Highlights
The government had asked the NCLT to freeze assets of IL&FS arm's audit partners Deloitte, BSR
The Order by the Ministry of Corporate Affairs (MCA)
The Ministry of Corporate Affairs (MCA) had asked the National Company Law Tribunal’s (NCLT’s) in order to freeze assets of the former auditors of an Infrastructure Leasing & Financial Services (IL&FS) subsidiary, stating that the step is required to stop fund diversion.
The counsel of the government requested the tribunal to pass an order to freeze the bank accounts of 23 proposed defendants that have been newly impleaded in MCA’s main appeal against IL&FS, including Deloitte Haskins & Sells LLP and BSR Associates LLP, the former auditors of subsidiary IL&FS Financial Services (IFIN) as well as other auditors. Both were named in the complaint received at the Serious Fraud Investigation Office (SFIO).
The tribunal, after hearing the MCA’s argument, suspended the matter till 28th August as its order allowing the prosecution of the auditors has stayed through the National Company Law Appellate Tribunal (NCLAT). The NCLAT would hear the matter on 19th August.
However the NCLT had already allowed the prosecution of the auditors, they managed to get a stay at the Tribunal and now NCLT wanted to wait till the Tribunal disposes of the matter. The Mumbai bench of the NCLT stated that it will not pass any order in the case until the NCLAT chooses on whether permission must be granted to the MCA to prosecute the auditors.
The issue has not yet settled so far with the NCLAT stopping the trial of the auditors. It had stated that it would not stop any other disciplinary action the MCA takes within the pertinent legal provisions. The current plea by the MCA towards the NCLT might be in response to this order of NCLAT. Though, the NCLT doesn’t want to again have a situation where its order is turned down at the Tribunal.
The action suggested by MCA is on the lines of the order issued through NCLT last December placing restrictions on the directors of IL&FS from tampering with the finances of the business through subterfuge. MCA stated that a similar fiat is issued in the case of the auditors too and that only restricted sums be allowed to be drawn by them to meet regular expenditures and the accounts be frozen as such. Wages, electricity bills, transportation, and rental prices are some of the heads identified by the ministry. Besides, it has suggested that the directors of the auditing firms might be allowed to draw a maximum of Rs 1 lakh and not more.
The ministry appealed to the NCLT contains a request to appoint new auditors for the three corporations, Infrastructure Leasing & Financial Services (IL&FS), IFIN and IL&FS Transportation Networks (ITNL).
In another plea before the NCLT, the MCA has also required that these defaulting auditors be barred for a period of 5 years for their collusion with the then management of IL&FS Financial Services (IFIN). The allegation here is that the auditors knew the exact position in the corporation and how the corporation was continuing to lend to borrowers who were defaulting on their earlier loans and these were being completed through other group corporations, which was all known to the auditors. They failed in order to stop this and to report them, which they are instructed to do.
The more severe allegation is the grievance with the SFIO that the auditors fabricated the accounts of IFIN for 4 years, FY-14 till FY-18. This caused in losses to investors in the non-convertible debentures in the corporation, the value of which was getting eroded as well as the auditors failed to report it.
Conclusion
The Corporate Affairs Ministry (MCA) filed an application at the Mumbai bench of the National Company Law Tribunal (NCLT) in the direction of freezing the assets of the auditors of the defaulting firm IL&FS Financial Services (IFIN) to stop fund diversion.
The plea came over nearly two months after the MCA had asked the tribunal to ban both the corporations from audit operations in the nation for a period of 5 years.
As per the Serious Fraud Investigation Office (SFIO), Deloitte had disregarded the Reserve Bank of India's (RBI) rules and turned a blind eye to IFIN's "evergreening" of loans, and did not cross-check any of the certificates the corporation used to mislead lenders.
Both Deloitte as well as the KMPG arm BSR & Associates, the investigation presented, had failed to accomplish their responsibilities as auditors.
The inquiries into the matter with the auditors as well as the rating agencies of IL&FS and its group corporations along with the erstwhile management made companies come under the scanner. Few of the previous IL&FS top officials have also been detained in this connection.
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