2024 (5) TMI 1062 - HC - Companies Law

Investigation under Section 212 (1) (c) of the Companies Act, 2013 - scope of judicial review - whether the Central Government has applied its mind and formed an opinion and whether there exist material and circumstances to form such opinion are open to judicial review? - HELD THAT - Once the liquidator and the authorities have taken action against the company for the alleged transactions covered under section 66 of the IBC, there is no question of SFIO carrying out investigation with respect to the same transactions and same cause of action, more particularly on the ground of public interest, which will otherwise amount to double jeopardy. In the present case the Application under section 66 is pending therefore investigation by the SFIO pursuant to sanction under section 212 would amount to double jeopardy. There is no element of public interest involved in the present case. Factual Existence of public purpose and interest is by the language of section 212 (1) (c) a condition precedent to order investigation - it is abundantly clear that there did not exist requisite material and circumstances based on which the Respondent No. 1 could have ordered investigation at the behest of SFIO. The commencement of investigation under section 212 of the Companies Act has far fetched impact on the functioning of a Company. Mere commencement of investigation by SFIO may cause serious injury as soon as it is made and such injury may not be capable of being entirely erased. These powers cannot be used ordinarily or in normal circumstances or in a mechanical way - there is no opinion formed by the Central Government as contemplated and mandated under section 212 of the Companies Act. Merely ordering investigation in a routinely fashion and in a mechanical way, as is done in the present case, would not qualify as forming of opinion for the purposes of Section 212 of the Companies Act. In the present case, the functions of the Company have come to stand still since its admission under the CIRP by order passed by the NCLT Mumbai dated 03.03.2020 and is pending liquidation, further there is an Application under section 66 of the IBC for recovery of monies which will be decided on its own fate, therefore, in our opinion there is no public interest involved or even a prima-facie case made out for initiation of investigation under section 212 of the Companies Act, even assuming the material and circumstances available with the Central Government at the time of passing the impugned sanction to be true and correct. An order of sanction under Section 212 of the Companies Act, 2013 needs to be a reasoned order, there needs to be existence of opinion formed by the Central Government on the basis of material facts and circumstances warranting such investigation and in compliance with principles of natural justice - the impugned sanction dated 30.11.021 fails on all counts. The sanction dated 30.11.2021 under Section 212 (1) (c) of the Companies Act, 2013 is arbitrary, illegal and bad in law and ought to be set aside. Any steps taken in furtherance of the sanction dated 30.11.2021 deserves to be quashed and set aside - Petition allowed.

Summary

Issues Involved:
1. Legality of the sanction order dated 30.11.2021 issued by the Central Government u/s 212 of the Companies Act, 2013.
2. Existence of material and circumstances indicating prejudice to public interest.
3. Double jeopardy concerning the ongoing proceedings under Section 66 of the IBC.

Summary:

Issue 1: Legality of the Sanction Order Dated 30.11.2021 u/s 212 of the Companies Act, 2013
The petitioners challenged the sanction order dated 30.11.2021 issued by the Central Government u/s 212 of the Companies Act, 2013, which directed an investigation into the affairs of the company by the SFIO. The petitioners contended that the order lacked requisite opinion and material circumstances warranting such an investigation. The court emphasized that an order directing investigation u/s 212 must demonstrate the existence of material/circumstances considered by the government. The court found the sanction order to be non-speaking, evidencing non-application of mind, and passed in a mechanical manner. The court held that the impugned sanction dated 30.11.2021 was perverse and bad in law as it did not give any reasons or show application of mind, thus vitiating the sanction itself.

Issue 2: Existence of Material and Circumstances Indicating Prejudice to Public Interest
The petitioners argued that there was no public interest or prejudice to the public involved in the transactions carried out by the company. The court noted that the Central Government's opinion must be based on relevant material and circumstances. The impugned sanction was based on the liquidator's presentation and the transaction audit report, which did not indicate any prejudice to public interest. The court concluded that there was no material or relevant circumstances to form an opinion that the company's affairs were causing prejudice to public interest, and hence, the sanction order was invalid.

Issue 3: Double Jeopardy Concerning the Ongoing Proceedings under Section 66 of the IBC
The petitioners contended that the ongoing proceedings under Section 66 of the IBC covered the same transactions and cause of action, and initiating an SFIO investigation would amount to double jeopardy. The court observed that the liquidator had already filed an application under Section 66 of the IBC before the NCLT, Mumbai, which was pending adjudication. The court held that the initiation of an SFIO investigation on the same cause of action was unnecessary and could lead to double jeopardy.

Conclusion:
The court quashed and set aside the impugned sanction dated 30.11.2021, any steps taken in furtherance of the sanction, and the Look Out Circulars issued against the petitioners. The petition was allowed with no order as to costs.