2025 (9) TMI 137 - HC - Companies Law

Quashed SFIO probe order under Section 212(1)(c) for lack of necessity, boilerplate reasoning and omitted Section 206(5) inspection

Nita Puri Versus Union Of India

Nita Puri Versus Union Of India - 2025:DHC:7433 ISSUES PRESENTED AND CONSIDERED 1. Whether an order directing SFIO investigation under Section 212(1)(c) of the Companies Act, 2013 is legally sustainable where the impugned order does not articulate demonstrable circumstances justifying (a) necessity of investigation and (b) assignment of investigation to SFIO. 2. Whether the Central Government's formation of 'opinion' under Section 212(1)(c) is amenable to judicial review on the ground that the existence of circumstances relied upon is non-demonstrable, vitiated by mis-statement, or based on non-existent materials. 3. Whether the statutory pre-course under Chapter XIV (notably inquiry/inspection under Sections 206(4)/206(5)/208/210) was required and, if ordered, whether its non-execution affects the validity of the subsequent Section 212(1)(c) order. 4. Whether reliance upon forensic/special purpose audit reports to record PUFE (Preferential, Undervalued, Fraudulent, Extortionate) transactions is sustainable where those reports do not, on their face, find PUFE transactions. 5. Whether the Central Government was obliged to consider binding judicial pronouncements dealing with the same forensic reports and factual matrix before issuing a Section 212(1)(c) order. 6. Whether additional reasons/grounds sought to be relied upon in counter-affidavit can validate an impugned public order that is deficient on its face. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal requirements for an order under Section 212(1)(c) and assignment to SFIO Legal framework: Chapter XIV (Sections 206-212) establishes a statutory scheme for inspection, inquiry and investigation; Section 210 empowers investigation by appointment of inspectors; Section 212 permits investigation by SFIO where the Central Government is of the opinion that such investigation is necessary, including in public interest or on specified reports/requests. Precedent treatment: The Court follows and applies the analytical principles in precedents that require the existence of demonstrable circumstances as a condition precedent to forming the opinion to order an investigation (consistent with earlier leading authorities and a binding High Court interpretation affirmed on merits by the Supreme Court in the cited line of authority). Interpretation and reasoning: The power under Section 212(1)(c) is discretionary but not unfettered; the Central Government must (i) form an opinion that investigation is necessary and (ii) justify why such investigation should be entrusted to SFIO. The opinion may be subjective but must be founded upon demonstrable circumstances (not mere assertion). The impugned order failed to articulate the necessity of SFIO involvement or the specific circumstances warranting investigation by SFIO, thereby contravening the statutory scheme and precedent. Ratio vs. Obiter: Ratio - necessity for demonstrable circumstances and explicit articulation of necessity for SFIO assignment as preconditions for valid exercise of Section 212(1)(c). Obiter - observations on the specialised nature of SFIO and the gravity of such orders reinforce the ratio. Conclusion: Order under Section 212(1)(c) that does not disclose demonstrable circumstances or reasoning for SFIO assignment is legally unsustainable. Issue 2 - Judicial review of the 'formation of opinion' when based on non-existent or mis-stated facts Legal framework: While the formation of subjective opinion is entrusted to the executive, precedents require that the existence of the underlying circumstances be objectively demonstrable and open to judicial scrutiny where challenged. Precedent treatment: Earlier Supreme Court authorities and subsequent High Court decisions establish that courts may examine whether circumstances relied upon actually existed and whether the authority applied its mind to relevant materials (formation of opinion not insulated from review where foundation is absent or perverse). Interpretation and reasoning: The impugned order recorded that PUFE transactions were noticed in the forensic reports, but the forensic reports on their face negated PUFE findings. Where the foundation for the opinion is either factually incorrect or based on non-existent grounds, the subjective opinion lacks the sine qua non and is vitiated by non-application of mind; judicial review is warranted to test demonstrability of grounds. Ratio vs. Obiter: Ratio - existence of circumstances foundational to executive opinion must be demonstrable; mis-statement of report findings that are the basis for an opinion invalidates the order. Obiter - emphasis on expert standard expected of the administrative department. Conclusion: Formation of opinion based on mis-statements or non-existent circumstances is reviewable and invalidates the Section 212(1)(c) order. Issue 3 - Requirement and non-execution of inquiry/inspection under Sections 206(4)/206(5)/208/210 Legal framework: Chapter XIV envisages a graduated process - inquiry/inspection by Registrar/inspectors leading to report under Section 208, which may recommend further investigation; such reports are material for exercise of Section 210/212 powers. Precedent treatment: Authorities treat the Registrar/department as an expert body whose reports and statutory steps bear on exercise of higher investigatory powers; failure to undertake recommended inspection/inspection outcome affects the lawfulness of subsequent orders. Interpretation and reasoning: A statutory inquiry under Section 206(4) had been ordered and that inquiry recommended inspection under Section 206(5). The impugned order and counter-affidavit are silent as to whether the inspection was ever conducted or its outcome; omission to follow the statutory course recommended by an earlier inquiry without explanation exacerbates the lack of demonstrable material and indicates non-application of mind. Ratio vs. Obiter: Ratio - where statutory pre-courses are ordered/recommended, their non-execution without explanation undermines the validity of later exercise of Section 212(1)(c) power. Obiter - none beyond necessity of adherence to statutory scheme. Conclusion: Failure to conduct the recommended inspection materially undermines the basis for the impugned SFIO order. Issue 4 - Reliance on forensic/special audit reports when those reports do not find PUFE transactions Legal framework: Executive action premised on third-party reports must reflect accurate assimilation of those reports; conclusions drawn must be consistent with the source documents relied upon. Precedent treatment: Precedents permit judicial inquiry into whether recitals of facts in an executive order correspond to the underlying material and whether relevant materials were misread or misinterpreted. Interpretation and reasoning: The impugned order attributed PUFE findings to two forensic reports; detailed analysis of those reports demonstrates express negation of PUFE transactions (Sikdar Report and GSA Report excerpted and disclaiming PUFE findings and/or limited scope). The impugned order, in effect, mis-records or overstates those reports' conclusions; paragraphs of the order were lifted from the reports but the reports do not reach the adverse legal characterisation attributed. Such mis-attribution fatally undermines the opinion claimed to be formed. Ratio vs. Obiter: Ratio - executive reliance on forensic reports must accurately reflect report conclusions; mis-attribution of adverse findings is fatal to an order under Section 212(1)(c). Obiter - caution on test-check/limited scope disclaimers in audit reports and their limited probative value. Conclusion: The impugned attribution of PUFE findings to the audit reports is factually incorrect and invalidates the order based on such attribution. Issue 5 - Obligation to consider binding judicial pronouncements addressing the same forensic reports and facts Legal framework: Administrative decisions must take into account relevant and binding judicial pronouncements; failure to consider such material is failure to take into account relevant circumstances in forming statutory opinion. Precedent treatment: Courts have held that judicial treatment of the same material is a relevant circumstance that must be considered before taking adverse executive action. Interpretation and reasoning: There existed prior court judgments which examined the very forensic reports and concluded that they did not support findings of diversion/siphoning or wilful default; the impugned order neither references nor explains disregard of those binding findings. Wholesale non-consideration of such pronouncements is a failure to take into account relevant circumstances and demonstrates inadequate application of mind. Ratio vs. Obiter: Ratio - failure to consider binding judicial findings addressing the same material is a valid ground for quashing an administrative order. Obiter - practicable possibility of same opinion being formed after considering judgments does not excuse non-consideration; the order must disclose contemplation of those judgments. Conclusion: Non-consideration of binding judicial pronouncements dealing with the same reports/facts renders the Section 212(1)(c) order unsustainable. Issue 6 - Propriety of supplementing reasons for an administrative order by affidavit Legal framework: Foundational principle that validity of a public/statutory order is to be judged by reasons stated therein; subsequent justifications in affidavits cannot cure an order bad in inception. Precedent treatment: Binding authorities preclude supplementation of reasons by after-the-fact affidavits or counter-affidavits to validate an order which lacks requisite reasons. Interpretation and reasoning: The respondent sought to rely on additional grounds in a counter-affidavit to justify the impugned order. The Court applies precedent to hold such after-the-fact material cannot be used to cure the defect where the impugned order itself fails to disclose requisite reasons or demonstrable circumstances; reliance on such extraneous supplementation underscores the deficiency rather than remedies it. Ratio vs. Obiter: Ratio - an administrative order deficient on its face cannot be retrospectively validated by additional reasons in affidavits. Obiter - emphasis that genuine reasons must appear in the public order itself for affected persons to know the case against them. Conclusion: Additional reasons in counter-affidavit cannot sustain the impugned Section 212(1)(c) order; such supplementation is impermissible to cure legal defects. OVERALL CONCLUSION The impugned order directing investigation by SFIO under Section 212(1)(c) was quashed because (i) it failed to articulate demonstrable circumstances and specific necessity for SFIO assignment as required by the statutory scheme and binding authority; (ii) it was founded upon mis-statements/mis-attribution of forensic reports that on their face negated PUFE findings; (iii) it omitted to follow or to record the outcome of statutory inquiry/inspection channels and ignored binding judicial pronouncements that materially addressed the same reports; and (iv) the attempt to cure the order by relying on additional reasons in affidavit was impermissible. The Court held the order to be vitiated by non-application of mind and procedural/legal lacunae and consequently quashed it (ratio of decision applicable to similar administrative exercises under Chapter XIV).