The Hon’ble Supreme Court of India on 04.05.2020 in Usha Ananthasubramanian vs Union of India delivered by a Bench comprising Justice R.F. Nariman has clarified the true extent of powers conferred upon the National Company Law Tribunal under Sections 241 and 339 of the Companies Act, 2013. The facts of the case are that the appellant, Ms. Usha Ananthasubramanian, served as the Managing Director and Chief Executive Officer of Punjab National Bank from 14.08.2015 to 05.05.2017. In January 2018, PNB detected a large scale fraud involving fraudulent issuance of Letters of Undertaking to companies belonging to Nirav Modi and Gitanjali Gems. Pursuant to this, CBI filed a charge sheet against several officials of PNB and directors of Gitanjali Gems Ltd. The allegation against the appellant was that she failed to take adequate preventive measures and omitted to discharge her duties properly, which facilitated the fraud.
Parallelly, the Central Government filed an application before NCLT, Mumbai Bench under Section 241(2) of Companies Act alleging that the affairs of Gitanjali Gems Ltd were being conducted in a manner prejudicial to public interest. In those proceedings, NCLT by order dated 26.02.2018 passed interim orders freezing assets of several individuals including the appellant. The Tribunal also permitted withdrawal of only Rs.1,00,000 per month for personal expenses. The NCLAT vide order dated 29.07.2019 dismissed the appeal and affirmed the order of NCLT. Aggrieved by the same, the appellant filed appeal before the Supreme Court.
It was contended on behalf of the appellant by Mr. C.S. Vaidyanathan, learned Senior Counsel that Section 339 of Companies Act is not a provision of universal application. The section specifically speaks of “business of the company” and “creditors of the company”. The company in question was Gitanjali Gems Ltd. Punjab National Bank is a separate legal entity. Therefore NCLT had no jurisdiction to freeze assets of the appellant under Section 339. It was further argued that provisions creating personal liability and enabling attachment of property must be strictly construed and cannot be extended by implication to cover officials of other entities. On the other hand Mr. Sanjay Jain, learned ASG appearing for Union of India submitted that Section 339 uses the expression “any person” and therefore must be given wide interpretation to include even bank officials who were knowingly party to the fraud.
The Supreme Court accepted the submission of the appellant. The Court observed that Chapter XVI of Companies Act deals with prevention of oppression and mismanagement. Section 241(2) permits the Central Government to apply to Tribunal if affairs of a company are conducted prejudicial to public interest. Sections 337 and 339 are to be applied in aid of these powers. A plain reading of Section 339(1) shows that the Tribunal may declare personal liability of persons who were knowingly party to carrying on business of the company with intent to defraud creditors.
The repeated use of the definite article “the company” makes it clear that the provision is confined to the company whose mismanagement is alleged. The Court held that to give Section 339 the wide meaning suggested by the Union would lead to absurd results. It would enable NCLT to attach assets of bankers, auditors and other professionals who deal with the company. That was never the intention of Parliament. Such an interpretation would also be contrary to the principle of separate corporate personality. The Court further noted that penal and quasi-penal provisions must be construed strictly. Accordingly the impugned orders of NCLT and NCLAT were set aside qua the appellant. The Court clarified that this judgment will not affect investigation by CBI or SFIO which shall proceed in accordance with law.
Conclusion:
The Supreme Court in Usha Ananthasubramanian vs Union of India has reaffirmed that jurisdiction under Section 339 Companies Act 2013 is company specific. NCLT cannot freeze assets of officials of other companies under the guise of preventing mismanagement. This judgment on section 339 companies act scope freezing assets 2020 brings much needed clarity and protects professionals heading banks and financial institutions from being arbitrarily targeted in proceedings to which they are strangers.
