Hari Sankaran vs Union Of India

Limited (hereinafter referred to as ‘the IL&FS’) and has confirmed

the order passed by the National Company Law Tribunal,

Mumbai Bench (hereinafter referred to as ‘the learned Tribunal’)

dated 01.01.2019 by which the learned Tribunal allowed the said 2

application preferred by the Central Government under Section

130(1) & (2) of the Companies Act, 2013 (hereinafter referred to

as the ‘Companies Act’) and has permitted re­casting and re­

opening of the accounts of IL&FS, IL&FS Financial Services

Limited (hereinafter referred to as the “IFIN”) and IL&FS

Transportation Networks Limited (hereinafter referred as the

“ITNL”) for the last five years, the original appellant has preferred

the present appeal.

2. The facts leading to the present appeal in nutshell are as

under:

That respondent No. 2 – IL&FS is a company incorporated

under the provisions of the Companies Act, 1956. That the said

company IL&FS has 348 group companies, including IFIN and

ITNL. That the said IL&FS is a core investment company and

systemically important Non­Banking Finance Company duly

approved under the Reserve Bank of India Act, 1931. The said

company was promoted by the Central Bank of India, HDFC Ltd.,

the Union Trust of India. That the said company is holding

prominent infrastructure development and finance companies.

Over the years, it had inducted institutional shareholders. That

the said IL&FS, during the financial year 2017­18 had 169 3

companies, out of which, 24 companies are direct subsidiaries,

135 companies are indirect subsidiaries, 6 companies are joint

ventures and 4 companies are associate companies. That the

appellant herein claims to be the Vice­President/Director of

IL&FS who has been suspended as the Director of IL&FS and its

group companies.

2.1 That on 01.10.2018, the Central Government through the

Ministry of Corporate Affairs filed a petition before the learned

Appellate Tribunal under Sections 241 and 242 of the Companies

Act alleging inter alia, mismanagement by the Board of IL&FS

and that the affairs of IL&FS were being conducted in a manner

prejudicial to public interest. That the Central Government

prayed for the following reliefs:

1. That the existing Board of Directors of Respondent No. 1 company, comprising of R2 to R8, be suspended with immediate effect and 10 (Ten) persons be appointed as directors in terms of provisions of Section 242(2)(k) of the Act, to manage the affairs of R1 company and its group companies through their nominees, and such directors any report and function under the Hon’ble Tribunal on such matters as it may direct:

4

2. That the Board of Directors appointed by the Hon’ble Tribunal in terms of 242(2)(k) of the Act be authorized to replace such number of directors of subsidiaries, joint ventures and associate companies as may be required to make the R1 and its group companies as going concern.

2.2 That it was found that the management of IL&FS and other

group company/companies were responsible for negligence and

incompetence, and had falsely presented a rosy financial

statement. To unearth the irregularities committed by IL&FS

and its companies, the provisions of Section 212(1)(c) of the

Companies Act were invoked for investigation into the affairs of

the company. The investigation was to be carried out by the

Serious Fraud Investigation Office (hereinafter referred to as ‘the

SFIO’) in exercise of powers under Section 212 of the Companies

Act. The SFIO submitted an interim report dated 30.11.2018 to

the Central Government placing on record that the affairs in

respect of IL&FS group Companies were mis­managed, and that

the manner in which the affairs of the company were being

conducted was against the public interest. The said report shall

be referred to hereinbelow.

5

It appears that the Registrar of Companies also conducted

an enquiry under Section 206 of the Companies Act, and prima

facie concluded that mis­management and compromise in

corporate governance norms and risk management has been

perpetuated on IL&FS and its group companies by

indiscriminately raising long term and short terms

loans/borrowings through Public Sector Banks and financial

institutions. It was also observed that IL&FS company has been

presenting a rosy picture by camouflaging its financial

statements, and concealing and suppressing severe mismatch

between its cash flows and payment obligations, total lack of

liquidity and adverse financial ratios. It was also found that

IL&FS company has first defaulted on commercial paper and

then on short term borrowings i.e. inter corporate deposits,

negative cash flows in operating activities etc. It was further

observed that the consolidated balance­sheet of IL&FS company

indicated the extremely precarious financial position, and was

virtually in deep red. It was found that intangible assets of

approximately Rs.18,540 crores as on 31.03.2017, has increased

to approximately Rs.20,004 crores as on 31.03.2018, thus 6

creating a serious doubt about the correctness of the financial

statements. A Report dated 03.12.2018 was submitted by the

Institute of Chartered Accountants of India (“ICAI”) which has

been placed on the record of the Tribunal.

2.3 In this background, the Union of India approached the

learned Tribunal for reliefs under Sections 241 and 242 of the

Companies Act.

2.4 Thereafter, by a detailed and reasoned order, the learned

Tribunal vide Order dated 01.10.2018 allowed the said prayers

and suspended the Board of Directors of IL&FS, and appointed

the newly constituted Board to conduct the business as per the

Memorandum and Articles of the companies. That the learned

Tribunal issued the following directions:

“On the basis of the foregoing discussions and after considering the facts of the case, a narrated in the Petition filed by the Union of India, this Bench is of the considered view that it is judicious to invoke the jurisdiction prescribed under Section 241(2) of the Companies Act, 2013 and the Tribunal is of the opinion that as per Section 242(1) of the Companies Act, 2013, the affairs of the IL&FS were being conducted in a manner prejudicial to public interest. The Interim prayer of suspending the present Board of Directors 7

and reconstitution of the new Board of Directors is hereby allowed. At present, by an additional affidavit only 6 names (supra) of Board members have proposed by the Union of India.

Further directed that the present Board of Directors be suspended with immediate effect. The six Directors as reproduced supra shall take over the R1 company immediately. Newly constituted Board shall hold a meeting on or before 8th October, 2018 and conduct business as per the Memorandum and Articles of Association of the company and the provisions of the Companies Act, 2013. Liberty is granted to the Board of Directors to select a Chairman among themselves. Thereafter, report the roadmap to NCLT, Mumbai Bench at the earliest possible not later than the next date of hearing. The suspended directors hence forth shall not represent the R1 company as a Director and shall also not exercise any powers as a director in any manner before any authority as well.

As a consequence of “Admission” of the Petition, issue notice to intimate next date of hearing. The Petition is to serve copy of this order along with Petition to all the Respondents. The Respondents in turn may file their reply by 15th October, 2018, only after serving copy to the petitioner. The Petitioner can file rejoinder, if deem fit, by 30 th October, 2018.” 8

2.5 That thereafter the Union of India through the Ministry of

Corporate Affairs approached the learned Tribunal under Section

130(1) of the Companies Act seeking permission for re­opening of

the books of accounts and re­casting thereof, including the

financial statements of IL&FS, IL&FS Financial Services Limited

and IL&FS Transportation Networks Limited for the last five years

viz. from Financial Year 2012­2013 to Financial Year 2017­2018.

The learned Tribunal issued notices to the Income Tax

Authorities, SEBI, and any other statutory regulatory body or

authority, or other persons concerned. The learned Tribunal

directed the Central Government to serve the notices upon the

said parties.

At this stage, it is required to be noted that the aforesaid

three companies through their new board of directors appeared

through their counsel before the learned Tribunal at the time of

hearing of the aforesaid application under Section 130 of the

Companies Act. That, thereafter, after hearing the counsel

appearing on behalf of the respective parties, including the

learned counsel appearing on behalf of the erstwhile directors,

who opposed the application filed under Section 130 of the 9 Companies Act, the learned Tribunal vide its Order dated

01.01.2019 allowed the application filed under Section 130 of the

Companies Act, and permitted the said application for re­opening

the books of accounts, and re­casting the financial statements of

the aforesaid three companies for the last five years viz. from

Financial Year 2012­2013 to Financial Year 2017­2018.

2.6 Feeling aggrieved and dissatisfied with the order passed on

the application under Section 130 of the Companies Act by the

learned Tribunal dated 01.01.2019, permitting the re­opening

and re­casting of the financial statements of the aforesaid three

companies for the last five years viz. from Financial Year 2012­

2013 to Financial Year 2017­2018, the appellant herein who is a

suspended Director of IL&FS alone preferred an appeal before the

learned Appellate Tribunal. That by the impugned judgment and

order, the learned Appellate Tribunal has dismissed the said

appeal.

3. Feeling aggrieved and dissatisfied with the impugned

judgment and order passed by the learned Appellate Tribunal

dismissing the said appeal, and confirming the order passed by

the learned Tribunal dated 01.01.2019 allowing the application 10

under Section 130 of the Companies Act, the original appellant

i.e. the suspended Director/erstwhile Director of IL&FS has

preferred the present appeal.

4. With the consent of the learned Senior Counsel appearing

on behalf of the respective parties, and in the facts and

circumstances of the case, we have heard the application for

vacating the interim Order along with the main Appeal finally.

5. Shri Dhruv Mehta, learned senior counsel has appeared on

behalf of the appellant and Shri Maninder Singh, learned Senior

Counsel has appeared on behalf of the Union of India as well as

the other contesting respondents.

6. Shri Dhruv Mehta, learned Senior Counsel appearing on

behalf of the appellant has vehemently submitted that the

impugned order passed by the learned Appellate Tribunal

dismissing the said appeal and confirming the order passed by

the learned Tribunal allowing the application under Section 130

of the Companies Act is absolutely illegal and bad in law.

6.1 Mr. Dhruv Mehta, learned Senior Counsel appearing on

behalf of the appellant has submitted that the order passed by

the learned Tribunal allowing the application under Section 130

of the Companies Act is absolutely illegal and as such contrary to 11

the provisions of Section 130 of the Companies Act. It is further

submitted by Mr. Dhruv Mehta that as such the pre­conditions

before passing the order under Section 130 of the Companies Act

for re­opening and re­casting the statements of account of the

company, namely (i) the relevant earlier accounts were prepared

in a fraudulent manner; or (ii) the affairs of the company were

mismanaged during the relevant period, casting a doubt on the

reliability of financial statements, have not been satisfied.

6.2 Mr. Dhruv Mehta, learned Senior Counsel appearing on

behalf of the appellant has submitted that as such there is no

specific finding given by the learned Tribunal while allowing the

application under Section 130 of the Companies Act that either

the relevant earlier accounts were prepared in a fraudulent

manner, or the affairs of the company were mismanaged, during

the relevant period casting a doubt on the reliability of financial

statements. It is submitted that in the absence of any specific

finding by the learned Tribunal on the aforesaid, it was not

permissible for the learned Tribunal to pass the order under

Section 130 of the Companies Act permitting re­opening of the

books of accounts and re­casting of financial statements of the

company/companies.

12

6.3 It is further submitted that, on the contrary, there is a

specific finding/observation by the learned Tribunal in the order

under Section 130 of the Companies Act itself that the accounts

were not prepared in a fraudulent manner. It is submitted that

the conditions precedent for invoking the powers under Section

130 of the Companies Act were not satisfied, and the learned

Tribunal was not justified in passing the impugned order under

Section 130 of the Companies Act. It is further submitted that

therefore the learned Appellate Tribunal ought to have quashed

and set aside the order passed by the learned Tribunal.

6.4 It is further submitted by Shri Dhruv Mehta learned Senior

Counsel that, even otherwise, the order passed by the learned

Tribunal is in breach of natural justice inasmuch as sufficient

opportunity was not given to the appellant by the learned

Tribunal before passing the order under Section 130 of the

Companies Act. It is submitted that the notice on the

application under Section 130 of the Companies Act was issued

on 27.12.2018 and the impugned order came to be passed on

01.01.2019. It is submitted that even though the appellant

sought time to file the reply, the Tribunal without granting any

further time to the appellant to file the reply, passed the 13

impugned order. It is submitted that as per the amended Section

130 of the Companies Act, before passing the order under Section

130 of the Companies Act, not only the Income Tax Authorities

and other authorities were required to be heard, even the “other

persons concerned”, including the Directors/Ex­Directors of the

company were required to be heard. It is submitted that the

order passed by the learned Tribunal was in violation of the

principles of natural justice, therefore the same was required to

be quashed and set aside by the learned Appellate Tribunal.

It is further submitted that though the aforesaid submission

was made before the learned Appellate Tribunal, and the learned

Appellate Tribunal accepted that the order passed by the learned

Tribunal is in breach of the principles of natural justice, the

learned Appellate Tribunal dismissed the appeal. It is submitted

that, therefore, in the facts and circumstances of the case, the

learned Appellate Tribunal ought to have set aside the order

passed by the learned Tribunal and ought to have remanded the

matter to the learned Tribunal for fresh decision after giving

opportunity of hearing to the appellant. In support of the above

submissions and request, Shri Dhruv Mehta, learned senior

counsel appearing on behalf of the appellant has heavily relied 14

upon the decisions of this Court in the case of Mannalal Khetan

v. Kedar Nath Khetan (1977) 2 SCC 424 and in the case of

Swadeshi Cotton Mills v. Union of India (1981) 1 SCC 664.

Relying upon the above decisions of this Court, it is submitted

that when the Statute provides that things are required to be

done in a particular manner, it ought to have been done in the

same manner as provided under the Statute. It is submitted that

in the present case as the Statute specifically provides that before

passing the order under Section 130 of the Companies Act, an

opportunity is to be given to all concerned and that two

conditions, as referred to hereinabove, are to be satisfied, the

same are required to be followed and complied with.

6.5 It is further submitted by Shri Dhruv Mehta, learned Senior

Counsel appearing on behalf of the appellant that, even

otherwise, there is no specific finding by the learned Tribunal

with respect to the mismanagement by the erstwhile Directors.

So far as the reliance placed upon the observations made in the

earlier order dated 01.10.2018 is concerned, it is submitted that

the order dated 01.10.2018 passed under Sections 241/242 of

the Companies Act cannot be said to be the final order. It is 15

submitted that it is an interim order/report to which the

appellant has already submitted the objections, which are yet to

be considered. It is submitted that, therefore, condition No. (ii) of

Section 130(1) of the Companies Act is not satisfied.

6.6 It is submitted that therefore, as the condition precedent

while invoking the powers under Section 130 of the Companies

Act are not being met, the learned Tribunal ought not to have

and could not have invoked and applied Section 130 of the

Companies Act. In support of his above submission, Shri Dhruv

Mehta, learned Senior Counsel appearing on behalf of the

appellant has relied upon the decision of this Court in the case of

Calcutta Discount Company v. Income Tax Officer AIR 1961

SC 372.

6.7 It is further submitted by the learned Senior Counsel

appearing on behalf of the appellant that all the three different

provisions, namely Section 130, Sections 211/212 and Sections

241/242 of the Companies Act, operate in the different fields and

in different situations and as such they are in different chapters

and therefore the observations made while passing the order 16

under one provision cannot be made applicable to while passing

the order under different provisions.

6.8 Shri Dhruv Mehta, learned Senior Counsel appearing on

behalf of the appellant has further submitted that what is

required to be considered is the relevant material at the time

when the learned Tribunal passed the order under Section 130 of

the Companies Act. It is submitted that the respondents cannot

support the order passed by the learned Tribunal under Section

130 of the Companies Act relying upon the subsequent

developments/events. In support of his above submission, he

has heavily relied upon the decisions of this Court in the cases of

Mohinder Singh Gill v. Chief Election Commissioner, New

Delhi (1978) 1 SCC 405 and T.P. Senkumar v. Union of India

(2017) 6 SCC 801. It is submitted that the decision of this Court

in the case of Chairman, All India Railway Recruitment

Board v. K. Shyam Kumar (2010) 6 SCC 614 relied upon by the

learned Counsel appearing on behalf of the Union of India shall

not be applicable to the facts of the case on hand. It is submitted

that in the case of K. Shyam Kumar (supra), this Court was

considering the administrative decision/order and while 17

considering such administrative order/decision, this Court

observed that the subsequent events/reports can be considered

while considering the legality and validity of the original

action/order in the public interest.

6.9 Shri Dhruv Mehta, learned Senior Counsel appearing on

behalf of the appellant has further submitted that, therefore,

neither the condition precedent provided in Section 130(1) of the

Companies Act has been complied with/satisfied, nor even

Section 130(2) of the Companies Act has been complied with, and

it is in violation of the provisions of Section 130(1) of the

Companies Act, and as sufficient opportunity was not given to

the appellant, therefore, is in violation of the principles of natural

justice. It is prayed that the present appeal be allowed and the

order passed by the learned Tribunal allowing the application

under Section 130 of the Act be set aside.

6.10 It is further submitted by Shri Dhruv Mehta, learned Senior

Counsel appearing on behalf of the appellant that so far as the

impugned order passed by the learned Appellate Tribunal is

concerned, it is submitted that none of the submissions/ground

raised on behalf of the appellant have been dealt with and/or 18

considered by the Appellate Tribunal. It is submitted that the

learned Appellate Tribunal was considering/deciding the

statutory appeal and therefore the learned Appellate Tribunal

was supposed to deal with the grounds raised on behalf of the

appellant. It is submitted that though the plea of violation of

principles of natural justice was specifically pleaded and even the

learned Appellate Tribunal also observed that there may be

violation of principles of natural justice, in that case, the learned

Appellate Tribunal ought to have remanded the matter to the

learned Tribunal. It is submitted that the learned Appellate

Tribunal ought to have appreciated that in view of the violation of

principles of natural justice, it has caused great prejudice to the

appellant. It is submitted that as observed and held by this

Court in the case of Swadeshi Cotton Mills (supra), when the

principles of natural justice are prescribed by the statutory

provision, no prejudice is required to be shown for invoking the

ground of violation of principles of natural justice.

6.11 it is further submitted by learned Counsel appearing on

behalf of the appellant that the impugned orders have far

reaching consequences. It is submitted that the books of 19

accounts once re­opened and re­casted are deemed to be final

under the provisions of Section 130(2) of the Companies Act.

6.12 Making the above submissions and relying upon the above

decisions, it is prayed to quash and set aside the impugned order

passed by the learned Tribunal, confirmed by the learned

Appellate Tribunal.

7. The present appeal is vehemently opposed by Shri Maninder

Singh, learned Senior Counsel appearing on behalf of the Union

of India.

7.1 It is vehemently submitted by the learned Senior Counsel

appearing on behalf of the Union of India that the impugned

order passed by the learned Tribunal, confirmed by the learned

Appellate Tribunal do not suffer from any vice of illegality. It is

submitted that the order passed by the learned Tribunal under

Section 130 of the Companies Act is absolutely in the larger

public interest and absolutely in consonance with the provisions

of Section 130 of the Companies Act.

7.2 It is further submitted by the learned senior Counsel

appearing on behalf of the Union of India that there are very

serious allegations of preparing the earlier accounts in a 20

fraudulent manner, and also with respect to the mis­

management of the affairs of the company during the relevant

period. It is submitted that, in the present case, after having

satisfied that there are serious allegations against IL&FS group of

companies, the Department of Economic Affairs took a conscious

decision to approach the NCLT under Section 242 of the

Companies Act to order re­constitution of the Board of Directors.

It is submitted that by a detailed order and considering the

material on record, and having been prima facie satisfied with

respect to the allegations of mismanagement and relating to the

affairs of IL&FS group of companies, the learned Tribunal passed

an order dated 01.10.2018 suspending the earlier

Directors/Board of Directors of the companies and appointed a

new Board of Directors. It is submitted that even the Ministry of

Corporate Affairs, Government of India in exercise of powers

under Section 212 of the Companies Act had issued an order

directing to conduct investigation into the affairs of IL&FS group

of companies. It is submitted that SFIO constituted under

Section 212 of the Act has already commenced a specialized

investigation into the affairs of IL&FS group of companies. It is

submitted that the appellant has been arrested on 02.04.2019, 21

and is presently in judicial custody. It is submitted that

thereafter when the Union of India through the Ministry of

Corporate Affairs submitted an application before the learned

Tribunal to re­open the books of accounts and to re­cast the

financial statements of the three main companies for the last five

years and thereafter considering the investigation reports and

having been satisfied that the conditions precedent for invoking

the powers exercised under Section 130 of the Companies Act are

satisfied/complied with, thereafter when the learned Tribunal

has passed the order, the same cannot be said to be illegal. It is

submitted that all the requirements under Section 130 of the

Companies Act have been complied with/satisfied.

7.3 It is further submitted that the order dated 01.10.2018

passed under Sections 241/242 of the Companies Act has

attained finality inasmuch as the same is not challenged till date.

It is submitted that therefore the same can be considered by

passing an order under Section 130 of the Companies Act also.

7.4 It is further submitted by the learned Senior Counsel

appearing on behalf of the Union of India that all the three

provisions, namely Sections 211/212, Sections 241/242 and 22 Section 130 of the Companies Act are required to be considered

and read conjointly. It is submitted that while considering the

one provision and/or while passing the order under one

provision, it is required to be seen that the effect of the

order/orders passed in other provisions do not become nugatory

and/or ineffective. It is submitted that therefore if all the

aforesaid three provisions are considered and read conjointly, in

that case, it can be said that the order passed under Section 130

of the Companies Act would be in the aid of the investigation

going on by the SFIO under Section 212 of the Companies Act

and the same shall be in the larger public interest. It is

submitted that, in the present case, Justice D. K. Jain, a former

Judge of this Court, has been appointed to supervise the

resolution process of IL&FS group of companies. It is submitted

that the re­opening of the books of accounts and re­casting the

financial statements of the aforesaid three companies is very

much required and necessary, since the same shall be in the

larger public interest, to find out the real truth.

7.5 It is further submitted by the learned Senior Counsel

appearing on behalf of the Union of India that the powers 23

conferred under Section 130 of the Companies Act are less

stringent than the powers conferred under Sections 241/242

and/or Sections 211/212 of the Companies Act. It is submitted

that while exercising powers under Section 130 of the Companies

Act, there may not be any final conclusion/opinion that the

relevant earlier accounts are prepared in a fraudulent manner or

the affairs of the company were mismanaged during the relevant

period. It is submitted that if, on the basis of the material on

record, the learned Tribunal is satisfied on either of the aforesaid

two eventualities, it is always open to the Tribunal to pass the

order to re­open the books of accounts and to re­cast the

financial statements of the company.

It is further submitted that, in the present case, before

passing the order under Section 130 of the Companies Act

notices were issued under the first proviso to Section 130 of the

Companies Act. It is submitted that SEBI appeared and

submitted that it had no objection to the accounts and financial

statement of respondent Nos. 2 to 4, which are listed companies,

being re­opened and re­casted.

24

It is submitted that, as observed by the Tribunal in the

impugned order, the erstwhile directors had opposed the

application under Section 130 of the Companies Act, that after

hearing all parties, the impugned order has been passed by the

learned Tribunal. It is submitted that therefore the impugned

order passed by the learned Tribunal cannot be said to be in

violation of the principles of natural justice as alleged.

7.6 Relying upon the subsequent interim investigation reports

by the RBI, it is submitted that the impugned order passed by

the learned Tribunal under Section 130 of the Companies Act is

not required to be interfered with. It is submitted that mere

perusal of the report of the RBI dated 22.3.2019 demonstrates

and establishes beyond any doubt about the complete

correctness, validity and legality of the order under Section 130

of the Act. In support of his submission, the learned counsel

has relied upon and requested to consider the subsequent event

also, more particularly the report of the RIB dated 22.03.2019.

The learned counsel appearing on behalf of the Union of India

has heavily relied upon the decision of this Court in the case of 25 K. Shyam Kumar (supra) in support of the prayer to consider

the subsequent Report of RBI also.

7.7 Making the above submissions, it is prayed to dismiss the

present appeal, more particularly, considering the larger public

interest as, in the present case, thousands of crores of the public

money is involved.

8. We have heard the learned counsel for the respective parties

at length and perused the written submissions filed by them.

At the outset, it is required to be noted that by the

impugned order and in exercise of powers under Section 130 of

the Companies Act, the learned Tribunal has allowed the said

application preferred by the Central Government and has

directed/permitted re­opening of the books of accounts and re­

casting the financial statements of IL&FS and other two

companies for the last 5 years, viz., F.Y 2012­2013 to 2017­2018.

The order passed by the learned Tribunal has been affirmed by

the learned Appellate Tribunal. Therefore, the short question

which is posed for consideration before this Court, whether in the

facts and circumstances of the case, can it be said that the order 26

passed by the learned Tribunal is illegal and/or contrary to

Section 130 of the Companies Act?

8.1 While considering the aforesaid question/issue, few facts

and the relevant provisions of the Companies Act which are

relevant for determining/considering the legality and validity of

the order passed by the learned Tribunal are required to be

referred to and considered, which are as under:

Section 211 of the Companies Act provides for

establishment of Serious Fraud Investigation Office to investigate

frauds relating to a company. Section 212 of the Companies Act

provides for investigation into affairs of company by SFIO.

Section 212 of the Companies Act provides that if the Central

Government is of the opinion that it is necessary to investigate

into the affairs of a company by SFIO....in the public interest; or

on a request made by any department of the Central Government

or a State Government. In the present case, the Central

Government has already constituted SFIO and has also ordered

investigation into the affairs of IL&FS and other group of

companies and the investigation by the SFIO is under progress.

It is also required to be noted that SFIO had also submitted its 27

preliminary report. In the preliminary SFIO report, there are

specific findings with respect to mismanagement of the affairs of

the aforesaid companies, and also with respect to preparing

fraudulent accounts. At this stage, it is also required to be noted

that ICAI had also conducted an enquiry into the accounts for

the past five years, and in the preliminary report, the ICAI has

mentioned that “accounts for the post five years have been

prepared in a fraudulent and negligent manner by the erstwhile

auditors”. That the Registrar of Companies had also conducted

an enquiry under Section 206 of the Companies Act and prima

facie concluded that mismanagement and compromise in

corporate governance norms and risk management has been

perpetuated on IL&FS and its group companies by

indiscriminately raising long term and short term

loans/borrowings through public sector banks and financial

institutions. Considering the fact that thousands of crores of

public money is involved, and in the public interest, the Central

Government has thought it fit to handover the investigation with

respect to the affairs of IL&FS and other group companies to

SFIO.

28

8.1.1 Sub­section (2) of Section 241 of the Companies Act

provides that if the Central Government is of the opinion that the

affairs of the company are being conducted in a manner

prejudicial to public interest, it may itself apply to the Tribunal

for an appropriate order under Chapter XVI, more particularly

the order under Section 242 of the Companies Act. In the

present case, the Central Government had approached the

learned Tribunal under Section 241 of the Companies Act and for

an appropriate order to suspend the existing Board of Directors

of the Companies and to appoint new Directors in terms of the

provisions of Section 242(2)(k) of the Companies Act, to manage

the affairs of IL&FS and group companies. That by an order

dated 01.10.2018, the learned Tribunal, in exercise of powers

under Section 242(2) of the Companies Act, has suspended the

Board of Directors of IL&FS and has further passed an order for

reconstitution of the new Board of Directors. Six persons are

appointed as Directors as Board members. While issuing such

directions, the learned Tribunal has specifically observed that the

learned Tribunal is satisfied that the affairs of the IL&FS were

being conducted in a manner prejudicial to public interest.

Thus, pursuant to the said order dated 01.10.2018, the erstwhile 29

Board Members/Directors of the IL&FS are suspended, and new

Directors are appointed as Board Members and the new Board of

Directors are conducting the affairs of the IL&FS and group

companies. It is further ordered that the suspended Directors

henceforth shall not represent the IL&FS company as Directors,

and shall also not exercise any power as Directors in any manner

before any authority as well. The appellant herein is the Vice

President and suspended Director of the company, who alone has

challenged the impugned order passed by the learned Tribunal

passed under Section 130 of the Companies Act.

8.2 In between there is one another development. Pursuant to

the order passed by the NCLAT, a former Judge of this Court –

Hon’ble Justice (Retd.) D.K. Jain has been appointed to supervise

the operation of the “Resolution Process” of the IL&FS group

companies. Considering the aforesaid facts and circumstances

and in the larger public interest and having found on the basis of

the reports/preliminary reports of SFIO, ICAI and ROC and

having observed and found that the relevant earlier accounts of

IL&FS and other group companies, named hereinabove, were

prepared in a fraudulent manner and the affairs of the company 30

were mismanaged during the relevant period, casting a doubt on

the reliability of the financial statements, the Union of

India/Central Government considered it fit to submit an

application before the learned Tribunal under Section 130 of the

Companies Act. After issuing notice to all concerned including

the Central Government, Income Tax Authorities, SEBI, other

Statutory Regulatory Body and even to the erstwhile Directors of

IL&FS and other two companies, by the impugned order, the

learned Tribunal has permitted/directed the Central Government

to re­open the books of accounts and to recast the financial

statements of IL&FS and other two companies, named

hereinabove, of last 5 years.

8.3 Considering the aforesaid facts and circumstances, the

legality and validity of the impugned order passed by the learned

Tribunal passed under Section 130 of the Act, confirmed by the

learned Appellate Tribunal is required to be considered.

9. On going through the order passed by the learned Tribunal

passed under Section 130 of the Act, it appears that the learned

Tribunal is conscious of the relevant provisions of the Act, more

particularly Section 130 of the Companies Act and more 31

particularly the conditions precedent to be complied

with/satisfied while directing/permitting re­opening of the books

of accounts and re­casting of the financial statements of the

company. From the order passed by the learned Tribunal under

Section 130 of the Companies Act, it appears that the learned

Tribunal has considered the preliminary report submitted by the

ICAI and SFIO and the observations made in the aforesaid

reports/preliminary reports. That thereafter having satisfied that

the conditions precedent for invoking powers under Section 130

of the Companies Act, stated in Section 130 (i) OR (ii) of the

Companies Act are satisfied, thereafter the learned Tribunal has

passed an order allowing the application under Section 130 of the

Companies Act for re­opening the books of accounts and re­

casting the financial statements of IL&FS and other two

companies, viz, for the last 5 years.

10. While assailing the order passed by the Tribunal under

Section 130 of the Act, it is vehemently submitted on behalf of

the appellant, who as such is a suspended director of the

company that there is no specific finding recorded by the learned

Tribunal that (i) the relevant earlier accounts were prepared in a 32

fraudulent manner; and (ii) the affairs of the company were

mismanaged during the relevant period casting a doubt on the

reliability of the financial statements. It is the case on behalf of

the appellant that in the order dated 01.01.2019 passed under

Section 130 of the Companies Act, learned Tribunal has

specifically given a finding that the alleged accounts of the

companies cannot be said to have been prepared in a fraudulent

manner. However, it is required to be noted that the aforesaid

observations by the Tribunal are required to be considered in the

context for which the observations are made. It appears that the

said observations are made with respect to role of the auditors. It

is to be noted that in the same para, the learned Tribunal has

specifically observed that in the earlier order dated 01.10.2018, it

is observed that the affairs of the company were mismanaged

during the relevant period and that the affairs of the company

and subsidiary companies were being mismanaged during the

relevant period, as contemplated under Sub­Section (1) and (2).

At this stage, it is required to be noted that as per Section 130 of

the Act, the Tribunal may pass an order of re­opening of

accounts if the Tribunal is of the opinion that (i) the relevant

earlier accounts were prepared in a fraudulent manner; OR (ii) 33

the affairs of the company were mismanaged during the relevant

period casting a doubt on the reliability of the financial

statements. Therefore, the word used is “OR”. Therefore, if

either of the conditions precedent is satisfied, the Tribunal would

be justified in passing the order under Section 130 of the Act.

Considering the order passed by the Tribunal passed under

Section 130 of the Companies Act, it appears that the learned

Tribunal has passed the order on being satisfied with respect to

the second part of Section 130 of the Companies Act. It is also

required to be noted that the learned Tribunal has also taken

note of the preliminary report submitted by the ICAI with respect

to the earlier accounts were being prepared in a fraudulent

manner. On a fair reading of Section 130 of the Companies Act,

if the Tribunal is satisfied that either of the conditions precedent

is satisfied, the Tribunal would be justified in passing the order

under Section 130 of the Companies Act.

11. Considering the facts narrated hereinabove and the

preliminary reports of SFIO and ICAI which came to be

considered by the learned Tribunal and considering the specific

observations made by the learned Tribunal while passing the 34

order under Section 241/242 of the Companies Act and

considering the fact that the Central Government has entrusted

the investigation of the affairs of the company to SFIO in exercise

of powers under Section 242 of the Companies Act, it cannot be

said that the conditions precedent while invoking the powers

under Section 130 of the Act are not satisfied. We are more than

satisfied that in the facts and circumstances of the case, narrated

hereinabove, and also in the larger public interest and when

thousands of crores of public money is involved, the Tribunal is

justified in allowing the application under Section 130 of the

Companies Act, which was submitted by the Central Government

as provided under Section 130 of the Companies Act.

12. Now so far as the submission on behalf of the appellant that

all the three provisions, viz., Section 130, Sections 211/212 and

Sections 241/242 operate in different fields and in different

circumstances and they are in the different Chapters and

therefore any observation made while passing the order/orders

with respect to a particular provision may not be considered

while passing the order under relevant provisions is concerned, it

is required to be noted that all the three provisions are required 35

to be considered conjointly. While passing an order in a

particular provision, the endeavour should be to see that the

order/orders passed under other provisions of the Companies Act

are given effect to, and/or in furtherance of the order/orders

passed under other Sections. Therefore, the observations made

while passing order under Section 241/242 of the Companies Act

can be said to be relevant observations for passing the order

under Section 130 of the Companies Act. At this stage, it is

required to be noted that even otherwise in the order passed by

the Tribunal under Section 130 of the Companies Act, there is a

specific observation made by the learned Tribunal with respect to

mismanagement of the affairs of the company, and even with

respect to the relevant earlier accounts prepared in a fraudulent

manner.

13. It is next contended on behalf of the appellant that proviso

to Section 130 of the Act has not been complied with and that the

order passed by the learned Tribunal passed under Section 130

of the Act is in violation of the principle of natural justice. At the

outset, it is required to be noted that while passing he order

under Section 130 of the Companies Act, the learned counsel 36

appearing on behalf of the erstwhile directors appeared and

opposed the application under Section 130 of the Companies Act.

Therefore, the learned counsel appearing on behalf of the

erstwhile directors was heard before passing he order under

Section 130 of the Companies Act. Therefore, it can be said that

there is a compliance/substantial compliance of the principle of

natural justice to be followed. It is required to be noted that as

per proviso to Section 130 of the Companies Act before passing

the order under Section 130 of the Act, the Tribunal is required

to issue notice to the Central Government, Income Tax

Authorities, SEBI or any other statutory regulatory body or

authorities concerned or any “other person concerned” and is

required to take into consideration the representation, if any

made. The “other person concerned” is as such not defined.

Who can be said to be “other person concerned”, that question is

kept open. At this stage, it is required to be noted that while

passing the order under Section 130 of the Act, there shall be

reopening of the books of accounts and re­casting of the financial

statements of the company and therefore the Board of Directors

of the company may make a grievance. The erstwhile directors

cannot represent the company as they are suspended pursuant 37

to the earlier order passed under Section 242 of the Companies

Act. Be that as it may, even otherwise in the present case and as

observed hereinabove the erstwhile directors of the company

represented before the Tribunal and they opposed the application

under Section 130 of the Act. Therefore, in the facts and

circumstances of the case, it cannot be said that the order

passed by the learned Tribunal is per se in violation of the

principle of natural justice as alleged.

14. The submission by learned Counsel appearing on behalf of

the appellant that in the impugned order passed by the learned

Appellate Tribunal, the learned Appellate Tribunal has

specifically observed that there is a violation of principle of

natural justice and therefore the learned Appellate Tribunal

ought to have remanded the matter to the Tribunal is concerned,

on considering/fair reading of the impugned order passed by the

learned Appellate Tribunal, as such, there is no specific finding

by the learned Appellate Tribunal that there is a violation of

principle of natural justice. What is observed by the learned

Appellate Tribunal is that “even if it is accepted that the appellant

on receipt of notice wanted to file reply” cannot be considered as 38

a specific finding given that the order passed by the Tribunal was

in violation of principle of natural justice.

15. Now insofar as the submission on behalf of the appellant

that the order dated 01.10.2018 passed under Section 241/242

of the Companies Act is an interim order and the same is not a

final order suspending the directors and the erstwhile board of

directors of the company, and therefore the observations made in

the order dated 01.10.2018 cannot be considered, has no

substance. It is required to be noted that as on today the order

dated 01.10.2018 suspending the erstwhile directors of the

company including the appellant stands and remains in

operation. The same is not challenged by way of an appeal before

an appropriate appellate Tribunal/Court.

16. Now so far as the submission on behalf of the appellant that

the impugned order passed by the learned Appellate Tribunal is a

non­speaking and non­reasoned order and the grounds urged

before the learned Appellate Tribunal have not been dealt with by

the learned Appellate Tribunal and therefore the prayer to set

aside the order is concerned, in view of our specific findings 39

recorded hereinabove on the legality and validity of the order

passed by the learned Tribunal under Section 130 of the

Companies Act, we do not propose to remand the matter to the

learned Appellate Tribunal. It is true that the learned Appellate

Tribunal could have passed a reasoned/speaking order. But in

the facts and circumstances of the case and our findings

recorded hereinabove and as observed hereinabove, the order

passed by the Tribunal under Section 130 of the Companies Act

does not suffer from any illegality and the same is passed in the

larger public interest, we have considered the order passed by the

learned Tribunal under Section 130 of the Companies Act on

merits.

17. In view of the aforesaid findings recorded by us, the

decisions relied upon by the learned counsel appearing on behalf

of the appellant shall not be applicable to the facts of the case on

hand. There cannot be any dispute to the proposition of law laid

down by this Court in the aforesaid decisions relied upon by the

learned counsel appearing on behalf of the appellant. However,

in the light of the aforesaid findings recorded by us, none of the 40

decisions relied upon by the learned counsel appearing on behalf

of the appellant shall be applicable to the facts of the case on

hand.

18. Now so far as reliance placed upon the subsequent report of

the RBI and the objection by the learned counsel appearing on

behalf of the appellant to rely upon the subsequent report and

the reliance placed upon the decision of this Court in the case of

Mohinder Singh (supra) is concerned, as the impugned order

passed by the learned Tribunal is in the larger public interest,

this Court can take note of the subsequent development/report.

However, at the same time, the same shall be in support of the

order under challenge. Even otherwise, it is required to be noted

and as observed hereinabove, independent to the subsequent

report of the RBI, there is a specific finding with respect to the

mismanagement and the fraudulent accounts. Therefore

subsequent Report of the RBI Report can be taken note of, while

upholding the order passed by the learned Tribunal under

Section 130 of the Companies Act. As observed hereinabove, a

larger public interest has been involved and reopening of the 41

books of accounts and recasting of financial statements of the

aforesaid companies is required to be carried out in the larger

public interest, to find out the real truth, and as observed

hereinabove both the conditions precedent while invoking power

under Section 130 of the Companies Act are satisfied/complied

with, therefore in the facts and circumstances of the case, we are

of the opinion that the order passed by the learned Tribunal

passed under Section 130 of the Companies Act, confirmed by

the learned Appellate Tribunal, is not required to be interfered

with.

19. In view of the above and for the reasons stated above, we

see no reason to interfere with the impugned order dated

01.01.2019 passed by the learned Tribunal under Section 130 of

the Companies Act for re­opening of the books of accounts and

re­casting the financial statements of the Infrastructure Leasing

& Financial Services Limited; IL&FS Financial Services Limited

and IL&FS Transportation Networks Limited for the last five

years, viz. from Financial Year 2012­13 to the Financial Year

2017­18, which came to be confirmed by the learned Appellate 42

Court vide impugned judgment and order dated 31.01.2019.

Consequently, the present appeal fails and deserves to be

dismissed and is accordingly dismissed.

All connected IAs are also disposed of.

...................................J [INDU MALHOTRA]

..................................J. [M. R. SHAH] NEW DELHI, JUNE 4, 2019