TaxTMI 
TaxTMI 
TaxTMI 
2019 (3) TMI 887
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....y incorporated under the provisions of the Companies Act, 1956 having its registered office at Greenwood Tea Estate, Dibrugarh. 4.1. Petitioner No.1 is involved in the business of cultivation and manufacture of tea having several tea estates in the State of Assam. As per Annexure-B statement annexed to the writ petition, petitioner No.1 has 14 tea estates in the State of Assam producing approximately 11 million kgs of tea per year which are sold either through auction or through private sale. Petitioners have also annexed balance-sheet of petitioner No.1 for the last five years including annual report for the year 2016-2017. Petitioner No.1 is an income tax assessee and has been submitting income tax returns regularly. Income tax return submitted for the assessment year 2017-2018 has been annexed to the writ petition as Annexure-F. It is stated that besides income tax, petitioner No.1 has been regularly paying other statutory dues and taxes. In addition to tea, petitioner No.1 has extended its business operation to oil exploration. 4.2. It is stated that on 07.08.2017, petitioners came to learn that respondent No.2, i.e., Securities and Exchange Board of India (SEBI) had initiate....
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....tax department having been identified in various search/seizures. 4.7. From the database, it appears that petitioner No.1 was shown as a company controlled by one Shri Vijay Kumar Gupta who is an entry operator and against whom several income tax proceedings are pending. A nexus was drawn between Shri Vijay Kumar Gupta and petitioner No.1 through Shri Sanjay Khandelwal who is one of the independent Directors of petitioner No.1 and also a Director in the companies controlled by Shri Vijay Kumar Gupta. 4.8. Petitioners have vehemently denied that petitioner No.1 has any link with Shri Vijay Kumar Gupta. Mere presence of Shri Sanjay Khandelwal as an independent Director of petitioner No.1 who is also a Director in the companies controlled by Shri Vijay Kumar Gupta cannot be construed as there being a nexus between petitioner No.1 and Shri Vijay Kumar Gupta. 4.9. In the meanwhile, respondent No.2 passed an interim order dated 08.12.2017. By the said order trading in securities of petitioner No.1 was reverted to the status as it stood prior to issuance of the letter dated 07.08.2017. It was ordered that stock exchanges would appoint independent auditors to verify misrepresentation of....
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....llate Tribunal had already passed order dated 21.08.2017 on the appeal filed by the petitioners staying the order of respondent No.2 suspending trading of shares of petitioner No.1 in the stock exchanges. Respondent No.2 passed an order dated 08.12.2017 directing the stock exchanges to appoint forensic auditors to verify misrepresentation and misuse of funds, etc of petitioner No.1. 7.2. It is contended that respondent No.1 has not committed any illegality in forwarding the information received from an investigating agency, i.e., SFIO to one of the regulators of the capital market, i.e., SEBI for taking action as per law. In such circumstances, respondent No.1 seeks dismissal of the writ petition. 8. Respondent No.2, i.e., SEBI in their counter affidavit has stated that it received a letter dated 09.06.2017 from the Ministry of Corporate Affairs, Govt. of India forwarding a copy of letter dated 23.05.2017 of SFIO annexing a list of 331 shell companies for initiating necessary action as per SEBI laws and regulations. On receipt of such letter, respondent No.2 directed the stock exchanges to identify the 331 companies and to place them under stage-IV of credit surveillance measures....
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....Thereafter by order dated 12.01.2018, Tribunal appointed resolution professional to conduct corporate resolution process. 8.5. Respondent No.2 has stated that petitioner No.1 has not filed its submissions in terms of the interim order dated 08.12.2017 giving liberty to petitioner No.1 to file objection to the aforesaid order. 8.6. Contention of respondent No.2 is that petitioner No.1 being under the corporate insolvency resolution process and resolution professional having been appointed by the Tribunal, petitioner No.2 has no locus or authority to represent petitioner No.1 and to file the writ petition. Management of the affairs of petitioner No.1 having been vested with the resolution professional, petitioner No.2 cannot act for and on behalf of respondent No.1. Therefore, at the instance of petitioner No.2, writ petition is not maintainable. 8.7. Finally, it is contended that respondent No.2 has acted in accordance with law by rightly directing the stock exchanges to initiate forensic audit in order to reach a definite and conclusive finding. Therefore, respondent No.2 seeks dismissal of the writ petition. 9. Petitioners have filed rejoinder affidavit to the affidavit filed ....
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....us provisions of the Code, she submits that upon commencement of corporate insolvency resolution process, Board of Directors of petitioner No.1 has become non-functional; management of petitioner No.1 being vested first with the interim resolution professional and thereafter with the resolution professional. In such a situation, resolution of the Board of Directors of petitioner No.1 authorising petitioner No.2 to initiate legal action on behalf of petitioner No.1 would have no legal sanctity. The resolution professional cannot also ratify such resolution of the Board of Directors. Petitioner No.2 is not competent to file writ petition on behalf of petitioner No.1. Therefore, writ petition so filed would not be maintainable. Resolution of the Board of Directors being illegal, question of ratifying such an illegal act by the resolution professional does not arise inasmuch as such ratification would be non est in the eye of law. Further submission of Ms. Hazarika is that resolution plan of petitioner No.1 having been approved, present petitioners cannot pursue the writ petition. 12.1. On merits, Ms. Hazarika submits that after receipt of the impugned letter dated 09.06.2017, SEBI to....
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....n interpretation which furthers the purpose of law rather than that which frustrates it. Besides power to issue directions under Section 11B thereof being procedural in nature can be applied retrospectively). 4. (2018) 1 SCC 407 = Innoventive Industries Ltd v. ICICI Bank (in support of the contention that a legal action at the instance of erstwhile director of the company when Insolvency and Bankruptcy Code, 2016 has come into play would not be maintainable). 13. In his reply submissions, Mr. Gaggar has contended that notwithstanding initiation of proceedings against petitioner No.1 under the Code, Board of Directors of the company does not loose locus to institute a legal action. This would be evident from the various orders passed by the Tribunal in the case of petitioner No.1. His submission is that though Board of Directors stands suspended, all the directors and employees of the company are required to assist the resolution professional in managing the affairs of the company during the period of moratorium. That is why resolution professional has ratified the resolution of the Board of Directors to authorize petitioner No.2 to institute legal proceedings. Therefore, petitio....
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....o eliminate tax-avoidance by profitable corporations. In the said glossary, shell company has been defined as a company which is formally registered, incorporated or otherwise legally organized in an economy but which does not conduct any operations in that economy other than in a pass-through capacity. Shells tend to be conduits or holding companies and are generally included in the description of special purpose entities. 17.1. As per the glossary, special purpose entities have been described as legal entities with little or no employment or operations or physical presence in the jurisdiction in which they are created by their parent enterprises which are typically located in other jurisdictions (economies). They are often used as devices to raise capital or to hold assets and liabilities and usually do not undertake significant production. An enterprise is usually considered as a special purpose entity if it meets the following criteria:- (1) The enterprise is a legal entity - (a) formally registered with a national authority, and (b) subject to fiscal and other legal obligations of the economy in which it is resident; (2) The enterprise is ultimately controlled by a no....
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....ation of black money, carrying out benami transactions, shifting of corporate profit to tax haven jurisdictions and round tripping of such profit or black money by taking advantage of double tax avoidance treaties thereby causing huge loss in tax revenue. Apprehension has been expressed by the Financial Action Task Force (FATF) that shell companies may be used for financing terrorism. FATF is an inter-governmental policy making body established in the year 1989 to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. 18.4. As per the study, SEBI has proposed to the Government of India that there should be a legal definition of shell company as there is no law in India which defines shell company at present. Such definition besides giving legal clarity will also enable investigative agencies to carry out investigation more swiftly and in a structured manner. 18.5. Parliamentary Standing Committee on Finance has suggested that shell companies be defined under the Companies Act, 2013. The Committee was of the....
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....om the perspective of the Government and its agencies, a shell company is ordinarily identified with dubious activities concerning serious economic offences, such as, tax evasion, money laundering, benami transaction, conversion of black money into white, round-tripping with host of other associated offences. The general perception is that presence of shell companies and its potential use for illegal activities threatens the very economic foundation of the country and severely compromises its economic foundation and ultimately sovereignty. 22. Having discussed the above, interim order dated 12.07.2018 passed by this Court may now be adverted to, relevant portion of which is extracted hereunder:- "Petitioner No.1 is a public limited company incorporated under the provisions of the Companies Act, 1956 having its registered office at Dibrugarh and is represented by petitioner No.2, Managing Director. Petitioners are primarily aggrieved by the letter dated 09.06.2017 of the Govt. of India, Ministry of Corporate Affairs addressed to the Chairman, Securities Exchange Board of India (SEBI) forwarding a CD regarding the database of 331 listed shell companies for initiating necessary act....
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....ish Dictionary, 11th (Revised) Edition, shell company has been defined as a non-trading company used as a vehicle for various financial manoeuvres. The submission is that the expression shell company in popular parlance refers to a tainted company which is used as a front for routing of crime tainted money into the economy. Therefore, the expression itself has an adverse consequence, penal as well as financial. Before terming the petitioner company No.1 as a shell company, notice ought to have been issued and a hearing ought to have been afforded because terming the petitioner No.1 as a shell company by itself would carry adverse consequences. On the other hand, Mr. Keyal, learned Assistant Solicitor General of India, submits that proceedings against the 331 shell companies have been initiated by the SEBI and an interim order was passed on 08.12.2017 in the case of the petitioner No.1 company wherein adverse observations have been made regarding genuineness of investments made by the petitioner No.1 company and regarding financial misrepresentation. SEBI has also observed that the short-term and long term loans and contractual relationship with companies associated with petitione....
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....by itself would entail adverse consequences, petitioner No.1 should have at least been put on notice before being branded as a shell company. It was recorded that petitioner No.1 is an old and reputed company owning 14 tea estates in the State of Assam producing 11 million kgs of tea every year and having a labour force of 20 thousand of its own. Therefore, branding such a company as a shell company was not justified. Besides, initiating proceedings after branding petitioner No.1 as a shell company virtually amounted to giving a finding first and thereafter initiating a proceeding to justify the finding like a post-decisional hearing. One cannot be declared guilty first and thereafter subjected to a trial to justify or uphold such finding of guilt. The letter dated 09.06.2017 and the office memorandum dated 23.05.2017 are very clear. Those clearly proceed on the basis that petitioner No.1 is a shell company and not a suspected shell company. 24. In the appellate order dated 21.08.2017, Securities Appellate Tribunal considered the annual turnover of petitioner No.1 for the last three years which even according to SEBI prima facie appeared to be correct and stayed the restrictions i....
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....derly and healthy growth of securities market on the one hand and on the other hand to protect the interest of investors. It has power to issue directions if it is satisfied upon enquiry that such direction is necessary in the interest of investors etc. Thus, the power of SEBI to enquire into any infraction of law by corporate entities or to conduct enquiry or to issue direction in exercise of its powers under the SEBI Act is not in dispute. Such a power SEBI undoubtedly has but that is not the question here. The question is whether a person, a juristic person in this case, can be condemned unheard. It goes to the root and is fundamental that no person can be condemned unheard. Therefore, before branding petitioner No.1 as a shell company, it was obligatory on the part of respondent No.1 to have issued notice and to have heard petitioner No.1. 30. That having not been done, declaration or branding of petitioner No.1 as a shell company cannot be legally sustained. 31. In so far maintainability of the writ petition at the instance of petitioner No.2 is concerned, Court is of the view that it is the company which is staring at being branded as a shell company with all its negative c....