The do’s and don’ts for the NCLT to order investigations into a company’s operations
The National Company Law Appellate Tribunal (“NCLAT”) in the case of Mr. Lagadarpati Ramesh v. Ramanathan Bhuvaneshwari ruled on the National Company Law Tribunal’s (“NCLT”) authority to order investigations into the affairs of a company.
Background:
The present case was filed under Section 66 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) by Mr. Ramanathan Bhuvaneshwari (“Mr. Bhuvaneshwari”), the Resolution Professional appointed for the corporate resolution insolvency process of M/s. Bhuvana Infra Projects Private Limited (“Bhuvana Infra”). Mr. Lagadarpati Ramesh (“Mr. Ramesh”) is a promoter of Bhuvana Infra.
Section 66 of the IBC stipulates that a resolution professional can make an application before the NCLT informing it about any fraudulent transaction carried out by the corporate debtor (Bhuvana Infra in this case).
In the present case, Mr. Bhuvaneshwari contended that Bhuvana Infra’s directors had transferred the assets of Bhuvana Infra to shell companies controlled by Bhuvana Infra’s directors with the intention of defrauding the creditors of Bhuvana Infra. Mr. Bhuvaneshwari therefore, requested the NCLT to attach the personal property of Bhuvana Infra’s directors to Bhuvana Infra.
On hearing Mr. Bhuvaneshwari, the NCLT passed an order directing the Central Government to order the Serious Fraud Investigation Office (“SFIO”) to investigate this matter.
Mr. Ramesh challenged this order before the NCLAT.
What did the NCLAT hold?
In the current case, the NCLAT ruled that the NCLT did not have the right to directly order the SFIO to investigate the matter. The NCLAT ruled that the NCLT will need to follow the provisions outlined in the Companies Act, 2013 to order an investigation into the affairs of a company.
As per the Companies Act, 2013, the NCLT, after hearing all parties (including representatives of the company), can merely order the Central Government to investigate the matter. Thereafter, it is the Central Government’s discretion to decide the nature of such investigation.
The NCALT therefore, ruled that the NCLT had contravened its powers in the present case because:
- It had not heard Mr. Ramesh or any of the other directors of Bhuvana Infra prior to passing the order, and;
- It directly ordered the Central Government to order the SFIO to investigate the matter.
Can the NCLT order an investigation under the Companies Act, 2013?
The Companies Act, 2013 stipulates that the NCLT, after hearing both parties, can order the Central Government to investigate the actions of a company if:
- At least 100 shareholders or shareholders with more than 10% of the voting powers of the company have requested for the same; or
- If an application has been made by any person suggesting that:(i) The business of the company is being carried out to defraud creditors or shareholders or any other person;(ii) Any of the promoters have been found guilty of fraud, misfeasance, or misconduct towards the company or its shareholders; or (iii) Important information of the company has not been shared with the company’s shareholders.
Quick View
Although this case arose as a dispute under the IBC, the repercussions will be felt across any matter that the NCLT would want investigated.
The NCLAT did not bring about any new points of law in this case. Rather, the NCLAT reiterated (a) the basic principle of natural justice where both parties need to be heard; and (b) the provisions of the Companies Act, 2013 which stipulates that although the NCLT can order the Central Government to undertake any investigation, it is the Central Government’s discretion to determine the manner in which the investigation is carried out.
Therefore, we are of the view that by reiterating the position outlined in the Companies Act, 2013, promoters of companies can rest assured that they will be heard before any investigation is ordered against the actions of the Company. However, we are of the view that in order to ensure that proceedings are not delayed in the NCLT, a definitive timeline or process should be put in place by either the NCLAT or the Central Government by which time the promoters should appear before the NCLT.
Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.