2025 (8) TMI 815 - HC - Companies Law

HC upholds SFIO probe under Section 212 into promoters' asset siphoning amid urgent investigation order

The Administrator, (as appointed by this Hon’ble Court) M/s. Zylog Systems Limited, M/s. Zylog Systems Limited Versus R. Ramachandran, Vilasrao Manikra Ghorpade, The Official Liquidator, IFIN Securities Finance Limited (Formerly Incorporated as Narayanan Sriram Investments Pvt. Ltd)

The Administrator, (as appointed by this Hon’ble Court) M/s. Zylog Systems Limited, M/s. Zylog Systems Limited Versus R. Ramachandran, Vilasrao Manikra ... 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Company Court has the jurisdiction and authority under the Companies Act, 2013 to direct the Serious Fraud Investigation Office (SFIO) to investigate the affairs of a company. 2. Whether the reference to the SFIO by the Company Court without a prior order or direction from the Central Government is legally valid. 3. The scope and necessity of investigation into alleged misfeasance, malfeasance, and diversion of funds by the company and its subsidiaries. 4. The legal effect and binding nature of a Company Court order directing investigation under Section 210(2) of the Companies Act, 2013 on the Central Government. 5. The permissibility and implications of appointment of a forensic auditor by the parties, and the relationship of such appointment to the SFIO investigation. 6. The impact of a status quo order on the commencement and continuation of investigation by the SFIO. 7. Whether allegations made by minority shareholders with negligible shareholding should be entertained in the context of investigation and administration of the company. 8. The procedural propriety and legal consequences of the Central Government ordering an investigation under Section 212(1)(c) of the Companies Act, 2013 in public interest. 9. Whether the investigation by SFIO overlaps or conflicts with prior closure of complaints by the Official Liquidator and Regional Director. 10. The consequences of non-payment of forensic audit costs by the party requesting such audit and its impact on investigation process. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Jurisdiction and Authority of Company Court to Direct SFIO Investigation - Relevant Legal Framework: Sections 210 to 213 of the Companies Act, 2013 govern investigation into affairs of companies, including the role of the Central Government and SFIO. Section 210(2) mandates the Central Government to order investigation where a Court or Tribunal has ordered so. Section 212 allows the Central Government to assign investigation to SFIO on various grounds. - Court's Interpretation and Reasoning: The Court held that the Company Court, defined under Section 2(29) as the High Court with jurisdiction over the company's registered office, has the power to direct investigation under Section 210(2). Such direction binds the Central Government, which must order investigation accordingly. The Court rejected the contention that only the Central Government can initiate SFIO investigation, emphasizing that the Company Court's order is binding and a valid basis for investigation. - Precedents and Authority: The Court referred to decisions of the National Company Law Appellate Tribunal (NCLAT) and various High Courts, which consistently held that the Central Government's satisfaction is primary but must follow a Court order under Section 210(2). The Court also noted that NCLAT's power is limited to referring matters to the Central Government, which then decides on investigation. - Conclusion: The Company Court's order directing SFIO investigation is legally valid and binding on the Central Government, thereby confirming the jurisdiction and authority of the Company Court to make such reference. Issue 3 & 9: Necessity and Scope of Investigation into Alleged Misfeasance and Malfeasance - Key Evidence and Findings: The Court extensively reviewed the Administrator's reports and findings, which detailed allegations of diversion of funds, fraudulent financial transactions, mismanagement of subsidiaries, and criminal investigations by SEBI, CBI, Enforcement Directorate, and other agencies. The Administrator's interim and final reports revealed high-value fund transfers with unclear utilization, involvement of promoters and employees in siphoning funds, and litigation in USA courts. - Court's Reasoning: Given the complexity, cross-border nature, and serious allegations involving multiple agencies, the Court found that a normal independent or forensic audit would be insufficient. The SFIO, with its expertise in law, accountancy, forensic investigation, IT, and taxation, was deemed the appropriate agency to conduct a detailed and in-depth investigation. - Treatment of Competing Arguments: The appellant argued that prior complaints had been closed by the Official Liquidator and Regional Director, and that forensic audit attempts failed due to non-payment. The Court held that such prior closure does not preclude a more comprehensive SFIO investigation. The failure of forensic audit was noted but not considered a bar to SFIO's probe. - Conclusion: A detailed SFIO investigation is necessary and appropriate to uncover the truth regarding alleged frauds, misfeasance, and malfeasance affecting the company and its subsidiaries. Issue 4: Binding Effect of Company Court's Direction on Central Government - Legal Framework: Section 210(2) uses the word 'shall' indicating a mandatory obligation on the Central Government to order investigation upon Court or Tribunal direction. - Court's Interpretation: The Court emphasized that the Central Government is legally bound to order investigation once the Company Court has passed an order to that effect. This statutory mandate removes discretion from the Central Government in such cases. - Conclusion: The Central Government's subsequent order initiating investigation under Section 212(1)(c) following the Company Court's direction is in accordance with statutory mandate and valid. Issue 5 & 10: Appointment of Forensic Auditor and Its Relationship to SFIO Investigation - Facts: The parties had agreed to appoint a forensic auditor at the cost of the party requesting such audit. The forensic audit did not proceed due to non-payment by the requesting party. - Court's Reasoning: The Court noted that the forensic audit was a separate and less comprehensive process compared to the SFIO investigation. The failure to remit costs and consequent non-commencement of forensic audit did not affect the SFIO's mandate or investigation. - Conclusion: The forensic audit appointment and its failure do not impede or substitute the SFIO's statutory investigation, which is broader and mandated by law. Issue 6: Impact of Status Quo Order on SFIO Investigation - Facts: A status quo order had been passed by the Court prior to the Central Government's order directing SFIO investigation. The appellant contended that SFIO's commencement of investigation violated the status quo. - Court's Reasoning: The Court acknowledged that commencement of investigation in the face of a status quo order was inappropriate. However, given the serious allegations and the binding nature of the Company Court's direction, coupled with the Central Government's independent examination and order, the Court preferred to decide the matter on merits rather than procedural violation. The Official Liquidator was directed to explain the breach, with contempt proceedings contemplated. - Conclusion: The status quo order does not invalidate the investigation but procedural compliance must be ensured going forward. Issue 7: Relevance of Minority Shareholders' Allegations - Facts: The appellant argued that allegations were made by shareholders holding negligible shareholding and should not be encouraged. - Court's Reasoning: The Court did not give weight to the quantum of shareholding in deciding the necessity of investigation. The allegations were supported by Administrator's reports and independent findings, thus warranting investigation regardless of the complainants' shareholding percentage. - Conclusion: The merit of allegations and evidence is paramount over the shareholding quantum in determining investigation necessity. Issue 8: Procedural Legitimacy of Central Government's Investigation Order under Section 212(1)(c) - Legal Framework: Section 212(1)(c) empowers the Central Government to order investigation by SFIO in public interest. - Court's Findings: The Central Government's order dated 18.06.2025 was issued after examination of the Company Court's order and related reports, expressing opinion that investigation was necessary in public interest. The order specified the scope, powers, and timeline of investigation, consistent with statutory provisions. - Conclusion: The Central Government's order directing SFIO investigation is procedurally valid and in accordance with the Companies Act, 2013. Issue 9 (Revisited): Overlap with Prior Closure of Complaints - Facts: Prior complaints filed by shareholders' forum had been closed by Official Liquidator and Regional Director. - Court's Reasoning: The Court held that such closure does not preclude a more detailed and statutory investigation by SFIO. The SFIO's investigation is broader and empowered to access records and conduct inquiries beyond the scope of prior complaints. - Conclusion: Prior closure of complaints does not bar SFIO investigation. Issue 10 (Revisited): Non-payment of Forensic Audit Costs - Court's Reasoning: The inability of the party requesting forensic audit to pay costs led to failure of forensic audit process but does not affect the statutory investigation by SFIO. - Conclusion: Non-payment of forensic audit costs is irrelevant to the SFIO investigation mandate. Additional Observations and Conclusions - The Administrator's detailed reports, including forensic audit findings, revealed systemic siphoning of funds, fraudulent transactions involving promoters and employees, and mismanagement of subsidiaries including cross-border entities. - The Court emphasized the importance of SFIO's multi-disciplinary expertise to uncover complex frauds affecting the root of the economy. - The Court directed the SFIO to complete preliminary investigation within two months and submit report to Company Court for further proceedings. - The Court dismissed the appeals and closed connected petitions, with no costs.