TMI Blog2020 (9) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... procedure envisaged under Section 206(4) is not followed - the issue is answered in the affirmative, in favour of the respondents. Whether the opinion formed by the 2nd respondent for ordering investigation into the affairs of the petitioner - company, is in consonance with Section 212(1) (a) and ( c ) of the Act? - HELD THAT:- The 5th respondent initiated inquiry under Section 206 of the Act and issued notices and the petitioner also filed a detailed reply dated 03.02.2020 and at during that stage, the 2nd respondent vide order dated 10.01.2020 directed the 5th respondent to conduct full-fledged inquiry under Section 206(4) of the Act and submit report. And this court vide order dated 14.02.2020 directed the respondents to conclude the inquiry under Section 206(1) of the Act by duly taking into consideration the reply submitted by the petitioner on 03.02.2020. Accordingly, the 5th respondent, by considering the reply of the petitioner dated 03.02.2020, concluded the inquiry under Section 206(4) of the Act and submitted report dated 24.02.2020, and this court, while considering the first issue, held that initiation of inquiry by Central Government and report submitted by 5th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any, as per the averments made in the affidavit filed in support of the writ petition is that, it is involved in the business of stock broking, commodities trading, depository, wealth management services and distribution of other financial produces. 7. As there were media reports stating that the petitioner - company is violating the regulations of Securities Exchange Board of India (SEBI), the 5th respondent - Ministry of Corporate Affairs, O/o the Registrar of Companies, through its Assistant Director - 6th respondent, vide letter in Ref:ROCH/KSBL/2019/2410 dated 03.12.2019, called for certain information from the petitioner - company with regard to current status of investigation by SEBI, and the action taken against the petitioner and its group of companies, and to submit a copy of the latest financial statement of the company. The petitioner - company, vide letter dated 13.12.2019, submitted a detailed reply with regard to information sought for by the 6th respondent. 8. Thereafter, the 6th respondent issued notice dated 14.01.2020 under Section 206(1) of the Act, calling upon the petitioner, to furnish some more information and documents within seven days of receipt of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent - Office of Director General, Ministry of Corporate Affairs, New Delhi, passed the impugned order dated 27.02.2020, directing investigation into the affairs of the company under Section 212(1)(a) and (c) of the Act. 14. The Chairman and the Managing Director of the petitioner - company, vide email dated 20.02.2020, to the Secretary of Ministry of Corporate Affairs, also gave the gist of the issues with SEBI, and requested for a personal hearing. In response to the same, vide email dated 27.02.2020, it was intimated that the petitioner could meet the Secretary, Ministry of Corporate Affairs on 05.03.2020 at noon. In view of the same, the said writ petition has become infructuous. Therefore, challenging the order dated 27.02.2020, the present writ petition is filed. 13. Counter affidavit is filed on behalf of respondents 1, 2 4, 5 and 6. In the counter affidavit, the business activities of the petitioner - company, is not denied. It is stated that the petitioner is the company registered with the 5th respondent - ROC, doing the business as a registered stock broker and as a depository participant. On 22.11.2019, the National Stock Exchange (NSE) reported to Securities E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 17. While so, the Director General of Company affairs, vide letter No.07/341/2015/CL.II(SER) dated 10.01.2020 conveyed the 5th respondent, the approval of the Central Government to carryout the full-fledged inquiry under Section 206(4) of the Act. The said letter was received by the 5th respondent on 16.01.2020 and on 17.01.2020, the 5th respondent submitted preliminary report under Section 206(4) of the Act. 18. That, to the notice dated 14.01.2020 issued by the 5th respondent under Section 206 (1) of the Act, though the petitioner - company, vide letter dated 22.01.2020, sought four weeks time, it has not provided any information. Therefore, the 5th respondent caused notice under Section 206(3) of the Act to furnish documents on 27.01.2020. On the said date, the officials of the company submitted some soft copies of the original documents and certain information, and sought further time to provide remaining details, the same was denied. On 03.02.2020, the company filed a detailed reply to the notice dated 14.01.2020. On 06.02.2020, meeting of the Oversight Committee of Ministry of Corporate Affairs, New Delhi was held, and in the meanwhile, the respondents received a copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this court in W.P.No.3143 of 2020 dated 14.02.2020, the reply filed by the petitioner on 03.02.2020 in pursuance of the notice under Section 206(1) of the Act, was considered, and final report was submitted. 22. To the averment made in the writ affidavit that to the e-mail addressed by the Chairman and Managing Director of the petitioner - company to the Secretary, Ministry of Corporate Affairs giving a basic gist of the issue with SEBI and requesting for personal hearing, petitioner received a response on 27.02.2020 requiring to meet the Secretary, Ministry of Corporate Affairs on 05.03.2020 at noon; it is stated that the company, through its officials, instead of meeting the Secretary, Ministry of Company affairs on 05.03.2020, filed W.P.No.4742 of 2020, and by that time, as the impugned order was passed, the said writ petition has become infructuous. 23. That consequent to the impugned order, the Serious Fraud Investigation Office (SFIO), designated inspectors for investigation, and the petitioner instead of co-operating with the investigation, is filing writ petitions on the very same subject matter. That the authorities that deal with the Inquiry, Inspection or Investiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents made in the writ affidavit, the stand of the respondents that sub-section (4) of Section 206 is independent of other provisions under sub-section (1) to (3), and that since the 5th respondent conducted inquiry as per the directions of the Central Government under the first proviso to sub-section (4) of Section 206, there is no requirement of providing opportunity of being heard; is denied. That sub-section (4) is also an integral part of Section 206 and hence the 5th respondent - ROC is required to provide an opportunity of being heard before submitting report under Section 208 of the Act. That the communications/directions referred to in the counter affidavit between the official respondents, for initiating inquiry under Section 206(4) of the Act, is not referred in the notices issued to the petitioner, and they are also not made available to the petitioner. 29. That the letter dated 10.01.2020, where under the 2nd respondent conveyed the approval of the Central Government to carryout the inquiry under Section 206(4) of the Act, was not brought to the notice of this court while disposing of W.P.No.3143 of 2020 dated 14.02.2020. That even if the inquiry is conducted under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd such report, cannot form basis for ordering investigation. 33. Learned Senior Counsel further submits that the Chairman and Managing Director, addressed email dated 20.02.2020 to the Secretary, Ministry of corporate Affairs stating the gist of issues with SEBI, and sought for personal hearing. In response to the same, petitioner received email dated 27.02.2020 intimating the petitioner to meet the Secretary, Ministry of Corporate Affairs on 05.03.2020 at noon. But even by that date, the impugned order was passed on 27.02.2020 ordering investigation, based on the inquiry report dated 24.02.2020, and this is also another instance of violation of principles of natural justice. He submitted that until the filing of the counter affidavit in the present writ petition, the copy of the report dated 24.02.2020 was not made available to the petitioner. 34. He submits that the stand of the respondents is that while the inquiry under Section 206(1) is under progress, the 2nd respondent conveyed the approval of the Central Government to carryout the full-fledged inquiry under Section 206(4) of the Act and, therefore as the inquiry was ordered by the Central Government under the first p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for directing the ROC to inquire under sub-section 4 of Section 206 of the Act. Therefore non-recording of reasons, by the Central Government, is contrary to the provisions of the Act. 37. Learned Senior Counsel further submits that in the impugned order the 2nd respondent merely relying on the report dated 24.02.2020, stated that in exercise of the powers conferred under Section 212(1)(a) and (c) of the Act, the Central Government has formed an opinion that the affairs of the petitioner company and its group of companies needs to be investigated by SFIO to examine the serious nature of fraud committed, as large public interest is involved. He submits the 2nd respondent has not specifically stated the circumstances for forming of such an opinion. In other words, his contention is that the 2nd respondent, in a mechanical manner, and without application of mind independently, and without appreciating or referring the circumstances for formation of opinion for ordering investigation into the affairs of the company by SFIO, passed the impugned order. 38. He submits that as the investigation into the affairs of the company by SFIO, will have serious repercussions, the procedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioner that no opportunity of being heard as required under Section 206(4) of the Act was provided to the petitioner before submitting report dated 24.02.2020; learned Assistant Solicitor General submits that under Section 206(4) of the Act, if the Registrar of Companies, suo motu initiates inquiry under the said provision, he is required to issue notice and provide opportunity of being heard to the company. But in the present case, as already stated above, the Central Government ordered for full-fledged inquiry under Section 206(4) of the Act. When the Central Government, in exercise of its power conferred on it under the first proviso to Section 206(4) of the Act, orders an inquiry by Registrar of Companies, there is no requirement of issuance any notice, or providing an opportunity of being heard, because the inquiry conducted by the 5th respondent at that stage, would be a non-invasive inquiry. However, as per the directions of this court in W.P.No.3143 of 2020 dated 14.02.2020, 5th respondent, taking into consideration the reply filed by the petitioner on 03.02.2020, submitted report under Section 208 of the Act on 24.02.2020, and based on said report, the 2nd respondent passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for ordering investigation into the affairs of the petitioner - company, is in consonance with Section 212(1) (a) and ( c ) of the Act? 47. Issue No.1. To consider this issue, it is necessary to examine Sections 206, 207 and 208 of the Act. The said provisions, to the extent relevant, are extracted as under: 206. Power to call for information, inspect books and conduct inquiries: (1) Where on a scrutiny of any document filed by a company or on any information received by him, the Registrar is of the opinion that any further information or explanation or any further documents relating to the company is necessary, he may by a written notice require the company-- (a) to furnish in writing such information or explanation; or (b) to produce such documents, within such reasonable time, as may be specified in the notice. (2) On the receipt of a notice under sub-section (1), it shall be the duty of the company and of its officers concerned to furnish such information or explanation to the best of their knowledge and power and to produce the documents to the Registrar within the time specified or extended by the Registrar: Provided that where such in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m as the Registrar or inspector may require and shall render all assistance to the Registrar or inspector in connection with such inspection. .... Section 208. Report on inspection made:- The Registrar or inspector shall, after the inspection of the books of account or an inquiry under Section 206 and other books and papers of the company under Section 207, submit a report in writing to the Central Government along with such documents, if any, and such report may, if necessary, include a recommendation that further investigation into the affairs of the company is necessary giving his reasons in support. 48. A reading of the above provisions makes it clear that sub-section (1) of Section 206 provides that on scrutiny of any document filed by the company or on any information received by him, the Registrar is of the opinion that further information, or explanation, or any further documents relating to the company are required, he may issue notice requiring the company to furnish such information or explanation and to produce such documents. Under sub-section (2) of Section 206, the obligation is cast on the company to furnish such information or explanation and to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it only mandates that Central Government should be satisfied. 53. As per the averments made in the counter affidavit, the circumstances i.e., the alleged frauds appeared in the news papers, SEBI order and the balance sheet submitted by the petitioner as on 31.03.2019, lead to the issuance of notice to the petitioner under Section 206(1) of the Act and the while the scrutiny is in process is in progress, the 2nd respondent also through F.No.07/341/2015/CL-ii(SER) dated 10.01.2020, directed the office to carryout full-fledged inquiry under Section 206(4) of the Act. In the light of these circumstances, it cannot be said that there is no material before the Central Government for satisfying itself that circumstances mentioned in the sub-section, exist for directing the 5th respondent to carryout the inquiry under Section 206(4) of the Act. Therefore, non- recording of the reasons with regard to the satisfaction of existence of circumstances for ordering inquiry, cannot be said to be fatal to the case of the respondents, as that requirement is not envisaged under the statute. It is to be noticed that the issue is at the stage of issuing notice for inquiry, and there is no adjudicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UM UNIVERSAL LTD. v. CENTRAL BOARD OF DIRECT TAXES, 1989 Supp. (2) SCC 462 and UNION OF INDIA v. JESUS SALES CORPORATION (1996)4 SCC 69, as well as foreign judgments, held thus: 50. Oral hearing is not an integral part of hearing, unless the circumstances are (sic) so exceptional that without oral hearing a person cannot put up an effective defence. The rule of audi alteram partem does not require full judicialisation in every case. An opportunity of being heard does not necessarily mean an opportunity of oral hearing is to be provided. It depends upon the nature of inquiry and the nature of right involved in a given case. An order or decision which may have the tendency to adversely affect the liberty to property rights may have to be preceded by a notice and oral hearing. In most of the cases where property rights or liberties are not involved, the type of hearing may depend upon variety of factors - whether oral hearing is necessary in such cases to large extent depend upon the view of the Tribunal or adjudicatory body. Oral hearing may not be necessary where there is no adjudication as such. Oral hearing as such may be necessary in cases where the decision takes away some e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought for were not produced, 5th respondent issued notice dated 24.01.2020 under Section 206(3) of the Act directing the petitioner - company to produce certain original documents/ registers on 27.01.2020 at 3-00 p.m. in his office. 61. The case of the petitioner is that on 27.01.2020, the officials of the company produced original documents and submitted a preliminary reply and requested time to submit further documents and opportunity of personal hearing. The time sought for was rejected. However, the petitioner submitted a detailed reply on 03.02.2020. 62. At that stage, petitioner filed W.P.No.3143 of 2020 challenging the notices dated 03.12.2019, 14.01.2020 and 24.01.2020 issued by the 5th respondent, and this court vide order dated 14.02.2020 directed the respondents to proceed with the inquiry initiated against the petitioner under Section 206(1) of the Act by duly taking into consideration the explanation submitted by the petitioner - company, and conclude the enquiry as expeditiously as possible, preferably within a period of six months, from the date of receipt of a copy of the order. The petitioners were satisfied with the directions of this court. Accordingly as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State Government shall proceed with investigation in such case in respect of any office under this Act and in case any such investigation has already been initiated, it shall not be proceeded further with and the concerned agency shall transfer the relevant documents in respect of such offences under this Act to Serious Fraud Investigating Office. . . . 66. Section 210 deals with the power of the Central Government to order investigation into the affairs of the company under the circumstances enumerated in the said section by the Inspectors to be appointed by the Central Government. Section 212 deals with investigation into affairs of the company by Serious Fraud Investigation Office. In the present case, the investigation is ordered under clauses (a) and (c) of sub-section (1) of Section 212 of the Act. A reading of the said provision makes it clear that without prejudice to Section 210, where the Central Government, on receipt of a report of the Registrar or inspector under Section 208; on intimation of a special resolution passed by a company that its affairs are required to be investigated; in the public interest or; on request from any Department of the Central Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volved and hence, ordered investigation into the affairs of the said companies by SFIO. 73. Section 237 of the 1956 Act deals with investigation of company's affairs by Central Government, and sub-section (b) of said provision requires the Central Government, to form an opinion for ordering investigation into the affairs of the company. The said provision, is akin to Section 213 of the Act of 2013. However, as it is deals with the administrative jurisdiction of the Central Government for ordering investigation on forming an opinion in that regard, the judicial precedents in this regard, would be of considerable help in resolving the present controversy. 74. In Parmeshwar Das Agarwal's case (2 supra), a Division Bench of the High Court of Bombay, relying on the judgment of the Hon'ble Supreme Court in BARIUM CHEMICALS v. COMPANY LAW BOARD (1966) Supp SCR 311 and ROHTAS INDUSSTRIES v. S.D. AGGARWAL (1969)1 SCC 325 , held thus: 40. Thus, the principle is that there has to be an opinion formed. That opinion may be subjective, but the existence of circumstances relevant to the inference as to the sine qua non for action must be demonstrable. It is not reasonabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, this does not mean that the power confers absolute discretion over the decision and that its decision consequently attains unassailable finality. An order of investigation is an administrative order because, as explained in Barium Chemicals (supra) - The discretion conferred to order an investigation is administrative and not judicial since its exercise one way or the other does not affect the rights of a company nor does it lead to any serious consequences, as for instance, hampering the business of the company. 31. Being an administrative order, it is essential that the Government must form an opinion under the section and it has been repeatedly affirmed by the jurisprudence of courts that the certain defects in the formation of opinion is justiciable. ... 47. In the present case Sunair has challenged the order as being arbitrary and illegal primarily on the ground that the Central Government did not make the order on the basis of sufficient material. On this basis they contend that the application of mind in order to form an opinion was defective. It needs to be first established that no order of investigation passed under Section 212 of the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, the Central Government, on the sources referred to under clauses (a) to (d) of the said sub-section, is required to form an opinion that it is necessary to investigate into the affairs of the company by SFIO. It goes without saying that for formation of an opinion with regard to necessity for ordering investigation into the affairs of the company by SFIO, the necessary concomitant is existence of prima facie circumstances, which should be demonstrable before the court when questioned. As the investigation will have serious impact on the functioning of the company and its prospects, it is vital that before ordering investigation, the authority shall appraise itself all the relevant facts. Further, forming an opinion and ordering investigation, is an administrative act of the Central Government, and, therefore, it shall be on satisfactory grounds, and if the same are found to be defective, the action contemplated, is justiciable. 77. In the present case, the impugned order reads as under: Whereas the Central Government is empowered under Section 212 of the Companies Act, 2013 to order investigation into the affairs of any company in Public Interest and to appoint one o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestigation into the affairs of the petitioner - company and its group of companies, formed an opinion that the affairs of the company needs to be investigated to examine the serious nature of fraud committed, as larger public interest involved, and ordered investigation into the affairs of the said companies by SFIO. Before ordering investigation, Oversight Committee was also appointed, which went into the report submitted by the 5th respondent and other material, and recommended for investigation into the affairs of the company by SFIO. 79. The source for forming of an opinion by the Central Government with regard to necessity for ordering investigation into the affairs of the company by SFIO is the report of the 5th respondent dated 24.02.2020 and also the recommendations of the Oversight Committee dated 25.02.2020. 80. As per the facts noted above, the petitioner - company is doing business as a registered stock broker and as a depository participant. As per the averments made in the counter affidavit, on 22.11.2019, National Stock Exchange has reported to Securities Exchange Board of India (SEBI) the findings of an Inspection and Forensic Audit conducted by NSE on the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng with the material papers to the counter affidavit, and the relevant conclusions are as under: (14) CONCLUSION: (14.1) The company has filed its latest financial statements for the financial year 2018-19 only on 23.12.2019 and Annual Return on 31.12.2019. Further based on the media reports and directions from the Directorate and the Ministry letters have been issued to the company include the latest one issued under Section 206(1) dated 14.01.2020 for their comments within 7 days. The company has furnished its reply vide letter dated 03.02.2020, which has been examined in detail in the Tabular Statement attached as Annexure-IV. It may be seen that the company has not provided full details on specific details called for, as may be seen from the attached report. (14.2) In view of the nature of allegations, the number of group companies involved which are under jurisdictions of various ROCs, the prima facie findings that the company has raised their loan capital by pledging shares of their clients and diverted the money to group companies using a power of attorney taken from the clients, which is meant to be used only at the time of the client's direction to sell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d fraud. 8.2 Taking into consideration all these factors, the Oversight Committee unanimously recommended investigation into the affairs of KSBL and their 9 companies mentioned in para 44 above, by SFIO under Section 212(1)(a) and (c) of Companies Act, 2013 by SFIO, in public interest. 85. Considering the report submitted by the 5th respondent dated 24.02.2020 and also the decision of the Oversight Committee dated 25.02.2020, I am of the considered view, that there are prima facie circumstances justifying the action taken by the 2nd respondent in forming opinion with regard to necessity for ordering investigation into the affairs of by the company by SFIO, as large public interest is involved. 86. In the judgments relied on by the learned Senior Counsel appearing for the petitioner in Medak Diocese of Church of South India Trust Association vs. Union of India (1 supra), the facts disclose that the impugned order therein does not disclose formation of opinion with regard to necessity for ordering investigation by SFIO. Therefore, the learned single Judge has remitted the matter back for passing fresh orders in exercise of jurisdiction under Section 212 of the Act. 87 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found that ROC has followed the procedure envisaged under Section 206(4) of the Act and submitted the report; and the said report and the order of this court, and also the other material available on record, was examined by the Oversight Committee, and vide its minutes dated 25.02.2020, recommended for investigation. Eventually, the 2nd respondent, considering the report dated 24.02.2020, and in exercise of his jurisdiction under Section 212(1)(a) and (c) of the Act, and forming an opinion with regard to necessity for ordering investigation into the affairs of the company by SFIO, ordered investigation vide the impugned, as large public interest is involved. In these circumstances, no exception can be taken to the impugned order. 93. For the foregoing reasons, I do not find any infirmity in the impugned order warranting interference of this court under Article 226 of the Constitution of India for exercise of power of judicial review, and in view of the same, W.P.No.5024 of 2020 is liable to be dismissed. 94. It is made clear that the present writ petitions are confined to the jurisdiction of the 2nd respondent in ordering investigation into the affairs of the company by SFIO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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