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IL&FS Crisis: NCLT Rejects Deloitte, BSR’s Applications Challenging Tribunal’s Jurisdiction

The tribunal said it will hear the ministry’s application seeking a five-year ban on these auditors afresh on Sept. 5.

A pedestrian passes the offices of Deloitte. (Photographer: Bartek Sadowski/Bloomberg)
A pedestrian passes the offices of Deloitte. (Photographer: Bartek Sadowski/Bloomberg)

The National Company Law Tribunal today rejected Deloitte’s and BSR’s applications challenging the tribunal’s jurisdiction to ban them from business for five years for their omissions and commissions in the IL&FS Group collapse.

This is the second setback for these foreign audit firms as earlier the tribunal had allowed the corporate affairs ministry to prosecute them along with 21 others in the same case, though its implementation has been stayed after they sought time to challenge the order at the National Company Law Appellate Tribunal.

The ministry had in June moved NCLT seeking a five-year ban on the two auditors.

The tribunal today said it will hear the ministry’s application seeking a five-year ban on these auditors afresh on Sept. 5.

The auditors had challenged the jurisdiction of the NCLT to ban them under Sec 140(5) of Company’s Act.

They had challenged the jurisdiction of the NCLT to ban them, saying section 140(5) of the Companies Act pertains to auditors who are still auditing the company in question while they have already resigned as auditors of IL&FS companies and thus cannot be banned under the given provisions.

While Deloitte had stopped auditing IL&FS Group, which owes over Rs 95,000 crore to lenders and other financial institutions, by the end of FY18, BSR was the statutory auditor of IL&FS Financial Services and resigned only in June this year—nine months after the company was sent to the bankruptcy court.

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The BSR counsel Darius Khambata and Deloitte’s counsel Janak Dwarakadas had also argued that before banning them, the tribunal must pass a final order in the matter establishing that fraud was indeed committed by the auditors.

The ministry move to ban them came after the Serious Fraud Investigation Office in its investigation found them guilty of painting a rosy picture of IFIN despite being aware of the poor financial health of the company.

The counsels of the audit firms had argued that merely an investigation by SFIO is not sufficient basis to ban them.

The SFIO, in its report alleged that these auditors were aware that IFIN was lending to defaulting companies through group companies so that they could suppress their NPAs and not provide for the bad debt.

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Meanwhile, NCLT approved the appointment of other auditors to recast accounts of IL&FS and its subsidiaries.

The ministry had on Thursday proposed Borkar & Mazumdar & Co and MM Chitale & Co for IL&FS and IFIN respectively; and GM Kapadia & Co and CNK & Associates for IL&FS Transportation Networks to recast account of IL&FS and its subsidiaries.

Terming today’s ruling unfortunate, Deloitte in a statement said ity “will review the order and decide on the future course of action shortly”.

“We remain committed to high standards of audit quality and ethical conduct in our professional practice. We have faith in the country's regulatory and judicial processes and will continue to cooperate fully with the authorities,” a Deloitte spokesperson was quoted as saying in the statement.

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