2021 (4) TMI 1088 - AT - Insolvency and Bankruptcy

Appellate Tribunal partially allows appeal, upholds bank account joint operation, orders transparency measures.

The Appellate Tribunal partly allowed the appeal, setting aside the NCLT's direction for the Registrar of Companies to investigate the affairs of ... Oppression and mismanagement - Siphoning of funds - diversion of funds - investigation of the Respondent No. 1 Company's affairs by Registrar of Companies - HELD THAT:- It is clear that the NCLT may direct the Central Government to investigate under Section 210 (2) of the Companies Act 2013. After a reference from the NCLT, the Central Government has to mandatorily appoint an Inspector under Section 210 (2) of the Act. Therefore, before the Learned NCLT passes such an order, it will follow as a natural corollary that the Learned NCLT, at least form prime facie opinion, based on the records available and the submissions made, that such an investigation into the affairs of the Company was necessary, and such direction, in any event, ought to be issued to the Central Government and not to the Registrar - the direction issued by the Learned NCLT appointing the Registrar of Companies to investigate into the affairs of Respondent No. 1 Company violates the provisions of the statute, in as much as in terms of Section 210 (2) of the Companies Act 2013, such a direction can be given only to the Central Government and not to the Registrar. In terms of Section 213 of the Companies Act 2013, such a direction can be given, once again, only to the Central Government and not to the Registrar, and only upon the satisfaction of the conditions precedent specified therein. The Learned NCLT erred in directing the Registrar of Companies to investigate into affairs of Respondent No. 1 Company, as the said Directions violate the statutory provision of Section 210 (2) and Section 213 of the Companies Act 2013 - Appeal allowed in part. Issues Involved:1. Legitimacy of the NCLT's directive to jointly operate the bank accounts of the Respondent No. 1 Company.2. Allegations of siphoning off funds by Respondent No. 2.3. NCLT's interference in the internal management of the company.4. The direction for an investigation into the affairs of Respondent No. 1 Company by the Registrar of Companies.Issue-wise Detailed Analysis:1. Legitimacy of the NCLT's Directive to Jointly Operate the Bank Accounts:The NCLT directed that the bank accounts of Respondent No. 1 Company be operated jointly by one representative of the Appellants and one representative of Respondent No. 2 to 4. This order superseded the Board Resolution dated November 19, 2019, which allowed any two Directors to operate the bank accounts. The Appellants argued that this directive was issued without any discussion or finding of mismanagement, thus interfering with the company's internal management. However, the NCLT justified its order by noting prima facie acts of oppression and mismanagement.2. Allegations of Siphoning Off Funds by Respondent No. 2:The Appellants contended that Respondent No. 2, who was the sole authorized signatory of the bank accounts, siphoned off Rs. 55,99,68,131/- to himself and related parties, failing to make payments to royalty and statutory dues, including GST. This led the Board of Directors to pass a resolution on November 19, 2019, authorizing any two Directors to operate the bank accounts. The Respondents countered by alleging that the Appellants were committing acts of oppression to oust Respondent No. 2 and mismanage the company's funds.3. NCLT's Interference in the Internal Management:The Appellants argued that the NCLT's order interfered with the internal management of the company, which was impermissible in law. The NCLT, however, passed interim orders to prevent further acts of oppression and mismanagement and to protect the company's assets. The Appellate Tribunal found that the NCLT's interim orders were equitable and maintained a balance of convenience, given the allegations and counter-allegations of siphoning off funds.4. Direction for Investigation by the Registrar of Companies:The NCLT directed the Registrar of Companies to investigate the affairs of Respondent No. 1 Company. The Appellants contended that this direction was erroneous as the Companies Act provides that such investigations should be conducted by the Central Government or an inspector appointed by it, not the Registrar. The Appellate Tribunal agreed, stating that the NCLT erred in directing the Registrar to investigate, as per Sections 210(2) and 213 of the Companies Act, 2013. The Tribunal noted that the NCLT should form a prima facie opinion and, if necessary, direct the Central Government to conduct the investigation.Conclusion:The Appellate Tribunal partly allowed the appeal, setting aside the NCLT's direction for the Registrar of Companies to investigate the affairs of Respondent No. 1 Company. However, it upheld the NCLT's directive for joint operation of the bank accounts, with an additional order that a weekly report of all transactions over Rs. 1000 be circulated to all directors by email to ensure transparency and prevent siphoning off funds. The NCLT was directed to provide an opportunity for both parties to be heard and, if necessary, pass an order for investigation under Section 210(2) of the Companies Act, 2013.