THE HON’BLE SRI JUSTICE B.PRAKASH RAO AND THE HON’BLE SRI JUSTICE R.KANTHA RAO COMPANY APPEAL Nos.15 and 23 of 2003, WRIT PETITION Nos.3780 and 17814 of 2004, COMPANY PETITION Nos.55 of 2002, 15, 56, 57, 75, 76, 77, 87, 91, 93, 94, 101, 102, 113, 115, 117, 123, 126, 127, 129, 130, 131, 132, 134 , 135 and 153 of 2003; 80, 162, 190 and 195 of 2004; 109, 110, 119 of 2005 and 77 of 2006 JUDGMENT: (per BPR, J) The main appeal being C.A.No.15 of 2003 has come up before us on a reference made by the learned Single Judge vide his order, dated 18.11.2003. Thereupon, we have taken up the main appeal along with connected batch cases, which have been posted. Heard Sri M.Anil Kumar, learned counsel appearing for the appellant and Sri Ch.Ramesh Babu, Sri B.Kantha Rao, learned Senior Counsel, Sri V.S.Raju, Sri P.Prabhakar Rao, Sri C.Ramesh Sagar, Sri Deepak Bhattacharjee, Sri S.Ravi, learned Senior Counsel appearing on behalf of Sri C.V.Narasimham, and Sri E.Manoher, learned Senior Counsel. C.A.No.15 of 2003 has been filed by M/s.Nagarjuna Finance Limited (for brevity, it will be referred as NFL Company) against order, dated 23.06.2003 passed in C.P.No.27 of 2003 by the Company Law Board (CLB). The NFL Company has filed C.P.No.27 of 2003 before the CLB for rescheduling the repayment of matured deposits collected by the said company. The CLB by its order, dated 26.06.2003 dismissed the said application. The NFL Company aggrieved by the said order, has filed the present appeal being C.A.No.15 of 2003. During the pendency of the appeal, the appellant has filed Application No.693 of 2003 to direct the Promoter, erstwhile Directors and other holding companies to arrange the funds for repayment of fixed deposits on 05.08.2003. Further, the appellant has sought for a direction from this Court to conduct investigation into the affairs of the company by making allegations against the promoter and erstwhile Directors of the NFL Company. During the pendency of the said application, the appellant has also filed Application No.802 of 2003 to implead the Promoter, erstwhile Directors and the other holding companies as respondent Nos.4 to 22 on the ground that Promoter and holding companies have filed an affidavit assuring the repayment of deposits by the NFL Company. This Court has ordered notice to the proposed respondents. The proposed respondents have filed counter affidavits and opposed for impleading. When the matter came up for hearing, the learned Single Judge while observing that the matter involves considerable importance involving larger public interest, formulated the following three points and referred the matter to the Division Bench for adjudication. 1) Whether the Company Court exercising its jurisdiction under the provisions of the Companies Act, 1956 can direct investigation into the affairs of a company by an independent agency like the Central Bureau of Investigation or any other independent investigating agency by lifting the corporate veil? 2) Whether a person not a party to the proceedings before the Company Law Board can be impleaded as party- respondent in appeal arising from an order of the Company Law Board under Section 10-F of the Companies Act, 1956? and 3) Whether failure of the company to repay the deposited amounts to the deposit-holders, can be challenged, as a matter of public interest in an appeal under Section 10-F of the Companies Act, 1956 filed against an order of Company Law Board? BACKGROUND OF THE CASE: Originally, the NFL Company was incorporated in 1982 by Promoter Sri K.S.Raju and others under the Companies Act, 1956 (for short ‘the Act’) and functioned as Non-Banking Finance Company under the Reserve Bank of India Act, 1934 (for short ‘the 1934 Act’). The Company, being Finance Company, was classified as Hire Purchase Finance Company by the Reserve Bank of India (R.B.I.) Guidelines. The Company has accepted the deposits and conducted business in hire purchase finance business. The Company has conducted the business till 1996 and 1997. Due to change of regulations by the R.B.I. regarding limits of acceptance of deposits by non-banking finance companies, the Company could not accept any further deposits and consequently the Company was forced to refund the deposits already collected. It appears, the Company has faced lot of financial crunch from 1998 and it was not able to repay the deposits in time. Hence, the Company has filed C.P.No.35 of 2000 for rescheduling of repayment of the matured deposits by extending the time ranging from 12 to 48 months. The CLB by exercising Suo Motu Powers under Section 58- A(9) of the Act, passed order, dated 29.02.2000 rescheduling the payment schedule by extending the time by 12 to 36 months depending upon the amounts to be refunded. After passing the said order, the CLB has reviewed the meeting from time to time regarding compliance of the order of CLB. It appears that the Nagarjuna Holding Pvt. Limited (NHPL), which is controlling the majority equity capital in NFL Company, has entered into Memorandum of Understanding (MOU) with M/s.Mahalakshmi Factoring Services Limited (for short, ‘MFSL’) represented by its Director Sri Muthu Swamy on 13.09.2000. As per the said MOU, the NHPL has to transfer all its shares and equity capital in favour of MFSL and all the directors of NFL Company have to resign enabling the MFSL Company to nominate its directors for the purpose of management. The MFSL Company is entitled to take over all the assets of NFL Company and to recover all the dues from its debtors. The MFSL Company has to repay all the deposits, which have been collected by the NFL Company, as per order, dated 29.02.2000 passed by the CLB. However, the NHPL Company has to repay all the secured debts from banks. In pursuance of the said MOU, the NHPL has transferred all its shares and equity in favour of the nominees of MFSL. The Directors have resigned from their posts on 1st, 2nd, 8th and 16th September, 2000 and the Managing Director, Sri Sridhar Chary resigned on 31.01.2001. In the place of resigned directors and managing director, the MFSL has appointed its nominees to the board on 16.09.2000 and 31.01.2001. The new management has paid certain deposits amounting Rs.35 Crores to the depositors also. The NFL Company, which could not pay the remaining deposits, has filed C.P.No.27 of 2003 to the CLB for rescheduling the repayment schedule by enlarging the period on the ground that the erstwhile promoter and erstwhile directors are responsible for the payment and they are not cooperating with the company. The CLB by its order, dated 23.06.2003 dismissed the said application and against the said order, C.A.No.15 of 2003 has been filed. C.A.No.23 of 2003 is filed by one Sri Bapanaiah, who has deposited an amount of Rs.40 Lakhs with NFL Company. Since the NFL Company failed to repay the said deposit, he has filed C.P.No.49 of 2003 before the CLB for payment of deposited amount. The CLB passed order, dated 31.10.2003 to the effect that the issue relating to payment is before the High Court of Andhra Pradesh, and posted the matter to a later date. Against the said order, Company Appeal No.23 of 2003 has been filed. W.P.No.17814 of 2004 is filed by the Depositors in NFL Company. It is alleged that the petitioners have deposited certain amounts with NFL Company and in spite of repeated demands, the NFL Company has failed to repay the deposited amounts. It is alleged that the erstwhile Directors of the NFL Company have advertised the NFL Company to be 2000 Crore Nargarjuna Group Company and solicited for deposit of the amounts. It is further alleged that the funds of the Company were diverted to other companies and on such allegations, the petitioners sought for investigation into the Company affairs including the change of Directors. C.P.No.80 of 2004 is filed by the Reserve Bank of India for winding up of the NFL Company under Section 45 MC of the 1934 Act. C.P.No.55 of 2002 and batch are filed by various depositors of the NFL Company. It is alleged that the petitioners therein have deposited certain amounts in the NFL Company and the period of the deposits has also matured. In spite of repeated demands, the NFL Company is not repaying the deposited amounts. The facts involved in all these matters are relating to the affairs of the NFL Company. In all these matters, the main issue is with regard to repayment of the deposited amount to the depositors and who is responsible for payment of the said amounts. Hence, all these matters are clubbed together. The learned Single Judge has formulated three questions and referred the matter to the Division Bench. First, we will take up question No.2 as the said question much depends upon the facts. Question No.2: Whether a person not a party to the proceedings before the CLB can be impleaded as party- respondent in appeal arising from an order of the CLB under Section 10-F of the Act? Originally, the appellant in C.A.No.15 of 2003 has filed Company Application No.27 of 2003 before the CLB for rescheduling the repayment schedule and the same was dismissed by order, dated 23.06.2003. Against the said order, the appeal in C.A.No.15 of 2003 came to be filed. Originally, there are three respondents in the appeal i.e. the CLB, the R.B.I. and the Registrar of Companies. Application No.802 of 2003 has been subsequently filed for impleading the erstwhile promoter, erstwhile directors and holding companies as Respondent Nos.4 to 22. The learned counsel for the appellant has submitted that though MOU has been entered by the NHPL with MFSL, the said MOU was never acted upon and that new Directors are only the nominees of Sri K.S.Raju, who is the Promoter of the NFL. He has contended that K.S.Raju as well as other Directors of holding companies gave affidavits to provide funds for payment of deposited amounts. He has further contended that matter was entrusted to the independent Chartered Accountants, M/s.Kali and Company and the said Chartered Accountants Company has submitted the report pointing out the severe irregularities committed by the promoter and erstwhile directors. It is the case of the appellant that the promoter and erstwhile directors of the NFL Company are to be held responsible for payment of the amounts on the basis of the affidavits submitted by them and on these allegations, the learned counsel for the appellant sought for investigation into the affairs of the NFL Company and for impleading them as respondents to the appeal. On the other hand, the learned counsel for the proposed respondents has submitted that the NHPL has entered into MOU with MFSL on 13.09.2000 and as per the said MOU, the shares of NHPL have been transferred to the nominees of MFSL and all the erstwhile directors have resigned from the board and MFSL has nominated its directors to the board of NFL Company. The learned counsel for the proposed respondents has submitted that in view of the transfer of shares and equity and resignation of the directors, the promoter and erstwhile directors have nothing to do with the affairs of the Company after such transfer and the new management is only responsible for the affairs of the Company. It has been much emphasized by the learned counsel for the appellant that the promoter and erstwhile directors are only responsible for payment of the amounts. In view of the serious contentions regarding the liability of the promoter and erstwhile directors, it is necessary to consider whether erstwhile promoter and erstwhile directors are liable for the affairs of the Company. It is not in dispute about the execution of MOU between NHPL and MFSL on 13.09.2000. It is mentioned in the said MOU that the NHPL has to transfer all its shares and equity pertaining to NFL Company in favour of MFSL Company or to its nominees and the promoters and directors have to resign to enable MFSL to appoint its directors to the board of NFL Company. As per the said MOU, the NHPL Company is liable to repay only the secured debts owed to bankers. The MFSL Company will succeed to the assets of NFL Company and are entitled to recover all the dues from debtors to the NFL Company. The important clause in the said MOU is that the MFSL Company assumes the entire responsibility of repayment of deposits of NFL depositors. The learned counsel for the appellant has not seriously disputed about the execution of the MOU, but he has only contended that the MOU was never acted upon and the so-called new directors are only the nominees of promoter Sri K.S.Raju. He has contended that MFSL Company is not in existence and management was never changed and records also not handed over. It is seen from the record that MOU has been signed by Sri Muthu Swamy on behalf of MFSL Company. Sri K.S.Raju, the proposed respondent No.4, has filed Counter Affidavit along with documents evidencing transfer of entire preference equity and preference capital from NHPL and its associates to the nominees of MFSL Company. The documents further show endorsements, which were made on the reverse of the certificates by NFL Company, for transfer of preference capital and equity capital. Sri K.S.Raju filed one more affidavit, dated 10th October, 2008 enclosing certain documents i.e. copies of Form 32 filed with the Registrar of Companies, Andhra Pradesh, Hyderabad showing resignation of erstwhile directors on 2nd, 8th, 10th and 16th September, 2000 and January 31st 2001 and appointment of Mr.S.Ram Murthy and Anthony James on 16.09.2000 as nominees of the board of NFL. In fact, the certificate of Gopichand Bhattaram, Company Secretary was also filed in proof thereof to record the changes. The affidavit further encloses copies of reply affidavits filed by the NFL in O.A.Nos.76 of 2003, 129 of 2002 and 430 of 2002 filed before the Hon’ble Debt Recovery Tribunal, Andhra Pradesh, Hyderabad wherein NFL has admitted the signing of the MOU between NHPL and MFSL and the change of management in NFL by mentioning about the new management of MFSL. It is brought to our notice that Mr. N.Selva Raju as the President NFL Company (under new management) has filed counter affidavit in C.A.No.7 of 2000 stating that K.S.Raju, promoter is not personally liable for payment of the amount and it is only the NFL Company liable for the payment. In the said counter affidavit, it is not denied that there was change of management. Further, Sri Muthu Swamy has also filed affidavit in C.A.No.7 of 2001 to the effect that he representing MFSL joined as new promoter of NFL Company and offered to give security relating to the property of MFSL worth of Rs.18 Crores. It is clear from the above-mentioned documents that the NHPL has transferred its shares and equity and the promoter and erstwhile directors have resigned from the respective posts and the MFSL Company has assumed the management of NFL Company along with its own nominee directors. The entries in the records of the Registrar of Companies, Andhra Pradesh, which are mentioned by the public office, go to show that the promoter and erstwhile directors have resigned and new directors assumed the charge. The new management has filed affidavits in different proceedings at different levels accepting the change of management and after paying certain deposits amounting to Rs.35 Crores. They have also filed affidavits that they have adequate assets and receivables in NFL Company to pay all the deposits and they wanted additional time in the appeal. They cannot now be allowed to dispute about the change of management. The management, which has filed the present appeal, is the same management, which has accepted the change of management and liabilities of NFL Company. Hence, we are of the view that the promoters and erstwhile directors have ceased their interests from the date on which they have transferred their shares and resigned from the post of directors. Hence, the promoter and directors are not liable for the affairs of the Company after their resignation from the board of directors and consequently they are not personally liable to pay the amounts to the depositors. Whether proposed respondents 4 to 22 are liable to be impleaded in the appeal. The appeal is filed under Section 10-F of the Act against the order of the CLB dated 23.06.2003. The appellant has filed an application before the CLB for rescheduling the payment schedule by enlarging the time. The appellant has placed certain facts and hardships in payment of deposits to the depositors. The impugned order has been passed basing on the facts stated by the appellant and other material placed before the CLB. The appeal is filed under Section 10-F of the Act and Section 10- F of the Act provides for entertaining the appeal on question of law only. The relevant provision is as follows: Section 10-F:- Any person aggrieved by any decision or order out of Company Law Board may file an appeal to the High Court within 60 days from the date of communication of the decision or order of the Company Law Board to in on any question of law arising out of such order. The question of law under Section 10-F of the Act always depends upon the facts and circumstances of the case. It is however, to be borne in mind that the question of law has to arise out of facts, which are already on record. The appeal is extension of proceedings of CLB. Since the appeal is filed against the order of CLB, the facts and material which are placed on record before the CLB should be the basis for this Court to decide any question of law arising out of the facts already on record in the appeal filed under Section 10-F of the Act. No new facts can be looked into it. In the instant case, certain material has been placed before the CLB and the CLB has passed the impugned order. Except the appellant, no other party has participated in the proceedings before the CLB. This Court has to decide the matter based on the material in the appeal under Section 10-F of the Act. If third parties are impleaded, consequent new material has to be placed in the appeal for consideration for determining the issues after impleading the third parties. But, appeal under Section 10-F has to be confined to the only question of law. In other words, Section 10-F prohibits the consideration of facts much less new facts. Hence, there is no scope for introduction of either new facts or new parties in the appeal. If new parties are allowed to come on record, it would enlarge the scope of appeal by accepting new facts and the evidence, which is against to the scope and spirit of Section 10-F of the Act. Hence, we are of the view that the Appeal under Section 10-F of the Act is confined to only question of law, and this Court has no power to add any new parties to the appeal. Whether the Company Court exercising its jurisdiction under the provisions of the Companies Act, 1956 can direct investigation into the affairs of a company by an independent agency like the Central Bureau of Investigation or any other independent investigating agency by lifting the corporate veil? The appellant has filed C.A.No.15 of 2003 against the order of CLB dated 23.06.2003 and filed an Application No.693 of 2003 for directing the promoter and erstwhile director of NFL Company to provide funds for payment of the deposited amounts. In the said application, the appellant has filed another application seeking a direction to conduct investigation into the affairs of the Company by independent agencies. The depositors have filed W.P.No.17814 of 2004 directing the Central Government to conduct enquiry by the Central Bureau of Investigation regarding the affairs of the NFL Company. In the affidavits filed in C.A.No.15 of 2003 and W.P.No.17814 of 2004, number of allegations are levelled against the promoter and erstwhile directors of the NFL Company. The respondent promoter and erstwhile directors of NFL Company have filed counter affidavits and denied all the allegations. We are not going into merits and demerits of the allegations. We are concerned with the mode of investigation into the irregularities if any committed by the Directors present and past. Sri Anil Kumar, learned counsel for the appellant as well as Sri M.V.Durga Prasad, learned counsel for the depositors have contended that there are severe irregularities committed by promoter and erstwhile directors including diversion of funds from NFL Company to other Companies and consequently there are no amounts in the Company for repayment of the deposits and submitted that if thorough investigation is carried out by an independent agency like C.B.I., fraud and irregularities committed by the promoter and erstwhile directors would come out and it would be beneficial to the depositors. On the other hand, Sri S.Ravi, learned Senior Counsel for the proposed respondents has submitted that there are sufficient provisions in law to safeguard the interests of the depositors and the members of the Company and there are certain provisions to conduct investigation into the affairs of the Company including the misdeeds of past directors and penalties thereof. The learned counsel has submitted that the persons appointed under the Act are more competent to go into the affairs of the Company instead of outside agency, which is not well versed with the intricacies of working of the companies. The learned counsel further submitted that there is no material on record to show that the promoter and erstwhile directors have committed irregularities and it is only to put pressure on them, the present management and depositors are seeking for investigation through CBI. In the background of the above rival contentions, whether this Court can exercise the power under the Act or order investigation through independent agency. In the course of arguments, it is suggested by Sri Anil Kumar and Sri M.V.Durga Prasad that a High Power Committee may be appointed to look into the affairs of the Company but Sri S.Ravi, learned Senior Counsel did not accept the said proposal. The Act is a self-contained Code containing relevant and adequate provisions right from incorporating the Company till winding up of the company and payment of amounts to the creditors even after winding up of the company by the independent authority like Official Liquidator. There are two sets of remedies available for the grievance against the company and its management. One set of procedure is provided for the depositors and another set is provided for the members of the Company. The depositor who is an unsecured creditor has to file application under Section 58-A & AA of the Act for the purpose of refund of his money before the CLB. The CLB on the application filed by the creditor has to conduct enquiry and pass order directing the Company to pay the amount to the said creditor. The order of CLB passed under Section 58-A & AA of the Act is enforceable under Section 634-A of the Act. As per the provisions of Section 634-A of the Act, the order of CLB is deemed to be a decree and executable under the provisions of CPC. Notwithstanding the right under Section 58-A & AA of the Act, the depositor has right to file a petition under Section 433 of the Act for winding up of the Company as the company failed to discharge its financial obligations/commitments towards its creditors. On filing the winding up petitions under Section 433 of the Act, the Court after giving opportunity to the company may pass order of winding and appoint the Liquidator to the company. Once the Liquidator is appointed, the management of the Company ceases to function and the Official Liquidator would take charge of the Company. The liquidator is entitled to recover the dues of the company or to do all the acts for discharging the liabilities of company and distribute the sale proceeds among the creditors.