Facts of the Case

  • NFRA issued a Show Cause Notice (SCN) on 28.01.2020 to CA Rukshad Daruvala, Engagement Quality Control Reviewer (EQCR) in the statutory audit of ILFS Financial Services Ltd (IFIN) for FY 2017–18.
  • Instead of replying, the CA filed a writ petition before the Delhi High Court challenging the vires of Section 132(4) of the Companies Act, 2013 and NFRA Rules, 2018.
  • Despite multiple reminders, the CA delayed filing his reply citing COVID-19 and pending litigation.
  • The Delhi High Court directed him to file his reply by 10.06.2020. He submitted an “interim/pro tem reply” and later a “supplemental response.”

Issues Involved

  1. Whether NFRA had jurisdiction to issue SCN under Section 132(4).
  2. Whether professional misconduct can be established without proving ill motive.
  3. Whether due process was followed in issuing AQRR and SCN.
  4. Whether negligence or gross negligence amounts to misconduct under the Companies Act, 2013.

Petitioner’s Arguments (NFRA)

  • The CA failed to discharge his statutory duty as EQCR in the audit of IFIN.
  • Audit documentation was inadequate and unsupported by evidence.
  • Delay tactics were adopted to avoid disciplinary proceedings.
  • Compliance with Standards on Auditing (SAs) is mandatory and unconditional.

Respondent’s Arguments (CA Rukshad Daruvala)

  • SCN was invalid as it was issued by the Secretary, not NFRA itself.
  • AQRR was issued without considering firm’s submissions or granting a post-AQRR meeting.
  • Investigation into misconduct is quasi-criminal; negligence without ill motive cannot amount to misconduct.
  • Cited case laws: Council of ICAI vs. Somnath Basu (AIR 2007 Cal 29), Tri-sure India Ltd. vs. A.F. Ferguson & Co. (1981), Kishorelal Dutta vs. P.K. Mukherjee (AIR 1964 Cal 131), among others.

Court Order / Findings (NFRA)

  • NFRA held that professional misconduct under Section 132(4) does not require proof of ill motive; failure to comply with statutory auditing standards itself constitutes misconduct.
  • The CA’s defenses were found inconsistent and unsupported by evidence.
  • NFRA emphasized that Standards on Auditing (SA 230, SA 240, SA 570, etc.) are mandatory and have the force of law.
  • NFRA proceeded with disciplinary action but, as per Delhi High Court’s interim order, its decision was not to be given effect until 31.07.2020.

Important Clarifications

  • Section 132(4), Companies Act, 2013 empowers NFRA to investigate and penalize professional misconduct.
  • Professional misconduct includes failure to comply with statutory auditing standards, irrespective of motive.
  • Case law cited by the respondent was distinguished as not directly applicable to NFRA’s statutory framework.

 

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/01/2023010552.pdf

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