Company Law Board
Central Government vs Kopran Limited And Ors. on 15 June, 2004
Equivalent citations: [2005]125COMPCAS495(CLB), [2004]56SCL428(CLB)
ORDER
S. Balasubramanian, Chairman
1. The Central Government has filed this petition under Sections 397/398 read with Sections 401/408 of the Companies Act, 1956 (the Act) seeking for appointment of Government Directors on the Board of M/S Kopran Limited (the company) on the main ground that the company had loaned a sum of Rs. 78 crores to one M/s Classic Credit Limited, a group company of Shri Khetan Parikh, who was involved in the stock market scam in 2001 and that in the process the company has lost Rs. 28 crores, exhibiting mismanagement in the affairs of the company.
2. A summary of the petition is as follows: On the basis of a preliminary report of SEBI on the stork market scam in 2001, the Central Government had ordered an inspection of the books of accounts of the company in terms of Section 209 A of the Act. The Inspecting Officer had pointed out that the company had indulged itself in loaning of funds to the extent of Rs. 78 crores which is a huge sum considering the fact that it had not loaned such sum in its recent past, that too, to an investment viz. M/s Classic Credit Ltd, a company belonging to Ketan Parikh Group, which was in the share market operations which is a high risk and volatile business. In spite of the risk profile of the borrower, the directors of the company went ahead and loaned such a huge sum only on the strength of Balance Sheet of M/s Classic Credit, without obtaining any security whatsoever and thus endangering the shareholders' interest. The company had received back only Rs. 50 crores and is yet to receive balance amount of Rs. 28 crores for which, even though it received a cheque from Classic Credit Limited, the same has been dishonored. The company is unlikely to receive this amount as KP Group of companies went broke due to Stock Market scam in 2001. Even though there is a disclosure in the Balance for the year ended 31st March 2001, yet, the company had stated therein that it was confident of recovering the amount, however without disclosing the grounds on which the company had formed that opinion, as, by the balance sheet date, it was universally known that Ketan Parikh companies had gone broke. Thus, the disclosure is inadequate and therefore the company had violated the provisions of Section 628 of the Act. On the basis of these allegations, the Central Government has sought for the appointment of majority directors by the Central government to effectively safeguard the interest of the company, its shareholders and public interest, to hold office for 3 years.
3. This petition was mentioned on 29.1.2003. On 17.3.2003, the respondents filed an application CA 50 of 2003 seeking for dismissal of the petition on the ground that the allegations made in the petition are baseless and that the petitioner has not filed, along with the petition, necessary documents and all other material as required under Section 10E and 4-C of the Companies Act and Regulation 18 and Annexure III of the Company Law Board Regulations. In the hearing held on 12.8.2003, when this application was taken up for hearing, the advocate for the petitioner sought lime to file an affidavit with additional documents. Thereafter, the petitioner filed an extract of the report of the inspection carried out in terms of Section 209A of the Act and also a copy of the Balance Sheet as at 31.3.2001. In the rejoinder to the reply of the respondents to the petition, the petitioner annexed copies of extracts of SEBI and JPC reports wherein the name of Kopran figures. By another affidavit dated 12.4.2004, the petitioner filed a copy of a letter issued by the Inspecting Officer to the company, to point out that there had been other violations committed by the company of various provisions of the Companies Act and these violations should also be taken into account in deciding this petition.
4. Shri Sanjay Agarwal, Advocate, appearing for Central Government submitted: The company raised a sum of Rs. 40 crores from UTI by way secured NCDs and the disbursement was unusually, speedily completed on the day of sanction itself i.e. on 27.2.2001. Immediately, on the same day, this amount was parked with Classic Credit Limited, giving rise to a reasonable presumption that Kopran acted as a front to Classic Credit in routing the funds from UTI to Classic Credit. This amount was given without any security at a rate of 16% interest per annum. In addition, the company also diverted Rs. 38 crores from its internal resources and paid the same on 27.2.2001 to Classic Credit Limited. The manner in which this amount of Rs. 78 crores was raised and transferred by the company to Classic Credit which is a company of Ketan Parekh in haste, clearly indicates that the lending was meant for some other purpose than being a genuine business transaction. Even though in the proposal to UTI, the company had represented that the amount was required for brand promotion expenses, pre payment of outstanding ECB and expansion of Mahad Plant, it diverted the funds to Classic Credit Limited. Ketan Parekh utilized this amount for transactions in the stock market which resulted in a scam. Even though the company has received Rs. 50 crores back, yet, the balance Rs. 28 crores is yet to be received as the cheque for this amount given by Classic Credit Limited had bounced. Giving such a huge sum without any security and losing Rs. 28 crores in the process reflect a grave act of financial mismanagement on the part of the company. The company cannot be allowed to play with the funds of the banks and its investors. The company has become one of the instruments by which Ketan Parekh could manipulate the stock market. From the report of SEBI annexed at Annexure -1 of the Rejoinder, it is evident that it was Ketan Parekh who had negotiated with the company on behalf of Classic Credit. The role played by Ketan Parekh in the stock market scam with the money raised by him from Kopran and other companies has been adversely commented by the Parliamentary Committee.
5. Learned counsel further submitted: There have been a number of irregularities in conducting the affairs of the company as is evident from the report of the Inspecting Officer. The company had violated the provisions of Sections 193, 224(8), 233(8), 257, 205, 270(3), 209(1), 203(3), 209(3)(b), 211(3A) read with (3C), Part 1 of Schedule VI read with Section 211 and 212. These violations would also indicate that all is not well with the present management. The company had made a public issue with a premium of Rs. 80/- for a share of Rs. 10/- but the present quoted price of the shares of the company is about Rs. 60/-. This is the only pharmaceutical company, the share price of which is quoted much lower than the issued price. This is also an indication that the affairs of the company are not being conducted in a sound manner. Therefore it is necessary that the CLB should order appointment of 10 Government directors on the Board of the company to effectively safeguard the interest of the company, its shareholders and the public interest and also to prevent the affairs of the company being conducted either in a manner oppressive to any member of the company or in a manner which is prejudicial to the interest of the company or the public interest.
6. In the written submission, the learned counsel has relied on the following cases in support of his prayers:
1. A conduct which is prejudicial in a financial sense to the company must also be prejudicial to the interest of the shareholders". Re Macro (Ipswich) Ltd., (1994 2 BCLC 354 (Ch.D).
2. Violation of statutory provisions and those of article of the company have been held to be acts constituting mismanagement of affairs, so as to attract the preventive jurisdiction of CLB under Section 398, (Akbarali A. Kalvert V.K. Konkan Chemicals P. Ltd. (1997 88 Com Cases 245 CLB)
3. A single act is sufficient to constitute oppression so as to enable the Company Law Board to exercise its power under Section 402. The single act was capable of causing perpetual damage to the majority shareholder. His removal from directorship and the new allotment were both set aside. Tea Brokers P. Ltd. v. Hamendra Prosad Barooah (1998 5 Comp L J 463 Cal.).
4. Where a conduct affected the revenues/profits/output/return to investors, it was held that it amounted to a conduct prejudicial to public interest. N.R. Murty v. Industrial Development Corporation of Orissa (1977 47 Com Case 38.
7. Shri Chaudhary, Senior Advocate appearing for the respondents submitted: The only allegation in the petition relates loaning of Rs. 78 crores-to M/s Classic Credit. There is not even a whisper of allegation in the petition of any other act of either oppression or mismanagement. Having found that with a single allegation the petition may not be maintainable, the petitioner filed an affidavit enclosing therewith a copy of the letter of the Inspecting Officer dated 14.9.2001 to the company to show as if there were many irregularities/violation of the provisions of the Act. The petitioner did not choose to file a copy of the reply given by the company by a letter dated 24.9.2001, explaining the stand of the company on each and every alleged irregularity/violation of the provisions of the Act. It appears, that, out of the sixteen alleged irregularities pointed out by the Inspecting Officer in his notice, the petitioner seems to have been satisfied with the reply of the company on eight items. For the balance eight items, which are in the nature of procedural irregularities, the respondents have already filed compounding applications in terms of Section 621A of the Act, which are pending with the Regional Director, Mumbai. In law, once a compounding application is made, no further action in respect of the matters covered in the compounding application can be taken or initiated since the matter would be subjudice.
8. On the main allegation on loaning of Rs. 78 crores to M/s Classic Credit the learned counsel submitted: The entire allegation is imaginary and not based on facts. An attempt has been made in the petition as if the company had been used as a conduit by UTI to pass on funds to M/s Classic Credit and that UTI sanctioned the amount of Rs. 40 crores hastily. The company obtained the shareholders approval in a meeting held on 30.9.2000 for private placement of non convertible debentures with financial institutions amounting to Rs. 70 crores. Thereafter, the company was in discussion with various financial institutions and application were made to LIC, UTI Bank and Unit Trust of India. While UTI Bank subscribed to an amount of Rs. 10 crores, LIC subscribed to a similar amount on 30.10.2000. After obtaining credit rating, UTI sanctioned Rs. 40 crores and disbursed the same on 27.2.2001. In other words it took nearly five months after the application was made to UTI before the amount was disbursed. Therefore, it is wrong to say that UTI hastily disbursed this amount. The Board of Directors of the company decided to place Rs. 78 crores with M/s Classic Credit only after satisfying itself about the credit worthiness of M/s Classic Credit on perusal of its balance sheet as on 31.3.2000. M/s Classic Credit had earned a net profit of Rs. 132.05 crores with net current assets of Rs. 164 crores and share capital & reserves of Rs. 83 crores. Further, at that time Ketan Parekh had high profile reputation with his group having a profit of about Rs. 215 crores and payment of income tax to the tune of Rs. 100 crores. Since M/s Classic Credit needed the funds only for a short period, the Board of Directors of the company assessed that, advancing this amount to Classic Credit for a very short period would not involve any special risk and accordingly loaned this amount which was not needed for any immediate use by the company. In the process the company was also assured of 16% interest. In view of the credit worthiness of M/s Classic Credit and also of the fact that seeking for and creation of security would take considerable time, the Board did not insist on any security. Parking of surplus idle funds for short periods with the view to earn interest, is not uncommon. The very fact that a sum of Rs. 50 crores was returned within a period of three days by M/s Classic Credit would vindicate the decision of the Board of Company. Unfortunately, even though Classic Credit remitted balance amount of Rs. 28 crores by a cheque, it bounced, as by that time the stock market scam had come to light and the bank accounts of all Ketan Parikh companies had been frozen. However, with a view to protect the interest of the company, it has already initiated proceedings under Section 138 of the Negotiable Instruments Act and has also been obtaining acknowledgement of debt from Classic Credit periodically.
9. The learned counsel further submitted: The respondents had no related transactions or dealings of whatever nature with Ketan Parekh or his group except the solitary instance of this inter-corporate deposit. Even the Joint Parliamentary Committee Report on this stock market scam does not mention anything about any relation/dealing on account of the respondent company with Ketan Parekh or his group entities or any share transaction in the shares of the company or shares of Ketan Parekh entities. JPC has, in fact, observed that no direct nexus of collusive nature was found to be existing at the relevant point of time either by Income Tax Department or the RBI or the SEBI or the Deptt. of Company Affairs. Further the JPC report at para 11.6, notes that DCA had pointed out that the company had not violated the provisions of law relating to transfer this amount to Classic Credit. Therefore, the Board of Directors cannot be accused of mismanagement for having taken a commercial decision just because a part of the amount loaned by the company bonafide, has not yet come back to the company. There are no allegations in the petition that any of the Directors is guilty of misappropriation or siphoning of funds. The allegations of the petitioner that the respondent directors are endangering the shareholders' interest and that the directors had acted negligently are totally misplaced and wrong. There has been no complaint from any of the shareholders about the functioning of the company. Therefore, since the petitioner has not established that there have been acts of oppression and/or mismanagement in the affairs of the company, the petition should be dismissed.
10. I have considered the pleadings and arguments of the counsel and also the written submissions filed by them, wherein they have also referred to some decided cases. This petition has been filed by the Central Government under Section 401 read with Section 397/398 and Section 408 of the Act, which empower the Central Government to move this Bench whenever it comes to its knowledge that the affairs of a company arc being carried on in a manner as envisaged in those Sections. In the present case the source of knowledge of the Central Government is the report of inspection carried out into the books of accounts of the company in terms of Section 209A of the Act. Perhaps, this petition is the briefest petition that has been filed before this Board under Sections 397/398 or under Section 408 of the Act. The main petition consists of 6 pages of which the only allegation relating to the loaning of Rs. 78 crores by M/s Kopran, runs to two pages. No supporting documents, like the inspection report (the source of knowledge), or a copy of the preliminary report of SEBI, Balance Sheet of Kopran etc had been filed with the petition, even though they were filed subsequently. One of the basic principles of pleadings, that too in a petition under Sections 397/398 or under Section 408, that full particulars including all the materials relevant for deciding the petition which are available with the petitioner should be disclosed in the petition itself. (Re Clive Mills co Ltd -34 cc 731 Cal: Bengal Lakshmi Cotton Mills Ltd- 35 CC 187: M.M. Dua v. Indian Dairy & allied Services P Ltd-86 CC 657CLB ). In the present case more, and more materials were added by and by even though they were always available with the petitioner. By a subsequent affidavit, the petitioner, on the basis of a notice issued by the inspecting officer to the company, contended that the contents of the notice, which indicate that there were violations of the provisions of the Act, should also be taken into account while deciding this petition. Normally a petition under Sections 397/398 or under Section 408, should stand on the own footing and the petition cannot be strengthened by subsequent affidavits as held by the Supreme Court in Shanti Prasd Jain v. Kalinga Tubes (35 CC 351 SC)and no new material or new allegations can be added unless otherwise they relate to events taking place after the petition is filed. Therefore, as rightly pointed out by the respondents, the only allegation that can be legitimately examined by me in this petition is in relation to the loaning of Rs. 78 crores to M/s Classic Credit and to determine whether the same could either amount to an act of oppression or mismanagement or against public interest for the purposes of granting appropriate relief in terms of either Sections 397/398 or Section 408.
11. It is not in dispute that the company had given a sum of Rs. 78 crores to M/s Classic Credit. The petitioner had made a statement before the JPC that the company, as seen from the report of JPC, had not violated any provisions of the Act in lending this amount to M/s Classic Credit. In the present petition also there is no allegation that the company had violated any of the provisions of the Act in lending this amount. From, the explanation given by the respondents, I find that the petitioner is not justified in alleging that UTI hastily disbursed Rs. 40 crores to the company with the view to enable the company to lend this amount to M/s Kopran. I also find from the reply of the respondents, that before lending this amount the Board of Directors of the company had assessed the credit worthiness of M/s Classic Credit/Ketan Parekh the details of which have been indicated as a part of the arguments of the counsel for the respondents. As a matter of fact, even in the petition, the allegation is that the company should not have gone only by the Balance Sheet of Kopran and that it should have taken adequate security. I do agree that when the amount was so large, the company should have asked for adequate security from M/s Classic Credit but the mere failure to do so cannot be in any way considered to be a willful act of mismanagement especially considering the fact that the company had received back Rs. 50 crores within a period of 3 days. According to the company, the bouncing of cheque for Rs. 28 crores was on account of detection of the stock market scam and consequent freezing of bank accounts of Classic Credit, while according to the petitioner, Classic Credit had gone broke and had no funds to meet this liability. In either event, even if the company had taken security, it might not have been able to enforce the same. Therefore, the only issue for consideration is whether the company could have at all parked funds raised for some specific purpose, with a third party. There are catena of judgments to the effect that a judicial forum cannot sit on judgment on business/ commercial decisions which are within the ambit of the powers of the Board of Directors unless the power has been used for an ulterior motive or with an intent to defraud the company or to bestow an undue advantage to an outsider or in breach of the fiduciary duties of the directors. The admitted position in the present case is that, till the stock market scam came into light, Ketan Parekh had a good reputation, on the basis of which the company had lent this amount. If it had been established that the Board of directors, being aware that Classic Credit was availing the loan to manipulate the stock market, then, the lending of money would have been not only be for a fraudulent purpose but also be against public interest. However, there is nothing on record to show or establish that in any of the reports of various agencies including JPC which probed into the stock market scam, there is any observation that the company had the knowledge that Ketan Parikh was manipulating the stock market and by lending this amount, the company had abetted him in doing so. None of these reports mentions that the company had any dealings with Ketan Parekh or his companies other than the solitary instance impugned in the petition. In the absence of any ulterior motive of any nature established against the Board of Directors, it could, at the best be held, that the Board was guilty of commercial misjudgment or had taken an unwise decision, as the amount of Rs. 28 crores is still to be realized back. It has been held that commercial misjudgments will not amount to oppression even if they have adverse effect on the price of the shares of the company (Rutherford Re (1994 BCC 876). The Supreme Court has observed, in the celebrated Needles Industries case ( (51 CC 743) that unwise, inefficient or careless conduct of a director cannot give raise to a claim under Section 397 unless the conduct is one which lacks probity or a conduct which is unfair. Further the company has already taken appropriate steps for recovering the money by invoking the provisions of Section 138 of the Negotiable Instruments Act and also have been periodically obtaining acknowledge of debt from M/s Classic Credit.
12. There is no allegation in the petition, which could be considered as an act of oppression to attract the provisions of Section 397. Only during arguments it was submitted that the fall in the market price of the shares would indicate that the affairs of the company are being carried on in a manner oppressive to the shareholders and it would also indicate mismanagement in the affairs of the company. This argument is far fetched, Fluctuations in the stock market depend on various factors and just because the price of the shares of a company falls, it does not necessarily mean that the affairs of the company is carried on in an oppressive manner. In paragraph 6 of the Inspection Report, the Inspecting Officer has dealt with the Financial Position and Working Results for 3 years and he had opined that the "working results appear to be satisfactory".
13. The petitioner has pointed out, subsequent to the filing of this petition, by filing a copy of the letter dated 14.9.2001 issued to the company that there were instances of violations of other provisions of the Act during the year 2000-2001, which would indicate that the affairs of the company are mismanaged. I have already indicated at para 4 of this order, the various Sections in respect of which the petitioner has alleged violation. The requirements of all these Sections are procedural, violation of which cannot lead to a conclusion that such violations are prejudicial to the interest of the company or public interest. Most of these Sections provide for penalties for violation and are compoundable and it is stated that the company/directors have already applied for compounding. The petitioner has relied on Konakan Chemicals P.Ltd case to state that violation of statutory provisions and Articles would constitute mismanagement. In that case, the company was a private company, and the allegations in that petition related to issue of further shares in violation of the provisions of Articles and statutory provisions. Therefore, that case has no application to the facts of this case.
14. Thus, the violations of the provisions of the Act are procedural in nature and in lending the amount of Rs. 78 crores, the act of the Board could at best be declared as an act of commercial misjudgment or a unwise decision. Further, the words used in Sections 397/398 are "the affairs of the company are being conducted---------" and in Section 408 the words used are "being conducted---". The scope of these Sections has been explained in a number of judicial pronouncements that there should be continuous acts of oppression or mismanagement up to the date of the petition. Needle Industries case is a leading one on this proposition. The acts complained in the present petition relate to the year 2000-2001 and there is no allegation that there had been further acts subsequently also which could be classified as either oppressive or mismanagement in the affairs of the company. The company is a listed company, having five independent directors with experience in various fields. To order appointment of government directors on the Board of the company in terms of Section 408, this Bench should be satisfied that the such an order is necessary to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interest of the company or to public interest. Thus, this Section envisages that at the time of filing the petition, there have been acts of oppression or mismanagement, the continuance of which has to be prevented in future by appointment of government directors. In, South India Viscos Limited v. Union of India (52 CC 247), the Delhi High Court has held that the exercise of the power under Section 408, has grave consequences and must inevitably have serious consequences on the reputation and credibility of the management of the company and as such it must be exercised rarely and only when the requisite conditions of the Section are fully complied with. In Peerless General Finance and Investment Companies Ltd. v. Union of India (71 CC 300), the Calcutta High Court has held that the "Company Law Board must be satisfied that the affairs of the company are being conducted in a manner "which is prejudicial to the interest of the company ......". The expression in the present tense and not in future or past. The Company Law Board cannot interfere on the basis that a company in future would be acting in a manner prejudicial to public interest". As I have pointed out earlier, the acts complained of either relate to a single act of commercial misjudgment or violations of procedural requirements. For the proposition that even a single act could warrant action under Sections 397/398, the petitioner has relied on Tea Brokers case. That case related to allotment of additional shares and the Court held that even though the allotment of further shares was a single act, it had continuous effect. Therefore, that case has no bearing on the present case. In Re Macro case, the company had a single director and his action regarding some property deal was questioned by the petitioner While holding that the Court cannot interfere with the commercial judgment of the Board, but considering the fact that the Board had only one director, it directed him to purchase the shares held by the petitioner. Thus, this case also has no application in the present case. Thus, on an over all assessment of the allegations, I find that the petitioner has not established that by the single act of lending money and violating the provisions of certain Sections of the Act in the year 2000-2001, the company is being managed in a manner either oppressive to its shareholders or in a manner prejudicial to the interests of the company or to public interest and that the situation in the company warrants appointment of government directors.
15. Accordingly, the petition is disposed of with the direction to the Board of Directors of the company to take all steps available in law to get back the amount of Rs. 28 crores from M/Classic Credit Ltd at the earliest.