In a significant development in the long-running Infrastructure Leasing & Financial Services (IL&FS) case, the National Company Law Tribunal (NCLT) has permitted proceedings against several audit firms, including Deloitte, BSR & Associates and SRBC & Co., to continue. The decision clears the way for a closer examination of whether auditors, traditionally seen as independent watchdogs, played any role in the alleged fraud that contributed to the collapse of the financial conglomerate.
The tribunal’s order does not reach any conclusion on the culpability of these firms. Instead, it establishes that they cannot be excluded from the process at the outset. By doing so, the NCLT has ensured that questions surrounding their conduct will be addressed through a detailed, evidence-based inquiry rather than dismissed at a preliminary stage.
The proceedings form part of a broader legal effort initiated by the Union of India in 2018, following governance failures at IL&FS and its group entities.
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Interpreting Section 339: Scope Beyond Insiders
At the center of the tribunal’s reasoning is Section 339 of the Companies Act, 2013, a provision that deals with fraudulent conduct of business. The section allows tribunals to hold individuals personally liable if it is found that a company’s operations were carried out with intent to defraud creditors or for other fraudulent purposes.
Audit firms and their partners had sought to be excluded from proceedings under this provision. However, the tribunal held that the language of Section 339 is sufficiently broad to include not only company insiders but also third parties, such as auditors, if evidence indicates their involvement in or facilitation of fraudulent conduct.
Government submissions had argued that the provision applies to “any person” connected with fraudulent activity, and that auditors could not be granted blanket exclusion. Accepting this position, the tribunal emphasized that the scope of the law extends to all relevant actors whose roles must be examined on a case-by-case basis.
‘Watchdogs’ and the Limits of Immunity
The ruling directly addressed the long-standing characterization of auditors as corporate watchdogs. While acknowledging this role, the tribunal made clear that such a designation does not confer immunity.
“A watchdog cannot claim immunity,” the tribunal observed, noting that auditors could be held accountable if it is established that they knowingly failed to act against fraudulent conduct. At the same time, the order underscored that liability is not automatic. Mere professional engagement as an auditor, it said, is insufficient to establish wrongdoing.
Instead, the determination of liability will depend on evidence demonstrating “knowing” involvement — a standard that places emphasis on intent, awareness and participation. Financial records, witness testimony and expert analysis by investigative bodies such as the Serious Fraud Investigation Office (SFIO) and the National Financial Reporting Authority (NFRA) are expected to play a central role in this assessment.
Implications for Audit Firms and Future Cases
Legal experts say the ruling increases litigation exposure for audit firms while leaving the ultimate question of liability unresolved. By rejecting attempts to exclude auditors at the threshold stage, the tribunal has shifted the focus toward a merits-based examination of their conduct.
“The order materially widens the immediate litigation exposure,” said Raheel Patel, a partner at Gandhi Law Associates, noting that firms will now have to defend their actions through detailed proceedings. At the same time, he added, the tribunal has drawn a distinction between negligence and conscious involvement, making clear that only the latter could attract liability under Section 339.
Akshat Pande, managing partner at Alpha Partners, described the ruling as a clarification of the provision’s scope. By rejecting a narrow interpretation of the phrase “any person,” the tribunal has affirmed that third parties may fall within its ambit, provided there is evidence of participation or knowledge of fraudulent activity.
The decision is expected to influence how fraud provisions are applied in future corporate cases, particularly those involving complex organizational structures and multiple external advisors. It reinforces the principle that professional firms, while external to management, may still be subject to scrutiny where investigative findings point to potential involvement. For now, the tribunal’s order ensures that the role of auditors in the IL&FS case will be examined in full — not presumed, but tested against the record.
