N Sampath Ganesh v. Union of India
and Anr.
(Cr. Writ Petition No. 4144 of
2019)
- Nikhil Sukhija
Facts
Union
of India through Ministry of Corporate Affairs made prayer under Section 140
(5) of the Companies Act, 2013 (“2013 Act”) for investigating against the
statutory auditors of IL &FS financial services limited (“IFIN”) regarding
the constant ever-greening of debts extended to subsidiary companies of
IL&FS Limited.
The
statutory auditors had factually ceased to be company auditors (CA) of the IFIN
and another auditor had been appointed by the company. On this basis, the
ex-statutory auditors questioned the maintainability of the Company Petition
presented to NCLT. NCLT has by impugned order rejected these objections and
held the Company Petition presented by Union of India to be maintainable.
In
the present case, bunch of petitions has been filed by the ex-statutory
auditors of the IFIN against the orders passed by the National Company Law
Tribunal (NCLT). Questioning the Constitutionality
of Section 140(5) of the 2013 Act and the directions issued by the Union of
India to lodge prosecution under Section 212 (14) of the 2103 Act, the
Petitioners are arguing only on the law points in this case.
Issues
1.
Whether
Section 140(5) of 2013 Act is unconstitutional for being in violation of
Article 14?
Held: That
Section 140(5) of the Companies Act, 2013 is not unconstitutional. The Hon’ble
High Court of Bombay based its finding on the following points:
i.
Advocate for petitioners submitted that
unequal treatment of Directors of a company and the Company Auditors renders
the provision to be unconstitutional in nature. For basing its argument, it
placed reliance upon State of Rajasthan
v. Mukan Chand[1],
whereby the conditions were laid down by the Constitution Bench for a provision
to pass the test of permissible classification, two conditions must be
fulfilled, namely,
Ø That
the classification must be founded on an intelligible differentia.
Ø That
the differentia must have a rational relationship to the object sought to be
achieved by the statute in question.
ii.
Hon’ble High Court noted that the twin
test is not relevant to the circumstances of the case because the Directors of
a company forms a distinct class while the CA stands entirely on a different
footing and cannot be seen as an officer or subordinate to the Company in any
manner.
2.
Whether
Section 140(5) of the 2013 Act violates the principle of double jeopardy?
Held: That
the Section 140(5) of 2013 Act does not violates the principle of double
jeopardy enshrined under Article 20(2) of the Constitution of India. To support
its findings, the Hon’ble Court based its decision on the following:
i.
The powers under the provisions
contained in Section 132, 140(5) and Section 447 of the 2013 Act cannot be seen
as parallel powers and the same are workable. The Hon’ble Court placed its
reliance on Raja Ram Pal v. Hon. Speaker, Lok Sabha[2] to
support its reasoning which stated, “In a
modern State it is often necessary for the good of the country that parallel
powers should exist in different authorities. It is not inevitable that such
powers will clash. It would be defeatism to take the view that in our country
men would not be available to work these powers smoothly and in the best
interests of the people and without producing friction”.
ii.
Debarment of CA constitutes Double
Jeopardy is erroneous as the debarment prescribed under Section 140(5) is not
for fraud.
iii.
To understand the reason why doctrine of
double jeopardy is not attracted, the court explained the difference between
disqualification and punishment.
Ø Disqualification
is for a conduct which may not constitute an offence and it rules out
possibility of conflict of interests. It was held that disqualification may not
always result in conviction for an offence. Just like disqualification exists for
the aspirants of the elective public offices, the object for disqualification in
Section 140(5) is to maintain the purity of administration of such artificial
bodies.
Ø Punishment
is for a conduct declared as an offence or misconduct. Commission of an offence
would lead to a punishment of imprisonment or to a penalty of fine or both.
iv.
Parliament provides Section 132 of 2013
Act for disciplinary proceedings against CAs while it also specifies criminal
prosecution under Section 447. But in view of the important position occupied
by such CA, parliament through Section 140 (5) provides for his immediate
removal.
v.
As professional misconduct and offences
are not dealt with by the NCLT, disqualification stipulated in second proviso
to Section 140(5) cannot be construed as a second punishment for the same
misconduct and therefore, it does not attract the principle of double jeopardy.
vi.
Section 140(5) begins with the words
“without prejudice to the other provisions”. It means that in suitable cases,
after such change of CA, the earlier CA, Company through its directors can
proceed under Section 132, 447 or Chartered Accountants Act.
3.
Whether
the NCLT can exercise the jurisdiction under Section 140(5) after the CA
resigns or ceases to be the statutory auditor of the concerned Company?
Held: That
the Company Petition filed by the Union of India before the NCLT is not tenable
after the resignation of the statutory auditors from the IFIN. Therefore,
answering the above issue in negative, court based its finding on the following
points:
i.
Relying on the case of Competition Commission of India vs. Bharti
Airtel Limited and Ors.[3],
the Hon’ble Court noted that the facts upon which the jurisdiction of a court,
tribunal or an authority depends can be said to be a “jurisdictional fact”. If
the jurisdictional fact exists, the judicial/quasi-judicial body has the jurisdiction
to decide the same. It was noted that a judicial body cannot confer upon itself
the jurisdiction which it otherwise does not possess.
ii.
An agency like NCLT formed under Section
408 of the Companies Act 2013 has been given a power to issue direction to
change the CA while one cannot overlook the fact that the Parliament in 2013
Act made provision for NFRA through Section 132 to consider cases of
professional misconduct and for a criminal trial under Section 447.
iii.
NCLT cannot inquire into a professional
misconduct by the CA as it is not conferred with the power to choose the nature
of punishment.
iv.
Against the punishment imposed by NFRA,
CA can appeal to NCLAT and not to NCLT.
v.
After NCLT issues direction to a company
for changing its CA, procedure under Section 140 (1) need not to be followed.
CA against whom a company passes a special resolution is not prohibited from
resigning after following the prescribed procedure.
vi.
CAs who defrauded the company but have
completed their term and left cannot be changed and therefore does not fall
under the ambit of Section 140(5). They can be tried for professional
misconduct under Section 132 of Companies Act, 2013.
vii.
“Satisfaction” of the NCLT triggers the
said jurisdiction of NCLT. Threat of disqualification is only to expedite the
change of CA and the intention is not to punish but to prohibit a CA with prima
facie dubious records from continuing.
viii.
As the NCLT is concerned with purity of
affairs of the companies, it cannot issue a general or blanket direction to the
other companies for changing their CAs. However, if the CA forgets his
independent and impartial noble status and raises a frivolous defence,
consequences provided under second proviso gets attracted debarring such CA to
be appointed by any other company in future for 5 years.
ix.
The CA in relation to whom the NCLT
proposes to issue a direction to change, has the liberty to walk out by
resigning, thereby not taking the risk of a disqualification.
4.
Whether
the direction given by the government to prosecute is after due application of
mind?
Held: Directions
issued by the Respondent no. 1, Union of India to Respondent No. 2, SFIO is
unsustainable and is set to be quashed and set aside on the ground of
non-application of mind.
i.
The processing note and the report
prepared by the SFIO ran into 750 pages with 32,000 pages of annexures to be
considered by two officers of the government for passing the direction to lodge
the prosecution. It seems highly improbable for the concerned officers to apply
his mind personally and therefore verify the correctness of the appreciation in
the procession note itself.
ii.
Hon’ble Court relying on the case of K.K. Mishra v. State of Madhya Pradesh[4]
stated that the haste with which direction to lodge prosecution was given in less
than 30 hours after receipt of a 732 page report of SFIO along with about
32,000 pages of annexures shows an instance of non-application of mind.
iii.
Court placed its reliance on Manukhlal Vithaldas Chauhan v. State of
Gujarat[5]
to state the effect of non-application of mind and how it vitiates the sanction
itself and the prosecution has to fall to ground and also stated that a case
without sanction is void ab initio on the basis of the findings in the case of Mohd. Iqbal Ahmed v. State of A.P.[6]
5.
Whether
the report of SFIO in the present matter is an interim report or a final report
under the scheme of Section 212 (11), (13), (14) of Companies Act 2013?
Held: Question
whether the said report is “final” or “interim” needs to be answered by reading
the report. Its title or nomenclature cannot be decisive. If the content of the
report speaks about change of conclusions therein due to subsequent
investigation, it cannot be seen as a report filed for framing the charge.
i.
Section 140(5) in its substantive part,
does not envisages any such interim order. It only speaks of an order and
direction to company to change its CA.
ii.
As the object of Section 140(5) is to
change the suspect auditor. Therefore, an order asking the Company to change
the auditor needs to be treated as a final order which will attract the
disqualification or debarment.
iii.
Section 212 (11) obliges SFIO to submit
an interim report when so directed by the Central Government and Section 212
(12) obliges him to submit the investigation report after completing the
investigation. Therefore, the section does not speak of said report as “final
report”. Parties have coined that phrase since Section 212 (11) uses the word
“interim report”.
iv.
There is nothing in Section 212 of 2013
Act to demonstrate that an interim report under Section 212 (14) cannot be an
investigation report. Section 212 (14) does not in any manner prohibits the
Central Government from considering the interim investigation report.
Observations regarding the interpretation
of Section 140(5) of the Companies Act, 2013.
i.
Regarding the interpretation of a
statute, it was noted that when a law prescribes the mode/ manner in which a
thing is to be done, it must be done in that way or not at all. When the one
section in same Act deals with the general power while the other deals with a
specific power, the specific power cannot be utilized via such general
provision.
ii.
Hon’ble Court placed its reliance upon
the submissions of the Respondent by relying on the findings in the case of Dwaraka Prasad v. Dwaraka Das Saraf[7]
which stated “The proper course is to
apply the broad general Rule of construction which is that a section or
enactment must be construed as a whole, each portion throwing light if need be,
on the rest” to note that the words in second proviso to Section 140 (5) of
2013 Act ordinarily cannot be ignored and the golden rule is to read the whole
section, inclusive of the proviso, in such a manner that they mutually throw
light on each other and result in a harmonious construction.
Therefore,
the court partly allowed and disposed of the petition.
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[1]
(1964) 6 SCR 903
[2] (2007)
3 SCC 184
[3]
(2019) 2 SCC 521
[4]
(2018) 6 SCC 676
[5]
(1997) 7 SCC 622
[6]
(1979) 4 SCC 172
[7]
(1976) 1 SCC 128
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