Nita Puri v. Union of India

(iv) It is submitted that the impugned order suffers from material infirmity owing to the non-consideration of the BOB judgment dated 29.02.2024, which was in the backdrop of an identical factual conspectus, involving the same company and, therefore, has a direct and determinative bearing on the present proceedings. Specific reliance is placed on para 107, 144 and 150 of the said judgment.

(v) It is submitted that the SBI judgment dated 20.03.2023, similarly bears directly on the validity and rationale of the impugned order. It is submitted that in light of the reasons and circumstances detailed in the BOB and SBI judgments, any direction by the Central Government to initiate an investigation under Section 212(1)(c) of the Companies Act, 2013 is untenable.

12. Lastly, it is submitted that confronted with the infirmities in the impugned order, the counter-affidavit filed on behalf of the respondent seeks to furnish certain additional reasons in justification thereof. It is submitted that these additional reasons, are liable to be disregarded in view of the legal position laid down by the Supreme Court in Mohinder Singh Gill & Another vs. The Chief Election Commissioner, New Delhi & Ors., 1978 1 SCC 405, Opto Circuit India Ltd. vs. Axis Bank & Ors. 2021 6 SCC 707 and Ritesh Tiwari & Anr. vs. State of Uttar Pradesh & Ors., 2010 10 SCC

677. Without prejudice, learned senior counsel for the petitioner submits that even the purported additional grounds sought to be relied upon are squarely covered and precluded by the findings in the BOB Judgment.

13. For the above reasons, it is submitted that the present petition merits acceptance, and the impugned order is required to be set aside.

14. Learned counsel for the respondent has controverted the above submissions of the learned senior counsel for the petitioner and has sought to justify the impugned order. It has been specifically contended that the issues presented before this Court while rendering the BOB judgment were SUBMISSIONS ON BEHALF OF THE RESPONDENT entirely different. The limited question before the Court in the said proceedings was whether the order declaring the petitioner therein, [Ratul Puri (former Director of MBIL)], as a wilful defaulter, was valid. This Court, in Para 52 of the said judgment, delineated the definition of ‘wilful default’ keeping in mind the applicable RBI Master Circular. It was held that the person who has used the loan amount for other purposes than the one set out in the loan agreement is a wilful defaulter.

15. It is emphasized that in the BOB judgment, this Court identified certain material irregularities in the procedure followed for declaring the petitioner therein a wilful defaulter, and that the said irregularities formed the primary reason for the conclusions drawn in the said judgment. It is contended that procedural lapses, if any, on the part of the Bank of Baroda in pursuing its legal remedies cannot prejudice or constrain the SFIO in the exercise of its statutory functions.

16. It is further emphasized that the judgment rendered in BOB case does not quash the concerned forensic audit report i.e. the GSA Report. It is submitted that setting aside/quashing of the action declaring the ex-directors as wilful defaulters cannot preclude the SFIO investigation qua other aspects pertaining to conduct of affairs of the company. Likewise, it is submitted that the Sikdar Report pertains to the affairs of the MBIL only for a limited timeframe, i.e. for the financial year 2015-16, 2016-17 (audited) and 2017- 18 (provisional) and accordingly, the findings contained therein cannot limit or foreclose the scope of the proposed SFIO investigation.

17. In response to a query of the Court as regards the basis of the findings/reasons recorded in Para 2(a) to 2(g) of the impugned order dated 05.09.2024, it has been categorically contended that the said findings are based on the Sikdar Report and GSA Report. The written submissions filed on behalf of the respondent clearly affirm this position in the following words: “A query was raised by this Court regarding the basis of the finding mentioned in Point 2(a) to (g) of the impugned order (Page 27-28 of the petition). The said findings are based on the Sikdar Report (page 30 onwards in the petition) and GSA Report (page 195 of the petition). The relevant page number with respect to the said findings are as follows: Finding at Relevant page no. in the petition and para Para 2 (a) 42 (internal page no.13) at Para VI A. Para 2 (b) 44 (internal page no. 15) at Para d Para 2 (c) 45 (internal page no. 16) at Para C Para 2 (d) 46 (internal page no. 17) at Para D Para 2 (e) 47 (internal page no. 19) at Para G Para 2 (f) 48 (internal page no. 20) at Para H Para 2 (g) 49 (internal page no. 20) at Para J

18. Finally, it is contended that no prejudice will be caused to the petitioner if a comprehensive investigation is undertaken into the affairs of MBIL.

19. Having considered the rival contentions of the parties, this Court finds that there is merit in the petitioner’s contention that the impugned order cannot withstand the scrutiny of law. The reasons are enumerated as under:

REASONING AND FINDINGS:

20. In the aforesaid case, the Bombay High Court had occasion to examine the statutory scheme of Chapter XIV of the Companies Act, 2013. After taking note of the corresponding provisions in Section 234 and 237 of the Companies Act, 1956 (hereinafter “Act, 1956”) and considering the judgment of the Supreme Court in Barium Chemicals Ltd. & Anr. vs. Company Law Board & Ors. (supra) and Rohtas Industries vs. S.D. Aggarwal & Ors. (supra) it was held as under:

company is necessary. For that, reasons in support have to be set out. We are not concerned with the power of search and seizure vesting in the Registrar in terms of Section 209. Then comes the crucial provision in the 2013 Act, namely, section 210. That reads as under: "210. Investigation into affairs of company.-(1) Where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company (a) on the receipt of a report or the Registrar or inspector under section 208; (b) on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or

(c) in public interest it may order an investigation into the affairs of the company. (2) Where an order is passed by a court or the Tribunal in any proceedings before it then the affairs of a company ought to be investigated, the Central Government shall order the investigation into the affairs of that company. (3) For the purposes of this section, the Central Government may appoint one or more persons as inspectors to investigate into the affairs of the company and to report thereon in such manner as the Central Government may direct."

42. Therefore, a perusal of this section would indicate that the Central Government must form an opinion, that opinion must be that it is necessary to investigate into the affairs of a company. The Central Government can act on the receipt of a report of the Registrar or Inspector under section 208 or on intimation of a special resolution passed by a company that its affairs are to be investigated or in public interest. Thus, there is a discretion to order an investigation into the affairs of the company.

XXX XXX XXX

45. The Registrar of Companies had already made a detailed report and forwarded it to the Ministry and the contents of which he has reproduced. He has also reported on the issue raised in the letter of the Ministry of Corporate Affairs dated 30th October, 2015. He points out in details as to how matters are subjudice and with regard to subjudice matters, it will not be possible for him to undertake any investigation. He has pointed out clearly as to how the issues relating to non filing of annual accounts/annual returns, no action is required till the pendency of litigation and upto the final outcome. As far as serious issues regarding the above matters, namely, allotment of coal mines, extension of facilities he has opined that it is not for his office to take any action. It is on the basis of such a report that the impugned order has been passed. The impugned order reads as under: "WHEREAS, the Central Government has the power under section 210 and section 212(1)(c) of the Companies Act, 2013 to order investigation into the affairs of a company in Public interest.

2. AND WHEREAS ROC, West Bengal has submitted his report dated 13.01.2016 to the Central Government in the matter of Singhal Enterprises Pvt. Ltd. and has recommended that investigation be made by multidisciplinary authorities/specialised agency to find out misutilisation of bank finance and other violations under provision of law.

3. NOW therefore, in exercise of powers conferred under section 212(1)(c) of the Companies Act, 2013, the Central Government hereby orders investigation into the affairs of Singhal Enterprises Pvt. Ltd. by the Serious Fraud Investigation Office (SFIO) of the Ministry of Corporate Affairs.

4. The Director, SFIO, in exercise of powers u/s 212(1), may decide such number of inspectors, as he may consider necessary and the Inspectors so appointed, shall exercise all the relevant powers under the Companies Act, 2013 for the purpose of the investigation.

5. SFIO shall complete the investigation and submit report to the Central Government within a period of four months from the date of issue of this order.

6. This order is issued for and on behalf of the Central Government. Sd/- (UK Sahoo) Joint Director"

47. Section 210 falling in the same Chapter XIV titled Inspection, Inquiry and Investigation contains these two sections. Section 210 confers a discretion in the Central Government to order an investigation into the affairs of the company and that power has to be exercised if there is an order passed by a Court or a Tribunal in any proceedings before it to the effect that the affairs of a company ought to be investigated. Thus subsection (1) of section 210 confers a discretion while sub-section (2) is mandatory in terms. By sub-section (3) and when the Central Government orders an investigation into the affairs of the company, it may appoint one or more persons as Inspectors so as to carry out this task and to report thereon in such manner as the Central Government may direct. By section 212 the seventeen sub-sections thereof enable investigation into the affairs of a company by Serious Fraud Investigation Office. This power is without prejudice to the provisions of section 210. This power is to be exercised if the Central Government is of the opinion that it is necessary to investigate into the affairs of a company by the SFIO. Therefore, the power to investigate into the affairs of company is common to both provisions. In the former there are three clauses (a) to (c) in sub-section (1) of section 210 and the investigation is to be carried out by the Central Government by appointing Inspectors and there is a discretion in that behalf. This power is stated to be akin to section 235 of the 1956 Act. The latter enables investigations into the affairs of a company by the SFIO and there is one more clause (d) in sub-section (1) of section 212 where the Central Government can act on a request from any department of the Central Government or a State Government. Therefore, in a given case there could be an action initiated on the request of the Central Vigilance Commission or based on its recommendations. However, by its very title, the investigation under section 212 by the SFIO ought to be on the basis of the opinion of the Central Government that it is necessary to investigate into the affairs of the company by SFIO. That opinion has to be based on the report of the resolution passed by a company that its affairs are required to be investigated; in the public interest or on the request from any department of the Central Government or the State Government. By section 211, the SFIO is established to investigate frauds relating to a company. It is a very special office and headed by a Director and consists of such number of experts from the fields enumerated in subsection (2) of section 211 to be appointed by the Central Government from amongst persons of ability, integrity and experience. The wide powers that this office enjoys, as is set out in various sub-sections of section 212, would denote as to how its involvement comes after the investigations are assigned to it by the Central Government. By their very nature the investigations into frauds relating to a company have to be assigned. They have to be of such magnitude and seriousness demanding involvement of experts in the fields enumerated in sub-section (2) of section 211. Therefore, while exercising the powers under sub-section (1) of section 212, the Central Government ought to be not only forming an opinion about the necessity to investigate into the affairs of the company, but further that such investigations have to be assigned to the SFIO.

48. We do not think that there were materials in the present case and which can be termed as enough to warrant the exercise of power by the Central Government by resorting to section 212(1) of the Act of 2013. The Central Government, in the order under challenge, did not spell out any circumstances, except outlining its power under the above sections to order investigation into the affairs of a company in public Interest. None disputes that power or its existence. In para 2 of the impugned order, however, a reference is made to the report of the Registrar of Companies, West Bengal, dated 13th January, 2016. We have already held that the findings in this report are not enough for the Central Government to exercise the drastic power. Something more was required and to be established as circumstances or material enough for exercise of the power. That is clearly lacking in this case.

49. This is the only basis, namely, the report of the Registrar of Companies, West Bengal, or its contents which has enabled the Central Government to exercise its powers under section 212(1)(c). It is, therefore, apparent that it has not necessarily acted in terms of its power conferred by section 212 to direct investigation into the affairs of the company in public interest. The foundation for reaching the opinion or satisfaction is the report of the Registrar. We have referred to the details in that report and we are of the firm opinion that based on that the Central Government could not have recorded a satisfaction or an opinion that investigation into the affairs of the company are necessary. There is no element of public interest which is projected, save and except some vague and general references to certain allegations in matters of bank finance and allotment of coal mines and alleged diversion of raw materials. There has been absolutely no details furnished nor referred in the report. Rather, the report proceeds on the basis that as far as these issues are concerned nothing can be done by the Ministry of Corporate Affairs or the Registrar of Companies. We fail to understand, therefore, how in the present facts and circumstances and based on allegations and counter allegations between two groups of shareholders can it be even held that it is necessary in public interest to direct an investigation into the affairs of the company. Once we reach the conclusion that there is lack of requisite material to arrive at the requisite opinion or record the necessary satisfaction, then, in exercise of our powers of judicial review, we can safely quash and set aside the impugned order. We find that the opinion recorded or the satisfaction reached is vitiated by total non application of mind. None of the factors which are germane and relevant for forming the opinion have been referred. The opinion or satisfaction is based only on the complaint of the Member of Parliament to the CVC and with regard to which report was called for from the Registrar. Even the contents of that report have been, as held above, misread and totally misinterpreted. Based on that no opinion could have been recorded that it is necessary to investigate the affairs of the company in public interest.”

21. Thus, it has been unequivocally laid down in the aforesaid judgment that:

(i) the existence of circumstances relevant for formation of opinion for the purpose of Section 212(1)(c) of the Act, 2013, “must be demonstrable”;

(ii) the exercise of power under Section 212 must be in consonance with the scheme of Chapter XIV of the Act, 2013. In terms thereof, in the first instance, power is conferred under Section 206 to conduct inspection/inquiry (Section 206(4) of the Companies Act, 2013). Section 208 specifically contemplates that the registrar or inspector shall, after inspection of books of accounts or inquiry under Section 206, submit a report in writing to the Central Government, along with such documents, if any, and the report may also include or recommend further investigation into the affairs of the company, if necessary.

(iii) Section 210 contemplates investigation into the affairs of a company:

(a) on the receipt of a report of the Registrar or inspector under Section 208; (b) on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or

(c) in public interest.

(iv) Where a report under Section 208 does not find any occasion to conduct a further investigation, the same has a bearing on the exercise of power under Section 212(1)(c) of the Act, 2013 (as in the facts of the case before the Bombay High Court).

(v) Where recourse is sought to be taken to Section 212(1)(c) of the

Act, 2013, the same ought to be “based on the report of the Registrar or Inspector under Section 208; on intimation of a special resolution passed by a company that its affairs are required to be investigated; in the public interest or on the request from any department of the Central Government or the State Government”

(vi) It is necessary for the Central Government not only to form an opinion regarding necessity to investigate into the affairs of the company, but also to justify the assignment of such investigation/s to the SFIO.

(vii) An order under Section 212 must disclose the relevant circumstance/s which warrant (i) conduct of investigation and (ii) conduct of investigation by the SFIO.

22. In the present case, the impugned order (apart from other infirmities referred to herein below), fails to articulate the “necessity of investigation by SFIO”, thereby contravening the mandatory requirement articulated in Para 47 of the aforesaid judgment of the Bombay High Court.

23. Importantly, in the SLP filed against the aforesaid judgment of the Bombay High Court, the following order was passed by the Supreme Court: “The Special Leave Petition is dismissed both on the ground of delay as well as on merits Thus, the Supreme Court has approved the aforesaid judgement of the Bombay High Court “on merits”, thereby lending a binding force to its interpretation of Section 212(1)(c)..”

24. The impugned order, inasmuch as it does not satisfy the ingredients enunciated by the Bombay High Court for the purpose of an order under Section 212(1)(c) of the Act, 2013, suffers from an apparent and incurable legal lacuna.

25. Apart from the above, there are other independent reasons as well, which render the impugned order unsustainable.

26. Crucially, the counter-affidavit filed on behalf of the respondent, avers that the Central Government had, pursuant to a complaint dated 20.07.2018 by Shri Balraj Singh, President of the Bhartiya Mazdoor Sangh, ordered an inquiry under Section 206(4) of the Companies Act, 2013 on 08.08.2018. The resulting inquiry report recommended that an inspection of the books of accounts and papers of the concerned companies be undertaken under Section 206(5) of the Companies Act, 2013. Non Conduct of Inquiry Under Section 206(4) of the Companies Act,

27. There is absolute silence in the impugned order, and also in counteraffidavit filed on behalf of the respondent, as to whether such inspection was ever conducted, and if so, the outcome thereof. The abandonment of the statutory course recommended under Section 206(4), without any explanation therefor, exacerbates the legal lacuna, as noticed hereinabove.

28. It is noticed that in Rohtas Industries (supra), it was observed by the Supreme Court that the concerned Department of the Central Government which deals with Companies is “presumed to be an expert body in Company Law Matters[1]

29. It is incomprehensible as to why the Central Government was remiss in conducting an independent inspection despite the same having been ordered pursuant to an inquiry under Section 206(4) of the Companies Act, 2013, as far back as in 2018. ”. The same position has been reiterated by the Bombay High Court in Parmeshwar Das Agarwal (supra).

30. It is notable that that in Parmeshwar Das Agarwal (supra), the Bombay High Court found that where a report under Section 208 does not find any occasion to conduct a further investigation, the same has a bearing on the exercise of power under Section 212(1)(c) of the Act, 2013. In the present case, the situation is much worse. Despite a recommendation that an inspection of the books of accounts and papers of the concerned company be undertaken under Section 206(5) of the Companies Act, 2013, the same was The power under Sections 235 to 237 has been conferred on the Central Government on the faith that it will be exercised in a reasonable manner. The department of the Central Government which deals with companies is presumed to be an expert body in company law matters. Therefore the standard that is prescribed under Section 237(6) is not the standard required of an ordinary citizen but that of an expert. The learned Attorney did not dispute the position that if we come to the conclusion that no reasonable authority would have passed the impugned order on the material before it, then the same is liable to be struck down. This position is also clear from the decision of this Court in Barium Chemicals v. Company Law Board. apparently not done.

31. A perusal of the impugned order reveals that it relies on alleged Preferential, Undervalued, Fraudulent, and Extortionate (PUFE) transactions purportedly identified in the forensic audit conducted by M/s GSA & Associates, and the ‘Specific Purpose Audit’ by Kashayap Sikdar & Co. Apparent false / mis-statement on the face of the impugned order; nonexistence of any “demonstrable circumstances” on the basis of which any “opinion” could be formed for the purpose of Section 212(1)(c) of the Act, 2013.

32. However, upon examination of the actual forensic audit reports (GSA Report and Sikdar Report) it becomes evident that the said assertion made in the impugned order (regarding identification of PUFE transaction/s) is factually inaccurate and inconsistent with the very audit reports, on which the impugned order is founded.

33. The Sikdar Report clearly sets out that the scope thereof was to “report on transactions as mentioned u/s 43, 45, 49, 50 and 66 of IBC, 2016 from books of accounts of Moser Baer India Ltd. (MBIL) for last two years i.e. 2015-16 and 2016-17 (audited) and 2017-18 (Provisional) till the insolvency commencement date i.e. 14.11.2017.”

34. Pursuant thereto, the report specifically takes note of above enumerated provisions of the IBC 2016 which deal with Preferential, Undervalued, Fraudulent and Extortionate (PUFE) transaction and the render findings with regard thereto. The relevant findings of the Sikdar Report are reproduced hereunder: “5. OUR OBSERVATIONS AND KEY FINDINGS

I. REPORT U/S 43 OF IBC, 2016

Section 43 of Insolvency and Bankruptcy code states as under: (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in subsection (2) to any persons as referred to in subsection (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44. (2) A corporate debtor shall be deemed to have given a preference, ifa) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53. (3) For the purposes of sub-section (2), a preference shall not include the following transfersa) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee; b) any transfer creating a. security interest in property acquired by the corporate debtor to the extent that-

(i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest and was used by corporate debtor to acquire such property: and

(ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property: Provided that any transfer made in pursuance of the order of a court shall not preclude such transfer to be deemed as giving of preference by the corporate debtor. Explanation.- For the purpose of sub-section (3) of this section, "new value" means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt. (4) A preference shall be deemed to be given at a relevant time. if a) it is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date. We understand that for any Transaction to be termed as Preferential as per section 43(2), there should be transfer of property or an interest thereof of the corporate debtor, not in the ordinary course of business for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor: and such transfer shall has the effect of putting such creditor or a surety or a guarantor as the case may be, in a beneficial position in order of preference than it would have been in the event of distribution of assets being made in accordance with section 53.

REPORT U/S 45 OF IBC,2016

In compliance of the above, we have verified the transactions during the period under consideration and have not come across any such transaction of the nature as stated above. Section 45 of IBC, 2016 states that: (1) If the liquidator or the resolution professional, as the case may be on an examination of the transactions of the corporate debtor referred to in subsection (2) of section 43 determines that certain transactions were made during the relevant period under section 46 which were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction in accordance with this Chapter. (2) A transaction shall be considered undervalued where the corporate debtora) makes a gift to a person; or b) enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and such transaction has not taken place in the ordinary course of business of the corporate debtor. Our understanding of the Section 45(2) of the Insolvency and Bankruptcy Code,2016 means that an undervalued transaction is one where corporate debtor makes a gift or transfers one or more assets for insignificant consideration, provided that such transaction has not taken place in the ordinary course of business of the corporate debtor. For transaction made with a related party the relevant period is two years preceding the insolvency commencement dale and for transactions made with any other person this period is one year preceding the insolvency commencement date. In compliance with the above section. we have verified the transaction of Sales and Purchases including the transactions to related party and we have not come across any transaction to be covered u/s 45 of IBC,2016 as per our observation given below: a. Moser Baer India Ltd (MBIL) has been selling finished goods to Moser Baer Entertainment Ltd (MBEL) and also purchasing the goods from the MBEL which is a related party. The detail of sale and purchase during the year 2016-17 and 2015-16 is as under: Verification of Financial and Inventory records We have made product wise comparison of goods sold to MBEL with price charged to other parties and report that no major discrepancies were noticed. A detail of product wise sample picked for comparison is enclosed as Annexure A. Similarly, in case of purchases made by MBIL from MBEL, we have made product wise comparison of item purchased with price from other parties and report that no major discrepancies were observed Detail of product wise sample picked for comparison ss enclosed as Annexure B.

REPORT U/S 49 OF INSOLVENCY AND BANKRUPTCY

CODE,2016 Section 49 of IBC, 2016 states as under: Where the corporate debtor has entered into an undervalued transaction as referred to in sub-section (2) of section 45 and the Adjudicating Authority is satisfied that such transaction was deliberately entered into by such corporate debtora) for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim, against the corporate debtor; or b) in order to adversely affect the interests of such a person in relation to the claim, the Adjudicating Authority shall make an order-

(i) restoring the position as it existed before such transaction as if the transaction had not been entered into; and

(ii) protecting the interests of persons who are victims or such transactions:

Provided that an order under this Sectiona) shall not affect any interest in property which was acquired from a person other than the corporate debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or affect any interest deriving from such an interest, and b) shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction.

REPORT U/S 50 OF INSOLVENCY AND BANKRUPTCY CODE,

As stated in our report on Section 45 of Insolvency and Bankruptcy Code, 2016 we have not come across any undervalued transactions during the period under review, Section 49 of the Insolvency and Bankruptcy Code 2016 is not applicable. Section 50 of the IBC, 2016 stipulates as under- (1) Where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, the liquidator or the resolution professional as the case may be, may make an application for avoidance of such transaction to the Adjudicating Authority if the terms of such transaction required exorbitant payments to be made by the corporate debtor. (2) The Board may specify the circumstances in which a transactions which shall be covered under sub-section (1). Explanation.-For the purpose of this section, it is clarified that any debt extended by any person providing financial services which is in compliance with any law for the time being in force in relation to such debt shall in no event be considered as an extortionate credit transaction. We understand that the Extortionate credit transactions are the credit transactions which involve the receipt of financial or operational debt to the corporate debtor. They are termed as extortionate because the terms are either unconscionable, or require the corporate debtor to make exorbitant payments in respect of the credit provided. However, a debt which is in compliance with any law for the time being in force in relation to such debt shall in no event be considered as an extortionate credit transaction.

V. REPORT U/S 66 OF INSOLVENCY AND BANKRUPTCY CODE,

We have not come across any such transaction where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date. (1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit. (2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and b) such director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the corporate debtor. Explanation.- For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor.

35. Thus, the existence of any PUFE transactions was expressly negated by the Sikdar Report. We understand that, as per Section 66 of the IBC, 2016, the business should be carried out with the intention to defraud the creditors or for any fraudulent purpose. During the course of our special audit, we have not come across any such transaction.”

36. Likewise, in the GSA Report, it has been concluded as under: “i. The period of our review did not present an opportunity for any diversion of funds. Imbalance in the capital structure indicates diversion of short term funds for long term uses arising out of investments/ advances credit afforded to associate companies prior to the period of our assignment. xiv. Most of the transaction related to assets and leases were entered into the company in the period before our review and therefore shall not be able comment on the fraudulent and extortionate transactions.”

37. As such, even the GSA Report does not arrive at the conclusion that is sought to be attributed to it in the impugned order.

38. In the circumstances, it is apparent that the impugned order, in paragraph 2 thereof, wrongly records that “in Moser Bear India Limited (MBIL) following Preferential, Undervalued, Fraudulent and Extortionate transactions (PUFE) transactions were noticed in the Forensic Audit Report… ”. As noticed, the said assertion is belied by a bare perusal of the concerned Audit report/s. It is incomprehensible as to why the impugned order contains such an apparent mis-statement.

39. The above strikes at the very root of the validity of the impugned order. While it is true that an order issued by the Central Government under Section 212(1)(c) of the Act, 2013 is predicated on the “opinion” of the Central Government, the same clearly has no legs to stand on, where the formation of opinion is based on non-existent ground/s.

40. It is again noticed that in making a wrong / false attribution to the GSA Report and / or Sikdar Report, the impugned order in the present case bears an uncanny similarity to the factual conspectus of the case that fell for consideration before the Bombay High Court in the aforesaid case of Parmeshwar Das Agarwal (supra). Paragraph 2 of the order under Section 212(1)(c) of the Act, 2013 in that case, referred to an ROC report dated 13.01.2016, which allegedly recommended that investigation be made by “Multi Disciplinary Authority / Specialized Agency to find out malutilization of the bank finance and other violations under provisions of law”. The Bombay High Court, however, found that in fact, the ROC report did not make any such recommendation[2]

41. In the present case, the impugned order asserts that the concerned audit report/s rendered findings regarding transactions which fall in the “PUFE Category”. However, neither of the two forensic audit reports on the basis of which such attribution is made, finds any PUFE transaction.. A bare perusal of this order would indicate that the Central Government has referred to the report dated 13th January, 2016, but completely misread and misinterpreted it. It has not recommended any investigations to be made under the Companies Act, 1956 or 2013. If at all the investigations are to be made in terms of this recommendatory report, or suggestion therein, that is for the multiple disciplinary authorities to find out misutilisation of bank finances and other violations of law. The respondents ought to be aware that there is a difference in the language of the two relevant sections, namely, section 210 and section 212.

42. The law is well-settled that although the formation of opinion by the Central Government is subjective, but the existence of circumstance/s forming the basis of such opinion must be ‘demonstrable’. The legal position in this regard has been expounded by the Supreme Court in the landmark cases of Barium Chemicals Limited vs. Company Law Board (supra), Rohtas Industries vs. SD Aggarwal (supra) and Rampur Distillery vs. Company Law Board, (supra). The same has also been reiterated by the Division Bench of Bombay High Court in Parmeshwar Das Agarwal (supra). As held therein, the legal position expounded by the Supreme Court [in Barium Chemicals, Rohtas Industries and Rampur Distillery (supra)] for the purpose of judicial review of the “opinion” under Section 237 and 326 of the 1956 Act, is also applicable, and relevant for the purpose of testing the “formation of opinion” under Section 212 of the Act, 2013.

43. In Barium Chemicals Limited vs. Company Law Board (supra) M. Hidayatullah, J and J.M. Shelat, J, while considering the provisions of Section 237(b) of the Companies Act, 1956 (which also contemplates the formation of “opinion”) came to the conclusion that though the power under Section 237(b) is a discretionary power (as in the case of Section 212(1)(c) of the Act, 2013), the existence of relevant circumstance/s on the basis of which such an opinion if founded must be “objectively established” and must be “demonstrable”.

44. The judgment of J.M. Shelat, J in Barium Chemicals Limited vs. Company Law Board (supra) holds as under:

difficulty as investigation is instituted either at the wishes of the company itself expressed through a special resolution or through an order of the court where a judicial process intervenes. Clause (b), on the other hand, leaves directing an investigation to the subjective opinion of the government or the Board. Since the legislature enacted Section 637(i)(a) it knew that government would entrust to the Board its power under Section 237(b). Could the legislature have left without any restraints or limitations the entire power of ordering an investigation to the subjective decision of the Government or the Board? There is no doubt that the formation of opinion by the Central Government is a purely subjective process. There can also be no doubt that since the legislature has provided for the opinion of the government and not of the court such an opinion is not subject to a challenge on the ground of propriety, reasonableness or sufficiency. But the Authority is required to arrive at such an opinion from circumstances suggesting what is set out in sub-clauses (i), (ii) or (iii). If these circumstances were not to exist, can the government still say that in its opinion they exist or can the Government say the same thing where the circumstances relevant to the clause do not exist? The legislature no doubt has used the expression "circumstances suggesting". But that expression means that the circumstances need not be such as would conclusively establish an intent to defraud or a fraudulent or illegal purpose. The proof of such an intent or purpose is still to be adduced through an investigation. But the expression "circumstances suggesting” cannot support the construction that even the existence of circumstances is a matter of subjective opinion. That expression points out that there must exist circumstances from which the Authority forms an opinion that they are suggestive of the crucial matters set out in the three sub-clauses. It is hard to contemplate that the legislature could have left to the subjective process both the formation of opinion and also the existence of circumstances on which it is to be founded. It is also not reasonable to say that the clause permitted the Authority to say that it has formed the opinion on circumstances which in its opinion exist and which in its opinion suggest an intent to defraud or a fraudulent or unlawful purpose. It is equally unreasonable to think that the legislature could have abandoned even the small safeguard of requiring the opinion to be founded on existent circumstances which suggest the things for which an investigation can be ordered and left the opinion and even the existence of circumstances from which it is to be formed to a subjective process. This analysis finds support in Gower's Modern Company Law (2nd Edn.), p. 547 where the learned author, while dealing with Section 165(b) of the English Act observes that "the Board of Trade will always exercise its discretionary power in the light of specified grounds for an appointment on their own motion" and that "they may be trusted not to appoint unless the circumstances warrant it but they will test the need on the basis of public and commercial morality". There must therefore exist circumstances which in the opinion of the Authority suggest what has been set out in sub-clauses (i), (ii) or (iii). If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute.”

45. Again, in the case of Rohtas Industries vs. SD Aggarwal, (supra), it was held in the judgment rendered by K.S. Hegde, J. as under: “5. Before taking action under Sections 237(b)(i) and (ii), the Central Government has to form an opinion that there are circumstances suggesting that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose or in a manner oppressive to any member or that the company was formed for any fraudulent or unlawful purpose or that the persons concerned in the formation or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members. From the facts placed before us, it is clear that the Government had not bestowed sufficient attention to the material before it before passing the impugned order. It seems to have been oppressed by the opinion that it had formed about Shri S.P. Jain. From the arguments advanced by Mr Attorney, it is clear that but for the association of Mr S.P. Jain with the appellantcompany, the investigation in question, in all probabilities would not have been ordered. Hence, it is clear that in making the impugned order irrelevant considerations have played an important part. The power under Sections 235 to 237 has been conferred on the Central Government on the faith that it will be exercised in a reasonable manner. The department of the Central Government which deals with companies is presumed to be an expert body in company law matters. Therefore the standard that is prescribed under Section 237(b) is not the standard required of an ordinary citizen but that of an expert. The learned Attorney did not dispute the position that if we come to the conclusion that no reasonable authority would have passed the impugned order on the material before it, then the same is liable to be struck down. This position is also clear from the decision of this Court in Barium Chemicals v. Company Law Board. It was urged by Mr Setalvad, learned counsel for the appellant, that clause (b) of Section 237 prescribes two requirements i.e. (1) the requisite opinion of the Central Government and (2) the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (1) or that the persons mentioned in sub-clause (2) were guilty of fraud, misfeasance or misconduct towards the company or any of its members. According to him though the opinion to be formed by the Central Government is subjective, the existence of circumstances set out in clause (b) is a condition precedent to the formation of such an opinion and therefore the fact that the impugned order contains recitals of the existence of those circumstances, does not preclude the court from going behind those recitals and determining whether they did in fact exist and further whether the Central Government in making that order had taken into consideration any extraneous consideration. But according to the learned Attorney the power conferred on the Central Government under clause (b) of Section 237 is a discretionary power and the opinion formed, if in fact an opinion as required by that section has been formed, as well as the basis on which that opinion has been formed are not open to judicial review. In other words according to the learned Attorney no part of Section 237(b) is open to judicial review: the matter is exclusively within the discretion of the Central Government and the statement that the Central Government had formed the required opinion is conclusive of the matter. Courts both in this country as well as in other Commonwealth countries had occasion to consider the scope of provisions similar to Section 237(b). Judicial dicta found in some of those decisions are difficult of reconciliation.

6. The decision of this Court in Barium Chemicals case which considered the scope of Section 237(b) illustrates that difficulty. In that case Hidayatullah, J., (our present Chief Justice) and Shelat, J., came to the conclusion that though the power under Section 237(b) is a discretionary power the first requirement for its exercise is the honest formation of an opinion that the investigation is necessary and the further requirement is that "there are circumstances suggesting" the inference set out in the section; an action not based on circumstances suggesting an inference of the enumerated kind will not be valid; the formation of the opinion is subjective but the existence of the circumstances relevant to the inference as the sine qua non for action must be demonstrable; if their existence is questioned, it has to be proved at least prime facie; it is not sufficient to assert that those circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness; the conclusions must relate to an intent to defraud, a fradulent or unlawful purpose, fraud or misconduct. In other words they held that although the formation of opinion by the Central Government is a purely subjective process and such an opinion cannot be challenged in a court on the ground of propriety, reasonableness or sufficiency, the authority concerned is nevertheless required to arrive at such an opinion from circumstances suggesting the conclusion set out in sub-clauses (i), (ii) and (iii) of Section 237(b) and the expression "circumstances suggesting" cannot support the construction that even the existence of circumstances is a matter of subjective opinion. Shelat, J., further observed that it is hard to contemplate that the legislature could have left to the subjective process both the formation of opinion and also the existence of circumstances on which it is to be founded; it is also not reasonable to say that the clause permitted the authority to say that it has formed the opinion on circumstances which in its opinion exist and which in its opinion suggest an intent to defraud or a fraudulent or unlawful purpose.”

46. It was further held as under: “11. Coming back to Section 237(b), in finding out its true scope we have to bear in mind that that section is a part of the scheme referred to earlier and therefore the said provision takes its colour from Sections 235 and 236. In finding out the legislative intent we cannot ignore the requirement of those sections. In interpreting Section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under Article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of the general public. In fact the vires of that provision was upheld by majority of the Judges constituting the Bench in Barium Chemicals case principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated earlier we agree with the conclusion reached by Hidayatullah and Shelat, JJ. in 'Barium Chemicals’ case that the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question are open to judicial review though the opinion formed by the Government is not amenable to review by the courts. As held earlier the required circumstances did not exist in this case.”

47. In Rampur Distillery vs. Company Law Board (supra), in the context of formation of opinion under Section 326(2) of the Act, 1956, it was observed as under:

48. The Division Bench of the Bombay High Court in Parmeshwar Das Agarwal (supra) placed reliance on the aforesaid judgment, as well as on the following paragraphs of Hariganga Cement Ltd. vs. Company Law Board

1953, the Supreme Court had held that "whenever a provision of law confers certain power on an authority on its forming a certain opinion on the basis of certain facts, the courts are precluded from examining whether the relevant facts on the basis of which the opinion is said to have been formed were in fact existed." This decision in 1953 has been overruled by the subsequent decision of the Supreme Court in the matter of Rohtas Industries Ltd. v. S.D. Agarwal reported in AIR 1969 SC 707, in which the Supreme Court has observed that the 1953 decision cannot be considered as authority for this proposition. It was further held by the Supreme Court, approving the decision in Barium Chemicals case (AIR 1967 SC 295) that "the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (1) or the person-mentioned in sub-clause (ii) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and, if the existence of those conditions is challenged, the courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question is open to judicial review though the opinion formed by the Government is not amenable to review by the courts....". Thus, even though the subjective opinion formed by the Company Law Board is not amenable to challenge, the judicial courts can certainly look at the circumstances as to whether they were existing, or if they were existing, whether they had any nexus to the opinion formed by the Company Law Board.

12. It is well settled that the discretionary powers under Section 237(b) of the Companies Act must be exercised honestly and not for corrupt or ulterior purposes. The authority must form the requisite opinion honestly and after applying its mind to the relevant material before it. In exercising the discretion, the authority must have regard only to circumstances suggesting one or more of the matters specified in sub clauses (i), (ii) and (iii) of Section 237(b) of the Companies Act. It must act reasonably and not capriciously or arbitrarily. It will be an absurd exercise of discretion, if, for example, the authority forms the requisite opinion on the ground the the director in charge of the company is a member of a particular community. Within these narrow limits, the opinion is not conclusive and can be challenged in a court of law. (refer paragraph-45 of Rohtas Industries Ltd.'s case AIR 1969 SC 707). The Supreme Court has also observed in the above case at paragraph-46 that "If it is established that there were no materials upon which the authority could form the requisite opinion, the court may infer that the authority did not apply its mind to the relevant facts. The requisite opinion is then lacking and the condition precedent to the exercise of the power under Section 237(b) is not fulfilled.

15. The discretionary powers vested in the Company Law Board under Section 237(b) of the Companies Act are of a very wide nature and the said powers have to be exercised with great conception and retrospection and in a judicious manner. The powers under Section 237 have been conferred on the Central Government in the faith that it will be exercised in a reasonable manner. The Department of the Central Government which deals with companies is presumed to be an expert body in company law matters. Therefore, the standard that is prescribed under Section 237(b) is not the standard required of an ordinary citizen by that of an expert. Hence, if the court comes to the conclusion that no reasonable authority would have passed the impugned order on the material before it, then the same is liable to be struck down.

16. The formation of the opinion under Section 237 of the Companies Act by the Central Government is subjective, but the existence of circumstances relevant to the inference as the sine que non for action must be demonstrable. It is not reasonable to say that the clause permits the Government to say that it has formed the opinion on circumstances which, it thinks, exist. Since the existence of "circumstances" is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned in court, has to be proved at least prima facie. It is not sufficient to say that circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to a conclusion of certain definiteness. When it is challenged that the opinion has been formed mala fide or upon extraneous or irrelevant matters, the respondents must disclose before the court, the circumstance which will indicate that his action was within the four corners of his own powers."

49. Considering the above exposition of law, the Division Bench of the Bombay High Court in Parmeshwar Das Agarwal (supra), concluded as under: “existence of circumstances relevant to the inference as to the sine qua non for action must be demonstrable. It is not reasonable to hold that the clause permits the Government to say that it has formed an opinion on circumstances which it thinks exist. Since existence of circumstances is a condition fundamental to the making of the opinion, when questioned the existence of these circumstances have to be proved at least prima facie.”

50. It necessarily follows that all the relevant circumstance/s must be taken into account, and the existence of the same must be “demonstrable”, for the purpose of forming an opinion under Section 212(1)(c) of the Act,

2013. The impugned order in the present case, falls short of these requirements on account of the false attribution/mis-statement in paragraph 2 thereof. The same demonstrates that in material respect/s, the impugned order/formation of opinion for the purpose of Section 212(1)(c), is based on “non-existent” circumstances.

51. In addition to the above, there are other difficulties as well, which seriously afflict the impugned order and render the same unsustainable. The same are enumerated below.

52. A perusal of the impugned order reveals that the paragraphs 2(a), 2(b), 2(c), 2(d), 2(e), 2(f) and 2(g), have been bodily lifted (cut and pasted) from certain selected portions of the Sikdar Report. The following table is illustrative of the same. Impugned order dated 05.09.2024 Sikdar Report (a) MBIL has sold finished goods to its subsidiary Moser Bear Entertainment Limited (MBEL) regularly although there was substantial non-recovery of its dues from MBEL. Whereas, MBEL has made recovery of its sundry debtor on regular basis but payment to it holdings company MBIL has not been made regularly. As on 31.03.2017, MBIL has made provision of Rs 57.48 Crores for MBEL debtor. Similarly, sales made to other related parties have also not been realized and provision for the same has also been made in books of accounts. Total provision against sales to related parties has been made for Rs 167.47 Cr as on 31.03.2017: VI A. Moser Baer India Limited (MBIL) has sold Finished Goods to its Subsidiary, Moser Baer Entertainment Limited (MBEL) regularly inspite of the fact that substantial non-recovery of its dues from MBEL. Our scrutiny of Financial Statements of MBEL also revealed that MBEL has made recovery of its Sundry Debtor on regular basis but payment to its creditor MBIL has not been made regularly, although the outstanding balance been decreasing in last few years. Similarly sales made to other related parties have also not being realized and provision for the same has also been made in books of accounts. Total provision against sales to related party has been made for Rs. 167.47 crores till 31.03.2017. (b) MBIL had to recover a sum of Rs

333.36 crores from Moser Baer Solar VI B(d) MBIL has to recover a sum of Rs. 333.36crores from MBSL and Rs. 50.41 Cr Limited ("MBSL") and Rs 50.41 crores from Helios Photo Voltaic Limited ("HPVL") on account of lease/sublease as on 14.11.2017. A sum of Rs 226.74 Cr has also been provided out of above in the books of accounts of MBIL as on 31.03.2017. As the lease rent was not received in full from the very first year and subsequently a substantial amount has become recoverable, the reason for not terminating the agreement and restricting the loss to MBIL by giving lease to other parties is not clarified to the auditor conducting the special purpose audit. from HPVL on account of lease/ sublease entered with MBSL and HPVL as on 14.11.2017. A sum of Rs. 226.74 crores, as per detail below has also been provided out of above in the books of accounts of MBIL till 31.03.2017, resulting loss to MBIL to this extent.

(c) MBIL had invested in

Equity/Preference shares as well as debentures of related parties and provision for Rs.653.09 crores have been made against the same for diminution in value of investments. VI C. Moser Baer India Limited had invested in Equity/ Preference shares as well as Debentures of related parties and Rs. 653.09 crores has been provided against the same for diminution in value of investments in last four years. However the provisions made in last two years are as under;

(d) MBIL has made Provisions against doubtful loans and advances given to related parties and their interest for Rs

23.53 crores has been made. VI D. Provisions against doubtful Loans and advances given to related parties and there interest for 23.53 crores has been made in last two years. (e) MBIL has leased total land from GNIDA admeasuring 381418 sq. mt. Documents provided to the auditor does not give any information about the portion of land admeasuring 44131 sq. mt. VI G. Moser Baer India Limited, by way of three lease deeds dates 26.06.2001, 22.03.2002 and 5.09.2002 owns land from Greater Noida Industrial Development Authority at Plot No.66, Udyog Vihar Phase- 11, GNIDA, Gautam Budha Nagar, UP admeasuring 381418.230 sq. ml. xxx xxx xxx The documents provided to us does not give any information about balance portion of land i.e. 44131.07 sq, mt. (f) MBIL has made provision for slow moving inventory of stores & spares and consumables for Rs 24.62 crores was made VI H. Provision for slow moving inventory of stores & spares and consumables for Rs

24.62 crores has been made during the during FY 2016-17. year 2016-17 based on internal assessment of the company. Further, its realization value has been considered @ 10% without any basis. (g) MBIL has made provision for impairment of assets has been made for Rs 61 crores in the books of accounts as on 31.03.2017. VI J. Provision for impairment of assets has been made for Rs 61.00 crores in the books of accounts as on 31.03.2017 based on the report of SPA Capital Advisers Ltd which has been calculated on the basis of distressed sale value of assets as on August, 2015, considering fixed valuation report or assets by M/s Dun & Bradstreet Information Services Pvt. Ltd.

53. The above is disconcerting for a variety of reasons. Firstly, the Sikdar Report contains an express disclaimer stating that report has been prepared on “test check basis”3

4. LIMITATIONS OF OUR AUDIT. It further states that the report is neither an audit nor an expression of opinion on the financial statements of the company, and that it was prepared solely for the benefit of the concerned professional within the confines of a limited mandate entrusted to it. As already noticed, there is no reason why the Central Government ought not to have conducted The procedures performed are not an audit. or a compilation of the Company's financial statements or any part thereof, nor an examination of management's assertions concerning the effectiveness of the Company's internal control systems and detection of fraud, nor an examination of compliance with laws. regulations, or other matters. Accordingly, our performance of the procedures will not result in the expression of an opinion or any other form of assurance on the Company's financial statements or any part thereof. nor an opinion or any other form of assurance on the Company's internal control systems or its compliance with laws, regulations, or other matters. The report is meant for Insolvency Professional of the company who has assigned us the job to carry out the Special Purpose Audit in respect of scope of audit mentioned in the report. The Report is furnished solely for the information of the RP and should not be used. circulated, quoted or otherwise referred to for any other purpose nor included or referred to in whole or in part in any document. We have carried out our assignment on test check basis on the documents submitted by management of the company. Our observations on Statutory Regulations do not purport to be an opinion, expert or otherwise. It merely repre an inspection of its own, especially since an inquiry under Section 206(4), as far back as in 2018, culminated in a recommendation that “an inspection of the books of accounts and papers of the concerned companies be undertaken under Section 206(5) of the Act, 2013. As noticed, this has been specifically adverted to in paragraph 5 of the counter-affidavit filed by the respondent[4]

54. Secondly, the treatment accorded to the concerned Audit Reports in successive judicial pronouncements [the BOB judgment] has evidently not been considered at all while passing the impugned order. The same amounts to a failure to take into account ‘relevant circumstance/s’ for the purpose of forming an opinion under Section 212(1)(c) of the Companies Act, 2013.. No explanation has been offered for the (presumable) omission to conduct such an inspection. Findings qua the Forensic Reports (Sikdar Report and GSA Report) in the Judgment dated 29.02.2024 in W.P.(c) 4181/2023

55. In the judgment rendered by a Coordinate Bench of this Court in W.P.(C) 4181/2023, it was categorically held that the reliance placed by the respondent on the GSA Forensic Audit Report, was misconceived inasmuch as report itself repels the contention of diversion or siphoning of funds from the concerned company.

56. It is the strenuous contention on behalf of the petitioner that the said judgement elaborately deals with the alleged objectionable dealings between MBIL and its subsidiary/ies, which are also cited in the impugned order. The That the Central Government had earlier ordered an Inquiry u/s 206(4) of the Companies Act, 2013 on 08.08.2018, based on the complaint of Shri Balraj Singh, President, Bhartiya Mazdoor Sangh dated 20.07.2018 and the Inquirt report has recommended the conducting of inspection of books of accounts and papers of the companies under section 206(5) of the Companies Act, 2013. said judgement also copiously deals with the concerned Forensic Audit Report/s, and the observations made therein.

57. It is submitted that the findings rendered in the aforesaid judgment preclude the requirement of any investigation or order under Section 212(1)(c) of the Act, 2013.

58. In the present proceedings, while this Court is not required to go to the extent of adjudicating whether the petitioner’s inference as regards the judgment dated 29.02.2024 in W.P.(C) 4181/2023, is justified, it is apparent that the said judgment, which deals with allegations regarding siphoning of funds / alleged ‘PUFE’ transactions, was in the nature of ‘relevant material’ that ought to have been considered prior to issuance of the impugned order. It is theoretically possible, that the Central Government may have arrived at the same “opinion” even after consideration of the said judgment. However, the wholesale disregard/ non-consideration of a binding judicial pronouncement which makes copious observations as regards the very same Audit Report/s on which the impugned order is founded, cannot be countenanced. Judicial treatment accorded to the very same Forensic Audit Report/s on which the present impugned order is founded [even in the context of an action to declare the ex-directors as ‘wilful defaulters’] is a relevant circumstance that ought to have been taken into consideration. It has been admitted in paragraph 16 5

of the Counter Affidavit of the Respondent, that neither the BOB Judgment nor the SBI Judgment, which also consider the effects of the concerned forensic audit report, were placed or considered by the respondent while reaching its subjective satisfaction/opinion for the purpose of issuing the impugned order.

59. The relevant paragraphs in the said judgment dated 29.02.2024 which makes comments / render findings as regards the very same Audit Report/s are as under:-

“iv. Please further note that source of funds of the investments made by the company in its subsidiaries, associates and joint ventures were not review”.

150. Thus, the Forensic Audit Report did not verify the source of funds which were invested in the subsidiaries. The respondent-Bank, could not have issued show cause notice to the petitioner for wilful default, without verifying the source of funds that were invested. Unless the funds that were invested were found to be borrowed funds, the respondent-Bank did not have jurisdiction to invoke the Master Circular. The very genesis of “diversion” or “siphoning of” funds is dependent on the funds being borrowed funds. The reliance placed by the respondent-Bank on the Forensic Audit Report is clearly misconceived. The Forensic Audit Report does not record any conclusion regarding diversion or siphoning of funds qua the petitioner. The reliance placed by the respondent-Bank on the Forensic Audit Report to issue show cause notice of wilful default to the petitioner is clearly misplaced.”

60. The judgment rendered by the Division Bench in LPA No. 294/2024 serves to corroborate the point that the findings rendered qua the forensic audit reports in the judgment dated 29.02.2024 in W.P.(C) 4181/2023 were relevant factors that ought to have been taken into account before forming the opinion. The Division Bench has made scathing observations as regards the tenability of drawing any adverse inference, either on the basis of the Sikdar Report or the GSA Report. In fact, the very credibility of the concerned Forensic Audit Report/s has been doubted by the Division Bench. The Division Bench has gone to the extent of saying that the said reports cannot be relied upon in any “cognate proceedings”.

61. It has been observed by the Division Bench of this Court as under: “43............When one examines the track record of MBIL, it has to be noted that, in the period of twelve years starting FY 2006-2007, MBIL had been subjected to three separate and independent forensic audits, by Kashyap Sikdhar & Co. and Rajvanshi & Associates and GSA & Associates, none of which detected any fraud or diversion, much less siphoning off of funds. Even at the time of approving the CDR, the CDR-EG gave MBIL a clean chit. Post CDR, as already noted, all inflow and outflow of accounts took place through the TRA, which was managed by the lender Banks and maintained by the Central Bank. Not a single proceeding was ever initiated against MBIL, at any point of time. In the same context, it is worthwhile to note that MBIL had accumulated cash accruals of 4304 crores as recorded in its balance sheets, the veracity of which has not been disputed by BOB.

44. We, like the learned Single Judge, are, therefore, not satisfied that MBIL, or the respondent, can be characterised as a "wilful defaulter", within the meaning of the Master Circular. Indeed, that seems to have been the view of all concerned, including the lenders, the Banks and the CDR- EG, till the FAR of GSA Associates. This is why, quite obviously, the Minutes of Meeting dated 24 February 2020 of the BOB cited the FAR, and the FAR alone, as the basis for the decision to issue show cause notice to the respondent. The FAR itself, as we have already observed, does not commend itself to credibility.

62. Further, it has been observed as under: 111..........We are constrained, moreover, to enter this comment as we find, in these appeals, that the financial auditor, in the FAR, has acknowledged that all details, or facts, were not available with it. Unless the financial auditor is in possession of all facts and details, it cannot return even a tentative opinion on whether there has been diversion or siphoning of funds. An FAR which is issued without being possessed of all the necessary factual material and statistical details is really worthy of little credibility, and cannot constitute the basis for proceeding against the borrower for declaring him a wilful defaulter either under the Master, Circular, or, we may venture to add, in any cognate proceedings either.”

63. In view of the above observations, this Court is unable to countenance a situation where SFIO investigation under Section 212(1)(c) of the Companies Act, 2013 is initiated without even taking note of / factoring in the judicial pronouncement/s referred to hereinabove.

64. It also transpires that the counter affidavit filed on behalf of the respondent/claimant at para 3(i) to (iii) and 4(i) to (ix), 7 (a) to (i) and 15 has referred to additional reasons/grounds to justify the impugned order.

65. The petitioner is right in contending that the validity of this impugned order has to be assessed on the basis of what is stated therein and not on the basis of the additional reasons/circumstances sought to be supplied in the counter-affidavit filed on behalf of the respondent. The same is mandated in terms of the judgment of the Supreme Court in Mohinder Singh Gill & Another v. The Chief Election Commissioner, New Delhi & Ors. (supra)6, Opto Circuit India Ltd. v. Axis Bank & Ors. (supra)7 and Ritesh Tiwari v. State of Uttar Pradesh (supra) 8

8. The second equally relevant matter is that when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge, get validated by additional grounds later brought out. We may here draw attention to the observations of Bose, J. in Gordhandas Bhanji [Commr. of Police, Bombay v. Gordhandas Bhanji, 1951 SCC 1088: AIR 1952 SC 16]:. If anything, the additional “Public orders, publicly made, in exercise of a statutory authority cannot be construed in the light of explanations subsequently given by the officer making the order of what he meant, or of what was in his mind, or what he intended to do. Public orders made by public authorities are meant to have public effect and are intended to affect the actings and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself.” Orders are not like old wine becoming better as they grow older.

12. The action sought to be sustained should be with reference to the contents of the impugned order/communication and the same cannot be justified by improving the same through the contention raised in the objection statement or affidavit filed before the Court. This has been succinctly laid down by this Court in Mohinder Singh Gill v. Chief Election Commr. [Mohinder Singh Gill v. Chief Election Commr., (1978) 1 SCC 405] as follows: (SCC p. 417, para

8) “8. The second equally relevant matter is that when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge, gets validated by additional grounds later brought out. We may here draw attention to the observations of Bose, J. in Gordhandas Bhanji [Commr. of Police v. Gordhandas Bhanji, 1951 SCC 1088]: (SCC p. 1095, para 9) ‘9. … public orders, publicly made, in exercise of a statutory authority cannot be construed in the light of explanations subsequently given by the officer making the order of what he meant, or of what was in his mind, or what he intended to do. Public orders made by public authorities are meant to have public effect and are intended to affect the actings and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself.’ Orders are not like old wine becoming better as they grow older.” In fact, in the instant case such contention of having exercised power under Section 102 CrPC has not been put forth even in the counter-affidavit, either in this appeal or before the High Court and has only been the attempted ingenuity of the learned Additional Solicitor General. Such contention, therefore, cannot be accepted. In fact, in the objection statement filed before the High Court much emphasis has been laid on the power available under the PMLA and the same being exercised though without specifically referring to the power available under Section 17 of the PMLA.

32. It is settled legal proposition that if an order is bad in its inception, it does not get sanctified at a later stage. A reasons/justifications in the impugned order, serves to corroborate the point that the respondent was remiss in taking note of all ‘relevant circumstances’ prior to ‘formation of opinion’ for the purpose of Section 212(1)(c).

66. The petitioner vehemently contends that even the additional grounds referred to in the counter-affidavit, are precluded by the BOB Judgment. In this regard, reliance is placed on the following chart, which has been handed over during the course of the arguments: subsequent action/development cannot validate an action which was not lawful at its inception, for the reason that the illegality strikes at the root of the order. It would be beyond the competence of any authority to validate such an order. It would be ironical to permit a person to rely upon a law, in violation of which he has obtained the benefits. (Vide Upen Chandra Gogoi v. State of Assam [(1998) 3 SCC 381: 1998 SCC (L&S) 872]; Satchidananda Misra v. State of Orissa [(2004) 8 SCC 599: 2004 SCC (L&S) 1181] and SBI v. Rakesh Kumar Tewari [(2006) 1 SCC 530: 2006 SCC (L&S) 143].)

67. 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.

68. It is not necessary in these proceedings to conclusively pronounce upon the aforesaid contention of the petitioner. Suffice it to say, that prior to issuance of the impugned order, the scope, import and consequences flowing from the judgment dated 29.02.2024 in W.P.(C) 4181/2023 ought to have been taken into consideration.

69. For all the above reasons, the impugned order fails to withstand legal scrutiny.

70. 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.

71. The existence of “relevant circumstances” is sine qua non as for the purpose of formation of opinion under Section 212(1)(c) of the Act, 2013. As held by the Supreme Court in Barium Chemicals Limited vs. Company Law Board (supra), Rohtas Industries vs. SD Aggarwal (supra) and Rampur Distillery vs. Company Law Board, (supra), and reiterated by the Bombay High Court in Parmeshwar Das Agarwal (supra), 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. 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.

72. In the circumstances, the impugned order dated 05.09.2024 (and all consequential proceedings pursuant thereto), is hereby quashed.

73. The petition is allowed in the above terms. All pending applications also stand disposed of.

SACHIN DATTA, J AUGUST 28, 2025/at, ss, r