NFRA gets thumbs up from SC on retrospective jurisdiction

  • In March and again in May, the Supreme Court dismissed two appeals challenging a tribunal's decision that affirmed the audit watchdog's retrospective authority over audits.

Gireesh Chandra Prasad
First Published27 May 2024
The apex court’s decision not to intervene in the tribunal order is significant because it also seals the fate of the challenges to NFRA orders pending in a few High Courts.
The apex court’s decision not to intervene in the tribunal order is significant because it also seals the fate of the challenges to NFRA orders pending in a few High Courts.

New Delhi: The question of the National Financial Reporting Authority's (NFRA's) investigative powers over statutory audits of businesses done prior to the watchdog's creation in 2018 is finally getting settled.

The Supreme Court in March and then in May dismissed two appeals against a tribunal order that upheld the audit watchdog’s retrospective powers over audits, showed court orders seen by Mint

According to an assessment by the NFRA, this development has reinforced the watchdog’s jurisdiction including for the period before its creation in October 2018, a person with knowledge of the regulator’s view said. 

This assessment is based on a fundamental principle of law called the ‘doctrine of merger,’ which implies that only one operative order can govern a particular subject matter at any given time. 

This doctrine also seeks to preserve the hierarchical structure of courts and tribunals. The apex court’s decision not to intervene in the tribunal order is significant because it also seals the fate of other challenges to NFRA orders pending in a few high courts, said a second person who also spoke on condition of not being named.

The National Company Law Appellate Tribunal had on 1 December 2023 held that the NFRA has “clear and required retrospective jurisdiction over alleged offences by delinquent Chartered Accountants for the period prior to the formation of NFRA.” 

NFRA's retrospective powers upheld

The question over the NFRA’s past jurisdiction arose when four branch auditors of erstwhile Dewan Housing Finance Corporation Ltd. contested the disciplinary orders issued by the NFRA for alleged lapses, leading to the tribunal order upholding the regulator’s retrospective powers. 

Two of the branch auditors then appealed against the tribunal order, and these are what the SC dismissed this year.

Clarity on retrospective jurisdiction of the NFRA comes as a big boost to its authority in examining statutory audits of companies done prior to October 2018. It also ensures that there is no regulatory vacuum in the country’s oversight of the corporate and the financial sectors. 

“When an appeal or revision is lodged against a decision by a lower court, tribunal, or authority, and the higher forum modifies, reverses, or affirms the decision under scrutiny, the decision of the lower forum becomes absorbed into the decision of the higher forum. As a result, the decision of the higher forum becomes the operative and enforceable one in the eyes of the law,” said the person.

Also Read | Audit watchdog set to widen inspections

The apex court’s orders on 22 March and 17 May saying there is no reason to interfere with the NCLAT order, “underscores NFRA's authority, including retrospective jurisdiction, in matters of financial reporting standards and norms,” the first person quoted above said. 

It also applies to the tribunal's order on other issues in the same order -- for example, clarifying that the standards of audits notified by government are mandatory and not advisory or a guidance note to auditors, the person said.

Experts said that as per the 'doctrine of merger,' when a higher court reviews a case and issues a decision, the order of the lower court merges into the higher court's judgment. 

“This principle ensures that the final decision from the higher court takes precedence, and the lower court's decision no longer stands independently. Essentially, it affirms the authority of the higher court's ruling as the definitive judgment on the matter,” Sonam Chandwani, managing partner at law firm KS Legal & Associates, said, without referring to this specific case. 

This doctrine prevents conflicting rulings and upholds the higher court's interpretation and application of the law as the ultimate resolution, said Chandwani. 

“In practical terms, when a higher court, such as the Supreme Court, either decides on a case or chooses not to intervene in a lower court's decision, it effectively endorses that decision. This endorsement solidifies the lower court's ruling as the final legal outcome, preventing further legal disputes on the same issue within the lower courts,” said Chandwani.

Supreme Court decision explained

One of the branch auditors who had contested the NFRA’s disciplinary order said in response to an emailed query from Mint that the decision of the Supreme Court not to interfere with the order of the NCLAT, as things stand now, brings finality to the proceedings initiated by NFRA against five branch auditors of DHFL. 

“However, this has no meaning that the law on NFRA has been settled,” said the auditor, who spoke on condition of not being named.

He said that the NCLAT' s power is restricted to deciding on issues raised in an appeal, testing whether law was applied correctly or not, with the assumption that the law is correct. 

“In other words, deciding the correctness of the law itself or on the vires of the law whether it is in compliance with the Constitution, are not within the powers of the NCLAT, but can be decided by High Courts or the SC.” 

Therefore, the writs filed by others in the High Court will be unaffected, regardless of the refusal of the SC to interfere in the particular the NCLAT order, because the questions before the HC are about the correctness of law, said the auditor. 

An email sent to the NFRA on Friday seeking comments for the story remained unanswered at the time of publishing. 

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