The Supreme Court bench comprising Justices Hemant Gupta and V. Ramasubramanian was recently hearing a case where the order of winding up passed by the NCLT under Section 271(c) of the Companies Act, 2013 which was confirmed by the NCLAT on appeals. The company in liquidation, through its ex-Director, has come up with an appeal and one of the shareholders of the company in liquidation has come up with another appeal challenging the order of winding up passed by the National Company Law Tribunal under Section 271(c) of the Companies Act, 2013.
The Supreme Court did not find any merit in the appeal. The Bench noted that If as a matter of fact, fraud as projected by the Respondent, stands established, the motive behind the victim of fraud, coming up with a petition for winding up, was of no relevance.
The Bench observed that If the seeds of the commercial relationship between the Appellant and the Respondent were a product of fraud perpetrated by Appellant, every part of the plant that grew out of those seeds, such as the Agreement, the disputes, arbitral awards etc., were all infected with the poison of fraud. A product of fraud was in conflict with the public policy of any country including India. The basic notions of morality and justice are always in conflict with fraud and hence the motive behind the action brought by the victim of fraud could never stand as an impediment.
The Supreme Court bench observed that the "basic notions of morality and justice are always in conflict with fraud and hence the motive behind the action brought by the victim of fraud could never stand as an impediment."
An argument was advanced by the learned senior counsel for the appellants, on the basis of a statement contained in the order of NCLAT that the allegations are prima facie made out, that a company cannot be ordered to be wound up on the basis of prima facie findings. The standard of proof required for the winding up of a company cannot be prima facie. But the Apex court did not think that the appellants could take advantage of the use of an inappropriate expression by NCLAT. The detailed findings recorded by the Tribunal showed that they were final and not prima facie. Merely because NCLAT used an erroneous expression those findings could not become prima facie.
Apart from the above main grounds of attack, the counsel for the appellants also made a few supplementary submissions. One of them was that a lis between two private parties cannot become the subject matter of a petition under Section 271(c). But this argument was to be rejected outright, in view of the fact that the claims of Devas and its shareholders were also on the property of the Government of India. The space segment in the satellite proposed to be launched by the Government of India was the property of the Government of India. In fact, the shareholders had secured two awards against the Republic of India under BIT. Therefore, it was neither a lis between two private parties nor a private lis between a private party and a public authority. It was a case of fraud of a huge magnitude that could not be brushed under the carpet, as a private lis.
Another contention raised on behalf of the appellants was that the petition under Section 271(c) should have been preceded, at least by a report from the Serious Fraud Investigation Office, which had now gained statutory status under Section 211 of the Companies Act, 2013. But this contention was unacceptable, in view of the fact that under the 2013 Act there were two different routes for winding up of a company on allegations of fraud. One was under Section 271(c) and the other was under the just and equitable clause in Section 271(e), read with Section 224(2) and Section 213(b). What was Section 439(1)(f) read with Section 243 and Section 237(b) of the 1956 Act, had now taken a new avatar under Section 224(2) read with Section 213(b). It was only in the second category of cases that the report of the investigation should precede a petition for winding up.
Yet another contention raised on behalf of the appellants was that the criminal complaint filed for the offences punishable under Section 420 read with Section 120B IPC, had not yet been taken to its logical end. Therefore, it was contended that in case the officials of Antrix and shareholders of the Appellant-company were acquitted after trial, the clock Could not be put back if the company was now wound up. Attractive as it may seem at first blush, this contention could not hold water, if scrutinised a little deeper. The standard of proof required in a criminal case was different from the standard of proof required in the proceedings before NCLT. The outcome of one need not depend upon the outcome of the other, as the consequences were civil under the Companies Act, 2013 and penal in the criminal proceedings. Moreover, this argument could be reversed like the handle of a dagger. What if the company was allowed to continue to exist and also enforce the arbitration awards for amounts totalling tens of thousands of crores of Indian Rupees and eventually the Criminal Court found all shareholders guilty of fraud? The answer to this question would be abhorring.
It was also contended that the actual motive behind Respondent seeking the winding up of Appellant-company, was to deprive Appellant, of the benefits of a unanimous award passed by the ICC Arbitral tribunal presided over by a former Chief Justice of India and the two BIT awards and that such attempts on the part of a corporate entity wholly owned by the Government of India would send a wrong message to international investors.
The Supreme Court bench further said that it did not know, if the action of Respondent in seeking the winding up of Appellant-company may send a wrong message, to the community of investors. But allowing Devas and its shareholders to reap the benefits of their fraudulent action, may nevertheless send another wrong message namely that by adopting fraudulent means and by bringing into India investment in a sum of INR 579 crores, the investors can hope to get tens of thousands of crores of rupees, even after siphoning off INR 488 crores. Therefore, in fine, the Bench found all the grounds of attack to the concurrent orders of the NCLT and NCLAT to be unsustainable. Therefore, the appeals were dismissed.