TaxTMI 
TaxTMI 
2020 (5) TMI 152
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.... in the cause title. It carries on business 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 alienat....
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....oner pursuant to MoU, as averred in para (D) (clauses 13 to 18) of the petition: (i) The petitioner makes 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 p....
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....para D(34) of the petition irregularities in depositing amounts towards Provident Fund, Employees' State Insurance and remitting TDS amounts are 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 o....
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.... TMAPL is engaged in Air Transport business for passengers, whose promoter and director is Shri Vankayalapati Umesh. He holds 31,03,334 shares of Rs. 10/- each. Originally he held 3,3,334 shares of Rs. 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 ....
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....wings are in excess of net worth of Rs. 1.81 crores of TEPL and no special resolution was filed with MCA. 5.19 In para D(52) of the petition irregularities in Turbo Projects Private Limited (TPPL) are pointed out as under: (i) TPPL, a private company incorporated on 30-3-2012, 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. ....
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....raining from alienating any of its properties till disposal of the petition. 7.2 It is averred in para 4 of the Interim Counter that as per Memorandum of Understanding dated 26-9-2013, the respondent was to lease out an aircraft to the petitioner against refundable security deposit of Rs. 2 crores given by the 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 o....
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....eets and annual reports of the respondent and its group of companies based on unsubstantiated allegations levelled against the respondent and its director, group of companies and their auditors. 7.6 It is contended in para 9 of the Interim Counter that the interim relief sought for is barred by limitation as the alleged cause of action 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,....
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.... its members or that the company was formed for any fraudulent or unlawful purpose; (ii) .. .. (iii) .. .. 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." 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....
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....on 213 to investigate into the affairs of a company considers it necessary for the purposes of the investigation, to investigate also the affairs of- (a) any other body corporate which is, or has at any relevant time been the company's subsidiary company or holding company, or a subsidiary company of its holding company; (b) any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, 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 affair....
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....siness considerations of the respondent. 9.7 In para 10(k) of the Rejoinder the petitioner contends that when trade payables increase without corresponding increase in business it requires probe. 9.8 In paras 10(l) and (m) of the Rejoinder the petitioner contends that the transactions between various entities of the group would only expose the misfeasance, misapplication and diversion of funds and the information furnished in the petition is sufficient for ordering an investigation. Section 219 of the Companies 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 ....
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....37) of Turbo Institute of Aviation Technology Private Limited (TIATPL) for the year ended on 31-3-2018 when compared to the balance sheet of the respondent-company for the same year. 10. We have heard the PCS for the petitioner and also the learned counsel for respondent. The PCS for the petitioner filed a compilation dated 28-1-2020 containing the decisions on which the petitioner places reliance. The petitioner has also filed Written Synopsis of arguments dated 5-2-2020, wherein each of the decisions of the compilation are dealt with emphasis on particular para 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 MA....
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....unded to the Petitioner on expiry of two years from the date of MoU. Thus, the period of 2 years ended on 25-9-2018 and amount became due to be payable to the Petitioner. The normal period of taking action for recovery of the security deposit is by 25-9-2018. 14. The learned counsel contended that security deposit was not refunded. The Directors furnished personal guarantee and further they pledged their shares in the Company by duly handing over the share certificates to the Petitioner including share transfer form. The respondent also has undertaken not to issue new shares without the consent of the Petitioner and legal notice was issued to the respondent. 15. The learned counsel contended, since no response 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. T....
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....hered only during investigation. The learned counsel has relied on the definition given for "fraud" under section 447 of the Companies Act, 2013 and contended that the respondent is indulging in committing fraud. If material placed by the petitioner, prima facie, discloses fraud, then investigation can be ordered. Thus, the learned counsel strongly contended that petition deserves to be allowed and investigation to be ordered against the affairs of the respondent Company. 18. On the other hand, the learned counsel for respondent Company would contend that no doubt respondent entered into Memorandum of Understanding on 26-9-2013, wherein respondent had leased out an Aircraft to the petitioner and that petitioner gave 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 pe....
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.... not parties to the Petition. So, there is absolutely no grounds to order investigation since petitioner has no locus standi and that there is absolutely no material placed by the petitioner to order for any investigation and petition deserves to be dismissed. 20. The petition is filed under sections 213, 219 and 221 of the Companies Act, 2013. The petitioner is mainly seeking investigation into the affairs of the respondent-company in terms of section 213 of the Act and also to direct the Inspectors to take appropriate action and prosecute the Directors of the respondent-company under the applicable provisions of the Companies Act, 2013 including section 447 of the Act. These are the main reliefs sought for by the petitioners 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 ....
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....eposit lying with the respondent to be refunded at the end of the period of Memorandum of Understanding or at the time of termination. It is also not in dispute that the period of Memorandum of Understanding is two years and it came to an end on 25-9-2015. 25. It is an undisputed fact that the petitioner has not initiated any action against the respondent for recovery of the security deposit. The petitioner has directly filed this petition nearly four years after the expiry of the MoU. It is also very clear that the petitioner has neither questioned whatever transactions done by the respondent in all these years nor the petitioner challenged the details given in the Balance Sheet filed by the respondent-company from time to time. 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 o....
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....e security deposit and three-year period was also expired, which starts from 26-9-2015, the petitioner cannot be held to be the creditor of the respondent-company when the present petition was filed. 28. The contention of the PCS for the petitioner is that even assuming for the sake of argument that the petitioner is not a creditor, section 213 of the Act provides for 'any other person' to make an application for ordering investigation into the affairs of the respondent-company in the circumstances envisaged in section 213 of the Act. In this connection the learned counsel has relied on a decision of the Company law Board, Principal Bench in the matter of HSBC Private Equity India fund Ltd. (supra) and contended that a petition 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 unlawf....
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...., if it is satisfied that there are circumstances suggesting that- (i) the business of the company is being conducted with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members or that the company was formed for any fraudulent or unlawful purpose; (ii) persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or (iii) the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation 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 competen....
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....tor and hence investigation is required. The next contention of the petitioner is that the respondent-company has committed default in paying taxes due to various Government Departments. The contention of the PCS for the petitioner is that the respondent-company without discharging its tax liability was indulging in giving loans to the Directors which is also prohibited. Thus, the PCS contended that the details in the Balance Sheets are not reflecting the true affairs of the respondent-company and that the affairs of the company are being held in a manner intended to defraud the creditors. Therefore, investigation is sought. 33. The PCS for the petitioner contended that the respondent-company was indulging in diversion of funds from one company to another including reckless loans and advances, contravention of mandatory 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.....
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....of payment of statutory taxes, yet it is for the authorities to take appropriate action and this cannot be treated as a ground for ordering an investigation. The learned counsel for the respondent-company contended that till date no action is initiated against the respondent-company by the authorities concerned. Thus, the learned counsel for the respondent-company contended that the petitioner has failed to establish any prima facie case to order an investigation into the affairs of the respondent-company. 37. Learned PCS further contended that there are several irregularities in the group companies of the respondent. The group companies of the respondent are not parties to the petition, may be Mr. Vankayalapati Umesh and Mrs. Devineni Radha Rani are the shareholders/promoters in other group companies. The question is whether the petitioner 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 ....
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....he Companies Act, 2013. Therefore, it is not at all a fit case to order investigation basing on the financial statements. If any irregularity is found in the financial statements it is for the authority concerned to initiate action under the provisions of the Companies Act, 2013. However, the concerned authorities have not initiated any action. Therefore, the financial statements cannot be taken as ground for ordering investigation into the affairs of the respondent-company as if the company is indulging in fraudulent activities. 39. When an investigation can be ordered under section 213(b) of the Companies Act, 2013? The applicant must place the circumstances suggesting that the business of the respondent-company is being conducted with intent to defraud the creditors. Except the petitioner, no other creditor had initiated any action against the respondent-company. Even no Member of the respondent-company has alleged that the business of the respondent-company is being done in a fraudulent manner or for unlawful purpose. The members have not complained that the affairs of the respondent-company are being conducted in an oppressive manner. The petitioner admittedly is not a memb....