2020 (2) TMI 1081 - SC - Companies Law

Court clarifies asset freezing under Companies Act limited to individuals directly involved in misconduct

USHA ANANTHASUBRAMANIAN Versus UNION OF INDIA

The court set aside the NCLAT and NCLT orders in an appeal by the former MD & CEO of Punjab National Bank. It held that freezing assets under Sections ... Fraud/misconduct/conspiracy - oppression and mismanagement - injunction from disposing movable and immovable properties/assets which belong to them and whose assets were frozen - HELD THAT:- Under Section 241(2), the Central Government, if it is of the opinion that the affairs of the Company are being conducted in a manner prejudicial to public interest, may apply itself to the Tribunal for orders under this Chapter, which is headed “prevention of oppression and mismanagement”. Apart from the vast powers that are given to the Tribunal under Section 242, powers under Section 337 and 339 are also given in aid of this power, which will apply mutatis mutandis - Section 337 refers to penalty for frauds by an officer of the company in which mis-management has taken place. Likewise, Section 339 refers to any business of the company which has been carried on with intent to defraud creditors of that company. Obviously, the persons referred to in Section 339(1) as persons who are other than the parties “to the carrying on of the business in the manner aforesaid” which again refers to the business of the company which is being mismanaged and not to the business of another company or other persons. This being the case, it is clear that powers under these sections cannot possibly be utilized in order that a person who may be the head of some other organization be roped in, and his or her assets be attached - impugned order set aside - appeal allowed - decided in favor of appellant. Issues:1) Appeal by former MD & CEO of Punjab National Bank.2) Charge sheet filed by CBI against several individuals.3) Jurisdiction of NCLT under Section 241 of Companies Act.4) Interpretation of Sections 337 and 339 of Companies Act.5) Freezing of assets and liability for fraudulent conduct.Analysis:1) The appeal was filed by the former MD & CEO of Punjab National Bank regarding a charge sheet filed by the CBI against various individuals, including the Directors of Gitanjali Gems Ltd.2) The appellant's counsel argued that the criminal case against the appellant was limited to her alleged omission to prevent fraud by Nirav Modi, which did not relate to mismanagement of Punjab National Bank. They contended that freezing the appellant's assets under Section 241 of the Companies Act would be beyond jurisdiction.3) The respondent's counsel supported the NCLT and NCLAT orders, citing Sections 337 and 339 of the Companies Act. They argued that these sections allow for freezing the assets of individuals involved in fraudulent conduct, even if they are not directly linked to the mismanagement of the company in question.4) The court examined Sections 241(2), 337, and 339 of the Companies Act. It noted that Section 241 allows the Central Government to intervene if a company's affairs are prejudicial to public interest, with Sections 337 and 339 providing penalties for fraud by officers and liability for fraudulent conduct, respectively.5) The court concluded that Sections 337 and 339 are applicable only to individuals directly involved in the mismanagement or fraudulent conduct of the specific company under investigation. Therefore, freezing the assets of a person heading a different organization would be beyond the scope of these sections. Consequently, the impugned NCLAT and NCLT orders were set aside, allowing the appeal. The judgment clarified that it would not impact ongoing investigations by CBI or SFIO.