IL&FS Crisis: Government Moves NCLT To Freeze Deloitte, BSR Bank Accounts 

The government today moved the National Company Law Tribunal seeking relief against Deloitte Haskins & Sells and BSR & Associates in the ongoing oppression and mismanagement case at Infrastructure Leasing and Financial Services Ltd. and its non-bank lending unit IL&FS Financial Services Ltd.

The government sought an ad interim order from the tribunal for freezing the bank accounts of the erstwhile auditors.

The probe stemmed from the surprise defaults by IL&FS last year that set off a liquidity crisis, forcing the government to take over control over the debt-laden conglomerate. This triggered concerns about the efficacy of India's corporate governance mechanism involving everyone from rating agencies and audit firms to independent directors. The government moved the NCLT to seek relief under sections 241 and 242 of the Companies Act against individuals and auditors involved in oppression and mismanagement at the IL&FS group companies.

While the government today argued that the interim stay granted by the NCLAT doesn't restrain it or the tribunal from acting against the auditors, counsel for the auditors said when the effect and operation of an order is stayed, impleadment cannot affect the party and therefore a respondent remains a “proposed respondent”.

Government's Arguments

Sanjeev Shorey, representing the government, argued:

• Interim stay granted by the NCLAT on July 29 doesn't restrain the ministry or tribunal from proceeding against the auditors in accordance with law. Therefore, hearings in the matter must proceed to ensure speedy justice.
• Extension of the Dec. 3 order to include DHS, BSR & Associates and other individuals is necessary to ensure funds aren't transferred or alienated.
• Ad interim orders against the auditors, their partners and other individuals charged with oppression and mismanagement by the Ministry of Corporate Affairs necessary to ensure justice.
• Prayer for freezing of bank accounts of the auditors is necessary for obtaining relief; however, operational expenses like payment of employee salaries may be allowed to ensure their business operations continue. This will be pursuant to any affidavit filed by the auditors in the court.
• Freezing of the bank accounts of the charged individuals is necessary. Monthly withdrawal may be allowed up to a certain extent may be allowed after obtaining NCLT's approval.

Deloitte & BSR's Arguments

Darius Khambata, counsel for BSR & Associates, argued:

• The NCLAT had granted a stay on the effect and operation of the order which impleaded BSR as an additional respondent.
• The order of the appellate tribunal allows the ministry and tribunal to proceed in accordance with the law. However, when effect and operation of an order is stayed, impleadment cannot affect the party and therefore a respondent remains a “proposed respondent”.

Janak Dwarkadas, counsel for Deloitte, sought an adjournment in the hearing. The tribunal will now hear the case against Deloitte on Aug. 28.

Timeline

• November 2018: The Serious Fraud Investigation Office probes IL&FS and names nine individuals in its first investigation report, charging Ravi Parthasarathy, Hari Sankaran and Arun K Saha among others, for oppression and mismanagement at the group.
• Dec. 3, 2018: The NCLT restrained nine individuals from alienating or mortgaging any movable or immovable property owned by them.
• June 10, 2019: Government filed an application for impleading DHS and BSR & Associates among others as additional respondents to the petition filed by it in December 2018.
• July 18: NCLT allows impleading of DHS, BSR & Associates, Udayan Sen, Kalpesh Mehta and Sampath Ganesh, among others, as additional respondents.
• July 23: NCLT grants an interim stay on its July 18 order for a ten-day period to allow DHS to file an appeal at the National Company Law Appellate Tribunal.
• July 29, 2019: NCLAT extends the stay granted under NCLT's interim order till August 19.