Deloitte Haskins & Sells has moved the Bombay High Court challenging the constitutional validity of the central government’s petition in the National Company Law Tribunal (NCLT) seeking removal of the former auditors to IL&FS under Section 140 (5) of the Companies Act.
Deloitte’s petition is on the same lines as that filed by BSR & Associates. Senior counsel Amit Desai, representing Deloitte, also informed the court that the facts of the case were similar and the issue was merely on the question of law. At Thursday’s hearing, Darius Khambata, senior counsel appearing for BSR, reiterated his arguments. Meanwhile, the court directed the Attorney General to submit a statement. The court has set October 16 as the next date of hearing.
As part of his arguments, Khambata informed the court that his petition was based on two main prayers — one, that Section 140 (5) of the Companies Act be declared ultra vires (outside the purview of the Indian Constitution), and second, that the NCLT not be allowed to oversee proceedings on the matter of removal of auditors of IL&FS.
In June, the Centre moved the NCLT seeking removal of BSR and Deloitte as auditors of IFIN. The application was filed under Section 140 (5) of the Companies Act, which deals with removal, and resignation of auditors. The section seeks to remove auditors which have acted in or abetted fraud. One of the provisions (the second proviso) of the section allows for removed auditors to be banned for a period of five years.
In August, BSR filed a writ petition in the Bombay HC against the government’s move to ban the auditors. The petition sought to declare Section 140 (5) ultra vires of the Constitution of India (ie, outside the purview of the Indian constitution or, unconstitutional).
Khambata claimed Section 140(5) of the Companies Act is ultra vires on the premise that it only allows for summary proceedings which is left to the sole discretion of the NCLT. He stated that there was no procedure or safeguards available to the respondents under the section and hence, ‘left to the devices of the NCLT’.
Khambata went as far as to state that a fraudster was in a better position than an auditor. “Why should I suffer a summary procedure when others get benefit of a full trial? I am being made to face civil death in a summary trial,” he said. He added that the NCLT would not even have to pass an order on the matter and that if disqualified, BSR would be automatically banned. On this automatic ban, Khambata said “disqualification was akin to a death penalty”.