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Amita Prasad
5th sem. (3 years LL.B), University of Lucknow, Uttar Pradesh
Facts:
The facts may be summarised as follows: In January 2018, a major fraud at the Punjab National Bank (PNB) Mid-Corporate Branch, Mumbai, involving unauthorized Letters of Undertaking (LoUs) and Foreign Letters of Credit (FLCs) was detected. The CBI filed charge-sheets in connection with the case of the diamond merchant groups (Nirav Modi / Gitanjali). The Central Government, through the Ministry of Corporate Affairs, initiated Company Petition CP No. 277/2018 under the Act, seeking investigation into the affairs of 107 companies and 7 LLPs and, by MA No. 407/2019, sought to implead 19 persons including Mr Rao as respondents, on the ground that they had acted “dishonestly and fraudulently” in connection with the corporate entities and/or bank transactions.
Mr Rao, at the time, was Executive Director of PNB at its Head Office, New Delhi, and the NCLT’s Mumbai Bench ordered his impleading and asset-freezing under its power. Mr Rao challenged this order before NCLAT.
Issues:
1. Whether the NCLT was justified in impleading Mr Rao (who was an Executive Director of PNB, a bank) as a respondent in a company-petition under the Act (CP 277/2018) and ordering freezing of his personal assets under Sections 221/222/241/242/246/339 of the Act.
2. Whether the power conferred under section 339 (and related sections) of the Act extends to persons such as Mr Rao in the factual matrix of the petition, i.e., whether his role made him a “person concerned” so as to justify the NCLT’s exercise of such powers.
3. Whether the order of asset-freezing/attachment (in advance of investigation/trial) was in accordance with principles of natural justice, due process and correct application of statutory powers.
Law:
The reliefs derive from the Act: Sections 221, 222, 241, 242, 246 read in conjunction with Section 339 of the Companies Act, 2013. These grant powers for investigation and the Tribunal’s directions (including asset freezing) in cases of mis-management or fraud.
Additionally, the appellate jurisdiction of NCLAT under Section 421 of the Act is relevant. The threshold for impleading a person and freezing assets requires prima facie material of fraud/mis-management justifying such action. The doctrine of natural justice and fair opportunity also informs impleading.
(1) Petitioner’s Argument :
He held a limited domain responsibility at PNB (Executive Director in Head Office, not branch or IBD in its core or fraud-related functions) and that the RBI report did not specifically implicate him in the LoU/FLC scam.
That the NCLT order imposed a serious burden (asset freezing) without adequate material to show misconduct or his involvement; hence the impleading and attachment are disproportionate and premature.
That the appeal was not time-barred because he received the order copy on 11 February 2019 and filed an appeal accordingly.
(2) Opponent’s Argument :
The appellant was part of the overall fraud architecture in the PNB LoU scandal and thus prima facie suspicion warranted his impleading and asset-freeze in order to protect stakeholder interest and further the investigation.
That the NCLT acted within its power under the Act; the material furnished to it (including CBI findings, RBI observations) sufficed at the interim stage to justify freezing of assets and impleading the appellant.
That the appeal may be time-barred and should be dismissed on procedural grounds.
Analysis:
In its decision, the NCLAT observed that in light of the Supreme Court’s ruling in the Usha Ananthasubramanian matter, the Tribunal could not simply attach the assets of a person who held an executive post in a bank (PNB) but whose domain of responsibility did not directly connect with the misconduct alleged in the company petition. The NCLAT found that the NCLT’s orderred in treating Mr Rao as a “person concerned” within the meaning of section 339 given that his role did not involve the specific branch or operations in which the fraud (LoU/FLC) was detected; he was posted at Head Office, New Delhi, and was not directly connected with the Brady House, Mumbai branch which had executed the LoUs.
Further, the NCLAT held that the attachment/asset-freezing orders were premature: the evidence did not sufficiently show that Mr Rao had dishonestly or fraudulently acted with the companies under investigation, and thus the conditions precedent for exercise of s.339 were not met. By setting aside the NCLT’s order, the NCLAT emphasised that interim powers of attachment must be exercised with caution and only where there is credible prima facie material against the person concerned.
The decision also under scores the importance of causation, domain of responsibility and connection between the person’s function and the alleged wrongdoing when invoking heavy remedies like asset-freezing under corporate-law investigations.
Conclusion:
In sum, the NCLAT’s ruling in K. V. Brahmaji Rao v. Union of India marks a significant reaffirmation of procedural safeguards under the Companies Act, 2013. The Tribunal correctly held that the NCLT’s order was untenable in so far as it attempted to rope in an executive external to the core transaction and freeze his assets without sufficient prima facie material. The appeal succeeds, the impleading and asset-freezing orders against Mr Rao are set aside, and the matter is remitted without prejudice to any further proceedings if proper evidence is made out. The case thus emphasises that powerful interim remedies under s.339 cannot be applied in a mechanical or broad-brush manner; the person must be shown to be a “person concerned” in the misconduct, and fair procedures must be followed.
References
1. K. V. Brahmaji Rao v. Union of India, Company Appeal (AT) No. 126 of 2019, NCLAT (2020/2021).
2. The Companies Act, 2013, §§ 221, 222, 241, 242, 246 & 339.
3. Usha Ananthasubramanian v. Union of India, W.P. (C) No. 8714 of 2018, Delhi High Court.
4. The Legal Lock, “Case Brief – K. V. Brahmaji Rao v. Union of India (2020)”.
5. CaseMine, K. V. Brahmaji Rao v. Union of India & Ors.
6. RBI Report on PNB LoU Fraud (2018).
7. CBI Charge Sheets in PNB Fraud Case (2018).
