Govt asks NCLT to freeze assets of IL&FS arm's audit partners Deloitte, BSR

Audit firm partners named in SFIO complaint to be allowed withdrawal of Rs 1 lakh a month

The Ministry of Corporate Affairs (MCA) on Tuesday sought the National Company Law Tribunal’s (NCLT’s) approval to freeze assets, including bank lockers, of Deloitte Haskins & Sells and KPMG-network auditor BSR & Associates, both former auditors of IL&FS Financial Services (IFIN) which have been named in the Serious Fraud Investigation Office (SFIO) complaint. 

The tribunal, after hearing the MCA’s argument, adjourned the matter till August 28 as its order permitting the prosecution of the auditors was stayed by the National Company Law Appellate Tribunal (NCLAT). The NCLAT will hear the matter on August 19. 

The Mumbai Bench of the NCLT on Tuesday categorically stated that it won’t pass any order in the case until the NCLAT decides on whether permission should be granted to the MCA to prosecute the auditors. 

The counsel for the auditors objected to the MCA’s application, saying they were no longer party to the case as the NCLAT had stayed the NCLT order giving permission to the ministry to prosecute them. However, the tribunal observed that the NCLAT while staying the interim order had said it won’t come in the way of the NCLT and the Union of India to proceed with the case in accordance with the law.

The NCLT, Mumbai, in its December 3 order, had barred former IL&FS directors from “creating third-party rights, mortgaging or alienating movable and immovable assets fully or partly owned”. The MCA has prayed to the NCLT to extend the same order to audit firms and their partners named in the SFIO complaint and other individuals. 

The MCA said it was necessary to do so to prevent diversion of funds.

However, the MCA said the audit firms could be granted relief so that they could meet their operational costs such as salaries, electricity bills, transportation and rental costs. In the case of partners of the audit firms named in the SFIO complaint, they would be allowed to withdraw a sum of Rs 1 lakh per month.

The MCA has also moved an affidavit in the NCLT, seeking the tribunal’s nod to appoint auditors at Infrastructure Leasing & Financial Services (IL&FS), IFIN and IL&FS Transportation Networks (ITNL). 

The MCA said the new board led by Uday Kotak had suggested two accounting firms for the job -- one to do the recasting and the other for auditing the books. 
 

The case so far
 

• May 30: SFIO alleges auditors were hand in glove with IFIN management in committing fraud
• June 10: MCA seeks banning of auditors for five years
• June 21:  Auditors say NCLT doesn’t have jurisdiction to ban them; MCA moves another application to prosecute them
• July 18: NCLT grants permission to MCA to prosecute auditors
• July 30: NCLAT stays the order
• August 6: MCA seeks freezing of assets of auditors

Another matter concerning the auditors of IFIN is pending in the NCLT wherein the MCA has sought to ban them for five years based on the SFIO investigation for colluding with the erstwhile management of IFIN and not raising red flags despite being aware of the sorry state of the company. The tribunal has reserved its order after hearing the arguments of the MCA and the auditors. 

The SFIO, in its complaint, had alleged that the auditors were aware that IFIN was lending to defaulting borrowers through group companies so that it could suppress its non-performing assets and not provide for the bad debt.

The SFIO report also said the auditors failed to verify the end-use of bank finances and money raised through non-convertible debentures (NCDs), despite it being a regulatory requirement.

The SFIO complaint goes on to allege that the auditors falsified IFIN’s financial statements from FY14 to FY18 and did not report the negative net-owned funds, as well as its negative capital to risk (weighted) assets ratio, resulting in loss to those who had invested in the company’s NCDs.