TaxTMI 
TaxTMI 
TaxTMI 
2020 (9) TMI 131
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....n pursuance of the order dated 27.02.2020, the Investigating Officer issued notice dated 16.06.2020 under Section 217 of the Act calling for information, and vide communication dated 19.06.2020, intimated the petitioner to strictly comply with Section 217 of the Act, with a default clause. 4. Challenging the order passed by the 2nd respondent under Section 212 (1) (a) and (c) of the Act dated 27.02.2020, petitioner - company filed W.P.No.5024 of 2020, and challenging the consequential notices issued under Section 217 of the Act dated 16.06.2020 and 19.06.2020, W.P.No.8997 of 2020 has been filed. 5. Since the result in W.P.No.5024 of 2020 will have bearing on W.P.No.8997 of 2020, the former is taken up for adjudication. 6. The case of the petitioner - company, as per the averments made in the affidavit filed in support of the writ petition is that, it is involved in the business of stock broking, commodities trading, depository, wealth management services and distribution of other financial produces. 7. As there were media reports stating that the petitioner - company is violating the regulations of Securities Exchange Board of India (SEBI), the 5th respondent - Ministry of Corp....
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....and conclude the same as expeditiously as possible, preferably within a period of six months from the date of receipt of that order. 11. It is stated that as per the above directions of this court, the petitioner approached the respondents vide letter dated 25.02.2020, to give opportunity of hearing before the 6th respondent, but there was no response. 12. Petitioner also filed W.P.No.4742 of 2020 aggrieved by the action of the respondents is not responding to its letter dated 25.02.2020. During the hearing of the said writ petition, the Standing Counsel informed the court that based on the inquiry report dated 24.02.2020 submitted by the 5th respondent - Registrar of Companies (ROC), under Section 208 of the Act, the Joint Director of the 2nd respondent - Office of Director General, Ministry of Corporate Affairs, New Delhi, passed the impugned order dated 27.02.2020, directing investigation into the affairs of the company under Section 212(1)(a) and (c) of the Act. 14. The Chairman and the Managing Director of the petitioner - company, vide email dated 20.02.2020, to the Secretary of Ministry of Corporate Affairs, also gave the gist of the issues with SEBI, and requested for a p....
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....etitioner replied to the same on 13.12.2019. Subsequently, the 2nd respondent - Office of the Directorate General, vide letter dated 09.12.20190, directed the 5th respondent to examine the matter and submit report for further course of action. Accordingly the office of the 5th respondent submitted status report dated 02.01.2020, seeking sanction to conduct enquiry under Section 206(1) of the Act. The 4th respondent - Regional Director, vide letter dated 02.01.2020, directed the 5th respondent to carryout the enquiry under Section 206 of the Act, and hence the petitioner was issued notice dated 14.01.2020 under Section 206(1) of the Act on the basis of SEBI order, media reports and balance sheet as on 31.03.2019, seeking its reply. 17. While so, the Director General of Company affairs, vide letter No.07/341/2015/CL.II(SER) dated 10.01.2020 conveyed the 5th respondent, the approval of the Central Government to carryout the full-fledged inquiry under Section 206(4) of the Act. The said letter was received by the 5th respondent on 16.01.2020 and on 17.01.2020, the 5th respondent submitted preliminary report under Section 206(4) of the Act. 18. That, to the notice dated 14.01.2020 iss....
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....6(4) of the Act is an independent provision which describes the circumstances under which the ROC can suo motu decide to conduct an inquiry, and the procedure to be followed. The procedure to be followed under Section 206(4) include giving an opportunity of being heard for conducting inquiry under the said sub-section. But in the present case, the inquiry undertaken by the 5th respondent - ROC, was based on the orders of the Central Government, and hence as per the first proviso to Section 206(4) of the Act, there is no mandate for issuance of any notice and opportunity of being heard, since the 5th respondent, does a non-invasive inquiry, and sends report under Section 208 of the Act. However, as per the directions of this court in W.P.No.3143 of 2020 dated 14.02.2020, the reply filed by the petitioner on 03.02.2020 in pursuance of the notice under Section 206(1) of the Act, was considered, and final report was submitted. 22. To the averment made in the writ affidavit that to the e-mail addressed by the Chairman and Managing Director of the petitioner - company to the Secretary, Ministry of Corporate Affairs giving a basic gist of the issue with SEBI and requesting for personal h....
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....nquiry or investigation under Section 212 of the Act, will in no way affect the functioning of the company or its employees and its reputation, as contended by the petitioner - company. It is stated that the petitioner instead of co-operating with the investigation for its early conclusion, is filing writ petitions on the same subject matter and is resorting to delay tactics and, therefore, the writ petitions are sought to be dismissed. 27. Counter affidavit is filed by the 3rd respondent. In the counter affidavit, the action initiated by the 3rd respondent in pursuance of the impugned order dated 27.02.2020 is stated. 28. Petitioner filed rejoinder in W.P.No.5024 of 2020, and while reiterating the averments made in the writ affidavit, the stand of the respondents that sub-section (4) of Section 206 is independent of other provisions under sub-section (1) to (3), and that since the 5th respondent conducted inquiry as per the directions of the Central Government under the first proviso to sub-section (4) of Section 206, there is no requirement of providing opportunity of being heard; is denied. That sub-section (4) is also an integral part of Section 206 and hence the 5th responde....
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....ts would consider the explanation submitted by the petitioner on 03.02.2020, and proceed with the inquiry in accordance with law, after giving opportunity to the petitioner. Taking into consideration the said representation of the learned Assistant Solicitor General, this court, vide order dated 14.02.2020 disposed of the writ petition directing the respondents to proceed with the enquiry under Section 206(1) of the Act by duly taking into consideration the explanation submitted by the petitioner. But the 5th respondent while submitting the report dated 24.02.2020, under Section 208 of the Act, has not provided opportunity of being heard, and this is in violation of principles of natural justice, and such report, cannot form basis for ordering investigation. 33. Learned Senior Counsel further submits that the Chairman and Managing Director, addressed email dated 20.02.2020 to the Secretary, Ministry of corporate Affairs stating the gist of issues with SEBI, and sought for personal hearing. In response to the same, petitioner received email dated 27.02.2020 intimating the petitioner to meet the Secretary, Ministry of Corporate Affairs on 05.03.2020 at noon. But even by that date, t....
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.... direct the ROC to carryout the inquiry under the first proviso to sub-section (4) of Section 206 of the Act, but before such a direction is given, the Central Government has to prima facie satisfy that circumstances, as specified under sub-section 4, exist, and the basis for such satisfaction, has to be recorded in the order, and then only ROC can be directed to inquire into the matter. In the present case, the 2nd respondent, vide letter dated 10.01.2020 conveyed the approval of the Central Government to carryout the full-fledged inquiry under Section 206(4) of the Act. But the said communication does not disclose the circumstances based on which the Central Government formed its satisfaction for directing the ROC to inquire under sub-section 4 of Section 206 of the Act. Therefore non-recording of reasons, by the Central Government, is contrary to the provisions of the Act. 37. Learned Senior Counsel further submits that in the impugned order the 2nd respondent merely relying on the report dated 24.02.2020, stated that in exercise of the powers conferred under Section 212(1)(a) and (c) of the Act, the Central Government has formed an opinion that the affairs of the petitioner co....
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....ioner - company under Section 206(4) of the Act. Learned Assistant Solicitor General submits that against the notice under Section 206(1) of the Act, petitioner filed W.P.No.3143 of 2020, and this court vide dated 14.02.2020, directed the respondents to consider the reply filed by the petitioner on 03.02.2020, and conclude the inquiry under Section 206(1) of the Act within a specified time. Accordingly, as per the directions of this court, the 5th respondent - ROC, considered the reply filed by the petitioner on 03.02.2020, and submitted a detailed report under Section 208 of the Act recommending investigation into the affairs of the company. 41. Adverting to the case of the petitioner that no opportunity of being heard as required under Section 206(4) of the Act was provided to the petitioner before submitting report dated 24.02.2020; learned Assistant Solicitor General submits that under Section 206(4) of the Act, if the Registrar of Companies, suo motu initiates inquiry under the said provision, he is required to issue notice and provide opportunity of being heard to the company. But in the present case, as already stated above, the Central Government ordered for full-fledged i....
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....d an opinion that the affairs of the company needs to be investigation by SFIO, to examine the serious nature of fraud alleged to have been committed by the petitioner - company. 45. With these submissions, the learned Assistant Solicitor General sought for dismissal of the writ petitions. 46. In view of the above pleadings and the contentions of the learned counsel, the following issues emerge for my consideration: 1. Whether the inquiry initiated by the Central Government and the report dated 24.02.2020 submitted by the 5th respondent - Registrar of Companies, is in conformity with Section 206(4) of the Act? 2. Whether the opinion formed by the 2nd respondent for ordering investigation into the affairs of the petitioner - company, is in consonance with Section 212(1) (a) and ( c ) of the Act? 47. Issue No.1. To consider this issue, it is necessary to examine Sections 206, 207 and 208 of the Act. The said provisions, to the extent relevant, are extracted as under: 206. Power to call for information, inspect books and conduct inquiries: (1) Where on a scrutiny of any document filed by a company or on any information received by him, the Registrar is of the opinion that....
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....easonable opportunity of being heard; Provided that the Central Government may, if it is satisfied that the circumstances so warrant, direct the Registrar or an inspector appointed by it for the purpose to carry out the inquiry under this sub-section: ... Section 207. Conduct of inspection and inquiry: (1) Where a Registrar or inspector calls for the books of account and other books and papers under Section 206, it shall be the duty of every director, officer or other employee of the company to produce all such documents to the Registrar or inspector and furnish him with such statements, information or explanation in such form as the Registrar or inspector may require and shall render all assistance to the Registrar or inspector in connection with such inspection. .... Section 208. Report on inspection made:- The Registrar or inspector shall, after the inspection of the books of account or an inquiry under Section 206 and other books and papers of the company under Section 207, submit a report in writing to the Central Government along with such documents, if any, and such report may, if necessary, include a recommendation that further investigation into the affai....
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.... 51. Referring to letter dated 10.01.2020, where under the Central Government granted approval to carryout full-fledged inquiry under Section 206(2) of the Act, the contention of the learned Senior Counsel for the petitioner is that no reasons are reflected in the said letter that the Central Government is satisfied with the circumstances warranting inquiry, and hence it is fatal to the case of the respondents. 52. As contended by the learned Senior Counsel appearing for the petitioner, no reasons are recorded in the letter dated 10.01.2020, but sub- section (4) of Section 206 does not require recording of reasons, and it only mandates that Central Government should be satisfied. 53. As per the averments made in the counter affidavit, the circumstances i.e., the alleged frauds appeared in the news papers, SEBI order and the balance sheet submitted by the petitioner as on 31.03.2019, lead to the issuance of notice to the petitioner under Section 206(1) of the Act and the while the scrutiny is in process is in progress, the 2nd respondent also through F.No.07/341/2015/CL-ii(SER) dated 10.01.2020, directed the office to carryout full-fledged inquiry under Section 206(4) of the Act. ....
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....the whole or part of the area applied for, held that "opportunity of being heard" does not contemplate oral and personal hearing. That the rejection the application of the petitioner therein for a prospective mining licence after issuing show cause notice and after considering the written explanation submitted by the petitioner was held to be valid, and it was further held that such decision cannot be challenged on the ground of denial of personal hearing. The learned Judge while relying on several Apex Court judgments in MADHYA PRADESH INDUSTRIES LTD. v. UNION OF INDIA (1966)1 SCR 466 = AIR 1966 SC 671, CARBORUNDUM UNIVERSAL LTD. v. CENTRAL BOARD OF DIRECT TAXES, 1989 Supp. (2) SCC 462 and UNION OF INDIA v. JESUS SALES CORPORATION (1996)4 SCC 69, as well as foreign judgments, held thus: 50. Oral hearing is not an integral part of hearing, unless the circumstances are (sic) so exceptional that without oral hearing a person cannot put up an effective defence. The rule of audi alteram partem does not require full judicialisation in every case. An opportunity of being heard does not necessarily mean an opportunity of oral hearing is to be provided. It depends upon the nature of inqu....
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....er the case of the respondents is under the first proviso to sub-section (4) of Section 206 of the Act. However, as discussed above, whether the ROC takes up inquiry suo motu under sub-section (4) of the Section 206, or under the first proviso to the said sub-section, he has to follow the procedure, while examining the circumstances enumerated under the said sub-section. 60. It is stated that in pursuance of the notice dated 14.01.2020, issued under Section 206(1) of the Act, petitioner, vide letter dated 22.01.2020, sought four weeks time. In the counter affidavit it is stated that as the documents sought for were not produced, 5th respondent issued notice dated 24.01.2020 under Section 206(3) of the Act directing the petitioner - company to produce certain original documents/ registers on 27.01.2020 at 3-00 p.m. in his office. 61. The case of the petitioner is that on 27.01.2020, the officials of the company produced original documents and submitted a preliminary reply and requested time to submit further documents and opportunity of personal hearing. The time sought for was rejected. However, the petitioner submitted a detailed reply on 03.02.2020. 62. At that stage, petition....
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....the public interest; or (d) On request from any Department of the Central Government or a State Government, the Central Government may, by order, assign the investigation into the affairs of the said company to the Serious Fraud Investigation Office and its Director, may designate such number of inspectors, as he may consider necessary for the purpose of such investigation. (2) Where any case has been assigned by the Central Government to the Serious Fraud Investigation Office for investigation under this Act, no other investigating agency of Central Government or any State Government shall proceed with investigation in such case in respect of any office under this Act and in case any such investigation has already been initiated, it shall not be proceeded further with and the concerned agency shall transfer the relevant documents in respect of such offences under this Act to Serious Fraud Investigating Office. . . ." 66. Section 210 deals with the power of the Central Government to order investigation into the affairs of the company under the circumstances enumerated in the said section by the Inspectors to be appointed by the Central Government. Section 212 deals with inves....
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.... investigation under Section 212(1)(a) and (c) of the Act and that they have to await the conclusion of the proceedings by SEBI, cannot be sustained, as the procedure adopted by the authorities are different. 72. Perusal of the impugned order discloses that the 2nd respondent considering the report submitted by the 5th respondent under Section 208 of the Act, formed an opinion that the affairs of the petitioner - company and its group of companies, needs to be investigated to examine the serious nature of fraud committed, as large public interest is involved and hence, ordered investigation into the affairs of the said companies by SFIO. 73. Section 237 of the 1956 Act deals with investigation of company's affairs by Central Government, and sub-section (b) of said provision requires the Central Government, to form an opinion for ordering investigation into the affairs of the company. The said provision, is akin to Section 213 of the Act of 2013. However, as it is deals with the administrative jurisdiction of the Central Government for ordering investigation on forming an opinion in that regard, the judicial precedents in this regard, would be of considerable help in resolving....
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....at such investigations have to be assigned to the SFIO." 75. A Division Bench of the High Court of Delhi in SUNAIR HOTELS LTD. v. UNION OF INDIA 2019 SCC Online Del 6465 held as under: "30. The Central Government is entrusted with the power in Section 212 of the Companies Act, 2013 to order an investigation by the SFIO if in its discretion such an investigation is necessary to safeguard public interest. It is true that the text of the statute does not contain an explicit right to challenge the opinion of the Central Government. However, this does not mean that the power confers absolute discretion over the decision and that its decision consequently attains unassailable finality. An order of investigation is an administrative order because, as explained in Barium Chemicals (supra) - "The discretion conferred to order an investigation is administrative and not judicial since its exercise one way or the other does not affect the rights of a company nor does it lead to any serious consequences, as for instance, hampering the business of the company." 31. Being an administrative order, it is essential that the Government must form an opinion under the section and it has been r....
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....which the reputation and prospects of the company may be adversely affected. It should not therefore be ordered except on satisfactory grounds. 49. Since an investigation into the affairs of a company is likely to have a serious impact on the confidence of its shareholders and of the general public, it is also vital that before such an investigation is ordered, the deciding authority must appraise itself of all the relevant facts." 76. The quintessence of the above judgments is that under Section 212(1) of the Act, the Central Government, on the sources referred to under clauses (a) to (d) of the said sub-section, is required to form an opinion that it is necessary to investigate into the affairs of the company by SFIO. It goes without saying that for formation of an opinion with regard to necessity for ordering investigation into the affairs of the company by SFIO, the necessary concomitant is existence of prima facie circumstances, which should be demonstrable before the court when questioned. As the investigation will have serious impact on the functioning of the company and its prospects, it is vital that before ordering investigation, the authority shall appraise itself al....
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....r, SFIO to investigate into the affairs of the above mentioned company, shall exercise all the powers available to them under the Companies Act, 2013. The inspectors shall complete their investigation and submit the report to the Central Government. 5. This order is issued for and on behalf of the Central Government." 78. A reading of the above order makes it clear that the Central Government, considering the report submitted by the 5th respondent - ROC dated 24.02.2020, which recommended investigation into the affairs of the petitioner - company and its group of companies, formed an opinion that the affairs of the company needs to be investigated to examine the serious nature of fraud committed, as larger public interest involved, and ordered investigation into the affairs of the said companies by SFIO. Before ordering investigation, Oversight Committee was also appointed, which went into the report submitted by the 5th respondent and other material, and recommended for investigation into the affairs of the company by SFIO. 79. The source for forming of an opinion by the Central Government with regard to necessity for ordering investigation into the affairs of the company by S....
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....the Act. The said report formed the basis for passing the impugned order dated 27.02.2020, ordering investigation by SFIO into the affairs of the company, and the investigation is also ordered in public interest. 82. As the report dated 24.02.2020 is relied upon by the 2nd respondent to pass the impugned order, it is necessary to examine the said report, to see whether the 2nd respondent is justified in forming an opinion to order for investigation by SFIO. The said report is filed along with the material papers to the counter affidavit, and the relevant conclusions are as under: (14) CONCLUSION: (14.1) The company has filed its latest financial statements for the financial year 2018-19 only on 23.12.2019 and Annual Return on 31.12.2019. Further based on the media reports and directions from the Directorate and the Ministry letters have been issued to the company include the latest one issued under Section 206(1) dated 14.01.2020 for their comments within 7 days. The company has furnished its reply vide letter dated 03.02.2020, which has been examined in detail in the Tabular Statement attached as Annexure-IV. It may be seen that the company has not provided full details on s....
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....ER) and the inquiry report, the oversight committee (OC) observed: a) Interest of investors (more than 80,000), including retail investors, which are at stake as KSBL had prima facie abused its position as a Depository Participant. b) KSBL had prima-facie borrowed fund from Banks & BFIs by citing false information. c) There is a likelihood of diversion of public funds through related parties. d) Specialized/Technical/Complex nature of the alleged fraud. 8.2 Taking into consideration all these factors, the Oversight Committee unanimously recommended investigation into the affairs of KSBL and their 9 companies mentioned in para 44 above, by SFIO under Section 212(1)(a) and (c) of Companies Act, 2013 by SFIO, in public interest. 85. Considering the report submitted by the 5th respondent dated 24.02.2020 and also the decision of the Oversight Committee dated 25.02.2020, I am of the considered view, that there are prima facie circumstances justifying the action taken by the 2nd respondent in forming opinion with regard to necessity for ordering investigation into the affairs of by the company by SFIO, as large public interest is involved. 86. In the judgments relied on ....
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....hat this court is not sitting in appeal over the decision of the Central Government in ordering investigation into the affairs of the company under Section 212(1)(a) and (c) of the Act, and scope of this court under Article 226 of the Constitution of India, with regard to judicial review, is limited to the examination of decision making process, and not the decision. In the preceding paragraphs, this court, on examining the said process, found that ROC has followed the procedure envisaged under Section 206(4) of the Act and submitted the report; and the said report and the order of this court, and also the other material available on record, was examined by the Oversight Committee, and vide its minutes dated 25.02.2020, recommended for investigation. Eventually, the 2nd respondent, considering the report dated 24.02.2020, and in exercise of his jurisdiction under Section 212(1)(a) and (c) of the Act, and forming an opinion with regard to necessity for ordering investigation into the affairs of the company by SFIO, ordered investigation vide the impugned, as large public interest is involved. In these circumstances, no exception can be taken to the impugned order. 93. For the foreg....