2020 (8) TMI 653 - AT - Companies Law

Appointment of the Government Nominated Directors - Section 388B of the Companies Act, 1956 - HELD THAT - The Central Government is empowered under Section 241(2) of the Companies Act, 2013 to file application in cases, if it is of the opinion that the affairs of the Company are being conducted in a manner prejudicial to public interest. The Tribunal in terms of Section 242 of the Companies Act, 2013, if of the opinion, that the Company s affairs or/ are being conducted in a manner prejudicial to the public interest and to wind up the Company would unfairly prejudice member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the Company should be wound up, it (Tribunal) with a view to bring to an end the matters complained of, make such order as it thinks fit. Thus, even in absence of Section 388B of the Companies Act, 1956, with a view to bring an end of the matters complained of, the Tribunal is empowered to pass similar order relying on Sections 241 242 of the Companies Act, 2013 as was empowered under Section 388B of the old Act. In view of the fact that the affairs of the Company are being conducted in the manner prejudicial to the public interest as noticed from the report of the SFIO, it is held that the Tribunal is empowered to replace the present Management and to replace it with Directors nominated under the control and management by the Central Government - appeal dismissed.

Issues:
- Relief sought under Section 388B of the Companies Act, 1956 for appointment of Government Nominated Directors and control of company affairs.
- Challenge to Tribunal's decision based on misdirection in granting relief under Section 388B.
- Interpretation of Section 465 of the Companies Act, 2013 and its impact on granting relief under repealed provisions.
- Allegations of financial fraud, mismanagement, and illegal practices by the company's management.
- Empowerment of Central Government under Sections 241(2) and 242 of the Companies Act, 2013 to file applications and make orders in cases prejudicial to public interest.
- Tribunal's authority to replace existing management with government-nominated directors under Sections 241 & 242 of the Companies Act, 2013.

The judgment pertains to a petition under Sections 401/397/398 read with Section 408 of the Companies Act, 1956, seeking relief under Section 388B for the appointment of Government Nominated Directors and control of a company's affairs. The National Company Law Tribunal found merit in the Union of India's petition, deeming it necessary to interfere in the company's affairs to protect stakeholders and ensure statutory compliance. Consequently, the Tribunal directed the removal of existing directors and the appointment of new directors nominated by the Union of India. The shareholders of the company challenged this decision, arguing that the Tribunal erred in granting relief under Section 388B of the repealed Companies Act, 1956.

The appellants contended that without a corresponding provision in the Companies Act, 2013, relief under Section 388B could not be granted. They relied on Section 465 of the Companies Act, 2013, and the General Clauses Act, 1897, to argue that the Tribunal lacked the authority to grant relief under a repealed provision. Additionally, they criticized the Tribunal for not providing reasons for deeming the appellants unfit for their roles and for accepting reports without shareholder complaints. The appellants also highlighted pending legal proceedings that were allegedly ignored by the Tribunal.

The investigation revealed serious financial fraud, mismanagement, and illegal practices by the company's management, including forging documents, misrepresenting projects, and conducting business prejudicial to public interest. The Serious Fraud Investigation Office's report highlighted various allegations, such as non-filing of statutory returns, land purchases, and fraudulent practices. The Tribunal found that the company's affairs were conducted against the public interest and stakeholders under the existing management.

The judgment emphasized the empowerment of the Central Government under Sections 241(2) and 242 of the Companies Act, 2013, to file applications and make orders in cases prejudicial to public interest. It clarified that even in the absence of Section 388B of the Companies Act, 1956, the Tribunal could pass similar orders under Sections 241 & 242 of the Companies Act, 2013. Given the findings of prejudicial conduct by the company's management, the Tribunal was authorized to replace the existing management with government-nominated directors to protect public interest.

In conclusion, the Tribunal dismissed the appeal, citing no interference was warranted based on the findings of prejudicial conduct and the authority vested in the Central Government and the Tribunal under the Companies Act, 2013. The judgment underscores the importance of protecting public interest and stakeholders in cases of mismanagement and illegal practices within companies.

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