2020 (5) TMI 152 - Tri - Companies Law

Oppression and mismanagement - siphoning off of funds - the promoters of the respondent-company obtain loan from that company invest the loan proceeds in other entities of the group promoted by them and the same money comes back to the respondent as loans and advances - allegation that transactions carried out without approval of the shareholders - bar created by section 185 of the Companies Act 2013 - invocation of section 213 of the Companies Act 2013. Whether the petitioner is entitled to the main reliefs as prayed for since the matter is listed for final disposal and therefore there is no question of granting any interim relief in favour of the petitioner? HELD THAT - It is an undisputed fact that the petitioner has not initiated any action against the respondent for recovery of the security deposit. The petitioner has directly filed this petition nearly four years after the expiry of the MoU. It is also very clear that the petitioner has neither questioned whatever transactions done by the respondent in all these years nor the petitioner challenged the details given in the Balance Sheet filed by the respondent-company from time to time. The question arises why the petitioner remained silent without taking appropriate steps for recovery of security deposit within the period of limitation. The Memorandum of Understanding came to an end by 25-9-2015. The petitioner ought to have initiated action against the respondent-company on or before 25-9-2018. Whereas the present petition is filed by the petitioner on 18-2-2018. By the date when the petitioner moved the present petition the claim of the petitioner against the respondent-company became time-barred. The petitioner cannot claim that it is the creditor of the respondent-company as on the date when it filed the present petition. The reason is the debt if any stands barred by limitation. The petitioner therefore lost the character of a creditor by the date when it filed the present petition against the respondent-company. The petitioner in order to prove its case has mainly relied on Memorandum of Understanding Deed of Pledge Original Share Certificate and Share Transfer forms. Actually there is no dispute about the entering into the Memorandum of Understanding and also security taken by the petitioner for security deposit. The petitioner has obtained Personal Guarantee as well as Promissory Note. The petitioner has taken sufficient security. However the petitioner did not initiate any action either against the company or against the Personal Guarantee when security amount became due. On the other hand the petitioner is now seeking investigation on the ground that there was a default by the respondent in returning the security deposit. This cannot be a ground for ordering investigation - the documents are not sufficient to come to any conclusion that the company is indulging in fraudulent activities and as such investigation is required to be ordered under section 213 of the Companies Act 2013. Therefore it is not at all a fit case to order investigation basing on the financial statements. If any irregularity is found in the financial statements it is for the authority concerned to initiate action under the provisions of the Companies Act 2013. However the concerned authorities have not initiated any action. Therefore the financial statements cannot be taken as ground for ordering investigation into the affairs of the respondent-company as if the company is indulging in fraudulent activities. When an investigation can be ordered under section 213(b) of the Companies Act 2013? The applicant must place the circumstances suggesting that the business of the respondent-company is being conducted with intent to defraud the creditors. Except the petitioner no other creditor had initiated any action against the respondent-company. Even no Member of the respondent-company has alleged that the business of the respondent-company is being done in a fraudulent manner or for unlawful purpose. The members have not complained that the affairs of the respondent-company are being conducted in an oppressive manner. The petitioner admittedly is not a member - The question is whether the business of the respondent-company is being conducted in any fraudulent manner. The petitioner has simply alleged that taxes were not paid to the Government authorities and there is violation of certain provisions of the Companies Act. The authorities concerned can initiate appropriate action against the respondent if really the respondent-company committed any violation of the provisions of the Companies Act. There is no need to order an investigation on these grounds. The petitioner has not established any fraud in the course of business carried out by the respondent-company. Therefore the petitioner has utterly failed to establish the prima facie case that the affairs of the respondent-company is being held in a fraudulent manner. There is absolutely no ground to order investigation into the affairs of the respondent-company - Petition dismissed.

Summary

Issues Involved:
1. Whether the petitioner is entitled to the main reliefs of investigation under Section 213 of the Companies Act, 2013.
2. Whether the petitioner has the locus standi to file the petition.
3. Whether the petition is barred by limitation.
4. Whether the respondent's business is conducted with intent to defraud creditors.
5. Whether the respondent has violated provisions of the Companies Act, 2013.

Issue-wise Detailed Analysis:

1. Entitlement to Main Reliefs of Investigation:
The petitioner sought an investigation into the affairs of the respondent-company under Section 213 of the Companies Act, 2013, alleging mismanagement, fraudulent diversion of funds, and other irregularities. The Tribunal noted that the petitioner relied primarily on financial statements and alleged violations of statutory provisions. However, it was held that mere allegations based on financial statements are insufficient to warrant an investigation. The Tribunal emphasized that the authorities concerned should initiate appropriate action if there are any irregularities. Consequently, the Tribunal found no grounds to order an investigation.

2. Locus Standi of the Petitioner:
The petitioner claimed to be a creditor of the respondent due to a security deposit of Rs. 2 crores given under a Memorandum of Understanding (MoU). The Tribunal examined whether the petitioner could maintain the petition under Section 213 as a creditor or "any other person." It was held that "any other person" must be an aggrieved party and not a stranger. Since the petitioner's claim was time-barred, it was no longer a creditor and thus lacked the locus standi to file the petition.

3. Barred by Limitation:
The Tribunal noted that the MoU expired on 25-9-2015, and the petition was filed on 18-2-2018, beyond the three-year limitation period for recovering the security deposit. The petitioner argued that the disclosure of the pledge in the financial statements extended the limitation period. However, the Tribunal held that once the debt is barred by limitation, the pledge of shares does not survive. Therefore, the petitioner's claim was barred by limitation.

4. Conduct of Respondent's Business:
The petitioner alleged that the respondent's business was conducted with intent to defraud creditors by not showing the security deposit as a liability and by advancing loans to directors. The Tribunal found that the petitioner failed to establish any prima facie evidence of fraud or unlawful conduct. It was noted that no other creditor or member had complained about the respondent's business practices. The Tribunal concluded that the petitioner did not prove that the respondent's business was conducted fraudulently.

5. Violation of Companies Act Provisions:
The petitioner alleged violations of Sections 180, 185, 186, and 188 of the Companies Act, 2013, and statutory defaults in tax payments. The Tribunal held that any irregularities in financial statements should be addressed by the authorities concerned under the provisions of the Companies Act. It was emphasized that the petitioner could not seek an investigation based solely on these allegations without concrete evidence of fraud or unlawful conduct.

Conclusion:
The Tribunal dismissed the petition, concluding that the petitioner failed to establish grounds for ordering an investigation into the affairs of the respondent-company. The petitioner's claim was barred by limitation, and it lacked the locus standi to file the petition. The allegations of fraud and violations of statutory provisions were not substantiated with sufficient evidence to warrant an investigation.