The Mumbai Bench of the National Company Law Tribunal (NCLT) has clarified that the aspect whether third persons, including the auditors, participated in, facilitated or assisted fraudulent transactions by a company knowing that the company’s business is being carried on for any fraudulent purpose are yet to be looked into and can only be considered when the evidence(s) on record in relation to their role in perpetration of such fraud are examined.
No general rule for their exclusion from scope of section 339 of the Companies Act, 2013 can be laid, as it would depend on the facts of each case. Accordingly, the contention of third persons, including auditors, against their liability is premature at this juncture, added the NCLT.
The Division Bench comprising Sushil Mahadeorao Kochey (Judicial Member) and Prabhat Kumar (Technical Member) observed that Section 339 of the Companies Act makes liable any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business if any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose.
The Tribunal observed that the definition of officer under Explanation (b) to section 339 has the effect of excluding the word ‘key managerial person’ from the ambit of section 339 of the Act, however, they may fall under the words “any person”.
Further, the Tribunal held that the words “any person” cannot be read ejusdem generis to the words ‘officer, manager or director’ so as to hold that any person would only include a person who is an insider to the company, instead this word is a catch all provision to bring within its ambit any third person i.e. outsider who participated or aided or assisted in the fraud perpetrated by the insiders i.e. ‘officer, manager or director’.
The knowledge of carrying on of the business with intent to defraud creditors of the company or any other persons or for any fraudulent purpose is sine qua non to bring these persons within the ambit of section 339 of the Companies Act, 2013, added the Tribunal.
Moving ahead, the Tribunal made it abundantly clear that the word ‘any persons’ would also include the persons outside the organisation of the company, in whose affairs the fraud has been committed, who participate in, facilitate or assist fraudulent transactions by a company when they know that the company’s business is being carried on for any fraudulent purpose. It also follows that the third persons cannot be automatically brought within the ambit of section 339 of Companies Act, 2013 merely because they were parties to any activity alleged to be fraudulent unless they have participated in facilitating or furthering the said fraudulent activity.
In relation to the liability of Auditors and their partner(s) under Section 339, the Tribunal 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 cannot claim any immunity if they are found guilty of active participation or collusion or abatement in the commission of fraud in the affairs of auditee company. Accordingly, the action u/s 339 against the auditors will not lie automatically, however, their culpability in commission of fraud remains subject matter of examination and depends on the evidences on record, concluded the Tribunal.
Briefly, the Applications were filed against the Statutory Auditor Firm and Partners representing IL&FS Financial Services Limited (IFIN) and IL&FS Transportation Network Limited (ITNL). The Applicants BSR and NSG had contested, inter-alia, on the ground of applicability of Section 339 of the Companies Act, 2013 to the Statutory Auditors and their Partners of IL&FS companies.
It was vehemently argued that the Statutory Auditors and their signing/engagement partners stand at a different pedestal as the third person, and they cannot be said to be persons engaged in carrying of business of auditee company under Section 339 of Companies Act, 2013 merely because they issued their audit report on the financial statements of auditee company. Per contra, the Union represented that the scope of section 339 qua Statutory Auditors and their partners as well as third person can only effectively be adjudicated in the light of findings contained in the investigation report on a case-to-case basis.
Appearances:
Advocates Aditya Sikka and Onshi Jakhar, for the Union of India
Senior Advocate Mustafa Doctor, along with Advocate Sagar Divekar, Abhimanyu Mhapankar, Saumya Mishra, and Koshy J., for the Applicant in CA 313 & 314
Advocate Robin Jaisinghani, for the Respondent No.323 & 324
Advocate Prachi Dhanani and Raushan Kumar, for the Respondent No.326 in MA 2070
Senior Advocate Navroz Seervai, VP Singh, Aditya Jalan, Raghav Seth, Ambareen Mujawar, Shreya Choudhary, Akash Manwani, Aksh Jain, for the Respondent No.325 & 327 in MA and Applicant in IA 1 & 2 of 2022
Advocates Sagar Divekar, Abhimanyu Mhapankar and Saumya Mishra, for the Applicant in CA 313 & 314
Senior Advocate Janak Dwarkadas, for DHS
