TaxTMI 
TaxTMI 
2019 (1) TMI 785
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.... hereafter) under Section 212(1)(c) of the Companies Act, 2013. 2. Sunair is a public limited company incorporated in 1977 under the Companies Act, 1956 ("the Act" hereafter). Sunair is engaged inter alia in the business of establishing and managing hotels; it is not listed on any national stock exchange and is held among 44 of its shareholders. One of Sunair's shareholders is VLS Finance Ltd. (hereafter "VLS"), a public limited company incorporated under the Companies Act, 1956. VLS is a non-banking financial company engaged inter alia in the business of leasing and portfolio investments in equity shares, with an expertise in funding projects. It is joined as second respondent in this case. 3. The record reveals a chequered litigious history between Sunair and VLS since 1998. In 1982, the NDMC allotted a plot of land to Sunair for a hotel project. This license was further supplemented with an additional license deed executed in 1988 and possession was subsequently received. In June 1993, pursuant to a joint-venture agreement between Sunair and M/s Aeroflot, a wholly-owned subsidiary of Sunair (Sun Aero Ltd) was set up to carry out the hotel project. In 1993 M/s Aeroflot with....
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....airs of the Company. The substance of VLS's allegation in its petition was that Sunair had allotted shares worth about Rs. 21 Crores without investing any money and the shares were allotted to them by a fraudulent rotation of funds of the company. It was additionally alleged that this was achieved through the fraudulent re-transfer of land between Sunair and one of its wholly-owned subsidiaries. By order dated 13th June 2001, the CLB noted that none of VLS's contentions were made out and dismissed the petition noting in conclusion that "on an overall assessment of the case, we conclude that the intention of the promoters [of SUNAIR] had always been to get shares allotted against the value of the land and that the petitioner [VLS] was also aware of the same and as such the transfer and retransfer of the developmental rights are not sham transactions." VLS appealed the above decision under Section 10F of the Companies Act, 1956. The appeal entitled C.O. Appeal (SB) 11/2001 was heard by a learned single judge of this Court. The learned single Judge by judgement dated 16th December 2005 noted that the CLB erred in not considering the effect of MOU between VLS and Sunair and consequentl....
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....misappropriation of funds to stealing government documents from the Ministry of Corporate Affairs. Investigations under the Companies Act, 1956 and Companies Act, 2013: Investigation under Section 209A of the Companies Act, 1956: 9. In 1999, few Members of Parliament, namely Mr. Mohan Singh, M.P. (Lok Sabha) (as he was then) and Mr. Dilip Singh, M.P. (Rajya Sabha) (as he was then) submitted complaints to the Department of Corporate Affairs alleging that SUNAIR had engaged in cheating and fraud. Accordingly an investigation under section 209A of the Act, was conducted by the then Joint Director of the Department of Corporate Affairs. Resultantly, the Deputy Registrar of Companies, acting under Section 211 of the Companies Act, 1956, issued a show cause notice dated 16th March 2000, calling upon Sunair to explain the default in the accounts of the Company for the financial years 1994-1995 to 1997-1998 related to the abovementioned disputed shares and the land allotted to Sunair by the NDMC. In its response dated 28th March 2000, Sunair apart from partially denying the allegations, admitted to certain defaults and expressed the intention to have recourse to Section 40(1) of t....
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....rough CO.A.(SB) 16/2007 and the matter was heard by a Single-Judge and the appeal was dismissed by judgement dated 23rd April 2012. The learned Single Judge observed that the decision of CLB on merits of the mismanagement claim of VLS, that was to be decided afresh, by the CLB as directed in the order of the this court in C.O. Appeal (SB) 11/2001, remanding the issue agitated by VLS in C.P. No. 45/98 for reconsideration, there was no need to interfere with the order of the CLB denying to exercise its discretion to order an inquiry into the affairs of SUNAIR under Section 237(b) of the Companies Act, 1956. This order was confirmed by the Supreme Court vide Order dated 21st January 2013 in S.L.P. (Civil) No(s).27437/2012. Investigations under Section 401 of the Companies Act, 1956 13. In 2005, VLS filed a Writ Petition, W.P. (C) No. 14300/2005 in this court under Article 226 of the Constitution of India, claiming for a direction to the Central Government to institute proceedings under Section 401 of the Companies Act, 1956 against Sunair. That petition was dismissed by the learned single judge by order dated 30th November, 2007. The court then noted that VLS Finance was engagin....
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....shing the order of the MCA dated 29th February 2016. During the pendency of the above proceedings, on 06.06.2016, the SFIO conducted a search at the office of Sunair. The Supreme Court, that was still seized of the matter in S.L.P (C) No. 3317/09, directed on 22nd July 2016 that the investigations, which had already commenced be concluded on or before 31st October 2016 and that the report be placed before the learned single Judge that was hearing W.P. (C) 3444/2016 concerning the validity of the order of investigation. Pertinently, the Supreme Court ordered that: "(ii) The High Court is requested to dispose of the writ petition challenging the order directing the aforesaid investigation by the end of November, 2016 after the report of investigation is placed before it, meaning thereby if the report of investigation is in favour of respondent No.2 (Sunair Hotels Ltd.), the High Court may not have any occasion to go into the merits of the writ petition." 16. The material on the basis of which the investigation was ordered, comprising various complaints addressed to the Ministry of Corporate Affairs ("MCA") concerning the alleged mismanagement of Sunair, were submitted to the co....
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....he gravity of the allegations therein levelled seriously implicated Sunair. The Supreme Court in SLP (C) No. 3317/2009, in so far that it ordered that the Final Report of the SFIO investigation be placed before this court, rendered the present Writ Petition infructuous. Further, it was argued that the order of the Supreme Court dated 22nd July 2016 in the above petition required this court to consider the findings in the Final Report in order to determine the writ challenging the validity of the order of investigation. 21. It was contended furthermore that the judgements rendered in the context of Section 237 of the Act were not apt to an order of investigation under Section 212 of the 2013 Act, owing to the difference in language between the two sections. Section 212 of the Companies Act, 2013 only required a prima facie opinion and that there was no requirement for conclusive proof. Finally, it was contended that the gravity of allegations in the complaints received and the violations allegedly uncovered in the SFIO's final report confirm the suspicions and justify the order of investigation. Impugned judgment 22. Thus, the single issue framed is: "whether the formati....
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....enable the Central Government to assume the power to step in where there is reason to suspect that a company may be conducting its affairs in a manner prejudicial to the interests of its shareholders or the public at large. iii. However, the discretionary power must not be exercised by the Central Government, in a manner that, by reason of misconstruction of the statute or other reason, would lead to frustrating the object of the statute conferring the discretion. iv. In order to exercise this discretion reasonably and lawfully, the Central Government is required to formulate an opinion that an investigation into the affairs of the company is necessary; v. The opinion must be an honest opinion, rendered after bestowing sufficient attention to the relevant material/circumstances available before the Central Government; and vi. The opinion must not be based on a wholly irrelevant or extraneous consideration. vii. The materials/circumstances based on which the opinion to order an investigation has been rendered, have to prima facie, show that the inferences drawn from the facts in the materials/circumstances led to conclusions of certain de....
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....e the statutory provisions governing the investigation of companies under both the 1956 and the 2013 Acts. 27. Section 234 of the old Act conferred a general power of superintendence over the affairs of companies upon the Registrar of Companies, who may order the production of the documents of the company or detailed written answers to queries raised where he/she has reason to believe that further explanation is required on perusing the documents submitted by the company as required under the Act or on representations made by individuals who are interested in the functioning of the company that the affairs of the company disclose irregularities. If the information obtained proves insufficient, the Registrar shall report in writing to the Central Government under Section 234(6) of the 1956 Act. The Central Government receiving the report may then direct and investigation into the affairs of the company and accordingly appoint an officer under Section 235(1) of the 1956 Act. Additionally, an investigation could be ordered by the Company Law Tribunal under 235(2) if a certain proportion of Members of the company apply, along with supporting evidence that the affairs of the company ....
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....n, that it is necessary to investigate into the affairs of a company- (a) on the receipt of a report of the Registrar or inspector under section 208; (b) on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or (c) in public interest, it may order an investigation into the affairs of the company. (2) Where an order is passed by a court or the Tribunal in any proceedings before it that the affairs of a company ought to be investigated, the Central Government shall order an investigation into the affairs of that company. (3) For the purposes of this section, the Central Government may appoint one or more persons as inspectors to investigate into the affairs of the company and to report thereon in such manner as the Central Government may direct." 29. Section 211, which finds no comparable provision in the 1956 Act establishes the Serious Fraud Investigation Office that would be headed by a Director and comprise a number of experts in various fields ranging from banking, corporate affairs, taxation, forensic audit, capital market, information technology or law etc. Under Section 212, the Central G....
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....estraints or limitations the entire power of ordering an investigation to the subjective decision of the Government or the Board? There is no doubt that the formation of opinion by the Central Government is a purely subjective process. There can also be no doubt that since the legislature has provided for the opinion of the government and not of the court such an opinion is not subject to a challenge on the ground of propriety, reasonableness or sufficiency. But the Authority is required to arrive at such an opinion from circumstances suggesting what is set out in sub-clauses (i), (ii) or (iii). If these circumstances were not to exist, can the government still say that in its opinion they exist or can the Government say the same thing where the circumstances relevant to the clause do not exist? The legislature no doubt has used the expression "circumstances suggesting". But that expression means that the circumstances need not be such as would conclusively establish an intent to defraud or a fraudulent or illegal purpose. The proof of such an intent or purpose is still to be adduced through an investigation. But the expression "circumstances suggesting" cannot support the construc....
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....ary power and no facet of that power is open to judicial review. 35. The above discussed conclusions arrived at by the two judges in Barium Chemicals (supra) were subsequently affirmed by a three-judge bench of the Court in Rohtas Industries (supra) where the majority held that: "For the reasons stated earlier we agree with the conclusion reached by Hidayatullah and Shelat, JJ. in Barium Chemicals case that the existence of circumstances suggesting that the company's business was being conducted as laid down in subclause(1) or the persons mentioned in sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question is open to judicial review though the opinion formed by the Government is not amenable to review by the courts. As held earlier the required circumstances did not exist in this case." 36. The requirement to show the o....
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....on in Barium Chemicals (supra) and Rohtas Industries (supra), it is evident that the conclusion arrived at by the Court was primarily based on the fact that Section 237(b) of the 1956 Act required the formation of an opinion by the Central Government or the Tribunal that there were "circumstances suggesting": "(i) 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 of any of its members, or that the company was formed for any fraudulent or unlawful purpose; (ii) that persons concerned in the formation of the company 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 ; or (iii) that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company." 40. Section 212 on the other hand is framed in radically different ....
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.... the basis of the learned Judge's disagreement with the majority.] 42. The above discussion on Section 212 clarifies that the legislature has indeed decided to make the departure that Justice Mudholkar refers to. This is not to suggest that no observations that were made regarding the law governing investigations in these decisions are applicable to the new Act whatsoever. Standard of review of discretion exercised under Section 212 of Companies Act, 2013 43. The Supreme Court in the case of Corporation of Calcutta v Calcutta Tramways Ltd. [1964 5 SCR 25] wherein Section 437(1)(b) of the Calcutta Municipal Corporation Act, 1951, that vested absolute power to form an opinion in the Municipal Corporation of Calcutta was challenged on the ground of violating Article 19(1)(g). Justice Wanchoo, writing on behalf of all five judges observed: "...It has been urged that the Corporation which is an elected body would exercise the power conferred on it under Section 437(1)(b) reasonably and therefore the provision must be considered to be a reasonable provision. This in our opinion is no answer to the question whether the provision is reasonable or not. It is of course true that ....
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....to be analyzed in the context of the nature of the legislation, the nature of the powers conferred and the severity of its effects. He observed that: "A recent decision in Vellukunnel v. Reserve Bank of India [(1962) Supp 3 SCR 632 : AIR 1962 SC 1371] is in point in this connection. Section 38(3)(b)(iii) of the Banking Companies Act, 1949 was assailed there as being discriminatory and an unreasonable restriction. The impugned clause provided that the High Court shall order the winding up of a banking company on the Reserve Bank making an application for winding up "if in the opinion of the Reserve Bank.... (iii) the continuance of the banking company is prejudicial to the interests of the depositors". The learned Attorney-General rightly pointed out that the question there was not so much on the meaning of the words "in the opinion of" as whether a law which requires the High Court to order winding up because the Reserve Bank is of that opinion is constitutional. But it is not without significance that the divergence of opinion in this Court was that according to the minority opinion the vice of the impugned provision lay in the power vested in the Reserve Bank to apply to th....
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.... was defective. It needs to be first established that an order of investigation passed under Section 212 of the Companies Act, 2013 may be challenged on such grounds before examining the veracity of the factual basis of these grounds. To elaborate on the standard of review that courts may exercise in reviewing a decision to order an investigation into the affairs of a company, it is imperative to first understand the character of the ordering authority, nature of investigation that would be conducted and effects of such an investigation on the company. 48. In Rohtas Industries (supra), the majority judgment explained the substantial effect that investigations have on Companies in the following words: "It may be noted that before the Central Government can take action under Section 235, certain preconditions have to be satisfied. In the case of an application by members of the company under clause (a) or (b) of Section 235, the same will have to be supported by such evidence as the Central Government may require for the purpose of showing that the applicants have good reasons for requiring the investigation, and the Central Government may, before appointing an Inspector, requi....
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....ch of the Bombay High Court in Hariganga Cement Limited v The Company Law Board [(1987) 2 Bom CR 250] further supports this proposition. An investigation that was commenced purely on the basis of allegations, some of which pertained to alleged illegalities outside the ambit of corporate management of a Company. In striking down the order of investigation, the court observed that; "We do not find that such contention can be accepted at all, for the simple reason that the speaking order passed by the Board at Annexure-A clearly brushes aside the applications filed by Batra and Arora, and they have categorically concluded that most of the allegations in the applications were not substantiated, whereas the remaining allegations have been duly explained by the Company." Examination of the Material upon which the impugned investigation order was rendered: 52. The court now would examine the material on the basis of which the impugned order was passed. The UOI's counter affidavit reveals that the order of investigation was passed on the basis of complaints received by the Ministry of Corporate Affairs and the complaints have been accordingly annexed. Upon considering the list of ....
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..... It is true that the compounding related to the misstatement during the financial years 1994-95 to 1997-98 and that the allegation relates to a persisting failure to rectify the defect. 55. As regard the allegations of the stolen files, this matter formed part of FIR No. 315/2005 registered at Police Station, Naraina, Delhi and investigation into this has been stayed by this Court. The pleadings here only contain the statement that the matter has been stayed - the order granting the stay has not been attached by the Appellant and, therefore, unable to verify this fact nor the reasons for the stay order. In any event such an act would be punishable under the IPC and does not in any manner relate to the management of Sunair. 56. Apart from these, the original files, which were called for consideration, by the court, during the course of this appeal, suggest that after the Division Bench decision (upholding the order of the learned single judge, in 2007), an appeal by special leave was preferred to the Supreme Court, under Article 226 of the Constitution of India. The court had issued notice in the petition, which remained pending. In the meanwhile, several fresh complaints wer....
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....ion was taken after receipt of fresh materials, in mid-2015, ultimately by the impugned order. 58. Sunair contended that the conclusion of these disputes acts as a bar on any further investigations on these grounds as it amounts to double jeopardy, violative of Article 20 of the Constitution of India. In the case of Raja Narayanlal Bansilal v Maneck Phiroz Mistry [1961 SCR 417] a five-judge bench of the Supreme Court was called upon to adjudicate on the applicability of Articles 20(2) and 20(3) to investigations that were ordered into the affairs of the appellant-company. Specifically, the question before the court was whether an investigation could be conducted into offences that were previously disclosed and raised in a different forum and whether the search and seizure provisions, requiring a company to produce documents over the course of the investigation amounted to compelled testimony, in contravention of the right against self-incrimination, the court observed: "The investigation carried on by the inspectors is no more than the work of a fact-finding commission. It is true that as a result of the investigation made by the inspectors it may be discovered that the affai....
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....ved by them, post the year 2013, from other sources as well." 60. This court concurs with the conclusions of the learned single judge on the issue of double jeopardy. In our opinion it is the nature of investigations into the affairs of a company that render Article 20 inapplicable and not the fact that the complaints were recent. Even though the conclusion of the various disputes are not a bar on further investigations, they certainly form part of the material that would have to be examined before an order of investigation is passed under Section 212. In the opinion of this court an order of investigation under Section 212, nonetheless cannot be ordered casually. The duty to exercise discretion judiciously obliged the Central Government to examine the multiplicity of judgements that were available in the public domain (most of which the Ministry was directly a party to) relating to the allegations and to form an opinion in good faith that there was a need for further investigation. It was imperative for the Ministry to peruse all these documents and to record reasons as to why the abovementioned judicial decisions were not conclusive of the issue, necessitating further investig....
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.... absence of a higher threshold Section 212 courts the risk of falling foul of Article 14 and an interpretation that renders a provision invalid ought to be avoided. 63. This court further notes that the existence of public interest in the present case is a condition precedent to the exercise of power under Section 212.One of the judges (Justice Bachawat), in his judgement in Rohtas Industries (supra) observed: "In construing statutory provisions of this description, the actual words used and their subject-matter are of the utmost importance. Thus if the statute provides that "if in the opinion of the Provincial Government it is necessary or expedient to do so the Provincial Government may, by order in writing requisition any land for any public purpose", the existence of the public purpose but not its necessity or expediency is justiciable, see Province of Bombay v. K.S. Advani [(1950) SCR 621] . The reason is that the factual existence of the public purpose is by the language of the section a condition precedent of the requisition." 64. It is unnecessary in the present case to exhaustively enumerate the bounds of "public interest" in Section 212. Nevertheless, this court ....