Statutory Auditors Cannot Claim Blanket Immunity Under Section 339 Of Companies Act: NCLT Mumbai

The Mumbai National Company Law Tribunal (NCLT) on 24 March, held that statutory auditors cannot claim blanket immunity under Section 339 of the Companies Act if they are found to have facilitated or consciously ignored fraudulent conduct.

A Bench of Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar passed the order in proceedings initiated by the Union of India to investigate IL&FS and its group entities, and implead its auditors SRBC & Co LLP and BSR & Associates LLP and their partners.

The Tribunal observed:

“It is also noted that an Auditor in view of his professional obligations is equated to a watchdog but not a blood hound… however, a watchdog cannot claim immunity if it is found that watchdog deliberately or consciously failed to be vigilant to allow perpetration of fraud by the insiders of the company and such deliberate or conscious act on part of watchdog furthered or facilitated commission of fraud.”

The auditors had challenged their impleadment, arguing they were “third parties” and Section 339, which addresses fraudulent conduct by “any person,” should not apply to them. They contended their role was limited to reviewing financial statements and that liability should be restricted to company insiders.

Rejecting a blanket exclusion, the Tribunal held that the term “any person” under Section 339 is wide enough to include outsiders who knowingly participate in or facilitate fraud. Liability is not confined to directors or officers but may extend to third parties where there is conscious involvement.

Accordingly, it disposed of the applications while granting liberty to the applicants to raise other objections in further proceedings.

For the Union of India: Advocates Aditya Sikka a/w Ms. Onshi Jakhar

For Applicants: Senior Advocate Mustafa Doctor with Advocates Sagar Divekar, Abhimanyu Mhapankar, Saumya Mishra, Koshy J

For Respondents: Senior Advocate Navroz Seervai with Advocates Robin Jaisinghani, Prachi Dhanani, Raushan Kumar, VP Singh, Aditya Jalan, Raghav Seth, Ambareen Mujawar, Shreya Choudhary, Akash Manwani, Aksh Jain

For DHS: Senior Advocate Janak Dwarkadas