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TMI Blog2019 (7) TMI 1737X X X X Extracts X X X X X X X X Extracts X X X X ..... RDER Shri V. P. Singh, . MA 2071/2019 has been filed by Union of India, Ministry of Corporate Affairs, seeking direction to implead the proposed Respondent Nos. 321 to 343 in CP No.3638/2018. 2. The applicant contends that due to continuous failure of the Infrastructure Leasing and Financial Services Ltd. (IL&FS) (Respondent No. 1), to service its debt and imminent possibility of contagion effect in the financial market, the Applicant-Petitioner, at the request of Department of Economic Affairs, filed Company Petition No. 3638/2018 under Sections 241 and 242 of the Companies Act, 2013 before this Tribunal inter alia seeking suspension of the then Board of Directors of Respondent No. 1 and further seeking restraint on alienation of moveable and immoveable properties of the respondents named therein during the pendency of investigation into the affairs of Respondent No. 1 and its subsidiaries, which had been ordered to be carried out by the Serious Fraud Investigation Office (SFIO) vide order dated 30/09/2018, under Section 212(1)(a) & (c) of the Companies Act, 2013. The thrust of the aforementioned Petition is still pending 3. The applicant further contends that the Respondent N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D") which was empowered to take decisions pertaining to the operations of the said Companies, amongst others. The said CoD, in abuse of their powers, through various acts including circuitous transactions increased the debt burden across the Respondent No. 1 group. In other words, the said suspended Directors acted as the controlling will and mind of the Respondent No. 1 group. (b) Further, hefty salaries were drawn by the erstwhile suspended Board of Directors which increased despite the poor financial performance/condition of Respondent No. 1 group that too without proper authorization under law. (c) The intent was to show profitable financials at the holding company and at immediate subsidiary levels by hiding depleted financial conditions, in order to avoid breach of regulatory ceiling of leverage, obtain high credit ratings to access market funds, and reap personal benefits by way of high managerial remunerations; (d) The Respondent No. 1 group procured funds from the market through short term instruments and invested in its group companies by way of giving long term loans and advances, which was prejudicial to the interest of the group and therefore the financial market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were persons named as accused in the SFIO's Interim Report dated 30/11/2018. In addition to the above application, the Applicant-Petitioner simultaneously filed Miscellaneous Application, seeking certain reliefs under Sections 242(4), 246 read with Section 339 of the Companies Act, 2013 against the additional respondents namely Mr. Hari Sankaran, Mr. Arun K. Saha, Mr. Ravi Ramaswami Parthasarthy, Mr. Vibhav Kapoor, Mr. K. Ramachandra, Mr. R.C. Bawa, Mr. Pradeep Puri, Mr. S. Rengarajan and Mr. Mukund Sapre. Interim reliefs were sought by the Applicant-Petitioner against the said respondents inter alia seeking disclosure of moveable and immoveable properties/assets and further restraining them from mortgaging or creating charge or lien or third party interest or in any way alienating, the moveable or immoveable properties owned by them, including jointly held properties. The said application was allowed by this Bench vide order dated 3.12.2018. Interim order was granted against Respondent Nos. 2, 3, 9 and 313 to 318 to disclose their moveable and immoveable properties/assets, including bank accounts, lockers owned by them in India or anywhere in the world, including jointly held pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 of the MA participated in the worsening of the financial condition of the IL&FS and therefore, it is imperative that the above named persons may be arrayed as Respondent Nos. 321 to 343 in the original company petition no. 3638/2018 as they are also necessary and proper parties in the matter, being hand glove with the management of the IL&FS Financial Services Limited. 11. It is further stated that the above mentioned additional Respondents are necessary and proper parties to the original company petition and as such, it is essential they be arrayed as Respondent Nos. 321 to 343 in Company Petition No. 3638/2018. 12. It is further stated that it is imperative that immediate action against these persons need to be taken, in order to effectively support the investigation already being carried on into the affairs of Respondent No. 1 and its subsidiary companies, through the Serious Fraud Investigation Office. 13. The applicant contends that impleadment of the proposed Respondents is absolutely necessary to render a complete and effective adjudication on the subject matter. The names of the proposed Respondents are given below for ready reference: Sr. no. Name of the persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... athod At: C - 309, Saidham CHSL, Vaisahli Nagar, Dahisar (E), Mumbai - 400068. 341 (Proforma respondent) 22. A P Shah Associates At: 7/11, Kalyan Building, Khadilkar Road, Mumbai - 400004. 342 23. A P Shah At: 7/11, Kalyan Building, Khadilkar Road, Mumbai - 400004. 343 14. Respondent Nos. 321, 324, 325, 326, 327, 335, 337, 338, 339 and 340 have filed their reply against the proposed Impleadment application. 15. Respondent Nos. 324, 337, 338 and 339 have filed their affidavit in reply to the application filed by the Petitioner that M/S. Deloitte Haskin & Sells LLP (hereinafter "DHS LLP") ceased to be the auditor of IL&FS Financial Services Limited ("IFIN") with effect from the date of the Annual General Meeting of IFIN as relevant for the end of the financial year 2017-18, by operation of law, on expiry of the term as the auditors of IFIN in terms of Section 139 of the Companies Act, 2013. It is further stated that the Objectors are neither a proper nor a necessary party to the captioned Petition which has been filed under Section 241 (2) of the Companies Act, 2013. It is further stated that the captioned Petition under section 241 seeks certain limited reliefs against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7) and of IL&FS Transportation Networks Limited ("ITNL") (for over ten years and up to 2017). 18. It is further contended by the R325, R340 and R327 in their replies that they were not part of the management of any IL&FS group entity, including IFIN, at any point in time. BSR, as the auditor has no role in so far as operations of IFIN are concerned. As an auditor, BSR only audited the financial statements of IFIN, which were prepared by the management of IFIN. BSR as an auditor performed its duties in accordance with applicable audit standards and procedures. Further, the above mentioned proposed respondents could not have taken any decisions in so far as the affairs and operations of IFIN are concerned and hence, it could not have participated in, whether directly or indirectly, any acts of alleged oppression or mismanagement, at the level of Respondent No. 1 or any of its group entities. It is further stated in their replies that the Serious Fraud Investigation Office ("SFIO") report, which has been relied upon by the Petitioner does not anywhere accuse BSR of oppression or mismanagement. As the Applicant/Petitioner has pointed out, the SFIO has filed a criminal complaint CC No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a manner prejduicial to public interest.' However, in the present case, the allegations and averments made in the said Application pertain exclusively to past events and there is no allegation or averment Whatsoever with respect to the existing and continuing mismanagement of IFIN as on the date of filing the said Application. 21. On the contrary, the Applicant has acknowledged that vide order dated 01/10/2018, this Hon 'ble Tribunal was pleased to replace the existing board of IFIN with government nominated directors, 'who have been tasked with the orderly resolution of the Respondent no. I and its group companies. In the circumstances, when there is no allegation or averment regarding the affairs of the company 'being conducted in a manner prejudicial to public interest', there is no reasonable basis or justification for impleading the proposed respondents as a party respondents to the Company Petition. 22. It is further submitted that an order impleading the Proposed Respondents as Respondents in the present proceedings will not have any nexus with ending the matters complained of, i.e. purported oppression and mismanagement. 23. It is further stated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the reply filed has stated that he was appointed as an Independent Director of IL&FS Financial Services Ltd (IFIN) on 31.3.2015 and resigned from that position on 20.9.2018. It is stated in the reply that there is no valid authority on the basis of which, the Petitioner/Regional Director has sought his Impleadment to the Company Petition. It is further stated in the reply that perusal of the SFIO's Report dated 28.5.2019 demonstrates that the SFIO has neither charged him with any wrong doing nor has it recommended any action to be taken against him. As such, no question arises of the petitioner seeking his Impleadment as a Respondent to the petition. 31. Heard the argument of the Ld. Counsel for the Parties and perused the record. Application for Impleadment of the proposed Respondent has been moved by the Union of India Ministry of Corporate Affairs mainly on the ground of two interim investigation reports filed by SFIO. The Director Prosecution, Mr. Sanjay Shorey has submitted that impleadment is necessary to ensure that the Respondents do not alienate or encumber their movable and immovable properties. 32. It is further stated that impleadment of Oppression and Mismanagement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n above law laid down by the Hon'ble NCLAT, Senior Counsel representing the Auditors has stated that Auditors cannot be necessary party to the Petition filed under section 241-242 of the Companies Act, 2013 relating to the act of oppression and mismanagement. 36. On perusal on the facts of the above mentioned case, it is clear that in the petition filed under Section 214-242, 243 & 244 of the Companies Act, 2013, in the Array of parties, inter alia, the Statutory Auditors- Respondent Nos. 5 & 6 were added. 37. The said Respondents filed I.A. No. 07/2017 to delete them from the array of parties claiming themselves to be only statutory Auditors and that they have already resigned and they are not necessary parties in the Petition. The Tribunal has allowed the application and deleted the Respondent Nos 5 & 6 from array of parties. 38. The fact further shows that there was allegation that the Board of Directors were not making payments towards the PF contribution of the Workers nor the same were being paid but this information was suppressed by the Company while submitting Annual Financial Statement for the Financial year 2014-15 and the Statutory Auditors Respondent Nos. 5 and 6 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k out any of the parties of the case or to add any of the party whose impleadment is necessary in order to enable the court to effectually and completely to adjudicate upon and settle all the questions involved in the suit. After passing such order by the court, Rule 1094) provides that plaint should be amended and copy of the amended plaint to be served. 46. It is also important to point out that Order 1 Rule 3 of CPC provides criteria of persons who may be joined as defendants. It shows that all persons may be joined in one suit as defendants where- (a) any right to relief in respect of, or arising out of, the same act or transaction or series of acts or transactions is alleged to exist against such persons, whether jointly, severally or in the alternative; and (b) if separate suits were brought against such persons, anycommon question of law or fact would arise. 47. It is important to point out that this petition has been filed by Union of India, MCA under provisions of Section 241(2) of the Companies Act, 2013 which authorizes the Central Government if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it/petition. 51. In case of Ramesh Hirachand Kundanmal vs. Municipal Corporation of Greater Bombay, Hon'ble Supreme Court has held that "Sub-rule (2) of Rule 10 gives a wide discretion to the Court to meet every case of defect of parties and is not affected by the inaction of the plaintiff to bring the necessary parties on record. The question of impleadment of a party has to be decided on the touchstone of Order 1 Rule 10 which provides that only a necessary or a proper party may be added. A necessary party is one without whom no order can be made effectively. A proper party is one in whose absence an effective order can be made but whose presence is necessary for a complete and final decision on the question involved in the proceeding. The addition of parties is generally not a question of initial jurisdiction of the Court but of a judicial discretion which has to be exercised in view of all the facts and circumstances of a particular case." In the above mentioned case, Hon'ble Supreme Court in Para 14 has further observed that "the person to be joined must be one whose presence is necessary as a party. What makes a person a necessary party is not merely that he has relevant evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the NCDs. The end-use certificates for utilization of bank finances are issued by Ajay P Shah, Chartered Accountant without verifying the documents. He stated that the filled format of end use certificates to be signed by him were sent to him on email. Hence, it can be concluded that the end use certificates were tutored by the management of the company. A P Shah had helped the management by issuing the fraudulent end use certificates. "AUDIT COMMITTEE The Audit Committee members were aware of the stressed asset portfolio, the modus operandi used for granting loans to group companies of existing defaulting borrowers in order to prevent their being classified as NPA, non-receipt of the fees and income specially from the group entities, funding of the interest income, funding of its groups entities etc. and the RBI inspection reports for the Financial Years during the Financial Years 2016-17 and 2017-18.. They did not ensure adequate disclosure or reporting of the facts brought out in these reports based on explanations given by management. The committee connived with the management and overlooked the numerous impairment indicators in contravention of the accounting standards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terially misstated) to an acceptably low level. These auditors were responsible for verification, auditing and reporting that the financial statements reveal a true and fair view. During the course of investigation, it was established that auditors of IFIN did not perform their duties diligently. Investigation also revealed that: * The auditors, despite having the knowledge of funding of the defaulting borrowers for principal and interest payments, which was prejudicial to the interest of the company and its creditors, besides having awareness of the impact of the same on the financial statements, the auditor failed to report in the auditor's report for FY 2013-14 and 2017-18 (non compliance of Section 143(1)(a)); * The loans which were transferred by mere book entry had resulted in considering the old loan as closed and new loans didn't require provisioning etc., and this was an effort to postpone the provisioning, recognition of NPA etc. Hence, assignment of the same was prejudicial to the interest of the company. The auditors having knowledge of the same had not reported the same in the audit report (non compliance of Section 143(1)(b)); * Udayen Sen and Sampath Ganesh h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , observed that above mentioned auditors of IFIN did not use professional skepticism to ensure true and fair disclosure of state of affairs of the companies. They in-fact, colluded with officials of the companies in order to conceal their fraudulent activities and thus, they had failed to perform their duties as required from the u/s 143 of the Companies Act, 2013 and, hence, all of them are also liable to be prosecuted for the offence punishable u/S 147 of the Companies Act, 2013. ACCUSED PERSONS Name Years/Period Udayen Sen 2017-18, 2016-17 Kalpesh Mehta 2015-16, 2014-15, 2013-14 Sampath Ganesh 2017-18 Deloitte Haskins and Sells LLP 2017-18, 2016-17, 2015-16, 2014-15,. 2013-14 BSR and Associates LLP 2017-18." 55. On the basis of the findings of this SFIO Report, Union of India has filed this application for impleadment of the proposed Respondent Nos.321 to 343 as a party respondents to the petition. 56. It is pertinent to mention that IL&FS (R1) procured funds from the market through short term instruments and invested in its group companies by way of giving long term loans and advances, which was prejudicial to the interest of the group and therefore the financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e potential problematic accounts which were getting stressed in the succeeding months from the reports generated through the MIS of the IFIN regarding the fraudulent practices adopted by IFIN in order not to let loan/credit facility be classified as NPA. Investigation revealed that loans were approved by management of IFIN for Siva Group of Companies. IT is further said that lending to the group entity IL&FS Transport Network Ltd was in breach of RBI guidelines, the management of the IFIN devised an illegal strategy for IFIN to lend the money to its group companies and one of the other modus operandi used by Rajesh Kotian and others, whereby they decided to support group entities by lending through vendors/third parties. 61. The proposed Respondent No.323 Mr. Udayan Sen is said to be a partner in Deloitte Haskins and Sells LLP, who were the statutory auditors of IFIN from FY 2008-09 to FY 2017-18. The investigation revealed that in furtherance of the modus operandi, the statutory auditors of the IFIN, connived with the management of the company to conceal material information/facts, in not reporting on the fraudulently falsified books of accounts and thereby financial statements f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BSR and Associates LLP is said to be the Joint Statutory Auditors for IFIN for FY 2017-18. Investigation revealed that the auditor knowingly did not report the true state of affairs of the company, particularly negative NOF and negative CRAR, which has resulted in causing the loss to creditors of the company who had lent and invested in the NCDs. This has led to auditor conniving, colluding with coterie to conceal material information and facts, and in fraudulently falsifying the books of accounts and thereby financial statements from FY 2013-14 to 201718. 66. The proposed Respondent No.328 Surinder Singh Kohli is said to be an Independent Director on the Board of Directors of IFIN and was also part of the Audit committee of IFIN. The investigation revealed that the Audit Committee members were aware about the stressed asset portfolio, the modus operandi used for granting loans to group companies of existing defaulting borrowers in order to prevent their being classified as NPA, non-receipt of the fees and income specially from the group entities etc. and the RBI Inspections Report for the Financial years during the Financial years 2016-2017 and 2017-2018. 67. The Proposed Respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent 332, Shahazaad Dalal, was said to be a Non-Executive Director on the Board of Directors of IFIN. The independent Directors and CFO of the Company are appointed with objective to help the company in improving corporate credibility and governance standard but they ignored al alarming indicators and failed to save the interest of the company and its stakeholders by not raising of thes issues in the Board Meetings and remained mute spectator. It is revealed that in connivance with each other, the Independent Directors, Directors, CFO of the IFIN, group CFO abused their positions and used various modus operandi to continue lending from IFIN to group entities, by causing wrongful loss to IFIN & its stakeholders such as investors and creditors whose money it was misusing for fraudulent lending, which ultimately resulted in ultimate loss to the company, and its creditors. Investigation further revealed that the Audit Committee members and the Independent Directors, Director, CFO of the IFIN and group CFO of the IL & FS were aware of the stressed asset portfolio, the modus operandi used for granting loans to group companies of existing defaulting borrowers in order to prevent th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing loans to group companies of existing defaulting borrowers in order to prevent their being classified as NPA. 73. With regard to proposed Respondent No. 335 Mr. Uday Ved, SFIO has stated in its complaint before the Special Court at Mumbai that the independent Directors and CFO of the company are appointed with objective to help the company in improving corporate credibility and governance standard but they ignored al alarming indicators and failed to save the interest of the company and its stakeholders by not raising of these issues in the Board Meetings and remained mute spectator. It is revealed that in connivance with each other, the Independent Directors, Directors, CFO of the IFIN, group CFO abused their positions and used various modus operandi to continue lending from IFIN to group entities, by causing wrongful loss to IFIN & its stakeholders such as investors and creditors whose money it was misusing for fraudulent lending, which ultimately resulted in ultimate loss to the company, and its creditors. Investigation further revealed that the Audit Committee members and the Independent Directors, Director, CFO of the IFIN and group CFO of the IL & FS were aware of the str ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d additional Respondent No 326 and was part of the Engagement Team for the audit of IFIN. The investigation revealed that auditors, along with their engagement team for IFIN, did not perform their duties diligently. The auditors, despite having the knowledge of funding of the defaulting borrowers for principal and interest payments, which was prejudicial to the interest of the company and its creditors, besides having awareness of the impact of the same on the financial statements, the auditor failed to report in the Auditors' Report for FY 2013-14 to 2017-18. The loans which were transferred by mere book entry has resulted in considering the old loan as closed and new loans did not require provisioning etc and this was an effort to postpone the provisioning, recognition of NPA. 77. The Proposed Respondent No.339 Nishit Dipak Udani, is said to be a Director in proposed additional Respondent No 326 and was part of the Engagement Team for the audit of IFIN. The investigation revealed that auditors, alongwith their engagement team for IFIN, did not perform their duties diligently. The auditors, despite having the knowledge of funding of the defaulting borrowers for principal and inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had provided the service of End use certification to IFIN over years from 2009-10 onwards. SFIO has stated in its2nd Interim Report dated 28.5.2019 that as per the Standards of Auditing (SA) 500 Audit Evidence, the auditor shall design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. When designing and performing audit procedures, the auditor shall consider the relevance's and reliability of the information to be used as audit evidence. When using information produced by the entity, the auditor shall evaluate whether the information is sufficiently reliable for the auditors' purposes. The SA 500 casts responsibility on the Auditors to evaluate whether the information is sufficiently reliable of the auditors purposes if the information is provided by the Management. 81. It is pertinent to mention that in 2nd SFIO Report, no role of Independent director has been specified. Therefore, their impleadment in the case is not justified, at this stage. 82. It is important to point out that on perusal of the facts of the case of Shanta Prasad Chakravarty, it is clear that in that case, some error was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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