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Company & Insolvency LawSupreme Court of India

Hari Sankaran v. Union of India & Others

Civil Appeal · 2019 INSC 691Decided 4 Jun 2019
Civil Appeal No. 3747 of 2019
Justice Indu Malhotra · Justice M.R. Shah

Background

IL&FS (Infrastructure Leasing & Financial Services Limited), a major non-banking finance company with hundreds of group companies, was found by government investigators (SFIO, ICAI, and the Registrar of Companies) to have presented a misleadingly healthy financial picture while actually being deeply mismanaged and financially unstable. The Central Government first got the NCLT to suspend IL&FS's existing board and install a new one, and then separately asked the NCLT to re-open and re-cast the company's financial statements for the previous five years. The appellant, a suspended director of IL&FS, challenged the order allowing that re-opening of accounts, after the NCLAT had already upheld it.

Decision Breakdown

The Supreme Court held that under Section 130 of the Companies Act, a tribunal can order re-opening of accounts if it finds either that past accounts were prepared fraudulently OR that the company's affairs were mismanaged in a way that casts doubt on the reliability of the financial statements: the two grounds are alternatives, not both required. Since investigative reports (SFIO, ICAI, RBI) and the earlier, unchallenged order suspending the board had already established mismanagement, that condition was satisfied even without a separate finding of fraud. The Court also rejected the argument that natural justice was violated, since the erstwhile directors' counsel had in fact appeared and opposed the application before the order was passed. Given the scale of public money involved and the larger public interest, the Court declined to interfere and dismissed the appeal.

Lesson Learnt

When a law allows action on "either of two conditions," courts will enforce it as a true either/or test: a company facing fraud allegations cannot escape scrutiny merely by disputing one ground if the other (such as mismanagement) is independently established on the record.

Hari Sankaran v. Union of India & Others – Legal Case Shots | LegalAware