Union of India and another Vs Deloitte Haskins and Sells LLP & Anr (Supreme Court)
Date-3rd May 2023
Sub-Whether an auditor who is charged with offence under Section 140(5) of the companies Act dealing with non-reporting of fraud in a company can get away by simply resigning as an Auditor and thereby rendering the provisions of Section 140(5) nugatory?

The provisions of Section 140(5) of the Companies Act, 2013 dealing with *Removal, Resignation of Auditor and Giving of Special Notice* appears in Chapter X of the Act which deals with *Audit and Auditors*. Also Section 143(12) provides that in the event an auditor has reason to believe that an offence or fraud is being or has been committed in a company then the auditor has to report this to central government. Moreover Section 144 provides that an auditor cannot provide management services to the company. Section 140(5) has to be thus interpreted in the light of these provisions. As per first proviso to Section 140(5), NCLT as a preliminary measure, has the power to order change of auditor on an application made by the Central Government and further if upon final enquiry it is found so, NCLT can order that such Auditor shall not act as auditor of any company for five years.
The Supreme Court in this case was dealing with a situation where upon reference having been made by the Central Government, Deloitte resigned as auditor and thus argued that the proceedings as per second proviso to Section 140(5) do not survive as the purpose of Section 140(5) was achieved.
However, the Supreme Court dismissed these arguments by saying that subsequently resignation of an auditor cannot terminate proceedings u/s second proviso to 140(5) when such auditor has directly or indirectly acted in a fraudulent manner. Also the court brushed aside arguments regarding the violation of Article 14 and 19(1)(g) of the Constitution of India. Moreover, the arguments that there were other provisions in the Companies Act dealing with the same were also dismissed.

This judgement highlights the need for independence of auditors and to act proactively in case of need.

Ramesh Patodia
04-05-2023