Company Law Board
Srihari Rao And Ors. vs Gopal Automotive Limited And Ors. on 16 June, 1998
Equivalent citations: [1999]96COMPCAS493(CLB)
ORDER
1. Srihari Rao and his wife, Mrs. Manorama, together holding roughly about 11 per cent. shares in Sri Gopal Automotive Limited ("the company"), a deemed public company have filed this instant petition under sections 397/398/402 and 403 of the Companies Act, 1956 ("the Act") alleging oppression and mismanagement in the affairs of the company. In addition to various reliefs, they have also sought to invoke the provisions of Section 406 read with Schedule Xi to the Act.
2. According to the petitioners, the company was incorporated on September 17, 1985, as a private limited company for taking over the business carried on by a partnership firm in the name of Sri Gopal Auto Service in which respondents Nos. 2, 4, 8 and 9 were partners. The main line of business of this company is to carry on the business of manufacturing, purchase and sale of various types of automobiles, parts and automobile machinery. Apart from these, the company is also carrying on business as distributors, dealers and agents for the manufacturers of various kinds of automobiles, spare parts, and lubricants. In addition, it is also engaged in the repair, servicing and body building of all kinds of vehicles. The company employs about 800 workers.
3. It is alleged in the petition that the second respondent being the chairman of the company to whom the petitioners are closely related, has been siphoning off the funds of the company and is also oppressing the minority shareholders as elaborated in the petition. The petitioners have cited certain alleged acts of oppression and mismanagement and siphoning off of funds by the second respondent in SRMT, another company in which the petitioners are shareholders and the second respondent, the chairman. Since the petitioners have already filed a petition under Section 397/398 in respect of SRMT and this petition is not against the affairs of SRMT, we are not dealing with the allegations in respect of SRMT in this order. The main allegations in the petition are as follows :
4. Diversion of funds for the personal gain of the respondents by opening benami firms in the name of clerks working in the company and SRMT.
5. Diversion of funds for the personal gain by paying commission on sale of tractors and other vehicles to the employees of the company.
6. Proposed increase in the share capital of the company without bona fide needs and with the sole object of increasing the shareholding of the respondents and reducing the petitioners to less than 10 per cent.
7. Diversion of funds for the personal gain by not making actual payment to employees as per the salary register even though the books of account show that the salary had been fully paid to the employees.
8. Sale of used oil, scrap, old and condemned spare parts of vehicles and not accounting for the same in the accounts of the company.
9. When the petition was mentioned, the petitioners also moved an application for interim reliefs. In the hearing on March 14, 1997, we passed an order, ex parte, to the effect that the rights shares offered to the petitioners should be kept in abeyance and that the petitioners need not apply for the shares till we hear the respondents. This order still continues.
10. Shri Gupta, advocate for the petitioners, elaborating the allegations in the petition, submitted that the respondents are indulging in siphoning off funds in the company through various means. According to him, a firm was floated in the name of Sri Ram Das Trailers by one Shri Appa Rao Bhabji, who is a clerk in the company and who is a close confidant of the second and third respondents. This firm supplies tractor trailers to customers who purchase tractors from the company. These trailers are bought at a price higher than the actual value of the trailers. The difference between the actual value and the price paid is later on passed on to the second and third respondents by the firm. Likewise, one K. Vishwa-nathan, an employee of the company, purchased a tractor and the company is shown to have used this tractor for carrying freight and for other purposes which are non-existing. For usage of this tractor, the company has paid a huge amount of around Rs. 13.5 lakhs. This amount had been later paid by Mr. Vishwanathan to the second and third respondents and thus funds of the company have been siphoned off for the benefit of the respondents by dubious means.
11. He also alleged that the second and fourth respondents have been guilty of diverting the company funds by using three clerks employed in the company, by paying them sales commission for sale of tractors and other vehicles. According to learned counsel, there was no need to pay commission to the clerks of the company for selling the tractors when there is a huge demand for the same and that there is always a waiting list of customers desiring to purchase the tractors. The commissions so paid to the clerks works out to about Rs. 5 lakhs every year and this amount is later collected by the second and third respondents from these clerks. In the same way, the second and fourth respondents opened a firm in the name of Sri Aruna Industries which is a benami in the name of one Shri D. Prasad, an employee of the company. This firm manufactures automobile parts and sells the same to the company. These parts are purchased at a price much higher than the market price and the difference is later on passed on to the respondents.
12. He further submitted that, the respondents are also guilty of raising fictitious debts in the books of the company and showing as if these debts have been discharged by making payments. All the payments made against these fictitious debts have been siphoned off by the respondents. For instance, in the year 1994-95, the company is shown to have paid a sum of Rs. 19,000 to one Shri D. Ashok Kumar against a debt while no such debt existed.
13. He drew our attention to para. 26 of the petition, wherein, comparative figures of sales and profits for 1994-95 and 1995-96, have been given. It is his allegation that, as against increase in the turnover of 35 per cent, between the two years, the profit is sliown to have gone up only by 4.7 per cent, indicating therein that the respondents have been diverting the funds of the company by increasing the expenditure by way of commission and the payment of money on fictitious vouchers. This is evident according to the counsel, from a case filed by the income-tax authorities before the Special Court for Economic Offences at Hyderabad, wherein, it has been alleged that they have found out, on verification, that the company had shown purchase of raw material from non-existent persons for a value of Rs. 50,000. According to the learned counsel, because of such diversion, the rate of dividend is not commensurate with the profits shown by the company and thus the shareholders are deprived of their legitimate returns on investments.
14. Learned counsel further submitted that, the second respondent has been systematically gaining a stranglehold on the company first by asking the fourth respondent to resign from the post of MD of the company and second, by appointing the son-in-law of the second respondent as the MD. The other purpose of such changes was to save the fourth respondent from being prosecuted for alleged acts of misfeasance and siphoning off funds of the company.
15. Since the petitioners had filed a petition against SRMT, learned counsel submitted that, to ensure such similar petitions are not filed in respect of other companies, the second respondent decided to offer additional equity shares in the company, to existing shareholders on a rights basis at the rate of two shares for every five shares held. Even though, the purpose of this issue is purported to be for increased business requirement of funds, i.e., for replacement-cum-modernisation and also to augment the working capital resources, the real reason is for consolidating their interest in the company and for reducing the shareholding by the petitioners, so that, they would not fulfil the requirement of Section 399 of the Act to file a petition under Section 397/398. According to counsel, the company is not at all in need of additional funds especially when it has been earning handsome profits every year. Even otherwise, since the main business of the company, as could be seen from the turnover, the business from manufacturing activities is negligible and, therefore, the question of modernising the plant and machinery does not arise.
16. Even assuming that the company needed funds, counsel submitted that the same could have been raised internally, by prudent business practices. He pointed out that in the year 1995-96, the company spent Rs. 40 lakhs for purchase of lorries which were given to SRMT on hire for Rs. 12 lakhs per year. After deduction for depreciation, overheads, income-tax, etc., the net income would be only Rs. 2 lakhs working out to less than 5 per cent, on the investment. According to learned counsel, this sum of Rs. 40 lakhs could have been been spent for modernisation instead of asking the shareholders to contribute towards the new shares amounting to Rs. 28 lakhs.
17. Summing up his arguments, Shri Gupta submitted that, the allegations as narrated above would clearly indicate that the respondents are guilty of acts which are burdensome, harsh and oppressive to the members and that the respondents are guilty of gross mismanagement of affairs of the company and misfeasance and malfeasance. Accordingly, he submitted that the board of directors should be superseded, the petitioners should be declared to be entitled to appoint two of their nominees on the board with an independent chairman, and an investigation into the misappropriation of funds by the respondents should be ordered and that they should be asked to compensate the company for all damages done to the company and that the company should be restrained from going ahead with the rights issue.
18. Shri Raghavan, senior advocate, appearing for the respondents, pointed out that the petitioners had obtained interim orders on March 14, 1997, that they need not have to apply for the rights shares, without disclosing the fact that they had, in fact on March 12, 1997, itself applied for the rights shares by remitting the call money. Therefore, he submitted that the petitioners, having obtained interim orders without disclosing vital information should not be allowed to proceed with the petition as, one of the main stipulations in a Section 397/398 petition is that the petitioners should come with clean hands. Since, this objection was raised, we asked learned counsel for the petitioners to react. He submitted that since the petitioners were not sure of getting the interim orders, they had made arrangements for remitting the call money and when they moved the application for interim reliefs on March 14, 1997, they were not aware that the earlier instructions had been carried out. In other words, according to him, when they obtained the interim orders, they had no knowledge that on behalf of the petitioners, applications had already been made on March 12, 1997. We are satisfied with the explanation of counsel.
19. Dealing with the merits, Shri Raghavan stated that the respondents are not guilty of any of the allegations made in the petition. According to him, the petition contains various allegations right from paragraphs 10 to 24 in the affairs of SRMT on which the petitioners have already filed another petition. This petition has been filed with the collateral motive to influence the Board in the matter of the other petition. Further, according to him, this petition is essentially a petition under Section 398 as no act of oppression has been alleged except relating to the rights issue of shares, and the petitioners have not made out a case to convince the Board that the affairs of the company are being carried out in a manner oppressive to them justifying winding up of the company but such winding up would be prejudicial to them. Even the acts of mismanagement as alleged, do not contain full particulars and have been made only on suspicion and surmises.
20. Dealing with the allegations in detail, Shri Raghavan submitted that the respondents have not opened any firm in the name of the company's employees. It is true that Shri Ram Das Trailers is a proprietary concern of Sri Appa Rao Babji, a clerk in the company up to 1996. He is not a benami of respondents Nos. 2. and 3. The company has not bought any trailers from this firm after 1991. From 1986 to 1991, the company had purchased only fifteen trailers from this firm that too at prevailing market rates. These trailers are bought only when a customer purchasing a tractor in the company desires to purchase trailer also. Whenever the trailers are bought at the demand of the customers, they are sold to the customers with certain margin to the company. At no time, the firm passed on any consideration to respondents Nos. 2 and 3.
21. In regard to the dealings with K. Vishwanathan, Shri Raghavan submitted that there is no such person employed in the company. There is one G. K. Vishwanatham, working as assistant sales manager in the company and the company took on hire, a tractor along with the trailer owned by this gentleman, by an agreement dated July 1, 1993, for a limited purpose of free service campaign and for carrying material from place to place till June 30, 1994. The monthly rental was Rs. 2,100 per month and as such the allegation that the company paid over Rs. 13.5 lakhs to this gentleman is not correct. The figure of Rs. 13.5 lakhs relied on by the petitioner in 1995-96 is not correct and these figures reflect the freight charges incurred by the company for the receipt of material, vehicles and spare parts and also for despatches on FOR destination basis.
22. In regard to the allegation that the company has been paying commission to three select clerks, Shri Raghavan stated that the company introduced an incentive scheme in the years 1989-90 and 1990-91 since there was slackness in the market. Therefore, a sum of Rs. 500 for 1989-90 and Rs. 750 in the year 1990-91 was being paid as incentive to the employees. These three clerks in the sales department and they had to move about extensively for soliciting customers. All these incentives were paid by cheques. The scheme of incentive was stopped after 1991, since the market picked up thereafter. The amount of Rs. 3.32 lakhs shown in the accounts for the year 1995-96 as commission represents commission paid to dealers, outside mechanics, drivers and painters.
23. In regard to fictitious liabilities, Shri Raghavan, submitted that the allegation that the respondents are siphoning off funds by purported payments of non-existent debts is baseless. A sum of around Rs. 10,300 in the name of D. Ashok Kumar is shown as liability in the books of account, out of the unsettled advance paid by him for repairing his vehicle. Therefore, this liability is a factual one and is still outstanding and has not been withdrawn by the respondents. Likewise, the amount of Rs. 37.9 lakhs shown in the books of account as liability as on March 31, 1996, is only the amount borrowed from shareholders and public as deposits, complying with the provisions of Section 58A of the Act. Therefore, the allegation of the fictitious liabilities is wrong and unfounded. He further submitted, in regard to Shri Aruna Industries that the respondents have no connection with this firm and even the dealings with the firm have been stopped from April, 1991.
24. Dealing with the allegation relating to fall in profits, non-payment of adequate dividend, etc. Shri Raghavan submitted that the increase in the turnover of vehicles was on account of increase in the sale price and the company is entitled to a fixed margin as fixed by the manufacturer. Therefore, to say that fall in profits is due to siphoning off of funds by payment to fictitious persons is not correct. In regard to the income-tax proceedings in the criminal court in relation to an amount of Rs. 52,500, Shri Raghavan submitted that the complaint of the income-tax department has been dismissed by the High Court of Andhra Pradesh and as such this allegation need not be gone through by us. As far as payment of dividend is concerned, he stated that the rate of dividend is to be decided by the board taking into consideration various aspects and so far no shareholder has complained about it. He also submitted, with reference to appointment of the managing director that the same has been done in accordance with the provisions in the articles and the fourth respondent on his own volition, being unable to devote his time and attention to the affairs of the company, resigned and in his place the third respondent was appointed as MD. His appointment as MD was unanimously approved in the general body meeting which was not attended by the petitioners.
25. As far as the issue of rights shares is concerned, he submitted that, right from the incorporation of the company in the year 1985, the share capital had not been increased. Since the company needed funds, the board decided to go in for a rights issue and the petitioners have not been in any way prejudiced as they would be entitled to apply for the same. According to him, the company needed funds for modernisation and replacement, and to meet its working capital needs. When the company approached the bankers for increase in the working capital limits and term loan in December, 1996, the bankers advised the company to increase the capital to meet the margin requirement and accordingly, the board decided to offer rights shares at the rate of 2 : 5 to existing members. The petitioners did accept the offer for 2,920 rights shares and also remitted Rs. 2.29 lakhs towards the same on March 12, 1997. All the shareholders to whom shares were offered, have accepted and paid the necessary consideration. It is not for the petitioners, Shri Raghavan submitted, to decide whether the company should modernise or not. It is the board which has to decide and it had decided so. He also submitted that the stand taken by the petitioners that instead of purchasing lorries for Rs. 40 lakhs in 1995-96 and leasing the same to SRMT on which the return is negligible, the company could have utilised this amount towards its financial needs, is not correct inasmuch as no lorry has been purchased during that year.
26. Summing up his arguments, Shri Raghavan submitted that the petitioners have not made out a case for any of the reliefs sought for and that the petition should be dismissed.
27. We have considered the pleadings and arguments of the counsel. This is a classic case wherein the inter-personal relationship between relations having become sour, it has resulted in filing of this petition. As rightly pointed out by Shri Raghavan, no details or particulars have been given on the alleged kickback received by the respondents from the alleged benami firms. In the absence of some particulars, if we weigh the allegations with the explanations provided by the respondents, which we have elaborated earlier, we find that the explanations offered are convincing. In view of this, since we have elaborately summarised the allegations as well as the replies, we do not propose to once again to deal with the same in relation to the allegations relating to Sri Ram Das Trailers, payment of commission to three clerks, creation of fictitious liabilities, Aruna Industries, criminal case filed by the income-tax department etc.
28. In regard to the allegation that the profits are not commensurate with the turnover the stand of the petitioners is that respondents Nos. 2 to 4 are diverting the income of the company in the form of commission and other expenses being paid to fictitious purchases and agents by showing false vouchers. In the rejoinder, they have also countered the explanation of the respondents that the mark on vehicles sold remains the same and the sale price of vehicles that had gone up to reflects the increased turnover, by stating that as against 378 tractors sold in 1994-95, the number of tractors sold in 1995-96 was 510 and there has been corresponding increase in sale of other vehicles also. Therefore, according to the petitioners, there has been siphoning off of funds to inflate expenses. In this connection, it is relevant to refer to paragraph 28 of the petition wherein the petitioners, while complaining about inadequacy of the dividend for the year 1996-97, have themselves averred that the operative profits have gone up by 28 per cent, between the years 1991-92 and 1995-96, while the turnover has gone up by 88 per cent. In a case of allegation of misapplication or siphoning off of funds being made, unless and otherwise some details are given, it would not be possible to examine these allegations especially when the accounts of the company have been audited by a chartered accountant without any adverse comments. In any company, ups and downs over a period of time is a normal phenomenon. Even in respect of the respondent-company, we find from the annual report for 1996-97, that the operating profit has gone up from 67.8 lakhs in 1995-96 to 98.76 lakhs in 1996-97. The turnover has also been shown to have gone up from 21.7 crores in 1995-96 to 29.9 crores in 1996-97. While we do appreciate that the petitioners, not being in the management would not be in a position to furnish full particulars relating to alleged siphoning off of funds through fictitious vouchers, yet at least some concrete details/proof should have been furnished for us to examine the allegations in detail. In the absence of even an iota of evidence, purely on the basis of comparing the figures of income/expenditure between two years, we cannot come to a conclusion that such differences reflect siphoning off of funds. In the rejoinder, in many places, the petitioners have averred that it is for the respondents to disprove the allegations by proper evidence. It is a settled law that the burden of proof lies on the person making allegations of fraud, etc., to prove the allegations. Therefore, we are unable to sustain the allegations in this regard.
29. In regard to the allegations of fictitious loans from others of Rs. 39.97 lakhs as on March 31, 1996, it was explained by the respondents that it consisted of loans and deposits from the shareholders and deposits under Section 58A from members of the public. Perhaps, the apprehension of the petitioners seems to be justified, in the absence of clear classification in the accounts. Even though, the auditors, have in their report, stated that the company has complied with the requirements of Section 58A of the Act, indicating therein that the company has accepted public deposits, the same has not been shown separately in the accounts. However, we find from the annual report for 1996-97, that the same has been classified properly in Schedule 4. Under these circumstances, we would like to go by the explanation given by the company.
30. With regard to the allegation relating to inadequate dividend and appointment of the managing director, we feel that, when the general body of members, in their own wisdom, have approved the decision taken by the board in these matters, we should not intervene, as in a corporate democracy, it is the will of the shareholders which has to prevail, the exception being that the shareholders are not misled with ulterior motive. The petitioners have not been able to substantiate any mala fide intention either in reducing the rate of dividend or in the resignation and appointment of the managing director other than what they have stated in the petition, from which we do not find sufficient ground to interfere in these matters.
31. As far as the rights issue is concerned, the respondents have produced in their additional documents filed on April 2, 1998, a letter from Bank of India dated January 11, 1997, wherein the bank has advised the company to increase the capital base. It is also seen from various balance-sheets over a period of time that there has been increase in the fixed assets of the company and in the year 1996-97, it was of the order of about Rs. 46 lakhs. In a Section 397/398 petition, further issue of shares, if alleged to have been made, in exclusion of certain shareholders and with a view to increasing the holding of a particular group, then a serious note of the same will have to be taken. In the present case, we find that the justification given by the management for issue of additional shares was to augment the resources of the company. In what way, mode and manner the additional resources are to be raised, is for the board to decide. Further, the shares have been issued on rights basis in the same proportion to all the shareholders. Once such a rights issue is made, the question of increasing the shareholding by one group does not arise unless otherwise others decline to accept the offer made. From the pleadings, we find that the petitioners are only questioning the need for additional funds which we have already held that the company was justified in raising additional funds. If the complaint of the petitioners is that they have been made to subscribe to the shares, even though they have no confidence in the company, we are afraid that such complaint cannot be entertained to restrain a company from raising additional share capital as no minority shareholder can, just because he does not want to subscribe to the shares, demand restraining the company from issuing further shares. However, we find that the petitioners have already subscribed to the shares as also every other shareholder. Accordingly, we do not find any justification in acceding to the prayer of the petitioners in this regard. Accordingly, our restraint order dated March 14, 1997, stands vacated with immediate effect. While doing so, we also give liberty to the petitioners to apply for refund of money paid towards the shares, if they desire so and the company will comply with the request.
32. Thus, on an over all assessment of the allegations and the explanations offered on the allegations, we find that the petitioners have not made out a case for grant of any of the reliefs sought for and as such the petition deserves to be dismissed. During the hearing, in view of the close relationship between the parties, we suggested that the disputes should be resolved amicably. Towards this end, the petitioners were prepared to sell their shares to the respondents on a particular price which was not acceptable to the respondent. As a matter of fact, Shri Raghavan argued that the main motive behind the petition was to arm twist the respondents to purchase the shares of the petitioners at a high price to which the respondents were not prepared to accede. The respondents were also not prepared for the valuation of the shares by an independent valuer. Under the circumstances, while we do not pass any orders for the respondents to purchase the shares of the petitioners, yet we suggest to the respondents, to avoid any future litigation, to purchase the shares held by the petitioners at a reasonable price taking into consideration the family relationship.
33. With the above suggestion, we dismiss this petition. No order as to costs.