The National Company Law Tribunal (NCLT) on Friday rejected an application filed by the erstwhile auditors of IL&FS financial services (IFIN) – Deloitte Haskins & Co and BSR & Associates — questioning the jurisdiction of the tribunal to ban them for 5 years under section 140(5) of the companies act.

It will hear the arguments of the Ministry of Corporate Affairs (MCA) on banning the former auditors of IFIN on September 5.

The MCA had moved the NCLT in June to ban Deloitte Haskins & Co and BSR & Associates for 5 years after the Serious Fraud Investigation Office (SFIO) in its investigation found them guilty of colluding with the management in painting a rosy picture of the struggling company IFIN, despite neing aware of the sorry state of the company.

The auditors had challenged the jurisdiction of the NCLT to ban them, saying section 140(5) of the companies pertains to auditors who are still auditing the company. However, they have already resigned and hence, cannot be banned under the given provisions.

Moreover, they argued that before banning them, the tribunal has to pass a final order in the matter which establishes that fraud was committed by the auditors. Merely an investigation report by SFIO is not sufficient to ban them.

The SFIO, in its complaint, has alleged that the auditors were aware that IFIN was lending to defaulting borrowers through group companies so that they could suppress their non-performing assets (NPAs) and not provide for the bad debt.

Moreover, it alleged that the auditors failed to verify the end-use of bank finances and money raised through non-convertible debentures (NCDs) despite it being a regulatory mandate for verifying such things.

The SFIO complaint goes on to say that the auditors falsified books of accounts and financial statements of the company from FY14 to FY18 and did not report the negative net owned fund, as well as its negative capital to risk (weighted) assets ratio (CRAR) resulting in loss to investors who had invested in the company’s NCDs. The audit committee members colluded with the management and overlooked the many impairment indicators in contravention of the accounting standards and principals of prudence, the SFIO said in its complaint.