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REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3747 OF 2019
Hari Sankaran ... Appellant
Versus
Union of India & Others ... Respondents
J U D G M E N T
M.R. SHAH, J.
1. Feeling aggrieved and dissatisfied with the impugned Order
dated 31.01.2019 passed by the National Company Law Appellate
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 – ExDirector of
respondent No. 2 – Infrastructure Leasing & Financial Services
Limited (hereinafter referred to as ‘the IL&FS’) and has confirmed
the order passed by the National Company Law Tribunal,
Mumbai Bench (hereinafter referred to as ‘the learned Tribunal’)
dated 01.01.2019 by which the learned Tribunal allowed the said
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application preferred by the Central Government under Section
130(1) & (2) of the Companies Act, 2013 (hereinafter referred to
as the ‘Companies Act’) and has permitted recasting and reopening 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 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 NonBanking 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.
Over the years, it had inducted institutional shareholders. That
the said IL&FS, during the financial year 201718 had 169
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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 VicePresident/Director 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 inter 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:
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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 negligence and
incompetence, and had falsely presented a rosy financial
statement. To unearth the irregularities committed by IL&FS
and its companies, the 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 Section 212 of the Companies
Act. The SFIO submitted an interim report dated 30.11.2018 to
the Central Government placing on record that the affairs in
respect of IL&FS group Companies were mismanaged, 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.
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It appears that the Registrar of Companies 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 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 company has been
presenting a rosy picture by camouflaging its financial
statements, and concealing and suppressing severe mismatch
between its cash 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 balancesheet of IL&FS company
indicated 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
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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 learned
Tribunal vide Order dated 01.10.2018 allowed the said prayers
and suspended the Board of Directors of IL&FS, and appointed
the newly constituted Board to conduct the business as per the
Memorandum and Articles of the companies. That the learned
Tribunal issued the following directions:
“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 public interest. The
Interim prayer of suspending the present Board of Directors
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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 Directors be
suspended with immediate effect. The six Directors as
reproduced supra shall take over the R1 company
immediately. Newly constituted Board shall hold a meeting
on or before 8th 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 shall not
represent the R1 company as a Director and shall also not
exercise any powers as a director in any manner before 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
Respondents. The Respondents in turn may file their reply by
15th October, 2018, only after serving copy to the petitioner.
The Petitioner can file rejoinder, if deem fit, by 30th October,
2018.”
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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 reopening of
the books of accounts and recasting thereof, including the
financial statements of IL&FS, IL&FS Financial Services Limited
and IL&FS Transportation Networks Limited for the last five years
viz. from Financial Year 20122013 to Financial Year 20172018.
The learned Tribunal issued notices to the Income Tax
Authorities, SEBI, and any other statutory regulatory body or
authority, or other persons concerned. The learned Tribunal
directed the Central Government to serve the notices upon 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 erstwhile directors,
who opposed the application filed under Section 130 of the
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Companies Act, the learned Tribunal vide its Order dated
01.01.2019 allowed the application filed under Section 130 of the
Companies Act, and permitted the said application for reopening
the books of accounts, and recasting the financial statements of
the aforesaid three companies for the last five years viz. from
Financial Year 20122013 to Financial Year 20172018.
2.6 Feeling aggrieved and dissatisfied with the order passed on
the application under Section 130 of the Companies Act by the
learned Tribunal dated 01.01.2019, permitting the reopening
and recasting of the financial statements of the aforesaid three
companies for the last five years viz. from Financial Year 2012
2013 to Financial Year 20172018, 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 Tribunal 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
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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
circumstances of the case, we have heard the application for
vacating the interim Order along with the main Appeal finally.
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
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the provisions of Section 130 of the Companies Act. It is further
submitted by Mr. Dhruv Mehta that as such the preconditions
before passing the order under Section 130 of the Companies Act
for reopening and recasting 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
specific 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 reopening of the
books of accounts and recasting of financial statements of the
company/companies.
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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 precedent 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 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 Senior
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
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impugned order. It is submitted that as per the amended Section
130 of the Companies Act, before passing the order under Section
130 of the Companies Act, not only the Income Tax Authorities
and other authorities were required to be heard, even the “other
persons concerned”, including the Directors/ExDirectors 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
Tribunal 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 to have remanded the
matter to the learned Tribunal for fresh decision after giving
opportunity of hearing to the appellant. In support of the above
submissions and request, Shri Dhruv Mehta, learned senior
counsel appearing on behalf of the appellant has heavily relied
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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 submitted that
in 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 be 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 the final order. It is
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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 different chapters
and therefore the observations made while passing the order
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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 Tribunal under Section
130 of the Companies Act relying upon the subsequent
developments/events. In support of his above submission, he
has heavily 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
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considering such administrative order/decision, this Court
observed that the subsequent events/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
concerned, it is submitted that none of the submissions/ground
raised on behalf of the appellant have been dealt with and/or
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considered by the Appellate Tribunal. It is submitted that the
learned Appellate Tribunal was considering/deciding the
statutory appeal and therefore the learned Appellate Tribunal
was supposed to deal with the grounds raised on behalf of the
appellant. It is submitted that though the plea of violation of
principles of natural justice was specifically pleaded 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 appreciated 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 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
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accounts once reopened and recasted 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 Maninder
Singh, learned Senior Counsel appearing on behalf of the Union
of India.
7.1 It is vehemently submitted by the learned Senior Counsel
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 any vice of illegality. It is
submitted that the order passed by the learned Tribunal under
Section 130 of the Companies Act 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
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fraudulent manner, and also with respect to the mismanagement 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 reconstitution 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 powers
under 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 been arrested on 02.04.2019,
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and is presently in judicial custody. It is submitted that
thereafter when the Union of India through the Ministry of
Corporate Affairs submitted an application before the learned
Tribunal to reopen the books of accounts and to recast the
financial statements 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 finality inasmuch as the same is not challenged till date.
It is submitted 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
provisions, namely Sections 211/212, Sections 241/242 and
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Section 130 of the Companies Act are required to be considered
and read conjointly. It is submitted 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 nugatory
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 reopening of the books of accounts and recasting the
financial statements of the aforesaid three companies is very
much required and necessary, since the same shall be in the
larger public interest, to find out the real truth.
7.5 It is further submitted by the learned Senior Counsel
appearing on behalf of the Union of India that the powers
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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 manner or
the affairs of the company were mismanaged during the relevant
period. It is submitted that if, on the basis of the material on
record, the learned Tribunal is satisfied on either of the aforesaid
two eventualities, it is always open to the Tribunal to pass the
order to reopen the books of accounts and to recast the
financial statements of the company.
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 reopened and recasted.
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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 submitted 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 the 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
also, more particularly the report of the RIB dated 22.03.2019.
The learned counsel appearing on behalf of the Union of India
has heavily relied upon the decision of this Court in the case of
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K. Shyam Kumar (supra) in support of the prayer to consider
the subsequent Report of RBI also.
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 parties
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 reopening of the books of accounts and recasting the financial statements of IL&FS and other two
companies for the last 5 years, viz., F.Y 20122013 to 20172018.
The order passed by the learned Tribunal has been affirmed by
the learned Appellate Tribunal. Therefore, the short question
which is posed for consideration before this Court, whether in the
facts and circumstances of the case, can it be said that the order
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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
relevant 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 relating 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 the 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 also ordered
investigation into the affairs of IL&FS and other group of
companies and the investigation by the SFIO is under progress.
It is also required to be noted that SFIO had also submitted its
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preliminary report. In the preliminary SFIO report, there are
specific findings with 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 to be noted
that ICAI had also conducted an enquiry into the accounts for
the past five years, and in the preliminary report, the 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 its group companies by
indiscriminately raising long term and short term
loans/borrowings through public sector banks and financial
institutions. Considering the fact that thousands of crores of
public money is involved, and in the public interest, the Central
Government has thought it fit to handover the investigation with
respect to the affairs of IL&FS and other group companies to
SFIO.
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8.1.1 Subsection (2) of Section 241 of the Companies Act
provides that if the Central Government is of the opinion that the
affairs 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 Companies 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
provisions 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 further passed an order for
reconstitution of the new Board of Directors. Six persons are
appointed as Directors as Board members. While issuing such
directions, the learned Tribunal has specifically observed that the
learned Tribunal is satisfied that the affairs of the IL&FS were
being conducted in a manner prejudicial to public interest.
Thus, pursuant to the said order dated 01.10.2018, the erstwhile
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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 Directors in any manner
before any authority as well. The appellant herein is the Vice
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 public 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
30
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 the erstwhile Directors of
IL&FS and other two companies, by the impugned order, the
learned Tribunal has permitted/directed the Central Government
to reopen 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
particularly Section 130 of the Companies Act and more
31
particularly the conditions precedent to be complied
with/satisfied while directing/permitting reopening of the books
of accounts and recasting of the financial statements of the
company. From the order passed by the 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 aforesaid
reports/preliminary reports. That thereafter having satisfied that
the conditions precedent for invoking powers under Section 130
of the Companies 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 reopening the books of accounts and recasting 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 appellant, 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
32
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 to 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 period, as contemplated under SubSection (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 reopening of
accounts if the Tribunal is of the opinion that (i) the relevant
earlier accounts were prepared in a fraudulent manner; OR (ii)
33
the affairs of the company were mismanaged during the relevant
period casting a doubt on the reliability of the financial
statements. 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 that 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 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
34
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 in 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 the 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
circumstances and they are in the different Chapters and
therefore any observation made while passing the order/orders
with respect to a particular provision may not be considered
while passing the order under relevant provisions is concerned, it
is required to be noted that all the three provisions are required
35
to be considered conjointly. While passing an order in a
particular provision, the endeavour should be to see that the
order/orders passed under other provisions of the Companies Act
are given effect to, and/or in furtherance of the order/orders
passed under other Sections. Therefore, the observations made
while passing order under Section 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, there is a
specific observation made by the learned Tribunal with 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 the
order 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
36
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
there 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 recasting 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
37
to the earlier order passed under Section 242 of the Companies
Act. Be that as it may, even otherwise in the present case and as
observed hereinabove 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 that 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 violation of
principle of natural justice. What is observed by the learned
Appellate Tribunal is that “even if it is accepted that the appellant
on receipt of notice wanted to file reply” cannot be considered as
38
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 appeal 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
nonspeaking and nonreasoned order and the grounds urged
before the learned Appellate Tribunal have not been dealt with by
the learned Appellate Tribunal and therefore the prayer to set
aside the order is concerned, in view of our specific findings
39
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 remand the matter to the
learned Appellate Tribunal. It is true that the learned Appellate
Tribunal could have passed a reasoned/speaking order. But in
the facts and circumstances of the case and our findings
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 public 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 Court 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
40
decisions relied upon by the learned counsel appearing on behalf
of the appellant shall be applicable to the facts of the case on
hand.
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
41
books of accounts and recasting of financial statements of the
aforesaid companies is required to be carried out in the larger
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 order passed by the learned Tribunal
passed under Section 130 of the Companies Act, confirmed by
the learned Appellate Tribunal, is not required 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 reopening of the books of accounts and
recasting 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 201213 to the Financial Year
201718, which came to be confirmed by the learned Appellate
42
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.
...................................J
[INDU MALHOTRA]
..................................J.
[M. R. SHAH]
NEW DELHI,
JUNE 4, 2019
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