Bombay HC quashes proceedings against IL&FS Fin auditors Deloitte, BSR & Co

The Bombay High Court granted relief to Deloitte Haskins and Sells and BSR & Co, former auditors of IL&FS Financial Services, quashing prosecution against them for alleged financial irregularities and dismissing the government's plea for a five-year plan.

The auditors had moved court last year challenging the validity of the government's plea before the companies tribunal seeking a ban on them.

The plea was sought under Section 140 (5) of the Companies Act.

The auditors, who worked with IL&FS Group for a few years in the lead-up to its collapse in July 2019, were under scrutiny for the role in the meltdown.

In August last year, the NCLT had found merit in the Union government's plea, and subsequently approved the proposed removal of both firms.

The firms, however, approached HC arguing that they had already resigned as auditors of ILFS much before the Ministry sought their removal.

They had, therefore, challenged the constitutional validity of section 140 (5) of the Act. The section deals with removal and resignation of auditors and imposes a five-year ban on an auditing firm that is proven to have "acted in a fraudulent manner", or to have "abetted or colluded in any fraud".

On Tuesday, a bench of Chief Justice BP Dharmadhikari and Justice NR Borkar quashed the prosecution of both firms before the NCLT.

While the bench upheld the constitutional validity of section 140 (5), it held that the provisions of the section did not apply to former auditors who had resigned.

The bench also quashed a criminal complaint filed against the two firms by Serious Fraud Investigation Office (SFIO), a Central agency, in the above case of financial irregularities.

The bench said the SFIO complaint filed before a special court was "bad in law".

In June last year, the Ministry of Corporate Affairs had moved the NCLT against BSR and some of the then external auditors of IL&FS alleging professional misconduct.

At the time, it had also directed the SFIO to initiate probe and disciplinary action against such audit firms.

The SFIO had subsequently claimed BSR and some other audit firms had acted in breach of auditing standards and that they had failed to detect financial inconsistencies at IL&FS.

Advocate Sujay Kantawala, who was a part of the legal team for BSR, said on Tuesday, the Union government sought a stay for eight weeks on HC's order quashing such prosecution.

While the counsels for BSR and Deloitte opposed the government's request, HC granted such stay on its own order.

Kantwala stated that HC granted such stay saying that denying time to the government for an appeal would not be "fair in today's troubled times".

He added that Tuesday's order quashing prosecution would have major implications on the corporate world and would act as a precedent in preventing "harassment of innocent firms".