Company Law Board
Citicorp International Finance ... vs System America (India) Limited And Ors. on 11 July, 2007
Equivalent citations: [2008]141COMPCAS954(CLB), [2008]83SCL311(CLB)
ORDER
Vimla Yadav, Member (Date of final hearing 6.3.2007)
1. In C.P. No. 75 of 2002 the petitioner has sought an order for investigation into the affairs of the R-1 under Section 235 of the Companies Act, 1956 (hereinafter referred to as 'the Act') alleging that R-4 and his group have fabricated resolutions and siphoned off funds of R-1 by illegal remittance of USD 1 million to a wholly owned subsidiary namely 'Local Information Service Inc' in the US which did not even exist at the relevant time (the date of incorporation was stated as "Applied").
2. Shri Neeraj Sharma, Counsel for the petitioner pointed out that the petitioner, Citicorp International Finance Corporation (hereinafter referred to as "CIFC"), entered into a Subscription-cum-Shareholders Agreement dated July 24, 2000 (the "Agreement") with Respondent Nos. 1 (hereinafter referred to as the "Company"), 2 and 4. In terms of the Agreement, CIFC by way of a Preferential Issue, subscribed to One Million Equity Shares of the Company of the face value of Rs. 10/- each for a consideration of Rs. 157 million @ Rs. 157/- per equity share at a premium of Rs. 147/- per equity share. The said shares were duly issued and allotted by the Company to the Petitioner and constitute 14.25% of the paid up and fully issued share capital of the Company on date. CIFC's nominee (hereinafter referred to as the "the CIFC Director"), Mr. Ajay Relan, was appointed as an Additional Director of the Company by a resolution of Board of Directors passed September 27, 2000 by circulation and was subsequently appointed as a Director of the Company by members at the Annual General Meeting of the Company held on August 10, 2001. It was pointed out that the Articles of Association of the Company gave certain affirmative rights to CIFC: (a) the Chairman of the Board of Directors was to be a person acceptable to CIFC (Article 81.2); (b) the Managing Director of the Company was to be a person acceptable to CIFC (Article 81.3); (c) the quorum of the Board Meetings of the Company could not be considered valid till such time as the CIFC Director is not present (Article 81.8); (d) no item listed in Article 82 could be discussed or voted upon at any meeting of the Board unless the same had been included in the agenda of the meeting (Article 81.12); (e) a circular resolution on a matter enumerated in Article 82 required the affirmative vote in writing of the CIFC Director (Article 81.13); and (f) Article 82 when read with Articles 81.12 and 81.13 expressly provided that circular resolutions on matters relating to approval of the annual budget of the Company including capital expenditure, investment in securities of any other company or subsidiary, revenue expenses, revenue targets and funding plans could neither be discussed or voted upon at any meeting of the Board unless the same had been included in the agenda of the meeting nor could they be passed without the affirmative vote in writing of the CIFC Director.
3. Further, it was pointed out by the counsel that in the meeting of the Board of Directors held on November 30, 2001 that CIFC Director attended along with Respondent Nos. 4, 5, 6, 7 and 8, the Directors passed resolutions, inter alia, for the incorporation of a wholly owned subsidiary of the Company in the USA. In connection with the same, the Board also passed a resolution in-principle approving an investment of USD 1 million to be made in a wholly owned subsidiary in the USA. The resolution giving the in-principle approval was conditional upon: (a) a cut off date to be determined by the Board of the Company; and (b) a signed business plan of the Company envisaging investment of USJ 1 million in the wholly owned subsidiary to be incorporated at a later stage. It was pointed out that no person was identified to give effect to the resolution since the same pertained merely to an in-principle approval. Furthermore, no source of funds was identified for the purposes of the said investment. The next meeting of the Board of the Company was called by notice for the January 5, 2002 and three Directors, namely CIFC Director, Respondent No. 4 and Respondent No. 5 attended the meeting. The draft minutes of this Board Meeting were prepared and circulated by Respondent No. 7 via email on January 17, 2002, to the CIFC Director and Mr. J.K. Basu, an officer of Citibank N.A., an affiliate of CIFC. These draft minutes were subsequently debated and discussed by the Directors but could not be finalized on account of differences between Respondent No. 4 and Respondent No. 6 with regard to authority given to Respondent No. 6 for operation of bank accounts. As such, the minutes of the Board Meeting of the Company held on January 5, 2002 were never finalized and remained in draft form. Furthermore, the said draft minutes were never confirmed on account of the fact that no Board Meeting of the Company was held after the Board Meeting of January 5, 2002. The draft minutes of the Board Meeting of the Company held on January 5, 2002 and circulated on January 17, 2002 confirmed the minutes of the Board Meeting of the Company held on November 30, 2001. Furthermore, these draft minutes record that the CIFC Director asked Respondent Nos. 4 and 6 to stop further investment in wholly owned subsidiaries of the Company in Canada on account of non-operation of the same after the change in business conditions in the USA post the World Trade Centre attacks on September 11, 2001. It was pointed out by the counsel that it is expressly recorded in these draft minutes that the CIFC Director asked the management of the Company to have a signed business plan, which would be strictly adhered to. The business plan, which was one of the pre-conditions to the in-principle approval by CIFC for the infusion of USD 1 million in the wholly owned subsidiary of the Company resolved to be incorporated vide the resolution dated November 30, 2001, had not been prepared. In response to the draft minutes circulated, Respondent No. 4 responded with his comments with regard to the limits for the signatory to the bank accounts of the Company. However, Respondent No. 4 did not advert or refer to any resolution for changing the authorized signatory to the Company's investment with mutual funds in this communication and did not seek the addition or inclusion of any such discussion or resolution to the draft minutes. My attention was drawn to the following essential points which emerge on a perusal of the draft minutes of the Board Meeting dated January 5, 2002: (a) the CIFC Director was the Chairman of the said Board Meeting and the draft minutes were never confirmed by him and do not bear his signatures till date; (b) the agenda for the Board Meeting held on January 5, 2002 did not incorporate the alleged proposed investment in the wholly owned subsidiary in terms of Article 81.12 of the Articles of Association of the Company; (c) the CIFC Director had instructed to stop any further investment in the subsidiaries on account of poor market conditions post September 11, 2001; and (d) the CIFC Director was made the Chairman of the Audit Committee which has had no meeting or report on the alleged investment of USD 1 million till date.
4. Shri Neeraj Sharma, Counsel for the petitioner further pointed out that the CIFC Director and representative Mr. J.K. Basu received an e-mail dated January 24, 2002 from Respondent No. 6, alleging fraud and embezzlement by Respondent No. 4 and his family members. It was also alleged that plans were being made by Respondent No. 4 in collusion with certain other Respondents to somehow siphon the balance US$ 1.2 million which was in the Company's accounts at the relevant time. This was followed by another email dated January 26, 2002 whereby Respondent No. 6 again reiterated that outgoings from the Company's Indian and US bank accounts were not in control. He apprehended that in the absence of signed minutes of the Board Meeting of the Company held on January 5, 2002 that authorized him to operate the accounts, monies were being rapidly withdrawn. Upon being questioned by the CIFC Director regarding the allegations above, Respondent No. 4 denied any wrongdoing and offered to agree to an audit of the Company, its branch office in the US and also of Respondent No. 4's associates and affiliates companies in the US, which offer was accepted by the CIFC Director who immediately initiated steps to conduct the audit of the Company and its branch office in the US. On February 7, 2002 another email was addressed by Respondent No. 6 to the CIFC Director and Mr. J.K. Basu about the fraud and embezzlement being perpetrated by Respondent No. 4 and his family members on CIFC. On being confronted by the CIFC Director, Respondent No. 4 offered on February 19, 2002 to buy back 6% of the shares of the Company held by CIFC, albeit he continued to deny allegations of fraud in the manner in which the affairs of the Company were being conducted. However, subsequently, this offer to buy back 6% of the CIFC shareholding was not given to CIFC. On February 6, 2002 Respondent No. 4 addressed another email to the CIFC Director and Mr. J.K. Basu whereby he denied any attempts to siphon monies from the Company. On the contrary aspersions were cast on Respondent No. 6. By way of this communication Respondent No. 4 offered that an audit of the Company be carried out. In the bona fide belief that the express representations made by Respondent No. 4 were true, CIFC mandated Ernst & Young Pvt. Ltd. to carry out the audit of the Company. Respondent No. 4 was also informed about the appointment of Ernst & Young Pvt. Ltd. vide email dated February 27, 2002. This was followed by an initial information request by Ernst and Young on March 6, 2002 to Respondent No. 4. However, the audit of the Company and its subsidiaries in USA as represented by Respondent No. 4 was evaded by Respondent No. 4 on several occasions and the same was not permitted to be carried out in accordance with the previous promises. In the meantime the CIFC Director learnt that three identical letters dated January 23, 2002 had been issued by the Company under the signatures of the Company Secretary to three assets management companies, namely Sunlife Mutual Fund, Alliance Capital Management India (P) Ltd. and Prudential ICICI Assets Management Company Limited (hereinafter referred to as the "Investment Funds"). These letters to the Investment Funds were for the purpose of changing the authorized signatories of the Company in respect of investments of the Company maintained with them. These three letters of January 23, 2002 enclosed what was claimed to a certified copy of a resolution of the Board of Directors dated January 5, 2002 for the purpose of authorizing the change in authorized signatories in respect of the investments with the Investment Funds. This enclosure was certified to be a true copy of the original minutes by Respondent No. 5 and this alleged resolution authorizes, inter alia, the authorized signatories namely Respondent No. 4 or Respondent No. 5, Respondent No. 7 or Respondent No. 9 to sell, withdraw, disinvest, redeem or otherwise dispose of such investments, deposits, etc. In fact, no such resolution was passed by the Board of the Company which is evidenced from a perusal of the resolutions recorded in the draft minutes of the Board Meeting held on January 5, 2002. Furthermore, these communications were forwarded to the Investment Funds even prior to the finalization/confirmation of the minutes of the Board Meeting dated January 5, 2002 of the Company. Additionally, it was pointed out by the counsel, the communication containing the comments of Respondent No. 4 to the draft minutes of the said Board Meeting also did not bear any reference to the above resolution. The CIFC Director realized that this purported resolution and its certification were false and on the basis of this fabricated resolution, Respondent No. 5 had apparently in collusion and conspiracy with Respondent No. 4 and other persons in these resolutions, caused the investments of the Company amounting to Rs. 57 million to be unauthorisedly withdrawn from the Investment Funds. The malafldes and illegality of the transaction and the fact that Respondent No. 5 and Respondent Nos. 8 and 9 made efforts to conceal the liquidation of these deposits were established when the CIFC Director further learnt that the amounts from these deposits on being received from the Investment Funds had been deposited in a bank account of the Company maintained with HDFC Bank, New Delhi that was to have been closed vide Board resolution dated December 20, 2000. As such, the said resolution dated December 20, 2000 was never given effect to and the same was deliberately and willfully suppressed by Respondent No. 4 from CIFC. CIFC further learnt that on February 4, 2002 the Company addressed a letter under the signatures of Mr. K.P. Singh, Respondent No. 9 and remitted USD 1 million purportedly to a wholly owned subsidiary in the USA. It was pointed out by the counsel that Respondent No. 9 was not a Director of the Company at the time and did not have the authority to sign on behalf of the Company. Respondent No. 9 was not authorized to draw cheques on the bank account of the Company maintained with HDFC Bank as per the draft minutes circulated on January 17, 2002 of the Board Meeting of the Company. Even as per the fabricated resolutions forwarded by the Company to the asset management companies Respondent No. 9 alone did not have the authority and required the signatures of either Respondent No. 4 or Respondent No. 5 for the same to be in consonance therewith. The CIFC Director further learnt from investigations that after the amounts realized from the withdrawn investments were deposited in the Company's accounts maintained with HDFC Bank, New Delhi, these were debited from that account in the last week of February 2002 to the account of the Company's wholly owned subsidiary in the US, Local Information Services Inc. On February 14, 2002 Respondent No. 5 addressed a letter to HDFC Bank requesting remittance of USD 1 million in favour of a wholly owned subsidiary of the Company in the name and style of 'Local Information Service Inc.' The filing made by the Company with RBI discloses that the subsidiary, Local Information Services Inc, USA, to which the remittance of USD 1 million was made did not, in fact, exist at the relevant time in as much as the date of incorporation for the same has been stated as "APPLIED". It was pointed out that the ODA has been signed only by Respondent No. 5 which is contrary even to the fabricated resolution purported to have been passed by the Board at the Board Meeting dated January 5, 2002 and requires the signatures of either Respondent No. 7 or Respondent No. 9 to be in consonance with the fabricated resolution (page 176 of the petition refers) Pursuant to receiving information of the malafide and patently illegal acts of Respondent Nos. 4 and 5 in collusion with Respondent Nos. 7 and 9, the CIFC Director addressed a letter dated April 6, 2002 to the Board of Directors and the Company Secretary of the Company objecting to the illegal and unauthorized remittances made by the Company on the basis of a fabricated resolution of the Board purportedly passed on January 5, 2002. In this letter the CIFC Director specifically denied that any resolution was passed on January 5, 2002 to change the authorized signatory of the Company in respect of the deposits with the investment funds. In the correspondence dated April 11, 2002 in response to the above the Company under the signatures of Respondent No. 9, Respondent No. 9 deliberately neglected and failed to furnish any details regarding the illegal remittance of USD 1 million to a wholly owned subsidiary, 'Local Information Service Inc.' and instead sought time to collate the requisite information on the false ground of non-availability of the directors of the Company It was further pointed out that on receipt of the above letter dated April 11, 2002, the CIFC Director addressed a letter dated April 17, 2002 to the Board of Director and the Company Secretary and intimated his intention to personally inspect and examine all the records of the Company on April 22, 2002. The CIFC Director also called upon Respondent No. 9 to have all necessary and relevant books and papers of the Company ready for inspection and also to ensure presence of all officers responsible for financial matters relating to the Company. No inspection was allowed. Respondents did not cooperate.
5. Shri Neeraj Sharma, Counsel for the petitioner further contended that R-4 by e-mail on April 30, 2002 that was dated April 25, 2002 which was with regard to the Petitioner's letter of April 6, 2002, denied any wrongdoings on the part of the Company or the management. For the first time sought to defend the fabrication of resolutions allegedly passed on January 5, 2002 by falsely adverting to a purported supplementary agenda for that meeting. On the basis of this a purported supplementary agenda which he falsely claimed was duly circulated to the Directors, he contended that Respondent No. 9 was inducted as an additional signatory to the accounts pursuant to the alleged discussions by Directors in their meeting of January 5, 2002. Respondent No. 4 further contended that some resolutions were finalized in respect of matters on which the Directors were agreed to in the January 5, 2002 Board Meeting, and matters in dispute were kept in abeyance and resolutions were not passed. This contention, it was argued by the counsel, was also false as matters regarding change of signatories for investments with mutual funds and remission of funds to the US subsidiary were neither discussed in fact nor reflected in the draft minutes of the Board meeting of January 5, 2002. Furthermore, Respondent No. 4 ignored the fact that the disputed matters were in respect of the authority to operate accounts and control the Company's funds and therefore no resolution was passed in respect thereof at that meeting. Vide this communication the CIFC Director was also belatedly offered inspection of the Company's records on the same date on which the email was dispatched i.e. April 30, 2002. Lastly, Respondent No. 4 informed the CIFC Director in the said letter that a resolution was being circulated shortly to confirm and ratify the resolutions and the actions purportedly already taken by the Company in an attempt to cover up the wrongdoings and the falsification of the statutory records of the Company. The counsel for the petitioner argued that there is no denial in this letter of the admitted fact that the CIFC Director was the chairman of the Board Meeting of the Company held on January 5, 2002. Thereafter, on April 30, 2002, the CIFC Director received a resolution circulated under Section 289 of the Companies Act, 1956 under cover of notice dated April 29, 2002 for ratifying resolutions purportedly passed on January 5, 2002 relating to amendment in authorized signatory with reference to mutual funds. This attempt of Respondent No. 4 to legitimize and perpetuate the illegal and fabricated resolutions purported to have been passed on the Board Meeting of January 5, 2002 were responded to by the CIFC Director by his letter dated May 4, 2002 whereby he categorically denied that any resolutions were discussed or passed oh January 5, 2002 to change the signatories to the Company's investments with funds and the same was intimated to Respondent No. 9 vide letter dated May 4, 2002. Furthermore, a letter dated May 7, 2002 was also forwarded by the CIFC Director to Respondent No. 4 whereby Respondent No. 4 was intimated of the CIFC Director's refusal to ratify the fabricated resolutions. By way of this letter the CIFC Director also requested Respondent No. 4 to convene a Board Meeting of the Company at the earliest to finalize and confirm the minutes of the Board Meeting dated January 5, 2002. Respondent No. 4 responded to the above letter of the CIFC Director vide letter dated May 21, 2002 whereby he falsely contended that the resolutions circulated on April 29, 2002 with a view to ratify the fabricated resolutions forwarded by the Company to the asset management companies had been passed by circulation with 2:1 majority. Further, it was contended that the attendance for the Board Meeting of January 5, 2002 did not show that the CIFC Director had signed as Chairman thereof. Lastly, Respondent No. 4 proposed that a Board Meeting be called in the first week of June 2002. The resolution by circulation was passed in violation of the Articles of Association of the Company in as much as a co-joint reading of Article 81.13 and 82 (xi) makes it clear that a resolution on matters relating to approval of the annual budget of the Company including capital expenditure, investment in securities of any other company or subsidiary, revenue expenses, revenue targets and funding plans required the affirmative vote in writing of the CIFC Director. As such, it was argued, the purported resolution by circulation passed with majority of 2:1 was not valid, being contrary to the Articles of the Company, and ought to be set aside.
6. Further, the counsel for the petitioner pointed out that in order to avoid further delays being caused by the officers of the Company in the inspection of the Company's records, Mr. Ajay Relan of the Petitioner without awaiting any confirmation with regard to the inspection of the Company's books and papers went to the Company's registered office on June 5, 2002 at 3.00 p.m. as intimated to the Company in his letter dated June 3, 2002. He was accompanied by Mr. J.K. Basu and was received at the office by Respondent No. 9. But the Company's relevant accounts, books and papers that were to be inspected were neither found at the registered office nor did Respondent No. 9 have any information with regard to any of the matters in respect of which clarifications were sought by the CIFC Director. The inspection was as such frustrated by the Company and the CIFC Director was constrained to record the events of his visit of June 5, 2002 to the Company's registered office in his letter of June 7, 2002. In this letter, the CIFC Director enumerated and detailed the outcome of his visit of June 5, 2002 and recorded all the information and records denied to him by the Company and Respondent No. 9. All the findings of the inspection, particularly the fact that the loose leaf minute book of Board Meetings did not have any record of the January 5, 2002 Board Meeting, were set out in this letter. The Company did not respond to the above letter and instead issued a notice dated June 10, 2002 for convening a meeting of Board of Directors on June 28, 2002 together with an agenda. The Notice included items for confirmation with regard to the circular resolution dated April 29, 2002. However the Board meeting notified for the June 28, 2002 was adjourned to the July 5, 2002 as Respondent No. 4 failed to turn up for the same. On the next date fixed for the meeting, July 5, 2002, the CIFC Director received intimation and a written notice informing him that the meeting was adjourned to July 12, 2002. In the mean time it was also learnt by the CIFC Director that the Company Secretary, Respondent No. 8 had resigned and that Respondent No. 9 had been inducted in his place. The CIFC Director inquired for the reasons of Respondent No. 8's resignation and the qualification of Respondent No. 9 who was sought to be appointed as a Director of the Company. The Board Meeting adjourned to July 12, 2002 also stood cancelled on the ground that Respondent Nos. 4 and 5 would be unable to attend the meeting on the said date. Thereafter, on July 12, 2002 a notice was issued by Respondent No. 10 informing that the Board Meeting notified for that day was adjourned to July 29, 2002. On receipt of the above notice, the CIFC Director requested the Company to reschedule the Board Meeting adjourned to July 29, 2002 as he was not available in India on that date. However, the Company failed to respond to this request for adjournment immediately. On July 23, 2002 Respondent No. 9 rejected the request for adjournment on the pretext that the request had been belatedly received. Thereafter, on returning to India the CIFC Director learnt that the Company had gone ahead with its Meeting of Directors on July 29, 2002 but no minutes of the meeting were circulated. The CIFC Director also learnt that in his absence from India the Company issued a supplementary notice on July 26, 2002 to discuss at the Board Meeting of July 29, 2002. After repeated requests to the Company, the minutes of this Board Meeting were furnished to the CIFC Director on August 20, 2002 wherein leave of absence was denied to the CIFC Director and the false and illegal resolutions of January 5, 2002 and April 29, 2002 were confirmed by the Respondent Nos. 4 and 5. It was also seen that large scale change had been made to the authorized signatories of the Company's bank accounts in which Respondent Nos. 4, 5 and 9 were exclusively in control of the Company's funds.
7. Shri Neeraj Sharma, Counsel for the petitioner further pointed out that in view of the Company's failure to provide inspection of the records of the Company to CIFC, CIFC sought directions from the Hon'ble CLB. However, the Respondents' despite the order dated February 12, 2004 directing them to allow inspection of the Company's documents, registers and books failed to allow CIFC the inspection of the records and papers of the Company. The Company's failure to permit the inspection of its books and records is also contained in the Bench Officer's Report dated March 6, 2004 whereby it is recorded that the Respondents had submitted that they would provide the certified copies of documents within seven days. Certified copies of the said documents have not been furnished to CIFC till date. The CLB had also passed orders dated August 10, 2005 and October 17, 2005 directing the Respondents to furnish details/evidence regarding the transfer of USD 1 million by the Company to its subsidiary in the US and further utilization of the said funds by the subsidiary. However, the Respondents have repeatedly failed to furnish the details of the remittance of USD 1 million in gross disregard of the orders dated August 10, 2005 and October 17, 2005 passed by the Hon'ble CLB. As such, no details regarding the transfer of USD 1 million by the Company to its subsidiary in the US and the further utilization by the subsidiary of the said funds have been made available to CIFC by the Respondents till date. Pursuant to the above orders passed by the Hon'ble CLB, the Respondents had filed on December 20, 2005 an Affidavit of Respondent No. 9 who has claimed therein to be a Director of the Company. In the said Affidavit the Company has again failed and willfully neglected to produce any accounts or details of the manner in which the USD 1 million transferred by the Company to the subsidiary in the US has been utilized. It was argued that on the contrary, instead of a copy of the bank statement of the subsidiary of the Company a copy of the bank statement of the Company opened with Bank of America, California has been produced. The said statement pertains to transactions for the period of February 2002 to April 2002 which merely evidence that on February 26, 2002 a sum of USD 1 million was deposited in the said account and that on the same date i.e. February 26, 2002 the said USD 1 million was withdrawn from the account. The USD 1 million transferred on February 26, 2002 in the Company's account with Bank of America, California, was remitted from the Company's account with HDFC Bank, New Delhi that was to have been closed vide Board resolution dated-December 20, 2000. No further details have been furnished explaining the manner in which these monies were utilized by the subsidiary of the Company. Furthermore, the list of vendors annexed with the said Affidavit also relates to the Company and not its subsidiary as is being represented by the Respondents. Significantly, It was pointed out, no balance sheets or vouchers have been produced in support of the list of vendors to validate the same. As such, the Affidavit of Respondent No. 9 filed on December 20, 2005 lacks the material details directed to be produced by the Hon'ble CLB in its orders mentioned above.
8. Shri Neeraj Sharma, Counsel for the petitioner further pointed out that the Company has become a disappearing company. It does not maintain an office. There have been no filings on behalf of the Company with the Registrar of Companies for the last three (3) years. Additionally, save for Respondent No. 9 who claims to be a Director of the Company there are no other Directors of the Company. It was contended that the following acts on the part of the Respondents are manifestly contrary to the best interest of the shareholders and officers of the Company and call for the affairs of the Company to be investigated by the Central Government in that business of the Company is clearly being conducted with the malafide and illegal intention of defrauding its creditors and members:
a. fabrication of resolutions for the illegal use of the Company's funds;
b. fabrication of the Board Minutes of the meeting of the Company held on January 5, 2002;
c. making false certificates of non-existent resolutions purported to have been passed by the Board of the Company on January 5, 2002;
d. illegal overseas remittance of USD 1 million from the Company's funds in the absence of any authority accorded by the Board of the Company for the liquidation of investments of the Company;
e. refusal and denial of audit and inspection of the books of the Company despite orders passed to that effect by this Hon'ble Board;
f. recording and confirmation of resolutions under Section 289 of the Act that were, in fact, never passed in accordance with the Articles of Association of the Company;
g. illegal removal of the Company's statutory records from the registered office of the Company to deny information to the shareholders and directors of the Company, particularly the CIFC Director;
h. illegal and malafide adjournment of the Board Meetings of the Company in order to deny discussion of the illegalities and irregularities on the part of the Directors of the Company; and i. failure to furnish details/evidence regarding the transfer of USD 1 million by the Company to its subsidiary in the US and further utilization of the said funds by the subsidiary despite orders dated August 10, 2005 and October 17, 2005 passed by this Hon'ble Board directing the Respondents to make the due disclosure of the utilization of USD 1 million.
The foregoing, it was reiterated by the counsel, indicate that the Respondents concerned in the management of the affairs of the Company have been guilty of fraud, misfeasance and other misconduct towards the Company and towards its members. The present case falls squarely within the ambit of Section 237 of the Act and warrant an investigation into the affairs of the Company, Reliance was placed on the decision in Barium Chemicals Ltd. C. Co. Law Board (para 64) AIR 1967 SC 295. It was reiterated that "It was held that the object of Section 237 of the Companies Act, 1956 is to safeguard the interest of those dealing with a company by providing for an investigation where the management is so conducted as to jeopardize those interests or where a company is floated for a fraudulent or an unlawful object. It was further held that there must exist circumstances which in the opinion of the Company Law Board suggest what has been set out in Clauses (i), (ii), and (iii) of Section 237(b)....
9. Shri Anupan Tripathi, Counsel for the respondents argued that the petitioner has alleged wrong doing against the respondent and is seeking investigation under Section 235 of the Act. None of the allegations have any basis. As regards the allegation that no approval for remittance of USD 1 million for setting up subsidiary was given, it was contended that various business plans were formulated and it was agreed that business of the company should be expanded further and accordingly the need to transfer funds was felt. It was at the relevant time considered appropriate that full fledged company should come into existence instead of merely a Branch Office to take advantage of USA market. The need for the funds in USA was felt and Mr. Satish Lele, who was Chairman at the relevant time kept on pressing for the same. Thereafter mode of transfer, was decided through the route of setting up wholly owned subsidiary of the Company (WOS) and the matter was placed before the Board for approval on 30.11.2000 wherein the petitioner's nominated director was present and accordingly the setting up as WOS with initial funding from India to tune of USD 1 million was agreed unanimously. On 4.12.2002 the nominated Director again supported the idea of setting WOS and, in fact, suggested how and in what form i.e. common Stocks/Preference Capital should be invested. Thus, all along there was unanimity of transfer of funds, even amounts, the mode of transfer, the investments etc were all agreed upon and thus the allegation of the petitioner has no basis.
10. As regards the allegation that the Minutes of 5.1.2002 were incorrect and had been used for transfer of funds, it was contended that the said minutes dated 5th January, 2002 were in furtherance of the decision taken by the Board of Directors to send/transfer 1 million USD to WOS. However, petitioner had challenged them by stating that nothing of the sort transpired in the Board Meeting and in support had filed drafted minutes that were circulated and also claimed that the meeting was presided over by their representative director. It was contended that the meeting was presided over by Mr. Adesh Tyagi, who has authenticated the minutes of the said meeting. My attention was drawn to the extract of the Attendance Register wherein Mr. Adesh Tyagi had signed as Chairman. Thus, it was argued, with authentication of minutes of the meeting by the Chairman, in law presumption is attached whereby the account given by the Chairman represents the actual proceedings or matters considered at the meeting. Further the exchange of the minutes (drafted) only means that certain discussion did take place but only keeping in view the agreed issues, they were authenticated. The petitioner objected to aforesaid minutes' authenticity, their overriding right of giving affirmative vote and induction of Mr. K.P. Singh as a signatory by the said minutes. It was pointed out that the said objections were clearly repelled by the respondent's letter dated 25.4.2002 and the aforesaid resolution was put to vote once again and was passed with 2:1 majority and was immediately conveyed to the petitioner. The second objection of affirmative vote was a non-issue as the agreement did not provide for the same. Mr. K.P. Singh had been signatory to various banks even before the petitioner was allotted shares and now to doubt his presence/ability is not understood.
11. Further Shri Anupam Tripathi, Counsel for the respondents responding to the allegation that illegal confirmation of the circular resolution under Section 289 of the Companies Act was made, contended that the objection is without merit. The circular resolution after having passed by 2:1 majority was duly conveyed to the petitioner and the objection or 'Non approval by petitioner Director only constituted a dissenting Note amongst 3 directors and same was duly circulated and approved and subsequently confirmed in a Board meeting dated 29.7.2002. Further to confirm the aforesaid meeting the said resolution was included in the Agenda for the next meeting. However, due to other directors' prior commitment the same could not take place and after adjournment was fixed for 5.7.2002. However, petitioner on 4.7.2002 sought adjournment as their director was not available and eventually the meeting was held on 29.7.2002 and said resolution was confirmed. It was pointed out that the circular resolutions were being passed earlier and in fact, appointment of the petitioner's director on the Board of Company was by circular resolution besides the agreement clearly provided for the same.
12. As regards the allegation that the Books of the company were removed or the petitioner was not allowed to inspect, it was contended that the allegation cannot be a ground for considering a petition under Section 235 of the Act. The remedy in law lies elsewhere and not invocation of Section 235 of the Act for investigation. However, the allegation is without basis and in fact, is contrary to the facts. The same was levelled by the petitioner earlier also by their letter dated 3.6.2002 and were clearly repelled and answered by the respondent's letter dated 13.6.2002. It was clearly brought out as to how it was the petitioner who was time to time seeking inspection, fixing up timing but were never inspecting. The allegation of removal of statutory books has no basis as the same were available and always have been available at the registered address of the company besides the company has no other office.
13. As regards the allegation that the board meetings were not adjourned, it was contended that the allegation is again without merit. The Board meeting is a requirement of law, it was fixed every quarter but since the revenue of the company to the extent of 90-95% is in USA the Directors had to travel for business of the company to USA. Petitioner is merely an investor director and having only to attend Board Meetings. The Board Meetings were adjourned to facilitate presence of directors from USA only. However, at the relevant time petitioners never raised any objection and, in fact, in their letter dated 4.7.2002 themselves asked for adjournment of the meeting to be held on 5th July and when eventually meeting was fixed for 29th July, 2002 he also wanted to create impediment in holding of the meeting and, accordingly, pre-dated 4 letters on 21st June, 27th June, 15th July and 22nd July and inspite of short notice, additional agenda sought by the petitioner in his letters delivered on 22.7.2002, the same were included for discussion on 29.7.2002. The objections raised in pre-dated letters were either same or were baseless ones and were duly replied to by the respondents.
14. I have considered the pleadings and the documents filed therewith as well as the arguments of the counsels for the petitioners and the respondents. Petitioner's case is that it is a fit case for ordering investigation under Section 235 of the Act whereas the respondents case is that no case has been made out for ordering an investigation under that Section. In view of the foregoing, it is amply clear that the CIFC, the petitioner, who holds 14.25% shares in the R-1 was given affirmative rights as enumerated above as per agreement dated July 24, 2000. These affirmative rights have not been denied by the respondents. It is noticed that the respondents have not given effect to the resolution dated 20th Dec. 2000. The fabrication of the minutes of the resolution dated 5th July, 2002 is also not in doubt. The entire effort of the respondents have been to justify the resolution dated 5th January, 2002. They have pointed out that all along there was unanimity of transfer of funds, even amounts, the mode of transfer, the investments, etc. were all agreed upon and the minutes of resolution dated 5 January, 2002 were in furtherance of the decision taken by the Board of Directors to send/transfer 1 million USD to the wholly owned subsidiary. This contention of the respondents is not borne out from the chronology of the events and the documents. It is an admitted position that when remittance of USD 1 million was made to the WOS, it did not even exist at the relevant time (the date of incorporation was stated as "Applied"). In the name of unanimous decision the funds were siphoned off to the three assets management companies. Documents were fabricated for the purpose of authorising the change in the authorized signatories in respect of the investments with the investment funds. The amounts from these deposits on being received from the Investment Funds were deposited in the R-1's HDFC Bank at New Delhi - the account which should have been closed as per Board's resolution dated 20.12.2000. Later on by the signatures of R-9, who was illegally shown as a director, USD 1 million was illegally and unauthorisedly remitted on February 4, 2002 to a wholly owned subsidiary namely 'Local Information Service Inc' in the US which did not even exist at the relevant time. Even as per fabricated resolution dated January 5, 2002, R-9 all alone did not have the authority and required the signatures of R-4 or R-5. However, the petitioner's specific letter seeking confirmation of change in the signatories was denied by the respondents. R-9 was not a legally appointed director. Nor was he alone an authorised signatory. Other facts which falsify the respondents' contentions and point towards their intention to defraud the creditors, members or any other person including the petitioner or otherwise for a fraudulent or unlawful purpose are that despite the petitioner's repeated request for inspection and audit, despite CLB's repeated orders, the respondents have not given the requisite information to R-1's members with respect to its affairs. It is true that the petitioner is only an investor director as contended by the respondents. It is also true that non-allowing of inspection cannot be a ground for considering a petition under Section 235 of the Act. But the entire facts and totality of the circumstances and the illegal and unlawful and fraudulent acts of the respondents lead to the inference that there exists a prima facie case for investigation under Section 235 of the Act as the respondents have been guilty of fraud, misfeasance towards the company as well towards its members. The respondents have not complied with the AOA and the legal provisions of the Act. Moreover, the R-1 has become a disappearing company. It is reportedly not available at the registered office of the company nor are its statutory records available at the registered office. Statutory statements have not been sent to the ROC for several years. I find that the contentions raised by the respondents are not even relevant for considering a case for ordering investigation. Instead of meeting the specific charges and making their case for non-investigation, the respondents have simply reiterated their contention that the resolution dated 5 January, 2002 was not fabricated while the respondents' subsequent acts - the false plea of supplementary agenda, the invalid circular resolution dated April 29, 2002, etc. reveal an unsuccessful effort to cover up the intent to defraud the creditors and members for a fraudulent and unlawful purpose and only makes the petitioner's prima facie case for investigation by pointing out specific instances more strong. Resolution dated January 5, 2002 giving in-principle approval was conditional upon certain conditions, as enumerated above, which were not fulfilled. Further, there has been no rebuttal of the facts pointed out by the petitioners. Inspection taken of the loose leaf minute book of the Board Meetings did not have any record of the January 5, 2002 Board Meeting. This fact was mentioned in the June 7, 2002 letter of the petitioner. The R-1 did not even respond to the letter and instead issued a notice dated June 10, 2002 for convening a Board Meeting on June 28, 2002 together with an agenda. The notice included items for confirmation with regard to the circular resolution dated April 29, 2002 but the R-1 had already proceeded with the so-called resolution. Even R-9's affidavit of December 20, 2005 lacks the material details directed to be produced by this Board.
15. This Board has an onerous duty to form an opinion with regard to the existence of the intent to defraud. The conditions contained in Section 235 are to be satisfied before ordering investigation under Section 235 of the Act. Now coming to the facts of the present case, it has to be determined that whether the conditions as laid down in Section 235 of the Act are satisfied or not. The facts and circumstances of the present case prima facie demonstrate and establish the existence of pre-requisites which compel me to form an opinion in terms of Section 235 of the Act. On a consideration of the facts and circumstances of the case, I am satisfied that the grounds for ordering investigation do exist. I find overwhelming material pointing to the circumstances suggesting that the business of the company was conducted for a fraudulent and unlawful purpose. The persons concerned in the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company. This is a case squarely covered under the provisions of Section 235 as the pre conditions for initiating such action exist as is clear from the foregoing.
16. The above makes the credentials and intention of the respondent company amply clear. Such credentials raise suspicion. Investigation seems to be the remedy available. The directors owe fiduciary duty to the shareholders and they have to function in not only in good faith but in utmost good faith. But in this case shareholders faith seems to have been belied. In the present case the petitioner is on a very sound footing besides having come to this Board bona-fide. Only investigation under Section 235 of the Act can bring out the true state of affairs. Let the truth prevail. An order to investigate under Section 235 of the Act, in any case cannot prejudice the respondents. An order of this Board under this section, directing an investigation is only analogous to the issue of a fact finding commission. This particular power of the CLB is not of judicial or quasi-judicial nature. It is a power of administrative nature and the CLB may even take the initiative suo-motu or on the application of or information supplied by any shareholder or other person. Under this Section directing an investigation is only analogous to the issue of a fact finding commission by a civil court for looking into accounts or making an investigation and does not amount to a judgment within Clause 15 of the Letters Patent, so as to enable an aggrieved party to appeal. An order of investigation is not an end by itself, it is only a means to find out the full facts of the acts complained of. It is nothing but an exploratory measure to be proved or disproved with reference to the facts later on ascertained. This discretionary power of the CLB has to be exercised in good faith. An investigation may be ordered when public interest is involved or detriment to the interest of shareholders had been caused surreptitiously. Such investigation should not be taken lightly. Unless proper grounds exist for investigation of the affairs of the company investigation cannot be ordered. The allegations made in the petition are such a matter as would require an investigation.
17. In view of the above, I have reason to believe that there is a likelihood of the existence of malpractices envisaged in the provisions of Section 235 of the Act. To prove this prima-facie case of "intent to fraud" and misfeasance on general public and specifically the investor in this case conducting the business of the company otherwise for a fraudulent and unlawful purpose, I have no hesitation in granting the petitioner's prayer for ordering investigation under Section 235 of the Companies Act, 1956. The facts and circumstances of the case compel me to opine that this is a fit case for ordering investigation under Section 235 of the Act. To do substantial justice between the parties, I hereby order that investigation of the respondent company be carried out by the Central Government under the provisions of Section 235 of the Companies Act, 1956 so that the truth can come out about the nature and modus operandi of these transactions.
18. With the above directions, the petition is hereby allowed.
19. All interim orders stand vacated. All CAs stand disposed of. No order as to cost.