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

HC quashed the government order directing SFIO to investigate the company and its affiliates under Section 212(1)(c) of the Companies Act, 2013, and ... Wilful defaulter or not - Challenge to order directing the Serious Fraud Investigation Office (SFIO) to conduct an investigation into the affairs of MBIL, and its subsidiaries including joint venture and associate companies as on date - contravention of the dicta laid down in the judgment of the Bombay High Court in Parmeshwar Das Aggarwal & Ors. vs. Additional Director (Investigation) Serious Fraud Investigation Office & Ors. - Non Conduct of Inquiry Under Section 206(4) of the Companies Act, 2013 - Apparent false / mis-statement on the face of the impugned order - non- existence of any “demonstrable circumstances” on the basis of which any “opinion” could be formed for the purpose of Section 212(1)(c) of the Act, 2013. Contravention of the dicta laid down in the judgment of the Bombay High Court in Parmeshwar Das Aggarwal & Ors. vs. Additional Director (Investigation) Serious Fraud Investigation Office & Ors. - HELD THAT:- In the aforesaid case, the Bombay High Court had occasion to examine the statutory scheme of Chapter XIV of the Companies Act, 2013. After taking note of the corresponding provisions in Section 234 and 237 of the Companies Act, 1956 (hereinafter “Act, 1956”) and considering the judgment of the Supreme Court in Barium Chemicals Ltd. & Anr. vs. Company Law Board & Ors. [1966 (5) TMI 36 - SUPREME COURT] and Rohtas Industries vs. S.D. Aggarwal & Ors. [1968 (12) TMI 50 - SUPREME COURT] it was held 'Once we reach the conclusion that there is lack of requisite material to arrive at the requisite opinion or record the necessary satisfaction, then, in exercise of our powers of judicial review, we can safely quash and set aside the impugned order. We find that the opinion recorded or the satisfaction reached is vitiated by total non application of mind. None of the factors which are germane and relevant for forming the opinion have been referred. The opinion or satisfaction is based only on the complaint of the Member of Parliament to the CVC and with regard to which report was called for from the Registrar.' In the present case, the impugned order (apart from other infirmities referred to herein below), fails to articulate the “necessity of investigation by SFIO”, thereby contravening the mandatory requirement articulated in Para 47 of the aforesaid judgment of the Bombay High Court - The impugned order, inasmuch as it does not satisfy the ingredients enunciated by the Bombay High Court for the purpose of an order under Section 212(1)(c) of the Act, 2013, suffers from an apparent and incurable legal lacuna. Non Conduct of Inquiry Under Section 206(4) of the Companies Act, 2013 - HELD THAT:- It is incomprehensible as to why the Central Government was remiss in conducting an independent inspection despite the same having been ordered pursuant to an inquiry under Section 206(4) of the Companies Act, 2013, as far back as in 2018 - It is notable that that in Parmeshwar Das Agarwal [2016 (11) TMI 29 - BOMBAY HIGH COURT], the Bombay High Court found that where a report under Section 208 does not find any occasion to conduct a further investigation, the same has a bearing on the exercise of power under Section 212(1)(c) of the Act, 2013. In the present case, the situation is much worse. Despite a recommendation that an inspection of the books of accounts and papers of the concerned company be undertaken under Section 206(5) of the Companies Act, 2013, the same was apparently not done. Apparent false / mis-statement on the face of the impugned order - non- existence of any “demonstrable circumstances” on the basis of which any “opinion” could be formed for the purpose of Section 212(1)(c) of the Act, 2013 - HELD THAT:- The law is well-settled that although the formation of opinion by the Central Government is subjective, but the existence of circumstance/s forming the basis of such opinion must be 'demonstrable'. The legal position in this regard has been expounded by the Supreme Court in the landmark cases of Barium Chemicals Limited vs. Company Law Board. The same has also been reiterated by the Division Bench of Bombay High Court in Parmeshwar Das Agarwal. As held therein, the legal position expounded by the Supreme Court [in Barium Chemicals, Rohtas Industries and Rampur Distillery] for the purpose of judicial review of the “opinion” under Section 237 and 326 of the 1956 Act, is also applicable, and relevant for the purpose of testing the “formation of opinion” under Section 212 of the Act, 2013. It necessarily follows that all the relevant circumstance/s must be taken into account, and the existence of the same must be “demonstrable”, for the purpose of forming an opinion under Section 212(1)(c) of the Act, 2013. The impugned order in the present case, falls short of these requirements on account of the false attribution/mis-statement in paragraph 2 thereof. The same demonstrates that in material respect/s, the impugned order/formation of opinion for the purpose of Section 212(1)(c), is based on “non-existent” circumstances. There is no reason why the Central Government ought not to have conducted an inspection of its own, especially since an inquiry under Section 206(4), as far back as in 2018, culminated in a recommendation that “an inspection of the books of accounts and papers of the concerned companies be undertaken under Section 206(5) of the Act, 2013. As noticed, this has been specifically adverted to in paragraph 5 of the counter-affidavit filed by the respondent. No explanation has been offered for the (presumable) omission to conduct such an inspection - Secondly, the treatment accorded to the concerned Audit Reports in successive judicial pronouncements [the BOB judgment] has evidently not been considered at all while passing the impugned order. The same amounts to a failure to take into account 'relevant circumstance/s' for the purpose of forming an opinion under Section 212(1)(c) of the Companies Act, 2013. An order under Section 212(1)(c) of the Act, 2013 directing investigation by the SFIO is not a routine administrative measure. It is in the nature of an extremely serious statutory action having grave consequences and repercussions for the subject entities and individuals. It is therefore, imperative that such an order must be issued only after due application of mind, after examining all relevant circumstances - The use of boilerplate language and/or extrapolations from third party documents, without consideration of all the “relevant circumstances”, reflects a disregard for procedural propriety. It can hardly be emphasized enough that the power under Section 212(1)(c) must be exercised with circumspection and deliberation. In the present case, the impugned order under Section 212(1)(c) appears to have been issued in a rather casual manner, unmindful of the statutory pre-requisites therefor. The impugned order dated 05.09.2024 (and all consequential proceedings pursuant thereto), is hereby quashed - Petition allowed. 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).