TMI Blog2019 (8) TMI 1582X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the appointment of auditors and section 123(10) of this bill provides without prejudice to any action under the provisions of this Act, or any other law for the time being in force, the Tribunal, if it is satisfied that the auditor of a company has acted in a fraudulent manner or abetted or colluded in any fraud by or in relation to, the company or its directors or its officers, it may, by order direct the company to change its auditors . Proviso to sub-section (5) was earlier not in the Companies Bill, 2009 but in 2011, this proviso was added. It is further to add that when the 2013 Act was passed, one more Explanation was added, i. e., : It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers - Thus it is clear that section 225 of Act No. 1 of 1956 was replaced by section 140 of the Companies Act, 2013 and second proviso to sub-section (4) and sub-section (5) of section 140 is enforced with effect from June 1, 2016 - Thus legislative intent is very much clear if we compare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ays better interpretation or the creative interpretation - In this case, it is apparent that 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 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. The 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 pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent auditor for IL and FS Financial Services Ltd., to replace respondent No. 2- BSR and Associates in terms of first proviso to section 140(5) of the Companies Act, 2013 read with Explanation II thereto. 4. The petitioner has also sought relief under second proviso to section 140(5) read with Explanation I thereto of the Companies Act, 2013 that respondent No. 1 shall not be eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of the order by this Tribunal, in view of the serious fraud committed, as a result of which the petitioner has had to step in to prevent the destabilization impact on the economy at the request of the Department of Economic Affairs, and therefore proportionality of punishment demands debarment for 5 years. 5. Similar relief of debarment has also been sought against respondents Nos. 2, 3, 4 and 5 in C. P. No. 2062 of 2019. 6. In company petition, counter and rejoinder have been exchanged. However, learned counsel for the respondents has filed the above mentioned M. A. No. 2258 of 2019, M. A. No. 2505 of 2019, M. A. No. 2506 of 2019, M. A. No. 2268 of 2019 and M. A. No. 2270 of 2019 challenging the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertiorari. The underlying principle is that by erroneously assuming existence of such jurisdictional fact, no authority can confer upon itself jurisdiction which it otherwise does not possess. 75. In Halsbury's Laws of England, it has been stated : 'Where the jurisdiction of a Tribunal is dependent on the exist ence of a particular state of affairs, that state of affairs may be described as preliminary to, or collateral to the merits of, the issue. If, at the inception of an inquiry by an inferior Tribunal, a challenge is made to its jurisdiction, the Tribunal has to make up its mind whether to act or not and can give a ruling on the preliminary or collateral issue; but that ruling is not conclusive.' 76. The existence of jurisdictional fact is thus sine qua non or con dition precedent for the exercise of power by a court of limited juris diction . . . 85. In our opinion, the submission of Mr. Salve is well founded and deserves to be accepted that 'concession' under clause (ii) of sub-sec tion (2) of section 17 of the Act is a 'jurisdictional fact', is only when there is a 'concession' in the matter of rent respecting any accom modati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t deals with removal, resignation of auditors. Sub-section (1) of section 140 of the Act provides that an auditor appointed under section 139 of the Act can be removed before expiry of his term by a special resolution of the company. This section, thus contemplates removal of an individual or firm functioning as an auditor of the company. More over, a person/entity can resign as an auditor only if the person/entity is currently functioning as an auditor of a company. (b) The provisions contained in sections 139 to 141 of the Act about the scheme of the Act regarding appointment, removal and disqualification of an auditor have to be read as a whole for its true interpretation and pur port. The applicant states that sub-section (5) of section 140 of the Act together with the two provisos thereto are an exception to the two rules- (a) corporate democracy (i. e., removal of an auditor appointed under sec tion 139 of the Act by the members of the company by way of a special res olution) ; and (b) removal of an auditor who has not suffered any disqual ification under section 141 of the Act. (c) The applicant states that sub-section (5) of section 140 provides that the Tribunal if i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riginal petitioner despite being aware of the fact that the applicant is not an existing auditor of IFIN and being conscious of the non-applicability of the said section to the applicant, is seeking a decla ration of the nature sought in prayer clause (a) therein (deemed removal) in a desperate attempt to bring the applicant within the purview of the said section. (h) The petitioner by seeking the relief that the applicant be deemed to be removed as a statutory auditor for the past years for which it acted as an auditor of IFIN is seeking to create a deeming fiction in the said sec tion when none exists. The applicant states that when the law wants to deem a state of affairs to exist, the law must provide for it. It has legislative powers, and it so provides for it. It is trite law that a deeming fiction cannot be introduced by construction and it is the exclusive privilege of the Legis lature to apply the deeming fiction in a given case. It is amply clear that a fiction cannot be resorted to for the purpose of interpreting statutory pro visions. Therefore, in the absence of an express provisions to this effect, interpreting section 140(5) to bring within its ambit the power t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Central Government, to the effect that in such cases, if an order of removal of auditor is passed the right to appoint a new auditor is granted to the Central Government and not to the company, which would be the case of any order passed in appli cation by any applicant other than the Central Government. Proviso (2) is a consequence statutorily provided for an order to be passed under proviso (1) to section 140(5) and section 140(5), which is to impose a ban upon such an auditor from being appointed as an auditor of any company for a period of 5 years from the date of passing a final order under section 140(5). The applicant therefore states that the consequences following the application of sub-section (5) of section 140 of the Act being penal in nature the same cannot be applied retrospectively to past auditors by cre ating an artificial deeming fiction, which respondent No. 1 herein/the ori ginal petitioner seeks to create for the purpose of seeking the reliefs prayed for in the captioned petition. (l) Without prejudice to the aforesaid, the applicant further says that the powers conferred under sub-section (5) of section 140 of the Act ought to be exercised judiciously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (5) of section 140 cannot be construed to mean mandatory. (o) In light of the aforesaid, since the prayer clause (a) pertaining to deeming fiction cannot and ought not to be applied, the question of the consequential ineligibility of the applicant to be appointed as an auditor of any company does not arise. Thus, the prayer clause (d) seeking a direction that the applicant shall not be eligible to be appointed as an auditor of any company ought to be rejected outright. (p) Without prejudice to the aforesaid, the applicant submits that since it is not an existing auditor of IFIN the question of its removal under the first proviso to section 140(5) of the Act does not arise. Consequently, the question of this Tribunal passing any order against the applicant within a period of 15 days does not occur. The applicant submits that for the imposition of ban under the second proviso to section 140(5) of the Act shall operate upon a final order being passed under the first proviso and/or section 140(5). For the purposes of passing a final order, the Tribunal would necessarily have to follow due process of law and afford an adequate and effective opportunity to the applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BSR and Associates challenging the maintainability of C. P. No. 2062 of 2019 filed by Union of India. 14. The applicant has stated that as a consequence of the cessation of the applicant as the statutory auditor of IFIN, the company petition is infructuous and no reliefs can be passed against the applicant in the company petition under section 140(5) of the 2013 Act. The applicant further contends that after the resignation of the applicant, IFIN has also taken the necessary steps for filling the vacancy through the appointment of one M/s. Mukund M. Chitale and Co., with effect from June 19, 2019 which did following due process, including the recommendation of the audit committee, the acceptance by M/s. Mukund M. Chitale and Co., and the approval of the shareholders of IFIN at its extraordinary general meeting on July 11, 2019. 15. The applicant further contends that both section 140(1) and (5) of the Companies Act, 2013 contemplate that the auditor being removed when it is the auditor of the company at the time the removal occurs. The provisions do not apply to circumstances where the auditor sought to be removed already ceased to hold that position, irrespective of the ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the affairs of IFIN were mismanaged during the relevant period casting a doubt on the reliability of the financial statements. The relevant paragraphs of order dated January 1, 2019 are given below : Union of India has filed this petition on the basis of preliminary report of SFIO and prima facie opinion of ICAI, wherein it is stated that from the maturity pattern of certain items of assets and liabilities as at March 31, 2017 that during the period from over two months till five years, there is a serious mismatch between assets and liabilities position, so liquidity concerns existed on the balance-sheet date. However, no such concerns were reported in the audit report. In our earlier order dated January 1, 2018 based on the SFIO report that the affairs of the company were mismanaged during the relevant period and that the affairs of the company and subsidiary companies were mismanaged during the relevant period under section (1) and (2) . . . In the circumstances, we allow this petition, filed under section 130 of the Companies Act, 2013 for reopening the books of account and recasting the financial statements of Infrastructure Leasing and Financial Services Ltd. (res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Central Government has entrusted the investigation of the affairs of the company to SFIO in exercise of powers under section 242 of the Companies Act, 2013, it cannot be said that the conditions precedent while invoking the powers under section 130 of the Act are not satis fied. We are more than satisfied that in the facts and circumstances of the case, narrated hereinabove, and also in the larger public interest and when thousands of crores of public money is involved, the Tri bunal is justified in allowing the application under section 130 of the Companies Act, which was submitted by the Central Government as provided under section 130 of the Companies Act. 12. There is a specific observation made by the learned Tribunal with respect to mismanagement of the affairs of the company, and even with respect to the relevant earlier accounts prepared in a frau dulent manner . . . 19. In view of the above and for the reasons stated above, we see no reason to interfere with the impugned order dated January 1, 2019 passed by the learned Tribunal under section 130 of the Companies Act for reopening of the books of account and re-casting the financial statements of the Infrastruc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny or its directors of officers, it may, by order, direct the company to change its auditors : Provided that if the application is made by the Central Govern ment and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Cen tral Government may appoint another auditor in his place : Provided further that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any com pany for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447. Explanation I.-It is hereby clarified that the case of a firm, the lia bility shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers. Explanation II.-For the purpose of this Chapter the word 'audi tor' includes a firm of auditors. (ii) Section 140(5) therefore contemplates rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avoided. 20. We have heard the argument of learned senior counsel/advocates representing the applicants and Mr. Sanjay Shorey, Director (Prosecution and Legal) and perused the record. The applicants contention is mainly based on the premise that petition under section 140(5) is maintainable only against the auditor of the company who has 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 or officers, it may, by order direct the company to change its auditors. First proviso to sub-section (5) of section 140 provides that if application is made by the Central Government and Tribunal is satisfied that any change of auditor is required, it shall within 15 days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place. 21. Sub-section (5) of section 140 of the Companies Act, 2013 empowers the Central Government to order the company to change its auditor in case Central Government is satisfied that the auditor of a company has acted in a fraudulent manner or abetted or colluded in any fraud. 22. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployee of the company ; (c) a person who is a partner, or who is in the employment, of an officer or employee of the company ; (d) a person who, or his relative or partner- (i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company : Provided that the relative may hold security or interest in the company of face value not exceeding one thousand rupees or such sum as may be prescribed ; (ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of such amount as may be prescribed ; or (iii) has given a guarantee or provided any security in connec tion with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed ; (e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its hold ing or associate company or subsidiary of such holding company or associate company of such nature as may be prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one in this case. I admit that viewed from one standpoint the logic of Shri Gupte is flawless, but it also makes the law lifeless, since the appellant is thereby enabled neatly to nullify the whole object of Chapter III which is to inhibit concentration of economic power. To repeat for emphasis, when two interpretations are feasible, that which advances the remedy and suppresses the evil, as the Legislature envi sioned, must find favour with the court. Are there two interpretations possible ? There are, as I have tried to show and I opt for that which gives the law its claws. 29. The hon'ble Supreme Court in the case of Chairman, Board of Mining Examination and Chief Inspector of Mines v. Ramjee [1977] 2 SCC 256 ; [1977] SCC (L and S) 226 has laid down the law that law is meant to serve the living and does not beat its abstract wings in the jural void. 30. The hon'ble Supreme Court has held that (pages 259 and 261 of [1977] 2 SCC) : 5. Was regulation 26, in the context and setting of the Mines Act, misinterpreted by the High Court at all ? This is the short question canvassed before us. We permit ourselves a few observations which serve as perspective-setters. La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d down the principle that if the language used in a statute can be construed widely so as to salvage the remedial intendment, the court must adopt it. 32. The hon'ble Supreme in the matter of Carew and Co. Ltd. v. Union of India [1975] 2 SCC 791 ; [1976] 46 Comp Cas 121 (SC) has further held that (page 133 of 46 Comp Cas) : The law is not 'a brooding omnipotence in the sky' but a prag matic instrument of social order. It is an operational art controlling economic life, and interpretative effort must be imbued with the sta tutory purpose. No doubt, grammar is a good guide to meaning but a bad master to dictate. Notwithstanding the traditional view that grammatical construction is the golden rule, Justice Frankfurter used words of practical wisdom when he observed Massachusetts Bonding and Insurance Co. v. USA [1956] 352 US 128, 138 : 'There is no surer way to misread a document than to read it literally'. 33. Given the law laid down by the hon'ble Supreme Court in the above- mentioned case, it is clear that only literal interpretation cannot be taken to interpret the statutory provision but a pragmatic approach has to be applied. The question ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the auditor of a company 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 or officers, it may, by order, direct the company to change its auditors : Provided that if the application is made by the Central Govern ment and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Cen tral Government may appoint another auditor in his place : Provided further that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any com pany for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447. Explanation.-For the purposes of this Chapter the word 'auditor' includes a firm of auditors. 36. It is thus clear that proviso to sub-section (5) was earlier not in the Companies Bill, 2009 but in 2011, this proviso was added. It is further to add that wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted as an auditor of the same company within a period of 5 years though that was prohibited in case of the removal of the auditor. Therefore, it cannot be said that by resigning auditor during pendency of case, petition filed under section 140 shall become infructuous. 41. Learned counsel representing the applicant has relied on the case law of hon'ble Supreme Court in Nathi Devi v. Radha Devi Gupta [2005] 2 SCC 271, 276, wherein the hon'ble Supreme Court has held that : 13. The interpretative function of the court is to discover the true legislative intent. It is trite that in interpreting a statute the court must, if the words are clear, plain, unambiguous and reasonably sus ceptible to only one meaning, give to the words that meaning, irre spective of the consequences. Those words must be expounded in their natural and ordinary sense. When the language is plain and unambiguous and admits of only one meaning, no question of con struction of statute arises, for the Act speaks for itself. Courts are not concerned with the policy involved or that the results are injurious or otherwise, which may follow from giving effect to the language used. If the words used are c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achieved and the purpose intended to be served by such a provision so as to advance the cause for which the enactment is brought into force. If two interpretations are possible, the one which promotes or favours the object of the Act and purpose it serves, is to be preferred. At any rate, in the guise of purposive interpretation, the courts cannot rewrite a statute. A purposive interpretation may permit a reading of the provision consistent with the purpose and object of the Act but the courts cannot legislate and enact the provision either creating or taking away substantial rights by stretching or straining a piece of legislation. 44. Learned senior counsel representing the applicant has also emphasized that deeming fiction cannot be introduced by construction. Mr. Sanjay Shorey, Director (Legal and Prosecution), Union of India, MCA, contends that it is the case of Union of India that section 140(5) of the Act should be interpreted such that it should be deemed to include removal of a past auditor of a company. 45. The applicant has relied on the case law of the hon'ble Bombay High Court in case of Shankarrao Ramchandrarao Phate v. Chatrapal Anandrao Kedar [1974] SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89 ITR 83, 97 (SC) ; [2007] 9 SCC 665, wherein it is held that : Section 271 of the Act is a penal provision and there are wellestablished principles for the interpretation of such a penal provision. Such a provision has to be construed strictly and narrowly and not widely or with the object of advancing the object and intention of the Legislature. This court as well as the various High Courts of the country have consistently held that the statute creating the penalty is the first and the last consideration and must be construed within the term and language of the particular statute. In Bijaya Kumar Agarwala v. State of Orissa [1996] 5 SCC 1 ; [1996] SCC (Cri) 864 it has been held by this court in paragraphs 17 and 18 as under (SCC pages 6-7) : '17. Strict construction is the general rule of penal statutes. Mahajan J. in Tolaram Relumal v. State of Bombay, AIR 1954 SC 496 ; [1954] Cri LJ 1333 (AIR at pages 498-99) stated the rule in the fol lowing words : If two possible and reasonable constructions can be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the proviso in question affords a real and sanctified protection to tenant against eviction on the ground of default. It should not be given a hypothetical or literal construction, but should be meaningfully construed. We agree with this observa tion. The legislative protection concerning the tenants should not be narrowly tailored. Indeed, it should be given wider meaning and broader concept. We should try to understand the spirit of the text and not be bound by letter. 51. The applicant has relied on the case law of the hon'ble Bombay High Court in the case of Shankarrao Ramchandrarao Phate v. Chatrapal Anandrao Kedar [1974] SCC Online Bom 14 ; AIR 1974 Bom 281, wherein it is held that deeming fiction cannot be introduced by construction. Learned counsel contends that it is the case of Union of India that section 140(5) of the Act should be interpreted such that it should be deemed to include removal of a past auditor of a company. 52. The hon'ble Supreme Court in Carew and Co. Ltd. v. Union of India[1975] 2 SCC 791 ; [1976] 46 Comp Cas 121 (SC) has laid down the law that while interpreting a statute, when two interpretations are feasible, that which advances t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company but the intention of the Legislature was that the auditor 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. 57. This interpretation cannot be accepted that if an auditor has resigned during the pendency of the petition, then he would be saved from being debarred for five years from being the auditor of any company, under second proviso to sub-section (5) of section 140 of the Companies Act, 2013. 58. Learned senior counsel for the applicant 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act enlarge the scope of the original section as home buyers/allottees would be subsumed within section 5(8)(f) as it orig inally stood as has been held by us hereinabove. As a matter of stat utory interpretation, that interpretation, which accords with the objects of the statute in question, particularly when we are dealing with a beneficial legislation, is always the better interpretation or the 'creative interpretation' which is the modern trend of authority, and which is reflected in the concurring judgment of Eera (through Dr. Manjula Krippendorf) v. State (NCT of Delhi) [2017] 15 SCC 133 at paragraphs 122 and 127. This argument must, therefore, also be rejected. We, therefore, hold that allottees/home buyers were included in the main provision, i. e., section 5(8)(f) with effect from the inception of the Code, the Explanation being added in 2018 merely to clarify doubts that had arisen. 60. Thus, it is clear that interpretation which accords with the object of the statute in question is always better interpretation or the creative interpretation . 61. In this case, it is apparent that proviso to section 140(5) (in the present form) did not feature in the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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