First Case Of Winding Up Of Company On The Ground Of Fraud – SC Upholds Winding Up Of Devas On Plea By Antrix
A two-judge Bench of Justice Hemant Gupta and Justice V. Ramasubramanian has noted in the context of the Companies Act that "The main departure of the 2013 Act from the statutory regime of the 1956 Act, is the specific inclusion of fraud, directly as one of the circumstances in which a company could be wound up."
The Court noted that Section 271 of the Companies Act, 2013 lists out the circumstances in which a company may be wound up and what were clauses (a), (g), (h), and (i) of Section 433 of 1956 Act has now become clauses (a), (b), (d) and (e) of Section 271 of the 2013 Act, though not in the same order.
In appeal, before the Supreme Court was an order of winding up passed by the NCLT under Section 271(c) of the Companies Act, 2013 that was confirmed by NCLAT. One appeal was filed by the company in liquidation i.e. Devas Multimedia Private Limited while another appeal was filed by its shareholder Devas Employees Mauritius Private Limited.
Senior Advocate Mr. Mukul Rohatgi appeared for the company in liquidation while Senior Advocate Mr. Arvind Datar appeared for the shareholder. Mr. N. Venkataraman, ASG appeared for Antrix Corporation Ltd. (who moved the Tribunal for winding up the company in liquidation), and Mr. Balbir Singh, ASG appeared for UOI.
Antrix is the commercial arm of the Indian Space Research Organization (ISRO) that is wholly owned by UOI. Antrix had made a request to MoCA seeking authorization to initiate proceedings under Section 271(c) of the 2013 Act for winding up Devas.
The authorization was given and NCLT admitted the company petition. A provisional Liquidator was appointed. An appeal was filed by DEMPL which was disposed of NCLAT directing DEMPL to seek impleadment before NCLT and raise all objections.
A writ was filed by DEMPL before the Karnataka High Court challenging the constitutional validity of Section 272(1)(c) of the 2013 Act and praying for quashing of the authorization granted by MoCA. The writ was dismissed with costs.
NCLT directed the winding up of Devas. Appeals were filed and, as noted above, were dismissed by NCLAT. Hence, the appeals before the Supreme Court.
The Court considered the contours of Section 271(c) of the Companies Act, 2013, and compared the provisions with those of the 1956 Act. The Court made the following crucial observations -
"Thus a combined reading of Sections 439(1)(f), 243 and 237(b) of the 1956 Act shows that, (i) fraud in the formation of the company; (ii) fraud in the conduct of affairs of the company; and (iii) fraud on the part of the persons engaged in the formation or conduct of the affairs of the company, though not listed as some of the circumstances under Section 433 of the 1956 Act, were still available for the winding up of the company, even under the 1956 Act. But there were 3 requirements to be satisfied. They are: (i) the perpetration of one or the other types of fraud mentioned above are reflected in a report of investigation; (ii) the petition under these provisions is to be filed only by a person authorised by the Central Government; and (iii) the petition should be premised on the ground that it is just and equitable to wind up the company."
The Court noted that the words "just and equitable" are not to be read as being ejusdem generis with the preceding words of enactment. They are not to be cut down by the formation of categories or headings for which the cases must be brought if the enactment were to apply.
The Court noted, traditionally, fraud committed by a company on outsiders was not a ground for winding up in English Law, however, the law did not remain static.
The Court noted that 2 different routes for winding up of a company on the ground of fraud are provided by virtue of the 2013 Act regime. They are : (i) winding up under clause (c) of Section 271 (directly on the ground of fraud) by any person authorized by the Central Government by notification; or
(ii) winding up under clause (e) of Section 271 (on the ground that it is just and equitable to wind up) in terms of Section 224(2)(a) on the basis of a report of investigation under Section 213(b).
On the argument of the advertisement of the petition, the Court noted as follows:
"Therefore, the way in which the requirement of advertisement has been viewed by Courts is that advertisement causes more harm to the company than the benefit that it brings to the company. Hence the argument of the appellant in this case that the failure to advertise the petition was prejudicial to their interest, goes contrary to one of the important purposes of the advertisement and the chilling effect that it is supposed to have on the company."
The Court noted that failure to publish an advertisement would not lead to automatic dismissal of the petitioner as the same is to perceived to be something that worked at cross purposes, sometimes beneficial to stakeholders and sometimes as a measure of harassment.
On the ground of limitation, the Court observed as follows:
"We must keep in mind the fact that apart from the persons in charge of the management of the affairs of the company in liquidation, the officials of Antrix as well as the officials of the Department of Space are now facing prosecution not only for offences under Section 420 read with Section 120B of the Indian Penal Code, but also for offences under the Prevention of Corruption Act, 1988 and the Prevention of Money Laundering Act. The termination of the Contract on 25.02.2011, was not triggered by an allegation of fraud and corruption. Fraud and corruption were discovered only later and by the time the discovery was made, the attempts to reap the fruits of fraud had reached the pinnacle. These attempts continue even till date and this falls squarely within Section 271(c). Therefore, the contention that the petition was barred by limitation was rightly rejected by the Tribunal and we have no reason to take a different view."
The Court noted that the standard of proof required for winding up of a company cannot be prima facie but the appellants cannot take advantage of the use of an inappropriate expression by NCLAT as the Tribunal had recorded detailed findings which were not prima facie but final.
The Court noted that allowing Devas and its shareholders to reap benefits of fraudulent action may send a wrong message that by adopting fraudulent means and by bringing into India investment in a sum of INR 579 crores, investors can hope to get tens of thousands of crores of rupees, even after siphoning off INR 488 crores.
The Court considered, in extenso, all grounds of challenge and ultimately dismissed the appeals finding them to be unsustainable.