New Delhi: In a significant ruling on corporate fraud investigations, the National Company Law Appellate Tribunal (NCLAT) has clarified that the National Company Law Tribunal (NCLT) cannot directly order an investigation by the Serious Fraud Investigation Office (SFIO). The tribunal held that under the Companies Act, the authority to initiate an SFIO probe rests exclusively with the Central Government and must follow the statutory process prescribed under law.
Modification of Jurisdictional Directives
The judgment came while hearing an appeal challenging an earlier NCLT order that had directed an SFIO investigation. Partly allowing the appeal, the NCLAT modified the direction and referred the matter to the Secretary of the Ministry of Corporate Affairs instead of permitting a direct SFIO probe. The tribunal directed that the matter may be examined through an Inspector or Inspectors in accordance with legal provisions.
A bench comprising Justice Mohd. Faiz Alam Khan and Technical Member Naresh Salecha observed during the proceedings that Sections 212 and 213 of the Companies Act clearly vest the discretion to refer cases to the SFIO with the Central Government. The tribunal also relied on an earlier NCLAT precedent that held the Adjudicating Authority was not competent to “straight away direct” an SFIO investigation.
Allegations of Fund Diversion and Misleading Disclosures
However, the appellate tribunal upheld findings relating to alleged fraudulent transactions and contribution directions issued against the parties involved. During the hearing, records indicated that shares in a Singapore-based subsidiary were claimed to have been sold in 2018, yet the corresponding investment continued to appear in the company’s balance sheets until 2022.
The tribunal described the situation as serious, observing that creditors were allegedly misled and that the sale proceeds had been kept beyond their reach. The order further noted that the agreement cited to justify the diversion of sale proceeds appeared, prima facie, to have been drafted subsequently with the intention of siphoning funds away from the corporate debtor.
Compliance Failures and Suspended Directors
The bench also remarked that the suspended directors failed to provide satisfactory explanations regarding the transfer of sale proceeds. Additionally, they allegedly remained non-cooperative during the Corporate Insolvency Resolution Process, raising concerns about transparency, disclosure practices, and corporate governance standards.
Legal experts believe the ruling could become an important precedent in future corporate fraud and insolvency-related litigation. The judgment clearly establishes that while judicial bodies such as the NCLT and NCLAT may comment on the need for investigation, the ultimate administrative authority to activate the SFIO lies solely with the Central Government.
Navigating Complexities in Corporate Governance
Corporate law specialists point out that an SFIO investigation is considered one of the most serious forms of corporate scrutiny under the Companies Act. Such probes are generally invoked in cases involving large-scale financial irregularities, fund diversion, shell company networks, accounting manipulation, and complex corporate fraud structures. In such matters, the government evaluates available records, preliminary findings, and regulatory inputs before deciding whether an SFIO investigation is warranted.
According to a legal expert associated with the Future Crime Research Foundation, corporate fraud investigations have become significantly more complex in recent years due to digital transactions, layered investment structures, and cross-border fund movements. As a result, clear demarcation of powers between tribunals, regulators, and investigative agencies has become increasingly important to ensure that investigations and prosecutions are not weakened by procedural or jurisdictional challenges.
Experts further noted that the ruling sends a strong message to corporate entities, resolution professionals, and investors that tribunals may adopt a strict approach in cases involving misleading disclosures, hidden investments, or attempts to keep assets beyond the reach of creditors, even though the final decision to order an SFIO probe will continue to remain with the Central Government.
