2026 (1) TMI 285 - AT - Companies Law

Forensic audit ordered amid mismanagement and fund siphoning claims under Companies Act ss. 241-242; appeal dismissed, order upheld

In an appeal challenging an interim direction for a forensic audit in a pending petition under ss. 241-242 of the Companies Act, 2013, the AT held that, ... Direction to conduct Forensic audit - main Petition filed un/s 241–242 of the Companies Act, 2013 contains no specific plea or relief seeking a forensic audit - scope of interim direction for such audit - grievance of the appellant is that without forming an opinion as to if there were any acts of oppression and mismanagement on the part of the appellants herein, such an order appointing Forensic Auditor ought not to have been passed - HELD THAT:- It is found from the impugned order that while keeping the main CP under Section 241-242 of the Companies Act, 2013 pending; in view of the hostile attitude between the two groups of shareholders and also in view of allegations and counter allegations, the Ld. NCLT had passed the order to find out the truth with regard to the running of the operations of Respondent No.2 company, in order to proceed further with the main Company Petition as the said Report would enable the Ld. NCLT to appreciate the issues necessary for fair and just adjudication of the Company Petition. It is required to look into the allegations set out in the Company Petition to find out as to if there existed allegations, sufficient to exercise discretion, as is given under Section 242(4) of the Companies Act, 2013 - In the Company Petition there exist allegations against the appellants of mismanagement and siphoning of funds from the Respondent No.2 company. There is no dispute to the law laid down but what is important to note is the cited judgement is a case where the company was still doing operations but whereas in the present case admittedly the company’s operations are nil and though allegedly the Respondents have resigned from the Management of the Company, yet for paying the debts of the company, taken during the tenure when the management of the company was in the hands of appellant, the Respondent had to dispose of their assets to clear of such debts of the Bank. Thus in the circumstances when the company is not in operations and there being allegations and counter allegations, hence no fault can be found in the impugned order directing forensic audit, only to enable it to know the truth into the allegations to pass a judgement. More so when a discretion u/s. 242(4) is exercised during the pendency of company petition, on facts of the case in hand, then it would not be appropriate to set aside such discretion, only if it could have been exercised in some other manner. Hence the appeal has no merit and it is accordingly dismissed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the Tribunal was justified in directing a forensic audit during pendency of a petition alleging oppression and mismanagement, to ascertain the truth of allegations and enable fair adjudication. (ii) Whether the appellate forum should interfere with the Tribunal's discretionary interim direction for forensic audit, particularly when the order is made to aid adjudication and two views are possible. (iii) Whether the existence of a prior understanding for a 'special audit', and the contention that the main petition did not specifically seek forensic audit, required setting aside the direction for forensic audit on the facts of the case. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Justification for directing forensic audit pending adjudication of oppression and mismanagement allegations Legal framework (as discussed): The Court examined the exercise of powers for interim measures during pendency of proceedings under Sections 241-242, including the Tribunal's discretion under Section 242(4), and the Tribunal's inherent powers (referred to as being exercised under Rule 11 of the applicable rules). Interpretation and reasoning: The Court noted that the underlying petition contained allegations of mismanagement and siphoning of funds, with specific facts and instances pleaded (identified in the petition's detailed paragraphs). The Court treated the presence of serious allegations and counter-allegations concerning financial irregularities, alleged siphoning, undocumented loans, irregular interest payments, tampering, bogus vouchers, and payments as the context in which an independent forensic audit could assist the Tribunal in reaching the truth. The Court further relied on the factual circumstance that the company's operations were admittedly nil, and that there was a contest regarding responsibility for debts incurred during the tenure of control of one group, which, on the Court's assessment, reinforced the need for an independent audit to facilitate adjudication. Conclusion: The Court upheld the forensic audit direction as a permissible interim measure to enable appreciation of the issues and to ensure 'fair and just adjudication' of the pending oppression and mismanagement petition, rather than as a determination of rights and liabilities. Issue (ii): Standard for appellate interference with discretionary interim orders directing forensic audit Legal framework (as applied): The Court applied the settled principle that an appellate forum does not substitute its discretion for that of the first-instance forum in an appeal against a discretionary order, unless the discretion is shown to have been exercised arbitrarily, capriciously, perversely, or in disregard of settled legal principles. Interpretation and reasoning: The Court found that the Tribunal's direction was made while the main petition was pending, in the backdrop of hostility between shareholder groups and competing allegations. The Court emphasized that the audit was ordered to aid the Tribunal in appreciating the controversy and proceeding further with adjudication. It held that when discretion under Section 242(4) is exercised on the facts, the order should not be set aside merely because an alternative course could also have been adopted, or because two views were possible. Conclusion: No basis for interference was found, as the forensic audit direction was treated as a reasonable, judicial exercise of discretion aimed at assisting adjudication. Issue (iii): Effect of prior understanding for a 'special audit' and contention of absence of a specific plea for forensic audit in the main petition Interpretation and reasoning: The Court considered the argument that a prior understanding contemplated a different audit mechanism and that the main petition did not contain a specific prayer for forensic audit. However, the Court focused on whether the petition nevertheless contained allegations sufficient to justify interim discretion under Section 242(4). After finding that allegations of mismanagement and siphoning were pleaded with supporting particulars, and given the admitted cessation of operations and dispute over financial liabilities, the Court held that the Tribunal's forensic audit direction was justified to ascertain the truth and aid adjudication. The Court also distinguished the reliance placed on precedent cautioning against 'fishing' investigations by emphasizing the present case's factual circumstances, including the company being non-operational and the nature of the allegations and financial issues requiring clarification. Conclusion: The prior understanding and the objection regarding absence of a specific plea did not warrant setting aside the order; the forensic audit direction was upheld as a proper aid to adjudication on the pleaded allegations and the factual situation. Final determination: The appeal was dismissed, and the direction for forensic audit was maintained.