2022 (1) TMI 774 - SC - Insolvency and Bankruptcy

Validity of Winding up order - breach of the mandatory requirement of advertisement before ordering winding up - bar of time limitation - estoppel from pleading fraud - violation of the principles of natural justice due to the denial of permission for cross examination - erroneous findings of fact - application of incorrect standard of proof on the question of fraud - erroneous conclusions regarding the consequences of fraud, assuming that fraud was established - winding up under clause (c) of Section 271 (directly on the ground of fraud) by any person authorised by the Central Government by notification or winding up under clause (e) of Section 271 (on the ground that it is just and equitable to wind up) in terms of Section 224(2)(a) on the basis of a report of investigation under Section 213(b). Applicability of provisions of IBC - HELD THAT - Antrix, which initiated the proceedings for winding up, is neither a financial creditor nor an operational creditor nor a corporate applicant. This is why Antrix have not and could not have gone for insolvency resolution process, under the IBC, but taken recourse to Section 271(c) of the Companies Act, 2013. Hence the ratio in Jignesh Shah, as applicable to debts, whose recovery in any case should not have been time barred on the date of initiation of the proceedings for winding up/insolvency resolution process, cannot have any application to the case on hand. Acknowledge of Debt on the basis of the entries made in the balance sheets of a corporate debtor - Period of limitation - HELD THAT - limitation is not always akin to a lighted matchstick to a train of gun powder. The date of commencement of the period need not necessarily be static. The date of commencement may keep changing depending upon the acts of omission and commission on the part of the party against whom the action is initiated. These acts of omission and commission constitute the bundle of facts, which determine the question whether an action is barred by limitation or not. - The termination of the Contract on 25.02.2011, was not triggered by an allegation of fraud and corruption. Fraud and corruption were discovered only later and by the time the discovery was made, the attempts to reap the fruits of fraud had reached the pinnacle. These attempts continue even till date and this falls squarely within Section 271(c). Therefore, the contention that the petition was barred by limitation was rightly rejected by the Tribunal and we have no reason to take a different view. Advertisement of the Company Petition - HELD THAT - The requirement to advertise a petition for winding up does not flow out of the statute, but flows out of the Rules. Since the requirement to advertise a petition for winding up is stipulated in Rules 5 and 7 of the Companies (Winding up) Rules, 2020, what is prescribed in Rule 35 would cover even petitions for winding up. Though technically the Tribunal may not be correct in invoking useless formality theory in cases of this nature, we can certainly apply the test of prejudice, especially in the light of the serious nature of the allegations of fraud, on the basis of which the company is sought to be wound up. This is not a case where the company is sought to be wound up on the ground of inability to pay debts or on just and equitable ground. This is a case of fraud and all stakeholders are fully aware of the proceedings and they have even shown extreme urgency in enforcing an ICC Arbitration award and 2 BIT awards, before the conclusion of the winding up proceedings. Therefore, we are unable to sustain the argument that the failure of the Tribunal to order the publication of an advertisement rendered the entire proceedings unlawful. Estoppel - HELD THAT - The question is as to whether all the above would lead to an inference of estoppel against Antrix. The fact that the Agreement dated 28.01.2005 was not terminated on the ground of fraud, through the letter dated 25.02.2011, cannot take the appellants anywhere. The earliest First Information Report for the offences under Section 420 read with Section 120B of the IPC was filed by the CBI only on 16.03.2015. The officers of Antrix as well as officials of the Government were also implicated in the FIR for offences under the Prevention of Corruption act, 1988. Therefore, the appellants cannot set up a plea of estoppel on the ground that the termination of the Agreement in the year 2011 was not on the ground of fraud, when the discovery of fraud itself was many years later - For the very same reason, the failure of Antrix to plead fraud in the ICC arbitration proceedings, cannot also operate as estoppel. The arbitral proceedings commenced in the year 2013 and the award itself was passed on 14.09.2015. Antrix cannot be expected to plead fraud in the arbitral proceedings, even before the discovery of fraud. In the case on hand, the fraud alleged by Antrix is not solely on the ground that their consent to the Agreement dated 28.01.2005 was vitiated by fraud. What is alleged in the petition for winding up are, (i) formation of the company for fraudulent or unlawful purpose; (ii) fraud in the conduct of the affairs of the company; and (iii) fraud on the part of the persons who were involved in the formation and/or in the management of affairs of the company. The fraud relatable to the agreement, is only one facet of the whole scheme of things. Therefore, we have to go beyond section 19 of the Contract Act - Explanation (i) under Section 447 of the companies Act, 2013 also defines fraud, but for the purposes of Section 447. What is covered by Section 271(c) of the Companies Act, 2013 is a fraud that goes beyond what lies in the realm of contract or in the realm of the penal provisions of the Companies Act, 2013. Hence the contention that Antrix was estopped from pleading fraud, was rightly rejected by the Tribunal and we see no reason to taken a different view. Refusal to permit cross-examination - HELD THAT - In the case on hand, Antrix asserted that Devas offered services which were nonexistent, through a device which was not available and that even the socalled intellectual property rights over the device were not available. Therefore, obviously Antrix cannot lead evidence to show the nonexistence or nonavailability of those things, either by oral evidence or by subjecting their officials to crossexamination by Devas. Devas never produced before the Tribunals any device nor did they demonstrate the availability to Devas services. All that Devas wanted was, the crossexamination of the officials of Antrix. Any amount of crossexamination of the officials of Antrix could not have established the existence of something that was disputed by Antrix - It is clear from the timeline of events that the application for crossexamination was moved by Devas after conclusion of the arguments on the side of Antrix in the main petition itself, and that too after the unsuccessful attempt made by one of its shareholders to assail the constitutional validity of the statutory provisions. Therefore, the Tribunal was right in rejecting the request for crossexamination. Locus standi of shareholders - HELD THAT - It is true that the petition for winding up was filed under Section 271(c) alleging (i) that the affairs of the company have been conducted in a fraudulent manner; (ii) that the company was formed for fraudulent and unlawful purpose; and (iii) that the persons concerned in the formation or management of its affairs have been guilty of fraud. But there is no scope either in the Act or in the Rules for the impleadment of any shareholder as a respondent to the petition for winding up. Rule 3(1) of Companies (Winding Up) Rules 2020 requires a petition for winding up to be in Form WIN 1 or Form WIN 2. A look at these forms would indicate that there is no provision for making any one, as the respondent in the petition. Therefore, the question of impleading any shareholder at the time when the petition for winding up was filed, did not arise - NCLT did not have to go through the formality of ordering notice before admission, as a battery of counsel appeared for Devas, raised preliminary objections and also sought time to file response. The Tribunal passed a detailed order dated 19.01.2021 admitting the company petition and appointing a provisional liquidator even while granting time to the company to file its reply. In paragraph 5 of the detailed order dated 19.01.2021, the preliminary submissions made by the company in liquidation against the admission of the company petition, are recorded. The persons who are ducking/ avoiding summons in the criminal prosecution, cannot be heard to contend that they must have been heard in the petition for winding up. Taking advantage of their citizenship/residence abroad, these shareholders are prosecuting proceedings for the enforcement of (i) ICC Arbitral Tribunal Award in India; and (ii) BIT Awards overseas, even while making it impossible for CBI to serve summons on them for the past five years. It is not open to such persons to raise the bogey of failure to afford an opportunity. Findings erroneous and perverse and the standard of proof applied incorrect - HELD THAT - The appeal before us which is under Section 423 of the Companies Act, 2013, is only on a question of law. When two forums namely NCLT and NCLAT have recorded concurrent findings on facts, it is not open to this Court to reappreciate evidence. Realising this constraint, the learned Senior Counsel for the Appellant sought to project the case as one of perversity of findings. But we do not find any perversity in the findings recorded by both the Tribunals. These findings are actually borne out by documents, none of which is challenged as fabricated or inadmissible. Though it is sufficient for us to stop at this, let us go a little deeper to find out whether there was any perversity in the findings recorded by the Tribunals and whether such findings could not have been reached by any reasonable standards. The detailed findings recorded by the Tribunal show that they are final and not prima facie. Merely because NCLAT used an erroneous expression those findings cannot become prima facie. All the grounds of attack to the concurrent orders of the NCLT and NCLAT are unsustainable - appeal dismissed.

Summary

Issues Involved:
1. Breach of the mandatory requirement of advertisement before ordering winding up.
2. Winding up petition barred by limitation.
3. Antrix estopped from pleading fraud.
4. Violation of the principles of natural justice due to the denial of permission for cross-examination.
5. Erroneous findings of fact.
6. Application of incorrect standard of proof on the question of fraud.
7. Erroneous conclusions regarding the consequences of fraud, assuming that fraud was established.
8. The question of locus of a small shareholder to oppose winding up.
9. Findings recorded against shareholders on the question of fraud without making them a party and without giving them an opportunity of hearing.

Detailed Analysis:

1. Breach of the Mandatory Requirement of Advertisement Before Ordering Winding Up:
The petition for winding up was not advertised. The court noted that under the 1956 Act, advertisement was mandatory, but the 2013 Act provides the Tribunal with discretion to dispense with the advertisement requirement. The court found that all stakeholders were aware of the proceedings and no prejudice was caused by the failure to advertise. Thus, the failure to advertise did not render the proceedings unlawful.

2. Winding Up Petition Barred by Limitation:
The court held that the petition was not barred by limitation. Fraud was discovered over a period of time, and the right to apply became recurring due to the continuous nature of fraudulent conduct. The court noted that the standard of proof for winding up on the ground of fraud is different from that for recovering debts, as discussed in Jignesh Shah's case.

3. Antrix Estopped from Pleading Fraud:
The court rejected the estoppel argument, stating that the termination of the Agreement was not on the ground of fraud because the discovery of fraud occurred later. The auditors' reports stating no fraud were based on the information available at the time and did not preclude Antrix from pleading fraud later.

4. Violation of the Principles of Natural Justice Due to the Denial of Permission for Cross-Examination:
The court held that the denial of cross-examination did not violate natural justice. Antrix's allegations were based on the non-existence of technology and services, which Devas failed to prove. Cross-examination of Antrix officials would not have established the existence of the disputed technology or services.

5. Erroneous Findings of Fact:
The court found no perversity in the findings of NCLT and NCLAT. The findings were supported by documents and evidence, and the court did not reappreciate the evidence as it was an appeal on a question of law.

6. Application of Incorrect Standard of Proof on the Question of Fraud:
The court noted that the findings recorded by the Tribunal were final and not prima facie. The use of the term "prima facie" by NCLAT was a misnomer and did not affect the validity of the findings.

7. Erroneous Conclusions Regarding the Consequences of Fraud, Assuming That Fraud Was Established:
The court upheld the conclusion that the formation and conduct of Devas were fraudulent. The company's activities were found to be in violation of various policies and regulations, and the diversion of funds supported the finding of fraud.

8. The Question of Locus of a Small Shareholder to Oppose Winding Up:
The court found that the shareholders had an effective hearing before NCLT, and their objections were considered. The dismissal of the appeal by NCLAT on the ground of maintainability was not correct, but it did not affect the outcome as the shareholders' objections were addressed.

9. Findings Recorded Against Shareholders on the Question of Fraud Without Making Them a Party and Without Giving Them an Opportunity of Hearing:
The court noted that the shareholders were aware of the proceedings and had the opportunity to object. The shareholders' representatives on the board were involved in the fraudulent conduct, and their objections were considered along with those of the company.

Conclusion:
The court dismissed the appeals, finding all grounds of attack to the concurrent orders of NCLT and NCLAT to be unsustainable. The winding up of Devas Multimedia Private Limited was upheld based on the established fraud and unlawful conduct.