The ministry of corporate affairs and IL&FS on Thursday moved the Supreme Court seeking a stay on the Bombay High Court order that restrained it from proceedings against auditing firm BSR & Associates LLP, a KPMG affiliate firm, in the Infrastructure Leasing & Financial Services Ltd (IL&FS) case.
The HC on September 4 had stayed the proceedings against the audit firm and restrained the government from taking coercive action against the auditing firm before the National Company Law Tribunal, Mumbai, and a Mumbai special court dealing with the IL&FS scam.
A Bench led by Justice Indira Banerjee heard the arguments put forth by both Solicitor General Tushar Mehta and senior counsel Mukul Rohatgi, who represented BSR. It posted the case for further hearing on Wednesday.
The Serious Fraud Investigation Office (SFIO) in May filed a criminal complaint against 30 parties in the IL&FS case, including BSR & Associates and Deloitte. In its complaint, the SFIO accused these auditors of colluding with officials of IL&FS Financial Services to conceal facts and fraudulently falsifying the books of accounts and thereby financial statements from FY14 to FY18.
IL&FS Financial Services (IFIN), which is being investigated by multiple agencies for alleged financial irregularities, was audited by BSR in FY19 and jointly by BSR and Deloitte in FY18. Deloitte was the sole auditor of the firm in FY16 and FY17.
The financial affairs of the IL&FS group came under scrutiny last year after it defaulted on short-term and long-term debt obligations to the tune of Rs 91,000 crore.
Challenging the HC order, the government and IL&FS stated that the reviewing of the sanction to prosecute the auditors was contrary to the apex court’s law laid down in a catena of cases where it was held that the invalidity or legality of sanction had to be raised during the trial and not at the very threshold.
Mehta argued that “the interpretation of Section 140(5) of the Companies Act on which the impugned order proceeds erroneously suggest that an errant auditor who may be involved in a fraud can escape his consequential ineligibility to act as an auditor for any company for a period of five years merely by resigning during the pendency of an action…”
He said that the HC’s interpretation would render the provision “toothless and would give a right to an errant auditor to avoid the due process of law simply by resigning.”
Rohatgi opposed the government’s appeal, saying the direction to take action against the audit firm was given just a day after SFIO submitted its 32,000-page interim report. “These are complex issues. And, it is just impossible to do so just within a day and that, too, on an interim report,” he said, adding that an auditor cannot be removed if he has already resigned.
“If the auditor is found guilty of professional misconduct, he can be disqualified for a period of six months to 10 years. The rules are already quite harsh and violates Article 14 and 21 of the Constitution,” Rohatgi added.
Based on the SFIO’s findings, the MCA in June had moved the NCLT seeking a five-year ban on former IL&FS auditors — Deloitte Haskin & Sells LLP and BSR — for failing to red-flag problems in IFIN. However, the NCLT on August 9 rejected the auditors’ pleas challenging the jurisdiction of the tribunal to ban them and allowed the government’s proposed removal as auditors of IFIN — a position BSR had already resigned from — for alleged role in financial irregularities in the firm. On appeal by BSR & Associates and N Sampath Ganesh, a partner with the firm, the HC in an interim order ruled in their favour.
Source: Financial Express, September 21,2019