2026 (1) TMI 1358 - HC - SEBI

Doctrine of merger and trustee-like powers in SEBI-appointed Special Committee; order treated as open-ended, appeals dismissed

Doctrine of merger was held inapplicable because the impugned order was open-ended, contemplated contingencies and left proceedings alive, thus not ... Doctrine of merger - fiduciary duty - forensic audit - trustee-like powers - maintainability and locus - Companies Court's inherent powers - Character and legal effect of the order constituting the Special Committee and whether the interim order dated 25.01.1999 merged into the final order dated 29.05.2013. Contestations on maintainability of the appeals by the Special Committee, Rommels locus, and the permissibility of invoking Rule 9 of the Companies (Court) Rules instead of Regulation 68 of the 1996 Regulations. - HELD THAT:- The learned Single Judge appointed a three-member Committee comprising an expert member from SEBI, a representative from the Ex-Management, and a neutral individual in the form of a retired Judge of the District Court, and vested it with full trustee-like powers. It is noteworthy that, by the same order, the role of CRB Asset Management Company Ltd. was terminated, and therefore, the inclusion of a member from the Ex-Management was considered necessary for the smooth discharge of the Committee’s functions. In the said Order, the learned Single Judge issued several directions and clarifications, inter alia, that the termination of CRB Asset Management Company Ltd., as the Asset Management Company does not absolve it, or its directors or officers, from any liability arising out of acts of commission or omission during their tenure, in terms of Regulation 25(6) of the 1996 Regulations. The learned Single Judge further clarified that although no penalties or sanctions were to be imposed on the Ex-Management for statutory non-compliance during the pendency of the proceedings, liabilities pertaining to the period prior to the appointment of the PA were not extinguished, and statutory authorities were at liberty to proceed in accordance with law. This demonstrates that the learned Single Judge remained conscious of the prior conduct of the management and trustees and ensured that no party could take advantage of its own wrongs, which had culminated in a complete breakdown necessitating SEBI’s intervention to protect bona fide unitholders. Trustee-like powers - HELD THAT:- It is undisputed that the Order dated 29.05.2013 was passed with the consent of the parties present before the Court. The Trust Petition filed by SEBI was intended to safeguard the interests of the unitholders; however, the situation might have been better addressed had SEBI not allowed the earlier Order dated 25.01.1999 to go unnoticed while the Order dated 29.05.2013 was being passed by the learned Single Judge, and had SEBI sought appropriate clarification at that stage or at least soon thereafter. SEBI, being the regulator as well as the Petitioner, was further expected to act with greater promptitude and vigilance, particularly when extensions were being granted repeatedly from 2014 till 2022 without any objection. So far as the applicability of the doctrine of merger is concerned, as discussed hereinabove, having regard to the nature of the Order dated 29.05.2013, it cannot be said that the said order was final or co-terminus in nature. The order was clearly open-ended and itself contemplated multiple contingencies and further proceedings, thereby leaving the matter alive for continuation. Consequently, the doctrine of merger, in stricto sensu, could not be attracted in the present case. It is pertinent to note that when the PA was functioning for more than one and a half decades, he acted as a sole member. Having regard to the nature and object of the petition and the extraordinary situation prevailing, namely, the protection of the interests of the unitholders, and considering that the Special Committee envisaged by the Order dated 29.05.2013 was unable to complete the task assigned, we find no error in the learned Single Judge proceeding to constitute a Special Cell of SEBI to bring the long-pending winding-up process of the scheme to its logical conclusion. In any event, all actions of the Special Cell remain under the supervision of the Court and are always open to judicial scrutiny. We find no merit in this contention either. The Company Court is vested with ample authority to exercise its inherent powers, having regard to the facts and circumstances of each case. The comparison sought to be drawn between Regulation 68 of the 1996 Regulations and Rule 9 of the Companies (Court) Rules is misconceived. Regulation 68 of the 1996 Regulations empowers SEBI to initiate action upon satisfaction of the conditions stipulated therein, whereas Rule 9 of the Companies (Court) Rules preserves the inherent powers of the Court to pass such orders as may be necessary to meet the ends of justice. The two provisions operate in distinct and independent spheres and are not in conflict with each other. Accordingly, this argument of the Appellants also stands rejected. We find no merit in the present appeals. Accordingly, both appeals are dismissed. The present Appeals, along with pending application(s), if any, stand disposed of in the above terms. Issues: (i) Whether the Impugned Judgment directing a forensic audit by SEBI and constitution of a SEBI Special Cell to take over winding up of the Scheme was legally sustainable; (ii) Whether the interim order dated 25.01.1999 merged into or was superseded by the final order dated 29.05.2013 (applicability of the doctrine of merger); (iii) Whether the Special Committee, its composition, decisions (including reconstitution on 12.09.2023) and actions (including certain orders passed during pendency) were within its jurisdiction and whether adverse directions against the Committee/members were warranted; (iv) Whether invocation of Rule 9 of the Companies (Court) Rules and exercise of courts inherent/supervisory powers was impermissible vis-e0-vis remedies under the 1996 Regulations.Issue (i): Legality of directing a forensic audit by SEBI and constituting a Special Cell of SEBI to complete winding up of the Scheme.Analysis: The Court examined the factual matrix, inconsistencies in interim reports, the historic failure to complete winding up within the timelines envisaged by the 29.05.2013 order, and the statutory powers under Sections 11 and 11B of the SEBI Act. It considered the supervisory role of the Company Court and the need to protect unitholders, noting that the Special Committee functioned in a fiduciary capacity and that material existed justifying verification of payments and records.Conclusion: The direction for a forensic audit by SEBI and constitution of a Special Cell of SEBI to complete the winding up was upheld and found to be sustainable.Issue (ii): Applicability of the doctrine of merger between the interim order dated 25.01.1999 and the final order dated 29.05.2013.Analysis: The Court analysed the nature and terms of the 29.05.2013 order, its open-ended supervisory provisions, express liberty for clarification and modification, and the continuing judicial oversight and reporting requirements. It applied settled principles on construction of judicial orders and merger, noting that the 29.05.2013 order was not final and co-terminus so as to attract merger in the strict sense.Conclusion: The doctrine of merger did not apply; the interim order of 25.01.1999 continued to have operative significance and could not be treated as absorbed into the 29.05.2013 order.Issue (iii): Validity of the Special Committees composition, specific actions (including reconstitution on 12.09.2023) and whether adverse findings were conclusively recorded against the Committee or CRB Group.Analysis: The Court held that the Special Committee was vested with trustee-like, fiduciary duties under the 29.05.2013 order and was required to seek court clarification where ambiguity arose. It found that the Impugned Judgment did not record conclusive findings of mala fides or manipulation against the Committee members or CRB Group but identified deficiencies and inconsistencies warranting further enquiry by forensic audit. The Court also held that certain orders passed by the Committee beyond its subsisting mandate could not be sustained.Conclusion: No conclusive adverse finding was imputed against the Committee members or CRB Group in the Impugned Judgment; however, actions of the Committee were subject to supervisory control, some acts beyond mandate were liable to be set aside, and further enquiries (forensic audit) were justified. The reconstitution did not operate as an unqualified extension of mandate.Issue (iv): Permissibility of invoking Rule 9 of the Companies (Court) Rules and the Courts inherent/supervisory powers instead of only Regulation 68 remedies.Analysis: The Court compared the scope of Regulation 68 of the 1996 Regulations with the inherent and supervisory powers of the Company Court, observing that the two operate in distinct spheres and that the Court retains power to pass orders necessary to meet the ends of justice where circumstances so require.Conclusion: Invocation of Rule 9 and exercise of the Courts inherent/supervisory jurisdiction in the facts of the case was permissible and not impermissible as contended by the Appellants.Final Conclusion: The appeals lack merit and are dismissed; the Impugned Judgment directing a forensic audit, constituting a SEBI Special Cell to complete winding up within the stipulated framework, restraining certain payments pending audit, and dealing with unclaimed amounts and related directions is upheld in substance, while matters requiring further factual determination are left to the forensic process and supervisory proceedings of the Court.Ratio Decidendi: Where a court-appointed committee functions in a fiduciary/trustee-like capacity under a court order that contemplates ongoing supervision and leaves liberty for clarification, the court retains inherent and supervisory jurisdiction to order enquiries (including forensic audits) and to reallocate statutory winding-up responsibilities to statutory authorities (such as SEBI under Sections 11/11B) to protect investor interests; an open-ended supervisory order is not necessarily merged into earlier interim orders.