Central Government can authorize initiation of proceedings and the relief of freezing assets and disgorgement of property: Delhi High Court

Central Government can authorize initiation of proceedings and the relief of freezing assets and disgorgement of property as per the virtue of sections 241, 242 read with 246, and 339 of the Companies Act, 2013.

The aforementioned has been recently observed in the case that was filed in the Delhi High Court. The petition incorporated matters of:

  • Shriraj Investment & Finance Limited & Ors. v. Union of India Through Secretary & Another [W.P.(CRL) 1823/2020, CRL.M.A. 15208/2020, CRL.M.A. 11302/2021, CRL.M.A. 11304/2021]
  • Casper Consumer Electronics Pvt. Ltd. v. Union of India & Anr. [W.P.(CRL) 1414/2021 & CRL.M.A. 11968/2021]

The proceedings were taken place on September 14th, 2021, and the same was presided over by a single judge bench, consisting of Justice Yogesh Khanna.

The facts entailing the above case are hence as follows. The petitions had been filed under the purview of 241, 242, 246 read with 339 of the Companies Act, 2013, before the NCLT. It was stated that the letter calls for freezing and disgorgement of assets of 157 companies to be sold despite the fact such companies are functional. The above letter was impugned through the virtue of section 212(14) of the Companies Act. The officers of the Central government were obliged to go forth with scrutinizing the reports of the above companies. It was stated that “it was humanly impossible to examine such report, consisting of lakhs of pages within two days and then pass the impugned order”.

It was further stated that Section 212(14A) of the Companies Act came into effect on August 15th 2019, wherein for the first time power of disgorgement of properties came into effect. However, in the present case on dated June 29th, 2019, the order for disgorgement was issued hence it is a premature letter without any power. It was also stated that NCLT can’t decide jurisdiction of any issue. It was also argued that it was argued such power of disgorgement, even otherwise, can be ordered only after trial and not at filing of chargesheet as unless the State proves its case of disgorgement, no order can be passed by NCLT for such an action.

The learned counsels based their claims on precedents like Commissioner of Income Tax (Central) – I, New Delhi v. Vatika Township Private Limited [(2015) 1 SCC (1)], Hitendra Vishnu Thakur & Ors. v. State of Maharashtra & Ors. [(1994) 4 SCC 602].

The Court, while observing facts, arguments, and evidences, gave a comprehensive judgment which as follows:

  • With regards to the contention of invoking jurisdiction, it was ordained that “once the proceedings have been initiated before NCLT and if the NCLT is seized with the company petition, all contentions including power of the respondent to initiate such proceedings before NCLT must be raised before such forum and be determined in those proceedings.

Further the court, by the virtue of Section 430 if the Companies Act, also stated that jurisdiction of the civil courts can be barred in respect of the matter which NCLT has the power to determine.

  • The court, in respect of the above, by the persuasive value of the precedents in the cases of Raj Kumar Shivhare v. Directorate of Enforcement [(2010) 4 SCC 772], Arcelormittal India (P) Ltd. vs. Satish Kumar Gupta [(2019) 2 SCC 1] and State Bank of Travancore vs. Mathew K.C. [(2018) 3 SCC 85], held that the jurisdiction of the matter can only be entertained by NCLT and just because of the fact that the headquarters of Respondents fall in Delhi, doesn’t empower the Delhi High Court to entertain this petition.
  • By citing, [Kusum Ingots & Alloys Ltd. vs. Union of India, [(2004) 6 SCC 254] and SAS Hospitality Pvt. Ltd. vs. Surya Constructions Pvt. Ltd. [2018 SCC Online Delhi 11909], the court also held that the court shall not have any such jurisdiction over the said matter.
  • The court in the subject matter, took reference of judgments of Karvy Stock Broking Ltd. v. Securities and Exchange Board of India [MANU/SB/0064/2008] and Shadilal Chopra v. SEBI, [SAT, Mumbai, Appeal No.201/2009] also stated that “the reliefs for disgorgement can even be sought under section 241 and 242(1) (l) (m) de hors Section 212 (14A) amendment. The Central Government can authorize initiation of proceedings and the relief of freezing assets and disgorgement of property under Section 241, Section 242 r/w Sec.246, and Section 339/447 of the Companies Act inasmuch as disgorgement is a civil action in nature of an equitable relief and not a penal action.
  • The court while giving a concluding remark also ordered that the said letter should be treated as an executive order that flows from a statutory scheme, with the operation of 241, 242, 246 and 336 of the Act.
  • In the light of the above, the court disposed of the petition, accordingly.

Click here for the Judgment

Judgment Review by Lakshya Sharma

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