Delhi HC backs NFRA's powers but questions it on 'division of functions'

The Delhi High Court, while upholding the constitutional validity of the National Financial Reporting Authority (NFRA) and its retrospective authority, stated that it is obliged to maintain a division of functions between the review of an audit and the formation of an opinion to initiate disciplinary proceedings.

 

The court order was in response to petitions filed by Deloitte Haskins & Sells LLP, SRBC & Co LLP, and several chartered accountants challenging the constitutional validity of NFRA.

 

The High Court quashed 11 show-cause notices issued by NFRA, primarily in IL&FS matters, on the grounds that the procedure followed by the audit regulator in these cases lacked neutrality and a dispassionate appraisal.

 

However, the Delhi High Court order added, “We leave it open to the NFRA to draw proceedings afresh if so chosen and advised from the stage of issuance of fresh notices based on the findings recorded in the audit quality review report.”

 

A division bench comprising Justice Yashwant Varma and Justice Dharmesh Sharma noted that the absence of a bifurcation of functions exposes NFRA to allegations of bias, a tendency to dismiss challenges to pre-formed opinions, and disregard for arguments aimed at review and reappraisal.

 

“It would thus be akin to what we in law term as the useless formality theory—an appeal from Caesar to Caesar’s wife,” the Delhi High Court observed.

 

Sources in NFRA, however, stated that this part of the High Court order contradicts an earlier ruling by the National Company Law Appellate Tribunal (NCLAT), which held that NFRA followed the ‘divisions’ as stipulated in law. “This view of NCLAT was confirmed by the Supreme Court in its orders dismissing appeals against the NCLAT judgment. It appears that the Delhi High Court order has not taken cognizance of the doctrine of merger that applies in such matters by virtue of the Supreme Court rulings, which found no reason to interfere with the NCLAT order,” the source said.

 

NFRA had informed the High Court that its executive body is legally entitled to discharge all functions and duties assigned to the authority as a whole.