Bombay High Court Allows NSEIL Plea Against Fairwealth Financial Services, Lifts Corporate Veil

The Bombay High Court on 29 July held that courts can lift the corporate veil where a company's separate legal identity is used as a cloak for fraud and misappropriation of investor funds.

Justice Gauri Godse allowed an interim application filed by the National Stock Exchange of India Ltd. (NSEIL), directing Fairwealth Financial Services Ltd. to disclose its assets and restraining it from transferring or encumbering them after finding prima facie evidence of its involvement in the alleged misappropriation of client securities. She observed:

“In the present case, if the test of control is adopted, it is evident that the entities were incorporated for an illegal or improper purpose. Prima facie, it is seen that the corporate personality is being used as a cloak for misappropriation of funds. Therefore, to protect the interests of the investors, the corporate character has to be ignored, and the reality behind the corporate veil needs to be noted.”

NSEIL filed the commercial suit seeking recovery of over Rs. 100 crore arising from 2,418 investor claims against Fairwealth Securities Ltd. The exchange alleged that Fairwealth Financial Services Ltd. and other connected entities were controlled by common directors and promoters and had benefited from the alleged violations committed by Fairwealth Securities Ltd.

Earlier, the Court had granted ad-interim relief against Fairwealth Securities Ltd. and other defendants by directing disclosure of assets and restraining alienation. Fairwealth Financial Services Ltd. was later added as a defendant and the interim relief was extended against it. Though the company sought recall of the ex parte order, the Court permitted it to file a written statement and proceeded to decide the interim application.

NSEIL argued that Fairwealth Securities Ltd. had used connected entities as a facade to misuse client securities. It submitted that Fairwealth Tours & Travels Pvt. Ltd. was controlled by Fairwealth Financial Services Ltd., which held 99.99% of its shareholding.

The exchange relied on a Securities and Exchange Board of India (SEBI) confirmatory order dated 24 January 2020 and a forensic audit report, which allegedly revealed misappropriation of client securities. NSEIL submitted that the securities were transferred through Fairwealth Tours & Travels Pvt. Ltd., an entity promoted by Fairwealth Financial Services Ltd., and that Fairwealth Financial Services Ltd. was involved in the alleged misuse of client securities along with Fairwealth Securities Ltd. and other group entities.

NSEIL contended that the corporate veil had to be lifted to identify the actual beneficiaries of the alleged transactions and protect investors' claims. It also argued that the subsequent resignation of directors could not absolve Fairwealth Financial Services Ltd. of liability arising from the alleged misappropriation. The exchange further pointed out that Fairwealth Financial Services Ltd. had failed to file a disclosure affidavit despite the interim order.

Fairwealth Financial Services Ltd. denied that the defendants were group companies or that there was any commonality of directors. It argued that vague allegations of fraud without specific particulars could not justify interim relief. The company also contended that NSEIL's recovery claim was excessive since only 667 investor claims had been admitted by the defaulters' committee, while the suit covered 2,537 claims.

Justice Godse examined the forensic audit report, NSEIL's inspection findings and SEBI's confirmatory order. She noted that Fairwealth Financial Services Ltd. was the promoter of Fairwealth Tours & Travels Pvt. Ltd. and held 99.99% shareholding in it, while directors overlapped across the connected entities.

The Court noted that client securities from Fairwealth Securities Ltd. were transferred to Fairwealth Tours & Travels Pvt. Ltd. It observed that the securities sold from five client accounts were valued at approximately Rs. 73.30 crore, while the total value of the securities involved was approximately Rs. 82.15 crore. Further, it held that the corporate veil could be lifted as the corporate structure was being used to facilitate misappropriation of investor funds. It observed:

“The need for the protective orders in the present case, when compared with or weighed against defendant no. 7's rights and contentions, the balance of convenience tilts in favour of the plaintiff and there is a clear possibility of irreparable injury to the plaintiff. Hence, equitable relief must be granted by exercising the discretion.”

Lastly, the Bench added that “the involvement of defendant no. 7 is seen in the misappropriation of clients' securities, and it is also seen as the beneficiary of the amounts that are misappropriated. The plaintiff has therefore made out the prima facie case for securing the investors' claim received in view of the defaults committed by defendant no.1.” It noted that Fairwealth Financial Services Ltd. had not filed the disclosure affidavit despite the ex parte interim order.

Accordingly, the High Court allowed the interim application and directed Fairwealth Financial Services Ltd. to file a disclosure affidavit within four weeks containing details of its assets, properties, securities, investments, shareholdings, receivables and income tax returns for the previous three years. It restrained the company from transferring, alienating or encumbering its assets.

For Plaintiffs: Advocates Ranjeev Carvalho, Amol Rasal

For Defendants: Advocates Akansha Agrawal, Manish Bohra, Vikas Bengaul, Neloger Khan