In a first, the Mumbai bench of the National Company Law Tribunal (NCLT) on Tuesday allowed the corporate affairs ministry to reopen the books of the crippled Infrastructure Leasing & Financial Services (IL&FS) Group and its subsidiaries for the past five years under Section 130 of the Companies Act, to ascertain financial mismanagement.
The government on December 21, 2018, had invoked the powers under Section 130 of the new Companies Act of 2013 to reopen the books of a company. The government wants to check the balance-sheets of the crippled group and its two listed subsidiaries — ITNL and IL&FS Financial Services — for the past five years (FY13-FY18) and the move comes after the Serious Fraud Investigation Office (SFIO) and Institute of Chartered Accountants of India (ICAI) reports indicated that the accounts were prepared a fraudulently and negligently in the last five years by the previous management.
The statutory bodies including, the Reserve Bank of India (RBI), the markets watchdog Securities and Exchange Board of India (Sebi) and the Income Tax (I-T) department gave their no objection for restating the accounts.
The NCLT also granted relief to auditors who had examined the financial accounts of IL&FS and its two subsidiaries, observing that they had no role in preparing them. However, the interim order will not have any bearing on the ongoing proceedings by the ICAI against the auditors. “At this stage when the ICAI enquiry is pending, no such opinion can be formed that accounts were prepared in a fraudulent manner,” said the tribunal.
Moreover, the NCLT said the auditors did not prepare the financial accounts. “Their role is to audit the accounts prepared by the company,” the tribunal observed. The auditors who were involved in auditing the books of the IL&FS group are Deloitte Haskins and Sells, BSR & Associates, a KPMG affiliate, and S R Batliboi, an affiliate of EY. The government moved the NCLT in December, seeking the reopening of the financial accounts under Section 130 of the Companies Act based on the prima facie findings of the ICAI and the Serious Fraud Investigation Office. The findings had cast a shadow on the role of the auditors, saying they were negligent in doing their job.
Mustafa Doctor, counsel for Deloitte Haskins and Sells, argued that while the firm didn’t have a problem with the tribunal ordering the reopening of IL&FS’ books, the basis on which the government was seeking that was the accounts had been fraudulently prepared by the auditors, which was wrong as the auditors had no role in preparing them. The management prepared the account, he added.
Sanjay Shorey, arguing for the Ministry of Corporate Affairs, acceded to the point made by the auditor. “The government, at this stage, is not pressing allegations against the auditors,” he said.
The tribunal presided over by V P Singh and Ravikumar Duraisamy, however, observed that if the audit report prepared was genuine, then why was there no mention of the asset-liability mismatch of the group. Moreover, the bench said that if the accounts were recast, then it would help the auditors.
The auditors, defending their position, said they had been served with a show-cause notice by the ICAI. Also, the probe is at a nascent stage, and this cannot be the basis for reopening of the financial accounts of the IL&FS group and its two subsidiaries. Further, they argued that the report that the government was basing its allegations on didn’t even mention fraud. It just mentions negligence on the part of the auditors.
In the last hearing, the NCLT had refused to pass an order and had sought the opinion of the Sebi, the RBI and I-T department. All the three regulatory bodies have said they have no objection to the reopening and recasting of the books of the group and its subsidiaries.
The tribunal directed the central government to appoint an independent auditor to examine the financial accounts of the IL&FS group and its two subsidiaries and submit the name of the auditor to the tribunal.