IL&FS: Experts cheer HC ruling, say banning auditors no solution

​​NCLT had earlier ruled that it has the jurisdiction to “remove and ban” auditors.

Reuters
The high court upheld the constitutionality of Section 140(5) of the Companies Act, but said it would not apply to auditors who have resigned.
Mumbai: Lawyers and experts welcomed Tuesday’s Bombay High Court judgment, which ruled that the National Company Law Tribunal (NCLT) cannot ban Deloitte and KPMG, the auditors of the debt-laden IL&FS Financial Services (IFIN), for five years.

NCLT is a part of the Ministry of Corporate Affairs (MCA).

NCLT had earlier ruled that it has the jurisdiction to “remove and ban” auditors even if they have rotated out or resigned. The court has given eight weeks’ time to the ministry to challenge the ruling in the Supreme Court.


The high court upheld the constitutionality of Section 140(5) of the Companies Act, but said it would not apply to auditors who have resigned.

Legal experts said this could also imply that it could not be applied to firms that have rotated out. “MCA's interpretation of Section 140(5) of the Companies Act, which had led to the ban on auditors which had already resigned, was against the established principle of law,” said Ashish K Singh, managing partner of Capstone Legal.

“It is a landmark judgement, which will ensure that this provision is not misused by MCA or NCLT,” he said.
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The case arose from a series of defaults by IL&FS in 2018, sparking a liquidity crisis in India’s non-banking financial companies (NBFC) sector.

Eventually, the government took over the beleaguered infrastructure conglomerate to avoid a contagion. On June 10, the government moved the NCLT 10 seeking a five-year ban on the auditors under Section 140 (5) of the Companies Act.

It also sought to implead the auditors in the oppression and mismanagement case against the management of IL&FS and its non-bank lending arm.

“According to me, banning anyone is not a solution. Correcting gaps is a better solution. One will have to walk together to resolve the issue,” said Deven Choksey, Group Managing Director, KR Choksey Investment Managers.
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“IL&FS failure is a system failure. It cannot be termed as the failure of one entity, i.e. auditors in this case,” said Choksey.

He called for simplification of the compliance processes and systems.
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“Our entire compliance system is extremely complicated. When it is complicated, you are bound to fail some time. One needs to simplify them,” he said.
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