In a recent landmark judgment, the Tribunal has upheld the suspension of directors in the IL&FS mismanagement case involving allegations of financial irregularities and fraudulent accounts. The case, brought forward by the Union of India, sought legal remedies under Sections 241 and 242 of the Companies Act to address the alleged negligence and incompetence of the management of IL&FS and its group companies. The Tribunal’s decision comes after a detailed investigation by SFIO and the submission of an interim report highlighting mismanagement against public interest.
Facts
- IL&FS had 169 companies in the financial year 2017-18.
- 24 companies were direct subsidiaries, 135 companies were indirect subsidiaries, 6 companies were joint ventures, and 4 companies were associate companies.
- The Vice-President/Director of IL&FS was suspended.
- Investigation under Section 212(1)(c) of the Companies Act was initiated to uncover irregularities.
- SFIO was tasked with investigating IL&FS under Section 212 of the Companies Act.
- IL&FS was promoted by Central Bank of India, HDFC Ltd., and Union Trust of India.
- IL&FS has 348 group companies, including IFIN and ITNL.
- IL&FS is a core investment company and a systemically important NBFC approved under the RBI Act, 1931.
- Central Government alleged mismanagement by IL&FS Board leading to a petition under Sections 241 and 242 of the Companies Act.
- Management of IL&FS and its group companies were found negligent and incompetent.
- SFIO submitted an interim report stating mismanagement in IL&FS group companies against public interest.
- On 01.10.2018, the Tribunal issued a detailed and reasoned order.
- The Tribunal allowed the prayers and suspended the Board of Directors of IL&FS.
- A newly constituted Board was appointed to conduct business in accordance with the Memorandum and Articles of the companies.
Also Read: Compassionate Appointment Case: Supreme Court’s Landmark Ruling
Arguments
- The appellant has been arrested on 02.04.2019 and is presently in judicial custody.
- The Union of India submitted an application before the Tribunal to re-open the books of accounts and re-cast the financial statements of three main companies for the last five years, fulfilling the conditions under Section 130 of the Companies Act.
- The Tribunal passed the order under Section 130 of the Companies Act, which the appellant challenges as illegal and contrary to the provisions of the Act.
- The appellant’s submissions were not properly considered by the Appellate Tribunal in confirming the order of the Tribunal.
- The appellant argues that the conditions precedent for invoking the powers under Section 130 were not satisfied and the order was in breach of natural justice as sufficient opportunity was not given before passing the order.
- The order is believed to be in violation of principles of natural justice and has far-reaching consequences.
- The appellant’s objections are yet to be considered in response to an interim report, and the order passed under Sections 241/242 of the Companies Act has not been challenged till date.
- The relevance of earlier orders and the need for compliance with statutory provisions have been emphasized by the appellant.
- The appellant’s contentions include the lack of specific findings regarding fraudulent accounts or mismanagement by the Tribunal.
- The order under Section 130 is seen as vital in aiding the larger public interest amidst serious allegations against the companies.
- The appellant stresses the importance of considering all relevant provisions of the Companies Act and ensuring compliance with procedural requirements.
- The violation of natural justice, the necessity of thorough consideration of submissions, and the potential prejudice caused to the appellant have been highlighted.
- The amended Section 130 necessitates hearing all concerned parties, including authorities and directors, before passing orders.
- Compliance with statutory procedures and safeguarding against prejudicial impacts are central themes in the appellant’s arguments.
- RBI interim investigation reports support the impugned order under Section 130 of the Companies Act.
- The impugned order is justified based on the substantial public interest involved, with significant public funds at stake.
- The order does not violate principles of natural justice, as evidenced by the RBI report dated 22.3.2019.
- The subsequent report of RBI dated 22.03.2019 further validates the correctness, validity, and legality of the order under Section 130 of the Act.
- The counsel for the Union of India referred to the decision in the case of K. Shyam Kumar to support the consideration of the subsequent RBI report.
Also Read: Tokas v. Insurance Company: Multiplier Application and Compensation Enhancement
Analysis
- Central Government prayed for the suspension of the existing Board of Directors of R1 company.
- Central Government requested the appointment of 10 directors to manage the affairs of R1 company and its group companies.
- The appointed directors will operate under the direction of the Tribunal and submit reports as required.
- The Tribunal passed an order under Section 130 of the Companies Act allowing the re-opening and re-casting of financial statements of IL&FS and two other companies for the last five years.
- The order was challenged by the suspended director of IL&FS, who argued that the accounts were not prepared fraudulently and the mismanagement was not proven.
- The Tribunal considered reports from ICAI and SFIO and found conditions precedent for invoking powers under Section 130 were satisfied.
- The Tribunal observed mismanagement and fraudulent accounts, justifying the order under Section 130.
- The legality and validity of the order were upheld as serving the larger public interest and complying with natural justice principles.
- The Appeals Tribunal affirmed the Tribunal’s decision, stating no violation of natural justice.
- The suspension of directors and appointment of new directors by the Tribunal remained in force.
- The Central Government had approached the Tribunal under Sections 241 and 242 to suspend directors and appoint new ones in public interest.
- The alternative interpretation of provisions and non-compliance arguments were dismissed as the Tribunal acted within its jurisdiction.
- The Union of India approached the Tribunal for reliefs under Sections 241 and 242 of the Companies Act.
- This indicates that the Union of India sought legal remedies for issues related to the company in question.
- Sections 241 and 242 of the Companies Act are relevant in cases where the interests of the shareholders or other stakeholders are at risk.
- Reopening of books of accounts and recasting of financial statements of the companies is required in the larger public interest.
- The subsequent RBI Report can be considered while upholding the order passed by the Tribunal under Section 130 of the Companies Act.
- The real truth needs to be determined through the reopening and recasting process.
- Both conditions precedent for invoking power under Section 130 of the Companies Act are satisfied in this case.
- The order passed by the Tribunal under Section 130, confirmed by the Appellate Tribunal, should not be interfered with.
Also Read: Land Acquisition Dispute: Competent Authority’s Compliance Under Scrutiny
Decision
- Interim prayer of suspending the present Board of Directors and reconstitution of the new Board of Directors allowed.
- The six Directors mentioned shall take over the company immediately.
- Liberty granted to the Board of Directors to select a Chairman among themselves.
- Present Board of Directors to be suspended with immediate effect.
- Newly constituted Board to conduct business per the Memorandum and Articles of Association of the company and Companies Act, 2013.
- Notice to be issued to intimate the next date of hearing as a consequence of the Petition being admitted.
Case Title: HARI SANKARAN Vs. UNION OF INDIA
Case Number: C.A. No.-003747 / 2019
