ET: NCLT lacks jurisdiction to ban us, say Deloitte, KPMG

22 June 2019: Deloitte Haskins & Sells and BSR & Associates, a KPMG network firm, said the National Company Law Tribunal (NCLT) didn’t have the jurisdiction to decide on the government’s demand for a five-year ban against the auditors of IL&FS Financial Services (IFIN). Auditors can’t be put in the same category as independent directors and senior management, they argued. The government had moved the NCLT on June 10 seeking a ban.

After about four hours of heated arguments between government lawyers and senior counsel representing Deloitte and KPMG on Friday, the NCLT bench asked the Ministry of Corporate Affairs (MCA) to file its reply in the next four days and adjourned the case until July 15. Separately, the NCLT reserved its order in the petition filed by MCA, which seeks to implead 23 people including auditors and other officials of the debt-laden Infrastructure Leasing & Financial Services (IL&FS), of which IFIN is a unit.

Govt Took Two Actions

The case stems from the unexpected default by IL&FS in September last year that sparked a liquidity crisis and roiled the financial markets. Deloitte and BSR have been accused of ignoring telltale signs and face a ban that could effectively shut out two of the Big Four firms from auditing Indian companies.

The government had initiated two actions in the IFIN case. The first was filing a case in criminal court under Section 447 of the Companies Act, which primarily deals with punishments for fraud. The government has also sought to prosecute individuals who have been charged under Section 241 and 242 of the Companies Act. These two sections cover action against companies that engage in practices prejudicial to the public interest.

“The basic principle is that this (NCLT proceedings) shouldn’t become an academic exercise, especially when a fraud is committed,” said Sanjay Shorey, director, legal prosecution, MCA, who argued for the Union of India.

Senior counsel Janak Dwarkadas and Amit Desai appeared for Deloitte while senior advocate Navroz Seervai appeared for BSR & Associates. Lawyers representing the auditors also said action cannot be taken against them based on a chargesheet filed by the Serious Fraud Investigation Office (SFIO), the MCA’s investigative arm.

Dwarkadas argued that the auditors were neither “necessary” nor “proper” parties and he questioned the premise of the case targeting them. Auditors cannot be made parties in the case, he said. The lawyers also argued that action against the auditors cannot be equated to and clubbed with action against independent directors of IFIN. “Deloitte is not a proper party and removal of directors (of IFIN) has nothing to do with Deloitte,” said Dwarkadas.

Seervai cited an NCLT case in which the bench had ruled that a complaint against the auditor needed to be examined by the Institute of Chartered Accountants of India (ICAI). When investigations are being conducted by a separate audit regulator, arguing the same matter in two different forums may create a conflict. ET first reported on April 27 that the National Financial Reporting Authority (NFRA) had issued notices and taken over the quality review of IL&FS audits from ICAI.

Auditors cannot be held responsible for the affairs of the company, argued the lawyers, adding that they merely check financial statements.

The NCLT bench was presided over by VP Singh and Ravikumar Duraiswami. “Listening to the arguments, I am reminded of a newspaper headline… No one killed Jessica,” commented the bench. Dwarkadas replied that an innocent man cannot be put to the gallows because there is no one to pin the blame on.

GOVT FOR NO CLEAN CHIT

The SFIO has alleged that the auditors suppressed information on various loans, inflated profits and presented a rosy picture. In its chargesheets, the SFIO has accused both Deloitte and BSR of connivance.

Shorey also stated that the SFIO was yet to file its final investigation report and this will throw more light on the alleged role of the auditors. Due to this reason alone, he argued, no relief should be granted to the auditors.

The lawyers countered that the final report cannot be a reason why auditors cannot be given a clean chit. The SFIO chargesheet merely comprises allegations which the auditors have a right to defend themselves against.

Some of the senior executives in Deloitte and BSR who were part of the IFIN audit are also respondents in the case. Lawyers representing independent directors said that they have not received the documents from the MCA detailing the allegations in the case. Only Dwarkadas had been served with a pen drive that contained these, they said.

IFIN was audited by KPMG affiliate BSR in FY19 and jointly by BSR and Deloitte in FY18. Deloitte was the sole auditor of IFIN in FY16 and FY17. BSR on Thursday said that it had resigned as auditor of IFIN, which is being investigated by multiple agencies for alleged financial irregularities.

The Economic Times reported



Categories: Corporate Governance, Legal update

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