Union of India Vs. Deloitte Haskins and sells LLP

Name of Author- Lalidhambha S., Government Law College, Dharmapuri

Edited by – Sulesh Choudhary

ABSTRACT / HEADNOTE

This case deals with the provisions of Section 140(5) of the Companies Act, 2013 which deals with the Removal and resignation of the Auditor and giving of special notice mentioned in Chapter 10 of the act which deals with Auditor and Audit. Also, Section 143(12) provides that in the event an auditor has reason to believe that an offence or fraud is being or has been committed in a company then the auditor has to report this to the central government. It includes Section 144 provides that an auditor cannot provide management services to the company. Thus Section 140(5) has to be interpreted in the light of these provisions. According to this provision NCLT as a preliminary measure, has the power to order a change of auditor on an application made by the central government and further upon the final enquiry, also it can such an auditor shall not act as auditor of any company for five years. When the Supreme Court was about to deal with this case in such a situation where the reference had been made by the central government, Deloitte resigned as auditor and argued the proceedings as per the proviso to Section 140(5). However, the Supreme Court dismissed the arguments by stating that the subsequent resignation of an auditor cannot terminate proceedings under the second proviso to 140(5) when such an auditor has directly or indirectly acted fraudulently. Also, the court brushed aside arguments regarding the violation of Article 14 and Article 19(1)(g) of the Constitution of India.

Keywords: Companies Act 2013, Article 14, Article 19(1)(g), Removal and Resignation of auditor, NCLT

CASE DETAILS

INTRODUCTION AND BACKGROUND OF JUDGEMENT

In the judgment of Union of India v. Deloitte Haskins and Sells LLP, where the Supreme Court had stated the law about the removal and resignation of an auditor, whereas the proceedings had been initiated under section 140(5) of the Companies Act, 2013. Following that the Supreme Court also upheld the constitutional validity of the provisions and interpreted it as neither discriminatory, arbitrary and/or violative of Articles 14, 19(1)(g) of the Constitution of India.

Initially, the petition was filed before the National Company Law Tribunal seeking the removal and the inquiry into the conduct of an author involved in suspected fraud.

FACTS OF THE CASE

Procedural Background of the Case

The Ministry of Corporate Affairs directed the Serious Fraud Investigation Office to investigate IL&FS and its subsidiaries. The new board of directors submitted a progress report, and the SFIO also submitted an interim report on the individuals in control of IL&FS and the fraud committed by them. Later, the auditors of IL&FS subsidiary, IFIN, were issued a notice opposing the petition. Further, the proceedings were initiated by the Ministry of Corporate Affairs and the SFIO which seeks the removal of the auditors and also confers that they are ineligible for future appointments.

Factual Background of the Case

A series of defaults by IL&FS Group companies in 2018, with a debt burden of over Rs. 91,000 crores, had severe implications for India’s money market. The Ministry of Corporate Affairs requested action under the Companies Act, 2013, due to concerns about corporate governance failures, window-dressed accounts, and the potential catastrophic impact of further defaults. The High Court has set aside the NCLT’s order, quashing the petition, and cancelling the directions and criminal proceedings, but also upheld the validity of the provision and the auditor of IL&FS had filed a writ petition by challenging its validity.

LEGAL ISSUES RAISED

• Whether an auditor who is charged with an offence under section 140(5) of the Companies Act dealing with non-reporting of fraud in a company can get away by simply resigning as an auditor and thereby rendering the provisions of section 140(5) nugatory?
• Whether section 140(5) of the Companies Act 2013 constitutional?

PETITIONER’S ARGUMENTS

The counsels for Petitioner submitted that:-

• The Petitioner argues against the interpretation of section 140(5) of the Companies Act, 2013 made by the High Court held that the intention behind the provision was to break the collusion between auditors and companies, and if the auditor resigns, the purpose of the section is fulfilled. However, the submission contends that the High Court’s interpretation is erroneous. In conclusion, the petitioner requests the court to set aside the High Court’s order and uphold the proceedings under section 140(5) of the Companies Act, 2013 against the auditors. It argues that the resignation of auditors should not render the proceedings void and that the purpose of the provision is to prevent fraudulent auditors from being appointed in any company. {Devas Multimedia Private Limited v. Antrix Corporation Limited and Another [(2023)} 1 SCC 216]}

RESPONDENT’S ARGUMENTS

The counsels for Respondent submitted that:-

The Opposite Party argues various points regarding section 140(5) of the Indian Companies Act, 2013 and its interpretation. The High Court upheld the constitutionality of section 140(5) but read it down to only allow for the removal of an auditor, without the power to punish or debar them. The submission that the NCLT can debar an auditor for 5 years was rejected by the High Court as it only serves the purpose of removing an auditor and is not a standalone provision to disqualify auditors. Additionally, it contends that the resignation of auditors renders the section 140(5) proceedings infructuous, as the purpose of removal and change. Finally, argues that it grants unguided and untrammelled powers to the NCLT in a summary proceeding as it considers the penalty of automatic disqualification, disproportionate, as similar penalties already exist under section 141(3)(h) after due process of the trial.

RELATED LEGAL PROVISIONS

Section 140(5) – “Removal and Resignation of Auditor and Giving of Special Notice” and sub-section (5) states: “Without prejudice to any action under the provisions of this act or any other law for the time being in force, the Tribunal either suo moto or an application made to it by the central government or by any person concerned, to take action against the auditor who has acted fraudulently or is abetting or colluding in fraud with the management of a company”

Article 14 – “Equality before law or equal protection of the laws”

Article 19(1)(g) – “Right to practice any profession or to carry on any occupation, trade, business to all citizens”

Section 141(3)(h) – “prevents a person from being appointed as an auditor of a company if he has been convicted by a court for an offence that involves fraud less than 10 years ago”

JUDGEMENT

In this case, the Supreme Court reviewed the judgment of the High Court are no longer maintainable as it disagreed with the interpretation and held that the resignation or removal of an auditor does not terminate the proceedings under this provision. Regarding the challenge to the constitutionality of section 140(5), the court upheld its validity. The court also rejected the argument that section 140(5) discriminates against auditors compared to directors and management. It concludes the proceedings under section 140(5) should continue even if an auditor resigns, and the consequences of the final order, including disqualification, should be applied. The court upheld the constitutionality of section 140(5) and dismissed the challenges raised against it.

RATIO DECIDENDI

• The NCLT would have the powers of a civil court to examine the role of auditors and adjudicate their fraudulent conduct and abdication of their function.
• The powers under the first proviso to section 140(5), which provides for the removal of the auditor based on a prima facie satisfaction that a fraud has been perpetrated and when circumstances warrant the substitution.
• The powers under the second proviso to section 140(5) which envisages debarment of the auditor or the firm for five years passed by NCLT but that shall not be eligible to get appointed in any company for five years.
• In comparison to similarly placed alleged perpetrators, such as directors or management, it has been held that auditors play a vital role in the affairs of the company, therefore, they have to act in the larger public interest and consider all the other stakeholders.
• Hence the provision cannot be said to be discriminatory and violative of Article 14 of the Constitution of India.

CONCLUSION & COMMENTS

Given the above and for the reasons stated above, a challenge to the constitutional validity of section 140(5) of the companies acts, 2013 fails and it is observed and held that section 140(5) is neither discriminatory, arbitrate violative of articles 14 and 19(1)(g) of the Constitution of India, as alleged. The Supreme Court, after interpreting the provision has held that even on the principles 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) of the act.

REFERENCES

Important Cases Referred:

• {Devas Multimedia Private Limited v. Antrix Corporation Limited and Another [(2023)} 1 SCC 216]}

Important Statutes Referred

• The Constitution of India, 1950
• The Companies Act, 2013

WEBSITES REFERRED

• https://thelawtree.akmllp.com/apex-ruling
• https://corporate.cyrilamarchandblogs.com/2023/05/
• https://itatonline.org/digest/verdicts/union-of-india-and-another-vs-deloitte-haskins-and-sells-llp-anr-sc/
• https://www.livelaw.in
• https://www.indiankanoon.com
• https://www.manupatra.com