2023 (12) TMI 1256 - HC - Companies Law

Official liquidator's fraud allegations insufficient to warrant SFIO investigation without substantiated evidence from company records

The Allahabad HC recalled its order directing SFIO investigation into a company in liquidation after an ex-director's application. The court found the ... Direction for investigation into the affairs of the company - reference the matter of SFIO on the request of the official liquidator - Application filed by an Ex-Director of the Company in liquidation to recall the order passed by this Court - Money Laundering - diversion of funds - HELD THAT:- It is not denied by the Official Liquidator that it has a panel of Chartered Accountants through whom the inspection and inquiries may be ordered. The sole purpose for which the Official Liquidator has sought for referring the matter to the SFIO was for detection of diversion of assets/funds of the company in liquidation. It is not denied by the Official Liquidator that the balance sheet, other books of account and documents are in possession of the official liquidator as well as the statement of affairs filed by the ex-Director on behalf of the company in liquidation. Learned counsel for the applicant is right in saying that there was no material in the Official Liquidator’s report to demonstrate that there was any intention of the Ex-Director to defraud the creditors, members or any other person or that the management of the company was guilty of fraud and misfeasance or other misconduct towards the company or towards any of its members and, therefore, referring the matter to the SFIO is uncalled for. As a matter of fact, the allegation against the company in liquidation by the Official Liquidator regarding a web of intrigue employed by the company and other groups of companies for defrauding the investors and creditors and diversion of funds of the company, could have been substantiated by the specific references to the entries made in the balance sheet and other books of account of the company in liquidation, which has not been done. To insinuate that the office of the Official Liquidator does not have the capacity or ability to detect diversion of funds of the company in liquidation, is not acceptable given the fact that a panel of Chartered Accounts is admittedly available to assist the Official Liquidator in discharge of its duties. The provisions of the Act, 1956 and the Act, 2013 though, do not prohibit investigation to be initiated where the company has passed a special resolution for voluntary winding up or where other proceeding for winding of a company are pending before the Tribunal, however, the same may not applicable in the case of the company in liquidation, inasmuch as the winding up order of the company in liquidation was passed by the Court much prior to the report of the Official Liquidator filed before this Court seeking investigation by the SFIO. It is not the case of the Official Liquidator that the powers conferred on it by virtue of the aforesaid provisions are inadequate for purpose of detection of the irregularities like the allegation of diversion of funds, etc. that caused it to move this Court for referring the matter to the SFIO. It should not appear to the Court that the Official Liquidator seeks referral of the matter to the SFIO for the reason that it finds itself inadequate to exercise the powers conferred on the Official Liquidator by the aforesaid sections of the Act. The order dated 13.12.2019 is recalled and the Recall Application No.235 of 2020 is hereby allowed. Issues Involved:1. Recall of the order directing SFIO investigation.2. Adequacy of cooperation by ex-directors with the Official Liquidator.3. Evidence of fraud or misconduct by the ex-directors.4. Powers of the Official Liquidator under the Companies Act, 1956 and 2013.Summary:Recall of the order directing SFIO investigation:The application was filed by an ex-director to recall the order dated 13.12.2019, which directed the SFIO to investigate the affairs of the company in liquidation. The court had initially referred the matter to the SFIO based on the Official Liquidator's reports indicating clandestine asset transfers and lack of resources to investigate.Adequacy of cooperation by ex-directors with the Official Liquidator:The ex-directors had shown full cooperation, as evidenced by orders dated 6.5.2009 and 6.7.2012, where they appeared before the Official Liquidator, submitted statements of accounts, and deposited Rs. 1 crore to show bona fides. The Official Liquidator's reports, including Judicial/42 of 2018, detailed the assets and properties of the company as provided by the ex-directors.Evidence of fraud or misconduct by the ex-directors:The learned counsel for the applicant argued that there was no material evidence indicating fraud or misconduct by the ex-directors. The Official Liquidator's reports did not demonstrate any intention to defraud creditors or members. The court noted that vague allegations without specific references to the company's balance sheets and accounts could not justify an SFIO investigation.Powers of the Official Liquidator under the Companies Act, 1956 and 2013:The court reviewed the extensive powers granted to the Official Liquidator under Sections 235, 237, 456, and 457 of the Companies Act, 1956, and corresponding provisions in the Act, 2013. These powers include taking custody of the company's properties and investigating its affairs. The court found that the Official Liquidator had the necessary resources, including a panel of Chartered Accountants, to detect any diversion of funds without needing an SFIO investigation.Conclusion:The court concluded that the Official Liquidator's request for an SFIO investigation was unsubstantiated and that the ex-directors had cooperated adequately. Therefore, the order dated 13.12.2019 was recalled, and the Recall Application No. 235 of 2020 was allowed.