Court clarifies conditions for reopening of accounts

By Deepak Sabharwal, Deepak Sabharwal & Associates
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A Supreme Court bench comprising justices Indu Malhotra and MR Shah has held that the observations made by the National Company Law Tribunal (NCLT) while making an order under sections 241 and 242 of the Companies Act, 2013, can be said to be relevant for making an order under section 130 the act.

The NCLT can make an order to reopen accounts under section 130 of the act if either one of two conditions precedent is satisfied.

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Deepak Sabharwal
Managing partner
Deepak Sabharwal & Associates

In the case Hari Sankaran v Union of India, brought by Infrastructure Leasing & Financial Services Limited (IL&FS), the Supreme Court allowed the reopening of the books of accounts and recasting financial statements of IL&FS, IL&FS Financial Services and IL&FS Transportation Networks for the last five years.

The central government had filed an application with the National Company Law Appellate Tribunal, under sections 241 and 242 of the act, for reopening and recasting of the accounts on the grounds of mismanagement by the board of IL&FS, alleging that the affairs of the company were being run in a manner prejudicial to public interest.

Counsel for the appellant submitted that the conditions laid down in section 130(1) and 130(2) of the act had not been complied with by the tribunal and sufficient opportunity had not been given to the appellant to advance argument in violation of the principles of natural justice. Under the section, the accounts of a company can be reopened and recast only if the earlier accounts were prepared in a fraudulent manner and the affairs of the company were mismanaged during the period.

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Deepak Sabharwal is the managing partner of Deepak Sabharwal & Associates.

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