Case Name: Srividya C G v. Serious Fraud Investigation Office
Case No.: (WP No. 4380 of 2018)
Dated: April 15, 2024
Quorum: Justice Hemant Chandangoudar
FACTS OF THE CASE:
Under the direction of accused No. 5 (Mr. Vijay Mallya), Kingfisher Airlines Limited (KFAL) was founded in 2004 and is mainly involved in domestic civil aviation. It was created under the Companies Act, 1956. In order to operate internationally, airlines must have a fleet of 20 aircraft and five years of domestic commercial operation under the 5/20 Rules, which were introduced by the Indian government.
KFAL attempted to purchase Deccan Aviation Limited (DAL), which accused No. 10 controlled, despite not fulfilling the necessary standards. Acted No. 5, taking into account KFAL’s current loss of Rs. 1,234 crore and the possible capital gain from the acquisition of DAL, conspired with other accused to manufacture false documents, deceive, and cause loss to violating several sections of the Income Tax Act and the Companies Act, as well as DAL’s shareholders and stakeholders.
There were three steps to the process: pre-merger, merger, and post-merger. The accused chose to create two non-existent undertakings as part of a fake de-merger during the pre-merger phase in order to satisfy the demerger requirements. A plan of arrangement was submitted during the merger stage in order to de-merge the airline business from KFAL and combine it with DAL in accordance with Sections 391(2) and 394 of the Act, 1956. The faked paperwork was an attempt to evade capital gain taxation.
Following the merger, KFAL suffered losses; these were held by KFAL and rebranded as Kingfisher Training and Aviation Services Limited (accused No.1) rather than being transferred to the accused No. 2 – Company. This was done in an effort to present the accused No. 2 Company as a successful business in order to obtain more funding.
Following the merger, KFAL suffered losses. These losses were held by KFAL and rebranded as Kingfisher Training and Aviation Services Limited (accused No.1) rather than being transferred to the accused No. 2 – Company. This was done in an effort to present the accused No. 2 Company as a successful business in order to obtain more funding.
Accused No. 4: United Breweries (Holding) Ltd., the holding/promoter company of Accused Nos. 1 & 2, was instrumental in the transfer of monies to Accused No. 2 and provided a corporate guarantee in behalf of Accused No. 2. It was represented by its director, Mr. Vijay Mallya.
Mr. A Harish Bhat, the seventh accused (WP Nos. 3943–3947/2018), One of the main players in the coordination between the valuers for the Share Swap Ratio during the merger and the fraudulent brand valuation for the purpose of securing bank funding based on fictitious predictions was Mr. A Harish Bhat, Treasurer of the UB Group and Director of Accused No. 4 Company. Mr. Ashok Wadhwa is Accused No. 12. The approach to continue the merger process in a dishonest manner was proposed by Mr. Ashok Wadhwa, a director of Accused No. 11 and a chartered accountant.
CONTENTIONS OF THE PETITIONERS:
The petitioners contended that criminal complaints are not permitted to reopen the merger procedure, which was approved by the Court in accordance with the Companies Act. They contended that issues that have already been decided upon in processes conducted in accordance with the Companies Act ought not to be brought up again unless there is proof of the concealing of important facts.
The petitioners highlighted that shareholders and creditors are required by law to participate in schemes approved under Section 391 of the Companies Act. The approved plans can only be changed with the approval of the court, notwithstanding the existence of opposing views.
The Company Court’s responsibility in approving a scheme is supervisory; it makes sure that the law is followed and that no boundaries are crossed. While ensuring that the valuation procedure complies with legal criteria, the court does not serve as an appellate authority.
Unless there is an obvious breach of the law, courts should not be interrogating the business acumen of parties engaged in schemes. Disparities in valuation should not be the only reason for the court to get involved.
The appropriate line of action for contesting a fraudulently rendered decision is to file an application with the court that made the decision. Without proof of material facts, criminal complaints cannot be used to reopen cases that have previously been decided in proceedings under the Companies Act. Suppressing the material facts is not acceptable.
CONTENTIONS OF THE RESPONDENTS:
The responders vehemently argued that the charges against the accused should be brought under the previous Act since the acts were committed under it. As a result, a complaint was made outlining the accused’s violations of the previous Act. Following the repeal of the previous Act, the Companies Act, 2013 was passed and went into force on September 12, 2013. The new Act required the investigation to be carried out, therefore as a result, the investigation.
The respondents strongly argued that as per the terms of the new Act, the SFIO, a statutory investigation authority, has conducted an investigation, presented a report, and filed the complaint; therefore, the restrictions mentioned in Section 202 of Cr.PC would not apply in this particular case.
It was further argued that in this particular case, the officer was authorised by the central government to submit a complaint with the special court. Therefore, the need to record the public servant’s statement and carry out the investigation envisioned under Section 202, sub-clause 1, does not exist because the complaint was lodged by a public worker who was lawfully authorised by the central government. As such, the petitioners’ argument that the process of issuing the order is invalid because it does not follow the procedure for an inquiry as specified by Section 202 of the CRPC is baseless.
The plan was approved by the necessary majority of unsecured creditors. Deccan Aviation Ltd. subsequently filed Company Petition in 2008. Via an affidavit, the Regional Director of the Ministry of Corporate Affairs, Southern Region, Chennai, submitted objections to each and every petition with the Registrar of Companies, Bengaluru.
The Assistant Solicitor General of India, speaking on behalf of the Registrar of Companies, limited objections to just three, despite the affidavit raising six to seven concerns. The objections were centred around the valuation figures of Rs. 69 crore for the sale of Deccan’s charter services operation to DCL. Concerning the confusion created by the firms’ names, the Assistant Solicitor General further suggested that Sections 21 and 23 of the firms Act be followed.
It was rather vehemently contended that the fact that United Breweries Ltd. failed to obtain Central Government approval before to purchasing shares was also pointed out as a violation of Section 108A of the Act.
LEGAL PROVISIONS:
- Section 391 of the Companies Act, 1956: This clause ensures single-window clearance by acting as a comprehensive code for schemes of arrangement. Even if creditors and stockholders disagree or object, the schemes approved under Section 391 are legally binding on them.
- Section 212 of the Companies Act, 2013: The inquiry conducted by the Serious Fraud Investigation Office (SFIO) into a company’s operations is covered in this section. By virtue of the Companies Act, the SFIO is empowered to look into and prosecute fraud cases.
- Section 212(3) of the Companies Act, 2013: According to this clause, the Central Government’s investigation has to be finished in a certain amount of time. There could be consequences for bail and other legal actions if the inquiry is not finished in the allotted time frame.
- Section 36: Punishment for Fraudulently Inducing Persons to Invest Money: The deceptive acts that are intended to persuade people to invest money in a corporation are covered in this section. Anybody who gains a loan, incentive, or benefit from a business, its officer, representative, or another individual by making a false statement or using a fake document may be held accountable.
- Section 448: Punishment for False Statement: According to Section 448 of the Companies Act of 2013, anyone who provides a false appearance of title or obligation to any person or obtains a loan, reward, or benefit of any kind from a company, company officer, representative, or other person through the use of a false statement or document will be subject to legal action.
- Section 447: Punishment for Fraud: Regarding the operations of a corporation or any corporate body, fraud is defined in Section 447. In order to deceive, obtain unfair advantage, or do harm, it encompasses any act, omission, hiding of facts, or abuse of position carried out by one individual or in collusion with others.
COURT’S ANALYSIS AND JUDGMENT:
The court noted that unless the amending Act specifically or implicitly states differently, procedural adjustments are typically assumed to be retroactive. Unless the amending act specifically states otherwise, modifications to the trial forum are usually regarded as procedural and are assumed to be retrospective.
The statute loses its retroactive effect if a new forum is exclusively open to claims brought after it was established. On the other hand, the normal rule is to make it retrospective if no such restriction is clearly expressed.
The court additionally noted that if the new Act specifically permits such continuity and if the repealing Act does not indicate a contradictory purpose, the competence of a Special Court established under a new Act to try charges under a repealed Act may be preserved.
The court noted that the Act, 1956 was purportedly violated in the charges. Following the Act of 2013, the petitioner’s allegations of offences were the subject of an investigation. A First Class Magistrate presided over the trial of the offence punishable under Section 68 of the Act, 2013. In order to exercise its authority under Section 212 of the Act of 2013, the SFIO carried out an inquiry.
The court further observed that According to Section 435, the Special Court is limited to trying cases involving offences under this Act (i.e., the Act, 2013) and not the Act, 1956, which carry a sentence of two years or more in jail. Regarding the other violations punishable by the Act of 1956 or acts punishable by prior company law that carry a sentence of less than two years in prison.
The Act of 2013 and its associated offences are the only ones for which the Special Court created under Section 435 has jurisdiction; the Act of 1956 and its associated offences are not covered by this jurisdiction.
The jurisdiction of the Special Court is restricted to the Companies Act, 2013, as opposed to the proviso to Section 435(1), which states that all other offences shall be tried, as the case may be, by the Magistrate to try any offence under this Act or under any previous Company Law. That is because the Special Court was established specifically to try offences under the Act, 2013, and as such, its jurisdiction cannot be extended retroactively to try offences under the Act, 1956.
As per the court’s observation, any individual who satisfies the specified requirements may be subject to prosecution under Section 68 of the Act, 1956. It does not expressly state that just the company’s directors or officers will be covered by the provisions. This clause imposes liability on anybody who willfully and deliberately misleads others by making false claims, projections, or assertions or by hiding important information in order to persuade them to purchase shares or debentures.
As a result, it covers everyone engaged in these kinds of fraudulent actions, regardless of their status within the organisation, and it can also cover those who work for the organisation as professionals. The term “Any Person” refers to professionals working for the company and cannot be limited to “Officer who is in default,” as that term is defined in section 5 of the Act, 1956.
the court decided that following the aforementioned discussion, it became clear that the learned judge of the special court, which was created in accordance with the Companies Act of 2013, lacked legal jurisdiction in taking the reconnaissance. It is also not possible to reexamine the question of whether fraud tainted the merger process by starting a criminal investigation because this court had already approved the scheme of arrangement. Consequently, it would be an abuse of the judicial system to permit the criminal procedures to continue.
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Judgment reviewed by Riddhi S Bhora.
