2020 (10) TMI 694 - Tri - Companies Law

Company involved in Ponzi scheme ordered to wind up for fraud, violating Companies Act. Directors must cooperate with Liquidator.

Union of India Versus Super Royal Holidays India Pvt. Ltd. And Ors.

The Tribunal concluded that the Company was conducting fraudulent activities by running a Ponzi scheme under the guise of providing travel services. The ... Winding up order - Prevention of any withdrawals, transfer, disposal/diversion of funds or closure of the said accounts; to direct to disclose moveable and immovable properties/assets, including bank accounts, owned by the Company in India or anywhere in the world - restraint on Respondents from accepting further deposits/money from existing members or fresh deposits/money from the Public etc. - Whether the Central Government is empowered and justified to order investigation into the ownership of any Company, under provisions Companies Act, 2013 in public interest? - Whether the Petitioner proved that affairs of the Company are being conducted in a fraudulent manner or the Company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up? - Whether the Company is given reasonable opportunity by the Petitioner to disprove the case of Petitioner for wind up of the Company? HELD THAT:- THE findings in Investigation Report in question, has clearly indicted the Directors of Company leading to filing the instant Petition, apart from initiating prosecution before Special court, matter was referred to various statutory Authorities like Central Board of Indirect Taxes and Customs, Chief Secretary, Govt. of Karnataka; State Level Co-ordination Committee for taking appropriate action. The Company has not filed any Application seeking further modification of Interim orders dated 07.03.19 and 09.07.2019, after withdrawal of Company Appeal by the Respondent, before the Appellate Authority, however, except seeking to permit it to pay statutory dues. Therefore, the interim orders dated 07.03.19 and 09.07.19 passed by the Tribunal made final as it requires no modification since the Respondent could not plead any extenuating circumstances to vacate the interim order as the main Company Petitions are also being disposed of finally and Official Liquidator would take care of affairs of Company. Therefore, it would be just and proper to restrain the Company and its Directors from operating any affairs of Company including operating its Bank Accounts. The Central Govt. and the Registrar of Companies and the Inspectors appointed, have followed all extant provisions of Companies Act and rules made thereunder including principles of natural justice in ordering investigation, conducting investigation in question. However, the Directors of the Company, though appropriate notice given under the provisions of Companies Act, they have failed to avail it - The Company is established exclusively for the benefit of three Promotee-cum- Directors-cum- shareholders, and their Agents, and hardly any service provided to its customers except few customers, out of paltry sum of money remains, after apportioning the Deposits by way of collecting Membership fee, among themselves by way of huge Dividend/salaries/commission/awards to themselves and their Agents. The contention of the Respondent that investigation Report in question is inconclusive, and it gives no cause of action for the Petitioner to file the instant Petitions is not at all tenable - Therefore, various contentions/allegations raised by the Respondents are not all tenable, and thus they are liable to be rejected. The incorporation and conducting of business of the Company itself was with unlawful and fraudulent objects, and its affairs are being conducted in total violations of extant provisions of Law - it would be just and proper to order winding up the Respondent Company, without prejudice to the actions being initiated by other Statutory Authorities - company is ordered to be wound up - application allowed. Issues Involved:1. Whether the Central Government is empowered and justified to order an investigation into the ownership of the Company under the Companies Act, 2013.2. Whether the Petitioner proved that the affairs of the Company are being conducted in a fraudulent manner, or the Company was formed for fraudulent and unlawful purposes.3. Whether the Company was given a reasonable opportunity by the Petitioner to disprove the case for winding up.Issue-wise Detailed Analysis:1. Empowerment and Justification of Central Government to Order Investigation:The Central Government, under Sections 216 and 210(1)(C) of the Companies Act, 2013, ordered an investigation into the affairs of the Company due to suspicions of fraudulent activities. The investigation was initiated based on information from various banks and was conducted by appointed inspectors. The Tribunal confirmed that the Central Government was within its rights to order such an investigation in public interest, as per the provisions of the Companies Act, 2013.2. Conduct of Affairs in a Fraudulent Manner:The investigation revealed that the Company was running a Ponzi scheme, collecting membership fees from the public under the guise of providing travel services. The Company collected significant amounts as membership fees but paid out 73% of these fees as commissions and awards to agents, which is unsustainable and indicative of a Ponzi scheme. The financial statements showed that the Company had no other revenue sources and was using new members' fees to pay off earlier members. Additionally, the Company failed to provide services within the stipulated time, violating Section 73 r/w 76 and Rule 2(c)(xii)(a) of the Companies (Acceptance of Deposits) Rules, 2014. The Tribunal found that the business model was fraudulent and likely to collapse, leaving investors at risk.3. Reasonable Opportunity to Disprove the Case:The Company and its directors were given multiple opportunities to provide information and cooperate with the investigation but failed to do so. Notices were issued to the Company and its directors, but they either did not respond or provided incomplete information. The Tribunal noted that the directors did not avail themselves of the opportunity to disprove the allegations, leading to the conclusion that they had accepted the allegations by default. The Tribunal also observed that the Company’s actions, such as the resignation of auditors and the striking off and subsequent restoration of the Company’s name, indicated non-compliance with legal requirements.Conclusion:The Tribunal concluded that the Company was conducting its business in a fraudulent manner, violating several provisions of the Companies Act, 2013. The Company was found to be running a Ponzi scheme, misusing public funds, and not providing the promised services. The Tribunal ordered the winding up of the Company and appointed an Official Liquidator to take charge of the Company’s affairs. The directors and staff were directed to cooperate with the Liquidator, and the order was passed without prejudice to actions by other statutory authorities. The interim orders freezing the Company’s bank accounts were merged into the final order.