Company Law Board
Shri Ram Nath Gupta, Shri Ajay Kumar ... vs Phoel Industries Ltd., Shri Sajan Kumar ... on 18 February, 2005
Equivalent citations: (2005)5COMPLJ128(CLB), [2005]64SCL26(CLB)
ORDER
K.C. Ganjwal, Member
1. Shri Ram Nath Gupta and Ors have filed this petition against Phoel Industries and Ors. Under Sections 397/398 read with Sections 235, 402 and 403. The respondent company was incorporated under the Companies Act on 10.1.96 with its Regd. Office at Bhiwadi, Distt. Alwar Rajasthan. The respondent company is engaged in the manufacture of HDPE Pre lubricated duct for optical fiber, which is used in Telecommunications Industries. The unauthorized and paid up company of the company is Rs. 1 crores divided into 10,00,000 equity shares of Rs. 10 each. Shri Ram Nath Gupta (petitioner No. 2 holds 1,50,000 shares, Shri Ajay Kumar Gupta (Petitioner No. 2 holds 1,87,900 shares and petitioner No. 3 Smt. Shiv Lata Gupta holds 1,10,000 shares. The petitioners together holds 4,47,900 shares, which constitute 47.79% of the total paid up capital of the company.
2. The learned counsel for the petitioner submitted that the petitioners joined the respondent company on the basis of prospectus put before them by respondent No. 2 in respect of duct for optical fiber cable being manufactured by them. Considering the long experience of respondent No. 2 being an Engineer and that he is short of funds, the petitioner joined him for mutual benefits, with the condition that the petitioner will be inducted in the Board of Directors. The respondent informed the petitioner that the company is likely to get 40% business of directorate of telecommunication worth several crores. The respondent presented a very rosy picture about the company and the petitioners subscribed to 4,47,900 equity shares from the unsubscribed portion of the authorized capital of the respondent company. The petitioners were provided a provisional balance sheets from 1.4.2002 upto 1999-2000 in Sept. 2000 and again another provisional balance sheet for the year ended 31.3.2000. The respondent No. 2 misguided and deliberately suppressed the fact that the balance sheet for the year ended 31.3.2000 of the respondent company was not ready. It was also agreed amongst the petitioner and the respondents that the bank accounts of the company shall be operated jointly by the petitioners and respondents. A resolution to this effect was passed in the Board Meeting held on 25.11.2000. After the petitioners had invested funds amounting to Rs. 92 lakhs, they realized that they had misplaced their faith in the respondents. The petitioners realize that the respondent company is continuously suffering losses due to siphoning away of funds by respondent No. 2 to 4 to their sister concern. The respondent company had been floated with the sole purpose of duping financial institutions like Public Sector Banks and Sidbi, shareholders, suppliers as well as general public. The records of the company were manipulated so as to meet the terms of sanction of additional loan to the respondent company. The amount due from sister concerns of respondent No. 2 to 4 is Rs. 87,56,332 as stated in the sur-rejoinders of the respondent. The sister concerns of the respondent 2 to 4 used the entire funds for their benefits. The respondent company earned a profit of Rs. 3.19 lakhs during the period 2000-2001 when petitioners had invested funds and had been involved in the management of the company as directors. The company has never made profit before or after this year. The modus operandi adopted by respondent to siphon away funds to their sister concern was to provide sales of goods to sister concerns at much lower rate than the market rate and they have passed on a benefit of Rs. 2 crores on this account. The payments of the respondent company was unduly delayed by sister concerns and the respondent company was paid interest on outstanding amounts. The total amount due from sister concerns of respondent No. 2 to 4 as on 31.3.2001 is Rs. 87.56 lakhs approximately. Similarly, the job work was done for sister concerns at much lower rates than the market rates for similar work. The sale proceeds amount to Rs. 4,13,450 at Riwadi Branch of the company during 24.10.2000 to 19.3.2001 were deposited in the account of M/s Foil Industries, a sister concern of the respondent. Once the irregularities in the books were detected by the auditors, the accounts books were changed. The total benefits passed on by the respondent directors to their sister concerns runs in crores of rupees, whereas the respondent company has been deliberately put to loss. The petitioners have given specific details of some transactions involving siphoning away of funds by the respondents. The respondents No. 2 to 4 who are promoter directors of the company have milked the company dry. The loss shown in the balance sheets are due to siphoning away of funds. Unless a detailed investigation is carried out in the affairs of the company as well as in the affairs of the sister concern, the money cannot be brought back to respondent company. The petitioner therefore pray that a detailed investigation be carried out by an independent authority and bring back the money siphoned off into the company and pay off the loans of the petitioners as well as of financial institutions.
3. The learned counsel for respondent in reply submitted that the respondent company may good success in terms of productions and the ale of the company increased from Rs. 154 lakhs in the year 1998-99 to Rs. 384 lakhs in the year 2000-2001. The respondent NO. 2 by virtue of his experience in the industry backed sizeable orders of crores of rupees for the company. The petitioner NO. 1 had business dealings with R-2 for the last several years and used to supply raw material to the company of the petitioner No. 2. The petitioner No. 1 being in the similar trade, realize that the respondent company was knowing and had good potential and therefore joined respondent company as co promoter for mutual benefit by purchasing equity shares worth Rs. 44.7 lakhs with open eyes. The petitioner No. 1 has been in business for several decades and is not a novice. The story put forward in the company petition that the respondents provided a provisional balance sheet to the petitioner prior to their purchasing shares, is totally false. This document is not signed by any directors of authorized officer of the company. Secondly, when the audited balance sheet as on 31.3.2000 had already been prepared on 24.8.2000, there was no question of providing a provisional balance sheet to the petitioner. The respondents have invested huge amount of money in the respondent company. The petitioner from the very beginning were not satisfied with their minority shareholding and were insisting for increase. The respondent No. 2 firmly refused to do so and the petitioners committed various acts prejudicial to the company by insisting that some of their old junk machinery should be taken on hire by the respondent company. The petitioner No. 1 wanted to replace some of the staff members with his own. The petitioners stopped signing the cheuqes form day to day functioning of the company from the joint account of Oriental Bank of Commerce. These include salary cheques of staff members and workers. The respondent company could not participate in Govt. tenders because the petitioners No. 1 refused to sign cheques and even delayed in signing the cheques for creditors. The company could not be allowed to come to a stand still and the day to day expenses were met from the Syndicate Bank account of the company which had been opened at the instance of SIDBI, which has given loan for setting up plant at Bhiwadi. The petitioners caused obstructions here also and sent mischievous letters to OBC Bank mentioning that deposits were being made by the company in the Syndicate Bank account. The provisional balance sheet filed with the company petition clearly indicates that the syndicate bank account were very in existence and in the knowledge of petitioners. As a result of petitioners letters, Oriental Bank of Commerce refused to accommodate the respondent company's fund requirements. The company therefore was unable to execute the huge orders in hand and ran into heavy losses due to petitioners behavior. The allegations against respondent regarding siphoning of funds to the sister concern are mischievous or baseless and un-collaborated. There is no material whatsoever, that would prove of these allegations. Having failed to do so the company petition is liable to be dismissed and the petitioner cannot ask for a fishing or robbing enquiry into the affairs of the company. The learned counsel relied on the judgment of Rohtas Industry (1969) 39 CC 781 (Supreme Court). These transactions were valid and legal. The respondent company started manufacturing HDPE pipes after its incorporation. These pipes are not being consumer products are difficult to sell in the market. The sister concerns were similar in business in 1965 and 1982 as it was very difficult to sell these products in the open market the respondent company started selling its products to the sister concerns. After an agreement between the respondent company and the sister concern after an EOGM held on 20.11.976 this agreement was known to the petitioners at the time of their joining the company which is apparent from the balance sheet of 31.3.2000 which was prepared on 24.8.2000 i.e. prior to petitioners joining the respondent company. The allegations made about siphoning of funds are without any proof. The allegations of depositing of cash collected from the Riwari branch in the bank account of the sister concern is totally false and incorrect as the pass book of M/s Fuel Industries Riwari would demonstrate the same. The notices of all the Board meetings were sent to the petitioners Under Certificate of Posting which has been placed on record. The allegations of under invoicing/over invoicing are also baseless and unsubstantiated. There is negative net worth of respondent company as the banks froze accounts of the company. Having been deprived of funds, the company could not execute all orders. The SIDBI has sent recall notice dated 3.2.2004 to respondent company for Rs. 88.85 lakhs They have the first charge over the land, building and also the plant and machinery. SIDBI has also second charge over the movable stocks. The oriental Bank of Commerce has also sent a legal notice dated 18.6.2004 claiming an amount of Rs. 62.11 lakhs as due and payable to them. OBC Bank has also initiated proceedings under Securitization Act since the company was unable to repay the loans. The respondents have filed an application in CA No. 216/2003 before this Board bringing to the notice of this Board, the poor financial position of the company. The petitioners have already indicated that they are not willing to buy out the respondent. There are heavy dues of the respondent No. 1 company payable to banks and others, which have only increased with passage of time. Accordingly, the respondents make an offer to purchase the entire shareholding of the petitioners at Rs. 1 which may be considered by this Board in the light of order passed by this Board in the case of M.K. Dhir and Ors. v. GIVO Ltd. and Ors. in CP No. 31/2002.
4. I have considered the pleadings and arguments of the learned counsel of both sides. The fact that the respondent No. 1 company is in financial losses is not disputed by both the parties but each one is accusing the other for the present status of the company. The petitioners have mentioned that the company which had subscribed capital of Rs. 52 lakhs had incurred loss of Rs. 24.07 lakhs in first three years of its operation. The company earned a profit of Rs. 3.19 lakhs for the first time when petitioners had invested Rs. 92 lakhs in the company and Rs. 116 lakhs funded by SIDBI and Oriental Bank of Commerce and Rs. 34 lakhs of state subsidiary. The company thereafter suffered losses of more than Rs. 35 lakhs in the year 2001-02 and more than Rs. 37 lakhs in the year 2002-2003. The petitioners have alleged that the respondents have siphoned off their money to their sister concerns by selling goods much below the market rates. On the other hand, the respondents have mentioned that true picture of transaction is not correctly given by the petitioners and they have attempted to twist facts by giving misleading interpretation. The charts placed on record by respondents indicate that they had supplied same commodity at a higher rate to third parties and at a lower rate to the concerns of respondent No. 2 and 4.
5. The petitioners were not novice and they were in the same business for quite some time. They were fully aware of the supply to the sister concern when they joined the company and respondents have stated that these sister concerns in fact helped and assisted the growth of the business of the company by making available their marketing services. The company has undoubtedly incurred heavy losses but all such losses cannot be attributed to mismanagement. Various factors can lead to the loss in any company. According to respondents, the main reason of incurring losses was not fulfilling the orders received by the respondent company, as the petitioners had written to Banks/Financial Institutions adversely. In turn, the Banks/Financial Institutions did not give adequate money supply to the respondent company to enable them to complete their contractual obligation. This seems to be the main reason of the company incurring losses.
6. The net worth of the company is in negative as on date. I find the proposal of the respondent to be fair and justifiable in the facts of the case that the petitioner should transfer their shares for Re. 1 so that the respondents could take care of all the liabilities of the company. Relying on the judgment of this Board in CP No. 31/2002 in the matter of Mr. M.K. Dhir and Ors. v. Givo Ltd. and Ors. and with a view to put an end to the dispute between the parties, I direct that respondents to take all the steps to release the petitioners from their personal guarantees for loans taken in the favour of the company within a period of three months from the date of this order. However, I make it clear that, this direction is without prejudice to the pending proceedings before any other authorities such as DRT/BIFR and also subject to the concurrence of the Banks/financial institutions holding the personal guarantees of the petitioners As and when the personal guarantees of the petitioners are released, the petitioners shall transfer their shares to respondents for a consolidate consideration of Re. 1. The secured and unsecured loans of the respondent No. 1 company shall be paid as per law.
7. The petition is disposed of in the above terms without any order as to cost.