2025 (4) TMI 1413 - AT - Companies Law

Investigation into the affairs of the respondent company - eligibility to file an application under Section 213 of the Companies Act 2013 - Illegal allotments of convertible debentures at a discount - illegal increase in authorized share capital of company - conversion of Respondent No. 1 Company from a private to a public entity - Illegal borrowing of funds based on fraudulent documentation - HELD THAT - Admittedly the appellant is not a member of the Respondent No.1 company hence cannot allege the business of Respondent No.1 company is being conducted in a manner oppressive to its members; or the company is guilty of fraud misfeasance or other misconduct towards its members; or members of the company have not been given due information etc. The only argument of appellant is the business of the respondent company is being conducted with an intent to defraud its creditors though the appellant was unable to substantiate his allegations the creditors of the company are being defrauded. Admittedly the appellant and the Respondent are in money dispute and arbitration proceedings are pending between two. It appears to circumvent such proceedings and to create pressure upon Respondent company the appellant had filed the present Company Petition seeking investigation into its affairs. The Ld. NCLT has held the petition is not maintainable under sub-section (a) of Section 213 of Companies Act 2013 - petition disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal include:

- Whether the appellant, as a creditor, was eligible to file an application under Section 213 of the Companies Act, 2013 for investigation into the affairs of the respondent company;

- Whether the petition under Section 213(1)(a) or 213(1)(b) of the Companies Act, 2013 was maintainable, given the nature of allegations made;

- Whether the allegations raised by the appellant, including illegal allotment of convertible debentures, unauthorized increase in share capital, improper appointment/removal of auditors, unlawful conversion of company status, and fraudulent borrowing, constituted sufficient grounds for investigation under Section 213;

- Whether the National Company Law Tribunal (NCLT) erred in dismissing the petition on maintainability grounds without issuing notice or considering merits;

- The applicability and interpretation of Section 213 of the Companies Act, 2013, including the evidentiary threshold and procedural requirements for initiating an investigation;

- The relevance of pending arbitration proceedings and whether the petition was filed to circumvent those proceedings or as a fishing expedition;

- The role and jurisdiction of the NCLT in matters relating to proposed IPOs and regulatory compliance issues under SEBI.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility of the appellant to file an application under Section 213 of the Companies Act, 2013

Relevant Legal Framework and Precedents:

Section 213 of the Companies Act, 2013 empowers the Tribunal to order an investigation into the affairs of a company on an application made either by a specified number of members or persons holding a certain proportion of voting power (sub-section (a)) or by any other person or otherwise if circumstances suggest fraud, misfeasance, or oppression (sub-section (b)). The applicant must support the application with evidence showing good reasons for seeking such an investigation.

The Tribunal referred to the precedent in M/s RS India Wind Energy P Ltd v. PTC India Financial Services Ltd, which emphasized that an applicant must bring on record some evidence to establish a prima facie case and justify the need for investigation under Section 213.

Court's Interpretation and Reasoning:

The NCLT examined whether the appellant qualified under Section 213(a), which requires membership or voting power thresholds, and found that the appellant did not meet these criteria. The appellant was not a member of the respondent company but claimed creditor status. The Tribunal held that the appellant failed to provide sufficient documentary evidence such as invoices, ledgers, or proof of debt to establish creditor status or the nature and amount of debt. Consequently, the appellant did not qualify under Section 213(a).

Key Evidence and Findings:

The appellant submitted a ledger showing some exposure but did not provide detailed supporting documents like invoices or agreements. The respondent argued that the appellant was engaged in arbitration proceedings and that the petition was an attempt to circumvent those proceedings.

Application of Law to Facts:

The Tribunal applied the eligibility criteria strictly and found the appellant's claim insufficient to satisfy the threshold under Section 213(a). The absence of clear evidence showing the appellant as a member or qualifying creditor led to dismissal on maintainability grounds.

Treatment of Competing Arguments:

The appellant argued that sufficient allegations and prima facie evidence existed to warrant investigation. The respondent contended the petition was a fishing expedition and an abuse of process aimed at pressuring the company amid arbitration and proposed IPO plans. The Tribunal favored the respondent's position, noting the lack of concrete proof and the procedural deficiencies in the appellant's submissions.

Conclusion:

The appellant was not eligible to file the petition under Section 213(a) due to failure to meet membership or creditor thresholds and lack of supporting evidence.

Issue 2: Maintainability of the petition under Section 213(1)(b) of the Companies Act, 2013

Relevant Legal Framework:

Section 213(1)(b) permits the Tribunal to order an investigation if it is satisfied that the company's business is conducted with intent to defraud creditors or members, or for fraudulent or unlawful purposes, or if persons managing the company have been guilty of fraud, misfeasance, or misconduct. The Tribunal must be satisfied on the existence of such circumstances before ordering investigation.

Court's Interpretation and Reasoning:

The appellant's primary contention under Section 213(b) was that the company's business was being conducted with intent to defraud its creditors. However, the appellant was unable to substantiate this allegation with evidence. The Tribunal noted that the appellant was neither a member nor had shown that the company's affairs were conducted oppressively or fraudulently towards members. The pending arbitration between the parties indicated a dispute over money but did not establish fraudulent intent or misconduct warranting investigation.

Key Evidence and Findings:

The Tribunal reviewed the documents and submissions and found no prima facie evidence of fraud, misfeasance, or oppressive conduct. The respondent company's Board of Directors had approved the issuance of debentures and capital increases with shareholder consent, complying with relevant provisions of the Companies Act, including Section 71. The Tribunal also noted the absence of grievances from shareholders or creditors regarding the debenture issue or IPO.

Application of Law to Facts:

The Tribunal applied the stringent standard required for investigation under Section 213(b) and found the appellant's allegations unsubstantiated. Mere allegations without supporting evidence were insufficient to satisfy the Tribunal's satisfaction threshold.

Treatment of Competing Arguments:

The appellant argued that illegal allotment of debentures at a discount, unauthorized capital increase, improper auditor appointments, and fraudulent borrowing constituted grounds for investigation. The respondent countered that proper procedures were followed, approvals obtained, and no fraud or illegality was demonstrated. The Tribunal accepted the respondent's submissions and dismissed the petition as a fishing expedition.

Conclusion:

The petition was not maintainable under Section 213(b) as the appellant failed to establish circumstances suggesting fraud, misfeasance, or oppression by the company's management.

Issue 3: Whether the NCLT erred in dismissing the petition without notice and on maintainability grounds

Court's Interpretation and Reasoning:

The appellant contended that the NCLT dismissed the petition solely on maintainability without issuing notice or considering merits. The Tribunal clarified that it had examined the allegations and documents submitted and found no grounds for investigation. The dismissal was based on the appellant's failure to satisfy eligibility and evidentiary criteria under Section 213.

Application of Law to Facts:

The Tribunal's order was reasoned and based on the absence of prima facie evidence and failure to meet statutory thresholds. The appellant's lack of membership or creditor status and inability to prove fraud or misfeasance justified dismissal without further notice.

Conclusion:

No error was found in the NCLT's approach or order. The dismissal was appropriate and consistent with the legal framework.

Issue 4: Role of arbitration proceedings and proposed IPO in the petition

Court's Interpretation and Reasoning:

The Tribunal observed that arbitration proceedings between the appellant and respondent were pending regarding the money dispute. The appellant's petition appeared to be an attempt to circumvent arbitration and exert pressure on the respondent. The Tribunal also noted that issues relating to the proposed IPO were not within its jurisdiction and should be addressed before the Securities and Exchange Board of India (SEBI).

Application of Law to Facts:

The Tribunal declined to entertain the petition as a means to interfere with arbitration or IPO processes. It emphasized that regulatory matters concerning IPOs and securities fall under SEBI's purview.

Conclusion:

The petition was not a proper vehicle to challenge arbitration or IPO-related issues, and such matters should be pursued through appropriate forums.

3. SIGNIFICANT HOLDINGS

"The applicant has not brought in any valid proof including any grievance of any of the affected shareholders or creditors on account of the issue of such debentures on a discounted basis nor has he proved whether he is a creditor and in any way affected by such issue or proposed IPO which are apparently needed for restructuring or financial strength of the company for which we see that due procedure has been followed."

"The applicant does not qualify for filing this application under Section 213(a) (i) and (ii) of the Companies Act, 2013 and the Tribunal is not satisfied to take cognizance of this Company Petition."

"Though in para 15 of its impugned order, the Ld. NCLT has held the petition is not maintainable under sub-section (a) of Section 213 of Companies Act, 2013 yet if one examines the impugned order in its entirety, more specifically its para (Supra) one would find the Ld. NCLT had also dealt with circumstances enumerated in sub-section (b) of Section 213 of Companies Act, 2013."

"The appellant is not a member of the Respondent No.1 company, hence cannot allege the business of Respondent No.1 company is being conducted in a manner oppressive to its members; or the company is guilty of fraud, misfeasance or other misconduct towards its members; or members of the company have not been given due information etc."

"The Tribunal is not the authority to decide matters relating to a proposed IPO issue which has not been filed and such issues are to be taken up before the appropriate regulator, the SEBI."

Core Principles Established:

- Eligibility to file an application under Section 213(a) requires membership or voting power thresholds and evidentiary support.

- Investigation under Section 213(b) demands prima facie satisfaction by the Tribunal of fraud, misfeasance, or oppressive conduct, supported by evidence.

- Mere allegations without supporting proof do not warrant investigation and constitute an abuse of process or fishing expedition.

- Pending arbitration proceedings and regulatory matters such as IPOs are outside the scope of Section 213 investigations and must be pursued in appropriate forums.

Final Determinations:

The appeal was dismissed for lack of merit. The appellant was found ineligible to file the petition under Section 213(a) and failed to establish grounds for investigation under Section 213(b). The NCLT's dismissal of the petition on maintainability grounds was upheld as valid and justified.