GOVT INVOKES SECTION 241 FOR THIRD TIME

This is the first time — in three recent attempts — that the government has been able to successfully invoke the Companies Act, 2013, to take over the board of a private company. The previous two attempts — involving different companies — did not pass muster with the courts.

Section 241 of the Companies Act, 2013, corresponds to Section 397 under erstwhile Companies Act, 1956. The section stipulates the circumstances in which any member of a company or the Central government could apply to the National Company Law Tribunal (NCLT) to seek certain reliefs, in cases of oppression and mismanagement. “Section 241(2) of the Companies Act specifically enables the Central government to approach NCLT for reliefs, if it forms an opinion that the affairs of the company are being conducted in a manner prejudicial to the public interest,” said Sandeep Grover, partner, IndusLaw.

Section 397 of Companies Act, 1956, along with other provisions, were invoked in the Satyam Computers case in 2009 when the government took over the management of the company following an accounting scandal.

Under the new company law regime, the Ministry of Corporate Affairs in December 2017 moved the NCLT to take over the management of debt-laden real estate company Unitech, citing “public interest”. Agreeing to the plea, the principal bench of NCLT suspended the board for alleged mismanagement of funds and restrained the company directors from selling, transferring and mortgaging personal or company assets. However, the Supreme Court stayed the tribunal’s order on the grounds that the matter was already under the consideration of the apex court. The government too apologised to the Supreme Court for approaching NCLT in this case.

The most recent attempt by the government to take over the management of a private company was in June this year in the case of 63moons, earlier Financial Technologies, involving the ~56 billion National Spot Exchange (NSEL) scam. The Ministry of Corporate Affairs approached the NCLT to replace existing directors on the board of 63moons with government-appointed nominees. However, the tribunal turned down the plea on the grounds that the petitioner — the Central government — cannot be treated as a member who can seek relief for oppression and mismanagement of the company. Further, the tribunal said the petitioner must make out a case for winding up of the company on just and equitable grounds.

The Ministry of Corporate Affairs seems to have taken these lessons to heart while building a water-tight case in the IL&FS issue.