TaxTMI 
TaxTMI 
2020 (3) TMI 708
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....d of '63 Moons Technologies Limited' 1st Respondent Company (formerly 'M/s. Financial Technologies (India) Limited'). 2. After constitution of the National Company Law Tribunal ("Tribunal" for short), the case was transferred. The National Company Law Tribunal, Chennai vide impugned order dated 4th June, 2018 partly allowed the Petition disqualifying the past Board of Directors (i.e., those appointed before 31st July, 2013) and granting permission to the Government to nominate not more than 3 Directors. The Tribunal disqualified the past Board Directors i.e, those appointed till 31st July, 2013 on the following grounds: (a) The software used on the trading platform in 'National Spot Exchange Limited' was a proprietary software provided by '63 Moons Technologies Limited' which holds 99.99% of the equity shares of the subsidiary ('National Spot Exchange Limited'); (b) 1st Respondent Company ('63 Moons Technologies Limited') by virtue of preponderance of shareholding had the power to elect/nominate the Board of directors in 'National Spot Exchange Limited'. (c) The Board resolutions and other issues ....
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....sferred 99.99% shares to 1st Respondent, '63 Moons Technologies Ltd.' (erstwhile FTIL). About 45% of the shareholding of 1st Respondent is held by Shri Jignesh Prakash Shah (2nd Respondent) and family, and about 43% of the shareholding is held by others (public). Approximately 5% of the shareholding is held by institutional investors. 6. 'National Spot Exchange Limited' (29th Respondent) provided an electronic platform for trading of commodities between willing buyers and sellers through brokers representing them. In order to persuade the Central Government to permit 'National Spot Exchange Limited' (29th Respondent) to establish a commodity exchange, several representations, including the following were held out by the 'Multi-Commodity Exchange', the original promoter of 'National Spot Exchange Limited' (29th Respondent) and Mr. Jignesh Prakash Shah (2nd Respondent) as Group Chairman of 1st Respondent- '63 Moons Technologies Ltd.':- (i) No short sales would be permitted and all outstanding positions at the end of the day would result in delivery of the commodities;' (ii) In order to ensure delivery of commodi....
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....e Limited' (29th Respondent) offered paired contracts comprising short term buy contract and a long term sell contract, such as T+2 and T+25. 9. Mr. Jignesh Prakash Shah was present at the Board Meetings of 'National Spot Exchange Limited' (29th Respondent) in September, 2009 where such longer duration contracts were approved, which gave rise to the "paired contracts" system. This was defeat of the concept of "Spot Exchange", and thus caused injury to the business, trade, Industry of "Spot Exchanges". 10. On 27th April, 2012, the Department of Consumer Affairs issued a show cause notice to 'National Spot Exchange Limited' (29th Respondent) as to why action should not be initiated against it for permitting transactions in alleged violation of the exemption granted to it under the 'Forward Contracts (Regulation) Act, 1952'. 11. 'National Spot Exchange Limited' (29th Respondent), in its reply dated 29th May, 2012 to the said Show Cause Notice dated 27th April, 2012, stated that it never insisted on deposit of goods in the warehouse before generating a warehouse receipt and allowing the "Seller" to take a "Sale" position on its Exchange. ....
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....#39; consumption upto next 1 to 1.5 years. (ii) 'National Spot Exchange Limited' (29th Respondent) strictly prohibits short sales through its circulars, notifications, practices in letter and spirit. (iii) In agricultural commodities, more than 99% trades result into delivery on daily basis. (iv) As per empirical data, short delivery has not happened even in 0.0001% cases during last 5 years. (v) 'National Spot Exchange Limited' (29th Respondent) model has full stock as collateral, 10-20% of open position as margin fee with complete purchase commitment of the processors. (vi) This is full proof risk management system compared to any other financial market structure. (vii) The value of stocks held by 'National Spot Exchange Limited' (29th Respondent) is around Rs. 6,000 crores. 15. By the year 2013, the volumes of paired contracts constituted almost 99% of the turnover of the NSEL Exchange. In monetary terms, this turnover of paired contracts was to the tune of Rs. 1,34,000 crores between the years 2009 to 2013. This means that the entire operations at the NSEL Exchange, which was meant to be a commodit....
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....d 21st September, 2013 came out with damning facts and figures as to the real operations of 'National Spot Exchange Limited' (29th Respondent), namely, that they are not a commodity exchange, but an illegal financing scheme, and that no commodities were really in stock. 20. On 04th October, 2013, based on the Grant Thornton Report dated 21st September 2013, the FMC issued a Show Cause Notice to four persons, including 'Financial Technologies (India) Limited' (1st Respondent) and Mr. Jignesh Prakash Shah (2nd Respondent), which eventually resulted in the Order dated 17th December, 2013 declaring that 'Financial Technologies (India) Limited' (1st Respondent), along with Mr. Jignesh Prakash Shah (2nd Respondent), Mr. Joesph Messy and Mr. Shreekant Javalgekar as not "fit and proper" to hold equity in any commodity exchanges, and to dilute their shareholding to not more than 2% of the paid-up equity capital of MCX. It is important to notice that the Board of 'Financial Technologies (India) Limited' (1st Respondent) was filled with the present Directors closely after this date (04th October, 2013). 21. The Report filed by SFIO in 2018 further corrobo....
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.... who are liable regardless of the period on which they were occupying the post of Directors) 24. Further case of the Union of India is that the Directors on the board of 'Financial Technologies (India) Limited' prior to 31-7-2013: a. Business realities of the case show that 'National Spot Exchange Limited' (29th Respondent) and 'Financial Technologies (India) Limited' were a single economic unit and were alter egos of each other. b. 'Financial Technologies (India) Limited' held 99.9998% of NSEL's shares. 'National Spot Exchange Limited' (29th Respondent) and its affairs were entirely under the control of the Board of Directors of 'Financial Technologies (India) Limited'. c. The transactions between 'National Spot Exchange Limited' (29th Respondent) and 'Financial Technologies (India) Limited' were not on arms length basis. d. Mr. Jignesh Prakash Shah (Respondent No. 2) is the primary common link between both the companies apart from the others who were aiding and abetting his designs. He held 45% shares of 'Financial Technologies (India) Limited' and was its Chairman-c....
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....nover of the exchange comprised such paired contracts. In monetary terms, the turnover of the paired contracts between 2009 and 2013, was not some negligible figure, which might have legitimately escaped the attention of FTIL, but, this figure was Rs. 1,34,000 crores. The same is the position with inventory valued at Rs. 6,000 crores in the 120 warehouses as stated by Mr. Jignesh Prakash Shah in the presentation made hardly 20 days before the collapse of operation at the exchange. j. 'National Spot Exchange Limited' (29th Respondent) was treated, held out, and represented by Respondent No. 1 to be its own, and was part of its "exchange verticals". 25. It was submitted by the Union of India is that the Directors on the Board of 'Financial Technologies (India) Limited' after 31-7-2013: (a) The Directors appointed post 31-7-2013 are also liable to be disqualified. (b) The breach of Corporate Governance is still being defended by the present Board, the stand of the disqualified directors is being articulated by the present Board. (c) The keywords in Section 408 of the erstwhile Companies Act, 1956 (which corresponds with Section 24....
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....ard of Directors of the Company is accustomed to act. b. That the Companies Act, 2013 enlarges the definition of the positions who are encompassed within the meaning of the term defined as 'officers in default' [Section 2(60)]. It is submitted that not only the persons defined above but a whole host of persons who have control or influence over the affairs of the company have been included. It is submitted that the present respondents are 'officers in default' for nefarious state of affairs at both 'Financial Technologies (India) Limited' as well as 'National Spot Exchange Limited' (29th Respondent). 27. Learned counsel for the Union of India submitted that where the impugned actions are within the knowledge of the/Board of Directors, then each and every Director of the Company is liable for action and shall be declared as not fit and proper person. The Hon'ble Supreme Court in "Official Liquidator, Supreme Bank Ltd. v PA. Tendolkar (Dead) By LRs and Others (1973) 1 SCC 602" in a case involving malfeasance proceedings under section 45-H of the Banking Companies Act r/w Section 235 of Companies Act, 1913 against Directors of Supreme Ba....
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....of the same the Board of NSEL of which Mr. Jignesh Prakash Shah was a part took all steps (including filing a police complaint against the perpetrators of the wrongdoings at NSEL) to redress the same. 30. It was submitted that the FMC is a statutory body constituted pursuant to Section 3 of the Forward Contracts (Regulation) Act, 1952 (the "FCRA") and was the chief regulator of commodity futures markets in India. Union of India has relied upon the FMC Order for the purpose of forming its opinion to seek relief under section 241(3) of the Companies Act, 2013 (formerly Section 388B of the Companies Act, 1956). However, the criteria prescribed under the applicable guidelines for the FMC to declare a person to be not fit and proper is completely different from the requirements stated in clauses (a) to (d) of Section 241(3) of the Companies Act, 2013 and as such the entire basis of the Union of India on which it has approached this Appellate Tribunal to declare Mr. Jignesh Prakash Shah to be not fit and proper is misplaced. 31. It was further submitted that one of the criteria/aspect considered, in deciding whether Mr. Jignesh Prakash Shah qualified as fit and proper person or not....
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....blic interest in the aforesaid purpose and since the Union of India itself has admitted that it has not adjudicated upon the alleged fraud and there is no complaint by any shareholder, no case for winding-up has been made out. 33. It is stated that the tribunal while passing the order has completely ignored the number of documentary evidences placed on record by the Respondents which clearly establishes that the Board of NSEL (which included Mr. Jignesh Prakash Shah (2nd Respondent) and Mr. Ramanathan Devrajan (23rd Respondent), the two common directors between NSEL and 'M/s. 63 Moons Technologies Limited' had no knowledge whatsoever nor any red flags whatsoever were there before the Board of NSEL, in relation to the inadequacy of commodities in warehouses prior to the payment default. Case of Appellant- Mr. Dewang Sunderraj Neralla (3rd Respondent) and the Appellant- Mr. Manjay Prakash Shah (4th Respondent) 34. Similar plea has been taken by the Mr. Dewang Sunderraj Neralla and Mr. Manjay Prakash Shah (3rd and 4th Respondents respectively) Appellants in two of the appeals as taken by the Union of India as recorded do not mention the Appellants anywhere save and ex....
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....' (1st Respondent Company). Therefore, it cannot be accepted that they had no knowledge of any fraudulent act of 12th Respondent- Mr. Miten Narendra Mehta prior to 31st July, 2013. 40. The Tribunal accepted that 5th to 8th Respondents and 17th to 28th Respondents have joined FTIL Board ('63 Moons Technologies Limited') after the trading in NSEL was suspended on 31st July, 2013 and no specific allegations against them has been made by the Union of India. In that view of the matter, no relief was sought for by the Union of India under Relief No. 17 (a) to (d). 41. The summary of the impugned order i.e. 4th June, 2018, reads as follows: "Summary of the Orders: 1. With respect to relief No. 17.1(a)-R2, R3, R4, R9, R10, R11, R13, R14, R15 & R16 are hereby declared as not fit and proper persons to hold the office as Director or any other office connected with the conduct and management of Respondent No. 1 Company and Respondent No. 29 Company and also not eligible for appointment as Directors in any other company. 2. No directions have been given with respect to the relief No. 17.1(b) sought for by the petitioner. 3. With respect to r....
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....e Companies Act, 1956 (now Sections 241-242 of the Companies Act, 2013). As per Section 434 of the Companies Act, 2013, all cases transferred from Company Law Board to the Tribunal are to be dealt with in terms of the provision of the Companies Act, 2013. Therefore, the Tribunal is required to deal with the submissions in the matter under sub-section (2) of Section 241 r/w Section 242 of the Companies Act, 2013. 44. The Respondents before the Tribunal (Appellants herein) have not disputed that 'National Spot Exchange Limited' (29th Respondent) was in the business of holding commodities. "Warehouse Receipts", which were the documents of title to the commodities were printed without the commodities being present in the warehouse. The Warehouse Receipts so printed were deceptively similar to the pro forma prescribed under the 'Warehouse Development and Regulatory Authority Act' and the Regulations framed thereunder, without being authorized by it. This was an act of forgery injuring the commodities/spot exchanges industry as a 'Spot Exchange' is defined as a marketplace where Warehouse Receipts are traded. 45. Even after rejection of the application of wa....
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....d unfairly prejudice to such member or members, but otherwise the fact would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. 49. If the affairs of the Company have been or are being conducted in a manner prejudicial to public interest, though it may be beneficial to member or members of the company, such Company required to be wound up once such specific finding is arrived. It is in this background, as winding up of the Company is unfairly prejudice the member or members, but otherwise the fact would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up, hence, the impugned order was passed by the Tribunal. 50. It not in dispute that Respondent No. 2-Mr. Jignesh Prakash Shah was Director of Respondent No. 1-'63 Moons Technologies Limited' and 'National Spot Exchange Limited' (29th Respondent). Mr. Dewang Sunderraj Neralla and Mr. Manjay Prakash Shah (3rd and 4th Respondents respectively) were also functioning as Director prior to the date, i.e. 31st July, 2013 cannot state that they have no knowledge of illegal acts ....
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.... ('63 Moons Technologies Limited'), including the post of Director prior to 31st July, 2013, they were entitled for similar treatment as given to Respondent No. 28-Shri Chandran Thumparambil Nair and other Respondent Nos.5 to 8 or, who have joined after 31st July, 2013 in the Company. 54. In the impugned judgment (at page no. 28), the Tribunal has wrongly taken into consideration the dates of appointment of Respondent No. 2- Mr. Jignesh Prakash Shah, Respondent No. 3- Mr. Dewang Sunderraj Neralla, Respondent No. 4- Mr. Manjay Prakash Shah, Respondent No. 9- Mr. Devendra Kumar Agrawal, Respondent No. 10- Mr. Berjis Minoo Desai, Respondent No. 11- Mr. Anil Chandanmal Singhvi, Respondent No. 13- Ms. Nisha Dutt, Respondent No. 14- Mr. Sunil Hasmukhlal Shah, Respondent No. 15- Mr. Prashant Desai and Respondent No. 16- Mr. Jigish Shantilal Sonagara. We have verified their dates of appointment from the record submitted by the Union of India along with written submissions which shows that all of them appointed subsequently on the following dates: Respondent Names Date of appointment R2 Mr. Jignesh Prakash Shah 15-9-2000 R3 Mr. Dewang Sunderraj Neralla ....