2019 (11) TMI 290 - AT - Insolvency and Bankruptcy

Jurisdiction - power of Adjudicating Authority has to pass order u/s 213 of the Companies Act, 2013 - whether the Adjudicating Authority which is National Company Law Tribunal having dual jurisdiction under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 can direct the Central Government to refer the matter to the Serious Fraud Investigation Office (SFIO) for further investigation into the affairs of the Corporate Debtor , Bank of Maharashtra and other group of companies including the Directors of the companies of Corporate Debtor and group companies and officials of Bank of Maharashtra basing it on the Forensic Audit Report ? HELD THAT - As per Section 60(1) of the I B Code the National Company Law Tribunal having territorial jurisdiction over the place where the registered office is located will be the Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors - The provision of this section makes it clear that the National Company Law Tribunal is empowered to deal with insolvency resolution and liquidation for corporate persons including corporate debtor and others. Merely because additional power of Adjudicating Authority has been vested, the power of the National Company Law Tribunal under the Companies Act, 2013 does not stand extinguished. In the case of Y. SHIVRAM PRASAD AND ASSET RECONSTRUCTION COMPANY (INDIA) LTD. VERSUS S. DHANAPAL ORS. AND SERVALAKSHMI PAPER LTD. ORS 2019 (5) TMI 386 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI , the Appellate Tribunal held that the Adjudicating Authority has dual role of Adjudicating Authority and National Company Law Tribunal for the purpose of I B Code - Hon ble Supreme Court in SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. 2019 (1) TMI 1508 - SUPREME COURT while dealing with the matter of settlement between the parties also observed that the National Company Law Tribunal has inherent power under Rule 11 of the National Company Law Tribunal Rules, 2016. Thus, the Adjudicating Authority which is the National Company Law Tribunal has dual and interwoven role and power to pass order under Section 213 of the Companies Act, 2013 read with Rule 11 of the National Company Law Tribunal Rules, 2016. Therefore, in public interest, it is always open to the National Company Law Tribunal after giving a reasonable opportunity of being heard to the parties concerned refer the matter to the Central Government for investigation, if the Tribunal/Adjudicating Authority forms a prima facie opinion that acts of fraud have been committed by company or group of companies or its Director(s) or officers - In the present case Forensic Audit Report alleged that the members of the Corporate Debtor and its Group Companies along with officers of the Bank of Maharashtra have committed certain fraud, which, inter alia, suggest that a sum of ₹ 3,172.25 Lakhs are receivable by the Corporate Debtor - The Appellant and others were given reasonable opportunity of hearing by Adjudicating Authority. As such no interference is called for against the impugned order. Appeal dismissed.

Summary

Issues Involved:
1. Jurisdiction of the Adjudicating Authority under Section 213 of the Companies Act, 2013.
2. Alleged fraudulent activities and financial irregularities by the Corporate Debtor and its group companies.
3. Directions for investigation by the Serious Fraud Investigation Office (SFIO).

Detailed Analysis:

Jurisdiction of the Adjudicating Authority under Section 213 of the Companies Act, 2013:
The primary issue raised by the appellant was whether the National Company Law Tribunal (NCLT), acting as the Adjudicating Authority, has the jurisdiction to pass orders under Section 213 of the Companies Act, 2013. The appellant argued that the Adjudicating Authority does not possess such power in the absence of an amendment in Schedule XI of the Insolvency and Bankruptcy Code (I&B Code).

The judgment clarified that the NCLT, having territorial jurisdiction over the place where the registered office of the corporate person is located, is empowered to deal with insolvency resolution and liquidation for corporate persons, including corporate debtors and personal guarantors. The NCLT's power under the Companies Act, 2013 does not get extinguished merely because of its additional role under the I&B Code. The tribunal referred to previous cases, including "Y. Shivram Prasad Vs. S. Dhanapal & Ors." and the Supreme Court's observation in "Swiss Ribbons Pvt. Ltd. & Anr.", to establish that the NCLT has dual and interwoven roles and can exercise powers under Section 213 of the Companies Act, 2013, read with Rule 11 of the National Company Law Tribunal Rules, 2016.

Alleged Fraudulent Activities and Financial Irregularities:
The Forensic Audit Report highlighted several irregularities and fraudulent activities by the Corporate Debtor and its group companies. Key findings include:

- Related Parties and Individuals: The Corporate Debtor and associated entities were found to be part of a network of 56 group companies, with key individuals like Mr. Pratap Kunda and Mr. Sanjay Raj involved.
- Fraudulent Loans and Mis-utilization: Loans were fraudulently obtained from the Bank of Maharashtra (BoM) and misused, including the misuse of cash credit (CC) facilities meant for working capital for purchasing fixed assets.
- Financial Manipulations: The report identified inflated revenues, suspicious cash transactions, and round-tripping transactions, suggesting potential fund diversion and generation of unaccounted cash.
- Asset Stripping and Anomalies: Significant assets were written off without proper documentation, and there were discrepancies in financial statements, suggesting asset stripping and fraudulent financial reporting.

Directions for Investigation by the SFIO:
Based on the Forensic Audit Report, the Adjudicating Authority directed the Resolution Professional to forward all relevant documents to the Central Government and to the parties involved, adhering to principles of natural justice. The Central Government was instructed to refer the matter to the SFIO for further investigation into the affairs of the Corporate Debtor, Bank of Maharashtra, and related companies.

The judgment emphasized that the NCLT, under Section 213 of the Companies Act, 2013, has the authority to refer matters for investigation if there are circumstances suggesting fraudulent or unlawful activities. The inherent powers of the NCLT under Rule 11 of the National Company Law Tribunal Rules, 2016, allow it to act in public interest and refer cases for investigation if a prima facie opinion of fraud is formed.

Conclusion:
The appeal was dismissed, affirming the NCLT's jurisdiction and its decision to refer the matter to the SFIO for further investigation. The judgment upheld the Adjudicating Authority's directions and found no merit in the appellant's arguments against the impugned order.