2020 (4) TMI 644 - BOMBAY HIGH COURT

Constitutional validity of section 140(5) of the Companies Act, 2013 - violation of Article 14 and 21 of the Constitution of India - invocation of the section against the ex-statutory auditors - constant evergreening of debts extended to its subsidiary Companies & third parties/companies by IFIN.

Whether S. 140(5) of 2013 Act is unconstitutional? - Whether it is bad as it singles out only the Company Auditors and excludes the directors or the office bearers of the companies from its scope? - Whether it is arbitrary since it does not carry adequate procedural safeguards as contained in Indian Chartered Accountants Act or in S. 132 of the 2013 Act? - principle of double jeopardy.

HELD THAT:- The Parliament in 2013 Act made provision for NFRA to consider the cases of professional misconduct and for a criminal trial under its S. 447, an agency like NCLT formed under S. 408 has been given a power to issue a direction to change the CA. It is also apparent that NCLT has not been given power to debar or disqualify or impose any punishment on such CA - Proviso to S. 132(4)(a) of 2013 Act shows that after NFRA initiates investigation into the professional misconduct, the Institute of Chartered Accountants looses that jurisdiction - NCLT does not & can not inquire into a professional misconduct by the CA as it is not conferred with power to choose the nature of punishment or its quantum.

Section 140(5) is part of the provision (S.140) which deals with the removal of CA or his resignation. Need of special resolution to remove CA or grant of opportunity to him in that connection are part of this scheme. The concerned CA though removed by special resolution or due to his resignation, is not visited thereby with any action for professional misconduct or prosecution for crime or any disability because of that removal or resignation.

Chartered accountant Act takes care of the professional misconducts by CA while 2013 Act vide S. 132, also deals with type of the said misconducts and vide S. 447, takes care of criminal offences. In this backdrop, it is absurd to assume that S. 140(5) again envisages a punishment for a professional misconduct or for crime of fraud - Debarment or disqualification under 2nd proviso to S.140(5) follows automatically due to statutory mandate and NCLT has no option or discretion in that respect.

As professional misconduct & offence are not dealt with by the NCLT, disqualification stipulated in second proviso to S. 140(5) can not be construed as a second punishment for same misconduct & it also does not attract the principle of double jeopardy. As legislative mandate of disqualification in second proviso to S. 140(5) is not a punishment either for the misconduct or the offence, obviously it is added as a measure to achieve a laudable goal - Respondents as also the Petitioners do not dispute that considering the consequences emanating from scheme of S. 140(5), it needs to be strictly construed. It contemplates “change of CA” as a final order. The order therefore must be executable (executory) and if the CA has already ceased to be such CA, that final order can not be passed as he can not be or need not be changed.

The disqualification prescribed in second proviso to S. 140(5) is not for NCLT’s satisfaction of involvement in fraud or offence of fraud or for professional misconduct. As only fact of final order of NCLT ie a direction to change is the triggering point, it can not attract the principles of double jeopardy at all. Such debarment is avoidable - the CA in relation to whom the NCLT proposes to issue a direction to change, may therefore prefer to walk out by resigning thereby not taking the risk of a disqualification. He is expected to show a mature & neutral attitude - Even when Company proposes to pass a special resolution for removing its CA under S.140(1), the CA can avoid it by putting in a resignation. The scheme of S. 140 itself interposes “resignation” procedure between the decision of Company to move such special resolution & further processing thereof. The Parliament has placed sub-sections (2) & (3) regarding the resignation between sub-sections (1) & (4) of S. 140 and there is nothing in law to demonstrate that the CA against whom the special resolution of “removal” is initiated, can not resign. Such resignation does not lead to any debarment or disqualification in his practice as CA.

Status of report under S. 212 submitted by SFIO - HELD THAT:- Section 212(11) obliges SFIO to submit an interim report when so directed by the Central Government. S. 212(12) obliges him to submit the investigation report after completing the investigation. The section does not speak of said report as “final report”. Parties have for convenience coined that phrase since S. 212 (11) uses the word “interim report”.

There is nothing in S. 212 of 2013 Act to demonstrate that interim report under S. 212(11) can not be an investigation report. When the Central Government calls for the interim investigation report, there is nothing in S. 212(14), which prohibits the Central Government from considering it - As the respondents do not plead on affidavit and bring on record the basic facts to indicate a possibility of due application of mind by the authority granting “direction” to prosecute, no disputed question in relation to such process under S. 212(14) of 2013 Act arises before us. As such, there is no scope for claiming that arguments of the petitioners about non-application of mind raise a disputed question which can be examined during trial.

Thus, section 140(5) of the Companies Act, 2013 is not unconstitutional - Direction under S. 212(14) of the Companies Act, 2013 dated 29/05/2019 issued by respondent no. 1 Union of India to respondent no. 2 SFIO is unsustainable and it is quashed & set aside. The consequential prosecution lodged by the respondent no. 2 SFIO vide Cr. Complaint no. CC 20 of 2019 on the file of Special Court (Companies Act) and Additional Sessions Judge, Greater Mumbai; is therefore not maintainable and it is also quashed & set aside - petition is partly allowed.