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Bombay HC: Quashes criminal prosecution of BSR & Deloitte (Former Auditors) of IL&FS by SFIO - holds MCA prayer for declaration of deemed removal of auditors is untenable

The Bombay High Court on 21 April, 2020 {N Sampath Ganesh v. Union Of India} held that Direction under S. 212(14) of the Companies Act, 2013 dated 29/05/2019 issued by Union of India to SFIO is unsustainable and it is quashed & set aside. It was held that the consequential prosecution lodged by the SFIO vide Cr. Complaint  on the file of Special Court (Companies Act) and Additional Sessions Judge, Greater Mumbai; is therefore not maintainable and it is also quashed & set aside.

It was held by the Bench of Bombay High Court comprising, Chief Justice B.P. DHARMADHIKARI & Justice NITIN R. BORKAR, that Company petition filed by Union of India (MCA) before NCLT on 10th June 2019 is held not tenable qua these petitioners after M/s BSR resigned as statutory auditors of IL & FS Financial Services Limited.

The order dated 29/05/2019 has been questioned by the petitioner(s) on the ground that the report which runs into more than 750 pages & has annexures running into 32,000 pages, has been alleged to be examined in about 30 hours by Union of India and filing of prosecution has been ordered. Petitioners submitted before the HC that this shows non application of mind. It is also contended that the report submitted by SFIO was not a final report but an interim report and as such prosecution cannot be filed on its strength.

It was held by the HC that SFIO's report itself show the absence of application of mind to relevant facets having bearing on it. It was held that the direction by the Central Government under S. 212(14) itself should have shown whether any one instance of financial bungling has been fully investigated into & it prima-facie shows commission of an offence or not. It was held that such an application of mind would have revealed that examination of cross-linkages with other group companies would not have any impact on it. It was further held that this assumes significance since the report itself indicates need of further investigation into cross-linkages & cross-check of transactions with other companies. It was observed that absence of such a positive prima-facie finding in the impugned direction does not permit or require leading of any evidence to support the decision contained in said direction. It was held that the stand of the Respondents that the precedents cited need to be distinguished into two categories – one dealing with “no sanction” and the others dealing with “defective sanction”, therefore, does not hold any water. It was held that the direction dated 29/05/2019 is therefore untenable in law. 

It was held that to evaluate the arguments on non-application of mind by the Central Government while issuing direction to lodge prosecution in less than 30 hours after a 732 page report of SFIO with about 32,000 pages as annexures came to it, the reference to observations of Hon. Apex Court  – K.K. Mishra vs. State of Madhya Pradesh (2018) 6 SCC 676 become relevant in the present lis. It was observed in that case, there the cross-examination of Public Prosecutor demonstrated that the wholesome requirement spelt out by Sections 199(2) and 199(4) CrPC, as expounded by Apex Court in Subramanian Swamy, has not been complied with. It was observed that Hon. Supreme Court states that a Public Prosecutor filing a complaint under Section 199(2) CrPC without due satisfaction that the materials/allegations in complaint discloses an offence against an authority or against a public functionary which adversely affects the interests of the State would be abhorrent to the principles on the basis of which the special provision under Sections 199(2) and 199(4) CrPC has been structured. It was held by the Bombay High Court that these observations also apply to present case, inasmuch as,  requirement of application of mind in S. 212(14) of 2013 Act. It was held that the Public Prosecutor in terms of the statutory scheme under the Criminal Procedure Code plays an important role. He is supposed to be an independent person and apply his mind to the materials placed before him. 


In the present case, Union of India requested for declaration before the NCLT that M/s. BSR & Associates ceased to be statutory auditors of IL & FS (IFIN) with immediate effect. Permission was also sought to appoint independent auditor for IL & FS (IFIN) so as to replace M/s. BSR & Associates in terms of first proviso to section 140(5) of the Companies Act read with explanation (ii) thereto. The Union of India also sought relief in terms of the said second proviso read with explanation (I) that respondent no.1 in those proceedings namely Deloitte Haskins was not eligible to be appointed as an auditor of any company for the period of five years from the order passed by NCLT in view of serious fraud committed which required intervention of the MCA to prevent the destabilization impact on the company at the request of the department of Economic Affairs and sought debarment for the period of five years.

The SFIO accordingly submitted a report which was looked into by the Union of India, Ministry of Corporate Affairs (MCA) and on 29/5/2019 in exercise of the powers available to it under section 212 (14) of the Companies Act, 2013, it directed the SFIO and Regional Director (Western Region) to proceed further. This communication recommends prosecution of petitioners under various provisions and SFIO has been directed to file a complaint by next day i.e. 30/05/2019 without fail and to submit the compliance report.

The Bombay High Court has allowed the Writ petition, by quashing the criminal prosecution initiated by SFIO in terms of its report, and held petition for declaration of deemed removal of statutory auditors of IL & FS by MCA was found to be untenable - due to resignation of the auditors.

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