Section 140(5) Companies Act 2013 Is Constitutional; Resignation Of Auditor Won't End Proceedings Under Sec 140(5) : Supreme Court

The Supreme Court upheld the constitutional validity of Section 140(5) of the Companies Act, 2013 and held that that the provision is "neither discriminatory, arbitrary and/or violative of Articles 14, 19(1)(g) of the Constitution of India". The bench of Justices M R Shah and M M Sundresh further observed that the application/proceedings under section 140(5) is maintainable even after the resignation of the concerned auditors.Section 140(5)Section 140 deals with “Removal, Resignation of Auditor and Giving of Special Notice" and the sub-section (5) reads as follows: Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.Resignation of auditor will not terminate Section 140(5) proceedingsThe bench was considering the appeals filed by the Union of India against the Bombay High Court judgment that quashed a Section 140(5) petition and set aside the directions issued by the Ministry of Corporate Affairs and the SFIO and also quashed the criminal proceedings instituted by the SFIO. Though the High Court rejected the challenge against Section 140(5), it held that once the auditor resigns, thereafter Section 140(5) proceedings are no longer maintainable, as the petition filed by the Union of India under section 140(5) has been satisfied by the subsequent resignation of the auditor. Disagreeing with this view, the bench observed:Subsequent resignation of an auditor after the application is filed under section 140(5) by itself shall not terminate the proceedings under section 140(5). Resignation and/or removal of an auditor cannot be said to be an end of the proceedings under section 140(5).The bench observed that there are further consequences also on culmination of the enquiry under section 140(5) proceedings and passing a final order by the Tribunal on the conduct of an auditor, whether such a auditor has, directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers."Therefore, the enquiry/proceedings initiated under the first part of section 140(5) has to go to its logical end and subsequent resignation and/or discontinuance of an auditor shall not terminate the enquiry/proceedings under section 140(5). If the interpretation given by the High Court that once an auditor resigns, the proceedings under section 140(5) stand terminated and are no longer further required to be proceeded, in that case, an auditor to avoid the final order and the consequence of final order as provided under the second proviso to section 140(5) may resign and avoid any final order by the Tribunal. That cannot be the intention of the legislature", the bench observed.Section 140(5) not unconstitutionalThe court also considered the appeals filed by some writ petitioners (before HC) against the part of the judgment which upheld the constitutional validity of Section 140(5). It was the case on behalf of the original writ petitioners on the constitutionality/vires of section 140(5) that section 140(5) is excessive and arbitrary as it provides unguided and untrammelled powers to NCLT for determination of a serious offence of fraud and consequence of mandatory disqualification with grave consequences akin to civil death. However, the bench rejected this argument as having no substance. The bench noted that NCLT exercises the quasi-judicial powers under section 140(5) with all the powers akin to civil court. Ample opportunity shall be given by the NCLT before passing any final order. The second contention was that section 140(5) is violative of Article 14 of the Constitution of India as it discriminates against the auditors unfairly in comparison to similarly placed alleged perpetrators, such as directors, management etc. Rejecting this argument, the Court said :"It is required to be noted that the role of auditors cannot be equated with directors and/or management. Auditors play very important role in the affairs of the company and therefore they have to act in the larger public interest and all other stakeholders including investors etc. Chapter X of the Act specifically for the “Audit and Auditors” looking to the importance of the auditors. Therefore, section 140(5) cannot be said to be discriminatory and/or violative of Article 14 of the Constitution of India".The next submission was that the penalty in the form of automatic disqualification of auditors and of the entire firm including partners and that too for a period of five years to become the auditor of any other company is highly disproportionate. In this...

Section 140(5) Companies Act 2013 Is Constitutional; Resignation Of Auditor Won't End Proceedings Under Sec 140(5) : Supreme Court

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Section 140(5) Companies Act 2013 Is Constitutional; Resignation Of Auditor Won't End Proceedings Under Sec 140(5) : Supreme Court

Ashok KM

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Ashok KM

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