HC quashes prosecution against 2 former IL&FS audit firms

Granting relief to audit firms

BSR and Associates, and Deloitte Haskins and Sells, both former auditors of IL&FS Financial Services, the Bombay High Court on Tuesday quashed all prosecution against the two firms that had been pending before the National Company Law Tribunal and a special court in the city, over alleged financial irregularities.

BSR and Deloitte had moved HC last year challenging the validity of the Union government's plea before the NCLT seeking their removal as auditors of ILFS.

Such removal under section 140 (5) of the Companies Act would also bring along a ban on the audit firms for five years.

 

The Union Ministry of Corporate Affairs had sought such removal and also initiated criminal proceedings against the firms for their role in alleged financial irregularities at the now bankrupt IL&FS Group.

In August last year, the NCLT had found merit in the Union government's pea, and subsequently approved the proposed removal of both firms.

The firms however, approached HC arguing that they had already resigned as auditors of ILFS much before the Ministry sought their removal.

They had, therefore, challenged the constitutional validity of section 140 (5) of the Act.

The section deals with removal and resignation of auditors and imposes a five year ban on an auditing firm that is proven to have "acted in a fraudulent manner", or to have "abetted or colluded in any fraud".

On Tuesday, a bench of Chief Justice BP Dharmadhikari and Justice NR Borkar quashed the prosecution of both firms before the NCLT.

While the bench upheld the constitutional validity of section 140 (5), it held that the provisions of the section did not apply to former auditors who had resigned.

The bench also quashed a criminal complaint filed against the two firms by Serious Fraud Investigation Office (SFIO), a Central agency, in the above case of financial irregularities.

The bench said the SFIO complaint filed before a special court was "bad in law".

In June last year, the Ministry of Corporate Affairs had moved the NCLT against BSR and some of the then external auditors of IL&FS alleging professional misconduct.

At the time, it had also directed the SFIO to initiate probe and disciplinary action against such audit firms.

The SFIO had subsequently claimed BSR and some other audit firms had acted in breach of auditing standards and that they had failed to detect financial inconsistencies at IL&FS.

Advocate Sujay Kantawala, who was a part of the legal team for BSR, said on Tuesday, the Union government sought a stay for eight weeks on HC's order quashing such prosecution.

While the counsels for BSR and Deloitte opposed the government's request, HC granted such stay on its own order.

Kantwala stated that HC granted such stay saying that denying time to the government for an appeal would not be "fair in todays troubled times".

He added that Tuesday's order quashing prosecution would have major implications on the corporate world and would act as a precedent in preventing "harassment of innocent firms".