Order Directing SFIO Probe Not A Routine Administrative Measure; Must Be Issued Only After Due Application Of Mind: Delhi High Court
The Delhi High Court observed that the existence of “relevant circumstances” is sine qua non as for the purpose of formation of opinion under Section 212(1)(c) of the Companies Act.
Justice Sachin Datta, Delhi High Court
The Delhi High Court emphasized that an Order directing probe by the SFIO (Serious Fraud Investigation Office) is not a routine administrative measure and hence, it must be issued only after due application of mind.
The Court was hearing a Writ Petition filed by an ex/suspended director of a company namely Moser Baer India Ltd. (MBIL), challenging the Order issued by the Ministry of Corporate Affairs (MCA), Government of India under Section 212(1)(c) of the Companies Act, 2013, directing the SFIO to conduct an investigation into the affairs of the said company and its “subsidiaries including joint venture and associate companies as on date”.
A Single Bench of Justice Sachin Datta observed, “An order under Section 212(1)(c) of the Act, 2013 directing investigation by the SFIO is not a routine administrative measure. It is in the nature of an extremely serious statutory action having grave consequences and repercussions for the subject entities and individuals. It is therefore, imperative that such an order must be issued only after due application of mind, after examining all relevant circumstances.”
The Bench added that the existence of “relevant circumstances” is sine qua non as for the purpose of formation of opinion under Section 212(1)(c) of the Companies Act.
Senior Advocate Abhishek Manu Singhvi represented the Petitioner while CGSC Rupali Bandhopadhyay represented the Respondent.
Facts of the Case
MBIL was incorporated in 1983 by the Petitioner’s late husband, engaged in the manufacture of CDs, DVDs, and other optical media. In 2012, MBIL sought relief under the Corporate Debt Restructuring (CDR) Scheme of the Reserve Bank of India (RBI). Pursuantly, the Corporate Debt Restructuring Empowered Group (CDR-EG) comprising a consortium of lender banks, commissioned a Stock Audit and a Techno-Economic Viability (TEV) study. Based on the findings of the Stock Audit report and TEV report, MBIL was classified as a ‘Class B’ borrower and formally admitted into the CDR framework. MBIL was not categorized as ‘Class C’ or ‘Class D’, which are typically assigned to entities suspected of fraud, misfeasance, or other financial irregularities. In 2017, MBIL was admitted into insolvency proceedings before the National Company Law Tribunal (NCLT), New Delhi. Subsequently, the Interim Resolution Professional (IRP) acting at the instance of the Committee of Creditors (CoC) commissioned a Forensic/Special Purpose Audit of MBIL and the same aimed to ascertain instances of financial irregularities, including diversion of funds, siphoning of assets, or fraudulent transactions.
The Sikdar Report revealed no adverse findings. The CoC accepted the audit report affirming that no evidence of Preferential, Undervalued, Fraudulent and Extortionate (PUFE) transactions on the part of MBIL was found. Meanwhile, Bank of Baroda, one of the financial creditors of MBIL, issued a show-cause notice (SCN), calling to explain why they should not be declared wilful defaulters. In 2022, the Identification Committee of the said bank declared the Petitioner and her husband as ‘wilful defaulters’. This was challenged before the High Court and the said Order was set aside. An Appeal was then filed, which was dismissed. The grievance of the Petitioner was that despite the judicial findings, including the binding decision, the impugned Order was issued by the Respondent, relying upon the same forensic audit reports.
Court’s Observations
The High Court in the above regard, noted, “It is contended that paragraphs 3, 4, 7 and 15 of the counter affidavit contain allegations of diversion, siphoning, investments/receivables with respect to the transactions with subsidiaries, including sales or service, receivables, loans, advances, investments, write off/provisioning etc. They are all broadly covered by allegation 1 of the show cause notice, which was subject matter of the BOB judgment, which also corresponds to para 2(a) to (g) of the impugned order. Notably, allegation 1 and the findings in that regard by the Review Committee have been set aside on merits by this Court in the BOB Judgment.”
The Court said that it is not necessary in these proceedings to conclusively pronounce upon the contention of the Petitioner and prior to issuance of the impugned order, the scope, import and consequences flowing from the Judgment ought to have been taken into consideration.
“For all the above reasons, the impugned order fails to withstand legal scrutiny. … the existence of the relevant circumstances has to be “demonstrable”. Exercise of power under Section 212(1)(c) in a casual or perfunctory manner, seriously undermines the statutory provision itself and the safeguards implicit thereunder”, it reiterated.
The Court further observed that the use of boilerplate language and/or extrapolations from third party documents, without consideration of all the “relevant circumstances”, reflects a disregard for procedural propriety.
“It can hardly be emphasized enough that the power under Section 212(1)(c) must be exercised with circumspection and deliberation. In the present case, the impugned order under Section 212(1)(c) appears to have been issued in a rather casual manner, unmindful of the statutory pre-requisites therefor”, it also emphasised.
Accordingly, the High Court allowed the Writ Petition and quashed the impugned Order.
Cause Title- Nita Puri v. Union of India (Neutral Citation: 2025:DHC:7433)
Appearance:
Petitioner: Senior Advocate Abhishek Manu Singhvi, Advocates Vaibhav Mishra, Ekansh Mishra, Avishkar Singhvi, Rajeev Goyal, Vijay Aggarwal, Rachit Bansal, and Shubham Tiwari.
Respondent: CGSC Rupali Bandhopadhyay and Advocate Abhijeet Kumar.
