INDIA Trends and Developments Contributed by: Vijayendra Pratap Singh, Priyank Ladoia, Shubhangni Jain and Arjun Narang, AZB & Partners
sistent with the Companies Act nor violative of Article 14 of the Constitution. The Court further held that an audit firm can - not evade liability by distancing itself from the actions of its partners, given that audits are conducted solely because the firm has been appointed as the company’s auditor. Its appoint - ment is not an independent engagement; rather, it is the firm – whether a partnership or an LLP – that is designated as the auditor. Consequently, the firm’s members perform their duties and ful - fil their responsibilities in accordance with the directives issued by the audit firm. The Court also relied on the accounting stand - ards to hold that it is the liability of an audit firm to continuously and diligently monitor, regulate and control the quality of the audit. On this basis, the Court held that it would be untenable in law to hold that the firm could shrug off this respon - sibility when the audit is being carried out by its partners. The Court emphasised that auditing requires ongoing diligence, monitoring and oversight, establishing an inseparable connection between the firm and its members, who operate as a unified entity. It held that to suggest otherwise would ignore the practical realities of audit engagements, where the quality and integrity of the work are inherently shared between the firm and the individuals performing it. To conclude, the Court reaffirmed that the Companies Act establishes a clear framework of accountability for audit firms and their part - ners, ensuring that statutory liability cannot be circumvented by distancing the firm from the actions of its members.
The Court, however, failed to address the imposi - tion of vicarious liability under Section 132 of the Companies Act on partners who may not have been involved in the alleged audit. In doing so, the Court failed to take into consideration that such a provision places an unreasonable restric - tion on the individual partners’ right to practise their profession, violating the fundamental right guaranteed under Article 19(1)(g) of the Constitu - tion. Furthermore, the Court overlooked the plain language of Section 147(5), which states that only partners proven to have acted fraudulently would be held liable. Therefore, contrary to the finding of the Court, this provision clearly limits liability to the partner in charge and responsible for the audit, excluding other partners who had no involvement in the alleged audit. On the issue of vicarious liability, the petitioners also argued that the provisions of the Limited Liability Partnership Act, 2008 (the “LLP Act” ) do not permit an act of fraud to be attributed to the partner of a partnership firm who in no manner is involved in or had participated in the alleged fraud. On this submission of the petitioners, the Court held that Section 27 of the LLP Act makes the LLP liable for acts done by its partners “in the course of the business” of the LLP. An audit conducted by a firm or an LLP would be “in the course of the business” , therefore making the LLP liable for the acts of the partner. While the Court acknowledges that Section 28 of the LLP Act does not impose liability on indi - vidual partners solely by virtue of their partner - ship, it nevertheless held that the provision must be interpreted in light of the fundamental prin - ciple that an LLP operates through its partners and members, making their actions inseparable from the firm’s overall conduct. Consequently, the Court ruled that, if an audit firm’s wrongful act is established, Section 28(2) would not shield
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