Only Central Government Can Order SFIO Probes, Not Company Tribunals: NCLAT

The National Company Law Appellate Tribunal (NCLAT) in Delhi has recently reiterated that company tribunals cannot directly order a Serious Fraud Investigation Office probe, ruling that the power to direct such an investigation rests with the Central Government.

A bench of Judicial Member Justice Mohd. Faiz Alam Khan and Technical Member Naresh Salecha relying on its own earlier decision observed,

"The procedure for investigation in the affairs of the company has been provided under Section 212 and 213 of the Companies act, 2013 and keeping in view the provisions contained under Section 213 of the Companies Act, 2013 the discretion to get the matter investigated by the SFIO only vests in Central Govt., and if after the investigation ordered by the Central Govt., it is of the opinion that the matter further required to be investigated by SFIO, it can do so. However, the discretion lies solely with the Central Govt. and the Tribunal cannot order straightaway investigation by SFIO. We do not want to devote pages on this issue as the matter has been sent at rest by a coordinate Bench of this Appellate Tribunal in Maharashtra Tourism Development Corporation"

The ruling came in a case involving Gajanan Solvex Ltd, where the company's suspended directors challenged findings that they had fraudulently kept assets beyond the reach of creditors.

During the insolvency process, the resolution professional found that Gajanan Solvex's 51% stake in its Singapore subsidiary, Rio Resource PTE Ltd, had been sold years earlier, even though the company continued to show the investment of about ₹8.85 crore in its financial statements until 2022.

The sale proceeds never returned to the company. The directors claimed the money had instead been used to settle a contractual penalty allegedly owed to UAE-based Aero Steel Resources.

The suspended directors argued that the fraud finding leaned too heavily on the forensic audit report without enough independent material to support it. They maintained that the Aero Steel transaction was a legitimate commercial settlement, not a device to siphon off funds.

They further argued that the insolvency tribunal had no power to directly order an SFIO probe. The liquidator, however, argued that the transaction was structured to keep the company's assets out of creditors' reach, pointing to the fact that the investment continued to appear in the company's books for years after the shares were allegedly sold, even as no convincing records were produced to support the claimed settlement.

The appellate tribunal agreed that the directors had fraudulently concealed the transaction.

“Thus we concur with the findings recorded by the Ld. Adjudicating Authority in terms that showing the investment of Rs. 8.85 crores in the financials of the CD till 2022 despite the same was sold way back in 2018 was nothing but an act of misguiding the creditors of the CD so that the consideration of the sale of the shareholding be kept away from the reach of the creditors of the CD.”

Addressing the directors' argument that suspicion alone could not establish fraud, the tribunal said the surrounding circumstances had moved beyond mere suspicion.

“We are of the considered view that which was only a suspicion at the stage of selling of the shareholding by the Appellant in the Rio Resource to the Bellwether and not showing it in the financials of the CD and to the contrary, despite selling of the shareholding in the Rio Resource, continuously showing as an investment of Rs. 8.85 Crores in the audited balance sheet of the CD, become a proof of fraudulent transaction when the consideration of the sale of shareholding in Rio Resource to Bellwether, was shown to have been directly transferred to the Aero Steel and it has been claimed that the whole consideration has been transferred to the Aero Steel by the Bellwether in settlement of penalty of 1.37 million USD which was imposed by the Aero Steel for non-completion of the contract.”

While upholding the contribution direction of ₹19.95 crore against the directors, the tribunal set aside the direct SFIO probe direction and instead referred the matter to the Ministry of Corporate Affairs for investigation through inspectors in accordance with law.