Deloitte and BSR Case: Supreme Court Issues Notice to Government on Review Plea

Deloitte and BSR Case: Supreme Court Issues Notice to Government on Review Plea

The Supreme Court of India has taken a significant step in the ongoing legal battle involving Deloitte Haskins and Sells LLP and BSR & Associates LLC, former auditors of IL&FS Financial Services. The Court issued a notice to the government based on various pleas seeking a review of its earlier judgment.

In May, the Supreme Court allowed the Serious Fraud Investigation Office (SFIO) to resume criminal proceedings against Deloitte and BSR & Associates. These proceedings relate to their alleged involvement in financial irregularities at the beleaguered IL&FS Financial Services. Similar pleas were also filed by chartered accountants Kalpesh J Mehta, Udayan Sen, and others.

A Bench comprising Justices M.M. Sundresh and S.V.N. Bhatti sought responses from multiple entities, including the Ministry of Corporate Affairs, SFIO, and the Maharashtra government. The apex court had previously directed the National Company Law Tribunal (NCLT) to decide the government’s plea for imposing a five-year ban on the auditors. This ban was proposed due to their alleged failure to red-flag problems at IL&FS Financial Services.

The financial affairs of the IL&FS Group came under intense examination in 2018 when the company defaulted on both short-term and long-term debt obligations, amounting to ₹91,000 crore. BSR, a KPMG-affiliated firm, audited IL&FS Financial Services in FY19. In FY18, the audit was conducted jointly by BSR and Deloitte. Deloitte had been the sole auditor of the firm in FY16 and FY17.

In its review petition, Deloitte argued that the May decision failed to consider the provisions of the Limited Liability Partnership (LLP) Act. According to the LLP Act, no vicarious liability can be imposed on other partners in cases of alleged fraudulent acts. Deloitte emphasised that only three of its partners and a total team of 18 individuals were directly involved in the audit of IL&FS Financial Services. Any default on their part, Deloitte contended, should not result in action against the entire firm, which comprises approximately 150 partners and employs around 4,500 people. The firm asserted that in cases of fraud, abetment, or collusion, it is only the concerned chartered accountant who can be subjected to the five-year bar, not the entire LLP or firm.

The review petition asserted that the Supreme Court’s May judgment, while addressing the appeals of both BSR and Deloitte, failed to adequately consider a crucial distinction. This distinction lies between a firm that had ceased to be a statutory auditor by operation of law (in view of the bar under Section 139 of the Companies Act, 2023) and an auditor who subsequently resigned. As a result, a grave error of law occurred in the application of Section 140(5) of the Act.

Deloitte, in its review petition, highlighted a critical fact: It had never resigned at all. Unlike BSR, which resigned subsequent to the filing of the petition under Section 140(5), Deloitte’s situation was distinct. The firm had rotated out by operation of law one year prior to the filing. Therefore, treating both appeals as relating to firms or LLPs that had resigned subsequently is erroneous.

The SFIO filed a criminal complaint against 30 parties in the IL&FS case, including Deloitte and BSR. The allegations centred on collusion with officials of IFIN to conceal facts and fraudulently falsify the books of accounts and financial statements from FY14 to FY18. The SFIO claimed that audit firms had breached auditing standards and failed to detect financial inconsistencies at IL&FS.