| SooperKanoon Citation | sooperkanoon.com/47496 |
| Court | Company Law Board CLB |
| Decided On | Sep-23-1998 |
| Judge | S Balasubramanian, K Balu |
| Reported in | (2000)100CompCas665 |
| Appellant | K.R.S. Mani and ors. |
| Respondent | Anugraha Jewellers Limited and |
2. Initially, only respondents Nos. 2, 3 and 4 collectively had filed a reply to the petition and on our directions that the company should also file a detailed reply, the same was done. The respondents have, in their reply, raised a preliminary objection on the maintainability of the petition on the ground that most of the allegations contained in the petition are subject-matter of other proceedings initiated by the petitioners in other for a prior in time and as such none of the allegations should be gone into by us.
3. Arvind Datar, advocate, for the respondent initiating arguments on the preliminary objection, stated that, the petitioners have already filed a criminal complaint with the Assistant Commissioner of Police, Coimbatore, on the alleged financial irregularities and an FIR has been registered by the police. Therefore, continuation of parallel proceedings before the Company Law Board should not be permitted. He further submitted that if there are both criminal and civil proceedings on the same cause of action, then, as decided by the Supreme Court in M.S. Sheriff v. State of Madras, AIR 1954 SC 397, the civil proceedings should be stayed till completion of the criminal proceedings. Further, he submitted that the petitioners have also filed a civil suit in the court of the Subordinate Judge, Coimbatore, on some of the allegations contained in the petition. In other words, according to Datar, all the allegations in the petition are either simultaneously agitated in a criminal proceeding or in a civil proceeding. Therefore, he submitted that either the petitioners should be asked to withdraw both the proceedings in case they desire to proceed with the present proceeding in the Company Law Board or they should withdraw the present petition before the Company Law Board and continue with the earlier proceedings.
Anyway, he submitted that the petitioners cannot be allowed to proceed with multifarious legal proceedings on the same allegations.
4. Ramani, advocate for the petitioners argued that the criminal complaint filed by the petitioners was under Section 406 of the Indian Penal Code alleging breach of trust by the respondents. Even though an FIR has been registered, the investigation is still on and no charge-sheet has been filed by the State. Further, according to him, Section 406 of the Companies Act makes Sections 539 to 544 applicable to proceedings under Section 397/398 as set forth in Schedule XI and as such proceedings can be initiated under these sections even if the concerned persons are criminally liable. Relying on State of Rajasthan v. Kalyan Sundaram Cement Industries Ltd. [1996] 86 Comp Cas 433 ; [1996] 3 SCC 87, P. Jayappan v. S.K. Perumal, ITO (First) [1984] 149 ITR 696 ; AIR 1984 SC 1693 and Muthukrishnan v. State [1990] Crl. LJ 2570 (Mad), he stated that in rare cases it is the criminal proceeding which has to be stayed and not the civil proceeding. Further, he stated that since the criminal complaint is a warrant case, the punishment being three years under Section 406 of the Indian Penal Code, there is no procedure by which the complainant can withdraw the complaint and it is only the public prosecutor who can do so with the consent of the court as decided in Veerathaiah v. Ramaswamy Iyengar, AIR 1964 Mys 11.
However, he stated that the petitioners have already withdrawn the civil suits and as such there is no impediment in the petitioners' continuing with the present proceeding before the Company Law Board.
5. We have considered the arguments of counsel. It is seen that even though the petitioners have filed a criminal complaint, no charge-sheet has yet been filed and as such it cannot be said that any criminal proceeding is pending in a criminal court to consider the decisions in various cases cited by counsel. As far as the civil suit is concerned, the same has already been withdrawn. Under the circumstances, we are of the view that we could proceed with the present petition.
6. Ramani, initiating arguments on the petition stated that the respondents, in breach of a family agreement between the petitioners and respondents that the affairs of the company would be conducted on the principles of partnership, have indulged in various acts of oppression and mismanagement in the affairs of the company which have resulted in practically closing down the operations of the company.
According to him, right from allotment of shares to the petitioners till the petitioners' association with the company was terminated, the respondents have acted in a manner completely in breach of the family understanding and also against the interests of the company by diversion of funds of the company.
7. He submitted that the company was promoted by the first petitioner, father of the fourth petitioner and the second respondent, all brothers belonging to the K. R. and Sons family, which had been carrying on jewellery trade since 1934. This business was carried on in a building belonging to petitioners Nos. 2 to 4 and when the company was promoted, this building was given to the company for a consideration of Rs. 1.1 crore, which was to be treated as the petitioners' contribution towards the share capital of the company. Out of this Rs. 1.1 crore, shares were to be issued for Rs. 1 crore and Rs. 10 lakhs was adjusted as promotional expenses. All the four petitioners applied for allotment of shares as indicated below : 8. Consideration for the shares was remitted by cheques by the respective petitioners and the said shares were allotted, yet, the company has not issued all the share certificates. However, now the company is taking a stand that the total number of shares allotted to the petitioners was only 1,74,000 nil, 2,50,000 and 5,00,000 respectively, totalling to 9,24,000 shares. The company has also taken a stand that the second petitioner was, allotted 1,30,000 out of private placement and not from the promoters' quota. Later, the third petitioner and the fourth petitioner transferred, 1,50,000 shares each for a consideration of Rs. 50 lakhs. However, the respondents have taken a stand that the second petitioner had transferred 81,000 shares and the third petitioner 2,50,000 shares in addition to 1,50,000 shares transferred by the fourth petitioner. In other words, as against 7,00,000 shares that should be with the petitioners, according to the respondents, it is only 5,73,404 shares. He also referred to the bank statements of the petitioners annexed to the rejoinder to show that a sum of Rs. 1 crore was remitted for allotment of shares. Further, according to him, the transfer deeds have been forged to show that there was an alleged transfer of 1,10,000 shares from the third petitioner to the fourth respondent. Thus, according to Ramani, the entire records relating to the allotment of shares and transfer of shares have been fabricated and the petitioners have been denied the rightful entitlement to their shares. Such fabrication has also resulted in the reduction of petitioners' holding of 15.5 per cent.
shares in the company to 12.74 per cent.
9. He further stated that even though petitioners Nos. 1 to 3 held designation as wholetime directors and vice president and the fourth petitioner as director, they were not involved in the day-to-day administration of the company or with the financial dealings. These were exclusively dealt with by respondents Nos. 2, 3 and 4. Using their predominant control over the company, Ramani stated that these respondents had indulged in various acts of financial irregularities leading to a strong presumption that substantial amounts of the funds have been siphoned off by these respondents. According to him, subsequent to the first annual general meeting of the company, there was systematic deterioration in the financial affairs of the company and in spite of repeated demands by the petitioners, the respondents did not dispose the financial position of the company. Later, when the provisional balance-sheet and profit and loss account of the company made up to February 29, 1996, was received by the fourth petitioner, it was seen that a sum of about Rs. 1.37 crores was shown as loans and advances made by the company to various parties. Since, the second respondent had been pleading financial difficulties, the petitioners desired to know as to how such a large sum had been lent to various parties without the approval of the board, and as such sent a letter to the second respondent asking" for various details on June 3, 1996. The respondents did not care to send any reply. The amount advanced was as follows : 10. Ramani submitted that both Kota Jewellers and Aditya Investments have family connections with the second and third respondents, respectively. No details are available as to the justification for such advances to companies related to the directors nor are there any stipulations as to the terms of repayment. Further, in respect of Madras Building, there was no need to have made such a huge advance without any justification. In the same way, there are no details as to how Rs. 48 lakhs was given to A. M. Consultancy. Such grant of loans has to be viewed in the context of the company having been in existence only for a year and that it has not reached the full commercial potential. Therefore, Ramani stated that by way of showing as if huge amount of money has been given as advance, the same has been siphoned off by the respondents. Further, he also argued to state that even though the provisional balance-sheet shows a stock of about Rs. 76 lakhs in the show room, the actual stock was about 600 to 700 grams of gold. Thus, the entire balance-sheet has been fabricated to show as if the company has earned a gross profit of Rs. 52 lakhs and net profit of Rs. 9 lakhs.
11. In the board meeting held on June 24, 1996, this matter was raised but respondent No. 2 refused to allow any discussion on this matter. In that meeting, the audited financial results for the year ended March 31, 1996, were updated showing a net loss of Rs. 9.64 lakhs.
Respondents Nos. 5 and 6 also sought a lot of clarifications from respondent No. 2 on the financial results of the company, but no explanation was furnished. Further, Ramani pointed out that when the audited financial results of the company for the year ended March 31, 1996, were published in the Economic Times, dated July 4, 1996, it was seen that it was completely different from the one circulated to the board on June 24, 1996. As against a loss of Rs. 9.64 lakhs as circulated in the board meeting, the loss as shown in the publication was Rs. 12.81 lakhs. There were also variations in the total sales as well as total expenditure. This clearly shows that the respondents have been fabricating the accounts of the company. Accordingly, the petitioners addressed a letter to the company on July 12, 1996, to consider appointment of a special auditor to examine and report on the affairs of the company and to take out a physical verification of cash and inventories. They also took up with the statutory auditors seeking clarification on the discrepancies between the financial results circulated to the board and published in the Economic Times, There was no reply.
12. In the second annual general meeting held on September 4, 1996, there were proposals as special resolutions to reduce the remuneration of all the directors and when the petitioners arrived at the meeting" hall, they found a lot of outsiders including goondas and rowdy elements posing threat and intimidation to the petitioners and no discussion was allowed to take place either on the accounts or on the various resolutions. As against the special resolutions for reduction of remuneration, resolutions were modified to remove the first petitioner from the post of whole time director and the second and third petitioners from the post of vice presidents and the fourth petitioner was not re-elected as a director. Even though poll was taken in respect of all these resolutions, no proper procedure was followed and forged proxies were used. Further, even the ballot papers had been printed in advance for removal of the petitioners as against the proposal for reduction in remuneration. There were no proposals for amendment to the original special resolutions nor were such amendments put to vote. Ramani submitted that the entire episode had been stage-managed by the respondents to oust the petitioners from the management of the company even though the company was incorporated as a family company with substantial contribution from the petitioners. This according to Ramani exhibits complete lack of probity on the part of the respondents. In this process, various provisions of the Companies Act like Sections 284, 189(2), 176, 172 and 173 were completely flouted. His allegation is that the respondents were aggrieved that the petitioners had questioned the acts of commission and omission and misfeasance on the part of the respondents. This prompted the petitioners to file a criminal complaint with the Commissioner of Police, Coimbatore, which has been registered as an FIR later.
13. Further, learned counsel for the petitioners pointed out that as per books of account, the amount of loan given to Kota Jewellers was shown to have been refunded yet these amounts have been later on siphoned off by the respondents, In the same way, even though Aditya is reported to have refunded the advance subsequent to March 31, 1996, yet, the books of account do not reflect the same.
14. Aggrieved by the proceedings in the annual general meeting held on June 4, 1996, the petitioners filed a suit challenging the resolutions passed in that meeting and the court appointed an advocate commissioner to peruse the records and registers of the company. The advocate commissioner has furnished an adverse report to the court regarding the deliberations in the meeting. Having not been satisfied with the removal of the petitioners from the board, on September 18, 1996, the board has appointed the fourth respondent (whose post as vice president of the company was to be kept vacant as decided in the general meeting) and also two sons of the second respondent as directors. It has also appointed the nephew of the second respondent, viz., the seventh respondent to the board. Thus, the respondent group has taken over the entire management of the company to the exclusion of the petitioners' group. He also submitted that there is no business activity in the show rooms of the company as the staff have been removed and various furniture and fittings have been disposed of. This way, learned counsel submitted, that the reputation and goodwill of K. R. and Sons has been brought to disrepute.
15. Ramani, referring to para. 37 of the petition stated that the appointment of the second respondent as the managing director of the company is in violation of Section 269 read with Schedule XIII of the Companies Act. Since the second respondent has served a period of detention under the COFEPOSA for about six months in 1975, the approval of the Central Government should have been taken before he was appointed as the managing director, which the company did not do. Since the petitioners came to know of the violation only in March, 1996, they asked the second respondent to step down from the post of managing director and get himself re-appointed with the approval of the Central Government which the second respondent refused to do. The petitioners have taken the matter with the Registrar of Companies furnishing necessary documentary proof of the second respondent having suffered detention under the COFEPOSA and the matter is still under examination by the Registrar. In the meanwhile, counsel submitted, the third petitioner filed a civil suit in Coimbatore, impugning the appointment of the second respondent as a director and in those proceedings the second respondent has admitted his detention. However, the second respondent has taken a stand in those proceedings that the civil court has no jurisdiction in this matter and only the Company Law Board has jurisdiction. This suit has later been withdrawn as the same is being agitated in the present proceedings.
16. Ramani also referred to the allegation regarding the loan given to the fourth respondent of about Rs. 5 lakhs during the year 1995-96, which is in violation of the provisions of Section 295. He also stated that for the Madras Building, an advance of Rs. 35.5 lakhs is shown to have been given while as per agreement with the vendor, an amount of Rs. 27 lakhs only was to be paid. Thus, there is siphoning off of funds of Rs. 8.5 lakhs. He also stated that the stock of gold both in the Coimbatore showroom as well as Madras showroom does not match with the figures shown in the books of account. As against about 50 kgs of gold as shown as stock in the books of account, the actual gold available is only to the extent of about 650 grams as detected by the police. Thus, a substantial value of gold has been taken out by the respondents.
Further, counsel for the petitioners stated that the company has been running a chit scheme without the approval of the Central Government under Section 4 of the Chit Fund Act and this business is being carried on without the knowledge and approval of the board.
17. Ramani, to substantiate the stand of the petitioners that the respondents have been carrying" on the business of the company as indicated above without the knowledge and approval of the board, relied on the joint affidavit filed by respondents Nos. 5 and 6 being independent directors, wherein they have stated that the loans and advances given by the company were not with the approval of the board and that these respondents also raised a lot of queries about the provisional balance-sheet made up to February 29, 1996. They also sought clarifications from the second respondent about the discrepancies between the balance-sheet and profit and loss account circulated to the board and the one published in the Economic Times.
Learned counsel also pointed out that the sixth respondent who was present in the annual general meeting held on September 4, 1996, cautioned respondents Nos. 2 to 4 on the resolutions relating to the status of the petitioners with an advice that both the groups should sort out their disputes amicably. Since, the second respondent did not take any action to set the matters right, these respondents had resigned from the board by a letter dated October 1, 1997. Ramani submitted that the affidavits of these independent directors completely confirm the allegations made by the petitioners.
18. Learned counsel submitted that all the above acts would indicate that not only the respondents are guilty of acts of oppression against the petitioners but also for mismanaging the affairs of the company in such a way that huge funds of the company have been siphoned off and that the entire business of the company has been brought to a standstill. Learned counsel relied on the following case law for the proposition as indicated against each : G.K. Ketkar v. M.H. Latir, AIR 1968 SC 1413 : When a person relies on certain documents in the absence of production of such documents, adverse inference should be drawn against him and since the respondents are not in a position to furnish complete details of the loans and advances given, adverse inference should be drawn against them.
Irudayam Ammal v. Salayath Mary, AIR 1973 Mad 421 : If a man by his tortious acts withholds the evidence by which the truth of his case would be manifested, every presumption to his disadvantage will be adopted.Hamant D. Vakil v. RDI Print and Publishing Pvt. Ltd. [1992] 2 CLJ 113 (CLB) : If it is a well established principle of law that if there is no full knowledge of all the facts and of the right to take action, there could be no acquiescence to state that the petitioners came to know of the huge loans and advances only after the draft accounts were circulated.
Debi Jhora Tea Co. Ltd. v. Barendra Krishna Bhowmick [1980] 50 Comp Cas 771 (Cal) : The powers of the Company Law Board are wide and that to prevent the affairs of the company being conducted in a manner prejudicial to the public interest, the entire corporate management can be supplanted to state that the Company Law Board in the given circumstances should appoint an administrator to carry on the business of the company.
Accordingly, he prayed for the various reliefs sought for in the petition which include appointment of an administrator, declaration that the annual general meeting held on September 4, 1996, and various resolutions passed therein are invalid and non est, declaration that the appointment of the second respondent as managing director is invalid, surcharging respondents Nos. 2 to 4 under Section 402 read with Section 406 and Schedule IX of the Act, ordering rectification in respect of the shares as elaborated earlier and directions to the company to issue share certificates in respect of 26,000 shares to the first petitioner, in respect of 50,000 shares to the second petitioner, 1,00,000 shares to the third petitioner and in respect of 20,000 shares to the fourth petitioner.
19. Arvind Datar, advocate for the respondents in reply to the arguments of counsel for the petitioners, stated that the petitioners were closely associated with the affairs of the company and the company has come to a standstill only due to the various proceedings initiated by the petitioners in various fora. According to him, a perusal of the allegations shows that the petitioners have not been able to make out a case of either oppression or mismanagement in the affairs of the company and as such they are not entitled for any relief as decided by the Company Law Board in Mahendra Singh Mewar v. Lake Palace Hotels and Motels Pvt. Ltd. [1997] 4 CLJ 440 ; [1999] 96 Comp Cas 757. Further, since the petitioners were fully aware of the affairs of the company especially when the third petitioner had signed most of the cheques issued in connection with loans and advances, their conduct should be taken into consideration in considering a petition under Section 397/398 as in Nurcombe v. Nurcombe [1985] 3 CLJ 163 (CA) the court held that if a person does not come to the court with clean hands, he is not entitled to claim any relief. For the same proposition, he also relied on Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Pvt.) Ltd. [1991] 72 Comp Cas 211 (Kar). He also stated that the allegations in the petition do not make out a case for winding up of the company which is a pre-condition for grant of relief under Section 397/398, and, therefore, no relief can be granted as decided in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; AIR 1981 SC 1228. According to Datar, the petition has been instituted on the ground that there has been loss of confidence between the petitioners and the respondents and this cannot be a ground for grant of relief as decided in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 ; AIR 1965 SC 1535.
He also cited G. Kasturi v. N. Murali (1992] 74 Comp Cas 661 (Mad) to state that no public interest was interfered with in the exclusion of the petitioners from the management or in the alleged violation of company law provisions by the managing director.
20. Dealing with allegations relating to allotment and transfer of shares, Datar pointed out that as per the prospectus, 10,00,000 shares were kept for the promoters' quota. The first petitioner applied for 1,74,000 shares and he already had 101 shares at the time of incorporation of the company. Thus, his total shareholding comes to 1,74,101. The second petitioner did not apply out of the promoters' quota and he was earlier allotted 1,30,000 shares in exchange for the shares in K. R. and Sons Jewellery Private Limited. Even though the second petitioner is reported to have transferred all the shares, the transfer has not yet been registered. He had originally, at the time of incorporation, 101 shares. The third petitioner in addition to 101 shares allotted at the time of incorporation applied for 2,50,000 shares and on allotment he has transferred these shares for full consideration and the transfers have been registered. The fourth petitioner also was allotted 101 shares at the time of incorporation and later out of the promoters' quota, he applied for and was allotted 5,00,000 shares of which he has subsequently transferred 1,50,000 shares to the fourth respondent. Datar relied on page 25 of the additional affidavit filed by respondents Nos. 1 to 4 which is a photo copy of the postal acknowledgment for registered letters posted by Cameo Share Registery Limited wherein the number of shares enclosed in each of the covers sent to the allottees out of the promoters' quota, to show that these figures noted therein tally with the stand of the company on the number of shares allotted to the petitioners. Therefore, according to Datar, the claim of the petitioners for more number of shares than what had been allotted is not justified. As far as the transfer of shares is concerned, he pointed out that the consideration for the shares had been paid by cheque as indicated in para. 5 of the counter filed by respondents Nos. 2 to 4. Therefore, he submitted that there is no irregularity either in the allotment of shares or transfer of shares.
21. In regard to the financial affairs of the company including loans and advances, Datar stated that the first and the third petitioners were closely associated with the financial affairs of the company as joint signatories to the bank operations. In respect of most of the loans and advances as alleged in the petition, the third petitioner himself had signed the respective cheques as is evident from the counterfoils of the cheques which bear the signature of the third petitioner (annexure B to counter filed by the company). Further, counsel submitted, in relation to the various loans and advances alleged in the petition, that the purpose of these loans and advances was as follows : M/s. A. M. Consultancy : A sum of Rs. 65 lakhs was advanced as security for management of the public issue of which a sum of Rs. 16.32 lakhs has already been refunded and the outstanding balance has been confirmed by A. M. Consultancy.
Kota Jewellery : A sum of Rs. 25 lakhs was advanced as intercorporate deposit and the same has been refunded.
M/s. Aditya Investments : A sum of Rs. 10 lakhs was advanced for investment in a show room in Erode and since the company has aborted this proposal, the money has been refunded.
Madras Building : The advance of about Rs. 35.50 lakhs comprises Rs. 29.11 lakhs as advance for the building and Rs. 10.34 lakhs as advance for furniture in the building as the same is being used as show room.
22. Accordingly, Datar submitted that the petitioners are fully aware of all these advances and loans and except recovery of Rs. 48.68 lakhs from A. M. Consultancy, all other advances have been recovered and have been properly accounted for. Therefore, according to him, there is nothing surviving in respect of these allegations. The company has also taken steps to recover the advance from A. M. Consultancy.
23. In regard to the variations between the financial results circulated to the board and the one published in the Economic Times, he stated that the circulated financial results were discussed in a board meeting and on the basis of discussion; the board approved the same with certain modifications in a meeting held on June 24, 1996, and the board approved financial results were published in the Economic Times.
Therefore, according to him, this allegation has been made for the sake of making an allegation.
24. In regard to shortage of stock, Datar stated that the reliance placed by the petitioners on the finding of the police has to be seen with reference to the actual situation. According to him, the police verified the stock in the show room at Coimbatore, which tallied with the stock register maintained in the show room. The police did not verify the stock in the factory and the Madras showroom. The Commissioner appointed by the Company Law Board has verified the stock in the show room at Madras, Coimbatore, and the factory at Coimbatore, and they have found the same to tally with the computer statement.
Therefore, it is wrong to say that the stock in the company was only 600 grams. He also referred to the sales tax returns in respect of Madras and Coimbatore showrooms in this regard.
25. In regard to the proceedings in the annual general meeting on September 4, 1996, and the resolutions passed therein, Datar submitted that the meeting was held in an orderly manner and continued for more than three hours. The second petitioner did not attend this meeting. In addition to show of hands, all the resolutions were passed on September 4, 1996, by poll. All the ballot papers were signed by the shareholders/proxies including the petitioners without protest. Since the shareholders felt that there was no need for the posts of vice presidents and whole time directors in view of the financial position of the company, they modified the resolution from reducing the remuneration to keeping in abeyance these posts. The fourth petitioner was not re-elected as director. In view of this, Datar submitted that the will of the shareholders cannot be questioned by the petitioners.
26. In regard to the allegations on the appointment of the second respondent as managing director being in violation of Schedule XIII, Datar stated that, in fact this respondent was detained for certain alleged violation of the Gold Control Act and later on acquitted. In other words, the detention itself was wrong and resulted in acquittal.
This respondent was not detained under COFEPOSA, and, therefore, the question of getting the Central Government approval does not arise. In this connection, he also submitted that the Registrar of Companies has also been given the same clarification.
27. As far as the chit scheme is concerned, Datar stated that many other jewellers are also having such schemes and the petitioners were fully aware of the scheme of the company. This scheme was operated only for a short time and there have been no complaints from any customers.
In regard to the alleged loan to the fourth respondent, Datar stated that, it was paid only as salary advance and not as a loan and as such there is no violation of any provisions of the Companies Act.
28. We have considered the pleadings and arguments of counsel. The petition contains various allegations, some with respect to the general affairs of the company and some relating to the petitioners as shareholders. It is evident from the signatories to the memorandum that the petitioners and respondents Nos. 2 and 4 jointly promoted this company and the family business was taken over by this company. It is also an admitted position that the property belonging to the petitioners was sold to the company for carrying" on the business. Both the respondents and the petitioners were given positions of importance in the company, either as a wholetime director or a vice president.
Each one had certain allocated responsibilities. The company was incorporated in December, 1994, and public issue was made in May, 1995, the dispute among the promoters started in February, 1996, i.e., within a short period of one year. In this background the allegations have to be examined.
29. The allegations pertaining to the petitioners as shareholders relate to allotment of shares and transfer of shares. As promoters, the allegation relates to their ousting from the management. As far as non-allotment of shares is concerned, it is the stand of the petitioners that out of the sale consideration for the premises sold by them to the company for Rs. 1.1 crores, they invested Rs. 1 crore and the balance of Rs. 10 lakhs was adjusted by the company towards company promotional expenses. As far as Rs. 10 lakhs is concerned, we find from the sale agreement dated July 12, 1995 (exhibit P-6), that a sum of Rs. 10,01,000 had been received by the petitioners as advance and that the balance amount of Rs. 99,99,000 was received by way of cheques. In other words, as per the said agreement, the entire amount of Rs. 1.1 crore had been received by the petitioners. As far as allotment of shares and consequent issue of share certificates is concerned, we have two different versions--one by the petitioners and another by the respondents. According to the petitioners, share certificates have been received by the first petitioner for 1,74,000 shares and the fourth petitioner for 3,30,000 shares. Petitioners Nos. 2 and 3 have not received any share certificates. According to the respondents the relevant share certificates for the shares applied for by and allotted to the petitioners have been sent and for this they have relied on page 25 of the additional affidavit. It has been admitted by the petitioners that petitioner No. 4 had transferred 1.5 lakhs shares and the third petitioner another 1.5 lakhs shares. The transfer instruments, copies of which have been annexed with the reply of respondent No. 1 show the distinctive numbers of the shares transferred. If we are to accept the contention of the petitioners that petitioner No. 3 had not received any share certificates, then the question would arise as to how the shares were transferred. This is the position with the fourth petitioner also as he has also transferred admittedly 1,50,000 shares, which according to him, had been short received. Under these circumstances, we find that the petitioners have not been able to substantiate the stand regarding non-receipt of share certificates for the shares they had applied for. As far as allotment of shares is concerned, the dispute relates to the number of shares applied for and the shares allotted. On this aspect, while the respondents rely on the applications made by the petitioners, the petitioners rely on the bank statements. Since it is a matter of record, we shall be issuing suitable directions on this later. In regard to transfer of 1,10,000 shares from the third petitioner to the fourth respondent, since we are of the prima facie view that the share certificates had been dispatched to the petitioners, we are not entering into the controversy as to whether the instruments of transfers have been fabricated or not as the physical possession of the certificates would determine whether the shares had been transferred or not.
30. In respect of the petitioners' complaint on the resolutions in the second annual general meeting held on September 4, 1996, wherein instead of reduction of the remuneration, it was decided to keep the post of whole time director held by the first petitioner as vacant, the posts of vice presidents held by the second petitioner, the third petitioner and the fourth respondent as vacant, an issue always arises whether in a Section 397/398 petition, directorial complaints could be looked into. While in the normal circumstances, the same cannot be looked into, yet, in the present case the petitioners had been promoters of the company and the prospectus issued in connection with the public issue has projected petitioner No. 1 as a well known expert in diamond and gem stones and that he had been a Government approved valuer for the past 25 years and that he would assist the managing director in the management of the company. In the same way, under particulars of key management personnel, the second and third petitioners, designated as vice presidents have been shown to have experience in jewellery business for a number of years. In other words, at the time of the public issue, it had been projected that the company would be managed by experts in the line of business of the company.
However, within about a year's time such experts who are also signatories to the memorandum are sought to be excluded from the management of the company, notwithstanding the fact, they also have substantial stake similar to that of the respondents. Even though, a decision in the general body in a democratic manner may not be subject to judicial scrutiny, yet, in the facts and circumstances of the case, without going into the allegations of the petitioners that the annual general meeting was not properly held, in view of the fact that these petitioners had been projected to be experts in the line of business in the prospectus to motivate the general public to invest in the shares of the company and that the resolutions were drastically amended which could not have been possible but for the active involvement of the respondents, we are of the view that the decision in the general body to keep the posts held by the petitioners vacant has rightly been assailed as an act of oppression. Further, we also note that the fourth respondent whose post as vice president had been kept vacant in the second annual general meeting held on September 4, 1996, was later, within a short period appointed as a director on the board on September 18, 1996. Finally, it has also been proposed in the annual general meeting for 1996-97 convened on August 27, 1997, that the posts of the whole time director and vice presidents which were kept in abeyance were to be abolished permanently. In other words, we find that after ousting the petitioners' group, the respondents' group has consolidated its hold on the company notwithstanding the fact that money from the public had been collected on the strength of both the groups promoting the company. Our decision in the instant matter has not been influenced by the stand of the petitioners that there was a family agreement that the company would be managed on the principles of partnership, but by the statement in the prospectus that the company would be benefited by the expertise of the petitioners and the respondents.
31. Having dealt with the allegations of the petitioners in regard to their status as members, we shall now deal with the allegation with regard to the affairs of the company. The main allegation relates to the alleged siphoning off of funds through purported loans and advances to various entities. According to the petitioners, even though they were directors on the board, no board resolution had been passed in regard to such huge loans and advances while according to the respondents, the third petitioner was the signatory on various cheques issued towards such loans and advances and as such the petitioners were aware of such loans and advances. It is also stated by the respondents that except for an amount of Rs. 48 lakhs from A. M. Consultancy, all other loans and advances have been recovered. On this, the petitioners' allegation is that even if the loans and advances had been recovered, such amounts have been later siphoned off. The respondents have not disputed grant of loans and advances. These loans and advances are found to have been made immediately after public issue. As per the prospectus, the cost of the project was as follows : 32. This was to be funded by promoters' contribution of Rs. 200 lakhs and public issue of Rs. 250 lakhs. In the prospectus, the first year's turnover was projected to be about Rs. 51 crores, while the actual turnover was less than Rs. 2 crores. It is very clear from the replies filed by the respondents that the company did not get any benefit from the loans and advances given to Kota Jewellers or from Aditya Investments. It is also not clear as to how a huge sum of Rs. 65 lakhs was given to A. M. Consultancy. The respondents claim that the same was given as security deposit for meeting public issue expenses. It is rather surprising that there is no mention of A. M. Consultancy in the prospectus and as even as per the prospectus, the total amount of preliminary and issue expenses was to be only of the order of Rs. 46.5 lakhs. We find from the annual accounts for the year 1995-96 that the issue expenses have been noted to be of the order of Rs. 25.25 lakhs.
The amount given to A. M. Consultancy was in two instalments of Rs. 45 lakhs and Rs. 20 lakhs on May 31, 1995 and on July 22, 1995. Out of this amount, a sum of Rs. 16.32 lakhs has been refunded on September 4, 1995, leaving a balance of Rs. 48.68 lakhs. If the amount had been given as a security for public issue, it is not clear from the statement annexed at page 210 of the reply by respondent No. 1 as to the services rendered by A. M. Consultancy in relation to the public issue or otherwise. Thus we do not find any justification to grant loan to A. M. Consultancy. As far as Kota Jewellers is concerned, an amount of advance of Rs. 25 lakhs is reported to be an intercorporate deposit.
Even though, the company has given the details of recovery of this amount along with interest at page 211 of the reply by respondent No.1, we find that this amount has been refunded over a period of five months from May, 1996, to October, 1996, in various instalments.
Normally, any intercorporate deposit is refunded in full in one instalment. As far as the loans and advances to Aditya are concerned, no details of recovery have been provided by the company. Further from the board minutes dated April 19, 1995, it is seen that the company had been authorised to accept a sum not exceeding Rs. 100 lakhs for its funds requirements and from the minutes of the board meeting held on June 28, 1995, it is seen that Lord Krishna Bank Limited was approached for additional funds needed by the company up to a sum of Rs. 150 lakhs. It is also seen from the board minutes dated August 26, 1995 that the company was authorised to accept Rs. 25 lakhs as intercorporate deposits for immediate requirement. From these resolutions, it is clear that the company was trying to mobilise funds for its own requirement and that the directors were aware that the approval of the board was necessary for taking such deposits/loans.
However, in spite of the need for funds, how the respondents decided to make loans and advances that too without the approval of the board is an issue which has not been answered by the respondents satisfactorily except to state that the third petitioner was a signatory to the cheques issued in connection with the loans and advances. Further, the auditors of the company have also disclaimed expressing any opinion on the loans and advances as the company has not specified the conditions for making the loans, terms of repayment of the principal and interest thereon. In respect of these loans and advances, the Central Government has issued notices to the respondents for violation of certain provisions of the Companies Act and the respondents have already filed applications for compounding. The above narration would make it crystal clear that the public money has been diverted for unknown and unwanted purposes which has definitely had an effect on the financial position of the company as is evident from such a low turnover than what had been projected in the prospectus. Even though the petitioners claim that they were not aware of the diversion of the funds, yet, they cannot absolve themselves as the third petitioner has been a signatory to some of the cheques issued in connection with the loans and advances. This is a gross act of mismanagement and in the absence of complete details as to the recovery of this amount, it is necessary that a proper probe is made to unearth the same.
33. In the same way there is an investment in Anugraha Jewellers, Houston and the company's stand is that a wholly owned subsidiary was being established in the USA to market the company's products. Here also we find that as per the prospectus, the company was to have a show room in Coimbatore, and another one at Madras, and there is no mention in the prospectus about Houston. As per the application made to the RBI in this regard, the company was to invest US $60,000 as share capital and in the first five years, the company would export over US $17 million worth gold jewellery. The preliminary expenses in connection with this venture have so far been of about Rs. 10 lakhs and the company proposes to convert all these expenses as share capital in the new venture. When the subsidiary is to come into existence and when the export would start is not clear. Another major advance is for Madras building of Rs. 35.5 lakhs, which according to the respondents, comprises both advances towards the cost of building as well as cost of furniture to the building. This is a matter of fact which will have to be physically verified.
34. In respect of the allegation of the second respondent continuing as managing director in violation of Schedule XIII to the Act, we do not propose to give any finding inasmuch as it is for the Central Government to enquire into the matter and state a case before the Company Law Board as per the provisions of Section 269(7) of the Act.
35. In regard to the shortage of stock of gold, we had appointed a Commissioner who had taken inventory of the gold in the show rooms at Madras and Coimbatore, and also at the company's factory at Coimbatore, and this verification was done in the presence of the representatives of the petitioners and the respondents. As per the report of the Commissioner, the total stock of gold found in the company was 5973.5285 grams at the time when he took inventory. The inventory was taken on February 14, 1998, at Chennai, and on February 21, 1998, at Coimbatore. This inventory includes two gold bars weighing 231.460 grams which according to the petitioners did not contain any gold while according to the respondents, the bars contained primary gold. It has also been noted by the Commissioner that the stock statement at Chennai, was not made available at the time of taking the inventory on the ground that there was a breakdown of the computer. However, a computer print out of the stock at Chennai, was handed over on February 21, 1998. This stock is against the claim of the petitioners that the company had only about 600 to 700 grams of gold. Of course this allegation was with reference to the stock as per accounts for 1995-96.
In the intervening period of two years there must have been purchases and sales and the figures of stock tallied with the stock statement when the Commissioner took inventory and, therefore, it is not possible for us to come to any conclusion as to the actual stock on hand on the last day of 1995-96. However, from the notice issued by the Commercial Tax Officer (page 27 of the set of documents filed by respondents Nos.
1 to 4) it is seen that as against the closing stock as per the books on November 27, 1995 of 1509.657 gms., the sales tax authorities found an actual stock of 4499.924 gms., thus the excess stock being 2990.267 gms. This shows that there is a possibility of the stock on hand being different from the one as shown in the stock register. This aspect will be taken care of later.
36. There are yet a few more allegations brought out in the rejoinder that the company had conducted a chit scheme without the Central Government's approval or the approval of the board of directors, and that the company has given loans to the fourth respondent in violation of Section 295, etc. As far as the loans to the fourth respondent are concerned, we do not propose to deal with the same inasmuch as the respondents have already filed applications for compounding for violation of the relevant provisions of the Act. As far as the chit scheme is concerned, now that the company has stopped the scheme, we do not propose to deal with the same and any violation in this regard has to be taken care of by the concerned authorities.
37. In regard to the variations in the accounts circulated to the board and the one published in the Economic Times, we are of the view that the petitioners are not justified in making this as an issue as we find that the one circulated to the board had been discussed by the board and the board approved results had been published.
38. Having given our findings on the allegations, we shall deal with the reliefs. Datar, citing certain cases submitted that the petitioners having been a part of the management cannot question the acts of the management later and that there has been delay, laches and acquiescence and the petitioners have not come with clean hands. We would have accepted this submission if the company had been a closely held or a family company. The stand of the respondents itself is that there is no family arrangement. Admittedly, the company is a widely held public company and as long as there is substance in the allegations meriting consideration we have to deal with the same and mould the relief accordingly.
39. This is a petition under Section 397/398 of the Act. Section 397 deals with oppression while Section 398 deals with mismanagement. One of the essential ingredients of Section 397 is that the facts should justify winding up of the company on just and equitable grounds. We have already pointed out that the complaints of the petitioners in regard to their membership were related to the alleged non-allotment of their entitled shares, non-issue of share certificates and alleged falsification of transfer documents. On these we have already given our findings. In regard to their complaint on their ouster from the management, without taking into cognisance their claim of family arrangement, in the facts and circumstances of the case, we have held that the action of the respondents in this regard was not justified.
Considering the fact that the company is a public listed company, we are of the view that these alleged acts do not justify winding up of the company on just and equitable grounds. The Needle Industries' case [1981] 51 Comp Cas 743 (SC) cited by Datar is relevant in this context.
However, according to us the petitioners have fairly established that the affairs of the company are being conducted in a manner prejudicial to the interest of the company and to the public interest as envisaged in Section 398 as elaborated hereinafter. Even though there were two independent directors, namely, respondents Nos. 5 and 6 (who had filed their reply affidavit only on March 2, 1998, i. e., long after the petition was filed), there does not seem to have been transparency in the affairs of the company. The petition has clearly brought out that all is not well with the affairs of the company. The combined holding of the petitioners and the respondents is roughly of the order of 32 per cent. of the share capital while the public at large hold 68 per cent. This company went in for public issue in May, 1995, and raised Rs. 2.5 crores. A perusal of the prospectus issued in connection with the public issue shows that the turnover of the company would go from Rs. 50.90 crores in 1996 to Rs. 94.59 crores in 2000 and profit after taxation from Rs. 1.'29 crores to Rs. 3.13 crores during the same period. The public issue was over subscribed by 1.6 times. Having given such a rosy picture about the fortunes of this company, the promoters holding among themselves only about 32 per cent, of shares, by fighting among themselves have brought this company to a stage where the turnover of the company in 1995-96 was about Rs. 1.85 crores and in 1996-97 it was about Rs. 59 lakhs and the net loss was about Rs. 13 lakhs and Rs. 56 lakhs respectively. The result is that the members of public who have subscribed to the shares have been taken for a ride. It seems to us that the promoters are more interested in having control on the management of the company rather than attempting at fulfilling their promises made in the prospectus. The state of affairs of the company is such that the same gives rise to a doubt as to whether the statements contained in the prospectus relating to the financial projection and plan of action were made with due diligence or with a view to hoodwink the public. The situation before us is a classic case, which makes it abundantly clear that the regulatory authorities who authorise public issues, while insisting on various disclosures, do not monitor the utilisation of the funds raised from the market and also the fulfilment of the various projections made in the prospectus. The absence of such a monitoring system is perhaps one of the reasons for this company's, position being what it is. Even though the respondents have asserted that the affairs of the company have been affected due to the various litigations instituted by the petitioners, yet, the first instance of misunderstanding arose between the promoters only in March, 1996, when even the plant and machinery had not been fully installed as is evident from the balance-sheet as on March 31, 1996, wherein as against the projected schedule of implementation of all the activities by June, 1995, and starting of commercial activity by July, 1995, the same had not been achieved. Thus, we are of the prima facie view that not only the financial projections made in the prospectus had not been made after due diligence but also the schedule of implementation.
Whether the schedule of implementation had been affected due to diversion of funds by way of loans and advances or the projections made in the prospectus are unachievable, is a question to be looked into.
Whatever it is, the promoters have failed miserably in achieving the targets, if not fully, at least to a larger extent, as had been projected in the prospectus.
40. One noteworthy instance is that having bought the property from the petitioners in July, 1995, for running the business of the company in Coimbatore, which has also been specifically mentioned in the prospectus very prominently, the board sought the approval of the general body to sell back the building to the petitioners within a year thereafter for Rs. 115 lakhs, the reason for doing so being, that it was not desirable to lock up substantial amount in a building and that the same could be used for improving the liquidity position of the company. Yet the company had given away substantial loans and advances.
However, the general body approved auctioning of the building to the highest bidder. This is another instance wherein the company has gone against what had been mentioned in the prospectus. We have, however restrained the company from implementing this decision.
41. The company is facing liquidity problems while there is a huge outstanding of Rs. 48 lakhs with A. M. Consultancy and in the absence of details regarding recovery of advances given to Aditya, we are not aware of the correct situation. For the year 1996-97 there was a cash loss of about Rs. 12 lakhs. The turnover is progressively coming down while the loss is going up. It is evident from the results of the two years after the company went in for a public issue, that the fortunes of the company are on the downward trend completely belying the forecast in the prospectus. The prime asset of the company, viz., the Coimbatore building has been proposed to be disposed of and in respect of the Madras showroom, the company is yet to pay the full consideration as is evident from exhibits P-39 to 43. These two buildings constitute the core of the business of the company as these two are the only show rooms this company is having. These properties have to be protected. The fight between the promoters has crippled the company and the victims are the poor general public shareholders who have invested in the company on the basis of the tall claims made by the promoters. The need of the hour is to remedy the situation in which the company has been placed by infighting between the promoters. The public interest element is more relevant in this case than the interest of the promoters. In G. Kasturi's case [1992] 74 Comp Cas 661, the Madras High Court observed that "public interest" means (page 685) "in which a class of the community have a pecuniary interest, or some by which their legal rights or liabilities are affected". In this company, the general public hold about 68 per cent. shares and their stake is more than the stake of the promoters. Further, the way in which the affairs of the company are being conducted is against the interest of the company itself. Therefore, in the larger interest of the public shareholders, and in the interest of the company itself, we consider that certain suitable remedial steps have to be ordered. It is transparently clear that the present management has not acquitted itself creditably and is guilty of acts of commission and omission and as such it is essential that there is revamping of the management of the company.
42. Accordingly, we consider it appropriate that the management of the company should be entrusted for some time to an independent person so that the inter se disputes between the promoters do not affect the business of the company any further. Accordingly, in exercise of the powers under Section 402 of the Act, we supersede the board and appoint R. Aghoramurthy, former Regional Director of the Department of Company Affairs as the administrator. He will be in charge of the entire management of the company. Since the company is only three years old, he will examine the various aspects of the company's affairs during the entire period including the bona fides of the various loans and advances, the entitlement of the petitioners to the shares they claim, the amounts spent on the Madras showroom building, etc. He will also explore the possibilities of recovery of all the amounts due to the company. Aghoramurthy will take charge immediately and to assist him, he will co-opt one representative each from the petitioners' group and the respondents' group of their choice. The tenure of appointment of Aghoramurthy will be up to June 30, 1999, initially. He will send us periodical reports on the affairs of the company once in three months commencing from January 1, 1999. He will be entitled to a sum of Rs. 10,000 as remuneration per month in addition to all incidental expenses incurred in connection with the affairs of the company which shall be paid out of the company's funds. Till such time Aghoramurthy takes charge, the bank accounts of the company will stand frozen, and the bank will act according to his instructions. He will make all efforts to improve the working of the company. The annual general meeting of the company due for the year 1997-98 shall be postponed and will be held on June 30, 1999, in which the general body will elect the members of the board so that thereafter the company is managed by the elected representatives of the shareholders. In case any further directions are necessary including examination as to whether there is any need to surcharge the promoters as per Schedule XI to the Act, we shall intervene either on the basis of the periodical reports of the administrator on any application made by him.
43. The petition is disposed of with the above directions. Let copies of this order be sent to the Department of Company Affairs and the SEBI drawing their attention to the last five paragraphs of this order.