2016 (11) TMI 29 - HC - Companies Law

Necessity of investigation into the affairs of the company - exercise of power by the Central Government by resorting to section 212(1) of the Act of 2013 - Held that - We do not think that there were materials in the present case and which can be termed as enough to warrant the exercise of power by the Central Government by resorting to section 212(1) of the Act of 2013. The Central Government, in the order under challenge, did not spell out any circumstances, except outlining its power under the above sections to order investigation into the affairs of a company in public interest. None disputes that power or its existence. In para 2 of the impugned order, however, a reference is made to the report of the Registrar of Companies, West Bengal, dated 13th January, 2016. We have already held that the findings in this report are not enough for the Central Government to exercise the drastic power. Something more was required and to be established as circumstances or material enough for exercise of the power. That is clearly lacking in this case. This is the only basis, namely, the report of the Registrar of Companies, West Bengal, or its contents which has enabled the Central Government to exercise its powers under section 212(1)(c). It is, therefore, apparent that it has not necessarily acted in terms of its power conferred by section 212 to direct investigation into the affairs of the company in public interest. The foundation for reaching the opinion or satisfaction is the report of the Registrar. We have referred to the details in that report and we are of the firm opinion that based on that the Central Government could not have recorded a satisfaction or an opinion that investigation into the affairs of the company are necessary. There is no element of public interest which is projected, save and except some vague and general references to certain allegations in matters of bank finance and allotment of coal mines and alleged diversion of raw materials. There has been absolutely no details furnished nor referred in the report. Rather, the report proceeds on the basis that as far as these issues are concerned nothing can be done by the Ministry of Corporate Affairs or the Registrar of Companies. We fail to understand, therefore, how based on allegations and counter allegations between two groups of shareholders can it be even held that it is necessary in public interest to direct an investigation into the affairs of the company. Once we reach the conclusion that there is lack of requisite material to arrive at the requisite opinion or record the necessary satisfaction, then, in exercise of our powers of judicial review, we can safely quash and set aside the impugned order. We find that the opinion recorded or the satisfaction reached is vitiated by total non application of mind. None of the factors which are germane and relevant for forming the opinion have been referred. The opinion or satisfaction is based only on the complaint of the Member of Parliament to the CVC and with regard to which report was called for from the Registrar. Even the contents of that report have been, as held above, misread and totally misinterpreted. Based on that no opinion could have been recorded that it is necessary to investigate the affairs of the company in public interest.

Issues Involved:
1. Validity of the investigation ordered by the Central Government under Section 212 of the Companies Act, 2013.
2. Compliance with statutory prerequisites for ordering an investigation.
3. Adequacy of the material and circumstances justifying the investigation.
4. Influence of private disputes and family litigation on the decision to investigate.
5. Territorial jurisdiction of the Serious Fraud Investigation Office (SFIO).

Issue-Wise Detailed Analysis:

1. Validity of the Investigation Ordered by the Central Government:
The petitioners challenged the investigation ordered by the Central Government under Section 212 of the Companies Act, 2013, arguing that it was not justified. The court found that the Central Government must form an opinion based on specific grounds and reasons before ordering an investigation. The court concluded that the Central Government's decision was influenced by a complaint from a Member of Parliament, which was forwarded by the Central Vigilance Commission (CVC), and lacked substantial grounds for such an investigation.

2. Compliance with Statutory Prerequisites for Ordering an Investigation:
The court emphasized that the Central Government must comply with the statutory prerequisites outlined in Sections 210 and 212 of the Companies Act, 2013. The judgment highlighted that the Registrar of Companies' report, which formed the basis of the investigation, did not provide sufficient grounds for such an action. The court noted that the Registrar's report primarily focused on the non-filing of balance sheets, which was already subject to litigation, and did not substantiate the need for an investigation into the affairs of the company.

3. Adequacy of the Material and Circumstances Justifying the Investigation:
The court scrutinized the material and circumstances cited by the Central Government to justify the investigation. It found that the allegations regarding misuse of bank finance, coal mines, and material diversion were vague and lacked specific details. The court held that the Central Government's opinion was based on misinterpretations and insufficient evidence, rendering the decision to investigate unjustified.

4. Influence of Private Disputes and Family Litigation on the Decision to Investigate:
The court acknowledged that the disputes between the shareholders, who were family members, significantly influenced the Central Government's decision to order an investigation. The judgment emphasized that the Central Government should not intervene in private disputes and family litigation unless there is a clear public interest. The court concluded that the investigation was initiated at the behest of one rival group, making the action appear biased and not bona fide.

5. Territorial Jurisdiction of the Serious Fraud Investigation Office (SFIO):
While the court did not delve deeply into the issue of territorial jurisdiction, it acknowledged the petitioners' argument that the SFIO's jurisdiction was questionable. However, since the court found the investigation itself to be unjustified, it did not need to address the jurisdictional issue in detail.

Conclusion:
The court quashed the Central Government's order for an investigation under Section 212 of the Companies Act, 2013, finding it to be based on insufficient grounds and influenced by private disputes. The judgment emphasized the need for the Central Government to exercise its powers reasonably and based on substantial evidence, particularly when dealing with private companies and family disputes. The court ruled in favor of the petitioners, making the rule absolute in terms of prayer (a) and disposing of the Notice of Motion accordingly.

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