Merger Process Sanctioned By Court Under Companies Act Cannot Be Reopened Through Criminal Complaint Without Evidence Of Suppression Of Material Facts: Karnataka HC

The Karnataka High Court has considered the question of whether a merger process, sanctioned by the Court, can be reopened due to the concealment of material facts.

The Bench of Justice Hemant Chandangoudar observed that matters already adjudicated upon in proceedings under the Companies Act cannot be reopened through criminal complaints unless there is evidence of suppression of material facts.

Senior Counsel Udaya Holla appeared for the petitioner, while Senior Counsel Prabhuling K Navadagi appeared for the respondent.

The petitions challenged proceedings before the LIX Additional City Civil and Sessions Judge, Special Court, under the Companies Act, 2013 for offences under Sections 36, 448, and 447 of the Companies Act, 2013, and Sections 68 and 628 of the Companies Act, 1956.

The Serious Fraud Investigation Officer (SFIO) filed a complaint under relevant sections, alleging irregularities by Kingfisher Airlines Limited (KFAL) and its associates. The prosecution claimed that KFAL, led by Vijay Mallya, engaged in fraudulent activities, including manipulating accounts, fabricating documents, and causing losses to shareholders and stakeholders of DAL.

The accused, including various individuals and companies, were alleged to have committed offences such as fraudulent conduct of business, improper accounting, failure to disclose true financials, and fraudulent inducement of banks.

Roles and charges varied among the accused, including Vijay Mallya, KFAL, UB Group, and others, who were accused of conspiring to cheat, manipulate assets, and induce banks with false information. The case involved complex schemes, including pre-merger, merger, and post-merger stages, wherein the accused allegedly engaged in fraudulent activities to benefit themselves at the expense of shareholders, stakeholders, and banks.

The following principles were summarised by the Court:

i) Section 391 of the Companies Act, 1956, serves as a comprehensive code and facilitates a single window clearance for schemes of arrangement.

ii) Schemes sanctioned under Section 391 are statutorily binding on creditors and shareholders, even if they dissent or oppose, and can only be altered with the court's sanction.

iii) The jurisdiction of the Company Court in sanctioning a scheme is supervisory, not appellate, ensuring compliance with legal provisions and preventing overstepping of limits.

iv) The Company Court's role is to ensure that valuation is conducted by an independent body in accordance with the law, rather than intervening based solely on valuation discrepancies.

v) Courts should refrain from questioning the commercial wisdom of parties involved in schemes unless there is a clear violation of legal principles.

vii) When seeking to challenge a decision tainted by fraud, the proper recourse is to apply to the court that rendered the decision.

viii) Matters already adjudicated upon in proceedings under the Companies Act cannot be reopened through criminal complaints unless there is evidence of suppression of material facts.

The Court observed that, "While sanctioning the scheme of arrangement, this court accepted the valuation of the business assessed by an independent body. Additionally, the shareholders and unsecured creditors approved the scheme by requisite majority. Therefore, the merger process alleged to have been obtained fraudulently cannot be reopened by launching criminal prosecution. If the merger process is indeed obtained fraudulently, the aggrieved person or complainant has the option to approach the court in which the merger process was obtained fraudulently or challenge the scheme of arrangement sanctioned by this court before the appropriate forum. In the absence of any material to substantiate that the scheme of arrangement was obtained by suppression of material facts... the initiation of criminal prosecution against the petitioners accused will be an abuse of the process of the law."

Accordingly, the petitions were allowed, and the impugned proceedings were quashed.

Appearance:

Petitioner: Senior Counsel Udaya Holla, Counsel Amar Correa

Respondent: Senior Counsel Prabhuling K Navadagi, Counsel Madhukar Deshpande

Cause Title: Srividya CG vs Serious Fraud Investigation Office

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