Deloitte Haskins and Sells LLP v. Union Of India: Case analysis

    Infrastructure Leasing and Financial Services Ltd. (IL&FS) is a shadow bank, that means it does not receive any kind of deposits unlike the traditional banks.[1] IL&FS defaulted the payment of dues which amounted to more than Rs. 91,000 Crore. Because of the forthcoming imminent possibility of contagion effect in the financial market, the Central Government filed an application to the National Company Law Tribunal for removal of the then existing directors of the company and barring them from managing the affairs of the Company.

    Equivalent Citation: Company Appeal (AT) No. 190 of 2019

    Introduction

    The Serious Fraud Investigation Office (SFIO) released an interim report on the basis of which the Central Government[2] filed a Miscellaneous Application for the Impleadment of other Respondents, including the auditors of IL&FS (Appellant in the Present case).

    Institute of Chartered Accountants of India (ICAI) has Suo moto sought to take into consideration the performance of the Auditors of the Company and it found that there were prominent lapses, manipulations and shortcomings on the Financial statements served by the Auditors and thereby held them guilty of Professional misconduct.

    On the basis of such reports, Central Government through the Ministry of Corporate Affairs moved against the Appellants under section 140(5) of the Companies Act, 2013 alleging their role in ‘perpetuating the fraud’ at one of the subsidiary companies of IL&FS and also sought the interim attachment of the Appellant’s property including lockers and bank accounts.

    Facts 

    The Appellant in the instant case is ‘Deloitte Haskins & Sells LLP’, which was the auditor of ‘IL&FS’ Financial Services Limited until the financial year 2017-2018. Union of India, the Respondent herein, through Minister of Corporate Affairs filed a Miscellaneous Application no. 2071/2019 in the Company Petition no. 3638/2018 to implead the appellants herein as one of the respondents in the said Company Petition. The Respondent herein has sought in the said company petition for the suspension of the then Board of directors of ‘Deloitte Haskins & Sells LLP’ by contending that Infrastructure Leasing and Financial Services Ltd. (IL&FS) has failed to service its debt and there is a forthcoming chance of contagion effect in the financial market.

    Central Government through the Ministry of Corporate Affairs moved against the Appellants under section 140(5) of the Companies Act ,2013 alleging their role in ‘perpetuating the fraud’ at one of the subsidiary companies of IL&FS and also sought the interim attachment of the Appellant’s property including lockers and bank accounts.

    Furthermore, the Respondents herein have filed another Company petition No. 02 of 2014, wherein The Union of India has sought to debar the directors of the Company from managing company’s affairs and further to allow them to nominate five directors to manage the same.  Vide impugned order dated 14th March 2019, this petition was disposed by barring the directors from managing the company and allowed the prayers of the Union of India.

    The Appellants herein filed a Miscellaneous Application No. 2258 of 2019 challenging the maintainability of the Company Petition which was thereafter rejected by the Tribunal vide the impugned order dated 9th August 2019. Hence the present appeal before the Hon’ble National Company Law Appellate Tribunal.

    Issues 

    1)Whether ‘Deloitte Haskins & Sells LLP’ can be impleaded as a Party in the Company Petition No. 3638/2019?

    2)Whether the Tribunal has jurisdiction to pass an order against ‘Deloitte Haskins & Sells LLP’ under Section 241 or Section 242 of the Companies Act, 2013 pertaining to mismanagement and oppression of the affairs of the Company?

    Claims Of The Appellants

    Among several other claims some of the prime and supreme contentions laid by the Appellants in the instant case are as follows:

    • That ‘Deloitte Haskins & Sells LLP’ was no longer the auditors of ‘IFIN’ at the end of the Annual General Meeting for Financial Year 2017-2018 on account of expiry of their terms under section 139 of the Companies Act 2013.
    • Putting reliance on the case of Ramesh Hirachand Kundanmal v. Municipal Corporation of Greater Bombay[3], the appellants contended that the Hon’ble Tribunal in the impugned order have not rendered that the Appellant herein is a necessary or proper party to the CP No. 3638/2018
    • The Tribunal does not have jurisdiction to pass an order against auditors under the provision of section 241 or section 242 of the Companies Act 2013 as this provision pertains to mismanagement and oppression of the affairs of the company but an auditor is not involved in the management of the affairs of the company.
    • That the fact that section 339 of Companies Act, 2013 is applicable in the present case in in the light of section 246 of the act is baseless because section 339 of the Act is applicable to the directors, managers or officers of the company only and not to the auditors, as the auditors are not carrying on the business of the company.
    • The Report of the SFIO on which the entire impleadment application is based does not contain any allegations against the appellant of any unlawful gains and so there cannot be any question of disgorgement under the provision of section 339 of the act read with section 246 of the Companies act, 2013.

    Response Of The Respondent

    In Arguendo, the Respondent laid down several responses challenging the claims put forward by the Appellants. The relevant responses in connection with the above-mentioned claims are as follows:

    • The Central Government has humbly submitted that the Tribunal has ample powers under the provisions of Section 241(12) read with the provisions of section 242 of the Companies Act, 2013.
    • The Respondent herein highlighted various allegations as quoted in the 2nd Report of SFIO/ ICAI Report/ RBI Inspection viz

    i) The Statutory Auditors made connivance with the management of the company.

    ii)That the Auditors have concealed material facts as they have not reported falsified books and fraudulent statements from financial Year 2011-2012 to 2017-2018.

    iii)That the Auditors have not performed their duties with due diligence.

    iv) The auditors have attempted to postpone the provisions and recognitions of NPA as they have transferred the loans by mere book entry which showed old loans as closed and non-provisioning of new loans.

    • That under the provisions of Sections 143(2) and 143(12) of the Companies Act, 2013 it is the duty of the auditor that if the auditor has reason to believe that if an offence of fraud has been committed, involving account, in the company by its employees or officers then the auditor must report the same. But in the present case the auditors failed to perform their statutory duty and did not report the same to the Central Government.
    • That Respondent herein submitted that opinion was not solely formed on the basis of SFIO Report as alleged by the Appellants. Rather, other facts were taken into account viz, RBI Inspection Report, ICAI Report, etc while filing its application for impleadment.

    https://legalreadings.com/consequences-of-publishing-false-electronic-signature-certificates/

    Judgment

    The National Company Law Appellate Tribunal (NCLAT) in its judgment considered the claims put forward by the Appellants and considered the responses sufficed by the respondent and observed that the Hon’ble Tribunal is not inclined to state any opinion whether the allegations made would require any further investigation and what order is required to be passed in public interest.

    The burning question in the present matter is whether the appellants shall be impleaded as party Respondents in the Company Petition filed by the Respondent herein.

    The Hon’ble NCLAT while passing its judgment has observed the principles relied in the case of ‘Union of India, Ministry of Corporate Affairs v. Gitanjali Gems Ltd. & Ors etc.[4] in which it was observed that the Tribunal has inherent powers to pass such orders as it may deem fit and necessary for achieving the ends of ends and to prevent abuse of the process of the Hon’ble Tribunal under Rule 11 of the NCLT Rules, 2016.

    The Hon’ble NCLAT has observed that the principles of natural justice are to be followed and for that if any order is passed against one or another which includes investigation then it is always open to the Tribunal to question such party to be impleaded.

    The Hon’ble NCLAT also held that prior to passing any befitting order in public interest in order to save the economy of the country from getting crumbled, if the Tribunal forms the opinion that it requires to give apposite hearing to the concerned parties including the auditors of ‘ILFS’ then it will not be illegal. The Hon’ble NCLAT found no merit on the appeals and they were subsequently dismissed.

    Analysis

    In the present Case the Respondents herein, that is the Central Government through the Ministry of Corporate Affairs moved against the Appellants under section 140(5) of the Companies Act, 2013 alleging their role in ‘perpetuating the fraud’ at one of the subsidiary companies of IL&FS and also sought the interim attachment of the Appellant’s property including lockers and bank accounts.

    In the instant Company Appeal the National Company Law Tribunal did not find it necessary to discuss the ambit of section 140(5) of the Companies Act, 2013 as the main issue is still pending consideration. Whether ex-auditors are to be removed or not is not guided by section 241(2) read with Section 241 of the Companies Act.

    As per author’s view the auditors are not involved in managing the affairs of the company. The directors of the company (IL&FS) are responsible for managing the affairs of the company.  In the instant case though the matter is pending consideration before the National Company law Tribunal but the National Company Law Appellate Tribunal did not clearly deal with the substantial question of law and has neither provided any supportive statement regarding the ambit of section 140(5) of the Companies Act, 2016 and whether or not the Appellants herein are proper or necessary party in the instant case.

    Furthermore it can be stated that in the case involving oppression and mismanagement guided by Section 241 of the Companies Act, 2013, it is not necessary to implead the auditors directly and moreover, Deloitte Haskins & Sells LLP had ceased to be the Auditor w.e.f the date of the Annual General meeting of IFIN (the subsidiary company of IL&FS) which is relevant for the end of the financial year 2017-2018 by the expiry of the term of the auditors under the provision of Section 139 of the Companies Act, 2013.

    According to the author’s view, the provisions of Section 140(5) of the Companies Act, 2013 applies to the present auditors. This section provides for the removal of the existing auditors but in the instant case the auditors have already resigned.

    Thus, if the author analyzes the case then it can be observed that the National Company Law Tribunal has not given proper reasoning before disposing of the appeal of the Appellants. The question of law is not properly dealt in the present case and the judgment lacks proper reason backed by law.

    Conclusion

    The Hon’ble National Company Law Tribunal has considered various provisions of the Company law regarding the removal of the directors of a company or barring them from managing the affairs of the company. Though it has not directly laid down whether Tribunal can directly pass an order to implead the Respondents herein as appropriate parties, rather it laid down that the Tribunal can pass any such orders which it may deem fit.

    It has also discussed the provision of various sections of the Companies Act, 2013 viz, section 242 read with section 241 and have interpreted them with the help of relevant precedents but has not discussed the provision of section 140(5) of the Companies Act,2016.

    References:

    [1] IL&FS Crisis Case Study: Everything You need to Know, CASE READS (Nov.  24, 2020, 8:56 AM),

    Available at  https://casereads.com/ilfs-crisis-case-study-everything-you-need-to-know/.

    [2] Shashank Pandey, Explainer: The IL&FS Insolvency case, BAR AND BENCH (Nov. 24, 9:47 AM),

    Available at  https://www.barandbench.com/columns/ilfs-insolvency-the-journey-so-far.

    [3] Ramesh Hirachand Kundanmal v. Municipal Corporation of Greater Bombay, (1992) 2 SCC 524.

    [4] Union of India, Ministry of corporate Affairs v. Gitanjali Gems Ltd. & Ors, Company Appeal (AT) No. 103 of 2018.


    BY TIYASA LODH | LLYOD LAW COLLEGE

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