If Fraudulent Affairs Of Company Are Continuing, Right To Seek Winding Up Becomes Recurring : Supreme Court In Antrix-Devas Case

The judgement authored by Justice V Ramasubramanian dismisses the appeal undertaking a point by point analysis of the seven grounds.

Advertisement of Company Petition

It was contended by the appellants that the failure to comply with the requirement of advertising the petition for winding up would vititiate the entire proceedings. Senior Advocate Arvind P Datar had argued on behalf of the appellants that under Rule 7 of the 2020 Rules there was no option available to NCLT but to order the advertisement of the petition.

The Court undertook a detailed analysis of Rule 5 of the Companies (Winding up) Rules, 2020 and notes that the purpose of advertisement is to provide an opportunity to all the stakeholders to either support or oppose the proceedings and to serve as a warning to all those dealing with the company so that they would know there there is an element of risk involved. The Court also notes that advertisement has been said to cause more harm to the company than the benefits it brings. The Court notes:

"Therefore, the way in which the requirement of advertisement has been viewed by Courts is that advertisement causes more harm to the company than the benefit that it brings to the company. Hence the argument of the appellant in this case that the failure to advertise the petition was prejudicial to their interest,goes contrary to one of the important purposes of the advertisement and the chilling effect that it is supposed to have on the company." (7.14)

Further, the Court reiterates the observation in IDBI Bank Ltd v the Official Liquidator (2020) 15 SCC 517 that failure to publish an advertisement is not something that would lead to an automatic dismissal of the petition for winding up. Further, the Court notes that under Rule 35 of the National Company Law Tribunal Rules, 2016 the Tribunal has the power to even dispense with any advertisement. It notes:

"It may be seen from Sub­rule (1) of Rule 35 that the procedure laid down in Rule 35 is applicable to cases "where any application, petition or reference is required to be advertised." The requirement to advertise a petition for winding up does not flow out of the statute, but flows out of the Rules. Since the requirement to advertise a petition for winding up is stipulated in Rules 5 and 7 of the Companies (Winding up) Rules, 2020, what is prescribed in Rule 35 would cover even petitions for winding up. 7.28 If so understood, Sub­rules (5) and (6) of Rule 35 of the NCLT Rules 2016 would throw light upon the controversy on hand. Sub­rule (5) makes it clear that even in cases where the direction of the Tribunal as regards advertisement has not been complied with, the Tribunal has an option (i) either to dismiss the petition; or (ii) to give such further directions as it may think fit. Sub­rule (6) confers power upon the Tribunal even to dispense with any advertisement." (Paras 7.26-7.28)

In the case at hand, the Court notes that the company does not have any creditors or customers who have had dealing with the company and thus there were no stakeholders who were prejudiced by the failure of NCLT to order the publication of the advertisement of petition. In this light, the Court finds itself "unable to sustain the argument that the failure of the Tribunal to order the publication of an advertisement rendered the entire proceedings unlawful."

Limitation

It was argued by the appellants that the petition under Section 271 (c ) were barred by limitation as Article 137 of the Schedule to the Limitation Act which prescribes a period of limitation of 3 years would be applicable to the present case. It was argued by Senior Advocate Mukul Rohatgi that since the date of discovery of the fraud was in 2016 when the chargesheet was filed, the petition for winding up should have been filed before 2019. However, Antrix applied for authorisation only in 2021. Reliance was placed on the case of  Jignesh Shah and Anr. vs. Union of India and Anr (2019) 10 SCC 750. 

The Court at the onset observes that the ratio in Jignesh Shah as applicable to debts would not have any application to the case at hand since Antrix, which initiated the proceedings for winding up, is neither a financial creditor nor an operational creditor nor a corporate applicant. This is why Antrix have not and could not have gone for insolvency resolution process, under the IBC, but taken recourse to Section 271(c) of the Companies Act, 2013.

Secondly, the Court notes that fraud is a continuing act and remedies cannot be barred by confining the act of fraud to a single incident. It notes: 

"The above decisions show that limitation is not always akin to a lighted matchstick to a train of gun powder. The date of commencement of the period need not necessarily be static. The date of commencement may keep changing depending upon the acts of omission and commission on the part of the party against whomthe action is initiated. These acts of omission and commission constitute the bundle of facts, which determine the question whether an action is barred by limitation or not." (Para 8.21)

Concurring with the finding of the Tribunal it notes:

"The main departure of the Companies Act, 2013 from statutory regime of The Companies Act, 1956 is specific inclusion of fraud 'directly' as a circumstance in which a Company could be wound up [See, Section 271 of 2013 Act, as it now stands after 2016]. Section 271(c) of The Companies Act, 2013 covers three circumstances for winding up: (i) affairs of Company being conducted in a fraudulent manner; (ii) Company was formed for fraudulent and unlawful purpose; and (iii) persons concerned in formation and management of its affairs have been guilty of fraud, misfeasance or misconduct in connection. A singular act of omission or commission may constitute fraud and even a series of acts may constitute fraud"

"As rightly pointed out by the Tribunal, a singular act of omission or commission may constitute fraud and even a series of acts may constitute fraud. A fraudulent act may be different from the fraudulent manner in which an act is performed. The words "the conduct of the affairs of a company in a fraudulent manner" indicate that the process was a continuing one. If the conduct of the affairs of the company in a fraudulent manner is a continuing process, the right to apply becomes recurring." (Para 8.22)

Specifically, the court notes that the alleged acts of fraud and corruption in the present case were discovered only laters and continue even till date and thus fall squarely within Section 271 (c ). 

Estoppel

It was argued on behalf of the Appellants that Antrix is estopped from pleading fraud in view of the fact that the termination of the Agreement was not on the ground of fraud but by invoking the force majeaure clause and because in the proceedings before the Tribunals no allegation of fraud was ever raised.

In response, the Court notes that the appellants cannot set up a plea for estoppel on the ground that the termination of the Agreement in the year 2011 was not on the ground of fraud when the discovery of fraud itself was many years later as is evidenced by the FIR filed in 2015. Similarly, the Court notes that the failure of Antrix to plead fraud in arbitration proceedings would not operate as estoppel as "arbitral proceedings commenced in the year 2013 and the award itself was passed on 14.09.2015. Antrix cannot be expected to plead fraud in the arbitral proceedings, even before the discovery of fraud. The Court also notes that the failure of the auditors to make a report of fraud in their Annual Reports, while may make them liable for penal consequences, would not operate as an estoppel against the company.

Refusal to Permit Cross-Examination

The appellants argued that allegations of fraud warranted a full-fledged trial and proof and the omission on part of the Tribunal to afford an opportunity of cross-examination vitiated the final outcome. 

In this backdrop, the Court notes that a party alleging the non-existence of something cannot be called upon to prove the non-existence- it is the party who asserts the existence or who challenges the assertion of non-existence, who is liable to prove the existence of the same. In the case on hand, Antrix asserted that Devas offered services which were non­existent, through a device that was not available and that even the so­called intellectual property rights over the device were not available. Thus, the Court notes, "obviously Antrix cannot lead evidence to show the non­existence or non­availability of those things, either by oral evidence or by subjecting their officials to cross­examination by Devas. Devas never produced before the Tribunals any device nor did they demonstrate the availability to Devas services. All that Devas wanted was, the cross­examination of the officials of Antrix. Any amount of cross­examination of the officials of Antrix could not have established the existence of something that was disputed by Antrix."

Locus Standi of Shareholders

The appellants had assailed the impugned orders on the ground that despite the petition for winding up containing specific allegations of fraud as against the shareholders of Devas, NCLT did not give any opportunity to the shareholders. The appellants relied on National Textile Workers' Union vs. P.R. Ramakrishnan & Ors to contend that it would be contrary to every recognised principle of fair judicial procedure and violative of the rule of audi alteram partem which constitutes one of the basic principles of natural justice, to deny to the shareholders, the right to be heard before an order prejudicially affecting their interest was passed.

In this regard, the Court observes that there is no scope in either the Act or in the Rules for the impleadment of any shareholder as a respondent to the petition for winding-up. The Court further notes that the argument that the stakeholders were not given an opportunity to be heard is "just theoretical" as they were heard.

"It will be clear from the above sequence of events that (i) despite NCLT not disposing of the impleadment petition before passing final orders; and (ii) despite NCLT dismissing the impleadment petition along with the main company petition, their objections to the main company petition have been dealt, along with the objections of the ex­Director of the company in liquidation. In other words, the objecting shareholder had an effective hearing before NCLT. Though their appeal was rejected by NCLAT on the ground of maintainability, their arguments for opposing the winding up, which were just the same as that of the company, have been considered. Therefore, the objection that an opportunity was not given to the shareholders, is just theoretical, when in fact they were heard." (Para 11.8)

Incorrect Standard of Proof

It was argued before the Court that the standard of proof for cases of fraud applied by the NCLT and approved by NCLAT were completely incorrect and that the findings were recorded to be be only prima facie, which is not sufficient to order the winding up of the company. 

Averring to Antrix's case for winding up, Devas' response to the case, findings by NCLT and NCLAT, the Court notes that there isn't any perversity in the findings recorded by both the Tribunals which were in fact borne out by documents, none of which is challenged as fabricated or inadmissible. In response to the specific argument that company cannot be ordered to be wound up on the basis of prima facie findings, the Court notes that:

"the appellants cannot take advantage of the use of an inappropriate expression by NCLAT. The detailed findings recorded by the Tribunal show that they are final and not prima facie. Merely because NCLAT used an erroneous expression those findings cannot become prima facie." (Para 12.9)

Additionally, the Court also rejected the argument of the appellants that a lis between two private parties cannot become the subject matters of a petition under Section 271 (c). It notes:

"this argument is to be rejected outright, in view of the fact that the claims of Devas and its shareholders are also on the property of the Government of India. The space segment in the satellite proposed to be launched by the Government of India, is the property of the Government of India. In fact, the shareholders have secured two awards against the Republic of India under BIT. Therefore, it is neither a lis between two private parties nor a private lis between a private party and a public authority. It is a case of fraud of a huge magnitude which cannot be brushed under the carpet, as a private lis." (Para 13.1)

The Court also rejected the argument that the petition under section 271 (c ) should have been preceded at by a report by the Serious Fraud Investigation office. The Court records that this argument is unacceptable in view that there are two different routes for winding up of a company on allegations of fraud one of which does not require a report by SFIO. It notes:

" under the 2013 Act there are two different routes for winding up of a company on allegations of fraud. One is under Section 271(c) and the other is 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, have now taken a new avatar under Section 224(2) read with Section 213(b). It is only in the second category of cases that the report of the investigation should precede a petition for winding up." (Para 13.2)

Lastly, the Court also categorically rejects the argument that the winding up of Devas was motivated by fraud to deprive Devas, of the benefits of an 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. In this regard, it observes:

" If as a matter of fact, fraud as projected by Antrix, stands established, the motive behind the victim of fraud, coming up with a petition for winding up, is of no relevance. If the seeds of the commercial relationship between Antrix and Devas were a product of fraud perpetrated by Devas, every part of the plant that grew out of those seeds, such as the Agreement, the disputes, arbitral awards etc., are all infected with the poison of fraud. A product of fraud is 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 can never stand as an impediment. " (Para 13.5)

Responding to the plea that the act of winding up would send a "wrong message to international investors" the Court observes: 

"We do not know if the action of Antrix in seeking the winding up of Devas 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 an 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."

Observing this, the Court dismissed the appeals without costs. 

Citation : 2022 LiveLaw (SC) 57

Appearances: Senior Advocate Mukul Rohatgi for Devas, Senior Advocate Arvind P Datar for Devas Employees Mauritius Pvt Ltd, Additional Solicitor General N Venkataraman for Antrix, Additional Solicitor General Balbir Singh for Union Govt

Click here to read/download the judgment