This is the first time -- in three recent attempts -- that the government has been able to successfully invoke the Companies Act, 2013, for the takeover of the board of a private company. Its two previous attempts in different cases did not pass muster with the courts.
Section 241 of the Companies Act, 2013, corresponds to Section 397 under the 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 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," noted 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 had in December 2017 moved the National Company Law Tribunal 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 of personal or company assets. However, the Supreme Court stayed the tribunal's order on the ground 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 63moons -- earlier Financial Technologies -- case involving the Rs 56 billion NSEL scam. In this case, the Ministry of Corporate Affairs had 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 ground that the petitioner -- namely the central government -- cannot be treated as a member who can seek relief for oppression and mismanagement of the company. Further, the tribunal said in this case that 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.