Hari Sankaran v. Union of India & Others
M. R. SHAH, J.
1. Feeling aggrieved and dissatisfied with the impugned Order
dated 31.01.2019 passed by the National Company Law Appell ate
Tribunal, New Delhi in Company Appeal (AT) No. 29 of 2019 by which
the learned Appellate Tribunal has dismissed the said appeal preferred
by the appellant herein – Ex-Director of respondent No. 2 – Infrastructure
Leasing & Financial Services Limited (hereinafter referr ed to as ‘the
IL&FS’) and has confirmed the order passed by the National Company
Law Tribunal, Mumbai Bench (hereinafter referred to as ‘the l earned
Tribunal’) dated 01.01.2019 by which the learned Tribunal allowed the
said application preferred by the Central Government under Section 130(1)
& (2) of the Companies Act, 2013 (hereinafter refer red to as the
‘Companies Act’) and has permitted re-casting and re-opening of the
accounts of IL&FS, IL&FS Financial Services Limited ( hereinafter
referred to as the “IFIN”) and IL&FS Transportation Networks Limited
(hereinafter referred as the “ITNL”) for the last five years, the original
appellant has preferred the present appeal.
2. The facts leading to the present appeal in nutshell are as under:
That respondent No. 2 – IL&FS is a company incorporated under
HARI SANKARAN v. UNION OF INDIA & OTHERS
the provisions of the Companies Act, 1956. That the said company IL&FS
has 348 group companies, including IFIN and ITNL. That the said IL&FS
is a core investment company and systemically important Non-Banking
Finance Company duly approved under the Reserve Bank of India Act,
1931. The said company was promoted by the Central Bank of India,
HDFC Ltd., the Union Trust of India. That the said company is holding
prominent infrastructure development and finance companies. Ov er
the years, it had inducted institutional shareholders. That the said IL&FS,
during the financial year 2017-18 had 169 companies, out of which, 24
companies are direct subsidiaries, 135 companies are indirect subsidiaries,
6 companies are joint ventures and 4 companies are associate companies.
That the appellant herein claims to be the Vice-President/D irector of
IL&FS who has been suspended as the Director of IL&FS and its group
companies.
2.1 That on 01.10.2018, the Central Government through the
Ministry of Corporate Affairs filed a petition before the learned Appellate
Tribunal under Sections 241 and 242 of the Companies Act alleging in ter
alia , mismanagement by the Board of IL&FS and that the affairs of
IL&FS were being conducted in a manner prejudicial to public interest.
That the Central Government prayed for the following reliefs:
1. That the existing Board of Directors of Respondent No. 1
company, comprising of R2 to R8, be suspended with
immediate effect and 10 (Ten) persons be appointed as
directors in terms of provisions of Section 242(2)(k) of the
Act, to manage the affairs of R1 company and its group
companies through their nominees, and such directors any
report and function under the Hon’ble Tribunal on such matters
as it may direct:
2. That the Board of Directors appointed by the Hon’ble Tribunal
in terms of 242(2)(k) of the Act be authorized to replace such
number of directors of subsidiaries, joint ventures and
associate companies as may be required to make the R1 and
its group companies as going concern.
2.2 That it was found that the management of IL&FS and other
group company/companies were responsible for neglig ence and
incompetence, and had falsely presented a rosy financial statement. To
unearth the irregularities committed by IL&FS and its comp anies, the
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provisions of Section 212(1)(c) of the Companies Act were invoked for
investigation into the affairs of the company. The investigation was to
be carried out by the Serious Fraud Investigation Office (hereinafter
referred to as ‘the SFIO’) in exercise of powers under Se ction 212 of
the Companies Act. The SFIO submitted an interim r eport dated
30.11.2018 to the Central Government placing on record that the affairs
in respect of IL&FS group Companies were mis-managed, and that the
manner in which the affairs of the company were being conducted was
against the public interest. The said report shall be referred to hereinbelow.
It appears that the Registrar of Companies also conducte d an
enquiry under Section 206 of the Companies Act, and pri ma facie
concluded that mis-management and compromise in cor porate
governance norms and risk management has been perpetuated on IL&FS
and its group companies by indiscriminately raising long term and short
terms loans/borrowings through Public Sector Banks and financial
institutions. It was also observed that IL&FS compa ny has been
presenting a rosy picture by camouflaging its financial statements, and
concealing and suppressing severe mismatch between its ca sh flows
and payment obligations, total lack of liquidity and adverse financial ratios.
It was also found that IL&FS company has first defaulted on commercial
paper and then on short term borrowings i.e. inter corporate deposits,
negative cash flows in operating activities etc. It was further observed
that the consolidated balance-sheet of IL&FS company indicat ed the
extremely precarious financial position, and was virtually in deep red. It
was found that intangible assets of approximately Rs.18,540 crores as
on 31.03.2017, has increased to approximately Rs.20,004 crores as on
31.03.2018, thus creating a serious doubt about the correctness of the
financial statements. A Report dated 03.12.2018 was submitted by the
Institute of Chartered Accountants of India (“ICAI”) which has been
placed on the record of the Tribunal.
2.3 In this background, the Union of India approached the learned
Tribunal for reliefs under Sections 241 and 242 of the Companies Act.
2.4 Thereafter, by a detailed and reasoned order, the l earned
Tribunal vide Order dated 01.10.2018 allowed the said prayers and
suspended the Board of Directors of IL&FS, and appointed th e newly
constituted Board to conduct the business as per the Memorandum and
Articles of the companies. That the learned Tribunal issued the following
directions:
HARI SANKARAN v. UNION OF INDIA & OTHERS
[M. R. SHAH, J.]
“On the basis of the foregoing discussions and after considering
the facts of the case, a narrated in the Petition filed by the Union
of India, this Bench is of the considered view that it is judicious to
invoke the jurisdiction prescribed under Section 241(2) of the
Companies Act, 2013 and the Tribunal is of the opinion that as per
Section 242(1) of the Companies Act, 2013, the affairs of the
IL&FS were being conducted in a manner prejudicial to publi c
interest. The Interim prayer of suspending the present Bo ard of
Directors and reconstitution of the new Board of Directors is
hereby allowed. At present, by an additional affidavit only 6 names
(supra) of Board members have proposed by the Union of India.
Further directed that the present Board of Director s be
suspended with immediate effect. The six Directors as reproduced
supra shall take over the R1 company immediately. N ewly
constituted Board shall hold a meeting on or before 8 th October,
2018 and conduct business as per the Memorandum and Articles
of Association of the company and the provisions of the Companies
Act, 2013. Liberty is granted to the Board of Directors to select a
Chairman among themselves. Thereafter, report the roadmap to
NCLT, Mumbai Bench at the earliest possible not later than the
next date of hearing. The suspended directors hence forth sha ll
not represent the R1 company as a Director and shall als o not
exercise any powers as a director in any manner befo re any
authority as well.
As a consequence of “Admission” of the Petition, issue notice
to intimate next date of hearing. The Petition is to serve copy of
this order along with Petition to all the Responden ts. The
Respondents in turn may file their reply by 15 th October, 2018,
only after serving copy to the petitioner. The Petitioner can file
rejoinder, if deem fit, by 30 th October, 2018.”
2.5 That thereafter the Union of India through the Ministry of
Corporate Affairs approached the learned Tribunal under Section 130(1)
of the Companies Act seeking permission for re-opening of the books of
accounts and re-casting thereof, including the financial statem ents of
IL&FS, IL&FS Financial Services Limited and IL&FS Transportation
Networks Limited for the last five years viz. from Financial Year 2012-
2013 to Financial Year 2017-2018. The learned Tribunal issued notices
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to the Income Tax Authorities, SEBI, and any other statutory regulatory
body or authority, or other persons concerned. The learned Tr ibunal
directed the Central Government to serve the notices upo n the said
parties.
At this stage, it is required to be noted that the aforesaid three
companies through their new board of directors appeared through their
counsel before the learned Tribunal at the time of hearing of the aforesaid
application under Section 130 of the Companies Act. That, thereafter,
after hearing the counsel appearing on behalf of the respective parties,
including the learned counsel appearing on behalf of the e rstwhile
directors, who opposed the application filed under Section 130 of t he
Companies Act, the learned Tribunal vide its Order dated 01.01.20 19
allowed the application filed under Section 130 of the Companies Act,
and permitted the said application for re-opening the books of accounts,
and re-casting the financial statements of the aforesaid three companies
for the last five years viz. from Financial Year 2012-2013 to Financial
Year 2017-2018.
2.6 Feeling aggrieved and dissatisfied with the order passe d on
the application under Section 130 of the Companies Act by the learned
Tribunal dated 01.01.2019, permitting the re-opening and re-casting of
the financial statements of the aforesaid three companies for the last
five years viz. from Financial Year 2012-2013 to Financial Year 2017-
2018, the appellant herein who is a suspended Director of IL&FS alone
preferred an appeal before the learned Appellate Tribunal. That by the
impugned judgment and order, the learned Appellate Trib unal has
dismissed the said appeal.
3. Feeling aggrieved and dissatisfied with the impugned judgment
and order passed by the learned Appellate Tribunal dismissing the said
appeal, and confirming the order passed by the learned Tribunal dated
01.01.2019 allowing the application under Section 130 of the Companies
Act, the original appellant i.e. the suspended Director/erstwhile Director
of IL&FS has preferred the present appeal.
4. With the consent of the learned Senior Counsel appearing on
behalf of the respective parties, and in the facts and cir cumstances of
the case, we have heard the application for vacating the in terim Order
along with the main Appeal finally.
HARI SANKARAN v. UNION OF INDIA & OTHERS
[M. R. SHAH, J.]
5. Shri Dhruv Mehta, learned senior counsel has appeared on
behalf of the appellant and Shri Maninder Singh, learned Senior Counsel
has appeared on behalf of the Union of India as well as the other
contesting respondents.
6. Shri Dhruv Mehta, learned Senior Counsel appearing on behalf
of the appellant has vehemently submitted that the impugned order passed
by the learned Appellate Tribunal dismissing the said appeal and confirming
the order passed by the learned Tribunal allowing the application under
Section 130 of the Companies Act is absolutely illegal and bad in law.
6.1 Mr. Dhruv Mehta, learned Senior Counsel appearing on behalf
of the appellant has submitted that the order passed by the learned
Tribunal allowing the application under Section 130 of the Companies
Act is absolutely illegal and as such contrary to the provisions of Section
130 of the Companies Act. It is further submitted by Mr. Dhruv Mehta
that as such the pre-conditions before passing the order under S ection
130 of the Companies Act for re-opening and re-casting the statements
of account of the company, namely (i) the relevant earlier accounts were
prepared in a fraudulent manner; or (ii) the affairs of the company were
mismanaged during the relevant period, casting a doubt on the reliability
of financial statements, have not been satisfied.
6.2 Mr. Dhruv Mehta, learned Senior Counsel appearing on behalf
of the appellant has submitted that as such there is no specif ic finding
given by the learned Tribunal while allowing the application under Section
130 of the Companies Act that either the relevant earlier accounts were
prepared in a fraudulent manner, or the affairs of the company were
mismanaged, during the relevant period casting a doubt on the reliability
of financial statements. It is submitted that in the absence of any specific
finding by the learned Tribunal on the aforesaid, it was not permissible
for the learned Tribunal to pass the order under Section 130 of the
Companies Act permitting re-opening of the books of accounts and re-
casting of financial statements of the company/companies.
6.3 It is further submitted that, on the contrary, there is a specific
finding/observation by the learned Tribunal in the order under Section
130 of the Companies Act itself that the accounts were not prepared in
a fraudulent manner. It is submitted that the conditions prec edent for
invoking the powers under Section 130 of the Companies Act were not
satisfied, and the learned Tribunal was not justified in passing the impugned
773
order under Section 130 of the Companies Act. It is further submitted
that therefore the learned Appellate Tribunal ought to have quashed and
set aside the order passed by the learned Tribunal.
6.4 It is further submitted by Shri Dhruv Mehta learned Se nior
Counsel that, even otherwise, the order passed by the learned Tribunal
is in breach of natural justice inasmuch as sufficient opportunity was not
given to the appellant by the learned Tribunal before passing the order
under Section 130 of the Companies Act. It is submitted that the notice
on the application under Section 130 of the Companies Act was issued
on 27.12.2018 and the impugned order came to be passed on 01.01.2019.
It is submitted that even though the appellant sought time to file the
reply, the Tribunal without granting any further time to the appellant to
file the reply, passed the impugned order. It is submitted that as per the
amended Section 130 of the Companies Act, before passing the orde r
under Section 130 of the Companies Act, not only the Income Tax
Authorities and other authorities were required to be heard, e ven the
“other persons concerned”, including the Directors/Ex-Directors of the
company were required to be heard. It is submitted that the order passed
by the learned Tribunal was in violation of the principles of natural justice,
therefore the same was required to be quashed and set aside by the
learned Appellate Tribunal.
It is further submitted that though the aforesaid submission was
made before the learned Appellate Tribunal, and the learned Appellate
Tribunal accepted that the order passed by the learned T ribunal is in
breach of the principles of natural justice, the learned Appellate Tribunal
dismissed the appeal. It is submitted that, therefore, in the facts and
circumstances of the case, the learned Appellate Tribunal ought to have
set aside the order passed by the learned Tribunal and ought t o have
remanded the matter to the learned Tribunal for fresh deci sion after
giving opportunity of hearing to the appellant. In support of the above
submissions and request, Shri Dhruv Mehta, learned senior couns el
appearing on behalf of the appellant has heavily relied upon the decisions
of this Court in the case of Mannalal Khetan v. Kedar Nath Khetan
(1977) 2 SCC 424 and in the case of Swadeshi Cotton Mills v. Union
of India (1981) 1 SCC 664. Relying upon the above decisions of this
Court, it is submitted that when the Statute provides that things are
required to be done in a particular manner, it ought to have been done in
the same manner as provided under the Statute. It is submitte d that in
HARI SANKARAN v. UNION OF INDIA & OTHERS
[M. R. SHAH, J.]
the present case as the Statute specifically provides that before passing
the order under Section 130 of the Companies Act, an opportunity is to
be given to all concerned and that two conditions, as referred to
hereinabove, are to be satisfied, the same are required to b e followed
and complied with.
6.5 It is further submitted by Shri Dhruv Mehta, learned Senior
Counsel appearing on behalf of the appellant that, even otherwise, there
is no specific finding by the learned Tribunal with respect to the
mismanagement by the erstwhile Directors. So far as the reliance placed
upon the observations made in the earlier order dated 01.10.2018 is
concerned, it is submitted that the order dated 01.10.2018 passed under
Sections 241/242 of the Companies Act cannot be said to be th e final
order. It is submitted that it is an interim order/report to which the appellant
has already submitted the objections, which are yet to be considered. It
is submitted that, therefore, condition No. (ii) of Section 130(1) of the
Companies Act is not satisfied.
6.6 It is submitted that therefore, as the condition precedent while
invoking the powers under Section 130 of the Companies Act are not
being met, the learned Tribunal ought not to have and could not have
invoked and applied Section 130 of the Companies Act. In support of his
above submission, Shri Dhruv Mehta, learned Senior Counsel appearing
on behalf of the appellant has relied upon the decision of this Court in the
case of Calcutta Discount Company v. Income Tax Officer AIR 1961
SC 372.
6.7 It is further submitted by the learned Senior Counsel appearing
on behalf of the appellant that all the three different provisions, namely
Section 130, Sections 211/212 and Sections 241/242 of the Companies
Act, operate in the different fields and in different situations and as such
they are in differentchaptersand therefore the observations made while
passing the order under one provision cannot be made applicable to while
passing the order under different provisions.
6.8 Shri Dhruv Mehta, learned Senior Counsel appearing on behalf
of the appellant has further submitted that what is required to be considered
is the relevant material at the time when the learned Tribunal passed the
order under Section 130 of the Companies Act. It is submitted that the
respondents cannot support the order passed by the learned Trib unal
under Section 130 of the Companies Act relying upon the subseque nt
developments/events. In support of his above submission, he has heavily
775
relied upon the decisions of this Court in the cases of Mohinder Singh
Gill v. Chief Election Commissioner, New Delhi (1978) 1 SCC 405
and T.P. Senkumar v. Union of India (2017) 6 SCC 801. It is submitted
that the decision of this Court in the case of Chairman, All India Railway
Recruitment Board v. K. Shyam Kumar (2010) 6 SCC 614 relied
upon by the learned Counsel appearing on behalf of the Union of India
shall not be applicable to the facts of the case on hand. It is submitted
that in the case of K. Shyam Kumar (supra), this Court was considering
the administrative decision/order and while considering such administrative
order/decision, this Court observed that the subsequent eve nts/reports
can be considered while considering the legality and validity of the original
action/order in the public interest.
6.9 Shri Dhruv Mehta, learned Senior Counsel appearing on behalf
of the appellant has further submitted that, therefore, neither the condition
precedent provided in Section 130(1) of the Companies Act has been
complied with/satisfied, nor even Section 130(2) of the Companies Act
has been complied with, and it is in violation of the provisions of Section
130(1) of the Companies Act, and as sufficient opportunity was not given
to the appellant, therefore, is in violation of the principles of natural justice.
It is prayed that the present appeal be allowed and the order passed by
the learned Tribunal allowing the application under Section 130 of the
Act be set aside.
6.10 It is further submitted by Shri Dhruv Mehta, learned Senior
Counsel appearing on behalf of the appellant that so far as the impugned
order passed by the learned Appellate Tribunal is con cerned, it is
submitted that none of the submissions/ground raised on behalf of the
appellant have been dealt with and/or considered by the Appellate
Tribunal. It is submitted that the learned Appellat e Tribunal was
considering/deciding the statutory appeal and therefo re the learned
Appellate Tribunal was supposed to deal with the grounds rai sed on
behalf of the appellant. It is submitted that though the plea of violation
of principles of natural justice was specifically pleade d and even the
learned Appellate Tribunal also observed that there may be violation of
principles of natural justice, in that case, the learned Appellate Tribunal
ought to have remanded the matter to the learned Tribunal. It is submitted
that the learned Appellate Tribunal ought to have appreciate d that in
view of the violation of principles of natural justice, it has caused great
prejudice to the appellant. It is submitted that as observed and held by
HARI SANKARAN v. UNION OF INDIA & OTHERS
[M. R. SHAH, J.]
this Court in the case of Swadeshi Cotton Mills (supra), when the
principles of natural justice are prescribed by the statutory provision, no
prejudice is required to be shown for invoking the ground of violation of
principles of natural justice.
6.11 it is further submitted by learned Counsel appearing on behalf
of the appellant that the impugned orders have far reaching consequences.
It is submitted that the books of accounts once re-opened and re-casted
are deemed to be final under the provisions of Section 130(2) of the
Companies Act.
6.12 Making the above submissions and relying upon the above
decisions, it is prayed to quash and set aside the impugned order passed
by the learned Tribunal, confirmed by the learned Appellate Tribunal.
7. The present appeal is vehemently opposed by Shri Man inder
Singh, learned Senior Counsel appearing on behalf of the Union of India.
7.1 It is vehemently submitted by the learned Senior Counse l
appearing on behalf of the Union of India that the impugned order passed
by the learned Tribunal, confirmed by the learned Appellate Tribunal do
not suffer from anyvice of illegality. It is submitted that the order passed
by the learned Tribunal under Section 130 of the Companies Ac t is
absolutely in the larger public interest and absolutely in consonance with
the provisions of Section 130 of the Companies Act.
7.2 It is further submitted by the learned senior Counsel appearing
on behalf of the Union of India that there are very serious allegations of
preparing the earlier accounts in a fraudulent manner, and als o with
respect to the mis-management of the affairs of the company during the
relevant period. It is submitted that, in the present case , after having
satisfied that there are serious allegations against IL &FS group of
companies, the Department of Economic Affairs took a conscious
decision to approach the NCLT under Section 242 of the Companies
Act to order re-constitution of the Board of Directors . It is submitted
that by a detailed order and considering the material on record, and
having been prima facie satisfied with respect to the allegations of
mismanagement and relating to the affairs of IL&FS group of companies,
the learned Tribunal passed an order dated 01.10.2018 suspending the
earlier Directors/Board of Directors of the companies and appointed a
new Board of Directors. It is submitted that even the Ministry of
Corporate Affairs, Government of India in exercise of powe rs under
777
Section 212 of the Companies Act had issued an order directing to conduct
investigation into the affairs of IL&FS group of companies. It is submitted
that SFIO constituted under Section 212 of the Act has already
commenced a specialized investigation into the affairs of IL&FS group
of companies. It is submitted that the appellant has b een arrested on
02.04.2019, and is presently in judicial custody. It is submitted that
thereafter when the Union of India through the Ministry of Corpor ate
Affairs submitted an application before the learned Tribunal to re-open
the books of accounts and to re-cast the financial statem ents of the
three main companies for the last five years and thereafter considering
the investigation reports and having been satisfied that the conditions
precedent for invoking the powers exercised under Section 130 of the
Companies Act are satisfied/complied with, thereafter when the learned
Tribunal has passed the order, the same cannot be said to be illegal. It is
submitted that all the requirements under Section 130 of the Companies
Act have been complied with/satisfied.
7.3 It is further submitted that the order dated 01.10.2018 passed
under Sections 241/242 of the Companies Act has attained f inality
inasmuch as the same is not challenged till date. It is su bmitted that
therefore the same can be considered by passing an order under Section
130 of the Companies Act also.
7.4 It is further submitted by the learned Senior Counsel appearing
on behalf of the Union of India that all the three provision s, namely
Sections 211/212, Sections 241/242 and Section 130 of the Companies
Act are required to be considered and read conjointly. It is s ubmitted
that while considering the one provision and/or while passing the order
under one provision, it is required to be seen that the effect of the order/
orders passed in other provisions do not become nug atory and/or
ineffective. It is submitted that therefore if all the aforesaid three
provisions are considered and read conjointly, in that case, it can be said
that the order passed under Section 130 of the Companies Act would be
in the aid of the investigation going on by the SFIO under Section 212 of
the Companies Act and the same shall be in the larger public interest. It
is submitted that, in the present case, Justice D. K. Jain, a former Judge
of this Court, has been appointed to supervise the resolution process of
IL&FS group of companies. It is submitted that the r e-opening of the
books of accounts and re-casting the financial statements of the aforesaid
three companies is very much required and necessary, since t he same
shall be in the larger public interest, to find out the real truth.
HARI SANKARAN v. UNION OF INDIA & OTHERS
[M. R. SHAH, J.]
7.5 It is further submitted by the learned Senior Counsel appearing
on behalf of the Union of India that the powers conferred under Section
130 of the Companies Act are less stringent than the powers conferred
under Sections 241/242 and/or Sections 211/212 of the Companies Act.
It is submitted that while exercising powers under Section 130 of the
Companies Act, there may not be any final conclusion/opinion that the
relevant earlier accounts are prepared in a fraudulent manne r or the
affairs of the company were mismanaged during the relevant period. It
is submitted that if, on the basis of the material on recor d, the learned
Tribunal is satisfied on either of the aforesaid two event ualities, it is
always open to the Tribunal to pass the order to re-open the books of
accounts and to re-cast the financial statements of the co mpany.
It is further submitted that, in the present case, before passing the
order under Section 130 of the Companies Act notices were issued under
the first proviso to Section 130 of the Companies Act. It is submitted
that SEBI appeared and submitted that it had no objection to the accounts
and financial statement of respondent Nos. 2 to 4, which are listed
companies, being re-opened and re-casted.
It is submitted that, as observed by the Tribunal in the impugned
order, the erstwhile directors had opposed the application under Section
130 of the Companies Act, that after hearing all parties, the impugned
order has been passed by the learned Tribunal. It is su bmitted that
therefore the impugned order passed by the learned Tribunal cannot be
said to be in violation of the principles of natural justice as alleged.
7.6 Relying upon the subsequent interim investigation reports by
the RBI, it is submitted that the impugned order passed by the learned
Tribunal under Section 130 of the Companies Act is not required to be
interfered with. It is submitted that mere perusal of t he report of the
RBI dated 22.3.2019 demonstrates and establishes beyond any doubt
about the complete correctness, validity and legality of the order under
Section 130 of the Act. In support of his submission, the learned counsel
has relied upon and requested to consider the subsequent event al so,
more particularly the report of the RIB dated 22.03.2019. The learned
counsel appearing on behalf of the Union of India has heavily rel ied
upon the decision of this Court in the case of K. Shyam Kumar (supra)
in support of the prayer to consider the subsequent Report of RBI also.
779
7.7 Making the above submissions, it is prayed to dismiss the
present appeal, more particularly, considering the larger public interest
as, in the present case, thousands of crores of the public money is involved.
8. We have heard the learned counsel for the respective part ies
at length and perused the written submissions filed by them.
At the outset, it is required to be noted that by the impugned order
and in exercise of powers under Section 130 of the Companies Act, the
learned Tribunal has allowed the said application preferred by the Central
Government and has directed/permitted re-opening of the bo oks of
accounts and re-casting the financial statements of IL&FS and other
two companies for the last 5 years, viz., F.Y 2012-2013 to 2017-2018.
The order passed by the learned Tribunal has been affirmed by the learned
Appellate Tribunal. Therefore, the short question which is p osed for
consideration before this Court, whether in the facts and circumstances
of the case, can it be said that the order passed by the learned Tribunal
is illegal and/or contrary to Section 130 of the Companies Act?
8.1 While considering the aforesaid question/issue, few facts and
the relevant provisions of the Companies Act which are rel evant for
determining/considering the legality and validity of the order passed by
the learned Tribunal are required to be referred to and considered, which
are as under:
Section 211 of the Companies Act provides for establishment of
Serious Fraud Investigation Office to investigate frauds rela ting to a
company. Section 212 of the Companies Act provides for investigation
into affairs of company by SFIO. Section 212 of the Companies Act
provides that if the Central Government is of the opinion that it is necessary
to investigate into the affairs of a company by SFIO....in t he public
interest; or on a request made by any department of the Central
Government or a State Government. In the present case, the Central
Government has already constituted SFIO and has als o ordered
investigation into the affairs of IL&FS and other group of c ompanies
and the investigation by the SFIO is under progress. It is also required
to be noted that SFIO had also submitted its preliminary report. In the
preliminary SFIO report, there are specific findings wi th respect to
mismanagement of the affairs of the aforesaid companies, and also with
respect to preparing fraudulent accounts. At this stage, it is also required
HARI SANKARAN v. UNION OF INDIA & OTHERS
[M. R. SHAH, J.]
to be noted that ICAI had also conducted an enquiry into the accounts
for the past five years, and in the preliminary report, t he ICAI has
mentioned that “accounts for the post five years have been prepared in
a fraudulent and negligent manner by the erstwhile auditors”. That the
Registrar of Companies had also conducted an enquiry under Section
206 of the Companies Act and prima facie concluded that
mismanagement and compromise in corporate governance norms and
risk management has been perpetuated on IL&FS and i ts group
companies by indiscriminately raising long term and short term loans/
borrowings through public sector banks and financial i nstitutions.
Considering the fact that thousands of crores of public money is involved,
and in the public interest, the Central Government has thought i t fit to
handover the investigation with respect to the affairs of IL&F S and
other group companies to SFIO.
8.1.1 Sub-section (2) of Section 241 of the Companies Act provides
that if the Central Government is of the opinion that the af fairs of the
company are being conducted in a manner prejudicial to public interest,
it may itself apply to the Tribunal for an appropriate order under Chapter
XVI, more particularly the order under Section 242 of the Compani es
Act. In the present case, the Central Government had approached the
learned Tribunal under Section 241 of the Companies Act and for an
appropriate order to suspend the existing Board of Directors of the
Companies and to appoint new Directors in terms of the provi sions of
Section 242(2)(k) of the Companies Act, to manage the affairs of IL&FS
and group companies. That by an order dated 01.10.2018, the learned
Tribunal, in exercise of powers under Section 242(2) of the Companies
Act, has suspended the Board of Directors of IL&FS and has fur ther
passed an order for reconstitution of the new Board of Direct ors. Six
persons are appointed as Directors as Board members. Whi le issuing
such directions, the learned Tribunal has specifically observed that the
learned Tribunal is satisfied that the affairs of the IL&F S were being
conducted in a manner prejudicial to public interest. Thus, pursuant to
the said order dated 01.10.2018, the erstwhile Board Members/Directors
of the IL&FS are suspended, and new Directors are appointed as Board
Members and the new Board of Directors are conducting the affairs of
the IL&FS and group companies. It is further ordered that the suspended
Directors henceforth shall not represent the IL&FS company as
Directors, and shall also not exercise any power as Dir ectors in any
manner before any authority as well. The appellant herein is the Vice
781
President and suspended Director of the company, who alone has
challenged the impugned order passed by the learned Tribunal passed
under Section 130 of the Companies Act.
8.2 In between there is one another development. Pursuant to
the order passed by the NCLAT, a former Judge of this Court – Hon’ble
Justice (Retd.) D.K. Jain has been appointed to supervise the operation
of the “Resolution Process” of the IL&FS group companies. Considering
the aforesaid facts and circumstances and in the larger pu blic interest
and having found on the basis of the reports/preliminary reports of SFIO,
ICAI and ROC and having observed and found that the relevant earlier
accounts of IL&FS and other group companies, named hereinabove,
were prepared in a fraudulent manner and the affairs of the company
were mismanaged during the relevant period, casting a doubt on the
reliability of the financial statements, the Union of India/Central
Government considered it fit to submit an application before the learned
Tribunal under Section 130 of the Companies Act. After issuing notice
to all concerned including the Central Government, Income Tax
Authorities, SEBI, other Statutory Regulatory Body and even to t he
erstwhile Directors of IL&FS and other two companies, by the impugned
order, the learned Tribunal has permitted/directed the Central Government
to re-open the books of accounts and to recast the financial statements
of IL&FS and other two companies, named hereinabove, of last 5 years.
8.3 Considering the aforesaid facts and circumstances, the legality
and validity of the impugned order passed by the learned Tribunal passed
under Section 130 of the Act, confirmed by the learned Appellate Tribunal
is required to be considered.
9. On going through the order passed by the learned Tribunal
passed under Section 130 of the Act, it appears that the learned Tribunal
is conscious of the relevant provisions of the Act, more pa rticularly
Section 130 of the Companies Act and more particularly the conditions
precedent to be complied with/satisfied while directing /permitting re-
opening of the books of accounts and re-casting of the financial
statements of the company. From the order passed by th e learned
Tribunal under Section 130 of the Companies Act, it appears that the
learned Tribunal has considered the preliminary report submitted by the
ICAI and SFIO and the observations made in the aforesai d reports/
preliminary reports. That thereafter having satisfied that the conditions
precedent for invoking powers under Section 130 of the Compani es
HARI SANKARAN v. UNION OF INDIA & OTHERS
[M. R. SHAH, J.]
Act, stated in Section 130 (i) OR (ii) of the Companies Act are satisfied,
thereafter the learned Tribunal has passed an order allowing the
application under Section 130 of the Companies Act for re-opening the
books of accounts and re-casting the financial statements of IL&FS and
other two companies, viz, for the last 5 years.
10. While assailing the order passed by the Tribunal under Section
130 of the Act, it is vehemently submitted on behalf of the ap pellant,
who as such is a suspended director of the company that there is no
specific finding recorded by the learned Tribunal that (i) the relevant
earlier accounts were prepared in a fraudulent manner; and (ii) the affairs
of the company were mismanaged during the relevant period casting a
doubt on the reliability of the financial statements. It is the case on
behalf of the appellant that in the order dated 01.01.2019 passed under
Section 130 of the Companies Act, learned Tribunal has specifically given
a finding that the alleged accounts of the companies cannot be said to
have been prepared in a fraudulent manner. However, it is required to
be noted that the aforesaid observations by the Tribunal are required to
be considered in the context for which the observations are made. It
appears that the said observations are made with respect t o role of the
auditors. It is to be noted that in the same para, the learned Tribunal has
specifically observed that in the earlier order dated 01.10.2018, it is
observed that the affairs of the company were mismanaged during the
relevant period and that the affairs of the company and subsidiary
companies were being mismanaged during the relevant pe riod, as
contemplated under Sub-Section (1) and (2). At this stage, it is required
to be noted that as per Section 130 of the Act, the Tribunal may pass an
order of re-opening of accounts if the Tribunal is of the opinion that (i)
the relevant earlier accounts were prepared in a fraudulent manner;
OR (ii) the affairs of the company were mismanaged during the relevant
period casting a doubt on the reliability of the financial s tatements.
Therefore, the word used is “ OR ”. Therefore, if either of the conditions
precedent is satisfied, the Tribunal would be justified in passing the order
under Section 130 of the Act. Considering the order passed by the Tribunal
passed under Section 130 of the Companies Act, it appears t hat the
learned Tribunal has passed the order on being satisfied with respect to
the second part of Section 130 of the Companies Act. It is also required
to be noted that the learned Tribunal has also taken note of the preliminary
report submitted by the ICAI with respect to the earlier accounts were
being prepared in a fraudulent manner. On a fair reading of Section 130
783
of the Companies Act, if the Tribunal is satisfied that either of the
conditions precedent is satisfied, the Tribunal would be justified in passing
the order under Section 130 of the Companies Act.
11. Considering the facts narrated hereinabove and the preliminary
reports of SFIO and ICAI which came to be considered by the learned
Tribunal and considering the specific observations made by the learned
Tribunal while passing the order under Section 241/242 of the Companies
Act and considering the fact that the Central Government has entrusted
the investigation of the affairs of the company to SFIO i n exercise of
powers under Section 242 of the Companies Act, it cannot be said that
the conditions precedent while invoking the powers under Section 130
of the Act are not satisfied. We are more than satisfied that in the facts
and circumstances of the case, narrated hereinabove, and also in the
larger public interest and when thousands of crores of public money is
involved, the Tribunal is justified in allowing the application under Section
130 of the Companies Act, which was submitted by th e Central
Government as provided under Section 130 of the Companies Act.
12. Now so far as the submission on behalf of the appellant that
all the three provisions, viz., Section 130, Sections 211/212 and Sections
241/242 operate in different fields and in different circum stances and
they are in the different Chapters and therefore any obs ervation made
while passing the order/orders with respect to a particular provision may
not be considered while passing the order under relevant provis ions is
concerned, it is required to be noted that all the three provis ions are
required to be considered conjointly. While passing an order in a particular
provision, the endeavour should be to see that the order/order s passed
under other provisions of the Companies Act are given effect to, and/or
in furtherance of the order/orders passed under oth er Sections.
Therefore, the observations made while passing order under Sec tion
241/242 of the Companies Act can be said to be relevant observations
for passing the order under Section 130 of the Companies Act. At this
stage, it is required to be noted that even otherwise in the order passed
by the Tribunal under Section 130 of the Companies Act, ther e is a
specific observation made by the learned Tribunal wit h respect to
mismanagement of the affairs of the company, and even with respect to
the relevant earlier accounts prepared in a fraudulent manner.
13. It is next contended on behalf of the appellant that proviso to
Section 130 of the Act has not been complied with and that t he order
HARI SANKARAN v. UNION OF INDIA & OTHERS
[M. R. SHAH, J.]
passed by the learned Tribunal passed under Section 130 of the Act is in
violation of the principle of natural justice. At the outset, it is required to
be noted that while passing he order under Section 130 of the Companies
Act, the learned counsel appearing on behalf of the erstwhile directors
appeared and opposed the application under Section 130 of the
Companies Act. Therefore, the learned counsel appearing on behalf of
the erstwhile directors was heard before passing he order under Section
130 of the Companies Act. Therefore, it can be said that th ere is a
compliance/substantial compliance of the principle of natural justice to
be followed. It is required to be noted that as per proviso to Section 130
of the Companies Act before passing the order under Section 130 of the
Act, the Tribunal is required to issue notice to the Central Government,
Income Tax Authorities, SEBI or any other statutory regulatory body or
authorities concerned or any “other person concerned” and is required
to take into consideration the representation, if any made. The “ other
person concerned” is as such not defined. Who can be said to be “other
person concerned”, that question is kept open. At this stage, it is required
to be noted that while passing the order under Section 130 of the Act,
there shall be reopening of the books of accounts and re-casting of the
financial statements of the company and therefore the Board of Directors
of the company may make a grievance. The erstwhile directors cannot
represent the company as they are suspended pursuant to the earl ier
order passed under Section 242 of the Companies Act. Be that as it
may, even otherwise in the present case and as observed her einabove
the erstwhile directors of the company represented before the Tribunal
and they opposed the application under Section 130 of the Act. Therefore,
in the facts and circumstances of the case, it cannot be said t hat the
order passed by the learned Tribunal is per se in violation of the principle
of natural justice as alleged.
14. The submission by learned Counsel appearing on behalf of
the appellant that in the impugned order passed by the learned Appellate
Tribunal, the learned Appellate Tribunal has specifically observed that
there is a violation of principle of natural justice and therefore the learned
Appellate Tribunal ought to have remanded the matter to the Tribunal is
concerned, on considering/fair reading of the impugned order passed by
the learned Appellate Tribunal, as such, there is no specific finding by
the learned Appellate Tribunal that there is a violati on of principle of
natural justice. What is observed by the learned Appellat e Tribunal is
that “even if it is accepted that the appellant on receipt of notice wanted
785
to file reply” cannot be considered as a specific finding given that the
order passed by the Tribunal was in violation of principle of natural justice.
15. Now insofar as the submission on behalf of the appellant that
the order dated 01.10.2018 passed under Section 241 /242 of the
Companies Act is an interim order and the same is not a final order
suspending the directors and the erstwhile board of directors of the
company, and therefore the observations made in the order dated
01.10.2018 cannot be considered, has no substance. It is required to be
noted that as on today the order dated 01.10.2018 suspending the erstwhile
directors of the company including the appellant stands and remains in
operation. The same is not challenged by way of an appe al before an
appropriate appellate Tribunal/Court.
16. Now so far as the submission on behalf of the appellant that
the impugned order passed by the learned Appellate Tribunal is a non-
speaking and non-reasoned order and the grounds urged before the
learned Appellate Tribunal have not been dealt with by the l earned
Appellate Tribunal and therefore the prayer to set aside the order is
concerned, in view of our specific findings recorded hereinabove on the
legality and validity of the order passed by the learned Tribunal under
Section 130 of the Companies Act, we do not propose to rem and the
matter to the learned Appellate Tribunal. It is true that t he learned
Appellate Tribunal could have passed a reasoned/speaking order. But in
the facts and circumstances of the case and our findi ngs recorded
hereinabove and as observed hereinabove, the order passed by the
Tribunal under Section 130 of the Companies Act does not suffer from
any illegality and the same is passed in the larger pub lic interest, we
have considered the order passed by the learned Tribunal under Section
130 of the Companies Act on merits.
17. In view of the aforesaid findings recorded by us, the decisions
relied upon by the learned counsel appearing on behalf of the appellant
shall not be applicable to the facts of the case on hand. There cannot be
any dispute to the proposition of law laid down by this Co urt in the
aforesaid decisions relied upon by the learned counsel appearing on behalf
of the appellant. However, in the light of the aforesaid findings recorded
by us, none of the decisions relied upon by the learned counsel appearing
on behalf of the appellant shall be applicable to the facts of the case on
hand.
HARI SANKARAN v. UNION OF INDIA & OTHERS
[M. R. SHAH, J.]
18. Now so far as reliance placed upon the subsequent report of
the RBI and the objection by the learned counsel appearing on behalf of
the appellant to rely upon the subsequent report and the reliance placed
upon the decision of this Court in the case of Mohinder Singh (supra)
is concerned, as the impugned order passed by the learned Tribunal is in
the larger public interest, this Court can take note of the subsequent
development/report. However, at the same time, the same shall be in
support of the order under challenge. Even otherwise, it is required to be
noted and as observed hereinabove, independent to the subsequent report
of the RBI, there is a specific finding with respect to the mismanagement
and the fraudulent accounts. Therefore subsequent Report of the RBI
Report can be taken note of, while upholding the order passed by the
learned Tribunal under Section 130 of the Companies Act. As observed
hereinabove, a larger public interest has been involved and reopening of
the books of accounts and recasting of financial state ments of the
aforesaid companies is required to be carried out in the lar ger public
interest, to find out the real truth, and as observed hereinabove both the
conditions precedent while invoking power under Section 130 of the
Companies Act are satisfied/complied with, therefore in the facts and
circumstances of the case, we are of the opinion that the orde r passed
by the learned Tribunal passed under Section 130 of the Companies Act,
confirmed by the learned Appellate Tribunal, is not req uired to be
interfered with.
19. In view of the above and for the reasons stated above, we see
no reason to interfere with the impugned order dated 01.01.2019 passed
by the learned Tribunal under Section 130 of the Companies Act for re-
opening of the books of accounts and re-casting the financial statements
of the Infrastructure Leasing & Financial Services Limited ; IL&FS
Financial Services Limited and IL&FS Transportation Networks Limited
for the last five years, viz. from Financial Year 2012-13 to the Financial
Year 2017-18, which came to be confirmed by the learned Appella te
Court vide impugned judgment and order dated 31.01.2019. Consequently,
the present appeal fails and deserves to be dismissed and is accordingly
dismissed.
All connected IAs are also disposed of.
Devika Gujral Appeal dismissed and IAs diposed of.