Madras High Court Refuses to Quash FIR in Ind Barath Power Gencom Case Despite SBI Dropping “Fraud” Classification

Background of the Criminal Proceedings

The Madras High Court dealt with a batch of Criminal Original Petitions seeking quashing of an FIR registered as Crime No. RCBD1/2021/E/0002. The case involves alleged offences under Sections 120-B, 420, 467, 468 and 471 of the Indian Penal Code, along with Section 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988.

The FIR names eight accused persons. The first accused is the company, M/s. Ind Barath Power Gencom Limited, and Accused Nos. 2 to 8 are its Directors. The petitioners before the Court were some of these Directors, including Independent Directors, seeking to terminate the criminal proceedings at the threshold.

According to the prosecution, M/s. Ind Barath Power Gencom Limited, engaged in power generation in Tamil Nadu, largely supplied electricity to Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO). The company allegedly suffered severe cash flow issues when TANGEDCO did not remit outstanding dues.

As on 30.06.2017, an amount of Rs.157,85,71,585/- was stated to be receivable from TANGEDCO by the company. Because of this non-payment, creditors approached the High Court and secured orders restraining TANGEDCO from disbursing funds to the company.

Subsequently, proceedings were initiated before the National Company Law Tribunal (NCLT), Chennai, and though the initial application was dismissed, an appeal before the National Company Law Appellate Tribunal (NCLAT) led to a compromise being recorded on 29.05.2018. On that date, TANGEDCO’s total liability towards the Ind Barath group was recorded as Rs.229 crores.

Despite this, loan repayment defaults continued, leading the consortium of lenders to classify the company’s account as a Non-Performing Asset and to initiate insolvency resolution under the Insolvency and Bankruptcy Code, 2016.

Forensic Audit and Fraud Classification

Role of Forensic Audit

Following admission of the company into insolvency, the Committee of Creditors held a meeting on 21.01.2020 and commissioned a forensic audit by M/s. BDO India LLP. The audit was mandated to cover the period from 28.05.2012 to 28.05.2017.

The audit report dated 24.07.2020 allegedly revealed serious irregularities, including:

  • Diversion of bank funds
  • Manipulation of financial statements
  • Falsification of books of account and supporting records

Based on this report, the consortium of banks, led by State Bank of India, placed the matter before its Fraud Identification Committee (FIC) under the Stressed Assets Resolution Group, Mumbai.

Declaration of Account as “Fraud”

In a meeting held on 14.09.2020, the Fraud Identification Committee classified the account of M/s. Ind Barath Power Gencom Limited as “Fraud”. This classification was over and above its prior NPA status with effect from 28.05.2017.

The “Fraud” tag was then reported to the investigating agency, which led to registration of the FIR in Crime No. RCBD1/2021/E/0002 by the first respondent.

Petitioners’ Contentions

Independent Directors and Limited Role

Senior counsel appearing for the petitioners, particularly Accused Nos. 5, 7, and 8, stressed that these individuals were either Independent Directors or former Directors with no role in the daily management of the company.

The petitioners contended that:

  • They were inducted solely for their expertise, as Independent Directors as defined under the Companies Act, 2013.
  • There were no precise or specific factual allegations in the FIR attributing any overt act to them.
  • They did not participate in fund diversion or fraudulent activities alleged against the company.

It was asserted that they were being proceeded against merely due to their board positions, without any concrete material indicating participation in the alleged offences.

Financial Distress Due to External Factors

The petitioners also argued that the root cause of the company’s financial distress was TANGEDCO’s failure to pay for power purchases, not any dishonest conduct by the company or its Directors.

According to them:

  • The company had availed term loans of approximately Rs.493.72 crores and working capital facilities of about Rs.316 crores from a banking consortium.
  • The inability to service these facilities arose from non-receipt of dues from electricity buyers, especially TANGEDCO.
  • The NCLT’s order dated 29.05.2018 directing payment of Rs.229.3 crores by TANGEDCO was still not honoured, worsening the financial position.

In their view, these were commercial and insolvency issues and not matters to be criminalised.

Withdrawal of “Fraud” Classification and Exoneration

A key plank of the petitioners’ case was the subsequent withdrawal of the “Fraud” classification by the bank: