IL&FS Case: Bombay HC Quashes Criminal complaint against ex-IFIN Auditor Deloitte, BSR [Read Judgment]

The Bombay High Court has quashed criminal complaints filed by the Serious Fraud Investigation Office (SFIO) against the erstwhile auditors of Infrastructure Leasing and Financial Services Ltd (IL&FS). and its non-bank lending arm for alleged collusion in falsifying books.

The high court while upholding the constitutional validity of Section 140(5) of the Companies Act, observed that the provision applies only to existing auditors.

The case stems from a string of surprise defaults by IL&FS in 2018, sparking a liquidity crisis in the Indian financial markets. That prompted the government to take over the beleaguered infrastructure conglomerate to avoid a contagion. The government then directed the SFIO, Registrar of Companies, the Ministry of Corporate Affairs and the Institute of Chartered Accountants to investigate the alleged involvement of the auditors.

“The auditors failed to report the serious mismatch between assets and liabilities as well as key indicators which pointed to liquidity concern in its balance sheet. Deloitte was the statutory auditor of IL&FS Finance Services Ltd. between Financial Year 2007 and Financial Year 2017, while BSR was appointed as a joint auditor for Financial Year 2018,” the accounting regulator ICAI said in its December interim report.

“Auditors allegedly colluded with the management of IL&FS Financial Services and falsified the books of accounts and the financial statements between 2013 and 2018. It filed a criminal complaint against certain partners and officials of the audit firms, alleging fraud under the company law and criminal conspiracy under the Indian Penal Code,” SFIO, after a nine-month probe, concluded.

The government moved the NCLT on June 10 seeking a five-year ban on the auditors under Section 140(5) of the Companies Act. It also sought to impede the auditors in the oppression and mismanagement case against the management of IL&FS and its non-bank lending arm.

Deloitte Haskins and Sells and BSR & Co., an Indian affiliate of KPMG, had moved the high court after the National Company Law Tribunal (NCLT) denied relief. They had challenged the central government’s move to bar them for five years, and the SFIO’s decision to initiate criminal proceedings invoking Section 447 of the Companies Act, among others. The two firms, which were auditors for IL&FS for different.

Deloitte Haskins and BSR contended that the government’s move, arguing the law permitted removal of an “existing” auditor only after a final order establishing a fraud was passed and the NCLT lacked jurisdiction as the firms had already resigned.

The Serious Fraud Investigation Office (SFIO) contended that Section 140(5) is constitutionally valid and provides adequate procedural safeguards. The word ‘interim’ does not affect the finality of the investigation report, which was prepared after a detailed probe. Provisions for debarring an auditor are preventive in nature and have proper procedural safeguards. The initiation of the process to remove auditors was necessary considering the widespread impact caused by the alleged fraud at IL&FS group entities.

The single-judge bench of Chief Justice, B.P. Dharmadhikari quashed the criminal complaint against Deloitte Haskins & Sells and BSR Associates, an affiliate of KPMG, filed by Serious Fraud Investigation Office (SFIO) terming it to be “bad in law”. However, the court upheld the constitutional validity of Section 140 (5) of the Companies Act 2013, it said that it is not applicable to auditors who have already resigned. BSR & Associates resigned in June 2019, while Deloitte’s term ended in 2018.