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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 ..... ffectually and completely to adjudicate upon and settle all the questions involved in the suit. After passing such order by the court, Rule 10(4) provides that plaint should be amended and copy of the amended plaint to be served. In the present matter, Union of India has sought impleadment of the proposed Respondents mainly on the ground that in the 2nd SFIO report the role of proposed respondents has been found conniving, colluding with coterie to conceal material information/facts and in fraudulently falsifying the books of accounts and thereby financial statements from FY 2011-12 to 2017-18 - Director (Prosecution) appearing on behalf of Union of India has emphasized that the entire exercise of initiating this public interest petition will be useless unless action is not initiated against the persons who have siphoned of the public money. 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 markets at large. Based on its bogus and fictitious but good credit ratin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d additional Respondent Nos. 321 to 343 to the Company Petition No.3638/2018 - application allowed. - MA 2071/2019 in C.P. No. 3638/2018 - - - Dated:- 18-7-2019 - Hon ble Member (Judicial) Shri V. P. Singh And Hon ble Member (Technical) Shri Ravikumar Duraisamy For the Petitioner: Shri Sanjay Shorey, Director (Legal Prosecution), MCA, New Delhi, Shri Manmohan Juneja, RD, WR, Mr. Meghav Gupta, CP at MCA, Mr. Rakesh Tiwari, Joint Director (WR), Shri M. R. Das, ROC, Mumbai, Shri Anil Yadav, Dy. ROC, Mumbai, Ms. Ananya Saikia, Asst. Director (WR), Shri Parvez Naikwadi. AD (MCA) For the Respondent: Mr. Ashish Kamat, Mr. Aditya Sikka, Ms. Neelakshi Bhadauria, Mr. Navroz Seervai, Sr. Advocate, Ms. Vinati Kartia, Adv., Mr. Darius Khambata, Sr. Advocate, Mr. Zal Andhyarujina, Adv, Mr. Janak Dwarkadas, Sr. Counsel, Mr. Amit Desai. Sr. Counsel, Mr. Robin Jaisinghani, Ms. Ankita Singhania, Mr. Navshad Engineer, Mr. Pulkit Sharma, Adv. Kunal Mehta, Adv. Rohaan Cama, Adv. Dinesh Airandare, Adv. Nihar Mody, CS Omkar Deosthale. ORDER Shri V. P. Singh, . MA 2071/2019 has been filed by Union of India, Ministry of Corporate Affairs, seeking direction to implead the propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09/10/2018, further permitted the newly appointed Directors to appoint themselves as Directors on the group/subsidiary/associate/jointly controlled entities or operations of Respondent No. 1. 5. It is further contended that vide order dated 30/09/2018, in exercise of powers under Section 212(1)(a) (c) of the Companies Act, 2013, the Applicant-Petitioner had ordered investigation into the affairs of IL FS and its subsidiary companies to be carried out by the Serious Fraud Investigation Office (SFIO). The SFIO submitted 1st interim report dated 30/11/2018 to the Applicant-Petitioner, placing on record key findings in respect of the Respondent No. 1 Group and the manner in which the affairs thereof were conducted contrary to public interest. In a gist, the findings demonstrate that: (a) There was complete control of affairs of the Respondent No. 1 group (and therefore each entity therein) in the hands of the erstwhile suspended Board of Directors. Particularly, the erstwhile suspended Board of Directors constituted a Committee of Directors ( CoD ) which was empowered to take decisions pertaining to the operations of the said Companies, amongst others. The said CoD, in abuse o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions were also noted. (g) Non-current loans to group companies to the tune of ₹ 317.13 Crore in the financial year 2016-17 and the same was increased to ₹ 2490.11 Crore in the Financial Year 2017-18. The source of funds is short term loans borrowed by way of Commercial Papers, which stood at ₹ 499.25 Crore in Financial Year 2016-17 and increased to ₹ 2007.29 Crore in Financial Year 2017-18, and Inter Corporate Deposits ₹ 459.20 Crore in Financial Year 2016-17 increased to ₹ 1100.35 Crore in Financial Year 2017-18. (h) The Employee Welfare Trust of Respondent No. 1 was used as an instrument to enrich the erstwhile suspended Directors of the company at the cost of the Respondent No. 1 group. In fact the said Trust has been used to perpetuate fraud on the Respondent No. 1 group. 6. It is further contended that on the basis of aforementioned SFIO s Interim Report dated 30/11/2018, the Applicant-Petitioner immediately sought impleadment of further respondents in the Company Petition No. 3638/2018, pending before this Tribunal. These respondents were persons named as accused in the SFIO s Interim Report dated 30/11/2018. In addition to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i under section Sections 447, 36 R/W 447, 143 R/W 147, 129 R/W 448, 184 (4) of the Companies Act 2013, Sections 68, 211 R/W 628 of the Companies Act 1956 and Sections120B of the Indian Penal Code, 1860 R/W 447 of the Companies Act, 2013, 417, 420, of the Indian Penal Code, 1860 R/W 120B of the Indian Penal Code, 1860. 8. It is further stated that in the criminal complaint no. 20 of 2019 filed before Ld. ASJ-cum-Special Judge, Greater Mumbai role in the fraud of IFIN has been explained in detail and copy of the complaint no. 20 of 2019 is attached herewith with the application as Annexure B. 9. It is further stated that taking into consideration the role of the above accused in criminal complaint no. 20 of 2019 filed before Hon ble Court of ASJ-cum-Special Judge, Greater Mumbai, the persons named as accused in criminal complaint no. 20 of 2019 who were also found to be in hand in glove with the erstwhile management of IL FS may be added as additional respondents in original Company petition no. 3638 of 2018 in the interest of justice. 10. It is further stated that the persons named in para 12 of the MA participated in the worsening of the financial condition of the IL FS a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Park, Goregaon, Mumbai 400063. 327 8. Surinder Singh Kohli At: J 170, Rajouri Garden, New Delhi. 328 9. Subhalakshmi Panse At: Row House B 3, Roseland Residency, Pimple Saudagar, Pune 411027 329 10. Deepak Pareek At: D.B Woods, B-Wing, 601, Krishna Vatika Marg, Gokul Dham, Goregaon East, Mumbai -06. 330 11. C Sivasankaran and his group Companies At: 30, Giri Road, Thiyagaraya Nagar, Chennai, Tamil Nadu 600017. 331 12. Shahzaad Dalal At: Flat No. 5, Aurum Platz, BN Cross Lane, Mumbai 400007. 332 13. Manu Kochhar At: B 91, Cozi Home, Pali Hill, Bandra West, Mumbai 400050 333 14. Renu Challu At: A34/1, Afochs, Laxmi Narayana Temple, Sainikpuri, Tirumal Agiri, Hyderabad 500094. 334 15. Uday Ved At: D-1101, Kukreja Palace, Vallabhbaug Extn Road, Garodia Naga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s further stated in their reply that a copy of the unamended Company Petition filed under Section 241 of the Companies Act, 2013 was served upon the Advocate on 17th June, 2019 but the complete amended copy has still not been served upon them. It is further stated in the objection that the captioned Petition does not contain any statement, averment and/or allegation in respect of or against them or DHS LLP and/or against any of its partners/ employees and/or in relation to their conduct or that of DHS LLP and/or its partners/ employees in its capacity as auditors. It is further stated that moreover, the captioned Application itself does not make out any case whatsoever for their impleadment. The above mentioned Proposed Respondent Nos. 324, 337, 338 and 339 in their replies have further contended that they are neither nor proper party to the captioned Petition. Further, their presence is not necessary in order to enable this Tribunal to effectually and completely adjudicate upon and settle the question involved in the Petition or the real controversy between the parties to the Petition. It is further stated that this Tribunal has no jurisdiction to pass any orders against the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Ld. Additional Sessions Judge-cum Special Judge (Companies Act) at Greater Mumbai ( Special Court ). The proposed Respondents submits that once the Special Court takes cognizance of the matter, it will consider through trial, the SFIO report and the allegations made thereunder. It is further stated that the SFIO report itself will be considered in detail by the Special Court and the Special Court will try the matter in accordance with due process of law. It is further stated in their replies that the Applicant/Petitioner seeks impleadment of the proposed Respondents in the present proceedings, the subject matter of which is oppression and mismanagement by those in governance and management of the companies concerned. There is no basis for directions for extension of any orders as against the proposed respondents. 19. It is further stated that the proposed Respondents are not a proper party to the present proceedings and that it ought not to be impleaded herein. It is further submitted that BSR worked as Statutory Auditor of IFIN only for a few months and even in the short time that BSR was the joint Statutory Auditor, there were improvements and enhancements in the audit work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent proceedings. 24. It is further stated that without prejudice to the fact that the audit of the financial statements of IFIN for the year ended 31. 3. 2018 conducted by BSR jointly with Deloitte was in accordance with the requirements of the Auditing Standards issued by Institute of Chartered Accountants of India ( ICAI ) and there was no negligence on the part of BSR or the proposed Respondents in the conduct of audit in question. 25. Proposed Respondent No. 326 has filed its objections, wherein it is stated that the proposed Respondent 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 2017-2018, by operation of law, on expiry of the term as the auditors of IFIN in terms of Section 139 of the Companies Act, 2013. 26. It is further stated that the said Respondent is neither a proper nor a necessary party to the captioned Petition which has been filed under Section 241 (2) of the Companies Act, 2013. 27. It is further stated that the captioned Petition does not contain any statements, averments and/or allegations in respect of or against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 339 read with section 242 of the Companies Act, 2013 which deals with the liability arising out of fraudulent conduct of business as such conduct can be past or present. 33. Ld Senior Counsel appearing on behalf of Deloitte Haskins Sells has emphasized that in cases involving oppression and mismanagement under Section 241-242 of the Companies Act,2013, impleadment of auditor is not necessary as it is not directly connected with the case. Under this section, case can be made against the management, the challenge in SIFO reports and allegation and or not proved in any court of law , which makes strong ground for exclusion from the impledment. 34. Senior Advocate Mr. Navroz Servai has emphasized on behalf of the proposed Respondent BSR Associates that BSR was appointed as statutory auditor from November 2017, for part of the Financial year. The complaint against the BSR are also being investigated by Institute of Chartered Accountant of India . A Compliant under section 477 is also filed in the Criminal Court. Separate proceeding in similar matters can create a conflict and it is further stated that auditors being independent body is not involved in day to day management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of Directors. 39. In reply to the above application Respondent Nos. 5 and 6 submitted that there was an error on their part, while preparing Annual Financial Report of the F. Y. 2014-15. The error was accepted and their bonfides can be seen from the Audited Tax Audit Report which was submitted soon after the Annual Financial Report. 40. The Respondent Nos 5 and 6 pleaded that they have already resigned, from the assignment being statuary Auditory of the Company and the question of removal does not arise. 41. In the said Company Petition direction was sought against the Institute of Chartered Accounts of India to investigate into their conduct. Since the appellants directly filed complaint before the Institute of Chartered Accounts of India therefore, the said prayers become redundant, and the NCLT Guwahati Bench considered this aspect and passed the said order which was confirmed by Hon ble NCLAT. 42. Ld. Counsel for the Proposed Respondents have based their argument mainly on the finding of the Hon ble NCLAT s order passed in Shanta Prasad Chakravarty supra and they emphasized that the petition filed under Section 241-242 of the Companies Act, 2013 for the affairs of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay itself apply to the Tribunal for an order. This public interest petition has been filed by Central Government under Section 241(2) of the Companies Act, 2013. 48. It is important to point out that this petition was not filed under Section 245 of the Companies Act 2013 because at the time of filing this petition, provision of Section 245 was not notified and effective. In Chapter 7, a Blindfold on Corporate Governance at page 65, it is stated that the Companies Act, 2013 has introduced the concept of class action suits in India. This concept takes its roots from countries like U.S.A., U.K, Malaysia, South Africa, Singapore and the like. The statute confers a right upon a class of people, with common interests in the company, to file a complaint in the tribunal if they are of the opinion that the management or conduct of the affairs of the company is such that it defeats the interests of the members of the company. A class may maintain an action against the directors, the auditors, misleading experts and any contracting party. The concept of class action suits has been introduced with a view to provide minority protection in companies. However, the same may cause a lot of confu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant evidence to give on some of the questions involved; that would only make him a necessary witness. It is not merely that he has an interest in the correct solution of some question involved and has thought of relevant arguments to advance. The only reason which makes it necessary to make a person a party to an action is so that he should be bound by the result of the action and the question to be settled, therefore, must be a question in the action which cannot be effectually and completely settled unless he is a party. 52. In the present matter, Union of India has sought impleadment of the proposed Respondents mainly on the ground that in the 2nd SFIO report the role of proposed respondents has been found conniving, colluding with coterie to conceal material information/facts and in fraudulently falsifying the books of accounts and thereby financial statements from FY 2011-12 to 2017-18. 53. Director (Prosecution) appearing on behalf of Union of India has emphasized that the entire exercise of initiating this public interest petition will be useless unless action is not initiated against the persons who have siphoned of the public money. 54. Few findings of the 2nd S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting standards and principals of prudence by agreeing with the decision of management to differ the provision of diminution in books of accounts. The incorrect provisioning of the investments in half yearly financial statements were of great significance as such incorrect financial statements were being used by the rating agencies for various new instrument rating and surveillance rating. These particular financials were also used for borrowing from market, wherein, such incorrect financial were used to lure the investors investing the public money. It is revealed in the investigation that Audit committee connived with the management and to give the wrongful benefit to the group companies repeatedly deferred the decision to carry out provisioning of the fee receivable income from Non Banking Financial Income activities primarily from the group companies despite the uncertainties over recoverability this income was recognized in the financial statements over the years. The fee was written off as in FY 2018-19. Statutory Auditors have been assigned specific responsibilities under Section 143(1) and 143(3) of the Companies Act, 2013 and, for the period under investigation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en Sen and Sampath Ganesh had stated about reliance on RBI Inspection Report for NPA matters, Review Report of Khandelwal Jain Co., Chartered Accountants, etc., availability of collateral and management representation on exit plan, rather than stating whether they had obtained the details necessary for the purpose of their audit or not. The auditors had relied on the oral discussion of the company officials with RBI for reporting the NOF and CRAR as per the existing policy of the company, rather than RBI guidelines in FY 2017-18 and not disclosed this material departure from regulatory requirements and thus caused loss to the creditors of IFIN (Please refer to Negative Net Owned Funds in Chapter 4 of this report) (non compliance of Section 143(3)(a)); By recognizing the interest income which was funded by the IFIN itself, it had not followed AS 9 (Refer to Section Audit of Revenue). As the company had not written of the loss investments it had violated the accounting standard 13. (non compliance of Section 143(3)(e)); Investigation revealed that the auditor had not followed the following auditing standards while auditing the financial statements of the company for FY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. 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 markets at large. Based on its bogus and fictitious but good credit rating and financial statements, Respondent No. 1 and its key subsidiaries such as IL FS Financial Services Ltd. (IFIN) and IL FS Transportation Networks Ltd. (ITNL) raised short term market funding through commercial papers /inter corporate deposits and passed the same to their project SPVs/ group companies (which were unable to raise funds externally), for helping them service their debt obligations. The CoD being fully aware, thereby hid and avoided possible defaults resulting into increasing indebtedness on a standalone basis. This is virtually an act of fraud leading to a spiraling debt of over ₹ 91,000 crores of the IL FS group. 57. In this case, after investigation, on the basis of 1st SFIO report, Respondent Nos. 313 to 318 were added as party respondents in CP 3638/2018. On the basis of 2nd SFIO report, Union of India has filed this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestigation 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 from FY 2011-12 to 2017-18. 62. The proposal Respondent No. 324 Mr. Kalpesh J Mehta 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. Mr. Kalpesh Mehta was also the engagement partner on behalf of Deloitte Haskins and Sells LLP for the audit of IFIN for FR 2011-12 to FY 2015-16. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies 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 Respondent No. 329, Subhalakshmi Panse, was 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 Inspection Reports for the Financial years during the Financial Years 201617and 2017-18. 68. The Proposed Respondent No. 330, Mr. Deepak Pareek, was said to be the Chief Financial Officer (CFO) for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igation 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 their being classified as NPA. 71. The Proposed Respondent No. 333 Manu Kochhar, was said to be the CEO- Special Initiatives for 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 all 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 loss to the company, and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 their being classified as NPA. 74. With regard to proposed Respondent No. 336, Neera Saggi, 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 wrong ..... 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, 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 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. 78. The Proposed Respondent No.340 Anuj Rawat, is said to be a Manager in proposed additional Respondent No 327 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 interest pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 pointed out in audit work which was ratified later on, therefore, auditor s name from the array of parties were struck of by NCLT, Guwahati Bench. That case was based on error committed by auditors and the error was committed by auditors and their bonafide were also verified from the Report which was submitted after the annual financial report. Therefore, the court allowed the application to struck of their name from the array of the parties. 83. Hon ble NCLAT has also dismissed the appeal but the fact of this case is totally different. This is the case of siphoning of the public money which resulted in default of the Respondent companies about 90,000 crores and this is the biggest scam like Satyam. It is also important to point out that seeing the gravity of the case, Union of India has filed public interest litigation under Section 241(2) of the Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X
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