CASE BRIEF: K.V. BRAHMAJI RAO V. UNION OF INDIA

CASE NAME	K.V. BRAHMAJI RAO V. Union of India
CITATION	Company Appeal (AT) No.126 of 2019
COURT	National Company Law Appellate Tribunal, New Delhi
BENCH	Justice Jarat Kumar Jain
APPELLANT	K.V. Brahmaji Rao
RESPONDENT	Union of India
DECIDED ON	August 17, 2020

INTRODUCTION 

The case of K.V. Brahmaji Rao v. Union of India deals with the involvement of directors in financial scams and powers provided in provisions under section 337 and 339 of the Companies Act, 2013 to freeze assets of these individuals. This case also informs about the roles and responsibilities of directors in corporate governance and how they should exercise their powers to ensure no fraudulent activities is conducted. This case emerged as a result of one of India’s largest banking scams, which involved the Punjab National Bank and the now fugitive diamond merchant, Nirav Modi. The NCLT ruled that K.V. Brahmaji Rao, Executive director of the Punjab National Bank, along with several others, was also part of these fraudulent activities and ordered to freeze his assets under provisions of the Companies Act, 2013. Rao then filed an appeal against this order stating that freezing his assets were not justified and in violation of the principles of natural justice as he was not given any chance to defend him and provide his side of the case before this ruling. The National Company Law Appellate Tribunal’s decision in this case highlighted the importance of substantial evidence proving involvement of individuals in fraudulent activities and scams before imposing penalties on them. It also serves an important reminder to follow due process before giving the ruling as the NCLT in this case had not given opportunity to the appellant KV. Brahmaji Rao to present his arguments before the tribunal. This case serves as an important guideline for future corporate governance issues.

FACTS

In case of K.V. Brahmaji Rao v. Union of India, the respondents had initiated a petition against the appellant and some other individuals who were believed to be involved in the Punjab National Bank fraud involving Nirav Modi. Mr. K.V. Brahmaji Rao, who was the executive director of PNB at the time of the fraud was also made an accused in this case. The NCLT, on 31.09.2019 passed the orders to freeze the assets of Rao and the other accused whose involvement led to financial losses to the bank. The order given by NCLT was based on the allegations that Rao, as executive director of the bank, had information about the fraudulent activities and scam but he did not exercise his powers to stop them and let them occur. Allegations were made that Rao had neglected his duties and failed to do appropriate checks which led to the massive scale fraud by Nirav Modi causing significant losses to the bank. Thus, the order to freeze his assets was a protective measure while the investigation on the fraud was being carried on. Rao claimed that the ruling of the NCLT was in violation of the principles of natural justice as it did not give him sufficient opportunity before giving the decision against him. He also argued that there was no sufficient evidence to show his involvement in any financial mismanagement and he had always acted in good faith following all the regulatory procedures when he was the executive director of PNB. After hearing the counsel for both the parties, the National Company Law Appellate Tribunal set aside the impugned order which was passed by the NCLT and lifted the freezing of the assets of Mr Rao giving him access to his finances. The court ruled that there was absence of sufficient evidence to prove that he was involved in the fraudulent activities related to the scam and thus cannot be made to suffer just because he was the executive director of PNB at the time of commission of the scam.

ISSUE RAISED

1. Freezing of Asset and filing of lawsuit: The NCLT had ordered to start proceedings against 19 individuals, including the appellant K.V. Brahmaji Rao, in connection to a scam of Rs. 14,000 crore involving diamond merchant Nirav Modi Group and Gitanjali Group. Questions were raised on validity of this order as it lacked proper legal backing.
2. Principles of Natural Justice: Another issue raised was that the NCLT violated the rights of the appellant by issuing the order and freezing the assets without giving him proper chance to be heard before the tribunal and present his side of the case. 
3. Section 337 and 339 of the Companies Act, 2013: Interpretation of sections 337 and 339 which relate to the action of freezing asset for fraud done by company officers is also dealt with. Questions as to whether the assets of heads of organizations can be frozen without clear evidence of their involvement in the fraud activities also emerged.

APPELLANT'S ARGUMENTS (K.V. Brahmaji Rao)

• The Appellant argued the order made by the NCLT was made without hearing him giving him sufficient opportunity to present his case as he was not served any advance copy of the application. This resulted in violation of his rights and the principles of natural justice as there was no fair hearing.
• The Appellant also contended that there was no sufficient evidence which indicated his role in the fraudulent activities and freezing his assets under provisions of sections 337 and 339 of the Companies Act was unjustified. He also cited a previous judgement in the Supreme Court case of Usha Ananthasubramanian where it was held that freezing of asset of individuals who were not directly involved in the fraud was invalid.
• The Appellant provided that the delay of 41 days made in filing the appeal was because after receiving the copy of the impugned order, examination of the documents was required for preparation of the Appeal.  Thus, it should not be the ground for dismissal of the appeal.

RESPONDENT'S ARGUMENTS (Union of India)

• The Respondent argued that the appeal filed by K.V. Brahmaji Rao was time-barred because it was filed after expiry of the stipulated time from the NCLT’s order dated January 31, 2019 and thus, should not be entertained.

• The Respondent stated that Rao was a part of the financial scam involving Nirav Modi and used his position as Executive Director of the Punjab National Bank to aid the happening of the scam.

• The Respondent also contended that there was substantial evidence and legal grounds to freeze the assets of Rao under the Sections 337 and 339 of the Companies Act based on his knowledge and involvement in the fraudulent activities relating to the Nirav Modi Scam.

JUDGEMENT

The National Company Law Appellate Tribunal, in this case, ruled in the favour of the appellant and set aside the order given by the National Company Law Tribunal stating that it was invalid. They ordered to lift the freezing of assets of Mr. K.V. Brahmaji Rao as the allegations against him to be a part of the scam done by Diamond Merchant Nirav Modi was not based on any substantial evidence. The NCLAT in its judgement stated that the evidence which was presented against Mr Rao was not sufficient enough to establish grounds proving his direct involvement in the fraudulent activities being conducted by Nirav Modi and his accomplices. The tribunal stated that due process must be followed before taking severe legal actions against individuals and there should be sufficient proof to establish direct involvement of the accused person.  With this judgement, the NCLAT also made it clear that principles of natural justice must be followed and individuals must be given a fair chance to defend themselves in the court. The order by the NCLAT to set aside the judgement given by NCLT and free the asset of Rao allowing him to access his property highlights the fact that it is important for the regulatory authorities to cautiously impose severe measures only after finding enough evidence of the fraudulent activities.

CONCLUSION

The case of K.V. Brahmaji Rao v. Union of India sets important precedent regarding the legalities involved in holding executives liable for financial misconduct. The judgement given by the NCLAT in this case underscores the importance of substantial evidence before taking severe measures against individuals who are alleged to be involved in corporate governance. The ruling by the NCLAT to life the freeze on asset of K.V. Brahmaji Rao marks the importance of following the principles of natural justice before taking action against the individuals. The decision by the NCLAT not only protected Rao but also set important precedent regarding the need of more fair and transparent legal process in the governance of corporate sector. This case also tells about the complexities and vulnerabilities that are associated with the large financial institutions like the Punjab National Bank. The lapse in governance due to which Nirav Modi could scam the PNB raises crucial questions about the duty of care which directors like Rao are expected to have while conducting their responsibilities. This calls for strict compliance of the duties which the directors must follow within corporation to prevent similar incidents of fraud in the future. This case, while clarifying the accountability of Mr K.V. Brahmaji Rao, also reflected the concepts of regulatory oversight and governance through legal frameworks in financial institutions. The judgement given in this case by the National Company Law Appellate Tribunal sets important precedent for future legal interpretations regarding the allegations of fraud in financial institutions and also for matters related to individual liability in domain of corporate governance.