Delhi High Court Quashes SFIO Probe Into Educomp, Says Govt Cannot Form Opinion Whimsically
The Delhi High Court has quashed the Central Government's order directing a probe by the Serious Fraud Investigation Office (SFIO) into the affairs of Indian edtech and digital education company- Educomp Solutions Limited.
Justice Amit Mahajan held that the Government cannot form an opinion whimsically while exercising its statutory power to order an investigation under Section 212(1)(c) of the Companies Act, 2013.
Section 212(1)(c) of the Companies Act, 2013 empowers the Central Government to order an investigation into the affairs of a company by the Serious Fraud Investigation Office (SFIO) in the public interest.
The Court held that the order directing the SFIO investigation was passed mechanically, without demonstrating the requisite application of mind to the relevant material.
Ur observed that the minutes of the Oversight Committee and the consequential order were “ex facie product of non-application of mind” and appeared to be a mere formality for initiating the investigation.
The pleas were filed by former directors and other persons associated with Educomp, challenging the Central Government's order dated August 17, 2018, directing an SFIO investigation into the company's affairs.
The petitioners questioned the legality of the decision, contending that the statutory requirements for ordering an investigation had not been satisfied.
The Court noted that the inspection and supplementary inspection reports prepared by the Regional Director did not find siphoning or defalcation of funds. It held that the other material relied upon to justify the investigation could not, in the circumstances of the case, independently sustain the decision to initiate an SFIO probe.
The Court emphasised that the power under Section 212 of the Companies Act cannot be exercised routinely or mechanically and that the authority must objectively evaluate the relevant material and apply its mind before forming the requisite opinion to order an investigation.
The Court further held that reasons subsequently furnished through affidavits or later material could not cure the defect in the original decision.
It added that the legality of the order had to be assessed on the basis of the reasons and material supporting it when it was passed.
Justice Mahajan held that powers under Section 212(1)(c) of the Companies Act cannot be exercised in a routine administrative manner, particularly in view of the safeguards inherent in the statutory scheme and emphasised by the Courts from time to time.
At the same time, the Court said that though the formation of opinion is founded on a subjective satisfaction of the authorities but the same has to be routed in objective consideration of cogent and relevant material available at the time of passing of the order.
“Mere presence of material is of no consequence unless the same is discernible from the order itself. Formation of opinion cannot also be whimsical or on unverified allegations or a third-party material unless the same is independently examined and authenticated through the scheme of the Act warranting investigation,” the Court said.
Holding that the defect went to the foundation of the investigation, the Court quashed the Central Government's order dated August 17, 2018, along with all consequential proceedings.
“Once an initial order of investigation is found to have been passed dehors the powers conferred under Section 212(1)(c) of the Act, all proceedings emanating therefrom are liable to be brought to an end,” the judge concluded.
The Court clarified that it was examining only the legality of initiating the SFIO investigation and was not adjudicating upon the underlying allegations or the petitioners' defence on merits.