TaxTMI 
TaxTMI 
TaxTMI 
2020 (5) TMI 152
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of aviation activities with manufacture of equipments for airlines. It provides ground handling services to various domestic airlines, engineering services and maintenance facility for various aircrafts, Continuing Airworthiness Management of Aircraft (CAMO) Services. It has also set up Maintenance Repair and Overhaul (MRO) unit for aircraft components. 3. This petition is filed seeking direction for an investigation into the affairs of the respondent-company under section 213 of the Companies Act to inquire into every transaction, funds, properties and assets of the respondent and its transaction with its associate companies and other related parties and to inquire into every material transactions to ascertain misfeasance, misapplication, diversion, embezzlement, misappropriation, frauds, other crimes, governance failures, contraventions, non-feasance and malfeasance to and submit a report thereon for the purpose of initiating such action and prosecution and public examination and other reliefs. 4. The Tribunal vide its order dated 12-7-2019 has recorded the undertaking given by the learned counsel for the respondent not to alienate or dispose of the assets of the company excep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....kes payment of Rs. 2,00,00,000/- towards security deposit to the respondent by cheque dated 17-10-2013 (ANNEXURE P17) and the respondent confirms receipt thereof vide e-mail dated 21-10-2013 (ANNEXURE P18). (ii) The Memorandum of Understanding expired on 25-9-2015 and the respondent did not refund the security deposit notwithstanding reminders. The petitioner issues legal notice dated 24-12-2018 (ANNEXURE 19) to the respondent seeking refund thereof within 15 days. (iii) The petitioner learns that the respondent is carrying on business in a manner defrauding its creditors when the petitioner visits the portal of the Ministry of Corporate Affairs and downloads the forms, statements and returns filed by the respondent, through which it is revealed that the respondent has allotted 60,00,000 shares to different parties on 21-11-2013 and 07-12-2013, in contravention of the Memorandum of Understanding in question. 5.4 It is averred in paras D(20), (21) and (22) of the petition that the shareholding of Mr. Vankayalapati Umesh and Ms. Devineni Radha Rani got pruned from 50% each to 29.16% each. Due to said illegal and invalid allotment of 50,00,000 shares to an entity known as "MEIL H....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... alleged. 5.12 In paras D(35), (36), (37) and (38) of the petition allegations are levelled based on the disclosures in the audited accounts of the respondent during the years 2014 to 2017, about the loans and advances given to Managing Director, Whole Time Director and one of the companies of the respondent group, viz. Turbo Projects Private Limited. 5.13 In paras D(39), (40) and (41) of the petition it is alleged that the Statutory Auditor is found to be acting in collusion with the company and its director in making false statements in his report for the year ended on 31-3-2017. The Auditor's Report for year ended on 31-3-2017 says that the company has neither granted any loans nor made investments nor provided guarantees or securities to the parties covered under sections 185 and 186 of the Companies Act, 2013. In fact, the loans and advances given by the respondent are higher than its net worth. The shareholders passed Special Resolution dated 29-9-2017 approved loans in excess of the limits prescribed under section 186 of the Companies Act, 2013. Even in 2017, prior to passing the Special Resolution the actual amount of loans/advances were in excess of the limits: Part....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 10 each. On 20-5-2013 he has been allotted 31,00,000 shares which brought his shareholding to 31,03,334. Possibly he has invested the proceeds of interest free loans received from the respondent. (ii) On 28-11-2016 allotment of 3,79,90,000 equity shares of Rs. 10/- each has been made to two individuals who were not the existing shareholders at the time of allotment. Copy of Form PAS 3 - Return of allotment filed by TMAPL with the Registrar of Companies on 29-11-2016 is at ANNEXURE P28. (iii) It is averred in sub-para (d) [page 19] of the petition that the respondent had incurred loss of Rs. 50,23,00,268 for the year ended on 31-3-2016, bringing down its net worth to Rs. 38.15 crores, as per Audited Financial Statements filed with Registrar of Companies on 10-1-2018 (ANNEXURE P29). The question is how it manages the business without borrowings. (iv) It is averred in sub-para (e) [page 19] that when aggregate amount of Trade Payables (Rs. 25,93,00,626/-) and the accrued expenses payable (Rs. 63,28,59,622/-) are above the total revenue, how could the respondent advanced long term loans and advances amounting to Rs. 22,50,82,995/- and has kept Rs. 7,96,11,200/- as cash and bank ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....3-2012, is one of the entity of Turbo Aviation Group carrying on business of building of Airport Structures and other constructions and civil engineering. Shri Vankayalapati Umesh and Ms. Devineni Radha Rani hold 7,500 + 2,500 shares respectively as on 31-3-2017, aggregating to 10,000 shares. Said promoters-cum- shareholders ought to have invested the proceeds of interest free loans received from the respondent. (ii) It is averred in sub-paras (c), (d) and (e) [pages 22-24] of the petition that the Financial Statements of TPPL filed with Registrar of Companies for the years ended 31-3-2017, 31-3-2016 and 31-3-2015 (ANNEXURES P31, P32 and P33) mentioned the figures of short liability advances received by Turbo Aviation Pvt. Ltd., Ms. D. Radha Rani and Mr. V. Umesh. It is averred how the respondent gave loans and advances to TPPL, when there was no trading activity between the respondent and TPPL. It is further averred that the business carried on by the company and the business carried on by the respondent have no correlation with each other. Thus, the advance given by the respondent is clearly a loan and is in violation of section 185 of the Companies Act, 2013. Such short term a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e petitioner. In lieu of such security deposit the petitioner obtained (i) pledge of 60,00,000 shares of face value of Rs. 10 each, of both the directors of the respondent, (ii) personal guarantees of both the directors of the respondent, and (iii) Promissory Note issued by the respondent for Rs. 2 crores. Pursuant to said pledge of shares, the respondent is stated to have made a bonus issue of 10,00,000 equity shares, shared equally by its existing members in 2013. Further, the petitioner claims that 50,00,000 shares were allotted to one MEIL Holdings Ltd. in 2013. 7.3 The respondent, in paras 5 and 6 of the Interim Counter, relies on section 221(1) of the Companies Act, 2013, which reads as under: "Freezing of assets of company on inquiry and investigation. 221. (1) Where it appears to the Tribunal, on a reference made to it by the Central Government or in connection with any inquiry or investigation into the affairs of a company under this Chapter or on any complaint made by such number of members as specified under sub-section (1) of section 244 or a creditor having one lakh amount outstanding against the company or any other person having a reasonable ground to believe th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion relates to the year 2013 and the Memorandum of Understanding has expired on 29-5-2015. 7.7 In view of the above submissions the respondent contends that the interim relief sought for is required to be rejected. 8. Counter Dated 04-10-2019 Filed By The Respondent: 8.1 Counter is filed by Shri Vankayalapati Umesh on behalf of the respondent in the capacity of its Managing Director, in continuation of his Interim Counter dated 27-6-2019 opposing the interim relief prayed for under section 221 of the Companies Act, 2013. The deponent urges that the said Interim Counter be treated as part of the present Counter. 8.2 Para 4 of the Counter is reiteration of what was stated in para 4 of the Interim Counter, viz. in lieu of security deposit of Rs. 2 crores, the petitioner had obtained the following security interests: (i) pledge of 60,00,000 equity shares of both the directors of the respondent, (ii) two personal guarantees; one of Shri V. Umesh dated 26-9-2013 and another of Mrs. Radha Rani dated 26-9-2013, and (iii) promissory note issued by the respondent for Rs. 2 crores. Pursuant to said pledge of shares, the respondent is stated to have made a bonus issue of 10,00,000 e....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... competent persons as inspectors to investigate into the affairs of the company in respect of such matters and to report thereupon to it in such manner as the Central Government may direct." It is contended that a bare reading of the above provision signifies the prerequisite to invoke section 213 of the Companies Act, 2013, viz. the Tribunal must come to a conclusion based on the material placed before it that the business of the company is being conducted with intent to defraud its creditor or members. It is contended that the petition does not make any substantial ground that the business of the company is conducted with intent to defraud its creditors. 8.7 In para 9 of the Counter the respondent relies on a phrase "the circumstances suggesting that" as contained in clause (b) of section 213, to contend that any material placed before the Tribunal must suggest certain inferences, which may not need a deeper probe. The phrase "to be investigated" as contained in para 29 of the petition does not find place in section 213 of the Companies Act, 2013. Hence the petition is required to be dismissed. 8.8 In para 10 of the Counter the respondent refutes the allegation that the securi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r, who is, or was, at the relevant time, the managing director or the manager of the company; (c) any other body corporate whose Board of Directors comprises nominees of the company or is accustomed to act in accordance with the directions or instructions of the company or any of its directors; or (d) any person who is or has at any relevant time been the company's managing director or manager or employee. he shall, subject to the prior approval of the Central Government, investigate into and report on the affairs of the other body corporate or of the managing director or manager, insofar as he considers that the results of his investigation are relevant to the investigation of the affairs of the company for which he is appointed." 8.12 However, the respondent, in para 15 of the Counter states that it is the discretion of the Tribunal to be exercised under section 213(b) of the Companies Act, 2013, only after circumspection and in a judicious manner. In the present case, the respondent states that the petitioner being a rank outsider, such a discretion cannot be exercised. 8.13 In para 17 of the Counter it is averred that a sole transaction taken place six years ago can....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpanies Act, 2013 does not prevent the Tribunal from ordering an investigation based on the information given in the petition. The respondent laying emphasis on Inspector' is misplaced. 9.9 In para 10(e) of the Rejoinder the petitioner contends that it is not the case of the petitioner that merely because the company is making losses an investigation is needed, but investigation is needed on the indicators mentioned in the petition. 9.10 In para 12 of the Rejoinder the petitioner brings forth certain additional information as under: (i) Even after bringing to the notice of the Tribunal about the mismanagement of the affairs of the respondent, the respondent continued diversion of funds from one company to another company of the group in violation of section 185 of the Companies Act, 2013 as reflected in the financial statements for the year ended on 31-3-2018. (ii) An interest free loan of Rs. 2.34 crores has been advanced to the Managing Director of the respondent. The opening balance plus the loan does not math with the closing balance as on 31-3-2018. (iii) The Auditor's Report of the respondent for the year ended on 31-3-2018 discloses that, ".. .. It is....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... number as detailed hereunder: Sl. No. Citation Title 1 [2004] 53 SCL 449 Company Law Board, Principal Bench,. (para 15) HSBC Private Equity India Fund Ltd. v. Shree Rama Multi Tech Ltd. 2 Order in Company Appeal (AT) No. 18 of 2016 by NCLAT. R.S. India Wind Energy (P.) Ltd. v. PTC India Financial Services Ltd. 3 MANU/GJ/0004/1971 High Court of Gujarat at Ahmedabad. (para 12) Deodatt Purshottam Patel v. Alembic Glass Industries Ltd. 4 [CS(COMM) 513/2017, dated 19-9-2018] High Court of Delhi Zest Systems (P.) Ltd. v. Centre for Vocational and Entrepreneurship Studies 5 MANU/CL/0005/2010 NCLAT. (para 8). SME Asset Reconstruction Co. Ltd. v. Medirad Tech India Ltd. 6 Supreme Court of India. (para 27). Nagindas Ramdas v. Dalpatram Ichharam Brijram AIR 1974 SC 471 7 [2007] 80 SCL 463 CLB. Kasturi and Sons Ltd. v. Sporting Pastime India Ltd. 8 [2011] 105 SCL 601 Company Law Board. (para 6) Hemant Babubhai Desai v. Jayant Vitamins Ltd. 9 [2007] 73 SCL 242 (AP.) (paras 30 and 310) High Court of Andhra Pradesh. A.P. Civil Supplies Corpn. Ltd. v. Delta Oils and Facts Ltd. 10 R.S. India Wind Energy (P.) Ltd (supra) 11 [2018] 97 taxmann.com 673/150 SCL....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ponse is received to the legal notice, Petitioner has filed the present petition for ordering investigation in to the affairs of the respondent Company since directors and management of the respondent company are indulging in mismanagement, fraudulent diversion of funds including round tripping, reckless loans and advances, violating mandatory provisions of sections 180, 185, 186 and 188 of the Companies Act, 2013 and further Company defaulted in paying the tax liabilities. Thus, the affairs of the Company are being held in a manner to defraud the creditors. Hence, investigation is sought. The learned counsel contended, any person can move under section 213 of the Companies Act, 2013 and not necessarily Applicant must be a creditor. The learned counsel contended, even if debt is barred by limitation, still petitioner has locus standi to file Petition under section 213 of the Companies Act, 2013 and there is no bar. The learned counsel contended any "other person" is entitled to file petition under section 213 of the Companies Act and therefore, objections raised by respondent cannot be given any credence. 16. The learned counsel contended that there are decisions rendered by the H....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve Rs. 2 crores as security deposit refundable after expiry of 2 years from the date of execution of Memorandum of Understanding i.e. by 25-9-2015. The learned counsel contended that for security deposit the petitioner has obtained pledge of shares of both the Directors, which is around 60 lakh shares of face value of Rs. 10/- each as well as irrevocable power of attorney dated 25-9-2013 to deal with the pledged shares in case of default. The petitioner also obtained personal guarantee of the two Directors Mr. Vankayalapati Umesh and Ms. Devineni Radha Rani, besides obtaining promissory note also for Rs. 2 crores. Thus, the petitioner has taken sufficient security from the Directors for the security advance given to the respondent and there was issuance of bonus shares of Rs. 10 lakhs to the existing shareholders. 19. The learned counsel contended that the value of Rs. 60 lakh shares on the face value of Rs. 10/- is Rs. 6 crores and pledge is given for the shares, besides bonus shares are also issued. There was no irregularity in issuing the bonus shares as well as shares to M/s. MEIL Holdings Limited. The main contention of the learned counsel that the Memorandum of Understanding....
X X X X Extracts X X X X
X X X X Extracts X X X X
....titioners apart from the interim relief of freezing the assets of the respondent-company in terms of section 219 of the Act. 21. The question is whether the petitioner is entitled to the main reliefs as prayed for since the matter is listed for final disposal and therefore, there is no question of granting any interim relief in favour of the petitioner. 22. The petitioner claimed that it was the creditor of the respondent. The petitioner is contending that it can maintain the petition under section 213 of the Act against the respondent-company being creditor of the respondent-company. The next contention raised on behalf of the petitioner is that even if the petitioner is not a creditor, still the petitioner can maintain the present petition, who will fall under the category 'any other person'. 23. On the other hand the contention of the respondent is that the debt said to be due from the respondent to the petitioner is barred by limitation. Therefore, the petitioner is no longer a creditor of the respondent-company. Thus, the petitioner has no locus standi to file the petition against the respondent-company. The contention of the learned counsel for the respondent-compa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. The question arises why the petitioner remained silent without taking appropriate steps for recovery of security deposit within the period of limitation. The Memorandum of Understanding came to an end by 25-9-2015. The petitioner ought to have initiated action against the respondent-company on or before 25-9-2018. Whereas the present petition is filed by the petitioner on 18-2-2018. By the date when the petitioner moved the present petition, the claim of the petitioner against the respondent-company became time-barred. The petitioner cannot claim that it is the creditor of the respondent-company as on the date when it filed the present petition. The reason is the debt, if any, stands barred by limitation. The petitioner, therefore, lost the character of a creditor by the date when it filed the present petition against the respondent-company. 26. The contention of the PCS for the petitioner is that the petitioner is a pledgee of the shares. The contention of the petitioner is that there is a pledge of shares as a security for the amount given to the respondent-company. It is true that there is no dispute that 60,00,000 shares of promoters/shareholders with face value of Rs. 10 e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on under section 237(b) of the Companies Act, 1956 (which is equivalent to section 213 of the Companies Act, 2013) can be filed by any interested party being a creditor, member or 'any other person' on the ground that the affairs of the company are being conducted with intent to defraud 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 and unlawful purpose. Similarly, PCS for the petitioner also relied on a decision of the Hon'ble NCLAT rendered in the case of R.S. India Wind Energy Private Ltd. (supra) and contended that the Tribunal can entertain an application under section 213 of the Companies Act, 2013 made by 'any other person', which includes creditor. Thus, the PCS for the petitioner contended that any other person is competent to initiate action under section 213 of the Companies Act, 2013 for investigation, where the affairs of the company are being held in a fraudulent manner with intent to defraud or otherwise for a fraudulent or unlawful purpose or in a manner oppressive of any of its members. 29. On the other hand the learned counsel for the responden....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the commission payable to a managing or other director, or the manager, of the company, order, after giving a reasonable opportunity of being heard to the parties concerned, that the affairs of the company ought to be investigated by an inspector or inspectors appointed by the Central Government and where such an order is passed, the Central Government shall appoint one or more competent persons as inspectors to investigate into the affairs of the company in respect of such matters and to report thereupon to it in such manner as the Central Government may direct: Provided that if after investigation it is proved that- (i) 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 that the company was formed for any fraudulent or unlawful purpose; or (ii) any person concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, then, every officer of the company who is in default and the person or persons concerned in the formation of the company or the management of its affairs shall be pu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....andatory provisions of sections 180, 185, 186 and 188 of the Companies Act, 2013 and further statutory defaults, tax defaults, indirect tax defaults, etc. The PCS contended that the respondent-company is indulging in all these activities only with a view to defraud the creditors and that promoters are guilty of fraud and hence this is a fit case to order an investigation. 34. The PCS for the petitioner has relied on a decision in the matter of Kasturi and Sons Ltd. (supra) wherein it is held that persistent irregularities and contraventions are sufficient to form a prima facie opinion in terms of section 237(b)(i) of the Act. Similarly PCS for the petitioner relied on the decision of the Company Law Board, Chennai in the matter of Hemant Babubhai Desai (supra) wherein it is held that, "Where the facts and materials reasonably suggest and/or sufficient to form a prima facie opinion in terms of section 237(b)(i) of the Act that the company's day to day management is being conducted in a manner oppressive of the minority shareholder which warrants the timely intervention of the Company Law Board." Similarly, PCS for the petitioner relied on the decision of the Hon'ble High....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ner can make allegations against the group companies of the respondent without impleading the group companies as parties to the petition. The allegations made against the group companies cannot be looked into since they are not the parties to the petition. The petitioner is asking an investigation into the affairs of the respondent-company under section 213 of the Companies Act, 2013. Making certain allegations as if some irregularities are committed in the affairs of group companies, which in no way connected to the relief sought against the respondent-company. The Tribunal has to consider the allegations levelled against the respondent-company and to see whether investigation to be ordered or not. 38. The petitioner has to prima facie establish that the circumstances exist for ordering an investigation. I have discussed in detail various allegations made against the respondent. The petitioner in order to prove its case has mainly relied on Memorandum of Understanding, Deed of Pledge, Original Share Certificate and Share Transfer forms. Actually, there is no dispute about the entering into the Memorandum of Understanding and also security taken by the petitioner for security depo....