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TMI Blog2023 (5) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Naman Tandon, Adv. Mr. Samarvir Singh, adv. Mr. Kanu Agarwal, Adv. Mr. Vikash Jha, Adv. Vasudha Vijayshree, Adv. Ritu Anand, Adv. Pratyush Srivastava, Adv. Ms. Sansriti Pathak, Adv. Ms. Bani Dikshit, Adv. Mr. Arvind Kumar Sharma, AOR Mr. Chandra Prakash, AOR Ms. Anannya Ghosh, AOR Mr. Mahesh Agarwal, Adv. Mr. Rishi Agrawala,, Adv. Mr. Rahul Dwarkadas, Adv. Ms. Prachi Dhanani, Adv. Ms. Rishika Harish, Adv. Ms. Niyati Kohli, Adv. Ms. Juhi Bahirwani, Adv. Mr. Pratham Vir Agarwal, Adv. Ms. Rohini Jaiswal, Adv. Ms. Manavi Agarwal, Adv. Mr. E. C. Agrawala, AOR Mr. Aaditya Aniruddha Pande, AOR Mr. Sachin Patil, AOR Ms. Misha Rohatgi, AOR JUDGMENT 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. 2300/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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, 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 dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out 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) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.5 Thereafter, Shri Balbir Singh, learned ASG has taken us and referred to the legislative history of Section 140(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 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. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 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:- (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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enders 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 substanti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 proviso to Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted 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 ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 into IFIN is complete, a direction for a further report on certain aspects could only have been issued after application of mind. iv. Legal and factual mala fides has a very high threshold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aph numbers 202(VIII) and 202(XII). 3.26 Thereafter, Shri Balbir Singh, learned ASG has taken us to the findings recorded in the SFIO IFIN Report. It is submitted that based on the findings in the Investigation Report, auditors have been charged with: a. fraud under Section 447 of the Act for colluding with the management of IFIN and falsifying the books of accounts; b. failure in discharging duties under section 143 & 147 of the Act ; and c. suppression of information/ facts to hide the true and fair account of the financial statements and present a rosy picture under section 211 read with section 628 & Section 129 read with section 448 of the Act. It is submitted that the Investigation Report broadly records that the auditors despite knowledge did not point out any financial abnormality in the operation of IFIN and gave an unmodified opinion stating that the financial statements give a true and fair view in conformity with the accounting standards and other accounting principles accepted in India. 3.27 It is submitted that in the Investigation Report, there are specific findings with respect to auditing of borrowings and utilisation; audit of non-convertible debentures; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. It is further observed and held that the consequences of debarment in the second proviso automatically follow upon such change and NCLT does not have any discretion in it. iii) It is submitted that before the High Court, the BSR also challenged two orders of the NCLT, namely, order dated 09.08.2019 and order dated 18.10.2019. Both these orders were passed by the NCLT purportedly under section 140(5) of the Act in proceedings commenced pursuant to the Ministry's sanction and directions dated 29.05.2019 under section 212 of the Act. It is submitted that BSR had also challenged the jurisdiction of NCLT to pass orders under section 140(5) of the Act, 2013. It is submitted that the NCLT has not determined the merits of a section 140(5) order and the NCLT in its first order has only upheld the maintainability of section 140(5) proceedings. It is submitted that therefore the submissions on behalf of the respondents do not go into the merits at all. iv) Now so far as on interpretation and applicability of section 140(5) of the Act, 2013, learned counsel appearing on behalf of the respective respondents - original writ petitioners has taken us to the scheme of regulation of Audito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... misconduct, for which powers are vested with the NFRA to disqualify, suspend etc. ii. Section 141(3)(h), which specifically deals with eligibility of auditors, provides for the ineligibility for appointment of an auditor in case such person is convicted of an offence involving fraud. Section 141(3)(h) disqualifies the auditor for 10 years from the date of conviction for an offence involving fraud. Pertinently, while the underlying offence is the same, i.e., an act involving the same fraud, the penalty under Sections 140(5) and 141(3)(h) are triggered at different times. A situation could arise where a person deemed ineligible under Section 140(5) by way of the NCLT's final order is subsequently acquitted of the charge of fraud on the same set of facts under Section 447 of the Act by the criminal court. Further even where a person is convicted under Section 447, if he has already suffered the disqualification under Section 140(5) for 5 years he could face a further ineligibility to be appointed as an auditor for 10 years. The total period hence could extend to 15 years. iii. Section 147(3) imposes financial liability on auditors by way of refund of remuneration or even damag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any fraudulent, unlawful or wrongful act or conduct. Section 245(2) permits the NCLT to impose "any suitable action" vii. Section 447 pertains to the criminal consequences of fraud. Section 447 prescribes a punishment for the offence of 'fraud, the offence itself is created by way of an explanation appended to the said section. Section 447 of the Act provides: "447, Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years. Explanation. For the purposes of this section- (i) "fraud" in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -obstante clause provided in Section 140(5), it is clear that the NCLT can direct the company and no one else to remove the auditor. The non-obstante clause needs to be read with the term "change" as provided therein. It is submitted that Section 140(5) of the Act cannot apply in circumstances where the auditor sought to be removed has ceased to hold that position as no order of change can be passed once the auditor has resigned. It is submitted that this is clear from the plain language of the provision itself. xi) It is next submitted that under the first proviso to Section 140(5), when an application under Section 140(5) is filed by the Central Government and if NCLT is satisfied that a change in auditor is required, then within 15 days from the date of filing the said application, NCLT can pass an urgent order that the auditor will not "function" as an auditor and that the Central Government may appoint a new auditor to replace the current auditor. It is submitted that this is in the nature of a pro tem order pending final order by NCLT under the operative part of Section 140(5) and to facilitate the Central Government in appointing an auditor whilst the existing auditor func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in no other manner. Reliance is placed upon the decision of this Court in the case of Dharani Sugars and Chemicals Ltd. v. Union of India, (2019) 5 SCC 480 (para 55). xv) It is further submitted that expanding the scope and purpose of Section 140(5) to include punishment for fraud, would tantamount to prejudicing the defence that an auditor, in a given case, could take in any other proceedings. The summary nature in which Section 140(5) aims to determine fraud may lead to a complete redundancy of all other processes and procedures provided for under the Companies Act and materially impact an auditor's right to fair trial. As an example, the determination of guilt under Section 140(5) by way of a summary procedure could render the process of defences and appeals provided as a part of the NFRA process nugatory and a mere formality qua the auditors. xvi)It is submitted that It is only when the language of provisions in a statute are not clear and categorical, the purpose of the same can be examined by a court to interpret the provision. It is submitted that the following principles of law are well settled with regard to the primacy of plain language interpretation over purposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xx) It is submitted that the need for a deemed removal of a past auditor does not arise, since the very purpose and object of Section 140, i.e., removal and change of auditors, has been satisfied by the auditor's resignation. Such a past auditor can, despite his resignation, be prosecuted for fraud under Section 447 of the Act. Therefore, the question of removing the auditor under Section 140(5) cannot and does not arise. xxi)It is submitted that the Ministry was aware that an order under Section 140(5) cannot be passed against a past auditor except through the device of a deeming fiction. This is evident from prayers (a), (b) and (c) of the 140(5) Company Petition sought qua Deloitte in which Ministry sought a "deemed removal" of Deloitte even though it had already rotated out as auditor. Consequently, NCLT could not have gone into the merits of the 140(5) Company Petition itself as the relief sought for was beyond NCLT's powers. xxii) It is submitted that further, the prayers in the Company Petition sought against BSR became infructuous with its resignation on 19 June 2019. Pertinently, no "deemed removal" prayer was sought against BSR after its resignation. Despite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on behalf of the original writ petitioners that Section 140(5) is excessive and manifestly arbitrary as it provides unguided and untrammelled powers to NCLT and that too in a summary proceeding, for determination of a serious offence of fraud and consequence of mandatory disqualification with grave consequences akin to civil death. It is submitted that the penalty in the form of automatic disqualification of auditors and of the entire firm including partners who may be entirely unconnected and innocent for a predetermined period envisaged under Section 140(5) is highly disproportionate and not the least invasive method. It is submitted that Section 140(5) creates an automatic penalty of disqualification, upon summary adjudication, when such a penalty has already been provided for under section 141(3)(h) of the Act after following due process of trial under Sections 435 to 446 of the Act. The same results in contravention of the principles of double jeopardy and violation of Article 20(2) of the Constitution. It is submitted that disqualification akin to "civil death" under Section 140(5) impinges upon BSR and its partners' fundamental right to carry on its profession, as gua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Section 140(5) since firstly, Section 140(5) itself did not apply to the past auditors, and hence no question of invoking the first proviso could arise; secondly, the first proviso is only a pro tem measure pending a jurisdiction order under Section 140(5); thirdly, the NCLT's second order is not in the nature of a pro tem order; fourthly, once the proceedings under section 140(5) of the Act are initiated, only the Central Government is authorised to appoint or change the auditors under the first proviso. Under the first proviso to section 140(5), the power given to Central Government to appoint an auditor due to urgency, does not take away the power of the concerned company to appoint an auditor of its choice; fifthly, BSR had admittedly already resigned and vacated its office, as accepted by the Ministry in its submissions before this Court and this Court noted the same in the order dated 26.09.2019. It is submitted that moreover, the Ministry withheld various key facts from the NCLT at the time of filing. 4.1 Now so far as the direction issued under Section 212(14) and the prosecution under Section 212(15), it is submitted as under: i) Section 212(1) provides that the Cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... police officer's report under Section 173, CrPC; viii) It is therefore clear that the legislature has envisaged two distinct kinds of reports, with its own specific purpose. The first kind of report is under Section 212(11). which report is an 'Interim Report' and can be issued at any point of time during the course of investigation by the SFIO. The 2nd kind of report is an 'Investigation Report" which can be issued only after completion of the investigation by the SFIO. Only the Investigation Report' can be considered by the Central Government under Section 212(14) for the purposes of commencement of prosecution. On the other hand, an action before the NCLT under Section 212(14A) can be brought on based on either the Investigation Report or even the Interim Report; ix) It is further clear that the Central Government, under Section 212(14) is required to apply its mind, seek legal opinion (if required) and only thereafter decide whether or not a sanction order is to be issued, i.e., if in its opinion prosecution is to be initiated based on the "Investigation Report'. Further, only such 'Investigation Report', which is considered by the Central Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h time investigation has been completed. This is clear from a conjoint reading of Sections 212(12), (14) and (15). Further, though Section 173(8) of the CrPC contemplates a further investigation after filing of a report under Section 173(2), it is trite that Section 173(8) does not enable the inspector to submit an incomplete or preliminary report and later on submit a final report. Reliance is placed on the following decisions in the cases of Kamal Lochan Sen v. State of Orissa (1982) 54 CLT 509 (Para 5) and AV Dharma Reddy v. State of A.P. & Ors., 2011 CriLJ 185 (Para 5). Therefore, the stratagem adopted by SFIO and the Ministry in proceeding to act based on an "interim report" and simultaneously carrying on a further investigation is illegal; xvi) Since the investigation itself was not complete and the 2nd Interim SFIO Report is merely an interim report, there was no basis for the Ministry to issue a direction under Section 212(14) to initiate prosecution. Accordingly, the Sanction Order is ultra yes. It does not constitute sanction and the prosecution is void ab initio and a nullity; xvii) The Sanction Order was passed without application of mind to the relevant material an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ); xxii) Further, Ministry's failure to produce any evidence to demonstrate that its officers independently applied their minds to the 2nd Interim SFIO Report is also contrary to the principles relating to duty of disclosure since disclosure would protect the fairness of the proceedings and also enhance the transparency of the process. Reliance is placed upon the decision of this Court in the case of T.Takano v. SEBI, (2022) 8 SCC 162 (Para 62.3); xxiii) It is therefore submitted that the Sanction Order is bad in law and the Bombay High Court rightly quashed the same; xxiv) A mandatory prerequisite to jurisdiction is the existence of a valid sanction. Therefore, the prosecution becomes incompetent and consequently the proceedings are vitiated and without jurisdiction where no valid sanction is granted. Reliance is placed on the decisions in the cases of Gokulchand Dwarkadas Morarka v. The King, (1947-48) 75 IA 30; Yusofalli Mulla Noobbhoy v. The King, 1949 Cri LJ 889 ( Para 15); Mohd. Iqbal Ahmed v. State of Andhra Pradesh (1979) 4 SCC 172 (Para 3); xxv) The Sanction Order issued by MCA under Section 212(14) is invalid and non-est. In such circumstances, it is submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 five years. 5.1 At this stage, 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 objective seems to be that the auditor should function as an independent person uninfluenced by any of its activities outside the scope of audit s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances 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. 5.3 Second proviso to section 140(5) of the Act further 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 of such action under section 447 of the Companies Act. Therefore, as such, second proviso to Section 140(5) can be said to be a substantive provision and it operates on the final order passed by the Tribunal under Section 140(5) (first part). At this stage, it is required to be noted that after taking into consideration the recommendations made by the previous Standing Committee in respect of Companies Bill, 2009 and the recommendations from various stakeholders, the Companies Bill, 2011 came to be introduced. The suggestion of the Standing Committee to clause 123(1) of the 2009 B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 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. 6.1 As observed hereinabove, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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. At the cost of repetition, it is observed that 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 secon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not an auditor. The words used in Section 241(3) of the Act are "conduct and management of the company". 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. 10. At this stage, it is required to be noted that 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... squalification with grave consequences akin to civil death. The aforesaid has no substance. As observed hereinabove, 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. 13. Now so far as another 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. 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. Therefore, section 140(5) cannot be said to be discriminatory and/or violative of Article 14 of the Constitution of India. 14. Now so far as the submission that the penalty in the form of automatic disqualification of auditors and of the entire firm includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 High Court also observed that the relevant facts and documents to demonstrate application of mind have not been placed on record. With the above conclusion, the High Court has observed that even according to the investigating agency, SFIO Report was an interim report, even asked by the Central Government. 15.2 Now so far as the observations made by the High Court that issuance of the direction to prosecute within 30 hours of the receipt of IFIN SFIO Report demonstrates non-application of mind as it was improbable that report of about 750 pages and 32000 pages of annexures could have been considered in 30 hours is concerned, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any further instances or transactions are uncovered qua IFIN during the investigation of other group companies of IL&FS, then a further report will be filed. Therefore, the High Court has materially erred that the investigation in respect of IFIN is incomplete. It is required to be noted that as such the SFIO had submitted the report after a detailed and extensive investigation of IFIN. There are conclusive findings against each of the writ petitioners including Hari Sankaran pointing out multiple breaches, violations of statutory duties and fraudulent conduct. We are not elaborating the same in detail as the prosecution is yet to take place and the concerned persons are to be tried. 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) to prosecute at this stage and on the aforesaid grounds. C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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