NCLT cannot straight away direct probe into affairs of Corporate Debtor by SFIO, NCLAT
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NCLT cannot straight away direct probe into affairs of Corporate Debtor by SFIO, NCLAT

Aditi Singh

The NCLAT has held that the Adjudicating Authority under the Insolvency and Bankruptcy Code,2016 (IBC) i.e. National Company Law Tribunal has no power to straightaway order an investigation to be conducted into the affairs of a Corporate Debtor by the Serious Fraud Investigation Office (SFIO) in terms of 213 of the Companies Act, 2013.

The Appellate Tribunal has clarified that the Adjudicating Authority can, after giving notice to the promoters etc of the Corporate Debtor and following the procedure as laid down in Section 213, refer the matter to the Central Government for investigation by the Inspector or Inspectors if prima facie case is made out.

On such investigation, if any actionable material is made out and the Central Government feels that the matter requires investigation through SFIO, it may refer the matter to SFIO for investigation, the Appellate Tribunal has stated.

The judgment was passed by a three-member Bench of Chairperson, Justice SJ Mukhopadhaya, Member (Judicial) Justice AIS Cheema and Member (Technical) Kanthi Narahari in an appeal against an order passed by the Adjudicating Authority, NCLT, Bengaluru Bench.

During the Corporate Insolvency Resolution Process against the Corporate Debtor, M/s Bhuvana Infra Projects Private Limited, the Resolution Professional filed an application under Section 66 read with Sections 25(2), 69, 70 and other applicable Sections of the IBC, seeking to attach the personal assets of the Promoters of Corporate Debtors for the recovery of total dues of Rs 461,163,402.

The Resolution Professional argued that the Promoters of the Corporate Debtor had defrauded the creditors and the Corporate Debtor was made a Shell Company with no employees, no business and no assets.

It was alleged that the Promoters were not co-operating in the insolvency resolution process and since there were no other assets available with the Corporate Debtor, except receivables from the Group Companies, the Resolution Professional was entitled to find out the assets diverted by the Corporate Debtor to the Group Companies.

After hearing the parties, the NCLT opined that it was necessary to refer the matter to SFIO in order to test the veracity of allegations and counter-allegations made by the parties.  It, therefore, directed the Central Government to refer the matter to the SFIO for further investigation as expeditiously as possible.

One of the Promoters and a Group Company of the Corporate Debtor (Appellants) moved the Appellate Tribunal in an appeal against the order.

The Appellants submitted that the order was passed by the NCLT in the exercise of powers conferred under Section 213 of the Companies Act, 2013 without framing any charge against the individual proprietary and without notice and hearing the Appellants or other Promoters.

It was further argued that for an investigation into affairs of Company by SFIO, Section 212 of the Companies Act could only be invoked by the Central Government and not by the Adjudicating Authority/NCLT.

After hearing the parties, including the Resolution Professional, the Appellate Tribunal perused the relevant provisions of law and observed that if during the Corporate Insolvency Resolution Process or Liquidation Process, it is found that any business of the Corporate Debtor had been carried on with intent to defraud creditors or for any other fraudulent purpose, it was always open to the Adjudicating Authority to pass appropriate orders in terms of Section 66 IBC.

In the present case, apart from Section 66, the allegations leveled by the Resolution Professional, prima facie, attracted Part II, Chapter VII of IBC as well i.e. Section 68 for punishment for concealment of property, Section 69 for punishment for transactions defrauding creditors, Section 70 for punishment for misconduct in course of corporate insolvency resolution process, Section 71 for punishment for falsification of books of corporate debtor, Section 72 for punishment for wilful and material omissions from statements relating to affairs of corporate debtor and Section 73 for punishment for false representations to creditors.

Clarifying the power of the NCLT with respect to the above-listed sections,  the Appellate Tribunal stated that the power of NCLT to pass appropriate orders was limited to Section 66 and no order for punishment or imprisonment could be imposed by it for the above-listed offences.

The offences under Chapter VII can be passed only by way of a trial by a Special Court in terms of Section 236 of the IBC, it held.

The Appellate Tribunal further added that no Court can even take cognizance of any of these offences except on a complaint made by the Insolvency and Bankruptcy Board of India (IBBI) or the Central Government or any person authorized by the Central Government in this behalf.

Addressing the issue of referring the matter to SFIO, the Appellate Tribunal analyzed Section 212 of the Companies Act and observed that  an investigation into affairs of a company could be made only on receipt of a report of the Registrar or Inspector under Section 208 of the Companies Act, 2013 or on intimation of a special resolution passed by a company that its affairs are required to be investigated or in the public interest or on request from any Department of the Central Government or a State Government.

Section 212 does not empower the National Company Law Tribunal or the Adjudicating Authority to refer the matter to the Central Government for investigation by the ‘Serious Fraud Investigation Office’ even if it notices the affairs of the Company of defrauding the creditors and others.“, it iterated.

The Appellate Tribunal, however, added that in terms of an application made to the NCLT by ‘any other person’ (Resolution Professional) or otherwise (suo motu) under Section 213(b) of Companies Act,  the NCLT may order an investigation into affairs of a company by “an Inspector or Inspectors” appointed by the Central Government after giving a “reasonable opportunity” of being heard to the parties.

If a case is made out after the investigation by the Inspector and the Central Government feels that the matter requires investigation by the SFIO under Section 212 of the Companies Act, 2013, depending on the gravity of charges found during the investigation, the Central Government may refer the matter to the Agency, the Appellate Tribunal stated.

Therefore, the Appellate Tribunal held,

In view of the aforesaid position of law, we are of the view that the Adjudicating Authority was not competent to straight away direct any investigation to be conducted by the ‘Serious Fraud Investigation Office’.”

The Appellate Tribunal has further clarified that on the completion of the investigation, if it is found that offences punishable under Section 213 read with Section 447 of the Companies Act, 2013 or Sections 68, 69, 70, 71, 72 and 73 IBC have been committed, the Central Government may refer the matter to the Special Court for trial or may ask the IBBI or may authorize any person in terms of sub-section (2) of Section 236 IBC to file a complaint before the Special Court.

In view of the above, in order to ascertain if there was a violation of Sections 68, 69, 70, 71, 72 & 73 IBC, the Appellate Tribunal modified the order passed by NCLT and referred the matter to the Secretary, Ministry of Corporate Affairs, Government of India, to get the matter investigated by Inspector or Inspectors.

It ordered,

“..(We) refer the matter to the Secretary, Ministry of Corporate Affairs, Government of India, to get the matter investigated by Inspector or Inspectors and following the procedure in terms of Section 213 of the Companies Act, 2013 and/ or on such report after investigation by the Inspector, the Central Government feels that the matter is further required to be investigated by the ‘Serious Fraud Investigation Office’ it may do so and thereafter, if actionable material making out case of fraud is made out after such investigation by the ‘Serious Fraud Investigation Office’, it may act in terms of sub-section (2) of Section 236 of the ‘I&B Code’ for referring the matter to the Special Court. 

Both the appeals stand disposed of with aforesaid observations and directions. No costs.”

The Appellant – Lagadapati Ramesh was represented by Senior Advocate Arun Kathpalia with Advocates Y Suryanarayan and the appellants – Commune Properties were represented by Rajshekhr Rao, along with RV Yogesh, Areeb Amanull and Anigdha Singh.

Resolution Professional R Bhuvaneshwari appeared in person. ,

Read the Judgement:

Lagadapati-Ramesh-vs-Ramanathan_watermark.pdf
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