Case Law - CHAPTER 8 – ACCOUNTS & AUDIT

CHAPTER 8 – ACCOUNTS & AUDIT

04.06.2019

Hari Sankaran (Appellant) Vs. Union of India & Ors. (Respondents)

The Supreme Court of India

NCLAT order of allowing re-opening of books and recasting of financial statements of

IL&FS is valid

Facts of the case

The facts leading to the present appeal in nutshell are as under:

The Respondent No. 2 – IL&FS is a company incorporated under the provisions of the Com-

panies Act, 1956. That the said company IL&FS has 348 group companies, including IFIN and

ITNL. That the said IL&FS is a core investment company and systemically important Non-

Banking Finance Company duly approved under the Reserve Bank of India Act, 1931.

Over the years, it had inducted institutional shareholders. That on 01.10.2018, the Central

Government through the Ministry of Corporate Affairs filed a petition before the learned Ap-

pellate Tribunal under Sections 241 and 242 of the Companies Act alleging inter alia, mis-

management by the Board of IL&FS and that the affairs of IL&FS were being conducted in

a manner prejudicial to public interest. It was found that the management of IL&FS and

other group company/companies were responsible for negligence and incompetence, and had

falsely presented a rosy financial statement.

To unearth the irregularities committed by IL&FS and its companies, the provisions of Sec-

tion 212(1)(c) of the Companies Act were invoked for investigation into the affairs of the

company. The investigation was to be carried out by the Serious Fraud Investigation Office

(hereinafter referred to as ‘the SFIO’) in exercise of powers under Section 212 of the Com-

panies Act. The SFIO submitted an interim report dated 30.11.2018 to the Central Govern-

ment placing on record that the affairs in respect of IL&FS group Companies were misman-

aged, and that the manner in which the affairs of the company were being conducted was

against the public interest.

The Registrar of Companies also conducted an enquiry under Section 206 of the Companies

Act, and prima facie concluded that mismanagement and compromise in corporate governance

norms and risk management has been perpetuated on IL&FS and its group companies by in-

discriminately raising long term and short terms loans/borrowings through Public Sector

Banks and financial institutions.

This appeal was filed by Infrastructure Leasing & Financial Services Limited (referred to as

‘IL & FS’) before the Supreme Court of India against the order dated 31.01.2019 passed by

the NCLAT, vide. the said order the Appellate Tribunal has dismissed the appeal preferred by

the Appellant and has confirmed the order passed by the NCLT, Mumbai Bench dated

01.01.2019 by which the NCLT allowed the application preferred by the Central Government

under Section 130(1) & (2) of the Companies Act, 2013 and has permitted recasting and re-

opening of the accounts of IL&FS, IL&FS Financial Services Limited (“IFIN”) and IL&FS

Transportation Networks Limited (“ITNL”) for the last five years.

Issues

The question which is posed for consideration before the Hon’ble Supreme Court is, whether

in the facts and circumstances of the case, can it be said that the order passed by the

learned Tribunal is illegal and/or contrary to Section 130 of the Companies Act?

Judgement

The Supreme Court of India inter-alia observed that the Tribunal may, under Section 130 of

the Act, pass an order of re-opening of accounts if it is of opinion that

(i) the relevant earlier accounts were prepared in a fraudulent manner; or

(ii) the affairs of the company were mismanaged during the relevant period casting

a doubt on the reliability of the financial statements.

Thus, the Tribunal would be justified in passing the order under Section 130 of the Act upon

fulfillment of either of the said two conditions.

In view of the above referred legal position in addition to the reports of SFIO & ICAI, the

specific observations made by the learned Tribunal while passing the order under Section

241/242 of the Companies Act and considering the fact that the Central Government has

entrusted the investigation of the affairs of the company to SFIO in exercise of powers under

Section 242 of the Companies Act, the Apex Court observed that it cannot be said that the

conditions precedent while invoking the powers under Section 130 of the Act are not satis- fied.

The Supreme Court of India upheld the order passed by NCLAT under Section 130 of the

Companies Act for reopening of the books of accounts and re-casting the financial state-

ments of the Infrastructure Leasing & Financial Services Limited; IL&FS Financial Services

Limited and IL&FS Transportation Networks Limited for the last five years, viz. from Finan-

cial Year 2012-13 to the Financial Year 2017-18 in larger public interest and dismissed the

appeal.