former auditor of IL&FS group, BSR & Associates, has approached Bombay high court to challenge the constitutional validity of provisions of the Companies Act being invoked by the ministry of corporate affairs (MCA) in its attempt to ban it for five years.

In June MCA had petitioned National Company Law Tribunal (NCLT) in Mumbai to seek a ban on Deloitte and BSR for five years under section 140(5) of the Companies Act. The ministry’s action was after the Serious Fraud Investigation Office (SFIO) investigated into affairs of IL&FS group and submitted its report.

The auditors had challenged the tribunal’s jurisdiction to decide the MCA plea to ban them. Darius Khambata who had appeared for BSR before NCLT had argued that section 140(5) can be relied on when an auditor refuses to resign and not against a former auditor.

But on August 9, the NCLT held that it had the jurisdiction.

The NCLT order came as a set back to the erstwhile auditors of finance company Infrastructure Leasing & Financial Services.

BSR has challenged the validity of section 140(5) of The Companies Act which provides that NCLT, on its own or on an application made by the centre may direct a company to changes its auditors if it is satisfied that the auditor… acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers. The challenge is on grounds of right to equality and right to carry on trade as the section allows NCLT to, in a summary procedure, adjudicate to decide what constitutes “fraudulent” conduct by auditors of a company.

The provision also provides that an auditor against whom final order has been passed by the Tribunal shall not be eligible to be appointed as an auditor of any company for a period of five years. Such auditor shall also be liable for action under section 447.

The principles of natural justice are likely to be invoked in the challenge.

Section 447 provides for jail term of minimum six months or max 10 years’ if the auditor is found guilty of fraud involving at least Rs 10 lakh or one percent of the company turnover, whichever is lower.

The next hearing in NCLT is in September. The HC is scheduled to hear the BSR petition on August 22. #casansaar (Source - TNN, Times of India)