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TMI Blog2019 (8) TMI 1582X X X X Extracts X X X X X X X X Extracts X X X X ..... tition, challenging the maintainability of the company petition on the ground of jurisdiction of this Tribunal to entertain and try the petition under section 140(5) of the Companies Act, 2013. 2. The applicant has sought the declaration that Company Petition No. 2062 of 2019 filed by respondent No. 1/original petitioner is not maintainable against the applicant. C. P. No. 2062 of 2019 has been filed by Union of India against respondents Nos. 1 to 5, i. e., Deloitte Haskins and Sells LLP, BSR and Associates LLP, CA Sampath Ganesh, CA Udayen Sen and CA Kalpesh J. Mehta in addition to other pro forma respondents under section 140(5) of the Companies Act, 2013, seeking declaration that respondent No. 1-Deloitte Haskins shall be deemed to be removed as the statutory auditor for IL and FS Financial Services Ltd., for financial year 2012-13 to financial year 2017-18, in the light of its vacation of office on rotation at the end of financial year 2017-18. 3. Further declaration has been sought under section 140(5) of the Companies Act that respondent No. 2-BSR and Associates shall cease to act as the statutory auditor of IL and FS Financial services Ltd. (IFIN) with immediate effect and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the action of the appellant amounts to a closure, there would be an end to the proceedings before the Tribunal so far as the main dispute is concerned. If, on the other hand, the finding is that the action of the appellant amounts to a lockout which has been dis guised as a closure, then the Tribunal will be entitled to deal with the reference. The finding which the Tribunal may make on this prelim inary issue is a finding on a jurisdictional fact and it is only when the jurisdictional fact is found against the appellant that the Industrial Tribunal would have jurisdiction to deal with the merits of the dis pute. This position is also not in dispute. (page 118 of ITR 74. A 'jurisdictional fact' is a fact which must exist before a court, Tribunal or an authority assumes jurisdiction over a particular matter. A jurisdictional fact is one on existence or non- existence of which depends jurisdiction of a court, a Tribunal or an authority. It is the fact upon which an administrative agency's power to act depends. If the jurisdictional fact does not exist, the court, authority or officer cannot act. If a court or authority wrongly assumes the existence of such fact, the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity issue based on the jurisdiction of the court should be decided as a preliminary issue before proceeding in the matter. 10. Relying on the case law of the hon'ble Supreme Court in Arun Kumar v. Union of India [2006] 286 ITR 89 (SC) ; [2007] 1 SCC 732, we are deciding maintainability issue, specially taken in MAs as a preliminary issue, prior to passing the final order on the basis of pleading filed in C. P. No. 2062 of 2019. 11. The applicant/respondent No. 1 of Original Petition No. 2062 of 2019 contends that respondent No. 1 is the Union of India, MCA who has filed captioned petition under section 140(5) of the Companies Act, 2013 against the applicant and respondents Nos. 2 to 15 herein. By the present application, the applicant seeks to challenge the maintainability of the company petition filed by respondent No. 1 herein/original petitioner under section 140(5) of the Companies Act, 2013 on the ground more particularly stated hereinbelow, that the CP and the relief sought therein are not maintainable against the applicant Deloitte Haskins and deserves to be dismissed for the following reasons : (a) The applicant states that as the very title of the section makes cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment under section 140(5), only deals with removal which would mean removal/change of an existing auditor whose appointment is continuing on the date of the petition. On an interpretation of section 140 alone, it is evident that it can not apply to the past auditor. (e) It is further stated that even as per respondent No. 1/original peti tioner's own case, the applicant has vacated its office as an auditor of IFIN with effect from the date of the annual general meeting of IFIN as relevant for the end of the financial year 2017-18 on account of rotation (i. e., by operation of law) and has since then ceased to be an auditor of IFIN. Con sequently, the question of its removal/change cannot or does not arise. Thus, section 140 is itself not applicable to the applicant. On this ground itself the captioned petition ought to be dismissed in liminie. (f) The applicant states that in order to deal with the past auditor there are other provisions in the Companies Act, 2013 which can be resorted to. It is thus submitted that the provisions of section 140(5) cannot and ought not to apply to an erstwhile auditor. (g) Without prejudice to the aforesaid, the applicant submits that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision cannot be given a retrospective effect, as the petitioner is seeking that this Tribunal should do in the present case. (j) The applicant states that if the deeming fiction sought to be argued by respondent No. 1 herein were to be allowed, it would lead to absurd positions. Illustratively, section 140(5) could also be extended to an audit that could have been performed by another auditor, five or even ten years before. Clearly, a plain reading of the said section shows unequivocally that the law did not intend to cover past auditors under the said section ; rather, the said section expressly provides for removal of an auditor who is actively auditing a company at the time of a proceeding under section 140(5). (k) The applicant states that proviso (1) and (2) are both conse quences of an application "to change" the statutory auditors flowing out of an application made under section 140(5). Proviso (1) provides for an order of change of the statutory auditor of that specific company in respect of which an application is made under section 140(5) by the Central Govern ment. The purpose of proviso (1) is to create an exception in cases where an application under section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/the original petitioner. The applicant states that the period of 15 days for passing an order under the first proviso of sub-section (5) of section 140 is indicative more of the expediency with which power is required to be exercised rather than a strict timeline to be observed by this Tribunal. This timeline cannot be regarded mandatory to be applied in each case. The said period of 15 days ought to be interpreted as being directory and not man datory. It is submitted that if the said section were to be read so strictly the section itself would be amenable to challenge as being unreasonable, arbi trary and unconstitutional. (n) Without prejudice to the aforesaid, the applicant's contention that the 15 days period is not mandatory is further supported by the fact that under sub-section (1) of section 140, an auditor can be removed by the members of the company before the expiry of his term by way of a special resolution, and special notice must be given in this regard. This itself indi cates that the democratic process available to the members of the company itself permits a longer period of time for removal of an auditor. Conse quently, the time prescribed under the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the due process of law, affording an opportunity to the applicant and respondents Nos. 1 to 12 herein to defend themselves and appreciating the evidence led during the court of the trial of the mat ter, would arrive at a finding whether the allegations contained therein and the charges levelled against the applicant of abetting and/or colluding in the fraud deserve to be confirmed or dropped. (t) Therefore, respondent No. 1/the original petitioner cannot in a summary proceeding (which in any case does not apply to the applicant for the reasons stated above) seek to circumvent the fair trial process, if and/or when commenced, available to the applicant to defend the allegations/ charges framed against it pursuant to the SFIO report. 12. The applicant further contends that till such time as the Special Court decides the issue whether the applicant is guilty of committing fraud, no reliefs ought to be granted in favour of respondent No. 1/original petitioner and the captioned petition ought to be kept in abeyance till the outcome of the decision of the Special Court. 13. The applicant has also filed an affidavit in support of its application. M. A. 2505 of 2019 has been filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of passing order in the captioned company petition. The applicant Deloitte Haskins, BSR and engagement partners have filed their applications challenging the maintainability of the captioned company petition mainly on the ground that section 140(5) of the Act does not contemplate removal of auditors who has retired by rotation, the nature and intent of section 140(5) of the Act is to provide Central Government or any other person, the power to remove a recalcitrant auditor. Thus, if after a petition under section 140(5) of the Act is filed against recalcitrant auditor and the auditor resigns, the object of the provision is achieved, no further proceedings can be taken against the auditor under section 140(5) of the Act. 19. The petitioner's contention is that the present petition is maintainable and orders can be passed due to the following reasons : (a) Accounts of IFIN-directed to be re-opened/recast for the past 5 financial years. (i) By an order dated January 1, 2019, this Tribunal directed that the accounts and financial statements of IFIN be reopened and recast under section 130 of the Companies Act, 2013. The basis of January 1, 2019 order is that the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd FS). The order dated January 30, 2019 passed by the hon'ble National Company Law Appellate Tribunal and the January 1, 2019 order was challenged before the hon'ble Supreme Court. By an order dated June 4, 2019 the hon'ble Supreme Court upheld the order dated January 1, 2019. While upholding the order dated January 1, 2019 the hon'ble Supreme Court has made some crucial findings which are extracted below : "Considering the order passed by the Tribunal under section 130 of the Companies Act, it appears that the learned Tribunal has passed the order on being satisfied with respect to the second part of section of the Companies Act. It is also required to be noted that the learned Tribunal has also taken note of the preliminary report submitted by the ICAI with respect to the earlier accounts were being prepared in a fraudulent manner. 11. Considering the facts narrated hereinabove and the preliminary reports of SFIO and ICAI which came to be considered by the learned Tribunal and considering the specific observations made by the learned Tribunal while passing the order under sections 241 and 242 of the Companies Act and considering the fact that the Central Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and BSR continues to be statutory auditors of IFIN. (v) Under the circumstances, since Deloitte and BSR continue to be the statutory auditors for IFIN (because of the order dated January 1, 2019 which directs the reopening and recasting of accounts of IFIN), the present petition can be filed to seek reliefs as contemplated under section 140(5) of the Act. (b) Section 140(5) of the Act is to be interpreted in a purposive man ner as a literal construction will lead to an absurdity Section 140(5) brief background (i) Section 140(5) of the Act provides for removal of auditors for act ing in a fraudulent manner or abetted or in collusion in any fraud relating to the company or its directors or officers. Section 140(5) of the Act is as follows : "(5) Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a com pany has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors of of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came to be part of the Act only in 2013 when the section came into force. This indicates that the intention of the final form of this section was not just confined to merely changing the auditor in the company but the intention of the Legis lature was that the auditor (being proceeded against) be not eligible to be appointed as an auditor in any company for a period of 5 years, in case the Tribunal is satisfied that the auditor has inter alia acted in a fraudulent manner. In addition, the Legislature, also provided for an independent action under section 447 of the Act, by using the word 'and' ahead of "shall also be liable for action under section 447". Purposive Interpretation of section 140(5) of the Act (i) It is settled law that : * The statute must be read as a whole and must be interpreted giv ing due regard to the legislative intent and the mischief that the Legislature sought to curb by the provision or the statutory scheme. * The courts must interpret provisions of a statute having due regard for the letter and spirit of the provision in its statutory scheme so that absurd results are avoided/if absurd results are to be avoided. 20. We have heard the arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entence of sub-section (5) of section 140 is essential to understand, the entire provision of sub-section (5) to section 140. The sub-section (5) starts "without prejudice to any action under the provisions of this Act or any other law for the time being in force" itself indicates that sub-section (5) of section 140 will be applicable irrespective of any action under the provisions of this Act or any other law for the time being in force. Therefore, the argument that if a person (statutory auditor) has acted in a fraudulent manner or abetted or colluded in any fraud, then action can be initiated under this provision against that auditor irrespective of the fact that action can also be initiated against him under other existing provisions of this Act or any other law for the time being in force. 27. Provision of section 141(3) is given below for ready reference : "(3) The following persons shall not be eligible for appointment as an auditor of a company, namely,- (a) a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008 (6 of 2009) ; (b) an officer or employee of the company ; (c) a person who is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it clear that the definitions given in that section will be attracted only if the context so requires". The word "undertaking" is a coat of many colours, as it has been used in different sections of the Act to convey different ideas. In some of the sections, the word has been used to denote the enterprise itself while in many other sections it has been used to denote the person who owns it. The definition of the word "undertaking" in section 2(v) of the Act would indicate that "undertaking" means an enterprise which is engaged in production, sale or control of goods, etc. (page 135 of 46 Comp Cas) : "If the language used in a statute can be construed widely so as to salvage the remedial intendment, the court must adopt it. Of course, if the language of the statute does not admit of the construction sought, wishful thinking is no substitute and then, not the court but the Legislature is to blame for enacting a damp squib statute. In my view, minor definitional disability, divorced from the realities of industrial economics, if stressed as the sole touchstone, is sure to prove disastrous when we handle special types of legislation like the one in this case. I admit that viewed fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm the jurisprudence of high-risk operations. In short, the Mines Act (and Regulations) must receive its judicial con struction in the total setting, teleologically approached, not fragmen tarily dissected. The relevant regulation is only a tiny inset in the larger justice of the statute . . . 10. The High Court held that the order of cancellation was illegal for a few reasons which strike us as untenable. The argument runs thus. Without first suspending the certificate, the Regional Inspector cannot report to the Board and without such a report following upon a suspension the latter cannot take seisin of the matter. Since the Regional Inspector did not suspend the respondent's certificate, the Board had no jurisdiction. Secondly, the Regional Inspector had no power to recommend, but only to report and so the Board's order, influenced by the recommendation, was bad in law. Thirdly, the Board should have given a fresh opportunity to be heard before can cellation of the certificate and its absence in the present case violated natural justice, voiding the order." 31. Thus it is clear that the hon'ble Supreme Court has laid down the principle that if the language used i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause correspondence to section 225 of the Companies Act, the clause seeks to provide for the provisions of removal of auditor before the expiry of its terms. It provides that the auditor concern shall be given reasonable opportunity for being heard. The clause provides the provisions for resignation by the auditor. It further provides that special notice shall be required for appointing a person as auditor other than a retiring auditor. The Tribunal is empowered to change the auditor of the company in case of any fraudulent activities by auditor. An auditor, company secretary in practice or cost accountant in practice shall immediately report to the Central Government if they have reason to believe in pursuance of their duties that an offence involving fraud is being committed against the company. Sub-section (5) of section 140 of the Companies Bill, 2011 provides that : "(5) Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either itself or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint another auditor in place of delinquent auditor or deeming provision was added if an order is passed against this section such auditor shall not be eligible to act as an auditor or any company for a period of 5 years in addition to the action taken against him under section 447 of the Companies Act, 2013. 39. It is thus clear that section 140 of the Companies Act, is not incorporated simply to compel the auditor either to resign or remove him from the duties of auditor. In the second proviso to sub-section (5) of section 140, the use of word "shall not be eligible to be appointed an auditor of any company for a period of 5 years" itself shows that the direct consequence of removal of the auditor from a company will be on his eligibility to act as an auditor in any company. Thus, by resigning from a company the auditor cannot escape from his disqualification under second proviso of sub-section (5) of section 140 of the Companies Act, 2013. 40. It is also important to point out that there is vast difference between the resignation and removal. If an auditor has resigned on its own, then he can be reappointed as an auditor of the same company within a period of 5 years though th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 226 ; AIR 1988 SC 1979, J. K. Cotton Spg. and Wvg. Mills Co. Ltd. v. State of U. P., AIR 1961 SC 1170 and Ghanshyamdas v. Regional Assistant Commissioner of Sales Tax, AIR 1964 SC 766 ; [1964] 4 SCR 436). 15. It is well-settled that literal interpretation should be given to a statute if the same does not lead to an absurdity." 42. Learned senior counsel for the Deloitte has also relied on the case law of the hon'ble Supreme Court in the case of Sri Ram Saha v. State of West Bengal [2004] 11 SCC 497. 43. In the abovementioned case law, the hon'ble Supreme Court has held that (page 508 of [2004] 11 SCC) : "19. It is well-settled principle of interpretation that a statute is to be interpreted on its plain reading ; in the absence of any doubt or difficulty arising out of such reading of a statute defeating or frus trating the object and purpose of an enactment, it must be read and understood by its plain reading. However, in case of any difficulty or doubt arising in interpreting a provision of an enactment, courts will interpret such a provision keeping in mind the objects sought to be achieved and the purpose intended to be served by such a provision so as to advance t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elected at a bye-election ; and if that is so, irrespective of the fact that such a councillor holds office as president for two consecutive terms, it will be contrary to the plain and grammatical meaning of the proviso to hold that the bar will not operate." 46. On the basis of the law laid down by the hon'ble Bombay High Court, it is said that deeming fiction cannot be introduced by construction and it is exclusive privilege of the Legislature to apply a deeming fiction in a given case. In this case, relief sought by Union of India is that R1 be deemed to have been removed as the statutory auditor of IFIN for financial years 2012-13 to 2017-18. It is submitted that without their being express deeming provision, such relief can never be granted. 47. Learned senior counsel for the applicant has also contended that debarment for a period of 5 years as per second proviso to section 140(5) of the Act is in the nature of a penalty. It is a trite that penal provision must be construed strictly. 48. Learned counsel has relied on the case law of Virtual Soft Systems Ltd. v. CIT [2007] 289 ITR 83, 97 (SC) ; [2007] 9 SCC 665, wherein it is held that : "Section 271 of the Act is a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... say that in all instances of storage there would be possession. Yet, all possession may not amount to storage. 'Storage' in the common parlance meaning connotes the concept of continued possession. There is an element of continuity of possession spread over some time and the concept is connected with the idea of a regular place of storage. Transhipment in a moving vehi cle would not amount to storage within the meaning of the Orissa order"'." 49. Learned counsel for the applicant has also contended that penal statutes cannot be interpreted as applying retrospectively. 50. In the case of Pushpa Devi v. Milkhi Ram [1990] 2 SCC 134, 142, the hon'ble Supreme Court has held that : "22. Against this backdrop, we have to construe the word 'tenant' used in the proviso. Mr. Ramamurthy, learned counsel for the appel lants urged for liberal construction of the word so as to include a per son claiming to be a tenant. Reference was made to the observation of this court in Mangat Rai v. Kidarnath [1980] 4 SCC 276 ; [1981] 1 SCR 476. There Fazal Ali, J. said that the proviso in question affords a real and sanctified protection to tenant against eviction on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the auditor has resigned or has rotated out on completion of its statutory term, suitable orders (other than directing a change in auditors) may be passed. The emphasis here is on the word "may" and not "change" (which becomes inconsequential in an appropriate case). 56. Further, the second proviso to section 140(5) of the Act contemplates that once a final order is passed under section 140(5) of the Act against an auditor by this hon'ble Tribunal, the said auditor "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". The proviso to section 140(5) (in the present form) did not feature in the Companies Bill, 2009 and was first introduced by the Companies Bill, 2011. These provisos then formed a part of the Companies Act, 2013 (as enacted). Further, Explanation 1 to section 140(5) came to be part of the Act only in 2013 when the section came into force. This indicates that the intention of the final form of this section was not just confined to merely changing the auditor in the company but the intention of the Legislature was that the auditor be not eligible to be appointed as an auditor in any c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eer Urban Land and Infrastructure Ltd. v. Union of India (W. P. No 43 of 2019) [2019] 217 Comp Cas 1 (SC) the hon'ble Supreme Court has held that : "It was also argued that an Explanation does not enlarge the scope of the original section and for this purpose S. Sundaram Pillai v. V. R. Pattabiraman [1985] 1 SCC 591 was relied upon. This very judgment recognises, in paragraph 46, that an explanation does not ordinarily enlarge the scope of the original section. But if it does, effect must be given to the legislative intent notwithstanding the fact that the Legis lature has named a provision as an explanation. (See Hiralal Ratanlal v. State of U. P. [1973] 1 SCC 216 at 225, followed in paragraph 51 of S. Sundaram Pillai v. V. R. Pattabiraman [1985] 1 SCC 591). In any case, it has been found by us that the Explanation was added by the Amendment Act only to clarify doubts that had arisen as to whether home buyers/allottees were subsumed within section 5(8)(f). The Explanation added to section 5(8)(f) of the Code by the Amendment Act does not in fact enlarge the scope of the original section as home buyers/allottees would be subsumed within section 5(8)(f) as it orig inally stood ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on any auditor and appoint another auditor in his place where the Central Government is satisfied that any change of auditor is required. 64. The second proviso to sub-section (5) of section 140 is a deeming provision, which provides that where a final order has been passed by the Tribunal under this section, then by implication of this section automatically such auditor 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. 65. Thus it is clear that miscellaneous applications, filed by the applicants, on the premise, that section 140(5) only deals with removal/change of an existing auditor, whose appointment is continuing on the date of the petition, cannot apply to the past auditor or the auditor who has resigned during the pendency of the petition are not maintainable and deserves to be rejected. 66. In the above background, facts and circumstances as discussed above, we are of the considered opinion that, MAs filed by the applicants deserves to be rejected. Accordingly, M. A. No. 2258 of 2019 filed by Deloitte Haskins and Sells LLP, M. A. No. 2505 of 2019 filed by BSR and Associates LLP, M. A. No ..... X X X X Extracts X X X X X X X X Extracts X X X X
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