TaxTMI 
TaxTMI 
2016 (11) TMI 29
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....respect of the proceedings related to the investigation ordered by the Respondent and after going through the same,to quash and set aside the Order dated 6th May, 2016 passed by the Respondent No.2." 2 Since the petitioners as also the respondents counsel have been heard at great length, on conclusion of arguments, we dispose of this writ petition finally by the present judgment and order. 3 Rule. Respondents waive service. By consent, heard forthwith. 4 It is necessary to set out certain facts in order to appreciate the challenge raised in this writ petition. The petitioner Nos.1 to 6 and 9 are shareholders of petitioner No.8, namely, Singhal Enterprises Private Limited (for short "the company"). That company is a Kolkata based company. The version of the petitioners is that they hold altogether 1849200 equity shares in this company constituting 89.58% of the total paid up share capital of this company. The petitioner Nos.1 to 6 and the petitioner No.7 are also Directors of the company. They are related inter-se. We are not concerned with their relationship, but suffice it to state that these petitioners claim to be permanent residents of Raipur, the capital of the Sta....
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....rdance therewith. The allegation is that Radha Krishan and Parmanand obtained substantial benefits under the MOU. In terms of the MOU Parmanand, along with his family, sold all their shares in the company to the group of petitioner No.1. They obtained exclusive ownership and control of another sponge iron manufacturing company at Raigarh, namely, B.S. Sponge Private Limited. The petitioners state that in terms of the MOU, the Jharsuguda unit of Singhal Enterprises Private Limited was to be demerged to another company to be owned by the said Radha Krishan and his family. Further, since the two factories of the company were located in two geographically different regions, it was thought in the interest of the company to give effect to such scheme of demerger. The other company was identified as Singhal Enterprises (Jharsuguda) Private Limited and a company in control of Radha Krishan. For such demerger, the company - petitioner No.9 and Singhal (Jharsuguda) Private Limited filed proceedings before the Hon'ble High Court at Calcutta. They prayed for sanction to the scheme of demerger. The petition in that regard was jointly filed (Company Petition No.384 of 2007). However, Parmana....
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....re concerned, the same have been audited and were approved by the shareholders in the Annual General Meeting held on 27th September, 2007. The annual accounts were disclosed in the petition for sanction of the scheme for demerger filed in December, 2007. 9 On account of the disputes between the shareholders, the consolidated annual accounts of the petitioner No.8-company could not be filed with the Registrar of Companies. The petitioners claim they were unable to hold an Annual General Meeting of the company on account of the non- cooperation from Radha Krishan and his group. The claim of the petitioners is that at all material times and to the best of their ability, they have complied with the statutory obligations under the provisions of the then Indian Companies Act, 1956, but in the absence of the information about the affairs of the Jharsuguda unit controlled by Radha Krishan it was not possible to prepare the consolidated accounts. 10 The company and its Directors received notice from the Registrar of Companies from time to time with regard to non-compliance of the statutory provisions relating to filing of annual accounts and/or holding of the AGMs and copies of these ....
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....ice was issued under section 234(1) of the Companies Act on 1st October, 2012 and an explanation was sought with regard to the affairs of the company. The petitioners pointed out in detail as to how the entire attempt on their part is to comply with law, but given the pending disputes between family members and the litigation, they are unable to do so. The petitioners also forwarded alongwith their replies, copies of the relevant orders passed by the High Court of Calcutta. They also gave a detailed explanation as sought by the Registrar when he invoked section 234(1) of the Indian Companies Act, 1956. 15 It is stated that since Radha Krishan and his group were acting in a manner prejudicial to the interest of the company and oppressing the petitioners group of shareholders by also closing down the Jharsuguda unit, the petitioners had no alternative, but to initiate proceedings invoking sections 397 and 398 of the Indian Companies Act, 1956. Once again, they approached the Company Law Board in March, 2013. The proceedings were numbered as Company Petition No.60 of 2013. In these proceedings also orders were passed by the Company Law Board from time to time. The first interim ord....
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....rovided by the first respondent when the petitioners demanded it through their advocate's letter. The petitioners submit that there is no justification or basis for passing of this order. It is extremely vague and unsubstantiated. It bears no reasons whatsoever to justify any investigation against the petitioners in terms of the aforesaid statutory provision. That order has been passed pursuant to a report dated 13th January, 2016, submitted by the Registrar of Companies, West Bengal, but at the relevant time, no copy thereof was enclosed or provided. Therefore, the report was not available for the petitioners to resist these orders effectively. 19 Reliance is also placed upon a letter dated 13th June, 2016, issued to the company by the State Bank of India informing and recording that the company obtained a total credit of only Rs. 22.82 crores from the bank as on 12th June, 2016. 20 It is in the above circumstances that this writ petition has been filed. 21 The writ petition has been amended extensively by incorporating and raising grounds to challenge the order dated 6th May, 2016, copy of which is at Annexure-Z to the writ petition. The petitioners point out that th....
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....ous offences. Therefore, timely action should be permitted. 23 This affidavit comes only after this Court, on filing of this writ petition had, on 31st August, 2016, passed the following order : "1. When this writ petition was called out for admission and together with a notice of motion, the respondents contesting the petition have filed an affidavit in reply. It is tendered in Court today. We take it on record. 2. Since Mr. Godbole for the petitioners complains that the petitioners' Advocates have received it just now in Court, we agree to his request for an adjournment. For that purpose, we grant time and list these matters on 23-9-2016. 3. In the meanwhile, we direct the Additional Director, Serious Fraud Investigation Office to procure all original records and files, particularly from the Registrar of Companies at Kolkata so as to enable this Court to peruse them and if necessary. We also clarify that no further affidavit in reply shall be filed by the respondents." 24 It is on the above material that we have heard the learned counsel appearing for parties. 25 Mr. Girish Godbole learned counsel appearing for the petitioners would submit that there is no c....
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....sed by the company Judge in the High Court of Calcutta approving the scheme is still pending. Then there are various acts of oppression and mismanagement alleged and they are pending before the Company Law Board. 27 The above events and developments are not held back and made known to the respondents. The details are also disclosed from time to time. It is in these circumstances that we must view this matter according to Mr. Godbole. He would submit that the Central Government cannot exercise the power under section 212 of the Act of 2013 when there are allegations and counter allegations of groups of shareholders and family disputes and legal proceedings are pending in a competent Court. Thereafter, the Central Government cannot at the behest and instance of one rival or disgruntled group seek to investigate the affairs of the company. Precisely that has happened in the instant case. The aggrieved group has approached one Member of Parliament. That Member of Parliament on their behalf, has addressed a letter to the Central Vigilance Commission. That letter contains a complaint with regard to the alleged mismanagement of affairs of the company and, therefore, that complaint was ....
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.... to be pending with it. 28 Mr. Godbole submits that even the so-called grounds and which are contained in the report of the Registrar of Companies based on which the impugned order is passed would demonstrate that none of them have any basis. If a bank like a Nationalized Bank has any pending dues and stated to be huge or in crores nothing prevents it from invoking the appropriate statutory powers, particularly the measures in the SARFAESI Act and to recover its monies by invoking the right vesting in it. Secondly, there is no basis for presuming that the raw material has been diverted or that there are certain acts which would endanger and adversely affect the rights of the public in the mines. There are several provisions enabling the authorities in charge of managing and administering the mines or issuing licences for prospecting minerals therefrom and those authorities can use them. There is no substance in such allegation because there is no divergence as is claimed. Even if there is diversion alleged, action can be taken under distinct laws for the alleged violation of the rules and regulations enabling mining and transport of coal or other minerals. For all these reasons,....
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.... which have been set out in the report which forms the basis for the ultimate step can be said to be real and existing. It is not at the behest of any group that the Central Government has acted. The SFIO steps into the picture only because the Central Government formed the requisite opinion. The grounds or the contents of the report enabled the Central Government to form that opinion. The opinion is reasonable. The discretion has been exercised by applying correct judicial principles and there is no deviation from the same. For these reasons and when the petition is premature, this Court should not interfere in writ jurisdiction and the petition be dismissed. 31 The Indian Companies Act, 1956 (for short "1956 Act") and The Companies Act, 2013 (for short "2013 Act") are both enacted to consolidate and amend the law relating to companies and certain other associations. As far as the 2013 Act is concerned, on its initial enactment and later on its amendment, it has been clarified that the legislation relating to incorporation and registration of companies had to be consolidated and brought in tune with the current situation prevailing in the country and abroad. Several provisions ....
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....ion or if the company or any such person as is referred to in sub-section (3A) refuses or neglects to produce any such books and papers, that is an offence in terms of sub-section (4) of section 234. Sub-section (5) of section 234 enables the Registrar to annex a writing, book or paper or where that book or paper is required by the company, any copy or extract thereof to the document referred to in sub-section (1), and he shall annex that writing in pursuance of the order he passes under sub-section (3A) or of an order under sub-section (4). Sub-section (6) of section 234 deals with a situation where information or explanation called for is not furnished within the specified time or furnished but on such information or explanation being perused the Registrar forms an opinion that the document referred to in sub-section(1) together with such information or explanation or such books and papers discloses an unsatisfactory state of affairs or does not disclose a full and fair statement of any matter to which the document purports to relate, the Registrar shall report in writing the circumstances of the case to the Central Government. 34 By sub-section (7) of section 234, t....
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....al review and that is conclusive. It is that decision which was challenged in the Hon'ble Supreme Court. After stating the facts in great details and the rival contentions, the Hon'ble Supreme Court set out both the provisions, namely, from section 235 to section 237 and held as under : "5. Before taking action under Section 237(b)(i) and (ii), the Central Government has to form an opinion that there are circumstances suggesting that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose or in a manner oppressive to any member or that the company was formed for any fraudulent or unlawful purpose or that the persons concerned in the formation or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members. From the facts placed before us, it is clear that the Government had not bestowed sufficient attention to the material before it before passing the impugned order. It seems to have been oppressed by the opinion that it had formed about Shri S. P. Jain. Fro....
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....o the learned Attorney no part of section 237(6) is open to judicial review, the matter is exclusively within the discretion of the Central Government and the statement that the Central Government had formed the required opinion is conclusive of the matter Courts both in this country as well as in other Commonwealth countries had occasion to consider the scope of provisions similar to Section 237(6). Judicial dicta found in some of those decisions are difficult of reconciliation. ... ... ... ... 11. Coming back to Section 237(b), in finding out its true scope we have to bear in mind that that section is a part of the scheme referred to earlier and therefore the said provision takes its colour from Sections 235 and 236. In finding out the legislative intent we cannot ignore the requirements of those sections. ln interpreting Section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under Article 19(1) (g) and its validity cannot be up....
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....e affairs by the second and third appellants. In the said petition, injunction was sought to restrain the first appellant before the Hon'ble Supreme Court from proceeding with the Rights Issue of its shares. The Company Law Board declined to grant any interim order. Thereafter, the rival groups filed another Company Petition before the Company Law Board. There also, an interim injunction was sought but the application in that regard was rejected. Then, the rival groups filed a Company Application for appointment of an Administrator. 37 Thereafter, the first respondent to the appeal before the Supreme Court filed a writ petition under Article 226 of the Constitution of India before the High Court of Andhra Pradesh seeking a writ of mandamus directing the Union of India to forthwith prosecute the appellant Nos.2 and 3 in accordance with law. The Hon'ble Supreme Court referred to the allegations in the writ petition and then held that based on a prayer for investigation into the affairs of the first appellant company and to take action, that the writ petition was filed. The Hon'ble Supreme Court referred to the powers conferred in the Central Government in paragra....
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....ercised in a reasonable manner. The department of the Central Government which deals with companies is presumed to be an expert body in company law matters. Therefore, the standard that is prescribed under Section 237(b) is not the standard required of an ordinary citizen but that of an expert. 10. In the present case an attempt has been made by the first respondent to get the affairs of the company investigated in the manner provided under the Companies Act. Neither the Central Government nor the Company Law Board has been moved by the 1st respondent in accordance with law for this purpose. Instead of moving the authorities prescribed under the Companies Act the first respondent has chosen to resort to the writ jurisdiction of the High Court for a direction to have the affairs of the company investigated by the C.B.I. ... ... ... ... 13. ... ... ... ... The only ground for intervention appears to be "public interest". We fail to see what public interest is involved in disputes of the kind referred to in the writ petition. They basically deal with mismanagement of the affairs of the company and oppression of the minority shareholders. The company is only a deemed public li....
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....he company who were the main promoters. He sought his associates to be replaced as Directors in the resultant vacancies. The resolution as proposed by him failed. The Annual General Meeting was scheduled on 31st March, 1986, but K.R. Batra another shareholder filed an application before the Company Law Board and Arora joined therein. The allegations made by the said Batra and Arora are somewhat identical to the present case and to be found in paragraph 4. They read as under : "(1) That the Chairman and his brother had diverted funds of the Company and siphoned out the same through series of transactions to other sister concerns; (2) That the Annual General Meeting on 31-3- 1986 was misconducted; and (3) That Shri G.R. Agarwal had invested over Rs. 25 lakhs in the names of poor and illiterate villagers of Jeetpura, Haryana, in the sums of Rs. 10,000/- to Rs. 25,000/- each even though those persons had no resources. It is, therefore, Shri G.R. Agarwal, who is actively controlling the affairs of the company on the basis of such bogus shares. To substantiate these allegations, the said Arora had collected signatures and thumb impressions and statements from the said village....
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....isting, or if they were existing, whether they had any nexus to the opinion formed by the Company Law Board. 12. It is well settled that the discretionary powers under Section 237(b) of the Companies Act must be exercised honestly and not for corrupt or ulterior purposes. The authority must form the requisite opinion honestly and after applying its mind to the relevant material before it. In exercising the discretion, the authority must have regard only to circumstances suggesting one or more of the matters specified in sub clauses (i), (ii) and (iii) of Section 237(b) of the Companies Act. It must act reasonably and not capriciously or arbitrarily. It will be an absurd exercise of discretion, if, for example, the authority forms the requisite opinion on the ground the the director in charge of the company is a member of a particular community. Within these narrow limits, the opinion is not conclusive and can be challenged in a court of law. (refer paragraph-45 of Rohtas Industries Ltd.'s case AIR 1969 SC 707). The Supreme Court has also observed in the above case at paragraph-46 that - "If it is established that there were no materials upon which the authority could form th....
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.... opinion on circumstances which it thinks exist. Since existence of circumstances is a condition fundamental to the making of the opinion, when questioned the existence of these circumstances have to be proved at least prima facie. 41 In that light if one peruses the powers conferred under the 2013 Act, they are also identical. By section 206, there is a power to conduct inspection and enquiry by section 207. Both these powers are to be exercised by the Registrar. Then, the report has to be made by the Registrar and the Registrar or the Inspector after inspection of the Books of account or inquiry under section 206 and other books and papers of the company under section 207, shall submit a report in writing to the Central Government along with such documents, if any, and such report may, if necessary, include a recommendation that further investigation into the affairs of the company is necessary. For that, reasons in support have to be set out. We are not concerned with the power of search and seizure vesting in the Registrar in terms of section 209. Then comes the crucial provision in the 2013 Act, namely, section 210. That reads as under : "210. Investigation into af....
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....r / GM has supported the Company instead of stopping loan. b) It appears that Hon'ble MP has also raised doubts that "If any thing wrong goes in balance sheet tomorrow and loan goes bad the bank will suffer". c) The Company has taken Iron Ore from Barbil, Orissa to Raigarh, Chhattisgarh. The Company has got CBT allotment of 10 Railway Rack per month and doing fraudulent activity. They sale material to other plant and misusing the rack allotment. I has also stated that do proper investigation through Railway Board and there allotment of CBT should be suspend until the investigation is done. d) Company has not filed its Balance Sheet since 5 years. e) Various other issues like money laundering fraud / cheating etc have raised in enclosure of complaint." [See Pg. 188] 44 On each of these issues the Registrar of Companies stated that only the issue in paragraph 1(d) that the company has not filed its balance sheet for five years comes within his purview. However, his explanation says that the company has filed a petition before the Calcutta High Court being Company Petition Nos.475 of 2010 and 112 of 2012 restraining the Registrar of Companies from taking action. The....
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....er violations under provision of law. 3. NOW therefore, in exercise of powers conferred under section 212(1)(c) of the Companies Act, 2013, the Central Government hereby orders investigation into the affairs of Singhal Enterprises Pvt Ltd by the Serious Fraud Investigation Office (SFIO) of the Ministry of Corporate Affairs. 4. The Director, SFIO, in exercise of powers u/s 212(1), may decide such number of inspectors, as he may consider necessary and the Inspectors so appointed, shall exercise all the relevant powers under the Companies Act, 2013 for the purpose of the investigation. 5. SFIO shall complete the investigation and submit report to the Central Government within a period of four months from the date of issue of this order. 6. This order is issued for and on behalf of the Central Government. Sd/- (U K Sahoo) Joint Director" 46 A bare perusal of this order would indicate that the Central Government has referred to the report dated 13th January, 2016, but completely misread and misinterpreted it. It has not recommended any investigations to be made under the Companies Act,1956 or 2013. If at all the investigations are to be made in terms of this r....
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....t it is necessary to investigate into the affairs of the company by SFIO. That opinion has to be based on the report of the Registrar or Inspector under section 208; on intimation of a special resolution passed by a company that its affairs are required to be investigated; in the public interest or on the request from any department of the Central Government or the State Government. By section 211, the SFIO is established to investigate frauds relating to a company. It is a very special office and headed by a Director and consists of such number of experts from the fields enumerated in subsection (2) of section 211 to be appointed by the Central Government from amongst persons of ability, integrity and experience. The wide powers that this office enjoys, as is set out in various sub-sections of section 212, would denote as to how its involvement comes after the investigations are assigned to it by the Central Government. By their very nature the investigations into frauds relating to a company have to be assigned. They have to be of such magnitude and seriousness demanding involvement of experts in the fields enumerated in sub-section (2) of section 211. Therefore, while exercising....
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....cumstances and based on allegations and counter allegations between two groups of shareholders can it be even held that it is necessary in public interest to direct an investigation into the affairs of the company. Once we reach the conclusion that there is lack of requisite material to arrive at the requisite opinion or record the necessary satisfaction, then, in exercise of our powers of judicial review, we can safely quash and set aside the impugned order. We find that the opinion recorded or the satisfaction reached is vitiated by total non application of mind. None of the factors which are germane and relevant for forming the opinion have been referred. The opinion or satisfaction is based only on the complaint of the Member of Parliament to the CVC and with regard to which report was called for from the Registrar. Even the contents of that report have been, as held above, misread and totally misinterpreted. Based on that no opinion could have been recorded that it is necessary to investigate the affairs of the company in public interest. 50 Once we reach the above conclusion, it is not necessary to express any opinion as to whether the SFIO at Mumbai has the necessary terr....