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2023 (5) TMI 204 - SC - Companies LawProsecution proceedings against the Auditor of the company - 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 - Constitutional Validity of Section 140(5) of Companies Act, 2013 - direction under Section 212(14) assailed on the ground that issuance of the direction to prosecute within 30 hours of receipt of the IFIN SFIO Report demonstrates non-application of mind - assailed also on the ground that the IFIN SFIO Report was an incomplete report as investigation had not been completed and therefore Section 212(14) direction was incompetent HELD THAT - Section 140(5) of the Act, 2013 titled as Removal, Resignation of Auditor and Giving of Special Notice appears in Chapter X of the Act which is titled as Audit and Auditors . Therefore, Chapter X is a special provision under the new Act with respect of Audit and Auditors . It cannot be disputed that the auditor plays a very important role so far as the affairs of any company are concerned and therefore he should be independent and above board. Companies Act, 2013 is the result of the culmination of detailed study after taking into consideration the Parliamentary Standing Committee on Finance Report as well as the recommendations of the Standing Committee by introducing Companies Bill, 2009 and Companies Bill, 2011. When the earlier Companies Bill, 2009 was introduced, it was a culmination of the growing corporate economy and past experiences of corporate fiascos too and one of the suggestions were to provide for stricter accountability for auditors. It is required to be noted that 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 auditor 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. Therefore, a statutory duty is cast upon the auditor to report the matter to the Central Government about the offence of fraud being committed in a company. To see that the auditor is not holding any post in the company and he acts independently, Section 144 of the Act provides that the auditor cannot provide certain services including the management services - 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. Keeping in mind the aforesaid provisions and the underlying public policy in the backdrop, Section 140(5) of the Act, 2013 is required to be interpreted and/or considered. Section 140(1) of the Act provides for the procedure to remove an auditor by the company before the expiry of his term; section 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. However, Section 140(5) of the Act 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 - 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. By the impugned judgment and order, though the High Court has upheld the vires of Section 140(5) of the Act, 2013, however, the High Court has held that once the auditor resigns as an auditor or is no more an auditor on his resignation, thereafter Section 140(5) proceedings are no longer maintainable as the petition filed by the Union of India under section 140(5) has been satisfied by the subsequent resignation of the auditor. The view taken by the High Court is absolutely erroneous and is unsustainable. 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). 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) - 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 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. The High Court has materially erred in holding that on resignation of auditors BSR Deloitte and on appoint of new auditors, application under section 140(5) shall not be maintainable. Consequently, the High Court has erred in setting aside the order(s) passed by the NCLT/NCLAT by which the NCLT/NCLAT held that despite the resignation of the auditors, enquiry/proceedings under Section 140(5) shall be maintainable and/or continued. Vires of Section 140(5) of the Act - HELD THAT - 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. Therefore, section 140(5) cannot be said to be discriminatory and/or violative of Article 14 of the Constitution of India. Section 140(5) of the Act has been enacted with the specific object and purpose as referred to hereinabove 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. Thus, challenge to the constitutional validity of section 140(5) of the Companies Act, 2013 fails and it is observed and held that 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 - 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 and set aside. Appeal allowed.
Issues Involved:
1. Interpretation and applicability of Section 140(5) of the Companies Act, 2013. 2. Validity of resignation by auditors during proceedings under Section 140(5). 3. Constitutionality of Section 140(5) of the Companies Act, 2013. 4. Validity of the direction under Section 212(14) of the Companies Act, 2013. 5. Maintainability of the prosecution based on the SFIO report. Summary: 1. Interpretation and Applicability of Section 140(5) of the Companies Act, 2013: The Supreme Court held that Section 140(5) of the Companies Act, 2013 empowers the Tribunal (NCLT) to take action against auditors who have acted fraudulently. The first part of Section 140(5) involves a quasi-judicial enquiry by the NCLT to determine if an auditor has acted in a fraudulent manner. The first proviso allows interim measures to prevent the auditor from continuing, while the second proviso provides that an auditor found guilty shall not be eligible to be appointed as an auditor for any company for five years and shall be liable under Section 447. 2. Validity of Resignation by Auditors During Proceedings Under Section 140(5): The Court rejected the High Court's interpretation that proceedings under Section 140(5) terminate upon an auditor's resignation. The Supreme Court clarified that resignation does not end the proceedings and that the enquiry must continue to its logical end. The resignation of an auditor cannot be used to avoid the consequences under the second proviso to Section 140(5). The proceedings and final order by the Tribunal are necessary to determine the auditor's fraudulent conduct and subsequent disqualification. 3. Constitutionality of Section 140(5) of the Companies Act, 2013: The Supreme Court upheld the constitutionality of Section 140(5), stating it is neither arbitrary nor violative of Articles 14, 19(1)(g) of the Constitution of India. The provision is intended to ensure stricter accountability for auditors and protect the interests of stakeholders. The Court emphasized that the role of auditors is crucial and distinct from that of directors or management, justifying the stringent measures under Section 140(5). 4. Validity of the Direction Under Section 212(14) of the Companies Act, 2013: The Supreme Court overturned the High Court's decision that quashed the direction to prosecute under Section 212(14). The Court held that the direction to prosecute, issued within 30 hours, does not imply non-application of mind. The detailed note prepared by the officer and the final decision by the authority were deemed sufficient. The Court also clarified that the SFIO report on IFIN was complete concerning IFIN, even if investigations into other subsidiaries were ongoing. 5. Maintainability of the Prosecution Based on the SFIO Report: The Supreme Court reinstated the prosecution lodged by the SFIO, stating that the SFIO report was a result of a detailed investigation into IFIN. The High Court's view that the report was incomplete was incorrect. The Court emphasized that the SFIO's findings were conclusive and that the accused would have ample opportunity to defend themselves during the trial. Conclusion: The Supreme Court allowed the appeals filed by the Union of India and dismissed those filed by Deloitte and its partners. The Court directed the NCLT to continue proceedings under Section 140(5) and for the Special Court to proceed with the prosecution based on the SFIO report. The constitutional validity of Section 140(5) was upheld, and the interpretation that resignation ends the proceedings was rejected.
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