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Upholding Accountability in Auditing: SC's Ruling on UOI vs Deloitte Haskins and Sells LLP

In a recent ruling, the Hon’ble Supreme Court of India found Deloitte Haskins and Sells LLP (CRIMINAL APPEAL NOS.2305-2307 OF 2022) guilty of failing to fulfil its auditing obligations as outlined in the Companies Act, 2013 (‘the Act’). The case was earlier referred to the National Company Law Tribunal ('NCLT') by the Central Government, which accused Deloitte of overlooking financial irregularities at Infrastructure Leasing & Financial Services Limited (‘IL&FS’). After a thorough investigation, the NCLT found Deloitte guilty of professional misconduct and imposed a fine of ₹1 crore. Despite Deloitte's appeal to the Supreme Court, the decision was upheld.


This ruling underscore the importance of auditors exercising due diligence and maintaining independence in their audits. It also serves as a stark reminder for the auditing profession to uphold rigorous standards in their practices. The penalties imposed by the NCLT, and the Supreme Court should serve as a deterrent to other auditors who may be tempted to cut corners or neglect their duties.


Facts:

  • 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.

  • An office memorandum was issued dated 30.09.2018 by the Department of Economic Affairs, Ministry of Finance. It urged the Ministry of Corporate Affairs (‘MCA’), and the Union of India (‘UOI’) to take action under the Act.

  • Meanwhile, the MCA, upon receipt of a report from the Registrar of Companies under section 208 of the Act, directed the Serious Fraud Investigation Office (‘SFIO’) to investigate the affairs of IL&FS and its subsidiaries.

  • On 01.08.2018 the MCA filed a company petition against IL&FS and its then existing Board of Directors(‘BOD’) before the NCLT. The petition sought the removal of the company's board of directors and the appointment of a new Board of Directors in place. The NCLT passed an interim order, superseding the then existing BOD of IL&FS with a new BOD.

  • The MCA also filed a petition before the NCLT under section 130 of the Act to reopen the company's books and accounts. But the IL&FS Financial Services Ltd. (‘IFIN’) auditors (BSR & Deloitte) vehemently opposed this petition.

  • The petition was approved, and the books and accounts for the past 5 years of the company were reopened. Later, the Reserve Bank of India investigated the group and submitted an investigation/inspection report to IFIN. Thereafter, the IFIN issued a notice seeking to remove BSR as auditors.

  • MCA further filed a petition under section 140(5) of the Act dated 10.06.2019, seeking to remove BSR & Deloitte as IFIN auditors and debar them for five years.

  • Thereafter, BSR finally resigned as the statutory auditor of IFIN and challenged the maintainability of section 140(5) petition before the NCLT on the ground that BSR is no longer the auditor for IFIN. The NCLT however dismissed their plea on 09.08.2019.

  • BSR Associates, Deloitte Haskins & Sells and other external auditors had then moved to the High Court of Bombay which had granted an interim stay on the NCLT’s decision of debarment of the audit firms vide its order on 05.09.2019 and challenged the constitutional validity of section 140(5) of the Act.

High Court Decision:

  • The Hon’ble Bombay High Court upheld the validity of section 140(5) of the Act and set aside the order passed by the NCLT with respect to the debarment of the two audit firms. The court directed the NCLT to pass a fresh order after giving the audit firms an opportunity to be heard.

  • The court held that section 140(5) of the Act cannot be exercised against auditors who have resigned or ceased to be the auditor of the company after the completion of their term.

  • The court declared the further proceedings under section 212(14) of the Act issued by UOI via SFIO to be unsustainable and set aside.

Aggrieved by this order of the Hon’ble Bombay High Court, UOI filed an appeal before the Hon’ble Supreme Court.


Supreme Court Decision:

  • The Hon’ble Apex Court upheld the constitutional validity of section 140(5) of the Act and held that it does not violate Articles 14, 19(1) (g) of the Constitution of India.

  • The court rejected Deloitte's contention that the resignation of an auditor terminates proceedings under section 140(5) of the Act if such an auditor has directly or indirectly acted in a fraudulent manner.

  • The court held that the purpose of section 140(5) of the Act is to ensure that auditors who have acted in a fraudulent manner are not allowed to continue as auditors of companies. The court observed that the resignation of an auditor does not undo the damage that has been caused by the auditor's fraudulent conduct.

  • The court also held that the fact that Deloitte had resigned as auditor of IFIN did not imply that it had admitted to any wrongdoing. Deloitte had resigned in order to circumvent the possibility of being held liable for the fraudulent conduct of IFIN's management.

Our Analysis:


The Hon’ble Supreme Court's judgment in this case is a welcome development. The judgment sends a strong message to the auditors that they will be held accountable for their actions, even if they resign from their position as an auditor. The judgment will additionally safeguard the interests of the stakeholders of companies by ensuring that fraudulent auditors are prevented from continuing to practice as auditors.


This case signaled that section 140(5) of the Act would not become nugatory merely upon the resignation of the auditor. The decision passed by the High Court of Bombay in this case was deemed erroneous as it was based on a narrow interpretation of the provisions of the Act. The Supreme Court ruled that no provision in the Companies Act was discriminatory or against the Constitution.


We believe that the Supreme Court's judgment is a positive development for the corporate governance landscape in India. It sends a strong message to auditors that they will be held accountable for their actions, and it will help to protect the interests of investors and other stakeholders.


Authored by Jitin Bharadwaj, Associate at Metalegal Advocates. The views are personal and do not constitute legal opinion.

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