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TMI Blog2024 (5) TMI 1062X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of certiorari or any other appropriate writ, order or direction calling for the records in relation to the issuance of the Impugned Sanction dated 30.11.2021 issued by the Respondent No. 1 after going through the legality, validity and propriety thereof issue such orders and directions quashing and setting aside any and all actions taken and orders issued in furtherance of the Impugned Sanction dated 30.11.2021 including the impugned notice and impugned summons; (3) Issue a Writ of Certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction calling for the records in relation to the issuance of the Look Out Circular with respect to the Petitioner's by the SFIO and after going through the legality, validity and propriety thereof issue such orders and directions quashing and setting aside the Look Out Circular issued against the Petitioners. 2. Before dealing with the merits of the petition, it is pertinent to highlight brief facts leading to the present petition which are as under: 1. The Company was incorporated on 24.02.2006 by the erstwhile promoters. On account of share purchase transactions between 2008 to 2011, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed an application under Section 66 of the IBC, which is pending adjudication. The Petitioners state that they are taking independent steps to defend these proceedings before the Ld. NCLT, Mumbai. 6. However, shockingly, the Petitioners have recently learnt that on 30.11.2021, a sanction was uploaded by Respondent No. 1 to investigate into the affairs of the Company by exercising power under Section 212 of the Companies Act, 2013. It appears that on 10.03.2022 officers were also appointed in furtherance of the order dated 30.11.2021. 7. Being unaware of the investigation by the SFIO, the Petitioners continued to take bona fide steps to settle the claims with the financial creditor i.e. IDBI Bank. 8. Sometime on or about 12.10.2023, for the first time, notice was issued to one Mr. Gautam Kumar by the Respondent No. 2 with respect to the investigation. This is the first time that the Petitioners learnt that an investigation had been approved and commenced in terms of Section 212 of the Act. 9. In the meantime, on 25.01.2024, IDBI Bank accepted a one-time settlement from the Petitioners and other persons involved with the Company and the Petitioners have substantially paid amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an order sanctioning investigation ought not to be subjected to judicial review on merits, the same can be examined on ground whether the sanction complies with the mandatory requirement of; i) there is requisite opinion formed by the Central Government; and' ii) existence of material and circumstances to indicate that the company's affairs are causing prejudice to the public interest. The Petitioners submit that in the present case the order of investigation is completely unreasoned, requisite opinion is not formed by the Central Government, there does not exist material/circumstances/fact necessitating investigation and is without any basis and is merely based on the ipse-dixi of the liquidator who has already filed an application under Section 66 of the Insolvency and Bankruptcy Code 2016 ("IBC"), which is pending adjudication. 4. The order of sanction dated 30.11.2021 is reproduced as under: "Whereas the central government is empowered under section 212 of the companies act 2013 to order an investigation into the affairs of a company. AND Whereas IBBI has forwarded the name of SPG Multitrade Private Limited wherein the Resolution Professional has filed an applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 25.01.2024. Therefore, the sanctioning order dated 30.11.2021 be quashed and any further steps in furtherance thereto be quashed and set aside. 6. Notice was issued by this Court on 19.03.2024, time was given to the Respondents to file a reply and the Petition was made returnable within 3 weeks. On 15.04.2024, once again the Respondent sought time and as and by way of last indulgence, one week time was granted to the Respondent to file reply. However, till date, the Respondent has not filed any reply and therefore the matter shall be proceeded without reply. It may not be out of place to mention at this juncture that the Petitioners may be right in contending that the impugned sanction will have to stand on its own, the Respondent authority cannot substitute the existence of opinion, material facts and circumstances and public interest, by way of filing additional Affidavit. 7. The learned counsel for the Petitioners submits that their case is wholly covered by the judgment of the Bombay High Court in Parmeshwardas Agarwal v/s. Additional Director [reported in 2016 SCC OnLine Bom. 9276). Learned counsel for the Petitioners states that the said order has been confirmed by the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his section, the Central Government may appoint one or more persons as inspectors to investigate into the affairs of the company and to report thereon in such manner as the Central Government may direct." 42. Therefore, a perusal of this section would indicate that the Central Government must form an opinion, that opinion must be that it is necessary to investigate into the affairs of a company. The Central Government can act on the receipt of a report of the Registrar or Inspector under section 208 or on intimation of a special resolution passed by a company that its affairs are to be investigated or in public interest. Thus, there is a discretion to order an investigation into the affairs of the company. 46. A bare perusal of this order would indicate that the Central Government has referred to the report dated 13th January, 2016, but completely misread and misinterpreted it. It has not recommended any investigations to be made under the Companies Act, 1956 or 2013. If at all the investigations are to be made in terms of this recommendatory report, or suggestion therein, that is for the multiple disciplinary authorities to find out mis-utilisation of bank finances and other v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the request from any department of the Central Government or the State Government. By section 211, the SFIO is established to investigate frauds relating to a company. It is a very special office and headed by a Director and consists of such number of experts from the fields enumerated in subsection (2) of section 211 to be appointed by the Central Government from amongst persons of ability, integrity and experience. The wide powers that this office enjoys, as is set out in various sub-sections of section 212, would denote as to how its involvement comes after the investigations are assigned to it by the Central Government. By their very nature the investigations into frauds relating to a company have to be assigned. They have to be of such magnitude and seriousness demanding involvement of experts in the fields enumerated in sub-section (2) of section 211. Therefore, while exercising the powers under sub-section (1) of section 212, the Central Government ought to be not only forming an opinion about the necessity to investigate into the affa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly non-speaking. There is absolutely no reflection of any sort of opinion arrived at by the Government in the impugned sanction. 12. It is further argued by the counsel for the Petitioners is that the provisions of Section 212 require the Respondent No. 1 to form an 'opinion' which itself means that there has to be due application of mind on the basis of relevant material before it, and the formation of 'opinion' under the said provisions cannot be rendered an empty formality as has been done in the present case. The passing of an order under Section 212 (1) (c) on a mere Transaction report allegedly placed on record by the Liquidator without any independent application of mind by the Respondent No. 1 is impermissible. Further, the opinion so formed by the Respondent No. I cannot be vague, generic or indefinite. The necessity and justification or otherwise for passing an order under Section 212 (1) (c) is also required to firstly exist and secondly the same has to be spelled out in the Impugned Order. For the purposes of section 212 of the Companies Act, there is a mandatory duty on the Central Government to verify the material on record and the allegations made, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 of the Companies Act can by no stretch of imagination mean a liquidator. It is well settled that whenever in the process of liquidation, a liquidator has a suspicion that the affairs of the company have not been conducted in a manner as required under the Companies Act and there are transactions hit by section 66 of the IBC, he may file an application before the NCLT, seeking necessary reliefs. In the present case, the liquidator has already filed a preferential transaction application before the NCLT Mumbai, on the same cause of action. Therefore, it is stated that initiation of SFIO investigation under section 212 of the Companies Act, relying on the recommendation of a liquidator is completely without jurisdiction and deserves to be quashed and set aside. 18. It is the case of the Petitioners that once a transaction is classified as a transaction which is likely to be covered under section 66 of the IBC, the provisions of IBC will come into operation and all actions will be required to be taken under the IBC, which is a code in itself. In the present case, the liquidator has filed an application before the NCLT Mumbai, on the same cause of action, on the ground that the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. As far as the 1956 Act is concerned, the same contains provision enabling the Central Government to act upon a report made by the Registrar under sub-section (6) of section 234 or sub-section (7) of section 234 read with sub- section (3) thereof and appoint one or more competent persons as Inspectors to investigate into the affairs of the company and to report thereon in such manner as the Central Government may direct. The further powers in terms of section 236 enables members of the company to approach the Central Government for causing an investigation to be made. That is a situation dealt with by section 236. Without prejudice to the powers under section 235, the Central Government independently can direct investigation, but that is in other cases. The said power is to be found in section 237. In view of the aforesaid, the learned counsel for the respondent has prayed for dismissal of the writ petition. 22. We have heard learned counsel for the parties and perused the record. 23. Once the liquidator and the authorities have taken action against the company for the alleged transactions covered under section 66 of the IBC, there is no question of SFIO carrying out investiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities. Therefore, in the entire transaction, there is no element of public interest. As per the Petitioners the following facts and circumstances show that the affairs of the Company was at all times carried in accordance with law and there is absolutely no element of fraud and/or public interest involved in the transaction carried out by the Company; 26. On 01.04.2009, 04.12.2010, 25.07.2012, 29.01.2013, 20.11.2013, 05.08.2014, 08.04.2015, 02.04.2016, 12.07.2016 and 07.09.2017 the IDBI Bank Ltd, considering the healthy financial status of the Company has extended financial facilities totaling to about 70 crores to the Company. At the time of renewal of the financial facilities, the IDBI Bank Ltd has done its due diligence inter-alia examining the financial health of the Company and the conduct of the management and after being duly satisfied, has renewed the financial facilities. 27. Since 2013 to 2019, the IDBI Bank Ltd, has been regularly conducting stock audit reports of the Company. A stock audit conducted by a Bank includes a third party verifying the physical stocks of the Company, examining the books of the Company vis-à-vis the sale and cash flow and as such is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serious injury as soon as it is made and such injury may not be capable of being entirely erased. These powers cannot be used ordinarily or in normal circumstances or in a mechanical way. There has to be extraordinary circumstances made out, an opinion formed by the Central Government based on material and relevant documents and circumstances of such extra ordinary circumstances and an opinion that investigation by SFIO is required against a company. The Legislature has given extremely wide powers under section 212 of the Companies Act to order investigation by the SFIO, on the presumption that the Central Government being an expert body will not arbitrarily or without duly applying its mind invoke the powers under section 212 of the Companies Act. Such kind of unbridled power will necessarily ought to be exercised with great responsibility. 32. Discretionary power has been conferred upon the central government to enable the government to assume the power to step in where there is reason to suspect that a company may be conducting its affairs in a manner prejudicial to the interest of the public at large. However the discretionary power must not be exercised, in a manner, that wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irrelevant or extraneous consideration. The material and circumstances based on which the opinion to order and investigation has been rendered will have to prima facie show that the inferences drawn from the facts in the material and circumstances led to conclusions of certain definiteness as has been rightly held in the judgment of Parmeshwardas Agarwal (supra). In other words, it will have to be examined weather there existed necessary material or circumstances to arrive at an opinion requiring investigation of the affairs of a company by the SFIO. At this juncture, we must caution ourselves to not sit in appeal over the opinion formed by the Central Government and to not substitute the opinion of the Central Government but restrict to examination of existence of circumstances and material facts to grant the impugned sanction. 37. A perusal of the impugned sanction dated 30.11.2021 would show that the Central Government has based its opinion on the following material and circumstances; A) presentation and information given by the liquidator; and B) transaction audit Report. 38. We are of the considered view that to commence investigation under section 212 of the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to be true and correct. Therefore, on examination of all the material and facts available with the Central Government at the time of granting the impugned sanction dated 30.11.2021, we are of the considered opinion, there did not exist any material or relevant circumstances to arrive at a conclusion that investigation into the affairs of the company is required under section 212 (1) (c) of the Companies Act in the public interest and no prudent person could have arrived at such a conclusion on basis of the facts which were available with the Central Government at the time of granting the impugned sanction. 42. In light of the aforementioned judgments, we are of the opinion that an order of sanction under Section 212 of the Companies Act, 2013 needs to be a reasoned order, there needs to be existence of opinion formed by the Central Government on the basis of material facts and circumstances warranting such investigation and in compliance with principles of natural justice. In our opinion the impugned sanction dated 30.11.021 fails on all counts for reasons stated hereinabove. On a perusal of the impugned order it is evident that the Impugned Order is solely based on the suspic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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