2025 (11) TMI 1566 - AT - Companies Law

Investigation Under Section 213 Upheld Where Prima Facie Material Shows Possible Fraud and Mismanagement, Appeal Dismissed

Exclusive Capital Limited, Mr. Satya Prakash Bagla and Mr. Achal Kumar Jindal Versus Mrs. Kanta Agarwala and Mr. Suresh Agarwala, Kolkata

The NCLAT (PB) upheld the HC-appointed Observer's reports and the NCLT's order directing investigation into the affairs of the appellant company under ... Seeking investigation qua the affairs of the Appellant, requesting to pass an order directing investigation into the affairs of the company by the Serious Fraud Investigation Office - Section 241-242 read with Section 244 of the Companies Act, 2013 - HELD THAT:- In Capt. Valdamantti Jayapushpkumar [2022 (4) TMI 81 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, CHENNAI] a coordinate Bench of this Tribunal in paragraph no. 46, 47, 48, 49 and 50 held that an investigation into the companies’ affairs cannot be initiated simply on the basis of allegations made by a shareholder and merely because a shareholder feels aggrieved about the manner in which the business of the company is being carried on. It was emphasized that an investigation into the affairs of a company could only be ordered when public interest is involved or the management of the company is conducted to the detriment to the member’s interest. It is also highlighted that the tribunal on the basis of material placed before it must be satisfied that a deeper probe into the companies affair is desirable - it is fully agreed with the opinion of a coordinate Bench of this Tribunal. Certainly the investigation as contemplated under Section 213 of the Companies Act cannot be directed without being satisfied of the necessity of it, having regard to the quality of material produced in support of the allegations. In Rohtas Industries, [1968 (12) TMI 50 - SUPREME COURT] relied by the appellants in context of Section 235, 236 and 237 of the Companies Act, 1956, it is opined that the similar power given to the Central Government by virtue of Section 237 of the Companies Act, 1956 could only be exercised when the Central Government has formed an opinion that there are circumstances suggesting that the business of the company is being conducted with the intent to defraud its creditors, members or any other persons or for a fraudulent or unlawful purpose or in a manner oppressive to any member or for any other unlawful purpose. Thus, at the stage of making a subjective opinion with regard to taking a decision of investigation under section 213 of the Companies Act, the tribunal is required to take into consideration the material/evidence placed before it in right perspective and to apply its mind in order to satisfy itself that there are not only 'good reasons' but also to record its subjective satisfaction with regard to the necessity of desired investigation. Three reports dated 1st July 2024, 2nd December 2024, and 18th March 2025 have been submitted by Ld. Observer wherein various allegations of the nature that the Board of Appellant No. 1 are engaged in fraudulent transactions, detrimental to the interests of its members and creditors have been levelled. In paragraph No. 29 of the impugned judgment Observer Report No.1 has been noticed wherein certain Data Gaps were highlighted by the Observer in the information provided by the Appellants - No doubt reply with regard to these reports have been filed by the appellants but we prima facie do not find any element of bias in these reports submitted by Ld. Observer, who is a former judge of the High Court. There are also allegations of siphoning of funds from the Company. It is to be recalled that to order an investigation under 213 of the Companies Act conclusive proof with regard to the allegations is not required. It would be sufficient if the Tribunal, on the basis of taking into consideration the material/evidence produced on record, may form an opinion subjectively to satisfy itself that there are good grounds and reasons and prima facie case to order such investigation and such satisfaction must also be reflected in the order. Thus, in the impugned order sufficient satisfaction and reasons are shown by the tribunal with regard to the material/evidence considered by it and the same was sufficient to order the investigation as contemplated under section 213 of the Companies Act. After all the allegations are yet to be investigated by the Inspector(s) and the truthfulness of the same could only be verified/surfaced during the investigation. It is clarified that it is consciously not discussed the material/evidence relied on by the Tribunal with regard to its evidentiary value, as our satisfaction or dissatisfaction with regard to the same may tilt the investigation either way, but it is a fit case where the investigation, into the affairs of Appellant no.1, should have been directed. Thus, there are no good grounds to interfere in the impugned Judgment. Appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the statutory threshold and substantive preconditions for directing an investigation into the affairs of a company under Section 213 of the Companies Act, 2013 were satisfied on the material before the Tribunal. 1.2 Whether the National Company Law Tribunal had jurisdiction to entertain and allow the application under Section 213 after passing its order dated 15.05.2024 in the company petition, or had become functus officio. 1.3 Whether the National Company Law Tribunal could properly rely on the reports of the Observer (earlier Administrator) in forming its satisfaction under Section 213, notwithstanding that those reports and objections thereto were pending consideration before the Appellate Tribunal. 1.4 Whether the existence of inspection/enquiry proceedings and regulatory jurisdiction of the Reserve Bank of India under Chapter III-B of the Reserve Bank of India Act, 1934 barred or displaced the jurisdiction of the National Company Law Tribunal to order an investigation under Section 213 of the Companies Act. 1.5 Whether the impugned order directing investigation under Section 213 was vitiated by non-application of mind, absence of reasons or misreading of the orders of the Supreme Court and other courts/tribunals. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Threshold and preconditions for investigation under Section 213 Legal framework as discussed 2.1 The judgment examines Section 213(a) and (b) and relies on the interpretation in 'R.S. India Wind Energy Pvt. Ltd.', and on principles drawn from 'Barium Chemicals Ltd.', 'Devas Multimedia Pvt. Ltd.', 'Lagadapati Ramesh', 'Capt. Valadamanatti Jaya Pushpakumar', 'Rohtas Industries', 'Jaswant Sugar Mills' and 'Rajeev Suri'. 2.2 It reiterates that: (i) an application may be made by members meeting the thresholds in Section 213(a) or by 'any other person'/otherwise under Section 213(b); (ii) in all cases, the Tribunal must be 'satisfied that there are circumstances suggesting' the ingredients in Section 213(b)(i)-(iii); (iii) the applicant must place material showing 'good reasons' for investigation; and (iv) the Tribunal need not return conclusive findings, but must record its subjective satisfaction based on material/evidence that there are good grounds to order investigation, the detailed fact-finding being for the Inspectors. Interpretation and reasoning 2.3 The Court records that the respondents hold 10% of the total shareholding of the company, which satisfies the numerical threshold prescribed under Section 213(a). This fact was not disputed. 2.4 Applying 'R.S. India Wind Energy Pvt. Ltd.', the Court holds that the phrase 'if it is satisfied that there are circumstances suggesting' in Section 213(b) applies irrespective of whether an application is under clause (a) or clause (b); the Tribunal must form a subjective opinion that circumstances suggest the affairs of the company are being conducted in the manner described in Section 213(b)(i)-(iii). 2.5 The Court accepts and reiterates that: (i) the Tribunal must record reasons and show that it has applied its mind; (ii) the satisfaction is subjective but must be founded on material/evidence; (iii) conclusive proof is not required at the stage of ordering investigation; and (iv) the order is only a trigger for investigation under Section 213 leading, where warranted, to prosecution under Section 447 before the Special Court. 2.6 The Court endorses the approach in 'Capt. Valadamanatti Jaya Pushpakumar' that investigation under Section 213 cannot be ordered merely on bare allegations of a shareholder; there must be material justifying a deeper probe, especially where public interest or detriment to members' interests is involved, and the Tribunal must be satisfied of the necessity of investigation. Application to facts 2.7 The National Company Law Tribunal took into account: (i) the detailed allegations in the Section 241-242 petition regarding siphoning of funds, related-party transactions, misuse of company funds (including purchase of luxury cars), and other acts of corporate misgovernance; and (ii) three Observer's reports dated 01.07.2024, 02.12.2024 and 18.03.2025 highlighting serious financial irregularities, related-party loans, non-compliance with prudential norms, and persistent non-cooperation by the management. 2.8 The reports, as summarised and quoted in the impugned order, specifically refer to: (a) large unsecured concessional loans to related entities without proper documentation, board approvals, or credit assessment, with no effective recovery steps and exposure to likely loss; (b) a substantial loan to the Managing Director himself without requisite documentation, IRAC-classification compliance or provisioning; (c) a heavily indulgent vehicle finance transaction with prior lien of another bank and effectively converted into an interest-free facility; (d) high-value luxury vehicles on the books without supporting documentation on acquisition, use, or running costs, raising doubts as to whether they were actually controlled by or in use of the company; and (e) repeated non-disclosure of critical information, and apparent fabrication/questionability of board resolutions and minutes. 2.9 The Court notes that, though the appellants filed detailed objections to the Observer's reports, there was no allegation of bias against the Observer, who is a retired High Court Judge, and the findings prima facie support the allegations of siphoning, related-party abuse and potential fraud/misconduct by those in management. 2.10 The Court emphasises that at the Section 213 stage, the Tribunal was not required to reach conclusive findings about guilt or fraud; it was sufficient that, on the basis of pleadings and these reports, there were 'good reasons' and a prima facie case suggesting that: (i) business was being conducted with intent to defraud creditors/members or for a fraudulent/unlawful purpose; and/or (ii) persons involved in management had been guilty of fraud, misfeasance or other misconduct towards the company/members. Conclusions on Issue 1 2.11 The statutory shareholding threshold under Section 213(a) stood satisfied. 2.12 On the totality of material, including in particular the Observer's reports, there were 'good reasons' and sufficient circumstances suggesting possible fraud, siphoning of funds and misconduct by persons in management, as contemplated under Section 213(b)(i)-(iii). 2.13 The National Company Law Tribunal recorded adequate reasons and subjective satisfaction based on material/evidence; its order was not a bare or mechanical direction. The substantive preconditions for directing an investigation under Section 213 were met. Issue 2 - Jurisdiction of the National Company Law Tribunal and functus officio Legal framework and contextual orders 2.14 The appellants argued that, having 'disposed of' Company Petition No. 48/ND/2024 by its order dated 15.05.2024 and expressly stating that the petition 'stands disposed of', the National Company Law Tribunal became functus officio and lacked jurisdiction to entertain IA No. 130 of 2025 under Section 213 filed nearly a year later. 2.15 The respondents relied on directions (g), (h) and (i) of the order dated 15.05.2024, which contemplated: (i) appointment of an Administrator (later Observer) to manage the company's affairs, (ii) suspension of the Board for 180 days, (iii) monthly reports to the Tribunal, and (iv) the Administrator framing and placing before the Tribunal a scheme for fresh Board composition and running of the company, with liberty to seek extension. They contended the order was interlocutory and the petition was not finally concluded. 2.16 The Court also considered the Supreme Court's order dated 24.02.2025 in SLP (C) No. 4534 of 2025, which: (i) expressly recorded that proceedings concerning oppression and mismanagement before the NCLT/NCLAT were ongoing; (ii) in clause (vi) granted liberty to the writ petitioner and shareholders who had moved the NCLT to file applications before NCLT/NCLAT seeking appropriate directions; and (iii) in clause (vii) directed that 'proceedings before the NCLT/NCLAT may continue', and allowed the parties to contest/pursue those proceedings. Interpretation and reasoning 2.17 The Court agrees with the National Company Law Tribunal's reasoning that, despite the expression 'petition stands disposed of', the nature of directions in the order dated 15.05.2024 - especially monitoring of the Administrator/Observer, filing of monthly reports, evolution and approval of a future management scheme - show that the Tribunal had not given a complete quietus to the issues. The order was in substance interlocutory and supervisory, not a final determination of all reliefs. 2.18 The Court notes that the Supreme Court, while staying certain High Court directions and preserving NCLAT's order regarding the Observer, explicitly treated the NCLT proceedings as 'ongoing' and granted liberty to approach the NCLT/NCLAT for further directions. The Supreme Court did not modify or curtail that liberty, despite a specific modification application filed by the appellants. 2.19 In this backdrop, the Court holds that it was not open to the National Company Law Tribunal to treat the Supreme Court's reference to 'NCLT' in clause (vi) as if it meant 'NCLAT'; the Tribunal correctly proceeded on the basis that the Supreme Court had expressly preserved and recognised its jurisdiction to entertain applications in the pending oppression and mismanagement matter. 2.20 The Court also notes that subsequent orders of the Supreme Court dated 08.08.2025, transferring IA No. 115 of 2025 and other applications to NCLAT for consideration along with pending appeals, did not modify or nullify the earlier order dated 24.02.2025 preserving NCLT/NCLAT proceedings, and did not retrospectively invalidate the NCLT's consideration of IA No. 130 of 2025. Conclusions on Issue 2 2.21 The National Company Law Tribunal had not become functus officio by virtue of its order dated 15.05.2024; it retained jurisdiction to monitor the affairs of the company through the Administrator/Observer and to consider appropriate applications arising in that context. 2.22 In light of the Supreme Court's order dated 24.02.2025 expressly recognising ongoing NCLT proceedings and granting liberty to move applications, the NCLT had jurisdiction to entertain and decide IA No. 130 of 2025 under Section 213. Issue 3 - Reliance on the Observer's reports and their evidentiary status Legal framework and arguments 2.23 The appellants contended that the Observer's reports stood on the same footing as a commissioner's report under the Code of Civil Procedure, and could not be treated as conclusive or as the sole basis for ordering an investigation; especially because detailed objections to those reports were pending before the Appellate Tribunal. Reliance was placed on 'M.P. Rajya Tilhan Utpadak Sahakari Sangh Maryadit' and 'Kishore v. Preeti'. 2.24 The respondents argued that the Observer, a retired High Court Judge, had been appointed by the Tribunal (and his appointment/nomenclature change affirmed by higher forums) specifically to examine financial transactions and allegations of siphoning of funds. His reports, together with other material, furnished credible prima facie evidence of serious irregularities and non-cooperation, which the NCLT was entitled to consider for the limited purpose of reaching 'good reasons' and subjective satisfaction under Section 213. Interpretation and reasoning 2.25 The Court distinguishes the authorities cited by the appellants. 'M.P. Rajya Tilhan Utpadak Sahakari Sangh Maryadit' dealt with the evidentiary value of a commissioner's report under Order XXVI Rule 9 CPC in a civil suit, and 'Kishore v. Preeti' concerned judicial propriety when a subordinate court proceeds despite knowledge of a pending challenge before a higher court. The Court holds that those principles do not directly control the exercise of statutory discretion under Section 213. 2.26 The Court emphasises that at the stage of directing investigation the Tribunal is not required to rely on conclusive or formally proved evidence. It must consider all relevant material placed before it to determine whether there are 'good reasons' and circumstances suggesting possible fraud/misconduct, justifying a deeper probe. 2.27 The Court finds that the NCLT did not treat the Observer's reports as conclusive proof, but used them as significant prima facie material: (i) the impugned order specifically discussed and quoted material portions of the Observer's first, second and third reports; (ii) it also noted the appellants' non-cooperation and data gaps; and (iii) it read these findings together with the allegations and surrounding circumstances, including criminal proceedings and alleged fabrication of minutes. 2.28 The Court reiterates that if conclusive findings were required at this stage, there would be no need for an investigation under Section 213; the Inspector's role is precisely to investigate and gather evidence to establish, or dispel, the allegations. The Tribunal's task is to assess whether the material, including the Observer's reports, discloses a prima facie case and good reasons to warrant such investigation. Conclusions on Issue 3 2.29 The National Company Law Tribunal was entitled to take the Observer's reports into account as relevant prima facie material for the limited purpose of forming subjective satisfaction under Section 213. 2.30 The reliance on these reports, together with other pleadings and circumstances, did not amount to treating them as conclusive evidence; the use made of them was consistent with the statutory scheme and the standard articulated in 'R.S. India Wind Energy Pvt. Ltd.' and related precedents. 2.31 The pendency of objections to the Observer's reports before the Appellate Tribunal did not bar the NCLT from considering them at a prima facie level for deciding whether to direct an investigation. Issue 4 - Effect of RBI's regulatory regime and proceedings vis-à-vis Section 213 investigation Legal framework as discussed 2.32 The appellants relied on Chapter III-B of the Reserve Bank of India Act, 1934, especially Sections 45N and 45Q, and on 'Akshay N. Patel', 'Nedumpilli Finance Company', and 'Integrated Finance Company Ltd.', to argue that RBI has exclusive supervisory and investigative jurisdiction over Non-Banking Financial Companies, and Chapter III-B is a complete code overriding the Companies Act; hence the NCLT could not order investigation under Section 213 in respect of the same allegations already inquired into by RBI. 2.33 The respondents relied, inter alia, on: (i) an affidavit filed by RBI before the Supreme Court (SLP (C) No. 4534 of 2025) stating that RBI 'may not be the appropriate authority to investigate' allegations of siphoning of funds; (ii) the decision in 'Shonkh Technologies Ltd. v. Union of India', where it was held that pending action under another enactment (SEBI law) does not bar investigation under the Companies Act; and (iii) the scheme of Section 213 read with Section 447 and the Special Court provisions, which contemplate criminal prosecution for 'fraud' under the Companies Act. Interpretation and reasoning 2.34 The Court carefully distinguishes the scope and purpose of Chapter III-B of the RBI Act from that of Section 213 read with Section 447 of the Companies Act: (a) Chapter III-B provides for regulation, supervision and control of NBFCs by RBI, focusing on prudential norms, depositor protection and systemic stability (including inspection under Section 45N and powers such as seeking winding up under Section 45MC). (b) The Chapter does not presently contain provisions for investigation into fraud/siphoning of funds with corresponding penal consequences or prosecution under the Companies Act. Earlier provisions relating to penalties and cognisance (Sections 45O and 45P) were deleted by the 1974 amendment. (c) By contrast, Section 213 of the Companies Act is specifically designed to enable investigation into the affairs of a company where there are circumstances suggesting fraud, misconduct or other offences, and is directly linked to prosecution under Section 447 before Special Courts under Section 435. 2.35 The Court notes that, even after full compliance with RBI's directions under Chapter III-B, officers of an NBFC may still commit 'fraud' as defined and penalised under the Companies Act. To treat RBI's supervisory jurisdiction and inspection powers as barring a Section 213 investigation would mean that such frauds could escape prosecution, which cannot be the legislative intent. 2.36 The Court relies on 'Shonkh Technologies Ltd.' to underline that proceedings and prosecutions under other regulatory statutes (such as SEBI Acts) do not bar the Central Government or authorities from invoking Companies Act investigation provisions, since different enactments address different wrongs and provide different remedies. 2.37 The Court also takes note of RBI's own affidavit before the Supreme Court, specifically stating that it 'may not be the appropriate authority to investigate' the siphoning allegations, reinforcing that RBI does not claim exclusive competence over fraud investigations of the kind contemplated under Section 213. Conclusions on Issue 4 2.38 Chapter III-B of the RBI Act and Section 213 of the Companies Act operate in distinct though complementary fields: RBI regulates and supervises NBFCs; Section 213 provides a mechanism to investigate and, if warranted, prosecute fraud and misconduct under the Companies Act. 2.39 Even if RBI has examined similar factual allegations and has decided not to proceed further, that does not divest or curtail the jurisdiction of the National Company Law Tribunal to order an investigation under Section 213. 2.40 There is no inconsistency or repugnancy between Chapter III-B of the RBI Act and Section 213 of the Companies Act in relation to fraud investigations; Section 45Q does not preclude the use of Companies Act remedies for fraud and shareholder protection. The impugned order is not invalid on this ground. Issue 5 - Alleged non-application of mind, misreading of superior court orders, and forum shopping Interpretation and reasoning 2.41 The appellants alleged that: (i) the impugned order was non-speaking and reflected non-application of mind; (ii) it misread the Supreme Court's order dated 24.02.2025; and (iii) the respondents were engaged in 'forum shopping', approaching multiple fora, rendering the order unsustainable. 2.42 The Court, after analysing the impugned order, finds that the National Company Law Tribunal: (i) considered the pleadings; (ii) discussed in detail the three Observer's reports, quoting extensive extracts; (iii) adverted to the allegations of siphoning, related-party loans, luxury car purchases, non-cooperation and possible fabrication of minutes; and (iv) recorded its satisfaction that these circumstances warranted investigation into the company's affairs under Section 213. The order therefore contains sufficient reasons and reflects due application of mind. 2.43 On the Supreme Court's order dated 24.02.2025, the Court holds that the NCLT correctly understood and applied clauses (vi) and (vii) preserving NCLT/NCLAT proceedings and granting liberty to file applications; it was neither required nor permitted to 'reinterpret' those clauses as excluding the NCLT. The subsequent Supreme Court order dated 08.08.2025 transferring certain IAs to NCLAT did not retrospectively negate the NCLT's competence when it passed the impugned order. 2.44 On the allegation of forum shopping, the Court notes that the NCLT was a forum of competent jurisdiction to entertain a Section 213 application, and the existence of other proceedings (including before the High Court, Supreme Court and RBI) does not by itself vitiate the exercise of that jurisdiction, particularly when the Supreme Court itself had preserved the NCLT/NCLAT proceedings and granted liberty to move applications. Conclusions on Issue 5 2.45 The impugned order cannot be characterised as non-speaking or arbitrary; it contains adequate reasoning and a discernible chain of satisfaction based on material/evidence, consistent with the standard under Section 213 as interpreted in binding precedents. 2.46 The National Company Law Tribunal did not misread or act in disregard of the Supreme Court's orders; rather, it acted within the jurisdiction expressly preserved and recognised by the Supreme Court. 2.47 Allegations of forum shopping do not affect the validity of the impugned order, since the NCLT was a competent forum to entertain and decide the Section 213 application. Overall Conclusion 2.48 The Appellate Tribunal holds that: (i) the jurisdictional objections fail; (ii) the statutory thresholds and substantive preconditions under Section 213 were satisfied; (iii) reliance on the Observer's reports and other material was proper for forming prima facie satisfaction; and (iv) RBI proceedings did not bar a Section 213 investigation. The appeal is dismissed and the order directing investigation into the affairs of the company under Section 213 is upheld.