Hari Sankaran vs Union of India & Others

Companies Act, 1956: s.130 – The submission on behalf of the appellant was that all the three provisions, viz., s.130, ss.211/

212 and ss.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 orders with respect to a particular provision may not be considered while passing the order under relevant provisions is concerned – Held: All the three provisions are required to be considered conjointly – While passing an order in a particular provision, the endeavour should be to see that the 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 ss.241/242 of the Act can be said to be relevant observations for passing the order under s.130 of the Act – Even otherwise in the order passed by the Tribunal under s.130 of the Act, there is a specific observation made by the 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.

Companies Act, 1956: s.130, proviso – Compliance of – Whether order passed under s.130 was in violation of natural justice and the proviso of s.130 was not complied with – Held: As per proviso to s.130 of the Act before passing the order under s.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. While passing the order under s.130 of the Act, there shall be reopening of the books of accounts and re-casting 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 to the earlier order passed under s.242 of the Act – In the instant case, the erstwhile directors of the company represented before the Tribunal and they opposed the application under s.130 of the Act – Therefore, in the facts and circumstances of the case, it cannot be said that the order passed by the Tribunal is per se in violation of the principle of natural justice as alleged. Companies Act, 1956: ss.241 and 242 – Submission of the appellant that order dated 01.10.2018 passed under ss.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 order dated 01.10.2018 cannot be considered, has no substance – Order dated 01.10.2018 suspending the erstwhile directors of the company including the appellant is not challenged by way of an appeal before an appropriate appellate Tribunal/Court and till date stands and remains in operation.

Companies Act, 1956: s.130 – Reliance placed on subsequent report of RBI – Held: It is required to be noted, independent to the subsequent report of the RBI, there is 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 Tribunal under s.130 of the Act – Since a larger public interest is involved and reopening of the books of accounts and recasting of financial statements of the said companies is required to be carried out in the larger public interest, to find out the real truth, and both the conditions precedent while invoking power under s.130 of the Act are satisfied/complied with, therefore in the facts and circumstances of the case, the order passed by the Tribunal passed under s.130 of the Companies Act not to be interfered with.

Dismissing the appeal and disposing of the IAs, the Court

HELD : 1. As per Section 130 of the Act, the Tribunal may pass an order of re-opening of accounts if the Tribunal is of the opinion that (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 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. The Tribunal passed the order on being satisfied with respect to the second part of Section 130 of the Companies Act. The Tribunal also took 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. In the facts and circumstances of the case, 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 Act. [Paras 10, 11] [782-F-H; 783-A, C-D]

2. The submission on behalf of the appellant was 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. Iit is required to be noted that all the three provisions are required 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. Even otherwise in the order passed by the Tribunal under Section 130 of the Companies Act, there is a specific observation made by the 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. [Para 12] [783-D-G]

3. 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 re-casting 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 to the earlier order passed under Section 242 of the Companies Act. 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 Tribunal is per se in violation of the principle of natural justice as alleged. [Para 13] [784-C-F]

4. Order dated 01.10.2018 suspending the erstwhile directors of the company including the appellant is not challenged by way of an appeal before an appropriate appellate Tribunal/Court and till date stands and remains in operation. [Para 15] [785-C]

5. As the impugned order passed by the Appellate Tribunal is in the larger public interest, subsequent development/report were taken into account. However, at the same time the same shall be in support of the order under challenge. Even otherwise, it is required to be noted, independent to the subsequent report of the RBI, there is 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 Tribunal under Section 130 of the Companies Act. Since a larger public interest has been involved and reopening of the 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 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, the order passed by the Tribunal passed under Section 130 of the Companies Act, confirmed by the Appellate Tribunal, is not required to be interfered with. [Para 18] [786-B-E] Mannalal Khetan v. Kedar Nath Khetan (1977) 2 SCC

424 : [1977] 2 SCR 190 ; Swadeshi Cotton Mills v. Union of India (1981) 1 SCC 664 : [1981] 2 SCR

533 ; Calcutta Discount Company v. Income Tax Officer AIR 1961 SC 372 : [1961] SCR 241 ; Mohinder Singh Gill v. Chief Election Commissioner, New Delhi (1978)

1 SCC 405 : [1978] 2 SCR 272 ; T.P. Senkumar v. Union of India (2017) 6 SCC 801 : [2017] 6 SCR 881 ; Chairman, All India Railway Recruitment Board v. K. Shyam Kumar (2010) 6 SCC 614 : [2010] 6 SCR 291 – held inapplicable.