Supreme Court highlights auditors in cases of corporate fraud.

The Supreme Court highlighted the accountablity of company auditors in cases of corporate fraud.

The Supreme Court has given a detailed judgement in this context in the case of Union of India and Another v. Deloitte Haskins & Sells LLP & ANR. This case involves the interpretation and application of Section 140(5) of the Companies Act 2013, which deals with the role, powers, and responsibilities of auditors in a company, particularly in the context of fraudulent activities.

Key points of the judgment are:

1. Section 140(5) Analysis: The Supreme Court clarified that Section 140(5) empowers the National Company Law Tribunal (NCLT) to take action against an auditor who has acted in a fraudulent manner or is abetting or colluding in fraud. This action can be initiated either suo motu, by the Central Government, or by any concerned person.
2. Maintainability of Proceedings Post-Resignation: The Court held that proceedings under Section 140(5) are maintainable even after the resignation of the concerned auditors. It emphasized that resignation or discontinuance cannot terminate an ongoing inquiry under this section. The High Court’s view that such proceedings are no longer maintainable post-resignation was found to be erroneous.
3. Constitutional Validity of Section 140(5): The Supreme Court held that Section 140(5) is neither discriminatory nor violative of Articles 14 and 19(1)(g) of the Constitution of India. It exercises quasi-judicial powers and provides ample opportunity for auditors to present their case.
4. Quashing of SFIO Directions by High Court: The High Court’s decision to set aside the direction to prosecute, issued under Section 212(14) to the Serious Fraud Investigation Office (SFIO), was overturned. The Supreme Court noted that the High Court erred in its judgment on the grounds of non-application of mind and incompleteness of the SFIO report.
5. Auditor’s Role and Responsibilities: The judgment highlights the crucial role of auditors in a company’s affairs and emphasizes that their role cannot be equated with directors or management. Auditors must act independently and in public interest.
6. Implications of Auditor’s Misconduct: If an auditor is found to have acted fraudulently or colluded in fraud, the second proviso to Section 140(5) stipulates significant consequences, including a ban from being appointed as an auditor in any company for five years.
7. Final Order Requirement: For the consequences under the second proviso to be applicable, there must be a detailed inquiry and a final order by the NCLT establishing the auditor’s fraudulent conduct.
8. Continued Applicability of Section 140(5): The Court made it clear that the powers conferred upon the Tribunal under Section 140(5) remain applicable irrespective of any other provisions of the Companies Act 2013 or any other law in force.

This judgment is significant as it clarifies the legal position regarding auditors’ accountability and the scope of the NCLT’s powers in dealing with auditor misconduct, especially in cases of fraud.

Union of India and Another v. Deloitte Haskins & Sells LLP & ANR