2019 (7) TMI 1737 - Tri - Companies Law

Oppression and Mismanagement - Seeking suspension of the then Board of Directors of Respondent No. 1 and further seeking restraint on alienation of moveable and immoveable properties of the respondents named therein during the pendency of investigation into the affairs of Respondent No. 1 and its subsidiaries - liability arising out of fraudulent conduct of business as such conduct can be past or present - siphoning of public money - HELD THAT - Order 1 Rule 10(4) provides that Where defendant is added, plaint to be amended. Where a defendant is added, the plaint shall, unless the Court otherwise directs, be amended in such manner as may be necessary, and amended copies of the summons and of the plaint shall be served on the new defendant and, if the Court thinks fit, on the original defendant - thus, it is clear that Order 1 Rule 10(2) gives discretion to the court to struck out any of the parties of the case or to add any of the party whose impleadment is necessary in order to enable the court to effectually and completely to adjudicate upon and settle all the questions involved in the suit. After passing such order by the court, Rule 10(4) provides that plaint should be amended and copy of the amended plaint to be served. In the present matter, Union of India has sought impleadment of the proposed Respondents mainly on the ground that in the 2nd SFIO report the role of proposed respondents has been found conniving, colluding with coterie to conceal material information/facts and in fraudulently falsifying the books of accounts and thereby financial statements from FY 2011-12 to 2017-18 - Director (Prosecution) appearing on behalf of Union of India has emphasized that the entire exercise of initiating this public interest petition will be useless unless action is not initiated against the persons who have siphoned of the public money. It is pertinent to mention that IL FS (R1) procured funds from the market through short term instruments and invested in its group companies by way of giving long term loans and advances, which was prejudicial to the interest of the group and therefore the financial markets at large. Based on its bogus and fictitious but good credit rating and financial statements, Respondent No. 1 and its key subsidiaries such as IL FS Financial Services Ltd. (IFIN) and IL FS Transportation Networks Ltd. (ITNL) raised short term market funding through commercial papers /inter corporate deposits and passed the same to their project SPVs/ group companies (which were unable to raise funds externally), for helping them service their debt obligations. The CoD being fully aware, thereby hid and avoided possible defaults resulting into increasing indebtedness on a standalone basis. This is virtually an act of fraud leading to a spiraling debt of over ₹ 91,000 crores of the IL FS group. It is pertinent to mention that in 2nd SFIO Report, no role of Independent director has been specified. Therefore, their impleadment in the case is not justified, at this stage - It is important to point out that on perusal of the facts of the case of Shanta Prasad Chakravarty, it is clear that in that case, some error was pointed out in audit work which was ratified later on, therefore, auditor s name from the array of parties were struck of by NCLT, Guwahati Bench. That case was based on error committed by auditors and the error was committed by auditors and their bonafide were also verified from the Report which was submitted after the annual financial report. Therefore, the court allowed the application to struck of their name from the array of the parties. It is pertinent to mention that Order 1, Rule 10 (2) of CPC authorizes the court may at any stage of the proceedings, either upon or without the application of either party, and on such terms as may appear to the Court to be just, order that the name of any party improperly joined, whether as plaintiff or defendant, be struck out, and that the name of any person who ought to have been joined, whether as plaintiff or defendant, or whose presence before the Court may be necessary in order to enable the Court effectually and completely to adjudicate upon and settle all the questions involved in the suit, be added - It is also important to point out that in the 2nd SFIO Report, no role of Independent director has been specified. It is observed from the record that even though Mr. Surinder Singh Kohli, Ms. Subhalakshmi Panse were the Independent Directors, they were also the part of Audit Committee of IFIN. The petitioner are directed to implead the names of Proposed additional Respondent Nos. 321 to 343 to the Company Petition No.3638/2018 - application allowed.

Summary

Issues Involved:
1. Impleadment of Proposed Respondents Nos. 321 to 343 in CP No. 3638/2018.
2. Allegations of financial mismanagement and fraud by IL&FS and its subsidiaries.
3. Role and responsibility of auditors and audit committee members.
4. Legal provisions and jurisdiction under Sections 241, 242, and 339 of the Companies Act, 2013.
5. Public interest litigation by Union of India under Section 241(2) of the Companies Act, 2013.
6. Application of Order 1, Rule 10(2) of CPC for adding or striking out parties.

Detailed Analysis:

1. Impleadment of Proposed Respondents Nos. 321 to 343:
The Union of India, Ministry of Corporate Affairs, filed MA 2071/2019 seeking the impleadment of Proposed Respondents Nos. 321 to 343 in CP No. 3638/2018. This was based on findings from the Serious Fraud Investigation Office (SFIO) reports, which indicated the involvement of these individuals and entities in the financial mismanagement and fraudulent activities of IL&FS and its subsidiaries.

2. Allegations of Financial Mismanagement and Fraud:
The applicant contended that IL&FS and its group companies presented a misleading financial picture, hiding severe financial issues, and engaged in activities prejudicial to public interest. The SFIO's interim reports highlighted several key findings, including:
- Complete control by the suspended Board of Directors.
- Hefty, unauthorized salaries despite poor financial performance.
- Misrepresentation of financial health to avoid regulatory breaches and obtain high credit ratings.
- Misuse of short-term market funds for long-term loans within the group.
- Fabricated and inflated revenue figures.
- Use of Employee Welfare Trust for personal gain by directors.

3. Role and Responsibility of Auditors and Audit Committee Members:
The SFIO reports implicated auditors and audit committee members in the fraudulent activities. Specific allegations included:
- Failure to report true financial conditions.
- Collusion with management to conceal material information.
- Non-compliance with auditing standards and regulatory requirements.
- Issuance of fraudulent end-use certificates without proper verification.

4. Legal Provisions and Jurisdiction:
The application was filed under Sections 241 and 242 of the Companies Act, 2013, which deal with oppression and mismanagement. The tribunal emphasized that the impleadment was necessary to ensure that the respondents do not alienate or encumber their properties, and to support the ongoing investigation.

5. Public Interest Litigation by Union of India:
The Union of India filed the petition under Section 241(2) of the Companies Act, 2013, on grounds that the affairs of IL&FS were conducted in a manner prejudicial to public interest. The tribunal noted the gravity of the case, likening it to the Satyam scam, and acknowledged the necessity of including all involved parties to ensure comprehensive adjudication.

6. Application of Order 1, Rule 10(2) of CPC:
Order 1, Rule 10(2) of CPC allows the court to add or strike out parties to ensure effective adjudication. The tribunal applied this provision to add the proposed respondents, emphasizing the necessity of their presence for a complete and final decision on the issues involved.

Conclusion:
The tribunal allowed the impleadment of Proposed Respondents Nos. 321 to 343, based on the findings of the SFIO reports and the necessity to address the extensive financial mismanagement and fraud within IL&FS and its subsidiaries. The decision was made to ensure that all involved parties are held accountable and to support the ongoing investigation into the affairs of the company.