, the 2 Interim Report is not an
“investigation report” under Section 212(12) of the Act and could
not have been considered by the Central Government under Section
E 212(14) for the purposes of issuing the Sanction Order;
xi) The present case is not a case of invalidity/irregularity of
sanction but a case of no sanction at all, since the pre-requisite to
the sanction, i.e., a final investigation report, is absent;
xii) As is evident from above, where an investigation report itself
F states that the investigation is incomplete or that further evidence
is yet to be collected, then such an investigation report does not
meet the obligatory requirements of law and cannot be considered
a final investigation report under Section 173(2) of the CrPC.
Reliance is placed on the following decisions in the cases of P.M.C
G Mercantile Private Ltd. v. The State 2014(3) MWN (Cr.) 454
(Para 11 and 19); Pravin Chandra Modi v. The State of
Andhra Pradesh, Crl. App. No. 49, 1964; Hari Chand & Ram
Pal v. State Crl. Misc. (M) 99 & 111 of 1977 ( Para 14).
Accordingly, given the language of paras 1.5 and 4.126.1 of the
2nd Interim SFIO Report, that report could never be treated as an
H investigation report under Section 212(12);
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 1001
AND SELLS LLP [M. R. SHAH, J.]
xiii) Even while examining the 2nd Interim Report, the MCA was A
of the view that the 2nd Interim Report was not a complete
investigation report with respect to IFIN. Accordingly, the Ministry
had directed the SFIO to carry out further investigation on aspects
which were already covered in the 2nd Interim Report;
xiv) Further, the Ministry and the SFIO, despite being afforded B
ample opportunity, did not place on record any affidavit or argument
to explain Para V of the Sanction Order or that the investigation
was complete and that the 2nd Interim Report was not treated by
the Ministry as an interim report. The SFIO cannot avoid the
consequences of not having filed an affidavit, stating on oath, that
the investigation was not complete. This is a question of fact; C
xv) Section 212(12), does not permit initiation of prosecution based
on a report which is issued till such time investigation has been
completed. This is clear from a conjoint reading of Sections 212(12),
(14) and (15). Further, though Section 173(8) of the CrPC
contemplates a further investigation after filing of a report under D
Section 173(2), it is trite that Section 173(8) does not enable the
inspector to submit an incomplete or preliminary report and later
on submit a final report. Reliance is placed on the following
decisions in the cases of Kamal Lochan Sen v. State of Orissa
(1982) 54 CLT 509 (Para 5) and AV Dharma Reddy v. State of E
A.P. & Ors., 2011 CriLJ 185 (Para 5). Therefore, the stratagem
adopted by SFIO and the Ministry in proceeding to act based on
an “interim report” and simultaneously carrying on a further
investigation is illegal;
xvi) Since the investigation itself was not complete and the 2nd F
Interim SFIO Report is merely an interim report, there was no
basis for the Ministry to issue a direction under Section 212(14) to
initiate prosecution. Accordingly, the Sanction Order is ultra yes.
It does not constitute sanction and the prosecution is void ab
initio and a nullity;
G
xvii) The Sanction Order was passed without application of mind
to the relevant material and evidence;
xviii) Section 212(14) requires an “examination” by the Central
Government and even contemplates “legal advice” being taken, if
required. The Parliament sets out a superior degree of care that
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1002 SUPREME COURT REPORTS [2023] 5 S.C.R.
A is required while passing an order under Section 212(14).
Therefore, the Central Government’s decision must be reasoned
and must be made with proper application of mind;
xix) In law, the order of sanction must disclose both adequacy of
material as well as consideration of the relevant facts, material
B and evidence by the sanctioning authority. Reliance is placed on
the decision of this Court in the case of Mansukhbhai Vithaldas
Chauhan v. State of Gujarat (1997) 7 SCC 622 (Paras 17, 18
and 19);
xx) SFIO submitted the 2nd Interim SFIO Report on 28.05.2019.
C Admittedly, the report comprised of over 32,000 pages, with the
body of the report itself forming approximately 787 pages. The 2
Interim SFIO Report was allegedly examined by a Processing
Officer (Legal Section), Ministry who had prepared a processing
note. This processing note was allegedly submitted to the ‘Senior
Officer’ on an urgent priority basis. Despite the above internal
D processes, Ministry issued the Sanction Order on 29.05.2019 (i.e.,
within one day). It is pertinent to note that a copy of the said
processing note was not placed before the Bombay High Court
or provided to BSR despite repeated requests for inspection vide
emails dated 01.10.2019, 10.10.2019, and 14.10.2019. The Bombay
E High Court, in these circumstances, was correct to draw adverse
inference since Ministry and SFIO failed to demonstrate due
application of mind through any document or affidavit;
xxi) Given the voluminous nature of the 2nd Interim SFIO Report
and the internal processes in place, it was impossible for Ministry
F to examine and apply its mind to the 2nd Interim SFIO Report (as
required under Section 212(14) of the Act) within one day before
it issued the Sanction Order. The events described above clearly
show that the Sanction Order was granted in haste, without
application of mind and for extraneous consideration. As such,
the proceedings following such Sanction Order also stand vitiated.
G Reliance is placed upon the decisions of this Court in the cases of
K.K Mishra v. State of Madhya Pradesh, (2018) 6 SCC 676
(Para 18) and Anirudhsinhji Karansinhji Jadeja v. State of
Gujarat (1995) 5 SCC 302 (Para 15);
xxii) Further, Ministry’s failure to produce any evidence to
H demonstrate that its officers independently applied their minds to
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 1003
AND SELLS LLP [M. R. SHAH, J.]
the 2nd Interim SFIO Report is also contrary to the principles A
relating to duty of disclosure since disclosure would protect the
fairness of the proceedings and also enhance the transparency of
the process. Reliance is placed upon the decision of this Court in
the case of T.Takano v. SEBI, (2022) 8 SCC 162 (Para 62.3);
xxiii) It is therefore submitted that the Sanction Order is bad in B
law and the Bombay High Court rightly quashed the same;
xxiv) A mandatory prerequisite to jurisdiction is the existence of a
valid sanction. Therefore, the prosecution becomes incompetent
and consequently the proceedings are vitiated and without
jurisdiction where no valid sanction is granted. Reliance is placed C
on the decisions in the cases of Gokulchand Dwarkadas
Morarka v. The King, (1947-48) 75 IA 30; Yusofalli Mulla
Noobbhoy v. The King, 1949 Cri LJ 889 ( Para 15); Mohd.
Iqbal Ahmed v. State of Andhra Pradesh (1979) 4 SCC 172
(Para 3);
D
xxv) The Sanction Order issued by MCA under Section 212(14)
is invalid and non-est. In such circumstances, it is submitted that
the prosecution initiated by SFIO is absent any sanction and hence
a nullity and without any jurisdiction.
4.2 Learned counsel appearing on behalf of respondent No.1 in
Criminal Appeal No. 2300/2011 – Hari Sankaran, in addition, has further E
submitted that in the present matter no final investigation report has
been filed by the SFIO qua Hari Sankaran. It is submitted that the second
report is not in the nature of final investigation report qua Hari Sankaran.
It is submitted that since the second report was not a final investigation
report qua Hari Sankaran, direction for prosecution in question could not F
have been issued and therefore consequently the complaint could not
have been filed qua Hari Sankaran.
4.3 Making above submissions and relying upon the aforesaid
decisions, it is prayed by the learned counsel appearing on behalf of the
original writ petitioners to dismiss the present appeals and uphold the
G
impugned judgment and order passed by the High Court.
Analysis and Interpretation of Section 140(5)of the
Companies Act, 2013:
5. Section 140(5) of the Act, 2013 titled as “Removal, Resignation
of Auditor and Giving of Special Notice” appears in Chapter X of the H
1004 SUPREME COURT REPORTS [2023] 5 S.C.R.
A Act which is titled as “Audit and Auditors”. Therefore, Chapter X is a
special provision under the new Act with respect of “Audit and Auditors”.
It cannot be disputed that the auditor plays a very important role so far
as the affairs of any company are concerned and therefore he should be
independent and above board. Companies Act, 2013 is the result of the
culmination of detailed study after taking into consideration the
B
Parliamentary Standing Committee on Finance Report as well as the
recommendations of the Standing Committee by introducing Companies
Bill, 2009 and Companies Bill, 2011. When the earlier Companies Bill,
2009 was introduced, it was a culmination of the growing corporate
economy and past experiences of corporate fiascos too and one of the
C suggestions were to provide for stricter accountability for auditors. There
was a long discussion on the role, responsibility, duties and regulation of
auditors and the regulatory and enforcement provisions. Various
suggestions were received to make the provisions pertaining to Audit
and Auditors more stringent. It was suggested on Clause 123(10) of the
2009 Bill which provides for removal of an auditor by the NCLT on
D
finding that there is a fraud and corresponds to Section 140(5) of the Act
should be made more stringent and should contemplate that an auditor
removed by the Tribunal should not be eligible to be appointed as an
auditor of any company for a period of five years.
5.1 At this stage, it is required to be noted that Section 143 of the
E Act deals with the powers and duties of the auditors. Sub-section (12)
of Section 143 specifically provides that in the event that the auditor has
reason to believe that an offence of fraud is being or has been committed
in the company, the auditor shall report the matter to the Central
Government. The detailed procedure is provided under the Rules issued
F in this regard. Therefore, a statutory duty is cast upon the auditor to
report the matter to the Central Government about the offence of fraud
being committed in a company. To see that the auditor is not holding any
post in the company and he acts independently, Section 144 of the Act
provides that the auditor cannot provide certain services including the
management services. The objective seems to be that the auditor should
G function as an independent person uninfluenced by any of its activities
outside the scope of audit services. The auditor is prohibited from
providing any management service to the company. Thus, the prohibition
and restriction created under Section 144 of the Act is primarily to protect
the interest of the company in question and other stakeholders such as
H lenders and investors and the public at large. Keeping in mind the
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 1005
AND SELLS LLP [M. R. SHAH, J.]
aforesaid provisions and the underlying public policy in the backdrop, A
Section 140(5) of the Act, 2013 is required to be interpreted and/or
considered.
5.2 Section 140(1) of the Act provides for the procedure to remove
an auditor by the company before the expiry of his term; section 140(2)
and (3) of the Act deal with resignation of auditors and Section 140(4) of B
the Act deals with giving of special notice at an AGM for appointment of
an auditor other than the retiring auditor and the process in that regard.
However, Section 140(5) of the Act empowers the Tribunal (NCLT),
either suo motu or on an application made to it by the Central Government
or by any person concerned, to take action against the auditor who has
acted in a fraudulent manner or is abetting or colluding in fraud with the C
management of a company. If on completion of an enquiry it is found by
the Tribunal that an 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. Therefore, powers of the D
NCLT in first part of Section 140(5) is quasi-judicial in nature and the
Tribunal would have the powers of a civil court to examine the role of
auditors and adjudicate on their fraudulent conduct and abdication of
their function. The first proviso to Section 140(5) confers power upon
the Tribunal on the application made by the Central Government and if
the Tribunal is satisfied that any change of the auditor is required, to E
remove such auditor and/or pass an order that such an auditor shall not
function as an auditor (within 15 days of receipt of such application) and
the Central Government may appoint another auditor in his place. Thus,
the powers under the first proviso to Section 140(5) can be said to be
interim or pro tem measure to prevent an existing auditor from continuing F
and substitute him with an auditor based on a prima facie satisfaction
that a fraud has been perpetrated and when circumstances warrant the
substitution. Such an order can be said to be an interim order akin to a
temporary suspension during the pendency of the detailed enquiry as
provided in Section 140(5) of the Act and before any final order is passed
by the Tribunal. G
5.3 Second proviso to section 140(5) of the Act further provides
that an auditor, whether individual or firm, against whom final order has
been passed by the Tribunal under section 140(5) shall not be eligible to
be appointed as an auditor of any company for a period of five years
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1006 SUPREME COURT REPORTS [2023] 5 S.C.R.
A from the date of passing of the order and the auditor shall also be liable
of such action under section 447 of the Companies Act. Therefore, as
such, second proviso to Section 140(5) can be said to be a substantive
provision and it operates on the final order passed by the Tribunal under
Section 140(5) (first part). At this stage, it is required to be noted that
after taking into consideration the recommendations made by the previous
B
Standing Committee in respect of Companies Bill, 2009 and the
recommendations from various stakeholders, the Companies Bill, 2011
came to be introduced. The suggestion of the Standing Committee to
clause 123(1) of the 2009 Bill (which provided for removal of an auditor
by the NCLT on finding that there is a fraud) was to make the provision
C more stringent; and to provide for consequences for an auditor when
such auditor is found to have been perpetrating a fraud and is removed
by the NCLT for such fraud. The same has been done by way of second
proviso to Section 140(5) of the Act, 2013. Therefore, the second proviso
to Section 140(5) which, as observed hereinabove, is a substantive
provision, is introduced after a detailed analysis and after taking into
D
consideration the recommendations of the Standing Committee and with
a view to make the provision more stringent and to provide for
consequences for an auditor when such auditor is found to have been
perpetrating a fraud and is removed by the NCLT for such fraud. It is
required to be noted that on passing of the final order by the NCLT
E under first part of section 140(5) and if an auditor is found to have been
indulged into fraudulent activities or abetting or colluding in a fraud with
the management of the company, consequences provided under the
second proviso to section 140(5) shall follow. Therefore, before second
proviso of section 140(5) is attracted, there must be a detailed enquiry
against an auditor of a company as per first part of section 140(5) and
F
there must be a finding arrived at by the NCLT that the auditor of a
company has, 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.
6. By the impugned judgment and order, though the High Court
G has upheld the vires of Section 140(5) of the Act, 2013, however, the
High Court has held that once the auditor resigns as an auditor or is no
more an auditor on his resignation, thereafter Section 140(5) proceedings
are no longer maintainable as the petition filed by the Union of India
under section 140(5) has been satisfied by the subsequent resignation of
H the auditor. The view taken by the High Court is absolutely erroneous
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 1007
AND SELLS LLP [M. R. SHAH, J.]
and is unsustainable. Subsequent resignation of an auditor after the A
application is filed under section 140(5) by itself shall not terminate the
proceedings under section 140(5). Resignation and/or removal of an
auditor cannot be said to be an end of the proceedings under section
140(5). There are further consequences also on culmination of the enquiry
under section 140(5) proceedings and passing a final order by the Tribunal
B
on the conduct of an auditor, whether such a auditor has, 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, as
provided under the second proviso to section 140(5) of the Act, 2013.
Therefore, the enquiry/proceedings initiated under the first part of section
140(5) has to go to its logical end and subsequent resignation and/or C
discontinuance of an auditor shall not terminate the enquiry/proceedings
under section 140(5). If the interpretation given by the High Court that
once an auditor resigns, the proceedings under section 140(5) stand
terminated and are no longer further required to be proceeded, in that
case, an auditor to avoid the final order and the consequence of final
D
order as provided under the second proviso to section 140(5) may resign
and avoid any final order by the Tribunal. That cannot be the intention of
the legislature.
6.1 As observed hereinabove, the second proviso to section 140(5)
of the Act, 2013 is a substantive provision, though it is by way of a
proviso, and the same shall operate and/or depend upon the final order E
to be passed by the Tribunal in the first part of section 140(5). If the
interpretation given by the High Court that on subsequent resignation
and/or discontinuance of an auditor, proceedings under section 140(5)
stand terminated and/or the petition under section 140(5) by the Central
Government is no longer maintainable is accepted, in that case, second F
proviso to section 140(5) would become nugatory and in no case there
shall be any action under the second proviso to section 140(5). If such
an interpretation, as interpreted by the High Court, is accepted, in that
case, the object and purpose of incorporation of second proviso to section
140(5) shall be frustrated. The object and purpose of second proviso to
section 140(5), as observed hereinabove, is to make the provision more G
stringent and to provide for consequences for an auditor when such an
auditor is found to have been perpetrating a fraud and is removed by the
NCLT for such fraud. At this stage, it is required to be noted that under
the second proviso to section 140(5) on the final order being passed by
the Tribunal that the auditor/firm has, directly or indirectly, acted in a H
1008 SUPREME COURT REPORTS [2023] 5 S.C.R.
A fraudulent manner or abetted or colluded in any fraud by, or in relation
to, the company or its directors or officers, he/it shall not be eligible to be
appointed as an auditor of any company for a period of five years. The
word “any” used in the second proviso to section 140(5) is significant.
On the final order being passed by the Tribunal, such an auditor not only
shall be removed or changed as an auditor of a company, but such an
B
auditor/firm shall also be ineligible to be appointed as an auditor of any
other company for a period of five years.
7. Therefore, on true interpretation and scheme of Section 140(5)
of the Act, 2013, once the enquiry/proceedings is/are initiated under first
part of section 140(5) of the Act, either suo motu by the Tribunal or on
C an application made to it by the Central Government or by any person
concerned, it must come to its logical end and irrespective of the fact
whether during such enquiry/proceedings the auditor has resigned or
not, there must be a final order to be passed by the Tribunal on whether
such an auditor has, in fact, directly or indirectly, acted in a fraudulent
D manner or not. Direction to the company to change its auditor as provided
in the first part of section 140(5) is only a consequence to the finding
recorded by the Tribunal that the auditor has, directly or indirectly, acted
in a fraudulent manner. This is the first consequence of the final order
under section 140(5) (first part). On passing the final order by the Tribunal
that the auditor of a company has, directly or indirectly, acted in a
E fraudulent manner, the second consequence as mentioned in the second
proviso to section 140(5) shall be attracted. Therefore, for any
consequence as provided under the second proviso to section 140(5),
there shall be a final order by the Tribunal on enquiry as per first part of
section 140(5). Therefore, on true interpretation, even on resignation by
F an auditor of a company even during the enquiry/proceedings under section
140(5) or even prior to that, there shall not be any termination of the
proceedings under section 140(5) as observed and held by the High
Court. At the cost of repetition, it is observed that in a given case, an
auditor, who in fact has, directly or indirectly, acted in a fraudulent manner,
to avoid any further consequence under the second proviso to section
G 140(5), resigns to avoid any consequence under the second proviso to
section 140(5), it cannot be permitted.
8. No so far as the submission on behalf of the respective auditors
that even if section 140(5) would not have been there, in that case also,
no auditor can get away with fraud, abetment of fraud or professional
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 1009
AND SELLS LLP [M. R. SHAH, J.]
misconduct etc. and for that purpose the reliance placed upon sections A
132, 141, 147, 245 and 447 of the Act is concerned, at the outset, it is
required to be noted that all the aforesaid provisions and section 140(5)
operate in different field. Section 140(5) has been enacted with a special
object and purpose, as observed hereinabove. Second proviso to section
140(5) specifically provides that on final order being passed by the NCLT,
B
such an auditor shall not be eligible to become an auditor in any other
company for a period of five years. Therefore, merely because the auditor
can be removed as an auditor of a company including the other provisions,
section 140(5) which has been enacted with a special object and purpose
cannot be said to be arbitrary and/or ultra vires.
9. Now so far as the reliance placed upon section 241(3) of the C
Act and the submission that even in a case where the auditor resigns,
the auditor concerned can be proceeded against under section 241(3) of
the Act and therefore the proceedings pursuant to section 241(3) of the
Act would lead to the same result and the auditor would be held ‘not to
be a fit and proper person’ to be appointed in any other office connected D
with the conduct and management of any company is concerned, at the
outset, it is required to be noted that Section 241(3) of the Act speaks
about the concerned company and not any other company. Section 241(3)
of the Act has been introduced w.e.f. 14.08.2019 which authorises the
Central Government to apply to the Tribunal to declare that the persons
mentioned in section 241(3) of the Act are “not fit and proper persons” E
to hold the office of a director or any other office connected with the
conduct and management of any company. Section 241(3) of the Act is
required to be read along with Sections 243(1A) and 243(2). On a conjoint
reading of the aforesaid provisions, it is clear that the reference
specifically in Section 241(3) of the Act to “any other office connected F
with the conduct and management of any company” means those akin
to manager, managing director or other director such as key managerial
personnel and not an auditor. The words used in Section 241(3) of the
Act are “conduct and management of the company”. As per the Scheme
of the Act, 2013, more particularly Chapter X, the auditor acts as an
independent examiner of accounts and cannot be said to be holding an G
office in the conduct and management of the company. Therefore, the
submission that what could be achieved under section 140(5) of the Act,
2013 can be achieved by Section 241(3) even after the auditor has resigned
has no substance.
H
1010 SUPREME COURT REPORTS [2023] 5 S.C.R.
A 10. At this stage, it is required to be noted that in section 140(5), it
is specifically mentioned that “without prejudice to any action under the
provisions of this Act or any other law for the time being in force”.
Therefore, the intention of the legislature while enacting section 140(5)
is very clear and the powers conferred upon the Tribunal under section
140(5) shall be without prejudice to any action under the provisions of
B
the Companies Act, 2013 or any other law for the time being in force.
Therefore, irrespective of any other provisions of the Act, 2013, the
Tribunal is vested with the powers under Section 140(5) of the Act to
pass a final order against the auditor on the allegation that such an auditor
of the company has, directly or indirectly, acted in a fraudulent manner.
C 11. For the reasons stated above, the High Court has materially
erred in holding that on resignation of auditors – BSR & Deloitte and on
appoint of new auditors, application under section 140(5) shall not be
maintainable. Consequently, the High Court has erred in setting aside
the order(s) passed by the NCLT/NCLAT by which the NCLT/NCLAT
D held that despite the resignation of the auditors, enquiry/proceedings under
Section 140(5) shall be maintainable and/or continued. As observed
hereinabove, despite the subsequent resignation of the auditors and/or
despite the resignation of an auditor even for the purpose of second
proviso to section 140(5), the enquiry/proceedings/application under
section 140(5) (first part) shall be maintainable and continued and on the
E final order being passed by the NCLT, as provided in section 140(5),
consequence as provided under the second proviso to section 140(5)
shall follow. As neither the NCLT nor the High Court have gone into the
merits of the allegations against the respective auditors and the decision
of the NCLT and the High Court is on the maintainability of the
F proceedings under section 140(5) after resignation of the auditors, we
refrain from considering anything on merits of the allegations against the
auditors as the allegations of fraud etc. are yet to be considered by the
Tribunal on merits in an application under Section 140(5) made by the
Central Government.
G 12. Now so far as challenge to the vires of Section 140(5) of the
Act is concerned, at the outset, it is required to be noted that the High
Court, as such, has upheld the constitutional validity/vires of section 140(5)
against which the BSR has not filed any special leave petition. Even
otherwise on merits also, when some of the writ petitioners have
challenged the impugned judgment and order passed by the High Court
H
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 1011
AND SELLS LLP [M. R. SHAH, J.]
on constitutional validity/vires of Section 140(5), we are of the opinion A
that section 140(5) cannot be said to be excessive and/or manifestly
arbitrary, as contended. It was the case on behalf of the original writ
petitioners on the constitutionality/vires of section 140(5) that section
140(5) is excessive and arbitrary as it provides unguided and untrammelled
powers to NCLT for determination of a serious offence of fraud and
B
consequence of mandatory disqualification with grave consequences akin
to civil death. The aforesaid has no substance. As observed hereinabove,
NCLT shall exercise the quasi-judicial powers under section 140(5) with
all the powers akin to civil court. Ample opportunity shall be given by the
NCLT before passing any final order.
13. Now so far as another submission that section 140(5) is C
violative of Article 14 of the Constitution of India and discriminates against
the auditors unfairly in comparison to similarly placed alleged perpetrators,
such as directors, management etc. It is required to be noted that the
role of auditors cannot be equated with directors and/or management.
Auditors play very important role in the affairs of the company and D
therefore they have to act in the larger public interest and all other
stakeholders including investors etc. Chapter X of the Act specifically
for the “Audit and Auditors” looking to the importance of the auditors.
Therefore, section 140(5) cannot be said to be discriminatory and/or
violative of Article 14 of the Constitution of India.
E
14. Now so far as the submission that the penalty in the form of
automatic disqualification of auditors and of the entire firm including
partners and that too for a period of five years to become the auditor of
any other company is highly disproportionate is concerned, it is ultimately
for the legislature/Parliament to provide the debarment. On the principle
of joint and severe liability, the auditors and the entire firm including F
partners shall be liable and therefore can be subjected to section 140(5)
and the consequences mentioned in section 140(5) of the Act, 2013. So
far as the submission that the disqualification is akin to civil death and
section 140(5) impinges upon BSR and its partners’ fundamental right to
carry on its profession, as guaranteed under Article 19(1)(g) of the
G
Constitution is concerned, nobody can be permitted to say that despite
acting fraudulently, directly or indirectly, they had a right to continue
and/or carrying on their profession. Acting in a fraudulent manner, directly
or indirectly, by an auditor is a very serious misconduct and therefore
the necessary consequence of indulging into such fraudulent act shall
follow. H
1012 SUPREME COURT REPORTS [2023] 5 S.C.R.
A At this stage, it is required to be noted and as observed hereinabove,
Section 140(5) of the Act has been enacted with the specific object and
purpose as referred to hereinabove and the same has been enacted
after due deliberations and taking into consideration the recommendations
of the Standing Committee as well as the respective stakeholders.
Therefore, taking into consideration the object and purpose for which
B
section 140(5) of the Act is enacted, the same cannot be said to be
arbitrary, excessive and violative of Article 14 of the Constitution of
India and/or violative of fundamental rights guaranteed under Article
19(1)(g) of the Constitution of India, as alleged.
15. Now far as quashing and setting aside section 212(14) direction
C by the High Court by its impugned judgment and order is concerned, it
appears that the High Court has set aside 212(14) direction mainly on
two grounds, firstly, that the direction to prosecute was issued within 30
hours of report of the IFIN SFIO Report which demonstrates non-
application of mind and secondly on the ground that IFIN SFIO Report
D was an incomplete report as investigation had not been completed and
therefore 212(14) direction was incompetent.
15.1 From the reasoning of the High Court, it appears that the
High Court has set aside the direction under section 212(14) terming the
same as non-application of mind since it was improbable that report of
E about 750 pages and 32000 pages of annexures could have been
considered in 30 hours. The High Court also observed that the relevant
facts and documents to demonstrate application of mind have not been
placed on record. With the above conclusion, the High Court has observed
that even according to the investigating agency, SFIO Report was an
interim report, even asked by the Central Government.
F
15.2 Now so far as the observations made by the High Court that
issuance of the direction to prosecute within 30 hours of the receipt of
IFIN SFIO Report demonstrates non-application of mind as it was
improbable that report of about 750 pages and 32000 pages of annexures
could have been considered in 30 hours is concerned, the observations
G made by the High Court cannot be accepted. Merely because the
direction to prosecute was issued within 30 hours, by that itself, it cannot
be presumed that there was a non-application of mind. A detailed note
was prepared by the officer which was ultimately placed before the
final authority who ultimately took a decision and issued a direction to
H prosecute. What was required to be considered was, whether there was
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 1013
AND SELLS LLP [M. R. SHAH, J.]
any material to prosecute or not and whether the direction to prosecute A
was properly given or not. During the trial, the accused shall be given
ample opportunity to put forward their case. Therefore, on the aforesaid
ground, the High Court has materially erred in setting aside the direction
to prosecute issued under section 212(14) of the Act.
Now so far as the observations made by the High Court that the B
relevant facts and documents to demonstrate application of mind have
not been placed on record is concerned, it is required to be noted that a
final order to prosecute was placed on record in which it has been
specifically mentioned that having gone through the IFIN SFIO Report.
15.3 Now so far as another ground on which the direction/sanction C
to prosecute has been set aside by the High Court, namely, that it was an
incomplete investigation report and therefore on such an incomplete
investigation report, no direction/sanction to prosecute could have been
issued is concerned, at the outset, it is required to be noted that the High
Court has not properly appreciated that the SFIO IFIN Report was a
report prepared by the SFIO on the completion of the investigation into D
the IFIN – one of the companies under investigation. It is required to be
noted that by an order dated 30.09.2018, an investigation was directed
to be conducted by the SFIO into IL&FS and its subsidiaries, which
comprise of approximately 100-160 entities. So far as the IFIN is
concerned, it was one of the subsidiaries in the IL&FS group and the E
financial services arm. It is the case on behalf of the Central Government
that so far as the SFIO IFIN Report is concerned, it is a record in respect
of IFIN, upon completion of investigation into IFIN. Merely because so
far as the investigation with respect to other subsidiary companies of
IL&FS group is concerned, the same might have been going on, cannot
be a ground to observe that at this stage so far as the IFIN is concerned F
the report was incomplete report and for which the investigation was
going on. The High Court has not properly appreciated the aforesaid
and has wrongly treated the report as an interim report so far as the
IFIN is concerned. At this stage, it is required to be noted that in the
SFIO IFIN Report itself, it is observed that in light of complex structure G
of the IL&FS Group and the inter-linkages between entities etc, if any
further instances or transactions are uncovered qua IFIN during the
investigation of other group companies of IL&FS, then a further report
will be filed. Therefore, the High Court has materially erred that the
investigation in respect of IFIN is incomplete. It is required to be noted
H
1014 SUPREME COURT REPORTS [2023] 5 S.C.R.
A that as such the SFIO had submitted the report after a detailed and
extensive investigation of IFIN. There are conclusive findings against
each of the writ petitioners including Hari Sankaran pointing out multiple
breaches, violations of statutory duties and fraudulent conduct. We are
not elaborating the same in detail as the prosecution is yet to take place
and the concerned persons are to be tried. The proceedings before the
B
High Court were at the stage of direction under section 212(14) to allow
the prosecution and the sanction to prosecute. Ample opportunity shall
be available to the concerned accused against whom the prosecution
was ordered for the offences punishable under section 447 of the
Companies Act and other relevant provisions of the IPC. Therefore, the
C High Court has erred in setting aside the direction under section 212(14)
to prosecute at this stage and on the aforesaid grounds.
Conclusion:
16. In view of the above and for the reasons stated above, challenge
to the constitutional validity of section 140(5) of the Companies Act,
D 2013 fails and it is observed and held that section 140(5) is neither
discriminatory, arbitrary and/or violative of Articles 14, 19(1)(g) of the
Constitution of India, as alleged. The impugned judgment and order passed
by the High Court quashing and setting aside the application/proceedings
under section 140(5) on the ground that as the auditors have resigned
E and therefore thereafter the same is not maintainable is hereby quashed
and set aside. Consequently, the impugned judgment and order passed
by the High Court quashing and setting aside the NCLT order holding
that even after the resignation of the auditors, the proceedings under
section 140(5) shall be maintainable is hereby quashed and set aside.
The application/proceedings under section 140(5) of the Act, 2013 is
F held to be maintainable even after the resignation of the concerned
auditors and now the NCLT therefore to pass a final order on such
application after holding enquiry in accordance with law and thereafter
on the basis of such final order, further consequences as provided under
the second proviso to section 140(5) shall follow. However, it is made
G clear that we have not expressed anything on merits on the allegations
against the concerned auditors and it is ultimately for the NCLT/Tribunal
to pass a final order on the application filed by the Central Government
under section 140(5) of the Act, 2013.
17. In view of the above and for the reasons stated above, the
H impugned judgment and order passed by the High Court quashing and
UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS 1015
AND SELLS LLP [M. R. SHAH, J.]
setting aside the direction under Section 212(14) of the Companies Act, A
2013 dated 29.05.2019 issued by the Union of India to SFIO is hereby
quashed and set aside. The impugned judgment and order passed by the
High Court quashing and setting aside the prosecution lodged by the
SFIO vide Criminal Complaint CC No.20/2019 on the file of Special
Court (Companies Act) and Additional Sessions Judge, Greater Mumbai
B
is also hereby quashed and set aside. Now the said Criminal Complaint
CC No. 20/2019 be proceeded further by the concerned Trial Court in
accordance with law and on its own merits.
18. Accordingly, in view of the above, the appeals filed by the
Union of India, viz., Criminal Appeal Nos. 2305-2307/2022; 2302-2303/
2022; and 2300/2022 are allowed and Criminal Appeal Nos. 2298/2022, C
2299/2022 and 2304/2022, as also, Civil Appeal Nos.793/2022; 801/2022
and 877/2022 filed by the Deloitte and its partners are hereby dismissed.
Bibhuti Bhushan Bose Appeals disposed of.
(Assisted by : Shubhanshu Das, LCRA) D
E
F
G
H
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