2003 (6) TMI 427 - HC - Companies Law

Invalidity of Show-Cause Notices Due to Lack of Authority and Jurisdiction

Oswal Agro Mills Ltd. Versus Custodian

The court held that the show-cause notices issued by the Custodian were without authority of law and jurisdiction, making them invalid. The court ... Contracts entered fraudulently may be cancelled Issues Involved:1. Authority and jurisdiction of the Custodian.2. Action taken under section 4 of the Special Courts Act and its limitation.3. Application of the Limitation Act.4. Scope of inquiry and powers of the Custodian.5. Fraudulent and illegal transactions.6. Principles of natural justice.7. Statutory presumption and burden of proof.Issue-wise Detailed Analysis:1. Authority and Jurisdiction of the Custodian:The show-cause notice issued by the Custodian was found to be without authority of law and a colorable exercise of the powers conferred under section 4 of the Special Courts Act. The court held that the Custodian did not have the jurisdiction to issue such notices, making them invalid.2. Action Taken Under Section 4 and Limitation:The court determined that the action taken under section 4 by the Custodian was not barred by the law of limitation. However, the Limitation Act does not apply to the Custodian's actions under section 4 of the Special Courts Act. The court emphasized that the Custodian must act with due diligence, and the delay in taking action (from 1991 to 2001) was unreasonable and lacked explanation.3. Application of the Limitation Act:The provisions of the Special Courts Act do not override the Limitation Act. The court noted that the Limitation Act applies only to appeals or applications filed in court, not to actions taken by administrative authorities like the Custodian.4. Scope of Inquiry and Powers of the Custodian:The Custodian has no power to pass orders directing payment by any party to the notified party. The Custodian must approach the Special Court with a petition or suit for recovery. The Custodian's orders were treated as demand notices, and upon non-compliance, the Custodian's remedy is to file a petition or suit in the Special Court.5. Fraudulent and Illegal Transactions:The court found that the show-cause notices issued by the Custodian lacked material particulars of the alleged fraud. The notices did not specify who practiced the fraud, the facts constituting the fraud, or the parties involved. The court held that the Custodian failed to establish the allegations of fraud or illegality, making the notices and subsequent actions invalid.6. Principles of Natural Justice:The court ruled that the impugned orders were not against the principles of natural justice. However, the show-cause notices did not provide the parties with sufficient details to defend themselves, violating the principles of natural justice.7. Statutory Presumption and Burden of Proof:The Custodian incorrectly assumed a statutory presumption of fraud, which does not exist under the law. The burden of proving fraud lies with the party alleging it. The Custodian's reliance on reports from committees and auditors without offering the authors for cross-examination was insufficient to establish fraud.Conclusion:The court quashed and set aside all the impugned orders passed by the Custodian. The petitions succeeded on the law points, and it was unnecessary to delve into the facts of each case separately. The court emphasized the need for the Custodian to act within the legal framework and provide detailed and specific allegations when issuing show-cause notices.