Bombay High Court Sets Aside SFIO Investigation Order for Non-Application of Mind

Overview

The Bombay High Court in Parmeshwar Das Agarwal Vs Additional Director (Investigation) Serious Fraud Investigation Office quashed an order of the Central Government dated 6 May 2016, which had directed the Serious Fraud Investigation Office (SFIO) to investigate a closely-held private company under Section 212(1)(c) of the Companies Act, 2013.

The Court held that the statutory preconditions for invoking the SFIO mechanism were not satisfied, as the decision was based on an erroneous reading of the Registrar of Companies’ (ROC) report and on vague allegations largely outside the domain of company law. The order suffered from non-application of mind and lack of relevant material, and therefore was without jurisdiction.

Background of the Dispute

Shareholding and Business Structure

The controversy centres around Singhal Enterprises Private Limited, a Kolkata-based private limited company engaged in the manufacture of sponge iron. Its features:

  • It is a closely held company with no public shareholding.
  • The entire equity capital is split between two family groups:
    • Petitioner group (petitioners 1 to 6 and 9) collectively holding around 89.58% shares.
    • The group of one Radha Krishan and his family holding the balance 10.42% shares.
  • The company operates two manufacturing units:
    • One at village Taraimal in District Raigarh, Chhattisgarh.
    • One at village Hirma in District Jharsuguda, Odisha.

Management of units was informally divided: the Raigarh unit was under the control of certain petitioners, whereas the Jharsuguda unit was under the control of Radha Krishan and his sons.

Family Arrangements and MOU

Three brothers (including petitioner No.1, Radha Krishan and Parmanand) and their respective families were involved in several business ventures. Disputes over division of family businesses and assets culminated in:

  • Execution of three Memorandums of Understanding (MOU) dated 24 April 2007.
  • Under these arrangements:
    • Parmanand and his family exited Singhal Enterprises Private Limited by selling their entire shareholding to the group of petitioner No.1.
    • In exchange, Parmanand’s group obtained exclusive control of another sponge iron company, B.S. Sponge Private Limited.
    • It was agreed that the Jharsuguda unit of Singhal Enterprises Private Limited would be demerged to a separate company, Singhal Enterprises (Jharsuguda) Private Limited, controlled by Radha Krishan’s group.

A scheme of demerger was jointly promoted before the Calcutta High Court through Company Petition No.384 of 2007 seeking court sanction.

Civil Suits and Litigation Cascade

Subsequently, the family settlement unraveled:

  • Parmanand resiled from the MOU, opposed the demerger scheme and:
    • Filed Civil Suit No.47 of 2008 in the Calcutta High Court seeking revocation of the MOU and injunctive reliefs.
  • Radha Krishan and his group eventually aligned with Parmanand and also sought to avoid their MOU obligations.
  • The Calcutta High Court:
    • On 3 August 2010, by a common order in interlocutory applications, held that pendency of the suit could not be used as a ground to stall implementation of the outstanding obligations under the MOU.
    • On 17 January 2011, sanctioned the demerger scheme.
  • Appeals were preferred against these orders:
    • The appeal against the interim order dated 3 August 2010 was dismissed by a common judgment dated 12 October 2012.
    • The appeal against the demerger sanction order remained pending, with consequential impact on the effective implementation of the scheme.
  • Meanwhile, in November 2014, Radha Krishan’s company (Jharsuguda) moved for withdrawal from the demerger scheme, which the original company opposed.

In addition, petitioner No.1 filed Civil Suit No.18 of 2011 for specific performance of the MOU; both this suit and the earlier suit of Parmanand continued to be sub judice.

Effect on Statutory Compliance

The intense family and shareholder dispute had direct repercussions on corporate compliance:

  • Consolidated accounts of Singhal Enterprises Private Limited could not be prepared after 31 March 2007 due to non-cooperation from the Jharsuguda unit’s controllers.
  • However:
    • Unit-level accounts (e.g., for Raigarh unit) were stated to be regularly drawn and audited.
    • Annual accounts for 2006-07 were audited, approved at the AGM on 27 September 2007, and disclosed in demerger proceedings.
  • The assessee company received several notices from the ROC for:
    • Non-filing of annual accounts and annual returns.
    • Failure to hold Annual General Meetings (AGMs).
  • The assessee responded in detail, explaining:
    • Pending litigation.
    • Lack of access to information about the Jharsuguda unit.
    • Steps taken to comply where practicable.

In parallel, the directors invoked Section 633 of the Companies Act, 1956 before the Calcutta High Court (Company Petition Nos. 475 and 112 of 2010/2012) seeking protection from prosecution. Interim orders were passed restraining the ROC from prosecuting them during pendency of those petitions.

Recourse to Company Law Board

To address AGM-related issues, the assessee approached the Company Law Board (CLB), Kolkata, through Company Petition No.62 of 2012. The CLB:

  • On 16 April 2012, permitted AGMs for Financial Years 2007-08 to 2010-11 to be convened.

Yet, in the absence of consolidated financial information from the Jharsuguda unit:

  • AGMs could be convened but accounts could not be approved.
  • Meetings were consequently adjourned sine die.