2021 (12) TMI 1379 - HC - Companies Law

Maintainability of petition - irreparable loss - balance of convenience - Constitutional validity of Section 217(5) of the Companies Act - HELD THAT - The Petitioners have made out a prima facie case for grant of interim relief. Balance of convenience is also in favour of the Petitioners and if the interim relief, as prayed for, is not granted, irreparable loss shall be caused to the Petitioners. There was thus a clear mandate by the Central Government to complete the investigation within three months from the date of the issue of the order i.e. 31.10.2018. However, the investigation was not completed within the stipulated time and as asserted by the Petitioners, the same is still ongoing. Prima facie, there is violation of Section 212(3) and the direction of the Central Government. So far as investigation into the affairs of the six Companies by virtue of impugned order dated 27.10.2020 (Annexure P-2 to the memo of this writ petition) is concerned, which includes Petitioners No.2 and 3 herein, there is violation of provisions of Section 219 of the Companies Act, 2013. There seems to be prima facie merit in the contention of the Petitioners that the Companies sought to be investigated under Section 219 ought to have an affiliation with the Company(s) under investigation, as provided for in the Statute. There is also prima facie merit in the contention of the Petitioners that the impugned orders dated 31.10.2018 and 27.10.2020 do not indicate the reasons or circumstances that compelled the Central Government to form an opinion to order investigation by the SFIO into the affairs of the Petitioners. All that the orders reveal is that the Central Government has the power under Section 212 of the Companies Act to direct investigation into the affairs of a Company and that it has formed an opinion to do so - nothing is discernible from the impugned orders as to what cogent material led to the formation of opinion by the Central Government that the affairs of the Petitioners were required to be investigated. The operation, implementation and execution of the orders dated 31.10.2018 and 27.10.2020 (Annexures P-1 and P-2 to the memo of this writ petition), passed by the Respondents as well as subsequent actions and proceedings initiated pursuant thereto, including coercive proceedings and look-out notices, are stayed, till the next date of hearing. List on 18.01.2022.

Summary

Issues:
Challenge to maintainability of the petition due to pending writ petitions in other courts regarding similar reliefs, violation of statutory mandate in continuing investigation, lack of reason for ordering investigation, legality of investigation into six companies, power of SEBI to investigate, admissibility of statements made before Investigating Officers, and constitutional validity of Section 217(5) of the Companies Act.

Analysis:

1. Maintainability of the Petition:
The Respondents raised a preliminary objection regarding the maintainability of the petition, citing pending writ petitions in other courts. However, the Petitioners argued that those petitions were not filed by them, making the present petition maintainable. The High Court agreed, stating that the present petition challenged specific orders and the constitutional validity of a Companies Act section.

2. Violation of Statutory Mandate:
The Petitioners contended that investigations into certain companies continued beyond the specified period, violating Section 212(3) of the Companies Act. The High Court found prima facie merit in this argument, noting that investigations were ongoing despite the lapse of the stipulated time.

3. Lack of Reason for Ordering Investigation:
The Petitioners highlighted that the orders directing investigations lacked clear reasons or circumstances justifying the Central Government's opinion for the investigations. The High Court observed that the orders did not provide sufficient material for forming an opinion, as required by Section 212 of the Companies Act.

4. Legality of Investigation into Six Companies:
Concerns were raised about the legality of investigating six companies based on an order dated 27.10.2020. The Petitioners argued that these companies had no affiliation with those under investigation earlier. The High Court found prima facie merit in this argument, questioning the justification for initiating investigations against these companies.

5. SEBI's Power to Investigate:
The Petitioners argued that only SEBI had the authority to investigate, not other authorities like the Respondents. Citing legal precedent, they claimed that investigations by the SFIO against the Petitioners were illegal. The High Court noted this argument for further consideration.

6. Admissibility of Statements Before Investigating Officers:
The Petitioners raised concerns about the admissibility of statements made before Investigating Officers under Section 217(5) of the Companies Act. They argued that such statements, obtained under pressure, should not be admissible as evidence. The High Court acknowledged this concern and noted the potential unconstitutionality of Section 217(5).

7. Conclusion:
Considering the arguments presented, the High Court granted interim relief to the Petitioners, staying the operation of the orders dated 31.10.2018 and 27.10.2020, along with subsequent actions and proceedings. The Court found a prima facie case for granting relief based on violations of statutory provisions and lack of justification for the investigations. The matter was scheduled for further hearing on 18.01.2022.