In a major respite to Deloitte and KPMG, the auditors of the crisis-hit IL&FS Financial Services (IFIN), the Bombay High Court on Tuesday said that the Ministry of Corporate Affairs (MCA) cannot take action against the audit firms. The government is seeking a five year ban on Deloitte Haskins & Sells and BSR Associates, a unit of KPMG, for their alleged fraud in IFIN, a subsidiary of IL&FS.
Pronouncing the order through video conference, the high court said that National Company Law Tribunal (NCLT) cannot ban the audit firms for five years. In March, NCLT had rejected the pleas of debt-ridden IL&FS auditors, challenging their impleadment in the case.
The high court upheld the constitutionality of section 140(5), which seeks removal of existing auditors, but said that it would not apply to auditors who have resigned. The court also squashed the criminal complaint filed by the Serious Fraud Investigation Office (SFIO), calling it "bad in law" and saying that it there was "non-application of mind."
The court has given eight weeks' time to the corporate affairs ministry to appeal in the Supreme Court.
In October 2019, Deloitte Haskins and Sells had moved the high court challenging the constitutional validity of Section 140 (5) of the Companies Act, to remove auditors, and the Ministry of Corporate Affairs (MCA) plea at NCLT seeking a ban on auditors for five years.
In August 2019, KPMG arm BSR & Associates had moved the high court seeking relief from proceedings of the NCLT that sought a five-year ban on former auditors of IFIN.
The audit firms argued that how the NCLT had no jurisdiction to ban them claiming that existing law says only those auditors on board can be penalised. While Deloitte Haskins & Sells and BSR Associates resigned as auditor of the debt-laden IL&FS group in FY18, BSR Associates stepped down in June 2019.
Law firm Veritas Legal was representing Deloitte in the case, while AZB & Partners was advising BSR in the dispute.
By Chitranjan Kumar