VIJAYA SAI POULTRIES PVT. LTD. v. VEMULAPLLI SAI PRAMEELS & ORS 

Case Name	Vijaya Sai Poultries Pvt. Ltd. v. Vemulapalli Sai Prameela & Ors
Citation	MANU/NL/0182/2021
Court	NCLT Delhi
Bench	Jarat Kumar Jain. J.
Decided On.	27th May 2021
Appellant	Vijaya Sai Poultries
Respondent	Vemulapalli Sai Prameela

IMPORTANT PROVISIONS 

• Companies Act, Section 241: talks about remedies for oppression and mismanagement and allows members or depositors to apply to the tribunal alleging such acts.   
• Companies Act, Section 59: this section deals with the issue and transfer of shares, relevant for allegations of illegal transfer of shares and forging of signatures in the present case.  
• Code of Civil Procedure, 1908, Order VI, Rule 17: provides a statutory basis for an interim injunction in civil litigations, allowing the court to restrain a party from specific actions pending the suit’s final adjudication. 

BRIEF FACTS – 

The present case revolves around serious allegations of oppression and mismanagement made against the managing director of Vijaya Sai Poultries Pvt. Ltd. Mr. Naveen Kishore, the petitioners which include members and family related parties alleged that during the financial years 2013 and 2014, Mr. Kishore unlawfully transferred shares belonging to the petitioners into his own name, these alleged transfers were executed through forged signatures and crucially without any considerations thus violating principles of corporate governance and shareholder rights. 

Further allegations were made that Mr. Kishore engaged in unauthorized alienation of company assets, specifically, he was accused of selling both movable and immovable properties belonging to the company. Many immovable assets were bought in Mr. Kishore’s name or in the names of his family members, allegedly using the proceeds of these sales for personal gain. 

The petitioners portrayed widespread mismanagement, claiming that Mr. Kishore disregarded due process and fiduciary duties while managing the company’s finances in a highly capricious and arbitrary manner, and crucially, the company’s auditors are accused of complicity in these financial irregularities, as they failed to exercise independent oversight and accountability.

The petitioners requested judicial intervention in response to these grave accusations. As a result, the National Company Law Tribunal (NCLT), Amaravati Bench, the adjudicating authority, issued an order requiring a thorough forensic audit of the business’s financial records and in order to fully examine the purported financial malaise and opacity, this audit was ordered to cover a wide range of time, going all the way back to the fiscal year that ended on March 31, 2004.

Vijaya Sai Poultries Pvt. Ltd., the appellant, contested this comprehensive forensic audit order. The appellant argued that the order lacked the prima facie finding of oppression or mismanagement required by Sections 241 and 242 of the Companies Act, 2013, and was instead based on nebulous and unsupported allegations. 

It further argued that the Adjudicating Authority’s order violated statutory procedural safeguards and basic natural justice principles because it was vague and lacked specific reasoning and the appellant also objected to procedural irregularities, specifically arguing that the provisions invoked did not warrant ordering a forensic audit, especially since the application was submitted in accordance with Rule 131 of the NCLT Rules, 2016, which deals with document production rather than investigative orders.

The appellant also emphasized the lack of hard proof to support the serious accusations, which include money theft and signature forgery and they contended that the petitioners did not specifically outline the scope and timing of the purported financial irregularities, the appellant further supported its claim that the accusations were baseless and driven by malice by citing investigations carried out by other authorities, such as FIRs that were filed but later closed for lack of evidence. 

ISSUES INVOLVED – 

1. Whether the National Company Law Tribunal (NCLT) justified in ordering a comprehensive forensic audit of the company’s books and accounts dating back to 2004, based on the allegations of oppression, mismanagement, and fraudulent transfers of shares? 
2. Whether the impugned forensic audit order was supported by adequate and reasoned findings as mandated by principles of natural justice and judicial accountability, or whether it was cryptic, vague, and hence liable to be set aside for lack of reasoned judgment.
3. Whether the petitioners (respondents in the appeal) had furnished sufficient prima facie evidence substantiating allegations of manipulation, misappropriation, and breach of fiduciary duties to warrant the extraordinary relief of a forensic audit over a protracted financial period. 

ARGUMENTS ADVANCED BY APPELLANTS – 

• According to the counsels representing the appellants, The appellants stressed that, in accordance with Sections 241 and 242 of the Companies Act of 2013, the order for a forensic audit was issued without any convincing prima facie evidence of oppression or mismanagement, they argued that in spite of the petition’s grave allegations, the adjudicatory body did not specify any particular facts or conclusions that would have supported this extraordinary remedy. 
• The accusations lacked the necessary specificity to pass judicial muster, remained ambiguous, and were made without specific evidence or supporting documentation.
• The appellants emphasized that the petitioners had not sufficiently provided details to support a drawn-out forensic audit that lasted more than ten years, nor had they sufficiently explained the timeline or occasion of the alleged wrongdoings’ discovery, and such a major investigative order was not warranted by mere accusations that were not supported by convincing evidence or a compelling story.
• The appellant’s arguments emphasized the importance of natural justice and procedural fairness, emphasizing the need for judicial and quasi-judicial orders to be transparent, well-reasoned, and unambiguous, and these requirements were not met by the contested order, which was characterized as cryptic and devoid of clearly stated justifications. As a result, it could be overturned.
• The appellants further contended that it was improper from a procedural standpoint to order a forensic audit by invoking Rule 131 of the National Company Law Tribunal Rules, 2016, which mainly deals with document production; the order’s legality was jeopardized by the procedural error.
• The appellants also highlighted the inadequacies in the affidavits annexed to the petition, such as improper stamping and insufficient verification, undermining the petition’s evidentiary findings. 
• The appellants informed the tribunal that a lack of incriminating evidence had resulted in closure of police and other agency investigations, including those that led to First Information Reports (FIRs,) and this procedural history was used to support the claim that there was no criminal activity or actionable misconduct that called for forensic auditing.
• They contended the prior clearance of allegations negated the need for further intrusive examination and guarding against repetitive or vexatious proceedings against the company and its officers.
• According to the appellants, the petition was filed with the intention of harassing the company’s management and impeding lawful business operations, and it was motivated by malice or vexation. They emphasized the pattern of delay and factual concealment by the petitioners, the non-joinder of essential parties, and the inconsistent allegations.
• Practically speaking, the appellants emphasized that the company’s operations would be paralyzed, and irreparable harm would result from the order for a forensic audit over a fifteen-year period. They asked the tribunal to take into account the remedy’s disproportionate nature in light of the unidentified claims and the serious harm it would cause to business continuity.
• Ultimately, the appellants made a strong case that the forensic audit order was an abuse of the legal system, lacked proper reasoning, was procedurally flawed, and was unsupported, in the absence of unambiguous proof and judicial accountability. They asked the appellate tribunal to revoke the order and stop the abuse of investigative authority.

ARGUMENTS ADVANCED BY RESPONDENTS – 

• The counsels for the respondents argued that, according to the respondents, Mr. Naveen Kishore, the managing director, misused his position to mismanage business affairs and systematically oppress minority shareholders. They described a pattern of unlawful activities, such as the unlawful transfer of petitioners’ shares to himself via purported forgery and without payment. They contended that this amounted to a classic instance of statutory rights violations and oppression. 
• They argued that the theft and syphoning of business funds and assets and the company’s properties were sold or alienated, and the money raised was used to buy real estate in Mr. Kishore’s and his family’s names, further it was claimed that these actions, which demonstrated egregious financial irregularity and a breach of fiduciary duties, were committed with the company auditors’ knowledge or consent.
• In order to uncover and prove the extent of financial impropriety and mismanagement within the company, the respondents defended the request for a forensic audit and they argued that, in light of the purported collusion or auditors’ failure to disclose the wrongdoings, the traditional statutory audits had been compromised or were insufficient to reveal the true picture and since the company’s operations had been carried out in secret and with record manipulation, only an independent forensic audit could guarantee transparency, truth, and the protection of shareholders’ interests.
• Given that the alleged wrongdoings involved intricate financial arrangements and spanned multiple years, the respondents contended that the petition, backed by affidavits and circumstantial evidence, established a solid basis for judicial review, they argued that the NCLT was given extensive jurisdiction and remedial flexibility in cases of oppression and mismanagement by Sections 241 and 242 of the Companies Act, 2013, including the authority to assign a forensic audit when the complexity and facts called for it.
• The Tribunal was not procedurally handicapped even if the proceedings had first relied on Rule 131 (production of documents) and Rule 11 of the NCLT Rules protected the Tribunal’s inherent authority to issue orders as needed to uphold justice or stop procedural abuse, further respondents argued that procedural details could not override substantive justice and that the specific and protracted nature of the allegations warranted the extraordinary relief requested.
• The respondents cited the need for judicial fora and courts to step in and stop ongoing harm to minority shareholders or the company’s overall interests. They argued that if a forensic audit was not conducted, ongoing mismanagement and asset diversion might go undetected and be immune to standard statutory remedies, perpetuating injustice.
• They rejected the appellant’s objections to the closure of criminal proceedings or FIRs, claiming that different thresholds and forums applied and that the results of criminal investigations did not restrict company law remedies.

JUDGEMENT – 

• The Court by The NCLAT emphasized that issuing a reasoned and speaking order is the foundation of judicial and quasi-judicial proceedings, citing the Supreme Court of India’s well-established jurisprudence. The Appellate Tribunal emphasized that any order affecting the rights of parties must not only document the outcome but also explain the rationale behind it. 
• For legal proceedings to be transparent, equitable, and accountable, this is essential, the NCLT order ordering a forensic audit was deemed confusing by the Tribunal because it made no mention of particular facts, conclusions, or analysis demonstrating the need for such a drastic measure, therefore, the order failed to maintain the minimal judicial standards required of such tribunals and was deemed to be lacking in procedural propriety.
• The Appellate Tribunal then carefully considered whether the respondents’ claims were sufficiently supported to support a request for a comprehensive forensic investigation and the Tribunal agreed that if the claims of asset transfer, theft, and forgery were accurate, they would constitute mismanagement and oppression, but it demanded that reliefs as extraordinary and invasive as forensic audits have a solid presumption, the NCLAT noted that the petitioners’ assertions lacked specifics and supporting documentation, making them vague and general and one significant flaw was the lack of specific circumstances or documentary evidence, which was cited as lessening the gravity of the accusations and even the most serious accusations cannot support extraordinary relief unless they are supported by solid evidence.
• The argument that the application that resulted in the forensic audit order was filed under Rule 131 of the NCLT Rules, 2016 which deals with document production rather than forensic investigation was given weight by the Tribunal and according to the NCLAT, these procedural errors give rise to justifiable worries regarding process abuse and the significance of closely adhering to the law, particularly when unfavorable orders are issued that have a major influence on business.
• The NCLAT also took into account the possibility of harassment, harm to the company’s reputation, and financial loss if frequent or unsupported petitions resulted in drawn-out, expensive forensic audits, and the Tribunal emphasized the possibility of judicial abuse if orders like these were issued without adequate explanation.
• While criminal and civil liabilities are not strictly coextensive, the Tribunal noted in response to arguments regarding the closure of previous police investigations and FIRs that the lack of substantial evidence against the company’s officers and directors in the earlier inquiries did not support the ordering of a new, comprehensive forensic investigation and the Tribunal upheld the significance of consistency in findings while acknowledging the disparity in standards.
• In the end, the NCLAT concluded that the NCLT’s forensic audit order was disproportionate to the unsupported nature of the claims and lacked sufficient justification and it reaffirmed that unless there are compelling and supported facts, the extraordinary remedy of a forensic audit should not be granted, the Tribunal explained that without a threshold demonstration of substantive misconduct, which was absent in this case, companies and their officers shouldn’t be exposed to open-ended scrutiny.
• Thus, the impugned order was set aside with guidance that lower courts and tribunals should at all times ensure their order are supported by clear and articulated reasons that logically follow from materials placed before them. 

CONCLUSION – 

As a result, the NCLAT declared the NCLT’s order for a forensic audit to be unwarranted and devoid of sound logic and supporting evidence and the Tribunal underlined that forensic audits and other extraordinary remedies must be based on precise, verified prima facie findings that are backed up by specific justifications and verifiable facts and since the use of such invasive measures cannot be justified by claims of fraud and poor management alone, without solid evidence to back them up. 

In balancing the need for corporate accountability with safeguards against capricious or overbearing judicial intervention, this ruling upholds the principle that judicial and quasi-judicial bodies must uphold strict procedural standards and issue well-reasoned, accountable orders.

*This article has been written by Mayur Shrestha (Presidency University Bengaluru School of Law).