The Hon’ble Supreme Court of India (“Supreme Court”) vide its judgment dated May 17, 2024 in the case titled Harish Kumar T.K. v National Financial Reporting Authority, [Civil Appeal No. 3656 /2024] upheld the decision of the National Company Law Appellate Tribunal (“NCLAT”) dated December 1, 2023 in which the NCLAT held that National Financial Reporting Authority (“NFRA”) had retrospective jurisdiction over the alleged offences by delinquent Chartered Accountants for the period prior to formation of NFRA or prior to coming into effect relevant portion of Section 132 of Companies Act, 2013.

Proceedings before NFRA 

Dewan Housing Finance Corporation Limited ("DHFL"), a housing finance company listed on both NSE and BSE and operating through a network of branches, was reportedly involved in financial fraud. NFRA took suo motu notice of the matter and carried out an Audit Quality Review (AQR) of the statutory audit of DHFL for FY 2017-18.

During the review, NFRA noticed that 33 Engagement Partners ("EP") or branch auditors had signed the "Independent Branch Auditors' Report" for nearly 250 branches. NFRA investigated these EPs under section 132 (4) of the Companies Act, 2013 ("Companies Act"), including K. Varghese & Co. (the Audit Firm), which was the "Statutory Branch Auditor" of 17 branches of DHFL for FY 2017-18, and CA Harish Kumar T K, who was the Engagement Partner (EP) for the audit of three of these 17 branches.

The EP was charged with professional misconduct on account of:

1. Failure to ascertain from the Company whether the requirements of Sections 139 of the Act in respect of such appointment have been duly complied with,
2. Failure to exercise due diligence and being grossly negligent in the conduct of professional duties,
3. Failure to obtain sufficient information which is necessary for the expression of an opinion, or its exceptions are sufficiently material to negate the expression of an opinion, and
4. Failure to invite attention to material departure from the generally accepted procedures of audit applicable to the circumstances.

After a detailed analysis of the arguments advanced, the NFRA held that, “Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of proportionality and keeping in mind the deterrence, proportionality, signaling value of the sanctions and time required for improvement in knowledge gaps we, in the exercise of powers under Section 132(4)(c) of the Companies Act, 2013, proceed to order the following sanctions:

1. Imposition of a monetary penalty off 100,000 (One Lakh) upon CA Harish Kumar T K
2. CA Harish Kumar T K is debarred for one year from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.”

Appeal before the NCLAT

The Engagement Partners for different branches filed appeal before the NCLAT impugning the order passed by NFRA. The appeals were clubbed together and a common order dated December 1, 2023 was passed by the NCLAT. The NCLAT, inter-alia framed the following issues-

Issue No. (I) Role of NFRA V/s ICAI on disciplinary matters of Chartered Accountants.

Issue No. (II) Retrospective V/s prospective applicability of provisions as contained in Section 132 of Companies Act, 2013 as well as NFRA Rules, 2018.

Issue I-

The NCLAT observed that Parliamentary Standing Committee on Finance” (‘SCOF’) proposed in its 21st  Report the concept of NFRA which was finally approved by Government of India on March 3, 2018 and subsequently necessary amendments were made in Section 132 of the Companies Act, 2013 to create NFRA. The objective of NFRA is to act as an independent regulatory body for improving transparency and reliability of financial statements and information of companies in India after Statutory Audit by the Chartered Accountants.

The role of NFRA is altogether different from ICAI, having overriding powers over ICAI for the companies covered under Section 132 of the Companies Act, 2013.

The NCLAT took note of the judgment passed by the Hon’ble Supreme Court in S. Kumar v. Secretary ICAI & Ors., [(2018) 14 SCC 2018] dated February 26, 2018, wherein the Hon’ble Supreme Court issued directions to Government for considering suitable mechanism and law for oversight of auditors on the lines of Sarbanes Oxley Act, 2002 [which came after Enron episode and resulted into establishment of Public Company Accounting Oversight Board (“PCAOB”)] in U.S.A.

The NCLAT observed that NFRA has the power to investigate the professional misconduct of the auditors and the law states that, if NFRA starts investigating on any case, no other institution has the power to continue or initiate any proceeding against the same case. This reduces the power of ICAI to act against the professional wrongdoing of its members as stipulated in Section 132 of the Companies Act, 2013. Before the formation of NFRA, ICAI had the exclusive right to take any action against the professional misconduct of its auditors.

The NCLAT has held that, “After going through provision of Chartered Accountant Act, 1949 and Companies Act, 2013 it becomes clear that disciplinary jurisdiction over the Chartered Accountants remain with both the ICAI and NFRA on concurrent basis. However, on carefully reading it reveals that NFRA has superior and overriding powers in matters relating to professional misconduct of the Chartered Accountants in terms of Section 132 of Companies Act, 2013 as discussed in details earlier.”

Issue II-

The NCLAT noted that it is the case of the Appellants that NFRA does not have any retrospective jurisdiction since NFRA itself was constituted on October 1, 2018 vide Ministry of Corporate Affairs (“MCA”) Notification dated October 1, 2018 and MCA also notified on October 24, 2018 as effective date for coming into force of Section 132(2), (4), (5), (10), (13), (14) & (15) of Companies Act, 2013. The Appellants submitted that NFRA Rules were notified on November 13, 2018, whereas the Financial Statements in question pertains to FY 2017-18 and Audit Reports for different branches were given on different dates which were prior to notification bringing NFRA into force, therefore, the NFRA did not have any jurisdiction to look into the period prior to its own formation on October 1, 2018. It is further the case of the Appellants that there is no mention regarding retrospective applicability in Section 132 of the Companies Act, 2013 or in the MCA Notification issued for the same.

The NCLAT relied upon the judgments delivered by the Hon’ble Supreme Court in Hitendra Vishnu Thakur and Ors. v. State of Maharashtra and Ors., [(1994) 4 SCC 602] and Zile Singh v. State of Haryana, reported in (2004) 8 SCC 1. 

The NCLAT thereafter held that, “From above judgments, it seems that if new law is made to take care of known wrongs for the benefits of society as a whole, then the express provision of retrospective application in new law may not be required and necessary implication need to be made out from the language employed.”

The NCLAT relied upon the decisions of the Hon’ble Supreme Court in Securities and Exchange Board of India v. Classic Credit Limited [Civil Appeal No. 67 of 2011] and  New India Insurance Co. Limited. v. Shanti Misra, [(1975) 2 SCC 840] and held that, “It is therefore, clear that for matters of misconduct committed prior to coming into force of Section 132 (4), NFRA can initiate an investigation. It also stated that the expression "such matters of misconduct" can be inferred to mean misconduct' which has been committed prior to October 24, 2018 i.e., the date of coming into force of Section 132 (4) and qua which proceedings already underway by the ICAI and w.e.f. October 24, 2018 the said proceeding would be in the exclusive domain of the NFRA.”

The NCLAT while relying upon Election Commission of India and Ors. v. Subramanian Swamy and Ors., [(1996) 4 SCC 104] and Bijender Singh v. State of Haryana and Ors., [(2005) 3 SCC 685], held as under -

“From above judgements, following clear ratios are noted for deciding on the issue of retrospectivity. These are as follows :-

1. Change in forum due to change in law has no bar on being implemented with retrospective effect.
2. The litigant has vested right in action but does not have any vested right on forum.
3. Retrospective application in such procedural law and change in forum is barred only if express provision is made in new law.

From this, we are of prima-facie view that Section 132 (4) of the Companies Act, 2013 can be applied retrospectively. We also take into consideration the fact that neither any new misconduct has been created in law, which NFRA can investigate and levy penalty, if required nor NFRA can levy penalty greater than the quantum of penalty envisaged under the Chartered Accountants Act, 1949.

Thus, plea of the Appellants about protection under Article 20 of the Constitution and cited judgments will not give any reprieve to the Appellants in present cases in view of our detailed discussing earlier.

Thus, after taking into consideration the background for forming NFRA, the judgment of the Apex Court, proven scams, need to restore shaken confidence of public and investors at large and prevent any adverse impact on Indian economy, we hold that NFRA has clear and required retrospective jurisdiction over the alleged offences by delinquent Chartered Accountants for period prior to formation of NFRA or prior to coming into effect relevant portion of Section 132 of Companies Act, 2013.”

The NCLAT in the above mentioned judgment has also decided some other related issues which have not been dealt with in this update.

Proceedings before Supreme Court of India

The Hon’ble Supreme Court in an appeal filed against the order passed by NCLAT, vide order dated May 17, 2024, held that, “We do not find any good ground and reason to interfere with the order of the National Company Law Appellate Tribunal dated December 1, 2023…”

Find a copy of the order passed by the Supreme Court here. 

This update has been contributed by R. Sudhinder (Senior Partner) and  Prerana Amitabh (Counsel).

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