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TMI Blog2024 (5) TMI 1062X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 liq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned notice and impugned summons; (3) Issue a Writ of Certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction calling for the records in relation to the issuance of the Look Out Circular with respect to the Petitioner's by the SFIO and after going through the legality, validity and propriety thereof issue such orders and directions quashing and setting aside the Look Out Circular issued against the Petitioners. 2. Before dealing with the merits of the petition, it is pertinent to highlight brief facts leading to the present petition which are as under: 1. The Company was incorporated on 24.02.2006 by the erstwhile promoters. On account of share purchase transactions between 2008 to 2011, the Petitioners became major shareholders of the Company. 2. For the purposes of business, the Company, in December 2009 took a loan from IDBI Bank to the tune of Rs. 5 crores. The loan facilities were enhanced from time to time between 2010 to 2017 and finally IDBI Bank had extended facilities aggregating to Rs. 70 crores. The IDBI Bank since 2013 conducted regular third party studies with respect to the Company. It is the submission of the Petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2022 officers were also appointed in furtherance of the order dated 30.11.2021. 7. Being unaware of the investigation by the SFIO, the Petitioners continued to take bona fide steps to settle the claims with the financial creditor i.e. IDBI Bank. 8. Sometime on or about 12.10.2023, for the first time, notice was issued to one Mr. Gautam Kumar by the Respondent No. 2 with respect to the investigation. This is the first time that the Petitioners learnt that an investigation had been approved and commenced in terms of Section 212 of the Act. 9. In the meantime, on 25.01.2024, IDBI Bank accepted a one-time settlement from the Petitioners and other persons involved with the Company and the Petitioners have substantially paid amounts in furtherance of the OTS. 10. In the meantime, the Petitioners learnt that an FIR was registered against them contrary to the law laid down by the Hon'ble Supreme Court in the case of State Bank of India V/s. Rajesh Agarwal [reported in (2023) 7 SCR 476] with respect to Reserve Bank of India (Fraud Classification and Reporting by Commercial Banks and select FIs) Directions, 2016. This Hon ble Court by an order dated 01.03.2024 in Writ Petition No. 4699 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etely unreasoned, requisite opinion is not formed by the Central Government, there does not exist material/circumstances/fact necessitating investigation and is without any basis and is merely based on the ipse-dixi of the liquidator who has already filed an application under Section 66 of the Insolvency and Bankruptcy Code 2016 ( IBC ), which is pending adjudication. 4. The order of sanction dated 30.11.2021 is reproduced as under: Whereas the central government is empowered under section 212 of the companies act 2013 to order an investigation into the affairs of a company. AND Whereas IBBI has forwarded the name of SPG Multitrade Private Limited wherein the Resolution Professional has filed an application for avoidance and fraudulent transaction before hon ble NCLT. AND Whereas liquidator made a presentation and informed that the transaction audit reported fraudulent transactions for Rs.364.59 crores and the central government has formed an opinion, on the basis of the transactions detailed in the presentation and other record that, since there are fraudulent transactions of a substantial amount, involving multidisciplinary transactions, therefore, the affairs of the company need ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any reply and therefore the matter shall be proceeded without reply. It may not be out of place to mention at this juncture that the Petitioners may be right in contending that the impugned sanction will have to stand on its own, the Respondent authority cannot substitute the existence of opinion, material facts and circumstances and public interest, by way of filing additional Affidavit. 7. The learned counsel for the Petitioners submits that their case is wholly covered by the judgment of the Bombay High Court in Parmeshwardas Agarwal v/s. Additional Director [reported in 2016 SCC OnLine Bom. 9276). Learned counsel for the Petitioners states that the said order has been confirmed by the Hon ble Supreme Court in its order dated 19.01.2018 passed in SLP (Civil) Diary No. 38664 of 2017. The Petitioners rely upon paragraphs 40 to 42 46 and 47 of the judgment which are reproduced as under: 40. Thus, the principle is that there has to be an opinion formed. That opinion may be subjective, but the existence of circumstances relevant to the inference as to the sine qua non for action must be demonstrable. It is not reasonable to hold that the clause permits the Government to say that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a special resolution passed by a company that its affairs are to be investigated or in public interest. Thus, there is a discretion to order an investigation into the affairs of the company. 46. A bare perusal of this order would indicate that the Central Government has referred to the report dated 13th January, 2016, but completely misread and misinterpreted it. It has not recommended any investigations to be made under the Companies Act, 1956 or 2013. If at all the investigations are to be made in terms of this recommendatory report, or suggestion therein, that is for the multiple disciplinary authorities to find out mis-utilisation of bank finances and other violations of law. The respondents ought be aware that there is a difference in the language of the two relevant sections, namely, section 210 and section 212. 47. Section 210 falling in the same Chapter XIV titled Inspection, Inquiry and Investigation contains these two sections. Section 210 confers a discretion in the Central Government to order an investigation into the affairs of the company and that power has to be exercised if there is an order passed by a Court or a Tribunal in any proceedings before it to the effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability, integrity and experience. The wide powers that this office enjoys, as is set out in various sub-sections of section 212, would denote as to how its involvement comes after the investigations are assigned to it by the Central Government. By their very nature the investigations into frauds relating to a company have to be assigned. They have to be of such magnitude and seriousness demanding involvement of experts in the fields enumerated in sub-section (2) of section 211. Therefore, while exercising the powers under sub-section (1) of section 212, the Central Government ought to be not only forming an opinion about the necessity to investigate into the affairs of the company, but further that such investigations have to be assigned to the SFIO. 8. Counsel for the petitioners further replying upon the case of Parmeshwardas Agarwal v/s. Additional Director [reported in 2016 SCC OnLine Bom. 9276) where the Hon'ble Supreme Court following its finding in Rohtas Industries v/s. S.D. Agarwal [reported in 1969 1 SCC 325] and the Judgment of Marg Limited vs Karaikal. Port Private Limited 2021 SCC Online Mad 2585, more particularly para 68 discussed what would be the meaning of pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e passing of an order under Section 212 (1) (c) on a mere Transaction report allegedly placed on record by the Liquidator without any independent application of mind by the Respondent No. 1 is impermissible. Further, the opinion so formed by the Respondent No. I cannot be vague, generic or indefinite. The necessity and justification or otherwise for passing an order under Section 212 (1) (c) is also required to firstly exist and secondly the same has to be spelled out in the Impugned Order. For the purposes of section 212 of the Companies Act, there is a mandatory duty on the Central Government to verify the material on record and the allegations made, no matter how serious the allegations are, and ascertain their veracity to a reasonable degree of certainty. It cannot be done in a mechanical way as is being done in the present case. 13. It is further vehemently argued by the Petitioners that there does not exist circumstances or material facts on basis of which sanction could have been granted by the Central Government under section 212 of the Companies Act. 14. It is argued that on perusal of the impugned order dated 30/11/2021, whereby the Respondent No. 1 has directed the Respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. Therefore, it is stated that initiation of SFIO investigation under section 212 of the Companies Act, relying on the recommendation of a liquidator is completely without jurisdiction and deserves to be quashed and set aside. 18. It is the case of the Petitioners that once a transaction is classified as a transaction which is likely to be covered under section 66 of the IBC, the provisions of IBC will come into operation and all actions will be required to be taken under the IBC, which is a code in itself. In the present case, the liquidator has filed an application before the NCLT Mumbai, on the same cause of action, on the ground that the transactions carried out by the company or covered under section 66 of the IPC. The said application is pending, as on date. 19. On the other hand, Shri Sudhanshu Vyas learned counsel appearing for Union of India submitted that if it is brought to the notice of the Central Government that its affairs are being managed in such a way as would prejudice the interest of the public, then, to protect such larger public interest, powers are conferred in the Central Government. Learned counsel relied upon the entire scheme contained in The Indian Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an investigation to be made. That is a situation dealt with by section 236. Without prejudice to the powers under section 235, the Central Government independently can direct investigation, but that is in other cases. The said power is to be found in section 237. In view of the aforesaid, the learned counsel for the respondent has prayed for dismissal of the writ petition. 22. We have heard learned counsel for the parties and perused the record. 23. 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. 24. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany has extended financial facilities totaling to about 70 crores to the Company. At the time of renewal of the financial facilities, the IDBI Bank Ltd has done its due diligence inter-alia examining the financial health of the Company and the conduct of the management and after being duly satisfied, has renewed the financial facilities. 27. Since 2013 to 2019, the IDBI Bank Ltd, has been regularly conducting stock audit reports of the Company. A stock audit conducted by a Bank includes a third party verifying the physical stocks of the Company, examining the books of the Company vis- -vis the sale and cash flow and as such is an examination of the financial health of the Company. As the Company had healthy financial status, at no point in time before commencement of CIRP, the IDBI Bank Ltd has raised any issue of fraud. 28. The Company on 16/08/2016, had sought for an NOC from the IDBI Bank Ltd to enable a listed Company to takeover the said Company. In the said request letter, it was brought to the notice of the IDBI Bank Ltd that the financial facility extended by them will be taken over by SBI. The IDBI Bank Ltd, after duly verifying with the financial health of the Company ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he SFIO, on the presumption that the Central Government being an expert body will not arbitrarily or without duly applying its mind invoke the powers under section 212 of the Companies Act. Such kind of unbridled power will necessarily ought to be exercised with great responsibility. 32. Discretionary power has been conferred upon the central government to enable the government to assume the power to step in where there is reason to suspect that a company may be conducting its affairs in a manner prejudicial to the interest of the public at large. However the discretionary power must not be exercised, in a manner, that will defeat the object of the statute conferring search discretion. In order to exercise the discretion reasonably and lawfully, the Central Government is required to form an opinion that investigation is necessary into the affairs of the company. Such opinion must be an honest opinion, rendered after bestowing sufficient attention to the relevant material and circumstances available before the central government. 33. A perusal of the impugned sanction dated 30.11.2021 would show that the same is absolutely without any reason, is nonspeaking, evidences non-applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we must caution ourselves to not sit in appeal over the opinion formed by the Central Government and to not substitute the opinion of the Central Government but restrict to examination of existence of circumstances and material facts to grant the impugned sanction. 37. A perusal of the impugned sanction dated 30.11.2021 would show that the Central Government has based its opinion on the following material and circumstances; A) presentation and information given by the liquidator; and B) transaction audit Report. 38. We are of the considered view that to commence investigation under section 212 of the Companies Act, opinion of the Central Government is necessary. The opinion of a liquidator will be completely irrelevant. 39. Let us now examine the transaction audit report which is exhibited at page 215 of the Writ Petition. A complete reading of the transaction audit report would show that there are only allegation of transactions which are covered under section 66 of the IBC. There is not even a suggestion or recommendation in the Transaction Audit report that the affairs of the company ought to be investigated by the SFIO or even a whisper of any prejudice caused to the public at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granting the impugned sanction. 42. In light of the aforementioned judgments, we are of the opinion that 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. In our opinion the impugned sanction dated 30.11.021 fails on all counts for reasons stated hereinabove. On a perusal of the impugned order it is evident that the Impugned Order is solely based on the suspicion raised by the Liquidator and Transaction Audit Report. On a bare perusal of the Transaction audit report has not brought forth any fact, material or circumstance in its report that could have led the Central Government to form the requisite opinion for the purposes of Section 212 (1) (c). The same shows that the Impugned Order has been passed by the Respondent No. 1 without applying its mind and the opinion so formed by it is lacking in the pre-conditions to be satisfied under Section 212 (1) (c). 43. Furthermore, the actions of the Central Government will amount to forcing t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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