2018 (7) TMI 1900 - HC - Companies Law

Shell company - statutory definition of shell company in either fiscal or in the penal statutes - HELD THAT - Petitioner No.1 company to be a shell company. This declaration of petitioner No.1 as a shell company as discussed above would entail adverse consequences upon the petitioners. As already discussed the expression shell company as is understood in popular parlance. Therefore, before declaring a company to be a shell company, it was necessary on the part of the Ministry of Corporate Affairs to have at least put the company on notice that it was being branded as a shell company but that was not done in the instant case. Petitioners has referred to the averments made in the writ petition and submitted that petitioner No.1 company is an old and reputed company owning 14 Tea Estates in the State of Assam producing 11 million kgs of tea every year. It has a labour force of 20 thousand of its own. Prima facie, branding a company like the petitioner No.1 company as a shell company and thereafter initiating proceeding to prove the same virtually amounts to giving a finding first and thereafter initiating proceeding to justify the finding, like a post decisional hearing. Court is, therefore, of the view that an interim order is called for in this case. Accordingly, impugned letter dated 09.06.2017 in respect of petitioner No.1 company shall remain stayed.

Summary

Issues:
1. Challenge to the notice directing action against listed shell companies.
2. Definition and consequences of being labeled a shell company.
3. Impact of interim orders on SEBI proceedings.

Issue 1: Challenge to the notice directing action against listed shell companies
The petitioners, a public limited company, challenged a notice dated 09.06.2017 from the Govt. of India, Ministry of Corporate Affairs, directing action against 331 listed shell companies. The petitioners contended that the notice adversely affected their trading activities and appealed to the Security Appellate Tribunal, Mumbai, obtaining an interim stay. The High Court issued notice on the writ petition and interim prayer, acknowledging the petitioners' challenge to the notice.

Issue 2: Definition and consequences of being labeled a shell company
The Senior Counsel for the petitioners argued that there is no statutory or judicially defined concept of shell companies, but in common understanding, they are non-trading entities used for financial maneuvers, often associated with illicit activities. The petitioners' counsel emphasized that labeling a company as a shell company should involve due process and a hearing, as it carries severe adverse consequences. The Assistant Solicitor General of India, representing the Govt., highlighted adverse observations by SEBI regarding the petitioners' investments, financial misrepresentations, and suspicious transactions, justifying SEBI's actions against the petitioners.

Issue 3: Impact of interim orders on SEBI proceedings
The Court considered the implications of passing an interim order that could affect SEBI's ongoing proceedings against the petitioners. The Senior Counsel for the Govt. and SEBI emphasized the need for SEBI's investigations to proceed unhindered to allow the petitioners a fair opportunity to defend themselves. However, the Court, after reviewing the impugned letter branding the petitioners as a shell company without prior notice, decided to stay the letter's effect to prevent adverse consequences for the petitioners. The Court also directed the exchange of affidavits between the parties within four weeks for further proceedings.

In conclusion, the High Court's judgment addressed the challenges to the notice against listed shell companies, discussed the definition and consequences of being labeled a shell company, and considered the impact of interim orders on SEBI's investigations, ultimately staying the impugned letter's effect on the petitioners pending further proceedings.