Companies Act, 1956 – sections 391 and 394 – amalgamation – court’s power – whether court has power to direct investigation of money trail by RBI and DRI – Held, No.

The appellant filed an application before the learned Single Judge proposing a scheme of amalgamation with Magic Tradelink Pvt. Ltd. and Moonlite Technochem Pvt. Ltd. both having registered office at New Delhi. The Delhi High Court already directed meetings to be held to ascertain the wishes of the shareholders. The application before this Court was on behalf of the first transferor company who intended to amalgamate itself with Moonlite. The learned judge directed the Registrar of Companies to conduct an investigation and file a report. Accordingly, the Registrar filed a report on April 3, 2012 which revealed, the company had issued share premium to large number of companies mostly private companies on the same day and used funds for investments to a small extent and made advances to others. There were crores of investments involving a large number of private companies. His Lordship directed the Director, Revenue Intelligence to conduct an enquiry as to whether there was any money trail. The company preferred an appeal which was disposed of by stating that the appellant should be given an opportunity to deal with the same before any order was passed against them.”

As the Director, Revenue Intelligence did not carry out the order of the Court, the Ministry of Corporate Affairs was directed to do so. Accordingly, the Ministry of Corporate Affairs asked the SFIO to conduct such investigation. SFIO submitted a report inter alia pointing out irregularity in the affairs of the company. His Lordship passed subsequent orders. By the order dated April 26, 2013 His Lordship directed the Regional Director to indicate the steps to be taken in terms of the report. Reserve Bank was asked to submit a preliminary report which stated that, “the company may have carried on business of non-banking financial company without any registration.” His Lordship passed an order directing Reserve Bank to take further steps.

The Company preferred four appeals against the orders dated February 11, 2013; March 21, 2013; April 26, 2013 and May 10, 2013.

Section 391 imposed wide discretion upon the Judge who had expressed doubts as to the functioning of the company and such doubt ultimately came true from the reports particularly of the SFIO. Hence, before the company was permitted to go ahead with the scheme, the Court was duty bound to remove doubt if any, in its mind as to whether such scheme was being propounded for an oblique purpose.

In the present case we find, His Lordship passed series of orders directing various agencies to carry out investigations. Looking to the facts, there would certainly be a justification to carry on investigation. The Income Tax Assessment order of the company indicated that an insignificant company proposed scheme of amalgamation involving crores through allotment of shares at a huge premium. However, His Lordship was perhaps not correct in either directing Director, Revenue Intelligence or the Reserve Bank of India. His Lordship was competent to issue direction under Section 237(a)(ii) and was right in sending the issue to the Ministry of Corporate Affairs being the appropriate authority of the Central Government. However, it is for the Central Government to decide which authority would investigate.

Considering the backdrop, the appellant was not permitted to proceed with the proposed scheme of amalgamation.

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