Hari Sankaran v. Union Of India Ministry Of Corporate Affairs & Ors.

Factual and Procedural Background

The matter arises from alleged mismanagement of three companies: Infrastructure Leasing & Financial Services Limited (IL&FS) (1st Respondent), IL&FS Financial Services Limited (2nd Respondent) and IL&FS Transportation Networks Limited (3rd Respondent). The Union of India, Ministry of Corporate Affairs, filed a petition under Section 133 of the Companies Act, 2013 before the National Company Law Tribunal (NCLT), Mumbai Bench. The NCLT passed an order dated 1 January 2019 directing recasting and re-opening of the books of accounts and financial statements of the three companies for the five financial years from 2012-13 to 2017-18, and directed the Central Government to appoint chartered accountants for that purpose.

The Tribunal observed the statutory preconditions under Section 130 (i) & (ii) for recasting accounts, recorded that it could not presently conclude that earlier accounts were prepared fraudulently because an investigation was pending, but relied on an earlier order dated 1 October 2018 which found prima facie mismanagement of affairs during the relevant period. The Tribunal allowed the petition under Section 130, clarified that the order was without prejudice to auditors' rights and to proceedings before the Institute of Chartered Accountants of India (ICAI), and stated that recasting would have no bearing on the main company petition pending under Sections 241-242 of the Companies Act, 2013. The petition was disposed of by the Tribunal.

The Appellant, a former Vice-President and Director, challenged the Tribunal's order dated 1 January 2019 on the grounds that the order was passed ex parte despite service of notice and a request for time to respond, and that Section 230 of the Companies Act, 2013 is a draconian provision. The appellate court heard counsel for the Appellant and a representative for the 1st Respondent on 31 January 2019 and dismissed the appeal.

Legal Issues Presented

1. Whether the Tribunal was justified in permitting re-opening and recasting of the accounts under Section 130 of the Companies Act, 2013 for the financial years 2012-13 to 2017-18, given the preconditions in Section 130(1) & (2).
2. Whether the impugned order dated 1 January 2019 was passed ex parte in violation of the rules of natural justice, despite service of notice and the Appellant's request for time to file a reply-affidavit.
3. Whether the Appellant's submission that Section 230 of the Companies Act, 2013 is draconian warrants consideration by this court in the present appeal (or must be challenged before a competent court such as a High Court or the Supreme Court).

Arguments of the Parties

Appellant's Arguments

• The impugned NCLT order dated 1 January 2019 was effectively ex parte because, although notice was served on the Appellant and he sought time to respond, the Tribunal proceeded without affording that opportunity.
• The Appellant submitted that Section 230 of the Companies Act, 2013 is a draconian provision (submission on the statute's character).

Respondent / Union's Position

• The Union of India, as recorded in the Tribunal's order, stated that it was without prejudice and was not pressing allegations at that stage; the Tribunal noted an investigation was pending and that it could not yet hold the accounts to be fraudulent.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The appellate court reviewed the Tribunal's approach to the statutory requirements under Section 130(1) & (2). The Tribunal had recognized two preconditions for recasting accounts: (i) that earlier accounts were prepared fraudulently, and (ii) that the affairs of the company were mismanaged during the relevant period so as to cast doubt on the reliability of financial statements. Because an investigation was pending, the Tribunal declined to hold that the accounts were fraudulently prepared but relied on its earlier order of 1 October 2018 which, on a prima facie basis, found mismanagement of the affairs of the companies during the relevant period. On that basis the Tribunal allowed recasting of accounts for the stated five-year period and directed the Central Government to appoint chartered accountants, with the Regional Director proposing names for approval.

The Tribunal also expressly framed its order as being without prejudice to auditors' rights and to any ICAI proceedings, and clarified that the recasting would not affect the main company petition pending under Sections 241-242.

Addressing the Appellant's complaints on appeal, the court noted the Appellant's contention of an ex parte order and his characterization of Section 230 as draconian. The court declined to entertain the statutory critique of Section 230 in this appeal, observing that such a challenge must be brought before an appropriate court of competent jurisdiction (High Court or Supreme Court). As to procedural fairness, the appellate court held that there was no ground to regard the Tribunal's order dated 1 January 2019 as illegal on the asserted breach of natural justice and therefore it was not inclined to remit the matter to the Tribunal for reconsideration.

Holding and Implications

Appeal dismissed.

Implications:

• The Tribunal's order dated 1 January 2019 permitting re-opening and recasting of accounts for IL&FS, IL&FS Financial Services and IL&FS Transportation Networks for the financial years 2012-13 to 2017-18 is upheld.
• The Central Government is to appoint chartered accountants to recast the accounts; the Regional Director may submit names for the Tribunal's approval.
• The appellate court found no legal basis to remit the matter to the Tribunal on the ground of violation of natural justice and declined to consider the Appellant's broader constitutional/statutory criticism of Section 230 in this forum; the order is without prejudice to ICAI proceedings and auditors' rights.
• No order as to costs (the appeal was dismissed with no cost). The opinion does not purport to set any new precedent beyond its application to the facts and orders in this case.

Judicial officers recorded in the opinion: Justice S.J. Mukhopadhaya (Chairperson) and Justice Bansi Lal Bhat (Member, Judicial). Date of hearing/decision recorded: 31 January 2019; Tribunal order dated 1 January 2019 referenced.