Company Law Board
K.P. Balakrishnan Nair And Ors. vs Vindya Tea And Industries Pvt. Ltd. And ... on 30 September, 1998
Equivalent citations: [1999]96COMPCAS421(CLB)
ORDER
1. This is a petition filed under sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as "the Act"), alleging various acts of oppression and mismanagement in the affairs of Vindhya Tea and Industries Private Limited (hereinafter referred to as "the company") and seeking the following reliefs :
(a) to declare the allotment of 3,000 equity shares in favour of the respondents Nos. 6 and 8 to 12 as illegal ;
(b) to delete the name of respondents Nos. 6 and 8 to 12 from the register of members of the company in relation to the impugned shares ;
(c) to supersede the board of directors of the company and appoint an administrator to regulate the affairs of the company ;
(d) to appoint a statutory auditor for preparation of the accounts for the year ending March 31, 1993 ;
(e) to convene an annual general meeting of the company ;
(f) to surcharge the third respondent for misappropriation of the company's assets, and funds ; and
(g) to declare that the sixth respondent is not the director of the company.
2. By the time when the matter was taken up for hearing it transpired that the financial institution, namely, the Tamil Nadu Industrial Investment Corporation, which had advanced credit facilities to the company, had in exercise of its powers under Section 29 of the State Financial Corporations Act, 1951, auctioned the entire undertaking of the company and utilised the proceeds, towards discharging the company's liabilities of TIIC and also for the liability towards Canara Bank. In view of this, the substratum of the company has been lost. The petitioners did not agitate on the various allegations and also did not press for the relief sought in the petition. Consequently, as alleged by the counsel for the petitioners we are not dealing with any of the allegations contained in the petition, nor the various reliefs sought except those relating to financial irregularities committed by the respondents and related reliefs of surcharging the respondents under Section 406 of the Companies Act.
3. Since the petition did not contain the full details of financial irregularities, the petitioners were directed to file an affidavit substantiating the alleged acts of financial irregularities and also an affidavit indicating the alleged financial irregularities. The additional affidavits were filed by the petitioners on January 21, 1997 ; July 10, 1997, and December 27, 1997. From these affidavits and also from the petition, the alleged financial irregularities relate to the following :
(i) Diversion of funds of the company to the tune of about Rs. 23 lakhs in the course of enjoying the credit facilities from TIIC.
(ii) Diversion of Rs. 15,23,109.62 and misappropriation of Rs. 1,84,025 on account of Canara Bank account.
(iii) Diversion of Rs. 1,00,100 in purchase of land for the company's factory use and misappropriated funds by inflating the construction cost of the factory building.
(iv) Diversion of Rs. 83,000 on account of jeep account.
(v) Misappropriation of funds of the company by showing payment of interest of Rs. 9.42 lakhs without being supported by any voucher.
(vi) Inflation of day-to-day expenses of the company by tampering with the vouchers and embezzling funds of the company.
(vii) Deliberate manipulation of accounts of the company showing false financial position as if the company incurred losses, though it was making a profit of Rs. 75,000 per month for 30 months during which the factory was in production for which accounts were not made available for the entire period.
(viii) Though Rs. 3 lakhs is said to be payable towards sales tax and penalty, sales taxes are paid as per the balance-sheet of the company.
(ix) The statement of accounts will show that the company has paid warehouse charges and interest to Fourbear and Company, but the latter had filed a suit against the company for recovery of Rs. 5 lakhs.
(x) Though the accounts of the company for the year 1992-93 were said to be audited by Rau and Nathan, in reality, there is no such auditor at the given address at Doty and thus playing fraud on members of the company.
(xi) The amounts collected from N. J. Peter Achuthan Chetty by the third respondent are not reflected in the balance-sheet of the account during the relevant period.
(xii) There has been discrepancy (i) in payment made to the sales tax authority, Janata Tea Traders Private Limited, (ii) stock of tea valued at Rs. 20,79,150, which were misappropriated by respondents Nos. 2 to 6.
4. These additional affidavits also deal with the reports of both the TIIC and Canara Bank furnishing the financial transactions that these institutions had with the company. Arguments were advanced on the above allegations and the parties also submitted their written arguments. During the hearing, it transpired that the petitioners had already filed a criminal complaint on the alleged financial irregularities and the police had seized practically all the documents and records of the company for the purpose of conducting an enquiry on the criminal complaint. The material before us without the original documents are not adequate even to form a prima facie opinion on the various allegations, in a proceeding under Section 397/398. By virtue of Section 406, the Company Law Board is empowered to invoke the provisions of Schedule XI by which it can impose penalty, for fraud committed by the officers for not keeping proper account, for fraudulently conducting the business of the company and also assessing the damages against the delinquent directors for ordering restoration of the same to the company. In other words, the action under Schedule XI is very drastic in nature. For taking such drastic action, mere prima facie opinion is not sufficient and as a matter of fact such a prima facie finding itself could not be proper as held in Colaba Land and Mill Co. Ltd. v. Vasant Investment Corporation Ltd., AIR 1964 Guj 107, cited by counsel for the petitioners. It can be done only on a specific finding given in respect of each allegation. From the averments of the petitioners without primary documents, especially when the respondents have defended each of the allegations it is not possible for us to give any definite conclusion on the allegations of financial irregularities. Since the petitioners have already filed a criminal complaint with the police who have seized the primary documents and other records of the company, we consider it appropriate not to express any opinion about the alleged act of financial irregularities. In the circumstances, we are not in favour of going into the merits of the various irregularities alleged by the petitioners against respondents Nos. 2 to 6. Accordingly, the petition is dismissed. No order as to costs.