The Ministry of Corporate Affairs (MCA) and the Serious Fraud Investigation Office (SFIO) are expected to move the Supreme Court in the next two days against the Bombay High Court order that quashed prosecution against Deloitte Haskin and Sells and BSR and Associates, the former auditors of IL&FS Financial Services (IFIN).
The High Court ruling on April 20 was a relief for the two audit firms that moved court against the government’s decision to ban them from auditing activities for five years and initiate criminal proceedings against them.
The court observed that the provisions under which the government sought to ban the two firms can only be applied to existing auditors of a company. The government received eight weeks’ time to challenge the order in the apex court.
"We have completed our preparations and might challenge this order in the Supreme Court on Monday or Tuesday," a source privy to the matter told Moneycontrol.
The High Court observed that the National Company Law Tribunal (NCLT), a part of MCA, cannot ban the audit firms. The tribunal had earlier argued that it had jurisdiction to ‘remove and ban’ the auditors even if they had rotated out or resigned.
The case pertains to a series of defaults by IL&FS in 2018, sparking a liquidity crisis in India’s non-banking financial companies sector. Eventually, the government took over the troubled infrastructure lending conglomerate to avoid contagion. On June 10, the government moved the NCLT seeking a five-year ban on the auditors under Section 140 (5) of the Companies Act for their alleged role in concealing bad loans at IL&FS and its group firms including IFIN.
Though the High Court upheld the constitutionality of Section 140 (5), the bench stated that the rule would not apply to auditors who have already resigned.
The High Court also rejected the criminal complaint by the SFIO filed before a special court, terming it “bad in law” and “non-application of mind.” According to sources, the SFIO is also getting ready to challenge this order in the top court in the next two days.
BSR and Associates, a part of KPMG India, became an auditor to IFIN in November 2017, and jointly audited the company with Deloitte till March 2018. BSR was the sole auditor for IFIN till June 2019, after which it resigned.
Law firm Veritas Legal was representing Deloitte in the case, while BSR was being represented by AZB and Partners.
The audit firms argued that the NCLT can only ban existing auditors and lacks the jurisdiction to ban them as they are no longer auditors of IFIN.
IL&FS went bust in September 2018. The infrastructure lending major with more than 100 subsidiaries owes more than Rs 1 lakh crore to the financial system.
The SFIO has filed a criminal complaint against IFIN and now will file a complaint against ITNL too. The Enforcement Directorate is also investigating this case and has filed the charge sheet.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!