TaxTMI 
TaxTMI 
2020 (10) TMI 694
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....C Bank, Vijayanagar Branch, Bangalore and (iii) Karnataka bank, Chandra Layout Branch Bangalore in A/C No. 9072000100027501 so as to prevent any withdrawals, transfer, disposal/diversion of funds or closure of the said accounts; to direct to disclose moveable and immovable properties/assets, including bank accounts, owned by the Company in India or anywhere in the world, to restrain the Respondents from accepting further deposits/money from existing members or fresh deposits/money from the Public etc. 3. C.P. No. 203 of 2019 is filed by the Registrar of Companies, Karnataka, against Super Royal Holidays India pvt. Ltd, Under Sections 272(1) R/w 272(3), 271(C) & 273(1) of Companies Act, 2013, by interalia seeking to wind up the Company; to appoint Official Liquidator to take charge of affairs of Company etc. 4. Brief facts of the case, as mentioned in both Company Petitions, which are relevant to the issue in question, are as follows: (1) M/s. Super Royal Holidays India Private Limited (hereinafter referred to as 'Company/R1 Company') was incorporated as a Private Limited Company on 02.01.2012 with CIN No. U6304KA2012PTCS061929 in the State of Karnataka. The R....
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....l face in the financial rotation of funds (3) In Pursuant to the information furnished by the Ministry that the R1 Company is maintaining account with Axis Bank, the Inspector has issued a letter dated 27.11.2017 to the Chairmen and Managing Director of Axis Bank, Mumbai requesting to furnish KYC details and the Bank Statements of the Company from the opening of account to till date. Further during the investigation, it was ascertained that the Company was conducting its banking transactions through Axis Bank (A/C No. 912020045477922), -HDFC Bank (A/C No. 03122320000888), Karnataka Bank (A/c No. 9072000100027501) and Yes Bank (A/c No. 073863700000034) and the account maintained with the Yes Bank was closed on 17.08.2017. (4) It is stated that the Financial Statements and Auditor's Report were examined to ascertain the disclosures made regarding the Specified Bank notes and Cash deposits of the Company. It is noticed that during the period of demonetisation i.e., 08.11.2016 to 30.12.2016 in the Axis Bank account and HDFC Account the Company had deposits of Rs. 10.32 crores in the aforesaid accounts and also shown withdrawal of Rs. 9.66 crore during the relevant....
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.... Respondent No. 2 only appeared on 24.01.2018 when he was questioned about the affairs of the Company. The Respondent No. 2 Mr. Madhukar assured to submit the information and consequently a letter was also issued on 25.01.2018 to the R1 Company calling for the information immediately. But no details/information was submitted either by the R1 Company or by its Directors. Further, a reminder was sent on 14.02.2018 to the Company stating that failure of submission of details would lead to freezing of the accounts of the company. Inspite of sending letter/email, no information was furnished by the Company. Moreover, the letter issued to the Respondent No. 2 returned undelivered with remarks left. The R1 Company and its Directors, have, therefore, no co-operated in the investigation process and thus violated the provisions of Section 217 of the Companies Act, 2013. (7) It is stated that the Inspector for the purpose of finding details about the commission's paid/business model had summoned certain members/commission against namely, Mr. Rajender Shetty, Mohammed Rafi, Rajehs G.L., Venktappa, K. Mohd. Shareef, Pradeep D.J., Anil Maben, K.R. Sundari, Mohd. Nisar Yermal, Naveen....
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....e. As per Section 73 r/w Section 76 further r/w Rule 2(3)(xii)(a) of the Companies (Acceptance of Deposits) Rules, 2014 any amount received in the course of, for the purposes of, the business of the company as an advance for the provisions of services accounted for in any manner whatsoever provided that such advance is appropriated against provision of services within a period of three hundred and sixty five days from the date of acceptance of such advance. Therefore, in respect of each membership/client, the Company has violated Rule 2(c) (xii)(a) of the Companies (Acceptance of Deposits) Rules, 2014. Further, as per Section 73 r/w 76 of the Companies Act, 2013 the Company being a Private Limited Company is not eligible for collecting deposits from the persons other than shareholders of the R1 Company. Therefore the R1 Company and its directors are liable for penal action under Section 76A of the companies Act, 2013 for violating Section 73 r/w 74 of the companies Act, 2013. A separate action is being initiated for the said violating as per the provisions of the Companies Act, 2013 by the Petitioner. (9) It is further stated that the Inspectors noticed that the C....
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....avoiding any prosecution or repayment of the amounts collected from the members of the R1 Company scheme, the Directors of the R1 Company may abscond after withdrawing or transferring into some other accounts the amount lying in the following bank accounts of the R1 company (i) A/c No. 912020045477922 maintained by Axis Bank (ii) A/C No. 03122320000888 maintained in HDFC Bank, Vijayanagar Branch and A/C No 9072000100027501 maintained by Karnataka Bank. If the Directors of the R1 Company are successful in doing so, then it will prejudicial to the interest of the Company, its schedule members, creditors which will be also against the public interest and they will all suffer irreparable losses and damages. Further the various proceedings suggested to be taken against the R1 Company and its directors for various other offences detailed in the report may not fructify or be fruitful. The affairs of the said Company have been and are being conducted in a manner highly prejudicial to public interest, prejudicial to its own interest since such scheme cannot sustain itself for long and also against the interest of the various members how have invested in the said Company. (....
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....f sale of goods or services by subscribers and the scheme/financial arrangement complies with all of the following: a) It has not provision that a Direct Seller with receive remuneration or incentives for the recruitment/enrolment of new participants. b) It does not require a participant to purchase goods or services: i. For an amount that exceeds an amount for which such goods or services can be expected to be sold or resold to consumers; ii. For a quantity of goods or services that exceeds an amount that can be expected to be consumed by, or sold or resold to consumers; c) It does not require a participant to pay any entry/registration fee, cost of sales demonstration equipment and materials or other fees relating to participation; d) It provides a participant with a written contract describing the "material terms" of participation; e) It allows or provides for a participant a reasonable cooling-off period to participate or cancel participation in the scheme and receive a refund of any consideration given to participate in the operations; f) It allows or provides for a buy-back or repurchase policy for "curre....
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....tiated by this office against the Company and its officers in default are for violation of various provisions of the Companies Act, 2013 etc are not tenable. In the instant case, action is initiated for winding up of Company, by considering huge public interest involved in the matter, as the fate of more than 3.5 Lacs investors, who have invested their hard earned money is involved. It is noticed during the investigation and also from the subsequent developments from the Financial statement of the Company that the Directors/Shareholders of the Company have already diverted/misappropriated substantial amounts towards managerial remuneration and huge dividend declared from the profits earned, which is nothing but the subscription amounts collected form the general public, as the Company has no other source of revenue. If the company is allowed to wipe out the entire leftover funds, the investors will lose their investment and the same may result in huge uproar form the public considering the huge number of investors of the Company. Therefore, it is just and necessary to wind up the Respondent Company and there is no double jeopardy, as both the actions are separate on different cause....
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....ent management of the Respondent as on date is follows: Name of the Director Designation Date of Appointment DIN Madhukara Director 02.01.2012 05139081 Prashanth Badhirappan Additional Director 20.11.2017 07995942 -do- Director 29.09.2018 07995942 Sri. Beru Kodige Srinivasa Nayari Sathisha (DIN: 05139174) was appointed as Director on 02.01.2012 and he resigned from the Company on 04.01.2018. (17) The name of the Company was struck off for non-filing of financial statements and Annual Returns of the years 2014-2015 and 2015-2016 under Section 248 of the Companies Act, 2013, after following due process of law, vide official Gazette notification was issued on 29.07.2017. Aggrieved by the striking off name of Company, Mr. Madhukara, of one two Directors of the Company (Respondent No. 2 in CP No. 47 of 2019 herein), has filed CP No. 124/BB/17 before the Tribunal, under Section 252(3) of the Companies Act, 2013 by interalia seeking to restore the name of Company, and it was disposed by the Tribunal, vide its order dated 08.11.2017 by directing to restore the name of Company to the Register of Registrar of Companies. Theref....
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....3 should not be taken against the said Statutory Auditor. Accordingly, the Inspectors have examined the matter and submitted their report dated 14.08.2019 recommending action under Section 140(5) against the auditor. And the Ministry vide its letter dated 28.08.2019 has accorded approval and authorized the Petitioner herein to move the Petition u/s. 140(5) against the Auditor, which is underway. Further, the Ministry of Corporate Affairs vide instructions letter dated 21.05.2018 on the investigation report had also directed the Registrar of Companies to file prosecution under Section 447 of the Companies Act, 2013 in connection with fraudulent business activities of the Company. Accordingly, the Petitioner has filed the prosecution u/s. 447 against the Respondent Company and its directors before the Special Court, Bengaluru which is pending. (21) In the above circumstances, and basing on the instructions of the Ministry of Corporate Affairs, vide letter dated 28.08.2019, notice dated 04.09.2019 was issued, under Section 271 of the Companies Act, 2013 to the Company and its past and present Directors for initiation of winding up proceedings against the Company. However, the....
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.... Company from the date of incorporation till date is not in the knowledge of the Petitioner. That by paying the entire enrolment fee/deposit collection as commission to the so called canvassing agents/business agents for enrolling members and also taking out a lion share of the remaining amount as dividend and Directors remuneration of this Private Limited Company is nothing but a fraud or impending fraud which the Directors are playing on the investors/deposit holders at large. (23) That, the way in which the Directors are utilizing the investors' money firstly by charging the same to profit and loss account as turnover/revenue and utilizing almost entire amount by way of paying commission to the agents for canvassing new investors and taking remaining amounts as dividend and remuneration by the two Directors is nothing but fraud/impending fraud as the Respondent Company cannot sustain for long as per the said 'business model'. (24) In view of the above, the Central Government has formed an opinion that the affairs of the Company have been conducted in a fraudulent manner or the Company was formed for fraudulent and unlawful purpose or the persons con....
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....visions of the Act are inconsequential, except when backed by foundational facts. The entire case foisted against the Company is triggered by baseless notion that during the period of demonetisation there has been disproportionate spurt in cash deposit of the account of the Company. The statement furnished discloses even on a bare look that while during the period preceding demonetisation exercise, the average daily cash deposit into the bank account of the Company was in the range of Rs. 17.65 lakhs. During the period of demonetisation, that is from date of demonetisation till the last date permitted for bringing demonetised Specified Bank Notes into the banking channels, the average daily cash deposit rose to Rs. 18.44 lakhs, which is a marginal increase of less than 1.7 %. This is ignorable in as much as during the post demonetisation period, the average daily cash deposit has increased to Rs. 27.53 lakhs, which only indicates normal growth of business and not any illegality. 3) It is stated that the foundational basis for the entire action initiated against the Company is a misapprehension on the part of the petitioner that the Company is operating a 'Ponzi Scheme&....
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....ceived is neither an advance nor it is deposit as the same is not adjusted to the future business. Those, who are all availing membership will have a concessional trip. There is no free trip. In fact, when the notice was issued, the First Respondent has provided complete list of services providers for Hotels and resorts and Tour Operators. The Respondent has produced the entire list to the ROC during enquiry. It is true that all the amounts are deposited by the Members and the Company has made related expenses towards Commissions, Salaries and other aspects. However no deposits have been accepted from any person other than the Member, who opted for 5) It is true that on 06.12.2017, notice was issued to the Respondent by the Deputy Director to furnish certain documents and on 15.12.2017. Accordingly, the Respondent has appeared before the Investigators, took oath and statement was recording in presence of Inspectors Mr. V Santhoshi Jagirdar and Mr. S.N. Tiwari, and submitted the document, which is acknowledged by the Investigator Sri S N Tiwari. The Respondents have furnished complete details of the information sought by the Petitioner. The Respondent No. 2 has changed the ....
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....mpany shall invite, accept or renew deposits under this Act from the public except in a manner provided under this Chapter: 76. Acceptance of deposits from public by certain companies.--(1) Notwithstanding anything contained in section 73, a public company, having such net worth or turnover as may be prescribed, may accept deposits from persons other than its members subject to compliance with the requirements provided in sub-section (2) of section 73 and subject to such rules as the Central Government may, in consultation with the Reserve Bank of India, prescribe: All the above provisions speaks about deposits. A receipt can be called as deposit only when there is an assurance to repay the same after specific duration or adjust the same on future transaction. There is no such assurance in the case of the Respondent. It is collected as membership fee. There is no assurance to repay it in future or it is not adjustable to any future transactions. The future business has no connection with membership fee. The member will get discount for having become the member. Therefore, there is no violation of Rule 73 and 76 of the companies Act or The Acceptance of Deposit Rul....
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....Bank, HDFC Bank and Yes Bank, but he was not aware of the banking transactions in the above said banks since it was looked into by the other Directors of the Company as he was not involved in the day to day business of the Company. He was also not aware of the contents with respect to total enrolled Members. (3) He has stated that he was unaware of the visit of the Inspectors to the R1 Company and also denied the imaginary averments of the Petitioner pertaining to payment of 73% of revenue earned as commission to the members would amount to ponzi scheme. Further the Respondent No. 3 states that the averments which are not specifically traversed hereby and the Petitioner is put to strict proof of the same. 7. Shri K.S. Harish, the learned Counsel for Respondent, has filed Memo dated 28.02.20 by seeking leave of the Tribunal to adopt the statement of Common Objections filed in CP No. 47/BB/2019, as reply in CP No. 203/BB/2019. 8. Heard Shri Kumar M.N., Central Government Standing counsel for the Petitioner, and Shri Vikram Chandra, with K.S. Harish & S.K. Ravi Learned Counsels for the Respondents We have carefully perused the pleadings of both the Parties and the extan....
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....and the same is inconclusive, self-contradictory and does not recommend any action by the Ministry of Corporate Affairs/ROC u/s 221, 241, 242, 246 & 339 of the Companies Act. Therefore, the Report cannot be basis for the instant Petitions. The entire case is foisted against the Company triggered by a baseless notion during the period of demonetisation there has been disproportionate spurt in cash deposit of the account of the Company. The statement of details of the deposits made in the bank account discloses that during the period preceding demonetisation and the statement disclosed that during the preceding demonetisation the average daily cash deposit into the Bank Account of the company was in the range of Rs. 17.65 lakh. During the period of demonetisation, the average daily cash deposit rose to Rs. 18.44 lakh which is a marginal increase of less than 1.7%. This is ignorable in as much as during the post demonetisation period the average daily cash deposit has increase to Rs. 27.53 lakhs which only indicates normal growth of business and not any illegality. 3) It is contended that the Company is not operating Ponzi scheme as alleged by the Petitioner. Further the Comp....
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....the opinion, that it is necessary to investigate into the affairs of a company, -- (a) on the receipt of a report of the Registrar or inspector under section 208; (b) on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or (c) in public interest, it may order an investigation into the affairs of the company. (2) Where an order is passed by a court or the Tribunal in any proceedings before it that the affairs of a company ought to be investigated, the Central Government shall order an investigation into the affairs of that company. (3) For the purposes of this section, the Central Government may appoint one or more persons as inspectors to investigate into the affairs of the company and to report thereon in such manner as the Central Government may direct. Whereas Section 216 reads as under: 216. (1) Where it appears to the Central Government that there is a reason so to do, it may appoint one or more inspectors to investigate and report on matters relating to the company, and its membership for the purpose of determining the true persons-- (a) who a....
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....f Company, enclosed to the Petition. Though, it is stated that the Company will enrol Members so as to facilitate them to avail facilities for travel, subject to paying relevant services charges, it allows even nomination, it should be through Sponsors, who are paid huge commission and awards amounting to 73 % of amount collected towards Membership. The Company has given wide publicity offering so many enticements so as to become its Members. Only two Directors namely, Madhukar and Prashanth Badhirappan, have given similar Depositions, even dated 15th December, 2017 before Investigation Inspector. Both the Directors are having educational qualifications only upto standard of SSLC/ITI. Mr. Madhukar in his deposition has interalia stated that as on 30.11.2017, the Company has enrolled 1,98,410 Members. He avoided to answer to material question with reference to multiple fake Membership and agreed that there might be some entries in the Members list, which might not be proper. He says that there are about 12,000 Commission Agents, and he agreed that though Sign Board of Company was displaced but Address of Registered office was not mentioned. With reference to Question No. 2, he has a....
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....ts entire Membership fee in one stage and it is shown as revenue without affording services to its customers saying it would be availed during a period of three years. The major amount of advance collected by way of Membership used to be paid as Commission to its Member/Agents as detailed supra. As per Directors Report for the year 2017-18, the Company has declared interim dividend at Rs. 320 per share and final dividend at Rs. 1700 per share to totalling to 2020 per share for the year 2017-18. Therefore total amount of Rs. 10.71 Cr has been pocketed by two Directors-cum-Shareholders, against their mere investment of Rs. 2.65 Lakhs each. The Directors, apart from Dividends, have also drawn huge salaries. The Company did not maintain correct details of its Members, and even the Directors, in their deposition, could not furnish correct details about their Members. It is also relevant to point out here that Badirappan has also stated similar operating business stated on 12.06.19 under the name and style of Royal Dream Private Limited in the state of Karnataka with an intention to divert funds of R 1 Company to other Company. So it is justified to freeze all the Accounts of Company in ....
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....aluru, which is pending. As stated supra, the name of Company was also struck off from the Registry of Registrar of Companies, w.e.f. 11.07.2017 on the ground that the Company has not filed either Balance sheet or Annual Returns for the years 2014-15 and 2015-16, vide Official Gazette notification dated 29.07.2017. Mr. Madhukar, Director, has filed CP No. 124/BB/2017 before the Tribunal, U/s 252(3) of Companies Act, 2013, by interalia seeking to restore the name of Company. He has interalia contended that he along with other Director was travelling during notices issued by the ROC for striking off the Company and key managerial persons of the Company left it, the business of Company is only source of income for Director-cum-Promoter-cum shareholders etc. However, he did not mention the details of their alleged travel during period of notices and striking off the Company. The Registrar of Companies has issued STK I Notice dated 17.03.17 to the Company and other two Directors vide Notice even dated 31.03.17 as to why name of Company should not be removed for not carrying on any business or operation for a period of two immediately preceding financial years etc. Subsequently, Public N....
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....r that the money, they have collected by way of Membership fee etc., is largely being pocketed by Agents, the Directors- cum- shareholders by way of commission, awards, dividends, salaries for Directors etc., leaving very paltry sum remains for the so called service for their Members. Therefore, it is established that the Company is running Ponzi scheme, as rightly contended by the Petitioner. 19. Though the Tribunal, on the basis of material placed before it, has passed interim order dated 07.03.2019 by freezing bank accounts of Respondent Company and its Directors, it has not stopped its operations and continued the litigation on un-tenable grounds before the Tribunal for vacation of interim orders, on rejection for total vacation of interim orders by an order dated 09.07.2019 passed in CP No. 47 of 2019, the Respondent has filed Company Appeal (AT) No. 226/2019 before the Hon'ble NCLAT, which was ultimately dismissed as withdrawn by an order dated 12.02.2020. Again, the Respondent has filed another Interim Application by seeking to pass an order releasing amounts claimed towards service Tax liability payable under 'Sabka Vshwas(Legacy Dispute Resolution) Scheme, 2019.....
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....ugned notice against the Directors and overall administrative issues. The denial of Respondent that Membership fee in question cannot be called a Deposit leads to an inference that it is simply collecting Membership Fee from Public by huge publicity and hardly rendering any services to its Customers and thus it is nothing but doing Pyramid business under Ponzi Scheme and it may collapse at any point of time. Moreover, the Petitioner has already initiated prosecution for violation of Section 73 R/w 76 A Companies Act, vide CC No. 372 of 2019 before Special Court, which is pending. 21. The main contentions raised on behalf of the Company/Respondents, are as follows: (1) To defreeze the Accounts of Company by vacating the interim orders dated 07.03.2019 and 09.07.2019 so as to facilitate the Company to pay statutory payments such as GST, TDS, EPF, ESI and service Tax liabilities, failing which it leads to void prosecution for its violations; (2) The Investigation Report dated 28.02.2018 in question is inconclusive, self-contradictory, and it does not recommend any action by the Ministry of Company Affairs, and thus it cannot be relied upon to take action against t....
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....ents, and hardly any service provided to its customers except few customers, out of paltry sum of money remains, after apportioning the Deposits by way of collecting Membership fee, among themselves by way of huge Dividend/salaries/commission/awards to themselves and their Agents. The contention of the Respondent that investigation Report in question is inconclusive, and it gives no cause of action for the Petitioner to file the instant Petitions is not at all tenable for the reasons given supra. Therefore, various contentions/allegations raised by the Respondents are not all tenable, and thus they are liable to be rejected. 24. For the aforesaid reasons and circumstances of the case, we are of the considered opinion that incorporation and conducting of business of the Company itself was with unlawful and fraudulent objects, and its affairs are being conducted in total violations of extant provisions of Law as discussed supra. Therefore, it would be just and proper to order winding up the Respondent Company, without prejudice to the actions being initiated by other Statutory Authorities as detailed supra, by appointing Official Liquidator appointed by Govt. of India. 25. In t....