INDIA Trends and Developments Contributed by: Vijayendra Pratap Singh, Priyank Ladoia, Shubhangni Jain and Arjun Narang, AZB & Partners
individual partners from liability arising from the firm’s misconduct. In doing so, the Court effectively gave the provi - sion a context and interpretation that is other - wise not contemplated in the statute. The plain language of Section 28(2) provides that “a part- ner shall not be personally liable for the wrongful act or omission of any other partner of the limited liability partnership” , thereby expressly insulat - ing partners from liability for the actions of other partners. Given this explicit statutory protection, the Court’s ruling may be flawed in its reasoning and application of Section 28(2). Challenge on the ground of retroactive application of Section 132 of the Companies Act The constitutional challenge primarily stemmed from the retroactive application of Section 132 of the Companies Act, which granted the NFRA the authority to initiate disciplinary proceedings against individual partners, chartered account - ants and auditing firms for audits conducted even before the provision was introduced in October 2018, including those that had already commenced and concluded prior to its enact - ment. On the issue of retrospective applicability, the Court observed that a provision will not apply retrospectively if it creates a new liability. How - ever, since “professional or other misconduct” was already defined under Section 22 of the CA Act before the establishment of the NFRA, Sec - tion 132 does not introduce a new disqualifica - tion. Instead, it merely modifies the manner and extent of enforcement. The Court in this regard also relied on the explanation to Section 132(4), which clarifies that the phrase “professional or other misconduct” retains the same meaning as assigned under Section 22 of the CA Act.
The Court noted that the system of auditing in India had to keep up with the winds of change, and the constitution of the NFRA is a clear reflec - tion of the change in policy. It also observed that the NFRA was created to fill a pre-existing regulatory gap in alignment of the government’s objectives of strengthening oversight mecha - nisms and enhancing the quality of profes - sional services rendered by audit firms, and to bridge the gap in enforcement while ensuring that standards of professional conduct evolve with global best practices. This shift represents a progressive regulatory shift, aimed at rein - forcing compliance and raising the standards of audit quality. The NFRA was intended to be given overarching authority for matters relating to classes of bodies corporate and persons. Further, the Court recorded the undertaking given by the NFRA that it would not proceed against any firms in respect of an audit that may have been conducted prior to October 2018. However, the Court left the door open for the NFRA to proceed against individuals for audits prior to October 2018, essentially holding that the NFRA can exercise its jurisdiction retrospec - tively qua individuals. The NFRA has abided by said undertaking in the case of audit firms, whereby the show-cause notices issued to the audit firms were withdrawn by the NFRA based While dismissing the constitutional challenge, the Court has quashed all show-cause notices issued even to individuals, on the ground of procedural irregularities in the manner of inves - tigation and adjudication by the same execu - tive body of the NFRA. The Court applied the principle of “no man can be a judge in his own cause” , in as much as the NFRA was functioning through its executive body, which would record on the Deloitte Judgment. Streamlining of procedure
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