Delhi High Court quashes SFIO probe into Educomp Solutions

The Delhi High Court has quashed the Serious Fraud Investigation Office (SFIO) investigation into the affairs of education technology company Educomp Solutions Limited [Vinod Kumar Dandona v Union of India & Ors]. 

In an order dated October 16, Justice Amit Mahajan held that the Central government’s order of August 17, 2018, directing the probe was passed mechanically and without application of mind.

“The cavalier manner in which the material, as noted above, has been cited, for justifying the entrusting of the investigation to the SFIO, in the opinion of this Court, ought to be deprecated,” the Court said.  

It added that the officers appointed under the Companies Act are experts in matters of corporate governance, and they cannot rely upon unsubstantiated material and reports to justify serious action as contemplated under Section 212(1)(c) of the Companies Act.

Section 212(1)(c) empowers the Central Government to order an investigation into the affairs of a company by the SFIO.

Justice Mahajan passed the order while hearing petitions filed by Educomp’s former independent director Vinod Kumar Dandona, founder Shantanu Prakash, director Jagdish Prakash, Learning Leadership Foundation and former chief financial officer Ashish Mittal.

The SFIO probe concerned allegations of financial irregularities, including account manipulation, diversion of funds, fictitious transactions and undervalued sale of group companies.

The petitioners argued that the investigation was ordered without sufficient material and that earlier inspections had not established fraud or diversion of funds. They also alleged that the probe stemmed from a corporate rivalry involving former business partner Raffles Group.

However, the Central government defended its decision. It stated that it followed a June 2018 oversight committee review of inspection reports, lenders’ complaints, references from the Prime Minister’s Office and media reports.

The Court also examined an article published by The Wire, which was among the material relied upon to justify the probe. 

Justice Mahajan held that a newspaper report, without independent corroboration, could not by itself, justify an SFIO investigation. 

The inspection reports had not found evidence of siphoning or defalcation of funds. A letter from a Member of Parliament was also insufficient to justify the probe, the Court said. 

Ultimately, the Court said that the government had failed to demonstrate application of mind under Section 212(1)(c) of the Companies Act, 2013. Therefore, it quashed the order for SFIO probe and all consequential proceedings. 

Senior Advocate Mahesh Jethmalani along with advocates Arshdeep Singh Khurana, Neha Nagpal, Vishvendra Tomar, Tannavi Sharma, Khushboo Jain, Nishta Juneja, Yashvendra Tomar and Ajatshatru Singh Rawat. Shikhar Sharma and Harsh Kumar appeared for the petitioners.

Additional Solicitor General (ASG) Chetan Sharma and Central Government Standing Counsel (CGSC) Amit Tiwari along with advocates Amit Gupta, Ayushi Srivastava, Chetanya Puri, Divyanshu Bhardwaj, RV Prabhat, Shubham Sharma, Arpan Narwal, Yash Wardhan Sharma, Naman Singh, Kushagra Malik, Ujjwal Tyagi and Vidhi Gupta represented SFIO.

[Read Judgment]