# UNION OF INDIA AND ANOTHER v. DELOITTE HASKINS AND SELLS LLP & ANR

- **Citation:** [2023] 5 S.C.R. 949
- **Court:** Supreme Court of India
- **Decided:** 2023-05-03
- **Case number:** Criminal Appeal Nos.2305-2307 of 2022
- **Bench:** M. R. Shah, M. M. Sundresh
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-and-another-v-deloitte-haskins-and-sells-llp-anr-37148
- **Pages:** 67

## Headnote

Companies Act, 2013 - s.140(5) - Analysis and Interpretation
of - Maintainability of proceedings u/s.140(5) after resignation of
the auditors - s.140(5) empowers the Tribunal (NCLT), either suo
motu or on an application made to it by the Central Government or
by any person concerned, to take action against the auditor who
has acted in a fraudulent manner or is abetting or colluding in
fraud with the management of a company - If on completion of an
enquiry it is found by the 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 in relation to, the company
or its directors or officers, it may by order direct the company to
change its auditors - By the impugned judgment, the High Court
held that once the auditor resigns as an auditor or is no more an
auditor on his resignation, thereafter s.140(5) proceedings are no
longer maintainable - Whether after resignation of the auditors,
proceedings u/s.140(5) are maintainable - Held: The view taken by
the High Court is absolutely erroneous and is unsustainable -
Application / proceedings u/s.140(5) of the Act, 2013 is maintainable
even after the resignation of the concerned auditors - Enquiry/
proceedings initiated under the first part of s.140(5) has to go to its
logical end and subsequent resignation and/or discontinuance of
an 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 further
required to be proceeded, in that case, an auditor to avoid the final
order and the consequence of final order as provided under the
second proviso to s.140(5) may resign and avoid any final order by
the Tribunal - That cannot be the intention of the legislature - NCLT
to pass final order on such application after holding enquiry in
accordance with law and thereafter on basis of such final order,
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further 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 an
application made to it by the Central Government or by any person
concerned, to take action against the auditor who has acted in a
fraudulent manner or is abetting or colluding in fraud with the
management of a company - If on completion of an enquiry it is
found by the 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 in relation to, the company or its directors
or officers, it may by order direct the company to change its auditors
- Held: s.140(5) is neither discriminatory, arbitrary and/or violative
of Arts. 14, 19(1)(g) of the Constitution - NCLT exercises quasijudicial powers u/s.140(5) with all the powers akin to civil court -
Ample opportunity is given by NCLT before passing any final order
- Plea that s.140(5) discriminates against the auditors unfairly in
comparison to similarly placed alleged perpetrators, such as
directors, management etc. not tenable, as the role of auditors cannot
be equated with directors and/or management - Acting in a
fraudulent manner, directly or indirectly, by an auditor is a very
serious misconduct and therefore the necessary consequence of
indulging into such fraudulent act shall follow - Merely because
the auditor can be removed as an auditor of a company under the
other provisions, s.140(5) which has been enacted with a special
object and purpose cannot be said to be arbitrary and/or ultra vires
- Constitution of India - Arts. 14 and 19(1)(g).
Companies Act, 2013 - s.140(5), first proviso - Powers under
the first proviso to s.140(5) - Nature of - Held: It can be said to be
interim or pro tem measure to prevent an existing auditor from
continuing and substitute him with an auditor based on

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949
 [2023] 5 S.C.R. 949
949
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 Interpretation
of - Maintainability of proceedings u/s.140(5) after resignation of
the auditors - s.140(5) empowers the Tribunal (NCLT), either suo
motu or on an application made to it by the Central Government or
by any person concerned, to take action against the auditor who
has acted in a fraudulent manner or is abetting or colluding in
fraud with the management of a company - If on completion of an
enquiry it is found by the 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 in relation to, the company
or its directors or officers, it may by order direct the company to
change its auditors - By the impugned judgment, the High Court
held that once the auditor resigns as an auditor or is no more an
auditor on his resignation, thereafter s.140(5) proceedings are no
longer maintainable - Whether after resignation of the auditors,
proceedings u/s.140(5) are maintainable - Held: The view taken by
the High Court is absolutely erroneous and is unsustainable -
Application / proceedings u/s.140(5) of the Act, 2013 is maintainable
even after the resignation of the concerned auditors - Enquiry/
proceedings initiated under the first part of s.140(5) has to go to its
logical end and subsequent resignation and/or discontinuance of
an 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 further
required to be proceeded, in that case, an auditor to avoid the final
order and the consequence of final order as provided under the
second proviso to s.140(5) may resign and avoid any final order by
the Tribunal - That cannot be the intention of the legislature - NCLT
to pass final order on such application after holding enquiry in
accordance with law and thereafter on basis of such final order,
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further 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 an
application made to it by the Central Government or by any person
concerned, to take action against the auditor who has acted in a
fraudulent manner or is abetting or colluding in fraud with the
management of a company - If on completion of an enquiry it is
found by the 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 in relation to, the company or its directors
or officers, it may by order direct the company to change its auditors
- Held: s.140(5) is neither discriminatory, arbitrary and/or violative
of Arts. 14, 19(1)(g) of the Constitution - NCLT exercises quasijudicial powers u/s.140(5) with all the powers akin to civil court -
Ample opportunity is given by NCLT before passing any final order
- Plea that s.140(5) discriminates against the auditors unfairly in
comparison to similarly placed alleged perpetrators, such as
directors, management etc. not tenable, as the role of auditors cannot
be equated with directors and/or management - Acting in a
fraudulent manner, directly or indirectly, by an auditor is a very
serious misconduct and therefore the necessary consequence of
indulging into such fraudulent act shall follow - Merely because
the auditor can be removed as an auditor of a company under the
other provisions, s.140(5) which has been enacted with a special
object and purpose cannot be said to be arbitrary and/or ultra vires
- Constitution of India - Arts. 14 and 19(1)(g).
Companies Act, 2013 - s.140(5), first proviso - Powers under
the first proviso to s.140(5) - Nature of - Held: It can be said to be
interim or pro tem measure to prevent an existing auditor from
continuing and substitute him with an auditor based on a prima
facie satisfaction that a fraud has been perpetrated and when
circumstances warrant the substitution - Such an order can be said
to be an interim order akin to a temporary suspension during the
pendency of the detailed enquiry as provided in s.140(5) and before
any final order is passed by the Tribunal.
Companies Act, 2013 - s.140(5), second proviso - Object
and purpose of - When attracted -- Held: The object and purpose
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of second proviso to s.140(5) is to make the provision more stringent
and to provide for consequences for an auditor when such an auditor
is found to have been perpetrating a fraud and is removed by the
NCLT for such fraud - Before second proviso of s.140(5) is attracted,
there must be a detailed enquiry against an auditor of a company
as per first part of s.140(5) and there must be a finding arrived at
by the NCLT that the auditor of a company has, directly or indirectly,
acted in a fraudulent manner or abetted or colluded in any fraud
by, or in relation to, the company or its directors or officers.
Companies Act, 2013 - s.140(5) - Powers conferred upon
the Tribunal u/s.140(5) - If without prejudice to any action under
the provisions of the Act, 2013 or any other law for the time being
in force - Held: Irrespective of any other provisions of the Act,
2013, the Tribunal is vested with powers u/s.140(5) to pass a final
order against the auditor on the allegation that such an auditor of
the company has, directly or indirectly, acted in a fraudulent manner.
Companies Act, 2013 - s.212(14) - Quashing and setting
aside of s.212(14) direction issued by Union of India to Serious
Fraud Investigation Office (SFIO), by the High Court -
Consequently prosecution lodged by SFIO set aside - High Court
set aside the s.212(14) direction mainly on two grounds, firstly, that
the direction to prosecute was issued within 30 hours of report of
the SFIO Report which demonstrates non-application of mind and
secondly on ground that SFIO Report was an incomplete report as
investigation had not been completed and therefore s.212(14)
direction was incompetent - Held: Merely because the direction to
prosecute was issued within 30 hours, by that itself, it cannot be
presumed that there was a non-application of mind - What was
required to be considered was, whether there was any material to
prosecute or not and whether the direction to prosecute was properly
given or not - High Court also did not properly appreciate that the
SFIO Report was a report prepared on completion of investigation
into IFIN - one of the companies under investigation - IFIN was
one of the subsidiaries in the IL&FS group and the financial services
arm - Merely because investigation with respect to other subsidiary
companies of IL&FS group might have been going on, cannot be a
ground to observe that so far as IFIN was concerned the report
was incomplete - High Court materially erred that investigation in
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AND SELLS LLP
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respect of IFIN was incomplete - Proceedings before the High Court
were at the stage of direction u/s.212(14) to allow the prosecution
and the sanction to prosecute - Ample opportunity was available to
the concerned accused - Therefore, High Court erred in setting
aside the direction u/s.212(14).
Companies Act, 2013 - Chapter X - Audit and Auditors -
Held: Role of auditors cannot be equated with directors and/or
management.
Words and Phrases - Word "any" used in second proviso to
s.140(5) of the Act, 2013 - Meaning - Under second proviso to
s.140(5), on the final order being passed by the Tribunal that the
auditor/firm has, directly or indirectly, acted in a fraudulent manner
or abetted or colluded in any fraud by, or in relation to, the company
or its directors or officers, he/it shall not be eligible to be appointed
as an auditor of any company for a period of five years - Held:
The word "any" is significant - On the final order being passed by
the Tribunal, such an auditor not only shall be removed or changed
as an auditor of a company, but such an auditor/firm shall also be
ineligible to be appointed as an auditor of any other company for a
period of five years - Companies Act, 2013 - s.140(5).
Disposing of the appeals, the Court
HELD:1. The powers of the NCLT in first part of Section
140(5) of the Companies Act, 2013 is quasi-judicial in nature and
the Tribunal would have the powers of a civil court to examine
the role of auditors and adjudicate on their fraudulent conduct
and abdication of their function. The powers under the first proviso
to Section 140(5) can be said to be interim or pro tem measure to
prevent an existing auditor from continuing and substitute him
with an auditor based on a prima facie satisfaction that a fraud has
been perpetrated and when circumstances warrant the
substitution. Such an order can be said to be an interim order
akin to a temporary suspension during the pendency of the
detailed enquiry as provided in Section 140(5) of the Act and
before any final order is passed by the Tribunal. [Para 5.2][1005D-G]
2. As such, second proviso to Section 140(5) can be said to
be a substantive provision and it operates on the final order
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passed by the Tribunal under Section 140(5) (first part). The
second proviso to Section 140(5) was introduced after detailed
analysis and after taking into consideration recommendations of
the Parliamentary Standing Committee and with a view to make
the provision more stringent and to provide for consequences
for an auditor when such auditor is found to have been
perpetrating a fraud and is removed by the NCLT for such fraud.
On passing of the final order by the NCLT under first part of
section 140(5) and if an auditor is found to have been indulged
into fraudulent activities or abetting or colluding in a fraud with
the management of the company, consequences provided under
the second proviso to section 140(5) shall follow. Therefore,
before second proviso of section 140(5) is attracted, there must
be a detailed enquiry against an auditor of a company as per first
part of section 140(5) and there must be a finding arrived at by
the NCLT that the auditor of a company has, directly or indirectly,
acted in a fraudulent manner or abetted or colluded in any fraud
by, or in relation to, the company or its directors or officers. [Para
5.3][1006-A-G]
3. Subsequent resignation of an auditor after the application
is filed under section 140(5) by itself shall not terminate the
proceedings under section 140(5). Resignation and/or removal
of an auditor cannot be said to be an end of the proceedings under
section 140(5). There are further consequences also on
culmination of the enquiry under section 140(5) proceedings and
passing a final order by the Tribunal on the conduct of an auditor,
whether such a auditor has, directly or indirectly, acted in a
fraudulent manner or abetted or colluded in any fraud by, or in
relation to, the company or its directors or officers, as provided
under the second proviso to section 140(5) of the Act, 2013.
Therefore, the enquiry/proceedings initiated under the first part
of section 140(5) has to go to its logical end and subsequent
resignation and/or discontinuance of an auditor shall not terminate
the enquiry/proceedings under section 140(5). If the
interpretation given by the High Court that once an auditor
resigns, the proceedings under section 140(5) stand terminated
and are no longer further required to be proceeded, in that case,
an auditor to avoid the final order and the consequence of final
order as provided under the second proviso to section 140(5)
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AND SELLS LLP
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may resign and avoid any final order by the Tribunal. That cannot
be the intention of the legislature. [Para 6][1007-A-D]
4. The second proviso to section 140(5) of the Act, 2013 is
a substantive provision, though it is by way of a proviso, and the
same shall operate and/or depend upon the final order to be
passed by the Tribunal in the first part of section 140(5). If the
interpretation given by the High Court that on subsequent
resignation and/or discontinuance of an auditor, proceedings under
section 140(5) stand terminated and/or the petition under section
140(5) by the Central Government is no longer maintainable is
accepted, in that case, second proviso to section 140(5) would
become nugatory and in no case there shall be any action under
the second proviso to section 140(5). If such an interpretation,
as interpreted by the High Court, is accepted, in that case, the
object and purpose of incorporation of second proviso to section
140(5) shall be frustrated. The object and purpose of second
proviso to section 140(5) is to make the provision more stringent
and to provide for consequences for an auditor when such an
auditor is found to have been perpetrating a fraud and is removed
by the NCLT for such fraud. Notably, under the second proviso
to section 140(5) on the final order being passed by the Tribunal
that the auditor/firm has, directly or indirectly, acted in a fraudulent
manner or abetted or colluded in any fraud by, or in relation to,
the company or its directors or officers, he/it shall not be eligible
to be appointed as an auditor of any company for a period of five
years. The word "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 only shall be removed or changed
as an auditor of a company, but such an auditor/firm shall also be
ineligible to be appointed as an auditor of any other company for
a period of five years. [Para 6.1][1007-E-H; 1008-A-B]
5. On true interpretation and scheme of Section 140(5) of
the Act, 2013, once the enquiry/proceedings is/are initiated under
first part of section 140(5) of the Act, either suo motu by the
Tribunal or on an application made to it by the Central
Government or by any person concerned, it must come to its
logical end and irrespective of the fact whether during such
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enquiry/proceedings the auditor has resigned or not, there must
be a final order to be passed by the Tribunal on whether such an
auditor has, in fact, directly or indirectly, acted in a fraudulent
manner or not. Direction to the company to change its auditor as
provided in the first part of section 140(5) is only a consequence
to the finding recorded by the Tribunal that the auditor has, directly
or indirectly, acted in a fraudulent manner. This is the first
consequence of the final order under section 140(5) (first part).
On passing the final order by the Tribunal that the auditor of a
company has, directly or indirectly, acted in a fraudulent manner,
the second consequence as mentioned in the second proviso to
section 140(5) shall be attracted. Therefore, for any consequence
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
of section 140(5). Therefore, on true interpretation, even on
resignation by an auditor of a company even during the enquiry/
proceedings under section 140(5) or even prior to that, there
shall not be any termination of the proceedings under section
140(5) as observed and held by the High Court. In a given case,
an auditor, who in fact has, directly or indirectly, acted in a
fraudulent manner, to avoid any further consequence under the
second proviso to section 140(5), resigns to avoid any
consequence under the second proviso to section 140(5), it cannot
be 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 get
away with fraud, abetment of fraud or professional misconduct
etc. and for that purpose the reliance placed upon sections 132,
141, 147, 245 and 447 of the Act is concerned, it is required to be
noted that all the aforesaid provisions and section 140(5) operate
in different field. Merely because the auditor can be removed as
an auditor of a company including the other provisions, section
140(5) which has been enacted with a special object and purpose
cannot be said to be arbitrary and/or ultra vires. [Para 8][1008H; 1009-A, B-C]
6.2. As per the Scheme of the Act, 2013, more particularly
Chapter X, the auditor acts as an independent examiner of
accounts and cannot be said to be holding an office in the conduct
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AND SELLS LLP
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and management of the company. Therefore, the submission 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 resigned
has no substance. [Para 9][1009-G-H]
6.3. In section 140(5), it is specifically mentioned that
"without prejudice to any action under the provisions 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 section
140(5) shall be without prejudice to any action under the
provisions of the Companies Act, 2013 or any other law for the
time being in force. Therefore, irrespective of any other
provisions of the Act, 2013, the Tribunal is vested with the powers
under Section 140(5) of the Act to pass a final order against the
auditor on the allegation that such an auditor of the company has,
directly or indirectly, acted in a fraudulent manner. [Para 10][1010A-C]
7. Section 140(5) cannot be said to be excessive and/or
manifestly arbitrary, as contended. It was the case on behalf of
the original writ petitioners on the constitutionality/vires of
section 140(5) that section 140(5) is excessive and arbitrary as it
provides unguided and untrammelled powers to NCLT for
determination of a serious offence of fraud and consequence of
mandatory disqualification with grave consequences akin to civil
death. The aforesaid has no substance. NCLT shall exercise the
quasi-judicial powers under section 140(5) with all the powers
akin to civil court. Ample opportunity shall be given by the NCLT
before passing any final order. [Para 12][1011-A-C]
8. Insofar as the submission that section 140(5) is violative
of Article 14 of the Constitution of India and discriminates against
the auditors unfairly in comparison to similarly placed alleged
perpetrators, such as directors, management etc. is concerned,
it is required to be noted that the role of auditors cannot be
equated with directors and/or management. Auditors play very
important role in the affairs of the company and therefore they
have to act in the larger public interest and all other stakeholders
including investors etc. Chapter X of the Act specifically for the
"Audit and Auditors" looking to the importance of the auditors.
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Therefore, section 140(5) cannot be said to be discriminatory
and/or violative of Article 14 of the Constitution of India. [Para
13][1011-C-E]
9. It was submitted that penalty in the form of automatic
disqualification of auditors and of the entire firm including partners
and that too for a period of five years to become the auditor of
any other company is highly disproportionate. However, it is
ultimately for the legislature/Parliament to provide the debarment.
On the principle of joint and severe liability, the auditors and the
entire firm including partners shall be liable and therefore can be
subjected to section 140(5) and the consequences mentioned in
section 140(5) of the Act, 2013. Nobody can be permitted to say
that despite acting fraudulently, directly or indirectly, they had a
right to continue and/or carrying on their profession. Acting in a
fraudulent manner, directly or indirectly, by an auditor is a very
serious misconduct and therefore the necessary consequence of
indulging into such fraudulent act shall follow. Section 140(5) of
the Act has been enacted with the specific object and purpose
and the same has been enacted after due deliberations and taking
into consideration the recommendations of the Standing
Committee as well as the respective stakeholders. Therefore,
taking into consideration the object and purpose for which section
140(5) of the Act is enacted, the same cannot be said to be arbitrary,
excessive and violative of Article 14 of the Constitution of India
and/or violative of fundamental rights guaranteed under Article
19(1)(g) of the Constitution of India, as alleged. [Para 14][1011E-H; 1012-A-C]
10.1. The High Court set aside the direction under section
212(14) terming the same as non-application of mind since it was
improbable that report of about 750 pages and 32000 pages of
annexures could have been considered in 30 hours. The
observations made by the High Court cannot be accepted. Merely
because the direction to prosecute was issued within 30 hours,
by that itself, it cannot be presumed that there was a nonapplication of mind. A detailed note was prepared by the officer
which was ultimately placed before the final authority who
ultimately took a decision and issued a direction to prosecute.
What was required to be considered was, whether there was any
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material to prosecute or not and whether the direction to
prosecute was properly given or not. During the trial, the accused
shall be given ample opportunity to put forward their case.
Therefore, on the aforesaid ground, the High Court has materially
erred in setting aside the direction to prosecute issued under
section 212(14) of the Act. [Paras 15.1 and 15.2][1012-F-H; 1013A-B]
10.2. The High Court has not properly appreciated that the
SFIO Report was a report prepared on the completion of the
investigation into the IFIN - one of the companies under
investigation. IFIN was one of the subsidiaries in the IL&FS
group and the financial services arm. Merely because so far as
the investigation with respect to other subsidiary companies of
IL&FS group is concerned, the same might have been going on,
cannot be a ground to observe that at this stage so far as the
IFIN is concerned the report was incomplete report and for which
the investigation was going on. The High Court materially erred
that the investigation in respect of IFIN is incomplete. The
proceedings before the High Court were at the stage of direction
under section 212(14) to allow the prosecution and the sanction
to prosecute. Ample opportunity shall be available to the
concerned accused against whom the prosecution was ordered
for the offences punishable under section 447 of the Companies
Act and other relevant provisions of the IPC. Therefore, the High
Court has erred in setting aside the direction under section
212(14). [Para 15.3][1013-D, E-F, H; 1014-B-C]
11. The challenge to the constitutional validity of section
140(5) of the Companies Act, 2013 fails. Section 140(5) is neither
discriminatory, arbitrary and/or violative of Articles 14, 19(1)(g)
of the Constitution of India, as alleged. The impugned judgment
and order passed by the High Court quashing and setting aside
the application/proceedings under section 140(5) on the ground
that as the auditors have resigned and therefore thereafter the
same is not maintainable is hereby quashed and set aside.
Consequently, the impugned judgment and order passed by the
High Court quashing and setting aside the NCLT order holding
that even after the resignation of the auditors, the proceedings
under section 140(5) shall be maintainable is hereby quashed
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and set aside. The application/proceedings under section 140(5)
of the Act, 2013 is held to be maintainable even after the
resignation of the concerned auditors and now the NCLT therefore
to pass a final order on such application after holding enquiry in
accordance with law and thereafter on the basis of such final order,
further consequences as provided under the second proviso to
section 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 Council
of India (1989) Supp 2 SCC 25 : [1988] 3 Suppl. SCR
361; 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) 5
SCC 598 : [2017] 2 SCR 993; Sant Lal Gupta v.
Modern Cooperative Housing Society Ltd. (2010) 13
SCC 336 : [2010] 13 SCR 621; B. Himmatlal Agrawal
v. Competition Commission of India AIR 2018 SC 2804:
[2018] 4 SCR 496 ; Cellular Operators Association of
India v. Union of India (2003) 3 SCC 186 : [2002] 5
Suppl. SCR 222; Pasupuleti Venkateswarlu v. Motor
& General Traders (1975) 1 SCC 770 : [1975] 3 SCR
958; Carona Ltd. v. Parvathy Swaminathan & Sons
(2007) 8 SCC 559 : [2007] 10 SCR 656; Arun Kumar
v. 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 Vithaldas
Chauhan v. State of Gujarat (1997) 7 SCC 622 : [1997]
3 Suppl. SCR 705; K.K Mishra v. State of Madhya
Pradesh (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. Iqbal
Ahmed v. State of Andhra Pradesh (1979) 4 SCC 172:
[1979] 2 SCR 1007 - referred to.
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P.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 889
and Gokulchand Dwarkadas Morarka v. The King,
(1947- 48) 75 IA 30- referred to.
Case Law Reference
(2023) 1 SCC 216
referred to
Para 3.6
[1988] 3 Suppl. SCR 361
referred to
Para 4(xiii)
[1986] 3 SCR 1049
referred to
Para 4(xiii)
[2019] 6 SCR 307
referred to
Para 4(xiv)
(2023) 2 SCC 643
referred to
Para 4(xvii)
[1955] 1 SCR 158
referred to
Para 4(xvii)
[2017] 2 SCR 993
referred to
Para 4(xix)
[2010] 13 SCR 621
referred to
Para 4(xix)
[2018] 4 SCR 496
referred to
Para 4(xxiv)
[2002] 5 Suppl. SCR 222
referred to
Para 4(xxiv)
[1975] 3 SCR 958
referred to
Para 4(xxiii)
[2007] 10 SCR 656
referred to
Para 4(xxix)
[2006] 6 Suppl. SCR 290
referred to
Para 4(xxix)
(2022) 9 SCC 425
referred to
Para 4(xxix)
[2019] 5 SCR 91
referred to
Para 4.1(iv)
[1997] 3 Suppl. SCR 705
referred to
Para 4.1(xix)
[2018] 5 SCR 315
referred to
Para 4.1(xxi)
[1995] 2 Suppl. SCR 637
referred to
Para 4.1(xxi)
(2022) 8 SCC 162
referred to
Para 4.1(xxii)
[1979] 2 SCR 1007
referred to
Para 4.1(xxiv)
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961
CRIMINAL/CIVIL APPELLATE JURISDICTION : Criminal
Appeal Nos.2305-2307 of 2022.
From the Judgment and Order dated 21.04.2020 of the High Court
of Judicature at Bombay in CRLWP Nos.5023, 5035 and 5036 of 2019.
With
Criminal Appeal Nos.2302-2303 of 2022, Civil Appeal Nos.793 of
2022, Criminal Appeal No.2298 of 2022, Civil Appeal No.801 of 2022,
Criminal Appeal No.2299 of 2022, Civil Appeal No.877 of 2022, Criminal
Appeal Nos.2300 And 2304 of 2022
Balbir Singh, Sanjay Jain, ASGs, Balasubramanian, Arvind Datar,
V. Giri, Kapil Sibal, Mukul Rohatgi, Darius Khambata, Neeraj Kishan
Kaul, Siddharth Dave, Sr. Advs., Naman Tandon, Samarvir Singh, Aditya
Sikka, Kanu Agarwal, Himanshu Gupta, Vikash Kumar Jha, Ms. Ritu
Anand, Ms. Vasudha Vijaysheel, Adhiraj Singh Chauhan, Ms. Padmaja
Sharma, Ms. Neela Kedar Gokhale, Ms. Sanskriti Pathak, Ms. Bani
Dikshit, Arvind Kumar Sharma, Rajat Nair, Bhuvan Kapoor, Anukalp
Jain, 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. Prachi
Dhanani, 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. Shreya
Chaudhary, Brian Moses, Ms. Aakanksha Kaul, Adit Khorana, Ms. Vidhi
Thakur, Prastut Dalvi, Chandra Prakash, Bharat Bagla, Siddharth
Dharmadhikari, Aaditya Aniruddha Pande, Ms. Kirti Dadheech, Sachin
Patil, 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 common
question(s) of law pertaining to the interpretation of Section 140(5) of
the Companies Act, 2013 (hereinafter referred to as the 'Act, 2013')
and the Investigation Report dated 28.05.2019 (hereinafter referred to
as the 'IFIN SFIO Report') in respect of IL&FS Financial Services
Limited (hereinafter referred to as the 'IFIN').
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1.1 Criminal Appeal Nos. 2305-2307/2022, Criminal Appeal Nos.
2302-2303/2022 and Criminal Appeal No. 2300/2022 have been filed by
the Union of India, inter alia, challenging the common judgment and
order dated 21.04.2020 passed by the High Court of Bombay in Writ
Petition Nos. 4144 & 4145 of 2019 and other companion writ petitions,
by which the High Court, though upheld that Section 140(5) of the Act,
2013 is not unconstitutional, has set aside the direction under Section
212(14) of the Act, 2013 dated 29.05.2019 issued by the Union of India
to the Serious Fraud Investigation Office (SFIO) and consequently set
aside the prosecution lodged by the SFIO vide Criminal Complaint No.
CC 20/2019 on the file of Special Court (Companies Act) & Additional
Sessions Judge, Greater Mumbai, the Union of India and the SFIO have
preferred the present appeals.
1.2 In Criminal Appeal Nos. 2302-2303/2022, the challenge
pertains to the auditor of IL&FS Financial Services Limited, namely,
BSR & Associates LLP (BSR) and in Criminal Appeal Nos. 2305-2307/
2022 and Criminal Appeal No. 2300/2022, the challenge pertains to another
auditor 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 have
been filed by Deloitte and two of its partners challenging the impugned
judgment and order passed by the High Court insofar as it upholds the
constitutionality of Section 140(5) of the Act, 2013.
1.4 Civil Appeal Nos. 793/2022, 801/2022 & 877/2022 have been
filed by Deloitte and two of its partners challenging the order passed by
the National Company Law Appellate Tribunal dated 04.03.2020.
Factual Background:
2. The facts leading to the present proceedings in nutshell are as
under:
 A series of defaults by the IL&FS Group Companies, which had
an aggregate debt burden of more than Rs. 91,000 crores, occurred
between June to September, 2018 and threatened to collapse the money
markets of India, added pressure to corporate bond yields and sparked a
sell off in the stock market. The Department of Economic Affairs, Ministry
of Finance issued an Office Memorandum dated 30.09.2018 in respect
of IL&FS to the Ministry of Corporate Affairs, Union of India requesting
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it to take action under the Act, 2013. The Memorandum and Note
highlighted that:
(a)
the IL&FS Group was struggling with a debt contagion of
approx.. Rs. 91,000 crores across the IL&FS Group against
Rs. 6950 crores in equity share capital and reserves a
leverage of at least 13 times. Moreover, in the year 201718, the IL&FS Group has shown a loss of Rs. 2670 crores;
(b)
this debt contagion, prima facie, was on account of inter
alia failure of corporate governance across the IL&FS
Group and window dressed accounts; and
(c)
any further defaults would be catastrophic for the wellbeing of the financial markets and the economy.
2.1 In parallel, the Ministry of Corporate Affairs, upon receipt of
a 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 its
subsidiaries.
2.2 The Ministry of Corporate Affairs filed a Company Petition
on 01.10.2018 being Company Petition No. 3638/2018 against IL&FS
and its the then existing Board of Directors before the National Company
Law Tribunal (NCLT) seeking, amongst others, the removal of the then
existing Board of Directors of IL&FS and the appointment of a new
Board of Directors in place and instead thereof. The NCLT passed an
interim order on the same date, i.e., 01.10.2018 superseding the then
existing Board of Directors of IL&FS with a new Board of Directors.
The new Board of Directors were directed to take charge of the affairs
of the IL&FS. The new Board of Directors of IL&FS submitted a report
dated 30.10.2018 on progress and way forward with the Ministry of
Corporate Affairs which was in turn filed by the Ministry of Corporate
Affairs with the NCLT on 31.10.2018, pursuant to the order passed by
the NCLT on 01.10.2018.
2.3 Further to the Office Order dated 30.09.2018 directing
investigation 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 Employees
Welfare Trust pertaining to the IL&FS Group. It is required to be noted
that the said interim report was submitted as Ministry of Corporate Affairs
called for an "interim report", which was called in pursuance to Section
212(11) of the Act, 2013 which provides that an interim report must be
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called for by the Central Government. It is to be noted that in the interim
report itself, it was specifically recorded that the findings in the interim
report are interim findings and the interim report concluded by setting
forth "based on the above interim findings..." It is also to be noted that
interim report was on the individuals who were in control of the affairs
of the IL&FS Group and the illegalities and fraud perpetrated by them.
2.4 On the basis of the interim report, the Ministry of Corporate
Affairs filed a Miscellaneous Application in Company Petition No. 3638/
2018 against the erstwhile Directors of the companies in the IL&FS
Group seeking to implead them in the said proceedings and an order to
attach their immovable/movable properties.
2.5 On the basis of the interim report and a prima facie opinion of
the Institute of Chartered Accountants dated 04.12.2018, the Ministry
of Corporate Affairs filed a petition under section 130 of the Companies
Act, 2018 before the NCLT praying inter alia that the books of accounts
of IL&FS, IFIN and IL&FS Transportation Networks Limited (ITNL)
may be re-opened and recast. Vide order dated 01.01.2019 passed in
Section 130 petition, the NCLT directed that the accounts of IL&FS,
IFIN & ITNL for the past 5 financial years be re-opened and recast on
the ground that the affairs of IL&FS, IFIN & ITNL had been mismanaged
casting a doubt on the reliability of the financial statements/accounts.
2.6 The auditors of IFIN (BSR & Deloitte) were given notice of
Section 130 petition who opposed the said petition. Order dated
01.01.2019 passed by the NCLT was challenged by one of the exdirectors of IFIN before the National Company Law Appellate Tribunal,
New Delhi (NCLAT), which dismissed the appeal vide order dated
31.01.2019. Order dated 31.01.2019 passed by the NCLAT was appealed
before this Court. Vide order dated 04.06.2019, this Court dismissed the
civil appeal filed by the said ex-director. Thus, this Court upheld initiation
of the proceedings by the Ministry of Corporate Affairs under section
130 of the Companies Act, 2018.
2.7 The Reserve Bank of India (RBI) initiated an inspection of
the IL&FS and IFIN under Section 45N of the RBI Act, 1934. Pursuant
to the investigation/inspection, the RBI submitted an investigation/
inspection report dated 22.03.2019 to IFIN. IFIN thereafter issued a
notice dated 13.05.2019 under Section 140(1) of the Act, 2013 inter
alia on BSR seeking to remove them as auditors. BSR filed a written
response to the notice served by IFIN under Section 140(1) of the Act,
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2013 denying the allegations in the notice. A hearing was held on
29.05.2019 by IFIN where BSR was also represented/present.
2.8 Pursuant to the Office Order dated 30.09.2018, SFIO submitted
the investigation report of IL&FS Financial Services Limited (SFIO
Report).
2.9 The Ministry of Corporate Affairs vide letter dated 29.05.2019
requested the Regional Director (Western Region) and the SFIO to initiate
proceedings/prosecution. The SFIO was asked to initiate proceedings/
prosecution under Section 447 and other provisions of the Companies
Act, r/w Sections 417, 420 and 120B of the Indian Penal Code. The
Regional 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 on
30.05.2019 before the Sessions Court (Special Judge - Companies Act),
Mumbai against, amongst others, the auditors/ex-auditors of IFIN being
CC No. 20/2019.
2.11 That thereafter the Ministry of Corporate Affairs filed a
Petition under Section 140(5) of the Act, 2013 dated 10.06.2019, inter
alia, against the auditors of the IFIN, namely, BSR & Deloitte and the
engagement partners as well as their team. In the petition under Section
140(5), it was inter alia prayed to remove BSR as auditors of IFIN;
declare that Deloitte shall be deemed to be removed as Statutory Auditor
for IL&FS for F.Y. 2012-13 to F.Y. 2017-18; permit the Ministry of
Corporate Affairs to appoint an auditor for IFIN under the first proviso
of Section 140(5) of the Act, 2013; and declare/direct that BSR, its
engagement partners, Deloitte and its engagement partners shall not be
eligible to be appointed as an auditor for any company for a period of
five 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 IFIN
and simultaneously completed the regulatory filings pursuant to such
resignation.
2.13 BSR and its engagement partners filed a reply dated
19.06.2019 to Section 140(5) petition before the NCLT, inter alia,
contending that (i) they are not the auditors for IFIN any longer as they
have tendered their resignation and therefore Section 140(5) is not
applicable to them; and (ii) Section 140(5) does not demonstrate any
case for fraud against BSR.
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2.14 Deloitte filed an application dated 19.06.2019 challenging
the maintainability of Section 140(5) petition before the NCLT on the
ground that Deloitte is no longer the auditor for IFIN. BSR and its
engagement partners also filed an application challenging the
maintainability of Section 140(5) petition before the NCLT on the ground
that BSR is no longer the auditor for IFIN.
2.15 After hearing the auditors (BSR & Deloitte) on the applications
challenging the maintainability of Section 140(5) petition, the NCLT passed
an order upholding the maintainability of Section 140(5) petition.