The National Company Law Tribunal will continue hearing arguments on the ban of BSR & Associates and Deloitte Haskin & Sells from auditing activities on July 22. On Friday, the tribunal spent over six hours hearing arguments laid out by the legal counsel of the audit firms and the government.
The legal counsel of both firms questioned the jurisdiction of the tribunal to enforce a ban under Section 140 (5) of the Companies Act. Their argument was that firms are no longer engaged as auditors and thus, cannot be replaced. Consequently cannot be banned from auditing activities.
Section 140 of the Companies Act deals with resignation and change of auditors. Subsection 5 reads, “without prejudice to any action under the provisions of this Act or any other law, the tribunal either suo motu or on an application made to it by the central government… if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company… direct the company to change its auditors.”
If a final order is passed under this section, the firms “shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order.”
Opposing the application, senior lawyer Janak Dwarkadas, representing Deloitte, said the Serious Fraud Investigation Office’s (SFIO) report only established prima facie evidence and cannot be the deciding factor.
He argued that the nature of fraud and involvement of the audit firms must be established beyond reasonable doubt before seeking an action as severe as a ban. He also argued that enforcing the government’s application may enable banning audit firms retrospectively, which may not be the section’s legal intent.
Senior counsel Darius Khambata, appearing on behalf of BSR & Associates, called the application a “witch hunt” against the audit firms. He added that the investigative report by the SFIO was “bogus.”
The ministry of corporate affairs had in June moved the insolvency tribunal seeking to ban the two audit firms, Deloitte audit partners Udayan Sen, Sampath Ganesh and Kalpesh Mehta for a period of five years.
The application was a consequence of the findings of SFIO in the probe into the affairs of IL&FS, which alleged that the audit firms and partners colluded with the former top management of the company to conceal material information.
The affairs of the IL&FS group came into scrutiny after the group defaulted on debt obligations to the tune of Rs 91, 000 crore. The SFIO and the Enforcement Directorate (ED) continue to investigate the financial affairs of the group companies.
Source: Financial Express, July 20, 2019