1998 (6) TMI 474 - HC - Companies Law

Summary

Issues Involved:
1. Conduct and financial status of the third respondent company.
2. RBI's prohibitory order and subsequent actions.
3. Allegations of fraudulent activities by the third respondent and associated companies.
4. Legal principles regarding lifting the corporate veil.
5. Court's directions for investigation and attachment of properties.

Detailed Analysis:

1. Conduct and Financial Status of the Third Respondent Company:
The petitioners, who are agents and policy-holders of the third respondent, Sanjeevani Savings and Investments India Limited, filed a writ petition under Article 226 of the Constitution of India. They complained about the activities and management of the third respondent. The third respondent, a non-banking financial company, showed a significant increase in deposits since 1992-93. However, an RBI inspection in 1994 revealed an extremely unsatisfactory financial position, including negative net owned funds of Rs. 1,341 lakhs, assets valued at Rs. 425 lakhs, and accumulated losses of Rs. 1,354 lakhs.

2. RBI's Prohibitory Order and Subsequent Actions:
On 3-3-1995, the RBI issued a prohibitory order restraining the third respondent from accepting deposits from the public. This directive was challenged and dismissed by the Nagpur Bench of this Court. Despite the prohibitory order, it was reported that the third respondent continued to accept deposits and operated under different names. A fresh inspection in 1997 confirmed that the company's registered office was not operational, and the books of account were maintained only up to 31-3-1995. The management had no control over the company's affairs, and the liabilities to depositors could not be determined due to incomplete accounts.

3. Allegations of Fraudulent Activities by the Third Respondent and Associated Companies:
The inspection revealed that the liabilities and assets of the third respondent were transferred to other companies, and new companies were formed to siphon off funds. For instance, Silver Investment and Finance India Ltd. (SIFIL) and Bharari Savings and Investment Finance Ltd. (BSIFL) were promoted by personnel connected with the third respondent. These companies continued deposit mobilization despite the prohibitory order, with SIFIL incorporated in February 1997 and BSIFL in December 1996. The third respondent also had substantial real estate and investments, many of which were encumbered or missing.

4. Legal Principles Regarding Lifting the Corporate Veil:
The Court referenced the case of Delhi Development Authority v. Skipper Construction (P.) Ltd., where the Supreme Court held that courts could lift the corporate veil when incorporation is used for illegal or improper purposes. The Court emphasized that the corporate entity concept should not be used to commit illegalities or defraud people. The absence of a statutory provision does not inhibit the Court from making appropriate orders to do justice between the parties.

5. Court's Directions for Investigation and Attachment of Properties:
The Court, considering the prima facie evidence of fraud and the need to protect public interest, issued several directions:
- The Commissioner of Police, Mumbai, was to appoint the Deputy Commissioner of Police, Economic Offence Wing, to inquire into the affairs of the third respondent.
- The Deputy Commissioner was directed to find the whereabouts of the third respondent's properties and prepare an inventory.
- Respondents Nos. 4 to 18 were ordered to provide a detailed list of their properties, bank accounts, and assets transferred to group companies.
- The RBI was instructed to notify all scheduled and commercial banks to freeze the accounts of the third respondent and its group companies.
- The Deputy Commissioner was to investigate the involvement of field staff and other connected persons, and ensure the attachment of properties where funds were siphoned off.

The Deputy Commissioner of Police was to submit an interim report by 20th July 1998, detailing the findings and actions taken.

Conclusion:
The judgment comprehensively addressed the fraudulent activities of the third respondent and associated companies, emphasizing the need for stringent actions to protect public interest and ensure justice for defrauded investors. The Court's directions aimed at thorough investigation and attachment of properties to prevent further fraud and recover the siphoned funds.