Company Law Board
M. Subbiah vs The Madras Cricket Club on 29 May, 2007
Equivalent citations: [2007]80SCL155(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. In this company petition filed under Section 237 of the Companies Act, 1956 ("the Act"), the petitioner is seeking directions against the Central Government to appoint an inspector to conduct an investigation into the affairs of The Madras Cricket Club ("the Club"), in support of which Ms K. Priya, learned Counsel, submitted as under:
• The Club, a recreation and non-profitable organisation, is carrying on its activities in a manner prejudicial to the interests of members with an intention to defraud them, as borne out by a circular dated 17.06.2005 issued by the President of the Club and the Executive Committee's report dated 01.09.2005 forming part of the annual report for the year 2004-2005 The various financial irregularities in the affairs of the Club are found reflected in the balance sheet for the year as at 31.03.2005. At the annual general meeting held on 30.09.2005, the petitioner raised various objections with regard to adoption of accounts, but all his objections were simply ignored by the Club.
• The Club being a non-profitable organisation, members of the Management Committee, who owe a fiduciary duty to the Club and its members must bestow proper attention while discharging their responsibilities and obligations, which were never adhered to by the members of the Executive Committee. The members outstanding statement given by the Executive Committee over the past several years has been grossly understated. The Club has not taken any steps to recover the outstanding subscription amount of Rs. 48.47 lakh from 400 defaulting members, who are close associates or members of the Executive Committee, inspite of pointing out the irregularities by the petitioner in his communication dated 10.08.2005. At the same time, the defaulting members are being permitted to avail all the facilities of the Club. There have been major accounting lapses during the years 2001-2004, causing serious prejudices to the Club and its members.
• The auditor's report dated 01.09.2005 forming part of the annual report for the year 2004-2005 shows that no provision has been made for the cash defalcation during the period from 2001-02 to 2004-05 amounting to Rs. 9,13,816/-, which have been shown as recoverable. Consequently, the excess of expenditure over income is understated to this extent and that there is un-reconciled difference in the bank reconciliation statement to the tune of Rs. 1,12,638.76. The Club has been incurring huge losses year after year on account of huge cash defalcation, gross mismanagement in the affairs of the Club and diversion of funds at the instance of the Executive Committee.
• The members of Executive Committee have been introducing their friends and associates having no connection to the sports, as members of the Club in contravention of the articles of association of the Company.
• The Executive Committee has removed the statutory auditor of the Club without following the relevant provisions of the Act, for having brought out several discrepancies in maintenance of accounts of the Club. The Club made an application under Section 224(3) in October 2005, before the Regional Director, Department of Company Affairs, for appointment of a statutory auditor in the place of the retiring auditor, which came to be rejected on the ground that the Club did not follow due process of law for not re-appointing the retiring auditor as provided in the Act.
2. Shri K. Manoj Menon, learned Counsel, opposed the prayer for appointment of an inspector to conduct an investigation into the affairs of the Club, on the following among other grounds:
• The present company petition has been filed with a malafide intention of harassing the members of the Executive Committee of the Club and does not fall within the ambit of Section 237. The petitioner has failed to make out a prima facie case by not producing any material. Furthermore, the petition does not disclose the existence of any of the circumstances which warrants an investigation in the manner as contemplated under Section 237 in support of which reliance has been placed on the following decisions:
• Kumaranuni v. Mathrubhumi Printing & Publishing Company Limited (1983) Vol.54 CC 370 - to show that the Central Government before exercising its power under Section 237(b) should form an opinion that circumstances suggesting the existence of one or other of the matters specified in Sub-clauses (i) to (iii) is in existence, which has been followed by this Board in 3. N.M. Pimpalkar v. Shree Narkesari Prakashan Limited (1998) 4 Comp LJ538.
• S.L. Verma v. Delhi Flour Mills Company Limited and Ors. (1975) Vol.45 CC 33 - to show that (a) the object of an investigation under Section 237 is to discover something, which is not apparently visible to the naked eye, (b) the Court has to act most cautiously on the question of considering whether the affairs of the company need investigation; and (c) prima facie evidence should exist concerning the circumstances which would lead to the conclusion that an investigation was necessary.
• Punjab Agro Industries Corporation Limited v. Superior Genetics (1) Limited and Ors. (2002) 1 Comp LJ 187 - to show that there must be sufficient material to form a prima-facie opinion that the affairs of the company require investigation under Section 235 of the Act.
• Rohinton Mazda and Anr. v. Hypoids (India) Private Limited (2004) 3 Comp LJ 449 - to show that an order of investigation under Section 235 cannot be made on mere suspicions or surmises without proper material to enable the CLB to form an opinion that the affairs of the company require to be investigated.
• The Club has been licensed under Section 25 of the Act and is one of the premier social and recreation clubs in Chennai. The Executive Committee is a honorary body and holds office for one year. The present Executive Committee was elected and assumed office for the year 2005-06 on 30.09.2005. The petitioner not being a sportsman does not adhere to the rules and regulations of the Club. The petitioner not having been elected to the office of the Executive Committee on several occasions, leading to his frustration and therefore, chosen to indulge in various vexatious proceedings periodically against the Club for oblique purpose.
• The subscription arrears due from the Club members pertain to the years 2001-2004. The general manager of the Club in connivance with two other employees failed to collect the dues from members and/or failed to credit the respective accounts when realised from members towards their dues. The erstwhile Executive Committee discovering this dereliction on the part of the employees, appointed an auditor to conduct an internal audit, who has submitted, on verification of the books of account of the Club, two reports, thereby the outstanding amount payable by each member was quantified. Thereafter, notices were sent to the defaulting members for recovery of the outstanding subscription amount of Rs. 28.19 lakh and recovered an aggregate amount of Rs. 25.35 lakh, thereby reducing the subscription arrears to Rs. 2.84 lakh. The unrecovered subscription amount is due from members, who are either deceased or ceased to be members. Nevertheless, the Club is taking appropriate steps for recovery of the outstanding subscription amount. The unreconciled difference of Rs. 1.13 lakh in the bank reconciliation statement pertains to the old transactions. The Executive Committee has not made any provision for the cash defalcation for the period 2001-2004, since the same came to light during the year 2004-2005. The Executive Committee has recovered a substantial portion of the arrears and necessary steps are being taken for recovery of the outstanding balance amount. The Executive Committee lodged a police complaint, conducted domestic enquiry against the erring employees, to secure the misappropriated and unaccounted sums, which took place during the years 2001-2004 and dismissed them from service. Consequently, an amount of Rs. 7 lakh could be recovered and appropriate legal action has been taken to secure the balance. Furthermore, the petitioner was provided complete access to the information and records of the Club in respect of 400 defaulting members as sought in his communication dated 10.08.2005 and the same is evident from his reply communication dated 20.08.2005. All these developments have been brought to the knowledge of the members at a meeting convened in July 2005. The petitioner participated in the aforesaid meeting. The accounts of the Club for the year ended 31.03.2005 were duly audited and unanimously adopted at the annual general meeting held on 30.09.2005. The petitioner, who was present at the meeting, did not choose to raise any objection at the time of adoption of accounts. Thus, the petitioner had accepted the accounts. The present Executive Committee, with a view to avoid recurrence of such incidence of misappropriation, has brought out amendments to the rules so as to penalise members, who fail to settle the subscription amount within the stipulated period.
• The Executive Committee did not initiate any move for removal of the auditor. On the other hand, at the annual general meeting held on 30.09.2005, there was a resolution for his re-appointment. But the members by a majority vote decided not to re-appoint the retiring auditor, for which the Executive Committee cannot be faulted on any account. Since the auditor was not re-appointed, the Club made an application before the Regional Director for appointment of an auditor, upon which, it was ordered that the said auditor is deemed to continue. The decision of the Regional Director is under challenge before the High Court of Madras.
3. I have considered the pleadings and arguments of learned Counsel. The short issue before me is whether the Company's affairs ought to be investigated by an inspector appointed by the Central Government, before which, I think it fit that necessary material provisions of the Act, must be borne in view. By virtue of Section 237(b), the Central Government may appoint one or more competent persons as inspectors to investigate the affairs of the company if in the opinion of the Company Law Board, there are circumstances suggesting -
i) that the business of the company is being conducted with intent to defraud its creditors, members, or any other persons, or the business of the company is being conducted otherwise for a fraudulent or unlawful purpose or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose:
ii) that the persons concerned in the formation of the company or the management of its affairs have been guilty of fraud or misfeasance or misconduct either towards the company or any of its members; or
iii) that the members of the company have not been given all the information with respect to its affairs which the members might reasonably expect.
It is, therefore, far from doubt that before ordering an investigation, it shall be ensured as to whether the circumstances of the present case do fall under one or other of the Sub-clause (i), (ii) or (iii) of Section 237 (b). Unless any of the circumstances, as contemplated in Section 237 (b) exists, this Board cannot order an investigation in the affairs of the Company. I shall now proceed to consider whether the requirements of this section have been duly met in the present case. The material charges levelled by the petitioner against the Club are:
• all the objections raised by the petitioner with regard to adoption of accounts of the Club at the annual general meeting held on 30.09.2005 have been ignored;
• no steps have been taken by the Club for recovery of the outstanding subscription amount from the defaulting members;
• the Club has not made any provision for cash defalcation during the period from 2001-02 to 2004-05, thereby the excess of expenditure over income has been understated;
• there has been un-reconciled difference in the bank reconciliation statements;
• the Club suffered on account of diversion of funds at the instance of members of the Executive Committee; and • the statutory auditor of the Club has been removed at the annual general meeting held on 30.09.2005, without following the relevant provisions of the Act.
The circular communication dated 17.06.2005 addressed by the Club to its members indicates the accounting lapses occurred during 2001-04 and the corrective measures proposed, to ensure non-recurrence of any such irregularities in future. All the financial irregularities and suggestions made by the members including the petitioner were deliberated on 01.07.2005 at the meeting of the members of the Club. The petitioner was given access to the records of the Club, in respect of the defaulting members. These developments, as evident from the communication dated 20.08.2005 of the Club have not been repudicated, by the petitioner in his communication dated 06.10.2005. The subscription arrears due from the Club members, as brought out by the respondent, pertained to the years 2001-04. M/s Rao & Santosh, Chartered Accountants, appointed by the erstwhile Executive Committee, on verification of the books of account of the Club submitted two reports dated 12.04.2005 and 25.05.2005, pointing out various financial irregularities and quantifying the outstanding subscription arrears, upon which the subscription arrears were reportedly brought down from Rs. 28.19 lakh to Rs. 2.84 lakh, which is outstanding from the members who are either deceased or ceased to be members. It is further observed that the erstwhile Executive Committee lodged a police complaint and conducted domestic enquiry against the erring employees who were responsible for cash defalcation during the period from 2001-02 to 2004-05, which led to their dismissal and recovery of an amount of Rs. 7 lakh from them. The annual accounts of the Club for the year ended 31.03.2005 have been unanimously adopted at the annual general meeting held on 30.09.2005. The participation, at the annual general meeting of the Club, by the petitioner, has not been repudiated. At the annual general meetings, a new article came to be introduced to provide for a uniform credit period of 30 days to all members and to provide for levying a charge of 2% for delayed settlement of bills. The Executive Committee's report dated 01.09.2005, forming part of the annual report for the year 2004-2005 gives a detailed account of cash defalcation and non-reconciliation of accounts, outstanding dues from the members, during the period 2001-02 to 2004-05. The object of investigation as held in S.L. Verma v. Delhi Flour Mills Company Limited and Ors. (supra) is to discover something, which is not apparently visible to the naked eye. In the present case, it is apparent that the members have been apprised of all the irregularities and that necessary corrective steps have already been taken by the Club, taking into account suggestions of the members, to rectify such irregularities. At the annual general meeting held on 30.09.2005, the members did not favour re-appointment of the retiring auditor and therefore, the stand taken by the petitioner that the statutory auditor was removed without following due process of law does not merit any consideration. The petitioner has been complaining of removal of the statutory auditor, without following the prescribed procedure in the present proceedings, but strongly urged in his communication dated 10.08.2005 that the statutory auditor of the Club be replaced by another auditor. Thus, there is no consistency in the petitioner's plea. The charges regarding cash defalcation, un-reconciled difference in the bank reconciliation statements, set out in the company petition are based on the accounts, which are apparent from the balance sheet for the year ended 31.03.2005, which alone does not warrant an investigation, as held in S.L. Verma v. Delhi Flour Mills Company Limited and Ors. (supra). This proposition has been followed by this Board in Punjab Agro Industries Corporation Limited v. Superior Genetics (I) Limited and Ors. (supra). Though the petitioner speaks of diversion and misuse of funds of the Club in his communication dated 10.08.2005, no material has been placed, substantiating such serious charges levelled against the members of the Executive Committee of the Club. Mere pleadings, without concrete proof of such serious charges, will in no way advance the case of the petitioner. There must be sufficient material to form a prima facie opinion that the affairs of the Club require to be investigated, as held by this Board in Punjab Agro Industries Corporation Limited v. Superior Genetics (I) Limited and Ors. (supra). Similarly. an order of investigation cannot be made on mere suspicions or surmises without proper material to enable this Bench to form an opinion that the affairs of the Club require to be investigated as held in Rohinton Mazda and Anr. v. Hypoids (India) Private Limited (supra). The Kerala High Court in Kumaranunni v. Mathrubhumi Printing & Publishing Company Limited (supra) categorically held that the Central Government before exercising its power under Section 237(b) should necessarily form an opinion that circumstances suggesting the existence of any one of the matters specified in Sub-clauses (i) to (iii) is in existence. This legal proposition has been consistently followed by this Board as in N.M. Dimpalkar v. Shree Narkesari Prukashan Limited (supra). The Delhi High Court, while considering the scope of the Section 237(b) in S.L. Verma v. Delhi Flour Mills Company Limited and Ors. (supra) came to the conclusion that "at least prima facie evidence should exist concerning circumstances which would lead to the conclusion that an investigation was necessary". In the present case, I do not find that any activity of the Club is being conducted with intent to defraud its creditors, members or any other persons or for a fraudulent or unlawful purpose. The Club has given all the information with respect to its affairs to its members. It is already found that the members of the Executive Committee have taken corrective action to check the financial irregularities and recovered substantial arrear amount and therefore, cannot be said that they are guilty of fraud or misfeasance or misconduct either towards the Club or any of its members, more so when, none of the financial irregularities took place during the tenure of the members of the present Executive Committee of the Club The grievance of the petitioner regarding introduction of friends and associates of the members of the Executive Committee without any sports background, as members of the Club, will in no way fall within the ambit of Section 237(b). Thus, none of the requirements of Section 237(b) exists in the present case and there are no sufficient materials to show that the affairs of the Club require to be investigated. The present petition does not survive and accordingly stands dismissed. At the same time, considering the interests of the members, it is deemed fit that the Executive Committee will place at the ensuing annual general meeting of the Club, among other things, the present status in regard to the defaulting members, cash defalcation and re-conciliation of bank statements for benefit of the Club members. With these directions, the company petition stands disposed of.