Nirav Modi | Independent Directors | Relief Granted

In a case dealing with the liability of independent directors for frauds and siphoning alleged to be committed by a company where they were independent directors, the National Company Law Tribunal, Mumbai Bench (“NCLT”), gave reliefs to the independent directors (partial relief to two independent directors) due to their position and lack of involvement in the day to day affairs of the company, and there being no incriminating material against them. The case also saw relief being given to an executive director, who had no connection since 2009 with the companies alleged to have committed fraud, and there being no incriminating material against him.

The NCLT decided seven (7) similar miscellaneous applications through one (1) common order (“Common Order”) in the case of Union of India vs. Gitanjali Gems Limited and Others., on 2 April 2018 (available here). Vide the Common Order, the NCLT vacated the restraint order dated 23 February 2018 (“Restraint Order”) against five (5) of the seven (7) applicants (4 being ex-independent directors, 1 being ex-executive director) and modified the applicability of the Restraint Order for the other two (2) applicants (both being ex-independent directors).

Factual Matrix:

1. The Restraint Order was passed by the NCLT against various respondents (64 in number) in the above-mentioned matter restraining the respondents from removal, transfer or disposal of funds, assets and properties of the entities and individuals until further orders. The applicants, who at some point in time, were the directors of the Gitanjali Group companies, were impleaded in the matter and the Restraint Order was also made applicable to them.

2. These seven (7) applicants had filed separate applications with the NCLT seeking vacation of the Restraint Order on various grounds including that they have not indulged in the fraud alleged to have taken place with respect to the Gitanjali Group companies.

3. The common grievance expressed in the applications was that the applicants could not even withdraw money from their bank accounts and deal with their assets for the fraud said to have been committed by someone else.

4. The common submission of the applicants was that no allegation had been made against them and no incriminating material were placed before the NCLT showing that the applicants had indulged or participated in anything that assisted or aided the alleged fraud.

5. In one of the applications, following were the key grounds taken by the erstwhile non-executive independent director to seek vacation of the Restraint Order:

(i) He had resigned from the board of directors of one of the respondents, and he had no connection with any of the respondents who have been alleged to commit fraud except continuing as an independent director until before his resignation;

(ii) Even before his resignation while he was continuing as an independent director, he did not come across any suspicious transactions warranting his interference, moreover, his appointment letter categorically stated that his commitment would be limited to certain identified days and he had no authority to operate bank accounts;

(iii) As per section 149(12) of the Companies Act, 2013, a non-executive independent director is not liable in respect of actions, omissions or commission by a company unless his involvement exists in such action or omission, it can only be initiated where there is prima facie proof that such acts occurred by his knowledge;

(iv) As per the general circular dated 29 July 2011 (available here) issued by the Ministry of Corporate Affairs, before making an allegation against the independent directors, it is the mandate to examine as to whether the violation has taken place with his knowledge attributable through board process, with his consent or connivance and whether he acted diligently or not.

(v) As per the RBI circular dated 1 July 2015 issued in the context of Master Circular on Wilful Defaulters (available here), normally a non-whole time director should not be considered as willful defaulter unless it is conclusively established that fraud has taken place in connivance with the independent director.

Findings of the NCLT:

1. The NCLT reiterated that the Restraint Order is an order passed under section 221 of the Companies Act, 2013, as an aid to investigate into the affairs of the Gitanjali Group companies.

2. Explaining in detail the rationale behind exercise of the powers under section 221 of the Companies Act, 2013, the NCLT observed that it is the duty of the NCLT to see that innocent people are not burdened by the Restraint Order. The NCLT observed that though the NCLT cannot decide who is innocent and who is culprit, but it will not become helpless to vacate the Restraint Order if no material is found against whom the Restraint Order is in force.

3. The NCLT accordingly gave reliefs to five (5) applicants (one being an ex-executive director, and other four being ex-independent directors) in the nature of vacation of the Restraint Order after observing that there being no incriminating material against them.

4. For other two miscellaneous applications involving ex-independent directors, the NCLT did not vacate the Restraint Order but gave partial reliefs in light of the facts of the case, as follows:

a. The applicant was appointed as an independent director but the NCLT was of the view that she was appointed for child care activities of the Gitanjali group companies, however, such companies were involved in diamond and jewellery which is in no way connected to child care. The NCLT observed that looking at her track record and business of the companies, it appears it was not believable that she had been taken as an independent director by looking at her expertise in child care. Also, an FIR has been filed against her under the provisions of the Indian Penal Code, 1860, along with the provisions of the Prevention of Corruption Act, 1988, and that she was already being examined by the Central Bureau of Investigation (CBI). Therefore, lifting of the Restraint Order would become an impediment if at all CBI found that any money or part of the money swindled from the bank has gone to the respondent. Accordingly, the NCLT did not vacate the Restraint Order but only modified it to the extent that the applicant can withdraw Rs. 1,00,000 per month from her bank accounts;

b. The applicant was named in the FIR filed by Punjab National Bank, being one of 16 persons against whom FIR was filed. Accordingly, the NCLT did not vacate the Restraint Order but only modified it to the extent that the applicant can withdraw Rs. 2,00,000 per month from his bank accounts.

5. The NCLT also held that if the Union of India finds any incriminating material against any of the respondents against whom the Restraint Order is vacated, the Union of India is at liberty to seek revocation of the order passed by the NCLT for such vacation.