2019 (9) TMI 333 - HC - Companies Law

Proceedings against the auditors of the company - removal from the statutory audit - proceedings after resignation - Constitutional validity of sub-section (5) of Section 140 of the Companies Act, 2013 - prosecution of the Petitioners and initiation of proceedings under section 140(5) of the Act - HELD THAT - the word action in the second proviso to sub-section (5) of section 140 of the Act, would be required to be read down as prosecution . The prosecution can be initiated only after final report, equated with a report under the provisions of section 173 of the Code of Criminal Procedure, 1973, is made - This issue, in our prima facie opinion, also requires to be dealt with elaborately. The matter thus warrants a response from Respondent No. 1 and Respondent No. 2. We defer the hearing on the writ petitions - Stand over to 3rd October 2019.

Issues:
Challenge to the constitutional validity of section 140(5) of the Companies Act, 2013 and the sanction order dated May 29, 2019; Resignation of auditor and its impact on proceedings under section 140(5) of the Act; Interpretation of the word "action" in the second proviso to section 140(5) of the Act; Initiation of prosecution under section 447 of the Act based on an interim report.

Analysis:

Challenge to Constitutional Validity and Sanction Order:
The petitioners challenge the constitutional validity of section 140(5) of the Companies Act, 2013 and the sanction order dated May 29, 2019, authorizing prosecution and proceedings under the Act. The petitioners seek various reliefs, including a writ to quash the impugned order and restrain the NCLT from further proceedings. The facts leading to the petitions involve the appointment of auditors, investigation orders, and subsequent actions against the auditors. The NCLT dismissed an application challenging the maintainability of the company petition under section 140(5) of the Act, prompting the petitioners' challenge.

Resignation of Auditor and Proceedings under Section 140(5):
The main contention revolves around the resignation of the auditor on June 19, 2019, and its impact on the proceedings under section 140(5) of the Act. The petitioners argue that once resignation is tendered and accepted, the proceedings under section 140(5) become irrelevant. However, Respondent No. 1 contends that resignation alone does not absolve the auditor, and proceedings can continue. This issue requires consideration in light of related provisions in the Act concerning disqualification and debarment of auditors.

Interpretation of "Action" in the Second Proviso:
A crucial aspect of the argument involves the interpretation of the term "action" in the second proviso to section 140(5) of the Act. The petitioners argue that this term, if broadly construed, could breach Article 21 of the Constitution. Respondent No. 1 asserts that "action" refers to prosecution under section 447 in accordance with the law. The court's prima facie opinion suggests that even if the respondent's interpretation is accepted, the term "action" may need to be construed as "prosecution."

Initiation of Prosecution based on Interim Report:
The petitioners challenge the initiation of prosecution under section 447 of the Act based on an interim report submitted by Respondent No. 2. The petitioners argue that prosecution can only be initiated after a final report, akin to a report under section 173 of the CrPC, is submitted. They contend that the interim nature of the report raises concerns about the validity of the sanction order and subsequent prosecution. This issue requires detailed deliberation and consideration, as the voluminous report submitted within a short timeframe raises questions about proper examination and application of mind by the authorities.

In light of the complex legal issues raised and the need for further examination, the court deferred the hearing on the writ petitions to October 3, 2019. As an ad-interim relief, the court restrained further proceedings under section 140(5) of the Act and directed that no coercive action be taken against the petitioners in the criminal complaint filed before the Special Court. The matter requires detailed consideration and responses from the concerned parties to address the arguable points raised in the petitions.

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