Sunair Hotels Limited v. Union of India and anr.

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Facts

  1. Sunair is a public limited company[1] established in 1977 and incorporated under the Companies Act of 1956. Sunair is in the business of building and operating hotels, among other things; it is not listed on any national stock exchange and is owned by 44 shareholders.
  2.  VLS Finance Ltd., a public limited company incorporated under the Companies Act, 1956, is one of Sunair’s shareholders. VLS is a non-banking finance firm that specialises in financing ventures and engages in leasing and portfolio investments in equity securities.
  3. The record shows a tumultuous legal history between Sunair and VLS dating back to 1998. Sunair was given a plot of land by the NDMC for a hotel project in 1982. This licence was replaced with an additional licence deed signed in 1988, and possession was obtained shortly after. 
  4. Sunair formed a wholly-owned subsidiary (Sun Aero Ltd) in June 1993 as part of a joint-venture agreement with M/s Aeroflot to complete the hotel project. Sun Aero Ltd. entered into an agreement with ACCOR Private Ltd., after M/s Aeroflot withdrew from the joint venture in 1993. 
  5. The Delhi High Court in 1994, ruled in Sunair’s favour, and the company was granted possession of the land once more. Sunair transferred the development rights of the above-mentioned land to its subsidiary under a management contract with ACCOR, for the purpose of constructing the hotel.
  6. VLS and Sunair signed a Memorandum of Understanding on March 11, 1995, under which VLS would invest 7 crores in Sunair’s share capital and provide a security deposit of 10 crores, while Sunair’s promoters would contribute a total of 22 crores to the share capital.
  7. Sunair agreed to pursue re-transfer of the developmental rights pertaining to the allotted land in 1995, and as a result, applied to purchase the rights, which were priced at 21 crores. Sunair issued cheques in the amount of one crore in favour of its subsidiary to carry out the repurchase, which was then returned to Sunair’s promoters, who used the funds to purchase additional shares in the company.
  8. Thus, a total of one crore with SUNAIR as share application money paid by VLS was rotated 21 times and accounted for Sunair’s share investment of twenty-one crores. 
  9. VLS viewed this transaction as dishonest and one that jeopardised their rights under the MOU because no correspondingly proportionate shares were given to VLS, diluting their Sunair shareholding.
  10. VLS filed a complaint with the Company Law Board (hereafter “CLB”) in 1998, alleging that the company’s affairs were mismanaged and that the allotment of 2,09,916.00 shares of Sunair to Shri Vipul Gupta and 23 others was illegal, and requesting, among other things, that the CLB cancel the allotment and guide an investigation into the company’s affairs.
  11. VLS claimed in its petition that Sunair had given them shares worth Rs. 21 crores without them investing any capital, and that the shares were given to them through a fraudulent rotation of the company’s funds. This was also allegedly accomplished through a fraudulent land re-transfer between Sunair and one of its wholly-owned subsidiaries. 
  12. The CLB noted that none of VLS’ claims were supported by evidence and dismissed the petition, concluding that “on an overall assessment of the case, we conclude that the promoters [of SUNAIR] had always intended to get shares allocated against the value of the property, and that the petitioner was aware of the situation as well, and as such the transfer. As a result, the production rights transfer and retransfer are not fraudulent transactions.
  13. Following that, the criminal Court issued summonses to members of Sunair for prosecution under the Indian Penal Code, 1860, Sections 420/406/409/468/471/477-A and 120-B. In July 2009, VLS filed an application with the relevant criminal court under Sections 451 and 457, requesting that the disputed allotted shares be confiscated and that the affected owners be denied the right to exercise the rights attached to those shares.
  14. By order dated September 25, 2010, the application was granted. The contested shares were forced to be held as tainted property before the entire case could be heard by the criminal court.
  15. In 2005, VLS filed a Writ Petition under Article 226 of the Constitution of India, claiming for a direction to the Central Government to institute proceedings under Section 401 of the Companies Act, 1956 against Sunair. The learned single judge rejected the appeal by order.
  16. The Writ Petition, filed under Article 226 of the Indian Constitution, seeks to overturn the order issued by the Ministry of Corporate Affairs, Union of India, on February 29, 2016, in which they, while exercising control under Section 212(1)(c) of the Companies Act, 2013, have directed an investigation into the affairs of Sunair Hotels Limited (Petitioner Company) in the public interest. 

Contentions and Issues

Sunair Hotels Limited has filed a writ petition seeking the following reliefs:

  1. Issue a writ of mandamus, certiorari, or some other reasonable writ, order, or instructions quashing the respondent’s order dated 29.02.2016, directing the Serious Fraud Investigation Office to investigate the petitioner’s affairs under section 212 (1) (c) of the Companies Act, 2013, as unlawful, unfair, and unconstitutional. 
  2. Issue a writ or orders quashing any subsequent act performed by the respondents on the basis of the impugned order dated 29.02.2016 and ordering the respondents to produce all documents in accordance with and on the basis of which the impugned order dated 29.02.2016 was passed.

The central issue is whether (Respondent)Ministry of Corporate Affairs, Union of India’s establishment of an opinion in the public interest to order an investigation by the SFIO into the affairs of the Petitioner Company is unlawful in law due to the inadequacy of the knowledge on which the said opinion is based. 

Judgement

  1. The Central Government has discretionary power to order an investigation into the company’s affairs under the relevant provisions of the Act; 
  2. The purpose of vesting such a power in the Central Government under the Statute is to allow the Central Government to assume the power to step in where there is reason to suspect that a company is conducting its affair. 
  3. The discretionary power must not, however, be exercised by the Central Government in a way that frustrates the purpose of the statute conferring the discretion, whether due to a misinterpretation of the statute or another cause.
  4. In order to exercise this power in a rational and lawful manner, the Central Government must form an opinion that an inquiry into the company’s affairs is required;  
  5. The opinion must be founded on a wholly unnecessary or extraneous consideration; and 
  6. The opinion must be an honest opinion, made after giving adequate attention to the relevant material/circumstances applicable to the Central Government. 
  7. The materials/circumstances used to make the decision to order an investigation must show, at a minimum, that the inferences taken from the evidence in the materials/circumstances lead to certain definite conclusions. 

To put it another way, the presence of material for the formulation of an opinion is a sine qua non, and it must be prima facie demonstrable if the opinion is challenged in court. 

  1. The expressed opinion does not have to be definitive evidence that the company’s operations are detrimental to the public interest, the shareholders’, representatives’, or any other person’s interests, or are in violation of the law. 
  2. Under the applicable provisions of the Act, an investigation is exploratory in nature and in the nature of a fact-finding mission, and it can only be ordered on satisfactory grounds. 
  3. Since an investigation is an intrusion into a company’s operations, it must be requested only if the facts and circumstances in the information available to the competent authority warrant it.
  4. The Court considered the materials/circumstances on which the Central Government’s decision to order an investigation is based, to determine whether the facts necessitating the investigation actually occurred, or whether extraneous factors influenced the Central Government’s decision.
  5. When considering a challenge to a competent authority’s opinion directing an inquiry into a company’s affairs, the Court must exercise caution because it cannot sit in appeal over the opinion and cannot substitute its own opinion for that of the Central Government’s competent authority. 
  6. The following are the material available on the basis of which the Court rendered the impugned order: 

a) Numerous complaints alleging mismanagement of the Petitioner Company, by VLS, in its capacity as a shareholder of the Petitioner Company, and various Members of Parliament at the relevant time, contributed to the formulation of the Court’s opinion. 

b) The illegal allotment of Petitioner Company shares in order to increase the shareholding and successful control of one family’s members. 

c) Falsely reporting government-owned land taken on lease as a fixed asset on the Petitioner Company’s balance sheet. The said land was used to make unjust personal profits for the Petitioner Company’s Chairman-cum-Managing Director. 

d) The dishonest manner in which the Petitioner Company obtained the rights to develop the land for Rs.21 crores from M/s Sunaero Limited, a 100 percent owned subsidiary of the former. 

e) The manner in which the aforementioned responsibility is discharged in the  amount of Rs.21 Crores, relating to the rights to develop the land under lease, was discharged, namely, by rotating a meagre sum of Rs.1 crore twenty times among multiple companies and persons in a short period of six days. 

f) Fake balance sheets are prepared in order to defraud shareholders, banks, financial institutions, and the general public. 

g) In order to secure a loan, two fictitious properties were created and pledged as collateral to the bank. 

h) Stealing official files relating to the Petitioner Company prepared by the Ministry of Corporate Affairs in order to thwart the legal process and avoid legal repercussions. 

i) The factum of the aforementioned official files being recovered from the residence of the Petitioner Company’s Financial Controller pursuant to the registration of FIR No.315/2005. 

j) The Inspection Report, which concluded the investigation into the Petitioner Company’s affairs under the provisions of section 209A, revealed a number of contraventions and violations committed by the Petitioner Company and its Directors, all of which are punishable under the 1956 Act. 

The Petitioner Company’s reliance on the Hon’ble Supreme Court’s decision in Sri Ram Das Motor Transport Ltd.[2] is misplaced, in that in that case, the petitioner sought to mask his private interest in relation to the company’s mismanagement and oppression of minority shareholders, as acts endangering public interest, by filing a writ of mandamus. In that case, the Hon’ble Supreme Court categorically held that the petition did not reveal any public interest justifying the establishment of a writ petition under Article 226 of the Indian Constitution.  

In the present case, the Petitioner Company’s contention that the former’s judgement is not justified, in the public interest, is found untenable in light of the materials available to the respondent. 

The Court Relied On the Following Important Case Laws :

1.Barium Chemicals v. Company Law Board[2]

2. Corporation of Calcutta v. Calcutta Tramways Co. Ltd[3]

3. Ashok Kumar Aggarwal v. CBI[4]

4. Joseph Kuruville Vellukunnel v. Reserve Bank of India[5]

5. Sri Ram Das Motor Transport Ltd. V. Karedla Suryanarayana And Others[6]


[1] Sunair Hotels Ltd. vs Union Of India And Anr.,  LPA 390/2017.

[2] [2002] 110 Comp Cas 193; [2002] 36 SCL 361.

[3] (1966) Supp 3 SCR 949.

[4] (1964) 5 SCR 25.

[5] (1962) Supp 3 SCR 632.

[6] Sri Ramdas Motor Transport Ltd. … vs Karedla Suryanarayana and ors., 2002 110 CompCas 193 AP.

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