The NCLT, on August 09, 2019, in the case of Deloitte Haskins & Sells LLP and Others (“Deloitte”) v. Union of India banned Deloitte and other chartered accountant firms from being appointed as auditors of any company for a period of five years from the date of the order.

In this case, Deloitte had filed an application before the NCLT under Section 140(5) of the Companies Act, 2013 (“Act”). Section 140(5) of the Act stipulates that the NCLT can disqualify any auditor which has acted in a fraudulent manner. Deloitte contended that Section 140 of the Act applies only to existing auditors of a company, and does not apply to a former auditor. Deloitte pleaded that it ceased to be an auditor of the company since the end of F.Y. 2017-18, and hence, section 140 will not be applicable on Deloitte.

On a review of the facts of the case, the NCLT rejected the contentions of Deloitte and noted that Section 140 (5) permits removal of an auditor who has acted in a fraudulent manner or abetted or colluded in any fraud...

The NCLT, observed that as Section 140 contemplates the removal of auditors who “has whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud”, the legislature has also empowered the NCLT to take action against auditors who have resigned or has rotated out on completion of its statutory term.

Further, by noting that Section 140 of the Act stipulates that the NCLT “ May, by order, direct the company to change its auditor”, the NCLT held that the legislature contemplated that in a situation where the auditor has resigned or has rotated out on completion of its statutory term, suitable orders (other than directing a change in auditors) may be passed.

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The NCLT has passed this order in order to increase accountability of auditors for their actions.  This order will ensure that auditors do not escape liability by virtue of not being the current auditor of a company. It will also act as a deterrent for audit firms which act fraudulently. The NCLT has used “creative interpretation” to interpret Section 140(5) of the Act, creative interpretation comes into play when a court interprets a provision in order to clear the doubts with respect to a provision, keeping into consideration the object of a statute.

The NCLT noted that the intent of the legislature while drafting Section 140(5) was not merely to give power to the NCLT to change the present auditor of a company but also to give it the power to punish fraudulent auditors by imposing a five-year ban on them.

Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.