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BSR drags govt to court after NCLT removed the firm as IFIN’s auditor after it resigned

BSR on Thursday filed a writ petition challenging the NCLT order where it, was sacked from auditing IFIN.

Updated: Aug 26, 2019, 06.25 PM IST
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KPMG
The government moved NCLT to ban Deloitte and BSR Associates, a KPMG affiliate, for five years for their alleged role in financial irregularities in the IL&FS case.
MUMBAI: BSR and Associates, an associate of KPMG India, has filed a case against the government after the bankruptcy court okayed its proposed removal as auditors of IL&FS Financial Services — a position BSR had already resigned — for alleged role in financial irregularities in the firm.

With the “deemed removal” of BSR, along with another former IFIN auditor Deloitte Haskins and Sells, both the firms could face a five-year ban from auditing.

The auditor on Thursday moved the Bombay High Court challenging the National Law Tribunal (NCLT) order. In its writ petition, BSR argued that to sack a firm even after it resigned is unconstitutional and that it would lead to double jeopardy for the firm as there are several other ongoing cases relating to the matter.

The NCLT Mumbai bench had ruled that there could be a “deemed removal” of an audit firm in such a situation.

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The government had moved NCLT to ban Deloitte and BSR Associates for five years for their suspected role in alleged money laundering and financial irregularities in IL&FS and its group companies.

BSR is seeking relief from Section 140 (5) of the Companies Act under which NCLT had passed the order. The section specifically deals with removal of an auditor.

Both BSR and Deloitte had contested NCLT’s jurisdiction to decide on the government’s demand for a five-year ban against them for failing to red flag problems in IFIN.

NCLT rejected their plea on August 9.

BSR in its writ has argued that the penalty under Section 140 (5) is highly disproportionate and violates Article 14 of the Constitution. It said the NCLT action leads to double jeopardy even as BSR and Deloitte are already facing action in the IFIN case in different forums.

The firm has challenged the jurisdiction of NCLT to even pass such an order. It argued that the Companies Act section does not provide any procedure or guideline for NCLT to arrive at a “satisfaction” for fraud.

The action taken by NCLT is “quasi criminal”, former attorney general Mukul Rohatgi, who represented the firm, told the High Court.

BSR argued that NCLT erred in interpreting Section 140 (5) of the Companies Act, ad urged the court to address the matter urgently as its fundamental rights have been violated. It pointed out that a criminal complaint has been filed before a special court dealing with the Infrastructure Leasing & Financial Services (IL&FS) scam, and the court may issue an order against BSR any time.

Legal experts said NCLT’s ruling may set a precedent and the firm may be looking to stay the proceedings.

“No purpose will be served in subjecting BSR and its partners to the harsh and harassing actions of MCA (Ministry of Corporate Affairs),” a person in the know said.

In the IFIN case, the government has filed a case in criminal court under Section 447 of the Companies Act, which primarily deals with punishments for fraud. It has also sought to prosecute individuals charged under Section 241 and 242 of the Companies Act. These two sections cover action against companies that engage in practices prejudicial to the public interest. IFIN is being investigated by multiple agencies for alleged financial irregularities.

IFIN was audited by BSR in FY19 and jointly by BSR and Deloitte in FY18. Deloitte was the sole auditor of the firm in FY16 and FY17.

The Serious Fraud Investigation Office (SFIO) has challenged the maintainability of the auditors petition. “The petition is not legally tenable on two grounds mainly, the petitioners cannot seek a stay without challenging the prosecution complaint in the petition and secondly,trial court hasn’t taken cognisance of the chargesheet filed by the probe agency“ and therefore the petitioner named as accused in the complaint have no locus standi to challenge the same till process is issued, said SFIO counsel Hiten Venegaonkar.
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