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Rejecting the contention of the auditors and others that they cannot be treated as part of the management, which is responsible for managing the affairs of the company and therefore should not be charged as per the said section, the NCLAT said that rules of natural justice are to be followed.
The NCLAT on Wednesday dismissed the pleas of auditors of debt-ridden IL&FS -- Deloitte Haskins & Sells and KPMG arm BSR & Associates -- along with independent directors challenging their impleadment in the case of alleged fraud at a group firm IFIN.
A two-member bench of the NCLAT upheld the directions of the Mumbai bench of the National Company Law Tribunal, saying it cannot be termed as "illegal".
The NCLT had directed them to implead the auditors and independent directors as party.
The NCLT is empowered to pass order to implead them under Section 242 of the Companies Act, 2013 in a petition under Section 241(2) if "it forms opinion that the affairs of the company have been conducted in a manner prejudicial to the public interest", the appellate tribunal further said.
"Once such opinion is formed by the Tribunal, it may pass any order as it deem fit and proper," said the National Company Law Appellate Tribunal (NCLAT) bench headed by chairperson Justice S J Mukhopadhaya.
The case relates to IFIN, a subsidiary of IL&FS.
Rejecting the contention of the auditors and others that they cannot be treated as part of the management, which is responsible for managing the affairs of the company and therefore should not be charged as per the said section, the NCLAT said that rules of natural justice are to be followed.
"As rules of natural justice are to be followed, if any order is passed against one or other, including investigation, it is always open to the Tribunal to ask such party to be impleaded," the NCLAT said.
The MCA had asked the NCLT to freeze the assets of the former auditors in the case, involving alleged fraud in IFIN.
The appellate tribunal, however, granted relief to both the auditors and other independent directors by allowing the operation of its earlier interim order passed on July 29, 2019 for two weeks.
After the judgment was pronounced by the NCLAT in the open court, a request was made by counsels, representing accounting firms and other independent directors, to allow the interim order passed by it on July 29, 2019 to continue for another two weeks, which was accepted by the appellate tribunal.
"We allow the prayer and continue the interim order passed on 29th July, 2019 for another two weeks," the bench said.
On July 29, the NCLAT stayed the order of the Mumbai bench of the National Company Law Tribunal (NCLT) to implead the auditors and independent directors of IL&FS.
Earlier on July 23, the NCLT had allowed the plea of the Ministry of Corporate Affairs (MCA) to implead the auditors and independent directors of IFIN.
Moreover, visualising the possible impact of IL&FS crisis on the Indian economy, the NCLAT in its 72-page-long order said that various acts "prejudicial to public interest" have been highlighted, which has cascading impact on various sectors of economy and even the Department of Economic Affairs -- which is responsible for the financial stability of the country -- too has raised "Red Signals" of the likely collapse of 'IL&FS' in its confidential note dated September 30, 2018.
"In the circumstances, before passing any appropriate order in public interest and to save the economy of the Country from collapse, if the Tribunal is of the opinion that it requires to give appropriate hearing to the concerned parties, including those who audited 'IL&FS' and/ or those who have managed or were concerned with 'IL&FS' or its Group Companies, it cannot be held to be illegal.
"We find no merit in these appeals. They are accordingly, dismissed," the NCLAT said.
The central government had submitted that the act of fraud perpetuated is on account of "mis-representation and falsehoods about the financial state of affairs" of the concerned company, which has jeopardized the financial health apart from causing serious damage and financial loss to various stakeholders.
However, the tribunal said that as the matter is still pending before the NCLT, it is "not inclined to express any opinion whether the allegations made against one or other require further investigation and the order what is required to be passed in public interest".
While commenting on the development, Deloite India spokesperson said: "We will review the written order before determining our further course of action, which may include an appeal."
Auditors cannot be treated as part of the management which is responsible for managing the affairs of the company and therefore should not be charged, the spokesperson said.
"We will continue to present and protect its position, supported by the facts, to the relevant authorities. The firm remains committed to high standards of audit quality and ethical conduct in its professional practice," he added.
Meanwhile, BSR & Associates also said that they are reviewing the NCLAT order and will explore options.
"We are reviewing the order and will explore appropriate steps as required.
“We do not anticipate this order impacting our ability to continue providing high quality audit services to our clients.
“BSR is committed to, and bears responsibility and accountability for, the highest ethical and quality standards in its audits," said a BSR spokesperson.
Photograph: Francis Mascarenhas/Reuters