Exalogic Solutions Private Limited Vs Director (Karnataka High Court)
Karnataka High Court held that during the pendency of proceedings u/s. 210 of the Companies Act, 2013, Serious Fraud Investigation Office (SFIO) can be assigned with the investigation, u/s. 212 of the Companies Act.
Facts- The petitioner, claiming to be a one person company incorporated in the year 2014, is before this Court seeking a direction to call for records and quash order dated 31-01-2024 passed by the 1st respondent/Director, Serious Fraud Investigation Office (‘SFIO’).
The petitioner alleges that during the pendency of proceedings u/s. 210, SFIO could not have been assigned with the investigation, u/s. 212 of the Act.
Conclusion- Held that the submission of the learned senior counsel for the petitioner is that when the proceedings under Section 210 are underway, assignment of investigation to the SFIO cannot take The strength on which the said submission is made is that there should a report under Section 210, as is directed, and only then the investigation can be handed over to the SFIO. The effect of such submission is that handing over of investigation to the SFIO, should precede a final report under Section 210. This submission is sans countenance as it travels on a slippery slope. Section 210 does speak of a report, the report can be either interim or final it need not be the final report only. During an investigation under Section 210, if the Inspectors, out of serendipity come across information that would prima facie touch upon skullduggery and thereon necessity emerges to assign the investigation to a multi-disciplinary body like the SFIO, created under the Act, this Court cannot put shackles on the hands of the Central Government, for such assignment. If it had been entrusted to any other agency outside the Act, it would have been a circumstance altogether different. It is entrusted to the SFIO which is created under the Act, i.e., in terms of Section 211 with elaborate functions under Section 212. The protection to any Company from duplication of proceedings is kept tight under sub-section (2) of Section 212 and above all, and after all, it is investigation.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The petitioner is before this Court seeking a direction to call for records and quash order dated 31-01-2024 passed by the 1st respondent/Director, Serious Fraud Investigation Office (‘SFIO’ for short).
2. Shorn of unnecessary details, facts in brief, as borne out from the pleadings, are as follows:
The petitioner claims to be a one person company incorporated in the year 2014, under the provisions of the Companies Act, 2013 (‘the Act’ for short) with the Registrar of Companies, Bangalore (hereinafter referred to as ‘the Registrar’ for short). The petitioner, is represented through its Director – Share Holder. On 28-07-2020, the 2nd respondent/Ministry of Corporate Affairs, Union of India addressed a communication to the petitioner/Company observing that a complaint has been received by it in respect of certain alleged incorrect address mentioned in Form No.10 filed by the petitioner/Company with Registrar. The communication never reached the petitioner. A show cause notice also comes to be issued against the petitioner, invoking Section 12 of the Act for the alleged non-maintenance of the registered office at the address mentioned in Form No.10 filed before the Registrar. The petitioner appears to have given its reply contending that owing to COVID-19 pandemic engulfing the nation, the Company began to work from home and, therefore, the registered office of the petitioner had been shifted. This results in another notice dated 19-08-2020 issued by the Registrar directing the petitioner to file adjudication application under Section 454 of the Act for the alleged non-maintenance of the office. The petitioner then submits an adjudication application before the Registrar who initiates adjudication proceedings against the petitioner for the alleged violation under Section 12 of the Act, with regard to non-intimation of change in address of the registered office as mandated under Section 12(4) of the Act. An order was later passed on 09-02-2021 imposing a penalty of `1,00,000/- each on the petitioner and the Director for the alleged violation of Section 12 of the Act. The petitioner prefers an appeal against the said order, which results in reduction of the amount of penalty to `20,000/-. The issue in the subject lis does not concern the aforesaid proceedings initiated under Section 12 of the Act.
3. On 29-01-2021 the Registrar addresses a communication of enquiry under Section 206 of the Act to the petitioner in respect of certain transactions between the petitioner and another company in the name and style of ‘Cochin Minerals and Rutile Limited’ (‘CMRL’ for short). The petitioner was directed in the communication to furnish various documents and details and annual reports, audited bank statements for the years 2014-15 to 2019-20 of the transactions of the aforesaid Companies. The petitioner, in response to the said communication, is said to have furnished all the documents sought for, which results in another communication being issued by the Registrar alleging that the copy of the trial balance furnished by the petitioner was not proper and further directed submission of several documents. It is said that the petitioner has from time to time furnished all the documents that were being sought by the Registrar through several communications.
4. On 24-06-2022, the Registrar issues a notice directing the petitioner to appear in person at the office of the Registrar. The petitioner is said to have represented through various representations along with all the documents and clarifications after which the Registrar had again directed the petitioner to be personally present on the next date of hearing. The next date was on 14-07-2022 and the proceedings were on before the Registrar in terms of the aforesaid communication which began under Section 206 of the Act. It is the averment in the petition that despite the petitioner providing all the relevant documents and details, the Registrar issues a show cause notice on 11-08-2023 alleging inter alia that a related party transaction has appeared between the petitioner and Kerala State Industrial Development Corporation (‘KSIDC’ for short) which owns 13.4% share of the Company which had transaction with the petitioner.
5. Then comes a communication/notice to the Director of the petitioner/Company seeking details of several transactions were sought in respect of certain agreements with CMRL, the notice also indicated that failure of the petitioner to furnish all the details would become open to prosecution under Sections 447 and 448 of the Act. The petitioner is stated to have complied with all the necessities that were demanded in the show cause notice contending that KSIDC was a government Company functioning independently with its Board of Directors and had nothing to do with the family members of the Director of the petitioner/Company.
6. The further averment in the petition is that the petitioner comes to know of a Writ Petition filed before the High Court of Kerala seeking a direction to the Central Government to initiate investigation into the affairs of the petitioner/Company, CMRL and The said writ petition is said to be pending before the High Court of Kerala, at Ernakulum. The petitioner then avers that it comes to know from various media and newspapers that an order under Section 210 of the Act is passed by the 2nd respondent directing initiation of investigation into the affairs of the entities – CMRL, KSIDC and the petitioner on the reports of the Registrar, Bengaluru and Registrar at Ernakulum. It is the case of the petitioner that no order to that effect is even served upon the petitioner. The narration again is that, the petitioner comes to know of the order dated 31-01-2024 passed by the 2nd respondent assigning the investigation to the SFIO under Section 212 of the Act. Pursuant to the impugned order, the petitioner receives a notice on 02-02-2024 and 06-02-2024, from the SFIO which is constituted to investigate into the affairs of the petitioner and two other Companies. The notice directed the petitioner to provide details of several documents that were sought in the said notice. The petitioner, on the said date, replies seeking extension of time upto 15-02-2024, and has filed the subject writ petition on 08-02- 2024.
7. Heard Sri Arvind Datar, learned senior counsel along with learned counsels Sri Manu Prabhakar Kulkarni, Sri Mrinal Shankar, Sri Dharmendra Chatur and Smt Isha Prakash appearing for the petitioner and Sri Arvind Kamath, learned Additional Solicitor General of India along with Sri H. Shanthi Bhushan, learned Deputy Solicitor General of India appearing for the respondents.
SUBMISSIONS:
Petitioner:
8. The learned senior counsel representing the petitioner, Sri Arvind Datar would contend that the proceedings, under Chapter XIV of the Act which deal with inspection, inquiry and investigation begin against the petitioner, after issuance of notice under sub- Section (4) of Section 206 of the Act. The same results in an order being passed under Section 210 which deals with investigation into affairs of a Company. The documents are sought by the competent officer under Section 210 and the petitioner has submitted, all the necessary documents, the proceedings are yet to conclude. During the pendency of the proceedings under Section 210, the learned senior counsel would submit, the SFIO could not have been assigned with the investigation, under Section 212 of the Act. He would submit that only after a report is made under Section 210, it can perhaps lead to commencement of proceedings under Section 212 of the Act, as the circumstances that would warrant investigation by the SFIO are only four which are listed in clauses (a), (b), (c) and (d) of sub-section (1) of Section 212. He would submit that Section 210 also has the same conditions for initiation of investigation except clause (d) that is found in Section 212. Therefore, he would submit that in the name of public interest, the 2nd respondent cannot go on assigning investigation, to other entities when there is already an investigation pending under Section 210 of the Act. He would contend that it is gross misuse of power conferred, on the Government of India under the Act.
8.1 The learned senior counsel would further submit that the basis of invoking the power under Section 212 should be formation of an opinion that it is necessary to have the investigation concluded into the affairs of the Company, there is no such opinion formed, in the case at hand, is the emphatic submission of the learned senior The other submission is that the petitioner is neither served with a copy of the order of the 2nd respondent dated 12-01-2024 ordering investigation under Section 210 of the Act, nor is made aware of the assignment of investigation to the SFIO under Section 212 of the Act. Therefore, the order suffers from violation of principles of natural justice, as well as, malice in law. In effect, the following are the submissions of the learned senior counsel:
(i) Once having commenced investigation under Section 210 of the Act, the investigation midway cannot be changed/ordered to be assigned under Section 212 of the Act to SFIO;
(ii) Formation of opinion to invoke Section 212 is No such opinion is formed or notified. Therefore, the order suffers from non-application of mind;
(iii) That no order either initiating investigation under Section 210 of the Act or assigning investigation to the SFIO under Section 212 of the Act is served upon the petitioner. Therefore, it is in violation of the principles of natural justice and resultantly, it is a product of malice in law.
The Union of India/SFIO:
9. Per contra, Sri. K. Arvind Kamath, the learned Additional Solicitor General of India would vehemently refute the submissions to contend that the SFIO is a multidisciplinary body. The investigation that began under Section 210 resulted in the Inspector who had taken up investigation submitting an interim report. The interim report necessitated assignment of investigation to the SFIO. Since it is a multidisciplinary body, it can call for information from any quarter which would ease completion of investigation against the petitioner. It is his contention, by taking this Court through the statement of objections that, it is not a case where `1.70 crores is the subject matter of investigation as is contended by the learned senior counsel for the petitioner but it is ` 135/- crores transaction between CMRL and the Company of the petitioner and others and those funds have been handed over to the accounts of several political entities. It is, therefore, the investigation for assimilation of information is assigned to the SFIO.
9.1 The Additional Solicitor General would contend, the moment investigation under Section 212 of the Act commences, all other investigations pending preceding to the said assignment would cease to Therefore, the submission that once Section 210 is invoked, Section 212 cannot be invoked, cannot be accepted. He would contend that no right of the petitioner is taken away and no prejudice is caused to her, as it is only an investigation conducted by different investigating entity within the Act. At the stage of investigation, it is no law that the appointment of Investigating Officer or assignment thereto should be made known to the person against whom the investigation is sought to be conducted or taken up. Natural justice, at this stage, would not be applicable to the fact situation. He would, therefore submit that the petition has to be dismissed on the ground that it projects no ground for entertaining the petition.
10. The learned senior counsel for the petitioner would join issue to contend that the SFIO was established in the wake of huge scams like the Sahara India or the Jet It is not a scam in the case at hand, but it is only alleged transactions of `1.70 crores, at this point in time. He would submit that he would have no objection for continuation of investigation under Section 210 of the Act, but and seeks quashment of investigation entrusted to the SFIO.
11. I have given my anxious consideration to the submissions made by the learned senior counsel and the learned Additional Solicitor General of India appearing for the respective parties and have perused the material on record.
12. The afore-narrated facts are not in The genesis of the problem is, as narrated hereinabove, but would require a little elaboration, as the issue that merits consideration is on the interpretation of the provisions of law.
THE PROTOGONISTS:
13. There are four protagonists in the lis. First is, the one person Company, registered under the Companies Act, before the Registrar of Companies, The petitioner/Company is represented through its Director-Share Holder. The second protagonist is one Cochin Minerals and Rutile Limited, having registered office in Kerala, a dormant protagonist. The third is the Union of India, Ministry of Corporate Affairs, in control of corporate affairs of companies coming within its ambit. The fourth protagonist is the Serious Fraud Investigation Office-SFIO, a multidisciplinary body, under the Ministry of Corporate Affairs, constituted under the Act for detecting and recommending prosecution of crimes by the Companies. The aforesaid are the four protagonists in the lis.
THE GENESIS:
14. The petitioner, as observed hereinabove, is a one person This is a matter of record. The genesis of the issue appears to be that, on 28-07-2020 a communication comes about from the Registrar at Bangalore to the Director of the petitioner/Company on the score that a complaint is received at the office of the Registrar in respect of incorrect address mentioned in Form No.10 filed by the petitioner/Company with the Registrar. The communication reads as follows:
“No. ROCB/Complaint/EXALOGIC/2020,
Date: 28-07-2020
To
Ms. Veena Thaikkandiyil
Pravik, Pandialamukku Pinarayi P.O., Thalassary,
KANNUR – 670 741, KERALA
e-mail: [email protected]
Sub: Complaint dated 22-05-2020 received from Mr. Vijay. J – in the matter of Exalogic Solutions Pvt. Ltd (OPC) – reg.
Madam,
Whereas this office has received a complaint stating that the address of the subscriber/first director and in form 10 mentioned as “AKG Centre, Palayam, Thiruvananthapuram, Kerala-695 034”. Letter dated 16- 06-2020 was issued to the company at the registered address calling for the explanation. However, the letter addressed to the company returned unserved with remarks “Unclaimed, Return to sender”. A copy of the said letter along with the complaint is enclosed herewith.
You are directed to offer your comments/ explanations on the complaint and also state as to why action should not be taken against the company and its director u/s 12 of the Companies Act, 2013 for non-maintenance of registered office at the address specified in the MCA portal, within 10 days hereof.”
(Emphasis added)
The petitioner was directed to offer explanation on the complaint, as to why action should not be taken under Section 12 of the Act for non-maintenance of registered office at the address specified. The petitioner then submits its reply justifying the change of address or no address being maintained on the score that due to the onset of COVID-19 from March, 2020 and in terms of the notification issued by the Government of Karnataka, directing IT companies to work from home, the registered office of the petitioner was shifted to work from home. On 19-08-2020, the office of the Registrar directed the Company to file an adjudication application under Section 454 of the Act for non-maintenance of registered office of the Company.
15. The petitioner then submits an application on 02-09- Based upon the said application, the Registrar initiated adjudication proceedings for imposition of penalty for alleged violation of Section 12 of the Act. An order of penalty comes about on 09-02-2021 imposing penalty of ` 1,00,000/- each upon the Company and its Director for the aforesaid violation of Section 12 of the Act. The petitioner files an appeal before the Regional Director, Ministry of Corporate Affairs assailing the aforesaid order of imposition of penalty. The Appellate Authority reduces the penalty from ` 1,00,000/- to ` 20,000/-. This is one set of proceeding against the petitioner.
16. Around the same time, a communication is sent by the Registrar on 29-01-2021 calling for information under Section 206 of the Act. Proceedings under Section 206 of the Act, therefore, was sought to be initiated against the petitioner. It did not spring from air, but it was due to the information received from the Enforcement Directorate regarding the transactions between CMRL and the petitioner. The communication sent to the petitioner on 29-01-2021 reads as follows:
“Sir,
With reference to the above subject, I am to state that this office has received a reference from Directorate of Enforcement, Bengaluru regarding the transactions between COCHIN MINERALS AND RUTILE LTD. (CMRL) and EXALOGIC SOLUTIONS PRIVARTE LIMITED. Hence, in order to examine the matter to see the compliance of various provisions of the Companies Act, 2013, this office has decided to conduct inquiry u/s 206 (4) of the Companies Act, 2013. In this connection, you are hereby directed to submit the following documents/information within 07 days hereof:
01. Certified copies of the printed Annual Reports/ financial statements since incorporation till date with Director’s Report, Audit Report and notes to accounts (three sets).
02. Details of all Bank accounts maintained by the Company with account numbers and name of the bank and branch address.
03. Bank statements till date for all the accounts.
04. Duly Certified copy of all the Statutory registers e., register of contracts with related party, register of charges, register of Loan & Guarantee given and received etc. maintained by the company as per Companies Act,, 2013,if any.
05. Copy of the party wise Trail balance showing opening balance, debit, credit closing balance for the year 2014-15 to 2019-20.
Yours faithfully,
Sd/-
(B. BHUVANESWARI) ASST. REGISTRAR OF COMPANIES
KARNATAKA”
(Emphasis added)
The petitioner replies to the same enclosing certain documents with regard to transactions between CMRL and the petitioner.
17. On 01-10-2021, the Competent Authority again communicates seeking information under sub-section (4) of Section 206 of the Act directing submission of complete trial balance showing opening balance, debit and credit for the last five years. The communication reads as follows:
“No. ROCB/INQ/ARBB/Exalogic/004243/2021/3037,
Date: 01-10-2021
To
Exalogic Solutions Private Limited (OPC),
No.21, 2nd Floor, PID 98-50-21,
New No. 020-W0181-40, 1st Main Road,
Hebbal Ganganagara Layout,
Bangalore-560 032
EK 761014705IN
Sir,
Sub: Inquiry u/s 206(4) of the Companies Act, 2013 in the matter of EXALOGIC SOLUTIONS PRIVATE LIMITED (OPC) – Reg.
Ref: 1) This office letter of even number dated 29.1.2021
2) Your reply dated 22.02.2021
—
With reference to the subject cited, I am directed to state that the trial balance submitted by you alongwith your letter under reference (2) is not proper. You are requested to submit the Complete Trial balance with Opening balance, Debit and Credit and closing balances with all entries year wise duly certified cy the Statutory Auditors of the company for the last 5 years.
2. Please furnish the Minutes of the Board meetings and General Meetings since incorporation as required under Section 118 read with Section 173(2) of the Companies Act, 2013.
3. Please furnish the details with respect to the following points:-
(a) As per the financial statement for the year endings 2017-18, 2018-19 and 2019-20, the company has taken unsecured loan from Empower India Capital Investments Private Limited, a Kerala based company in which Shri S.N. Sasidharan Kartha, is the Managing director and major shareholders.
