Delhi High Court Upholds NFRA’s Authority: Dismisses Challenges To Section 132 Of Companies Act
Delhi High Court Upholds NFRA’s Authority: Dismisses Challenges To Section 132 Of Companies Act
The Delhi High Court dismissed a batch of petitions filed by individual Chartered Accountants and auditing firms challenging the validity of Section 132(4) of the Companies Act, 2013, and contesting Rules 3, 8, 10, and 11 of the National Financial Reporting Authority (NFRA) Rules, 2018. A division bench of Justices Yashwant Varma and Dharmesh Sharma upheld the provisions, rejecting arguments on vicarious liability, retroactive application, and a violation of Article 20(1).
The petitioners contended that the provisions were unconstitutional, arbitrary, and ultra vires, particularly objecting to the retrospective enforcement of Section 132, which allows NFRA to initiate disciplinary proceedings for audits conducted before its introduction. They argued that this violated principles of fairness and due process by imposing penalties under a framework that did not exist at the time of the audits. Concerns were also raised about the procedural safeguards under NFRA’s disciplinary mechanisms compared to those under the Chartered Accountants Act, 1949. The petitioners asserted that NFRA’s structure, which enables it to both oversee audits and initiate disciplinary proceedings, created a conflict of interest, violating Article 14 by denying fair and impartial proceedings.
The Court emphasized that auditing services involve an integrated structure where roles and responsibilities overlap to maintain professional standards. It rejected the argument that firms could distance themselves from their partners' actions, affirming that the designation of an audit firm inherently includes collective responsibility. Section 132, therefore, was deemed a necessary mechanism to enforce professional accountability rather than an arbitrary imposition of liability.
Addressing the issue of retrospectivity, the Court reiterated that statutes are presumed to be prospective unless explicitly stated otherwise. It found that Section 132 did not create a new category of misconduct but merely adopted the definition of "professional or other misconduct" from Section 22 of the Chartered Accountants Act. The Court held that no vested right could be claimed regarding professional misconduct that existed before Section 132 came into force. The provision was seen as an attempt to close regulatory gaps and enhance oversight rather than impose new liabilities.
The Court ruled that Article 20(1) was not applicable, as it pertains to crimes and punishments, whereas Section 132 merely aligns existing definitions of professional misconduct with NFRA’s regulatory framework. The validity of the NFRA Rules was also upheld, with the Court noting that Rule 11 ensures compliance with principles of natural justice, including opportunities for hearings where necessary. The proceedings initiated by NFRA were deemed non-adversarial, as they are based on audit records and reviews rather than complaints from individuals. The Court rejected the argument that the absence of cross-examination rendered the procedure arbitrary, given that NFRA inquiries do not rely on oral testimony.
While upholding the validity of Section 132 and the NFRA Rules, the Court noted that NFRA had acted contrary to legislative intent by failing to maintain a clear division of functions as mandated under the Companies Act and the NFRA Rules.
