2020 (2) TMI 390 - AT - Companies Law

NCLT lacks power to order SFIO probes directly; Central Govt referral required for fraud investigations.

Union of India Versus Maharashtra Tourism Development Corporation

The judgment clarifies that the Adjudicating Authority (NCLT) does not have the jurisdiction to directly order an SFIO investigation into fraud or ... Jurisdiction - siphoning of funds - power of Adjudicating Authority to direct the SFIO to investigate about the fraud or siphoning of funds, if any, committed by the Company (Corporate Debtor) - HELD THAT:- Similar issue decided in the case of LAGADAPATI RAMESH AND M/S. COMMUNE PROPERTIES INDIA PVT. LTD. & ORS. VERSUS SMT. RAMANATHAN BHUVANESHWARI & ORS. [2019 (9) TMI 1316 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] where it was held that the Adjudicating Authority was not competent to straight away direct any investigation to be conducted by the 'Serious Fraud Investigation Office'. However, the Adjudicating Authority (Tribunal) being competent to pass order under Section 213 of the Companies Act, 2013, it was always open to the Adjudicating Authority/Tribunal to give a notice with regard to the aforesaid charges to the Promoters and others, including the Appellants herein and after following the procedure as laid down in Section 213, if prima facie case was made out, it could refer the matter to the Central Government for investigation by the Inspector or Inspectors and on such investigation, if any, actionable material is made out and if the Central Government feels that the matter requires investigation through the 'Serious Fraud Investigation', it can proceed in accordance with the provisions as discussed above. Impugned order shows parties have been heard on the charges claimed by the 'Resolution Professional'. The matter remitted to the Central Government for investigation through 'Inspector' or 'Inspectors' to find out whether one or other promoter or officer or employee or any other person related to the company or companies in question have violated the provisions of Section 70 of the 'I&B Code' - The matter is referred to the Secretary, Ministry of Corporate Affairs to get the matter investigated by 'Inspector' or 'Inspectors' following the procedure in terms of Section 213 of the Companies Act, 2013 read with Section 70 of the 'I&B Code' and Section 447 of the Companies Act, 2013 or any other offence punishable under Chapter VII of the 'I&B Code'. Appeal disposed off. Issues Involved:1. Jurisdiction of the Adjudicating Authority to direct the Serious Fraud Investigation Office (SFIO) to investigate fraud or siphoning of funds.2. Applicability of Section 70 of the Insolvency and Bankruptcy Code (I&B Code) and Section 212 of the Companies Act, 2013.3. Procedure for investigation into the affairs of a company under Section 213 of the Companies Act, 2013.4. Role of the Central Government in initiating investigations through Inspectors or the SFIO.Detailed Analysis:1. Jurisdiction of the Adjudicating Authority:The core issue addressed in the appeals is whether the Adjudicating Authority (National Company Law Tribunal, NCLT) has the jurisdiction to direct the SFIO to investigate allegations of fraud or siphoning of funds by a corporate debtor. The judgment clarifies that the NCLT does not have the authority to directly order an investigation by the SFIO. Instead, the NCLT can refer the matter to the Central Government, which then decides whether an investigation by the SFIO is warranted.2. Applicability of Section 70 of the I&B Code and Section 212 of the Companies Act, 2013:Section 70 of the I&B Code pertains to the punishment for misconduct during the corporate insolvency resolution process, including failure to disclose or deliver assets or information to the resolution professional. The judgment highlights that any investigation into such misconduct must follow the procedural requirements of the Companies Act, specifically Section 212, which empowers the Central Government to order an investigation by the SFIO based on certain conditions, such as a report from the Registrar or Inspector, a special resolution by the company, public interest, or a request from a government department.3. Procedure for Investigation under Section 213 of the Companies Act, 2013:The judgment refers to Section 213 of the Companies Act, which allows the NCLT to order an investigation into a company's affairs if there are circumstances suggesting fraudulent or unlawful conduct. The NCLT must provide a reasonable opportunity for the concerned parties to be heard before making such an order. If the NCLT is satisfied that an investigation is necessary, it can direct the Central Government to appoint Inspectors to conduct the investigation. The Central Government, upon receiving the investigation report, may then decide whether further investigation by the SFIO is required.4. Role of the Central Government:The judgment emphasizes the role of the Central Government in overseeing investigations into corporate misconduct. The Central Government, upon receiving a referral from the NCLT under Section 213, can appoint Inspectors to investigate the matter. If the investigation reveals serious misconduct, the Central Government can decide to involve the SFIO. The judgment underscores that the NCLT cannot bypass this procedural framework and directly order an SFIO investigation.Conclusion:The judgment modifies the impugned orders dated 24th July 2019 and 26th July 2019, which had directed the SFIO to investigate the affairs of 'Luxury Train Pvt. Ltd.' and 'Zynke Exports Pvt. Ltd.' Instead, the matter is referred to the Central Government for investigation by Inspectors under Section 213 of the Companies Act, 2013. The Central Government will then determine if further investigation by the SFIO is necessary. This procedural adherence ensures that investigations are conducted within the legal framework established by the Companies Act and the I&B Code.The appeals are disposed of with these observations and directions, ensuring that the investigation follows the proper legal channels. No costs are awarded.