2024 (8) TMI 672 - HC - Companies Law

NBFC faces oppression and mismanagement charges as RBI allegedly misled by company's false compliance claims

The Delhi HC found prima facie evidence of oppression and mismanagement in an NBFC's affairs. The court noted that despite the company's claims of ... Maintainability of petition - Invocation of extraordinary jurisdiction of this Court under Article 226 of the Constitution of India, 1950 - oppression and mismanagement in the affairs of the company - HELD THAT:- On perusal of the record, a strong inference is invited that although respondent No.2 is an NBFC, its present management has lot to answer with regard to the manner in which it is conducting its affairs. Though Respondent (Mr. Raj Shekhar Rao, Sr. Adv.) has forcefully argued that several notices issued by respondent No.2 have been dutifully replied and they are engaging with them in right earnest, however, it is prima facie evident that respondent No.1/RBI is allowing themselves to be taken for a ride inasmuch as repeated notices sent by respondent No.1 are being circumvented in the sense that relevant documents are not being submitted and corrective steps have not been taken by respondent No.2. Issue notice. Respondent No.1 is directed to file an updated “Status Report” as to the outcome of the proceedings conducted so far and the specify action(s), if any, proposed to be taken to streamline the running of the affairs of respondent No.2. As requested by learned Counsel for respondent No.1, two weeks” time is granted to file an updated Status Report. Issues Involved:1. Jurisdiction and maintainability of the petition under Article 226.2. Allegations of mismanagement and financial improprieties by the Board of Directors of respondent No. 2.3. Role and actions of RBI (respondent No. 1) in addressing the complaints.4. Pending proceedings and orders of the NCLT and NCLAT regarding the management of respondent No. 2.5. Reliefs sought by the petitioner under various sections of the RBI Act.Issue-wise Detailed Analysis:1. Jurisdiction and Maintainability of the Petition:The petitioner invoked the extraordinary jurisdiction of the High Court under Article 226 of the Constitution of India, seeking several writs of mandamus against the RBI to investigate and take action against respondent No. 2. The petitioner argued that the provisions of Chapter III B of the RBI Act form a complete code, not controlled by any other law, and cited the Supreme Court's decision in Nedum Pillai Finance Company Limited v. State of Kerala to support the claim that RBI's oversight of NBFCs is comprehensive. The respondent No. 2's counsel countered, arguing the petition was an attempt to overreach pending proceedings before the NCLAT and questioned the non-joinder of necessary parties.2. Allegations of Mismanagement and Financial Improprieties:The petitioner alleged that respondent No. 2, an NBFC, was involved in gross financial irregularities, including siphoning off funds and mismanagement by its Board of Directors. Specific allegations included the purchase of luxury cars worth Rs. 25.36 crores and misappropriation of loans. The petitioner highlighted that the current management was not cooperating with the Observer appointed by the NCLT, as evidenced by a report dated 01.07.2024 detailing non-compliances.3. Role and Actions of RBI (Respondent No. 1):The petitioner sought various writs directing the RBI to investigate the affairs of respondent No. 2, conduct a special audit, remove the current Board of Directors, and take measures to prevent further detrimental conduct. The petitioner argued that despite detailed complaints sent to the RBI, no action had been taken. The respondent No. 2's counsel argued that the RBI had been engaged and receiving relevant documents from respondent No. 2, and that the relief sought required showing gross perversity on the part of the RBI, which the petitioner had not demonstrated.4. Pending Proceedings and Orders of the NCLT and NCLAT:The court noted that two shareholders had already raised similar issues before the NCLT, resulting in the appointment of an Administrator to manage respondent No. 2's affairs. The NCLT's order included detailed directions for the Administrator to prepare inventories, manage the company's functions, and conduct a transaction audit. This order was modified by the NCLAT to appoint the Administrator as an Observer, restricting major policy decisions and asset alienation until further hearings.5. Reliefs Sought by the Petitioner:The petitioner sought writs of mandamus for the RBI to:- Enquire into respondent No. 2's affairs and inspect its records.- Conduct a special audit of financial transactions from October 2021 onwards.- Remove the current Board of Directors.- Take measures to prevent detrimental conduct.- Prohibit respondent No. 2 from accepting deposits and encumbering assets.Analysis and Decision:The court acknowledged the serious allegations against respondent No. 2's management and the prima facie evidence suggesting non-compliance with RBI directives. However, it emphasized the need for a deeper examination of the issues, which could only be addressed after considering the RBI's updated status report on the proceedings and actions taken. The court directed the RBI to file this report within two weeks and scheduled the next hearing for 13.08.2024, making it clear that the current proceedings should not influence the merits of the matters pending before the NCLT and NCLAT.