Delhi HC on Vicarious Liability of Auditors: Deloitte Haskins & Sells LLP v. Union of India
BACKGROUND
On February 7, 2025, the Delhi High Court (“High Court”) ruled in Deloitte Haskins & Sells LLP v. Union of India & Ors. on writ petitions by audit firms like Deloitte Haskins & Sells LLP and SRBC & Co. LLP, and further, individual chartered accountants (collectively referred to as “Petitioners”).1 They challenged the constitutional validity of the Section 132 of the Companies Act, 2013 (“Companies Act”) and its retrospective operations, and certain provisions of National Financial Reporting Authority Rules, 2018 (“NFRA Rules”) dealing with the powers of National Financial Reporting Authority (“NFRA”). After reviewing the Companies Act and the NFRA Rules, the High Court upheld Section 132 of the Companies Act and the provisions of the NFRA Rules.
BRIEF FACTS AND CONTENTIONS
Petitioners: The Petitioners contended that these proceedings arose from disciplinary action initiated by the NFRA under Section 132(4) of the Companies Act, including in respect of audits completed prior to the provision’s notification. The Petitioners argued that vicariously holding a Limited Liability Partnership (“LLP”) incorporated under Limited Liability Partnership Act (“LLP Act”) liable under Section 132 of the Companies Act would unfairly impose liability on all partners, even those not involved in the audit-related fraud, negligence, or misconduct. This would unreasonably restrict their fundamental right to practice under Article 19(1)(g) and violate the principle of equality under Article 14 of the Constitution of India.
Another core grievance raised by the Petitioners was that the structure of NFRA permitted the same officers handle inspection, investigation, adjudication and further, penalties too. This concentration of functions was contended to be a violation of fair and due process in breach of Article 14 of the Constitution of India
Respondent: The Union of India (“Respondents”) justified the proceedings initiated by noting that Section 132 of the Companies Act establishes NFRA as an independent regulator for public-interest financial reporting, independent from ICAI’s framework. Further, the Respondents argued that an appointed audit firm partner acts as its representative as per Accounting Standards, requiring firm-level oversight over partners. Thus, individual actions of partners are inseparable from the firm’s engagement. Sections 25 and 26 of Partnership Act, 1932, and further, Section 27(2) of the LLP Act impose joint and several liability on partners of a firm and hence the arguments of the Petitioners were misplaced.
FINDINGS OF THE HIGH COURT:
The High Court held as follows:
- Legislative competence: The High Court upheld the sovereign power of the Parliament to enact retrospective laws under Section 132 of the Companies Act, if the legislative intent is clear. This addressed a clear regulatory gap in audit oversight by introducing the robust framework of NFRA. This move aligned India with global standards to ensure accountability and transparency in corporate audits. It dismissed claims that Section 132 of the Companies Act is arbitrary, viewing it as a justified measure to protect audit integrity.
- Vicarious liability: The High Court rejected the argument that Section 132 of the Companies Act creates a novel form of liability at the entity level. It observed that Section 147 of the Companies Act already contemplates consequences against both: (i) the auditor (including the audit firm); and (ii) the individuals involved in the audit process. Accordingly, firm liability is neither structurally impermissible nor legally unforeseen. Hence, imposition of liability on an audit firm for the actions of its partners is not violative of Article 14 of the Constitution of India.
The High Court further, noted that auditing standards impose firm-level obligations of control and oversight, reinforcing that audit quality is not solely an individual output but also a function of firm-wide systems and supervision. In essence, the Court affirmed that vicarious liability is integral to preserving audit accountability and preventing fragmentation of enforcement.
- Protections of LLP Act do not negate firm level accountability: The High Court examined the Companies Act with the LLP Act. It held that acts/omissions by partners during audits are done in course of the business of the LLP thereby, rendering the LLP liable under Section 27(2) of the LLP Act for partners’ wrongful acts. While Section 28(2) of the LLP Act limits personal liability of non-participating partners, it does not dilute firm-level exposure arising from a statutory audit engagement.
- Dual role of NFRA: The High Court rejected a blanket rule requiring separate authorities for investigation and adjudication. It upheld a single statutory body’s dual role if the scheme and practice ensure natural justice without risk of bias. It cited the judgement of the Supreme Court in Union of India v. Vipan Kumar Jain,2 allowing the same officer to conduct searches and assessments as a precedent.
Upon the current facts at hand, the Court held that the process of the NFRA is flawed as its Executive Body investigated, and de facto adjudicated via conclusive Audit Quality Review Reports (“AQRR”), then based Show Cause Notices solely on them. The Court, thus, quashed these proceedings for pre-determination and bias, mandating NFRA to treat AQRRs as preliminary, and allow meaningful pre-finalization responses.
APPEAL TO THE SUPREME COURT
NFRA has filed a Special Leave Petition (“SLP”) on 7 May 2025 before the Supreme Court of India, challenging the judgment of the Delhi High Court.3
OUR THOUGHTS
The High Court’s scrutiny of NFRA’s processes reveals the inherent risks in allowing a regulator to combine oversight, investigation, and adjudication without clear structural safeguards. While Section 132 validly empowers the NFRA to enhance audit quality even on a retrospective basis, its reliance on audit quality review reports that pre-judged alleged misconduct, raise serious concerns under Article 14 of the Constitution of India.
Further, the High Court by upholding Section 132 of the Companies Act preserves regulatory efficiency without compromising procedural fairness. The High Court’s decision serves as a reminder that regulatory enforcement must be proportionate, prospective, and procedurally robust.
The pending appeal before the Supreme Court of India will now be crucial in determining whether NFRA must structurally separate its functions or whether a composite regulatory model can withstand constitutional scrutiny, ultimately shaping the future architecture of audit oversight in India.
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