Delhi High Court: In a petition filed by the former director of Moser Baer India Ltd. (‘MBIL’), assailing the order dated 5-9-2024 (‘impugned order’), issued by the Ministry of Corporate Affairs, Government of India, under Section 212(1)(c) of the Companies Act, 2013 (‘the Act’), directing the Serious Fraud Investigation Office (‘SFIO’) to conduct an investigation into the affairs of MBIL, the Single Bench of Sachin Datta, J, held that the impugned order failed to satisfy the ingredients necessary for exercise of power under Sections 206(4), 210 and 212(1)(c) of the Act and quashed the same.
The Court further opined that an order under Section 212(1)(c) of the Act, directing investigation by the SFIO was not a routine administrative measure and cannot be used in a casual or perfunctory manner. It is in the nature of an extremely serious statutory action having grave consequences and repercussions for the subject entities and individuals. Therefore, the order must be issued only after due application of mind, after examining all relevant circumstances.
Background
MBIL, engaged in the manufacture of CDs, DVDs and other optical media, was incorporated in 1983 by the petitioner’s late husband. In 2012, MBIL had applied under the Corporate Debt Restructuring (‘CDR’) mechanism of Reserve Bank of India (‘RBI’) and was categorized as a ‘Class B’ borrower. In 2017, MBIL was admitted into insolvency proceedings before the National Company Law Tribunal, New Delhi (‘NCLT’) wherein the Interim Resolution Professional had commissioned a Forensic/Special Purpose Audit of MBIL for the years 2015-2018, to be conducted by Kashyap Sikdar & Co. The Sikdar Report had revealed no financial irregularities, including diversion of funds, siphoning of assets or fraudulent transactions.
A forensic audit for the period of 2012-2015 was commissioned to be prepared by GSA & Associates (‘GSA report’). On the basis of this report, Bank of Baroda, a financial creditor of MBIL, had issued a show cause notice to MBIL to explain why they should not be declared willful defaulters. Subsequently, the Identification Committee of Bank of Baroda declared the petitioner a ‘willful defaulter’ which was affirmed by the Review Committee of the bank as well.
The said declaration was challenged before the Court in the case of Ratul Puri v. Bank of Baroda, 2023 SCC OnLine Del 8595 (‘BOB judgment’) wherein the Court held that MBIL was admitted into CDR without any onerous conditions indicating that no instances of fraud, malfeasance, diversion or siphoning existed at the relevant time.
The petitioner contended that despite the BOB judgment, the impugned order was issued by the respondent, relying on the same forensic reports, directing the SFIO to investigate the affairs of MBIL.
Analysis, Law and Decision
The Court stated that the impugned order could not withstand the scrutiny of law for the following reasons:
1. The impugned order is in contravention to the dicta laid down in Parmeshwar Das Aggarwal v. Additional Director (Investigation) Serious Fraud Investigation Office, 2016 SCC OnLine Bom 9276.
The Court noted that the Bombay High Court in the aforementioned judgment had stated in the context of investigation by SFIO under Section 210 of the Act:
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the existence of circumstances relevant for formation of opinion for the purpose of Section 212(1)(c) of the Act, ‘must be demonstrable’;
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the exercise of power under Section 212 must be in consonance with the scheme of Chapter XIV of the Ac. In the first instance, power is conferred under Section 206(4) to conduct inspection/inquiry. Section 208 specifically contemplates that the registrar or inspector shall, after inspection of books of accounts or inquiry under Section 206, submit a report in writing to the Central Government, along with such documents, if any, and the report may also include or recommend further investigation into the affairs of the company, if necessary.
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Section 210 contemplates investigation into the affairs of a company:
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on the receipt of a report of the Registrar or inspector under Section 208;
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on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or
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in public interest.
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Where a report under Section 208 does not find any occasion to conduct a further investigation, the same has a bearing on the exercise of power under Section 212(1)(c) of the Act.
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Where recourse is sought to be taken to Section 212(1)(c) of the Act, the same ought to be ‘based on the report of the Registrar or Inspector under Section 208; on intimation of a special resolution passed by a company that its affairs are required to be investigated; in the public interest or on the request from any department of the Central Government or the State Government’.
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It is necessary for the Central Government not only to form an opinion regarding necessity to investigate into the affairs of the company, but also to justify the assignment of such investigation to the SFIO.
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An order under Section 212 must disclose the relevant circumstances which warrant
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conduct of investigation and
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conduct of investigation by the SFIO.
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The Court noted that the aforesaid Bombay High Court judgment was further affirmed by the Supreme Court, thereby lending a binding force to the interpretation of Section 212(1)(c) of the Act. The Court opined that the impugned order did not satisfy the ingredients enunciated above, and therefore suffered from an apparent and incurable legal lacuna which rendered it unsustainable.
2. Non-conduct of inquiry under Section 206(4) of the Companies Act, 2013
The Court noted that according to the respondent, in 2018, the Central government had ordered an inquiry under Section 206(4) of the Act. The resultant inquiry report had recommended that an that an inspection of the books of accounts and papers of the concerned company be undertaken under Section 206(5) of the Act. The Court noted that despite the recommendation, no inspection took place and opined that such abandonment of statutory recourse under Section 206(4) of the Act, exacerbated the legal lacuna described above.
3. Non-existence of any ‘demonstrable circumstances’ on the basis of which ‘opinion’ could be formed under Section 212(1)(c) of the Companies Act, 2013
The Court noted that the impugned order relied on alleged preferential, undervalued, fraudulent and extortionate (PUFE) transactions identified in GSA Report and Sikdar Report. Upon a perusal of both the Reports, the Court noted that both the Reports expressly negated any PUFE transactions. While the order issued by the Central Government under Section 212(1)(c) of the Act, 2013 is predicated on the subjective ‘opinion’ of the Central Government, the circumstances forming the basis of such opinion must be ‘demonstrable’. The Court observed that the impugned order in the present case, falls short of these requirements on account of the false attribution or mis-statement in the order itself. The same demonstrates that in material respects, the impugned order that was the basis formation of opinion for the purpose of Section 212(1)(c) of the Act, is based on ‘non-existent’ circumstances.
The Court further stated that some portions of the impugned order have been bodily lifted from selected portions of the Sikdar Report even though the Report itself disclaimed that it was neither an audit nor an expression of opinion on the financial statements of the company.
The Court opined that since the Report had been prepared within the confines of a limited mandate, the Central Government ought to have conducted an inspection of its own, especially since the same had been recommended way back in 2018. Additionally, the impugned order failed to consider the treatment accorded to the Reports in the BOB judgment and the same amounted to failure to consider ‘relevant circumstance’ for the purpose of forming an opinion under Section 212(1)(c) of the Act.
4. Treatment of Sikdar Report and GSA Report in the BOB judgment
The Court stated that the BOB judgement which dealt with allegations regarding siphoning of funds and alleged PUFE transactions, was in the nature of ‘relevant material’ that ought to have been considered prior to issuance of the impugned order. A blatant wholesale disregard of the binding judgment regarding the very same audit Reports on which the impugned order was founded could not be accepted.
The Court further observed that the Division Bench in the BOB judgment had doubted the credibility of the Reports and had gone to the extent of saying that the Reports cannot be relied upon in any ‘cognate proceedings’.
The Court stated that an order under Section 212(1)(c) of the Act, directing investigation by the SFIO is not a routine administrative measure. It is in the nature of an extremely serious statutory action having grave consequences and repercussions for the subject entities and individuals. It is therefore, imperative that such an order must be issued only after due application of mind, after examining all relevant circumstances.
The Court held that in the instant case the impugned order under Section 212(1)(c) appeared to have been issued in a rather casual manner, unmindful of the statutory pre-requisites and was therefore liable to be quashed.
[Nita Puri v. Union of India., 2025 SCC OnLine Del 5941, decided on 28-8-2025]
Advocates who appeared in this case:
For the Petitioner: Dr. Abhishek Manu Singhvi, Senior Advocate, Vaibhav Mishra, Ekansh Mishra, Avishkar Singhvi, Rajeev Goyal, Vijay Aggarwal, Rachit Bansal, Shubham Tiwari, Advocates
For the Respondent: Rupali Bandhopadhyay , CGSC, Abhijeet Kumar, Advocate
