DeseIn (P.) Ltd. Vs. Elektrim India Ltd. - Court Judgment

Excerpt:
1. the 1st petitioner and the 2nd petitioner, respectively, holding 24 per cent shares and 6 per cent shares in elecktrim india ltd. (the company) have filed this petition alleging various acts of oppression and mismanagement in the affairs of this company. this company was incorporated in june, 1990. this is a joint venture company between the petitioners and the 2nd and 3rd respondents are incorporated in poland.the business of the company is to provide engineering services, carry out erection, testing, commissioning and modification and rectification of equipments in overall indian power stations including management to such services. the articles of the company provide for maintenance of 30 per cent shares in the hands of the petitioners, 51 per cent with the 2nd respondent, 10 per cent with the 3rd respondent and 9 per cent with the 4th respondent. the articles also provides for nomination of 4 directors by the 2nd respondent, 3 by the 1st petitioner, 2 each by the 3rd and 4th respondents. the chairman is to be the nominee of the 2nd respondent or of the shareholder holding majority shares in the company. the board has powers to appoint one of the directors as the president or the managing director. the articles also provide that the quorum for the general body meeting shall be 3 members personally present representing each group of shareholders and for the board meetings one director from each group. the main grievances of the petitioners are that, they are not allowed to have effective participation in the company, the respondents have appointed their own nominee as the md of the company against the wishes of the petitioners, that the respondents have incorporated another company with the view to divert the business of the company in active connivance of the 6th respondent and that the 6th respondent is guilty of financial mismanagement, diversion of funds of the company and guilty of violation provisions of foreign exchange regulations etc. and have sought for various reliefs including investigation into the affairs of the company.2. shri sudipto sarkar, the senior advocate appearing for the petitioners submitted as follows : even though the company is a 43a company, it has been incorporated in the guise of a quasi partnership between the indian promoters, namely the petitioners and the foreign promoters, namely the respondents 2 to 4. with a view to ensure active participation in the management of the company, the article provides for adequate representation from both the groups. article 6 also provides for permanency in the shareholding percentage. article 7 provides for pre-emptive rights in case of transfer of shares. further, article 20 stipulates that for board meetings, to constitute the quorum, at least one director representing each group has to be present. further, article 15 stipulates that certain business in the general body meetings have to be approved by 75 per cent of all the shareholders of the company, which would mean that without the support of the petitioners, no business mentioned in article 15 could be carried through. therefore, all these provisions would indicate that the company is nothing but a glorified partnership between the petitioners and the respondents 2 to 4. in spite of all these protective articles, the respondents have been acting in an oppressive manner against the petitioners. even though, the relationship between the petitioners and the 2nd respondent had been smooth and fruitful for all these years, yet, by appointment of the 6th respondent as the managing director against the wishes of the petitioners, the smooth relationship has come to an end. even though, the 6th respondent was originally a nominee of the petitioners, he has changed his sides and has become now a nominee of the respondents. it is normally the 1st petitioner who procures orders from various powerhouses in india for turnkey projects. in these contracts, 80% of the contract value was to be done by the 2nd respondent and out of the balance, a portion of the contract is given to the 1st petitioner. in 1998, the 17th respondent, which itself a subsidiary of the 2nd respondent, incorporated the 16th respondent having similar objects as that of the company and the 6th respondent has started diverting the business of the company to the 16th respondent. this has resulted the company becoming a shell company without any business. when the 6th respondent came up for reappointment as the managing director with effect from 1-2-2000, the fact that he had incorporated another competing company was not disclosed in the resolution circulated. as a matter of fact, he himself is the managing director of the 16th respondent also. therefore, the consent of all the directors for his appointment as the managing director of the company is required in terms of section 316 of the companies act, 1956 ('the act'), which consent has not been obtained and therefore his appointment as the managing director with effect from 1 -2-2000 is invalid as also the remuneration drawn by him. the managing director being a full lime employee of the company cannot promote a competitor.the worst is that even the registered office of the 16th respondent is housed in the residence of the 6th respondent. since the company is a consultancy company, the 6th respondent having gained the knowledge, expertise and know how cannot use the same for the benefit of a competitor. since he is also a director in the company, he is in a fiduciary capacity to protect the interest of the company. being a trustee, he cannot use the expertise gained during the course of employment in the company other than for the benefit of the beneficiary, being the company. his functioning as the managing director of the 16th respondent is directly in conflict with the interest of the company. further, in terms of schedule xiii - part ii, he is entitled to get a maximum remuneration of only rs. 40,000 but he is being paid much more than his entitlement, which is also illegal. in view of the provisions of section 309(5a), he is liable to refund all the remuneration received in excess.3. he further submitted as follows : in spite of the request made by the petitioners in terms of section 209(4) of the act, the company refused to give complete inspection of the accounts of the company.however, later, the company offered inspection, which was canied out by one shri gupta, chartered accountant who has found out a number of instances of financial management and also violation of various statutory provisions. reference was made to a copy of invoice at page 72 of the rejoinder, wherein the company had indicated that the amount due on the invoice was payable to the company's account at warsaw, even though there is no disclosure in the accounts of the company about this account. therefore, it is obvious the 6th respondent had siphoned of this money. several expenses of the 16th respondent are found to have been booked in the books of account of the company. there have been various violations of foreign exchange regulations. there are no supporting vouchers for various reimbursements towards foreign travel expenses. going through the inspection report prepared shri gupta, chartered accountant, he pointed out to various adverse comments of the chartered accountant and submitted that it is necessary that there should be an investigation into the affairs of the company.4. shri sarkar further submitted : after having incorporated the 16th respondent, the respondents decided to hold a board meeting and an egm in poland on 14-3-2000 in which one of the resolutions was that the company would be voluntarily wound up in terms of section 484(1)(b) of the act. in the same meeting, it was also to be resolved that the 6th respondent would be the voluntary liquidator at a remuneration of rs. 57,000 per month. in the same meeting the 6th respondent was also appointed as the md at the same remuneration. even though for want of quorum, the meetings did not take place it is clear that the respondents had decided to kill the company after diversion of all the businesses to the 16th respondent. there have been irregularities in the appointment of auditors of the company also. one gupta & gupta were the auditors of the company for the year 1994-95. in the 5th agm held on 29-1-1996, these auditors were removed and no auditors were appointed in that agm. however, the 6th respondent was authorized to appoint the auditors. accordingly, gambhir, nanda & associates were appointed as auditors. since the auditors were not appointed in the agm, the company should have approached the central government in terms of section 224(3). these auditors are colluding with the respondents in suppressing various acts of financial mismanagement. one of the partners of this audit firm attended 3 egms of the company held in poland even though there was no item relating to the audit were to be discussed in these meetings. the company had to bear all the expenses in connection with his visit to poland.5. summing up his arguments, shri sarkar submitted that in spite of the joint venture agreement, the provisions of which have also been incorporated in the articles, the respondents have been acting in a manner so oppressive that there has been no meaningful participation of the petitioners in the affairs of the company. even though, the respondents offered to sell their shares in the company to the petitioners, yet, this suggestion could be considered only after a thorough investigation is conducted in the affairs of the company in view of the adverse remarks contained in the report of shri gupta on the accounts for the year 1998-99. relying on george mayor v. scottish cooperative wholesale society ltd. (1954) sc 381 (scot), he pointed out that a holding company has to deal with its subsidiary in a fair manner and if it does not do so, it is an act of oppression and stated that incorporation of the 16th respondent to engage in the similar business as that of the company is an act of oppression. referring to re ra nobel & sons (clothing) ltd (1983 bclc 275), he submitted that where there is breach of agreement of equal participation in the management of the company, then, it is a fit case for ordering winding up of the company. since in the present case, in spite of the protest by the petitioners regarding the appointment of the 6th respondent as the managing director, the respondents have appointed him as such and therefore there is no effective participation of the petitioners in the management of the company. as far as the investigation in the affairs of the company is concerned, he referred to the decisions of this board in eswar usha corpn. v. richimen silk ltd. (1999) 1 cla 237 and re.incab industries ltd. (1997) 1 clj 156 wherein on the basis of various deficiencies in the books of account of the company, an order of investigation was made. he also referred to re. london school of electronics limited (1985 bclc 273) wherein it was held that if the business of the company is diverted to another company by a director/ majority shareholder, then, it is not only an act of oppression but also imposes a duty on that person to pass on the advantage thus gained, to the company. he further submitted that since the business of the company has been diverted to the 16th respondent in breach of the fiduciary duties, even if bona fide, the benefits should be passed on to the company as held in regal (hasting) ltd. v. galliver (1942 1aer 378).6. shri gopal subramanium, the senior advocate appearing for the respondents submitted as follows: the petition is devoid of any merit.the only substantive allegation in this petition relates to the appointment of the 6th respondent as the managing director to which also the petitioner cannot have any grievance. initially, this respondent was a nominee of the petitioners. originally, a nominee of the 2nd respondent was the managing director of the company. in 1994, with the consent of shri n.p. gupta of the 1st petitioner company, the 6th respondent was appointed as the managing director for three years, at which time, he was the nominee of the petitioner. however, when the 2nd respondent obtained a contract for execution of a 75 mw power station from gujarat state electricity board of the value of about rs. 200 crores, the 1st petitioner wanted the indian portion of the contract for about rs. 20 crores to be given to itself for execution notwithstanding the fact that it should have legitimately gone to the joint venture company. however, with a view to keep the 1st petitioner in good humor, contract worth rs. 12 crores was given to the 1st petitioner, which was definitely against the interest of the jv company. however, the 1st petitioner insisted on the entire rs. 20 crores contract to be given to it. when the 6th respondent did not support the demand of the 1st petitioner, friction started between the 1st petitioner and the 6th respondent. after this incident, the 1st petitioner withdrew its nomination in respect of the 6th respondent and in 1997, and he was taken as the nominee of the 2nd respondent. from that time onwards, he has been continuing as the managing director of the company, his appointment being made in every agm for one year, with the unanimous approval of the shareholders including the petitioners.therefore, they cannot now impugn his appointment. as far as his remuneration is concerned, the same is within the permissible limits as per law.7. he further submitted as follows: in the year 1997, there was a reorganization of the 2nd respondent by which it was decided that this respondent would withdraw from the power sector all over the world and its subsidiary, namely, the 17th respondent would enter into the power sector. in view of the liberalised policy allowing 100 per cent subsidiary in power sector in india, the 17th respondent applied for and obtained fipb approval to incorporate the 16th respondent. in other words, the 16th respondent is a wholly owned subsidiary of the 17th respondent and the 6th respondent being locally available assisted the 17th respondent to register the company by being a signatory to the memorandum. this company was incorporated with a view to take care of the interest of the 17th respondent, which is not a shareholder in the company. the interest of the company is not in any way affected in as much as presently the company has executed all projected and is left with only one employee, namely, the managing director. reference to page 127 of the petition would indicate that the idea of the 17th respondent was to liquidate the 16th respondent and to have cooperation with the 1st petitioner in a new form. this indicates that it was not the idea of establishing the 16th respondent to divert the business of the company. while suggesting liquidation of the company, the 2nd respondent had advised the 1st petitioner vide letter at page 128 of the petition that an agency agreement could be entered into with the 1st petitioner. in the letter dated 3rd december, 1999 (page 130), the 1st petitioner itself suggested suspension all the activities of the company and as such cannot now complain that the company has no business. as far as the alleged diversion of the business of the company, no diversion could have been possible in as much as the company had executed all the pending contracts and no new business was to come to the company in view of the 2nd respondent having given up the power business. even though, the 16th respondent had undertaken the contract relating to operation and maintenance contract with m/s tenughat vidyut nigam ltd., it was negotiated and obtained by the consultant appointed by the 16th respondent way back in 1998 before the dispute started. further, the company does not deal with o & m contracts and therefore the question of diversion of business does not arise. it is also to be noted that after the present petition was filed, the 16th respondent has not entered into any contract.8. in regard to the report of shri gupta, the learned counsel submitted as follows: the report of the auditor cannot be considered in isolation of the fact which lead to the inspection. by a letter dated 3-12-1999, (page 131), the petitioner had evinced interest in the re-structuring of the relationship between the 17th respondent and the 1st petitioner.in view of this proposal, the 1st petitioner had also decided not to proceed with the earlier legal notice issued by the 1st petitioner to the 17th respondent. therefore, the motive for the present petition stressing investigation on the basis of the report of shri gupta is only to put pressure on the respondents to get into some working arrangement with the 1st petitioner and not with a view to protect the interest of the company. the prime motive of the petitioners is to derive some contractual benefit from the 17th respondent other than through the company and with a view to achieve this objective, the petitioners had stalled the board meetings of the company in the year 2000. that is the reason why they issued the letter dated 15-3-2000 (page 149) pointing out various deficiencies in the accounts of the company for 1998-99. when the draft annual accounts were circulated to the petitioners, claiming that they had to inspect the accounts of the company before considering the draft accounts proposed to be placed in the board meeting on 14-3-2000, engaged shri s.b. gupta of gupta and gupta who were earlier the auditors of the company, to carry out the inspection. the board meeting had to be adjourned to 21-3-2000 for want of quorum. according to the petitioners themselves, shri gupta made the inspection report available to them on 10-3-2000. in all fairness they should have placed the inspection report in the adjourned board meeting on 21-3-2000 so that the board would have had the opportunity to consider the report before approving the accounts. now, the petitioners claim that the inspection report was ready only on 24-3-2000 which is factually wrong as they had already indicated in para 9.34 of the petition that the report was dated 10-3-2000. the inspection report contains certain material, which was not in the original draft annual accounts. therefore, the inspection report should have been prepared, only after the respondents enclosed the approved annual accounts with the reply on 30-5-2000. if the petitioners had the inspection report as early as on 24-3-2000, there is no need to wait to enclose the same with the rejoinder. any way, the respondents have replied to each and every point raised in the report, from which it can be seen that there is no substance in the adverse comments made by shri gupta. referring to the allegation of the petitioners that the company has an undisclosed foreign account, he pointed out that the invoice at page 72 of the rejoinder is a forged one. in this forged invoice, it is shown that this amount was to be made by 'bank transfer to elektrim india ltd. account warsaw'. there are no particulars about the identification like bank account etc. it is a lake invoice as is evident from the fact that it is made on a containing sheet contrary to the commercial practice. producing a copy of the original invoice in relation to the same transaction, he pointed out that in this invoice it is very clearly indicated that the amount was to be paid to the account of the company in corporation bank, new delhi indicating the account number.any way, he submitted that this amount was not paid by the 2nd respondent in view of the cancellation of the agreement as is evident by a tetter from this respondent dated 15-6-1998, a copy of which was handed over to this bench. therefore, he submitted that the allegation of the petitioners that the company is having an undisclosed account in warsaw is not borne by the facts. further, the annual accounts approved by the board have not yet been audited and it is too immature to allege that the accounts do not exhibit true and fair view.9. in regard to the appointment of auditors for the year 1996-97, it was pointed out that the appointment of gambhir nanda & associates was approved unanimously in the agm held on 29-1-1996 and therefore it is wrong to state that the same was in violation of the provisions of the act. further, in all subsequent agms, the same auditors were appointed unanimously with the participation of the representatives of the petitioners. even assuming that there was any infirmity in the appointment of the auditors, yet, the petitioners are estopped from challenging the same after a gap of 3 years.10. summing up his arguments, the learned counsel contended that the entire petition has been filed for an oblique motive to get some contractual arrangement with the 17th respondent. he also pointed out that without the collaboration with the 2nd respondent, the company cannot survive and since the 2nd respondent has already dis-associated with the business relating to power area, no assistance could emanate from that respondent. the 17th respondent, not being a shareholder of the company does not owe any allegiance to the company and therefore the 16th respondent, which is a subsidiary of the 17th respondent, cannot be considered to be a competitor. ever some of the contracts referred to by the petitioners as procured by the 16th respondent were before the filing of the petition and in view of the pending proceedings, they are not taking on any new contract even though they are at liberty to take new contracts. the very fact that this petition has been filed only after the efforts of the 1st petitioner to get some working arrangement with the 17th respondent failed, it is evident that this petition has been filed with a mala fide intention which is evident from the fact that the only prayer insisted during the hearingis that this bench should order an investigation into the affairs of the company. for the proposition that the petition with an oblique motive should not be entertained, he cited the case of re.bellador ltd. (1965 1 aer 667). accordingly, he sought for dismissal of the petition.11. both the sides have filed written submissions. in the submissions by the petitioners, a large number of allegations have been made against the present auditors of the company, which we have decided not to take cognizance of in view of the fact that these auditors have not been impleaded as parties and they have no opportunity of refuting the allegations. in the same way, some of the allegations in the written submissions, which were not part of the arguments, have not been considered by us. we also note that in the petition, the main allegations related to the events occurred in or after 1999 but in the rejoinder and in the written submissions, the allegations have been made even on events that had taken place prior to 1999. it is on record that the petitioners had been parties to all the events before 1999 like passing of accounts, appointment of auditors, appointment of the 6th respondent as the managing director etc. in the exercise of equitable jurisdiction, the clb has to take into consideration the conduct of the parties and if a person who has been a party to decisions cannot impugn those decisions later on, on the ground that such decisions amount to acts of oppression. while dealing with the allegations in the petition, we have kept this principle in mind.12. we have considered the pleadings and the arguments of the counsel.the main allegations of the petitioners are three fold : the appointment of the managing director against the wishes of the petitioners and in violation of the act, setting up a rival company by the 17th respondent with the view to divert the business of the company as also the funds of the company and financial mismanagement including violation of the foreign exchange regulations.13. in regard to the appointment of the 6th respondent as the managing director, the petitioners' complaint is three fold. one is that he was appointed against the wishes of the petitioners, the second is that his appointment in the eogm held on 21-3-2000 was in violation of the statutory provisions in view of his being the md of the 16th respondent and the third is that the remuneration approved and drawn by him is beyond the limits prescribed by the act. we find that he was appointed as the md for 3 years with effect from 1-2-1994 and the resolution to that effect was proposed by the representative of the petitioners themselves. at this time he was the nominee director of the petitioners. again he was appointed as the md for another year in an eogm held on 22-1-1997 to which the petitioners opposed but the resolution was carried through by majority. again he was appointed as the md for another year with unanimous approval in the eogm held on 18-2-1998. again with the unanimous resolution of the board, he was again appointed for one more year in the board meeting held on 24-2-1999. the petitioners opposed his appointment for a further period of one year when the same was proposed by a circular resolution and also in the eogm held on 21 -3-2000. thus, in the tenure of nearly 6 years, the petitioner opposed his appointment as the md only on two occasions and the appointment was approved by majority. even though the petitioners contend that they had expressed their reservation about his appoinlment, yet they approved the same. they have not adduced any reason as to why they had any reservation about him. even in the petition, other than stating that due to the unfair conduct of the 6th respondent, the petitioners lost confidence inhim (para 9.7), no details have been given. the allegations against him all relate to post 1999. from the details of the performance of the company furnished at para 9.39 of the petition we find that the turn over as well as the profits of the company had shown an upward trend during his tenure.meaningful participation, as contended by the petitioners, does not mean that without their consent, no decision can be taken. therefore the complaint that there was no meaningful participation of the petitioners in the management of the company does not stand to scrutiny. substantive allegations have been made against the 6th respondent only in 1999 after he incorporated the 16th respondent. even the allegations against the other respondents also relate to post 1999.therefore, we do not subscribe to the stand of the petitioners that they were denied effective participation in the management of the company till 1999 only on the ground that in spite of their reservation about the 6th respondent, he was appointed as the md.14. the next limb of the complaint about the 6th respondent is that he had been allowed remuneration, which is beyond the permissible limit which allegation does not seem to have been made in the petition. in the rejoinder, they have alleged that when the respondent was appointed as md for 3 years in 1994, his remuneration was not fixed and approved by the general body, but he had drawn remuneration. in respect of the remuneration drawn by him during 1998-99, their complaint is that his remuneration was in excess of the permissible limits. there is no explanation as to why the petitioners did not point out this aspect either in the board meetings or in the eogm when the 6th respondent was appointed for further terms. if as contended by the petitioners that the 6th respondent has drawn remuneration in excess of the permissible limit, they are equally responsible for this violation. however the respondents have asserted that there the remuneration is within the legally permissible limits. we shall be giving appropriate direction on this later.15. the third allegation relates to his appointment for a year with effect from 1-2-2000. this appointment was made by a circular resolution dated 27-1-2000. while the directors from the petitioners group opposed the resolution, the same was passed by the majority and later on in the eogm held on 21-3-2000 by the majority. according to the petitioners, the fact that this respondent was also the md of the 16th respondent was not disclosed in the circular resolution and since section 316 requires the consent of all directors, his appointment without such approval is invalid. section 316 prohibits a public company from appointing a person as the md if he is already the md of another public company or private company which is a subsidiary of public company. however as per sub-section (2), a public company can appoint a person as the md, if he is already the md of a private company provided the same is done after passing a resolution at a meeting of the board with the consent all directors present at that meeting. in other words, the appointment has to be made in a meeting with the consent of all those present in that meeting. in other words, the question of appointing a person who is already the md of a company, as md of this company by a circular resolution is not contemplated in section 316(2). in the present case, the company is a 43 a company, and the counsel have not addressed us as to applicability of this provision to a 43a company. if it is applicable, then the 6th respondent could not have been appointed as the md through a circular resolution that too without the consent of all to whom the circular resolution was circulated. without complying with this stipulation, the company cannot overcome this by getting the appointment approved by the general body.it is surprising that when the petitioners sought an ex-parte order in the hearing on 21-3-2000 to restrain the general body from passing a resolution to wind up the company as proposed in that meeting, they did not seek any such order in respect of approving the appointment of the 6th respondent as the md proposed in the same meeting, notwithstanding the legal infirmities pointed out by them. instead of preventing the appointment by getting a restraint order, now they are complaining about the same. since the non compliance with the provisions of the act have been brought to our notice, we direct the company to make a reference to the central government in this regard within a month from the date of this order.16. the next allegation is that the respondents have incorporated a rival company viz,, the 16th respondent with the view to divert the business of the company and as such it is an act of oppression against the petitioners and against the interest of the company. it is to be noted that the 16th respondent is a wholly owned subsidiary of the 17th respondent, which is not a shareholder in the company and it owes no duty towards the petitioners or the company. even assuming that the company being a subsidiary of the 2nd respondent, the second respondent is bound to take care of the interest of the company as decided in scottish co-operative society case, yet, we do not think that the 17th respondent, being the subsidiary of the 2nd respondent owes similar duties to the company. it is not disputed that there had been restructuring of the 2nd respondent by which it had decided, on a global basis, to withdraw from the power sector as early as in 1997.even this decision was on account of change in the management of the 2nd respondent. therefore, in the normal course, the incorporation of the 16th respondent by the 17th respondent cannot be considered to be an act of oppression. the petitioners have complained that the business of the company is being diverted to the 16th respondent. for this allegation, no material has been placed as to which existing business, which in this case is contracts, has been diverted to the 16th respondent. if their allegation is that the future business opportunities of the company have been diverted, they have not shown whether in the absence of the assistance of the 2nd respondent, which has gone out of power business, the company could have had any business opportunity. the reliance by the learned counsel for the petitioners on london school of electronics has no application in this case, as in that case, the respondents had taken away a large number of students enrolled with the respondent company to their own company, which means the existing business of the company was diverted. in a similar case of incorporation of a company in the same line of business by one of the directors of a company, in pye land lease p. ltd. v. jewel brushes p.ltd, 1998 4 clj 363 clb, the argument of the petitioner was that by the incorporation of the new company, the future business of the company had been diverted to the new company, considering the facts and circumstances of that case this board held : 'therefore, it is not a lost opportunity but an opportunity which was never available to jewel.under these circumstances, we do not find that future business of jewel has been taken away by unident or any business of jewel had been diverted to unident'. in the same way, unless the petitioners establish that they could have carried on the business of the company without the assistance of the 2nd respondent, the question of diverting the future business by the company to the 16th respondent does not arise. this being the position, the other cases cited by the learned counsel for the petitioners have no application in facts of this case. therefore, we don't consider that the incorporation of the 16th respondent by the 17th respondent could be considered to be an act of oppression. in this connection, we may also refer to the various correspondence entered into with the petitioners and the 17th respondent by which the petitioners were trying to have an working arrangement between them and the 17th respondent, even with the suggestion of liquidating the company as well as the 16th respondent. it would indicate that the petitioners are more concerned about their interest than that of the company. the only grievance relating to the 16th respondent that deserves consideration is that if the company had funded any of the expenses of the 16th respondent, then, it should take immediate action to recover the same from the 16th respondent.17. another allegation of the petitioners is about the appointment of gambhir nanda and associates as the statutory auditors of the company for the year 1995-96 was not made in the agm held on 29-1-1996 when the earlier auditors were not reappointed. even though the respondents contend that the auditors were appointed in that agm, we find from the minutes of that meeting that the md was authorized to appoint the auditors and accordingly, the auditors were appointed. as per section 224(3) and (4), when auditors are not appointed in the agm, the company has to inform the central government, which alone could have appointed the auditor. even though we note that it is the correct legal position, yet, the petitioners are estopped from raising this issue in the present proceedings, as their representatives were present in the agm when the md was authorized to appoint the auditors. further, they never complained about this and as a matter of fact they have approved the appointment of the same auditors in the subsequent agms. as we have observed in relation to the remuneration of the 6th respondent, the directors from the petitioners group are also equally responsible for this violation and therefore cannot claim any relief on this score and they are at liberty to take up the matter with the central government.18. extensive arguments took place on the inspection report of shri gupta on the accounts for 1998-99 and on the basis of this report, the petitioners insisted for directing an investigation in to the affairs of the company. the observations in the report broadly relate to an undisclosed foreign bank account, non maintenance of proper books of account, accounting for prior period income and expenditure, payment of over rs. 20,000 by way cash rather than crossed cheques, unsupported payments, transactions with the foreign companies as if the company is an authorized agent in foreign exchange, diversion of funds of the company for the benefit of the 16th respondent etc. the respondents have replied to the remarks in the inspection report. now the issue is whether the adverse remarks, de-hors the reply given by the respondents, would warrant an investigation. ordering investigation in a 397/398 petition is very rarely exercised unless and until it is established that the ingredients of section 237(t) are satisfied.seldom, this power has been exercised in respect of closely held companies, wherein the element of public interest rarely arises. the learned counsel for the petitioners cited the cases of incab industries and richiman silks wherein this board had directed investigation. in the first case, the central government moved an application under section 237(b) and finding that the affairs of the company were being carried on in a manner affecting various section of the society, this board directed investigation. in richimen the ground for ordering investigation was that, even though it was a listed company, it had failed to convene general body meetings for a number of years and that there had been defalcation of the funds of the company. therefore, the decisions in those cases are not applicable to the present case. in the present case, most of the remarks of shri gupta relate to the improper maintenance of the accounts and non-complying with the accounting standards. the allegation relating to having a foreign bank account has been established to be incorrect. transactions relating to the foreign companies are reportedly having the sanction of the rbi but no evidence has been produced to that effect. the company, even though a 43a company, is, in reality, a private company having only 5 shareholders.the petitioners, who have sought for investigation, have three representatives on the board and as per the articles, without their presence, no business can be transacted either in the board or in the general body. in other words, the petitioners are closely associated with the affairs of the company and it is their duty to set right any wrongdoing. it is not the first time that they had sought for clarifications on the accounts. even in the earlier years, they had sought for clarifications on practically every item in the accounts before the board meetings and thereafter approved the accounts and till 1997-98, they had not dissented to the passing of the accounts in spite of seeking clarifications. even in respect of the accounts for the year 1998-99, in the legal notice issued to the 2nd and 17th respondents on behalf of the petitioners on 13-9-1999 (anncxurc m), allegations had been made about the accounts. however, when the 17th respondent conveyed its interest in having some business association with the 1st petitioner by letters dated 19-11-1999 and 25-11-1999, the legal notice was not proceeded with. thus, we find some substance in the arguments of the respondents that the prayer for investigation is a motivated one. nonetheless, we note that serious allegations have been made regarding payments being made in cash without any support including payments to polish nationals, adjustment of accounts of foreign nationals and foreign companies including holding respondent no. 2 company at the year end without any supporting documents, maintaining two cash books disclosing different transactions, unsupported payment of travelling bills including to foreign directors, diversion of funds for the benefit of respondent no. 2 company, illegally appointment and unauthorized remuneration drawn by the managing director including alternate directors, non compliance of mandatory accounting standards resulting in distorted profitability for different years adjusting various advances/debts of foreigners including associated companies in the respondent no. 2 company account without any supporting evidence, not accounting income/expenditure in the period to which it related resulting in distorted profitability payments made in cash entered in cash book not reflected in books, payment in cash in the guise of cheque payments and funding of profit and loss account. in our opinion, it is a fit case for ordering the inspection of books of account and other records of the company under section 209a of the companies act, accordingly, we order the central government to order an inspection under section 209a of respondent company no. 1 on priority basis and thereafter take appropriate action, if any thereafter. we further direct that till such time the central government take such view on the findings of the inspection report, the order dated 2-5-2000 regarding maintaining status quo on the fixed assets as well as the deposits of the company will continue.19. in regard to the final relief to be granted, in cases of closely held companies, this board has always been directing one of the parties to sell their shares to the other party. in the present case, the respondents have expressed their willingness either to sell their shares to the petitioners or purchase their shares. however, the petitioners were not willing to either of the options till such time the investigation sought for by them is completed.20. accordingly, the petition is disposed of without any order as to cost.

Judgment:
1. The 1st petitioner and the 2nd petitioner, respectively, holding 24 per cent shares and 6 per cent shares in Elecktrim India Ltd. (the company) have filed this petition alleging various acts of oppression and mismanagement in the affairs of this company. This company was incorporated in June, 1990. This is a joint venture company between the petitioners and the 2nd and 3rd respondents are incorporated in Poland.

The business of the company is to provide engineering services, carry out erection, testing, commissioning and modification and rectification of equipments in overall Indian power stations including management to such services. The articles of the company provide for maintenance of 30 per cent shares in the hands of the petitioners, 51 per cent with the 2nd respondent, 10 per cent with the 3rd respondent and 9 per cent with the 4th respondent. The articles also provides for nomination of 4 directors by the 2nd respondent, 3 by the 1st petitioner, 2 each by the 3rd and 4th respondents. The Chairman is to be the nominee of the 2nd respondent or of the shareholder holding majority shares in the company. The Board has powers to appoint one of the directors as the president or the managing director. The articles also provide that the quorum for the general body meeting shall be 3 members personally present representing each group of shareholders and for the Board meetings one director from each group. The main grievances of the petitioners are that, they are not allowed to have effective participation in the company, the respondents have appointed their own nominee as the MD of the company against the wishes of the petitioners, that the respondents have incorporated another company with the view to divert the business of the company in active connivance of the 6th respondent and that the 6th respondent is guilty of financial mismanagement, diversion of funds of the company and guilty of violation provisions of foreign exchange regulations etc. and have sought for various reliefs including investigation into the affairs of the company.

2. Shri Sudipto Sarkar, the senior Advocate appearing for the petitioners submitted as follows : Even though the company is a 43A company, it has been incorporated in the guise of a quasi partnership between the Indian promoters, namely the petitioners and the foreign promoters, namely the respondents 2 to 4. With a view to ensure active participation in the management of the company, the Article provides for adequate representation from both the groups. Article 6 also provides for permanency in the shareholding percentage. Article 7 provides for pre-emptive rights in case of transfer of shares. Further, article 20 stipulates that for Board Meetings, to constitute the quorum, at least one director representing each group has to be present. Further, Article 15 stipulates that certain business in the general body meetings have to be approved by 75 per cent of all the shareholders of the company, which would mean that without the support of the petitioners, no business mentioned in article 15 could be carried through. Therefore, all these provisions would indicate that the company is nothing but a glorified partnership between the petitioners and the respondents 2 to 4. In spite of all these protective Articles, the respondents have been acting in an oppressive manner against the petitioners. Even though, the relationship between the petitioners and the 2nd respondent had been smooth and fruitful for all these years, yet, by appointment of the 6th respondent as the managing director against the wishes of the petitioners, the smooth relationship has come to an end. Even though, the 6th respondent was originally a nominee of the petitioners, he has changed his sides and has become now a nominee of the respondents. It is normally the 1st petitioner who procures orders from various powerhouses in India for turnkey projects. In these contracts, 80% of the contract value was to be done by the 2nd respondent and out of the balance, a portion of the contract is given to the 1st petitioner. In 1998, the 17th respondent, which itself a subsidiary of the 2nd respondent, incorporated the 16th respondent having similar objects as that of the company and the 6th respondent has started diverting the business of the company to the 16th respondent. This has resulted the company becoming a shell company without any business. When the 6th respondent came up for reappointment as the managing director with effect from 1-2-2000, the fact that he had incorporated another competing company was not disclosed in the resolution circulated. As a matter of fact, he himself is the managing director of the 16th respondent also. Therefore, the consent of all the directors for his appointment as the managing director of the company is required in terms of section 316 of the Companies Act, 1956 ('the Act'), which consent has not been obtained and therefore his appointment as the managing director with effect from 1 -2-2000 is invalid as also the remuneration drawn by him. The managing director being a full lime employee of the company cannot promote a competitor.

The worst is that even the registered office of the 16th respondent is housed in the residence of the 6th respondent. Since the company is a consultancy company, the 6th respondent having gained the knowledge, expertise and know how cannot use the same for the benefit of a competitor. Since he is also a director in the company, he is in a fiduciary capacity to protect the interest of the company. Being a trustee, he cannot use the expertise gained during the course of employment in the company other than for the benefit of the beneficiary, being the company. His functioning as the managing director of the 16th respondent is directly in conflict with the interest of the company. Further, in terms of Schedule XIII - Part II, he is entitled to get a maximum remuneration of only Rs. 40,000 but he is being paid much more than his entitlement, which is also illegal. In view of the provisions of section 309(5A), he is liable to refund all the remuneration received in excess.

3. He further submitted as follows : In spite of the request made by the petitioners in terms of section 209(4) of the Act, the company refused to give complete inspection of the accounts of the company.

However, later, the company offered inspection, which was canied out by one Shri Gupta, Chartered Accountant who has found out a number of instances of financial management and also violation of various statutory provisions. Reference was made to a copy of invoice at page 72 of the rejoinder, wherein the company had indicated that the amount due on the invoice was payable to the company's account at Warsaw, even though there is no disclosure in the accounts of the company about this account. Therefore, it is obvious the 6th respondent had siphoned of this money. Several expenses of the 16th respondent are found to have been booked in the books of account of the company. There have been various violations of foreign exchange regulations. There are no supporting vouchers for various reimbursements towards foreign travel expenses. Going through the inspection report prepared Shri Gupta, chartered accountant, he pointed out to various adverse comments of the chartered accountant and submitted that it is necessary that there should be an investigation into the affairs of the company.

4. Shri Sarkar further submitted : After having incorporated the 16th respondent, the respondents decided to hold a Board Meeting and an EGM in Poland on 14-3-2000 in which one of the resolutions was that the company would be voluntarily wound up in terms of section 484(1)(b) of the Act. In the same meeting, it was also to be resolved that the 6th respondent would be the voluntary liquidator at a remuneration of Rs. 57,000 per month. In the same meeting the 6th respondent was also appointed as the MD at the same remuneration. Even though for want of quorum, the meetings did not take place it is clear that the respondents had decided to kill the company after diversion of all the businesses to the 16th respondent. There have been irregularities in the appointment of auditors of the company also. One Gupta & Gupta were the auditors of the company for the year 1994-95. In the 5th AGM held on 29-1-1996, these auditors were removed and no auditors were appointed in that AGM. However, the 6th respondent was authorized to appoint the auditors. Accordingly, Gambhir, Nanda & Associates were appointed as auditors. Since the auditors were not appointed in the AGM, the company should have approached the Central Government in terms of section 224(3). These auditors are colluding with the respondents in suppressing various acts of financial mismanagement. One of the partners of this audit firm attended 3 EGMs of the company held in Poland even though there was no item relating to the audit were to be discussed in these meetings. The company had to bear all the expenses in connection with his visit to Poland.

5. Summing up his arguments, Shri Sarkar submitted that in spite of the joint venture agreement, the provisions of which have also been incorporated in the Articles, the respondents have been acting in a manner so oppressive that there has been no meaningful participation of the petitioners in the affairs of the company. Even though, the respondents offered to sell their shares in the company to the petitioners, yet, this suggestion could be considered only after a thorough investigation is conducted in the affairs of the company in view of the adverse remarks contained in the report of Shri Gupta on the accounts for the year 1998-99. Relying on George Mayor v. Scottish Cooperative Wholesale Society Ltd. (1954) SC 381 (Scot), he pointed out that a holding company has to deal with its subsidiary in a fair manner and if it does not do so, it is an act of oppression and stated that incorporation of the 16th respondent to engage in the similar business as that of the company is an act of oppression. Referring to Re RA Nobel & Sons (Clothing) Ltd (1983 BCLC 275), he submitted that where there is breach of agreement of equal participation in the management of the company, then, it is a fit case for ordering winding up of the company. Since in the present case, in spite of the protest by the petitioners regarding the appointment of the 6th respondent as the managing director, the respondents have appointed him as such and therefore there is no effective participation of the petitioners in the management of the company. As far as the investigation in the affairs of the company is concerned, he referred to the decisions of this Board in Eswar Usha Corpn. v. Richimen Silk Ltd. (1999) 1 CLA 237 and RE.Incab Industries Ltd. (1997) 1 CLJ 156 wherein on the basis of various deficiencies in the books of account of the company, an order of investigation was made. He also referred to Re. London School of Electronics Limited (1985 BCLC 273) wherein it was held that if the business of the company is diverted to another company by a director/ majority shareholder, then, it is not only an act of oppression but also imposes a duty on that person to pass on the advantage thus gained, to the company. He further submitted that since the business of the company has been diverted to the 16th respondent in breach of the fiduciary duties, even if bona fide, the benefits should be passed on to the company as held in Regal (Hasting) Ltd. v. Galliver (1942 1AER 378).

6. Shri Gopal Subramanium, the senior Advocate appearing for the respondents submitted as follows: The petition is devoid of any merit.

The only substantive allegation in this petition relates to the appointment of the 6th respondent as the managing director to which also the petitioner cannot have any grievance. Initially, this respondent was a nominee of the petitioners. Originally, a nominee of the 2nd respondent was the managing director of the company. In 1994, with the consent of Shri N.P. Gupta of the 1st petitioner company, the 6th respondent was appointed as the managing director for three years, at which time, he was the nominee of the petitioner. However, when the 2nd respondent obtained a contract for execution of a 75 MW Power Station from Gujarat State Electricity Board of the value of about Rs. 200 crores, the 1st petitioner wanted the Indian portion of the contract for about Rs. 20 crores to be given to itself for execution notwithstanding the fact that it should have legitimately gone to the joint venture company. However, with a view to keep the 1st petitioner in good humor, contract worth Rs. 12 crores was given to the 1st petitioner, which was definitely against the interest of the JV company. However, the 1st petitioner insisted on the entire Rs. 20 crores contract to be given to it. When the 6th respondent did not support the demand of the 1st petitioner, friction started between the 1st petitioner and the 6th respondent. After this incident, the 1st petitioner withdrew its nomination in respect of the 6th respondent and in 1997, and he was taken as the nominee of the 2nd respondent. From that time onwards, he has been continuing as the managing director of the company, his appointment being made in every AGM for one year, with the unanimous approval of the shareholders including the petitioners.

Therefore, they cannot now impugn his appointment. As far as his remuneration is concerned, the same is within the permissible limits as per law.

7. He further submitted as follows: In the year 1997, there was a reorganization of the 2nd respondent by which it was decided that this respondent would withdraw from the power sector all over the world and its subsidiary, namely, the 17th respondent would enter into the power sector. In view of the liberalised policy allowing 100 per cent subsidiary in power sector in India, the 17th respondent applied for and obtained FIPB approval to incorporate the 16th respondent. In other words, the 16th respondent is a wholly owned subsidiary of the 17th respondent and the 6th respondent being locally available assisted the 17th respondent to register the company by being a signatory to the Memorandum. This company was incorporated with a view to take care of the interest of the 17th respondent, which is not a shareholder in the company. The interest of the company is not in any way affected in as much as presently the company has executed all projected and is left with only one employee, namely, the managing director. Reference to page 127 of the petition would indicate that the idea of the 17th respondent was to liquidate the 16th respondent and to have cooperation with the 1st petitioner in a new form. This indicates that it was not the idea of establishing the 16th respondent to divert the business of the company. While suggesting liquidation of the company, the 2nd respondent had advised the 1st petitioner vide letter at page 128 of the petition that an agency agreement could be entered into with the 1st petitioner. In the letter dated 3rd December, 1999 (page 130), the 1st petitioner itself suggested suspension all the activities of the company and as such cannot now complain that the company has no business. As far as the alleged diversion of the business of the company, no diversion could have been possible in as much as the company had executed all the pending contracts and no new business was to come to the company in view of the 2nd respondent having given up the power business. Even though, the 16th respondent had undertaken the contract relating to operation and maintenance contract with M/s Tenughat Vidyut Nigam Ltd., it was negotiated and obtained by the consultant appointed by the 16th respondent way back in 1998 before the dispute started. Further, the company does not deal with O & M contracts and therefore the question of diversion of business does not arise. It is also to be noted that after the present petition was filed, the 16th respondent has not entered into any contract.

8. In regard to the report of Shri Gupta, the learned counsel submitted as follows: The report of the auditor cannot be considered in isolation of the fact which lead to the inspection. By a letter dated 3-12-1999, (page 131), the petitioner had evinced interest in the re-structuring of the relationship between the 17th respondent and the 1st petitioner.

In view of this proposal, the 1st petitioner had also decided not to proceed with the earlier legal notice issued by the 1st petitioner to the 17th respondent. Therefore, the motive for the present petition stressing investigation on the basis of the report of Shri Gupta is only to put pressure on the respondents to get into some working arrangement with the 1st petitioner and not with a view to protect the interest of the company. The prime motive of the petitioners is to derive some contractual benefit from the 17th respondent other than through the company and with a view to achieve this objective, the petitioners had stalled the Board Meetings of the company in the year 2000. That is the reason why they issued the letter dated 15-3-2000 (page 149) pointing out various deficiencies in the accounts of the company for 1998-99. When the draft annual accounts were circulated to the petitioners, claiming that they had to inspect the accounts of the company before considering the draft accounts proposed to be placed in the Board meeting on 14-3-2000, engaged Shri S.B. Gupta of Gupta and Gupta who were earlier the auditors of the company, to carry out the inspection. The Board meeting had to be adjourned to 21-3-2000 for want of quorum. According to the petitioners themselves, Shri Gupta made the inspection report available to them on 10-3-2000. In all fairness they should have placed the inspection report in the adjourned Board meeting on 21-3-2000 so that the Board would have had the opportunity to consider the report before approving the accounts. Now, the petitioners claim that the inspection report was ready only on 24-3-2000 which is factually wrong as they had already indicated in para 9.34 of the petition that the report was dated 10-3-2000. The inspection report contains certain material, which was not in the original draft annual accounts. Therefore, the inspection report should have been prepared, only after the respondents enclosed the approved annual accounts with the reply on 30-5-2000. If the petitioners had the inspection report as early as on 24-3-2000, there is no need to wait to enclose the same with the rejoinder. Any way, the respondents have replied to each and every point raised in the report, from which it can be seen that there is no substance in the adverse comments made by Shri Gupta. Referring to the allegation of the petitioners that the company has an undisclosed foreign account, he pointed out that the invoice at Page 72 of the Rejoinder is a forged one. In this forged invoice, it is shown that this amount was to be made by 'Bank transfer to Elektrim India Ltd. account Warsaw'. There are no particulars about the identification like bank account etc. It is a lake invoice as is evident from the fact that it is made on a containing sheet contrary to the commercial practice. Producing a copy of the original invoice in relation to the same transaction, he pointed out that in this invoice it is very clearly indicated that the amount was to be paid to the account of the company in Corporation Bank, New Delhi indicating the account number.

Any way, he submitted that this amount was not paid by the 2nd respondent in view of the cancellation of the agreement as is evident by a tetter from this respondent dated 15-6-1998, a copy of which was handed over to this Bench. Therefore, he submitted that the allegation of the petitioners that the company is having an undisclosed account in Warsaw is not borne by the facts. Further, the annual accounts approved by the Board have not yet been audited and it is too immature to allege that the accounts do not exhibit true and fair view.

9. In regard to the appointment of auditors for the year 1996-97, it was pointed out that the appointment of Gambhir Nanda & Associates was approved unanimously in the AGM held on 29-1-1996 and therefore it is wrong to state that the same was in violation of the provisions of the Act. Further, in all subsequent AGMs, the same auditors were appointed unanimously with the participation of the representatives of the petitioners. Even assuming that there was any infirmity in the appointment of the auditors, yet, the petitioners are estopped from challenging the same after a gap of 3 years.

10. Summing up his arguments, the learned counsel contended that the entire petition has been filed for an oblique motive to get some contractual arrangement with the 17th respondent. He also pointed out that without the collaboration with the 2nd respondent, the company cannot survive and since the 2nd respondent has already dis-associated with the business relating to power area, no assistance could emanate from that respondent. The 17th respondent, not being a shareholder of the company does not owe any allegiance to the company and therefore the 16th respondent, which is a subsidiary of the 17th respondent, cannot be considered to be a competitor. Ever some of the contracts referred to by the petitioners as procured by the 16th respondent were before the filing of the petition and in view of the pending proceedings, they are not taking on any new contract even though they are at liberty to take new contracts. The very fact that this petition has been filed only after the efforts of the 1st petitioner to get some working arrangement with the 17th respondent failed, it is evident that this petition has been filed with a mala fide intention which is evident from the fact that the only prayer insisted during the hearingis that this Bench should order an investigation into the affairs of the company. For the proposition that the petition with an oblique motive should not be entertained, he cited the case of Re.

Bellador Ltd. (1965 1 AER 667). Accordingly, he sought for dismissal of the petition.

11. Both the sides have filed written submissions. In the submissions by the petitioners, a large number of allegations have been made against the present auditors of the company, which we have decided not to take cognizance of in view of the fact that these auditors have not been impleaded as parties and they have no opportunity of refuting the allegations. In the same way, some of the allegations in the written submissions, which were not part of the arguments, have not been considered by us. We also note that in the petition, the main allegations related to the events occurred in or after 1999 but in the rejoinder and in the written submissions, the allegations have been made even on events that had taken place prior to 1999. It is on record that the petitioners had been parties to all the events before 1999 like passing of accounts, appointment of auditors, appointment of the 6th respondent as the managing director etc. In the exercise of equitable jurisdiction, the CLB has to take into consideration the conduct of the parties and if a person who has been a party to decisions cannot impugn those decisions later on, on the ground that such decisions amount to acts of oppression. While dealing with the allegations in the petition, we have kept this principle in mind.

12. We have considered the pleadings and the arguments of the counsel.

The main allegations of the petitioners are three fold : The appointment of the managing director against the wishes of the petitioners and in violation of the Act, setting up a rival company by the 17th respondent with the view to divert the business of the company as also the funds of the company and financial mismanagement including violation of the foreign exchange regulations.

13. In regard to the appointment of the 6th respondent as the managing director, the petitioners' complaint is three fold. One is that he was appointed against the wishes of the petitioners, the second is that his appointment in the EOGM held on 21-3-2000 was in violation of the statutory provisions in view of his being the MD of the 16th respondent and the third is that the remuneration approved and drawn by him is beyond the limits prescribed by the Act. We find that he was appointed as the MD for 3 years with effect from 1-2-1994 and the resolution to that effect was proposed by the representative of the petitioners themselves. At this time he was the nominee director of the petitioners. Again he was appointed as the MD for another year in an EOGM held on 22-1-1997 to which the petitioners opposed but the resolution was carried through by majority. Again he was appointed as the MD for another year with unanimous approval in the EOGM held on 18-2-1998. Again with the unanimous resolution of the Board, he was again appointed for one more year in the Board meeting held on 24-2-1999. The petitioners opposed his appointment for a further period of one year when the same was proposed by a circular resolution and also in the EOGM held on 21 -3-2000. Thus, in the tenure of nearly 6 years, the petitioner opposed his appointment as the MD only on two occasions and the appointment was approved by majority. Even though the petitioners contend that they had expressed their reservation about his appoinlment, yet they approved the same. They have not adduced any reason as to why they had any reservation about him. Even in the petition, other than stating that due to the unfair conduct of the 6th respondent, the petitioners lost confidence inhim (para 9.7), no details have been given. The allegations against him all relate to post 1999. From the details of the performance of the company furnished at para 9.39 of the petition we find that the turn over as well as the profits of the company had shown an upward trend during his tenure.

Meaningful participation, as contended by the petitioners, does not mean that without their consent, no decision can be taken. Therefore the complaint that there was no meaningful participation of the petitioners in the management of the company does not stand to scrutiny. Substantive allegations have been made against the 6th respondent only in 1999 after he incorporated the 16th respondent. Even the allegations against the other respondents also relate to post 1999.

Therefore, we do not subscribe to the stand of the petitioners that they were denied effective participation in the management of the company till 1999 only on the ground that in spite of their reservation about the 6th respondent, he was appointed as the MD.14. The next limb of the complaint about the 6th respondent is that he had been allowed remuneration, which is beyond the permissible limit which allegation does not seem to have been made in the petition. In the rejoinder, they have alleged that when the respondent was appointed as MD for 3 years in 1994, his remuneration was not fixed and approved by the general body, but he had drawn remuneration. In respect of the remuneration drawn by him during 1998-99, their complaint is that his remuneration was in excess of the permissible limits. There is no explanation as to why the petitioners did not point out this aspect either in the Board meetings or in the EOGM when the 6th respondent was appointed for further terms. If as contended by the petitioners that the 6th respondent has drawn remuneration in excess of the permissible limit, they are equally responsible for this violation. However the respondents have asserted that there the remuneration is within the legally permissible limits. We shall be giving appropriate direction on this later.

15. The third allegation relates to his appointment for a year with effect from 1-2-2000. This appointment was made by a circular resolution dated 27-1-2000. While the directors from the petitioners group opposed the resolution, the same was passed by the majority and later on in the EOGM held on 21-3-2000 by the majority. According to the petitioners, the fact that this respondent was also the MD of the 16th respondent was not disclosed in the circular resolution and since section 316 requires the consent of all directors, his appointment without such approval is invalid. Section 316 prohibits a public company from appointing a person as the MD if he is already the MD of another public company or private company which is a subsidiary of public company. However as per sub-section (2), a public company can appoint a person as the MD, if he is already the MD of a private company provided the same is done after passing a resolution at a meeting of the Board with the consent all directors present at that meeting. In other words, the appointment has to be made in a meeting with the consent of all those present in that meeting. In other words, the question of appointing a person who is already the MD of a company, as MD of this company by a circular resolution is not contemplated in section 316(2). In the present case, the company is a 43 A company, and the counsel have not addressed us as to applicability of this provision to a 43A company. If it is applicable, then the 6th respondent could not have been appointed as the MD through a circular resolution that too without the consent of all to whom the circular resolution was circulated. Without complying with this stipulation, the company cannot overcome this by getting the appointment approved by the general body.

It is surprising that when the petitioners sought an ex-parte order in the hearing on 21-3-2000 to restrain the general body from passing a resolution to wind up the company as proposed in that meeting, they did not seek any such order in respect of approving the appointment of the 6th respondent as the MD proposed in the same meeting, notwithstanding the legal infirmities pointed out by them. Instead of preventing the appointment by getting a restraint order, now they are complaining about the same. Since the non compliance with the provisions of the Act have been brought to our notice, we direct the company to make a reference to the Central Government in this regard within a month from the date of this order.

16. The next allegation is that the respondents have incorporated a rival company viz,, the 16th respondent with the view to divert the business of the company and as such it is an act of oppression against the petitioners and against the interest of the company. It is to be noted that the 16th respondent is a wholly owned subsidiary of the 17th respondent, which is not a shareholder in the company and it owes no duty towards the petitioners or the company. Even assuming that the company being a subsidiary of the 2nd respondent, the second respondent is bound to take care of the interest of the company as decided in Scottish Co-operative Society case, yet, we do not think that the 17th respondent, being the subsidiary of the 2nd respondent owes similar duties to the company. It is not disputed that there had been restructuring of the 2nd respondent by which it had decided, on a global basis, to withdraw from the power sector as early as in 1997.

Even this decision was on account of change in the management of the 2nd respondent. Therefore, in the normal course, the incorporation of the 16th respondent by the 17th respondent cannot be considered to be an act of oppression. The petitioners have complained that the business of the company is being diverted to the 16th respondent. For this allegation, no material has been placed as to which existing business, which in this case is contracts, has been diverted to the 16th respondent. If their allegation is that the future business opportunities of the company have been diverted, they have not shown whether in the absence of the assistance of the 2nd respondent, which has gone out of power business, the company could have had any business opportunity. The reliance by the learned counsel for the petitioners on London School of Electronics has no application in this case, as in that case, the respondents had taken away a large number of students enrolled with the respondent company to their own company, which means the existing business of the company was diverted. In a similar case of incorporation of a company in the same line of business by one of the directors of a company, in Pye Land Lease P. Ltd. v. Jewel Brushes P.Ltd, 1998 4 CLJ 363 CLB, the argument of the petitioner was that by the incorporation of the new company, the future business of the company had been diverted to the new company, Considering the facts and circumstances of that case this Board held : 'Therefore, it is not a lost opportunity but an opportunity which was never available to Jewel.

Under these circumstances, we do not find that future business of Jewel has been taken away by Unident or any business of Jewel had been diverted to Unident'. In the same way, unless the petitioners establish that they could have carried on the business of the company without the assistance of the 2nd respondent, the question of diverting the future business by the company to the 16th respondent does not arise. This being the position, the other cases cited by the learned counsel for the petitioners have no application in facts of this case. Therefore, we don't consider that the incorporation of the 16th respondent by the 17th respondent could be considered to be an act of oppression. In this connection, we may also refer to the various correspondence entered into with the petitioners and the 17th respondent by which the petitioners were trying to have an working arrangement between them and the 17th respondent, even with the suggestion of liquidating the company as well as the 16th respondent. It would indicate that the petitioners are more concerned about their interest than that of the company. The only grievance relating to the 16th respondent that deserves consideration is that if the company had funded any of the expenses of the 16th respondent, then, it should take immediate action to recover the same from the 16th respondent.

17. Another allegation of the petitioners is about the appointment of Gambhir Nanda and Associates as the statutory auditors of the company for the year 1995-96 was not made in the AGM held on 29-1-1996 when the earlier auditors were not reappointed. Even though the respondents contend that the auditors were appointed in that AGM, we find from the minutes of that meeting that the MD was authorized to appoint the auditors and accordingly, the auditors were appointed. As per section 224(3) and (4), when auditors are not appointed in the AGM, the company has to inform the Central Government, which alone could have appointed the auditor. Even though we note that it is the correct legal position, yet, the petitioners are estopped from raising this issue in the present proceedings, as their representatives were present in the AGM when the MD was authorized to appoint the auditors. Further, they never complained about this and as a matter of fact they have approved the appointment of the same auditors in the subsequent AGMs. As we have observed in relation to the remuneration of the 6th respondent, the directors from the petitioners group are also equally responsible for this violation and therefore cannot claim any relief on this score and they are at liberty to take up the matter with the Central Government.

18. Extensive arguments took place on the inspection report of Shri Gupta on the accounts for 1998-99 and on the basis of this report, the petitioners insisted for directing an investigation in to the affairs of the company. The observations in the report broadly relate to an undisclosed foreign bank account, non maintenance of proper books of account, accounting for prior period income and expenditure, payment of over Rs. 20,000 by way cash rather than crossed cheques, unsupported payments, transactions with the foreign companies as if the company is an authorized agent in foreign exchange, diversion of funds of the company for the benefit of the 16th respondent etc. The respondents have replied to the remarks in the inspection report. Now the issue is whether the adverse remarks, de-hors the reply given by the respondents, would warrant an investigation. Ordering investigation in a 397/398 petition is very rarely exercised unless and until it is established that the ingredients of section 237(t) are satisfied.

Seldom, this power has been exercised in respect of closely held companies, wherein the element of public interest rarely arises. The learned counsel for the petitioners cited the cases of Incab Industries and Richiman Silks wherein this Board had directed investigation. In the first case, the Central Government moved an application under section 237(b) and finding that the affairs of the company were being carried on in a manner affecting various section of the Society, this Board directed investigation. In Richimen the ground for ordering investigation was that, even though it was a listed company, it had failed to convene general body meetings for a number of years and that there had been defalcation of the funds of the company. Therefore, the decisions in those cases are not applicable to the present case. In the present case, most of the remarks of Shri Gupta relate to the improper maintenance of the accounts and non-complying with the Accounting Standards. The allegation relating to having a foreign bank account has been established to be incorrect. Transactions relating to the foreign companies are reportedly having the sanction of the RBI but no evidence has been produced to that effect. The company, even though a 43A company, is, in reality, a private company having only 5 shareholders.

The petitioners, who have sought for investigation, have three representatives on the Board and as per the articles, without their presence, no business can be transacted either in the Board or in the general body. In other words, the petitioners are closely associated with the affairs of the company and it is their duty to set right any wrongdoing. It is not the first time that they had sought for clarifications on the accounts. Even in the earlier years, they had sought for clarifications on practically every item in the accounts before the Board meetings and thereafter approved the accounts and till 1997-98, they had not dissented to the passing of the accounts in spite of seeking clarifications. Even in respect of the accounts for the year 1998-99, in the legal notice issued to the 2nd and 17th respondents on behalf of the petitioners on 13-9-1999 (Anncxurc M), allegations had been made about the accounts. However, when the 17th respondent conveyed its interest in having some business association with the 1st petitioner by letters dated 19-11-1999 and 25-11-1999, the legal notice was not proceeded with. Thus, we find some substance in the arguments of the respondents that the prayer for investigation is a motivated one. Nonetheless, we note that serious allegations have been made regarding payments being made in cash without any support including payments to Polish Nationals, adjustment of accounts of foreign nationals and foreign companies including holding respondent no. 2 company at the year end without any supporting documents, maintaining two cash books disclosing different transactions, unsupported payment of travelling bills including to foreign directors, diversion of funds for the benefit of respondent No. 2 company, illegally appointment and unauthorized remuneration drawn by the managing director including alternate directors, non compliance of mandatory accounting standards resulting in distorted profitability for different years adjusting various advances/debts of foreigners including associated companies in the respondent no. 2 company account without any supporting evidence, not accounting income/expenditure in the period to which it related resulting in distorted profitability payments made in cash entered in cash book not reflected in books, payment in cash in the guise of cheque payments and funding of profit and loss account. In our opinion, it is a fit case for ordering the inspection of books of account and other records of the company under section 209A of the Companies Act, Accordingly, we order the Central Government to order an inspection under section 209A of respondent company No. 1 on priority basis and thereafter take appropriate action, if any thereafter. We further direct that till such time the Central Government take such view on the findings of the inspection report, the order dated 2-5-2000 regarding maintaining status quo on the fixed assets as well as the deposits of the company will continue.

19. In regard to the final relief to be granted, in cases of closely held companies, this Board has always been directing one of the parties to sell their shares to the other party. In the present case, the respondents have expressed their willingness either to sell their shares to the petitioners or purchase their shares. However, the petitioners were not willing to either of the options till such time the investigation sought for by them is completed.

20. Accordingly, the petition is disposed of without any order as to cost.