IL&FS Crisis: Deloitte Haskins & Sells Moves Bombay High Court

Deloitte Haskins and Sells moved the Bombay High Court today challenging the constitutional validity of certain parts of Section 140(5) of the Companies Act, 2013 which deal with removal of auditors by the central government.

This comes after BSR & Associates, the joint auditor of IL&FS Financial Services Ltd. for financial year 2017-18, moved the high court challenging the validity on similar grounds.

The Ministry of Corporate Affairs had earlier sought a five-year ban on the auditors alleging that they had colluded with the management in dubious lending practices at the IL&FS Group.

The government had moved the apex court challenging the interim stay order granted by the Bombay High Court, which was to remain effective till further orders by the court. To this, the Supreme Court had directed the high court to speedily decide the matter.

BSR’s Arguments

Darius Khambata, counsel representing BSR & Associates argued:

Validity of Sanction Order

The sanction order issued by the central government under Section 212 of the Companies Act can be issued only on the basis of an investigation report which is final and complete in nature. However, the central government had noted in its sanction order that the action was initiated on the basis of an interim report filed by the Serious Fraud Investigation Office.

Counsel representing BSR argued that the chargesheet against them was filed during the pendency of investigation. As the “incompleteness of the investigation report appears on the face of record”, the whole sanction order for a five-year ban and the criminal prosecution must be set aside.

Lack Of Procedural Safeguards For An Auditor

Section 140(5) suffers from lack of procedural safeguard as it provides no grounds of defence to an auditor against whom an action is initiated by the central government.

The law prescribes that the National Company Law Tribunal may determine its own procedure while dealing with cases of auditor removal in case of a fraud. Citing this, the counsel for BSR argued that the mechanism under Section 140 is “manifestly unreasonable”, as it provides very few options to the auditor to defend itself.

Hasty Proceeding By Agencies And Lack Of Jurisdiction

The SFIO had relied on a voluminous investigation report to establish charge against the auditors of IL&FS. Citing the size of the investigation report, counsel for BSR challenged the validity of the sanction order which was issued within a day of the generation of the report.

Orders passed by the NCLT against the auditors were also invalid on jurisdictional grounds.

Government’s Counter

Aspi Chinoy, counsel representing the central government, countered the arguments on auditors on the following grounds:

• Constitutional validity of a provision under the Companies Act, 2013, which is a civil law cannot be challenged under the criminal writ jurisdiction of the high court.
• Considering the nature of action initiated against BSR & Associates, the matter would not fall within the purview of the high court’s criminal jurisdiction.
• The central government does not require a sanction order under Section 140(5) to initiate action for removal of an auditor.

The high court will further hear the arguments of DHS and other parties on Oct. 17.