Government Seeks To Implead Auditors In IL&FS Mismanagement Case

The Ministry of Corporate Affairs seeks to bring charges of oppression and mismanagement against auditors and independent directors of IL&FS group as it looks to pin accountability for the financial troubles at the infrastructure lender and builder.

The ministry filed an application in the Mumbai bench of the National Company Law Tribunal to implead 23 persons and entities in the petition filed last year. These include Deloitte Haskins & Sells and BSR & Associates, a unit of KPMG—the former and current auditors—and former independent directors at Infrastructure Leasing & Financial Services Ltd. and its non-bank lending unit IL&FS Financial Services Ltd.

That comes days after the ministry sought a five-year ban and removal of the auditors for allegedly colluding with the management in dubious lending practices found by the Serious Frauds Investigation Office. The probe stemmed from the surprise defaults of IL&FS last year that set off a liquidity crisis, forcing the government to take over control. And it triggered concerns about the efficacy of India's corporate governance mechanism involving everyone from rating agencies and audit firms to independent directors.

The ministry had last year filed the petition under Sections 241 and 242 of the Companies Act alleging oppression and mismanagement at IL&FS. Sanjeev Shorey, the government's counsel, on Friday cited the SFIO probe to bring similar charges against more individuals and entities.

Government's Arguments

• Impleadment of auditors was on the basis of two interim investigation reports by SFIO.
• Regional director at the ministry was directed by the central government to implead additional respondents to the case filed for oppression and mismanagement.
• Impleadment is necessary to ensure that respondents do not alienate or encumber their properties. Impleadment for oppression and mismanagement is also necessitated under Section 339 read with Section 242 of the Companies Act which deals with liabilities arising out of fraudulent conduct of business. Such conduct can be past or present.
• The auditors, however, disputed the allegations and opposed inclusion in the petition.

Auditors' Counter

Janak Dwarkadas, appearing for Deloitte Haskins and Sells, argued that:

• In cases involving oppression and mismanagement under Sections 241 and 242, impleadment of auditor is not necessary as it is not directly or necessarily connected with the case.
• A case under these sections can be made against the management.
• The charges in the SFIO report are allegations and are not proved in court of law, which makes a strong ground for exclusion from impleadment.

Navroz Seervai, representing BSR & Associates, said:

• BSR was appointed as a statutory auditor from November 2017 for a part of the financial year.
• Complaints against BSR are also being investigated by the Institute of Chartered Accountants of India.
• A complaint under Section 447 is also filed in the criminal court. Separate proceedings in similar matters can create a conflict.
• An auditor being an independent body is not involved in day-to-day management of company, as it only audits the accounts of companies and hence cannot be impleaded.

Counsel representing Sampath Ganesh, partner at BSR, said he can't be impleaded in his individual capacity as he was acting on behalf of the BSR.

After hearing the arguments, the tribunal reserved its order for judgment. The NCLT asked the counsel representing the ministry to ensure that notices and reports a provided to the other parties.