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Bombay HC quashes SFIOs complaint against Deloitte, upheld Constitutional validity of S. 140(5) of Cos. Act

April 23, 2020[2020] 116 taxmann.com 263 (Bombay)
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Company Law: Section 140(5) does not violate Article 14 of Constitution by singling out CAs for a harsher treatment while leaving out Directors of Company or its office bearers; it neither allows pick and choose between CAs and Directors of Company or its office bearers nor is it arbitrary as it contains procedural safeguards

Companies Law: Where evergreening of debts was alleged but SFIO's report itself indicated need of further investigation into cross-linkages and cross-check of transactions and further, Central Government's impugned direction to SFIO under section 212(14) to lodge prosecution had not shown if any instance of financial bungling was fully investigated to establish offencenor was there application of mind to reveal cross-linkages of company in question with other group companies which would have any impact, idirection of Central Government would be untenable

• There was dispute regarding constant evergreening of debts extended by company IL&FS to its subsidiary companies and third parties/companies - Investigation was conducted by SFIO against IL&FS - Investigation Report was submitted - Union of India, through Ministry of Corporate Affairs (MCA), had made a prayer before NCLT under section 140(5) against statutory auditors of IL&FS alleging dubious role played by CAs i.e. company auditors and sought their removal - Petitioner-Chartered Accountants contended that section 140(5) is unconstitutional as there is unwarranted classification between company auditors on one hand and directors/office bearer of company on other hand and there are no pre-condition of higher degree compliances as required in case of directors and further, it permits authorities to pick and choose even between company auditors - NCLT rejected these objections and held that petition before it was maintainable under section 140(5) - Held, that section 140(5) does not violate Article 14 of Constitution by singling out CAs for a harsher treatment while leaving out Directors of Company or its office bearers; it neither allows pick and choose between CAs and Directors of Company or its office bearers - It is not arbitrary as it contains procedural safeguards - Further, debarment under second proviso to section 140(5) cannot be seen as quasi-criminal - Thus, section 140(5) is not unconstitutional

• There was dispute regarding constant evergreening of debts extended by company IL&FS to its subsidiary companies and third parties/companies - Investigation was conducted by SFIO against IL&FS - Investigation Report was submitted - Union of India, through Ministry of Corporate Affairs (MCA) had issued direction to SFIO under section 212(14) to lodge prosecution - Consequently, prosecution was lodged by SFIO vide criminal complaint on file of Special Court (Companies Act) and Additional Sessions Judge - In instant criminal writ petition, petitioners questioned validity of direction issued to SFIO - Held, that SFIO's Investigation report itself showed absence of application of mind to relevant facets having bearing on it - Further, direction by Central Government to SFIO under section 212(14) to lodge prosecution had not shown whether any one instance of financial bungling had been fully investigated into and it prima-facie showed commission of an offence or not while such an application of mind would have revealed cross-linkages with other group companies which would have any impact - Furthermore, SFIO's report itself indicated need of further investigation into cross-linkages and cross-check of transactions with other companies - Held, that in absence of a positive prima-facie finding in impugned direction of Central Government to SFIO, it would be untenable in law

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