Case Law Details
Deloitte Haskins & Sells LLP. Vs Union of India (NCLAT)
Conclusion: Various acts of IL&FS like over borrowing were prejudicial to the public interest which had cascading impact on various sectors of the economy and the red signals were raised against the IL&FS by the country and even by the department of economic affairs of the country, therefore, before passing any appropriate order in public interest and to save the economy of the Country from collapse, if the Tribunal was of the opinion that it required to give appropriate hearing to the concerned parties, including those who audited ‘IL&FS’ and/ or those who have managed or were concerned with ‘IL&FS’ or its Group Companies, it could not be held to be illegal.
Held: Infrastructure Leasing and Financial Services Limited’ (‘IL&FS’), was a company incorporated under the Companies Act, 1956. Over the years the IL&FS had inducted institutional shareholders to include Life Insurance Corporation of India (LIC), ORIX Corporation- Japan (ORIX), State Bank of India and Abu Dhabi Investment Authority. Besides the above, the ‘IL&FS Employees Welfare Trust’ also held significant shares in 1st Respondent. The company admitted total debt across the IL&FS Group was approximately Rs. 91,000 crore as on March 31, 2018 and the company had not even been making enough profits to take care of its interest expense leading to the default. It had to be kept in mind that out of the Rs. 91,000 crore debt obligations of the IL&FS, Rs. 57,000 crore had been borrowed from the Public Sector Banks. That subsequent to spreading defaults by the IL&FS Group, credit rating agencies CARE and ICRA had downgraded the credit rating of the IL&FS. The over exposure of loans and borrowings had been without prudent commercial practices and without any application of mind by the management of IL&FS over the several years. IL&FS and Ors. members of the Board of Directors, Promoters, Auditors, etc. were privy to the inner working of their respective businesses, and as such–could not evade responsibility for the fraudulent activities, misfeasance, persistent negligence and continuous defaults in carrying out their duties. The only question arose in these appeals was as to whether this Appellate Tribunal should interfere with the impugned order dated 9th August, 2019 whereby Auditors had been impleaded as party of IL&FS. Assessee contended that Tribunal had no jurisdiction to pass orders against an auditor under Section 241 or Section 242 of the Companies Act, 2013. An auditor was not involved in the management of the affairs of a company and, therefore, could not be covered within the ambit of Sections 241 and 242 of the Companies Act, 2013. It was held that as rules of natural justice were to be followed, if any order was passed against one or other, including investigation, it was always open to the Tribunal to ask such party to be impleaded. Tribunal was empowered to pass order under Section 242 of the Companies Act, 2013 in a petition under Section 241(2) if it forms opinion that the affairs of the company have been conducted in a manner prejudicial to the public interest. Once such opinion is formed by the Tribunal, it may pass any order as it deem fit and proper. The allegations showed that the ‘IL&FS Group Companies’ had suffered majority debt obligation of ‘IL&FS’. Rs. 57,000 Crores out of Rs.91,000 Crores, was from public sector banks and institutions. The ‘Life Insurance Corporation of India’, ‘State Bank of India’, ‘Central Bank of India’ besides ‘UTI AMC’ etc. in whose favour the fund was payable could not be paid. There were number of funds including ‘Army Pension Fund’, ‘Provident Fund’ etc. who had invested in the Group Companies will suffer. In effect, the public in general might suffer as the ‘Army Pension Fund’, ‘Provident Fund’ etc. were not the Government money but of the public in general. Department of Economic Affairs which was responsible for the financial stability of economy and in the Country too had raised Red Signals of the likely collapse of ‘IL&FS’ and had expressed its deep concern on the impact of Indian Economy. If Tribunal was of the opinion that it required to give appropriate hearing to the concerned parties, including those who audited ‘IL&FS’ and/ or those who had managed or were concerned with ‘IL&FS’ or its Group Companies, it could not be held to be illegal.
FULL TEXT OF ORDER OF NATIONAL COMPANY LAW APPELLATE TRIBUNAL, DELHI
The Central Government on its opinion that the affairs of ‘Infrastructure Leasing and Financial Services Limited’ (“IL&FS”) and its Group Companies are conducted in a manner prejudicial to the public interest applied to the National Company Law Tribunal (“Tribunal” for short), Mumbai Bench, Mumbai for issuance of orders and directions as sought for and as the Tribunal deemed fit.
2. In Company Petition No. 3638 of 2018, Miscellaneous Application No.2071 of 2019 was filed by the Central Government for impleadment of various persons, including the Appellant(s) herein, as parties to the said Petition. By way of an order dated 18th July, 2019, the Tribunal allowed the Miscellaneous Application and directed impleadment of inter alia the Appellant(s) as parties to the said Company Petition.
3. Miscellaneous Application No. 2258 of 2019 was filed by ‘Deloitte Haskins & Sells LLP’ and its partners challenging the maintainability of the Company Petition. By impugned order dated 9th August, 2019, the Tribunal rejected the Miscellaneous Application.
4. In another Company Petition No. 02 of 2014, the Union of India sought to debar the then present Directors (Appellants herein) from managing the affairs of the Company (M/s. Megacity Bangalore Developers and Builders Limited’) and further to permit to nominate five Directors to manage the affairs of the Company while several Civil and Criminal cases were pending against the Company and its Directors. In the said Petition, the Tribunal vide impugned order dated 14th March, 2019 disposed of the said Company Petition by removing and debarring the Directors from managing the affairs of the Company and allowing the prayer of Union of India to appoint Directors.
5. In these appeals as similar question of law is involved, they were heard together and disposed of by this common judgment.
6. For the said reasons, we have noticed only the main ground taken and the arguments advanced by learned Senior Counsel in “Deloitte Haskins & Sells LLP v. Union of India─ Company Appeal (AT) No. 190 of 2019”.
Company Appeal (AT) No. 190 of 2019
7. According to Appellant- ‘Deloitte Haskins & Sells LLP’, it was an Auditor of ‘IL&FS Financial Services Limited’ until 2017-2018 when they rotated out as the auditors of the Company (‘IL&FS’) on account of operation of law. It also acted as joint auditor for ‘IL&FS Financial Services Limited’ together with ‘BSR and Associates LLP’ in the Financial Year 2017-18.
8. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as it was neither a necessary nor a proper party for adjudication of the said Company Petition and further, there was no cause of action to implead the Appellant as a party Respondent.
9. It was further submitted that impleadment on the basis of criminal complaint which was not taken cognizance by Special Court was wrong.
Company Appeal (AT) No. 193 of 2019
10. In the present appeal, the Appellant- ‘Mr. Kalpesh J. Mehta’ who is a partner in ‘Deloitte Haskins & Sells LLP’ which was acting as an Auditor of ‘IL&FS Financial Services Limited’., a 100% subsidiary of ‘Infrastructure Leasing & Financial Services’ (‘IL&FS’), until F.Y. 20172018 and also acted as a Joint Auditor of ‘IL&FS Financial Services Limited’ with ‘BSR & Associates LLP’.
11. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as the Appellant during the F.Y. 2017-2018 was not at all concerned with the management and day-to-day affairs of ‘IL&FS’ and was only a Partner of ‘Deloitte Haskins & Sells LLP’, therefore, neither a necessary nor a proper party for adjudication of the said Company Petition.
Company Appeal (AT) No. 194 of 2019
12. The Appellant- ‘Mr. Udayan Sen’ is a partner in ‘Deloitte Haskins & Sells LLP’ which was acting as an Auditor of ‘IL&FS Financial Services Limited’., a 100% subsidiary of ‘Infrastructure Leasing & Financial Services’ (‘IL&FS’), until F.Y. 2017-2018 and also acted as a Joint Auditor of ‘IL&FS Financial Services Limited’ with ‘BSR & Associates LLP’.
13. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as the Appellant during the F.Y. 2017-2018 was not related to ‘IL&FS’ or its management and affairs and was only a Partner of ‘Deloitte Haskins & Sells LLP’, therefore, neither a necessary nor a proper party for adjudication of the said Company Petition. Further, it was submitted that no final reliefs were claimed in the Company Petition against the Appellant and, therefore, there was no question of any interim protective orders being granted against the Appellant.
Company Appeal (AT) No. 195 of 2019
14. The 1st Appellant- ‘Mr. Shrenik Baid’ is a partner and the remaining Appellants in this appeal are employees of ‘Deloitte Haskins & Sells LLP’ which was acting as an Auditor of ‘IL&FS Financial Services Limited’., a 100% subsidiary of ‘Infrastructure Leasing & Financial Services’ (‘IL&FS’), until F.Y. 2017-2018 and also acted as a Joint Auditor of ‘IL&FS Financial Services Limited’ with ‘BSR & Associates LLP’.
15. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellants have been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as the Appellants were not related to ‘IL&FS’ or its management and affairs and only connection was that they were partner/ employees of the statutory auditor, therefore, neither a necessary nor a proper party for adjudication of the said Company Petition. Further, it was submitted that no final reliefs were claimed in the Company Petition against the Appellant and, therefore, there was no question of any interim protective orders being granted against the Appellant.
It was further submitted that impleadment on the basis of criminal complaint which was not taken cognizance by Special Court was wrong.
Company Appeal (AT) No. 196 of 2019
16. The Appellant- ‘N. Sampath Ganesh’ is a partner of ‘BSR & Associates LLP’ which was appointed as Joint Statutory Auditor of ‘IL&FS Financial Services Limited’ (‘IFIN’)., subsidiary of ‘Infrastructure Leasing & Financial Services’ (‘IL&FS’) for the F.Y. 2017-2018 along with ‘Deloitte Haskins & Sells LLP’. During the period of audit, the Appellant was the engagement partner on behalf of ‘BSR & Associates LLP’ for the audit of ‘IFIN’.
17. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 on an incorrect interpretation of Order 1 Rule 10 of Civil Procedure Code, 1908 and Section 245 of the Companies Act, 2013, and was neither a necessary nor a proper party for adjudication of the said Company Petition. It was further submitted that the Appellant was never in-charge of nor responsible for the management and operations of ‘IFIN’ and was only the engagement partner of ‘BSR & Associates LLP’.
Company Appeal (AT) No. 197 of 2019
18. The Appellant- ‘BSR & Associates LLP’ was the Joint Statutory Auditor of ‘IL&FS Financial Services Limited’ (‘IFIN’) for the F.Y. 20172018 along with ‘Deloitte Haskins & Sells LLP’. It was submitted that the Appellant had never been Statutory Auditors of ‘IL&FS’ while ‘Deloitte Haskins & Sells LLP’ had been the sole auditors of IFIN for nine years prior to that i.e., for the period F.Y. 2007-2008 to 2016-2017. On May, 2018, the Statutory Auditors of ‘IFIN’ (including the Appellant) rendered their Audit Report on the financial statement of IFIN for the F.Y. 20172018.
19. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as it was neither a member of ‘IL&FS’ or ‘IFIN’, nor in any manner involved in the carrying on of business of ‘IL&FS’ or ‘IFIN’ and, therefore, neither a necessary nor a proper party for adjudication of the said Company Petition. It was further submitted that the Appellant was never in-charge of nor responsible for the management and operations of ‘IFIN’ and had issued only one Joint Audit Report for F.Y. 2017-18, along with ‘Deloitte Haskins & Sells LLP’, who had been Auditors of ‘IFIN’ for 10 years. Furthermore, it was submitted that there was no material against the Appellant for any fraudulent activity.
Company Appeal (AT) No. 205 of 2019
20. The Appellant- ‘Mr. Milind Patel’ was an Employee Director of ‘IL&FS Financial Services Limited’ (‘IFIN’) till 31st March, 2018, though he tendered his resignation on 5th February, 2018.
21. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as it was neither on the Committee of Directors, nor had ever been on the Board of Directors of ‘IL&FS’ and, therefore, neither a necessary nor a proper party for adjudication of the said Company Petition. It was further submitted that the Appellant had no decision or policy making role in the ‘IFIN’ organization and only followed the instructions of the Committee of Directors and the Uniform Approval Framework. Furthermore, the Appellant submitted that the impugned order was entirely based on the criminal complaint and the allegations contained therein which was a separate and distinct proceeding in law and merely because such a complaint had been filed against the Appellant, the Appellant could not have been joined as a party to the Company Petition, which was for relief on the basis of allegations of oppression and mismanagement on the part of the company’s management.
Company Appeal (AT) No. 206 of 2019
22. The Appellant- ‘Neera Saggi’ served as an Independent Director of ‘IFIN’ between 18th March, 2015 and 25th July, 2016 for a period of 16 months.
23. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as the Appellant had resigned from ‘IFIN’s Board on 25th July, 2016 and prior to that was an Independent Director of ‘IFIN’ and was not at all concerned with the management and day-to-day affairs of ‘IL&FS’. Therefore, Appellant was neither a necessary nor a proper party for adjudication of the Company Petition filed for alleged oppression and mismanagement of ‘IL&FS’.
24. It was further submitted that the Appellant was not a part of ‘IFIN’s audit committee and, therefore, could not have been equated with those independent directors who were on the Audit Committee.
Further, it was submitted that no final reliefs were claimed in the Company Petition against the Appellant and, therefore, there was no question of any interim protective orders being granted against the Appellant.
Company Appeal (AT) No. 207 of 2019
25. The Appellant- ‘Mr. Rajesh Kotian’ was the ex-director of the ‘IL&FS Financial Services Limited’ (‘IFIN’) and had resigned on 3rd July, 2019. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as no final reliefs were claimed in the Company Petition against the Appellant nor any allegations were made and, therefore, it was neither a necessary nor a proper party for adjudication of the said Company Petition.
26. It was further submitted that the Appellant could have been joined as a party Respondent only after guilt of the Appellant had been proved beyond doubt on the basis of the Serious Fraud Investigation Office Second Interim Report and the Criminal Complaint filed before Special Court.
Company Appeal (AT) No. 211 of 2019
27. The Appellant – ‘Manu Kochhar’ was an employee of ‘IL&FS’ from 23rd April, 1990 and retired on 31st August, 2018. The Appellant was appointed as Nominee Director of ‘IL&FS Financial Services Limited’ (‘IFIN’) in the year 2004 and resigned in March, 2015.
28. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as no final reliefs were claimed in the Company Petition against the Appellant and therefore, neither was a necessary nor a proper party for adjudication of the said Company Petition.
29. It was further submitted that the Appellant had neither any executive position in ‘IFIN’, nor had ever been part of the Audit Committee and it was never involved in day-to-day affairs of ‘IFIN’. It was also submitted that the Appellant was not assigned with or responsible for the task of verifying the viability, legality and veracity of the loans/ investments made by ‘IL&FS’.
30. Furthermore, the Appellant submitted that the Tribunal had on an erroneous interpretation of Order 1 Rule 10 of Civil Procedure Code, 1908 impleaded the Appellant. Also, it was submitted that impleadment by the Tribunal on the basis of criminal complaint, when the charges therein were unproven, was wrong.
Company Appeal (AT) No. 212 of 2019
31. The Appellant- ‘Mr. Deepak Jagdish Pareek’ was employed with ‘IL&FS’ since May, 1988 and was transferred from ‘IL&FS’ to ‘IFIN’. He was promoted as Assistant Vice President and designated to head the Finance and Accounts Department in August, 2006. Thereafter the Appellant was designated as CFO by the Board in April 2014 as per the mandate under Companies Act, 2013. It was submitted that the Appellant was neither a member of Audit Committee nor had any special privilege.
32. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as no final reliefs were claimed in the Company Petition against the Appellant who did not have any control over management and operations of lending business of ‘IFIN’.
33. It was also submitted that the Tribunal had failed to consider that the Appellant had a subordinate delegated authority and limited role as an employee of the Company.
Company Appeal (AT) No. 214 of 2019
34. The Appellant- ‘Surinder Singh Kohli’ was an Independent Director of ‘IFIN’ between 21st October, 2011 and 19th September, 2018. He was a part of ‘IFIN’s Audit Committee but was not a member of any committee of Directors of ‘IFIN’. The Appellant was only a non-executive Independent Director of ‘IFIN’ and held no other position, save as aforesaid being a part of its Audit Committee. The Appellant was not involved in ‘IFIN’s day-to-day affairs and management and had no executive powers.
35. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as the Appellant during the F.Y. 2017-2018 was not related to ‘IL&FS’ or its management and affairs, therefore, not a proper party for adjudication of the Company Petition filed for alleged oppression and mismanagement of ‘IL&FS’. Further, it was submitted that no final reliefs were claimed in the Company Petition against the Appellant and, therefore, there was no question of any interim protective orders being granted against the Appellant.
Company Appeal (AT) No. 215 of 2019
36. The Appellant- ‘Mr. Uday Ved’ served as an Independent Director of ‘IFIN’ between 31st March, 2015 and 20th September, 2018.
37. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as the Appellant was an Independent Director of ‘IFIN’ and was not at all concerned with the management and day-to-day affairs of ‘IL&FS’. Therefore, Appellant was neither a necessary nor a proper party for adjudication of the Company Petition filed for alleged oppression and mismanagement of ‘IL&FS’.
38. It was further submitted that the Appellant was not a part of ‘IFIN’s audit committee and, therefore, could not have been treated similarly with those independent directors who were on the Audit Committee.
39. Further, it was submitted that no averments have been made against the Appellant by way of the Miscellaneous Application and there was no cause of action to implead the Appellant as a party Respondent.
Company Appeal (AT) No. 221 of 2019
40. The Appellant- ‘Subhalakshmi Panse’ was an Independent Director of ‘IFIN’ between 5th February, 2015 and 20th September, 2018. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as there were no allegation of fact against the Appellant and no relief sought against the Appellant in the said petition.
It was submitted that the Tribunal is jurisdictionally barred from adjudicating on matters in a petition under Section 241 on the basis of any material other than what is introduced in the petition.
Company Appeal (AT) No. 222 of 2019
41. The Appellant- ‘Mr. Udayan Sen’ is a partner in ‘Deloitte Haskins & Sells LLP’ which was acting as an Auditor of ‘IL&FS Financial Services Limited’., a 100% subsidiary of ‘Infrastructure Leasing & Financial Services’ (‘IL&FS’), until F.Y. 2017-2018 and also acted as a Joint Auditor of ‘IL&FS Financial Services Limited’ with ‘BSR & Associates LLP’.
42. It was submitted that by impugned order dated 9th August, 2019, the Tribunal had failed to appreciate that the Appellant being an erstwhile auditor and ceasing to act as an Auditor of IFIN from F.Y. 201718 could not be covered within the ambit of Section 140 (5) of the Companies Act, 2013.
43. It was submitted that Section 140(5) only applies to existing auditors and the Tribunal could not have by way of a deeming fiction interpreted the said Section to include erstwhile Auditors.
Company Appeal (AT) No. 223 of 2019
44. In the present appeal, the Appellant- ‘Mr. Kalpesh Mehta’ who is a partner in ‘Deloitte Haskins & Sells LLP’ which was acting as an Auditor of ‘IL&FS Financial Services Limited’., a 100% subsidiary of ‘Infrastructure Leasing & Financial Services’ (‘IL&FS’), until F.Y. 20172018 and also acted as a Joint Auditor of ‘IL&FS Financial Services Limited’ with ‘BSR & Associates LLP’.
45. It was submitted that by impugned order dated 9th August, 2019, the Tribunal had failed to appreciate that the Appellant being an erstwhile auditor and ceasing to act as an Auditor of IFIN from F.Y. 201718 could not be covered within the ambit of Section 140 (5) of the Companies Act, 2013. It was further submitted that the Tribunal has failed to consider that the functioning of the auditor at the time when the petition under Section 140(5) is initiated being a jurisdictional fact in the absence of powers under the said Section cannot be resorted to at all.
46. It was submitted that Section 140(5) only applies to existing auditors and the Tribunal could not have by way of a deeming fiction interpreted the said Section to include erstwhile Auditors. Also, such a construction would be violative of Article 20(1) of the Constitution of India.
Company Appeal (AT) No. 224 of 2019
47. According to Appellant, ‘Deloitte Haskins & Sells LLP’, it was an Auditor of ‘IL&FS Financial Services Limited’ until 2017-2018 when they rotated out as the auditors of the Company (‘IL&FS’) on account of operation of law. It also acted as joint auditor for ‘IL&FS Financial Services Limited’ together with ‘BSR and Associates LLP’ in the Financial Year 2017-18.
48. It was submitted that by impugned order dated 9th August, 2019, the Tribunal had failed to appreciate that the Appellant being an erstwhile auditor and ceasing to act as an Auditor of IFIN from F.Y. 201718 by operation of law could not be covered within the ambit of Section 140 (5) of the Companies Act, 2013. It was further submitted that the Appellant has vacated its office as an auditor of ‘IFIN’ w.e.f. the date of the date of the Annual General Meeting of ‘IFIN’ as relevant for the end of the F.Y. 2017-2018 on account of rotation and has since then ceased to be an auditor of ‘IFIN’ and consequently, Section 140(5) was inapplicable.
49. It was submitted that Section 140(5) only applies to existing auditors and the Tribunal could not have by way of a deeming fiction interpreted the said Section to include erstwhile Auditors.
Company Appeal (AT) No. 225 of 2019
50. The Appellant- ‘Mr. Shahzaad Dalal’ was a Non-executive Director of ‘IFIN’ from 26th October, 2006 and resigned from the Directorship on 26th March, 2015.
51. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as there were neither any allegations made against the Appellant in the 2nd Interim Report of SFIO nor any final reliefs were claimed in the Company Petition against the Appellant giving rise to any interim protective orders being granted against the Appellant.
52. Furthermore, the Appellant submitted that the impugned order was entirely based on the criminal complaint and the allegations contained therein which was a separate and distinct proceeding in law and merely because such a complaint had been filed against the Appellant, the Appellant could not have been joined as a party to the Company Petition, which was for relief on the basis of allegations of oppression and mismanagement on the part of the company’s management.
Company Appeal (AT) No. 230 of 2019
53. The Appellant- ‘Mr. C. Sivasankaran’ was Ex-Chairman of ‘Siva Industries and Holdings Limited’ (‘SIHL’) until 19th March, 2017. It was submitted that ‘SIHL’ and its subsidiaries always had individual Directors, Shareholders, Board Members and Independent Auditors and he had no legal capacity in any of the companies that obtained loans from ‘IL&FS’ subsequent to his leaving from India and SIHL Group.
54. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as vague allegations were alleged on him by 2nd SFIO Report.
Company Appeal (AT) No. 285 of 2019
55. The Appellant- ‘Mrs. Renu Challu’ was appointed as an Independent Director of ‘IFIN’ on 27th September, 2017 and resigned on 17th July, 2018.
56. It was submitted that by impugned order dated 18th July, 2019 in Miscellaneous Application No. 2071 of 2019, the Appellant has been wrongly impleaded as a party Respondent in Company Petition No. 3638 of 2018 as the Appellant was an Independent Director of ‘IFIN’ and was not at all concerned with the management and day-to-day affairs of ‘IL&FS’. Therefore, Appellant was neither a necessary nor a proper party for adjudication of the Company Petition filed for alleged oppression and mismanagement of ‘IL&FS’.
57. The main plea taken by the Appellants is that they are not related to ‘IL&FS’ or its management and affairs and nor they are associated in past and present and, therefore, they are not a proper or necessary party.
Case of the Appellant- ‘Deloitte Haskins & Sells LLP’
58. According to Appellant- ‘Deloitte Haskins & Sells LLP’, it ceased to be the auditor of ‘IFIN’ at the end of the Annual General Meeting held for F.Y. 2017-18 on account of operation of law on expiry of its term under Section 139 of the Companies Act, 2013 and was not the statutory auditor of the company on the date of filing of the said Company Petition or at the time of filing of the Miscellaneous Application No. 2071 of 2019.
Necessary and/ or proper party
59. It was submitted by the Appellant- ‘Deloitte Haskins & Sells LLP’ that whereas the Impugned Order has directed the Appellant to be impleaded as a party to the said Company Petition, the Impugned Order does not in fact render a finding that the Appellant is a necessary or a proper party to the said Company Petition. [See “Ramesh Hirachand
Kundanmal v. Municipal Corporation of Greater Bombay (1992) 2 SCC 524”-Para 61] Even otherwise, it may be noted:
(a) the said Company Petition does not contain any statements, averments, allegations against the Appellant or its partners /employees and further no such averments have been sought to be added to the said Company Petition by way of the said Miscellaneous Application No. 2071 of 2019;
(b) the Appellant’s presence is not necessary to effectually and completely adjudicate the real controversy, which pertains to the management of the affairs of ‘IFIN’- with which the Appellant in its capacity as a statutory auditor (now rotated out0 has never been concerned; and
(c) the final reliefs originally sought in the said Company Petition were limited to replacement of the Board of Directors of ‘IL&FS’ and its subsidiaries including ‘IFIN’ (of which the Appellant was a statutory auditor), which has been done by way of order dated 1st October, 2018. Though the said Company Petition has been amended from time to time, at the time of passing of the Impugned Order no further final prayers or reliefs had been added. In fact, even in the said Miscellaneous Application, there is no mention of any final reliefs being sought against the Appellant. It is submitted that it is only on the touchstone of reliefs sought that it can be determined whether a person is a necessary or proper party to a proceeding.
Jurisdiction under Sections 241-242 vis-à-vis past auditors
60. The Tribunal has no jurisdiction to pass orders against an auditor under Section 241 or Section 242 of the Companies Act, 2013. The provision contained in Sections 241 and 242 of the Companies Act, 2013 pertain to oppression and mismanagement of the affairs of the company. An auditor is not involved in the management of the affairs of a company and, therefore, cannot be covered within the ambit of Sections 241 and 242 of the Companies Act, 2013. A reference to Section 242 (a) to (l) of the Companies Act, 2013 will demonstrate that none of the actions contemplated therein can be ordered against past statutory auditors of a company. Insofar as the general powers under Section 242(m) of the Companies Act, 2013 are concerned, it is submitted that the same must be read ejusdem generis with the remainder of Section 242 of the Companies Act, 2013 and not de hors the same.
61. The power of the Central Government under Section 241(2) of the Companies Act, 2013 is limited to cases of on-going oppression and/or mismanagement inasmuch as the said sub-section states that the Central Government may appeal to the Tribunal for reliefs where it is of the opinion that the affairs of the company “are being carried out in a manner prejudicial to the public interest”. The words ‘are’ in Section 241 (2) of the Companies Act, 2013 denotes in praesenti and, therefore, the said provision cannot apply to a past auditor. Given that the Appellant rotated out as the auditor of ‘IFIN’ at the end of the Annual General Meeting for F.Y. 2017-2018, there can be no question of the Appellant being concerned with how the affairs of the company are being run.
62. The jurisdictional fact required to invoke the Tribunal’s jurisdiction under Sections 241 and 242 of the Companies Act, 2013 are entirely absent in this case and the Appellant ought not to be impleaded as a party in the said Company Petition.
63. Reliance was placed on the report of the Serious Fraud Investigation Office (‘SFIO’). It was submitted that the application for the impleadment of inter alia the Appellant is based solely on the 2nd Interim Report of the SFIO dated 28th May, 2019. In the impugned order, the Tribunal has referred extensively to some of the allegations contained in the report against the Appellant and has held that, “The SFIO report clearly reveals prima facie evidence of involvement of proposed respondents.”. In this regard, it is submitted as under:
a. The SFIO investigation and the 2nd Interim Report prepared in pursuance thereof form part of an entirely separate and distinct proceeding in law and the 2nd Interim Report cannot automatically justify impleadment of the Appellant as a parry in a Petition under Sections 241-242 of the Companies Act, 2013;
b. The contents of the 2nd Interim Report, are only allegations and the same must be proven by means of trial and by leading evidence before the Special Court (and the persons against whom allegations are raised are presumed ‘innocent until and unless proven guilty’); and
c. Under Section 223 of the Companies Act, 2013, reports under Section 212 of the Companies Act, 2013 (such as the 1st and 2nd Interim Reports) are specifically excluded and as such the 1st and 2nd Interim Reports would not be admissible in any legal proceeding as evidence in relation to any matter contained in the report.
Section 339 of the Act:
64. It has been contended that the provisions of Section 339 of the Companies Act, 2013 are applicable in the facts of the present case in view of Section 246 of the Companies Act, 2013 and thus the Appellant is a necessary and/or a proper party. The said contention is baseless in view of the following:
a. Section 339 of the Companies Act, 2013 cannot apply to auditors at all and applies only to a director, manager or officer of the company or persons who are knowingly party to the carrying on of business of the company. It is submitted that an auditor, by definition, is not party to the carrying on of the business of a company. Nor is it anybody’s case that the auditor was carrying on the business of the company;
b. In any event, there is no pleading in the said Company Petition or the said Miscellaneous Application No.2071 of 2019 that there have been any unlawful gains by the Appellant that would attract the provisions of Section 339 of the Companies Act, 2013 read with Section 246 of the Companies Act, 2013; and
c. Without prejudice to the aforesaid, even the 2nd Interim Report of the SFIO, which is the entire basis for the impleadment application, does not contain any allegation against the Appellant of any unlawful gains and thus there is no question of any disgorgement under Section 339 read with Section 246 of the Companies Act, 2013.
Section 213 of the Companies Act, 2013:
65. Section 213 of the Companies Act, 2013 provides that on an application being made if the Tribunal is satisfied that the business of a company is being conducted with an intent to defraud creditors or members; or in a manner oppressive to any of its members; or that the company was formed for any fraudulent or unlawful purpose or for the other reasons stated therein, the Tribunal may direct that the affairs of the company be investigated by an inspector or officer by the Central Government.
66. However, Section 212 (2) of the Companies Act, 2013 provides that where a case has been assigned to the SFIO for investigation under Section 212 of the Companies Act, 2013, no other agency or officer of the Central government or any State Government can initiate or continue any other investigation in this behalf. As an investigation under Section 212 of the Companies Act, 2013 is continuing in the present case, no other investigation can be initiated/proceeded with.
Section 245 of the Companies Act, 2013:
67. In the Impugned Order, the Tribunal has erroneously equated a Petition filed under Section 241 (2) of the Companies Act, 2013 with Petitions filed under Section 245 of the Companies Act, 2013 with a view to supporting their application for impleadment. In this regard it is submitted as under:
a. Whilst the Tribunal has rightly observed that Section 245 was not in operation at the time of the filing of the present Petition under Section 241(2) of the Companies Act, 2013, the Tribunal erroneously holds that Section 245 having been notified after the filing of the Petition, Respondent No. 1 “was authorised to initiate action under this Chapter, which is also class action suit /petition.” It may be notified that the thresholds under Section 245 were notified on 8th May, 2019, i.e. prior to the filing of the said Miscellaneous Application.
b. The Tribunal has failed to appreciate that there were neither any averments not any reliefs in the impleadment application, which correspond to Section 245 or seek to incorporate the provisions of Section 245 into the present impleadment application; and
c. It is submitted that the very fact that Section 245 specifically makes reference to auditors makes it all the more evident that auditors are excluded from the ambit of proceedings under Sections 241-242 of the Companies Act, 2013, which make no reference to auditors or any relief being sought against them.
Special and specific remedies available against auditors:
68. The role of an auditor, whether it be in the nature of negligence or misconduct or fraud, can be investigated by, as Regulator, the National Financial Reporting Authority established under Section 132 of the Companies Act, 2013 or by the Institute of Chartered Accountants established under the Chartered Accountants Act, 1949 or under Section 447 of the Companies Act, 2013 by a Special Court established under Section 435 of the Companies Act, 2013. In view of the specific and special alternate remedies available against auditors, there is no question of invoking the jurisdiction under Sections 241 and 242 of the Companies Act, 2013 to seek any remedy or relief against the Appellant.
69. Almost similar plea has been taken by other Appellants including the partners of ‘Deloitte Haskins & Sells LLP’, Employees, Directors of ‘IL&FS’, the person who has renounced its Indian Citizenship, Independent Directors of ‘IL&FS’, Auditors and the Executive Directors of ‘IL&FS’ etc.
70. The Central Government has highlighted the brief background and circumstances necessitating the filing of the petition under Sections 241242 of the Companies Act, 2013 and the proceedings thereafter, as under:
70.1. Due to the continuous failure of ‘IL&FS’ to service its debts and the imminent possibility of contagion effect on the financial market, the Department of Economic Affairs vide its Office Memorandum dated 30th September, 2018, requested the Ministry of Corporate Affairs to take action against the then Board of Directors of ‘IL&FS’ and its Group Companies under the Companies Act, 2013.
70.2. In view of the above, the Ministry of Corporate Affairs, the very same day, directed the Serious Fraud Investigation Office (“SFIO”) by way of an Office Order, to investigate the affairs of ‘IL&FS’ and its group companies.
70.3. On 1st October, 2018, the Ministry of Corporate Affairs filed Company Petition No. 3638 / 2018 under Sections 241 and 242 of the Companies Act, 2013 before the Tribunal. The reliefs sought were, inter-alia, (i) suspension of the then Board of Directors of IL&FS and subsequent appointment of a new Board of Directors in terms of Section 242(2)(k) of the Companies Act, 2013 (ii) that such Board of Directors be authorized to replace directors of subsidiaries etc. of IL&FS (iii) seeking leave of the Tribunal, Mumbai to file supplement/ enlarge / amend / modify the scope of the reliefs sought and prayers made in the petition by filing any other documents or application in view of the extraordinary nature of the circumstances.
70.4. It is submitted that the Ministry of Corporate Affairs approached the Tribunal by way of an application seeking a moratorium on creditor proceedings against IL&FS and its group companies and to enable formation of an orderly resolution plan in light of the current circumstances facing the IL&FS group. The Tribunal declined to grant such reliefs by way of an order dated 12th October, 2018.
70.5. It was submitted that this Appellate Tribunal in an appeal from the order dated 12th October, 2018 passed by the Tribunal, while recognising the exigent and extraordinary circumstances that had arisen due to the financial irregularities within the IL&FS group that became apparent, granted an order protecting the whole IL&FS Group against any potential coercive action by creditors and other parties, in larger public interest on 15th October, 2018.
70.6. On 31st November, 2018, in pursuance to the Office Order, the SFIO submitted its first report in respect of the involvement of the Committee of Directors of IL&FS and an Employee Welfare Trust associated with IL&FS.
70.7. On the basis of the 1st SFIO Report and a prima-facie opinion of the Institute of Chartered Accountants dated 4th December, 2018 (which categorically holds the auditors of IL&FS, IL&FS Financial Services Limited (“IFIN”) and ‘IL&FS Transportation Networks India Limited’ (“ITNL”) guilty of professional misconduct), the Ministry of Corporate Affairs filed an application under Section 130 of the Companies Act, 2013 before the Tribunal, Mumbai praying, inter-alia, that the books of accounts of IL&FS, IFIN and ITNL for the past five years be reopened and recast.
70.8 By an order dated 1st January, 2019, the Tribunal, Mumbai directed that the accounts of IL&FS, IFIN and ITNL for the past 5 years, be re-opened and recast, observing that the affairs of these companies had indeed been mismanaged, casting a doubt on the reliability of their financial statements and accounts.
70.9 By an order dated 31st January, 2019, this Appellate Tribunal dismissed an appeal filed by one of the ex-directors against the order of the Tribunal, Mumbai allowing the re-opening and recasting of accounts.
70.10 Thereafter, on 22nd March, 2019, the Reserve Bank of India (“RBI”) submitted an inspection/investigation report on IFIN to the IFIN Board, pursuant to an investigation conducted by it under Section 45N of the Reserve Bank of India Act, 1934.
70.11 On 4th April, 2019, the ICAI, after giving the auditors a due hearing, passed a reasoned order holding the auditors of IL&FS, IFIN and ITNL guilty of professional misconduct.
70.12 Pursuant to the Office Order, the SFIO submitted its second report on 28th May, 2019, specifically in respect of IFIN (“2nd SFIO Report”).
70.13 Based on the 2nd SFIO Report, a sanction order bearing reference number Legal-35/16/2019 was issued by the Ministry of Corporate Affairs to the Regional Director (Western Region) and SFIO, requesting them to initiate appropriate proceedings.
70.14 In pursuance thereof, the SFIO, on 20th May, 2019 filed a Criminal Complaint before the Special Judge, Mumbai, against and amongst others, the parties sought to be impleaded.
71. Learned counsel for the Central Government submitted that the Tribunal has wide powers under Section 241(2) read with Section 242 of the Companies Act, 2013.
72. With regard to the former statutory auditors of ‘IL&FS Financial Services Limited’ (‘IFIN’) and its partners, it is submitted that the Central Government has not formed opinion on the basis of the SFIO Report as has been alleged by the Appellant(s). There are other facts, including ‘RBI Inspection Report’, ‘ICAI Report’ etc. which have also been taken into account while filing the application for impleading, inter alia, the Appellants.
73. Learned counsel for the Central Government has highlighted certain allegations as reported in the ‘2nd SFIO Report’/ ‘RBI Inspection Report’/ ‘ICAI Report’ based on which the opinion is formed by the Central Government and placed in a tabular form:
| S.NO | Parties | Specific Allegations in the SFIO Report/RBI Inspection Report/ ICAI Report |
|
AUDITORS |
||
| 1. | Delloite Haskins & Sells LLP
– CA No. 190 of 2019 – Statutory Auditors from 2008-09 to FY 2017-18 – Proposed Addl. Resp No. 326 – Para 64, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 74 |
|
| 2. | Kalpesh J Mehta
– CA No. 193 of 2019 – Engagement Partner on Behalf of Delloite – Proposed Addl. Resp No. 324 – Para 62, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 73 |
|
| 3. | Udayan Sen
– CA No. 194 of 2019 – Partner in Delloite – Proposed Addl. Resp No. 323 – Para 61, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 72 |
|
| 4. | Shrenik Baid
– CA No. 195 of 2019 – Partner in Delloite – Proposed Addl. Resp No. 337 – Para 75, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 79 |
|
| 5. | N Sampath Ganesh
– CA No. 196 of 2019 – Engagement Partner on behalf of BSR & Associates – Proposed Addl. Resp No. 325 – Para 63, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 73 |
|
| 6. | BSR & Associates LLP
– CA No. 190 of 2019 – Joint Statutory Auditors from 2008-09 to FY 2017-18 – Proposed Addl. Resp No. 327 – Para 65, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 74 |
|
|
DIRECTORS |
||
| 7. | Milind Patel
– CA No. 205 of 2019 – Joint Managing Director – Proposed Addl. Resp No. 321 – Para 59, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 72 |
|
| 8. | Rajesh Kotian
– CA No. 190 of 2019 – Statutory Auditors from 2008-09 to FY 2017-18 – Proposed Addl. Resp No. 326 – Para 62, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 73 |
|
|
INDEPENDENT DIRECTORS |
||
| 9. | Surinder Singh Kohli
– CA No. 214 of 2019 – Independent Director – Proposed Addl. Resp No. 328 – Para 66, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 74 |
|
| 10. | Subhalakshmi Panse
– CA No. 221 of 2019 – Independent Director – Proposed Addl. Resp No. 329 – Para 67, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 74
|
|
| OTHER CATEGORIES OF DIRECTORS | ||
| 11. | Neera Saggi
– CA No. 206 of 2019 – Independent Director – Proposed Addl. Resp No. 336 – Para 74, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 78 |
|
| 12. | Manu Kochhar
– CA No. 211 of 2019 – CEO-Special Initiatives – Proposed Addl. Resp No. 326 – Para 71, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 76 |
|
| 13. | Deepak Pareek
– CA No. 212 of 2019 – Chief Financial Officer (CFO) – Proposed Addl. Resp No. 330 – Para 68, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 75 |
|
| 14. | Uday Ved
– CA No. 215 of 2019 – Independent Director – Proposed Addl. Resp No. 335 – Para 73, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 77 |
|
| 15. | Shahzad Dalal
– CA No. 225 of 2019 – Non-Executive Director – Proposed Addl. Resp No. 332 – Para 70, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 76 |
|
| 16. | Renu Challu
– CA No. 285 of 2019 – Independent Director – Proposed Addl. Resp No. 334 – Para 72, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 77 |
|
| OTHER IMPLEADED PARTIES | ||
| 17. | C. Sivasankaran
– CA No. 230 of 2019 – Proposed Addl. Resp No. 331 – Para 69, Annexure 1, Vol 1, CA 190 of 2014 @ Pg 75 |
|
74. It is submitted that Section 143 of the Companies Act, 2013 provides for powers and duties of the auditors and accounting standards. It provides that the financial statements provided by the Auditors should give a true and fair view of the state of company’s affairs [Section 143(2)]. Further, Section 143(12) provides that if an auditor of the company, during the course of performance of his duties has reason to believe that an offence of fraud involving accounts, is being or has been committed in the company by its officers or employees, the auditors shall report to the Central Government. In view of the same, it is humbly submitted that the auditors failed to fulfil their statutory duties and report to the Central Government regarding the fraudulent accounts of ‘IFIN’.
75. Further, Section 149(8) of the Companies Act, 2013 provides that company and independent directors shall abide by Schedule IV to the Companies Act, 2013, which provides for roles, functions and duties of the independent directors. It was submitted that it is the duty of the independent directors to report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. Therefore, the independent directors have also failed to fulfil their statutory duties and report acts of fraud and suspected fraud, as statutorily obliged to.
76. Before deciding the issue, it is relevant to notice certain pleadings made by the Central Government in its application filed under Sections 241-242 of the Companies Act, 2013 before the Tribunal as under:
76.1. ‘Infrastructure Leasing and Financial Services Limited’ (‘IL&FS’), is a Company incorporated under the Companies Act, 1956. Over the years the IL&FS has inducted institutional shareholders to include Life Insurance Corporation of India (LIC), ORIX Corporation- Japan (ORIX), State Bank of India and Abu Dhabi Investment Authority. Besides the above, the ‘IL&FS Employees Welfare Trust’ also holds significant shares in 1st Respondent. The shareholding pattern of the IL&FS, as on 31st March, 2018, as derived from the Annual Report of the IL&FS, for the year 2018, is as follows:
| S.NO. | NAME OF SHAREHOLDER | PERCENTAGE HOLDING |
| 1 | Life Insurance Corporation of India | 25.34% |
| 2 | ORIX Corporation -Japan. | 23.54% |
| 3 | IL&FS Employees Welfare Trust | 12% |
| 4 | Abu Dhabi Investment Authority | 12.56% |
| 5 | Housing Development Finance Corporation Limited | 9.02% |
| 6 | Central Bank of India | 7.67% |
| 7 | State Bank of India | 6.42% |
| 8 | UTI- Unit Linked Insurance Plan – UTI Asset Management Company Limited | 0.82% |
| 9 | India Discovery Fund | 0.86% |
| 10 | Others | 1.17% |
| TOTAL | 100% |
In addition to the above, the total subscribed and paid up capital of the 1st Respondent, presently is Rs.983 Crores.
76.2. Although the equity shares of the IL&FS are not listed on any stock exchange, the secured non-convertible debentures as well as the non-convertible redeemable cumulative preference shares of the IL&FS are listed on the Bombay Stock Exchange. There are six major group companies of the 1st Respondent which contribute over 60% to the consolidated assets of the ‘IL&FS Group’. A brief of the four major group companies is provided hereunder:-
a) IL&FS Transportation Networks Limited (ITNL)
ITNL, incorporated in the year 2000, has business activities ranging from developer, sponsor, construction manager and operator of surface transportation infrastructure, taking Greenfield Projects from conceptualization through commissioning to operations and management of such projects. The company develops projects on build, operate and transfer basis and is the largest vertical of the IL&FS Group, admittedly holding over 40% of the total assets of the group. ITNL operates through special purpose vehicles (SPVs) and presently has 32 such SPVs in India and overseas.
b) ‘IL&FS Financial Services Limited (IFIN)
The IL&FS is engaged in the financial services sector through one of its material subsidiaries, IFIN, which is registered as a systematically important non-banking financial company (NBFC) with the Reserve Bank of India. IFIN admittedly contributes approx. 14.16% to the assets of the IL&FS Group and has a significant asset base with involvement in asset and project finance, structured debt and asset finance, syndication and corporate project advisory business.
c) IL&FS Energy Development Company Limited (IEDCL)
The IL&FS is engaged in the power sector through its subsidiary IEDCL, which develops, owns and operates power generation and transmission assets in India and abroad.
d) IL&FS Tamil Nadu Power Company Limited (ITNPCL)
‘ITNPCL’ is another subsidiary of the IL&FS engaged in the implementation of the thermal power project at Cuddalore in Tamil Nadu.
e) Noida Toll Bridge Limited
It is a listed company, subsidiary of IL&FS with 50.42% equity share capital all of which is pledged is running Infrastructure Flyover project connecting Delhi with Uttar Pradesh.
f) IL&FS Engineering and Construction Co. Limited
It is an Associate Company of IL&FS with over 42% equity. It is into multinational infrastructural development construction business.
In addition to the aforementioned major group companies, the IL&FS is engaged in maritime sector to develop maritime and logistic assets besides urban development sector for developing new cities, affordable housing, etc. The consolidated list of 169 group companies as derived from the Annual Report of the IL&FS for the year 2018, has been annexed herewith as Annexure P-4.
76.3. That further it has come to light through various reports and filing by the ‘IL&FS’ itself that the group companies of the ‘IL&FS’ have started defaulting on their debt obligations, which defaults are likely to grow and become severe in the coming months. It has been admitted by the IL&FS in its company application no. 1044 of 2018:
(i) ITNL has been, in default on its debt obligations since June 30, 2018.
(ii) The IL&FS itself has been in default on its debt obligations since August 25, 2018.
(iii) IFIN, the key subsidiary of the IL&FS engaged in financial services, has been in default since September 12, 2018. This has led to the resignation of the Managing Director & CEO and four independent directors of IFIN on September 21, 2018.
(iv) IEDCL, the IL&FS’s power generation subsidiary, has defaulted on its payment obligations since August 22 2018.
76.4. Furthermore, the IL&FS has admitted that total debt across the IL&FS Group is approximately Rs. 91,000 crore as on March 31, 2018 and the IL&FS is contemplating monetizing of significant assets of the group companies for servicing the debts besides seeking further financial assistance from the institutional shareholders by way of a proposed rights issue. It is further submitted that the consolidated debt of the company increased to Rs. 91,091.3 crore in 2018 from Rs. 48,671.3 crore in 2014. Interest outgo rose to Rs. 7,922.8 crore from Rs. 3,970.7 crore during the same period. By 2018, the company has not even been making enough profits to take care of its interest expense leading to the default. It has to be kept in mind that out of the Rs. 91,000 crore debt obligations of the IL&FS, Rs. 57,000 crore has been borrowed from the Public Sector Banks.
76.5. That subsequent to spreading defaults by the IL&FS Group, credit rating agencies CARE and ICRA have downgraded the credit rating of the Respondent No.1, ITNL and IFIN to ‘default’ or ‘junk’ grade. The said fact has also been admitted by the IL&FS in its company application no. 1044 of 2018. This indicate that IL&FS management was suppressing material information about its financial solvency and its ability to meet its obligation. The over exposure of loans and borrowings have been without prudent commercial practices and without any application of mind by the management of IL&FS over the several years. In fact, the management of IL&FS is responsible to bring it to this low due to its acts of commission & omission for which Union of India has ordered an investigation into the affairs of IL&FS and its group companies through SFIO. The Union of India seeks leave of the Tribunal to bring the findings of investigation on record.
76.6. That from the, financials and filings of the IL&FS and its group companies, it has been noticed that the flagship IL&FS holds 73.22% equity share capital in its direct listed company ITNL, out of which 98.23% is pledged. Similarly, IL&FS holds 50.42% equity share capital in another of its major subsidiary ¶IL&FS Investment Managers Limited’, all of which is pledged. Furthermore, the IL&FS also holds 42.25% equity share capital in one of its associate company namely ¶IL&FS Engineering and Construction Company Limited’ and 34.05% of that equity holding is also pledged which indicate that company has basically withdrawn from the financial management of its key subsidiaries as it has no financial left. Furthermore, IL&FS Investment Managers Ltd., a subsidiary of IL&FS is holding company of ¶Noida Toll Bridge Company Ltd. (a Listed Company) wherein it holds 50.42% equity share capital of which all equity is pledged.
76.7. That the Central Government submits that the act of fraud perpetuated is on account of mis-representation and falsehoods about the financial state of affairs of the concerned company, which has jeopardized the financial health apart from causing serious damage and financial loss to various stakeholders.
76.8.That in light of the above, it is stated that the IL&FS and Ors., being either members of the Board of Directors, Promoters, Auditors, etc. are privy to the inner working of their respective businesses, and as such–cannot evade responsibility for the fraudulent activities, misfeasance, persistent negligence and continuous defaults in carrying out their duties. Further, as a result of this fraudulent intent of such a huge magnitude, the entire stock market would be adversely affected which will have cascading impact not only on IL&FS but on the business sentiment in particular and economy in general and on the large section of common investors and creditors, etc. The siphoning of funds have been systematically carried out by way of excessive withdrawal of remuneration and otherwise which is apparent as under:
| No. | Name of the Director | Rs. in Million | SGD | Euro |
| 1 | Mr. Ravi Parthasarathi | 3.66 | – | 1315.79 |
| 2 | Hari Sankaran | 4.24 | – | 2631.58 |
| 3 | Arun K Saha | 4.68 | 6000 | 5263.16 |
Further, the fraudulent intent has been so apparent that many of the directors realized that IL&FS along with its group companies has become titanic ship, thus resigned their Directorship.
The Ex-director(s) namely Sh. Ravi Ramaswamy Parthasarathy (DIN: 2392), Sh. Ramesh Bawa (DIN: 040523) and present Director(s) namely Sh. Hari Sankaran (DIN: 2386), Sh. Karunakaran Ramachand (DIN: 051769) are likely to flee the country overnight, therefore the Ministry has to make a request for look-out notice for these persons.
76.9. That the facts detailed above by the Central Government clearly spell out the widespread mismanagement of funds by the current management of the IL&FS, in not only the holding company but throughout the IL&FS Group, leading to such a severe crisis that the group is reeling to meet even its day to day operational expenditures. The unscrupulous manner in which public money has been mismanaged and stuck in projects indicate that management of IL&FS has not only failed to manage but were involved in operation cover up till the end and wilfully created financial mess of IL&FS is astonishing. It has been admitted by the IL&FS in its company application no. 1044 of 2018 that there is severe liquidity crunch in the company with no immediate source of funding, so much so that the IL&FS is in no position to service its debt in the ‘short term’. IL&FS is left with no assets to raise funds, no credibility to bank, no takers to buy its promises and nothing to offer to the stakeholders in particular and public at large in general to assure its continuation.
76.10. That, last but not the least, Department of Economic Affairs which is responsible for the financial stability in economy too has raised Red Signals of the likely collapse of IL&FS and has expressed its deep concern of such a collapse would have on the economy in its Confidential Note dated 30.09.2018. It has also highlighted various acts of mismanagement from economic perspective which if become reality would have cascading impact on various sectors of economy.
76.11. According to Department of Economic Affairs, the following are the repercussions the economy would face:
i. Redemption pressure to continue: Now hereafter other AMCs having exposure of Rs. 2800 crores to IL&FS bonds would get redemption pressure from Corporate Clients who have invested in this Rs. 16 trillion Debt MF industry.
ii. Debt market sell-off expected: It’s impossible for such mutual fund schemes to get the redemption amounts in a short period of time. Further, illiquid Corporate Debt Market and DHFL saga may force AMCs to sell Government Securities. Hence, Government Securities will face a huge selling pressure so either Bond Yield will shoot up to 8.30-8.50% levels or the RBI has to do OMO (Open Market Operations). If RBI Opts for OMO, then the Government’s spending capacity will reduce by an equal amount.
iii. NBFC licenses could be cancelled: In the wake of the IL&FS crisis, as many as 1,500 smaller NBFCs may have their licenses cancelled because these don’t have adequate capital.
iv. Liquidity crunch: A liquidity crunch and recent events hitting market sentiment will lead to cost of funds for NBFCs increasing, impacting profitability.
v. Impact on debt market as reported by NSE:
Bond yields had increased already on the back of Oil Price and Rupee depreciating, Government bonds had seen yields rising from 7.70 to 8.20 levels. Corporate bond yields had widened commensurately. However post IFSL announcement and downgrade, the Mutual Funds, who are the main buyers in Corporate Bonds, have completely stopped buying. RBI’s liquidity inducing measures and announcements have helped Government bond yields to drop to 8.05- 8.08 levels, but corporate bond yields have risen further by about 40-50 bps post IFSL crisis. Primary market in Corporate Bonds has completely dried up as no one is willing to buy currently in expectation of further redemptions from MFs.
The added pressure is half yearly, seasonal redemptions MFs face anyway at this time of year. Hence Corporate Bond market is currently very illiquid and not seeing much volumes.
76.12. Further, the importance of the IL&FS and its group from financial stability perspective as highlighted by the Department of Economic Affairs are as under:
On consolidated basis, the borrowing of IL&FS from banks and financial institutions (debentures, loans, cash credit and commercial paper) comes to about Rs. 63,000 crores as per the balance sheet of 2017-18. If the exposure of banks to the IL&FS Group is assumed to be about Rs. 53,000 crores, then considering that the exposure of the entire banking sector to all the NBFCs is about Rs. 3.3 lakh crores, IL&FS Group is not inconsequential, but, critical to the financial stability as its share in the total exposure of the banks to the NBFC sector is about 16%. Therefore, there is a substantial public interest in ensuring financial solvency and good governance and management of this Group. The cascading impact of the default by the IL&FS Group on the financial sector would be quite substantial as evidenced from a partial default of some companies and its repercussions in the financial market in the month of September, 2018. The future impact of more defaults in the Group may be catastrophic for the financial stability.
In addition to above, from economic perspective, various acts of mis-governance and mis-management in IL&FS and its group companies are as under:
i. The IL&FS Group has shown a loss of Rs. 2670 core for the year 2017-18 in the consolidated balance sheet. The leverage is about 13 times as the borrowing of about Rs.9 1000 crores is on the base of equity capital and reserves of about Rs. 6950 cores. The CRAR (Capital to Risk Weighted Asset Ratio) of 15% for Systemically Important Non-Deposit Accepting Non-Banking Finance Company (NBFC-ND-SI) would result in a leverage ratio of about 6-7 times and the CRAR of 30% (for core Investment Company) would result in a leverage of about 3-4 times.
The indebtedness of the IL&FS at the end of Financial year 2017-18 is about 16468 crores and with debt market drying up for this company, it would be quite difficult to raise the fresh debt to service the existing debt or to do ever greening of debt. The leverage levels are quite elevated and need to be reduced to some, manageable levels, which require new thinking, and new management.
ii. IFIN, a Subsidiary of IF&SL, is registered with the Reserve Bank of India (RBI) as a Systemically Important Non-Deposit Accepting Non-Banking Finance Company (NBFC-ND-SI). IFIN specializes in infrastructure financing transactions, with a unique combination of investment banking skill sets comprising of Debt Structuring and Distribution (DS&D), Corporate Advisory and Lending capabilities. IFIN has evolved as one stop solution provider for all the Funding, Debt raising and Advisory requirements of the clients. The RBI in its inspection reports required IFIN to consider exposures as per section 370 (1B) of the Companies Act, 1956 (now replaced with the Companies Act, 2013) for determining ‘companies in the same group’. This impacts computation of Net Owned Funds (NOF) and Capital to Risk Assets Ratio (CRAR) of IFIN. The RBI has given time up to March 31, 2019 to fulfill the minimum NOF and CRAR requirements as the IFIN does not satisfy these prudential requirements.
iii. The restoration of solvency of the Group would require confidence of the money and debt markets and the banks in the credibility of, the Group. The defaults as on 29th September, 2018 are about Rs.3761 cores. The confidence of the financial market needs to be restored, and the present management has lost all credibility to service any further financing to the company and it is mentioned above that the existing debt of about Rs.16468 crores needs to be serviced. The replacement of the existing management by the new management would be the first step towards restoring that confidence and to avoid any suboptimal liquidation of assets.
iv. The IL&FS Group is involved in many infrastructure projects by way of project financing and also equity and debt financing. Any impairment in its ability to finance and support the infrastructure projects would be quite damaging to the overall infrastructure sector, financial markets and the economy, considering its systemically important nature and its borrowing level of Rs.91000 crores.
The business model of IL&FS is such that the company borrows from the money market and debt market besides bank borrowing to fund its income generating activities and assets, which are medium to long-term. So, there is a clear mismatch in its assets and liabilities. It is, therefore, imperative that the risk management framework of the company is robust. That is why RBI has issued the Non-Banking Financial Companies-Corporate Governance (Reserve Bank) Directions, 2015 for NBFCs. Although the Corporate Governance Principles are not strictly applicable to Core Investment Companies, however, Systemically Important Core Investment Companies are encouraged to follow these as a prudent measure. The said Directions provide for Risk Management Committee and reporting of its, role and functions, periodicity of the meetings and compliance with coverage and review functions, etc. The Risk Management Committee of IL&FS did not meet during the period 2015 to 2018 except once in July 2015. The responsibilities of the Risk Management Committee, inter-alia, include:
a. Review of the adequacy of the risk management framework and operational procedures developed for new businesses and products from time to time;
b. provision of guidance on. strengthening of risk management practices to respond to emerging global and national market and regulatory developments;
c. approval of overall limits for management of credit risk, liquidity risk and market risks;
d. review of asset liability management reports and provision of directions on improved management of liquidity and interest rate risk;
e. review of the capital adequacy requirements of the Company and provision of recommendations for the consideration of the Board in relation to the parameters to be considered in this regard;
f. review of the Company’s compliance programme; and
g. review of the status of any enquiry, investigation and other disciplinary action initiated by RBI, SEBI or other regulatory agencies.
Findings of this Appellate Tribunal:
77. As the matter is pending consideration before the Tribunal, we are not inclined to express any opinion whether the allegations made against one or other require further investigation and the order what is required to be passed in public interest.
78. The only question arises in these appeals is as to whether this Appellate Tribunal should interfere with the impugned order dated 9th August, 2019 whereby the Appellants have been impleaded as party Respondents.
79. In similar case of “Union of India, Ministry of Corporate Affairs v. Gitanjali Gems Ltd. & Ors. etc.─ Company Appeal (AT) No. 103 of 2018 etc.” while discussing wide powers of the Tribunal under Sections 241-242 of the Companies Act, 2013, conjointly read with Section 246 and Sections 337 to 341, this Appellate Tribunal held:
“38. In the interest of regulating the conduct of the Company’s affairs the interim order cannot be restrictive to any particular or individual person, including the Company/companies, existing or erstwhile Officers and employees of the Companies if investigation for alleged fraud is pending.
39. For the purpose of passing interim order the Tribunal cannot fix the personal liability of delinquent Directors or Managers or Officers or other employees in absence of any specific evidence. Therefore, during the process of investigation and pendency of an application under Section 241(2) read with Section 242 of the Companies Act, 2013 and in view of powers conferred under Section 221, the Tribunal is not only empowered to pass appropriate interim order against the Company but also against any person or individual, including the order to desist.
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42. The power of Tribunal is wide enough as is evident from sub-section (1) of Section 242 in terms of which ‘it may make such order as it thinks fit’, with a view to bringing to an end the matters complained of.
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45. From the aforesaid provisions, it is clear that on an application made by the Central Government alleging affairs of the Company are being conducted in a manner prejudicial to public interest, the Tribunal can pass any order in terms of Chapter XVI, which includes Section 242 and other provisions under the said Chapter.
46. Section 246 is part of Chapter XVI, the provisions mentioned therein will be also covered by sub-section (2) of Section 241. Therefore, in an application made by the Central Government alleging conduct of the Company in a manner prejudicial to public interest, the provisions of Sections 337 to 341 will be also applicable mutatis mutandis to an application made to the Tribunal under Section 241 or Section 245.
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50. Therefore, on an application under subsection (2) of Section 241, the Tribunal can pass not only any order under Chapter XVI and if it is read with Section 246, it will be evident that Sections 339, 340 and 341 being applicable mutatis mutandis, in relation to an application made to the Tribunal under Section 241, the Tribunal can pass order in terms of those extended provisions.
51. This apart under Section 420, the Tribunal is empowered to pass such orders as it thinks fit after giving the parties to any proceeding before it, a reasonable opportunity of being heard. The Tribunal has also inherent powers to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal under Rule 11 of the NCLT Rules, 2016.
52. Therefore, if sub-section (4) of Section 242 is read with Sections 339 & 340 and Section 221, it is clear that apart from ‘freezing of assets of company on inquiry and investigation’, it is also open to the Tribunal to freeze the assets of any person, including other companies and individuals, even during inquiry and investigation of fraud under Section 212 of the Companies Act, 2013”.
80. Similar issue was raised by one Mr. Hari Sankaran, Ex-Director of ‘IL&FS’ who moved before the Hon’ble Supreme Court in “Hari Sankaran v. Union of India & Ors. (2019) 6 SCC 584” wherein it held:
“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 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.
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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 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.”
81. The Hon’ble Supreme Court in unequivocal terms has held that the provisions of Sections 130, 212 and 241/242 operate conjointly so as to give full effect to the provisions of the Companies Act, 2013.
82. It is not necessary to discuss Section 140(5) of the Companies Act, 2013 for the present as the main issue is still pending consideration. The Ex- Auditors are to be removed or not is not the subject matter of Section 241(2) read with Section 242 of the Companies Act, 2013, till such relief is sought for and granted. If any such finding is given by the Tribunal with regard to the Ex-Directors only thereafter this Appellate Tribunal can decide such issue.
83. In “Aliji Momonji & Co. v. Lalji Mavji & Ors.─ (1996) 5 SCC 379”, the Hon’ble Supreme Court held:
“5 It is settled law by catena of decision of this Court that where the presence of the respondent is necessary for complete and effectual adjudication of the dispute, though no relief is sought, he is a proper party. Necessary party is one without whose presence no effective and complete adjudication of the dispute could be made and no relief granted.”
84. The question of grant of final relief against one or other is not the question for the present, as such we are not inclined to give such findings on such issue.
85. Section 424 of the Companies Act, 2013 deals with ‘procedure before the Tribunal and Appellate Tribunal’ as under:
“424. Procedure before Tribunal and Appellate Tribunal.─(1) The Tribunal and the Appellate Tribunal shall not, while disposing of any proceeding before it or, as the case may be, an appeal before it, be bound by the procedure laid down in the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice, and, subject to the other provisions of this Act 1[“or of the Insolvency and Bankruptcy Code, 2016] and of any rules made thereunder, the Tribunal and the Appellate Tribunal shall have power to regulate their own procedure.
(2) The Tribunal and the Appellate Tribunal shall have, for the purposes of discharging their functions under this Act 1[“or under the Insolvency and Bankruptcy Code, 2016”], the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit in respect of the following matters, namely:—
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) subject to the provisions of sections 123 and 124 of the Indian Evidence Act, 1872, requisitioning any public record or document or a copy of such record or document from any office;
(e)issuing commissions for the examination of witnesses or documents;
(f) dismissing a representation for default or deciding it ex parte;
(g) setting aside any order of dismissal of any representation for default or any order passed by it ex parte; and
(h) any other matter which may be prescribed.
(3) Any order made by the Tribunal or the Appellate Tribunal may be enforced by that Tribunal in the same manner as if it were a decree made by a court in a suit pending therein, and it shall be lawful for the Tribunal or the Appellate Tribunal to send for execution of its orders to the court within the local limits of whose jurisdiction,—
(a)in the case of an order against a company, the registered office of the company is situate; or
(b) in the case of an order against any other person, the person concerned voluntarily resides or carries on business or personally works for gain.
(4) All proceedings before the Tribunal or the Appellate Tribunal shall be deemed to be judicial proceedings within the meaning of sections 193 and 228, and for the purposes of section 196 of the Indian Penal Code, and the Tribunal and the Appellate Tribunal shall be deemed to be civil court for the purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973.”
86. As rules of natural justice are to be followed, if any order is passed against one or other, including investigation, it is always open to the Tribunal to ask such party to be impleaded.
87. The Tribunal is empowered to pass order under Section 242 of the Companies Act, 2013 in a petition under Section 241(2) if it forms opinion that the affairs of the company have been conducted in a manner prejudicial to the public interest. Once such opinion is formed by the Tribunal, it may pass any order as it deem fit and proper.
88. The allegations show that the ‘IL&FS Group Companies’ has suffered majority debt obligation of ‘IL&FS’. Rs. 57,000 Crores out of Rs.91,000 Crores, is from public sector banks and institutions. The ‘Life Insurance Corporation of India’, ‘State Bank of India’, ‘Central Bank of India’ besides ‘UTI AMC’ etc. in whose favour the fund is payable could not be paid. There are number of funds including ‘Army Pension Fund’, ‘Provident Fund’ etc. who have invested in the Group Companies will suffer. In effect, the public in general may suffer as the ‘Army Pension Fund’, ‘Provident Fund’ etc. are not the Government money but of the public in general.
89. The various acts prejudicial to public interest have been highlighted which has cascading impact on various sectors of economy. The Department of Economic Affairs which is responsible for the financial stability of economy and in the Country too has raised Red Signals of the likely collapse of ‘IL&FS’ and has expressed its deep concern on the impact of Indian Economy in its Confidential Note dated 30th September, 2018.
90. In the circumstances, before passing any appropriate order in public interest and to save the economy of the Country from collapse, if the Tribunal is of the opinion that it requires to give appropriate hearing to the concerned parties, including those who audited ‘IL&FS’ and/ or those who have managed or were concerned with ‘IL&FS’ or its Group Companies, it cannot be held to be illegal.
We find no merit in these appeals. They are accordingly, dismissed. No costs.
