1998 (6) TMI 471 - HC - Companies Law

Judgment emphasizes investor protection, regulatory oversight, and legislative reform

The court addressed the lack of legislation to control fraudulent companies, allegations of fund siphoning, unsafe investments, actions by regulatory ... Collective Investment Scheme Issues Involved:1. Lack of legislation to control fraudulent companies.2. Allegations of siphoning off funds by the company.3. Unsafe investments by middle-class shareholders.4. Actions taken by the Economic Offences Wing and SEBI.5. Role of nationalized banks and government undertakings.6. Application of the corporate veil doctrine.7. Directions for investigation and attachment of properties.Issue-wise Detailed Analysis:1. Lack of Legislation to Control Fraudulent Companies:The judgment highlighted the absence of effective legislation to control the proliferation of companies that defraud small investors by promising high returns. The court noted the unfortunate situation where nationalized banks advance loans to such companies without adequate security, leading to significant financial losses for investors.2. Allegations of Siphoning Off Funds by the Company:The petitioners alleged that Respondent No. 1, Indo French Biotech Enterprises Ltd., collected large funds through a scheme called 'PROJECT GRAPES,' promising returns of 1025%. It was claimed that nearly 50,000 investors had invested in this scheme since 1993, and the company collected approximately Rs. 32 crores. The petitioners contended that large amounts of the company's funds had disappeared, necessitating an investigation.3. Unsafe Investments by Middle-Class Shareholders:The petitioners, who were shareholders, argued that their investments were unsafe due to the company's mismanagement and siphoning off of funds. They emphasized the need for an investigation to protect the interests of middle-class investors who had invested their life savings.4. Actions Taken by the Economic Offences Wing and SEBI:The court noted that the Economic Offences Wing of the police department had been directed to take immediate action against the concerned persons based on complaints filed. SEBI had also filed a criminal complaint against Respondent No. 1 and its directors under the SEBI Act and the Companies Act. However, SEBI argued that this remedy was insufficient to protect investors.5. Role of Nationalized Banks and Government Undertakings:The judgment criticized MM.T.C. Ltd., a Government of India Undertaking, for abetting the situation by joining as a co-promoter of such companies. The court found the actions taken by MM.T.C. Ltd. under sections 397 and 398 of the Companies Act insufficient to render justice to common investors.6. Application of the Corporate Veil Doctrine:The court referred to the Supreme Court's decision in Delhi Development Authority v. Skipper Construction Company (P.) Ltd., which discussed lifting the corporate veil in cases of illegality or fraud. The court emphasized that the corporate character should not be used to commit illegalities or defraud people. It held that the absence of a statutory provision would not inhibit the court from making appropriate orders to do complete justice.7. Directions for Investigation and Attachment of Properties:The court issued comprehensive directions to investigate and attach properties to protect investors' interests:- The Commissioner of Police, Mumbai, was directed to appoint the Deputy Commissioner of Police, Economic Offences Wing, to inquire into the company's activities.- The RBI was directed to appoint auditors to assist in the inquiry.- Respondents No. 3 to 8 and 15 were directed to disclose their movable and immovable properties, bank accounts, and transfers to group companies.- The Deputy Commissioner of Police was instructed to investigate the disappearance of funds, ownership of land, collection and disbursement of funds, and the company's ability to repay investors.- The properties of Respondents No. 3 to 8 and 15 were ordered to be attached.- Scheduled and commercial banks were instructed not to permit the operation of bank accounts by the respondent companies.- The Deputy Commissioner of Police was to submit an interim report by 30-6-1998.Conclusion:The judgment addressed the critical issues of fraudulent investment schemes, the need for legislative measures, the role of regulatory authorities, and the application of the corporate veil doctrine. The court's detailed directions aimed to safeguard the interests of defrauded investors and ensure a thorough investigation into the alleged financial irregularities.