NCLT rejects IL&FS Financial Services auditors' plea challenging 5-year ban

It will hear the arguments of the Ministry of Corporate Affairs (MCA) on banning the former auditors of IFIN on September 5

The National Company Law Tribunal (NCLT), Mumbai, on Friday rejected an appeal of former auditors of IL&FS Financial Services (IFIN) — Deloitte Haskins & Sells and BSR & Associates — questioning the jurisdiction of the tribunal to ban them for five years under Section 140(5) of the Companies Act.

The tribunal also said that it would hear the argument of the Ministry of Corporate Affairs (MCA) on September 5 on banning the auditors based on the investigation of the Serious Fraud Investigation Office (SFIO). The MCA had moved the NCLT in June to ban Deloitte Haskins & Sells and KPMG-network firm BSR & Associates for five years after the SFIO in its investigation found them colluding with the erstwhile management of IFIN in painting a rosy picture of the struggling company, despite knowing the sorry state of affairs. 

The auditors, however, have said they will review the order and decide their future course of action and possibly appeal against the order.

“Based on advice from legal advisors, we will be appealing the order issued by the NCLT,” said the spokesperson for BSR & Associates. 

Deloitte’s spokesperson said: “The NCLT’s ruling is unfortunate. We continue to believe the NCLT lacks the jurisdictional authority to adjudicate this matter.” Earlier, the auditors’ lawyers had put forward the argument that the section under which the government was seeking a ban — Section 140(5) — applies only to auditors who are currently responsible for auditing the company and not those who have resigned or whose term has expired. BSR & Associates resigned in June 2019, while Deloitte’s term ended in 2018.

Moreover, the lawyers argued that the section only empowers the NCLT to change the auditor if it believes the auditors were involved in a fraud. 

They said the tribunal could ban them only when a final order were to be passed in the case and for that to happen, fraud on the part of the auditors has to be proved first. The lawyers also argued that the SFIO investigation report was an interim one and said the special court has not taken cognizance of the report. 

This is the second setback for auditors coming after the MCA moving the tribunal to freeze the assets of the auditors and partners associated with IFIN even as the NCLAT stayed the NCLT’s order to prosecute the auditors under Section 241-242 of the Companies Act. The matter has been adjourned to August 28. 

The SFIO, in its complaint, has alleged that the auditors were aware that IFIN was lending to defaulting borrowers through group companies so that they could suppress their non-performing assets and not provide for the bad debt.

It alleged that the auditors failed to verify the end-use of bank finances and money raised through non-convertible debentures (NCDs) despite it being a regulatory mandate for verifying such things. 

The SFIO complaint goes on to say that the auditors falsified books of accounts from FY14 to FY18 and did not report the negative net owned fund, as well as its negative capital to risk (weighted) assets ratio.

The audit committee colluded with the management and overlooked the many impairment indicators in contravention of the accounting standards and principals of prudence, the SFIO said in its complaint.