UNION OF INDIA AND ANOTHER versus DELOITTE HASKINS AND SELLS LLP & ANR on 3 May 2023

UNION OF INDIA AND ANOTHER

V.

DELOITTE HASKINS AND SELLS LLP & ANR.

(Criminal Appeal Nos.2305-2307 of 2022)

MAY 03, 2023

[M. R. SHAH AND M. M. SUNDRESH, JJ.]

Companies Act, 2013 – s.140(5) – Analysis and Interpretationof – Maintainability of proceedings u/s.140(5) after resignation ofthe auditors – s.140(5) empowers the Tribunal (NCLT), either suomotu or on an application made to it by the Central Government orby any person concerned, to take action against the auditor whohas acted in a fraudulent manner or is abetting or colluding infraud with the management of a company – If on completion of anenquiry it is found by the Tribunal that an auditor of a companyhas, whether directly or indirectly, acted in a fraudulent manner orabetted or colluded in any fraud by, or in relation to, the companyor its directors or officers, it may by order direct the company tochange its auditors – By the impugned judgment, the High Courtheld that once the auditor resigns as an auditor or is no more anauditor on his resignation, thereafter s.140(5) proceedings are nolonger maintainable – Whether after resignation of the auditors,proceedings u/s.140(5) are maintainable – Held: The view taken bythe High Court is absolutely erroneous and is unsustainable –Application / proceedings u/s.140(5) of the Act, 2013 is maintainableeven after the resignation of the concerned auditors – Enquiry/proceedings initiated under the first part of s.140(5) has to go to itslogical end and subsequent resignation and/or discontinuance ofan auditor shall not terminate the enquiry/proceedings u/s.140(5)– If interpretation given by High Court that once an auditor resigns,proceedings u/s.140(5) stand terminated and are no longer furtherrequired to be proceeded, in that case, an auditor to avoid the finalorder and the consequence of final order as provided under thesecond proviso to s.140(5) may resign and avoid any final order bythe Tribunal – That cannot be the intention of the legislature – NCLTto pass final order on such application after holding enquiry inaccordance with law and thereafter on basis of such final order,

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Afurther consequences as provided under second proviso to s.140(5)shall follow.

Companies Act, 2013 – s.140(5) – Constitutional validity of– s.140(5) empowers the Tribunal (NCLT), either suo motu or on anapplication made to it by the Central Government or by any personBconcerned, to take action against the auditor who has acted in afraudulent manner or is abetting or colluding in fraud with themanagement of a company – If on completion of an enquiry it isfound by the Tribunal that an auditor of a company has, whetherdirectly or indirectly, acted in a fraudulent manner or abetted orcolluded in any fraud by, or in relation to, the company or its directorsCor officers, it may by order direct the company to change its auditors– Held: s.140(5) is neither discriminatory, arbitrary and/or violativeof Arts. 14, 19(1)(g) of the Constitution – NCLT exercises quasi-judicial powers u/s.140(5) with all the powers akin to civil court –Ample opportunity is given by NCLT before passing any final orderD– Plea that s.140(5) discriminates against the auditors unfairly incomparison to similarly placed alleged perpetrators, such asdirectors, management etc. not tenable, as the role of auditors cannotbe equated with directors and/or management – Acting in afraudulent manner, directly or indirectly, by an auditor is a veryserious misconduct and therefore the necessary consequence ofEindulging into such fraudulent act shall follow – Merely becausethe auditor can be removed as an auditor of a company under theother provisions, s.140(5) which has been enacted with a specialobject and purpose cannot be said to be arbitrary and/or ultra vires– Constitution of India – Arts. 14 and 19(1)(g).F

Companies Act, 2013 – s.140(5), first proviso – Powers underthe first proviso to s.140(5) – Nature of – Held: It can be said to beinterim or pro tem measure to prevent an existing auditor fromcontinuing and substitute him with an auditor based on a primafacie satisfaction that a fraud has been perpetrated and whenGcircumstances warrant the substitution – Such an order can be saidto be an interim order akin to a temporary suspension during thependency of the detailed enquiry as provided in s.140(5) and beforeany final order is passed by the Tribunal.

Companies Act, 2013 – s.140(5), second proviso – ObjectHand purpose of – When attracted –– Held: The object and purpose of second proviso to s.140(5) is to make the provision more stringentand to provide for consequences for an auditor when such an auditoris found to have been perpetrating a fraud and is removed by theNCLT for such fraud – Before second proviso of s.140(5) is attracted,there must be a detailed enquiry against an auditor of a companyas per first part of s.140(5) and there must be a finding arrived atby the NCLT that the auditor of a company has, directly or indirectly,acted in a fraudulent manner or abetted or colluded in any fraudby, or in relation to, the company or its directors or officers.

Companies Act, 2013 – s.140(5) – Powers conferred uponthe Tribunal u/s.140(5) – If without prejudice to any action underthe provisions of the Act, 2013 or any other law for the time beingin force – Held: Irrespective of any other provisions of the Act,2013, the Tribunal is vested with powers u/s.140(5) to pass a finalorder against the auditor on the allegation that such an auditor ofthe company has, directly or indirectly, acted in a fraudulent manner.

Companies Act, 2013 – s.212(14) – Quashing and settingaside of s.212(14) direction issued by Union of India to SeriousFraud Investigation Office (SFIO), by the High Court –Consequently prosecution lodged by SFIO set aside – High Courtset aside the s.212(14) direction mainly on two grounds, firstly, thatthe direction to prosecute was issued within 30 hours of report ofthe SFIO Report which demonstrates non-application of mind andsecondly on ground that SFIO Report was an incomplete report asinvestigation had not been completed and therefore s.212(14)direction was incompetent – Held: Merely because the direction toprosecute was issued within 30 hours, by that itself, it cannot bepresumed that there was a non-application of mind – What wasrequired to be considered was, whether there was any material toprosecute or not and whether the direction to prosecute was properlygiven or not – High Court also did not properly appreciate that theSFIO Report was a report prepared on completion of investigationinto IFIN – one of the companies under investigation – IFIN wasone of the subsidiaries in the IL&FS group and the financial servicesarm – Merely because investigation with respect to other subsidiarycompanies of IL&FS group might have been going on, cannot be aground to observe that so far as IFIN was concerned the reportwas incomplete – High Court materially erred that investigation in AB

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Arespect of IFIN was incomplete – Proceedings before the High Courtwere at the stage of direction u/s.212(14) to allow the prosecutionand the sanction to prosecute – Ample opportunity was available tothe concerned accused – Therefore, High Court erred in settingaside the direction u/s.212(14).

BCompanies Act, 2013 – Chapter X – Audit and Auditors –Held: Role of auditors cannot be equated with directors and/ormanagement.

Words and Phrases – Word “any” used in second proviso tos.140(5) of the Act, 2013 – Meaning – Under second proviso toCs.140(5), on the final order being passed by the Tribunal that theauditor/firm has, directly or indirectly, acted in a fraudulent manneror abetted or colluded in any fraud by, or in relation to, the companyor its directors or officers, he/it shall not be eligible to be appointedas an auditor of any company for a period of five years – Held:The word “any” is significant – On the final order being passed byDthe Tribunal, such an auditor not only shall be removed or changedas an auditor of a company, but such an auditor/firm shall also beineligible to be appointed as an auditor of any other company for aperiod of five years – Companies Act, 2013 – s.140(5).

Disposing of the appeals, the CourtE

HELD:1. The powers of the NCLT in first part of Section140(5) of the Companies Act, 2013 is quasi-judicial in nature andthe Tribunal would have the powers of a civil court to examinethe role of auditors and adjudicate on their fraudulent conductand abdication of their function. The powers under the first provisoFto Section 140(5) can be said to be interim or pro tem measure toprevent an existing auditor from continuing and substitute himwith an auditor based on a prima facie satisfaction that a fraud hasbeen perpetrated and when circumstances warrant thesubstitution. Such an order can be said to be an interim orderGakin to a temporary suspension during the pendency of thedetailed enquiry as provided in Section 140(5) of the Act andbefore any final order is passed by the Tribunal. [Para 5.2][1005-D-G]

2. As such, second proviso to Section 140(5) can be said tobe a substantive provision and it operates on the final orderH

passed by the Tribunal under Section 140(5) (first part). Thesecond proviso to Section 140(5) was introduced after detailedanalysis and after taking into consideration recommendations ofthe Parliamentary Standing Committee and with a view to makethe provision more stringent and to provide for consequencesfor an auditor when such auditor is found to have beenperpetrating a fraud and is removed by the NCLT for such fraud.On passing of the final order by the NCLT under first part ofsection 140(5) and if an auditor is found to have been indulgedinto fraudulent activities or abetting or colluding in a fraud withthe management of the company, consequences provided underthe second proviso to section 140(5) shall follow. Therefore,before second proviso of section 140(5) is attracted, there mustbe a detailed enquiry against an auditor of a company as per firstpart of section 140(5) and there must be a finding arrived at bythe NCLT that the auditor of a company has, directly or indirectly,acted in a fraudulent manner or abetted or colluded in any fraudby, or in relation to, the company or its directors or officers. [Para5.3][1006-A-G]

3. Subsequent resignation of an auditor after the applicationis filed under section 140(5) by itself shall not terminate theproceedings under section 140(5). Resignation and/or removalof an auditor cannot be said to be an end of the proceedings undersection 140(5). There are further consequences also onculmination of the enquiry under section 140(5) proceedings andpassing a final order by the Tribunal on the conduct of an auditor,whether such a auditor has, directly or indirectly, acted in afraudulent manner or abetted or colluded in any fraud by, or inrelation to, the company or its directors or officers, as providedunder the second proviso to section 140(5) of the Act, 2013.Therefore, the enquiry/proceedings initiated under the first partof section 140(5) has to go to its logical end and subsequentresignation and/or discontinuance of an auditor shall not terminatethe enquiry/proceedings under section 140(5). If theinterpretation given by the High Court that once an auditorresigns, the proceedings under section 140(5) stand terminatedand are no longer further required to be proceeded, in that case,an auditor to avoid the final order and the consequence of finalorder as provided under the second proviso to section 140(5)

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Amay resign and avoid any final order by the Tribunal. That cannotbe the intention of the legislature. [Para 6][1007-A-D]

4. The second proviso to section 140(5) of the Act, 2013 isa substantive provision, though it is by way of a proviso, and thesame shall operate and/or depend upon the final order to beBpassed by the Tribunal in the first part of section 140(5). If theinterpretation given by the High Court that on subsequentresignation and/or discontinuance of an auditor, proceedings undersection 140(5) stand terminated and/or the petition under section140(5) by the Central Government is no longer maintainable isaccepted, in that case, second proviso to section 140(5) wouldCbecome nugatory and in no case there shall be any action underthe second proviso to section 140(5). If such an interpretation,as interpreted by the High Court, is accepted, in that case, theobject and purpose of incorporation of second proviso to section140(5) shall be frustrated. The object and purpose of second Dproviso to section 140(5) is to make the provision more stringentand to provide for consequences for an auditor when such anauditor is found to have been perpetrating a fraud and is removedby the NCLT for such fraud. Notably, under the second provisoto section 140(5) on the final order being passed by the Tribunalthat the auditor/firm has, directly or indirectly, acted in a fraudulentEmanner or abetted or colluded in any fraud by, or in relation to,the company or its directors or officers, he/it shall not be eligibleto be appointed as an auditor of any company for a period of fiveyears. The word “any” used in the second proviso to section140(5) is significant. On the final order being passed by theFTribunal, such an auditor not only shall be removed or changedas an auditor of a company, but such an auditor/firm shall also beineligible to be appointed as an auditor of any other company fora period of five years. [Para 6.1][1007-E-H; 1008-A-B]

5. On true interpretation and scheme of Section 140(5) ofGthe Act, 2013, once the enquiry/proceedings is/are initiated underfirst part of section 140(5) of the Act, either suo motu by theTribunal or on an application made to it by the CentralGovernment or by any person concerned, it must come to itslogical end and irrespective of the fact whether during such H

enquiry/proceedings the auditor has resigned or not, there mustbe a final order to be passed by the Tribunal on whether such anauditor has, in fact, directly or indirectly, acted in a fraudulentmanner or not. Direction to the company to change its auditor asprovided in the first part of section 140(5) is only a consequenceto the finding recorded by the Tribunal that the auditor has, directlyor indirectly, acted in a fraudulent manner. This is the firstconsequence of the final order under section 140(5) (first part).On passing the final order by the Tribunal that the auditor of acompany has, directly or indirectly, acted in a fraudulent manner,the second consequence as mentioned in the second proviso tosection 140(5) shall be attracted. Therefore, for any consequenceas provided under the second proviso to section 140(5), thereshall be a final order by the Tribunal on enquiry as per first partof section 140(5). Therefore, on true interpretation, even onresignation by an auditor of a company even during the enquiry/proceedings under section 140(5) or even prior to that, thereshall not be any termination of the proceedings under section140(5) as observed and held by the High Court. In a given case,an auditor, who in fact has, directly or indirectly, acted in afraudulent manner, to avoid any further consequence under thesecond proviso to section 140(5), resigns to avoid anyconsequence under the second proviso to section 140(5), it cannotbe permitted. [Para 7][1008-C-G]

6.1. No so far as the submission that even if section 140(5)would not have been there, in that case also, no auditor can getaway with fraud, abetment of fraud or professional misconductetc. and for that purpose the reliance placed upon sections 132,141, 147, 245 and 447 of the Act is concerned, it is required to benoted that all the aforesaid provisions and section 140(5) operatein different field. Merely because the auditor can be removed asan auditor of a company including the other provisions, section140(5) which has been enacted with a special object and purposecannot be said to be arbitrary and/or ultra vires. [Para 8][1008-H; 1009-A, B-C]

6.2. As per the Scheme of the Act, 2013, more particularlyChapter X, the auditor acts as an independent examiner ofaccounts and cannot be said to be holding an office in the conduct AB

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Aand management of the company. Therefore, the submission thatwhat could be achieved under section 140(5) of the Act, 2013 canbe achieved by Section 241(3) even after the auditor has resignedhas no substance. [Para 9][1009-G-H]

6.3. In section 140(5), it is specifically mentioned thatB“without prejudice to any action under the provisions of this Actor any other law for the time being in force”. Therefore, theintention of the legislature while enacting section 140(5) is veryclear and the powers conferred upon the Tribunal under section140(5) shall be without prejudice to any action under theprovisions of the Companies Act, 2013 or any other law for theCtime being in force. Therefore, irrespective of any otherprovisions of the Act, 2013, the Tribunal is vested with the powersunder Section 140(5) of the Act to pass a final order against theauditor on the allegation that such an auditor of the company has,directly or indirectly, acted in a fraudulent manner. [Para 10][1010-DA-C]

7. Section 140(5) cannot be said to be excessive and/ormanifestly arbitrary, as contended. It was the case on behalf ofthe original writ petitioners on the constitutionality/vires ofsection 140(5) that section 140(5) is excessive and arbitrary as itEprovides unguided and untrammelled powers to NCLT fordetermination of a serious offence of fraud and consequence ofmandatory disqualification with grave consequences akin to civildeath. The aforesaid has no substance. NCLT shall exercise thequasi-judicial powers under section 140(5) with all the powersakin to civil court. Ample opportunity shall be given by the NCLTFbefore passing any final order. [Para 12][1011-A-C]

8. Insofar as the submission that section 140(5) is violativeof Article 14 of the Constitution of India and discriminates againstthe auditors unfairly in comparison to similarly placed allegedperpetrators, such as directors, management etc. is concerned,Git is required to be noted that the role of auditors cannot beequated with directors and/or management. Auditors play veryimportant role in the affairs of the company and therefore theyhave to act in the larger public interest and all other stakeholdersincluding investors etc. Chapter X of the Act specifically for theH“Audit and Auditors” looking to the importance of the auditors.

Therefore, section 140(5) cannot be said to be discriminatoryand/or violative of Article 14 of the Constitution of India. [Para13][1011-C-E]

9. It was submitted that penalty in the form of automaticdisqualification of auditors and of the entire firm including partnersand that too for a period of five years to become the auditor ofany other company is highly disproportionate. However, it isultimately for the legislature/Parliament to provide the debarment.On the principle of joint and severe liability, the auditors and theentire firm including partners shall be liable and therefore can besubjected to section 140(5) and the consequences mentioned insection 140(5) of the Act, 2013. Nobody can be permitted to saythat despite acting fraudulently, directly or indirectly, they had aright to continue and/or carrying on their profession. Acting in afraudulent manner, directly or indirectly, by an auditor is a veryserious misconduct and therefore the necessary consequence ofindulging into such fraudulent act shall follow. Section 140(5) ofthe Act has been enacted with the specific object and purposeand the same has been enacted after due deliberations and takinginto consideration the recommendations of the StandingCommittee as well as the respective stakeholders. Therefore,taking into consideration the object and purpose for which section140(5) of the Act is enacted, the same cannot be said to be arbitrary,excessive and violative of Article 14 of the Constitution of Indiaand/or violative of fundamental rights guaranteed under Article19(1)(g) of the Constitution of India, as alleged. [Para 14][1011-E-H; 1012-A-C]

10.1. The High Court set aside the direction under section212(14) terming the same as non-application of mind since it wasimprobable that report of about 750 pages and 32000 pages ofannexures could have been considered in 30 hours. Theobservations made by the High Court cannot be accepted. Merelybecause 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 officerwhich was ultimately placed before the final authority whoultimately took a decision and issued a direction to prosecute.What was required to be considered was, whether there was any AB

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Amaterial to prosecute or not and whether the direction toprosecute was properly given or not. During the trial, the accusedshall be given ample opportunity to put forward their case.Therefore, on the aforesaid ground, the High Court has materiallyerred in setting aside the direction to prosecute issued undersection 212(14) of the Act. [Paras 15.1 and 15.2][1012-F-H; 1013-BA-B]

10.2. The High Court has not properly appreciated that theSFIO Report was a report prepared on the completion of theinvestigation into the IFIN – one of the companies underinvestigation. IFIN was one of the subsidiaries in the IL&FSCgroup and the financial services arm. Merely because so far asthe investigation with respect to other subsidiary companies ofIL&FS group is concerned, the same might have been going on,cannot be a ground to observe that at this stage so far as theIFIN is concerned the report was incomplete report and for whichDthe investigation was going on. The High Court materially erredthat the investigation in respect of IFIN is incomplete. Theproceedings before the High Court were at the stage of directionunder section 212(14) to allow the prosecution and the sanctionto prosecute. Ample opportunity shall be available to theconcerned accused against whom the prosecution was orderedEfor the offences punishable under section 447 of the CompaniesAct and other relevant provisions of the IPC. Therefore, the HighCourt has erred in setting aside the direction under section212(14). [Para 15.3][1013-D, E-F, H; 1014-B-C]

11. The challenge to the constitutional validity of sectionF140(5) of the Companies Act, 2013 fails. Section 140(5) is neitherdiscriminatory, arbitrary and/or violative of Articles 14, 19(1)(g)of the Constitution of India, as alleged. The impugned judgmentand order passed by the High Court quashing and setting asidethe application/proceedings under section 140(5) on the groundGthat as the auditors have resigned and therefore thereafter thesame is not maintainable is hereby quashed and set aside.Consequently, the impugned judgment and order passed by theHigh Court quashing and setting aside the NCLT order holdingthat even after the resignation of the auditors, the proceedingsunder section 140(5) shall be maintainable is hereby quashedH

UNION OF INDIA AND ANOTHER V. DELOITTE HASKINSAND SELLS LLP

and set aside. The application/proceedings under section 140(5)of the Act, 2013 is held to be maintainable even after theresignation of the concerned auditors and now the NCLT thereforeto pass a final order on such application after holding enquiry inaccordance with law and thereafter on the basis of such final order,further consequences as provided under the second proviso tosection 140(5) shall follow. [Para 16][1014-D-G]

Devas Multimedia Pvt. Ltd. v. Antrix Corporation Ltd.& Anr. (2023) 1 SCC 216; An Advocate v. Bar Councilof India (1989) Supp 2 SCC 25 : [1988] 3 Suppl. SCR361; ICAI v. LK Ratna & Ors. (1986) 4 SCC 537 : [1986]3 SCR 1049; Dharani Sugars and Chemicals Ltd. v.Union of India (2019) 5 SCC 480 : [2019] 6 SCR 307;SEBI v. Sunil Krishna Khaitan (2023) 2 SCC 643;Tolaram Relumal v. State of Bombay [1955] 1 SCR 158;Bhuwalka Steel Industries Ltd & Anr v. UOI (2017) 5SCC 598 : [2017] 2 SCR 993; Sant Lal Gupta v.Modern Cooperative Housing Society Ltd. (2010) 13SCC 336 : [2010] 13 SCR 621; B. Himmatlal Agrawalv. Competition Commission of India AIR 2018 SC 2804:[2018] 4 SCR 496 ; Cellular Operators Association ofIndia v. Union of India (2003) 3 SCC 186 : [2002] 5Suppl. SCR 222; Pasupuleti Venkateswarlu v. Motor& General Traders (1975) 1 SCC 770 : [1975] 3 SCR958; Carona Ltd. v. Parvathy Swaminathan & Sons(2007) 8 SCC 559 : [2007] 10 SCR 656; Arun Kumarv. Union of India (2007) 1 SCC 732 : [2006] 6 Suppl.SCR 290; Balram Garg v. SEBI (2022) 9 SCC 425;Serious Fraud Investigation Office v Rahul Modi (2019)5 SCC 266 : [2019] 5 SCR 91; Mansukhbhai VithaldasChauhan v. State of Gujarat (1997) 7 SCC 622 : [1997]3 Suppl. SCR 705; K.K Mishra v. State of MadhyaPradesh (2018) 6 SCC 676 : [2018] 5 SCR 315;Anirudhsinhji Karansinhji Jadeja v. State of Gujarat(1995) 5 SCC 302 : [1995] 2 Suppl. SCR 637; T.Takano v. SEBI (2022) 8 SCC 162 and Mohd. IqbalAhmed v. State of Andhra Pradesh (1979) 4 SCC 172:[1979] 2 SCR 1007 – referred to.

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AP.M.C Mercantile Private Ltd. v. The State 2014 (3)MWN (Cr.) 454; Kamal Lochan Sen v. State of Orissa(1982) 54 CLT 509; AV Dharma Reddy v. State of A.P.& Ors. 2011 CriLJ 185 – referred to.

Yusofalli Mulla Noobbhoy v. The King 1949 Cri LJ 889Band Gokulchand Dwarkadas Morarka v. The King,(1947- 48) 75 IA 30- referred to.

Case Law Reference

referred toPara 3.6referred toPara 4(xiii)referred toPara 4(xiii)referred toPara 4(xiv)referred toPara 4(xvii)referred toPara 4(xvii)referred toPara 4(xix)referred toPara 4(xix)referred toPara 4(xxiv)referred toPara 4(xxiv)referred toPara 4(xxiii)referred toPara 4(xxix)referred toPara 4(xxix)referred toPara 4(xxix)referred toPara 4.1(iv)referred toPara 4.1(xix)referred toPara 4.1(xxi)referred toPara 4.1(xxi)referred toPara 4.1(xxii)referred toPara 4.1(xxiv)

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CRIMINAL/CIVIL APPELLATE JURISDICTION : CriminalAppeal Nos.2305-2307 of 2022.

From the Judgment and Order dated 21.04.2020 of the High Courtof Judicature at Bombay in CRLWP Nos.5023, 5035 and 5036 of 2019.

With

Criminal Appeal Nos.2302-2303 of 2022, Civil Appeal Nos.793 of2022, Criminal Appeal No.2298 of 2022, Civil Appeal No.801 of 2022,Criminal Appeal No.2299 of 2022, Civil Appeal No.877 of 2022, CriminalAppeal Nos.2300 And 2304 of 2022

Balbir Singh, Sanjay Jain, ASGs, Balasubramanian, Arvind Datar,V. Giri, Kapil Sibal, Mukul Rohatgi, Darius Khambata, Neeraj KishanKaul, Siddharth Dave, Sr. Advs., Naman Tandon, Samarvir Singh, AdityaSikka, Kanu Agarwal, Himanshu Gupta, Vikash Kumar Jha, Ms. RituAnand, Ms. Vasudha Vijaysheel, Adhiraj Singh Chauhan, Ms. PadmajaSharma, Ms. Neela Kedar Gokhale, Ms. Sanskriti Pathak, Ms. BaniDikshit, Arvind Kumar Sharma, Rajat Nair, Bhuvan Kapoor, AnukalpJain, Deepabali Dutta, Pratyush Shrivastava, Ms. Misha Rohatgi Mohta,Ms. Suveni Bhagt, Ms. Ayushi Sharma, Nakul Mohta, Nischaya Nigam,Mahesh Agarwal, Rishi Agrawala, Rahul Dwarkadas, Ms. PrachiDhanani, Ms. Rishika Harish, Ms. Niyati Kohli, Ms. Juhi Bahirwani,Pratham Vir Agarwal, Ms. Rohini Jaiswal, Ms. Manavi Agarwal, E. C.Agrawala, V.P. Singh, Aditya Jalan, Ms. Anannya Ghosh, Raghav Seth,Ms. Bhagya K. Yadav, Ms. Vanya Chabra, Anant Mishra, Ms. ShreyaChaudhary, Brian Moses, Ms. Aakanksha Kaul, Adit Khorana, Ms. VidhiThakur, Prastut Dalvi, Chandra Prakash, Bharat Bagla, SiddharthDharmadhikari, Aaditya Aniruddha Pande, Ms. Kirti Dadheech, SachinPatil, Advs. for the appearing parties.

The Judgment of the Court was delivered by

M. R. SHAH, J.

Appeals under consideration:

1. This batch of Criminal Appeals/Civil Appeals raise commonquestion(s) of law pertaining to the interpretation of Section 140(5) ofthe Companies Act, 2013 (hereinafter referred to as the ‘Act, 2013’)and the Investigation Report dated 28.05.2019 (hereinafter referred toas the ‘IFIN SFIO Report’) in respect of IL&FS Financial ServicesLimited (hereinafter referred to as the ‘IFIN’).

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A1.1 Criminal Appeal Nos. 2305-2307/2022, Criminal Appeal Nos.2302-2303/2022 and Criminal Appeal No. 2300/2022 have been filed bythe Union of India, inter alia, challenging the common judgment andorder dated 21.04.2020 passed by the High Court of Bombay in WritPetition Nos. 4144 & 4145 of 2019 and other companion writ petitions,by which the High Court, though upheld that Section 140(5) of the Act,B2013 is not unconstitutional, has set aside the direction under Section212(14) of the Act, 2013 dated 29.05.2019 issued by the Union of Indiato the Serious Fraud Investigation Office (SFIO) and consequently setaside the prosecution lodged by the SFIO vide Criminal Complaint No.CC 20/2019 on the file of Special Court (Companies Act) & AdditionalCSessions Judge, Greater Mumbai, the Union of India and the SFIO havepreferred the present appeals.

1.2 In Criminal Appeal Nos. 2302-2303/2022, the challengepertains to the auditor of IL&FS Financial Services Limited, namely,BSR & Associates LLP (BSR) and in Criminal Appeal Nos. 2305-2307/D2022 and Criminal Appeal No. 2300/2022, the challenge pertains to anotherauditor of IFIN, namely, Deloitte Haskins & Sells LLP (for short,‘Deloitte’) and an ex-director of IFIN, namely, Hari Sankaran.

1.3 Criminal Appeal Nos. 2298/2022, 2299/2022 & 2304/2022 havebeen filed by Deloitte and two of its partners challenging the impugnedEjudgment and order passed by the High Court insofar as it upholds theconstitutionality of Section 140(5) of the Act, 2013.

1.4 Civil Appeal Nos. 793/2022, 801/2022 & 877/2022 have beenfiled by Deloitte and two of its partners challenging the order passed bythe National Company Law Appellate Tribunal dated 04.03.2020.

FFactual Background:

2. The facts leading to the present proceedings in nutshell are asunder:

A series of defaults by the IL&FS Group Companies, which hadan aggregate debt burden of more than Rs. 91,000 crores, occurredGbetween June to September, 2018 and threatened to collapse the moneymarkets of India, added pressure to corporate bond yields and sparked asell off in the stock market. The Department of Economic Affairs, Ministryof Finance issued an Office Memorandum dated 30.09.2018 in respectof IL&FS to the Ministry of Corporate Affairs, Union of India requestingH

it to take action under the Act, 2013. The Memorandum and Notehighlighted that:

(a) the IL&FS Group was struggling with a debt contagion ofapprox.. Rs. 91,000 crores across the IL&FS Group againstRs. 6950 crores in equity share capital and reserves aleverage 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 interalia failure of corporate governance across the IL&FSGroup 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 ofa 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 itssubsidiaries.

2.2 The Ministry of Corporate Affairs filed a Company Petitionon 01.10.2018 being Company Petition No. 3638/2018 against IL&FSand its the then existing Board of Directors before the National CompanyLaw Tribunal (NCLT) seeking, amongst others, the removal of the thenexisting Board of Directors of IL&FS and the appointment of a newBoard of Directors in place and instead thereof. The NCLT passed aninterim order on the same date, i.e., 01.10.2018 superseding the thenexisting Board of Directors of IL&FS with a new Board of Directors.The new Board of Directors were directed to take charge of the affairsof the IL&FS. The new Board of Directors of IL&FS submitted a reportdated 30.10.2018 on progress and way forward with the Ministry ofCorporate Affairs which was in turn filed by the Ministry of CorporateAffairs with the NCLT on 31.10.2018, pursuant to the order passed bythe NCLT on 01.10.2018.

2.3 Further to the Office Order dated 30.09.2018 directinginvestigation to be initiated by the SFIO and an e-mail dated 01.11.2018,SFIO submitted an interim report in respect of IL&FS and one EmployeesWelfare Trust pertaining to the IL&FS Group. It is required to be notedthat the said interim report was submitted as Ministry of Corporate Affairscalled for an “interim report”, which was called in pursuance to Section212(11) of the Act, 2013 which provides that an interim report must be A

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Acalled for by the Central Government. It is to be noted that in the interimreport itself, it was specifically recorded that the findings in the interimreport are interim findings and the interim report concluded by settingforth “based on the above interim findings…” It is also to be noted thatinterim report was on the individuals who were in control of the affairsof the IL&FS Group and the illegalities and fraud perpetrated by them.B

2.4 On the basis of the interim report, the Ministry of CorporateAffairs filed a Miscellaneous Application in Company Petition No. 3638/2018 against the erstwhile Directors of the companies in the IL&FSGroup seeking to implead them in the said proceedings and an order toattach their immovable/movable properties.C

2.5 On the basis of the interim report and a prima facie opinion ofthe Institute of Chartered Accountants dated 04.12.2018, the Ministryof Corporate Affairs filed a petition under section 130 of the CompaniesAct, 2018 before the NCLT praying inter alia that the books of accountsof IL&FS, IFIN and IL&FS Transportation Networks Limited (ITNL)Dmay be re-opened and recast. Vide order dated 01.01.2019 passed inSection 130 petition, the NCLT directed that the accounts of IL&FS,IFIN & ITNL for the past 5 financial years be re-opened and recast onthe ground that the affairs of IL&FS, IFIN & ITNL had been mismanagedcasting a doubt on the reliability of the financial statements/accounts.

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2.6 The auditors of IFIN (BSR & Deloitte) were given notice ofSection 130 petition who opposed the said petition. Order dated01.01.2019 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 datedF31.01.2019. Order dated 31.01.2019 passed by the NCLAT was appealedbefore this Court. Vide order dated 04.06.2019, this Court dismissed thecivil appeal filed by the said ex-director. Thus, this Court upheld initiationof the proceedings by the Ministry of Corporate Affairs under section130 of the Companies Act, 2018.

G2.7 The Reserve Bank of India (RBI) initiated an inspection ofthe IL&FS and IFIN under Section 45N of the RBI Act, 1934. Pursuantto the investigation/inspection, the RBI submitted an investigation/inspection report dated 22.03.2019 to IFIN. IFIN thereafter issued anotice dated 13.05.2019 under Section 140(1) of the Act, 2013 interalia on BSR seeking to remove them as auditors. BSR filed a writtenHresponse to the notice served by IFIN under Section 140(1) of the Act, 2013 denying the allegations in the notice. A hearing was held on29.05.2019 by IFIN where BSR was also represented/present.

2.8 Pursuant to the Office Order dated 30.09.2018, SFIO submittedthe investigation report of IL&FS Financial Services Limited (SFIOReport).

2.9 The Ministry of Corporate Affairs vide letter dated 29.05.2019requested the Regional Director (Western Region) and the SFIO to initiateproceedings/prosecution. The SFIO was asked to initiate proceedings/prosecution under Section 447 and other provisions of the CompaniesAct, r/w Sections 417, 420 and 120B of the Indian Penal Code. TheRegional Director was asked to institute a Petition under Section 140(5)of the Act, 2013.

2.10 That thereafter the SFIO filed a criminal complaint on30.05.2019 before the Sessions Court (Special Judge – Companies Act),Mumbai against, amongst others, the auditors/ex-auditors of IFIN beingCC No. 20/2019.

2.11 That thereafter the Ministry of Corporate Affairs filed aPetition under Section 140(5) of the Act, 2013 dated 10.06.2019, interalia, against the auditors of the IFIN, namely, BSR & Deloitte and theengagement partners as well as their team. In the petition under Section140(5), it was inter alia prayed to remove BSR as auditors of IFIN;declare that Deloitte shall be deemed to be removed as Statutory Auditorfor IL&FS for F.Y. 2012-13 to F.Y. 2017-18; permit the Ministry ofCorporate Affairs to appoint an auditor for IFIN under the first provisoof Section 140(5) of the Act, 2013; and declare/direct that BSR, itsengagement partners, Deloitte and its engagement partners shall not beeligible to be appointed as an auditor for any company for a period offive years under the second proviso of Section 140(5) of the Act, 2013.

2.12 BSR issued a letter of resignation dated 19.06.2019 to IFINand simultaneously completed the regulatory filings pursuant to suchresignation.

2.13 BSR and its engagement partners filed a reply dated19.06.2019 to Section 140(5) petition before the NCLT, inter alia,contending that (i) they are not the auditors for IFIN any longer as theyhave tendered their resignation and therefore Section 140(5) is notapplicable to them; and (ii) Section 140(5) does not demonstrate anycase for fraud against BSR.

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2.14 Deloitte filed an application dated 19.06.2019 challengingthe maintainability of Section 140(5) petition before the NCLT on theground that Deloitte is no longer the auditor for IFIN. BSR and itsengagement partners also filed an application challenging themaintainability of Section 140(5) petition before the NCLT on the groundthat BSR is no longer the auditor for IFIN.

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2.15 After hearing the auditors (BSR & Deloitte) on the applicationschallenging the maintainability of Section 140(5) petition, the NCLT passedan order upholding the maintainability of Section 140(5) petition. Thatthereafter, the BSR filed a writ petition before the High Court, interalia, challenging the vires of Section 140(5) of the Act, 2013; the directionsCissued and the order of the NCLT upholding the maintainability of Section140(5) petition.

2.16 By the impugned judgment and order, though the High Courthas upheld the validity of Section 140(5) of the Act, 2013, the HighCourt has interpreted section 140(5) of the Act, 2013 and has set asidethe order passed by the NCLT upholding the maintainability of Section140(5) petition and has quashed Section 140(5) petition and has set aside/quashed the directions issued by the Ministry of Corporate Affairs andthe SFIO and also has quashed/set aside criminal proceedings institutedby the SFIO. Hence, the present appeals.

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Submissions on behalf of the Union of India:

3. Shri Balbir Singh, learned Additional Solicitor General of Indiaappearing on behalf of the Union of India has vehemently submitted thatin the impugned judgment and order the High Court has misinterpretedSection 140(5) of the Act, 2013, though the High Court has upheld theFconstitutionality of the said provision.

3.1 It is submitted that as regards the interpretation of Section140(5) of the Act, 2013, the High Court has explained the legislativeintent as being to induce/effect a change of an auditor in a companywhere there is a suspected fraud. It is submitted that thereafter the HighCourt has erroneously proceeded to hold that the intention behind Section140(5) of the Act, 2013 is only to break the collusion between the auditorand the company. It is submitted that accordingly, the High Courterroneously holds that if the unholy bond between the auditor andcompany is broken, either by removal or resignation, then Section 140(5)of the Act, 2013 fulfils its purpose. It is submitted that according to the G

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High Court, Section 140(5) of the Act is only attracted when despite thepetition by the Central Government, an auditor sets up a defence andopposes the petition frivolously and thus invites a final order as set forthin the second proviso to Section 140(5) of the Act, 2013. It is submittedthat on this basis, the High Court proceeded to hold that the petition filedby the Union of India under Section 140(5) of the Act, 2013 has beensatisfied by the subsequent resignation of the auditor and therefore thepetition under Section 140(5) of the Act, 2013 filed by the Union of Indiais no longer maintainable. It is submitted that the High Court erroneouslyproceeded to quash Section 140(5) petition and the order passed by theNCLT, Mumbai upholding its maintainability.

3.2 Now insofar as quashing and setting aside the criminalproceedings, it is submitted that the respondents assailed Section 212(14)direction on two grounds. Firstly, on the ground that the issuance of thedirection to prosecute within 30 hours of receipt of the IFIN SFIO Reportdemonstrates non-application of mind. Secondly, that the IFIN SFIOReport was an incomplete report as investigation had not been completedand therefore Section 212(14) direction was incompetent. It is submittedthat insofar as the first ground is concerned, the High Court erroneouslyholds that there is non-application of mind since it was improbable that areport of about 750 pages and 32000 pages of annexures could havebeen considered in 30 hours. Further, the High Court erroneously holdsthat the relevant facts and documents to demonstrate application of mindhave not been placed on record. It is submitted that while doing so, theHigh court also holds that the existence of a valid sanction can beappreciated in a writ Court and need not wait trial.

3.3 As regards the IFIN SFIO Report, it is submitted that theHigh Court holds summarily and without even going into the same anderroneously holds that the SFIO Report is incomplete and lacking andtherefore Section 212(14) direction is incorrect and/or invalid.

3.4 On interpretation of Section 140(5) of the Act, 2013, Shri BalbirSingh, learned ASG has taken us to the legislative history and legislativeintent of Section 140(5) of the Act, 2013. It is submitted that Section 140of the Act, 2013 is titled as “Removal, resignation of auditor and givingof 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 theprocedure to remove an auditor by the company before the expiry of histerm. Sections 140(2) and (3) of the Act deal with resignation of auditors AB

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Aand Section 140(4) of the Act deals with giving of special notice at anAGM for appointment of an auditor other than the retiring auditor andthe process in that regard. It is submitted that if an auditor of a companyis acting directly or indirectly in a fraudulent manner or is abetting orcolluding in fraud with the management of a company, Section 140(5) ofthe Act, 2013 empowers either the Central Government or any personBconcerned to approach the NCLT for recourse. Section 140(5) of theAct also enables the NCLT to take action suo motu against an auditorwho has acted in the aforesaid manner. It is submitted that in addition,Section 140(5) of the Act, 2013 has also two provisos and twoexplanations. It is submitted that therefore as per the first proviso toCSection 140(5), on an application made by the Central Government andif the Tribunal is satisfied that any change of the auditor is required, theTribunal shall within fifteen days of receipt of such application make anorder that the said auditor shall not function as an auditor and the Centralgovernment may appoint another auditor in his place. It is submitted thatsecond proviso to Section 140(5) of the Act provides that an auditor,Dwhether individual or firm, against whom final order has been passed bythe Tribunal under section 140(5) shall not be eligible to be appointed asan auditor of any company for a period of five years from the date ofpassing of the order and the auditor shall also be liable for action underSection 447. It is submitted that therefore merely because during the

Ependency of the proceedings under Section 140(5) of the Act the auditorresigns, the proceedings under Section 140(5) do not come to an end.Still and after the final order is passed, in that case, a further order asper second proviso to Section 140(5) can be passed to render such aauditor ineligible to be appointed as an auditor of any company for aperiod of five years from the date of passing of the order and even suchFauditor shall also be liable for the action under section 447 of theCompanies Act. It is submitted that therefore the High Court hasmaterially erred in observing and holding that once the auditor has resignedthereafter the application under section 140(5) of the Act shall not bemaintainable and/or is not required to be proceeded further.G3.5 Thereafter, Shri Balbir Singh, learned ASG has taken us andreferred to the legislative history of Section 1‘40(5) of the Act as under:

Legislative History of Section 140(5) of the Act, 2013

Around August 2004, the Government initiated the process ofHreview of the Companies Act, 1956 and drafting of a new

Companies Bill to replace the Companies Act, 1956. A conceptpaper was published on the website of the Ministry of CorporateAffairs on which various comments were received. An expertcommittee was also constituted by the Ministry of CorporateAffairs under the chairmanship of Dr. J.J. Irani, to makerecommendations 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, theMinistry prepared the Companies Bill, 2008 and introducedthe same before the Lok Sabha on October 23, 2008. The2008 Bill was referred to the Department related ParliamentaryStanding Committee (PSC) on Finance for their examination.However, the Lok Sabha was dissolved before the PSC couldpresent its report and therefore the 2008 Bill lapsed as perArticle 107(5) of the Constitution of India.

ii. Accordingly, the Companies Bill 2009 was introduced in theLok Sabha on or about July 15, 2009. The 2009 Bill too wasreferred to the PSC. In identifying the features of the 2009Bill, the PSC Report of August 2010 notes the salient featuresas being “the role, rights and duties of the auditors have beendefined so as to maintain integrity and independence of theaudit process.”

iii. In setting out the guiding principles underlying the 2009 Bill,the PSC, in the Report, notes that, amongst other principles,the following are the key principles underlying the 2009Bill:

“Need for sturdy systems, enhanced transparency andcomprehensive disclosures based regime emphasized; ascompanies grow, become bigger and globalise with thenumber and range of stakeholders increasing by volumes,necessitating proper checks and balances.

Self-regulation through internal mechanism/procedures, tobe underpinned on strong systems and procedures; CentralGovernment to step in only when mis-governance takesplace.

In the light of recent experiences in corporate mis-governance, process of audit and functioning of auditors to AB

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be made more independent and effective; stringent jointand individual liability prescribed; setting up of oversightbody to set standards and supervise quality of auditrecommended”

iv. Further, the report notes that various suggestions were madeby the PSC during deliberations on the Bill which wereincorporated by the Central Government. On a reading of thesesuggestions, it is essential to note that independence of theauditors was a key point.

v. Crucially, in the Report, the PSC notes that the 2009 Billincorporates suggestions of the JPC on the 1993 Banking andSecurities Market Scam and the 2002 JPC on the Stock MarketScam. This means that the 2009 Bill was a culmination of thegrowing corporate economy and past experiences of corporatefiascos too. One of the suggestions were to provide for stricteraccountability for auditors. Moreover, at the foot of the samepage, the PSC notes that the 2009 Bill has made the regulatoryprovisions and regime more stricter by inter alia providing formaking statutory auditors more accountable by providing forsubstantial civil and criminal liability for auditors.

vi. The Report clearly demonstrates that there was a longdiscussion on the role, responsibility, duties and regulation ofauditors and the regulatory and enforcement provisions.Particularly, the Report records that various suggestions werereceived to make the provisions pertaining to audit and auditorsmore stringent. Significantly, it was suggested that Clause123(10) of the 2009 Bill (which provides for removal of anauditor by the NCLT on finding that there is a fraud andcorresponds to Section 140(5) of the Act) should be made morestringent and should contemplate that an auditor removed bythe Tribunal should not be eligible to be appointed as an auditorof any company for a period of 5 years. The relevant extractsare as follows:

“34.Suggestions have been received by the Committee thatthere is a need to make provisions relating to Audit andAuditors more stringent such as following:- (d) Suitable penalty may be provided in case ofcontravention of these provisions.

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(e) (i) Clause 123(10) of the Bill empowers the Tribunal, ifit is satisfied that the auditor of a company has acted in afraudulent manner or abetted/colluded in any fraud, to directthe company to change its auditors. Suggestions have beenmade that these provisions should be modified to clarify tocover act of fraud or abetment by auditor whether directlyor indirectly. It has also been suggested that the Bill mayprovide that if auditor, whether individual or firm, againstwhom an order has been passed by the Tribunal under thisclause should not be eligible to be appointed as an auditorof any company for a period of five years.”

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b. The Companies Bill, 2011

i.In view of the recommendations of the Standing Committeeand that of various stakeholders, the Central Governmentwithdrew the 2009 Bill with a view to introduce a fresh Billincorporating the recommendations of the StandingCommittee and various stakeholders. Consequently, the 2011Bill was introduced in the Lok Sabha in December, 2011,accepting and incorporating most of the recommendationsmade by the previous Standing Committee in respect of theCompanies Bill, 2009. This aspect has been recorded in theStatements of Objects and Reasons of the Companies Bill,2011.

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ii.At this juncture, it is important to bear in mid that thesuggestion of the Standing Committee to Clause 123(10) ofthe 2009 Bill (which provides for removal of an auditor bythe NCLT on finding that there is a fraud) was to:

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•Make the provision more stringent; and

•To provide for consequences for an auditor when suchGauditor is found to have been perpetrating a fraud and isremoved by the NCLT for such fraud.

iii.The 2001 Bill consolidates the provisions pertaining toremoval of auditors into one clause namely Clause 140 ofthe 2011 Bill. Further, the 2011 Bill (like the 2009 Bill) retains H

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the NCLT’s power to remove an auditor upon finding thatthe auditor has perpetrated a fraud at Clause 140(5) of the2011 Bill. Most pertinently, the 2011 Bill incorporating therecommendations of the Standing Committee as containedin the Report, provides for consequences for an auditor whois found to have perpetrated a fraud by the NCLT and isremoved for such fraud by the NCLT. This has been doneby way of a proviso to Clause 140(5) of the Bill (particularlythe second proviso). The relevant extract of Section 140(5)of the 2011 Bill is as follows:

“(5) Without prejudice to any action under the provisionsof this Act or any other law for the time being in force,the Tribunal either suo motu or on an application madeto it by the Central Government or by any personconcerned, if it is satisfied that the auditor of a companyhas, whether directly or indirectly, acted in a fraudulentmanner or abetted or colluded in any fraud by, or inrelation to, the company or its directors or officers, itmay, by order, direct the company to change its auditors:

Provided that if the application is made by the CentralGovernment and the Tribunal is satisfied that any changeof the auditor is required, it shall within fifteen days ofreceipt of such application, make an order that he shallnot function as an auditor and the Central governmentmay appoint another auditor in his place:

Provided further that an auditor, whether individual orfirm, against whom final order has been passed by theTribunal under this section shall not be eligible to beappointed as an auditor of any company for a period offive years from the date of passing of the order and theauditor shall also be liable for action under section 447.

Explanation – For the purposes of this Chapter the word“auditor” includes a firm of auditors”.

Thereafter, in January 2012, the 2011 Bill was placed beforethe Standing Committee by the Lok Sabha. The StandingCommittee has prepared and finalized its report in thisregard, and insofar as the penalty and guiding principles of Clause 140(5) are concerned, there is no further guidanceon the legislative intent behind the same.

v.In view of the above, the test of Clause 140(5) of the 2011Bill has remained unchanged, the same has been enactedas the present Section 140(5) of the Companies Act, 2013.

3.6 It is submitted that therefore by way of Companies Bill, 2009subsequently introduction the Act, for the first time it includes an obligationto an auditor to report any fraud detected to the Central Government asper Section 143(12) of the Act and incorporated in the form of the secondproviso to Section 140(5) of the Act a provision to make an auditor whohas been found to have been acting in a fraudulent manner or colludingfrom being an auditor in any company for a period of 5 years. It issubmitted that therefore, the public policy behind Section 140(5) of theAct is very clear – to prevent an auditor who has been found to perpetratefraud or colluding in it in one company from undertaking any statutoryaudits for a period of 5 years. Reliance is placed on the decision of thisCourt in the case of Devas Multimedia Pvt. Ltd. v. Antrix CorporationLtd. & Anr, reported in (2023) 1 SCC 216.

3.7 It is further submitted by Shri Balbir Singh, learned ASG thatSection 140(5) appears in Chapter X of the Act. It is submitted thatChapter X specifically deals with ‘Audit and Auditors’. Section 143 ofthe Act deals with the powers and duties of the auditors. Sub-section(12) of Section 143 specifically provides that in the event that the auditorshas reason to believe that an offence of fraud is being or has beencommitted in the company, the auditor shall report the matter to theCentral Government. The detailed procedure is provided under the Rulesissued in this regard.

3.8 It is further submitted that Section 144 of the Act providesthat the auditor cannot provide certain services and the relevant one forthe present matter is “Management services”. It is submitted that theobjective is that the auditor should function as an independent personuninfluenced by any of its activities outside the scope of audit services.The auditor is prohibited from providing any management service to theCompany. It is submitted that the prohibition and restriction created underSection 144 of the Act is primarily to protect the interest of the Companyin question and other stakeholders such as lenders and investors and thepublic at large.

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A3.9 It is submitted that keeping these provisions and the underlyingpublic policy in the backdrop, Section 140 (5) of the Act, 2013 is to beconsidered. It is submitted that the plain words of Section 140(5) of theAct, 2013 provide for the NCLT to, either suo motu or on an applicationmade by the Central Government/any person concerned, inquire into/examine the conduct of an auditor or his involvement in a fraud andBreach a satisfaction as regards the auditors fraudulent conduct. Theprovision 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 theAct is contemplated as an interim or pro-term measure to prevent anCexisting auditor from continuing and substitute him with an auditornominated by the Central Government based on a prima facie satisfactionthat a fraud has been perpetrated and when circumstances warrant thesubstitution. This is an interim order and operates akin to a temporarysuspension.D3.11 It is submitted that the second proviso to Section 140(5) ofthe Act which is in the nature of a substantive provision activates on anorder recording the Hon’ble NCLT’s satisfaction of fraudulent or collusiveconduct by an auditor and his consequent removal from the Companyand debars him from being an auditor in any company for a period of 5Eyears. An order under the first proviso is not the order contemplatedunder the second proviso to Section 140(5) of the Act. Thus, if the NCLTfinally finds no grounds to hold that there has been fraudulent conduct orcollusion in fraud, then the auditor who may have been temporarilysuspended under an order under the first proviso can be re-instated.F3.12 It is submitted that Section 140(5) of the Act therefore confers F3.12 It is submitted that Section 140(5) of the Act therefore conferspower onto the Hon’ble NCLT to adjudicate on or inquire into the conductof an auditor and determine whether the auditor has conducted itself ina fraudulent manner. This is clear from the operative part of the provisionwhich mandates the nature of inquiry required under the section. This is“directly or indirectly, acted in a fraudulent manner or abetted or colludedGin any fraud by, or in relation to, the company or its directors or officers.”

3.13 It is submitted that therefore, any final order would certainlycontain either a positive or negative determination of “fraud” or“fraudulent conduct”. As a consequence of finding fraud under Section140(5) of the Act, the provision illustrates that the finding of fraud/Hfraudulent conduct “may” lead to an order directing change of an auditor.

The second proviso further expressly provides that an auditor “againstwhom a final order has been passed” is in-eligible to act as an auditor ofany company for a period of 5 years. Significantly, the words used in thesecond proviso to Section 140(5) of the Act is “final order” and not “theauditor so removed” or “changed auditor”.

3.14 It is submitted that therefore the requirement or necessity ofchange of auditor in a company does not activate/govern the power ofthe NCLT under Section 140(5) of the Act, 2013. Instead, it is the inquiryinto the fraudulent act by an auditor who abdicates his statutorilyprescribed independent role and responsibilities and colludes with themanagement or otherwise perpetrates a fraud. It is submitted that theessence of the provision/section is determination of fraudulent conductof the auditor. The consequent “removal” contemplated by Section 140(5)of the Act, 2013 is not just as acting as an auditor in one company or thecompany concerned but from any company for a period of five years.

3.15 It is submitted that therefore the interpretation of Section140(5) of the Act, 2013 made by the High Court in the impugned judgmentand order is just contrary to the object and purpose of enactment ofSection 140(5) of the Act, 2013 and, as such, is contrary to the saidprovision.

3.16 Shri Balbir Singh, learned ASG has submitted that during thecourse of arguments, the submissions made on behalf of the respondentsare as under:

a) Section 140(5) of the Act, in light of the other provisions of theAct, is only to incentivize a recalcitrant auditor into resigning.Therefore, if an auditor resigns after the filing of a Petition underSection 140(5) of the Act but before the Hon’ble NCLTpronounces an order on that Petition, the purpose behind Section140(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 plainwords 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 aproviso into Section 140(5) of the Act which deems his continuancetill the culmination of proceedings under Section 140(5) of theAct; A

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c) The second proviso to Section 140(5) of the Act is arbitrary,harsh and burdensome and ought to be read down. The mandatoryineligibility to act as an auditor for a period of 5 years ought to beread as for a period up to 5 years to make the provisionconstitutional.

d) The ineligibility to act as an auditor of any company prescribedunder the second proviso to Section 140(5) of the Act can onlyextend to the audit partners concerned and not to the entire firmand the other audit partners who were not connected with thefraudulent act or acts.

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C3.17 Meeting with the aforesaid submissions, it is submitted asunder:

a) Acceptance of Respondent’s contention would mean that thejurisdiction of a quasi-judicial tribunal can be overcome merely byan act of a party. More significantly, it would lead mean that anDinquiry into fraudulent conduct can be disrupted and/or standssatisfied simply by an act of a party.

b) The entire contention of the provision operating in terrorem orto incentivize an auditor to resign is untenable. The consequencesof indulging in fraudulent activities provided for in the Act includingEbut not limited to Section 447 of the Act itself ought to serve as adeterrent and operate “in terrorem”.

c) The entire construction sought to be attributed to Section 140(5)of the Act by reference to the other provisions of the Act (as perparagraphs 9.17 (a) and (b) above) is to turn the provision into adead letter [See NEPC Micon Ltd. v. Magma Leasing Limited(1999) 4 SCC 253]. Moreover, the Respondent’s interpretation, ifaccepted, would lead to various absurdities. Pertinently, amongstother reasons:

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i. given that it is accepted that the first proviso provides for atemporary suspension or removal of an auditor, if an applicationis filed under the first proviso and the errant auditor replaced(albeit temporarily), then an order Second Proviso can neverfollow. This is because the errant auditor cannot, as on date ofthe final order, be said to be the auditor of a company due tothe first proviso order.

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ii. there exists no reason for Section 140(5) of the Act to operatein terrorrem or to induce a recalcitrant auditor to resign. Thisis so since the first proviso to Section 140(5) of the Act operatesimmediately to effect a change of the auditor/remove theexisting auditor after filing of a Petition by the CentralGovernment under Section 140(5) of the Act. In other words,the first proviso would thus be rendered redundant if the intentionbehind Section 140(5) of the Act is to induce an auditor intoresigning.

d) The ineligibility to act as an auditor for any company for aperiod of 5 years cannot be read down to mean “for a period “upto five years”. This is so since:

i. apprehension or misuse of the provision in future cannot beground to test the constitutional validity of the provision. [SeeMadras Bar Association v. Union of India 2021 SCC OnlineSC 463 (para 101-102)]

ii. fraud vitiates everything and the punishment mandates inthe statute cannot be varied by examining the length and breadthof the fraud.

iii. the ineligibility to act under Section 140(5) of the Act is onlyfor acting as an auditor of any company. It does not stop theauditor concerned from practising as a chartered accountantgenerally. The individual or firm concerned can take up anyother activity pertaining to accounts of the company (which isotherwise barred for an auditor by virtue of Section 144) suchas account and book keeping service, actuarial service etc orotherwise. In fact, in the present case, the auditing firms involvedhave a very significant part of their business outside the auditfunction. The prohibition of 5 years does not affect their practiseas a chartered accountant or any other area of service; and

iv. the fixed prohibition period of 5 years activates only in theevent of finding of a fraud by the Hon’ble NCLT in terms ofthe statutory scheme and public policy. The principle ofproportionality cannot be raised to a level where the extent ofthe fraud is required to be examined. The very deterrent effectof the provision would get diluted and more importantly, it would ABC

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amount to perpetuating the fraud in connection with othercompanies.

v. As regards the extent of application of the ineligibilityprescribed under the second proviso to Section 140(5) of theAct to the firm and individuals, it is submitted that a close readingof the provisions of the Act reflects that the legislatureconsidered every aspect relating to the consequence of Section140(5) of the Act. An examination of the second proviso toSection 140(5) of the act shows that the Hon’ble NCLT isrequired to give specific findings with regard to fraud andwhether the auditor is a firm or an individual. There cannot beany presumption that mere finding of fraud in connection withan individual will automatically result in the determination offraud by the firm. This is also provided under Section 147 ofthe Act which is as follows:

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(5) Where, in case of audit of a company beingconducted by an audit firm, it is proved that the partneror partners of the audit firm has or have acted in afraudulent manner or abetted or colluded in any fraudby, or in relation to or by, the company or its directorsor officers, the liability, whether civil or criminal asprovided in this Act or in any other law for the timebeing in force, for such act shall be of the partner orpartners concerned of the audit firm and of the firmjointly and severally.

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Provided that in case of criminal liability of an auditfirm, in respect of liability other than fine, the concernedpartner or partners, who acted in a fraudulent manneror abetted or, as the case may be, colluded in any fraudshall only be liable.

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3.18 Now so far as the submission on behalf of the respondentsGthat once an auditor resigns, the provisions of Section 140(5) of the Actwould cease to apply. Instead, the auditor concerned can be proceededagainst under Section 241(3) of the Act and the proceedings pursuant toSection 241(3) of the Act would lead to the same result and the auditorwould be held not to be ‘fit and proper person’ to be appointed in anyother office connected with the conduct and management of anyHcompany. It is submitted that:

a. Section 241(3) and its consequential provisions were introducedwith effect from 14.8.2019, which authorized the CentralGovernment to apply to the Tribunal with a request to declare thatthe persons mentioned in Section 241(3) of the Act are ‘not fitand proper persons to hold the office of director or any otheroffice connected with conduct and management of any company”.

b. Constructing “any other office connected with the conduct andmanagement of any company”, it would be necessary to considerthe consequential provisions that were enacted along with Section241(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 pursuantto sub-section (4A) of section 242 shall not hold the officeof a director or any other office connected with the conductand management of the affairs of any company for a periodof five years from the date of the said decision

(2) Any person who knowingly acts as a managing directoror other director or manager of a company in contraventionof clause (b) of sub-section (1) or sub-section (1A), andevery other director of the company who is knowingly aparty to such contravention, shall be punishable with finewhich may extend to five lakh rupees Clearly, from the words of the consequential provision, it is clearthat the reference in specifically Section 241(3) of the Act to“any other office connected with the conduct and managementof any company” means those akin to manager, managing directoror other director such as key managerial personnel and not anauditor.

c. Moreover, in Section 241(3) of the Act specifically, the wordsused are “conduct and management of the company”. The auditoras the Act sets forth is an independent examiner of accounts andcannot be said to be holding an office in the conduct andmanagement of the company. This would militate against the veryfibre of the Companies Act, 2013.

3.19 Making above submissions, it is submitted that, (i) Section140(5) of the Act, 2013 operates to enable a quasi-judicial tribunal equippedwith powers of a civil court to examine the role of auditors and adjudicate AB

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Aon their fraudulent conduct and the abdication of their function; (ii)Section140(5) is not a provision to merely induce/effect a change of an auditorwho is not resigning. It is intended as a provision which involves asubstantive determination of fraud so as to isolate or remove an auditorfrom the company and from any company that he/she is auditing. Ifconstrued to be a provision only to induce a change of a recalcitrantBauditor, the words conferring power on the NCLT to inquire into anauditor’s fraudulent conduct would be rendered meaningless; (iii) thesecond proviso to Section 140(5) of the Act is essentially remedial andpreventive, though it might incidentally also have a punitive effect. Thepublic purpose / object of the second proviso to Section is clearly toCprotect companies from being prejudicially affected, by debarring suchan auditor, who has been held to have acted fraudulently, from beingappointed as an auditor of any company.

3.20 It is submitted that in the facts of the present case, it ispertinent to note that:

Da) Deloitte was the statutory auditor of IFIN from 2008 till2018. 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 auditEof IFIN for the Financial Year 2017-2018;

d) the Petitioner i.e., the Union of India filed the Petition underSection 140(5) of the Act against both BSR and Deloitte onJune 1, 2019. BSR was the statutory auditor at that time.

e) this Petition is based on the SFIO IFIN Report which allegesFthat both auditors i.e., Deloitte and BSR acted in a fraudulentmanner. This includes the period when Deloitte was the soleauditor and for the year when the audit was jointly performedby BSR;

f) after the Petition was filed, BSR tendered its resignationGand filed an application in or about July 2019 challenging themaintainability of the Union of India’s Petition under Section140(5) of the Act. Deloitte who had retired in 2018 also filedmaintainability application; and

g) after leave from the Hon’ble Supreme Court, the Union ofHIndia invoked the Hon’ble NCLT’s powers under the first proviso to Section 140(5) of the Act and an auditor wasappointed for IFIN.

3.21 It is submitted that therefore in the facts and circumstancesof the present case and on true interpretation of Section 140(5) of theAct, explained above, the High Court has erroneously quashed theNCLT’s order upholding the maintainability of Union of India’s petitionunder Section 140(5) of the Act, 2013 and the proceedings under Section140(5) of the Act, 2013 against the auditors – BSR.

3.22 Given the interpretation of Section 140(5) of the Act submittedabove, it is contended that the act of resignation of BSR after the filingof the Petition under Section 140(5) of the Act cannot be held to renderthe proceedings under Section 140(5) of the Act as void. The Hon’bleBombay High Court’s interpretation would render any proceedingswhether against the company’s management and / or its auditors forfraud completely frustrated by mere stratagem of design of a party.Under the circumstances, the Impugned Order passed by the Hon’bleBombay High Court is unsustainable and deserves to be set aside.

3.23 As regards, Deloitte, it is submitted that the Hon’ble NCLTand the NCLAT have upheld the maintainability of the Petition underSection 140(5) of the Act. It is submitted that as set out above, Section140(5) of the Act requires the Hon’ble NCLT to satisfy itself that theauditor of the company, whether directly or indirectly, acted in a fraudulentmanner or abetted or colluded in any fraud. In order to arrive at a findingin this regard, it is important to examine the role of both auditors i.e.,Deloitte and BSR especially when both were acting as auditors for thefinancial year 2017- 2018. Keeping in mind the interpretation of theprovision set out above, the satisfaction of the Tribunal may finally resultin a change of auditor i.e., the change of BSR; however, that does nottake away the powers given to the Hon’ble NCLT in terms of Section140(5) of the Act to inquire into the fraud qua Deloitte as well and iffound record a satisfaction of fraud against Deloitte in its final order.Therefore, in the facts of this case, the final order and therefore thesecond proviso can operate against Deloitte and BSR.

3.24 Now so far as quashing and setting aside Section 212(14)direction by the Ministry of Corporate Affairs and the Criminal Complaintfiled by the SFIO and the IFIN SFIO Report, it is submitted that theBombay High Court has, in the Impugned Order, set aside/quashed the AB

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A212(14) Direction and the Criminal Complaint and the SFIO IFIN Reporton the ground that:

a. SFIO IFIN Report is an incomplete report/report on anincomplete investigation and therefore the 212(14) Directioncould not be given. The alleged basis of this finding is: (i) asingular paragraph in the SFIO IFIN Report; and (ii) the 212(14)Direction which calls for a further report on certain aspectsitself demonstrates that the investigation is incomplete; and B

b. The 212(14) Direction was given within 30 hours of placingthe SFIO IFIN Report before the Central Government and itwas improbable for the Central Government to have appliedits mind within such a short period.

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It is submitted that the impugned order is incorrect since:

a. The SFIO IFIN Report is a report prepared by the SFIO on thecompletion of investigation into IFIN viz. one of the companiesDunder investigation. The Hon’ble Bombay High Court has notappreciated the position that:

i. By an order dated September 30, 2018, an investigation wasdirected to be conducted by the SFIO into IL&FS and itssubsidiaries (IL&FS Group) which aggregates to approx. 100-E169 entities;

ii. The conduct of affairs of the IL&FS Group which was setout in the Interim Report of the SFIO dated November 30,2018 clearly set forth that there were a number of interlinkageswithin the group, routing transactions etc;

iii. IFIN is one of the subsidiaries in the IL&FS Group and thefinancial services arm. It facilitated borrowings for differentgroup companies in the IL&FS Group from third partyborrowers and at times routed funding from one group companyto another; G

iv. Given the nature of interlinkages and overlaps betweendifferent entities in the IL&FS Group, the SFIO IFIN Reportsets out that the SFIO IFIN Report is a report in respect ofIFIN and is a report upon completion of investigation into IFIN;and

v. Finally, the SFIO IFIN Report sets forth, in light of thecomplex structure of the IL&FS Group and the interlinkagesbetween entities etc, that if any further instances or transactionsare uncovered qua IFIN during the investigation of the othergroup companies of IL&FS then a further report will be filed.

This does not mean that the investigation into IFIN is incomplete.In fact, even the direction to call for a further report on certainaspects (which may be related to third parties) does not detractfrom the position that the investigation is complete in all otherrespects. The Hon’ble Bombay High Court has failed to appreciatethe purport of the submission and has fundamentally erred in holdingthat the SFIO IFIN Report is incomplete and/or that the investigationinto IFIN is incomplete. In the case at hand, the SFIO IFIN Reportwas submitted by the SFIO after a detailed and extensiveinvestigation of IFIN and the multiple parties involved. It issubmitted that there were conclusive findings against each auditor/CA pointing out multiple breaches, violations of statutory dutiesand fraudulent conduct with respect to inter alia functioning ofauditors at the relevant point of time.

b. The Bombay High Court has proceeded to accept the surfacelevel argument of the respondents that the 212(14) direction wasissued within 30 hours which demonstrates non-application of mindwithout considering the following:

i. The 212(14) direction itself demonstrates application of mindfrom the fact that the direction requests the SFIO to prosecuteadditional persons whose involvement was discernible from areading of the SFIO IFIN Report. This would have beenpossible only if the SFIO IFIN Report had been considered. Infact, the 212(14) Direction also rectifies a typographical errorby the SFIO in the charging section applied in the SFIO IFINReport;

ii. The affidavit in reply of the UOI before the Hon’ble HighCourt provided an explanation/justification for the time takento 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 cogentresponse; A

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iii. The Respondents’ contentions were self-serving andcontradictory. Particularly, the contention that the Union of Indiadid not apply its mind given the period of 30 hours taken toissue the 212(14) Direction is directly contrary to the contentionthat the direction (contained in the 212(14) Direction) to callfor 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 onlyhave been issued after application of mind.

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iv. Legal and factual mala fides has a very high threshold –one that cannot be met with a surface level contention of speedCof processing.

v. The scope of intervention before a Hon’ble Court with WritJurisdiction would be to determine if there was sufficiency ofmaterial before the authority granting the direction. In thepresent case, the SFIO IFIN Report was before the authoritygranting the direction to prosecute – this fact is not disputed.Therefore, it cannot be said that the relevant materials were D

not present before the relevant authority.

3.25 Now so far as the submission on behalf of the respondentsthat before the NCLT the SFIO IFIN Report was referred to as secondEinterim report and therefore the SFIO IFIN Report being an interimreport, 212(14) direction could not have been issued as the Act does notcontemplate issuance of a direction under Section 212(14) of the Act onthe basis of an interim report, it is submitted by Shri Balbir Singh, learnedASG that as per section 212(11) of the Act, 2013, during the course ofFinvestigation, the Central Government has been empowered to call foran interim report. It is submitted that the SFIO has not been empoweredto submit an interim report without a request for an interim report fromthe Central Government. It is submitted that the Central Governmentvide letter dated 03.11.2018 specifically directed the SFIO to submit aninterim report. Pursuant to this, the SFIO submitted an interim reportGdated 30.11.2018. The Interim Report, on a bare perusal, records that itis an interim report, records the Central Government’s request for aninterim report and classifies its findings as interim findings. It is submittedthat this is completely different from the SFIO IFIN Report whichclassifies itself as an Investigation Report under Section 212(12) of theAct, sets out the detailed and extensive investigation conducted andH

records conclusive findings against each of the Respondents in the presentcase. It is submitted that therefore, the stray references to the SFIOIFIN Report as an interim report cannot be accepted to classify thereport as an Interim Report. It is submitted that in fact, the only reasonfor such reference was since the investigation into the affairs of othersubsidiaries in the IL&FS Group (apart from IFIN) is on-going. It issubmitted that in fact the said position has been appreciated by theBombay High Court in the impugned order in paragraph numbers202(VIII) and 202(XII).

3.26 Thereafter, Shri Balbir Singh, learned ASG has taken us tothe findings recorded in the SFIO IFIN Report. It is submitted that basedon the findings in the Investigation Report, auditors have been chargedwith:

a. fraud under Section 447 of the Act for colluding with themanagement 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 accountof the financial statements and present a rosy picture under section211 read with section 628 & Section 129 read with section 448 ofthe Act.

It is submitted that the Investigation Report broadly records thatthe auditors despite knowledge did not point out any financial abnormalityin the operation of IFIN and gave an unmodified opinion stating that thefinancial statements give a true and fair view in conformity with theaccounting standards and other accounting principles accepted in India.

3.27 It is submitted that in the Investigation Report, there arespecific findings with respect to auditing of borrowings and utilisation;audit of non-convertible debentures; audit of lendings. It is submittedthat on the basis of the findings recorded in the Investigation Report, theauditors have been charged under Section 447 of the Companies Act,2013 and Sections 417, 420 r/w 120B of the IPC. It is submitted thattherefore the High Court has materially erred in quashing and settingaside the direction issued under Section 212(14) of the Act and thecomplaint/prosecution launched against the auditors.

3.28 Making above submissions, it is prayed to set aside thejudgment and order passed by the High Court by which the High Court A

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Ahas quashed Section 212(14) direction and the complaint filed by theSFIO and permit the trial to continue against the accused arrayed in thecomplaint. It is also prayed to set aside the impugned judgment andorder passed by the High Court quashing and setting aside the orderpassed by the NCLT/NCLAT upholding the proceedings under Section140(5) of the Act, 2013 and permit/allow the said proceedings to beBproceeded further, so as to allow the NCLT to reach to the final conclusionso that even further steps can be taken as per second proviso to Section140(5) of the Act, 2013.

Submissions on behalf of the opposite parties:

C4. While opposing the present appeals, learned senior counselappearing on behalf of the BSR has made the following submissions:

i) It is submitted that in fact the BSR had challenged the vires ofSection 140(5) of the Act, 2013 before the High Court beingviolative of Articles 14, 19(1)(g), 20 and 21 of the Constitution ofDIndia as well as being unconstitutional and void. It is submittedthat however the High Court by the impugned judgment and orderwhile upholding the constitutionality of Section 140(5) has readdown Section 140(5) of the Act, 2013.

ii) It is submitted that by the impugned judgment and order, theEHigh Court has held that the object of Section 140(5) is to removean auditor who has neither been removed by the company, norresigned. It is further observed that the role of the NCLT underSection 140(5) is only to examine the need to change a company’sauditor and not to punish or debar the auditor. It is submitted thatrejecting the Ministry’s submission that the NCLT can pass anForder to debar an auditor for 5 years under section 140(5) of theAct, the High Court has held that the NCLT’s order under section140(5) can only be for change of auditor of the company. It isfurther observed and held that the consequences of debarment inthe second proviso automatically follow upon such change andGNCLT does not have any discretion in it.

iii) It is submitted that before the High Court, the BSR alsochallenged two orders of the NCLT, namely, order dated09.08.2019 and order dated 18.10.2019. Both these orders werepassed by the NCLT purportedly under section 140(5) of the Actin proceedings commenced pursuant to the Ministry’s sanction H

and directions dated 29.05.2019 under section 212 of the Act. It issubmitted that BSR had also challenged the jurisdiction of NCLTto pass orders under section 140(5) of the Act, 2013. It is submittedthat the NCLT has not determined the merits of a section 140(5)order and the NCLT in its first order has only upheld themaintainability of section 140(5) proceedings. It is submitted thattherefore the submissions on behalf of the respondents do not gointo the merits at all.

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iv) Now so far as on interpretation and applicability of section140(5) of the Act, 2013, learned counsel appearing on behalf ofthe respective respondents – original writ petitioners has taken usto the scheme of regulation of Auditors under the Companies Actand has taken us to the various provisions relating to the regulationof Auditors under the Companies Act, more particularly Sections132, 141, 147, 245, 447 and Sections 435 to 438 of the CompaniesAct. It is submitted that the Act provides a holistic scheme forregulation and punishment of Auditors, all of which have beendifferent functions and purpose and with such matrix of sections,no auditor can get away with fraud, abetment of fraud, professionalmisconduct etc. It is submitted that therefore no auditor can escapeby way of resignation or termination of tenure due to efflux oftime.

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v) It is submitted that a plain reading of Section 140 as a wholeshows:

i.Section 140(1) of the Act deals with the procedure forvoluntary auditor by a company.

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ii.140(2) and (3) deal with the procedure for resignationof an auditor.

iii.Section 140(4) deals with special notice. Section 140(5)deals with involuntary removal by order of NCLT.

iv.The heading of Section 140 of the Act (i.e., “Removal,Gresignation of auditor and giving of special notice”) makesit clear that Section 140(5) only serves the purpose ofremoval of an auditor and is not a standalone substantiveprovision to disqualify auditors. It is well settled that aheading is a condensed name to collectively indicate thecharacteristics of the subject matter covered by aH

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Section. Reliance is placed on the decision of this Courtin the case of Raichurmatham Prabhakar v.Rawatmal Dugar, (2004) 4 SCC 766 (Para14).

vi) It is submitted that Sections 132, 141, 147, 245, and 447 of theAct deal with liability of an auditor in cases of fraud:

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i.Section 132 provides for the constitution of the NationalFinancial Reporting Authority (“NFRA”). NFRA hasbeen given ample power (including the powers of civilcourt) under Section 132 to impose penalty orpunishment on an auditor (including debarring the auditor)to the auditors professional or other misconduct. Theexplanation under Section 132 provides for the terms“professional or other misconduct” to have the samemeaning as prescribed under the Chartered AccountantsAct, 1949 (“CA Act”). The meaning of “professional orother misconduct” entails a very wide scope as evincedfrom Schedule I and II of the CA Act. Therefore, ifauditors are guilty of fraud or abetting in fraud, they arecertainly guilty of professional misconduct, for whichpowers are vested with the NFRA to disqualify, suspendetc.

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Eii.Section 141(3)(h), which specifically deals with eligibilityof auditors, provides for the ineligibility for appointmentof an auditor in case such person is convicted of anoffence involving fraud. Section 141(3)(h) disqualifiesthe auditor for 10 years from the date of conviction forFan offence involving fraud. Pertinently, while theunderlying offence is the same, i.e., an act involving thesame fraud, the penalty under Sections 140(5) and141(3)(h) are triggered at different times. A situationcould arise where a person deemed ineligible underSection 140(5) by way of the NCLT’s final order isGsubsequently acquitted of the charge of fraud on thesame set of facts under Section 447 of the Act by thecriminal court. Further even where a person is convictedunder Section 447, if he has already suffered thedisqualification under Section 140(5) for 5 years he couldface a further ineligibility to be appointed as an auditor G

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for 10 years. The total period hence could extend to 15years.

iii.Section 147(3) imposes financial liability on auditors byway of refund of remuneration or even damages wherethe auditor is convicted under Section 147(2) of the Act.Section 147(5) further imposes joint and several liabilityon audit firms and partners in case of criminal liability.

iv.Section 241(3)(a) pertains to the civil consequence offraud and concern “any person concerned in the conductand management of the affairs of a company”. Thiswould certainly include auditors who can be said to beconcerned in the conduct and management of acompany’s affairs. In a proceeding under Section 241,the NCLT will determine: (i) whether there has beenfraud; (ii) who the fraudsters are; (iii) who connived inor abetted the fraud; and (iv) whether the parties are fitand proper persons. The NCLT can decide that an auditorhas connived in fraud and is not a fit and proper personunder Section 242 (4A) which provides as follows:

“242. Powers of Tribunal. - (1) If, on any applicationmade under section 241, the Tribunal is of the opinion-...

(44) At the conclusion of the hearing of the case inrespect of sub-section (3) of section 241, the Tribunalshall record its decision stating therein specifically as towhether or not the respondent is a fit and proper personto hold the office of director or any other officeconnected with the conduct and management of anycompany.”

v.The consequence of holding that a person is not fit andproper is provided in Section 243 (1A) viz.:

“243. Consequences of termination or modification ofcertain agreements – (1A) The person who is not a fitand proper person pursuant to sub-section (4A) ofsection 242 shall not hold the office of a director or anyother office connected with the conduct andmanagement of the affairs of any company for a period A

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of five years from the date of the said decision: Providedthat the Central Government may, with the leave of theTribunal, permit such person to hold any such officebefore the expiry of the said period of five years....”

If a person is found not to be a fit and proper person,under Section 243 (1A), the NCLT can order that suchperson “shall not hold any office connected with theconduct or management of any company for 5 years.

vi.Section 245(1)(g)(ii) also provides for damages orcompensation to be ordered against auditors, includingan audit firm, by way of a class action suit for “Improperor misleading statement of particulars made in his auditreport or for any fraudulent, unlawful or wrongful act orconduct. Section 245(2) permits the NCLT to impose“any suitable action”

vii.Section 447 pertains to the criminal consequences offraud. Section 447 prescribes a punishment for theoffence of ‘fraud, the offence itself is created by wayof an explanation appended to the said section. Section447 of the Act provides:

“447, Without prejudice to any liability includingrepayment of any debt under this Act or any other lawfor the time being in force, any person who is found tobe guilty of fraud, shall be punishable with imprisonmentfor a term which shall not be less than six months butwhich may extend to ten years and shall also be liable tofine which shall not be less than the amount involved inthe fraud, but which may extend to three times theamount involved in the fraud:

Provided that where the fraud in question involves publicinterest, the term of imprisonment shall not be less thanthree years.

Explanation. For the purposes of this section-

(i) “fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealmentof any fact or abuse of position committed by any person or any other person with the connivance in any manner,with intent to deceive, to gain undue advantage from, orto injure the interest of the company or its shareholdersor its creditors or any other person, whether or not thereis any wrongful gain or wrongful loss:

(ii) “wrongful gain” means the gain by unlawful meansof property to which the person gaining is not legallyentitled,

(iii) “wrongful loss” means the loss by unlawful meansof property to which the person losing is legally entitled”

vii) It is submitted that Sections 435 to 438 of the Companies Actprovide a procedure in trial by a Special Court incorporatingsafeguards of the CrPC. A chart reflecting the comparative schemeof protections afforded to parties before the NCLT as opposed toa prosecution before the Special Court established under the Act

viii) It is submitted that even if Section 140(5) is not applicable ina given case due to the retirement or resignation of an auditorprior to an order being passed, that will not enable such an auditorto escape the vigour of law under the Companies Act, 2013, Evenif an auditor resigns, he will nevertheless have to face (a)prosecution for fraud under Section 447 of the Act; (b) actionbefore the National Financial Regulatory Authority; (c) order bythe NCLT debarring auditors from acting as such in respect ofany company as well can be passed under Section 243 (1A) readwith Section 241 and 242(4A); and (d) disqualification underSection 141(3)(h) if the auditor is found guilty of fraud. Theconsequence of each of these proceedings is grave for the auditor,including debarment, and the auditor does not escape punishment.

ix) It is submitted that the operative part of Section 140(5)empowers NCLT to direct a company to “change” its auditor.NCLT can exercise this power if it is satisfied that ah auditor isguilty of acting in a fraudulent manner or in abetting or colludingin a fraud and has neither resigned nor been removed by thecompany. It is submitted that therefore the order that NCLT canpass under the operative part of Section 140(5) is against thecompany and not the auditor. It is an order to the company tochange its auditor and no other order. It is submitted that the word A

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“change” has been held to mean “replace with or exchange foranother” and “the substitution of one thing for another”.

x) It is submitted that as per the non-obstante clause provided inSection 140(5), it is clear that the NCLT can direct the companyand no one else to remove the auditor. The non-obstante clauseneeds to be read with the term “change” as provided therein. It issubmitted that Section 140(5) of the Act cannot apply incircumstances where the auditor sought to be removed has ceasedto hold that position as no order of change can be passed once theauditor has resigned. It is submitted that this is clear from theplain 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 CentralGovernment and if NCLT is satisfied that a change in auditor isrequired, then within 15 days from the date of filing the saidapplication, NCLT can pass an urgent order that the auditor willnot “function” as an auditor and that the Central Governmentmay appoint a new auditor to replace the current auditor. It issubmitted that this is in the nature of a pro tem order pending finalorder by NCLT under the operative part of Section 140(5) and tofacilitate the Central Government in appointing an auditor whilstthe existing auditor functioning is restrained.

xii) It is next submitted that the second proviso to sub-section 5 ofSection 140 contemplates that if a final order is passed againstthe auditor, then the auditor will not be eligible to be appointed asan auditor of any company for a period of five years from thedate of passing of the order. Additionally, the auditor shall also beliable for action under Section 447 of the Companies Act. It issubmitted that the second proviso does not contemplate anyseparate order by NCLT. Instead, it only provides for an automaticconsequence, i.e., five years ineligibility qua an auditor whetherindividual or firm against whom a final order has been passed bythe NCLT. It is submitted that moreover, the entire firm getsautomatically disqualified for the actions of even one of its partners.There is no discretion provided to NCLT to alter the period ofineligibility. It is submitted that the debarment prescribed underthe second proviso is an in terrorem provision imposed by operationof law, in the event an auditor chooses not to resign and forces upon himself a final order under the provision. It is submitted thatthe plain language of second proviso is anchored squarely on afinal order being passed under the operative part of Section 140(5).

xiii) It is submitted that it is settled law that proceedings whichmay result in disqualification would be of a quasi-criminal natureand have to be strictly construed. Since Section 140(5) results ina disqualification of an auditor, proceedings thereunder would bequasi-criminal in nature. Disqualification of a professional is akinto a death penalty. The standard of proof is therefore satisfactionbeyond reasonable doubt. Reliance is placed upon the decision ofthis Court in the case of An Advocate v. Bar Council of India(1989) Supp 2 SCC 25 (Para 4(1) & (11) and ICAI v. LK Ratna& Ors. (1986) 4 SCC 537 (para 18).

xiv) It is submitted that the Act needs to be read and interpretedin a holistic manner. Under the scheme of the Act, it is Section447 which specifically provides for punishment for fraud. Section140(5) is not a provision to punish or penalize an auditor. By treatingSection 140(5) instead of Section 447 as a provision to punish forfraud, Ministry and NCLT failed to follow the well settled rule ofinterpretation that something may be done only in the mannerprescribed by the law and in no other manner. Reliance is placedupon the decision of this Court in the case of Dharani Sugarsand Chemicals Ltd. v. Union of India, (2019) 5 SCC 480 (para55).

xv) It is further submitted that expanding the scope and purposeof Section 140(5) to include punishment for fraud, wouldtantamount to prejudicing the defence that an auditor, in a givencase, could take in any other proceedings. The summary naturein which Section 140(5) aims to determine fraud may lead to acomplete redundancy of all other processes and proceduresprovided for under the Companies Act and materially impact anauditor’s right to fair trial. As an example, the determination ofguilt under Section 140(5) by way of a summary procedure couldrender the process of defences and appeals provided as a part ofthe NFRA process nugatory and a mere formality qua the auditors.

xvi) It is submitted that It is only when the language of provisionsin a statute are not clear and categorical, the purpose of the same AB

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Acan be examined by a court to interpret the provision. It is submittedthat the following principles of law are well settled with regard tothe primacy of plain language interpretation over purposiveinterpretation:

i.The courts should now be very reluctant to hold thatBParliament has achieved nothing by the language it used,when it is tolerably plain what Parliament wished toachieve. [See Dr. Jaishri Laxmanrao Patil v. ChiefMinister and Others, (2021) 8 SCC 1 (para 150).

ii.The courts will therefore reject that construction whichCwill defeat the plain intention of the legislature eventhough there may be some in exactitude in the languageused. [See Jaishri Laxmanrao Patil (supra) (para151).

iii.Purposive interpretation can be given only when thereis some ambiguity in the language of the statutoryprovisions or it leads to absurd results. [See State ofMaharashtra v. Shri Vile Parle Kelvani Mandal &Ors. (2022) 2 SCC 725 (para 16).

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xvii) It is submitted that in addition, this Court has time and againEupheld the principle of doubtful penalisation which requires that“if two views and reasonable constructions can be put on aprovision, the court must lean in favour of construction whichexempts the subject from penalty rather than one which imposespenalty”. Reliance is placed on the decision of this Court in thecases of SEBI v. Sunil Krishna Khaitan, (2023) 2 SCC 643F(Para 55) and Tolaram Relumal v. State of Bombay. (1955) 1SCR 158 (Para 8).

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xviii) It is submitted that NCLT’s jurisdiction under Section 140(5)of the Act is to direct the removal of a company’s existing auditorand to allow his substitution by the Central Government. It isGsubmitted that it is not possible to remove any person/firm from aposition which whey are not holding. Accordingly, an order directingremoval of BSR who had already resigned as auditor of IFINwould only be possible by way of a legal fiction of treating BSRas continuing to remain IFIN’s auditor.

xix) It is next submitted that Section 140(5) of the Act does notcreate any legal fiction by which an auditor who has resignedwould continue to be treated as an auditor. A deeming fiction canonly be created by the legislature. In fact, courts and tribunals donot have the power to create a deeming fiction by judicialinterpretation when the statute does not provide for it. Reliance isplaced upon the decisions of this Court in the cases of BhuwalkaSteel Industries Ltd & Anr v. UOI, (2017) 5 SCC 598 (Para38) and Sant Lal Gupta v. Modern Cooperative Housing SocietyLtd., (2010) 13 SCC 336 (Para 14).

xx) It is submitted that the need for a deemed removal of a pastauditor does not arise, since the very purpose and object of Section140, i.e., removal and change of auditors, has been satisfied bythe auditor’s resignation. Such a past auditor can, despite hisresignation, be prosecuted for fraud under Section 447 of the Act.Therefore, the question of removing the auditor under Section140(5) cannot and does not arise.

xxi) It is submitted that the Ministry was aware that an orderunder Section 140(5) cannot be passed against a past auditorexcept through the device of a deeming fiction. This is evidentfrom prayers (a), (b) and (c) of the 140(5) Company Petitionsought 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 the140(5) Company Petition itself as the relief sought for was beyondNCLT’s powers.

xxii) It is submitted that further, the prayers in the Company Petitionsought against BSR became infructuous with its resignation on 19June 2019. Pertinently, no “deemed removal” prayer was soughtagainst BSR after its resignation. Despite this, NCLT proceededto create a deeming fiction so as to clutch at its jurisdiction to passan order under Section 140(5) against BSR.

xxiii) It is then submitted that NCLT, exercising powers underSection 140(5), cannot direct removal of past auditors or deemsuch auditors to have been removed at a previous date. NCLT,being a creature of a statute, has to act within the domainprescribed by the law/statutory provision. Thus, NCLT cannot AB

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exercise power which has not been expressly vested in it, bydirecting a “deemed change in auditors. Reliance is placed uponthe decisions of this Court in the cases of B. Himmatlal Agrawalv Competition Commission of India, AIR 2018 SC 2804 (para8) and Cellular Operators Association of India v. Union ofIndia, (2003) 3 SCC 186 (para 20-21).

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xxiv) It is submitted that in Pasupuleti Venkateswarlu v. Motor& General Traders, (1975) 1 SCC 770, this Court held that aproceeding may not be maintainable by reasons of a post filingevent. This Court observed “If a fact, arising after the lis hascome to court and has a fundamental impact on the right to relieffor the manner of moulding it, is brought diligently to the notice ofthe tribunal, it cannot blink at it or be blind to events which stultifyor render inept the decrotal remedy.”

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xxv) It is submitted that in the present case although BSR resignedafter the filing of the 140(5) petition, the resignation rendered thepetition infructuous since the reliefs sought for could no longer begranted under Section 140(5) and indeed the purpose underlyingSection 140(5) stood accomplished by such resignation.

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xxvi) It is submitted that reading in an implied prohibition againstan auditor from resigning after the commencement of proceedingsEunder Section 140(5) would be contrary to the plain language ofthe section and would require it to be re-written. Such an impliedprovision would also be contrary to the object of Section 140(5)as it would mean that the provision ensures that an auditor againstwhom allegations of fraud have: been made continues as auditorFand is not permitted to resign. This would lead to an anomaloussituation of compelling the continuance of an auditor, despite himhaving committed a fraud until the NCLT passes a final order oran interim order under the first proviso to Section 140(5).

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xxvii) It is further submitted by the learned counsel appearing onbehalf of the original writ petitioners that Section 140(5) isexcessive and manifestly arbitrary as it provides unguided anduntrammelled powers to NCLT and that too in a summaryproceeding, for determination of a serious offence of fraud andconsequence of mandatory disqualification with graveconsequences akin to civil death. It is submitted that the penaltyin the form of automatic disqualification of auditors and of the G

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entire firm including partners who may be entirely unconnectedand innocent for a pre- determined period envisaged under Section140(5) is highly disproportionate and not the least invasive method.It is submitted that Section 140(5) creates an automatic penaltyof disqualification, upon summary adjudication, when such apenalty has already been provided for under section 141(3)(h) ofthe Act after following due process of trial under Sections 435 to446 of the Act. The same results in contravention of the principlesof double jeopardy and violation of Article 20(2) of the Constitution.It is submitted that disqualification akin to “civil death” underSection 140(5) impinges upon BSR and its partners’ fundamentalright to carry on its profession, as guaranteed under Article 19(1)(g)of the Constitution. The same, being unreasonable, does not fallwithin the protection of Article 19(6) of the Constitution of India.It is submitted that applying Section 140(5) in its plain languagei.e., to change of auditors, saves it from the above seriousconstitutional infraction without letting auditors “off the hook” underthe Companies Act.

xxviii) It is submitted that the NCLT, vide its first Order, erroneouslyupheld its jurisdiction to maintain the 140(5) Company Petitionagainst past auditors of IFIN, including BSR, by incorrectly creatinga deeming fiction, in absence of any legislation to this effect orthe necessary jurisdiction and power to do so. It is submitted thatthe NCLT wrongly assumed jurisdiction by holding that it wasempowered to pass directions for a deemed change of ex-auditorsand therefore the NCLT’s first order is contrary to Section 140(5)as it was passed without jurisdiction and based on an incorrectassumption that the jurisdictional fact that the existing auditors ofthe company needed to be “changed” existed.

xxix) It is submitted that it is trite law that a “jurisdictional fact’ isa sine qua non or the condition precedent to the assumption ofjurisdiction by a court. A court cannot erroneously assumejurisdiction either by not deciding the jurisdictional fact or byerroneously deciding it. Reliance is placed upon the decisions ofthis Court in the cases of Carona Ltd. v. Parvathy Swaminathan& Sons, (2007) 8 SCC 559 (Para 27, 28, 36) and Arun Kumarv. Union of India, (2007) 1 SCC 732 (Para 74-76). It is submittedthat this Court has clearly laid down that the foundational factmust be established before a presumption is made. Reliance is ABC

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placed on the decision of this Court in the case of Balram Gargv. SEBI, (2022) 9 SCC 425 (Para 45 and 51).

xxx) It is further submitted that even the NCLT’s second orderon the application filed by the Ministry for the appointment ofMMC as the statutory auditor of IFIN under the first proviso toBSection 140(5) is wholly without jurisdiction. It is submitted thatonce the BSR resigned as an auditor, there was no question ofinvoking first proviso to section 140(5) of the Act.

xxxi) It is submitted that statutory auditor appointment applicationwas clearly contrary to law, without jurisdiction and could notChave been under the first proviso to Section 140(5) since firstly,Section 140(5) itself did not apply to the past auditors, and henceno question of invoking the first proviso could arise; secondly, thefirst proviso is only a pro tem measure pending a jurisdiction orderunder Section 140(5); thirdly, the NCLT’s second order is not inthe nature of a pro tem order; fourthly, once the proceedings underDsection 140(5) of the Act are initiated, only the Central Governmentis authorised to appoint or change the auditors under the firstproviso. Under the first proviso to section 140(5), the power givento Central Government to appoint an auditor due to urgency, doesnot take away the power of the concerned company to appoint anEauditor of its choice; fifthly, BSR had admittedly already resignedand vacated its office, as accepted by the Ministry in its submissionsbefore this Court and this Court noted the same in the order dated26.09.2019. It is submitted that moreover, the Ministry withheldvarious key facts from the NCLT at the time of filing.

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F4.1 Now so far as the direction issued under Section 212(14) andthe prosecution under Section 212(15), it is submitted as under:

i) Section 212(1) provides that the Central Government may directthe SPIO to investigate into the affairs of a company inter aliaupon a receipt of the report of the Registrar, on intimation of aspecial resolution passed by a company, in public interest or onrequest from any Department of the Central Government or StateGovernment; G

ii) Section 212(11) provides that SFIO must submit an “interimreport” to the Central Government, if the SFIO is directed to doso by the Central Government; H

iii) Section 212(12) requires SFIO to submit an “investigationreport” to the Central Government only upon “completion of theinvestigation”. Therefore, an “investigation report” cannot besubmitted at any time prior to the completion of the investigation,whereas an “interim report” under Section 212(11) can besubmitted at any stage;

iv) Under Section 212(14), the Central Government has beenempowered to direct SPIO to initiate prosecution against acompany or its officers, if the Central Government considers itnecessary after examination of only the “investigation report”issued under Section 212(12), i.e., after completion of theinvestigation. Reliance is placed on the decision of this Court inthe case of Serious Fraud Investigation Office v Rahul Modi(2019) 5 SCC 266 (Para 30);

v) Section 212(14) permits the Central Government to take legaladvice when examining the “investigation report”, which itselfgives colour to the word “examination” and shows that the CentralGovernment is to properly apply its mind to the “investigationreport” before directing initiation of prosecution, Le, not to do somechanically or for collateral purposes;

vi) Section 212(14A) provides that where the report under Section212(11) or 212(12) stated that fraud has taken place and has beentaken advantage of by a director, key managerial personnel orother officer, the Central Government may file an application beforethe NCLT for appropriate orders for disgorgement of asset andfor holding such person liable personally; vii) Under Section 212(15), it is only the “investigation report”(submitted only upon completion of the investigation which is filedwith the Special Court is deemed to be police officer’s reportunder Section 173 of the Criminal Procedure Code, 1973. (CHPC)Significantly, Section 212(15) is a deeming fiction that is limited toonly making investigation report under Section 212(12), to be thepolice officer’s report under Section 173, CrPC;

viii) It is therefore clear that the legislature has envisaged twodistinct kinds of reports, with its own specific purpose. The firstkind of report is under Section 212(11). which report is an ‘InterimReport’ and can be issued at any point of time during the course AB

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of investigation by the SFIO. The 2nd kind of report is an‘Investigation Report” which can be issued only after completionof the investigation by the SFIO. Only the Investigation Report’can be considered by the Central Government under Section212(14) for the purposes of commencement of prosecution. Onthe other hand, an action before the NCLT under Section 212(14A)can be brought on based on either the Investigation Report oreven the Interim Report; B

ix) It is further clear that the Central Government, under Section212(14) is required to apply its mind, seek legal opinion (if required)and only thereafter decide whether or not a sanction order is tobe issued, i.e., if in its opinion prosecution is to be initiated basedon the “Investigation Report’. Further, only such ‘InvestigationReport’, which is considered by the Central Government for theinitiation of prosecution under Section 212(14), is to be the policeofficer’s report under Section 173, CrPC; C

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x) It is submitted that in the present case, SFIO’s 2nd InterimReport is an “Interim report” and was not issued upon “completionof the investigation”. As such, the 2 Interim Report is not an“investigation report” under Section 212(12) of the Act and couldnot have been considered by the Central Government under Section212(14) for the purposes of issuing the Sanction Order; E

xi) The present case is not a case of invalidity/irregularity ofsanction but a case of no sanction at all, since the pre-requisite tothe sanction, i.e., a final investigation report, is absent;

xii) As is evident from above, where an investigation report itselfFstates that the investigation is incomplete or that further evidenceis yet to be collected, then such an investigation report does notmeet the obligatory requirements of law and cannot be considereda final investigation report under Section 173(2) of the CrPC.Reliance is placed on the following decisions in the cases of P.M.CGMercantile Private Ltd. v. The State 2014(3) MWN (Cr.) 454(Para 11 and 19); Pravin Chandra Modi v. The State ofAndhra Pradesh, Crl. App. No. 49, 1964; Hari Chand & RamPal v. State Crl. Misc. (M) 99 & 111 of 1977 ( Para 14).Accordingly, given the language of paras 1.5 and 4.126.1 of the2nd Interim SFIO Report, that report could never be treated as anHinvestigation report under Section 212(12);

xiii) Even while examining the 2nd Interim Report, the MCA wasof the view that the 2nd Interim Report was not a completeinvestigation report with respect to IFIN. Accordingly, the Ministryhad directed the SFIO to carry out further investigation on aspectswhich were already covered in the 2[nd] Interim Report;

xiv) Further, the Ministry and the SFIO, despite being affordedample opportunity, did not place on record any affidavit or argumentto explain Para V of the Sanction Order or that the investigationwas complete and that the 2nd Interim Report was not treated bythe Ministry as an interim report. The SFIO cannot avoid theconsequences of not having filed an affidavit, stating on oath, thatthe investigation was not complete. This is a question of fact;

xv) Section 212(12), does not permit initiation of prosecution basedon a report which is issued till such time investigation has beencompleted. This is clear from a conjoint reading of Sections 212(12),(14) and (15). Further, though Section 173(8) of the CrPCcontemplates a further investigation after filing of a report underSection 173(2), it is trite that Section 173(8) does not enable theinspector to submit an incomplete or preliminary report and lateron submit a final report. Reliance is placed on the followingdecisions in the cases of Kamal Lochan Sen v. State of Orissa(1982) 54 CLT 509 (Para 5) and AV Dharma Reddy v. State ofA.P. & Ors., 2011 CriLJ 185 (Para 5). Therefore, the stratagemadopted by SFIO and the Ministry in proceeding to act based onan “interim report” and simultaneously carrying on a furtherinvestigation is illegal; xvi) Since the investigation itself was not complete and the 2ndInterim SFIO Report is merely an interim report, there was nobasis for the Ministry to issue a direction under Section 212(14) toinitiate prosecution. Accordingly, the Sanction Order is ultra yes.It does not constitute sanction and the prosecution is void abinitio and a nullity;

xvii) The Sanction Order was passed without application of mindto the relevant material and evidence;

xviii) Section 212(14) requires an “examination” by the CentralGovernment and even contemplates “legal advice” being taken, ifrequired. The Parliament sets out a superior degree of care that A

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is required while passing an order under Section 212(14).Therefore, the Central Government’s decision must be reasonedand must be made with proper application of mind;

xix) In law, the order of sanction must disclose both adequacy ofmaterial as well as consideration of the relevant facts, materialBand evidence by the sanctioning authority. Reliance is placed onthe decision of this Court in the case of Mansukhbhai VithaldasChauhan v. State of Gujarat (1997) 7 SCC 622 (Paras 17, 18and 19);

xx) SFIO submitted the 2nd Interim SFIO Report on 28.05.2019.CAdmittedly, the report comprised of over 32,000 pages, with thebody of the report itself forming approximately 787 pages. The 2Interim SFIO Report was allegedly examined by a ProcessingOfficer (Legal Section), Ministry who had prepared a processingnote. This processing note was allegedly submitted to the ‘SeniorOfficer’ on an urgent priority basis. Despite the above internalDprocesses, Ministry issued the Sanction Order on 29.05.2019 (i.e.,within one day). It is pertinent to note that a copy of the saidprocessing note was not placed before the Bombay High Courtor provided to BSR despite repeated requests for inspection videemails dated 01.10.2019, 10.10.2019, and 14.10.2019. The BombayEHigh Court, in these circumstances, was correct to draw adverseinference since Ministry and SFIO failed to demonstrate dueapplication of mind through any document or affidavit; C

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xxi) Given the voluminous nature of the 2nd Interim SFIO Reportand the internal processes in place, it was impossible for MinistryFto examine and apply its mind to the 2nd Interim SFIO Report (asrequired under Section 212(14) of the Act) within one day beforeit issued the Sanction Order. The events described above clearlyshow that the Sanction Order was granted in haste, withoutapplication of mind and for extraneous consideration. As such,the proceedings following such Sanction Order also stand vitiated.GReliance is placed upon the decisions of this Court in the cases ofK.K Mishra v. State of Madhya Pradesh, (2018) 6 SCC 676(Para 18) and Anirudhsinhji Karansinhji Jadeja v. State ofGujarat (1995) 5 SCC 302 (Para 15);

xxii) Further, Ministry’s failure to produce any evidence toHdemonstrate that its officers independently applied their minds to the 2nd Interim SFIO Report is also contrary to the principlesrelating to duty of disclosure since disclosure would protect thefairness of the proceedings and also enhance the transparency ofthe process. Reliance is placed upon the decision of this Court inthe case of T.Takano v. SEBI, (2022) 8 SCC 162 (Para 62.3);

xxiii) It is therefore submitted that the Sanction Order is bad inlaw and the Bombay High Court rightly quashed the same;

xxiv) A mandatory prerequisite to jurisdiction is the existence of avalid sanction. Therefore, the prosecution becomes incompetentand consequently the proceedings are vitiated and withoutjurisdiction where no valid sanction is granted. Reliance is placedon the decisions in the cases of Gokulchand DwarkadasMorarka v. The King, (1947-48) 75 IA 30; Yusofalli MullaNoobbhoy 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 thatthe prosecution initiated by SFIO is absent any sanction and hencea nullity and without any jurisdiction.

4.2 Learned counsel appearing on behalf of respondent No.1 inCriminal Appeal No. 2300/2011 – Hari Sankaran, in addition, has furthersubmitted that in the present matter no final investigation report hasbeen filed by the SFIO qua Hari Sankaran. It is submitted that the secondreport is not in the nature of final investigation report qua Hari Sankaran.It is submitted that since the second report was not a final investigationreport qua Hari Sankaran, direction for prosecution in question could nothave been issued and therefore consequently the complaint could nothave been filed qua Hari Sankaran.

4.3 Making above submissions and relying upon the aforesaiddecisions, it is prayed by the learned counsel appearing on behalf of theoriginal writ petitioners to dismiss the present appeals and uphold theimpugned judgment and order passed by the High Court.

Analysis and Interpretation of Section 140(5)of theCompanies Act, 2013:

5. Section 140(5) of the Act, 2013 titled as “Removal, Resignationof Auditor and Giving of Special Notice” appears in Chapter X of the A

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AAct which is titled as “Audit and Auditors”. Therefore, Chapter X is aspecial provision under the new Act with respect of “Audit and Auditors”.It cannot be disputed that the auditor plays a very important role so faras the affairs of any company are concerned and therefore he should beindependent and above board. Companies Act, 2013 is the result of theculmination of detailed study after taking into consideration theBParliamentary Standing Committee on Finance Report as well as therecommendations of the Standing Committee by introducing CompaniesBill, 2009 and Companies Bill, 2011. When the earlier Companies Bill,2009 was introduced, it was a culmination of the growing corporateeconomy and past experiences of corporate fiascos too and one of theCsuggestions were to provide for stricter accountability for auditors. Therewas a long discussion on the role, responsibility, duties and regulation ofauditors and the regulatory and enforcement provisions. Varioussuggestions were received to make the provisions pertaining to Auditand Auditors more stringent. It was suggested on Clause 123(10) of the2009 Bill which provides for removal of an auditor by the NCLT onDfinding that there is a fraud and corresponds to Section 140(5) of the Actshould be made more stringent and should contemplate that an auditorremoved by the Tribunal should not be eligible to be appointed as anauditor of any company for a period of five years.

5.1 At this stage, it is required to be noted that Section 143 of theEAct deals with the powers and duties of the auditors. Sub-section (12)of Section 143 specifically provides that in the event that the auditor hasreason to believe that an offence of fraud is being or has been committedin the company, the auditor shall report the matter to the CentralGovernment. The detailed procedure is provided under the Rules issuedFin this regard. Therefore, a statutory duty is cast upon the auditor toreport the matter to the Central Government about the offence of fraudbeing committed in a company. To see that the auditor is not holding anypost in the company and he acts independently, Section 144 of the Actprovides that the auditor cannot provide certain services including the management services. The objective seems to be that the auditor shouldGfunction as an independent person uninfluenced by any of its activitiesoutside the scope of audit services. The auditor is prohibited fromproviding any management service to the company. Thus, the prohibitionand restriction created under Section 144 of the Act is primarily to protectthe interest of the company in question and other stakeholders such asHlenders and investors and the public at large. Keeping in mind the

aforesaid provisions and the underlying public policy in the backdrop,Section 140(5) of the Act, 2013 is required to be interpreted and/orconsidered.

5.2 Section 140(1) of the Act provides for the procedure to removean auditor by the company before the expiry of his term; section 140(2)and (3) of the Act deal with resignation of auditors and Section 140(4) ofthe Act deals with giving of special notice at an AGM for appointment ofan auditor other than the retiring auditor and the process in that regard.However, Section 140(5) of the Act empowers the Tribunal (NCLT),either suo motu or on an application made to it by the Central Governmentor by any person concerned, to take action against the auditor who hasacted in a fraudulent manner or is abetting or colluding in fraud with themanagement of a company. If on completion of an enquiry it is found bythe Tribunal that an auditor of a company has, whether directly or indirectly,acted in a fraudulent manner or abetted or colluded in any fraud by, or inrelation to, the company or its directors or officers, it may by orderdirect the company to change its auditors. Therefore, powers of theNCLT in first part of Section 140(5) is quasi-judicial in nature and theTribunal would have the powers of a civil court to examine the role ofauditors and adjudicate on their fraudulent conduct and abdication oftheir function. The first proviso to Section 140(5) confers power uponthe Tribunal on the application made by the Central Government and ifthe Tribunal is satisfied that any change of the auditor is required, toremove such auditor and/or pass an order that such an auditor shall notfunction as an auditor (within 15 days of receipt of such application) andthe Central Government may appoint another auditor in his place. Thus,the powers under the first proviso to Section 140(5) can be said to beinterim or pro tem measure to prevent an existing auditor from continuingand substitute him with an auditor based on a prima facie satisfactionthat a fraud has been perpetrated and when circumstances warrant thesubstitution. Such an order can be said to be an interim order akin to atemporary suspension during the pendency of the detailed enquiry asprovided in Section 140(5) of the Act and before any final order is passedby the Tribunal.

5.3 Second proviso to section 140(5) of the Act further providesthat an auditor, whether individual or firm, against whom final order hasbeen passed by the Tribunal under section 140(5) shall not be eligible tobe appointed as an auditor of any company for a period of five years AB

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Afrom the date of passing of the order and the auditor shall also be liableof such action under section 447 of the Companies Act. Therefore, assuch, second proviso to Section 140(5) can be said to be a substantiveprovision and it operates on the final order passed by the Tribunal underSection 140(5) (first part). At this stage, it is required to be noted thatafter taking into consideration the recommendations made by the previousBStanding Committee in respect of Companies Bill, 2009 and therecommendations from various stakeholders, the Companies Bill, 2011came to be introduced. The suggestion of the Standing Committee toclause 123(1) of the 2009 Bill (which provided for removal of an auditorby the NCLT on finding that there is a fraud) was to make the provisionCmore stringent; and to provide for consequences for an auditor whensuch auditor is found to have been perpetrating a fraud and is removedby the NCLT for such fraud. The same has been done by way of secondproviso to Section 140(5) of the Act, 2013. Therefore, the second provisoto Section 140(5) which, as observed hereinabove, is a substantiveprovision, is introduced after a detailed analysis and after taking intoDconsideration the recommendations of the Standing Committee and witha view to make the provision more stringent and to provide forconsequences for an auditor when such auditor is found to have beenperpetrating a fraud and is removed by the NCLT for such fraud. It isrequired to be noted that on passing of the final order by the NCLTEunder first part of section 140(5) and if an auditor is found to have beenindulged into fraudulent activities or abetting or colluding in a fraud withthe management of the company, consequences provided under thesecond proviso to section 140(5) shall follow. Therefore, before secondproviso of section 140(5) is attracted, there must be a detailed enquiryagainst an auditor of a company as per first part of section 140(5) andFthere must be a finding arrived at by the NCLT that the auditor of acompany has, directly or indirectly, acted in a fraudulent manner orabetted or colluded in any fraud by, or in relation to, the company or itsdirectors or officers.

6. By the impugned judgment and order, though the High CourtGhas upheld the vires of Section 140(5) of the Act, 2013, however, theHigh Court has held that once the auditor resigns as an auditor or is nomore an auditor on his resignation, thereafter Section 140(5) proceedingsare no longer maintainable as the petition filed by the Union of Indiaunder section 140(5) has been satisfied by the subsequent resignation ofHthe auditor. The view taken by the High Court is absolutely erroneous

and is unsustainable. Subsequent resignation of an auditor after theapplication is filed under section 140(5) by itself shall not terminate theproceedings under section 140(5). Resignation and/or removal of anauditor cannot be said to be an end of the proceedings under section140(5). There are further consequences also on culmination of the enquiryunder section 140(5) proceedings and passing a final order by the Tribunalon the conduct of an auditor, whether such a auditor has, directly orindirectly, acted in a fraudulent manner or abetted or colluded in anyfraud by, or in relation to, the company or its directors or officers, asprovided under the second proviso to section 140(5) of the Act, 2013.Therefore, the enquiry/proceedings initiated under the first part of section140(5) has to go to its logical end and subsequent resignation and/ordiscontinuance of an auditor shall not terminate the enquiry/proceedingsunder section 140(5). If the interpretation given by the High Court thatonce an auditor resigns, the proceedings under section 140(5) standterminated and are no longer further required to be proceeded, in thatcase, an auditor to avoid the final order and the consequence of finalorder as provided under the second proviso to section 140(5) may resignand avoid any final order by the Tribunal. That cannot be the intention ofthe 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 aproviso, and the same shall operate and/or depend upon the final orderto be passed by the Tribunal in the first part of section 140(5). If theinterpretation given by the High Court that on subsequent resignationand/or discontinuance of an auditor, proceedings under section 140(5)stand terminated and/or the petition under section 140(5) by the CentralGovernment is no longer maintainable is accepted, in that case, secondproviso to section 140(5) would become nugatory and in no case thereshall be any action under the second proviso to section 140(5). If suchan interpretation, as interpreted by the High Court, is accepted, in thatcase, the object and purpose of incorporation of second proviso to section140(5) shall be frustrated. The object and purpose of second proviso tosection 140(5), as observed hereinabove, is to make the provision morestringent and to provide for consequences for an auditor when such anauditor is found to have been perpetrating a fraud and is removed by theNCLT for such fraud. At this stage, it is required to be noted that underthe second proviso to section 140(5) on the final order being passed bythe Tribunal that the auditor/firm has, directly or indirectly, acted in a AB

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Afraudulent manner or abetted or colluded in any fraud by, or in relationto, the company or its directors or officers, he/it shall not be eligible to beappointed as an auditor of any company for a period of five years. Theword “any” used in the second proviso to section 140(5) is significant.On the final order being passed by the Tribunal, such an auditor not onlyshall be removed or changed as an auditor of a company, but such anBauditor/firm shall also be ineligible to be appointed as an auditor of anyother company for a period of five years.

7. Therefore, on true interpretation and scheme of Section 140(5)of the Act, 2013, once the enquiry/proceedings is/are initiated under firstpart of section 140(5) of the Act, either suo motu by the Tribunal or onCan application made to it by the Central Government or by any personconcerned, it must come to its logical end and irrespective of the factwhether during such enquiry/proceedings the auditor has resigned ornot, there must be a final order to be passed by the Tribunal on whethersuch an auditor has, in fact, directly or indirectly, acted in a fraudulentDmanner or not. Direction to the company to change its auditor as providedin the first part of section 140(5) is only a consequence to the findingrecorded by the Tribunal that the auditor has, directly or indirectly, actedin a fraudulent manner. This is the first consequence of the final orderunder section 140(5) (first part). On passing the final order by the Tribunalthat the auditor of a company has, directly or indirectly, acted in aEfraudulent manner, the second consequence as mentioned in the secondproviso to section 140(5) shall be attracted. Therefore, for anyconsequence 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 ofsection 140(5). Therefore, on true interpretation, even on resignation byFan auditor of a company even during the enquiry/proceedings under section140(5) or even prior to that, there shall not be any termination of theproceedings under section 140(5) as observed and held by the HighCourt. At the cost of repetition, it is observed that in a given case, anauditor, who in fact has, directly or indirectly, acted in a fraudulent manner, to avoid any further consequence under the second proviso to sectionG140(5), resigns to avoid any consequence under the second proviso tosection 140(5), it cannot be permitted.

8. No so far as the submission on behalf of the respective auditorsthat even if section 140(5) would not have been there, in that case also,no auditor can get away with fraud, abetment of fraud or professionalH

misconduct etc. and for that purpose the reliance placed upon sections132, 141, 147, 245 and 447 of the Act is concerned, at the outset, it isrequired to be noted that all the aforesaid provisions and section 140(5)operate in different field. Section 140(5) has been enacted with a specialobject and purpose, as observed hereinabove. Second proviso to section140(5) specifically provides that on final order being passed by the NCLT,such an auditor shall not be eligible to become an auditor in any othercompany for a period of five years. Therefore, merely because the auditorcan be removed as an auditor of a company including the other provisions,section 140(5) which has been enacted with a special object and purposecannot be said to be arbitrary and/or ultra vires.

9. Now so far as the reliance placed upon section 241(3) of theAct and the submission that even in a case where the auditor resigns,the auditor concerned can be proceeded against under section 241(3) ofthe Act and therefore the proceedings pursuant to section 241(3) of theAct would lead to the same result and the auditor would be held ‘not tobe a fit and proper person’ to be appointed in any other office connectedwith the conduct and management of any company is concerned, at theoutset, it is required to be noted that Section 241(3) of the Act speaksabout the concerned company and not any other company. Section 241(3)of the Act has been introduced w.e.f. 14.08.2019 which authorises theCentral Government to apply to the Tribunal to declare that the personsmentioned in section 241(3) of the Act are “not fit and proper persons”to hold the office of a director or any other office connected with theconduct and management of any company. Section 241(3) of the Act isrequired to be read along with Sections 243(1A) and 243(2). On a conjointreading of the aforesaid provisions, it is clear that the referencespecifically in Section 241(3) of the Act to “any other office connectedwith the conduct and management of any company” means those akinto manager, managing director or other director such as key managerialpersonnel and not an auditor. The words used in Section 241(3) of theAct are “conduct and management of the company”. As per the Schemeof the Act, 2013, more particularly Chapter X, the auditor acts as anindependent examiner of accounts and cannot be said to be holding anoffice in the conduct and management of the company. Therefore, thesubmission 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 resignedhas no substance.

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A10. At this stage, it is required to be noted that in section 140(5), itis specifically mentioned that “without prejudice to any action under theprovisions 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 section140(5) shall be without prejudice to any action under the provisions ofBthe Companies Act, 2013 or any other law for the time being in force.Therefore, irrespective of any other provisions of the Act, 2013, theTribunal is vested with the powers under Section 140(5) of the Act topass a final order against the auditor on the allegation that such an auditorof the company has, directly or indirectly, acted in a fraudulent manner.C

11. For the reasons stated above, the High Court has materiallyerred in holding that on resignation of auditors – BSR & Deloitte and onappoint of new auditors, application under section 140(5) shall not bemaintainable. Consequently, the High Court has erred in setting asidethe order(s) passed by the NCLT/NCLAT by which the NCLT/NCLATDheld that despite the resignation of the auditors, enquiry/proceedings underSection 140(5) shall be maintainable and/or continued. As observedhereinabove, despite the subsequent resignation of the auditors and/ordespite the resignation of an auditor even for the purpose of secondproviso to section 140(5), the enquiry/proceedings/application undersection 140(5) (first part) shall be maintainable and continued and on theEfinal order being passed by the NCLT, as provided in section 140(5),consequence as provided under the second proviso to section 140(5)shall follow. As neither the NCLT nor the High Court have gone into themerits of the allegations against the respective auditors and the decisionof the NCLT and the High Court is on the maintainability of the

Fproceedings under section 140(5) after resignation of the auditors, werefrain from considering anything on merits of the allegations against theauditors as the allegations of fraud etc. are yet to be considered by theTribunal on merits in an application under Section 140(5) made by theCentral Government.G12. Now so far as challenge to the vires of Section 140(5) of theAct is concerned, at the outset, it is required to be noted that the HighCourt, as such, has upheld the constitutional validity/vires of section 140(5)against which the BSR has not filed any special leave petition. Evenotherwise on merits also, when some of the writ petitioners havechallenged the impugned judgment and order passed by the High CourtH

on constitutional validity/vires of Section 140(5), we are of the opinionthat section 140(5) cannot be said to be excessive and/or manifestlyarbitrary, as contended. It was the case on behalf of the original writpetitioners on the constitutionality/vires of section 140(5) that section140(5) is excessive and arbitrary as it provides unguided and untrammelledpowers to NCLT for determination of a serious offence of fraud andconsequence of mandatory disqualification with grave consequences akinto civil death. The aforesaid has no substance. As observed hereinabove,NCLT shall exercise the quasi-judicial powers under section 140(5) withall the powers akin to civil court. Ample opportunity shall be given by theNCLT before passing any final order.

13. Now so far as another submission that section 140(5) isviolative of Article 14 of the Constitution of India and discriminates againstthe auditors unfairly in comparison to similarly placed alleged perpetrators,such as directors, management etc. It is required to be noted that therole of auditors cannot be equated with directors and/or management.Auditors play very important role in the affairs of the company andtherefore they have to act in the larger public interest and all otherstakeholders including investors etc. Chapter X of the Act specificallyfor the “Audit and Auditors” looking to the importance of the auditors.Therefore, section 140(5) cannot be said to be discriminatory and/orviolative of Article 14 of the Constitution of India.

14. Now so far as the submission that the penalty in the form ofautomatic disqualification of auditors and of the entire firm includingpartners and that too for a period of five years to become the auditor ofany other company is highly disproportionate is concerned, it is ultimatelyfor the legislature/Parliament to provide the debarment. On the principleof joint and severe liability, the auditors and the entire firm includingpartners shall be liable and therefore can be subjected to section 140(5)and the consequences mentioned in section 140(5) of the Act, 2013. Sofar as the submission that the disqualification is akin to civil death andsection 140(5) impinges upon BSR and its partners’ fundamental right tocarry on its profession, as guaranteed under Article 19(1)(g) of theConstitution is concerned, nobody can be permitted to say that despiteacting fraudulently, directly or indirectly, they had a right to continueand/or carrying on their profession. Acting in a fraudulent manner, directlyor indirectly, by an auditor is a very serious misconduct and thereforethe necessary consequence of indulging into such fraudulent act shallfollow.

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A At this stage, it is required to be noted and as observed hereinabove,Section 140(5) of the Act has been enacted with the specific object andpurpose as referred to hereinabove and the same has been enactedafter due deliberations and taking into consideration the recommendationsof the Standing Committee as well as the respective stakeholders.Therefore, taking into consideration the object and purpose for whichBsection 140(5) of the Act is enacted, the same cannot be said to bearbitrary, excessive and violative of Article 14 of the Constitution ofIndia and/or violative of fundamental rights guaranteed under Article19(1)(g) of the Constitution of India, as alleged.

15. Now far as quashing and setting aside section 212(14) directionCby the High Court by its impugned judgment and order is concerned, itappears that the High Court has set aside 212(14) direction mainly ontwo grounds, firstly, that the direction to prosecute was issued within 30hours of report of the IFIN SFIO Report which demonstrates non-application of mind and secondly on the ground that IFIN SFIO ReportDwas an incomplete report as investigation had not been completed andtherefore 212(14) direction was incompetent.

15.1 From the reasoning of the High Court, it appears that theHigh Court has set aside the direction under section 212(14) terming thesame as non-application of mind since it was improbable that report ofEabout 750 pages and 32000 pages of annexures could have beenconsidered in 30 hours. The High Court also observed that the relevantfacts and documents to demonstrate application of mind have not beenplaced on record. With the above conclusion, the High Court has observedthat even according to the investigating agency, SFIO Report was aninterim report, even asked by the Central Government.F

15.2 Now so far as the observations made by the High Court thatissuance of the direction to prosecute within 30 hours of the receipt ofIFIN SFIO Report demonstrates non-application of mind as it wasimprobable that report of about 750 pages and 32000 pages of annexurescould have been considered in 30 hours is concerned, the observationsGmade by the High Court cannot be accepted. Merely because thedirection to prosecute was issued within 30 hours, by that itself, it cannotbe presumed that there was a non-application of mind. A detailed notewas prepared by the officer which was ultimately placed before thefinal authority who ultimately took a decision and issued a direction toHprosecute. What was required to be considered was, whether there was any material to prosecute or not and whether the direction to prosecutewas properly given or not. During the trial, the accused shall be givenample opportunity to put forward their case. Therefore, on the aforesaidground, the High Court has materially erred in setting aside the directionto prosecute issued under section 212(14) of the Act.

Now so far as the observations made by the High Court that therelevant facts and documents to demonstrate application of mind havenot been placed on record is concerned, it is required to be noted that afinal order to prosecute was placed on record in which it has beenspecifically mentioned that having gone through the IFIN SFIO Report.

15.3 Now so far as another ground on which the direction/sanctionto prosecute has been set aside by the High Court, namely, that it was anincomplete investigation report and therefore on such an incompleteinvestigation report, no direction/sanction to prosecute could have beenissued is concerned, at the outset, it is required to be noted that the HighCourt has not properly appreciated that the SFIO IFIN Report was areport prepared by the SFIO on the completion of the investigation intothe IFIN – one of the companies under investigation. It is required to benoted that by an order dated 30.09.2018, an investigation was directedto be conducted by the SFIO into IL&FS and its subsidiaries, whichcomprise of approximately 100-160 entities. So far as the IFIN isconcerned, it was one of the subsidiaries in the IL&FS group and thefinancial services arm. It is the case on behalf of the Central Governmentthat so far as the SFIO IFIN Report is concerned, it is a record in respectof IFIN, upon completion of investigation into IFIN. Merely because sofar as the investigation with respect to other subsidiary companies ofIL&FS group is concerned, the same might have been going on, cannotbe a ground to observe that at this stage so far as the IFIN is concernedthe report was incomplete report and for which the investigation wasgoing on. The High Court has not properly appreciated the aforesaidand has wrongly treated the report as an interim report so far as theIFIN is concerned. At this stage, it is required to be noted that in theSFIO IFIN Report itself, it is observed that in light of complex structureof the IL&FS Group and the inter-linkages between entities etc, if anyfurther instances or transactions are uncovered qua IFIN during theinvestigation of other group companies of IL&FS, then a further reportwill be filed. Therefore, the High Court has materially erred that theinvestigation in respect of IFIN is incomplete. It is required to be noted A

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Athat as such the SFIO had submitted the report after a detailed andextensive investigation of IFIN. There are conclusive findings againsteach of the writ petitioners including Hari Sankaran pointing out multiplebreaches, violations of statutory duties and fraudulent conduct. We arenot elaborating the same in detail as the prosecution is yet to take placeand the concerned persons are to be tried. The proceedings before theBHigh Court were at the stage of direction under section 212(14) to allowthe prosecution and the sanction to prosecute. Ample opportunity shallbe available to the concerned accused against whom the prosecutionwas ordered for the offences punishable under section 447 of theCompanies Act and other relevant provisions of the IPC. Therefore, theCHigh Court has erred in setting aside the direction under section 212(14)to prosecute at this stage and on the aforesaid grounds.

Conclusion:

Conclusion:

16. In view of the above and for the reasons stated above, challengeto the constitutional validity of section 140(5) of the Companies Act,D2013 fails and it is observed and held that section 140(5) is neitherdiscriminatory, arbitrary and/or violative of Articles 14, 19(1)(g) of theConstitution of India, as alleged. The impugned judgment and order passedby the High Court quashing and setting aside the application/proceedingsunder section 140(5) on the ground that as the auditors have resignedEand therefore thereafter the same is not maintainable is hereby quashedand set aside. Consequently, the impugned judgment and order passedby the High Court quashing and setting aside the NCLT order holdingthat even after the resignation of the auditors, the proceedings undersection 140(5) shall be maintainable is hereby quashed and set aside.The application/proceedings under section 140(5) of the Act, 2013 isFheld to be maintainable even after the resignation of the concernedauditors and now the NCLT therefore to pass a final order on suchapplication after holding enquiry in accordance with law and thereafteron the basis of such final order, further consequences as provided underthe second proviso to section 140(5) shall follow. However, it is madeGclear that we have not expressed anything on merits on the allegationsagainst the concerned auditors and it is ultimately for the NCLT/Tribunalto pass a final order on the application filed by the Central Governmentunder section 140(5) of the Act, 2013.

17. In view of the above and for the reasons stated above, theHimpugned judgment and order passed by the High Court quashing and setting aside the direction under Section 212(14) of the Companies Act,2013 dated 29.05.2019 issued by the Union of India to SFIO is herebyquashed and set aside. The impugned judgment and order passed by theHigh Court quashing and setting aside the prosecution lodged by theSFIO vide Criminal Complaint CC No.20/2019 on the file of SpecialCourt (Companies Act) and Additional Sessions Judge, Greater Mumbaiis also hereby quashed and set aside. Now the said Criminal ComplaintCC No. 20/2019 be proceeded further by the concerned Trial Court inaccordance with law and on its own merits.

18. Accordingly, in view of the above, the appeals filed by theUnion of India, viz., Criminal Appeal Nos. 2305-2307/2022; 2302-2303/2022; and 2300/2022 are allowed and Criminal Appeal Nos. 2298/2022,2299/2022 and 2304/2022, as also, Civil Appeal Nos.793/2022; 801/2022and 877/2022 filed by the Deloitte and its partners are hereby dismissed.

Bibhuti Bhushan Bose

Appeals disposed of.

(Assisted by : Shubhanshu Das, LCRA)

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