2021 (8) TMI 1240 - Tri - Companies Law

Tribunal Grants Interim Relief for Asset Freeze & Disclosure to Protect Public Interest

Union of India Versus Videocon Industries Limited and Ors.

The Tribunal granted interim reliefs to the petitioner, directing comprehensive disclosure and freezing of assets to prevent further asset depletion and ... Service to Respondents Through Joint Director - Preferential transactions under Section 43 of the Code - Undervalued transactions under Section 45 of the Code - Extortionate credit transactions under Section 50 of the Code - Fraudulent transactions under Section 66 of the Code - HELD THAT:- The contentions raised by the parties are one and the same and the transaction audit report is also more or less point out fraudulent conduct of erstwhile management. There has been thorough leakages taken place which has got a recurring effect until this day. This Bench is very cautiously making this statement and emphasising on the fact of the legal position that the transaction audit reports reveal for fraudulent conduct in the companies mentioned in the cause title and their affect felt till this date of filing the petition. The UoI has taken initiative to curtail the acts of preferential and fraudulent transactions in the best possible manner and the public interest could be better served. Whether to pass any order under Section 242(2)(m) of the Companies Act, 2013, to intervene or not since the Respondent Counsels are making submissions on the maintainability of the Petition in view of the provisions of Section 14 and 238 of the IBC? - HELD THAT:- The argument advances by the Ld. Counsels for the Respondents that the Petitioners have no power under Section 242 has no bearing for the reasons that the provision is very clear which shows that in the event the Central Government is of the opinion that the affairs of the company are been conducted in the manner provided and to protect the public interest it may itself be applied to the petitioner for the order under this chapter. Thus provisions of section 241(2)(m) of the Act are independent and have wide import as evident from IL&FS orders passed by this Bench and the Hon'ble NCLAT. The cover under moratorium and the same could not be instituted or proceeded with. This is not a proceedings against the Corporate Debtor but for the Corporate Debtor. We certainly agree that the contention that no suit or proceeding can be instituted against the Corporate Debtors. But here the efforts made by the Union of India is to secure or restore the assets back to the ultimate victims of fraud and it is not any adversarial proceeding that is the proceeding in rem which has initiated by the Government of India to catch hold all the wrong doers and the fraudulent persons - It is to be considered that the CIRP process is still on and it means that the company operations would continue under the control of RP. If at all an interim order as sought by the Union of India is not passed, the devastating effect would be that the wrong doers, fraudulent persons would get away and the valuable assets of the companies would get depleted, bringing the irreparable loss to the stakeholders. This Bench is surprised with the manner in which the financial institution has come forward to grant loans to a sinking ship and again come forward to file petition under Section 7 of IBC and again supports this petition - As this Bench is cautious that Union of India is taking steps and also carrying out investigation through SFIO, i.e. Serious Fraud Investigation office to unearth the fraud. List the matter on 22.09.2021. Issues Involved:1. Mismanagement of company funds and revenues.2. Disclosure and freezing of assets.3. Preferential and fraudulent transactions.4. Applicability of Section 241(2) and Section 242(2)(m) of the Companies Act, 2013.5. Continuation of proceedings under Section 14 and 238 of the Insolvency and Bankruptcy Code (IBC), 2016.6. Interim reliefs and public interest protection.Issue-wise Detailed Analysis:1. Mismanagement of Company Funds and Revenues:The Tribunal examined the financial statements of the flagship company, Videocon Industries Ltd., and noted a significant decline in reserves and surplus from Rs. 10,028.09 crores in 2014 to Rs.(-)2,972.73 crores in 2019. Similarly, secured loans increased from Rs. 20,149.23 crores in 2014 to Rs. 28,586.87 crores in 2019. Investments rose from Rs. 5,626.93 crores to Rs. 9,635.75 crores, which were deemed imprudent, leading to a depletion of the company's net worth. The operating income also plummeted from Rs. 18,967.60 crores in 2014 to Rs. 906.60 crores in 2019. The Tribunal highlighted that promoters held 40.59% of the company's share capital, with 98.16% pledged to financial institutions, indicating minimal financial interest left in the company.2. Disclosure and Freezing of Assets:The Tribunal directed the respondents to disclose their movable and immovable assets, including bank accounts, within India and globally, on affidavit. It also ordered the freezing of securities owned by the respondents through Central Depository Services Ltd. (CDSL) and National Securities Depository Ltd. (NSDL), and the disclosure of assets by the Central Board of Direct Taxes (CBDT). The Indian Banks Association (IBA) was instructed to facilitate the disclosure and freezing of bank accounts and lockers owned by the respondents. The State Governments and Union Territories were also directed to identify and disclose details of immovable properties held by the respondents.3. Preferential and Fraudulent Transactions:The Tribunal reviewed the transaction audit conducted during the Corporate Insolvency Resolution Process (CIRP), which revealed serious acts of mismanagement by the erstwhile management and promoters. The audit identified preferential transactions amounting to Rs. 1,209.25 crores, which benefitted certain creditor entities connected to the respondent company. The auditor noted that these transactions lacked proper authorization and were not conducted in the ordinary course of business, leading to the classification of these transactions under Section 43 of the IBC as preferential.4. Applicability of Section 241(2) and Section 242(2)(m) of the Companies Act, 2013:The Tribunal emphasized that Section 241(2) allows the Central Government to apply to the Tribunal if it believes the affairs of the company are being conducted in a manner prejudicial to public interest. The Tribunal clarified that the phrase 'are being conducted' includes past, present, and future acts of mismanagement. The Tribunal rejected the respondents' argument that Section 241(2) does not apply post-CIRP initiation, stating that the provision has a wide import and is independent, as evidenced by previous judgments.5. Continuation of Proceedings under Section 14 and 238 of the IBC, 2016:The Tribunal addressed the respondents' contention that proceedings cannot continue under the moratorium imposed by Section 14 of the IBC. It clarified that the current proceedings are not adversarial but aim to secure and restore assets to the victims of fraud. The Tribunal highlighted that the resolution plan approved earlier had been stayed, and the CIRP process was ongoing, necessitating interim orders to prevent further asset depletion and protect public interest.6. Interim Reliefs and Public Interest Protection:The Tribunal granted interim reliefs to the petitioner, allowing service of notice through various means, directing disclosure and freezing of assets, and permitting communication with state authorities to identify immovable properties. The Tribunal stressed the importance of these measures to prevent irreparable loss to stakeholders and protect public interest. It also directed the Serious Fraud Investigation Office (SFIO) to thoroughly investigate the affairs of the companies involved.Conclusion:The Tribunal concluded that the Union of India had established a prima facie case for interim reliefs, emphasizing the need to protect public interest and prevent asset depletion. The Tribunal directed comprehensive disclosure and freezing of assets, highlighting the ongoing investigation by the SFIO to uncover the full extent of the fraud. The matter was listed for further proceedings on 22.09.2021.