NCLT Mumbai to take a call on removal of ‘fraud’ auditor

MUMBAI: Can the National Company Law Tribunal (NCLT) remove an erstwhile auditor on a petition made by the Centre that such an auditor acted fraudulently directly or indirectly, abetted or colluded in any fraud in connection with the company and its directors? This is the crucial question on jurisdiction that NCLT, Mumbai is hearing in a highly contested battle between the ministry of corporate affairs (MCA) and Deloitte Haskins & Sells LLP and BSR Associates, erstwhile auditors of the allegedly scam-ridden IL&FS Financial Services (IFIN).
The MCA filed the petition recently to seek the removal of two auditors Deloitte and BSR, citing a report by the Serious Fraud Investigation Office (SFIO) against them. The MCA has sought a ban on the auditors for five years.
The provision that the MCA is relying on is section 140 (5) of the Companies Act of 2013. The section, notified on June 2016, provides that the NCLT can suo motu (on its own) or on an application made by the central government “may direct a company to change its auditors”, “if it is satisfied that the company’s auditor has…acted in a fraudulent manner…” This provision is meant to remove or change an auditor who is acting fraudulently.
Deloitte said its term as IFIN’s auditor concluded by the end of fiscal 2018 last year. The other auditor BSR resigned after the MCA moved the NCLT against Deloitte last month. The company has appointed a new auditor in place of BSR already. MCA counsel Sanjay Shorey said that the NCLT should direct that Deloitte be removed with retrospective effect since the fraud on the basis of the SFIO report against the auditor.
Deloitte had retired by end of financial year 2018, thus the application against Deloitte in 2019 is not maintainable, argued its counsel Janak Dwarkadas and Amit Desai, adding that the tribunal cannot legislate, but only interpret a law.
The MCA alleged that BSR had resigned to avoid consequences, which its counsel Darius Khambata and, for its partners, counsel Robin Jaisinghani denied, before a bench of V P Singh, presiding judicial member, and Ravikumar Duraisamy, technical member. There is no question of resigning to escape any consequences, they argued when there are other provisions specifically provided in the Companies Act to deal with or punish cases of fraud.The fight is largely veered around interpreting the provision of law.
Dwarkadas and Desai argued that the language of the section is clear as it talks about directions to “change” an auditor, and hence there is no occasion to change former auditors. Deloitte has been rotated out by operation of law last year and hence the provision cannot apply to it, was their first argument, “since the purpose of the section has been met”. The second was that there are other provisions and remedies including criminal prosecution and National Financial Reporting Authority (NFRA) where the allegations can be tested under a trial and hearing.
Dwarkadas argued that the jurisdiction of NCLT is dependent on there being an auditor in place. “Unless and until there is an auditor in place who requires to be removed or changed, section 140 (5) has no application to take action on an erstwhile auditor. “Since Deloitte had retired, the MCA plea is not maintainable,” it was argued.
The arguments on behalf of the auditing firms was that there are other provisions which entitle the government to launch prosecution or to reopen accounts to recover any amounts lost by reason of a fraud that may have taken place in the past. Khambata said section 132 (reporting to the NFRA) and 447 (punishment for fraud) of the Companies Act exist to deal with such cases, but that the SFIO report cannot be used as a means to short the process of a trial.
The government cannot seek removal of the auditors with a final order from the NCLT to hold that there was a fraud or mismanagement but the MCA wants to remove without a full fledged trial and cannot direct removal unless the auditor is currently the auditor of the company.
Shorey for the MCA said, “I will be able to demonstrate fraud when the time comes.” Seeking to tear through the maintainability argument of jurisdiction raised by the Deloitte and BSR, he said the question is of interpretation of law both “grammatically and technically”.
The section says if the “tribunal is satisfied”, he said. He added, “It is a present perfect tense used to describe something that happened in the past. But time is not material.” The spirit of law has to be maintained said Shorey. The intention of the law is to “debar, not change”. “The purpose is not that he has gone. But purpose is that he should be punished,’’ he added. The emphasis is on the word “may”, which means the court may or may not direct a change of auditor, on its discretion, he said.
The hearing will continue on Monday.