2010 (10) TMI 912 - HC - Companies Law

Whether the Appellate Authority for Industrial and Financial Reconstruction ( the AAIFR ) was justified in appointing the State Bank of Mysore as the operating agency? Held that - When there is no other scope of interference that could be made by the operating agency in regard to the work to be carried out by the independent chartered accountants while holding the special investigative audit, we do not find any prejudice being caused to the petitioner in the said exercise. Therefore, when statutorily the BIFR as well as the AAIFR are entitled to appoint the operating agency from among one of the notified institutions of the BIFR and the State Bank of Mysore though one of the secured creditors is a notified institution of the BIFR and inasmuch as we do not find any scope for interference in regard to the special investigative audit to be held by the chartered accountants to be chosen at the instance of the petitioner, there is no scope to hold that there is even a remote chance or likelihood of any bias or prejudice being caused to the petitioner. Appeal dismissed.

Issues Involved:
1. Justification of AAIFR in appointing the State Bank of Mysore as the operating agency.
2. Validity of the BIFR's restriction on the verification of accounts only up to March 31, 2008.
3. Jurisdiction of HSBC to function as the operating agency.
4. Eligibility of secured creditors to be appointed as the operating agency.

Detailed Analysis:

1. Justification of AAIFR in appointing the State Bank of Mysore as the operating agency:
The petitioner challenged the appointment of the State Bank of Mysore as the operating agency by the AAIFR. The primary contention was that the State Bank of Mysore, being a secured creditor with grievances against the petitioner, should not have been appointed. The court, however, upheld the AAIFR's decision, noting that under Section 16(2) of the SICA, the BIFR has the authority to appoint an operating agency to conduct necessary enquiries. The court found no statutory violation in appointing the State Bank of Mysore, a notified institution of the BIFR, as the operating agency. The court emphasized that the operating agency's role was limited to suggesting independent chartered accountants for the special investigative audit, thereby minimizing any potential bias.

2. Validity of the BIFR's restriction on the verification of accounts only up to March 31, 2008:
The petitioner argued that the BIFR should have extended the verification of accounts up to March 31, 2009, instead of restricting it to March 31, 2008. The AAIFR modified the BIFR's order to extend the scrutiny of accounts to March 31, 2009. The court found this modification appropriate and in line with the need for a comprehensive assessment of the petitioner's financial status. The AAIFR's decision to extend the audit period was seen as a corrective measure to ensure a thorough investigation.

3. Jurisdiction of HSBC to function as the operating agency:
The petitioner contended that HSBC was not a notified institution of the BIFR and thus lacked jurisdiction to act as the operating agency. The AAIFR upheld this grievance, stating that HSBC should not have been appointed. Consequently, the AAIFR replaced HSBC with the State Bank of Mysore. The court agreed with this correction, noting that the AAIFR acted within its rights to rectify the appointment and ensure compliance with statutory provisions.

4. Eligibility of secured creditors to be appointed as the operating agency:
The petitioner argued that none of the secured creditors should be appointed as the operating agency due to potential conflicts of interest. The court, however, found no legal impediment to appointing a secured creditor as the operating agency. It was noted that the BIFR and AAIFR provided sufficient safeguards to ensure impartiality, such as allowing the petitioner to choose one of three independent chartered accountants for the special investigative audit. The court emphasized that the operating agency's role was primarily to facilitate the audit and not to influence its outcome, thus mitigating concerns of bias.

Conclusion:
The court dismissed the writ petition, affirming the AAIFR's decision to appoint the State Bank of Mysore as the operating agency. The court found that the BIFR and AAIFR acted within their statutory powers and provided adequate safeguards to ensure a fair and unbiased investigation. The petitioner's concerns were addressed through procedural safeguards and the involvement of independent chartered accountants. Consequently, the court upheld the orders of the BIFR and AAIFR, ensuring that the investigation into the petitioner's financial status proceeded in accordance with the law.

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