HC stays NCLT order against IL&FS auditor BSR

Swati Deshpande | TNN

Mumbai: In a relief to BSR Associates and its employers including N Sampath Ganesh — former auditors of IL&FS, the

Bombay high court

on Wednesday stayed an order of the National Company Law Tribunal (

NCLT

), which had said that it has jurisdiction to hear a plea made by ministry of corporate affairs (MCA) seeking their five-year ban as auditors, under the Companies Act.

The HC bench of Justices Ranjit More and N J Jamadar also stayed criminal proceedings before sessions court in a complaint filed by Serious Fraud Investigation Office (SFIO). The stay would only operate for BSR.

The stay is for four weeks. The HC will hear the matter next on October 3. The HC bench in its order said “the petition raises arguable points’’ which require “detailed deliberations and consideration” and also warrant a response from the Central government.

The ministry’s action was after the SFIO investigated into affairs of IL&FS group and submitted its report. Senior counsel and former attorney general for India Mukul Rohatgi, appearing for BSR argued that the MCA action was “unwarranted”. He argued that it was based on an “interim” and not a final report of the SFIO. The SFIO filed a 32,000-page report and action was taken immediately on the next day, he argued adding, “It is not normal.” BSR challenged the constitutional validity of provisions of the Companies Act being invoked by MCA. In June MCA had petitioned NCLT in Mumbai to seek a ban on Deloitte and BSR for five years under section 140(5) of the Companies Act.

Aspi Chinoy special counsel for Union of India pointed out that Deloitte, the other ex-auditor of IL&FS had moved the NCLAT in appeal and Appellate Tribunal has allowed NCLT to conduct proceedings but not to pass any order till the appellate tribunal decides. Similarly, BSR should have approached NCLAT, which would be the competent court to decide on the issue, he said.

Hiten Venegaonkar the other counsel for the government argued that the report of SFIO was a final report and there is no such ‘interim report’ contemplated under the Companies Act. The petition, he argued was also premature since the trial court has yet to take cognizance of the SFIO report alleging fraud.

The auditors had challenged the tribunal’s jurisdiction to decide the MCA plea to ban them. Darius Khambata who had appeared for BSR before NCLT had argued that section 140(5) can be relied on when an auditor refuses to resign and not against a former auditor.

But on August 9, the NCLT held that it had the jurisdiction.

The NCLT order came as a set back to the erstwhile auditors of finance company Infrastructure Leasing & Financial Services (IL&FS)

Section 140(5) of The Companies Act which provides that NCLT, on its own or on an application made by the centre may direct a company to changes its auditors if it is satisfied that the auditor… acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers.

The challenge was on grounds of right to equality, right to life (Article 21) and right to carry on trade as the section allows NCLT to, in a summary procedure, adjudicate to decide what constitutes “fraudulent” conduct by auditors of a company.

The provision also provides that an auditor against whom final order has been passed by the Tribunal shall not be eligible to be appointed as an auditor of any company for a period of five years. Such auditor shall also be liable for action under section 447—which provides for jail term too, of minimum six months or max 10 years’ if the auditor is found guilty of fraud.