Company Law Board
Central Government vs Nuline Glassware India Ltd. And Ors. on 30 September, 2005
Equivalent citations: [2006]72SCL1(CLB)
ORDER
S. Balasubramanian, Chairman
1. The Central Government has filed this petition under Sections 397/398/408 and 402 read with Section 406 and Schedule XI of the Companies Act, 1956 (the Act) seeking for direction to the respondents to deposit a sum of Rs. 466.20 lacs with this Board being the money collected through prospectus issued in 1992, for attachment of the properties the respondents, initiation of action under Section 542 of the Act and also for investigation into the affairs of the company.
2. A summary of the petition is: The company was incorporated in February, 1992. The company issued a prospectus dated 4th Feb. 1993 for raising a sum of Rs. 6.799 crores out of which Rs. 4.66 crores worth of shares were to be allotted to general public. In terms of the prospectus, the money raised through the public issue was to be utilized mostly for land and building and plant and machinery and according to the projection made in the prospectus, the commercial production was to commence in June, 1993 and the turnover of the company for the third year was projected at Rs. 17.87 crores with a profit of Rs. 3.65 crores and a dividend of 25%. According to the prospectus, the promoters were not to transfer their shares till commercial production started. However, they transferred their shareholding and control of management in April, 1996 itself. It is seen from the Balance Sheet as on 31.3.1999 that installation of plant and machinery and construction of building are shown only as work in progress clearly indicating that project had not been completed even though in terms of the prospectus, the production was to commence in June, 1993. The company has also not filed any balance sheet after 31.3.1999 and as such the working results of the company and its financial position is not known. SEBI has received a number of complaints from the shareholders, investors and depositors complaining of mismanagement in the affairs of the company. ROC Gujarat has filed criminal cases under Sections 162&220 for not filing of annual report and balance sheets, under Sections 63, 68 and 628 of the Act for misstatement in the prospectus and also has filed FIR under Section 403, 406, 415, 418, 420 and 424 of IPC. The respondents are avoiding process of the court and are thus delaying the investigation and there is reasonable apprehension that they may abscond.
3. On the basis of the above allegations, the Central Government has Sought for various reliefs inter alia including direction to the respondents to deposit Rs. 446.20 lacs being the money collected from the public through the prospectus, attachment of the properties of the respondents, initiation of misfeasance proceedings against the respondents, ordering of investigation into the affairs of the company etc.
4. In the identical replies filed by respondents 2, 6 and 8, they have submitted: It is wrong to contend that the company is a vanishing company and respondents 1 to 8 who were signatories to the prospectus had not filed annual returns etc. or that they had siphoned of the funds collected from the public. The SEBI which also instituted enquiries has passed an order on 8.9.2004 pointing out that the erstwhile directors had filed balance sheets and had also complied with the requirements of Listing Agreements. The promoter directors had already transferred their shareholding to the 9th respondent and his associates and they no longer continue as directors. The contention of the Central Government that the respondent directors are not traceable and are likely to abscond is absolutely baseless. The very fact that they appeared before the SEBI and that they also attended all the hearings of investigation officer of the Economic Crime Cell would indicate that the allegation of the Central Government is baseless. These 3 directors were non executive directors without any remuneration and since they had not been in management, the question of siphoning of funds does not arise. Further, a perusal of the balance sheets from 1993 to 1999 would indicate that substantial expenditure had been incurred for building, plant and machinery and expenditure is shown under "work in progress" which has progressively gone up from Rs. 5.57 crores as on 31.3.1994 to Rs. 8.37 crores as on 31.3.1996. As on 21.7.1999, the total value of fixed assets came to Rs. 11.17 crores as per the valuation report enclosed with Exhibit-10 to the reply. This being the factual position, the Central Government, on the basis of misleading report of the Registrar of Companies, has alleged that no investment has been made out of the public funds collected. It is true that the project could not be completed as envisaged in the prospectus, the reason being that the delay was caused due to causes beyond the control of the promoters. The project of the company was first of its kind in India for which major portion of the plant and machinery were required to be imported. There was delay in getting foreign exchange loan/letters of credit. In the year 1993-94, due to devaluation of rupee to the extent of 43%, the cost of the project escalated. Such escalation required mobilization of further funds and accordingly the promoter inducted the 9th respondent for financing the escalated cost. Accordingly,an MOU was entered into with the 9th respondent by which the then existing board of directors including the 3 deponents rdsigned andthe new management took control of the company. Thus, none of these deponents could be held to have acted in any manner prejudicial to the interest of the company and as such they should be exonerated.
5. In his reply, the 17th respondent has submitted: He was not a signatory of the prospectus dated 29.12.1992 and as such the question of his being responsible for misstatement in the prospectus is not sustainable. Further, he functioned as a director only from 1.4.1993 to 20.4.1996. Since he was the General Manager (Works), during this period, 80% of the project had been completed by May, 1996 as reflected in the balance sheet as on 3 1.3.1997. It is quite obvious that the Registrar of Companies, without looking into the records, has falsely reported to the Central Government that the deponent was a signatory to the prospectus and that money collected from the public had been siphoned of and accordingly, he should be exonerated.
6. The 9th respondent has, in his reply, submitted: The name of the company has been changed from Nuline Glassware India Limited to Pur Opale Creations Limited effective from 13.8.1999. The main ground on which this petition has been filed is that public money collected through prospectus had been siphoned of and that the company is a vanishing company. The present directors took over the management of the company only in the year 1996. Therefore, the question of any action against the company or the present directors is uncalled for. The present management has invested a huge amount of money of over Rs. 5 crores into the project and the commercial production has commenced from July, 2005. The question of the present management making good the sum of Rs. 4.66 crores collected from the public does not arise. So far the present management has not received any compliant from the shareholders nor it has been advised that such complaints had been received by SEE I or other agencies. Even assuming that the promoters of the company had not fulfilled their commitments as per the prospectus, the present management cannot be held liable for the same. The present board of directors is not aware of any FIR filed by the ROC as they have not received any notice in this regard. As far as the present management is concerned, they have been filing all annual returns without fail. Therefore, none of the prayers sought should be granted. The company has also filed a reply more of less on the same lines as of the 9th respondent.
7. Ms. Madhu Tewanta, Advocate for the Central Government submitted: The promoters of the company, by giving a rosy picture of the prospects of the company, had cheated the public to the tune of more than Rs. 460 lacs. In terms of the prospectus, the commercial production was to commence by June, 1993 and till now the commercial production has not started. To get away from their responsibilities, the respondents 2 to 8 being the signatories to the prospectus, had transferred their shares in 1996 to the 9th respondent, that too in violation of the terms of the prospectus according to which the promoters were not to transfer their shares for a period of 5 years. The 2nd to 8th respondents had not invested the money collected for the project and no plant and machinery had been installed. It is evident from Article 7 of the MOU dated 8th July, 1996 between the 3rd respondent and the 9th respondent that the 9th respondent would not insist on physical delivery of all the assets mentioned in the books of accounts and monetary value of such assets could be deducted from the consideration payable by the 9th respondent. This would indicate that either the assets had not been purchased or they have been taken away by the 3rd respondent. Therefore, it is a fit case for taking action in terms of Section 542 read with Section 406 of the Act. The company has failed to file statutory returns and the shares have not yet been listed. In view of this, the members of the public who had invested in the shares are completely in dark about the affairs of the company. Therefore, the company should be directed to deposit the entire money collected through the public to this Board so that the money can be refunded to the shareholders. In the alternative, since the present Board of Directors has averred that commercial production has commenced recently, a few Government Directors should be appointed on the Board to effectively monitor the affairs of the company as a safeguard to the shareholders.
8. Shri Gopal Jain, Advocate appearing for the respondents submitted: The petition is hopelessly time barred. The main allegation in the petition relates to the alleged misstatement in the prospectus which was issued in 1993 and the petition has been filed in 2004 i.e. after a delay of nearly 11 years. Whatever might have been the lapses on the part of the promoters, the 9th respondent and his group cannot be held responsible for the same. The 9th respondent and his group have invested substantial amount of money in completion of the project and the commercial production has commenced from July, 1995 and marketing arrangement are also being made as is evident from the brouchure on the products of the company, as handed over to the Bench. The shares of the company now stand listed in Bombay and Baroda Stock Exchanges. The AGM was held in September, 2003. The company has filed all the due returns with the Registrar of Companies. In addition, with a view to ensure proper service to the shareholders, the company has also requested SEBI and Stock Exchanges to forward the complaints from the investors,if any,to the company. When the present Board of Directors,having crossed various hurdles and have started the commercial production, should not be hampered in any manner by granting any of the prayers of the Central Government.
9. Shri Deepak Diwan appearing for respondents 2, 5 to 8 and 17 submitted: All the allegations against the respondents 2 to 8 and 17 are wrong and baseless. The allegation that the promoters of the company had siphoned of the funds collected from the public without investment in the project is not based on facts as is evident from the balance sheets. It is true that the commissioning of the project got delayed due to various reasons beyond the control of the promoters mostly on account of escalation in the project cost which the promoters could not fund. That is the reason why they decided to induct 9th respondent for financial support. As on 31st March, 1995, the company had invested Rs. 8.88 crores in the capital assets including capital work in progress, which would indicate that the money collected from the public had been utilized for the project. The Registrar of Companies had filed FIR on the sole ground that the company had not filed annual reports for the year 1999-2000 onwards. In the FIR, the ROC had also alleged that the promoters had siphoned of the money collected from the public through prospectus and that they had disappeared and were not traceable. Accordingly, the ROC had alleged that the promoters had committed cognizable offence punishable under Section 403, 406, 415, 418, 420 and 424 of Indian Penal Code. The Police have submitted a report to the Judicial Magistrate completely exonerating all these respondents with a conclusion "and just because annual returns for the year 1999-2000 were filed on time, the company was considered as a vanishing company and due to "ignorance of fact", the complaint was filed which was found in the course oj investigation, hence request you to accept "C " summary". The SEBI also, by an order dated 8.9.2004, has exonerated these respondents on the ground that they had filed the balance sheets and had also complied with the requirements of Listing Agreements.
10. I have considered the pleadings and arguments of the counsel. From the petition, it is seen that all the allegations in the petition are against the 2n to 8' respondents, who are now neither shareholders nor directors of the company. The allegations against them, being the signatories to the prospectus, relate to non fulfillment of various projections made in the prospectus. In terms of the prospectus, the civil construction was to be completed by March, 1993, installation of plant and machinery was to be completed by May, 1993 and commercial production was to begin from June, 1993 and that the promoters were not to transfer their shares till commencement of commercial production. According to the petitioner, neither; the company had installed any plant and machinery nor commenced any commercial production till 31st March, 1999 and further progress is not known since annual reports for the subsequent years had not been filed. Since no commercial production has commenced, no dividend to the shareholders as promised in the prospectus has been declared or paid so far. Thus, the respondents 1 to 8 are liable for action for misstatement in the prospectus and as such the consequential relief sought should be granted. It is seen from the balance sheets that the capital work in progress as on 31st March, 1994 was of the order of Rs. 5.56 crores, as on 31st March, 1995, Rs. 7.86 crores. In April, 1996, the promoters had handed over the management to the 9th respondent and had resigned from the Board. In terms of the prospectus, the cost of fixed assets consisting of land, building and plant & machinery was to be to the tune of Rs. 6.56 crores and as revealed in the balance sheet as on 31st March 1995, the company had invested more than the projected amount on the fixed assets thus disclosing that the money collected from the public had been invested in the project. Respondents 2 to 8 have given various reasons, being beyond their control, for their inability to commence commercial production inter alia including the escalation in the cost. The grounds adduced by these respondents have not been contoverted by the petitioner. According to the petitioner, these promoters are not traceable and as such the petitioner has sought for attachment of their properties. I find that these respondents had not only filed their replies to the show cause notices issued by the ROC within a month of receipt of the same, they also participated in the proceedings before the SEBI and in the investigation by the police. In respect of the FIR filed by the ROC, the Police has filed a detailed enquiry report with the court with the following conclusion; "During the course of investigation it has been found that the company exists at the said address and like wise their Promoters are also available and also the funds collected from the Public issue have been invested in the company has been found. Due to the change in the government policies and due to devaluation, the Project cost increased and the whole Project was delayed resulting in the passing of time and escalation of cost nearly doubled. And even after investing the total funds available with the company they required more funds and having left with no other option the old management signed a memorandum of Understanding with Jay raj Group of companies, who formed their own Board of Directors and took over the Management and this change of Management was informed to the Registrar of Companies as required by law. This new Board relieved the Old Management from their responsibilities has also been found in course of investigation. Likewise the Old Directors who are the accused in this case have collected the Public issue funds and have invested the same in the company. Coordination and Monitoring Committee, which has been jointly formed, by Department of Companies Affairs and SEBI have also released the Old Management from their responsibilities. And it has also been noticed that for the same issue the Registrar of Companies has filed two cases at two different places i.e. Chief Judicial Magistrate, Baroda and secondly the said FIR at Padra Police Station. And just because the Annual Returns for the year 1999-2000 were not filed in time the company was considered a Vanishing Company and due to "Ignorance of Fact" the complaint was filed which was found in the course of investigation, hence request you to accept the "C" Summary". From this inspection report, it is evident, as also revealed from the balance sheets also, that the money collected from the public has been invested in fixed assets of the company and that the signatories to the prospectus have not absconded. The petitioner has alleged that in violation of the terms of the prospectus, the promoters had transferred their shares to the 9th respondent group before commencement of the commercial production. The promoters have justified the transfer on account of their inability to mobilize funds. Further, I note that the ROC has also initiated a criminal case against the respondents 2 to 8, and as such there is no scope to issue process against these respondents, especially when the money collected from the public is found to have been invested in the fixed assets of the company and the commercial production, even though belated, has commenced.
11. As far as the present management and the shareholders are concerned, there are no allegations in the petition, other than that they had not filed the annual reports in time. Now I find that all the annual returns have been filed and the present management has also commenced commercial production in July 2005. They have also taken steps to redress the investors' complaints. The learned counsel for the petitioner urged that, to safe guard the interests of the public, government directors should be appointed. Since there are no allegations against the present management and just now the commercial production has started, it would not be in the interests of the company to have government directors at this stage, especially when no allegations against the present management have been established.
12. In view of my findings, there is no scope to grant any of the reliefs sought for by the petitioner, and accordingly, the petition is dismissed.