TMI Blog2023 (5) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, Chapter X is a special provision under the new Act with respect of Audit and Auditors . It cannot be disputed that the auditor plays a very important role so far as the affairs of any company are concerned and therefore he should be independent and above board. Companies Act, 2013 is the result of the culmination of detailed study after taking into consideration the Parliamentary Standing Committee on Finance Report as well as the recommendations of the Standing Committee by introducing Companies Bill, 2009 and Companies Bill, 2011. When the earlier Companies Bill, 2009 was introduced, it was a culmination of the growing corporate economy and past experiences of corporate fiascos too and one of the suggestions were to provide for stricter accountability for auditors. It is required to be noted that Section 143 of the Act deals with the powers and duties of the auditors. Sub-section (12) of Section 143 specifically provides that in the event that the auditor has reason to believe that an offence of fraud is being or has been committed in the company, the auditor shall report the matter to the Central Government. The detailed procedure is provided under the Rules issued in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the High Court is absolutely erroneous and is unsustainable. Subsequent resignation of an auditor after the application is filed under section 140(5) by itself shall not terminate the proceedings under section 140(5). Resignation and/or removal of an auditor cannot be said to be an end of the proceedings under section 140(5). The second proviso to section 140(5) of the Act, 2013 is a substantive provision, though it is by way of a proviso, and the same shall operate and/or depend upon the final order to be passed by the Tribunal in the first part of section 140(5). If the interpretation given by the High Court that on subsequent resignation and/or discontinuance of an auditor, proceedings under section 140(5) stand terminated and/or the petition under section 140(5) by the Central Government is no longer maintainable is accepted, in that case, second proviso to section 140(5) would become nugatory and in no case there shall be any action under the second proviso to section 140(5) - on true interpretation and scheme of Section 140(5) of the Act, 2013, once the enquiry/proceedings is/are initiated under first part of section 140(5) of the Act, either suo motu by the Tribunal or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned judgment and order passed by the High Court quashing and setting aside the application/proceedings under section 140(5) on the ground that as the auditors have resigned and therefore thereafter the same is not maintainable is hereby quashed and set aside - the impugned judgment and order passed by the High Court quashing and setting aside the NCLT order holding that even after the resignation of the auditors, the proceedings under section 140(5) shall be maintainable is hereby quashed and set aside. Appeal allowed. - CRIMINAL APPEAL NOS. 2305-2307 OF 2022 - - - Dated:- 3-5-2023 - CRIMINAL APPEAL NOS. 2302-2303 OF 2022 CIVIL APPEAL NO. 793 OF 2022 CRIMINAL APPEAL NO. 2298 OF 2022 CIVIL APPEAL NO. 801 OF 2022 CRIMINAL APPEAL NO. 2299 OF 2022 CIVIL APPEAL NO. 877 OF 2022 CRIMINAL APPEAL NO. 2300 OF 2022 CRIMINAL APPEAL NO. 2304 OF 2022 Criminal Appeal Nos.2305-2307/2022 Etc. M. R. SHAH And M. M. SUNDRESH , JJ. For the Parties : Ms. Misha Rohatgi, AOR Ms. Suveni B., Adv. Ms. Ayushi Sharma, Adv. Mr. Nakul Mohata, Adv. Mr. Bharat Monga, Adv. Mr. Devansh Shrivastava, Adv. ms. Riya Dhingra, Adv. Mr. Mohd. Ovais, Adv. Mr. Mahesh Agarwal, Adv. Mr. Rishi Agrawala, Adv. Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Associates LLP (BSR) and in Criminal Appeal Nos. 2305-2307/2022 and Criminal Appeal No. 2300/2022, the challenge pertains to another auditor of IFIN, namely, Deloitte Haskins Sells LLP (for short, Deloitte ) and an ex-director of IFIN, namely, Hari Sankaran. 1.3 Criminal Appeal Nos. 2298/2022, 2299/2022 2304/2022 have been filed by Deloitte and two of its partners challenging the impugned judgment and order passed by the High Court insofar as it upholds the constitutionality of Section 140(5) of the Act, 2013. 1.4 Civil Appeal Nos. 793/2022, 801/2022 877/2022 have been filed by Deloitte and two of its partners challenging the order passed by the National Company Law Appellate Tribunal dated 04.03.2020. Factual Background: 2. The facts leading to the present proceedings in nutshell are as under: A series of defaults by the IL FS Group Companies, which had an aggregate debt burden of more than Rs. 91,000 crores, occurred between June to September, 2018 and threatened to collapse the money markets of India, added pressure to corporate bond yields and sparked a sell off in the stock market. The Department of Economic Affairs, Ministry of Finance issued an Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called for by the Central Government. It is to be noted that in the interim report itself, it was specifically recorded that the findings in the interim report are interim findings and the interim report concluded by setting forth based on the above interim findings It is also to be noted that interim report was on the individuals who were in control of the affairs of the IL FS Group and the illegalities and fraud perpetrated by them. 2.4 On the basis of the interim report, the Ministry of Corporate Affairs filed a Miscellaneous Application in Company Petition No. 3638/2018 against the erstwhile Directors of the companies in the IL FS Group seeking to implead them in the said proceedings and an order to attach their immovable/movable properties. 2.5 On the basis of the interim report and a prima facie opinion of the Institute of Chartered Accountants dated 04.12.2018, the Ministry of Corporate Affairs filed a petition under section 130 of the Companies Act, 2018 before the NCLT praying inter alia that the books of accounts of IL FS, IFIN and IL FS Transportation Networks Limited (ITNL) may be re-opened and recast. Vide order dated 01.01.2019 passed in Section 130 petition, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 140(5) of the Act, 2013 dated 10.06.2019, inter alia, against the auditors of the IFIN, namely, BSR Deloitte and the engagement partners as well as their team. In the petition under Section 140(5), it was inter alia prayed to remove BSR as auditors of IFIN; declare that Deloitte shall be deemed to be removed as Statutory Auditor for IL FS for F.Y. 2012-13 to F.Y. 2017- 18; permit the Ministry of Corporate Affairs to appoint an auditor for IFIN under the first proviso of Section 140(5) of the Act, 2013; and declare/direct that BSR, its engagement partners, Deloitte and its engagement partners shall not be eligible to be appointed as an auditor for any company for a period of five years under the second proviso of Section 140(5) of the Act, 2013. 2.12 BSR issued a letter of resignation dated 19.06.2019 to IFIN and simultaneously completed the regulatory filings pursuant to such resignation. 2.13 BSR and its engagement partners filed a reply dated 19.06.2019 to Section 140(5) petition before the NCLT, inter alia, contending that (i) they are not the auditors for IFIN any longer as they have tendered their resignation and therefore Section 140(5) is not applicable to them; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s broken, either by removal or resignation, then Section 140(5) of the Act, 2013 fulfils its purpose. It is submitted that according to the High Court, Section 140(5) of the Act is only attracted when despite the petition by the Central Government, an auditor sets up a defence and opposes the petition frivolously and thus invites a final order as set forth in the second proviso to Section 140(5) of the Act, 2013. It is submitted that on this basis, the High Court proceeded to hold that the petition filed by the Union of India under Section 140(5) of the Act, 2013 has been satisfied by the subsequent resignation of the auditor and therefore the petition under Section 140(5) of the Act, 2013 filed by the Union of India is no longer maintainable. It is submitted that the High Court erroneously proceeded to quash Section 140(5) petition and the order passed by the NCLT, Mumbai upholding its maintainability. 3.2 Now insofar as quashing and setting aside the criminal proceedings, it is submitted that the respondents assailed Section 212(14) direction on two grounds. Firstly, on the ground that the issuance of the direction to prosecute within 30 hours of receipt of the IFIN SFIO Repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 140(5), on an application made by the Central Government and if the Tribunal is satisfied that any change of the auditor is required, the Tribunal shall within fifteen days of receipt of such application make an order that the said auditor shall not function as an auditor and the Central government may appoint another auditor in his place. It is submitted that second proviso to Section 140(5) of the Act provides that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under section 140(5) 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 and the auditor shall also be liable for action under Section 447. It is submitted that therefore merely because during the pendency of the proceedings under Section 140(5) of the Act the auditor resigns, the proceedings under Section 140(5) do not come to an end. Still and after the final order is passed, in that case, a further order as per second proviso to Section 140(5) can be passed to render such a auditor ineligible to be appointed as an auditor of any company for a period of five years from the date of passing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g proper checks and balances. Self-regulation through internal mechanism/procedures, to be underpinned on strong systems and procedures; Central Government to step in only when misgovernance takes place. In the light of recent experiences in corporate misgovernance, process of audit and functioning of auditors to be made more independent and effective; stringent joint and individual liability prescribed; setting up of oversight body to set standards and supervise quality of audit recommended iv. Further, the report notes that various suggestions were made by the PSC during deliberations on the Bill which were incorporated by the Central Government. On a reading of these suggestions, it is essential to note that independence of the auditors was a key point. v. Crucially, in the Report, the PSC notes that the 2009 Bill incorporates suggestions of the JPC on the 1993 Banking and Securities Market Scam and the 2002 JPC on the Stock Market Scam. This means that the 2009 Bill was a culmination of the growing corporate economy and past experiences of corporate fiascos too. One of the suggestions were to provide for stricter accountability for auditors. Moreover, at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the Companies Bill, 2009. This aspect has been recorded in the Statements of Objects and Reasons of the Companies Bill, 2011. ii. At this juncture, it is important to bear in mid that the suggestion of the Standing Committee to Clause 123(10) of the 2009 Bill (which provides for removal of an auditor by the NCLT on finding that there is a fraud) was to: Make the provision more stringent; and To provide for consequences for an auditor when such auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud. iii. The 2001 Bill consolidates the provisions pertaining to removal of auditors into one clause namely Clause 140 of the 2011 Bill. Further, the 2011 Bill (like the 2009 Bill) retains the NCLT s power to remove an auditor upon finding that the auditor has perpetrated a fraud at Clause 140(5) of the 2011 Bill. Most pertinently, the 2011 Bill incorporating the recommendations of the Standing Committee as contained in the Report, provides for consequences for an auditor who is found to have perpetrated a fraud by the NCLT and is removed for such fraud by the NCLT. This has been done by way of a proviso to Clause 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in any company for a period of 5 years. It is submitted that therefore, the public policy behind Section 140(5) of the Act is very clear to prevent an auditor who has been found to perpetrate fraud or colluding in it in one company from undertaking any statutory audits for a period of 5 years. Reliance is placed on the decision of this Court in the case of Devas Multimedia Pvt. Ltd. v. Antrix Corporation Ltd. Anr, reported in (2023) 1 SCC 216. 3.7 It is further submitted by Shri Balbir Singh, learned ASG that Section 140(5) appears in Chapter X of the Act. It is submitted that Chapter X specifically deals with Audit and Auditors . Section 143 of the Act deals with the powers and duties of the auditors. Sub-section (12) of Section 143 specifically provides that in the event that the auditors has reason to believe that an offence of fraud is being or has been committed in the company, the auditor shall report the matter to the Central Government. The detailed procedure is provided under the Rules issued in this regard. 3.8 It is further submitted that Section 144 of the Act provides that the auditor cannot provide certain services and the relevant one for the present mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conduct of an auditor and determine whether the auditor has conducted itself in a fraudulent manner. This is clear from the operative part of the provision which mandates the nature of inquiry required under the section. This is 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. 3.13 It is submitted that therefore, any final order would certainly contain either a positive or negative determination of fraud or fraudulent conduct . As a consequence of finding fraud under Section 140(5) of the Act, the provision illustrates that the finding of fraud/fraudulent conduct may lead to an order directing change of an auditor. The second proviso further expressly provides that an auditor against whom a final order has been passed is in-eligible to act as an auditor of any company for a period of 5 years. Significantly, the words used in the second proviso to Section 140(5) of the Act is final order and not the auditor so removed or changed auditor . 3.14 It is submitted that therefore the requirement or necessity of change of auditor in a company does not activate/g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, it is submitted as under: a) Acceptance of Respondent s contention would mean that the jurisdiction of a quasi-judicial tribunal can be overcome merely by an act of a party. More significantly, it would lead mean that an inquiry into fraudulent conduct can be disrupted and/or stands satisfied simply by an act of a party. b) The entire contention of the provision operating in terrorem or to incentivize an auditor to resign is untenable. The consequences of indulging in fraudulent activities provided for in the Act including but not limited to Section 447 of the Act itself ought to serve as a deterrent and operate in terrorem . c) The entire construction sought to be attributed to Section 140(5) of the Act by reference to the other provisions of the Act (as per paragraphs 9.17 (a) and (b) above) is to turn the provision into a dead letter [See NEPC Micon Ltd. v. Magma Leasing Limited (1999) 4 SCC 253]. Moreover, the Respondent s interpretation, if accepted, would lead to various absurdities. Pertinently, amongst other reasons: i. given that it is accepted that the first proviso provides for a temporary suspension or removal of an auditor, if an application is filed u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to perpetuating the fraud in connection with other companies. v. As regards the extent of application of the ineligibility prescribed under the second proviso to Section 140(5) of the Act to the firm and individuals, it is submitted that a close reading of the provisions of the Act reflects that the legislature considered every aspect relating to the consequence of Section 140(5) of the Act. An examination of the second proviso to Section 140(5) of the act shows that the Hon ble NCLT is required to give specific findings with regard to fraud and whether the auditor is a firm or an individual. There cannot be any presumption that mere finding of fraud in connection with an individual will automatically result in the determination of fraud by the firm. This is also provided under Section 147 of the Act which is as follows: (5) Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any company means those akin to manager, managing director or other director such as key managerial personnel and not an auditor. c. Moreover, in Section 241(3) of the Act specifically, the words used are conduct and management of the company . The auditor as the Act sets forth is an independent examiner of accounts and cannot be said to be holding an office in the conduct and management of the company. This would militate against the very fibre of the Companies Act, 2013. 3.19 Making above submissions, it is submitted that, (i) Section 140(5) of the Act, 2013 operates to enable a quasi-judicial tribunal equipped with powers of a civil court to examine the role of auditors and adjudicate on their fraudulent conduct and the abdication of their function; (ii)Section 140(5) is not a provision to merely induce/effect a change of an auditor who is not resigning. It is intended as a provision which involves a substantive determination of fraud so as to isolate or remove an auditor from the company and from any company that he/she is auditing. If construed to be a provision only to induce a change of a recalcitrant auditor, the words conferring power on the NCLT to inquire into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the proceedings under Section 140(5) of the Act as void. The Hon ble Bombay High Court s interpretation would render any proceedings whether against the company s management and / or its auditors for fraud completely frustrated by mere stratagem of design of a party. Under the circumstances, the Impugned Order passed by the Hon ble Bombay High Court is unsustainable and deserves to be set aside. 3.23 As regards, Deloitte, it is submitted that the Hon ble NCLT and the NCLAT have upheld the maintainability of the Petition under Section 140(5) of the Act. It is submitted that as set out above, Section 140(5) of the Act requires the Hon ble NCLT to satisfy itself that the auditor of the company, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud. In order to arrive at a finding in this regard, it is important to examine the role of both auditors i.e., Deloitte and BSR especially when both were acting as auditors for the financial year 2017- 2018. Keeping in mind the interpretation of the provision set out above, the satisfaction of the Tribunal may finally result in a change of auditor i.e., the change of BSR; however, that does not ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O IFIN Report is a report in respect of IFIN and is a report upon completion of investigation into IFIN; and v. Finally, the SFIO IFIN Report sets forth, in light of the complex structure of the IL FS Group and the interlinkages between entities etc, that if any further instances or transactions are uncovered qua IFIN during the investigation of the other group companies of IL FS then a further report will be filed. This does not mean that the investigation into IFIN is incomplete. In fact, even the direction to call for a further report on certain aspects (which may be related to third parties) does not detract from the position that the investigation is complete in all other respects. The Hon ble Bombay High Court has failed to appreciate the purport of the submission and has fundamentally erred in holding that the SFIO IFIN Report is incomplete and/or that the investigation into IFIN is incomplete. In the case at hand, the SFIO IFIN Report was submitted by the SFIO after a detailed and extensive investigation of IFIN and the multiple parties involved. It is submitted that there were conclusive findings against each auditor/CA pointing out multiple breaches, violations of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore the SFIO IFIN Report being an interim report, 212(14) direction could not have been issued as the Act does not contemplate issuance of a direction under Section 212(14) of the Act on the basis of an interim report, it is submitted by Shri Balbir Singh, learned ASG that as per section 212(11) of the Act, 2013, during the course of investigation, the Central Government has been empowered to call for an interim report. It is submitted that the SFIO has not been empowered to submit an interim report without a request for an interim report from the Central Government. It is submitted that the Central Government vide letter dated 03.11.2018 specifically directed the SFIO to submit an interim report. Pursuant to this, the SFIO submitted an interim report dated 30.11.2018. The Interim Report, on a bare perusal, records that it is an interim report, records the Central Government s request for an interim report and classifies its findings as interim findings. It is submitted that this is completely different from the SFIO IFIN Report which classifies itself as an Investigation Report under Section 212(12) of the Act, sets out the detailed and extensive investigation conducted and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and permit the trial to continue against the accused arrayed in the complaint. It is also prayed to set aside the impugned judgment and order passed by the High Court quashing and setting aside the order passed by the NCLT/NCLAT upholding the proceedings under Section 140(5) of the Act, 2013 and permit/allow the said proceedings to be proceeded further, so as to allow the NCLT to reach to the final conclusion so that even further steps can be taken as per second proviso to Section 140(5) of the Act, 2013. Submissions on behalf of the opposite parties: 4. While opposing the present appeals, learned senior counsel appearing on behalf of the BSR has made the following submissions: i) It is submitted that in fact the BSR had challenged the vires of Section 140(5) of the Act, 2013 before the High Court being violative of Articles 14, 19(1)(g), 20 and 21 of the Constitution of India as well as being unconstitutional and void. It is submitted that however the High Court by the impugned judgment and order while upholding the constitutionality of Section 140(5) has read down Section 140(5) of the Act, 2013. ii) It is submitted that by the impugned judgment and order, the Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) It is submitted that a plain reading of Section 140 as a whole shows: i. Section 140(1) of the Act deals with the procedure for voluntary auditor by a company. ii. 140(2) and (3) deal with the procedure for resignation of an auditor. iii. Section 140(4) deals with special notice. Section 140(5) deals with involuntary removal by order of NCLT. iv. The heading of Section 140 of the Act (i.e., Removal, resignation of auditor and giving of special notice ) makes it clear that Section 140(5) only serves the purpose of removal of an auditor and is not a standalone substantive provision to disqualify auditors. It is well settled that a heading is a condensed name to collectively indicate the characteristics of the subject matter covered by a Section. Reliance is placed on the decision of this Court in the case of Raichurmatham Prabhakar v. Rawatmal Dugar, (2004) 4 SCC 766 (Para14). vi) It is submitted that Sections 132, 141, 147, 245, and 447 of the Act deal with liability of an auditor in cases of fraud: i. Section 132 provides for the constitution of the National Financial Reporting Authority ( NFRA ). NFRA has been given ample power (including the powers of civil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted the fraud; and (iv) whether the parties are fit and proper persons. The NCLT can decide that an auditor has connived in fraud and is not a fit and proper person under Section 242 (4A) which provides as follows: 242. Powers of Tribunal. - (1) If, on any application made under section 241, the Tribunal is of the opinion-... (44) At the conclusion of the hearing of the case in respect of sub-section (3) of section 241, the Tribunal shall record its decision stating therein specifically as to whether or not the respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company. v. The consequence of holding that a person is not fit and proper is provided in Section 243 (1A) viz.: 243. Consequences of termination or modification of certain agreements (1A) The person who is not a fit and proper person pursuant to sub-section (4A) of section 242 shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for a period of five years from the date of the said decision: Provided that the Central Government may, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a Special Court incorporating safeguards of the CrPC. A chart reflecting the comparative scheme of protections afforded to parties before the NCLT as opposed to a prosecution before the Special Court established under the Act viii) It is submitted that even if Section 140(5) is not applicable in a given case due to the retirement or resignation of an auditor prior to an order being passed, that will not enable such an auditor to escape the vigour of law under the Companies Act, 2013, Even if an auditor resigns, he will nevertheless have to face (a) prosecution for fraud under Section 447 of the Act; (b) action before the National Financial Regulatory Authority; (c) order by the NCLT debarring auditors from acting as such in respect of any company as well can be passed under Section 243 (1A) read with Section 241 and 242(4A); and (d) disqualification under Section 141(3)(h) if the auditor is found guilty of fraud. The consequence of each of these proceedings is grave for the auditor, including debarment, and the auditor does not escape punishment. ix) It is submitted that the operative part of Section 140(5) empowers NCLT to direct a company to change its auditor. NCLT can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y qua an auditor whether individual or firm against whom a final order has been passed by the NCLT. It is submitted that moreover, the entire firm gets automatically disqualified for the actions of even one of its partners. There is no discretion provided to NCLT to alter the period of ineligibility. It is submitted that the debarment prescribed under the second proviso is an in terrorem provision imposed by operation of law, in the event an auditor chooses not to resign and forces upon himself a final order under the provision. It is submitted that the plain language of second proviso is anchored squarely on a final order being passed under the operative part of Section 140(5). xiii)It is submitted that it is settled law that proceedings which may result in disqualification would be of a quasicriminal nature and have to be strictly construed. Since Section 140(5) results in a disqualification of an auditor, proceedings thereunder would be quasi-criminal in nature. Disqualification of a professional is akin to a death penalty. The standard of proof is therefore satisfaction beyond reasonable doubt. Reliance is placed upon the decision of this Court in the case of An Advocate v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... biguity in the language of the statutory provisions or it leads to absurd results. [See State of Maharashtra v. Shri Vile Parle Kelvani Mandal Ors. (2022) 2 SCC 725 (para 16). xvii) It is submitted that in addition, this Court has time and again upheld the principle of doubtful penalisation which requires that if two views and reasonable constructions can be put on a provision, the court must lean in favour of construction which exempts the subject from penalty rather than one which imposes penalty . Reliance is placed on the decision of this Court in the cases of SEBI v. Sunil Krishna Khaitan, (2023) 2 SCC 643 (Para 55) and Tolaram Relumal v. State of Bombay. (1955) 1 SCR 158 (Para 8). xviii) It is submitted that NCLT s jurisdiction under Section 140(5) of the Act is to direct the removal of a company s existing auditor and to allow his substitution by the Central Government. It is submitted that it is not possible to remove any person/firm from a position which whey are not holding. Accordingly, an order directing removal of BSR who had already resigned as auditor of IFIN would only be possible by way of a legal fiction of treating BSR as continuing to remain IFIN s audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of this Court in the cases of B. Himmatlal Agrawal v Competition Commission of India, AIR 2018 SC 2804 (para 8) and Cellular Operators Association of India v. Union of India, (2003) 3 SCC 186 (para 20-21). xxiv) It is submitted that in Pasupuleti Venkateswarlu v. Motor General Traders, (1975) 1 SCC 770, this Court held that a proceeding may not be maintainable by reasons of a post filing event. This Court observed If a fact, arising after the lis has come to court and has a fundamental impact on the right to relief for the manner of moulding it, is brought diligently to the notice of the tribunal, it cannot blink at it or be blind to events which stultify or render inept the decrotal remedy. xxv) It is submitted that in the present case although BSR resigned after the filing of the 140(5) petition, the resignation rendered the petition infructuous since the reliefs sought for could no longer be granted under Section 140(5) and indeed the purpose underlying Section 140(5) stood accomplished by such resignation. xxvi) It is submitted that reading in an implied prohibition against an auditor from resigning after the commencement of proceedings under Section 140(5) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correctly creating a deeming fiction, in absence of any legislation to this effect or the necessary jurisdiction and power to do so. It is submitted that the NCLT wrongly assumed jurisdiction by holding that it was empowered to pass directions for a deemed change of ex-auditors and therefore the NCLT s first order is contrary to Section 140(5) as it was passed without jurisdiction and based on an incorrect assumption that the jurisdictional fact that the existing auditors of the company needed to be changed existed. xxix) It is submitted that it is trite law that a jurisdictional fact' is a sine qua non or the condition precedent to the assumption of jurisdiction by a court. A court cannot erroneously assume jurisdiction either by not deciding the jurisdictional fact or by erroneously deciding it. Reliance is placed upon the decisions of this Court in the cases of Carona Ltd. v. Parvathy Swaminathan Sons, (2007) 8 SCC 559 (Para 27, 28, 36) and Arun Kumar v. Union of India, (2007) 1 SCC 732 (Para 74-76). It is submitted that this Court has clearly laid down that the foundational fact must be established before a presumption is made. Reliance is placed on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completion of the investigation . Therefore, an investigation report cannot be submitted at any time prior to the completion of the investigation, whereas an interim report under Section 212(11) can be submitted at any stage; iv) Under Section 212(14), the Central Government has been empowered to direct SPIO to initiate prosecution against a company or its officers, if the Central Government considers it necessary after examination of only the investigation report issued under Section 212(12), i.e., after completion of the investigation. Reliance is placed on the decision of this Court in the case of Serious Fraud Investigation Office v Rahul Modi (2019) 5 SCC 266 (Para 30); v) Section 212(14) permits the Central Government to take legal advice when examining the investigation report , which itself gives colour to the word examination and shows that the Central Government is to properly apply its mind to the investigation report before directing initiation of prosecution, Le, not to do so mechanically or for collateral purposes; vi) Section 212(14A) provides that where the report under Section 212(11) or 212(12) stated that fraud has taken place and has been ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invalidity/irregularity of sanction but a case of no sanction at all, since the pre-requisite to the sanction, i.e., a final investigation report, is absent; xii) As is evident from above, where an investigation report itself states that the investigation is incomplete or that further evidence is yet to be collected, then such an investigation report does not meet the obligatory requirements of law and cannot be considered a final investigation report under Section 173(2) of the CrPC. Reliance is placed on the following decisions in the cases of P.M.C Mercantile Private Ltd. v. The State 2014(3) MWN (Cr.) 454 (Para 11 and 19); Pravin Chandra Modi v. The State of Andhra Pradesh, Crl. App. No. 49, 1964; Hari Chand Ram Pal v. State Crl. Misc. (M) 99 111 of 1977 ( Para 14). Accordingly, given the language of paras 1.5 and 4.126.1 of the 2nd Interim SFIO Report, that report could never be treated as an investigation report under Section 212(12); xiii) Even while examining the 2nd Interim Report, the MCA was of the view that the 2nd Interim Report was not a complete investigation report with respect to IFIN. Accordingly, the Ministry had directed the SFIO to carry out further i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority. Reliance is placed on the decision of this Court in the case of Mansukhbhai Vithaldas Chauhan v. State of Gujarat (1997) 7 SCC 622 (Paras 17, 18 and 19); xx) SFIO submitted the 2nd Interim SFIO Report on 28.05.2019. Admittedly, the report comprised of over 32,000 pages, with the body of the report itself forming approximately 787 pages. The 2 Interim SFIO Report was allegedly examined by a Processing Officer (Legal Section), Ministry who had prepared a processing note. This processing note was allegedly submitted to the 'Senior Officer' on an urgent priority basis. Despite the above internal processes, Ministry issued the Sanction Order on 29.05.2019 (i.e., within one day). It is pertinent to note that a copy of the said processing note was not placed before the Bombay High Court or provided to BSR despite repeated requests for inspection vide emails dated 01.10.2019, 10.10.2019, and 14.10.2019. The Bombay High Court, in these circumstances, was correct to draw adverse inference since Ministry and SFIO failed to demonstrate due application of mind through any document or affidavit; xxi)Given the voluminous nature of the 2nd Interim SFIO Report and the internal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport qua Hari Sankaran, direction for prosecution in question could not have been issued and therefore consequently the complaint could not have been filed qua Hari Sankaran. 4.3 Making above submissions and relying upon the aforesaid decisions, it is prayed by the learned counsel appearing on behalf of the original writ petitioners to dismiss the present appeals and uphold the impugned judgment and order passed by the High Court. Analysis and Interpretation of Section 140(5)of the Companies Act, 2013: 5. Section 140(5) of the Act, 2013 titled as Removal, Resignation of Auditor and Giving of Special Notice appears in Chapter X of the Act which is titled as Audit and Auditors . Therefore, Chapter X is a special provision under the new Act with respect of Audit and Auditors . It cannot be disputed that the auditor plays a very important role so far as the affairs of any company are concerned and therefore he should be independent and above board. Companies Act, 2013 is the result of the culmination of detailed study after taking into consideration the Parliamentary Standing Committee on Finance Report as well as the recommendations of the Standing Committee by intr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocedure to remove an auditor by the company before the expiry of his term; section 140(2) and (3) of the Act deal with resignation of auditors and Section 140(4) of the Act deals with giving of special notice at an AGM for appointment of an auditor other than the retiring auditor and the process in that regard. However, Section 140(5) of the Act empowers the Tribunal (NCLT), either suo motu or on an application made to it by the Central Government or by any person concerned, to take action against the auditor who has acted in a fraudulent manner or is abetting or colluding in fraud with the management of a company. If on completion of an enquiry it is found by the Tribunal that an 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. Therefore, powers of the NCLT in first part of Section 140(5) is quasi-judicial in nature and the Tribunal would have the powers of a civil court to examine the role of auditors and adjudicate on their fraudulent conduct and abdication of their function. The fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking into consideration the recommendations of the Standing Committee and with a view to make the provision more stringent and to provide for consequences for an auditor when such auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud. It is required to be noted that on passing of the final order by the NCLT under first part of section 140(5) and if an auditor is found to have been indulged into fraudulent activities or abetting or colluding in a fraud with the management of the company, consequences provided under the second proviso to section 140(5) shall follow. Therefore, before second proviso of section 140(5) is attracted, there must be a detailed enquiry against an auditor of a company as per first part of section 140(5) and there must be a finding arrived at by the NCLT that the auditor of a company 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. 6. By the impugned judgment and order, though the High Court has upheld the vires of Section 140(5) of the Act, 2013, however, the High Court has held that once the auditor resig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch an interpretation, as interpreted by the High Court, is accepted, in that case, the object and purpose of incorporation of second proviso to section 140(5) shall be frustrated. The object and purpose of second proviso to section 140(5), as observed hereinabove, is to make the provision more stringent and to provide for consequences for an auditor when such an auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud. At this stage, it is required to be noted that under the second proviso to section 140(5) on the final order being passed by the Tribunal that the auditor/firm 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, he/it shall not be eligible to be appointed as an auditor of any company for a period of five years. The word any used in the second proviso to section 140(5) is significant. On the final order being passed by the Tribunal, such an auditor not only shall be removed or changed as an auditor of a company, but such an auditor/firm shall also be ineligible to be appointed as an auditor of any other company for a period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 140(5) has been enacted with a special object and purpose, as observed hereinabove. Second proviso to section 140(5) specifically provides that on final order being passed by the NCLT, such an auditor shall not be eligible to become an auditor in any other company for a period of five years. Therefore, merely because the auditor can be removed as an auditor of a company including the other provisions, section 140(5) which has been enacted with a special object and purpose cannot be said to be arbitrary and/or ultra vires. 9. Now so far as the reliance placed upon section 241(3) of the Act and the submission that even in a case where the auditor resigns, the auditor concerned can be proceeded against under section 241(3) of the Act and therefore the proceedings pursuant to section 241(3) of the Act would lead to the same result and the auditor would be held not to be a fit and proper person to be appointed in any other office connected with the conduct and management of any company is concerned, at the outset, it is required to be noted that Section 241(3) of the Act speaks about the concerned company and not any other company. Section 241(3) of the Act has been introduced w. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 140(5) shall be maintainable and/or continued. As observed hereinabove, despite the subsequent resignation of the auditors and/or despite the resignation of an auditor even for the purpose of second proviso to section 140(5), the enquiry/proceedings/application under section 140(5) (first part) shall be maintainable and continued and on the final order being passed by the NCLT, as provided in section 140(5), consequence as provided under the second proviso to section 140(5) shall follow. As neither the NCLT nor the High Court have gone into the merits of the allegations against the respective auditors and the decision of the NCLT and the High Court is on the maintainability of the proceedings under section 140(5) after resignation of the auditors, we refrain from considering anything on merits of the allegations against the auditors as the allegations of fraud etc. are yet to be considered by the Tribunal on merits in an application under Section 140(5) made by the Central Government. 12. Now so far as challenge to the vires of Section 140(5) of the Act is concerned, at the outset, it is required to be noted that the High Court, as such, has upheld the constitutional val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivil death and section 140(5) impinges upon BSR and its partners fundamental right to carry on its profession, as guaranteed under Article 19(1)(g) of the Constitution is concerned, nobody can be permitted to say that despite acting fraudulently, directly or indirectly, they had a right to continue and/or carrying on their profession. Acting in a fraudulent manner, directly or indirectly, by an auditor is a very serious misconduct and therefore the necessary consequence of indulging into such fraudulent act shall follow. At this stage, it is required to be noted and as observed hereinabove, Section 140(5) of the Act has been enacted with the specific object and purpose as referred to hereinabove and the same has been enacted after due deliberations and taking into consideration the recommendations of the Standing Committee as well as the respective stakeholders. Therefore, taking into consideration the object and purpose for which section 140(5) of the Act is enacted, the same cannot be said to be arbitrary, excessive and violative of Article 14 of the Constitution of India and/or violative of fundamental rights guaranteed under Article 19(1)(g) of the Constitution of India, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed on record is concerned, it is required to be noted that a final order to prosecute was placed on record in which it has been specifically mentioned that having gone through the IFIN SFIO Report. 15.3 Now so far as another ground on which the direction/sanction to prosecute has been set aside by the High Court, namely, that it was an incomplete investigation report and therefore on such an incomplete investigation report, no direction/sanction to prosecute could have been issued is concerned, at the outset, it is required to be noted that the High Court has not properly appreciated that the SFIO IFIN Report was a report prepared by the SFIO on the completion of the investigation into the IFIN one of the companies under investigation. It is required to be noted that by an order dated 30.09.2018, an investigation was directed to be conducted by the SFIO into IL FS and its subsidiaries, which comprise of approximately 100-160 entities. So far as the IFIN is concerned, it was one of the subsidiaries in the IL FS group and the financial services arm. It is the case on behalf of the Central Government that so far as the SFIO IFIN Report is concerned, it is a record in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the auditors have resigned and therefore thereafter the same is not maintainable is hereby quashed and set aside. Consequently, the impugned judgment and order passed by the High Court quashing and setting aside the NCLT order holding that even after the resignation of the auditors, the proceedings under section 140(5) shall be maintainable is hereby quashed and set aside. The application/proceedings under section 140(5) of the Act, 2013 is held to be maintainable even after the resignation of the concerned auditors and now the NCLT therefore to pass a final order on such application after holding enquiry in accordance with law and thereafter on the basis of such final order, further consequences as provided under the second proviso to section 140(5) shall follow. However, it is made clear that we have not expressed anything on merits on the allegations against the concerned auditors and it is ultimately for the NCLT/Tribunal to pass a final order on the application filed by the Central Government under section 140(5) of the Act, 2013. 17. In view of the above and for the reasons stated above, the impugned judgment and order passed by the High Court quashing and setting aside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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