In a batch of civil appeals raising common question(s) of law pertaining to the interpretation of Section 140(5) of the Companies Act, 2013, the Hon’ble Supreme Court of India held that subsequent resignation of an auditor after the application under Section 140(5) is filed, shall not terminate the proceedings under section 140(5).
Section 140 of the Companies Act,2013, deals with Removal and/or resignation of auditor. Furthermore, section 140(5) empowers the NCLT to take action against the Auditors who have acted in a fraudulent manner.
The Ministry of Corporate Affairs filed a petition under Section 140 (5) of the 2013 Act, against the auditors of the IL&FS Finance Services Limited (IFIN), BSR & Deloitte, praying inter alia to remove BSR as auditors of IFIN; and declare/direct that BSR & Deloitte 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 2013 Act. In parallel, the Ministry also directed SFIO to investigate into the affairs of IL&FS and its subsidiaries. Thereafter, BSR issued a letter of resignation to IFIN and simultaneously completed the regulatory filings pursuant to such resignation.
Subsequently, Deloitte & BSR questioned the maintainability of Section 140 (5) petition before NCLT on the ground that Deloitte is no longer the auditor for IFIN; however, the NCLT upheld the maintainability of Section 140(5) petition. Consequently, BSR filed a writ petition before the High Court, challenging the vires of Section 140(5) of the 2013 Act along with the impugned order passed by the NCLT, upholding the maintainability of Section 140(5) petition.
The High Court of Bombay, though upheld the validity of Section 140(5) of the 2013 Act, it interpreted Section 140(5) of the 2013 Act and set aside the order passed by NCLT, quashed Section 140(5) petition and set aside criminal proceedings instituted by SFIO. The High Court stated that once the auditor resigns as an auditor or is no more an auditor on his resignation, thereafter Section 140(5) proceedings are no longer maintainable as the petition filed under Section 140(5) has been satisfied by the subsequent resignation of the auditor.
The Hon’ble Supreme Court on appeal took note that Section 140(5) of the 2013 Act is a special provision under the new Companies Act with respect to “Audit and Auditors”. The Court further noted that Section 140(5) of the Act empowers the NCLT to take action against the auditor who has acted in a fraudulent manner. Therefore, the powers of NCLT in first part of Section 140(5) are 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.
Further the Apex Court took note of the first proviso to Section 140(5) that confers power upon the Tribunal to remove such auditor and/or pass an order that such an auditor shall not function as an auditor.
The Court then Stressed upon the second proviso to Section 140(5) of the 2013 Act which provides that an auditor 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 of such action under Section 447 of the 2013 Act. The Hon’ble Apex Court stated that second proviso to Section 140(5) can be said to be a substantive provision introduced 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 it operates on the final order passed by the Tribunal under Section 140(5) of the 2013 Act.
The Court stated that the view taken by the High Court is absolutely erroneous and is unsustainable. The Court further clarified that the enquiry/proceedings initiated under the first part of Section 140(5) have to go to its logical end and subsequent resignation and/or discontinuance of an auditor shall not terminate the enquiry/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). There are further consequences also on culmination of the enquiry under Section 140(5) proceedings and passing a final order by the Tribunal on the conduct of an auditor, whether such an auditor 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, as provided under the second proviso to Section 140(5) of the 2013 Act.
Union of India v. Deloitte Haskins & Sells LLP,
(2023) 8 SCC 56
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