2025 (9) TMI 1283 - AT - Companies Law

s.242(4) permits interim orders regulating company affairs but cannot override s.242(1)(a)-(b); forensic audit scope limited

Arya Iron and Steel Co Pvt Ltd Versus Ravikumar Arya and Pawan Kumar Arya Versus Arya Iron & Steel Co Pvt Ltd

NCLAT held that the Ld. NCLT has power under s.242(4) to pass interim orders regulating a company's affairs, but such directions must be supported by ... Oppression and mismanagement - Winding up of company - no lack of probity - no siphoning of funds - no denial of information - no prayer in the Company Petition is made for appointment of forensic auditor - HELD THAT:- The Ld. NCLT under Section 242(4) has power to pass interim orders as it thinks fit for regulating the conduct of the company’s affairs upon such terms and conditions which are just and equitable, but admittedly such an order is in the nature of an interim order, passed during the pendency of the Company Petition so as to enable the Ld. NCLT to pass a final order. The Ld. NCLT has tried to carve out an exception to the normal rule as is given in sub-clauses (a) and (b) of Clause (1) of Section 242, hence it was incumbent upon the Ld. NCLT to note the cogent circumstances exist to pass such directions to do substantial justice. In the cases cited above on behalf of the Respondents, admittedly the directions were given either in cases of buy back of shares to give an exit to member(s) and/or in a complete dead lock in the company. The Ld. NCLT rightly did not direct examination of the documents of the year 2015, being beyond limitation yet had directed appointment of forensic auditor to examine the allegations of misappropriation to look into such expenses for the last six years, without their being such cogent evidence filed by the Respondents after 2015. Admittedly even today Respondent No.2 is on the Board of Directors and yet submits he has no access to any of the financial statements, which submission appears to be frivolous. Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether the Tribunal erred in directing remote ERP access to a shareholder group that operates a rival business and has employees allegedly poached from the company. 2. Whether the Tribunal was justified in treating or characterising the company as a quasi-partnership for purposes of relief when the Articles and a shareholder agreement govern the relationship. 3. Whether the Tribunal could order a forensic audit (directions in para 42) when the company petition for oppression and mismanagement was dismissed and there was no cogent, recent evidence of misappropriation. 4. Whether the Tribunal may, while dismissing a petition under Section 242, exercise its powers to grant substantive or investigatory reliefs purportedly to do 'complete/substantial justice,' and the limits on using Section 242(4) interim powers for such directions. 5. Whether the statutory right of a director to inspect books (including via ERP) can be curtailed by concerns of confidentiality or past alleged theft absent tangible evidence of misuse. ISSUE-WISE DETAILED ANALYSIS Issue 1 - ERP access to a rival shareholder group Legal framework: Section 128(3) (inspection of books by directors during business hours) establishes a director's right to inspect books of account; Tribunal's powers under Section 242(4) permit interim orders to regulate conduct of company affairs. Precedent treatment: Prior authorities permit equitable directions in appropriate cases to regulate conduct, but such powers are to be exercised within cogent circumstances and consistent with statutory rights. Interpretation and reasoning: The Tribunal found that a director's entitlement to access company books cannot be denied merely because the director belongs to a rival group or because of general confidentiality concerns; denial requires tangible evidence of misuse. The Court emphasised that confidentiality concerns should be addressed by a policy applicable to all directors rather than singling out a director-group. The Tribunal's option to either allow remote ERP access to the rival group where other directors enjoy such access, or to stop remote access for all directors, was characterised as equitable and consistent with equal treatment. Ratio vs. Obiter: Ratio - directors entitled to access company books during business hours and remote access cannot be denied without tangible evidence of misuse; confidentiality to be regulated by policy applicable equally. Conclusion: The direction in para 41 (granting ERP access or equal denial) is upheld as an innocuous, equitable implementation of statutory inspection rights. Issue 2 - Quasi-partnership characterisation Legal framework: Articles of Association and any incorporated shareholders' agreement carry statutory effect; classification as quasi-partnership informs availability of equitable reliefs such as buy-outs or exit directions. Precedent treatment: Authorities allow exceptional relief (e.g., buy-outs, exit) where a company effectively functions as quasi-partnership or there is deadlock; such precedents were relied upon by respondents but are fact-sensitive. Interpretation and reasoning: The Tribunal observed that the Articles and shareholder agreement capture the governance structure and that no verbal understanding survives; therefore, the company cannot be treated as a quasi-partnership absent evidence to that effect. The Court noted that the precedents relied on involved buy-outs or absolute deadlocks, circumstances not present here. Ratio vs. Obiter: Ratio - where the Articles/shareholders' agreement govern and no deadlock or quasi-partnership facts exist, extraordinary equitable reliefs tied to quasi-partnership status are inapplicable. Conclusion: The Tribunal correctly declined to treat the company as a quasi-partnership for justifying additional reliefs; precedents relied on were distinguished on facts. Issue 3 - Forensic audit ordered despite dismissal and paucity of cogent evidence Legal framework: Section 242(1) and (4) permit the Tribunal to make orders to bring to an end matters complained of and to make interim orders regulating company affairs; winding up on just and equitable grounds and orders in lieu of winding up are available where circumstances justify. Precedent treatment: Authorities permitting reliefs despite no formal finding of oppression were cited, but those involved buy-outs or deadlocks or other exceptional facts; general principle requires cogent evidence of oppression, misappropriation or lack of probity to justify intrusive investigatory orders. Interpretation and reasoning: The Court examined the record and found the company petition dismissed on merits with findings of no lack of probity, no syphoning of funds and no denial of information. The alleged invoices relied upon dated back to 2015 and were produced only in 2022; there was absence of cogent, recent evidence (post-2015) establishing misappropriation. The Tribunal's earlier order had refused forensic audit; that order had been set aside on appeal but the present impugned order again directed a forensic audit without sufficient fresh material. The Court held that such an order, particularly an intrusive forensic examination covering six years, could only be justified on cogent evidence or circumstances akin to those warranting winding up or investigatory directions; none existed. The Court also observed that if there were credible indications of fraud after ERP access is given, respondents remain free to pursue investigations then, but a blanket forensic audit in the present factual matrix is unjustified. Ratio vs. Obiter: Ratio - ordering a forensic audit as a parting direction while dismissing an oppression/mismanagement petition requires cogent and proximate evidence of misappropriation or circumstances justifying departure from the normal rule; absent such evidence, the investigatory direction is unsustainable. Obiter - general commentary that respondents may pursue fraud claims if new credible evidence emerges after obtaining ERP access. Conclusion: The forensic audit direction in para 42 is set aside for lack of cogent evidence and absence of circumstances warranting such intrusive relief while dismissing the petition. Issue 4 - Scope and limits of Section 242(4) interim powers when petition is dismissed Legal framework: Section 242(4) empowers the Tribunal to make interim orders to regulate company affairs 'which it thinks fit' to bring an end to matters complained of; powers are to be exercised as just and equitable. Precedent treatment: Authorities permit the Tribunal to grant reliefs to do substantial justice even while dismissing petitions, but typically in narrowly defined circumstances (buy-outs, deadlock, exit arrangements) where equitable intervention is necessary to end the dispute. Interpretation and reasoning: The Court emphasised that Section 242(4) is essentially interim and must be used consistent with the statutory scheme and factual prerequisites. The Court found no justifying circumstances (no deadlock, no quasi-partnership, no cogent evidence of misappropriation) to warrant use of Section 242(4) to impose investigatory directions after dismissal. The Court further observed that certain investigatory directions may be appropriate if they are truly necessary to bring the matter to an end, but such necessity was absent here. Ratio vs. Obiter: Ratio - while Section 242(4) permits interim/regulatory directions, such powers cannot be exercised to order intrusive investigations absent factual justification; using them to grant substantive reliefs upon dismissal is constrained by the specific facts and statutory thresholds. Conclusion: The Tribunal exceeded permissible limits in issuing the forensic audit direction under the guise of Section 242(4) without requisite factual foundation; the ERP access direction was within permissible regulatory relief. Cross-references and final disposition The Tribunal upheld the ERP access direction (para 41) as consistent with statutory inspection rights and equitable regulation, but set aside the forensic audit direction (para 42) for lack of cogent evidence, absence of deadlock or quasi-partnership facts, and improper exercise of Section 242 powers. The Court noted respondents remain free to act on any credible post-access evidence of fraud or misappropriation.