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The article analyses a recent judgment passed by Bombay High Court concerning the liabilities of the auditors in case of fraud committed by the officers of a company.
On April 21, 2020, the Bombay High Court in N Sampath Ganesh vs. Union of India and Anr. (Cr. Writ Petition No. 4144 of 2019) handed down a big relief to Deloitte Haskins and Sells LLP and an Indian affiliate of KPMG, the ex-auditors of a beleaguered infrastructure development and finance conglomerate namely Infrastructure Leasing and Financial Services (IL&FS).
The judgment was passed in series of writ petitions filed by the above mentioned auditor firms and their auditors against the order of the NCLT, Mumbai barring them to be the auditor of any company in India for five years for alleged fraud committed by them in collusion with the officers of IL&FS. However, the relief was granted only on the sole basis that the auditors had already resigned as on the date of the order of debarment. Even though the judgment is hailed amongst auditors fraternity, the High Court, perhaps, missed the chance to make good the provision which has the potential to punish the auditors in India for misfeasance even in the absence of conclusive proof against them.
While the Hon’ble High Court did, and rightly so, set aside the order debarring the ex-auditors, it upheld the constitutional validity of Section 140(5) of Companies Act, 2013 (Act) under which the order of debarment was passed. Section 140(5) of the Act provides that if a tribunal is satisfied that fraud has been committed, it may remove the auditor of a company. This removal would have an effect of barring the said auditor to serve as an auditor of any company in India for a period of five years with no requirement of final proof as to his guilt.
The vires of Section 140(5) of the Act was challenged primarily on two grounds. Firstly, Section 140(5) of the Act enables a quasi-judicial tribunal to pass a penal order debarring an auditor for a certain period without prescribing any procedural safeguards. Secondly, the Act provides other penal provisions for fraud committed by an auditor, and as such Section 140(5) of the Act is ex facie against the rule against double jeopardy.
The Hon’ble High Court countered the aforesaid arguments by holding that the power of the tribunal to debar an auditor under Section 140(5) of the Act is only triggered in cases the suspected auditor chooses not to resign and remains with the company, and otherwise, the tribunal does not have the power to debar the auditor.
It further held that debarment under Section 140(5) of the Act is a punishment for not resigning as the auditor of the concerned company and unnecessary contest of auditor’s removal, and, interestingly, not for the alleged fraud, hence it does not violate the rule against double jeopardy.
The reasonings are not only erroneous but are more of a reason to hold the provision unconstitutional. It would not be wrong to suggest that debarring an auditor for five years is almost equal to his civil death. The mere acknowledgment that legislature intends to inflict such punishment on an auditor only because he chooses to contest his removal makes the provision ex facie violative of the basic principle of proportionality of punishment.
Moreover, it is perhaps unknown in law to recognize a legally absurd legislation that triggers the power of a judicial authority to inflict punishment only if the suspect chooses to contest it. Needless to say, legislation overshadowing a suspect’s right to defence is violative of the basic principles of natural justice.
Even though the High Court granted much-needed relief to the auditors before it, its reasoning seems to miss out on striking the problem at the root and the auditor fraternity in India remains exposed to being penalised even in absence of any conclusive proof of their guilt.