TaxTMI 
TaxTMI 
2020 (3) TMI 708
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....#39; 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 relating to 'National Spot Exchange Limited' were regul....
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....L). 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 commodities, the 'National Spot Exchange Limited' (29th Respondent) would establish designated warehouses, ....
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....h 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. 'National Spot Exchange Limited' (29th Respondent) cited an example of brinjals on standing crop, but has never explained as to how many transactions fell in such catego....
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.... 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 commodities spot exchange, were entirely subverted in gross violation of the conditions of the exemption notification dated 5th June 2007. In July 2013, 'National Spot Exchange Limited' (29th Respondent) declared that trading membe....
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....at 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 corroborates the fact that 'National Spot Exchange Limited' (29th Respondent), its Board of Directors, Chief Executive Officer and Other Officer and its holding Company Respondent No. 1 and its subsidiary 'Indian Bullion Market Associatio....
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.... 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-cum-Managing Director. He was also Vice Chairman on the Board of 'National Spot Exchange Limited' (29th Respondent), being one of the "key managerial personnel" of the aforesaid company. He also was a member of the Audit Committee of 'National Spot Exchange Limited' (29th Respondent).....
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.... 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 242 read with Section 241 of the Companies Act, 2013) provides for orders to pre-empt adverse actions and to thereby safeguard the interests of the company. The keyword in Section 408 is 'effective safeguard'. It is submitted that Directors who have been appointed as an eyewash after 31-7-2013 cannot be treated as an effective safeguard against actions of &....
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....ncluded. 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 Bank of India held: "It is certainly a question of fact, to be determined upon the evidence in each case, whether a Director, alleged to be liable for misfeasance, had acted reasonably as well as honestly and with due diligence, so that he could not be held liable for conniving at fraud and misappropriation which takes place. A Director may be shown to be so placed and to have been so closely and so l....
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.... 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, was public perception. This was the issue raised by the FMC in the Show Cause Notice issued to Mr. Jignesh Prakash Shah which eventually culminated into the FMC Order. The clause of which the FMC held Mr. Jignesh Prakash Shah to be violative of was the clause which laid down the criteria of what a 'fit and proper' person was i.e. "such person has a general reputation and record of fairness and integrity, inc....
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....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 except an erroneous observation. 35. It is further submitted that there is no finding of fraud committed by 3rd and 4th Respondents (Appellants herein) in the '63 Moons Technologies Limited' or the close association of the Director with the management of the company or the association needs to be long and personal or the Director's negligence must be proved and the negligence has to be of an enabling character. Ca....
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....e 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 relief No. 17.1(c)- The respondents (R2, R3, R4, R9, R10, R11, R13, R14, R15 and R16) have conducted themselves in a manner prejudicial to the public interest and the interests of the respondent companies. As has been discussed the actions of the respondents have shaken the public confidence in the Indian Commodity markets. The failure of the said respondents in exercising due diligence has resulted in the suspension of trade in NSEL (R29) and has had/will have adverse effects on the members and other stakeholders of....
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....as 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 warehousing licence made by 'National Spot Exchange Limited' (29th Respondent), it represented to the WDR Authority that the 'National Bulk Holding Corporation', a group company of 'Financial Technologies (India) Limited' would undertake the warehousing activities for 'National Spot Exchange Limited' (29th Respondent). As a matter of fact, NBHC never undertook the warehousing for the paired contracts of 'National Spot Exchange Limited' (29th Respondent). After the collapse of 'National Spot Exchange Limited' (29t....
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.... 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 'National Spot Exchange Limited' (29th Respondent). Therefore, no relief can be granted in their favour. 51. Respondent No. 9-Shri Devendra Kumar Agrawal, Respondent No. 15-Shri Prashant Desai and Respondent No. 16-Shri Jigish Shantilal Sonagara were not the Directors before 31st July, 2013, but it is not disputed that they were functioning in the other capacity in '63 Moons Technologies Limited', such as CFO etc. In such situation, it is not desirable to grant any relief in favour of Respondent No. 9-Shri Devendra Kumar Agrawal, Respondent No. 15-Shri P....
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....nil 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 15-9-2000 R4 Mr. Manjay Prakash Shah 1-4-2012 R9 Mr. Devendra Kumar Agrawal 27-5-2017 R10 Mr. Berjis Minoo Desai 7-11-2014 R11 Mr. Anil Chandanmal Singhvi 7-11-2014 R13 Ms. Nisha Dutt 20-11-2014 R14 Mr. Sunil Hasmukhlal Shah 20-11-2014 R15 Mr. Prashant Desai 7-11-2014 R16 Mr. Jigish Shantilal Sonagara 21-11-2014 54. In that view of the matter, while we uphold the impugned order dated 4th June, 2018, with regard to Respondent No. 2- Mr. Jignesh Prakash Shah, Respondent No. 3- Mr. Dewang Sunderraj Neralla, Respondent No. 4- Mr. Manjay Prakash Shah and appointment of Government nominee not more than three Directors to the board of '63 Moons Technologies ....