Infrastructure Leasing & Financial Services Ltd. Vs Union of India & Ors. (NCLAT Delhi)
Conclusion: Section 242(1) conferred overriding and comprehensive equitable powers upon the NCLT to grant appropriate relief in cases of oppression and mismanagement, including declaring fraudulent or sham transactions void. The consent requirement contained in the proviso to Section 242(2)(f) applied only to the modification or termination of valid contractual arrangements and could not restrict the Tribunal’s jurisdiction to examine and nullify transactions alleged to be fraudulent or colourable devices. Consequently, the challenge to the maintainability of the proceedings under Section 242(2)(f) was rejected, and the Tribunal affirmed its authority to adjudicate the validity of the impugned transactions and grant consequential relief.
Held: The appeal arose from proceedings concerning the powers of the National Company Law Tribunal (NCLT) under Sections 241 and 242 of the Companies Act, 2013, in relation to alleged fraudulent financial transactions undertaken between IL&FS Financial Services Ltd. (IFIN), SREI Infrastructure Finance Ltd. (SIFL), their group entities and third-party borrowers. It was alleged that, following RBI restrictions on intra-group lending, IFIN channelled funds through SREI group entities and third-party borrowers in a series of mirror transactions to indirectly finance IL&FS group companies. Applicant sought declarations that the transactions were fraudulent, sham and void, and requested substitution of creditor claims to reflect the true lender. Respondents contended that such relief effectively amounted to termination or modification of contractual arrangements, which, under the proviso to Section 242(2)(f), could not be granted without notice to and consent of the contracting parties. Appellants contended that Section 242(1) confers wide equitable powers upon the NCLT to pass any order necessary to bring an end to oppression and mismanagement, including declaring fraudulent transactions void. It was argued that the application did not seek termination or modification of valid agreements but challenged sham and fraudulent transactions that lacked legal sanctity. Reliance was placed on judicial precedents recognizing the Tribunal’s broad remedial jurisdiction. Respondents argued that the relief sought would effectively alter contractual rights and obligations between parties, thereby attracting Section 242(2)(f), which mandated notice and consent of the concerned parties before any agreement can be terminated, modified or set aside. Reliance was placed on decisions interpreting Section 62 of the Contract Act and Section 242(2)(f) to contend that contracts could not be altered unilaterally by judicial intervention. Tribunal held that the jurisdiction conferred under Section 242(1) is broad, equitable and intended to provide effective remedies against oppression and mismanagement. The proviso to Section 242(2)(f) applies only where the Tribunal seeks to terminate, modify or set aside a valid and subsisting contractual arrangement. It does not curtail the Tribunal’s general powers under Section 242(1) where the challenge is to transactions alleged to be sham, fraudulent or void ab initio. Tribunal observed that the application sought declarations regarding the true nature of the impugned transactions and substitution of creditor claims rather than termination or modification of valid agreements. Fraudulent or collusive arrangements, designed to circumvent regulatory restrictions, do not enjoy the protection accorded to genuine contractual arrangements. Accordingly, the consent requirement under Section 242(2)(f) was held to be inapplicable. Tribunal further held that Section 62 of the Contract Act, dealing with novation, rescission or alteration of contracts, had no application since the proceedings did not involve consensual modification of contracts but judicial examination of allegedly fraudulent transactions. Relying on the Supreme Court’s decisions recognizing the expansive jurisdiction of the Tribunal under Sections 397, 398 and 402 of the Companies Act, 1956 (corresponding to Sections 241 and 242 of the Companies Act, 2013), it reaffirmed that the Tribunal may pass any order necessary to bring an end to oppression and mismanagement.
