UNION OF INDIA AND ANOTHER v. DELOITTE HASKINS AND SELLS LLP & ANR

Citation: [2023] 5 S.C.R. 949

Court: Supreme Court of India

Bench: M. R. SHAH AND M. M. SUNDRESH, JJ.

Judgment text

SUPREME COURT OF INDIA UNION OF INDIA AND ANOTHER v. DELOITTE HASKINS AND SELLS LLP & ANR. UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP & ANR. (Criminal Appeal Nos. 2305-2307 of 2022) MAY 03, 2023 [M. R. SHAH AND M. M. SUNDRESH, JJ. ] Companies Act, 2013 - s. 140(5) - Analysis and Interpretation of - Maintainability of proceedings u/s. 140(5) after resignation of the auditors - s.

140(5) empowers the Tribunal (NCLT), either suo motu or on an application made to it by the Central Government or by any person concerned, to take action against the auditor who has acted in a fraudulent manner or is abetting or colluding in fraud with the management of a company - If on completion of an enquiry it is found by the Tribunal that an auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may by order direct the company to change its auditors - By the impugned judgment, the High Court held that once the auditor resigns as an auditor or is no more an auditor on his resignation, thereafter s. 140(5) proceedings are no longer maintainable - Whether after resignation of the auditors, proceedings u/s. 140(5) are maintainable - Held: The view taken by the High Court is absolutely erroneous and is unsustainable - Application / proceedings u/s.

140(5) of the Act, 2013 is maintainable even after the resignation of the concerned auditors - Enquiry/ proceedings initiated under the first part of s. 140(5) has to go to its logical end and subsequent resignation and/or discontinuance of an auditor shall not terminate the enquiry/proceedings u/s. 140(5) - If interpretation given by High Court that once an auditor resigns, proceedings u/s. 140(5) stand terminated and are no longer further required to be proceeded, in that case, an auditor to avoid the final order and the consequence of final order as provided under the second proviso to s. 140(5) may resign and avoid any final order by the Tribunal - That cannot be the intention of the legislature - NCLT to pass final order on such application after holding enquiry in accordance with law and thereafter on basis of such final order, 949 further consequences as provided under second proviso to s. 140(5) shall follow. Companies Act, 2013 - s. 140(5) - Constitutional validity of - s.

140(5) empowers the Tribunal (NCLT), either suo motu or on an application made to it by the Central Government or by any person concerned, to take action against the auditor who has acted in a fraudulent manner or is abetting or colluding in fraud with the management of a company - If on completion of an enquiry it is found by the Tribunal that an auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may by order direct the company to change its auditors - Held: s. 140(5) is neither discriminatory, arbitrary and/or violative of Arts. 14, 19(1)(g) of the Constitution - NCLT exercises quasi- judicial powers u/s. 140(5) with all the powers akin to civil court - Ample opportunity is given by NCLT before passing any final order - Plea that s.

140(5) discriminates against the auditors unfairly in comparison to similarly placed alleged perpetrators, such as directors, management etc. not tenable, as the role of auditors cannot be equated with directors and/or management - Acting in a fraudulent manner, directly or indirectly, by an auditor is a very serious misconduct and therefore the necessary consequence of indulging into such fraudulent act shall follow - Merely because the auditor can be removed as an auditor of a company under the other provisions, s. 140(5) which has been enacted with a special object and purpose cannot be said to be arbitrary and/or ultra vires - Constitution of India - Arts. 14 and 19(1)(g). Companies Act, 2013 - s. 140(5), first proviso - Powers under the first proviso to s.

140(5) - Nature of -Held: It can be said to be interim or pro tem measure to prevent an existing auditor from continuing and substitute him with an auditor based on a prima facie satisfaction that a fraud has been perpetrated and when circumstances warrant the substitution - Such an order can be said to be an interim order akin to a temporary suspension during the pendency of the detailed enquiry as provided in s. 140(5) and before any final order is passed by the Tribunal. Companies Act, 2013 - s. 140(5), second proviso - Object and purpose of - When attracted -- Held: The object and purpose UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP of second proviso to s. 140(5) is to make the provision more stringent and to provide for consequences for an auditor when such an auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud - Before second proviso of s.

140(5) is attracted, there must be a detailed enquiry against an auditor of a company as per first part of s. 140(5) and there must be a finding arrived at by the NCLT that the auditor of a company has, directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers. Companies Act, 2013 - s. 140(5) - Powers conferred upon the Tribunal u/s. 140(5) - If without prejudice to any action under the provisions of the Act, 2013 or any other law for the time being in force - Held: Irrespective of any other provisions of the Act, 2013, the Tribunal is vested with powers u/s. 140(5) to pass a final order against the auditor on the allegation that such an auditor of the company has, directly or indirectly, acted in a fraudulent manner. Companies Act, 2013 - s. 212(14) - Quashing and setting aside of s.

212(14) direction issued by Union of India to Serious Fraud Investigation Office (SFIO), by the High Court - Consequently prosecution lodged by SFIO set aside - High Court set aside the s. 212(14) direction mainly on two grounds, firstly, that the direction to prosecute was issued within 30 hours of report of the SFIO Report which demonstrates non-application of mind and secondly on ground that SFIO Report was an incomplete report as investigation had not been completed and therefore s.

212(14) direction was incompetent - Held: Merely because the direction to prosecute was issued within 30 hours, by that itself, it cannot be presumed that there was a non-application of mind - What was required to be considered was, whether there was any material to prosecute or not and whether the direction to prosecute was properly given or not - High Court also did not properly appreciate that the SFIO Report was a report prepared on completion of investigation into IFIN - one of the companies under investigation - IFIN was one of the subsidiaries in the IL&FS group and the financial services arm - Merely because investigation with respect to other subsidiary companies of IL&FS group might have been going on, cannot be a ground to observe that so far as IFIN was concerned the report was incomplete - High Court materially erred that investigation in respect of IFIN was incomplete - Proceedings before the High Court were at the stage of direction u/s.

212(14) to allow the prosecution and the sanction to prosecute - Ample opportunity was available to the concerned accused - Therefore, High Court erred in setting aside the direction u/s. 212(14). Companies Act, 2013 - Chapter X - Audit and Auditors - Held: Role of auditors cannot be equated with directors and/or management. Words and Phrases - Word "any" used in second proviso to s. 140(5) of the Act, 2013 - Meaning - Under second proviso to s.

140(5), on the final order being passed by the Tribunal that the auditor/firm has, directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, he/it shall not be eligible to be appointed as an auditor of any company for a period of five years - Held: The word "any" is significant - On the final order being passed by the Tribunal, such an auditor not only shall be removed or changed as an auditor of a company, but such an auditor/firm shall also be ineligible to be appointed as an auditor of any other company for a period of five years - Companies Act, 2013 - s. 140(5). Disposing of the appeals, the Court HELD:1. The powers of the NCLT in first part of Section 140(5) of the Companies Act, 2013 is quasi-judicial in nature and the Tribunal would have the powers of a civil court to examine the role of auditors and adjudicate on their fraudulent conduct and abdication of their function.

The powers under the first proviso to Section 140(5) can be said to be interim or pro tem measure to prevent an existing auditor from continuing and substitute him with an auditor based on a prima facie satisfaction that a fraud has been perpetrated and when circumstances warrant the substitution. Such an order can be said to be an interim order akin to a temporary suspension during the pendency of the detailed enquiry as provided in Section 140(5) of the Act and before any final order is passed by the Tribunal. [Para 5. 2][1005- D-G] 2. As such, second proviso to Section 140(5) can be said to be a substantive provision and it operates on the final order UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP passed by the Tribunal under Section 140(5) (first part).

The second proviso to Section 140(5) was introduced after detailed analysis and after taking into consideration recommendations of the Parliamentary Standing Committee and with a view to make the provision more stringent and to provide for consequences for an auditor when such auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud. On passing of the final order by the NCLT under first part of section 140(5) and if an auditor is found to have been indulged into fraudulent activities or abetting or colluding in a fraud with the management of the company, consequences provided under the second proviso to section 140(5) shall follow.

Therefore, before second proviso of section 140(5) is attracted, there must be a detailed enquiry against an auditor of a company as per first part of section 140(5) and there must be a finding arrived at by the NCLT that the auditor of a company has, directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers. [Para 5. 3][1006-A-G] 3. Subsequent resignation of an auditor after the application is filed under section 140(5) by itself shall not terminate the proceedings under section 140(5). Resignation and/or removal of an auditor cannot be said to be an end of the proceedings under section 140(5).

There are further consequences also on culmination of the enquiry under section 140(5) proceedings and passing a final order by the Tribunal on the conduct of an auditor, whether such a auditor has, directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, as provided under the second proviso to section 140(5) of the Act, 2013. Therefore, the enquiry/proceedings initiated under the first part of section 140(5) has to go to its logical end and subsequent resignation and/or discontinuance of an auditor shall not terminate the enquiry/proceedings under section 140(5).

If the interpretation given by the High Court that once an auditor resigns, the proceedings under section 140(5) stand terminated and are no longer further required to be proceeded, in that case, an auditor to avoid the final order and the consequence of final order as provided under the second proviso to section 140(5) may resign and avoid any final order by the Tribunal. That cannot be the intention of the legislature. [Para 6][1007-A-D] 4. The second proviso to section 140(5) of the Act, 2013 is a substantive provision, though it is by way of a proviso, and the same shall operate and/or depend upon the final order to be passed by the Tribunal in the first part of section 140(5).

If the interpretation given by the High Court that on subsequent resignation and/or discontinuance of an auditor, proceedings under section 140(5) stand terminated and/or the petition under section 140(5) by the Central Government is no longer maintainable is accepted, in that case, second proviso to section 140(5) would become nugatory and in no case there shall be any action under the second proviso to section 140(5). If such an interpretation, as interpreted by the High Court, is accepted, in that case, the object and purpose of incorporation of second proviso to section 140(5) shall be frustrated. The object and purpose of second proviso to section 140(5) is to make the provision more stringent and to provide for consequences for an auditor when such an auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud.

Notably, under the second proviso to section 140(5) on the final order being passed by the Tribunal that the auditor/firm has, directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, he/it shall not be eligible to be appointed as an auditor of any company for a period of five years. The word "any" used in the second proviso to section 140(5) is significant. On the final order being passed by the Tribunal, such an auditor not only shall be removed or changed as an auditor of a company, but such an auditor/firm shall also be ineligible to be appointed as an auditor of any other company for a period of five years. [Para 6. 1][1007-E-H; 1008-A-B] 5.

On true interpretation and scheme of Section 140(5) of the Act, 2013, once the enquiry/proceedings is/are initiated under first part of section 140(5) of the Act, either suo motu by the Tribunal or on an application made to it by the Central Government or by any person concerned, it must come to its logical end and irrespective of the fact whether during such UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP enquiry/proceedings the auditor has resigned or not, there must be a final order to be passed by the Tribunal on whether such an auditor has, in fact, directly or indirectly, acted in a fraudulent manner or not. Direction to the company to change its auditor as provided in the first part of section 140(5) is only a consequence to the finding recorded by the Tribunal that the auditor has, directly or indirectly, acted in a fraudulent manner. This is the first consequence of the final order under section 140(5) (first part).

On passing the final order by the Tribunal that the auditor of a company has, directly or indirectly, acted in a fraudulent manner, the second consequence as mentioned in the second proviso to section 140(5) shall be attracted. Therefore, for any consequence as provided under the second proviso to section 140(5), there shall be a final order by the Tribunal on enquiry as per first part of section 140(5). Therefore, on true interpretation, even on resignation by an auditor of a company even during the enquiry/ proceedings under section 140(5) or even prior to that, there shall not be any termination of the proceedings under section 140(5) as observed and held by the High Court. In a given case, an auditor, who in fact has, directly or indirectly, acted in a fraudulent manner, to avoid any further consequence under the second proviso to section 140(5), resigns to avoid any consequence under the second proviso to section 140(5), it cannot be permitted. [Para 7][1008-C-G] 6. 1.

No so far as the submission that even if section 140(5) would not have been there, in that case also, no auditor can get away with fraud, abetment of fraud or professional misconduct etc. and for that purpose the reliance placed upon sections 132, 141, 147, 245 and 447 of the Act is concerned, it is required to be noted that all the aforesaid provisions and section 140(5) operate in different field. Merely because the auditor can be removed as an auditor of a company including the other provisions, section 140(5) which has been enacted with a special object and purpose cannot be said to be arbitrary and/or ultra vires. [Para 8][1008- H; 1009-A, B-C] 6. 2. As per the Scheme of the Act, 2013, more particularly Chapter X, the auditor acts as an independent examiner of accounts and cannot be said to be holding an office in the conduct and management of the company.

Therefore, the submission that what could be achieved under section 140(5) of the Act, 2013 can be achieved by Section 241(3) even after the auditor has resigned has no substance. [Para 9][1009-G-H] 6. 3. In section 140(5), it is specifically mentioned that "without prejudice to any action under the provisions of this Act or any other law for the time being in force". Therefore, the intention of the legislature while enacting section 140(5) is very clear and the powers conferred upon the Tribunal under section 140(5) shall be without prejudice to any action under the provisions of the Companies Act, 2013 or any other law for the time being in force. Therefore, irrespective of any other provisions of the Act, 2013, the Tribunal is vested with the powers under Section 140(5) of the Act to pass a final order against the auditor on the allegation that such an auditor of the company has, directly or indirectly, acted in a fraudulent manner. [Para 10][1010- A-C] 7.

Section 140(5) cannot be said to be excessive and/or manifestly arbitrary, as contended. It was the case on behalf of the original writ petitioners on the constitutionality/vires of section 140(5) that section 140(5) is excessive and arbitrary as it provides unguided and untrammelled powers to NCLT for determination of a serious offence of fraud and consequence of mandatory disqualification with grave consequences akin to civil death. The aforesaid has no substance. NCLT shall exercise the quasi-judicial powers under section 140(5) with all the powers akin to civil court. Ample opportunity shall be given by the NCLT before passing any final order. [Para 12][1011-A-C] 8. Insofar as the submission that section 140(5) is violative of Article 14 of the Constitution of India and discriminates against the auditors unfairly in comparison to similarly placed alleged perpetrators, such as directors, management etc.

is concerned, it is required to be noted that the role of auditors cannot be equated with directors and/or management. Auditors play very important role in the affairs of the company and therefore they have to act in the larger public interest and all other stakeholders including investors etc. Chapter X of the Act specifically for the "Audit and Auditors" looking to the importance of the auditors. UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP Therefore, section 140(5) cannot be said to be discriminatory and/or violative of Article 14 of the Constitution of India. [Para 13][1011-C-E] 9. It was submitted that penalty in the form of automatic disqualification of auditors and of the entire firm including partners and that too for a period of five years to become the auditor of any other company is highly disproportionate. However, it is ultimately for the legislature/Parliament to provide the debarment.

On the principle of joint and severe liability, the auditors and the entire firm including partners shall be liable and therefore can be subjected to section 140(5) and the consequences mentioned in section 140(5) of the Act, 2013. Nobody can be permitted to say that despite acting fraudulently, directly or indirectly, they had a right to continue and/or carrying on their profession. Acting in a fraudulent manner, directly or indirectly, by an auditor is a very serious misconduct and therefore the necessary consequence of indulging into such fraudulent act shall follow. Section 140(5) of the Act has been enacted with the specific object and purpose and the same has been enacted after due deliberations and taking into consideration the recommendations of the Standing Committee as well as the respective stakeholders.

Therefore, taking into consideration the object and purpose for which section 140(5) of the Act is enacted, the same cannot be said to be arbitrary, excessive and violative of Article 14 of the Constitution of India and/or violative of fundamental rights guaranteed under Article 19(1)(g) of the Constitution of India, as alleged. [Para 14][1011- E-H; 1012-A-C] 10. 1. The High Court set aside the direction under section 212(14) terming the same as non-application of mind since it was improbable that report of about 750 pages and 32000 pages of annexures could have been considered in 30 hours. The observations made by the High Court cannot be accepted. Merely because the direction to prosecute was issued within 30 hours, by that itself, it cannot be presumed that there was a non- application of mind. A detailed note was prepared by the officer which was ultimately placed before the final authority who ultimately took a decision and issued a direction to prosecute.

What was required to be considered was, whether there was any material to prosecute or not and whether the direction to prosecute was properly given or not. During the trial, the accused shall be given ample opportunity to put forward their case. Therefore, on the aforesaid ground, the High Court has materially erred in setting aside the direction to prosecute issued under section 212(14) of the Act. [Paras 15. 1 and 15. 2][1012-F-H; 1013- A-B] 10. 2. The High Court has not properly appreciated that the SFIO Report was a report prepared on the completion of the investigation into the IFIN - one of the companies under investigation. IFIN was one of the subsidiaries in the IL&FS group and the financial services arm.

Merely because so far as the investigation with respect to other subsidiary companies of IL&FS group is concerned, the same might have been going on, cannot be a ground to observe that at this stage so far as the IFIN is concerned the report was incomplete report and for which the investigation was going on. The High Court materially erred that the investigation in respect of IFIN is incomplete. The proceedings before the High Court were at the stage of direction under section 212(14) to allow the prosecution and the sanction to prosecute. Ample opportunity shall be available to the concerned accused against whom the prosecution was ordered for the offences punishable under section 447 of the Companies Act and other relevant provisions of the IPC. Therefore, the High Court has erred in setting aside the direction under section 212(14). [Para 15. 3][1013-D, E-F, H; 1014-B-C] 11. The challenge to the constitutional validity of section 140(5) of the Companies Act, 2013 fails.

Section 140(5) is neither discriminatory, arbitrary and/or violative of Articles 14, 19(1)(g) of the Constitution of India, as alleged. The impugned judgment and order passed by the High Court quashing and setting aside the application/proceedings under section 140(5) on the ground that as the auditors have resigned and therefore thereafter the same is not maintainable is hereby quashed and set aside. Consequently, the impugned judgment and order passed by the High Court quashing and setting aside the NCLT order holding that even after the resignation of the auditors, the proceedings under section 140(5) shall be maintainable is hereby quashed UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP and set aside.

The application/proceedings under section 140(5) of the Act, 2013 is held to be maintainable even after the resignation of the concerned auditors and now the NCLT therefore to pass a final order on such application after holding enquiry in accordance with law and thereafter on the basis of such final order, further consequences as provided under the second proviso to section 140(5) shall follow. [Para 16][1014-D-G] Devas Multimedia Pvt. Ltd. v. Antrix Corporation Ltd. & Anr. (2023) 1 SCC 216;An Advocate v. Bar Council of India (1989) Supp 2 SCC 25 : [1988] 3 Suppl. SCR 361; ICAI v. LK Ratna & Ors. (1986) 4 SCC 537 : [1986] 3 SCR 1049;Dharani Sugars and Chemicals Ltd. v. Union of India(2019) 5 SCC 480 : [2019] 6 SCR 307; SEBI v. Sunil Krishna Khaitan(2023) 2 SCC 643; Tolaram Relumal v. State of Bombay [1955] 1 SCR 158; Bhuwalka Steel Industries Ltd & Anr v. UOI (2017) 5 SCC 598 : [2017] 2 SCR 993;Sant Lal Gupta v. Modern Cooperative Housing Society Ltd.

(2010) 13 SCC 336 : [2010] 13 SCR 621;B. Himmatlal Agrawal v. Competition Commission of India AIR 2018 SC 2804: [2018] 4 SCR 496 ;Cellular Operators Association of India v. Union of India(2003) 3 SCC 186 : [2002] 5 Suppl. SCR 222;Pasupuleti Venkateswarlu v. Motor & General Traders(1975) 1 SCC 770 : [1975] 3 SCR 958; Carona Ltd. v. Parvathy Swaminathan & Sons (2007) 8 SCC 559 : [2007] 10 SCR 656; Arun Kumar v. Union of India(2007) 1 SCC 732 : [2006] 6 Suppl. SCR 290;Balram Garg v. SEBI(2022) 9 SCC 425; Serious Fraud Investigation Office v Rahul Modi(2019) 5 SCC 266 : [2019] 5 SCR 91; Mansukhbhai Vithaldas Chauhan v. State of Gujarat(1997) 7 SCC 622 : [1997] 3 Suppl. SCR 705;K. K Mishra v. State of Madhya Pradesh(2018) 6 SCC 676 : [2018] 5 SCR 315; Anirudhsinhji Karansinhji Jadeja v. State of Gujarat (1995) 5 SCC 302 : [1995] 2 Suppl. SCR 637;T. Takano v. SEBI (2022) 8 SCC 162 and Mohd. Iqbal Ahmed v. State of Andhra Pradesh(1979) 4 SCC 172: [1979] 2 SCR 1007 - referred to. P. M.

C Mercantile Private Ltd. v. The State2014 (3) MWN (Cr. ) 454;Kamal Lochan Sen v. State of Orissa (1982) 54 CLT 509; AV Dharma Reddy v. State of A. P. & Ors. 2011 CriLJ 185 - referred to. Yusofalli Mulla Noobbhoy v. The King 1949 Cri LJ 889 and Gokulchand Dwarkadas Morarka v. The King, (1947- 48) 75 IA 30- referred to. Case Law Reference (2023) 1 SCC 216 referred to Para 3. 6 [1988] 3 Suppl. SCR 361 referred to Para 4(xiii) [1986] 3 SCR 1049 referred to Para 4(xiii) [2019] 6 SCR 307 referred to Para 4(xiv) (2023) 2 SCC 643 referred to Para 4(xvii) [1955] 1 SCR 158 referred to Para 4(xvii) [2017] 2 SCR 993 referred to Para 4(xix) [2010] 13 SCR 621 referred to Para 4(xix) [2018] 4 SCR 496 referred to Para 4(xxiv) [2002] 5 Suppl. SCR 222 referred to Para 4(xxiv) [1975] 3 SCR 958 referred to Para 4(xxiii) [2007] 10 SCR 656 referred to Para 4(xxix) [2006] 6 Suppl. SCR 290 referred to Para 4(xxix) (2022) 9 SCC 425 referred to Para 4(xxix) [2019] 5 SCR 91 referred to Para 4.

1(iv) [1997] 3 Suppl. SCR 705 referred to Para 4. 1(xix) [2018] 5 SCR 315 referred to Para 4. 1(xxi) [1995] 2 Suppl. SCR 637 referred to Para 4. 1(xxi) (2022) 8 SCC 162 referred to Para 4. 1(xxii) [1979] 2 SCR 1007 referred to Para 4. 1(xxiv) UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP CRIMINAL/CIVIL APPELLATE JURISDICTION : Criminal Appeal Nos. 2305-2307 of 2022. From the Judgment and Order dated 21. 04. 2020 of the High Court of Judicature at Bombay in CRLWP Nos. 5023, 5035 and 5036 of 2019. With Criminal Appeal Nos. 2302-2303 of 2022, Civil Appeal Nos. 793 of 2022, Criminal Appeal No. 2298 of 2022, Civil Appeal No. 801 of 2022, Criminal Appeal No. 2299 of 2022, Civil Appeal No. 877 of 2022, Criminal Appeal Nos. 2300 And 2304 of 2022 Balbir Singh, Sanjay Jain, ASGs, Balasubramanian, Arvind Datar, V. Giri, Kapil Sibal, Mukul Rohatgi, Darius Khambata, Neeraj Kishan Kaul, Siddharth Dave, Sr. Advs.

, Naman Tandon, Samarvir Singh, Aditya Sikka, Kanu Agarwal, Himanshu Gupta, Vikash Kumar Jha, Ms. Ritu Anand, Ms. Vasudha Vijaysheel, Adhiraj Singh Chauhan, Ms. Padmaja Sharma, Ms. Neela Kedar Gokhale, Ms. Sanskriti Pathak, Ms. Bani Dikshit, Arvind Kumar Sharma, Rajat Nair, Bhuvan Kapoor, Anukalp Jain, Deepabali Dutta, Pratyush Shrivastava, Ms. Misha Rohatgi Mohta, Ms. Suveni Bhagt, Ms. Ayushi Sharma, Nakul Mohta, Nischaya Nigam, Mahesh Agarwal, Rishi Agrawala, Rahul Dwarkadas, Ms. Prachi Dhanani, Ms. Rishika Harish, Ms. Niyati Kohli, Ms. Juhi Bahirwani, Pratham Vir Agarwal, Ms. Rohini Jaiswal, Ms. Manavi Agarwal, E. C. Agrawala, V. P. Singh, Aditya Jalan, Ms. Anannya Ghosh, Raghav Seth, Ms. Bhagya K. Yadav, Ms. Vanya Chabra, Anant Mishra, Ms. Shreya Chaudhary, Brian Moses, Ms. Aakanksha Kaul, Adit Khorana, Ms. Vidhi Thakur, Prastut Dalvi, Chandra Prakash, Bharat Bagla, Siddharth Dharmadhikari, Aaditya Aniruddha Pande, Ms. Kirti Dadheech, Sachin Patil, Advs. for the appearing parties.

The Judgment of the Court was delivered by M. R. SHAH, J. Appeals under consideration: 1. This batch of Criminal Appeals/Civil Appeals raise common question(s) of law pertaining to the interpretation of Section 140(5) of the Companies Act, 2013 (hereinafter referred to as the 'Act, 2013') and the Investigation Report dated 28. 05. 2019 (hereinafter referred to as the 'IFIN SFIO Report') in respect of IL&FS Financial Services Limited (hereinafter referred to as the 'IFIN'). 1. 1 Criminal Appeal Nos. 2305-2307/2022, Criminal Appeal Nos. 2302-2303/2022 and Criminal Appeal No. 2300/2022 have been filed by the Union of India, inter alia, challenging the common judgment and order dated 21. 04. 2020 passed by the High Court of Bombay in Writ Petition Nos. 4144 & 4145 of 2019 and other companion writ petitions, by which the High Court, though upheld that Section 140(5) of the Act, 2013 is not unconstitutional, has set aside the direction under Section 212(14) of the Act, 2013 dated 29. 05.

2019 issued by the Union of India to the Serious Fraud Investigation Office (SFIO) and consequently set aside the prosecution lodged by the SFIO vide Criminal Complaint No. CC 20/2019 on the file of Special Court (Companies Act) & Additional Sessions Judge, Greater Mumbai, the Union of India and the SFIO have preferred the present appeals. 1. 2 In Criminal Appeal Nos. 2302-2303/2022, the challenge pertains to the auditor of IL&FS Financial Services Limited, namely, BSR & Associates LLP (BSR) and in Criminal Appeal Nos. 2305-2307/ 2022 and Criminal Appeal No. 2300/2022, the challenge pertains to another auditor of IFIN, namely, Deloitte Haskins & Sells LLP (for short, 'Deloitte') and an ex-director of IFIN, namely, Hari Sankaran. 1. 3 Criminal Appeal Nos. 2298/2022, 2299/2022 & 2304/2022 have been filed by Deloitte and two of its partners challenging the impugned judgment and order passed by the High Court insofar as it upholds the constitutionality of Section 140(5) of the Act, 2013.

1. 4 Civil Appeal Nos. 793/2022, 801/2022 & 877/2022 have been filed by Deloitte and two of its partners challenging the order passed by the National Company Law Appellate Tribunal dated 04. 03. 2020. Factual Background: 2. The facts leading to the present proceedings in nutshell are as under: A series of defaults by the IL&FS Group Companies, which had an aggregate debt burden of more than Rs. 91,000 crores, occurred between June to September, 2018 and threatened to collapse the money markets of India, added pressure to corporate bond yields and sparked a sell off in the stock market. The Department of Economic Affairs, Ministry of Finance issued an Office Memorandum dated 30. 09. 2018 in respect of IL&FS to the Ministry of Corporate Affairs, Union of India requesting UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP [M. R. SHAH, J. ] it to take action under the Act, 2013.

The Memorandum and Note highlighted that: (a) the IL&FS Group was struggling with a debt contagion of approx.. Rs. 91,000 crores across the IL&FS Group against Rs. 6950 crores in equity share capital and reserves a leverage of at least 13 times. Moreover, in the year 2017- 18, the IL&FS Group has shown a loss of Rs. 2670 crores; (b) this debt contagion, prima facie, was on account of inter alia failure of corporate governance across the IL&FS Group and window dressed accounts; and (c) any further defaults would be catastrophic for the well- being of the financial markets and the economy. 2. 1 In parallel, the Ministry of Corporate Affairs, upon receipt of a report from the Registrar of Companies under Section 208 of the Act, 2013, directed the SFIO to investigate into the affairs of IL&FS and its subsidiaries. 2. 2 The Ministry of Corporate Affairs filed a Company Petition on 01. 10. 2018 being Company Petition No.

3638/2018 against IL&FS and its the then existing Board of Directors before the National Company Law Tribunal (NCLT) seeking, amongst others, the removal of the then existing Board of Directors of IL&FS and the appointment of a new Board of Directors in place and instead thereof. The NCLT passed an interim order on the same date, i. e. , 01. 10. 2018 superseding the then existing Board of Directors of IL&FS with a new Board of Directors. The new Board of Directors were directed to take charge of the affairs of the IL&FS. The new Board of Directors of IL&FS submitted a report dated 30. 10. 2018 on progress and way forward with the Ministry of Corporate Affairs which was in turn filed by the Ministry of Corporate Affairs with the NCLT on 31. 10. 2018, pursuant to the order passed by the NCLT on 01. 10. 2018. 2. 3 Further to the Office Order dated 30. 09. 2018 directing investigation to be initiated by the SFIO and an e-mail dated 01. 11.

2018, SFIO submitted an interim report in respect of IL&FS and one Employees Welfare Trust pertaining to the IL&FS Group. It is required to be noted that the said interim report was submitted as Ministry of Corporate Affairs called for an "interim report", which was called in pursuance to Section 212(11) of the Act, 2013 which provides that an interim report must be called for by the Central Government. It is to be noted that in the interim report itself, it was specifically recorded that the findings in the interim report are interim findings and the interim report concluded by setting forth "based on the above interim findings... " It is also to be noted that interim report was on the individuals who were in control of the affairs of the IL&FS Group and the illegalities and fraud perpetrated by them. 2. 4 On the basis of the interim report, the Ministry of Corporate Affairs filed a Miscellaneous Application in Company Petition No.

3638/ 2018 against the erstwhile Directors of the companies in the IL&FS Group seeking to implead them in the said proceedings and an order to attach their immovable/movable properties. 2. 5 On the basis of the interim report and a prima facie opinion of the Institute of Chartered Accountants dated 04. 12. 2018, the Ministry of Corporate Affairs filed a petition under section 130 of the Companies Act, 2018 before the NCLT praying inter alia that the books of accounts of IL&FS, IFIN and IL&FS Transportation Networks Limited (ITNL) may be re-opened and recast. Vide order dated 01. 01. 2019 passed in Section 130 petition, the NCLT directed that the accounts of IL&FS, IFIN & ITNL for the past 5 financial years be re-opened and recast on the ground that the affairs of IL&FS, IFIN & ITNL had been mismanaged casting a doubt on the reliability of the financial statements/accounts. 2.

6 The auditors of IFIN (BSR & Deloitte) were given notice of Section 130 petition who opposed the said petition. Order dated 01. 01. 2019 passed by the NCLT was challenged by one of the ex- directors of IFIN before the National Company Law Appellate Tribunal, New Delhi (NCLAT), which dismissed the appeal vide order dated 31. 01. 2019. Order dated 31. 01. 2019 passed by the NCLAT was appealed before this Court. Vide order dated 04. 06. 2019, this Court dismissed the civil appeal filed by the said ex-director. Thus, this Court upheld initiation of the proceedings by the Ministry of Corporate Affairs under section 130 of the Companies Act, 2018. 2. 7 The Reserve Bank of India (RBI) initiated an inspection of the IL&FS and IFIN under Section 45N of the RBI Act, 1934. Pursuant to the investigation/inspection, the RBI submitted an investigation/ inspection report dated 22. 03. 2019 to IFIN. IFIN thereafter issued a notice dated 13. 05.

2019 under Section 140(1) of the Act, 2013 inter alia on BSR seeking to remove them as auditors. BSR filed a written response to the notice served by IFIN under Section 140(1) of the Act, UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP [M. R. SHAH, J. ] 2013 denying the allegations in the notice. A hearing was held on 29. 05. 2019 by IFIN where BSR was also represented/present. 2. 8 Pursuant to the Office Order dated 30. 09. 2018, SFIO submitted the investigation report of IL&FS Financial Services Limited (SFIO Report). 2. 9 The Ministry of Corporate Affairs vide letter dated 29. 05. 2019 requested the Regional Director (Western Region) and the SFIO to initiate proceedings/prosecution. The SFIO was asked to initiate proceedings/ prosecution under Section 447 and other provisions of the Companies Act, r/w Sections 417, 420 and 120B of the Indian Penal Code. The Regional Director was asked to institute a Petition under Section 140(5) of the Act, 2013. 2.

10 That thereafter the SFIO filed a criminal complaint on 30. 05. 2019 before the Sessions Court (Special Judge - Companies Act), Mumbai against, amongst others, the auditors/ex-auditors of IFIN being CC No. 20/2019. 2. 11 That thereafter the Ministry of Corporate Affairs filed a Petition under Section 140(5) of the Act, 2013 dated 10. 06. 2019, inter alia, against the auditors of the IFIN, namely, BSR & Deloitte and the engagement partners as well as their team. In the petition under Section 140(5), it was inter alia prayed to remove BSR as auditors of IFIN; declare that Deloitte shall be deemed to be removed as Statutory Auditor for IL&FS for F. Y. 2012-13 to F. Y.

2017-18; permit the Ministry of Corporate Affairs to appoint an auditor for IFIN under the first proviso of Section 140(5) of the Act, 2013; and declare/direct that BSR, its engagement partners, Deloitte and its engagement partners shall not be eligible to be appointed as an auditor for any company for a period of five years under the second proviso of Section 140(5) of the Act, 2013. 2. 12 BSR issued a letter of resignation dated 19. 06. 2019 to IFIN and simultaneously completed the regulatory filings pursuant to such resignation. 2. 13 BSR and its engagement partners filed a reply dated 19. 06. 2019 to Section 140(5) petition before the NCLT, inter alia, contending that (i) they are not the auditors for IFIN any longer as they have tendered their resignation and therefore Section 140(5) is not applicable to them; and (ii) Section 140(5) does not demonstrate any case for fraud against BSR. 2. 14 Deloitte filed an application dated 19. 06.

2019 challenging the maintainability of Section 140(5) petition before the NCLT on the ground that Deloitte is no longer the auditor for IFIN. BSR and its engagement partners also filed an application challenging the maintainability of Section 140(5) petition before the NCLT on the ground that BSR is no longer the auditor for IFIN. 2. 15 After hearing the auditors (BSR & Deloitte) on the applications challenging the maintainability of Section 140(5) petition, the NCLT passed an order upholding the maintainability of Section 140(5) petition. That thereafter, the BSR filed a writ petition before the High Court, inter alia, challenging the vires of Section 140(5) of the Act, 2013; the directions issued and the order of the NCLT upholding the maintainability of Section 140(5) petition. 2.

16 By the impugned judgment and order, though the High Court has upheld the validity of Section 140(5) of the Act, 2013, the High Court has interpreted section 140(5) of the Act, 2013 and has set aside the order passed by the NCLT upholding the maintainability of Section 140(5) petition and has quashed Section 140(5) petition and has set aside/ quashed the directions issued by the Ministry of Corporate Affairs and the SFIO and also has quashed/set aside criminal proceedings instituted by the SFIO. Hence, the present appeals. Submissions on behalf of the Union of India: 3. Shri Balbir Singh, learned Additional Solicitor General of India appearing on behalf of the Union of India has vehemently submitted that in the impugned judgment and order the High Court has misinterpreted Section 140(5) of the Act, 2013, though the High Court has upheld the constitutionality of the said provision. 3.

1 It is submitted that as regards the interpretation of Section 140(5) of the Act, 2013, the High Court has explained the legislative intent as being to induce/effect a change of an auditor in a company where there is a suspected fraud. It is submitted that thereafter the High Court has erroneously proceeded to hold that the intention behind Section 140(5) of the Act, 2013 is only to break the collusion between the auditor and the company. It is submitted that accordingly, the High Court erroneously holds that if the unholy bond between the auditor and company is broken, either by removal or resignation, then Section 140(5) of the Act, 2013 fulfils its purpose. It is submitted that according to the UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP [M. R. SHAH, J.

] High Court, Section 140(5) of the Act is only attracted when despite the petition by the Central Government, an auditor sets up a defence and opposes the petition frivolously and thus invites a final order as set forth in the second proviso to Section 140(5) of the Act, 2013. It is submitted that on this basis, the High Court proceeded to hold that the petition filed by the Union of India under Section 140(5) of the Act, 2013 has been satisfied by the subsequent resignation of the auditor and therefore the petition under Section 140(5) of the Act, 2013 filed by the Union of India is no longer maintainable. It is submitted that the High Court erroneously proceeded to quash Section 140(5) petition and the order passed by the NCLT, Mumbai upholding its maintainability. 3. 2 Now insofar as quashing and setting aside the criminal proceedings, it is submitted that the respondents assailed Section 212(14) direction on two grounds.

Firstly, on the ground that the issuance of the direction to prosecute within 30 hours of receipt of the IFIN SFIO Report demonstrates non-application of mind. Secondly, that the IFIN SFIO Report was an incomplete report as investigation had not been completed and therefore Section 212(14) direction was incompetent. It is submitted that insofar as the first ground is concerned, the High Court erroneously holds that there is non-application of mind since it was improbable that a report of about 750 pages and 32000 pages of annexures could have been considered in 30 hours. Further, the High Court erroneously holds that the relevant facts and documents to demonstrate application of mind have not been placed on record. It is submitted that while doing so, the High court also holds that the existence of a valid sanction can be appreciated in a writ Court and need not wait trial. 3.

3 As regards the IFIN SFIO Report, it is submitted that the High Court holds summarily and without even going into the same and erroneously holds that the SFIO Report is incomplete and lacking and therefore Section 212(14) direction is incorrect and/or invalid. 3. 4 On interpretation of Section 140(5) of the Act, 2013, Shri Balbir Singh, learned ASG has taken us to the legislative history and legislative intent of Section 140(5) of the Act, 2013. It is submitted that Section 140 of the Act, 2013 is titled as "Removal, resignation of auditor and giving of special notice". It appears in Chapter X of the Act which is titled as "Audit and Auditors". Section 140(1) of the Act, 2013 provides for the procedure to remove an auditor by the company before the expiry of his term.

Sections 140(2) and (3) of the Act deal with resignation of auditors and Section 140(4) of the Act deals with giving of special notice at an AGM for appointment of an auditor other than the retiring auditor and the process in that regard. It is submitted that if an auditor of a company is acting directly or indirectly in a fraudulent manner or is abetting or colluding in fraud with the management of a company, Section 140(5) of the Act, 2013 empowers either the Central Government or any person concerned to approach the NCLT for recourse. Section 140(5) of the Act also enables the NCLT to take action suo motu against an auditor who has acted in the aforesaid manner. It is submitted that in addition, Section 140(5) of the Act, 2013 has also two provisos and two explanations.

It is submitted that therefore as per the first proviso to Section 140(5), on an application made by the Central Government and if the Tribunal is satisfied that any change of the auditor is required, the Tribunal shall within fifteen days of receipt of such application make an order that the said auditor shall not function as an auditor and the Central government may appoint another auditor in his place. It is submitted that second proviso to Section 140(5) of the Act provides that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under section 140(5) shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under Section 447.

It is submitted that therefore merely because during the pendency of the proceedings under Section 140(5) of the Act the auditor resigns, the proceedings under Section 140(5) do not come to an end. Still and after the final order is passed, in that case, a further order as per second proviso to Section 140(5) can be passed to render such a auditor ineligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and even such auditor shall also be liable for the action under section 447 of the Companies Act. It is submitted that therefore the High Court has materially erred in observing and holding that once the auditor has resigned thereafter the application under section 140(5) of the Act shall not be maintainable and/or is not required to be proceeded further. 3.

5 Thereafter, Shri Balbir Singh, learned ASG has taken us and referred to the legislative history of Section 1'40(5) of the Act as under: Legislative History of Section 140(5) of the Act, 2013 Around August 2004, the Government initiated the process of review of the Companies Act, 1956 and drafting of a new UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP [M. R. SHAH, J. ] Companies Bill to replace the Companies Act, 1956. A concept paper was published on the website of the Ministry of Corporate Affairs on which various comments were received. An expert committee was also constituted by the Ministry of Corporate Affairs under the chairmanship of Dr. J. J. Irani, to make recommendations on provisions of company law. a. Companies Bill 2008 and the Companies Bill 2009 i. After considering the report of the J. J. Irani Committee, the Ministry prepared the Companies Bill, 2008 and introduced the same before the Lok Sabha on October 23, 2008.

The 2008 Bill was referred to the Department related Parliamentary Standing Committee (PSC) on Finance for their examination. However, the Lok Sabha was dissolved before the PSC could present its report and therefore the 2008 Bill lapsed as per Article 107(5) of the Constitution of India. ii. Accordingly, the Companies Bill 2009 was introduced in the Lok Sabha on or about July 15, 2009. The 2009 Bill too was referred to the PSC. In identifying the features of the 2009 Bill, the PSC Report of August 2010 notes the salient features as being "the role, rights and duties of the auditors have been defined so as to maintain integrity and independence of the audit process. " iii.

In setting out the guiding principles underlying the 2009 Bill, the PSC, in the Report, notes that, amongst other principles, the following are the key principles underlying the 2009Bill: "Need for sturdy systems, enhanced transparency and comprehensive disclosures based regime emphasized; as companies grow, become bigger and globalise with the number and range of stakeholders increasing by volumes, necessitating proper checks and balances. Self-regulation through internal mechanism/procedures, to be underpinned on strong systems and procedures; Central Government to step in only when mis-governance takes place. In the light of recent experiences in corporate mis- governance, process of audit and functioning of auditors to be made more independent and effective; stringent joint and individual liability prescribed; setting up of oversight body to set standards and supervise quality of audit recommended" iv.

Further, the report notes that various suggestions were made by the PSC during deliberations on the Bill which were incorporated by the Central Government. On a reading of these suggestions, it is essential to note that independence of the auditors was a key point. v. Crucially, in the Report, the PSC notes that the 2009 Bill incorporates suggestions of the JPC on the 1993 Banking and Securities Market Scam and the 2002 JPC on the Stock Market Scam. This means that the 2009 Bill was a culmination of the growing corporate economy and past experiences of corporate fiascos too. One of the suggestions were to provide for stricter accountability for auditors. Moreover, at the foot of the same page, the PSC notes that the 2009 Bill has made the regulatory provisions and regime more stricter by inter alia providing for making statutory auditors more accountable by providing for substantial civil and criminal liability for auditors. vi.

The Report clearly demonstrates that there was a long discussion on the role, responsibility, duties and regulation of auditors and the regulatory and enforcement provisions. Particularly, the Report records that various suggestions were received to make the provisions pertaining to audit and auditors more stringent. Significantly, it was suggested that Clause 123(10) of the 2009 Bill (which provides for removal of an auditor by the NCLT on finding that there is a fraud and corresponds to Section 140(5) of the Act) should be made more stringent and should contemplate that an auditor removed by the Tribunal should not be eligible to be appointed as an auditor of any company for a period of 5 years. The relevant extracts are as follows: "34. Suggestions have been received by the Committee that there is a need to make provisions relating to Audit and Auditors more stringent such as following:- UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP [M. R. SHAH, J.

] (d) Suitable penalty may be provided in case of contravention of these provisions. (e) (i) Clause 123(10) of the Bill empowers the Tribunal, if it is satisfied that the auditor of a company has acted in a fraudulent manner or abetted/colluded in any fraud, to direct the company to change its auditors. Suggestions have been made that these provisions should be modified to clarify to cover act of fraud or abetment by auditor whether directly or indirectly. It has also been suggested that the Bill may provide that if auditor, whether individual or firm, against whom an order has been passed by the Tribunal under this clause should not be eligible to be appointed as an auditor of any company for a period of five years. " b. The Companies Bill, 2011 i.

In view of the recommendations of the Standing Committee and that of various stakeholders, the Central Government withdrew the 2009 Bill with a view to introduce a fresh Bill incorporating the recommendations of the Standing Committee and various stakeholders. Consequently, the 2011 Bill was introduced in the Lok Sabha in December, 2011, accepting and incorporating most of the recommendations made by the previous Standing Committee in respect of the Companies Bill, 2009. This aspect has been recorded in the Statements of Objects and Reasons of the Companies Bill, 2011. ii. At this juncture, it is important to bear in mid that the suggestion of the Standing Committee to Clause 123(10) of the 2009 Bill (which provides for removal of an auditor by the NCLT on finding that there is a fraud) was to: • Make the provision more stringent; and • To provide for consequences for an auditor when such auditor is found to have been perpetrating a fraud and is removed by the NCLT for such fraud.

iii. The 2001 Bill consolidates the provisions pertaining to removal of auditors into one clause namely Clause 140 of the 2011 Bill. Further, the 2011 Bill (like the 2009 Bill) retains the NCLT's power to remove an auditor upon finding that the auditor has perpetrated a fraud at Clause 140(5) of the 2011 Bill. Most pertinently, the 2011 Bill incorporating the recommendations of the Standing Committee as contained in the Report, provides for consequences for an auditor who is found to have perpetrated a fraud by the NCLT and is removed for such fraud by the NCLT. This has been done by way of a proviso to Clause 140(5) of the Bill (particularly the second proviso).

The relevant extract of Section 140(5) of the 2011 Bill is as follows: "(5) Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors: Provided that if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Central government may appoint another auditor in his place: Provided further that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447.

Explanation - For the purposes of this Chapter the word "auditor" includes a firm of auditors". iv. Thereafter, in January 2012, the 2011 Bill was placed before the Standing Committee by the Lok Sabha. The Standing Committee has prepared and finalized its report in this regard, and insofar as the penalty and guiding principles of UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP [M. R. SHAH, J. ] Clause 140(5) are concerned, there is no further guidance on the legislative intent behind the same. v. In view of the above, the test of Clause 140(5) of the 2011 Bill has remained unchanged, the same has been enacted as the present Section 140(5) of the Companies Act, 2013. 3.

6 It is submitted that therefore by way of Companies Bill, 2009 subsequently introduction the Act, for the first time it includes an obligation to an auditor to report any fraud detected to the Central Government as per Section 143(12) of the Act and incorporated in the form of the second proviso to Section 140(5) of the Act a provision to make an auditor who has been found to have been acting in a fraudulent manner or colluding from being an auditor in any company for a period of 5 years. It is submitted that therefore, the public policy behind Section 140(5) of the Act is very clear - to prevent an auditor who has been found to perpetrate fraud or colluding in it in one company from undertaking any statutory audits for a period of 5 years. Reliance is placed on the decision of this Court in the case of Devas Multimedia Pvt. Ltd. v. Antrix Corporation Ltd. & Anr, reported in (2023) 1 SCC 216. 3.

7 It is further submitted by Shri Balbir Singh, learned ASG that Section 140(5) appears in Chapter X of the Act. It is submitted that Chapter X specifically deals with 'Audit and Auditors'. Section 143 of the Act deals with the powers and duties of the auditors. Sub-section (12) of Section 143 specifically provides that in the event that the auditors has reason to believe that an offence of fraud is being or has been committed in the company, the auditor shall report the matter to the Central Government. The detailed procedure is provided under the Rules issued in this regard. 3. 8 It is further submitted that Section 144 of the Act provides that the auditor cannot provide certain services and the relevant one for the present matter is "Management services". It is submitted that the objective is that the auditor should function as an independent person uninfluenced by any of its activities outside the scope of audit services.

The auditor is prohibited from providing any management service to the Company. It is submitted that the prohibition and restriction created under Section 144 of the Act is primarily to protect the interest of the Company in question and other stakeholders such as lenders and investors and the public at large. 3. 9 It is submitted that keeping these provisions and the underlying public policy in the backdrop, Section 140 (5) of the Act, 2013 is to be considered. It is submitted that the plain words of Section 140(5) of the Act, 2013 provide for the NCLT to, either suo motu or on an application made by the Central Government/any person concerned, inquire into/ examine the conduct of an auditor or his involvement in a fraud and reach a satisfaction as regards the auditors fraudulent conduct. The provision further prescribes that the satisfaction of the Hon'ble NCLT "may" finally result in a change of an auditor. 3.

10 It is submitted that the first proviso to Section 140(5) of the Act is contemplated as an interim or pro-term measure to prevent an existing auditor from continuing and substitute him with an auditor nominated by the Central Government based on a prima facie satisfaction that a fraud has been perpetrated and when circumstances warrant the substitution. This is an interim order and operates akin to a temporary suspension. 3. 11 It is submitted that the second proviso to Section 140(5) of the Act which is in the nature of a substantive provision activates on an order recording the Hon'ble NCLT's satisfaction of fraudulent or collusive conduct by an auditor and his consequent removal from the Company and debars him from being an auditor in any company for a period of 5 years. An order under the first proviso is not the order contemplated under the second proviso to Section 140(5) of the Act.

Thus, if the NCLT finally finds no grounds to hold that there has been fraudulent conduct or collusion in fraud, then the auditor who may have been temporarily suspended under an order under the first proviso can be re-instated. 3. 12 It is submitted that Section 140(5) of the Act therefore confers power onto the Hon'ble NCLT to adjudicate on or inquire into the conduct of an auditor and determine whether the auditor has conducted itself in a fraudulent manner. This is clear from the operative part of the provision which mandates the nature of inquiry required under the section. This is "directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers. " 3. 13 It is submitted that therefore, any final order would certainly contain either a positive or negative determination of "fraud" or "fraudulent conduct".

As a consequence of finding fraud under Section 140(5) of the Act, the provision illustrates that the finding of fraud/ fraudulent conduct "may" lead to an order directing change of an auditor. UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP [M. R. SHAH, J. ] The second proviso further expressly provides that an auditor "against whom a final order has been passed" is in-eligible to act as an auditor of any company for a period of 5 years. Significantly, the words used in the second proviso to Section 140(5) of the Act is "final order" and not "the auditor so removed" or "changed auditor". 3. 14 It is submitted that therefore the requirement or necessity of change of auditor in a company does not activate/govern the power of the NCLT under Section 140(5) of the Act, 2013.

Instead, it is the inquiry into the fraudulent act by an auditor who abdicates his statutorily prescribed independent role and responsibilities and colludes with the management or otherwise perpetrates a fraud. It is submitted that the essence of the provision/section is determination of fraudulent conduct of the auditor. The consequent "removal" contemplated by Section 140(5) of the Act, 2013 is not just as acting as an auditor in one company or the company concerned but from any company for a period of five years. 3. 15 It is submitted that therefore the interpretation of Section 140(5) of the Act, 2013 made by the High Court in the impugned judgment and order is just contrary to the object and purpose of enactment of Section 140(5) of the Act, 2013 and, as such, is contrary to the said provision. 3.

16 Shri Balbir Singh, learned ASG has submitted that during the course of arguments, the submissions made on behalf of the respondents are as under: a) Section 140(5) of the Act, in light of the other provisions of the Act, is only to incentivize a recalcitrant auditor into resigning. Therefore, if an auditor resigns after the filing of a Petition under Section 140(5) of the Act but before the Hon'ble NCLT pronounces an order on that Petition, the purpose behind Section 140(5) of the Act is fulfilled.

This interpretation of Section 140(5) of the Act is, as per the Respondent's case, clear from the plain words of the provision; b) continuing a proceeding against an auditor under Section 140(5) of the Act would despite his resignation would lead to reading in a proviso into Section 140(5) of the Act which deems his continuance till the culmination of proceedings under Section 140(5) of the Act; c) The second proviso to Section 140(5) of the Act is arbitrary, harsh and burdensome and ought to be read down. The mandatory ineligibility to act as an auditor for a period of 5 years ought to be read as for a period up to 5 years to make the provision constitutional. d) The ineligibility to act as an auditor of any company prescribed under the second proviso to Section 140(5) of the Act can only extend to the audit partners concerned and not to the entire firm and the other audit partners who were not connected with the fraudulent act or acts. 3.

17 Meeting with the aforesaid submissions, it is submitted as under: a) Acceptance of Respondent's contention would mean that the jurisdiction of a quasi-judicial tribunal can be overcome merely by an act of a party. More significantly, it would lead mean that an inquiry into fraudulent conduct can be disrupted and/or stands satisfied simply by an act of a party. b) The entire contention of the provision operating in terrorem or to incentivize an auditor to resign is untenable. The consequences of indulging in fraudulent activities provided for in the Act including but not limited to Section 447 of the Act itself ought to serve as a deterrent and operate "in terrorem". c) The entire construction sought to be attributed to Section 140(5) of the Act by reference to the other provisions of the Act (as per paragraphs 9. 17 (a) and (b) above) is to turn the provision into a dead letter [See NEPC Micon Ltd. v. Magma Leasing Limited (1999) 4 SCC 253].

Moreover, the Respondent's interpretation, if accepted, would lead to various absurdities. Pertinently, amongst other reasons: i. given that it is accepted that the first proviso provides for a temporary suspension or removal of an auditor, if an application is filed under the first proviso and the errant auditor replaced (albeit temporarily), then an order Second Proviso can never follow. This is because the errant auditor cannot, as on date of the final order, be said to be the auditor of a company due to the first proviso order. UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP [M. R. SHAH, J. ] ii. there exists no reason for Section 140(5) of the Act to operate in terrorrem or to induce a recalcitrant auditor to resign. This is so since the first proviso to Section 140(5) of the Act operates immediately to effect a change of the auditor/remove the existing auditor after filing of a Petition by the Central Government under Section 140(5) of the Act.

In other words, the first proviso would thus be rendered redundant if the intention behind Section 140(5) of the Act is to induce an auditor into resigning. d) The ineligibility to act as an auditor for any company for a period of 5 years cannot be read down to mean "for a period "up to five years". This is so since: i. apprehension or misuse of the provision in future cannot be ground to test the constitutional validity of the provision. [See Madras Bar Association v. Union of India 2021 SCC Online SC 463 (para 101-102)] ii. fraud vitiates everything and the punishment mandates in the statute cannot be varied by examining the length and breadth of the fraud. iii. the ineligibility to act under Section 140(5) of the Act is only for acting as an auditor of any company. It does not stop the auditor concerned from practising as a chartered accountant generally.

The individual or firm concerned can take up any other activity pertaining to accounts of the company (which is otherwise barred for an auditor by virtue of Section 144) such as account and book keeping service, actuarial service etc or otherwise. In fact, in the present case, the auditing firms involved have a very significant part of their business outside the audit function. The prohibition of 5 years does not affect their practise as a chartered accountant or any other area of service; and iv. the fixed prohibition period of 5 years activates only in the event of finding of a fraud by the Hon'ble NCLT in terms of the statutory scheme and public policy. The principle of proportionality cannot be raised to a level where the extent of the fraud is required to be examined. The very deterrent effect of the provision would get diluted and more importantly, it would amount to perpetuating the fraud in connection with other companies. v.

As regards the extent of application of the ineligibility prescribed under the second proviso to Section 140(5) of the Act to the firm and individuals, it is submitted that a close reading of the provisions of the Act reflects that the legislature considered every aspect relating to the consequence of Section 140(5) of the Act. An examination of the second proviso to Section 140(5) of the act shows that the Hon'ble NCLT is required to give specific findings with regard to fraud and whether the auditor is a firm or an individual. There cannot be any presumption that mere finding of fraud in connection with an individual will automatically result in the determination of fraud by the firm.

This is also provided under Section 147 of the Act which is as follows: (5) Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally. Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable. 3. 18 Now so far as the submission on behalf of the respondents that once an auditor resigns, the provisions of Section 140(5) of the Act would cease to apply.

Instead, the auditor concerned can be proceeded against under Section 241(3) of the Act and the proceedings pursuant to Section 241(3) of the Act would lead to the same result and the auditor would be held not to be 'fit and proper person' to be appointed in any other office connected with the conduct and management of any company. It is submitted that: UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP [M. R. SHAH, J. ] a. Section 241(3) and its consequential provisions were introduced with effect from 14. 8. 2019, which authorized the Central Government to apply to the Tribunal with a request to declare that the persons mentioned in Section 241(3) of the Act are 'not fit and proper persons to hold the office of director or any other office connected with conduct and management of any company". b.

Constructing "any other office connected with the conduct and management of any company", it would be necessary to consider the consequential provisions that were enacted along with Section 241(3) of the Act. Particularly, Section 243(1A) and Section 243(2) of the Act.

(1A) The person who is not a fit and proper person pursuant to sub-section (4A) of section 242 shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for a period of five years from the date of the said decision (2) Any person who knowingly acts as a managing director or other director or manager of a company in contravention of clause (b) of sub-section (1) or sub-section (1A), and every other director of the company who is knowingly a party to such contravention, shall be punishable with fine which may extend to five lakh rupees Clearly, from the words of the consequential provision, it is clear that the reference in specifically Section 241(3) of the Act to "any other office connected with the conduct and management of any company" means those akin to manager, managing director or other director such as key managerial personnel and not an auditor. c.

Moreover, in Section 241(3) of the Act specifically, the words used are "conduct and management of the company". The auditor as the Act sets forth is an independent examiner of accounts and cannot be said to be holding an office in the conduct and management of the company. This would militate against the very fibre of the Companies Act, 2013. 3. 19 Making above submissions, it is submitted that, (i) Section 140(5) of the Act, 2013 operates to enable a quasi-judicial tribunal equipped with powers of a civil court to examine the role of auditors and adjudicate on their fraudulent conduct and the abdication of their function; (ii)Section 140(5) is not a provision to merely induce/effect a change of an auditor who is not resigning. It is intended as a provision which involves a substantive determination of fraud so as to isolate or remove an auditor from the company and from any company that he/she is auditing.

If construed to be a provision only to induce a change of a recalcitrant auditor, the words conferring power on the NCLT to inquire into an auditor's fraudulent conduct would be rendered meaningless; (iii) the second proviso to Section 140(5) of the Act is essentially remedial and preventive, though it might incidentally also have a punitive effect. The public purpose / object of the secondproviso to Section is clearly to protect companies from being prejudicially affected, by debarring such an auditor, who has been held to have acted fraudulently, from being appointed as an auditor of any company. 3. 20 It is submitted that in the facts of the present case, it is pertinent to note that: a) Deloitte was the statutory auditor of IFIN from 2008 till 2018. Deloitte retired by efflux of time in 2018; b) BSR was appointed as the joint statutory auditor in 2017; c) both Deloitte and BSR jointly conducted the statutory audit of IFIN for the Financial Year 2017-2018; d) the Petitioner i. e.

, the Union of India filed the Petition under Section 140(5) of the Act against both BSR and Deloitte on June 1, 2019. BSR was the statutory auditor at that time. e) this Petition is based on the SFIO IFIN Report which alleges that both auditors i. e. , Deloitte and BSR acted in a fraudulent manner. This includes the period when Deloitte was the sole auditor and for the year when the audit was jointly performed by BSR; f) after the Petition was filed, BSR tendered its resignation and filed an application in or about July 2019 challenging the maintainability of the Union of India's Petition under Section 140(5) of the Act. Deloitte who had retired in 2018 also filed maintainability application; and g) after leave from the Hon'ble Supreme Court, the Union of India invoked the Hon'ble NCLT's powers under the first UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP [M. R. SHAH, J. ] proviso to Section 140(5) of the Act and an auditor was appointed for IFIN. 3.

21 It is submitted that therefore in the facts and circumstances of the present case and on true interpretation of Section 140(5) of the Act, explained above, the High Court has erroneously quashed the NCLT's order upholding the maintainability of Union of India's petition under Section 140(5) of the Act, 2013 and the proceedings under Section 140(5) of the Act, 2013 against the auditors - BSR. 3. 22 Given the interpretation of Section 140(5) of the Act submitted above, it is contended that the act of resignation of BSR after the filing of the Petition under Section 140(5) of the Act cannot be held to render the proceedings under Section 140(5) of the Act as void. The Hon'ble Bombay High Court's interpretation would render any proceedings whether against the company's management and / or its auditors for fraud completely frustrated by mere stratagem of design of a party.

Under the circumstances, the Impugned Order passed by the Hon'ble Bombay High Court is unsustainable and deserves to be set aside. 3. 23 As regards, Deloitte, it is submitted that the Hon'ble NCLT and the NCLAT have upheld the maintainability of the Petition under Section 140(5) of the Act. It is submitted that as set out above, Section 140(5) of the Act requires the Hon'ble NCLT to satisfy itself that the auditor of the company, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud. In order to arrive at a finding in this regard, it is important to examine the role of both auditors i. e. , Deloitte and BSR especially when both were acting as auditors for the financial year 2017- 2018. Keeping in mind the interpretation of the provision set out above, the satisfaction of the Tribunal may finally result in a change of auditor i. e.

, the change of BSR; however, that does not take away the powers given to the Hon'ble NCLT in terms of Section 140(5) of the Act to inquire into the fraud qua Deloitte as well and if found record a satisfaction of fraud against Deloitte in its final order. Therefore, in the facts of this case, the final order and therefore the second proviso can operate against Deloitte and BSR. 3. 24 Now so far as quashing and setting aside Section 212(14) direction by the Ministry of Corporate Affairs and the Criminal Complaint filed by the SFIO and the IFIN SFIO Report, it is submitted that the Bombay High Court has, in the Impugned Order, set aside/quashed the 212(14) Direction and the Criminal Complaint and the SFIO IFIN Report on the ground that: a. SFIO IFIN Report is an incomplete report/report on an incomplete investigation and therefore the 212(14) Direction could not be given.

The alleged basis of this finding is: (i) a singular paragraph in the SFIO IFIN Report; and (ii) the 212(14) Direction which calls for a further report on certain aspects itself demonstrates that the investigation is incomplete; and b. The 212(14) Direction was given within 30 hours of placing the SFIO IFIN Report before the Central Government and it was improbable for the Central Government to have applied its mind within such a short period. It is submitted that the impugned order is incorrect since: a. The SFIO IFIN Report is a report prepared by the SFIO on the completion of investigation into IFIN viz. one of the companies under investigation. The Hon'ble Bombay High Court has not appreciated the position that: i. By an order dated September 30, 2018, an investigation was directed to be conducted by the SFIO into IL&FS and its subsidiaries (IL&FS Group) which aggregates to approx. 100- 169 entities; ii.

The conduct of affairs of the IL&FS Group which was set out in the Interim Report of the SFIO dated November 30, 2018 clearly set forth that there were a number of interlinkages within the group, routing transactions etc; iii. IFIN is one of the subsidiaries in the IL&FS Group and the financial services arm. It facilitated borrowings for different group companies in the IL&FS Group from third party borrowers and at times routed funding from one group company to another; iv. Given the nature of interlinkages and overlaps between different entities in the IL&FS Group, the SFIO IFIN Report sets out that the SFIO IFIN Report is a report in respect of IFIN and is a report upon completion of investigation into IFIN; and UNION OF INDIA AND ANOTHER V. DELOITTE HASKINS AND SELLS LLP [M. R. SHAH, J. ] v.

Finally, the SFIO IFIN Report sets forth, in light of the complex structure of the IL&FS Group and the interlinkages between entities etc, that if any further instances or transactions are uncovered qua IFIN during the investigation of the other group companies of IL&FS then a further report will be filed. This does not mean that the investigation into IFIN is incomplete. In fact, even the direction to call for a further report on certain aspects (which may be related to third parties) does not detract from the position that the investigation is complete in all other respects. The Hon'ble Bombay High Court has failed to appreciate the purport of the submission and has fundamentally erred in holding that the SFIO IFIN Report is incomplete and/or that the investigation into IFIN is incomplete. In the case at hand, the SFIO IFIN Report was submitted by the SFIO after a detailed and extensive investigation of IFIN and the multiple parties involved.

It is submitted that there were conclusive findings against each auditor/ CA pointing out multiple breaches, violations of statutory duties and fraudulent conduct with respect to inter alia functioning of auditors at the relevant point of time. b. The Bombay High Court has proceeded to accept the surface level argument of the respondents that the 212(14) direction was issued within 30 hours which demonstrates non-application of mind without considering the following: i. The 212(14) direction itself demonstrates application of mind from the fact that the direction requests the SFIO to prosecute additional persons whose involvement was discernible from a reading of the SFIO IFIN Report. This would have been possible only if the SFIO IFIN Report had been considered. In fact, the 212(14) Direction also rectifies a typographical error by the SFIO in the charging section applied in the SFIO IFIN Report; ii.

The affidavit in reply of the UOI before the Hon'ble High Court provided an explanation/justification for the time taken to process and also set out the process leading up to the 212(14) Direction. As against the Respondent's surface level allegation, the Union of India provided a clear, transparent and cogent response; iii. The Respondents' contentions were self-serving and contradictory. Particularly, the contention that the Union of India did not apply its mind given the period of 30 hours taken to issue the 212(14) Direction is directly contrary to the contention that the direction (contained in the 212(14) Direction) to call for a further report demonstrates that investigation is incomplete. Notwithstanding the fact that investigation