2019 (6) TMI 332 - SC - Companies Law

Supreme Court upholds NCLT/NCLAT orders on IL&FS financial statements; Section 130 invoked for mismanagement/fraudulent accounts.

Hari Sankaran Versus Union of India & Others

The Supreme Court upheld the orders of NCLT and NCLAT, dismissing the appeal challenging the legality of re-opening and re-casting financial statements of ... Re­casting and re­ opening of the accounts of IL&FS - suspension of Board of Directors of IL&FS - Whether in the facts and circumstances of the case, can it be said that the order passed by the learned Tribunal is illegal and/or contrary to Section 130 of the Companies Act? HELD THAT:- In the present case, the Central Government has already constituted SFIO and has also ordered investigation into the affairs of IL&FS and other group of companies and the investigation by the SFIO is under progress. It is also required to be noted that SFIO had also submitted its preliminary report. In the preliminary SFIO report, there are specific findings with respect to mismanagement of the affairs of the aforesaid companies, and also with respect to preparing fraudulent accounts. At this stage, it is also required to be noted that ICAI had also conducted an enquiry into the accounts for the past five years, and in the preliminary report, the ICAI has mentioned that “accounts for the post five years have been prepared in a fraudulent and negligent manner by the erstwhile auditors”. That the Registrar of Companies had also conducted an enquiry under Section 206 of the Companies Act and prima facie concluded that mismanagement and compromise in corporate governance norms and risk management has been perpetuated on IL&FS and its group companies by indiscriminately raising long term and short term loans/borrowings through public sector banks and financial institutions. Considering the fact that thousands of crores of public money is involved, and in the public interest, the Central Government has thought it fit to handover the investigation with respect to the affairs of IL&FS and other group companies to SFIO. Larger public interest has been involved and reopening of the books of accounts and recasting of financial statements of the aforesaid companies is required to be carried out in the larger public interest, to find out the real truth, and as observed hereinabove both the conditions precedent while invoking power under Section 130 of the Companies Act are satisfied/complied with, therefore in the facts and circumstances of the case, we are of the opinion that the order passed by the learned Tribunal passed under Section 130 of the Companies Act, confirmed by the learned Appellate Tribunal, is not required to be interfered with. Appeal dismissed. Issues Involved:1. Legality of the order passed by the National Company Law Tribunal (NCLT) under Section 130 of the Companies Act, 2013.2. Compliance with the conditions precedent for invoking Section 130 of the Companies Act.3. Alleged violation of principles of natural justice.4. Applicability and relevance of the observations made under Sections 241/242 of the Companies Act.5. Consideration of subsequent reports and developments.Detailed Analysis:1. Legality of the Order Passed by NCLT under Section 130 of the Companies Act:The Supreme Court examined whether the NCLT's order permitting the re-opening and re-casting of the financial statements of IL&FS and its group companies for the last five years was legal and in accordance with Section 130 of the Companies Act. The Tribunal had allowed the application by the Central Government, which was confirmed by the National Company Law Appellate Tribunal (NCLAT). The appellant, a suspended Director of IL&FS, challenged this order.2. Compliance with the Conditions Precedent for Invoking Section 130 of the Companies Act:The appellant argued that the conditions precedent for invoking Section 130, namely that the earlier accounts were prepared fraudulently or the affairs of the company were mismanaged, were not satisfied. The Supreme Court noted that Section 130 requires either of the two conditions to be met. The Tribunal had considered the preliminary reports from the Serious Fraud Investigation Office (SFIO) and the Institute of Chartered Accountants of India (ICAI), which indicated mismanagement and fraudulent preparation of accounts. The Court found that the Tribunal was justified in its decision as the conditions precedent were satisfied.3. Alleged Violation of Principles of Natural Justice:The appellant contended that the order was passed in violation of natural justice as sufficient opportunity was not given to file a reply. The Supreme Court observed that the erstwhile directors were represented and heard before the Tribunal, thus ensuring substantial compliance with the principles of natural justice. The Court dismissed the argument that the Tribunal's order was in violation of natural justice.4. Applicability and Relevance of Observations Made under Sections 241/242 of the Companies Act:The appellant argued that the observations made under Sections 241/242, which led to the suspension of the Board of Directors, should not influence the decision under Section 130. The Supreme Court held that all provisions must be read conjointly and that the observations under Sections 241/242 were relevant for the decision under Section 130. The Tribunal had noted mismanagement and fraudulent preparation of accounts, justifying the re-opening of financial statements.5. Consideration of Subsequent Reports and Developments:The Supreme Court considered the subsequent interim investigation reports by the Reserve Bank of India (RBI) and SFIO, which supported the Tribunal's order. The Court noted that the subsequent reports could be considered in the larger public interest, especially when significant public funds were involved. The Court upheld the Tribunal's order, emphasizing the need to find the real truth in the larger public interest.Conclusion:The Supreme Court dismissed the appeal, affirming the orders of the NCLT and NCLAT. The Court concluded that the conditions precedent for invoking Section 130 were met, the principles of natural justice were substantially complied with, and the order was justified in the larger public interest. The subsequent reports further supported the decision to re-open and re-cast the financial statements of IL&FS and its group companies.