2025 (11) TMI 1567 - HC - Companies Law

Fraud by Special Officer takes case outside limitation; liquidation ended, fraudulent orders void, NCLT transfer plea rejected

Chrestien Mica Industries Limited Versus Official Liquidator.

HC held that although the applications were filed after more than 30 years, allegations of fraud by the Special Officer took the matter outside ... Conduct of Special Officer in liquidation proceedings - Manipulation and orchestration of affairs to get exclusive and absolute control and management of the company (in liquidation) - all applications were barred by limitation and have been filed after a delay of more than 30 years - HELD THAT:- Fraud is a thing apart. It vitiates judgments, contracts and unravels all transactions. No Court will allow a person to keep an advantage which he or she has obtained by fraud. Fraud avoids all judicial acts, ecclesiastical or temporal. Any judgment or decree obtained by playing fraud on the Court is a nullity and non est in the eye of the law or decree and can be challenged in any Court even in collateral proceedings. Since fraud affects the solemnity, regularity and orderliness of proceedings of the Court and also amounts to an abuse of the process, all Courts are bestowed with inherent powers to set aside an order obtained by fraud practiced upon Court. No judgment of a Court, no order can be allowed to stand if it has been obtained by fraud. This power is necessary for the orderly administration of the Court's business. All Courts especially of superior jurisdiction have inherent powers to enable them to maintain their dignity, secure obedience to its process and rules, protect its officers from indignity and to punish unseemly behaviour. If this were otherwise, the entire foundation of the system would be shaken. The company was put into liquidation. Thereafter, the Official Liquidator was side-lined after having taken practically no steps for close to a decade. Subsequently, Special Officers were appointed and there was a stay of the winding up order. Arun Kumar Agarwala was an interested party and had a direct interest in the affairs and management of the company. His multiple roles as a legal heir of Late Ramanand Agarwala (who was a shareholder and director of the company) as well as guarantor per se disentitled him from acting as a Special Officer. This fact was suppressed from Court which in effect, permitted Arun Kumar Agarwala to operate solely and exclusively for decades unchecked. During the interregnum as Special Officer, the said Arun Kumar Agarwala has surreptitiously and in a clandestine manner purported to become both the single largest creditor and majority shareholder of the company (in liquidation). In view of the considerable long passage of time and the fact that no creditor (secured or unsecured) nor employee nor any third party having approached this Court, there is no question of the company continuing in liquidation. As stated above, the company has sufficient assets all of which were concealed from Court. It is well settled that winding up should be resorted to as the last resort after exhausting all remedies. In this context, on a combined reading of the Reports dated 15 November 2022, 25 November 2022 and 20 December 2022 filed by the Officer Liquidator and the order dated 12 December 1991, there were admittedly immoveable properties which belonged to the company (in liquidation). These are sound reasons as to why the company should no longer be treated to be winding up and the assets and properties which are left or can be traced should potentially benefit the company. All these facts have been concealed from Court at the contemporaneous point of time and do not also find any mention in the order dated 5 November 1979. The prayer for transfer of this proceeding to NCLT is equally mischievous - application disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the applications alleging fraud and misconduct against the Special Officers and Committee of Management were barred by limitation, vitiated by delay, or defeated by lack of locus of the applicants. 1.2 Scope of powers, duties and responsibilities of Special Officers and Committee of Management appointed by the Court in a company in liquidation, and the legal consequences of non-compliance with court directions and abuse of fiduciary position. 1.3 Whether the conduct of the Special Officer, particularly Arun Kumar Agarwala, in relation to the company (in liquidation), its assets, funds and shareholding, including dealings through Reliance Firebricks & Pottery Co. Ltd. and Nomura Investment and Finance Pvt. Ltd., amounted to fraud on the company and on the Court, and the legal effect of such fraud. 1.4 Whether the orders dated 12 December 1991 and 28 June 1993, passed under section 466 of the Companies Act, 1956 read with Rule 9 of the Companies (Court) Rules, 1959, and all acts done thereunder, ought to be recalled/vacated and what consequential directions should follow regarding winding up, control and management of the company, its assets, and potential claims against the Special Officers and Committee of Management. 1.5 Whether the alleged assignment of Punjab National Bank's debt to Nomura Investment and Finance Pvt. Ltd., and other post-winding-up share transfers (particularly to Reliance Firebricks & Pottery Co. Ltd.), were valid and binding on the company. 1.6 Whether CA 12 of 2024 seeking transfer of the company petition and connected applications to the National Company Law Tribunal was maintainable, having regard to the alleged dismissal of the company petition on the High Court's website, the applicant's locus, and the High Court's residual jurisdiction notwithstanding the Companies Act, 2013. 1.7 Effect of missing/undigitised records and the presumption under section 114(c) of the Evidence Act, 1872 on the challenge to genuineness of the orders dated 11 June 1993 and 28 June 1993. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Limitation, delay and locus of applicants Interpretation and reasoning 2.1 The Court noted that numerous serious allegations of fraud, self-dealing and abuse of process were made against a Court-appointed Special Officer (a fiduciary and officer of the Court) concerning assets in custodia legis over several decades. None of the core allegations were controverted by Arun Kumar Agarwala in any affidavit or report. 2.2 The Court reiterated the settled principle that fraud 'unravels everything'; any judgment, order or transaction obtained or effected by fraud is a nullity and can be challenged at any time, even collaterally, and that fraud and abuse of process empower the Court to act under its inherent jurisdiction to set aside such orders and undo their consequences. 2.3 Given the role of Special Officers as trustees/fiduciaries, the continuing non-accounting of company assets and funds, and the active, ongoing misuse of the office of Special Officer to control the company, the Court held that the excuse of delay or lapse of time was unavailable to the Special Officers. The long passage of time could not legitimise a fraudulent state of affairs or allow its continuation. 2.4 As regards locus, the Court accepted that the wrong was fundamentally 'a wrong to the company' and that shareholders/contributories were entitled to approach the Court where officers of the Court had abused their position and the company's assets were in custodia legis. No creditor, employee or third party had appeared to oppose; the applicants were shareholders or heirs of shareholders as per the last reliable register (30 June 1970). Conclusions 2.5 The applications were not barred by limitation or defeated by delay in so far as they sought to address fraud on the company and on the Court by Court-appointed fiduciaries. The applicants, being shareholders/contributories or their heirs, had sufficient locus to maintain the applications. Issue 2: Powers, duties and misconduct of Special Officers and Committee of Management Legal framework 2.6 The Court referred to: (a) Sections 456, 291-293 and 466 of the Companies Act, 1956; the role of the Official Liquidator as custodian of assets in winding up; and the principle that the Board ordinarily manages the company, subject to statutory limits. (b) Rule 9 of the Companies (Court) Rules, 1959 (inherent powers to make such orders as necessary for ends of justice or to prevent abuse of process). (c) Precedent on the nature and limits of powers of Special Officers and receivers, emphasizing that they are officers of the Court, must act under its supervision, and cannot assume greater powers than a Board of Directors unless expressly authorised. Interpretation and reasoning 2.7 The Special Officers were appointed by the Court in 1991 with specific directions: to take possession of all assets, books and records; collect specified compensation; run the mines and business; approach authorities; and convene an extraordinary general meeting to constitute a Board of Directors and ultimately hand over charge. Subsequent orders in 1993 created a Committee of Management to run day-to-day affairs under the supervisory right of the Special Officers. 2.8 The Court held that Special Officers, as officers of the Court and trustees, were bound to preserve assets, maintain proper accounts, regularly report to Court, and obtain directions before any controversial or major step, especially dealings with assets. 2.9 The Court found that: (a) There was complete non-compliance with the core directions in the order dated 12 December 1991, particularly regarding convening an extraordinary general meeting, handing over control to a duly constituted Board, and accounting for specified assets and funds, including Rs. 72 lakhs received from the Official Liquidator. (b) There had been no statutory filings, no annual general meetings, and no filings with the Registrar of Companies or Ministry of Corporate Affairs for over four decades; the last reliable records showed status as on 1970/1968 only. (c) The Committee of Management (Susanta Dasgupta, S.K. Palit, Amit Hazra) was a 'sham,' consisting of employees/stooges of Arun Kumar Agarwala, untraceable despite Court orders, and no details of their appointment were filed with the Registrar of Companies as required. (d) The Special Officers never returned to Court for approval, sanction or ratification of any acts; no reports were meaningfully filed except distorted reports by Arun Kumar Agarwala designed to mislead the Court. 2.10 With respect to individual responsibility: (a) Arun Kumar Agarwala was found to have single-handedly and clandestinely run the affairs of the company, sidelined the Official Liquidator, used the Committee of Management as a façade, dealt with assets, and failed to account for funds, movable and immovable assets, stocks of mica, subsidiary assets and compensation entitlements. (b) A.C. Kar had not been shown to have committed specific acts of fraud but had abdicated his duties as co-Special Officer by allowing all assets, funds and control to remain with Arun Kumar Agarwala, claiming no recollection of any joint bank account; such extreme inaction, despite voluntarily accepting office, was held unacceptable and not an 'innocent misjudgment.' Conclusions 2.11 Both Special Officers and the Committee of Management failed in their fiduciary duties and violated the Court's orders. Their powers, as officers of the Court, were strictly limited, and their conduct-especially that of Arun Kumar Agarwala-amounted to misuse of powers and abuse of process. 2.12 The Special Officers, Committee of Management and Official Liquidator were discharged, and directed to hand over any remaining assets, properties, books and records to the Board of Directors to be reconstituted at a general meeting. Issue 3: Fraud by Special Officer and legal effect on transactions and orders Interpretation and reasoning 2.13 The Court relied on established authorities that fraud vitiates all judicial and non-judicial acts; judgments, decrees or orders obtained by fraud are nullities and non est; such fraud can be challenged in any proceeding at any time; and Courts have inherent power to set aside orders obtained by fraud and prevent abuse of process. 2.14 The Court found, on undisputed material, that: (a) Arun Kumar Agarwala, while acting as Special Officer, was an interested party-legal heir of a shareholder/director and guarantor-and had suppressed these facts when seeking/retaining the appointment, thereby obtaining a position of control that he should never have occupied. (b) He orchestrated a scheme to become both the single largest creditor and majority shareholder of the company (in liquidation) through himself, family members, relatives, associates and 'stooges', including via Reliance Firebricks & Pottery Co. Ltd., which purchased shares of the company during pendency of proceedings and was controlled by his family. (c) Nomura Investment and Finance Pvt. Ltd., to whom Punjab National Bank purportedly assigned its debt, was effectively his alter ego, owned and controlled by his close relatives and associates (including his son and himself indirectly), with no real business activity; he thereby positioned himself on both sides of proceedings before the Debts Recovery Tribunal. (d) There was no accounting for Rs. 72 lakhs handed over by the Official Liquidator, and conflicting, irreconcilable stands regarding existence of any joint account between the Special Officers, indicating falsity and manipulation. (e) Numerous specific allegations of siphoning and unaccounted sale of plants, machinery, land and large quantities of mica and other assets (including at subsidiary Indian Malleable Castings Ltd. and various locations) remained unanswered and unexplained by Arun Kumar Agarwala. (f) He continued to hold himself out as 'Special Officer' and represent the company before other courts and authorities for decades, while simultaneously pleading incapacity and delay to avoid scrutiny in the present proceedings, demonstrating deliberate deceit. 2.15 The Court held that this was a 'calculated, ill-motivated' pattern of deceit, conflict of interest and self-dealing by a Court-appointed fiduciary, amounting to fraud on both the company and the Court and gross abuse of process. This fraud was so pervasive as to vitiate his acts as Special Officer, render many transactions void ab initio and others voidable, and justify exceptional intervention under Rule 9 and section 466. Conclusions 2.16 The Court held that the conduct of Arun Kumar Agarwala as Special Officer constituted fraud on the company and on the Court, and abuse of judicial process. 2.17 All dealings, transactions or representations by Arun Kumar Agarwala acting singly, contrary to the order dated 12 December 1991, were declared without lawful authority and non est. 2.18 Any transfer of shares post 5 November 1979 by Arun Kumar Agarwala, including in favour of Reliance Firebricks & Pottery Co. Ltd., was declared illegal, null and void and not to be recognised for purposes of management or voting. 2.19 The company, when re-constituted, was given liberty to decide on and pursue appropriate proceedings against the Special Officers and Committee of Management, including recovery of Rs. 72 lakhs with interest and compensation for other wrongs, with limitation for such actions to run from the date of this order. Issue 4: Recall of 1991 and 1993 orders; status of winding up; restoration of control to shareholders Legal framework 2.20 The orders dated 12 December 1991 and 28 June 1993 were passed under section 466 of the Companies Act, 1956 read with Rule 9 of the Companies (Court) Rules, 1959, staying the winding up and appointing Special Officers and a Committee of Management to run the company and ultimately hand it back to a re-constituted Board. 2.21 Rule 9 expressly preserves the Court's inherent powers to pass any orders necessary for ends of justice or to prevent abuse of process. Section 466 permits stay and related orders in a winding up proceeding. Interpretation and reasoning 2.22 The Court observed that any 'scheme' for running the company under these orders had demonstrably failed: there was no accountability, no compliance with critical directions, no statutory filings, and instead, the orders had been used as a cloak for fraud and usurpation of control by one Special Officer. 2.23 The Court also noted: (a) No creditor/employee/third party had appeared in decades to assert any claims. (b) The company had or once had substantial immovable properties and other assets, many concealed from the Court at the time of the winding-up order and in subsequent proceedings. (c) Winding up is a remedy of last resort and should not be allowed to continue indefinitely, especially where the liquidation machinery is being emasculated under the pretext of 'revival.' 2.24 Considering the gross fraud, abuse of process, long passage of time, absence of contesting creditors and existence of assets which should now enure to the benefit of the company, the Court considered it in the best interest of all stakeholders that the company should no longer continue in winding up and that control be restored to shareholders based on the last uncontested register. Conclusions 2.25 The orders dated 12 December 1991 and 28 June 1993 were recalled and vacated. 2.26 There was a permanent stay of the winding up order dated 5 November 1979. 2.27 The Special Officers, Committee of Management and Official Liquidator were discharged and directed to hand over any remaining assets, properties and records to the Board of Directors to be constituted pursuant to fresh shareholder action. 2.28 Liberty was granted to shareholders, heirs, legal representatives or assigns, based on the last available Register of Members as on 30 June 1970, to convene a general meeting, reconstitute the Board of Directors (preferably with one representative from each of the six Agarwala family groups), rectify the Register of Members to reflect shareholding as on 30 June 1970, and decide the future management and utilisation/recovery of remaining assets. 2.29 The company was directed to regularise statutory compliances and filings, with statutory authorities to take into account the pendency of these proceedings and orders for purposes of limitation or relaxation. Issue 5: Validity of assignment to Nomura and post-winding-up share transfers Interpretation and reasoning 2.30 The Court found that Nomura Investment and Finance Pvt. Ltd. was effectively controlled by Arun Kumar Agarwala, his family and associates, and had no independent business; the secured debt of Punjab National Bank had allegedly been assigned to Nomura at a pittance while Arun Kumar Agarwala continued to act as Special Officer for the debtor company and also effectively controlled the assignee. 2.31 This created a direct and obvious conflict of interest and duty, undermining the bona fides of the assignment and subsequent proceedings before the Debts Recovery Tribunal, where Arun Kumar Agarwala was effectively on both sides. 2.32 As to share transfers, the Court held that, in view of the gross fraud and abuse of process, any transfer of shares post the winding-up order effected by Arun Kumar Agarwala could not be recognised, especially where used to establish control through entities like Reliance Firebricks & Pottery Co. Ltd. Conclusions 2.33 All share transfers effected by Arun Kumar Agarwala post 5 November 1979 were declared void and not to be taken into account for purposes of the general meeting or management. 2.34 Specifically, any transfer of shares in favour of Reliance Firebricks & Pottery Co. Ltd. was declared illegal, null and void. 2.35 As regards Nomura, the company, through its reconstituted organs, was directed to take a final decision whether to adopt, ratify or rescind the assignment of the erstwhile Punjab National Bank debt and all steps taken pursuant thereto, and to act accordingly. Issue 6: Application to transfer proceedings to NCLT (CA 12 of 2024) Legal framework 2.36 The Court referred to the statutory scheme of transfer of pending company matters to NCLT under the Companies Act, 2013, and to the decision recognising that High Courts retain a limited discretion in appropriate cases to continue with pending proceedings, particularly where special circumstances exist. Interpretation and reasoning 2.37 The applicant (Nomura) relied on: (a) an alleged entry on the High Court's website showing the company petition as 'dismissed' as of 15 August 1947; and (b) the post-Companies Act, 2013 transfer regime, arguing that no sale of assets had taken place and the High Court's jurisdiction was ousted. 2.38 The Court found: (a) The 'dismissal' entry as of 15 August 1947 was an 'obvious mistake' and 'preposterous', since the petition was filed in 1979; the records were corrected and the erroneous status revoked on 18 July 2023. Numerous orders over the years showed the Court had remained seised and the petition was not concluded. (b) The plea for transfer to NCLT was inconsistent with the contention that the petition stood dismissed in 1947; the inconsistency highlighted the applicant's lack of bona fides. (c) The applicant company had been incorporated during the pendency of the proceedings, was controlled by close relatives and associates of Arun Kumar Agarwala, and was deeply implicated in the alleged fraudulent scheme; serious allegations of fraud, suppression and manipulation of Court records had to be adjudicated by this Court itself. (d) In such circumstances, and having regard to precedent, the High Court retained discretion to keep the matter and not transfer it to NCLT, especially where transfer could shield fraudulent acts from scrutiny. Conclusions 2.39 CA 12 of 2024 seeking transfer to NCLT was dismissed as frivolous, meritless and filed in desperation to evade inquiry into fraudulent acts and abuse of process. 2.40 The High Court retained seisin and completed adjudication of the company petition and all connected applications. Issue 7: Effect of missing records and presumption under Evidence Act on challenge to 1993 orders Interpretation and reasoning 2.41 The original records of the proceedings were untraceable and related ROC records had not been digitised and remained unavailable. Certain parties questioned the genuineness or veracity of the orders dated 11 June 1993 and 28 June 1993. 2.42 The Court invoked section 114(c) of the Evidence Act, 1872 (presumption as to regularity of official acts and records) in the absence of contrary proof, and in view of the consistent course of orders passed in the matter. Conclusions 2.43 All allegations challenging the genuineness and veracity of the orders dated 11 June 1993 and 28 June 1993 were rejected. 2.44 Subject to their recall/vacation on grounds of subsequent fraud and abuse of process, the said orders were treated as duly made orders of the Court.