IL&FS Crisis: Deloitte, BSR Challenge Government’s Plea Seeking Five-Year Ban

Deloitte Haskins and Sells and BSR & Associates, the erstwhile auditors of Infrastructure Leasing & Financial Services and IL&FS Financial Services Ltd., today challenged the petition filed by the central government seeking a five-year ban against them at the National Company Law Tribunal.

The auditors challenged the petition's maintainability on the grounds of the tribunal's jurisdiction. The Ministry of Corporate Affairs had sought a five-year ban on the auditors under Section 140 (5) of the Companies Act, 2013 for allegedly colluding with the management in dubious lending practices at the IL&FS Group.

Auditor's Arguments

Deloitte Haskins and Sells challenged the petition filed by the ministry on the grounds of the tribunal's jurisdiction in the matter.

Janak Dwarkadas, counsel representing DHS, said:

• DHS had ceased to be the auditor of IL&FS and IL&FS Financial Services when proceedings seeking a five-year ban under Section 140(5) were filed against it.
• The remedy under Section 140(5) for removal of an auditor is only available against an existing auditor. DHS was the auditor for IL&FS between the financial years 2012-13 to 2017-18. The petition seeking its removal must not be allowed as it has ceased to be an auditor.
• The law confers jurisdiction on the tribunal only for removing an “existing” auditor, therefore the tribunal lacks jurisdiction in this case. The tribunal has alternative remedies available against an erstwhile auditor under the Companies Act.
• Section 140(5) only contemplates “change” in an auditor. Change cannot apply to a person who has ceased to be an auditor by operation of law.
• No charges of fraud have been proved against DHS. The Serious Fraud Investigation Office findings against DHS are prima facie in nature i.e. an initial view and subject to legal scrutiny in the courts.
• Prayer filed by the Ministry of Corporate Affairs for deemed removal of DHS is invalid in law. The tribunal has not passed a final order against it. A final order will have drastic implications against the auditor.
• The time limit of fifteen days for change of an auditor is only directory in nature.

Darius Khambata, counsel representing BSR & Associates, said:

• BSR had resigned as an auditor of IL&FS Financial Services in accordance with the requirements of law. The impression given by the ministry that auditors are trying to escape is thus incorrect.
• BSR cannot be held liable under Section 140 (5) of the Companies Act as it had already resigned. There are other provisions in the Companies Act, 2013 which provide penalties for auditors.
• Existence of an auditor is a condition precedent for seeking a change or removal.
• The tribunal will have to interpret Section 140(5) in a narrow and strict manner. The tribunal cannot expand the scope of the section beyond what was intended by the government while passing the law. The power to expand the scope and interpretation of a section is only available to the High Court and Supreme Court.
• There is no concept of deemed removal under the Companies Act and hence, the prayer of the ministry must be quashed.

Counsel representing partners of DHS challenged the impleadment of the partners on the grounds that they have already been impleaded in criminal proceedings by the ministry.

Ministry's Counter

Sanjeev Shorey, the government's counsel, said:

• Failure of the IL&FS Group had a negative impact on the economy. Key lapses were noticed and found by the SFIO and Institute of Chartered Accountants of India during their investigations. The SFIO had noted such lapses in its November 2018 report.
• In some past instances the Supreme Court took notice of subsequent events in order to implead an accused for his actions in the past. As the directions of the Supreme Court are binding on the tribunal, the tribunal must widen the interpretation of Section 140(5) to allow remedial measures against the erstwhile auditors.
• Principles of natural justice have been followed by the ministry while initiating actions against the auditors.

The tribunal directed the parties to file replies and will hear them on July 22. Apart from the present case, the ministry has also initiated proceedings against the erstwhile auditors for oppression and mismanagement. Proceedings under Section 447 of the Companies Act have been initiated against the auditors in the Special Sessions Court in Mumbai.