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2020 (4) TMI 644 - HC - Companies LawConstitutional validity of section 140(5) of the Companies Act, 2013 - violation of Article 14 and 21 of the Constitution of India - invocation of the section against the ex-statutory auditors - constant evergreening of debts extended to its subsidiary Companies third parties/companies by IFIN. Whether S. 140(5) of 2013 Act is unconstitutional? - Whether it is bad as it singles out only the Company Auditors and excludes the directors or the office bearers of the companies from its scope? - Whether it is arbitrary since it does not carry adequate procedural safeguards as contained in Indian Chartered Accountants Act or in S. 132 of the 2013 Act? - principle of double jeopardy. HELD THAT - The Parliament in 2013 Act made provision for NFRA to consider the cases of professional misconduct and for a criminal trial under its S. 447, an agency like NCLT formed under S. 408 has been given a power to issue a direction to change the CA. It is also apparent that NCLT has not been given power to debar or disqualify or impose any punishment on such CA - Proviso to S. 132(4)(a) of 2013 Act shows that after NFRA initiates investigation into the professional misconduct, the Institute of Chartered Accountants looses that jurisdiction - NCLT does not can not inquire into a professional misconduct by the CA as it is not conferred with power to choose the nature of punishment or its quantum. Section 140(5) is part of the provision (S.140) which deals with the removal of CA or his resignation. Need of special resolution to remove CA or grant of opportunity to him in that connection are part of this scheme. The concerned CA though removed by special resolution or due to his resignation, is not visited thereby with any action for professional misconduct or prosecution for crime or any disability because of that removal or resignation. Chartered accountant Act takes care of the professional misconducts by CA while 2013 Act vide S. 132, also deals with type of the said misconducts and vide S. 447, takes care of criminal offences. In this backdrop, it is absurd to assume that S. 140(5) again envisages a punishment for a professional misconduct or for crime of fraud - Debarment or disqualification under 2nd proviso to S.140(5) follows automatically due to statutory mandate and NCLT has no option or discretion in that respect. As professional misconduct offence are not dealt with by the NCLT, disqualification stipulated in second proviso to S. 140(5) can not be construed as a second punishment for same misconduct it also does not attract the principle of double jeopardy. As legislative mandate of disqualification in second proviso to S. 140(5) is not a punishment either for the misconduct or the offence, obviously it is added as a measure to achieve a laudable goal - Respondents as also the Petitioners do not dispute that considering the consequences emanating from scheme of S. 140(5), it needs to be strictly construed. It contemplates change of CA as a final order. The order therefore must be executable (executory) and if the CA has already ceased to be such CA, that final order can not be passed as he can not be or need not be changed. The disqualification prescribed in second proviso to S. 140(5) is not for NCLT s satisfaction of involvement in fraud or offence of fraud or for professional misconduct. As only fact of final order of NCLT ie a direction to change is the triggering point, it can not attract the principles of double jeopardy at all. Such debarment is avoidable - the CA in relation to whom the NCLT proposes to issue a direction to change, may therefore prefer to walk out by resigning thereby not taking the risk of a disqualification. He is expected to show a mature neutral attitude - Even when Company proposes to pass a special resolution for removing its CA under S.140(1), the CA can avoid it by putting in a resignation. The scheme of S. 140 itself interposes resignation procedure between the decision of Company to move such special resolution further processing thereof. The Parliament has placed sub-sections (2) (3) regarding the resignation between sub-sections (1) (4) of S. 140 and there is nothing in law to demonstrate that the CA against whom the special resolution of removal is initiated, can not resign. Such resignation does not lead to any debarment or disqualification in his practice as CA. Status of report under S. 212 submitted by SFIO - HELD THAT - Section 212(11) obliges SFIO to submit an interim report when so directed by the Central Government. S. 212(12) obliges him to submit the investigation report after completing the investigation. The section does not speak of said report as final report . Parties have for convenience coined that phrase since S. 212 (11) uses the word interim report . There is nothing in S. 212 of 2013 Act to demonstrate that interim report under S. 212(11) can not be an investigation report. When the Central Government calls for the interim investigation report, there is nothing in S. 212(14), which prohibits the Central Government from considering it - As the respondents do not plead on affidavit and bring on record the basic facts to indicate a possibility of due application of mind by the authority granting direction to prosecute, no disputed question in relation to such process under S. 212(14) of 2013 Act arises before us. As such, there is no scope for claiming that arguments of the petitioners about non-application of mind raise a disputed question which can be examined during trial. Thus, section 140(5) of the Companies Act, 2013 is not unconstitutional - Direction under S. 212(14) of the Companies Act, 2013 dated 29/05/2019 issued by respondent no. 1 Union of India to respondent no. 2 SFIO is unsustainable and it is quashed set aside. The consequential prosecution lodged by the respondent no. 2 SFIO vide Cr. Complaint no. CC 20 of 2019 on the file of Special Court (Companies Act) and Additional Sessions Judge, Greater Mumbai; is therefore not maintainable and it is also quashed set aside - petition is partly allowed.
Issues Involved:
1. Constitutionality of Section 140(5) of the Companies Act, 2013. 2. Validity of the direction to prosecute under Section 212(14) of the Companies Act, 2013. 3. Maintainability of the petitions given the availability of alternative remedies. 4. Jurisdiction of the NCLT after the resignation of the statutory auditors. 5. Application of mind in the direction to prosecute. 6. Status of the SFIO report under Section 212 of the Companies Act, 2013. Detailed Analysis: 1. Constitutionality of Section 140(5) of the Companies Act, 2013: The petitioners challenged the constitutionality of Section 140(5) arguing it singles out company auditors and excludes directors or officers, lacks procedural safeguards, and violates the principle of double jeopardy. The court found that Section 140(5) is not unconstitutional. It held that the section is designed to maintain the integrity of company audits and does not impose a punishment but rather a regulatory measure to ensure the purity of corporate governance. The court emphasized that the role of a company auditor is distinct from that of directors or officers, justifying different treatment. The disqualification under the second proviso to Section 140(5) is not a punishment for fraud but a measure to prevent further potential misconduct. 2. Validity of the Direction to Prosecute under Section 212(14): The direction to prosecute issued by the Union of India under Section 212(14) was challenged on the grounds of non-application of mind. The court found that the direction was issued in undue haste without proper application of mind to the voluminous SFIO report. The court noted that the report was over 750 pages with 32,000 pages of annexures, and it was improbable for the concerned officers to have applied their minds within the short time frame. Consequently, the court quashed the direction to prosecute and the consequential prosecution lodged by the SFIO. 3. Maintainability of the Petitions Given the Availability of Alternative Remedies: The court held that the availability of an alternative remedy, such as an appeal to the NCLAT, does not bar the exercise of writ jurisdiction by the High Court, especially when the vires of a statutory provision are challenged. The court relied on precedents to assert that issues of constitutional validity can be directly addressed by the High Court. 4. Jurisdiction of the NCLT after the Resignation of the Statutory Auditors: The petitioners argued that the NCLT lost jurisdiction to proceed under Section 140(5) after the resignation of the statutory auditors. The court agreed, stating that the purpose of Section 140(5) is to change the auditor, and once the auditor resigns, there is no need for such an order. The court quashed the NCLT’s order rejecting the petitioners' objections and held that the company petition filed by the Union of India was not tenable after the resignation of the auditors. 5. Application of Mind in the Direction to Prosecute: The court found that the direction to prosecute was issued without due application of mind. The processing of a voluminous report within a short period indicated a lack of thorough consideration. The court emphasized the need for a detailed examination of the report before issuing such directions, which was not evident in this case. 6. Status of the SFIO Report under Section 212 of the Companies Act, 2013: The court analyzed whether the SFIO report was an interim or final report. It held that the report must be complete and conclusive to form the basis for prosecution. The respondents failed to demonstrate that the report was final and conclusive, leading the court to conclude that the direction to prosecute based on an incomplete report was unsustainable. Orders: 1. Section 140(5) of the Companies Act, 2013, is not unconstitutional. 2. The direction to prosecute issued under Section 212(14) is quashed. 3. The consequential prosecution lodged by the SFIO is quashed. 4. The NCLT’s order rejecting the petitioners' objections is quashed. 5. The petitions are partly allowed with no orders as to costs. 6. Interim relief granted by the High Court is continued for eight weeks.
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