National Company Law Appellate Tribunal
Shri M.N. Pratap Reddy & Anr vs M/S Sri Lakshmi Narasimha Mining Co. P ... on 24 April, 2023
NATIONAL COMPANY LAW APPELLATE TRIBUNAL,
CHENNAI BENCH
(APPELLATE JURISDICTION)
TA No.87/2021 (Comp. App. (AT) No.129/2019) &
For Directions IA/47/2022, For Additional
Documents IA/1086/2022
(Appeal under Section 421 of the Companies Act,
2013)
(Arising out of the order dated 22.03.2019 in C.P.
No.59 of 2014 in T.P. No.66 of 2016 passed by the
National Company Law Tribunal, Bengaluru Bench)
In the matter of:
Shri M.N. Pratap Reddy,
Flat No. 205, 2nd Floor, Vishwa Parkruthi
Haveli, Above Reliance Fresh, Amruthahalli
Main Road, Bengaluru-560024. ... Appellant No.1
Shri M. Kiran Kumar Reddy
Sri Lakshmi Nilayam
No. 266, 2nd Block, RMV 2nd Stage,
4th Cross, 80 Feet Road,
Sanjaynagar, Bangalore-560094. .... Appellant No.2
Vs.
M/s. Sri Lakshmi Narasimha Mining Co. (P)
Ltd., No. 83, Ground Floor,
6th cross, AG's Layout, New BEL Road,
Bengaluru-560054. .. Respondent No.1
Shri R. Swarup Reddy,
No.9, Ranjith Road,
Surya Nagar, Kotturpuram,
Chennai-600085. .. Respondent No.2
TA No.87/2021 (Comp. App. (AT) No.129/2019)
Page 1 of 38
Shri Yathin Reddy,
No.9, Ranjith Road,
Surya Nagar, Kotturpuram,
Chennai-600085. .. Respondent No.3
Ms. Jansi Reddy,
No.9, Ranjith Road,
Surya Nagar, Kotturpuram,
Chennai-600085. .. Respondent No.4
Shri Imran Pasha,
No.9, Ranjith Road,
Surya Nagar, Kotturpuram,
Chennai-600085. .. Respondent No.5
Present:
For Appellants : Mr. D. Abhinav Rao, Advocate
For Respondent No.2 : Mr. Krishnan Venugopal, Senior
Advocate
Mr. K. Udhayakumar, Advocate
For Respondent Nos.3 & 4 : Mr. Jayant K. Mehta,
Senior Advocate
Ms. Geetika Sharma and
Ms. Smiti Verma, Advocate
JUDGMENT
(Date: 24 .4.2023) (Virtual Mode) [Per.: Dr. Alok Srivastava Member (Technical) TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 2 of 38
1. The present Company Appeal TA No. 87 of 2021 [earlier registered as CA (AT) No. 129 of 2019] has been filed against the final order dated 22.3.2019 (in short 'Impugned Order') passed by the National Company Law Tribunal, Bengaluru Bench in CP No. 59/2014 (T.P. No. 66 of 2016) whereby the NCLT has dismissed the Company Petition filed by the Appellants.
2. In brief, the facts of the case as stated and argued by the Appellants, are that the Appellants Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy are minority shareholders of Respondent No. 1 Company (R-1) each holding 38,000 equity shares i.e. individually holding 13.68% of the issued, subscribed and paid-up capital of the Company. Further, the Appellants are also directors of R-1 Company. Appellants have further stated that due to a number of illegal and oppressive acts of Respondents No 2 to 5( in short "R-2", "R-3", "R-4" and "R-5"
respectively), the Appellants filed CP No. 59 of 2014 (TP No. 66 of 2016) before the Company Law Board, Chennai seeking certain reliefs, which included, inter-alia, declaration of Board meetings dated 6.9.2014 and 20.9.2014 to be invalid in law and TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 3 of 38 all resolutions passed therein to be null and void, direction for investigation to be carried out in the affairs of the Company including misconduct by Shri Venkata Rami Reddy, declaration of appointment of R-5 as Additional Director to be made null and void, and certain other reliefs. The Company Law Board, Chennai (in short "CLB") vide order dated 13.10.2014 allowed certain reliefs that were sought, namely declaration of Board meetings dated 6.9.2014 and 20.9.2014 to be null and void and directing investigation to be carried out in the affairs of R-1 Company including investigation into misconduct by Shri Venkata Rami Reddy in carrying out the affairs of the Company, on a consent given by the Respondents therein.
3. The Appellants have further stated that after the order dated 13.10.2014 was passed by the Company Law Board, M/s. H.C. Kincha & Company, Chartered Accountant, Bengaluru were appointed as Independent Auditor of R-1 Company, but due to certain reasons M/s. H.C. Kincha & Company were unable to carry out the said audit. Thereafter, vide order dated 7.7.2015, M/s. Brahmayya and Company, Chartered Accountant, Bengaluru were appointed as Independent Auditor to audit the books of accounts of R-1 Company for the period 1.4.2007 to 31.3.214 and in compliance, the Auditor furnished TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 4 of 38 Draft Audit Report dated 16.1.2016 wherein evidence of alleged gross mismanagement, fraud and other issues in accounts on the part of R-2, R-3 and R-4 along with illegal payments made to Auro Logistics Ltd. (in short 'ALL') and Trans India Shipping Services Pvt. Limited (in short 'TISSPL') in collusion with Mr. Venkata Rami Reddy, Company Secretary were found. The Final Audit Report was submitted in a sealed cover to the NCLT on 13.11.2017 after obtaining comments of relevant persons/parties, but the Final Report could not be released for want of payment of full fees to the Auditor. The Appellants have submitted that by passing the Impugned Order, the NCLT has erred by not giving appropriate direction on the prayer made by Appellants for payment of the balance fees and in directing for the release of the Final Audit Report to the parties and merely granting liberty to Appellants to file a fresh case based on the findings of the Audit Report is not appropriate consideration of the prayers made by the Appellants in the original company petition. Furthermore, he has claimed that the NCLT also erred in holding that the shares allotted to R-3 and R-4 and transactions relating to land were in accordance with law and aggrieved by the Impugned Order the Appellants have filed the appeal.
TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 5 of 38
4. We heard the arguments of the Learned Counsels for all the parties and perused the record.
5. The Learned Counsel for Appellants has argued that the Appellants are minority shareholders in R-1 Company and they have filed Company Petition under Sections 397, 398, 402, 403, 406 and 409 of the Companies Act, 2013 against the Respondents, who are majority shareholders holding 64% of shareholding, challenging their actions regarding mismanagement in R-1 Company. The Learned Counsel for Appellants has further argued that by the Impugned Order, the NCLT has erroneously dismissed the CP No. 59 of 2014 (TP No. 66 of 2016) without considering the Final Audit Report submitted by the Independent Auditor M/s. Brahmayya and Company, Chartered Accountant, whereas notably the Chartered Accountant was appointed on the orders of the CLB for conducting an Independent Audit of the wrongdoings of Respondents and mismanagement in the Company on the part of R-2 to R-4 in collusion with Mr. Venkata Rami Reddy, the Company Secretary. He has stated that the Final Audit Report submitted by the Independent Auditor after obtaining the comments and views of all the parties against whom various acts of mismanagement and misappropriation had been found, TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 6 of 38 and by order dated 18.7.2018, R-1 Company was directed to pay 50% of the fees by the Auditor which was a total of Rs. 36 lakhs, but the Respondents did not pay the requisite share of the fees deliberately and with the malafide intention of suppressing the Final Audit Report. He has further added that this act of Respondents was in contempt of the order of the NCLT dated 18.7.2018 and therefore, instead of getting the Respondents to pay their share of Independent Auditor's fees, the NCLT by the Impugned Order dated 22.3.2019, should have opened the Final Audit Report which was kept in a sealed cover and the wrongdoings and misconduct of Respondents in operating affairs of the Company and mismanagement could have come to light and receive due consideration by the NCLT before passing the Impugned Order.
6. The Learned Counsel for Appellants has pointed out that the Appellants had, through their CP No. 59 of 2014, made various allegations including the allegation regarding mismanagement in the affairs of the Company, which included misconduct of Shri Venkata Rami Reddy which was directed to be investigated vide the order dated 13.10.2014 of the Company Law Board, Chennai, which was given on the basis of no objection being given by the Respondents for appointment of TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 7 of 38 Independent Auditor by the Company Law Board to audit the books of accounts of the Company to ascertain the truth alleged by the Appellants as petitioner of CP No. 59 of 2014. This investigation was directed to be carried out by M/s. H.C. Kincha and Company Ltd., Chartered Accountant, who was later replaced by M/s. Brahmayya and Company, Chartered Accountant, as M/s. H.C. Kincha and Company Ltd. expressed inability to carry out the audit.
7. The Learned Counsel for Appellants has submitted that in the Impugned Order in paragraph 25 notes that the IA No. 124 of 2019 was filed seeking to furnish a copy of the Final Audit Report, but the same was not acceded to, but the Adjudicating Authority went to hold that the Auditor would directly furnish a copy of the Final Audit Report to the parties, including the petitioners i.e. Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy, after payment of balance of Auditor's fees and the petitioners were granted liberty to file a fresh case in case the findings in the Auditor's report give any cause of action, and additionally all the pending IAs were dismissed without giving due consideration. The Learned Counsel for Appellants has submitted that investigation into the affairs of R-1 Company was ordered by the CLB and once the Final Audit Report was TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 8 of 38 submitted to the CLB, it was necessary that the findings of the report were made available to the respective parties and adjudication was done in the light of the findings of the Auditor's report. Therefore, the NCLT has erred in closing CP No. 129 of 2019 and dismissing it without even looking at the contents of the Audit Report which include glaring instances of misconduct and wrongdoings in the management in the affairs of the R-1 Company, which was an important prayer in CP No. 59 of 2014. He has further contended that filing of a fresh petition would only result in unnecessary litigation, when the CP No. 59 of 2014 had been filed on the grounds of oppression and mismanagement and at least the contents of the Final Audit Report should have been noticed and adjudicated upon by the NCLT rather than passing a blanket order for dismissing CP No. 59 of 2014.
8. The Learned Counsel for Appellants has also argued that once the Final Audit Report prepared by M/s. Brahmayya and Company, the Chartered Accountant has seen and adjudicated upon, only then their prayers can be appropriately and fairly looked at, and therefore the matter should be remanded to the NCLT for releasing the Final Audit Report to the parties and the finding therein adjudicated upon, after setting aside the TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 9 of 38 Impugned Order. The Learned Counsel for Appellants has thus argued that the matter should be remanded to NCLT for examining and adjudicating on the alleged wrong doings of Shri Venkata Rami Reddy and Respondents No. 2 to 4 that appear prominently in the Audit Report.
9. The Learned Counsel for Appellants has cited the following judgments in support of his contentions:
(i) Motor General Finance Ltd. versus
Commissioner of Income Tax [2004 11 SCC 272]
(paras 6 and 7)
(ii) Om Prakash Avulla Versus Achala Gold Agritech Investment Limited & Ors. [2020 SCC Online NCLAT 874] (para 12)
10. The Learned Senior Counsel for R-3 and R-4 has argued that the NCLT has not erred by dismissing CA No. 59 of 2014, since the Final Audit Report could not be released as the issue of payment of fees by the parties was pending, which became a contentious issue, and therefore, NCLT by the Impugned Order directed that a copy of the Final Audit Report be furnished to the parties after payment of the balance fees of the Auditor by respective parties as has been decided by NCLT and the Appellate Tribunal and liberty was granted to the petitioners of TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 10 of 38 the original Company Petition to file fresh case, in case they found any cause of action based on the findings of the Auditor's Report.
11. The Learned Senior Counsel for Respondents R-3 and R-4 has referred to the judgment of Hon'ble Supreme Court in the matter of Syeda Rahimunnisa vs Malan Bi (Dead) by Legal Representatives & Anr. [(2016) 10 SCC 315], wherein in paragraph 36, the Hon'ble Supreme Court has held that it is necessary for the Appellant to raise an explicit plea of remand and further in para 7 of this judgment reference is made to Income-Tax proceedings where documents were produced before the Hon'ble High Court but not noticed by the Hon'ble High Court in its order, and therefore an order remanding case for consideration by the Hon'ble High Court was made out
12. The Learned Senior Counsel for R-3 and R-4 has further contended that remand of the case to NCLT is not a matter of right and can be done only if the pleadings are present in the original Company Petition and all the parties, whose names and actions appear in the Final Audit Report, are joined in the petition as necessary parties. In this connection, he has cited TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 11 of 38 the judgment of Hon'ble Supreme Court in the case of Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. (2021 3 SCC
475), wherein it is held that in the absence of necessary pleadings, the question of remand will not make any difference since all the respective parties, who are necessary parties, should have been impleaded in the petition and only thereafter adjudication can be done on the contents of the Report and in the present case the persons against whom allegations have been made and findings rendered by the chartered accountant were not arrayed as parties in the original company petition.
13. The Learned Senior Counsel for R-3 and R-4 has also claimed that after the order dated 29.10.2018, whereby the NCLT directed the parties to pay the audit fee, the company paid its share, but the petitioners (Appellants in the appeal) did not pay their share and therefore, the Report continued to remain in sealed cover. On other issues raised in the company petition, he has stated that the arguments about the transfer of shares has been noticed in the Impugned Order and it very correctly holds that the decisions in the Board meetings were taken by the petitioners while they were at the helm of the company and the petitioners No. 1 and 2 ( Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy respectively), who were TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 12 of 38 whole time directors of the Company at that time, cannot now claim that the decisions taken under their charge as whole time directors are faulty. He has further claimed that a memo was filed on 6.3.2019, which recorded that petitioners had undertaken to pay the balance of fees payable to the M/s. Brahmayya and Company, Chartered Accountant by mobilizing funds, but they did not fulfil their commitment, and so the Final Audit Report could not be made available to all the parties.
14. The Learned Senior Counsel for Respondents No. 3 and 4 has added that, thus, in the absence of any pleadings on the findings of the Auditor's Report, it was not possible for the Tribunal to examine the findings contained in the Auditor's Report. In this connection, he has cited the judgment of Hon'ble Supreme Court in Sangramsinh P. Gaekwad & Ors. versus Shantadevi P. Gaekwad (Dead) through LRS. and Ors. (2005 11 SCC 314) to claim that in the absence of pleadings, no allegation about the oppression and mismanagement in the company's affairs can be adjudicated upon.
15. The Learned Senior Counsel for R-2, while presenting his arguments, has argued that the petitioners had sought five TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 13 of 38 reliefs through CP No. 59/2014 from the Company Law Board, and four reliefs were granted by a consent order dated 13.10.2014. Out of the four reliefs granted, one related to the issue whether the shares that were allotted to R-3 and R-4 should have been allotted at a premium and whether such premium amount was paid. He has referred to the Impugned Order stating that the issue of payment of premium on shares allotment is dealt with in detail in the Impugned Order, wherein it is held that the issue requiring the payment of premium is not evidenced by any document and nowhere it is shown that the allotment of shares made to R-3 and R-4 was conditional upon payment of premium for shares allotment, and moreover, the petitioners namely, Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy were in control of the Company as directors, who allotted the shares and therefore, R-2, R-3 and R-4 cannot be held responsible and liable for any non-payment of premium. He has further referred to the Board's resolution allotting the shares, which has the signatures of both Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy and further in the additional documents filed by Diary No. 21249, the Form 2 regarding allotment of 177800 shares clearly shows that no premium was paid or was expected to be paid. On this basis, he has claimed that no relief or prayer is left for consideration in TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 14 of 38 the original CP No. 59/2014 and therefore the appeal deserves to be dismissed.
16. The Learned Senior Counsel for R-2 has also argued that the shares were allotted in December 2011, whereas all transactions in the Audit Report relate to the period 2007 to 2010, when the mining lease was in operation, but in 2011 the mining activity was stopped after the order of Hon'ble Supreme Court in another matter. He has further contended that the Auditor was prejudiced against the Respondents. He has further pointed out that whenever monies were paid to ALL and TISSPL, the cheques were signed by the Appellants who cannot complain about their own acquiescence in such payments. He has further claimed that IA No. 923/2022 which was not submitted before the NCLT, but has now been placed before the NCLAT at the final hearing stage, should not be considered.
17. The Learned Senior Counsel for R-2 has submitted that the letter dated 9.3.2015 addressed to Income-Tax Authorities was sent after the filing of the company petition by the petitioners, which confirms that the amount of alleged wrongful transactions actually related to trade payables. He has further TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 15 of 38 claimed that the payments made to ALL and TISSPL relate to transactions of the period before R-2 became a shareholder. He has further claimed that all the expenses incurred, which are part of the Final Audit Report prepared by relate to the period prior to December 2011, when the two brothers, namely, Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy were in control of the Company. Further, he has given details of transactions that were made by the Appellants or their father Shri Dasarath Rami Reddy who was the Managing Director of the Company, but the Auditor has put the responsibility for making such payments on the Respondents by claiming that the Shri Venkat Rami Reddy was responsible in getting everything done from the petitioners/appellants. He has argued that Shri Venkat Rami Reddy is not a party in the original company petition and therefore, his responsibility cannot be looked at.
18. The Learned Senior Counsel for R-2 has also argued that such contentions/allegations made by the petitioners/appellants and/or which appear in the Audit Report cannot be considered even by this Tribunal, as he is not a party in the appeal. He has also claimed that the contracts with ALL and TISSPL were duly approved by the Board of Directors of R-1 Company and if any payments were made to them, the TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 16 of 38 Respondents cannot be held responsible. In support, he has cited the judgment of Hon'ble Supreme Court in the matter of Incable Net (Andhra) Limited v. AP Aksh Broadband Limited [2010 6 SCC 719] wherein it is held that a commercial contract approved by the respondents stands outside the ambit of sections 397 and 398 of the Companies Act, 2013 and failure to act in terms of the contract cannot be said to have amounted to oppression and mismanagement.
19. On the request of the Learned Counsels of the parties, we decided to hear the parties on merits too, since the appeal had been pending for quite some time, and we felt that after deciding the issue regarding remand of the matter to the NCLT, we could then consider the appeal on merits based on the findings in the Audit Report, if it was found necessary. Therefore, we will firstly take up the issue of remand on which arguments have been advanced by the Learned Counsels for rival parties. The arguments presented by the Learned Counsels on merits of the case are, therefore also being noted here.
20. While advancing arguments on the grounds of merits, the Learned Counsel for Appellants has claimed that the TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 17 of 38 Respondents in the original Company Petition had given their consent for investigation to be carried out in the affairs of the Company by an Independent Auditor, as is recorded in para 3 of the CLB's order dated 13.10.2014, and the Final Audit Report was submitted in a sealed cover to the NCLT, but it was kept as such just on the ground that the audit fees was not paid in full which is a flimsy ground, and so the prayers made by the Appellants in the original company petition remained to be adjudicated upon.
21. The Learned Counsel for Appellants has further stated that the Auditor's final report is now open and before this Appellate Tribunal, and the Executive Summary and the detailed findings in the Final Auditor's Report point to many acts of wrongdoings on the part of Mr. Venkata Rami Reddy and other directors, including the two companies ALL and TISSPL, and since both ALL and TISSPL are owned directly or indirectly by R-3 and R-4, they are liable to face action for the wrongdoings and mismanagement of the company's affairs, and further R-2 is also liable since he is the father and husband of R-3 and R-4 respectively. He has contended that the prayer made by the Appellants as petitioners in the original CP No. 59 of 2014 was regarding various act of irregularities in payments TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 18 of 38 and running of the Company leading to oppression and mismanagement of the Appellants, and therefore, after the CLB had ordered a special audit by M/s. Brahmayya and Company, Chartered Accountant, there was no reason why the NCLT should not have considered the contents of the Audit Report, examined them and then adjudicated on them. He has adverted in great detail to various findings in the audit report to show the complicity of R-2, R-3 and R-4 which have remained to be looked at by NCLT, but which are now clear and hence even on merits they should be held liable and the monies illegally transferred from R-1 company to their relatives illegally should be recovered from them and deposited in the company's accounts. He has also referred to the allotment of equity shares to R-3 and R-4, which was a fresh allotment done in contravention of the provisions of the Articles of Association of the R-1 Company.
22. Arguing on the merits of the case, based on the findings in the Audit Report, the Learned Senior Counsel for R-3 and R-4 has adverted to the Final Audit Report and its various sections to show that all the payments were made when the Appellants were directors in company and all the payments took place after their approval and in their complete knowledge. He has TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 19 of 38 submitted that the payments made to ALL and TISSPL were made for the services which were rendered by the two companies in accordance with their contractual arrangement with R-1 Company and further the Appellants had approved all the payments. He has also claimed that M/s. Brahmayya and Company, the auditor appointed by the CLB favoured the Appellants and therefore, the Report prepared by them contains findings against the respondents which should not be relied upon.
23. We will first consider the arguments put forth by the rival parties on the issue whether the matter requires to be remanded to the NCLT for considering the issues that arise in the Final Audit Report. If the answer to this question is not in the affirmative and we do not find the case fit for remand, only then shall we consider the appeal on the merits of the findings of the Audit Report.
24. In doing so, we first look at the pleadings and reliefs sought in CP No. 59/2014, which is the genesis of this appeal. The prayers made in CP No. 59/2014 are as follows:-
TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 20 of 38 "8. Reliefs:
Wherefore, the Petitioners pray that this Hon'ble Board may be pleased to pass on order:
a. Declare that the Board Meetings dated 06.09.2014 and 20.09.2014 to be invalid in law and all resolutions passed thereat to be null and void;
b. Directing investigation to be carried out in to the affairs of the company including the misconduct committed by Shri. Venkata Rami Reddy in accordance with section 406 read with Schedule XI of the Companies fin Act, 1956 and direct the Respondents 2 to 4 to restore to the company all rah funds misapplied or retained by them including the company funds gran illegally diverted showing them as payments due to Auro Logistics Ltd. and Trans India Shipping Services (P) Limited.
c. Declaring that the appointment of the Respondent 5 as Additional Director to be null and void;
d. Granting permanent injunction restraining the Respondents 2 to 5 from dealing with the immovable properties, funds and other assets of the company; e. Directing the Respondents 3 and 4 to pay to the company the premium due on the shares allotted by the company on 02.12.2011 at the fair value to be determined by this Hon'ble Board;
f. Pass such further or other orders as this Hon'ble Board may deem fit and proper in the facts and circumstances of. the case and thus render justice."
25. We now peruse at the judgment of Company Law Board dated 13.10.2014, whereby the CLB ordered for a special audit to be carried out in the context of the allegation of wrong doings and mismanagement in the affairs of the R-1 Company. The paragraph 4(b) of the order of CLB dated 13.10.2014 in this TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 21 of 38 regard is as follows:-
"4. Heard the learned Senior Counsel appeared for the respective parties. In view of the above submissions and mutual consent expressed by the learned counsel for both the parties before this Bench, I hereby pass the following order:
xx xx xx xx
b) I, grant prayer 8(b) of the main relief and accordingly appoint M/s. H C Kincha & Company, Chartered Accountants, Bangalore (Ph No: 080-26702560) as Independent Auditor of the R1 Company. The company shall furnish all the books of accounts to the Independent Auditor.
The Independent Auditor shall complete the audit work by end of December 2014 and furnish the draft report to the petitioners and the respondents. After taking into consideration the comments if any of both sides the Independent Auditor shall submit his final report to the Bench thereafter within a period of 30 days. The company shall pay the remuneration and other incidental expenses to the Independent Auditor as claimed by him."
26. It is further noted that the order relating to the appointment of M/s. H.C. Kincha and Company, Chartered Accountant as Independent Auditor of R-1 Company was modified vide order dated 7.7.2015, and M/s. Brahmayya and Company, Chartered Accountant were appointed as Auditor to carry out the audit of R-1 Company and submit a report within a period of 30 days to the Bench. By an order dated 23.7.2015, the Company Law Board modified its earlier order dated 7.7.2016 and directed that the Independent Auditor M/s. Brahmayya and Company, Chartered Accountant shall carry out audit of the books of accounts of R-1 Company for the TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 22 of 38 period 1.4.2007 to 31.3.2014.
27. The Independent Auditor furnished the Draft Audit Report to the parties vide e-mail dated 16.1.2017 and also furnished hard copy of the Draft Audit Report to the concerned parties. Thereafter, it is noted that the matter of payment of the Auditor's fees was considered by NCLT in CP No. 59/2014 and vide order dated 18.7.2017, the following order was given regarding payment of the Auditor's fees:-
"Only final report is to be submitted by the Auditor to the Tribunal. The Auditors have submitted a claim for Rs. 36.00 lakhs towards their fee including service tax. The Auditors already did some work with regard to verifying the accounts of the Company and therefore, some amount is to be paid to the Auditors out of the claim which is subject to passing a final order as we have heard both sides about the fee to be payable to Auditor basing on their claim.
Since already the Auditors have submitted interim report and final report is to be submitted after completing the remaining audit, if any, the first Respondent Company is directed to pay 50% of the fee now claimed by the Auditors out of Rs. 36.00 lakhs at the first instance with fifteen days from the date of this order. The balance of the fees payable to the Auditor will be decided by passing a separate order as we have heard at length both sides."
28. The above order of NCLT was carried in appeal to NCLAT in CA(AT) No. 295 of 2017, wherein the following order passed on 17.11.2017:-
TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 23 of 38 "Heard learned counsel for the appellant and learned counsel for Respondents Nos. 1 and 2 as well as Chartered Accountant appearing on behalf of Respondent No. 7- Brahmayya & Co., which has been impleaded in view of order dated 7th November, 2017.
Perused the impugned order dated 18th July, 2017. The learned National Company Law Tribunal, Bengaluru Bench (hereinafter referred to as 'NCLT) had directed deposit of half of the fees of Rs. 36 Lakhs (i.e. Rs. 18 Lakhs) and said that balance of fees payable will be decided by passing separate order. NCLT directed the Auditor to complete the Audit work.
Rs. 5 Lakhs have already been paid. The impugned order shows that the learned NCLT has heard the parties regarding the fees claimed by Respondent No. 7. It would be appropriate that the learned NCLT takes a final decision on the fees to be paid. The Chartered Accountant of Respondent No. 7 submits that he will be able to submit the final Audit Report by the end of this month. The learned NCLT would naturally take a final decision considering the efforts put in by the Auditor regarding the fees.
We do not think that in the present impugned order, which was more interim in nature, we should take a decision, in this appeal.
Leaving all the questions open, the present appeal is disposed of.'"
29. Thereafter the payment of the balance fees of the Independent Auditor was again considered by the NCLT in CP No. 59/2014 by order dated 19.1.2018, which was carried to NCLAT in appeal by CA(AT) No 77 of 2018, wherein the Appellate Tribunal was pleased to pass the final order as follows:-
TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 24 of 38 "28. In the course of arguments, we toyed with idea if the 7th Respondent appearing in person through Mr. N.S. Sudarshan Gupta would consider voluntarily accepting to reduce the fees to some extent. The 7th respondent fairly stated that it would accept the orders of the Tribunal and another Rs.4 or 5 lakhs may be reduced. However, going through the material on record and the impugned order for which the audit was involved and the mandays Company Appeal (AT) No.77 and 121 of 2018 which were required to be spent as well as the expenditure made on audit of sister concerns, we feel it would be improper for us to reduce fees, least it set a precedent and generating litigations with the hope of getting reduction through the Tribunal by agitating the fees. When the auditor is showing the fees on the basis of ICAI norms we find it improper to interfere. The appellants are also not with clean hands and plead insufficiency of money in their accounts and when the NCLT directed that they can have the money by recovering what their dues are from their sister concern, the appellants, come up in appeals. We do not find that the impugned order has given any cause to the appellant in Company Appeal (AT) No. 121 of 2018 to file the appeal.".
29. For such reasons we proceed to pass the following orders:-
"Company Appeal (AT) No.77/2018 as well as Company Appeal (AT) No.121 of 2018 both are dismissed. In the circumstances no orders as to costs."
30. Therefore, it is quite clear from the above-mentioned order that the issue of Auditor's fees was settled at Rs. 36 lakhs and the NCLAT did not consider it proper to reduce the fees, since the basis of fees was as per Institute of Chartered Accountants of India (ICAI) norms. Further, the NCLAT felt that the Appellant R. Swarup Reddy (who is one of the respondents in the present appeal) has not been correct in pleading insufficiency of money in Company's accounts for paying the Auditor's fees. We are, TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 25 of 38 therefore, of the view that once the matter of payment of Auditor's fees was finally settled at the level of NCLAT, it was the duty of all the parties concerned to pay their obligatory shares of the fees.
31. We now peruse the Impugned Order dated 22.3.2019 in CP No. 59/2014 (TP No. 66 of 2016), wherein in para 27, the following final orders have been given:-
"27. In the result, C.P. No.59 of 2014 (T.P. No.66 of 2016) is hereby dismissed. The Auditor (M/s. Brahmayya & Co.) is directed to furnish a copy of its Report to the parties, subject to payment of their fees by the parties as per the directions of Tribunal. The Petitioner is also granted liberty to file fresh case, in case, findings in the Auditor report gives any cause of action. Resultantly, all pending 1.As stands dismissed and interim orders stands vacated. No order as to costs."
32. A perusal of the Impugned Order in para 25 makes it clear that IA No. 123 of 2019 and IA No. 124 of 2019 were filed by the petitioner, namely Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy (who are Appellants in the present appeal),, inter alia, seeking direction to furnish a copy of the Final Audit Report to both the parties to the original Company Petition pending disposal of the company petition. It is quite clear that these Interlocutory Applications were filed by the petitioners to enable TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 26 of 38 them to gain knowledge of the findings in the Final Audit Report.
33. It is also worth noting that the CLB while considering prayer 8(b) from among the main reliefs sought in CP No. 59/2014 had directed for appointment of an Independent Auditor, who was to submit his final report to the Bench within a period of 30 days. It was also directed in the said order that the Company shall pay the remuneration and other incidental expenses to the Independent Auditor as claimed by him. Notably, this order was given in the light of the consent given by both the parties, which is recorded in para 3 of the Impugned Order as follows:-
"With regard to the investigation to be carried out in the affairs of the Company is concerned, he submitted that the respondents have no objection in appointment of an independent auditor by this Bench to audit the books and accounts of the Company to ascertain the truth as alleged by the petitioners as prayed in para 8(b) of the main reliefs."
34. It is thus clear that the order for appointment of Independent Auditor to look into the accounts of R-1 Company and furnish draft audit report to the petitioners and Respondents was given with consent of the rival parties and it was also directed that the Final Audit Report, after taking into account the comments of both the parties, shall be submitted to the Bench within a period of thirty days, and furthermore, there was direction to the Company to pay the remuneration and other TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 27 of 38 incidental expenses to the Independent Auditor as claimed by him.
35. We note that after this order dated 13.10.2014 passed by the CLB, the matter was posted for 10.12.2014. This is a clear indication that the issue of submission of the Final Audit Report and the consideration thereof was to be done by the CLB. It is, therefore, very clear that the CLB or its successor tribunal NCLT should have taken note of the Final Audit Report and after due consideration of the findings passed an appropriate order.
36. In the judgment in the matter of Motor General Finance Ltd.(supra) which is cited by the Learned Counsel for Appellants, the following was observed:-
"6. The learned counsel appearing for the appellant points out from the record that the observations made by the High Court are factually incorrect and, as a matter of fact, the statement of relevant account was produced before the Commissioner of Income Tax, copies of which are in these appeal papers at pp. 70-74, notice of which has not been taken by the High Court. The learned counsel stated that it is in view of this factual error that the High Court has, by the impugned order, allowed the appeal of the respondent.
7. We have seen from the file that, as contended by the learned counsel, certain statements were produced before the authorities, notice of which has not been taken by the High Court. The contents of these statements would have vital importance on the ultimate decision that the High Court may TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 28 of 38 have to take. Therefore, we think it appropriate that since the High Court has proceeded on an erroneous factual basis, this matter should be remanded back to the High Court to consider the material produced by the appellant which is found at pp. 70-74 of the appeal papers and decide the case on that basis."
37. We are of the view that the above-mentioned judgment supports the case of the Appellant where the facts suggest that a proper consideration of the audit report requires the case to be remanded to NCLT.
38. We also peruse the observation of Hon'ble Supreme Court in the matter of Om Prakash Avulla (supra), which is as under:-
"12. It is observed that the all these suggests that Extra Ordinary General meeting as ordered by NCLT be convened after convening the Board Meeting and giving proper notice in accordance with provisions of Companies Act, 2013. After approval of the Board, the specific agenda with statement in accordance with section 102 of Companies Act, 2013 to consider the proposal to sell the property based on Auction through the newspaper and online modes be placed before Extra-Ordinary General Meeting. An Independent Administrator be appointed by the NCLT in order to have a proper voting by poll and not by show of hands and all material facts in relation to sale of the property be placed in the Extra Ordinary General Meeting and all the deliberations are properly recorded. Based on the decision of Extra Ordinary General meeting the sale of property of the Company, if approved, be acted upon. The requirement of the Appellant herein to be the joint signatory to an agreement to sell or to a sale deed according to the impugned order is therefore removed. The NCLT is to review Independent Administrator's report for proper disposal of the cases at hand. We accordingly remand back the matter to NCLT, Hyderabad."
TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 29 of 38
39. The judgment in the above-stated case of Om Prakash Auvlla (supra) directed for remand of the case so that the NCLT could do proper consideration and appreciation of the Independent Administrator's report. In the facts of the present case too, consideration of the Independent Auditor's report has not been done by the NCLT, and hence, this judgment supports the contention of the Appellants.
40. We also peruse the observation in Hon'ble Supreme Court's judgment in the matter of Sangramsinh P. Gaekwad (supra) which was cited the Learned Senior Counsel for R-2 and R-3, and which is as under:-
"183. The remedy under Section 397 of the Companies Act is not an ordinary one. The acts of oppression must be harsh and wrongful. An isolated incident may not be enough for grant of relief and continuous course of oppressive conduct on the part of the majority shareholders is, thus, necessary to be proved. The acts complained of may either be designed to secure pecuniary advantage to the detriment of the oppressed or be a wrongful usurpation of authority.
Xx xx xx xx
185. It has to be borne in mind that when a complaint is made as regards violation of statutory or contractual rights, the shareholder may initiate a proceeding in a civil court but a proceeding under Section 397 of the Act would be maintainable only when an extraordinary situation is brought to the c notice of the court keeping in view the wide and far- reaching power of the court in relation to the affairs of the company. In this situation, it is necessary that the alleged TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 30 of 38 illegality in the conduct of the majority shareholders is pleaded and proved with sufficient clarity and precision. If the pleadings and/or the evidence adduced in the proceedings remains unsatisfactory to arrive at a definite conclusion of oppression or mismanagement, the petition d must be rejected.
xx xx xx xx
200. It is now well settled that a case for grant of relief under Sections 397 and 398 of the Companies Act must be made out in the petition itself and the defects contained therein cannot be cured nor the lacuna filled up by other evidence oral or documentary.
xx xx xx xx
207. We may now consider the submissions of Mr. Desai that Appellant 1 herein is guilty of commission of fraud. Application filed by Respondent 1 before the Gujarat High Court does not contain the requisite pleadings in this behalf, the requirements where for can neither be denied nor disputed."
41. The above-cited observations are distinguishable as in the said case, the original company petition required complete pleadings for proper adjudication, whereas in the instant case allegations had been made about wrongdoings and mismanagement in the affairs of the Company and the CLB directed for preparation of the Independent Auditor's Report which was to be submitted to it by the Independent Auditor. The NCLT (as the successor tribunal of CLB) ought to have taken note of, and examined and considered the contents of the report and provided adjudication. To have kept the Auditor's Report in sealed cover on the ground that Auditor's fees was not paid does not appear to be the correct course of action, as there was no TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 31 of 38 necessity to link the two issues, moreso when the CLB had itself ordered for conduct of independent audit and submission of the final report to the CLB.
42. We also note the following observations made by Hon'ble Supreme Court in the judgment in the matter of Syeda Rahimunnisa (supra) :-
"36. It is a settled principle of law that in order to claim remand of the case to the trial court, it is necessary for the appellant to first raise such plea and then make out a case of remand on facts. The power of the appellate court to remand the case to the subordinate court is contained in Order 41 Rules 23. 23-A and 25 CPC. It is, therefore, obligatory upon the appellant to bring the case under any of these provisions before claiming a remand. The appellate court is required to record reasons as to why it has taken recourse to any one out of the three Rules of Order 41 CPC for remanding the case to the trial court. In the absence of any ground taken by the respondents (the appellants before the first appellate court and the High Court) before the first appellate court and the High Court as to why the remand order in these cases is called for and if so under which Rule of Order 41 CPC and further in the absence of any finding. there was no justification on the part of the High Court to remand the case to the trial court. The High Court instead should have decided the appeals on merits. We, however, do not consider it proper to remand the case to the High Court for deciding the appeals on merits and instead examine the merits of the case in these appeals."
43. The above-mentioned observation lays down that the appellants should have made a plea for remand of the case. As is noted in the pleadings in the original company petition and also in TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 32 of 38 this appeal, the reason for undertaking investigation in the company was spelt out and a prayer was made for such investigation. Once the prayer was accepted by the CLB, and an investigation was carried out by the Independent Auditor, and the CLB had fixed the case for further consideration, the NCLT (to whom the Audit Report had been submitted) ought to have looked at the report and passed necessary and appropriate orders. Since the NCLT did not do so, the prayer on the appeal for quashing of the Impugned Order implies that the Appellants are aggrieved by the Impugned Order and remand of the case remains an option that is available to this tribunal. We are of the view that the plea for remand in the arguments before us is sufficient in the facts of this case.
44. We also note the following observations made by Hon'ble Supreme Court In the matter of Incable Net (Andhra) Limited v. AP Aksh Broadband Limited 2010 6 SCC 719:-
"43. It is on the said foundation that a case of oppression and mismanagement has been attempted to be made out by the petitioners. However, in the facts of the case it becomes difficult to take a different view as has been expressed both by CLB as also by the High Court.
TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 33 of 38
44. Admittedly, Respondent 5 is a majority shareholder in Respondent 1 Company and at the same time the EPC contract has also been given by Respondent 1 Company to Respondent 5, to which transaction Petitioner 2, Shri R.V.R. Chowdhary, was also a party in his capacity as Vice- Chairman of Respondent I Company. Besides being a party to the decision to give the EPC contract to Respondent 5, Petitioner 2 was also instrumental in payment of large sums of money being made to Respondent 5 which estops him from alleging that Respondent 2 Company had been siphoning off the funds of Respondent 1 Company without diligently performing its part of the contract.
45. There is substance in Mr Raghavan's submissions that the EPC contract given to Respondent 5 by Respondent 1 was a commercial contract and stands outside the ambit of Sections 397 and 398 of the Companies Act. Failure to act in terms of the contract cannot be said to have amounted to either oppression or mismanagement by Respondent 1. At best it can be said that Respondent I had been used as a tool or mechanism by Respondent 5 to acquire benefits for itself, which in the instant case, does not appear to be so. having regard to the fact that one of the petitioners in the company petition was himself responsible for such payments being made."
45. The above judgment is distinguishable on the basis of the fact that in the Incable Net (Andhra) Ltd. (supra) matter, the contracts entered into by the Respondents were a relevant factor in the original company petition and at the heart of the pleadings, whereas in the present case the role of ALL and TISSPL and payments made to them has arisen in the Audit Report and no pleadings regarding the contracts was possible before the Audit Report was prepared and made available to the Appellants, after investigation into the affairs of the R-1 Company. TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 34 of 38
46. We have also taken note of the arguments put forward by the Learned Senior Counsel for Respondents that Appellants are not left remediless, and after they get hold of the Final Audit Report they can file a fresh Company Petition with proper pleadings after impleading all the necessary parties. We are of the view that once the Final Audit Report had been prepared on the orders of CLB and submitted to NCLT in the year 2017, it should have been considered by NCLT in the Impugned Order.
47. It therefore, appears that the NCLT did not carry the judicial process to its logical conclusion when it continued to keep the Final Audit Report submitted by M/s. Brahmayya and Company on 13.11.2017 in a sealed cover and did not open it for due consideration, but the matter was in a confusing manner entangled with the issue of payment of the Independent Auditor's fees. The issue of payment of Auditor's fees was also finally set to rest by the order dated 29.10.2018 of NCLAT in CA No. 77 of 2018 which settled to the amount of the fees to be paid to the Independent Auditor by holding that since fees is on the basis of ICAI norms, it is not proper to interfere in the quantum of fees. TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 35 of 38
48. A perusal of the Impugned Order in the light of the above- mentioned decision of NCLAT regarding quantum of payment of Independent Auditor's fees leaves no doubt in our mind that it was required on the part NCLT to ensure that appropriate payment was made to the Independent Auditor by the concerned parties, since the report had been prepared on the orders of CLB and submitted to NCLT and then carry the proceedings further after considering the report. Therefore, when the Appellants filed an IA to obtain a copy of the final report, the NCLT ought to have taken note and ensured adequate and proper consideration of the IA which, to our mind, was not done in an appropriate manner. Thus, the way the Final Audit Report in which the issue of the report was taken care of by the NCLT left a lot to be desired.
49. In the light of the above, we are inclined to hold the view that once the Final Audit Report was submitted to NCLT by the Independent Auditor and the quantum of their fees was not interfered by NCLT, it was incumbent on NCLT to open the Final Audit Report from the sealed cover and consider its findings, as the consideration of the investigation into the affairs of the Company would have given justice to the parties in a fair manner. TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 36 of 38
50. In the facts and circumstances of the case and the arguments of rival parties, we are of the clear opinion that the interest of the parties and requirement of justice would be met, if the matter is remanded to NCLT with the direction that the Final Audit Report submitted by M/s. Brahmayya and Company, Chartered Accountant be made available to the parties by NCLT and after due consideration of the Final Audit Report, which should include opportunity to the parties to be heard, necessary appropriate orders should be passed.
51. The rival parties had also presented their arguments on the merits of their case in view of the findings of the Final Audit Report. Having now decided that the matter should be remanded to the NCLT, we do not wish to enter into consideration of the findings of the Audit Report and examine the responsibility and liabilities of the respective parties, as it would be appropriate that they are now considered by NCLT and appropriate orders are passed after due consideration and opportunity of hearing to be granted to the respective parties. If such consideration requires joinder to some more parties and necessary additional pleadings to be submitted, the Appellants should be granted the necessary opportunity and the rival parties should be allowed to submit their replies thereon.
TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 37 of 38
52. We are also of the view that NCLT should ensure that the requisite payments by the parties as has been decided earlier, be made to the Independent Auditor.
53. With the above-stated observations/directions, the appeal is disposed of.
54. There is no order as to the costs.
[Justice M. Venugopal] Member (Judicial) [Dr. Alok Srivastava) Member (Technical) New Delhi 24th April, 2023 /aks/ TA No.87/2021 (Comp. App. (AT) No.129/2019) Page 38 of 38