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The Supreme Court of India.
The Supreme Court of India.

IL&FS: SC refuses stay on Bombay HC order quashing Centre's plea to ban Deloitte

  • The Ministry of Corporate Affairs had challenged the Bombay High Court order of 21 April in the apex court
  • The MCA had moved NCLT seeking removal of two two audit firms for their role in alleged financial irregularities by IL&FS Group

NEW DELHI: In a big relief to BSR & Associates LLC, and Deloitte Haskins and Sells, both former auditors of IL&FS Financial Services Ltd, the Supreme Court (SC) on Tuesday refused to stay the Bombay High Court (HC) order to quash all prosecution against the two firms pending before the National Company Law Tribunal (NCLT) and a special court in the city.

The Ministry of Corporate Affairs (MCA) had challenged the Bombay High Court order of 21 April in the apex court.

The bench comprising Justices MR Shah and AS Bopanna, while questioning the MCA for delay in filing the appeal said, “We want to penalise the government for filing its petition late."

The Bombay High Court had given eight weeks to the MCA to challenge its order in the Supreme court.

BSR, part of KPMG India, and Deloitte had moved the Bombay HC last year challenging the validity of the central government's plea before the Mumbai bench of the NCLT seeking their removal as auditors of IL&FS.

Such removal under section 140 (5) of the Companies Act, 2013, would also bring along a ban on the audit firms for five years.

The MCA had sought such removal and initiated criminal proceedings against the firms for their role in alleged financial irregularities at the now bankrupt IL&FS Group.

In August last year, the NCLT had found merit in the central government's plea, and subsequently approved the proposed removal of both firms.

The firms however, approached the Bombay HC arguing that they had already resigned as auditors of IL&FS much before the ministry sought their removal.

They had, therefore, challenged the constitutional validity of section 140 (5) of the Act. The section deals with removal and resignation of auditors and imposes a five-year ban on an auditing firm that is proven to have "acted in a fraudulent manner", or to have "abetted or colluded in any fraud".

On 21 April, a bench of Chief Justice BP Dharmadhikari and Justice NR Borkar of the Bombay High Court quashed the prosecution of both firms ordered by the NCLT. While the bench upheld the constitutional validity of section 140 (5), it said the provisions of the section did not apply to former auditors who had resigned.

The bench also quashed a criminal complaint filed against the two firms by Serious Fraud Investigation Office (SFIO), a central agency, in the above case of financial irregularities.

The bench said the SFIO complaint filed before a special court was "bad in law".

In June last year, the Ministry of Corporate Affairs had moved the NCLT against BSR and some of the then external auditors of IL&FS alleging professional misconduct. At the time, it had also directed the SFIO to initiate probe and disciplinary action against such audit firms.

The SFIO had subsequently claimed BSR and some other audit firms had acted in breach of auditing standards and that they had failed to detect financial inconsistencies at IL&FS.

PTI contributed to the story.

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