Company Law Board
Khandwala Securities Limited vs Kowa Spinning Limited And Ors. And Ors. on 25 April, 2005
Equivalent citations: [2006]132COMPCAS318(CLB)
ORDER
S. Balasubramanian, Chairman
1. The main complaint of the petitioners in this petition filed under Sections 397/398 of the Companies Act, 1956 (the Act) is that the respondents 2 and 3 had mis-utilized/diverted the funds raised by way of issue of shares in M/S Kowa Spinning Limited (the company).
2. The facts of the case are that the 2nd and 3rd respondents, who are promoters of the company entered into an agreement with the petitioners on 20th October, 1994 (Sponsorship Agreement). As per this Agreement, the petitioners, acting as sponsors under the said Agreement purchased 20.8 lakh equity shares of the company at Rs. 20/- per share including a premium of Rs. 10/- per share for a total consideration of Rs. 416 lacs which constituted 48.87% of the shares in the company. In terms of the Agreement, the petitioners were to offer the said shares to general public. To enable the petitioners to do so, the Agreement stipulated various responsibilities on the company arid the respondents. According to the petitioner, the company and the respondents failed to comply with the various terms of the Agreement. It is also the allegation of the petitioner that the money invested by the petitioners has been diverted to other companies under the control of the 2nd and 3rd respondents either by way of loan or by way of investment in market securities. This action of the respondents, according to the petitioners, was not only in violation of the provisions of Section 372 of the Act but also against the spirit of the "bought out deal". By the failure of the company and the respondents in making available the requisite information, the petitioners could not prepare offer of sale document. In spite of the request of the petitioner for appointment of his nominee on the Board, the respondents failed to do so. The company also did not act on the suggestion of the petitioners for appointment of special auditors to inspect and investigate into the financial affairs of the company with a view to safeguard the interest of the shareholders. The company had not taken delivery of certain machinery for which orders were placed. The company never offered for inspection the books of accounts of the company and also the details of the loans and advances given by the company. Even though, the petitioners held substantial shares in the company, notices for Board Meetings were not received by him. Due to non receipt of notices for the general meetings on 5th September, 1995, 30th December, 1996 and EOGM on 5th January, 1996, the petitioners could not exercise their right as shareholders. Even the dividends declared had not been paid to the petitioners on the ground that the resolution declaring dividend had been later on revoked. In terms of Section 163 of the Act, a representative of the petitioners inspected the documents of the company and found that many statutory records were not available and the company had failed to furnish copies of those documents inspected. Accordingly, the petitioners have complained that the respondents are conducting the affairs of the company fraudulently and in violation of the provisions of the Companies Act. With these allegations, the petitioners have sought for various reliefs inter alia including for a direction to the company/respondents 2 to 7 to purchase the shares held by the petitioners.
3. The respondents filed an application under Section 8 of the Arbitration & Conciliation Act, 1996 on the ground that the sponsorship agreement under which the petitioners acquired shares in the company contained an arbitration clause and since most of the allegations in the petition relate to the alleged breach of the terms of the arbitration agreement, the dispute should be referred to arbitration. This application was heard and a detailed order was passed on 28th June, 1999 rejecting the application on the ground that even though the petition contained certain allegations pertaining to the terms of the sponsorship agreement, some of them were independent of that agreement and as such this Board has the power to examine the allegations which were independent of the sponsorship agreement. Accordingly, the respondents were directed to restrict their replies only to those allegations which were not related to the terms of the sponsorship agreement. Accordingly, the respondents have filed a reply denying all allegations.
4. When the matter was taken up for hearing, by an order dated 6.7.2000, this Bench had directed the respondents to file copies of Balance Sheets along with the year wise statement of loans and advances and investments made by the company by 25.7.2000. In the hearing held on 19.10.2000, it was noted that the respondents had not complied with the order dated 6.7.2000 and as such were directed to comply with the same by 31.10.2000. In the hearing held on 30.1.2002, it was again noted that the respondents have not complied with the order dated 6.7.2000 and 19.10.2000 and were given further time to file the same by 15.2.2002. Thereafter, the parties appeared to have tried to resolve the dispute amicably but it was reported on 17.5.2004 that compromise efforts have failed. On this day also, it was noted that the respondents have not filed the documents as directed earlier and were given time to do so by 27.5.2004. In a few subsequent dates of hearing, none was present on behalf of the respondents. When the matter was heard finally on 25.1.2005, one Shri J.N. Dubey, a director of the company was present.
5. Shri Haksar appearing for the petitioners submitted: The promoter respondents of the company entered into an agreement with the petitioners by which the petitioners being in the business of merchant banking, stock broking, portfolio management and corporate finance activities was to act as sponsors in regard to raising of funds for expansion of the plant of the company. In terms of this agreement, the petitioners and other co-investors were to invest in 20.8 lakh equity shares of Rs. 10/- each at Rs. 20/- each of a total value of Rs. 416 lacs. The petitioner was entitled to offer these shares for sale to public. The terms of the agreement stipulated various obligations on the company and the respondents. In terms of this agreement, the petitioner and other co-promoters invested the said sum of Rs. 460 lacs in the equity shares of the company and thus acquired 48.87% shares in the company. However, instead of utilizing the money for the expansion of the plant, the respondents 2 and 3 being the promoters of the company diverted this amount in violation of various provisions of the Act and thus jeopardized the funds invested by the petitioner and the co-investors. In contravention of the provisions of Section 370 of the Act, they diverted Rs. 100 lacs to one M/S Maya Spinners Limited which is under the same management. Likewise, they also invested Rs. 225 lacs in shares of a company under the same management. In violation of the provisions of Section 78 of the Act, the company used the share premium account for purposes other than those permitted by law. The petitioner had conducted a review of the audited accounts of the company by an independent professional accountancy firm. This firm - R.S.M & Co. had given a report dated 5th October, 2000 wherein it has been clearly brought out that the company had not utilized the funds for the purpose for which the same were raised. Substantial amount had been either invested in group companies or had been lent as loans and advances. The report also highlights the violation of the various provisions of the Act. In addition, the respondents are also guilty of holding AGMs/EOGMs without notice to the petitioner and other co-investors. Even though, this Bench had directed the company to file various details in its order dated 6.7.2000, till date the company has not done so in spite of extension of time granted by the Bench repeatedly. Since the company has failed to comply with the directions of this Bench in filing various details as directed, an investigation under Section 237(b) of the Act should be ordered.
6. Shri Bubey who appeared before this Bench as a Director of the company did not argue the matter and therefore I have referred to the reply filed by the company. According to the reply, the company had lent Rs. 100 lacs to M/S Maya Spinners Ltd. in January, 1995 and has been receiving interest on this amount. It is also stated in the reply that there was no violation of the provisions of Section 370 of the Act and that effective from 1st April, 1998, M/S Maya Spinners Ltd. was not under the same management. In so far as investment of Rs. 225 lacs is concerned, it was not in a company under the same management and that this amount had already been liquidated. It is also stated in the reply that notices for all shareholders' meetings were being sent to the petitioner and the co-investors. It is further alleged in the reply that after having received a sum of Rs. 20 lacs as sponsorship fees, the petitioner had failed to comply with the terms of the sponsorship agreement. Having failed to comply with the terms of the agreement, the petitioner with a view to put pressure on the company has filed this petition, with malafide intention and as such the petition should be dismissed.
7. I have considered the matter carefully. Initially, on an application made by the petitioner, this Board passed an order on 25.2.1999 directing the company to give inspection of records and documents as per the list handed over by the petitioner. This order was taken on an appeal before the Jabalpur Bench of Madhya Pradesh High Court on the ground that this Board had no powers to pass such an order. This appeal was dismissed. It appears that the company had given inspection of certain, documents to the petitioner. However, in the meanwhile, the respondents filed an application under Section 8 of the Arbitration & Conciliation Act, 1996 seeking for dismissal of the petition on the ground that all the allegations in the petition arose out of the sponsorship agreement dated 20th October, 1994 which contained an arbitration clause and as such the matter should be referred to arbitration. By an order dated 28th June, 1999, the prayer of the respondents for referring the matter to arbitration was rejected on the ground that the petition contained allegations which were not covered by the Arbitration Agreement and as such the respondents were bound to reply these allegations. Accordingly, they filed replies to these allegations denying each of them. When the petitioner filed a rejoinder to the reply, in the hearing held on 10.1.2000, the respondents desired to file a sur-rejoinder which was permitted with a direction that in the sur-rejoinder, all the annual reports from 1994 till then should be enclosed. It was also directed that all relevant records of the company should be produced for the perusal of this Bench. In the hearing held on 6.7.2000, the counsel for the respondents submitted that due to some practical difficulties, copies of the balance sheets could not be filed along with the sur-rejoinder. Therefore, the respondents were directed to file the same along with a year-wise statement of details of loans and advances and investment made by the company. While the company filed copies of balance sheets for 1994-1995 onwards up to 1997-1998, it did not file the balance sheets for 1998-99 and 1999-2000 and also the statement of year-wise loans and investments till the date of final hearing.
8. Even though, in the petition a number of reliefs have been sought, at the time of final hearing, the learned counsel for the petitioner sought for investigation into the affairs of the company in terms of Section 237(b) of the Act on the ground that the respondents 2 and 3 and the company having mobilized funds by way of issue of shares for the purpose of expanding the business, had diverted the same to their own sister concerns and thus had defrauded the shareholders. Normally, before ordering an investigation, the company should be given full opportunity to present its case provided a prima facie case has been made out by the petitioner. In the present case, the petitioner has made out a prim a facie case and the company HAS also in its reply more or less admitted having made investments and loans, but according to the respondents, there has been no violations of the provisions of the Act in making investments or in lending money. However, the statements of year wise loans and investments could have enabled this bench to form a firm opinion but, the respondents have failed to furnish the same inspite of repeated opportunities. Further, I find that in their report dated 5th October 2000, R.S.M & Co. Chartered Accountants, has brought out that the company had not utilized the funds for the purpose for which the same were raised and that substantial amount had been either invested in group companies or had been lent as loans and advances. The report also highlights the violation of the various provisions of the Act. Therefore, I am of the opinion that a deeper probe is necessary to find the relevant facts. Even though the petitioners have sought for an investigation into the affairs of the company, I am of the view that an inspection in terms of Section 209A of the Act would suffice. Accordingly, I direct the Central Government to conduct, in terms of Act 209A, an inspection of the books of accounts of the company for the years 1994 to 2000 and take further action, if need be, on the basis of the inspection report.
9. The petition is disposed of in the above terms. Let a copy of this order be sent to the Central Government for necessary action in terms of the earlier paragraph.