The Locked Gate: Why Compelling Fraud Claims Failed to Grant Locus Standi

Introduction

The spectre of corporate fraud looms large in the digital age, making the mechanism for initiating official investigations under the Companies Act¹, a critical safeguard for stakeholders and the public interest. The core legal focus of the jurisprudence governing corporate oversight hinges on who possesses the right to demand an investigation into the affairs of a company—the critical question of locus standi. 

This was the principal issue before the NCLT², Ahmedabad, in the case of Parth Merchant v. Detox India Pvt Ltd & Ors³.. The Coram, comprising Mr. Shammi Khan, Hon’ble Member (J), and Mr. Sanjeev Sharma, Hon’ble Member (T), primarily held that a petitioner who is neither a member nor a creditor, nor a person “connected with the affairs of the company,” lacks the necessary locus standi to seek an investigation under Sections 212 and 213 of the Companies Act, 2013. Furthermore, they clarified that Section 212 does not permit intervention by private parties directly approaching the NCLT without a prior report from the ROC⁴.

The Petitioner who claimed to have a business association with Respondent No. 1 Company, filed a Company Petition under Sections 212 and 213 of the Companies Act. The petition alleged widespread manipulation of records, illegal allotments of shares, fraudulent valuations, diversion of funds (including violations of Sections 185 and 186), and other statutory non-compliances, primarily implicating the R-1 Company, its holding company (R-2), associated concerns (R-3, R-4), and various directors, officers, and professionals (R-5 to R-16). The Petitioner sought an interim order directing the ROC (R-17) to submit a preliminary report and a final relief for a thorough investigation into the affairs of the R-1 Company.

The Legal Battle: Prima Facie Fraud vs. Strict Locus Standi

The Appellant/ Petitioner contended that he possessed prima facie evidence of ongoing corporate fraud, including illegal share allotments and fund siphoning, warranting an investigation under the Companies Act, and asserted his connection to the company’s affairs through a Board Resolution from a creditor company authorizing him to act on its behalf. The Petitioner cited key NCLAT and High Court precedents to establish the necessity and scope of judicial intervention regarding company investigations. 

R S India Wind Energy Pvt Ltd vs PTC India Financial⁵ and Vijay Kumar Arora vs Jaswant Rai Arora⁶ were leveraged to affirm the NCLT’s broad power to order an investigation upon a mere prima facie satisfaction of malpractices and violations, even suo motu in matters of oppression and mismanagement, highlighting that detailed proof of fraud is the Inspector’s duty, not the applicant’s. Furthermore, the Delhi High Court in  Sunair Hotels Ltd vs UOI⁷, concerning the SFIO’s investigation powers under Section 212, was cited to emphasize the stringent, high threshold specifically, the necessary grounds and sufficient material required by the judiciary before ordering a drastic measure like a public interest investigation. Collectively, the Petitioner used these rulings to argue that an investigation is warranted whenever serious allegations of fraud and manipulation exist, thereby underscoring the necessity of judicial intervention in such grave corporate matters.

In opposition, the Respondent Company argued for the dismissal of the petition on the grounds of maintainability and lack of locus standi, stating that Section 212 does not permit direct NCLT intervention by a private party without an ROC report, and that the Petitioner failed to meet the mandatory eligibility criteria under Section 213 as he was neither a shareholder nor a creditor, a claim further undermined by his contradictory assertions regarding his status. The core of the legal battle, however, was the Respondent’s strict statutory interpretation, which the NCLT ultimately adopted. The Respondent’s analysis zeroed in on the explicit language of the Companies Act, contending that the precedents supporting an investigation are only applicable when the statutory threshold for locus standi is met. 

The Respondent further urged that Section 212 empowers the Central Government, not a private individual approaching the NCLT, to trigger an SFIO probe. Crucially, regarding the NCLT’s power under Section 213, for which the Petitioner failed to establish himself as a ‘member’ or ‘any other person’ connected with the company’s affairs demonstrating a legal injury. Therefore, despite the precedents showing the NCLT’s power to investigate, the Tribunal in this case applied a strict filter, holding that the Petitioner’s lack of statutory standing not being a member, creditor, or a person with demonstrable legal interest was a fatal flaw, thus distinguishing the facts from the cited caselaws where a valid applicant was present.

The NCLT, after considering the contentions and the NCLAT’s remand order which directed the Tribunal to first address the issues of locus standi and maintainability under Section 213, proceeded to resolve the core dichotomy between the Petitioner’s allegations of grave fraud and the statutory requirement for standing. The Tribunal focused strictly on the prerequisites for invoking its jurisdiction under the Companies Act, 2013. It concluded that the prayer for directing the ROC to submit a report and consequently initiating an investigation under Section 212 was untenable as a private party cannot circumvent the statutory scheme by bypassing the ROC and directly approaching the NCLT. The initiation of Section 212 proceedings requires a statutory trigger which was absent.

The NCLT reached its decision by upholding the statutory structure, emphasizing that serious allegations, however compelling, cannot override the fundamental requirement for the applicant to possess the requisite locus standi as defined by the law. The integrity of the process demands that even the gravest allegations must be presented by a party with the requisite locus standi, as judicial remedies cannot be sought by strangers to the statute.” Since the Petitioner did not fall into any of the eligible categories under the operative Sections, the Tribunal found the petition not maintainable and accordingly dismissed it.

Conclusion

The case of Parth Merchant (Supra) underscores the jurisdictional limitations of the National Company Law Tribunal (NCLT) when entertaining petitions for investigation under the Companies Act, 2013. The Ahmedabad Bench unequivocally established that the initiation of an investigation, particularly under Section 212 and Section 213, is governed by stringent statutory criteria. An applicant must possess clear locus standi, either as a qualifying member/creditor or a person demonstrably connected with the company’s affairs, a hurdle the Petitioner failed to cross due to his ambiguous and contradictory status. Furthermore, the ruling reaffirms that private individuals cannot bypass the prescribed corporate governance structure to trigger an SFIO investigation under Section 212 without a prior, mandatory report from the Registrar of Companies.

This order reinforces the gatekeeping function of the NCLT and is likely to have significant future ramifications for corporate litigation. The emphasis on strict locus standi will make it harder for third parties or unconnected individuals, even those purporting to act in public interest or on behalf of a statutory entity, to initiate costly and disruptive corporate investigations. This serves to protect companies from vexatious or speculative petitions. The ruling provides necessary clarity that the route for a private individual to trigger a large-scale government investigation is indirect, requiring the involvement of the ROC first. This structure promotes procedural discipline in corporate law enforcement. Future petitioners attempting to qualify under the “connected with the affairs of the company” clause of Section 213 will need to prove a much stronger, substantive, and direct relationship, moving beyond mere business association or a tenuous link through a third party.

The order’s reliance on a strict interpretation of locus standi gives rise to several questions for reform. Should the law be amended to allow the NCLT to consider the severity of the alleged fraud, irrespective of the petitioner’s standing, where the allegations are of a massive scale and clearly against ‘public interest’? Could the MCA⁸ issue guidelines or amendments to Section 213 to clearly define what constitutes a “person connected with the affairs of the company” to remove ambiguity and prevent contradictory assertions in court?

Citations

1. Companies Act, 2013
2. National Company Law Tribunal
3. Parth Merchant v. Detox India Pvt Ltd & Ors. (CP/39(AHM)2022)
4. Registrar of Companies 
5. R.S. India Wind Energy Private Ltd. v. PTC India Financial Services Ltd. & Ors. 2016 SCC OnLine NCLAT 10
6. Vijay Kumar Arora v. Jaswant Rai Arora, 2017 SCC OnLine NCLAT 522
7. Sunair Hotels Ltd. v. Union of India, 2000 SCC OnLine Del 756
8. Ministry of Corporate Affairs

Expositor(s): Adv. Shreya Mishra