1. Whether the declaration of a person as a "wilful defaulter" under Clause 2.1.3 of the RBI Master Circular on Wilful Defaulters, 2015, was legally sustainable based on the alleged diversion or siphoning of funds by the borrower or associated persons.

2. Whether the funds invested by the borrower company in its subsidiaries and related entities constituted "borrowed funds" and, if not, whether such investments could amount to diversion or siphoning of funds under the Master Circular.

3. Whether the Identification Committee and Review Committee of the bank complied with the procedural and substantive requirements of the Master Circular, including objective examination and application of mind before declaring a wilful default.

4. The evidentiary value and role of the Forensic Audit Report (FAR) prepared by independent auditors in the process of declaring a wilful defaulter.

5. Whether the classification of the borrower company under the Corporate Debt Restructuring (CDR) scheme (Class-B vs. Class-C) was relevant and indicative of the existence or absence of diversion or siphoning of funds.

6. The extent of scrutiny and standards to be applied by the bank's Identification and Review Committees in declaring wilful default, including the requirement of intentional, deliberate, and calculated default.

7. Whether the respondent's exit from the borrower company's management prior to the alleged diversion or siphoning of funds affects liability for wilful default.

8. The impact of prior knowledge and acceptance by lender banks of the investments and transactions alleged to constitute wilful default.

9. The legal consequences of a wilful defaulter declaration and the necessity for strict compliance with the Master Circular to avoid miscarriage of justice.

Issue 1 & 2: Applicability of the Master Circular and Definition of Diversion/Siphoning of Funds

- The Master Circular defines wilful default as occurring only when "borrowed funds" are diverted or siphoned off for purposes other than those for which the loan was sanctioned (Clauses 2.1.3(b) and (c)).

- Diversion of funds includes transferring borrowed funds to subsidiaries or group companies without lender approval; siphoning involves use of borrowed funds for unrelated purposes detrimental to borrower or lender (Clauses 2.2.1 and 2.2.2).

- The Court emphasized that the fundamental prerequisite for wilful default is that the funds involved must be borrowed funds; investments made from internal accruals or other non-borrowed funds do not fall within the scope of diversion or siphoning under the Master Circular.

- The Final Restructuring Scheme (FRS), a document prepared by the lender banks themselves, acknowledged that investments made by the borrower company in its subsidiaries were funded from substantial cash surpluses generated in earlier years and from Foreign Currency Convertible Bonds (FCCBs), not from borrowed funds.

- The Forensic Audit Report (FAR), relied upon by the bank for declaring wilful default, explicitly acknowledged that it did not verify the source of funds for investments in subsidiaries.

- Consequently, the issuance of show cause notices and declaration of wilful default based solely on alleged diversion of funds was found to be legally unsustainable as the investments were not from borrowed funds.

Issue 3 & 6: Compliance with Procedural and Substantive Requirements of the Master Circular

- Clause 3 of the Master Circular mandates a multi-tiered process: examination by Identification Committee, issuance of show cause notice, consideration of borrower's response, and final decision by Review Committee.

- The Identification Committee and Review Committee are required to apply their minds objectively, examining all relevant facts and circumstances, including the borrower's track record, before declaring wilful default.

- The Court found that the Identification Committee's decision was based solely on the FAR without independent application of mind or detailed reasoning.

- The Minutes of Meeting of the bank revealed no substantive examination or reasons justifying the conclusion of wilful default prior to issuance of the show cause notice.

- The Review Committee merely affirmed the Identification Committee's findings without addressing critical factual and legal points raised by the respondent.

- The Court held that such mechanical and superficial exercise fell short of the procedural safeguards and substantive standards mandated by the Master Circular.

- The stringent requirement that wilful default must be "intentional, deliberate and calculated" was not satisfied, as the investments were initially considered strategic and viable by lenders and no evidence of mens rea was established.

Issue 4: Evidentiary Value and Role of the Forensic Audit Report (FAR)

- The FAR is an expert opinion and not conclusive proof of wilful default; it must be corroborated by objective facts and subjected to independent scrutiny by the bank's committees.

- The FAR in this case was found to be incomplete and lacking credibility, particularly as it did not verify the source of funds invested in subsidiaries and contained disclaimers about limitations of its review period and data availability.

- The Court emphasized that issuing show cause notices and declaring wilful default solely on the basis of such a report without further inquiry or verification was improper and legally untenable.

- The Court cited precedent holding that forensic audit reports are not conclusive proof and must be treated as evidence subject to examination and challenge.

Issue 5 & 8: Relevance of CDR Classification and Prior Knowledge of Lenders

- The borrower companies were classified as Class-B under the CDR scheme, which pertains to corporates affected by external factors and not involved in diversion or siphoning of funds. Class-C classification applies to entities found to have diverted funds.

- The lenders, including the bank, were aware of and had accepted the investments in subsidiaries as strategic and viable at the time of CDR approval and in subsequent internal documents (FRS, Flash Reports).

- No objections or concerns were raised by the lenders at the time regarding these investments, nor were any management changes or forensic audits ordered during the CDR process.

- The Court found that the bank's later characterization of these investments as diversion or siphoning was inconsistent with its earlier acceptance and classification of the borrower as Class-B, undermining the wilful defaulter declaration.

Issue 7: Liability of the Respondent after Exit from Management

- The respondent had resigned as Executive Director and ceased to be associated with the day-to-day functioning of the borrower company prior to the period during which alleged diversion or siphoning of funds occurred.

- The Court noted that wilful default requires involvement or control over the acts constituting diversion or siphoning, which was not established in the respondent's case post-resignation.

Issue 9: Consequences of Wilful Defaulter Declaration and Need for Strict Compliance

- Declaration as a wilful defaulter results in severe consequences including bar on future loans, reputational damage, and potential criminal proceedings, effectively amounting to a "financial death knell."

- The Court underscored the necessity for strict and scrupulous adherence to the Master Circular's procedural and substantive requirements to prevent miscarriage of justice.

- The Supreme Court's precedent was noted emphasizing reasonable construction of the Master Circular and caution in declaring wilful default.

- The Court held that failure to comply with these standards vitiates the wilful defaulter declaration and warrants quashing of such orders.

Additional Observations

- The Court observed that the TRA (Trust and Retention Account) mechanism mandated that all financial transactions of the borrower be routed through monitored accounts under lender supervision, negating the possibility of diversion of borrowed funds during the review period.

- The Court found that the bank's reliance on isolated transactions without considering the overall track record and financial health of the borrower was contrary to the Master Circular's mandate.

- The Court noted that multiple forensic audits conducted over years did not find evidence of wilful default or diversion, reinforcing the conclusion that the wilful defaulter declaration was unfounded.

- The discharge of the respondent and others in associated criminal proceedings further supported the conclusion that wilful default was not established.

Conclusions

- The declaration of the respondent as a wilful defaulter was quashed and set aside for non-compliance with the Master Circular's requirements, absence of diversion or siphoning of borrowed funds, lack of objective and reasoned decision-making by the bank's committees, and reliance on an incomplete and inconclusive forensic audit report.

- The bank's actions were found to be legally unsustainable, arbitrary, and unreasonable.

- The procedural safeguards and substantive standards prescribed by the Master Circular must be strictly observed before declaring wilful default given the grave consequences involved.

- The CDR classification and lender banks' prior acceptance of investments negated the possibility of wilful default based on those investments.

- The appeal(s) challenging the quashing of wilful defaulter declaration were dismissed, affirming the detailed and well-reasoned judgments of the Single Judge.

ISSUES:

Whether the appellate court should grant ad-interim ex-parte stay of the impugned judgment of conviction and order on sentence under Section 430 read with Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023.Whether the appellant's conviction under Sections 120B, 420, and 471 of the IPC, relating to conspiracy and cheating in coal block allocation, is prima facie sustainable.Whether the appellant faces "irreversible consequences" due to disqualification under Section 196(3)(d) of the Companies Act, 2013, consequent to the conviction and sentence exceeding six months.Whether the power under Section 389(1) of the CrPC extends to suspension of conviction and its consequences, including statutory disqualification under the Companies Act.Whether the public interest and wider social impact of coal block allocation cases justify refusal of stay of conviction.Whether the appellant's role and knowledge regarding forged documents and misrepresentations before the Screening Committee have been sufficiently proved.Whether the appellant's ongoing prosecution in other coal block cases affects the consideration of the present application.

RULINGS / HOLDINGS:

The application seeking ad-interim ex-parte stay of the impugned judgment of conviction is dismissed, but the sentence is suspended, and the appellant is granted bail subject to conditions.The conviction is not prima facie unsustainable as the appellant was found to have misrepresented himself as Director/Authorized Signatory of the company, had knowledge of forged documents, and was involved in conspiracy to cheat the Screening Committee.The appellant faces "irreversible consequences" due to disqualification under Section 196(3)(d) of the Companies Act, 2013, as the conviction and sentence exceed six months, mandating disqualification irrespective of the nature of the offence.The power under Section 389(1) CrPC includes suspension of conviction and its consequences, including statutory disqualification, but such power must be exercised sparingly and after weighing pros and cons.Coal block allocation cases constitute a distinct category involving large-scale corruption and massive public interest impact, justifying differential treatment and refusal to stay conviction in such matters.The prosecution evidence, including letters signed by the appellant and testimony of witnesses, supports the conclusion that the appellant had deep knowledge of company affairs and misrepresented his position before the Screening Committee.The appellant's ongoing prosecution in other coal block cases as a key personnel of a listed company is a relevant factor militating against grant of stay of conviction.

RATIONALE:

The Court applied the legal framework under Section 389(1) of the CrPC, which empowers the appellate court to suspend execution of sentence or conviction pending appeal for reasons to be recorded in writing, considering "irreversible consequences" and injustice if conviction is allowed to operate.The Court relied on precedents including Afjal Ansari v. State of Uttar Pradesh, Rama Narang v. Ramesh Narang, and Girish Kumar Suneja v. CBI, which emphasize exceptional circumstances for stay of conviction, the mandatory nature of disqualification under Companies Act provisions, and the unique public interest in coal block allocation cases.The Court distinguished the present case from Afjal Ansari by noting the wider social impact, ongoing prosecution, and the nature of offences involving large-scale corruption in coal block allocation, which require strict adherence to statutory disqualifications and public interest considerations.The Court noted the legislative evolution from Companies Act, 1956 to 2013, where disqualification for Managing Director or Manager is mandatory upon conviction and sentence exceeding six months, regardless of moral turpitude, reflecting stricter corporate governance standards.The Court observed that suspension of conviction must be granted only after considering the "pros and cons" and may include conditions to protect shareholders' interests, but the appellant failed to demonstrate exceptional circumstances warranting stay of conviction.The Court emphasized that the appellant's concealment of ongoing prosecution in related coal block cases and the serious nature of the offences weigh against grant of relief.The Court granted suspension of sentence and bail considering appellant's age, family circumstances, compliance during trial, and to prevent irreparable injury pending appeal, but declined to stay the conviction itself.

ISSUES:

Whether Circular No. 13/2019 dated 29.10.2019 extended the due date for filing financial statements (e-forms AOC-4, AOC-4 (CFS), AOC-4 XBRL) without levy of additional fees up to 30.11.2019.Whether additional fees for delayed filing of financial statements should be levied from the original due date (30 days from AGM) or from the extended due date provided by the Circular.Whether the Circular can override or amend the statutory time limits prescribed under Section 137(1) and Section 403 of the Companies Act, 2013.The scope and applicability of Section 403 and its proviso regarding payment of additional fees for delayed filing under Sections 92 and 137 of the Companies Act, 2013.Whether the appellants are entitled to refund of excess additional fees charged for the period between the original due date and the extended due date granted by the Circular.

RULINGS / HOLDINGS:

The Circular No. 13/2019 dated 29.10.2019 did extend the due date for filing specified financial statements up to 30.11.2019 without levy of additional fees, thereby conferring an entitlement to companies to file within this extended period free of additional fee.Additional fees for delayed filing are leviable only from 01.12.2019 onwards and not from the original due date of 29.10.2019, as per the extension granted by the Circular.The Circular does not amend the statutory provisions but operates under the proviso to sub-section (1) of Section 403 of the Companies Act, which expressly permits submission beyond the prescribed period on payment of additional fees, thereby allowing extension of time.The proviso to Section 403(1) is an exception to the strict timelines and empowers the authority to extend the filing period subject to payment of additional fees, which the Circular exercises.The appellants are entitled to refund of the excess additional fees charged for the period between 29.10.2019 and 30.11.2019, as no additional fee was payable for that period under the Circular's extension.

RATIONALE:

The Court applied the provisions of Section 137(1) of the Companies Act, 2013, which mandates filing of financial statements within 30 days of the AGM, and Section 403(1) which prescribes fees for filing within prescribed time.The proviso to Section 403(1) was critically analyzed, which allows filing beyond the prescribed period on payment of additional fees, thus providing statutory authority for extension of filing deadlines.The Circular No. 13/2019 was interpreted as an exercise of power under the proviso to Section 403(1), granting a specific extension of time without additional fees up to 30.11.2019 for the relevant financial year filings.The learned Single Judge's interpretation that no administrative Circular can amend statutory provisions was rejected, as the Circular operates within the statutory framework and proviso exceptions.The Court emphasized that the extension period granted by the Circular must be recognized for waiver of additional fees, and additional fees are only payable for delays beyond the extended date.No dissent or doctrinal shift was indicated; the decision clarifies the interplay between statutory provisions and administrative Circulars regarding filing timelines and fees.

ISSUES:

Whether the interim injunction order dated 22.01.2024 permitting sale of company land/property above circle rate and through banking channels should be modified in light of allegations of undervaluation and cash transactions.Whether the plaintiffs' alleged negotiation for sale involving substantial unaccounted cash violates the terms of the interim injunction order.Whether the defendants are entitled to a status quo order restraining the plaintiffs from dealing with the company's assets during pendency of the suit.Admissibility and evidentiary value of electronic recordings and transcripts relied upon to establish violation of court orders.Whether the authority of the company's employee negotiating sales without explicit board authorization affects the validity of alleged transactions.Appropriateness of appointing a Local Commissioner/Observer to ascertain market value of properties and monitor compliance with court orders.Effect of prior final orders on shareholding and management rights on modification of interim injunction.

RULINGS / HOLDINGS:

The Court held that the allegations of undervaluation and cash transactions raise a prima facie apprehension that the interim order dated 22.01.2024 may be violated, warranting modification of the order to better protect the rights of the parties.The Court found that the recordings and transcripts, without deciding on their full evidentiary value, disclose a probable situation prejudicial to defendants, as they indicate possible receipt of unaccounted cash despite sale purportedly at circle rate.The Court declined to grant complete status quo restraining plaintiffs from dealing with company assets, noting that the plaintiffs' rights as de facto directors and shareholders were previously crystallized by final orders, and no subsequent change justified such relief.The Court observed that the plaintiffs' employee negotiating sales without explicit authority does not preclude the company from being bound if he represented himself as agent, but also noted that authority to execute sale deeds rests with directors.The Court recognized its power under Order IX Rule 26 CPC to appoint a Local Commissioner/Observer to ascertain market value and oversee sale transactions, even without parties' consent.The Court modified clause (ii) of para 1 of the interim order dated 22.01.2024 to require sales at prevailing market value (not merely circle rate), receipt of entire consideration through banking channels, and appointment of a Local Commissioner-cum-Observer to determine market value and monitor sales.The Court reaffirmed that prior final orders establishing plaintiffs' control over the company and its assets remain binding, applying principles of res judicata to reject re-agitation of shareholding disputes in this context.

RATIONALE:

The Court applied the principles governing interlocutory injunctions under Order XXXIX CPC, emphasizing the equitable nature of such relief to preserve the status quo and balance the inconvenience to parties pending final adjudication.The Court relied on precedent establishing the triple test for interim injunctions: prima facie case, balance of convenience, and irreparable injury, as upheld in prior Division Bench orders and Supreme Court decisions.The Court noted that circle rates are a statutory benchmark for minimum stamp duty but do not reflect actual market value, which may be significantly higher; thus, limiting sales to circle rate does not adequately protect parties' interests.The Court referenced prior orders and appeals, including a Division Bench order dated 06.11.2009, which had conclusively recognized plaintiffs as de facto directors and shareholders, thereby controlling the company and its assets.The Court acknowledged the distinction between analog and electronic evidence and cited the Supreme Court's ruling in Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal & Ors. regarding admissibility of electronic evidence under Section 65B of the Indian Evidence Act, 1872.The Court recognized the defendants' apprehensions based on the recordings but refrained from deciding on authenticity or admissibility at this interlocutory stage, reserving such issues for appropriate proceedings.The Court invoked its inherent powers under Order IX Rule 26 CPC to appoint a Local Commissioner to ascertain market value and ensure compliance, noting that such appointment may be made even without parties' agreement to safeguard justice.The Court applied the doctrine of res judicata and finality of prior orders to prevent re-litigation of shareholding and management rights, emphasizing that no new circumstances justified altering the established interim rights of the parties.

ISSUES:

Whether an order allowing disclaimer application can be recalled on the ground of non-service of notice to the applicant.Whether suppression of material facts relating to a prior winding-up order and an agreement for sale affects the validity of the disclaimer order.The legal effect and enforceability of a Company Court order directing completion of sale of property in winding-up proceedings.Applicability of Section 53A of the Transfer of Property Act in the context of possession and agreement for sale in winding-up proceedings.Whether dismissal of a prior application for enforcement of the winding-up order precludes subsequent claims based on the same order.Validity of the disclaimer order under Section 333 of the Companies Act, 2013, considering the nature of the property and liabilities involved.Locus standi of a contributory to file a recall application challenging the disclaimer order.Whether there was any suppression of material facts justifying recall of the order.Whether any ground for recall or review under Order XLVII of the Code of Civil Procedure has been established.

RULINGS / HOLDINGS:

The contention of non-service was rejected as the advocate for the applicant had accepted notices and appeared in proceedings post the alleged date of shifting practice, making the ground for recall "a mere camouflage".The facts relating to the 1987 winding-up order and agreement for sale were not material to the disclaimer application and thus not suppressed in a manner justifying recall.The order dated August 14, 1987 was not a decree for specific performance but a procedural direction contingent on registration of the agreement, which never occurred; hence, it lacks enforceability as a specific performance decree.Section 53A of the Transfer of Property Act does not apply as there was no subsisting enforceable contract and possession was held under prior lessor-lessee or licensee relationships, not under the agreement for sale.The applicant's prior application for enforcement of the 1987 order was dismissed for default in 2018, invoking the principle that "what a person cannot directly do in law, cannot be done indirectly as well," barring revival of the claim via recall.The disclaimer order was valid as the property was an onerous liability to the company in liquidation, with no enforceable agreement transferring title, and thus the DA had a lawful right to release of the property.The applicant, as a contributory, lacked locus standi since all secured creditors have been paid and no further liability exists, and a contributory does not per se have rights in company assets.No suppression of material facts was established because the undisclosed facts were not relevant to the disclaimer application adjudication.No ground for recall or review under Order XLVII CPC was made out, as there was no gross error or miscarriage of justice warranting such relief.

RATIONALE:

The court applied the principles governing Company Court powers under the Companies Act, 2013, particularly Sections 273(1)(e), 180(a), and 333, emphasizing that the Company Court's jurisdiction is coextensive but not superior to that of a Civil Court in enforcing contracts and property rights.The principle of ejusdem generis limited the scope of "any other order" under Section 273(1)(e) to orders consistent with the Company Court's statutory powers.The absence of a registered agreement and failure to institute a suit for specific performance within the statutory limitation period rendered the purported agreement unenforceable, negating any effect under Section 53A of the Transfer of Property Act.The court relied on procedural rules under the Code of Civil Procedure, including Order IX Rule 9 on dismissal for default and Order XLVII on review, to reject attempts to indirectly revive dismissed claims.Service of notice on a recognized agent (advocate) was held to be legally effective under Order III Rule 3(1) CPC, negating claims of non-service based on shifting of the advocate's practice location.The court distinguished between interlocutory/chamber orders and final decrees, noting that the 1987 order was passed in chambers and did not conclusively adjudicate title or specific performance rights.The court noted that contributories, defined under Section 2(26) of the Companies Act, do not have inherent rights to company assets absent outstanding liabilities, affecting locus standi in such matters.No dissent or doctrinal shift was indicated; the judgment adhered to established statutory interpretation and procedural principles.

ISSUES:

Whether the requirement of providing Unique Document Identification Number (UDIN) by full-time Chartered Accountants for documents relating to audit reports and financial statements is manifestly implicit in the tender conditions.Whether the disqualification of a bidder's tender on the ground of non-furnishing of UDIN, when such requirement is not expressly mentioned in the tender notice, is arbitrary, illegal, or violative of constitutional provisions including Articles 14, 19, 21, and 300A of the Constitution of India.Whether tender conditions must explicitly state all mandatory requirements or whether certain statutory or regulatory mandates can be considered implicitly incorporated.The extent of judicial interference permissible in government contracts and tender processes, particularly regarding technical bid evaluation.

RULINGS / HOLDINGS:

The Court held that the requirement of mentioning UDIN in audited financial statements and certificates issued by Chartered Accountants is "manifestly implicit in the Tender Conditions" and "indispensable," notwithstanding the absence of an express clause in the tender document.The rejection of the petitioner's bid on the ground of non-furnishing of UDIN was neither "discriminatory nor illegal or arbitrary" as UDIN generation is mandated by the Institute of Chartered Accountants of India (ICAI) and supported by statutory guidelines and notifications.The Court emphasized that tender conditions need not expressly mention requirements that are mandated by statutory or regulatory authorities, and such mandates are deemed incorporated by necessary implication.Judicial interference in government contracts is limited; the Court recognized the necessity for "reasonable amount of flexibility and 'play in the joints'" in commercial contracts and tender evaluations, and found no grounds for interference in the present case.

RATIONALE:

The Court applied the legal framework established by the Institute of Chartered Accountants of India (ICAI) through its statutory authority under the Chartered Accountants Act, 1949, which mandates generation of UDIN for all certificates, audit reports, and financial statements signed by full-time practicing Chartered Accountants since 2019.The Court relied on the ICAI's Notification dated 02.08.2019 and the detailed briefing on the UDIN system, which aims to "curb malpractices" such as false certification and forgery, and to provide a "universal verification mechanism" enhancing authenticity and trust in financial documents.Precedent decisions from Division Benches of the High Courts of Uttarakhand and Allahabad were followed, which upheld the implicit incorporation of UDIN requirements in tender conditions and justified rejection of bids lacking UDIN-compliant documents.The Court noted that the tender conditions required submission of audited financial statements certified by Chartered Accountants, and since UDIN is mandatory for such certificates under the ICAI regime, the requirement is "manifestly implicit" and need not be expressly stated.The Court rejected the petitioner's argument that absence of explicit mention of UDIN in the tender document rendered the disqualification arbitrary, emphasizing that statutory mandates applicable to tender submissions are binding on bidders.There was no dissent or doctrinal shift; the judgment aligns with established principles limiting judicial interference in government procurement and respecting regulatory frameworks governing professional certifications.

ISSUES:

Whether a consent judgment passed by the Court can be subject to review.Whether grounds raised in a review petition that merely rehash original contentions justify review under the applicable legal standards.The applicability of a Supreme Court decision regarding statutory force and binding nature of instructions/directions issued under Section 9 of the Insolvency and Bankruptcy Code and related RBI provisions to ongoing proceedings before the NCLT.Whether the petitioner's undertaking to withdraw parallel and related proceedings affects the Court's directions in the context of review.

RULINGS / HOLDINGS:

The Court held that "no error apparent on the face of record of the impugned order justifying a review" was found, emphasizing that the review petition was a "mere rehash of the grounds in the original Writ Petition."The Court ruled that a judgment "passed by consent of the parties" is not maintainable for review, and accordingly dismissed the review petition.The Court acknowledged the Supreme Court's ruling that instructions/directions issued by the Central Government under Section 9 of the Insolvency and Bankruptcy Code and by the RBI under Sections 21 and 35A have "statutory force and binding" effect, but noted that the parties consented to the procedure for the NCLT to consider those directions in the pending Company Petition, rather than reopening the consent judgment by review.The Court accepted the petitioner's undertaking to withdraw all related proceedings except specified suits and appeals, making the consent order binding and effective.

RATIONALE:

The Court applied the principles governing review petitions, which require the presence of an "error apparent on the face of record" or other exceptional grounds, and rejected review where the petition merely repeats earlier arguments.The judgment under review was a consent order, which the Court treated as binding and not subject to review, consistent with established legal doctrine that consent judgments are final and conclusive unless vitiated by fraud or mistake.The Court relied on the Supreme Court's authoritative interpretation of the statutory force of Government and RBI instructions under the Insolvency and Bankruptcy Code, but confined its application to the procedural context before the NCLT as agreed by parties.The Court imposed conditions including maintaining status quo and timely adjudication by the NCLT, reflecting a procedural framework to balance the interests of the parties without disturbing the consent judgment.

ISSUES:

• Whether the issuance of show cause notices alleging violations of the Companies Act, 2013 against a corporate debtor sold as a going concern during liquidation is maintainable.
• Whether the "clean slate" principle under Regulation 32A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 and Section 32 of the Insolvency and Bankruptcy Code, 2016 applies to shield the new management from prosecution for alleged pre-liquidation offences.
• Whether the petitioner company is liable for prosecution for alleged violations of Sections 128, 129, 139, 147, and 166 of the Companies Act, 2013 relating to maintenance and presentation of books of accounts, financial statements, auditor appointment, and loans after takeover as a going concern.
• Whether the continuation of statutory auditors appointed prior to the takeover violates the mandatory appointment period under the Companies Act, 2013.
• Whether the petitioner company is required to respond to the impugned show cause notices at the preliminary stage when the authority appears to have already concluded the violations and intends to proceed with prosecution.
• Whether the principle of "civil death" of the company on liquidation and subsequent resurrection of corporate identity as a going concern purchaser protects the new management from liabilities and prosecutions relating to antecedent acts.

RULINGS / HOLDINGS:

• The show cause notices issued against the petitioner company, which was sold as a going concern during liquidation, are liable to be interfered with and ultimately quashed, as the liquidation process operates as a "civil death" of the company and the new management takes over on a "clean slate."
• The "clean slate" principle under Regulation 32A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 and Section 32 of the Insolvency and Bankruptcy Code, 2016 wipes off criminal liability of the corporate debtor upon sale as a going concern, except for persons involved in day-to-day affairs prior to CIRP commencement.
• Alleged violations pertaining to events before the takeover date (February 2021) fall within the scope of the "clean slate" and cannot be imputed to the new management or the resurrected corporate debtor.
• Alleged violations after the takeover, including classification of assets and loans, are covered by the NCLT approval order and sale deed terms, which relieve the new management from liabilities arising prior to the deed of sale.
• The continuation of the statutory auditor appointed before the takeover as a stop-gap measure does not constitute a violation of the mandatory five-year appointment under Section 139 of the Companies Act, 2013, particularly during transition.
• The petitioner company is not required to undergo the procedural rigmarole of responding to the impugned show cause notices at this stage, as the authority has effectively concluded the violations and intends to proceed with prosecution, rendering further replies futile.
• The possibility of compounding offences under Section 441 of the Companies Act, 2013 does not compel the petitioner company to do so when it denies commission of any offence.

RATIONALE:

• The Court applied the legal framework under the Insolvency and Bankruptcy Code, 2016, specifically Section 32 and Regulation 32A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, which provide that sale of a corporate debtor as a going concern results in "civil death" of the original company and resurrection only of its corporate identity, thereby wiping out antecedent liabilities and criminal liabilities of the corporate debtor.
• The Court relied on the approval order of the National Company Law Tribunal (NCLT), which expressly relieved the corporate debtor from all liabilities arising prior to the deed of sale, and the terms of the sale deed, which transferred the company devoid of liabilities to the new management.
• The Court referred to precedent decisions, including a prior judgment of the same High Court and judgments of the Calcutta High Court, which affirm that the "clean slate" principle protects the new management from antecedent liabilities and prosecutions, and that the Regulations cannot override the provisions of the IBC.
• The Court recognized that criminal liability persists only for persons involved in the corporate debtor's management prior to CIRP commencement, not for the company or new management post-sale.
• The Court noted the procedural safeguards under the Companies Act, 2013, including the authority's ability to file a private complaint and the judicial magistrate's discretion to take cognizance, but held that forcing the petitioner to respond to show cause notices at a stage where the authority has effectively decided to prosecute serves no useful purpose.
• No doctrinal shift was indicated; the Court adhered to established principles of insolvency law and corporate prosecution, emphasizing the protective effect of the "clean slate" doctrine for purchasers of companies as going concerns during liquidation.

ISSUES:

• Whether the appointment of special/additional staff by the Official Liquidator under Rules 308 and 309 of the Companies (Court) Rules, 1959, complies with the requirement of necessity in liquidation proceedings.
• Whether employees appointed under Rule 308 can claim rights to regularization, absorption, or benefits equivalent to permanent government employees.
• Whether the creation and use of a 'common pool fund' for payment of salaries and expenses of company paid staff is permissible under Section 555 of the Companies Act, 1956.
• Whether the continuation of company paid staff for prolonged periods without liquidation completion is justified under the statutory and regulatory framework.
• The scope and limitations on the Official Liquidator's discretion in appointing and continuing special/additional staff in liquidation proceedings.
• The legal consequences of non-compliance with statutory provisions regarding disposal of unpaid monies and management of liquidation proceedings.

RULINGS / HOLDINGS:

• The appointment of special/additional staff must be based on the Official Liquidator's opinion of necessity in a particular liquidation, and such appointments are "on a purely temporary basis" with no entitlement to regularization or permanent benefits, as per the Supreme Court's ruling in Official Liquidator Vs. Dayanand.
• Employees engaged under Rule 308 constitute a separate class paid from funds created for disposal of assets of companies in liquidation and cannot claim rights equivalent to permanent government employees.
• The creation and use of a 'common pool fund' for payment of company paid staff and other expenses is "not permissible" under Section 555 of the Companies Act, 1956, which mandates deposit of unpaid monies into the Companies Liquidation Account.
• The continuation of company paid staff for years, without completion of liquidation or proper justification of necessity, violates the spirit and letter of Rules 308 and 309, and the appointments are effectively for administrative augmentation rather than liquidation needs.
• The Official Liquidator failed to justify the necessity of continuation of company paid staff in specific liquidations, and their services are primarily utilized for the Official Liquidator's Office rather than liquidation proceedings.
• The Official Liquidator is statutorily required to deposit unpaid monies in the Companies Liquidation Account and not in a common pool fund, and failure to do so constitutes illegality.

RATIONALE:

• The Court applied Rules 308 and 309 of the Companies (Court) Rules, 1959, which require the Official Liquidator to form an opinion of necessity before applying for court sanction to appoint special/additional staff, and provide for apportionment of expenses where staff serve multiple liquidations.
• The Supreme Court precedent (Official Liquidator Vs. Dayanand) was relied upon to clarify that company paid staff have no claim to permanent employment benefits and their engagement is temporary and liquidation-specific.
• Section 555 of the Companies Act, 1956, was interpreted strictly to require deposit of unpaid monies into a statutory Companies Liquidation Account, precluding the creation of a 'common pool fund' for staff salaries or miscellaneous expenses.
• The Court identified a doctrinal shift emphasizing strict compliance with statutory provisions and judicial scrutiny over administrative practices that circumvent liquidation timelines and statutory mandates.
• The judgment highlighted systemic lapses including strategic but unjustified appointments, lack of transparency in necessity justification, prolonged pendency of liquidations, and misuse of funds, calling for corrective action by the Ministry of Corporate Affairs.
• The dissent or differing opinion was not recorded; however, the judgment underscored the need for the Ministry to take corrective steps, including possible absorption/regularization of staff considering length of service, but within the statutory framework.

The core legal questions considered by the Court were:

• Whether the appellant company was unable to pay its debts within the meaning of Section 433(e) of the Companies Act, 1956, thereby justifying a winding-up order.
• Whether the existence of a bona fide dispute regarding the debt, especially in light of acquittals in criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881, precluded the winding-up petition.
• Whether the appellant's delay and conduct in disputing the debt only after the initiation of winding-up proceedings undermined the bona fides of its defense.
• The relevance and weight to be accorded to criminal acquittals under the NI Act vis-`a-vis civil liability and winding-up proceedings.
• The applicability of precedents concerning the threshold for winding-up where debt is disputed or admitted but unpaid.
• Whether the appellant's failure to pay an undisputed decree debt and absence of assets or business activity justified the winding-up order.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the appellant was unable to pay its debts under Section 433(e) of the Companies Act, 1956

The legal framework under Section 433(e) permits winding up where a company is unable to pay its debts. The Court examined whether the appellant was indebted and unable to discharge its liabilities.

The appellant had entered into a finance agreement under the "raw material assistance scheme" with the respondent, a Government of India undertaking, and had executed a demand promissory note in January 1999 admitting a debt of Rs. 2,83,70,700/- plus interest at 10% per annum. The respondent had furnished statements of accounts and repeatedly requested payment, with no substantive denial or dispute from the appellant until the winding-up notice in July 2001.

The appellant's own counsel admitted that the company had ceased all activities and had no assets. The appellant had not paid any amount against the admitted debt or the decree passed in Summary Suit No. 4441 of 2001, which confirmed liability on the same transaction.

The Court applied the law to facts and found that the appellant was clearly unable to pay its debts, satisfying the statutory criteria under Section 433(e). The absence of assets and business activity reinforced this conclusion.

Issue 2: Whether a bona fide dispute exists to preclude winding up, especially in light of acquittals under Section 138 NI Act

The appellant relied on acquittals in criminal proceedings under Section 138 of the NI Act relating to dishonoured cheques issued in favour of the respondent, arguing that these acquittals established a bona fide dispute regarding liability.

The Court distinguished the standards of proof in criminal and civil proceedings, noting that criminal acquittals require proof beyond reasonable doubt, whereas civil liability is determined on the preponderance of probabilities. Therefore, findings in criminal cases cannot be treated as conclusive in civil or company law proceedings.

Further, the appellant had not placed these acquittal orders before the Company Court at the time of the winding-up petition, despite the winding-up order being passed in 2007 and the first acquittal order dated 2004. The Court viewed this omission skeptically.

Moreover, the appellant had not challenged or satisfied the decree in Summary Suit No. 4441 of 2001, which confirmed liability on the same facts. The Court held that the existence of an unchallenged decree and non-payment negated the appellant's claim of a bona fide dispute.

The Court also observed that the appellant raised various defenses disputing the debt only after the winding-up petition was filed, which suggested an afterthought rather than genuine dispute.

Issue 3: The appellant's conduct and timing in disputing the debt

The appellant's conduct was scrutinized. The Court noted that the appellant had admitted liability via the demand promissory note and had not disputed the debt or requested documents for several years until the winding-up notice was served. The appellant's reply to the winding-up notice was vague and did not seriously contest the debt.

The Court held that raising defenses only in the reply to the winding-up petition, after a long delay and after the respondent had repeatedly sought payment, was indicative of mala fide intent to avoid payment and frustrate the winding-up process.

Issue 4: Applicability of precedents relied upon by the appellant

The appellant relied on two Supreme Court decisions: Madhusudan Gordhandas & Co. and Satish Chander Ahuja, arguing that these cases supported dismissal of winding-up petitions where bona fide disputes exist.

The Court distinguished the facts, noting that in the present case, the appellant had admitted liability, failed to pay the debt, and had an unchallenged decree against it. Unlike those cases, the appellant here had not raised any dispute in good faith or in a timely manner.

The Court quoted from Madhusudan Gordhandas & Co.:

"Where the debt is undisputed the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt... Where however there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed the court will make a winding up order without requiring the creditor to quantify the debt precisely... The principles which the court acts are first that the defence of the company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law and thirdly the company adduces prima facie proof of the facts on which the defence depends."

The Court found that none of these principles were satisfied by the appellant.

Issue 5: The purpose and policy underlying winding-up under Section 433(e)

The Court emphasized the policy rationale that winding up under Section 433(e) serves to prevent companies unable to pay their debts from continuing operations and defrauding creditors, including future creditors.

The Court held that allowing the appellant to continue despite admitted liabilities and no assets would be contrary to this objective.

3. SIGNIFICANT HOLDINGS

The Court held:

"The reason for enacting Section 433(e) of the Act for winding up of companies which are unable to pay its debts is to ensure that such companies do not carry out their activities in future with other creditors and dupe new creditors."

"It is only in the reply to the winding up petition that the appellant has raised various grounds disputing the discrepancies in the figure... We fail to understand why these grounds were raised after filing the petition, rather than while the respondents were pursuing the appellant for recovery of the dues."

"Findings in criminal proceedings cannot be relied upon while adjudicating civil proceedings."

"The decree passed in Summary Suit itself goes on to show that the appellant is liable to pay the debts based on demand promissory note and cheques and is unable to pay the same till today."

"The grounds raised for opposing the winding up are not bona fide but an afterthought and only to subvert winding up proceedings."

The core principles established include:

• Winding up under Section 433(e) is justified where a company is unable to pay admitted debts, especially when there is an unchallenged decree against it and no assets or business activity.
• Criminal acquittals under Section 138 NI Act do not negate civil liability or the ability to wind up a company.
• Defenses to debt must be raised in good faith and timely; raising disputes only after initiation of winding-up proceedings is suspect.
• The Court will not allow companies to prolong default and frustrate creditors through belated and baseless disputes.

Final determination:

The appeal against the winding-up order dated 11 October 2007 was dismissed. The interim stay granted earlier was vacated. The appellant company was ordered to be wound up under Section 433(e) of the Companies Act, 1956.

Regarding the petitioner's liability for arrear taxes prior to purchase, the Court examined the relevant legal framework including the Companies (Court) Rules, 1959, and the Kolkata Municipal Corporation Act, 1980. The petitioner acquired the property through Court auction after the company was wound up and the Official Liquidator had taken possession and control. The Official Liquidator had invited claims for outstanding dues, including municipal taxes, and after adjudication, paid Rs. 19,13,000/- to the municipal corporation, which was accepted without objection or appeal. The Court held that this payment constituted full and final settlement of the company's dues prior to the winding up date, extinguishing any further claim for arrear taxes from the company's estate.

The Court applied the principle that a purchaser at auction takes the property subject to known encumbrances but is not liable for charges of which he has no actual or constructive notice. The Court found that the municipal corporation had not published or maintained any public record or disclosure of outstanding tax dues at the time of auction, and thus the petitioner had no constructive notice of any arrear municipal taxes. The Court relied on authoritative precedents establishing that constructive notice arises only where a reasonably prudent purchaser would have been impelled to inquire and discover the charge, such as through registered documents or public records. Since no such notice was available, the petitioner could not be held liable for arrears predating his ownership.

The Court further analyzed the terms of the sale notice and the deed of conveyance executed by the Official Liquidator. The sale was conducted on an "as is where is" basis with no warranty as to encumbrances. The deed explicitly provided that the Official Liquidator, as vendor, was responsible for payment of outstanding municipal taxes due and payable up to the date of sale. This contractual provision reinforced the legal position that the petitioner's liability for municipal taxes commenced only from the date of purchase. The Court distinguished this case from precedents cited by the respondents, noting that those cases involved different statutory schemes or factual matrices where the purchaser had constructive notice or where the municipal dues created a charge on the property.

The respondents' argument that the petitioner should be liable for municipal tax arrears for the period between the company's winding up and the date of sale was rejected. The Court observed that the Official Liquidator had not been challenged in respect of the payment made and that the municipal corporation had accepted the payment as full settlement for the pre-winding up period. The Court noted that the municipal corporation's attempt to raise fresh demands against the petitioner for pre-purchase periods was contrary to settled law and the statutory adjudication process under the Companies (Court) Rules. The Court emphasized that the petitioner's liability was limited to property tax accrued from the date of his purchase and occupation.

On the issue of mutation, the Court found that the municipal corporation's refusal to mutate the property in the petitioner's name on grounds of non-payment of alleged arrear taxes was unsustainable. The Court held that mutation could not be withheld based on demands for pre-purchase arrears that were not legally payable by the petitioner. The Court directed the municipal corporation to immediately effect mutation upon the petitioner's payment of property tax due from the date of purchase. The Court also underscored the petitioner's obligation to cooperate with the municipal authorities in completing mutation formalities.

The Court addressed competing arguments regarding the nature of municipal tax liability. The respondents relied on Section 183(5) of the Kolkata Municipal Corporation Act, 1980, which requires arrear dues to be paid before mutation and recognizes the municipal corporation's right to refuse mutation without payment of dues. However, the Court clarified that this provision does not extend to arrears predating ownership by a purchaser who had no notice of such dues and where the company's dues had been settled by the Official Liquidator. The Court also distinguished the respondents' reliance on various judgments, including those concerning the liability of transferees for municipal taxes, by highlighting the factual distinctions and statutory context unique to company liquidation and auction sales.

The Court's findings on the Official Liquidator's role were informed by the Companies (Court) Rules, 1959, which provide a statutory mechanism for creditors to submit claims and for the Official Liquidator to adjudicate and pay admitted claims. The Court held that the municipal corporation's acceptance of payment from the Official Liquidator without objection or appeal conclusively settled the arrear tax liability of the company up to the winding up date. Consequently, the petitioner could not be burdened with those arrears, which were personal liabilities of the company in liquidation, not encumbrances running with the property.

In conclusion, the Court set aside the impugned letters dated April 8 and April 21, 2021 demanding arrear property tax for the period from 2003 to 2011 against the petitioner. It directed the municipal corporation to effect mutation of the property in the petitioner's name within four weeks, subject to payment of property tax from the date of purchase. The Court emphasized that the petitioner's liability for property tax and related charges is strictly prospective from the date of acquisition and occupation, and that the municipal corporation's attempt to recover pre-purchase arrears from the petitioner was legally untenable.

Significant holdings include the following:

"A bona fide purchaser takes property he buys free of all charges of which he has no notice actual or constructive."

"The Official Liquidator's payment of municipal dues as adjudicated and accepted by the municipal corporation extinguishes the liability of the company in liquidation for arrear taxes up to the date of winding up."

"The purchaser's liability for municipal taxes commences only from the date of purchase and occupation of the property, and mutation cannot be withheld on account of arrear taxes predating ownership for which the purchaser had no notice."

"Section 183(5) of the Kolkata Municipal Corporation Act does not authorize refusal of mutation based on arrears not legally payable by the applicant."

"The terms and conditions of auction sale must be read as a whole and given purposive meaning; 'encumbrance' in relation to municipal taxes does not create a charge running with the property under the Companies Act."

"Constructive notice arises only when ordinary prudence would have impelled the purchaser to inquire and discover the charge; absence of public disclosure negates constructive notice."

The Court's final determinations were that the impugned tax demand letters were invalid and quashed; the petitioner was not liable for arrear taxes prior to purchase; mutation must be granted upon payment of taxes due from the date of purchase; and the Official Liquidator's payment of municipal dues conclusively settled the company's liability for pre-winding up periods.

The core legal questions considered in the judgment include:

(a) Whether the cost imposed on the Petitioners for non-appearance before the Court was justified and if such cost could be waived.

(b) Whether the Petitioners, having allegedly resigned as Directors of the Company prior to the period of default, could be held liable as 'Officers in default' under the Companies Act, 1956 for non-filing of statutory documents.

(c) Whether the imposition of the compounding fine on the Petitioners was appropriate, particularly in light of their claim that they had ceased to be Directors before the period of default and that the default was attributable to the new management.

(d) The extent and exercise of the Court's discretion in modifying or reducing the compounding fine imposed under the Companies Act, considering principles of proportionality and the factual matrix.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Waiver of Cost Imposed for Non-Appearance

Relevant legal framework and precedents: Section 528 of the Bhartiya Nagrik Suraksha Sanhita, 2023, read with Section 482 Cr.P.C., empowers the Court to impose or waive costs for procedural defaults.

Court's interpretation and reasoning: The Court noted that the Petitioners' counsel was unable to appear due to being engaged before another Bench on a Company matter. The non-appearance was neither intentional nor mala fide.

Key evidence and findings: The Petitioners' counsel's explanation was accepted as genuine and not willful neglect.

Application of law to facts: Given the bona fide reason for non-appearance, the Court exercised its discretion to waive the cost of Rs. 25,000/- per person imposed earlier.

Treatment of competing arguments: No contrary submissions warranted maintaining the cost.

Conclusion: The cost imposed was set aside, and the application disposed of accordingly.

(b) Liability of Petitioners as Directors for Non-Filing of Statutory Documents

Relevant legal framework and precedents: Sections 159, 156, 210(3), 220(1), and 220(3) of the Companies Act, 1956, define the duties of Directors and penalties for non-compliance. The term 'Officer in default' includes Directors responsible for compliance. The judgment referenced Hindustan Steel Ltd. vs. State of Orissa (1969) 2 SCC 627, which held that penalty imposition must consider bona fide belief and technical breaches.

Court's interpretation and reasoning: The Court examined the Petitioners' claim of resignation in June 2011 and the assertion that the new management was responsible for defaults in 2012-13. However, the official records (Form DIR-12) showed resignation only filed with ROC in June 2015, contradicting the Petitioners' claim.

Key evidence and findings: The absence of Board acceptance or minutes regarding resignation in 2011, and the delayed filing with ROC, meant the Petitioners remained Directors during the default period. The Court held that the Petitioners were liable as Officers in default for the defaults committed during their tenure.

Application of law to facts: The statutory framework imposes liability on Directors until resignation is officially recorded. The Petitioners' failure to ensure formal acceptance and filing meant they remained liable.

Treatment of competing arguments: The Petitioners' argument that the defaults were committed by new management was rejected due to lack of formal resignation and continued statutory responsibility.

Conclusion: The Petitioners were rightly held liable as Officers in default for the defaults in filing statutory documents.

(c) Appropriateness of Compounding Fine Imposed on Petitioners

Relevant legal framework and precedents: Section 621A(6) of the Companies Act allows compounding of offences with payment of a fine, subject to Court's discretion. The Court referred to Viavi Solutions Pvt. Ltd. vs. ROC (2017) for factors to consider while imposing compounding fines, including gravity of offence, intent, financial condition, and public interest. The Court also cited M/s Instrumentation Laboratory India Pvt. Ltd. vs. Union of India & Anr. (2017) emphasizing proportionality and reasonableness in exercising discretion.

Court's interpretation and reasoning: The Court acknowledged that the Petitioners filed the compounding application with bona fide intent to resolve the matter. The initial fine imposed by the ACMM was Rs. 2 lacs each, reduced to Rs. 1.5 lacs by the Sessions Judge. The Petitioners sought waiver or further reduction, citing financial hardship and lack of direct responsibility.

Key evidence and findings: The Court noted the total statutory fine calculated by ROC was Rs. 59,51,500/-, while the compounding fine was Rs. 1,50,000/- each, which was proportionate and significantly less than statutory penalties. The Petitioners' financial difficulties and senior citizen status were considered mitigating factors.

Application of law to facts: The Court applied the balancing test and necessity test for proportionality, concluding that the imposed fine was reasonable but warranted some reduction due to prolonged litigation and Petitioners' circumstances.

Treatment of competing arguments: The Respondent argued the fine was proportionate and the Petitioners' claim of expectation of nominal fine was incorrect. The Court found the Respondent's position justified but allowed some leniency.

Conclusion: The Court reduced the compounding fine from Rs. 1,50,000/- to Rs. 1,00,000/- each, directing balance payment within 15 days, balancing fairness and proportionality.

3. SIGNIFICANT HOLDINGS

"The Petitioners had themselves filed an Application dated 14.12.2016 before the Ld. ACMM seeking compounding of the offence wherein it is specifically stated that they were the Directors of the Company. It was further stated by them that they had given their resignation on 08.06.2011 and submitted it to the Board of Directors, though it was never filed with the ROC. It is their own case that their resignation was forwarded to ROC in June, 2015 along with the Resignation Letters of the same day thereby belying the contention that they had ceased to be the Officers of the Company in 2011."

"The core question in the present Petition is whether there exist circumstances where the discretion may be exercised to further reduce the compounding fine of Rs.1.5 lacs imposed on each of the Petitioners."

"While exercising the discretion, not only it must be reasonable and fair in the given circumstances but also must satisfy the doctrine of proportionality which involves balancing test and necessity test. The balancing test permits scrutiny of excessive onerous penalties or infringement of rights or interest and manifest balance of relevant considerations. The necessity test requires infringement of human rights to the least restrictive alternative."

"The total fine amount that was imposed on the Petitioners and the Company was of Rs. 59,51,500/-, while the compounding amount imposed by the Court is Rs. 1,50,000/- which comes to Rs. 12.6 per day."

"Considering that the compounding fine which may be imposed by the Court while permitting compounding, is in sole discretion of the Court, which has already been exercised by Ld. ASJ in his Order dated 04.08.2014 by reducing the compounding fine to Rs. 1,50,000/-. However, considering the long litigation at the advance stage of the two Petitioners, the compounding fine is reduced to Rs. 1,00,000/- each."

Core principles established include:

- Directors remain liable as 'Officers in default' until resignation is formally accepted and recorded with the ROC.

- Compounding fines must be imposed proportionately, considering the nature of offence, intent, financial condition, and public interest.

- The Court's discretion in imposing or modifying compounding fines must adhere to the doctrine of proportionality, balancing competing interests and ensuring the least restrictive alternative.

- Bona fide conduct and prolonged litigation may justify reduction of compounding fines, but cannot absolve liability entirely.

Final determinations:

- The cost imposed for non-appearance was waived.

- The Petitioners were held liable as Directors during the default period due to non-filing of resignation with ROC.

- The compounding fine of Rs. 1.5 lacs each was reduced to Rs. 1 lac each considering proportionality and hardship.

- The Petitioners were directed to pay the balance fine within 15 days.

- Whether anticipatory bail should be granted to the Applicants accused under Sections 420, 468, and 471 IPC in connection with alleged fraudulent transfer of shares without consent.

- Whether the alleged transfer of 18,000 shares from the Complainant to her husband was forged or fraudulent, involving non-execution of Form No. SH-4 and violation of company law provisions.

- Whether the Applicants have cooperated with the investigation and produced requisite documents, including Form No. SH-4.

- Whether the delay of over two years in filing the FIR and the matrimonial discord between the Complainant and her husband affect the credibility of the allegations.

- Whether custodial interrogation of the Applicants is necessary for investigation, particularly for recovery of documents.

- Whether the Applicants' apprehension of arrest is justified given the nature of allegations and the ongoing investigation.

- The applicability of principles governing grant of anticipatory bail, including the nature and gravity of the offence, antecedents of the Applicants, possibility of fleeing justice, and mala fide intentions behind the FIR.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Grant of anticipatory bail in light of allegations under Sections 420, 468, and 471 IPC

Legal framework and precedents: The Court considered the settled principles governing anticipatory bail applications, including factors such as the nature and gravity of the accusation, antecedents of the accused, likelihood of fleeing justice, and mala fide intentions behind the accusation, as laid down in Gurbaksh Singh Sibbia v. State of Punjab and Siddharam Satlingappa Mhetre v. State of Maharashtra.

Court's interpretation and reasoning: The Court noted that the FIR relates to alleged forgery and cheating in the transfer of shares valued at Rs. 2.7 crores. However, the Applicants have no prior criminal record, have cooperated by joining the investigation, and have provided all documents within their possession. The Court observed the FIR was filed after a significant delay of over two years from the alleged incident and in the backdrop of ongoing matrimonial disputes, which raises questions about the timing and motive behind the FIR.

Key evidence and findings: The Status Report and investigation reveal that the share transfers occurred without execution of Form No. SH-4, which is admitted by the Applicants and not found in RoC records. The Applicants have also disclosed that the shares were transferred back to the Complainant. The investigation is documentary in nature, and no evidence suggests tampering or threat to witnesses by the Applicants.

Application of law to facts: Given the documentary nature of the case and the absence of evidence indicating misuse of interim protection by the Applicants, the Court found no necessity for custodial interrogation at this stage. The Court emphasized that the merits of the case, including whether the Form No. SH-4 is a "valuable security" under Section 30 IPC and whether cheating or forgery is established, are matters for trial.

Treatment of competing arguments: The Complainant argued the shares were part of her streedhan and were unlawfully transferred without consent, constituting forgery and cheating. The Applicants countered that the shares were held in fiduciary capacity as part of family arrangements, no Form No. SH-4 was executed, and the FIR is motivated by matrimonial discord and monetary demands. The Court acknowledged the matrimonial context and the delay in filing the FIR, which undermines the Complainant's claim of immediate injury.

Conclusion: The Court concluded that the Applicants are entitled to anticipatory bail subject to conditions ensuring cooperation and appearance before the investigating officer.

Issue 2: Non-production and alleged forgery of Form No. SH-4 and compliance with Companies Act provisions

Legal framework and precedents: Form No. SH-4 is a prescribed document under the Companies Act, 2013, required for transfer of shares. Its execution and filing with the Registrar of Companies (RoC) are essential for valid transfer. The Court also referred to relevant provisions of the Hindu Succession Act and Articles of Association of the Company, including the Right of First Refusal clause.

Court's interpretation and reasoning: The Court noted that neither the Applicants nor the RoC had the Form No. SH-4 corresponding to the alleged transfer. The Applicants admitted non-execution, and the Company's CFO confirmed the absence of the document. The Court held that the absence of Form No. SH-4 raises legal questions about the validity of the transfer, but such issues are to be determined at trial.

Key evidence and findings: The List of Share Transfer dated 06.09.2023 and Board Meeting records show that shares were transferred without the Complainant's consent. The Company's filings and replies to notices confirm the absence of Form No. SH-4. The Complainant was not informed of subsequent rectifications in shareholding.

Application of law to facts: The Court observed that the transfer without Form No. SH-4 may be irregular or invalid under company law, but these are civil or regulatory issues distinct from criminal forgery or cheating. The Court emphasized that the investigation is documentary and the Applicants' assertion that the document does not exist negates the need for custodial interrogation to recover it.

Treatment of competing arguments: The Complainant submitted that the shares were her absolute property and transferred without consent, constituting forgery. The Applicants contended the shares were held in fiduciary capacity and transferred as part of family arrangements, with rectifications made subsequently. The Court found the Applicants' explanation plausible enough to warrant trial rather than custodial interrogation.

Conclusion: The Court held that the absence of Form No. SH-4 and its implications are legal questions for trial, and custodial interrogation is not justified solely for recovery of a non-existent document.

Issue 3: Effect of matrimonial discord and delay in filing FIR on the credibility of allegations

Legal framework and precedents: The Court referred to the principle that an FIR filed with mala fide intentions or to humiliate or injure the accused may be a ground for anticipatory bail, as expounded in Gurbaksh Singh Sibbia.

Court's interpretation and reasoning: The Court noted the ongoing acrimonious matrimonial disputes, including divorce and domestic violence proceedings, between the Complainant and her husband. The FIR was filed more than two years after the alleged transfer, with no explanation for the delay. The Court found the timing of the FIR suspicious, especially given the failed mediation and alleged monetary demands.

Key evidence and findings: The matrimonial proceedings and mediation records, the timing of FIR registration post-failed mediation, and the absence of earlier complaints despite ongoing litigation since 2020.

Application of law to facts: The Court considered that the FIR may be an afterthought motivated by matrimonial discord and monetary demands, which reduces the likelihood of mala fide prosecution but does not negate the need for investigation.

Treatment of competing arguments: The Applicants argued the FIR is a tool to exert pressure for monetary gains. The Complainant denied mala fide intentions and insisted on the genuineness of the complaint. The Court found the Applicants' submissions regarding timing and context credible enough to weigh in favor of anticipatory bail.

Conclusion: The Court took the matrimonial context and delay into account as factors favoring grant of anticipatory bail.

Issue 4: Necessity and justification for custodial interrogation of Applicants

Legal framework and precedents: The Court relied on the principle that custodial interrogation is an exception and must be justified by necessity, particularly when investigation is documentary and the accused have cooperated, as held in Pradip N. Sharma v. State of Gujarat.

Court's interpretation and reasoning: The Court observed that the Applicants have joined the investigation, responded to notices, and provided all available documents. The only document sought for custodial interrogation, Form No. SH-4, is admitted not to exist. The Court found no demonstrated necessity for custodial interrogation to recover documents or evidence.

Key evidence and findings: Status Reports, replies to notices, and absence of any evidence of tampering or threat to witnesses. The Applicants' cooperation and absence of prior criminal record.

Application of law to facts: The Court held that custodial interrogation is unwarranted where the accused have cooperated, the investigation is documentary, and the document sought does not exist. The Court emphasized that anticipatory bail should not be denied merely on the ground of non-production of a non-existent document.

Treatment of competing arguments: The State and Complainant argued custodial interrogation is necessary for recovery of documents and to prevent tampering. The Applicants denied possession or knowledge of such documents and asserted cooperation. The Court sided with the Applicants on this point.

Conclusion: Custodial interrogation of the Applicants is not necessary or justified at this stage.

3. SIGNIFICANT HOLDINGS

- "When it is admitted that Form No. SH-4 was not executed, the question of forgery on the said document does not arise. Whether the Form No. SH-4 is a 'valuable security' within the meaning of Section 30 of IPC and whether there was any cheating or misappropriation of shares of the Complainant was undertaken by the Applicants will be a matter of trial and, at this stage, it will not be appropriate to comment on the merits of the investigation, which is ongoing."

- "The mere non-production of a document not in the possession/existence of the Applicants cannot be equated with their non-cooperation."

- "Custodial interrogation is requested only to ascertain the possession of Form No. SH-4. When no such document exists as admitted by the Applicants, there is no purpose of custodial interrogation of the Applicants."

- "If the proposed accusation appears to stem not from motives of furthering the ends of justice but from some ulterior motive, the object being to injure and humiliate the applicant by having him so arrested, a direction for the release of the applicant on bail in the event of his arrest would generally be made."

- The Court emphasized the importance of balancing the gravity of the offence with the Applicants' right to liberty, presumption of innocence, and the absence of evidence of tampering or flight risk.

- The Court granted anticipatory bail to the Applicants subject to conditions including cooperation with investigation, furnishing personal bonds, prohibition on leaving the country without permission, and non-interference with witnesses or evidence.

1. Whether the Appellant-Company was liable to repay the security deposit of Rs. 50 lakhs along with agreed interest to the Creditor, given the terms and conditions recorded in the minutes of meetings dated 04 January 1992 and 03 May 1992.

2. Whether the Appellant-Company had raised a bona fide dispute regarding the liability to repay the security deposit and interest, sufficient to resist the winding up petition under Section 433(e) of the Indian Companies Act, 1956.

3. Whether the defenses raised by the Appellant-Company, including claims about non-fulfillment of mutual obligations by the Creditor and alleged inaccuracies in the recorded minutes, were tenable and substantiated.

4. Whether the winding up order was justified in light of the Appellant-Company's financial condition and conduct during the proceedings.

Issue 1: Liability to repay the security deposit and interest

The relevant legal framework involved the contractual obligations arising from the agreement and subsequent minutes of meetings between the parties, which constituted written acknowledgments and undertakings to repay the security deposit with interest. The Indian Companies Act, 1956, particularly Section 433(e), empowers winding up where a company is unable to pay its debts.

The Court examined the minutes dated 04 January 1992 and 03 May 1992, which clearly acknowledged the receipt of the Rs. 50 lakhs security deposit and the Appellant-Company's liability to refund the amount with interest at 24% per annum due to delays. The Court noted that the Appellant-Company had failed to return the deposit despite these admissions and undertakings.

The Court rejected the Appellant-Company's argument that the debt was not crystallized or unconditional. It held that the writings constituted clear acknowledgment of debt and unqualified promises to pay, which were binding. The Court found no merit in the claim that the liability was contingent upon the Creditor fulfilling certain conditions, as these were not substantiated.

The Court also found that the contract had been terminated and thus the security deposit was due and payable. The Appellant-Company's failure to pay despite statutory notices served by the Creditor further evidenced the liability.

Issue 2: Bona fide dispute to resist winding up

Under the legal principles governing winding up petitions, a bona fide dispute on the existence or amount of debt can preclude winding up. The Court scrutinized the defenses raised by the Appellant-Company, including allegations that the minutes did not accurately reflect the meetings and that the Creditor failed to comply with mutual obligations.

The Court found these defenses to be vague, contradictory, and unsubstantiated. The Appellant-Company's claim of willingness to supply goods as an offset was unsupported by evidence and described as "bare words" by the learned Company Judge. The Court also noted the belated and inconsistent attempts to challenge the minutes and the production of unsigned and apparently fabricated minutes dated 16 and 17 July 1992, which further undermined the bona fides of the defense.

Consequently, the Court concluded that the dispute was not bona fide but rather an attempt to avoid payment and delay proceedings.

Issue 3: Evaluation of defenses and conduct of the Appellant-Company

The Court considered the entire record, including the Appellant-Company's financial difficulties, offers to pay which were later retracted, and the history of defaults. It noted that financial institutions had initiated recovery proceedings and a Receiver had been appointed, indicating insolvency.

The Court emphasized that the Appellant-Company's defense lacked credibility, especially given the fabrication of documents and inconsistent assertions. The Court rejected the contention that the winding up order would harm the chances of revival, observing that the company had ceased production activities for over five years and no payments were forthcoming despite offers.

Issue 4: Justification for winding up order

The Court found that the Appellant-Company was unable to pay its debts, as evidenced by admitted dues, statutory notices, and failure to make payments. The winding up order under Section 433(e) was therefore appropriate and justified.

The Court found no error in the learned Company Judge's findings or approach and declined to interfere with the winding up order.

Significant holdings and core principles established:

"There is no dispute whatsoever about the refundable security deposit of Rs.50 lakhs. At some stage, therefore, this deposit had to be returned by the Appellant- Company particularly after its manufacturing business declined and there were difficulties in making supplies."

"The minutes of the two meetings acknowledged not only the receipt of the security deposit but also the liability to pay. Initially, the security deposit was not liable to bear any interest. However, considering the delay and the accommodation offered, the Appellant-Company agreed to refund this security deposit with interest at the rate of 24% per annum."

"The entire attempt is to avoid payments by raising vague and contradictory defense which is not even prima facie made good."

"Raising false defenses by fabricating minutes, detracts from the bona fide of the defense."

"Even upon independent evaluation of the contentions raised before the Company Judge or raised in this Appeal, we are unable to accept the Appellant's version of either there being no liability to pay or that the dispute about payment was bona fide."

"The liability to pay is very clear and backed by the documentary evidence, admissions and acknowledgments."

The Court's final determinations were that the Appellant-Company was liable to repay the security deposit along with interest, that no bona fide dispute existed to resist winding up, and that the winding up order was rightly passed under Section 433(e) of the Indian Companies Act, 1956. The appeal was dismissed with no costs.

The core legal questions considered by the Court in these appeals arising under Section 10F of the Companies Act, 1956, challenging the order of the Company Law Board (CLB), include:

A. Whether the CLB erred in holding that alleged changes, deletions, and modifications in the register of share transfers did not amount to manipulation or fraud against Aasia Properties.

B. Whether the CLB was justified in concluding that Aasia Properties became a 1/3rd shareholder only on 28.01.1983 based on share certificates, ignoring alleged record manipulations.

C. Whether the CLB's finding that Aasia Properties became shareholder on 28.01.1983 without declaring the earlier register entries null and void was perverse.

D. Whether the CLB erred in applying Article 38 of the Articles of Association regarding pre-emption rights, particularly in relation to the transfer of shares by the Shah Group to the B. Raheja Group.

E. Whether the CLB was correct in holding that lack of written consent by the Raheja Group for transfers post-28.01.1983 did not invoke Article 38 in favor of Aasia Properties.

F. Whether the CLB misinterpreted Article 38 and wrongly held that setting aside transfers post-28.01.1983 would be a fruitless exercise.

G. Whether the CLB erred in holding that once oppression is established under Section 397, winding up on just and equitable grounds is automatic, requiring only an opinion that winding up would not be in the company's interest.

H. Whether the CLB correctly applied Supreme Court precedents on the jurisdiction and powers under Sections 397 and 402 of the Companies Act.

I. Whether the CLB can exercise powers beyond Sections 397 and 402 to do substantial justice even if statutory requirements are not satisfied.

J. Whether the CLB was justified in directing that Aasia Properties had the right to nominate a non-functional director on the Board despite rejecting its claim of any oral understanding for such right.

K. Whether the petition filed by Aasia Properties before the CLB was barred by limitation.

2. ISSUE-WISE DETAILED ANALYSIS

Issues A, B, and C: Alleged Manipulation of Company Records and Date of Share Acquisition

The CLB found discrepancies in the company's registers but held that these did not constitute manipulation or fraud sufficient to establish Aasia Properties' claim of acquiring 1/3rd shares on 30.08.1982. Instead, reliance was placed on share certificates dated 28.01.1983, which under Section 84 of the Companies Act are prima facie evidence of title to shares. Section 108 requires that transfers be registered only upon production of a duly stamped and executed instrument of transfer, and Section 164 makes the register of members prima facie evidence of matters therein.

Aasia Properties alleged extensive tampering with registers, overwriting, deletions, and additions to mask the true date of share acquisition. However, the CLB and this Court found that such discrepancies, while indicating poor record-keeping, did not amount to positive evidence to rebut the statutory presumption under Section 84. The share certificates stamped by the Registrar of Companies were decisive, showing the acquisition date as 28.01.1983. The Court emphasized that the burden lies on the petitioner to produce cogent proof, which Aasia Properties failed to discharge.

Further, the Court noted that Aasia Properties could not explain the discrepancy between the share certificate date and the alleged earlier acquisition date. The CLB's approach was consistent with the Supreme Court's ruling that no transfer can be registered without a proper instrument of transfer. Therefore, the CLB's findings were not perverse but legally sound.

Issues D, E, and F: Interpretation and Application of Article 38 (Right of Pre-emption)

Article 38 of the Articles of Association stipulates that shares may be transferred to a third party only with the approval of holders of not less than two-thirds of the issued share capital, and existing members have a right of pre-emption to purchase shares at face value before transfer to outsiders.

The Court held that since Aasia Properties was found to have become a shareholder only on 28.01.1983, it had no right of pre-emption in the Shah Group's transfer of shares to the B. Raheja Group on 15.01.1983. Thus, the claim that such transfer was illegal under Article 38 failed.

Regarding transfers post-28.01.1983, the Court rejected Aasia Properties' contention that the transferor's shares should be excluded from the calculation of the two-thirds approval threshold. The Court held that the plain language of Article 38 includes all shareholders, including the transferor, in the two-thirds calculation. This interpretation aligns with Supreme Court precedent emphasizing strict construction of share transfer restrictions in favor of free transferability.

The Court also agreed with the CLB that even if transfers post-28.01.1983 were invalid for lack of consent, the shares would revert to the transferors (Raheja Group), not to Aasia Properties, negating any increase in its shareholding. The Court found the reliance on a Supreme Court case concerning immovable property inapposite, as the facts and legal context differ significantly.

Therefore, the CLB's interpretation and application of Article 38 were correct, and the relief sought by Aasia Properties on this ground was rejected.

Issues G, H, and I: Jurisdiction and Powers of CLB under Sections 397 and 402

Section 397(2) requires the CLB to be satisfied of two conditions before exercising its powers: (a) that the company's affairs are conducted in a manner oppressive to members, and (b) that winding up the company would unfairly prejudice such members, but otherwise just and equitable grounds for winding up exist.

The CLB erred in holding that once oppression is established, winding up on just and equitable grounds is automatic, requiring only that the CLB form an opinion that winding up would not be in the company's interest. This misinterprets the statutory requirement that both conditions must be satisfied cumulatively.

Supreme Court precedents clarify that the CLB's jurisdiction under Sections 397 and 402 is conditional upon satisfaction of these twin requirements. The Court emphasized that the CLB cannot exercise powers beyond those conferred by statute.

Aasia Properties argued that even if statutory requirements are not met, the CLB retains broad powers to do substantial justice between parties. While the Court acknowledged that the CLB has wide powers under Section 402 to pass orders "as it thinks fit" to end oppression or mismanagement, such powers are exercisable only within the scope of Section 397's requirements.

The Court rejected Aasia Properties' reading of precedents that purportedly allow the CLB to act beyond statutory limits, holding that such interpretations take portions of judgements out of context. The power to do substantial justice is not unfettered and must be exercised within the statute's framework.

Issue J: Right to Nominate a Non-Functional Director on the Board

The CLB directed that Aasia Properties was entitled to nominate one non-functional director on the Company's Board on equitable grounds, despite rejecting its claim of any oral understanding or arrangement granting such right.

The Court found this approach erroneous. The CLB had correctly concluded that no legitimate expectation or oral agreement existed. Further, the delay by Aasia Properties in asserting any such right-being aware since at least 1989 that Ashok Hinduja was no longer a director and that share transfers had occurred-defeats any equitable claim.

The Court held that granting such a direction without basis in the Articles of Association or statutory provisions is unsustainable. The relief granted was effectively an invented form of oppression not pleaded or proven. The Court set aside the direction for nomination of a non-functional director as unsupported by law and facts.

Issue K: Limitation

Rahejas contended that the petition was barred by limitation, as the cause of action arose in the early 1980s or at least by 1989, but the petition was filed only in 2005.

The CLB found that the cause of action arose only when full records became available to Aasia Properties in 2004, revealing alleged manipulations and oppression, and that oppressive acts were continuous. The Court upheld this finding, holding that the petition was not barred by limitation.

3. SIGNIFICANT HOLDINGS

"The share certificates, that crucially bear the stamp of the ROC, show the date '28.01.1983'. This is a positive piece of evidence to ascertain the date on which Aasia Properties acquired the shares to become 1/3rd shareholder in the Company."

"The use of the word 'and' between clauses (a) and (b) of Section 397(2) of the Companies Act itself makes it abundantly clear that both the clauses must be satisfied before the CLB can invoke power under the said provision."

"The CLB is required to render findings on both the clauses by application of mind to the material in each individual case. There is no question of clause (b) being automatically satisfied upon the requirement of clause (a) being satisfied."

"The CLB... proceeded on the basis of 'equitable considerations'. This approach of the CLB is erroneous... delay itself would defeat equity."

"The relief granted by the CLB directing that Aasia Properties had the right to nominate a non-functional director on the Board of the Company is unsustainable and hence deserves to be set aside."

"The petition filed by Aasia Properties before the CLB cannot be said to be hit by limitation."

Core principles established include:

• Prima facie evidence of share ownership is established by share certificates bearing the Registrar's stamp, which cannot be displaced without cogent evidence.
• The right of pre-emption under Articles of Association is triggered only if two-thirds of shareholders do not approve a transfer; transferors are included in the two-thirds calculation.
• The CLB's jurisdiction under Section 397 requires satisfaction of both oppression and just and equitable grounds for winding up; neither condition alone suffices.
• The CLB cannot exercise powers beyond those conferred by statute, even in pursuit of substantial justice.
• Equitable reliefs cannot be granted where delay and acquiescence defeat equity.
• Claims of oral understandings for board representation must be supported by evidence and cannot be invented after long delay.
• Continuous oppression and discovery of manipulated records can extend limitation periods.

Final determinations:

• The CLB's findings that Aasia Properties became a shareholder on 28.01.1983 and that alleged record manipulations did not amount to fraud were upheld.
• The CLB's interpretation and application of Article 38 were affirmed, rejecting Aasia Properties' claims on pre-emption rights.
• The CLB's erroneous holding that winding up on just and equitable grounds is automatic upon oppression was set aside.
• The CLB's direction granting Aasia Properties the right to nominate a non-functional director was set aside as unsupported by law and facts.
• The petition was held not barred by limitation.
• Accordingly, Appeal No.6 of 2006 was allowed and Appeal No.11 of 2006 was dismissed, confirming the CLB's findings against Aasia Properties except for the relief of board nomination.

The core legal questions considered by the Court are:

• Whether the rejection of the NDH-4 Form submitted by the Petitioner, a Nidhi Company, by the Assistant Director, Ministry of Corporate Affairs, was legally valid and justified under the Nidhi Rules, 2014, as amended in 2019 and 2022.
• Whether the Petitioner complied with the statutory requirements under Rule 5(2) of the Nidhi Rules by filing the Form NDH-1 within the prescribed period, including extensions granted due to the Covid-19 pandemic.
• Whether the alleged failure to file half-yearly returns (Form NDH-3) for the half years ending 30.09.2022 and 31.03.2023 could be a valid ground for rejecting the NDH-4 Form, particularly in the absence of specific or individual notice to the Petitioner.
• Whether the failure to furnish the Auditor Certificate along with Form AOC-4 for the financial year 2021-22 justified rejection of the NDH-4 Form, especially when the Auditor Certificate was obtained but inadvertently not annexed.
• Whether the rejection of the NDH-4 Form without prior specific notice or opportunity of hearing violated principles of natural justice and the provisions of the Nidhi Rules, including Rule 23 that mandates an opportunity of being heard before enforcement actions.
• The legal consequences of rejection of the NDH-4 Form under the proviso to Rule 3(A) of the Nidhi Rules, including the prohibition on the company raising deposits or providing loans post-rejection.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of rejection of NDH-4 Form based on delayed filing of Form NDH-1

Legal framework and precedents: Rule 5(2) of the Nidhi Rules mandates filing of statutory compliance returns in Form NDH-1 within ninety days from the close of the first financial year after incorporation, certified by a practicing professional. The Companies (Registration Offices and Fees) Rules, 2014, prescribe fees for such filings. Circulars issued during the Covid-19 pandemic extended filing deadlines.

Court's interpretation and reasoning: The Petitioner filed Form NDH-1 on 22.12.2020, within the extended deadline of 31.12.2020 granted by Circulars No.12/2020 and No.30/2020 in view of the Covid-19 pandemic. The Court noted that no late fee was imposed and no specific show cause notice was issued regarding delay. Therefore, the first ground for rejection, alleging violation of Rule 5(2), was unsustainable.

Application of law to facts: The Court held that the Petitioner complied with the extended timeline and the rejection on this ground did not survive.

Issue 2: Non-filing of half-yearly returns (Form NDH-3) for 30.09.2022 and 31.03.2023

Legal framework and precedents: Rule 21 of the Nidhi Rules requires filing of half-yearly returns in Form NDH-3. Notice dated 16.04.2021 was issued by e-mail but was a general notice, not specifically addressed to the Petitioner.

Court's interpretation and reasoning: The Court observed that the alleged non-filing of half-yearly returns occurred after the general notice and after the date of filing the NDH-4 Form. Furthermore, no specific or individual notice was issued to the Petitioner regarding these defaults before rejecting the NDH-4 Form.

Treatment of competing arguments: The Respondents argued that subsequent events could be considered for rejection. The Court rejected this, emphasizing that the purpose of notice is to allow explanation and compliance. Without specific notice, rejection on this ground was erroneous.

Conclusion: The Court held that rejection on this ground was unjustified and did not survive.

Issue 3: Failure to furnish Auditor Certificate with Form AOC-4 for FY 2021-22

Legal framework and precedents: Rule 22 of the Nidhi Rules requires submission of an Auditor Certificate along with Form AOC-4. The Petitioner contended that the Auditor Certificate was obtained but inadvertently not annexed.

Court's interpretation and reasoning: The Court noted absence of any specific notice directing the Petitioner to rectify this omission before rejecting the NDH-4 Form. It found the rejection without opportunity of explanation or compliance to be violative of principles of natural justice and contrary to the procedural safeguards implicit in the Rules.

Application of law to facts: The Court observed that the Nidhi Rules do not explicitly provide circumstances under which NDH-4 Form may be rejected, and that rejection has severe consequences for the company.

Conclusion: The Court directed the Authority to reconsider this ground after allowing the Petitioner four weeks to submit the Auditor Certificate along with Form AOC-4.

Issue 4: Procedural fairness and natural justice in rejection of NDH-4 Form

Legal framework and precedents: Rule 23 of the Nidhi Rules mandates giving an opportunity of being heard before appointing a Special Officer for enforcement. The Proviso to Rule 3(A) imposes severe restrictions on companies whose NDH-4 applications are rejected.

Court's interpretation and reasoning: The Court emphasized that the rejection of NDH-4 Form is a drastic measure with wide repercussions, including prohibition on raising deposits or providing loans. Such a measure requires strict adherence to procedural fairness, including issuance of specific show cause notices and opportunity to respond.

Treatment of competing arguments: The Respondents contended that the Authority had power to reject the Form and consider subsequent defaults. The Court rejected this view, holding that without prior notice and opportunity for compliance, rejection amounts to violation of natural justice.

Conclusion: The Court held that the impugned communication rejecting the NDH-4 Form without such procedural safeguards was unlawful.

3. SIGNIFICANT HOLDINGS

The Court held:

"Before taking such drastic steps of rejection, an opportunity of explanation as well as if there is any deficiency, opportunity for compliance is required to be given to the Petitioner."

"There is provision of imposing penalty for non-compliance, however, recourse of rejection of NDH-4 Form is unwarranted specifically when there is no show cause notice as per the provisions of law."

"The impugned Communication dated 23.10.2023 issued by Respondent No. 3 - Assistant Director, Ministry of Corporate Affairs is hereby quashed and set aside."

Core principles established include:

• Strict compliance with procedural fairness and natural justice is mandatory before rejecting statutory forms with severe consequences.
• Extended timelines granted by the Government, including due to extraordinary circumstances such as the Covid-19 pandemic, must be given effect to in assessing compliance.
• General or common notices are insufficient to justify rejection; specific notices and opportunities to comply must be provided.
• Rejection of NDH-4 Form is a drastic measure that effectively disables the company's ability to operate under Nidhi Rules and must be exercised cautiously and lawfully.

Final determinations on each issue were:

• Grounds based on delayed filing of NDH-1 and non-filing of half-yearly returns were set aside as invalid.
• Ground based on non-furnishing of Auditor Certificate was remitted to the Authority for reconsideration after allowing the Petitioner four weeks to submit the requisite document.
• The impugned rejection communication was quashed for failure to comply with procedural requirements and principles of natural justice.

1. Whether the transfer of shares by the company under liquidation pursuant to exercise of a call option under a pre-existing Memorandum of Understanding (MOU) and its subsequent amendment is a bona fide transaction in the ordinary course of business and not void under Section 536(2) of the Companies Act, 1956.

2. Whether the call option granted under the MOU and amended agreement created an irrevocable and legally enforceable right in favour of the Applicants, and whether its exercise constituted a completed transaction prior to the winding up order.

3. Whether the transaction of transfer of shares post-presentation but prior to admission of the winding up petition can be validated by the Court under Section 536(2) of the Companies Act, 1956.

4. Whether the Applicants have sufficiently pleaded and proved the bona fides of the transaction and that it was in the best interest of the company in liquidation.

5. The scope of the Court's discretion under Section 536(2) of the Companies Act, 1956 to validate transactions entered into after the commencement of winding up proceedings.

Issue-wise Detailed Analysis

1. Validity of the Share Transfer under Section 536(2) of the Companies Act, 1956

The legal framework under Section 536(2) provides that any disposition of the property of a company after the commencement of winding up is void unless the Court orders otherwise. The Court recognized that this provision is an enabling one, conferring discretionary power to the Court to save bona fide transactions executed in the interest of justice and equity.

Precedents such as Sunita Vasudeo Warke v. Official Liquidator and Mukesh Mehra v. State Bank of India were considered, which emphasize that incomplete transactions cannot be validated and that bona fides must be established.

The Court noted that the winding up petition was presented on March 28, 2014, and admitted on August 8, 2016. The transfer of shares occurred on September 4, 2014, post-presentation but prior to admission. The Court held that since the transaction was pursuant to a pre-existing contract and was executed in accordance with crystallized rights, it was not void ab initio under Section 536(2).

The Court emphasized the equitable jurisdiction vested in it to protect genuine transactions and avoid paralysis of the company's business during winding up proceedings, citing Helbon Engineers Pvt Ltd. v. Ferral Anant Machinery Manufacturers Pvt Ltd.

2. Nature and Effect of the Call Option under the MOU and Amended Agreement

The Court examined the nature of the call option granted under the MOU dated March 1, 2009, and the amendment dated December 23, 2011. The legal principle adopted was that a call option creates an irrevocable right to receive the subject shares upon fulfillment of stipulated conditions, and its exercise is a unilateral act dependent on the volition of the option holder.

Reliance was placed on precedents including La-Fin Financial Services Pvt Ltd v. IL & FS Services Pvt Ltd and Sakalaguna Nayudu v. Chinna Munuswami Nayakar, which clarified that while the grant of an option is consensual, its exercise is unilateral and binding on the grantor.

The Court found that the Applicants had a legally enforceable right to exercise the call option from March 31, 2013, and the subsequent notices and actions culminating in the transfer of shares were ministerial acts effectuating this right.

The Court rejected the contention that the transfer was incomplete, pointing out that the Applicants had issued fresh cheques as consideration, received revised share transfer deeds, and the Board of Directors of WREPL approved the transfer on September 4, 2014, thereby completing the transaction.

3. Completion of the Transaction and Timing Relative to Winding Up Proceedings

The Official Liquidator argued that the transfer was incomplete and could not be validated as it occurred after the presentation of the winding up petition. The Court distinguished this case from others where transactions were incomplete or initiated post-winding up order.

It was held that the irrevocable right under the call option crystallized prior to the presentation of the winding up petition, and the subsequent exercise and completion of the transfer were within the Court's discretion to validate.

The Court observed that the transaction was not a new or unilateral disposition but enforcement of pre-existing contractual rights, and thus not subject to invalidation under Section 536(2).

4. Bona Fides and Best Interest of the Company

The Official Liquidator contended that the Applicants failed to plead or prove the bona fides of the transaction or that it was in the best interest of the company. The Court applied the principle from Ram Sarup Gupta v. Bishun Narain Inter College that pleadings should be liberally construed to ascertain substance over form.

The Court found that the Applicants had pleaded that the transfer was pursuant to a pre-existing contract and exercised due to default by TWDPL, and that no gains were made by the Applicants. The Court concluded that the transaction was bona fide, fair, just, and reasonable.

It was further noted that the transaction was in the ordinary course of business and protected the Applicants' rights as creditors secured by the pledged shares.

5. Discretion of the Court under Section 536(2)

The Court reiterated that Section 536(2) grants discretion to validate transactions post-commencement of winding up to prevent injustice and protect bona fide dealings. The Court emphasized that strict invalidation would paralyze company operations and harm innocent parties.

It held that the transaction in question deserved protection under this discretionary jurisdiction, given the pre-existing contract, the crystallized rights, and the bona fide nature of the transfer.

Treatment of Competing Arguments

The Official Liquidator's arguments focusing on the timing of the transfer and alleged incompleteness were rejected on the basis that the call option created a legally enforceable right prior to the petition, and the transfer was completed through ministerial acts with consideration and board approval.

Reliance on cases involving incomplete or post-winding up transactions was distinguished on facts. The Court also rejected the argument that the Applicants failed to plead bona fides, applying a liberal approach to pleadings and considering the substance of the transaction.

Significant Holdings

"Section 536 (2) of the Companies Act, 1956 is an enabling provision which does not render a transaction entered into by a company from the date of filing of the winding up petition till the date of winding up order void ab initio. The Court has absolute discretion to declare a transaction entered into by the company in liquidation between the date of filing of the winding up petition and the date of winding up order, and such discretion must be exercised equitably to save transactions that are genuine so that innocent third parties are not to put to a loss."

"A call option creates an irrevocable right to receive the subject shares in favour of the Applicants. Once a call option is granted, it results in a complete, concluded and legally enforceable nature of a concession or privilege, which may be exercised upon the fulfillment of the conditions on which it is made exercisable."

"The exercise of the call option is a unilateral act dependent entirely on the volition of the person granted the option. The Applicants herein became legally entitled to exercise the call option from 31st March 2013 itself and the unilateral exercise of the call option is binding upon the company in liquidation."

"Transactions which are bona fide and shown to be fair, just and reasonable deserve to be protected because of clear equity involved in such matters."

"The transaction has been executed in accordance with rights long crystallized by the MOU and Amended Agreement, prior to the admission of the Company Petition and prior to order of winding up and is not only bona fide but also fair, just and reasonable and deserves to be protected."

"The Official Liquidator's endeavour to give this transaction a colour of a typical call option cannot be countenanced in as much as in the present case, the failure on the part of the Company in Liquidation created an irrevocable right in favour of the Applicants."

The Court finally held that the sale and transfer of 2,34,000 equity shares of the company in liquidation pursuant to the MOU and its amendment is validated and ratified under Section 536(2) of the Companies Act, 1956. The application for validation was allowed, and the Official Liquidator's contrary prayers were rejected. Similarly, the interim application for validation of transfer of additional shares was also allowed.

The core legal questions considered by the Court in this review petition include:

• Whether the observations recorded in paragraphs (62), (70), and (75)(vii) of the earlier order dated 20.02.2025 create an erroneous impression that the Insolvency Resolution Professional (IRP) Report dated 09.08.2023 is a worthless or legally ineffective document.
• Whether the review petition discloses any error apparent on the face of the record warranting reconsideration of the earlier order under Section 114 read with Order XLVII Rule 1 and Section 151 of the Code of Civil Procedure, 1908.
• The scope and legal effect of the IRP Report dated 09.08.2023, including whether its findings are conclusive or require independent examination.
• The jurisdictional competence of the National Company Law Tribunal (NCLT) to adjudicate on the legality, probative value, and implications of the IRP Report and related proceedings under the Insolvency and Bankruptcy Code (IBC).
• The appropriateness of directions given to the Registrar of Companies (ROC) and other authorities to investigate the ACE Group of Companies uninfluenced by the IRP Report findings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the IRP Report dated 09.08.2023 is rendered useless or legally ineffective by the observations in the earlier order

Relevant legal framework and precedents: The Insolvency and Bankruptcy Code, 2016, particularly provisions relating to the appointment and functions of the IRP, and procedural rules under the Code of Civil Procedure for review petitions. The Court also referenced precedents including Arun Dev Upadhyaya v. Integrated Sales Service Limited and Swiss Ribbons Pvt. Ltd. v. Union of India regarding the maintainability of review petitions and the scope of judicial review.

Court's interpretation and reasoning: The Court carefully examined the language of paragraphs (62), (70), and (75)(vii) of the earlier order. It found that nowhere in these paragraphs or the order as a whole was the IRP Report characterized as "waste paper," "useless," or devoid of legal effect. Instead, the Court recognized the report as a significant document that has been considered in multiple forums, including the Supreme Court, the High Court, and the NCLT.

Key evidence and findings: The IRP Report was prepared pursuant to directions by the NCLT and involved verification of claims of secured and unsecured creditors. The report has been subject to scrutiny in various judicial proceedings, indicating its relevance.

Application of law to facts: The Court emphasized that the IRP Report's findings are not conclusive or final. The report serves as a triggering document for further inquiry but requires independent examination and corroboration through additional evidence and materials.

Treatment of competing arguments: The petitioner argued that the Court's observations undermined the report's credibility, while respondents contended that the review petition lacked merit and did not disclose any error apparent on record. The Court sided with the respondents, clarifying the actual intent of the observations.

Conclusions: The Court concluded that the IRP Report retains legal relevance and is not rendered ineffective by the earlier order. The impression that it is useless is a misreading of the Court's observations.

Issue 2: Maintainability of the review petition and presence of any error apparent on the face of the record

Relevant legal framework and precedents: Section 114 read with Order XLVII Rule 1 and Section 151 of the Code of Civil Procedure, 1908 govern review petitions. The threshold for review is the existence of an error apparent on the face of the record. The Court relied on authoritative decisions which restrict review to such errors and do not permit re-agitation of settled issues.

Court's interpretation and reasoning: On examination, the Court found that the review petition did not disclose any such error apparent on the face of the record. The petitioner's grievance stemmed from a misinterpretation of the Court's prior observations rather than any factual or legal mistake.

Key evidence and findings: The Court reviewed the pleadings and submissions, including replies filed by respondents and written submissions by an association of homebuyers, and found no basis to disturb the earlier order.

Application of law to facts: The Court applied the strict standard for review petitions and held that the petition failed to meet the criteria for review.

Treatment of competing arguments: The petitioner urged reconsideration based on perceived injustice, but the Court emphasized the need for finality and adherence to procedural safeguards.

Conclusions: The review petition was dismissed for lack of any error apparent on the face of the record.

Issue 3: Jurisdiction and role of the NCLT regarding the IRP Report and related insolvency proceedings

Relevant legal framework and precedents: The Insolvency and Bankruptcy Code, 2016, particularly Sections 45 and related provisions governing the powers and duties of the IRP and the jurisdiction of the NCLT over insolvency resolution proceedings.

Court's interpretation and reasoning: The Court recognized that the NCLT is the appropriate forum to examine the legality, probative value, and findings of the IRP Report. The NCLT has been seized of the matter following Supreme Court directions and is empowered to assess the report in light of all materials presented.

Key evidence and findings: The corporate insolvency proceedings of the respondent company have been revived by the Supreme Court, and the NCLT has jurisdiction to evaluate the IRP Report and related issues.

Application of law to facts: The Court declined to make any conclusive pronouncements on the IRP Report's findings, deferring to the NCLT's specialized jurisdiction.

Treatment of competing arguments: The petitioner sought judicial endorsement of the IRP Report's findings, while respondents highlighted the ongoing NCLT proceedings. The Court balanced these by affirming the NCLT's primacy in these matters.

Conclusions: The NCLT is the competent authority to decide on the IRP Report's validity and the related insolvency issues.

Issue 4: Directions to investigate the ACE Group of Companies independently of the IRP Report findings

Relevant legal framework and precedents: Sections 206, 209, 216, 217, and 224 of the Companies Act, 2013, which empower the Registrar of Companies and other authorities to investigate company affairs and financial irregularities.

Court's interpretation and reasoning: The Court modified earlier directions to clarify that the investigation against the ACE Group of Companies should proceed uninfluenced by the IRP Report findings. This ensures an independent and unbiased inquiry into alleged financial malpractices.

Key evidence and findings: The IRP Report triggered the investigation but is not conclusive evidence. Independent examination and unearthing of relevant material are necessary to substantiate any wrongdoing.

Application of law to facts: The Court ensured that statutory powers under the Companies Act are exercised on an independent basis, maintaining procedural fairness.

Treatment of competing arguments: The petitioner sought reliance on the IRP Report, whereas the Court emphasized the need for independent evidence-based investigation.

Conclusions: Investigations shall be conducted independently of the IRP Report findings, preserving the integrity of the inquiry process.

3. SIGNIFICANT HOLDINGS

"It has nowhere been observed by the Court that the IRP Report dated 09.08.2023 is in any manner a waste paper, useless or has no legal effect, or that the same can never be acted upon."

"The issue as to whether or not any actions or inactions on the part of the IRP are within or outside the scope of Section 45 and other relevant provisions of the IBC; and additionally, whether or not the findings recorded therein are substantiated or corroborated in any manner, are matters that clearly lie in the domain of the NCLT."

"The findings contained in the report are supposed to be independently examined and relevant material should be unearthed to substantiate the role of the concerned companies and nexus, if any, in the alleged financial malpractices."

"Respondent Nos. 1 & 2 shall investigate the matter against the ACE Group of Companies uninfluenced by the findings in the report of the IRP dated 09.08.2023 in accordance with Sections 206, 209, 216, 217 and 224 of the Companies Act, 2013."

Core principles established include:

• The IRP Report is a significant but not conclusive document; its findings require independent judicial or quasi-judicial scrutiny.
• The NCLT is the competent forum to adjudicate on the legality and probative value of the IRP Report within insolvency proceedings.
• Review petitions under the Code of Civil Procedure require demonstration of error apparent on the face of the record and cannot be used to re-litigate issues or correct mere misinterpretations.
• Investigations by statutory authorities must be conducted independently, uninfluenced by preliminary reports, ensuring procedural fairness and integrity.
• The Court reaffirms the principle of finality in judicial orders while allowing the specialized tribunal (NCLT) to resolve complex insolvency matters.

Final determinations on each issue were:

• The review petition was dismissed for failure to disclose any error apparent on the face of the record.
• The IRP Report retains legal relevance and is not rendered ineffective by the earlier order.
• The NCLT shall examine the IRP Report's findings and related insolvency issues.
• The investigation into the ACE Group of Companies shall proceed independently of the IRP Report.

The core legal questions considered by the Court in the present matter are:

(a) Whether the petitioner's account could be validly declared and classified as 'fraud' by the respondent Bank based on the allegations and forensic audit report relied upon;

(b) Whether the grounds on which the petitioner was earlier declared a 'wilful defaulter' under the RBI Master Circular of 2015, which were found unsustainable by Coordinate Benches of this Court, could be re-agitated to sustain a classification of 'fraud' against the petitioner;

(c) Whether the procedural and substantive requirements under the RBI Master Circular and related circulars concerning classification of accounts as 'wilful defaulter' or 'fraud' were complied with by the respondent Bank;

(d) Whether the petitioner's resignation from the company MBSL prior to the alleged events disentitles the respondent Bank from holding him liable for the alleged defaults or fraudulent acts;

(e) Whether the forensic audit findings and other documentary evidence substantiate the allegations of diversion, siphoning of funds, or other fraudulent conduct attributed to the petitioner;

(f) Whether the actions of the respondent Bank in declaring the petitioner's account as 'fraud' without independent material beyond the forensic audit report and without proper application of mind were arbitrary, illegal, and untenable in law;

(g) Whether the petitioner is entitled to a review of the earlier judgment dated 25.10.2024 to include detailed findings on the allegations levelled by the respondent Bank.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Validity of 'fraud' classification and reliance on grounds of wilful default

Relevant legal framework and precedents: The RBI Master Circular of 2015 and related circulars govern the classification of accounts as 'wilful defaulter' or 'fraud'. The circulars require that the Identification Committee examine evidence carefully before issuing show cause notices and that classification as 'fraud' demands a higher standard of proof than wilful default. The Supreme Court's decision in the cited State Bank of India v. Rajesh Aggarwal and SBI v. Jah Developers (P) Ltd. emphasize the need for adherence to procedural safeguards and proper application of mind.

Court's interpretation and reasoning: The Court noted that Coordinate Benches had already quashed the petitioner's classification as a wilful defaulter on grounds that the respondent Bank failed to examine relevant material such as loan sanction letters, flash reports, minutes of lender meetings, and restructuring agreements before issuing show cause notices. The Court emphasized that the same grounds cannot sustain a 'fraud' classification, which requires a higher degree of proof. The forensic audit report relied upon by the respondent Bank did not verify the source of funds invested in subsidiaries, a crucial element to establish diversion of borrowed funds, which is a prerequisite for invoking the Master Circular.

Key evidence and findings: The forensic audit report by M/s Haribhakti & Co. LLP did not verify whether the investments in subsidiaries were made from borrowed funds or internal accruals. The lender banks' own documents, including the Final Restructuring Scheme (FRS), acknowledged the investments were made from substantial cash surpluses generated by the company in earlier years. The petitioner's resignation from MBSL was recorded prior to the period of alleged defaults.

Application of law to facts: Given that the investments were made from internal accruals and not from borrowed funds, the Master Circular's provisions on diversion and siphoning of funds were not triggered. The respondent Bank's failure to consider relevant documents and the absence of independent material beyond the forensic audit report rendered the 'fraud' classification arbitrary and without jurisdiction.

Treatment of competing arguments: The respondent Bank contended that forensic audit revealed irregularities justifying the fraud classification. However, the Court found that the forensic audit itself did not conclude diversion of funds and that the Bank failed to discharge the burden of proof. The petitioner's counsel argued that the Bank had knowledge and acquiesced to the investments and transactions for years and that the allegations were belated and unsustainable.

Conclusions: The Court concluded that the grounds for wilful default being unsustainable preclude their use to sustain a fraud classification. The 'fraud' declaration was held to be illegal and untenable in law.

Issue (c): Compliance with procedural and substantive requirements under RBI Master Circular

Relevant legal framework and precedents: The RBI Master Circular requires the Identification Committee to carefully examine all material before issuing show cause notices and classifying accounts. The Circulars 8.9.4 and 8.9.5 prescribe procedures for forensic audits, reporting to RBI, and lodging complaints with investigative agencies.

Court's interpretation and reasoning: The Court observed that the respondent Bank failed to consider relevant documents such as the loan sanction letter, flash reports, minutes of lender meetings, and restructuring agreements before issuing the show cause notice. The Bank's reliance solely on the forensic audit report without independent verification of the source of funds was insufficient. The procedural safeguards mandated by the circulars were not complied with.

Key evidence and findings: The Identification Committee and Review Committee orders reflected that certain allegations were dropped or found unsustainable by the Bank's own internal processes. The forensic audit report itself acknowledged that the source of funds for investments was not verified.

Application of law to facts: The Bank's failure to discharge the obligations of examination and consideration of material evidence rendered the show cause notice and subsequent classification invalid.

Treatment of competing arguments: The Bank argued that the forensic audit justified the classification. The Court found this reliance misplaced and contrary to the Master Circular's requirements.

Conclusions: The procedural non-compliance and lack of substantive basis invalidated the fraud classification.

Issue (d): Effect of petitioner's resignation from MBSL on liability

Relevant legal framework and precedents: Liability for acts of default or fraud generally requires that the person held liable was in control or management at the relevant time.

Court's interpretation and reasoning: The petitioner resigned as Executive Director on 30.04.2012 and as Full Time Director w.e.f. 16.11.2012, prior to the alleged defaults and forensic audit period. The Joint Lenders' Meetings acknowledged this resignation. No material was produced to link the petitioner to acts of diversion or fraud after his resignation.

Key evidence and findings: Letters from MBSL to lenders informing about the petitioner's resignation; Joint Lenders' Meeting minutes; absence of SCN on grounds related to post-resignation period.

Application of law to facts: The petitioner cannot be held liable for alleged acts occurring after his resignation, as he was no longer in control or management.

Treatment of competing arguments: The Bank did not produce evidence to rebut the petitioner's resignation or link him to subsequent acts.

Conclusions: The petitioner's resignation disentitles the Bank from holding him liable for the alleged defaults or fraudulent acts post-resignation.

Issue (e): Substantiation of allegations of diversion, siphoning, and fraudulent conduct

Relevant legal framework and precedents: Diversion or siphoning of funds under the Master Circular requires that borrowed funds be used for unauthorized purposes. Mere transactions with related parties or subsidiaries are not fraudulent if made transparently and with lender knowledge.

Court's interpretation and reasoning: The Court extensively analyzed the forensic audit findings and related documents. It found that:

• Investments in subsidiaries were funded through private equity or internal accruals, not borrowed funds;
• Lease agreements and security deposits were disclosed and known to lender banks;
• Transactions between MBSL and related entities were part of strategic business decisions;
• Expired lease agreements did not result in fraudulent transactions;
• Supplier advances and loans were adequately accounted for, with no evidence of loss or misappropriation;
• Forensic audit did not conclude diversion or siphoning of funds;
• Lender banks classified MBSL as Class-B borrower, indicating external factors and no diversion of funds.

Key evidence and findings: Final Restructuring Scheme, Flash Reports, audited balance sheets, Joint Lenders' Meeting minutes, forensic audit report disclaimers, and prior judgments quashing wilful defaulter classification.

Application of law to facts: The factual matrix and documentary evidence did not support allegations of diversion, siphoning, or fraud.

Treatment of competing arguments: The Bank's reliance on forensic audit findings was undermined by absence of verification of source of funds and lender knowledge of transactions.

Conclusions: Allegations of diversion, siphoning, and fraudulent conduct were found unsustainable and unsubstantiated.

Issue (f): Arbitrary and illegal nature of respondent Bank's actions

Relevant legal framework and precedents: Principles of natural justice and fair procedure require that adverse classifications be based on proper evidence and reasoned decisions.

Court's interpretation and reasoning: The Court held that the respondent Bank's actions in declaring the petitioner's account as 'fraud' based on the same grounds earlier rejected for wilful default, without independent material, were arbitrary, unfair, and illegal. The Bank failed to comply with procedural safeguards and did not produce additional evidence to justify the fraud classification.

Key evidence and findings: Absence of independent material beyond forensic audit report; prior quashing of wilful defaulter classification; no fresh evidence produced.

Application of law to facts: The Bank's action lacked jurisdiction and violated principles of natural justice.

Treatment of competing arguments: The Bank conceded that a finding on merits could be rendered for administrative convenience but maintained the fraud classification. The Court rejected this stance.

Conclusions: The fraud classification was held to be arbitrary, illegal, and untenable.

Issue (g): Review of earlier judgment to include detailed findings

Relevant legal framework and precedents: Review petitions are maintainable to correct errors apparent on record or to consider relevant material omitted earlier.

Court's interpretation and reasoning: The Court found typographical errors and omissions in the earlier judgment, including incorrect party names and incomplete reference to precedents. The petitioner's request for detailed findings on the fraud allegations was accepted as necessary for administrative clarity and future guidance.

Key evidence and findings: Earlier judgment dated 25.10.2024; counter affidavit dated 30.10.2023; rejoinder and supplementary affidavits; relevant precedents.

Application of law to facts: The Court corrected typographical errors and supplemented the earlier judgment with detailed analysis of the fraud allegations, endorsing the findings of Coordinate Benches.

Treatment of competing arguments: The respondent Bank agreed to detailed findings for administrative convenience.

Conclusions: The review petition was allowed, and the earlier judgment was modified accordingly.

3. SIGNIFICANT HOLDINGS

"Once the aforementioned grounds, which clearly emanated from the Forensic Audit Report of M/s Hari Bhakti & Company LLP, were found to be insufficient or unsustainable on merits for declaring the petitioner's account as 'wilful defaulter', the same grounds cannot be re-agitated to lay the foundation for declaring the petitioner's account as 'fraud' in terms of Circulars 8.9.4 and 8.9.5 in the absence of additional independent material."

"The declaration of the account of a person or entity as 'fraud' requires a greater degree of criminality. The bottom line is that once the very substratum of the imputations is held to be unsustainable for lesser civil consequences such as being labelled a 'wilful defaulter' under the RBI Master Guidelines, the same grounds or imputations cannot form the foundation for declaring a person's or entity's account as 'fraud', which requires a greater degree of proof to be established."

"The respondent Bank failed to discharge the obligations mandated under Clauses 3 (a) and (b) of the Master Circular before issuing the show cause notice in the present case... Non-consideration of relevant material falls short of requirement of examination."

"The Forensic Audit Report did not verify the source of funds which were invested in the subsidiaries... The respondent Bank could not have issued show cause notice to the petitioner for wilful default, without verifying the source of funds that were invested."

"The investments were made by MBIL from its substantial cash surpluses generated in earlier years of FY 2006 and FY 2008. In other words, the investments were not made from the borrowed funds. Thus, the lender banks including the respondent Bank, in their own internal document acknowledged that they were fully aware of the investments made by MBIL in its subsidiaries."

"The respondent Bank's plea, that the company utilized borrowed funds for these transactions and thereby diverted borrowed funds, lacks merit and fails on the face of the record."

"The impugned action by the respondent Bank in declaring the account of the petitioner as 'fraud' vide Show Cause Notice dated 20.06.2019 is hereby held to be arbitrary, unfair, illegal and untenable in law."

Final determinations:

• The petitioner's classification as 'fraud' by the respondent Bank is quashed and set aside.
• The grounds relied upon by the respondent Bank, which were earlier found unsustainable for wilful defaulter classification, cannot sustain a fraud classification in the absence of additional independent material.
• The respondent Bank failed to comply with procedural and substantive requirements under the RBI Master Circular.
• The petitioner's resignation prior to the alleged defaults disentitles the Bank from holding him liable for fraudulent acts.
• Allegations of diversion, siphoning of funds, and fraudulent conduct are unsubstantiated and rejected.
• The review petition is allowed with corrections of typographical errors and inclusion of detailed findings on merits.

- Whether the appellants, as Green Card Holders (overage dependents of members), have a legal right to continue using the facilities of Respondent No. 1 Club despite not being full members under the Articles of Association (AoA).

- Whether the issuance and continuation of Green Cards to overage dependents beyond the age of 21 is valid under the AoA and Companies Act, 2013.

- Whether the termination and suspension of the appellants' Green Card privileges by Respondent No. 1 pursuant to the Naidu Committee Report and directions of the NCLT/NCLAT was lawful.

- Whether the appellants were entitled to the principles of natural justice, including a hearing, before termination of their Green Card privileges.

- Whether the appellants acquired enforceable contractual rights to use the Club facilities based on historical practices, payment of fees/penalties, and resolutions passed by the Club's General Committee.

- Whether the learned Single Judge erred in dismissing the interlocutory application seeking interim injunction and stay of termination orders.

- Whether the balance of convenience and irreparable harm favored the appellants.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legal Right of Green Card Holders to Use Club Facilities Beyond Age 21

Legal Framework and Precedents: The Respondent No. 1 Club is governed by its Memorandum of Association (MoA) and Articles of Association (AoA), which form a binding contract among members under the Companies Act, 2013. Articles 13(3a), 13(3b), and 13(3c) specifically regulate the use of Club facilities by dependents of members, limiting usage to those under 21 years or requiring application for full membership thereafter. The Indian Contract Act principles apply to implied contracts and practices but cannot override express provisions of the AoA.

Court's Interpretation and Reasoning: The Court held that the AoA provisions clearly restrict the use of Club facilities by dependents to the age of 21, after which they must apply for full membership to continue usage. The so-called Green Card category, allowing overage dependents to use facilities without full membership, is not recognized within the AoA and is therefore ultra vires. The Court emphasized that the privileges granted to dependents are temporary and do not confer any permanent or enforceable rights.

Key Evidence and Findings: The Naidu Committee Report declared the Green Card system void ab initio. The NCLT and NCLAT found the issuance of Green Cards to be unauthorized and contrary to the AoA. The Club's statutory auditors raised concerns about the collection of fees from Green Card Holders. The General Committee's resolutions and past practices did not override the AoA.

Application of Law to Facts: The appellants, having attained over 21 years, were not full members and their continued use of facilities via Green Cards contravened Articles 13(3b) and 13(3c). The informal practice of granting Green Cards was inconsistent with the Club's constitutional documents and thus invalid.

Treatment of Competing Arguments: The appellants argued that historical practices, payment of penalties, and resolutions granted them enforceable rights. The Court rejected this, holding that no implied contract or past practice can override express provisions of the AoA. The appellants' reliance on Article 13(3c) for unmarried daughters was considered but found insufficient to confer rights beyond the AoA's framework.

Conclusions: The appellants had no legal right to continue using the Club facilities as Green Card Holders beyond 21 years without full membership. The Green Card system was void ab initio and contrary to the AoA.

Issue 2: Lawfulness of Suspension and Termination of Green Card Privileges

Legal Framework and Precedents: The NCLT and NCLAT issued orders appointing an Administrator and restraining unauthorized membership practices under the Companies Act, 2013. The Specific Relief Act, 1963, Section 14(b) and Section 41(e), prohibits specific enforcement of contracts of determinable nature and injunctions preventing termination of such contracts.

Court's Interpretation and Reasoning: The Court held that the suspension and termination of Green Card privileges were corrective measures pursuant to the orders of the NCLT and NCLAT to restore lawful governance of the Club. The Green Card privileges were terminable and did not amount to enforceable contractual rights. The Court relied on established precedent that private club membership privileges are terminable and not subject to specific performance or injunctive relief.

Key Evidence and Findings: The Naidu Committee Report and the NCLT/NCLAT orders highlighted irregularities and violations in membership practices, including the unauthorized issuance of Green Cards. The Administrator's directives to suspend and terminate Green Card privileges were consistent with these findings.

Application of Law to Facts: The appellants' privileges were suspended and terminated lawfully under the authority of the Administrator appointed by the Tribunal. The appellants' failure to apply for full membership within the stipulated time further weakened their claim.

Treatment of Competing Arguments: The appellants contended that the termination was illegal as it did not follow the termination clauses of the AoA and violated natural justice. The Court rejected this, noting that the appellants were not members under the AoA and the privileges granted were outside the AoA's scope. The corrective action was necessary to comply with statutory orders and restore proper governance.

Conclusions: The suspension and termination of Green Card privileges were lawful, valid, and consistent with the directions of the NCLT and NCLAT, and the principles of the Companies Act and Specific Relief Act.

Issue 3: Applicability of Principles of Natural Justice

Legal Framework and Precedents: Principles of natural justice, including the right to be heard (audi alteram partem), apply when decisions affect rights. However, these principles do not apply where no legal right exists or where the decision is administrative or corrective in nature.

Court's Interpretation and Reasoning: The Court observed that the appellants were not members of the Club and only held privileges outside the AoA. The suspension and termination were administrative actions pursuant to statutory orders and corrective measures. Therefore, the principles of natural justice did not mandate a hearing before termination.

Key Evidence and Findings: The appellants admitted non-membership status. The Naidu Committee Report highlighted procedural lapses. The actions were taken by the Administrator appointed by statutory authority.

Application of Law to Facts: Since the appellants had no vested legal right, the absence of a hearing did not violate natural justice.

Treatment of Competing Arguments: The appellants relied on Supreme Court precedents to argue for natural justice. The Court distinguished those cases on the basis that the appellants' rights were not legal rights but privileges outside the AoA.

Conclusions: No breach of natural justice occurred in terminating the appellants' Green Card privileges.

Issue 4: Enforceability of Contractual Rights Based on Historical Practices and Payment of Penalties

Legal Framework and Precedents: The AoA is the constitution of the company and overrides any informal or implied contracts. The Indian Contract Act requires that implied contracts be consistent with express contracts. The Specific Relief Act disallows specific enforcement of terminable contracts.

Court's Interpretation and Reasoning: The Court held that past practices and resolutions cannot override the express provisions of the AoA. The Green Card scheme was an informal arrangement without legal foundation. Payment of penalties does not create enforceable rights if the underlying arrangement is ultra vires the AoA.

Key Evidence and Findings: The Green Card category is absent from the AoA. The Committee's resolutions and past practices were inconsistent with the AoA. The Naidu Committee and NCLAT found the Green Card system unauthorized.

Application of Law to Facts: The appellants' contractual claims failed as the Green Card rights were not legally sustainable under the Club's constitutional documents.

Treatment of Competing Arguments: The appellants argued that long-standing practice gave rise to enforceable rights. The Court rejected this, emphasizing the primacy of the AoA and the ultra vires nature of the Green Card system.

Conclusions: The appellants have no enforceable contractual rights arising from historical practices or payment of penalties.

Issue 5: Appropriateness of Interlocutory Relief and Balance of Convenience

Legal Framework and Precedents: The grant of interlocutory injunctions under Order XXXIX Rules 1 and 2 of the CPC requires a prima facie case, balance of convenience, and irreparable harm. The appellate court's interference with interlocutory orders is limited to cases of arbitrariness or perversity.

Court's Interpretation and Reasoning: The Court found no prima facie case in favor of the appellants as the Green Card system was void ab initio. The balance of convenience favored Respondent No. 1, especially as the appellants were offered refunds. The Court held that loss of recreational facility does not amount to irreparable harm.

Key Evidence and Findings: The appellants delayed applying for full membership beyond the permitted period. The Administrator directed refunds. The NCLT and NCLAT orders supported corrective measures.

Application of Law to Facts: The appellants failed to satisfy the requirements for interim relief. The Single Judge's refusal to grant injunction was a plausible exercise of discretion.

Treatment of Competing Arguments: The appellants contended irreparable harm and violation of rights. The Court rejected these, emphasizing statutory compliance and absence of vested rights.

Conclusions: The interlocutory relief was correctly refused; the appeal against the interlocutory order was without merit.

3. SIGNIFICANT HOLDINGS

"The Articles, in our opinion, merely provide that the dependents of regular members must apply to become full members should they wish to continue using the facilities. The words 'should he continue to use the Club' in Article 13(3c) of the AoA, merely informs the members that their dependents will have to apply to become full members in order to continue using the facilities. The same, prima facie, cannot be read to mean that dependents, even after attaining the age of 21, can continue using the same facilities as they were enjoying as dependents, despite not being full members."

"The system of granting benefits to the dependents of full members through an alternative method bypasses the restrictions imposed by the AoA, making it, prima facie, a violation of Article 13 (3b) of the AoA."

"Even if we assume, for the sake of argument, that a contract of grant of privilege of use of the club under the concept of 'Green card holder rights' exists between the Plaintiffs and the Club, this contract is terminable in nature and cannot be specifically enforced. According to Section 14 (d) of the Specific Relief Act contracts of a determinable nature cannot be specifically enforced. Additionally, Section 41(e) of the Specific Relief Act prohibits the granting of an injunction to prevent the termination of such contracts."

"The AoA forms the bedrock of the Club's constitution and serves as the definitive guide for membership criteria and rights. The General Committee, while empowered to make policy decisions, cannot contravene the explicit provisions of the AoA. The Plaintiffs' suggestion that the Committee acted within its discretion to grant them Green Card user rights ignores the fact that any such decision contradicts the AoA, rendering it legally untenable."

"The Plaintiffs' reliance on past practices as a basis for asserting contractual rights is also conceptually misplaced... any practices that contradict or deviate from the express terms of the AoA are ultra vires- beyond the powers granted under the Club's constitution."

"The impugned action is taken pursuant to the orders passed by the learned Tribunals in order to restore corporate governance. In the absence of any prima facie case in favour of the appellants, no fault can be found at this stage."

"The loss of recreational facilities does not amount to irreparable harm, and the balance of convenience does not lie in favour of the appellants."

"The appeals against the exercise of discretion by the Single Judge in refusing interlocutory relief cannot be interfered with unless the discretion was exercised arbitrarily or perversely. The discretion here was exercised judicially and reasonably."