INDIA Trends and Developments Contributed by: Vijayendra Pratap Singh, Priyank Ladoia, Shubhangni Jain and Arjun Narang, AZB & Partners
• banking companies, insurance companies, etc. Upon investigation, the NFRA may take action against erring statutory auditors by: • debarring them from practising as an auditor for a minimum period of six months, which may extend to a period of up to ten years; and • imposing a penalty as prescribed. As such, the NFRA is an oversight body over and above the existing framework which consisted of the authorities under the CA Act. However, no other institute or body can exercise jurisdiction and proceed with any misconduct proceedings in cases where the NFRA has already initiated an investigation. Challenge to the constitutionality of Section 132 of the Companies Act Recently, a division bench of the High Court of Delhi (the “Court” ), in Deloitte Haskins & Sells LLP v Union of India 2025 DHC 716-DB (the “Deloitte Judgment” ), upheld the constitutional validity of Section 132 of the Companies Act. In doing so, it has reinforced the growing judicial trend towards stricter scrutiny of auditors, par - ticularly concerning their role in fraud detection. The authors focus on the Court’s observations on two of the grounds of challenge, which high - light the recent judicial trend of enforcing strict compliance with the statutory duties of auditors as prescribed by law. Challenge on the ground of imposition of vicarious liability on the firm and its partners One of the grounds for challenging the consti - tutional validity of Section 132 of the Compa - nies Act was that it creates vicarious liability for
the audit firm and its partners, irrespective of whether that partner was involved in the con - cerned audit or had performed an audit function. Consequently, it was argued that such a liability amounts to an unreasonable restriction on the fundamental right of the firm and its partners to practise their profession in violation of the Constitution of India (the “Constitution” ) as also amounting to the imposition of a disproportion - ate penalty on the firm and its partners. On this ground of challenge, the Court held that the Companies Act explicitly contemplates an audit firm being held liable for the actions of its engagement partners and other constituents involved in conducting an audit. In reaching this conclusion, the Court relied on the following. • Section 147(5) of the Companies Act, which the Court held provides that, if an audit firm conducts an audit and if it is proven that its partner or partners engaged in fraud, both the firm and the responsible partners would be subject to civil or criminal liability. This dual liability is reinforced by use of the phrase “jointly and severally” in the provision. • The proviso to subsection (5), which states that in cases where an audit firm faces crimi - nal liability – other than a monetary fine – only the partner or partners who engaged in fraud or aided in the crime would be held account - able. Based on these provisions, the Court concluded that the Companies Act does not differentiate between the liability of an audit firm and its part - ners. On the contrary, it expressly provides for both the firm and its partners to be held liable. Consequently, the Court ruled that Section 132 of the Companies Act does not create any new liability beyond what is already contemplated under the statute and is, therefore, neither incon -
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