The Supreme Court upheld the constitutional validity of Section 140(5) of the Companies Act, 2013 and held that that the provision is “neither discrimnatory, 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) proceedings
The 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 of 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 1.1(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, on 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.
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