IL&FS Fraud: HC quashes criminal proceedings against two key auditor firms

In a major relief to auditor firms BSR & Associates, a KPMG affiliate, and Deloitte Haskins, which is accused of conniving in the IL&FS subsidiary IFIN financial

In a major relief to auditor firms BSR & Associates, a KPMG affiliate, and Deloitte Haskins, which is accused of conniving in the IL&FS subsidiary IFIN financial fraud case, the Bombay high court (HC) on Tuesday quashed criminal proceedings against the audit firms in the special court. However, the court did not stay the proceedings in the NCLT. After pronouncing the order on the request of the Central government, HC stayed its order for eight weeks to allow the investigating agency to challenge the order before the Supreme Court. The court, however, specified that interim protection of the auditor firms from coercive action would continue.

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A division bench of chief justice Bhushan Dharmadhikari and justice Nitin Borkar who conducted proceedings through video conferencing on Tuesday held that the firms could not be prosecuted by the special court as they had already resigned as auditors of IL&FS before the alleged fraud came to light.

The counsel for BSR also argued that the criminal proceedings against them were initiated a day after Serious Fraud Investigation Office (SFIO) had filed a 32,000 interim report and hence, it was not possible for the government to arrive at a conclusion within such a short span and initiate criminal action against them.

The SFIO had, however, argued the report was final and not an interim report as being portrayed by the audit firms. The Central government had submitted that the report was being labelled as interim as investigations were on against 79 firms, however, the action against the two firms was based on investigations which pointed to their role in the fraud.

The operative part of the order upheld the firms’ contentions about the criminal proceedings being invalid and set aside the trial against the two auditor firms. The bench justified its decision stating that while section 140 (5) of the Companies Act was constitutionally valid, it could not be applied to firms that had resigned. The bench, however, did not pass orders on the other plea by the firms to set aside the five-year ban imposed on them by NCLT.

After the order was pronounced, the bench stayed its order for eight weeks and said the interim protection against any coercive action against the firms granted in September 2019 would continue.