TaxTMI 
TaxTMI 
2020 (4) TMI 276
X X X X Extracts X X X X
X X X X Extracts X X X X
....as, Mr. Rajeev Kumar, Ms. Prachi Dhyani, Advocates. And Others For the Respondents : Mr. Karan Khanna, Mr. George Varghese, Ms. Ritu Anand, Advocates, Mr. Pratap Venugopal, Advocate, Mr. Sanjay Shorey and Mr. C. Balooni And Others JUDGMENT SUDHANSU JYOTI MUKHOPADHAYA, J. The Central Government on its opinion that the affairs of 'Infrastructure Leasing and Financial Services Limited' ("IL&FS") and its Group Companies are conducted in a manner prejudicial to the public interest applied to the National Company Law Tribunal ("Tribunal" for short), Mumbai Bench, Mumbai for issuance of orders and directions as sought for and as the Tribunal deemed fit. 2. In Company Petition No. 3638 of 2018, Miscellaneous Application No.2071 of 2019 was filed by the Central Government for impleadment of various persons, including the Appellant(s) herein, as parties to the said Petition. By way of an order dated 18th July, 2019, the Tribunal allowed the Miscellaneous Application and directed impleadment of inter alia the Appellant(s) as parties to the said Company Petition. 3. Miscellaneous Application No. 2258 of 2019 was filed by 'Deloitte Haskins & Sells LLP' and its partners challenging the mai....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 2017-2018 and also acted as a Joint Auditor of 'IL&FS Financial Services Limited' with 'BSR & Associates LLP'. 11. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as the Appellant during the F.Y. 2017-2018 was not at all concerned with the management and day-to-day affairs of 'IL&FS' and was only a Partner of 'Deloitte Haskins & Sells LLP', therefore, neither a necessary nor a proper party for adjudication of the said Company Petition. Company Appeal (AT) No. 194 of 2019 12. The Appellant- 'Mr. Udayan Sen' is a partner in 'Deloitte Haskins & Sells LLP' which was acting as an Auditor of 'IL&FS Financial Services Limited'., a 100% subsidiary of 'Infrastructure Leasing & Financial Services' ('IL&FS'), until F.Y. 2017-2018 and also acted as a Joint Auditor of 'IL&FS Financial Services Limited' with 'BSR & Associates LLP'. 13. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 363....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arty Respondent in Company Petition No. 3638 of 2018 on an incorrect interpretation of Order 1 Rule 10 of Civil Procedure Code, 1908 and Section 245 of the Companies Act, 2013, and was neither a necessary nor a proper party for adjudication of the said Company Petition. It was further submitted that the Appellant was never in-charge of nor responsible for the management and operations of 'IFIN' and was only the engagement partner of 'BSR & Associates LLP'. Company Appeal (AT) No. 197 of 2019 18. The Appellant- 'BSR & Associates LLP' was the Joint Statutory Auditor of 'IL&FS Financial Services Limited' ('IFIN') for the F.Y. 2017-2018 along with 'Deloitte Haskins & Sells LLP'. It was submitted that the Appellant had never been Statutory Auditors of 'IL&FS' while 'Deloitte Haskins & Sells LLP' had been the sole auditors of IFIN for nine years prior to that i.e., for the period F.Y. 2007-2008 to 2016-2017. On May, 2018, the Statutory Auditors of 'IFIN' (including the Appellant) rendered their Audit Report on the financial statement of IFIN for the F.Y. 2017-2018. 19. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n Company Petition No. 3638 of 2018 as the Appellant had resigned from 'IFIN's Board on 25th July, 2016 and prior to that was an Independent Director of 'IFIN' and was not at all concerned with the management and day-to-day affairs of 'IL&FS'. Therefore, Appellant was neither a necessary nor a proper party for adjudication of the Company Petition filed for alleged oppression and mismanagement of 'IL&FS'. 24. It was further submitted that the Appellant was not a part of 'IFIN's audit committee and, therefore, could not have been equated with those independent directors who were on the Audit Committee. Further, it was submitted that no final reliefs were claimed in the Company Petition against the Appellant and, therefore, there was no question of any interim protective orders being granted against the Appellant. Company Appeal (AT) No. 207 of 2019 25. The Appellant- 'Mr. Rajesh Kotian' was the ex-director of the 'IL&FS Financial Services Limited' ('IFIN') and had resigned on 3rd July, 2019. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petitio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tee nor had any special privilege. 32. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as no final reliefs were claimed in the Company Petition against the Appellant who did not have any control over management and operations of lending business of 'IFIN'. 33. It was also submitted that the Tribunal had failed to consider that the Appellant had a subordinate delegated authority and limited role as an employee of the Company. Company Appeal (AT) No. 214 of 2019 34. The Appellant- 'Surinder Singh Kohli' was an Independent Director of 'IFIN' between 21st October, 2011 and 19th September, 2018. He was a part of 'IFIN's Audit Committee but was not a member of any committee of Directors of 'IFIN'. The Appellant was only a non-executive Independent Director of 'IFIN' and held no other position, save as aforesaid being a part of its Audit Committee. The Appellant was not involved in 'IFIN's dayto-day affairs and management and had no executive powers. 35. It was submitted that by impugned order dated 18th July, 2019 in Miscell....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l (AT) No. 222 of 2019 41. The Appellant- 'Mr. Udayan Sen' is a partner in 'Deloitte Haskins & Sells LLP' which was acting as an Auditor of 'IL&FS Financial Services Limited'., a 100% subsidiary of 'Infrastructure Leasing & Financial Services' ('IL&FS'), until F.Y. 2017-2018 and also acted as a Joint Auditor of 'IL&FS Financial Services Limited' with 'BSR & Associates LLP'. 42. It was submitted that by impugned order dated 9th August, 2019, the Tribunal had failed to appreciate that the Appellant being an erstwhile auditor and ceasing to act as an Auditor of IFIN from F.Y. 2017-18 could not be covered within the ambit of Section 140 (5) of the Companies Act, 2013. 43. It was submitted that Section 140(5) only applies to existing auditors and the Tribunal could not have by way of a deeming fiction interpreted the said Section to include erstwhile Auditors. Company Appeal (AT) No. 223 of 2019 44. In the present appeal, the Appellant- 'Mr. Kalpesh Mehta' who is a partner in 'Deloitte Haskins & Sells LLP' which was acting as an Auditor of 'IL&FS Financial Services Limited'., a 100% subsidiary of 'Infrastructure Leasing & Financial Services' ('IL&FS'), until F.Y. 2017-2018 and also....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as there were neither any allegations made against the Appellant in the 2nd Interim Report of SFIO nor any final reliefs were claimed in the Company Petition against the Appellant giving rise to any interim protective orders being granted against the Appellant. 52. Furthermore, the Appellant submitted that the impugned order was entirely based on the criminal complaint and the allegations contained therein which was a separate and distinct proceeding in law and merely because such a complaint had been filed against the Appellant, the Appellant could not have been joined as a party to the Company Petition, which was for relief on the basis of allegations of oppression and mismanagement on the part of the company's management. Company Appeal (AT) No. 230 of 2019 53. The Appellant- 'Mr. C. Sivasankaran' was Ex-Chairman of 'Siva Industries and Holdings Limited' ('SIHL') until 19th March, 2017. It was submitted that 'SIHL' and its subsidiaries always had individual Directors, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....does not contain any statements, averments, allegations against the Appellant or its partners /employees and further no such averments have been sought to be added to the said Company Petition by way of the said Miscellaneous Application No. 2071 of 2019; (b) the Appellant's presence is not necessary to effectually and completely adjudicate the real controversy, which pertains to the management of the affairs of 'IFIN'- with which the Appellant in its capacity as a statutory auditor (now rotated out0 has never been concerned; and (c) the final reliefs originally sought in the said Company Petition were limited to replacement of the Board of Directors of 'IL&FS' and its subsidiaries including 'IFIN' (of which the Appellant was a statutory auditor), which has been done by way of order dated 1st October, 2018. Though the said Company Petition has been amended from time to time, at the time of passing of the Impugned Order no further final prayers or reliefs had been added. In fact, even in the said Miscellaneous Application, there is no mention of any final reliefs being sought against the Appellant. It is submitted that it is only on the touchstone of reliefs sought that it c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ained in the report against the Appellant and has held that, "The SFIO report clearly reveals prima facie evidence of involvement of proposed respondents.". In this regard, it is submitted as under: a. The SFIO investigation and the 2nd Interim Report prepared in pursuance thereof form part of an entirely separate and distinct proceeding in law and the 2nd Interim Report cannot automatically justify impleadment of the Appellant as a parry in a Petition under Sections 241-242 of the Companies Act, 2013; b. The contents of the 2nd Interim Report, are only allegations and the same must be proven by means of trial and by leading evidence before the Special Court (and the persons against whom allegations are raised are presumed 'innocent until and unless proven guilty'); and c. Under Section 223 of the Companies Act, 2013, reports under Section 212 of the Companies Act, 2013 (such as the 1st and 2nd Interim Reports) are specifically excluded and as such the 1st and 2nd Interim Reports would not be admissible in any legal proceeding as evidence in relation to any matter contained in the report. Section 339 of the Act: 64. It has been contended that the provisions of Section 339 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ribunal has erroneously equated a Petition filed under Section 241 (2) of the Companies Act, 2013 with Petitions filed under Section 245 of the Companies Act, 2013 with a view to supporting their application for impleadment. In this regard it is submitted as under: a. Whilst the Tribunal has rightly observed that Section 245 was not in operation at the time of the filing of the present Petition under Section 241(2) of the Companies Act, 2013, the Tribunal erroneously holds that Section 245 having been notified after the filing of the Petition, Respondent No. 1 "was authorised to initiate action under this Chapter, which is also class action suit /petition." It may be notified that the thresholds under Section 245 were notified on 8th May, 2019, i.e. prior to the filing of the said Miscellaneous Application. b. The Tribunal has failed to appreciate that there were neither any averments not any reliefs in the impleadment application, which correspond to Section 245 or seek to incorporate the provisions of Section 245 into the present impleadment application; and c. It is submitted that the very fact that Section 245 specifically makes reference to auditors makes it all the more....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs in terms of Section 242(2)(k) of the Companies Act, 2013 (ii) that such Board of Directors be authorized to replace directors of subsidiaries etc. of IL&FS (iii) seeking leave of the Tribunal, Mumbai to file supplement/ enlarge / amend / modify the scope of the reliefs sought and prayers made in the petition by filing any other documents or application in view of the extraordinary nature of the circumstances. 70.4. It is submitted that the Ministry of Corporate Affairs approached the Tribunal by way of an application seeking a moratorium on creditor proceedings against IL&FS and its group companies and to enable formation of an orderly resolution plan in light of the current circumstances facing the IL&FS group. The Tribunal declined to grant such reliefs by way of an order dated 12th October, 2018. 70.5. It was submitted that this Appellate Tribunal in an appeal from the order dated 12th October, 2018 passed by the Tribunal, while recognising the exigent and extraordinary circumstances that had arisen due to the financial irregularities within the IL&FS group that became apparent, granted an order protecting the whole IL&FS Group against any potential coercive action by credi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed. 71. Learned counsel for the Central Government submitted that the Tribunal has wide powers under Section 241(2) read with Section 242 of the Companies Act, 2013. 72. With regard to the former statutory auditors of 'IL&FS Financial Services Limited' ('IFIN') and its partners, it is submitted that the Central Government has not formed opinion on the basis of the SFIO Report as has been alleged by the Appellant(s). There are other facts, including 'RBI Inspection Report', 'ICAI Report' etc. which have also been taken into account while filing the application for impleading, inter alia, the Appellants. 73. Learned counsel for the Central Government has highlighted certain allegations as reported in the '2nd SFIO Report'/ 'RBI Inspection Report'/ 'ICAI Report' based on which the opinion is formed by the Central Government and placed in a tabular form: S.NO Parties Specific Allegations in the SFIO Report/RBI Inspection Report/ ICAI Report AUDITORS 1. Delloite Haskins & Sells LLP - CA No. 190 of 2019 - Statutory Auditors from 2008-09 to FY 2017-18 - Proposed Addl. Resp No. 326 - Para 64, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 74 * Statutory auditors connived with ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ors in contravention of accounting standards. 8. Rajesh Kotian - CA No. 190 of 2019 - Statutory Auditors from 2008-09 to FY 2017-18 - Proposed Addl. Resp No. 326 - Para 62, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 73 INDEPENDENT DIRECTORS 9. Surinder Singh Kohli - CA No. 214 of 2019 - Independent Director - Proposed Addl. Resp No. 328 - Para 66, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 74 * Part of the Audit Committee of IFIN * Aware about the stressed asset portfolio, the modus operandi used for granting loans to group companies of existing defaulting borrowers, preventing the account from being classified as NPA. * Did not ensure adequate disclosure or reporting of facts brought out by RBI Inspection Reports for FY 2016-17 and 2017-18 and non receipt of fees and income especially from group entities. 10. Subhalakshmi Panse - CA No. 221 of 2019 - Independent Director - Proposed Addl. Resp No. 329 - Para 67, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 74 OTHER CATEGORIES OF DIRECTORS 11. Neera Saggi - CA No. 206 of 2019 - Independent Director - Proposed Addl. Resp No. 336 - Para 74, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 78 * Although appoin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ting standards. It provides that the financial statements provided by the Auditors should give a true and fair view of the state of company's affairs [Section 143(2)]. Further, Section 143(12) provides that if an auditor of the company, during the course of performance of his duties has reason to believe that an offence of fraud involving accounts, is being or has been committed in the company by its officers or employees, the auditors shall report to the Central Government. In view of the same, it is humbly submitted that the auditors failed to fulfil their statutory duties and report to the Central Government regarding the fraudulent accounts of 'IFIN'. 75. Further, Section 149(8) of the Companies Act, 2013 provides that company and independent directors shall abide by Schedule IV to the Companies Act, 2013, which provides for roles, functions and duties of the independent directors. It was submitted that it is the duty of the independent directors to report concerns about unethical behaviour, actual or suspected fraud or violation of the company's code of conduct or ethics policy. Therefore, the independent directors have also failed to fulfil their statutory duties and repor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing over 40% of the total assets of the group. ITNL operates through special purpose vehicles (SPVs) and presently has 32 such SPVs in India and overseas. b) 'IL&FS Financial Services Limited (IFIN) The IL&FS is engaged in the financial services sector through one of its material subsidiaries, IFIN, which is registered as a systematically important non-banking financial company (NBFC) with the Reserve Bank of India. IFIN admittedly contributes approx. 14.16% to the assets of the IL&FS Group and has a significant asset base with involvement in asset and project finance, structured debt and asset finance, syndication and corporate project advisory business. c) IL&FS Energy Development Company Limited (IEDCL) The IL&FS is engaged in the power sector through its subsidiary IEDCL, which develops, owns and operates power generation and transmission assets in India and abroad. d) IL&FS Tamil Nadu Power Company Limited (ITNPCL) 'ITNPCL' is another subsidiary of the IL&FS engaged in the implementation of the thermal power project at Cuddalore in Tamil Nadu. e) Noida Toll Bridge Limited It is a listed company, subsidiary of IL&FS with 50.42% equity share capital all of which ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....76.5. That subsequent to spreading defaults by the IL&FS Group, credit rating agencies CARE and ICRA have downgraded the credit rating of the Respondent No.1, ITNL and IFIN to 'default' or 'junk' grade. The said fact has also been admitted by the IL&FS in its company application no. 1044 of 2018. This indicate that IL&FS management was suppressing material information about its financial solvency and its ability to meet its obligation. The over exposure of loans and borrowings have been without prudent commercial practices and without any application of mind by the management of IL&FS over the several years. In fact, the management of IL&FS is responsible to bring it to this low due to its acts of commission & omission for which Union of India has ordered an investigation into the affairs of IL&FS and its group companies through SFIO. The Union of India seeks leave of the Tribunal to bring the findings of investigation on record. 76.6. That from the, financials and filings of the IL&FS and its group companies, it has been noticed that the flagship IL&FS holds 73.22% equity share capital in its direct listed company ITNL, out of which 98.23% is pledged. Similarly, IL&FS holds 50.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to flee the country overnight, therefore the Ministry has to make a request for look-out notice for these persons. 76.9. That the facts detailed above by the Central Government clearly spell out the widespread mismanagement of funds by the current management of the IL&FS, in not only the holding company but throughout the IL&FS Group, leading to such a severe crisis that the group is reeling to meet even its day to day operational expenditures. The unscrupulous manner in which public money has been mismanaged and stuck in projects indicate that management of IL&FS has not only failed to manage but were involved in operation cover up till the end and wilfully created financial mess of IL&FS is astonishing. It has been admitted by the IL&FS in its company application no. 1044 of 2018 that there is severe liquidity crunch in the company with no immediate source of funding, so much so that the IL&FS is in no position to service its debt in the 'short term'. IL&FS is left with no assets to raise funds, no credibility to bank, no takers to buy its promises and nothing to offer to the stakeholders in particular and public at large in general to assure its continuation. 76.10. That, last....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lf yearly, seasonal redemptions MFs face anyway at this time of year. Hence Corporate Bond market is currently very illiquid and not seeing much volumes. 76.12. Further, the importance of the IL&FS and its group from financial stability perspective as highlighted by the Department of Economic Affairs are as under: On consolidated basis, the borrowing of IL&FS from banks and financial institutions (debentures, loans, cash credit and commercial paper) comes to about Rs. 63,000 crores as per the balance sheet of 2017-18. If the exposure of banks to the IL&FS Group is assumed to be about Rs. 53,000 crores, then considering that the exposure of the entire banking sector to all the NBFCs is about Rs. 3.3 lakh crores, IL&FS Group is not inconsequential, but, critical to the financial stability as its share in the total exposure of the banks to the NBFC sector is about 16%. Therefore, there is a substantial public interest in ensuring financial solvency and good governance and management of this Group. The cascading impact of the default by the IL&FS Group on the financial sector would be quite substantial as evidenced from a partial default of some companies and its repercussions in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ember, 2018 are about Rs. 3761 cores. The confidence of the financial market needs to be restored, and the present management has lost all credibility to service any further financing to the company and it is mentioned above that the existing debt of about Rs. 16468 crores needs to be serviced. The replacement of the existing management by the new management would be the first step towards restoring that confidence and to avoid any suboptimal liquidation of assets. iv. The IL&FS Group is involved in many infrastructure projects by way of project financing and also equity and debt financing. Any impairment in its ability to finance and support the infrastructure projects would be quite damaging to the overall infrastructure sector, financial markets and the economy, considering its systemically important nature and its borrowing level of Rs. 91000 crores. The business model of IL&FS is such that the company borrows from the money market and debt market besides bank borrowing to fund its income generating activities and assets, which are medium to long-term. So, there is a clear mismatch in its assets and liabilities. It is, therefore, imperative that the risk management framewor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpanies Act, 2013, conjointly read with Section 246 and Sections 337 to 341, this Appellate Tribunal held: "38. In the interest of regulating the conduct of the Company's affairs the interim order cannot be restrictive to any particular or individual person, including the Company/companies, existing or erstwhile Officers and employees of the Companies if investigation for alleged fraud is pending. 39. For the purpose of passing interim order the Tribunal cannot fix the personal liability of delinquent Directors or Managers or Officers or other employees in absence of any specific evidence. Therefore, during the process of investigation and pendency of an application under Section 241(2) read with Section 242 of the Companies Act, 2013 and in view of powers conferred under Section 221, the Tribunal is not only empowered to pass appropriate interim order against the Company but also against any person or individual, including the order to desist. xxx xxx xxx 42. The power of Tribunal is wide enough as is evident from sub-section (1) of Section 242 in terms of which 'it may make such order as it thinks fit', with a view to bringing to an end the matters complained of. xxx xxx ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fore any observation made while passing the order/orders with respect to a particular provision may not be considered while passing the order under relevant provisions is concerned, it is required to be noted that all the three provisions are required to be considered conjointly. While passing an order in a particular provision, the endeavour should be to see that the order/orders passed under other provisions of the Companies Act are given effect to, and/or in furtherance of the order/orders passed under other Sections. Therefore, the observations made while passing order under Section 241/242 of the Companies Act can be said to be relevant observations for passing the order under Section 130 of the Companies Act. At this stage, it is required to be noted that even otherwise in the order passed by the Tribunal under Section 130 of the Companies Act, there is a specific observation made by the learned Tribunal with respect to mismanagement of the affairs of the company, and even with respect to the relevant earlier accounts prepared in a fraudulent manner. xxx xxx xxx 18. Now so far as reliance placed upon the subsequent report of the RBI and the objection by the learned counsel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he dispute, though no relief is sought, he is a proper party. Necessary party is one without whose presence no effective and complete adjudication of the dispute could be made and no relief granted." 84. The question of grant of final relief against one or other is not the question for the present, as such we are not inclined to give such findings on such issue. 85. Section 424 of the Companies Act, 2013 deals with 'procedure before the Tribunal and Appellate Tribunal' as under: "424. Procedure before Tribunal and Appellate Tribunal.─(1) The Tribunal and the Appellate Tribunal shall not, while disposing of any proceeding before it or, as the case may be, an appeal before it, be bound by the procedure laid down in the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice, and, subject to the other provisions of this Act 1["or of the Insolvency and Bankruptcy Code, 2016] and of any rules made thereunder, the Tribunal and the Appellate Tribunal shall have power to regulate their own procedure. (2) The Tribunal and the Appellate Tribunal shall have, for the purposes of discharging their functions under this Act 1["or under the Insolvency an....