TMI Blog2019 (3) TMI 887X X X X Extracts X X X X X X X X Extracts X X X X ..... the SEBI Act is to promote orderly and healthy growth of securities market on the one hand and on the other hand to protect the interest of investors. It has power to issue directions if it is satisfied upon enquiry that such direction is necessary in the interest of investors etc. Thus, the power of SEBI to enquire into any infraction of law by corporate entities or to conduct enquiry or to issue direction in exercise of its powers under the SEBI Act is not in dispute. Such a power SEBI undoubtedly has but that is not the question here. The question is whether a person, a juristic person in this case, can be condemned unheard. It goes to the root and is fundamental that no person can be condemned unheard. Therefore, before branding petitioner No.1 as a shell company, it was obligatory on the part of respondent No.1 to have issued notice and to have heard petitioner No.1. That having not been done, declaration or branding of petitioner No.1 as a shell company cannot be legally sustained. Maintainability of the writ petition at the instance of petitioner No.2 is concerned, Court is of the view that it is the company which is staring at being branded as a shell company with al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WP(C) 2572/2018 - - - Dated:- 7-3-2019 - MR UJJAL BHUYAN, J. For The Petitioner : MR. D CHOUDHURY For The Respondent : MR. S C KEYAL (ASSTT. S.G.I.) ORDER Heard Mr. Ajay Gaggar, learned counsel for the petitioners; Mr. S.C. Keyal, learned Assistant Solicitor General of India for respondent Nos.1 and 3; and Ms. M. Hazarika, learned Senior counsel assisted by Ms. S. Khound, learned counsel for respondent No.2. 2. By filing this petition under Article 226 of the Constitution of India, petitioners seek quashing of Annexure-G letter dated 09.06.2017 in respect of petitioner No.1 at Serial No.2. 3. Petitioner No.1 is Assam Company Ltd represented by its Managing Director Shri Aditya Kumar Jajodia, petitioner No.2. 4. Petitioner No.1 is a company incorporated under the provisions of the Companies Act, 1956 having its registered office at Greenwood Tea Estate, Dibrugarh. 4.1. Petitioner No.1 is involved in the business of cultivation and manufacture of tea having several tea estates in the State of Assam. As per Annexure-B statement annexed to the writ petition, petitioner No.1 has 14 tea estates in the State of Assam producing approximately 11 million ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock exchanges from investigating the case of petitioner No.1 and to initiate proceedings if deemed fit. 4.5. In compliance to such order of the Appellate Tribunal, petitioner No.1 submitted several representations before respondent No.2 and also sought for copies of documents on the basis of which respondent No.2 had declared petitioner No.1 as a shell company which were handed over to petitioner No.1 on 25.01.2018. 4.6. According to the petitioners, from the documents handed over to them, it was found that the aforesaid letter dated 09.06.2017 had forwarded a compact disc (CD) received from the Serious Fraud Investigation Office of Government of India, Ministry of Corporate Affairs (SFIO) which included the database of 124 listed companies which were received from the income tax department having been identified in various search/seizures. 4.7. From the database, it appears that petitioner No.1 was shown as a company controlled by one Shri Vijay Kumar Gupta who is an entry operator and against whom several income tax proceedings are pending. A nexus was drawn between Shri Vijay Kumar Gupta and petitioner No.1 through Shri Sanjay Khandelwal who is one of the independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p capital is ₹ 30,97,60,963.00. Petitioner No.1 filed last balance sheet on 31.03.2017 with corresponding annual return up-to 31.03.2017. 7.1. Petitioner No.1 is a listed company. Respondent No.1 forwarded a letter dated 23.05.2017 received from SFIO to respondent No.2, SEBI through letter dated 09.06.2017 for necessary action only to safeguard public interest. The said letter was issued by respondent No.1 on the basis of SFIO letter dated 23.05.2017 enclosing a list of 331 companies including the names of companies received from the income tax department which were identified as shell companies during various search/seizures. It is stated that petitioner No.1 was identified by SFIO as one out of the 331 companies listed as shell companies and its source is the income tax department. Securities Appellate Tribunal had already passed order dated 21.08.2017 on the appeal filed by the petitioners staying the order of respondent No.2 suspending trading of shares of petitioner No.1 in the stock exchanges. Respondent No.2 passed an order dated 08.12.2017 directing the stock exchanges to appoint forensic auditors to verify misrepresentation and misuse of funds, etc of petitioner N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, respondent No.2 passed an interim order on 08.12.2017. It was ordered that stock exchanges shall appoint independent forensic auditor to verify misrepresentation including finances and/or business of petitioner No.1 and misuse of funds/books of accounts of petitioner No.1. Restrictions were put on promoters and directors of petitioner No.1 by permitting them to buy securities of petitioner No.1 only and not to transfer their shares in petitioner No.1 by way of sale. 8.4. It is further stated that National Company Law Tribunal, Guwahati Bench (Tribunal) vide order dated 26.10.2017 had ordered commencement of corporate insolvency resolution process against petitioner No.1 appointing Shri Vinod Kumar Kothari as the interim resolution professional to carry out functions under the Insolvency and Bankruptcy Code, 2016. Thereafter by order dated 12.01.2018, Tribunal appointed resolution professional to conduct corporate resolution process. 8.5. Respondent No.2 has stated that petitioner No.1 has not filed its submissions in terms of the interim order dated 08.12.2017 giving liberty to petitioner No.1 to file objection to the aforesaid order. 8.6. Contention of respondent No.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the case of petitioner No.1 to SEBI for investigation. Interference by the Court at this stage may not be justified. 12. Ms. M. Hazarika, learned Senior counsel appearing for respondent No.2, SEBI at the outset argued on the point of maintainability of the writ petition at the instance of petitioner No.2. She submits that National Company Law Tribunal, Guwahati Bench vide order dated 26.10.2017 had ordered commencement of corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (Code) in respect of petitioner No.1 whereafter an interim resolution professional was appointed to carry out the functions under the aforesaid Code. By subsequent order dated 12.01.2018, National Company Law Tribunal, Guwahati Bench appointed resolution professional to conduct corporate resolution process. Referring to various provisions of the Code, she submits that upon commencement of corporate insolvency resolution process, Board of Directors of petitioner No.1 has become non-functional; management of petitioner No.1 being vested first with the interim resolution professional and thereafter with the resolution professional. In such a situation, resolution of the Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s notice. This is done to protect the interest of investors and to regulate the securities market. In support of her submissions, learned Senior counsel has placed reliance on the following decisions:- 1. ( 1989) 3 SCC 132 = Marathwada University v. Seshrao Balwant Rao Chavan (in support of her contention that there cannot be ratification of an irregularity); 2. (2012) 1 SCC 314 = Bar Council of Maharashtra and Goa v. Manubhai Paragji Vashi (in support of the contention that ratification of an illegality will not validate the illegality). 3. (2010) 3 SCC 764 = Securities and Exchange Board of India v. Ajay Agarwal (in support of the contention that Securities and Exchange Board of India Act, 1992 is a social welfare legislation seeking to protect the interest of small investors. Therefore, it becomes the duty of the Court to adopt an interpretation which furthers the purpose of law rather than that which frustrates it. Besides power to issue directions under Section 11B thereof being procedural in nature can be applied retrospectively). 4. (2018) 1 SCC 407 = Innoventive Industries Ltd v. ICICI Bank (in support of the contention that a legal action at the instance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tified as companies which are used for tax evasion or money laundering, i.e., channelizing crime tainted money or proceeds of crime into the formal economy. 16.2. But just being a paper company and not having any assets or business operations per se is no offence. A corporate entity may be set up in such a fashion with the objective of carrying out corporate activities in future. That would not make it an illegal entity. 17. The Organisation for Economic Cooperation and Development (OECD) has prepared a glossary of foreign direct investment terms and definitions. OECD, which was established on December 14, 1960, is now a group of 34 member countries that discuss and develop economic and social policy. OECD members are democratic countries that support free market economies. OECD led a two year effort with G 20 nations to encourage tax reform worldwide and to eliminate tax-avoidance by profitable corporations. In the said glossary, shell company has been defined as a company which is formally registered, incorporated or otherwise legally organized in an economy but which does not conduct any operations in that economy other than in a pass-through capacity. Shells tend to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd either no or nominal assets, assets consisting solely of cash and cash equivalents or assets consisting of any amount of cash and cash equivalents and nominal other assets. 18.2. However, it is no offence to be a shell company per se. The maximum Registrar of Companies can do is to strike off the name of such company from the register of companies. But if the shell company is involved in money laundering or tax evasion or for other illegal purposes, then relevant provisions of laws under the Prevention of Money Laundering Act, 2002, Prohibition of Benami Transactions Act, 2016, Income Tax Act, 1961 and the Companies Act, 2013 would be attracted. 18.3. As per the study, the necessity for curbing shell companies stems from the fact that these companies are incorporated extensively for carrying out illegitimate transactions which aims at money laundering, tax evasion, generation of black money, carrying out benami transactions, shifting of corporate profit to tax haven jurisdictions and round tripping of such profit or black money by taking advantage of double tax avoidance treaties thereby causing huge loss in tax revenue. Apprehension has been expressed by the Financial Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies with whom India has entered into treaties came up for consideration in Vodafone International Holdings BV v. Union of India, [2012] 6 SCC 613. In the said decision, Supreme Court turned down the plea for reconsideration of Azadi Bachao Andolan (supra). Justice Radhakrishnan in his concurring judgment examined the expressions tax haven, treaty shopping, shell companies and round tripping. In that context, it was held as under :- 318. .. The term shell companies finds no definition in the tax laws and the term is used in its pejorative sense, namely, as a company which exists only on paper, but in reality, they are investment companies. .. 21. Thus, from the above, what can be deduced is that though a shell company is defined in other jurisdictions, in India there is no statutory definition of a shell company. However, in popular parlance as well as from the perspective of the Government and its agencies, a shell company is ordinarily identified with dubious activities concerning serious economic offences, such as, tax evasion, money laundering, benami transaction, conversion of black money into white, round-tripping with host of other associated offences. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r preferred an appeal being Appeal No. 196 of 2017 before the Security Appellate Tribunal, Mumbai and an interim stay was granted and the petitioners were allowed to continue in trading. He also prays for an interim order in terms of the prayer made in the petition. Mr. Keyal submits that he would like to file an affidavit. Issue notice of motion, returnable on 22.6.2018 No formal steps are called for with regard to respondent Nos. 1 and 3 as they are duly represented. However, extra copies be served. Steps on respondent No. 2 by registered post with A/D. Issue notice also on the interim prayer, returnable on 22.6.2018. Mr. Saha, learned Senior counsel, submits that there is no statutory definition of shell company in either fiscal or in the penal statutes. There is also no judicially evolved definition of shell companies. He submits that as per the definition given in Concise Oxford English Dictionary, 11th (Revised) Edition, shell company has been defined as a non-trading company used as a vehicle for various financial manoeuvres. The submission is that the expression shell company in popular parlance refers to a tainted company which is used as a front fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case. Learned counsel for the petitioners has referred to the averments made in the writ petition and submitted that petitioner No.1 company is an old and reputed company owning 14 Tea Estates in the State of Assam producing 11 million kgs of tea every year. It has a labour force of 20 thousand of its own. Prima facie, branding a company like the petitioner No.1 company as a shell company and thereafter initiating proceeding to prove the same virtually amounts to giving a finding first and thereafter initiating proceeding to justify the finding, like a post decisional hearing. Court is, therefore, of the view that an interim order is called for in this case. Accordingly, impugned letter dated 09.06.2017 in respect of petitioner No.1 company shall remain stayed. 23. Thus, while passing the interim order as extracted above, this Court took the prima facie view that since declaration of petitioner No.1 as a shell company by itself would entail adverse consequences, petitioner No.1 should have at least been put on notice before being branded as a shell company. It was recorded that petitioner No.1 is an old and reputed company owning 14 tea estates in the State of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treat petitioner No.1 as a shell company straightaway and thereafter to initiate investigation to justify such branding. Principles of natural justice would require that before such branding, petitioner No.1 should have been put on notice and afforded a reasonable opportunity of hearing as to why and on what grounds it was being suspected to be a shell company and only if the response was found to be not satisfactory, such a finding could have been recorded. A finding of shell company de hors any notice or hearing would not be justified having regard to its negative implications and serious consequences. In the case of petitioner No.1, the circumstances and the context in which it has been declared as a shell company is a virtual condemnation but it is a condemnation without a hearing. That apart, there is also the question of the State or its agencies using an expression which is not defined in any law. 29. Objective of the SEBI Act is to promote orderly and healthy growth of securities market on the one hand and on the other hand to protect the interest of investors. It has power to issue directions if it is satisfied upon enquiry that such direction is necessary in the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntertained the representation of the petitioners. If they can file appeal before the Securities Appellate Tribunal and file representation before SEBI, it would be wholly illogical to take the stand that they would have no locus standi to challenge branding of petitioner No.1 as a shell company. It is in the above context that authorisation of petitioner No.2 to initiate legal action on behalf of petitioner No.1 has to be seen. The delegation of authority to petitioner No.2 has been placed on record as Annexure-A to the counter filed by the petitioners to the application filed by respondent No.2 SEBI for vacating the interim order dated 12-07-2018 which was registered as IA (C) No. 2932 of 2018. This delegation of authority was signed by the resolution professional for petitioner No.1 on 23-04-2018. Be it stated that IA (C) No.2932/2018 was dismissed vide order dated 13-09-2018. 32. The decisions cited at the Bar and relied upon by learned counsel for respondent No.2 are clearly distinguishable on facts and would not be attracted in the present case. In Innovative Industries Ltd. (supra), application filed by the financial creditor for initiating corporate insolvency resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X
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