Company Law Board
Dr. Kamal K. Dutta Through Constituted ... vs Ruby General Hospital Ltd. And Ors. on 2 December, 2004
Equivalent citations: [2005]124COMPCAS441(CLB), (2005)3COMPLJ351(CLB), [2005]60SCL133(CLB)
ORDER
S. Balasubramanian, Chairman
1. The petitioner claiming to hold 52% shares in M/S Ruby General Hospital Limited (the company) has filed this petition under Sections 235/237 of the Companies Act, 1956 (the Act) seeking for an investigation into the affairs of the company on three main allegations that the 2nd respondent, being the Managing Director has siphoned of funds of the company by bogus expenditure on construction of building, leasing and purchasing of equipments and by inflating the liabilities to creditors.
2. Shri Choudhary, Sr. Advocate appearing for petitioner submitted: This Board, in its order on the petition filed by the petitioner (CP No. 86 of 1997) had adversely commented upon the conduct of the 2nd respondent and had held that the conduct of business and affairs of the company lacked probity and was being carried on in a manner oppressive to the members. A reading of the said order would indicate that this Board had upheld each and every contention of the petitioner in regard to oppression and mismanagement in the affairs of the company. During the pendency of the proceeding in that petition, the present petition was filed bringing out subsequent instances of misappropriation of funds by the 2nd respondent. In the Balance Sheet for the year ended 31.3.1998, there was an addition to the fixed assets of a sum of Rs. 190.60 lacs out of which a sum of Rs. 139.96 lacs had been spent on alleged renovation addition to the existing building. Such renovation/addition was inconceivable as the entire hospital building had been completed in the year 1995-96 itself at a cost of Rs. 237.65 lacs with all ultra modern facilities. There was absolutely no need, within 2 years, for making any further addition to or renovation of the building completed only in 1995-96. The company has already capitalized the building account in the year 1995-96 itself and has claimed full depreciation. The completion of the building in 1996 itself with the sanctioned capacity of 115 beds is evident from the fact that the sanctioned bed capacity remains as 115 even in 1998. Therefore, there were no additions in the building during the year 1998 for incurring an expenditure of over a crore of rupees. Even though it is contended that the amount of Rs. 139.96 lacs is capitalization of the building work in progress, the directors' report does not make any detailed disclosures to that effect and the present statement to that effect is only an after thought. Therefore the alleged expenditure on the building is nothing but bogus. Thus, the 2nd respondent has siphoned of Rs. 140 lacs.
3. The learned counsel further submitted: In the same annual report, it is seen that there is substantial increase in the lease rent from Rs. 6.62 lacs to Rs. 24.5 lacs without any justification. Even though the respondents have tried to substantiate their claims of purchase of equipments by filing copies of invoices etc., a perusal of these invoices/bills would indicate that they are all procured ones. There are no details of the addresses of suppliers, their sales tax registration numbers, excise registration number etc. Therefore, no reliance can be placed on these invoices or bills. By showing exorbitant lease rentals without incurring the same, the 2nd respondent has enriched himself at the cost of the company.
4. Referring to the additional affidavit dated 19.7.2004 filed by his client, the learned counsel submitted that the respondents had fabricated various documents. They have also, for their personal gain, created a charge in the year 2002-2003 on all the moveable and immovable properties of the company in favour of Bank of Baroda in gross contravention of the order dated 14.12.1999 of Calcutta High Court restraining the company from holding any Board Meeting. They have also filed Income Tax Returns etc. without adoption of accounts by the Board and thus have completely withheld all information about the functioning of the company from the petitioner. With the money siphoned of from the company, the 2nd respondent has proposed construction of his own new hospital in competition with the hospital of the company.
5. Summing up his arguments, Shri Choudhary submitted that only an investigation could unearth the misdeeds of the 2nd respondent. In P.R. Ramakrishnan v. V. R. Textiles Limited (CP No. 37 of 91), the Company Law Board has held that cases of dishonesty, lack of probity, malafide for personal gain on the part of the management would warrant investigation into the affairs of the company. In the present case, the petitioner has given ample evidence of siphoning of funds of the company by the respondents and as such investigation is called for. In Alembic Glass Industries Ltd. (42 CC 63), Gujarat High Court has held that if the court is satisfied that there is mal-administration in the affairs of the company, investigation should be ordered. Therefore, since the respondents are guilty of fabrication of documents, financial irregularities, oppression of majority shareholders, criminal breach of trust for personal gains, investigation in terms of Section 235 of the Act should be ordered.
6. Shri Mookherjee, appearing for respondents submitted: There is absolutely no justification for ordering any investigation. All the complaints made in the petition were before this Bench even at the time of hearing CP 86 of 1997 and even though this petition was filed during the pendency of that petition, the petitioner never pressed for disposal of the present petition. The order of this Bench in CP 86 of 1997 is already in appeal before Calcutta High Court wherein the petitioner has already filed an affidavit practically containing the same allegations as that of the additional affidavit dated 19.7.2004 filed before this Bench and as such the Calcutta High Court is already seized of the said affidavit.
7. On merits, the learned counsel submitted: The sum of Rs. 139.96 lacs in the building account for the year ended 31st March, 1998 comprises of a sum of about Rs. 111 lacs transferred from the building progress account. This amount of Rs. 111 lacs is the cumulative figure of work in progress from 1994-95 onwards as is evident from the Chartered Accountant's Certificate at Annexure R-14. During the year 1997-98, the company had incurred only about Rs. 28.75 lacs towards addition to the building. The building work had not been completed as on March, 1995 as is evident from Annexure R-28 and R-29 wherein the contractors have given details of building work yet to be completed. Further, the petitioner himself had signed the annual accounts as on 31st March, 1995 wherein the building capital work in progress was shown as Rs. 44.67 lacs and he has never raised any objection for addition of Rs. 46.64 lacs to the work in progress account during the year 1995-96. The company has claimed depreciation only on the capitalized amount and not on work in progress. Further, the petitioner who had raised some grievances with regard to the balance sheet as on 31st March, 1998 in the earlier proceedings in CP 86 of 1997, never raised any objection on the building account. This is only an after thought for further litigation. Therefore, there is absolutely no justification in the allegation that the 2nd respondent has siphoned of funds of the company by showing expenditure on addition to building.
8. The learned counsel further submitted: The allegation relating to increase in liabilities has to be straightway rejected. The increase is due to the better performance of the company and as a percentage to the gross revenue, the liabilities have come down from 61% as on 31st March, 1996 to 28.9% as on 31.3.1997 and to 25.4% as on 31.3.1998. By no stretch of imagination, it can be alleged that by increase in the amount of liabilities, the 2nd respondent has siphoned of the funds of the company. As can be seen from Annexure R-16, the Chartered Accountant has given a certificate to the effect that all the liabilities shown are correct.
9. As far as purchase and leasing of equipments is concerned, similar issues were raised in CP 86 of 1997 and this Board did not order any investigation. Complete details of the equipments purchased and taken on lease is annexed at Annexure R-19 together with a certificate from the Chartered Accountant. The equipment taken on leas are on the basis of lease agreements with the lessors as detailed in Annexure R-19. Most of the medical equipments are not chargeable to sales tax and therefore non indication of the sales tax registration number in the invoices does not make the invoices bogus. Since all the equipments bought or taken on lease have been accounted for and certified by the Chartered Accountant, the question of siphoning of funds through purchase of these equipments does not arise.
10. Summing up his arguments, Shri Mookherjee submitted that since the respondents have refuted each and every allegation with proper explanation have proved that all the allegations are baseless, the question of investigation does not arise. Further, the petition filed by the petitioner under Sections 397/398 has already been disposed of and in terms of Section 243 of the Act, the ultimate result of an investigation is to invoke the provisions of Sections 397/398 or filing of a petition for winding up. The provisions of Sections 235/237 cannot be used for seeking a roving enquiry without any basis. Further, during the last few years, the company has progressed extremely well under the management of the 2nd respondent. As far as the additional affidavit filed by the petitioner dated 19.7.2004 is concerned, a similar affidavit has been filed before the Calcutta High Court in the appellate proceedings and as such cannot be taken cognizance of by this Bench. As far as the allegation that the 2nd respondent is planning to have his own hospital is concerned, the same is incorrect as he has no such involvement in the alleged new hospital. Further, during the pendency of the present proceedings, the petitioner had caused an inspection to be conducted under Section 209 of the Act by the Department of company Affairs. The petitioner cannot rely on various findings given in CP 86 of 1997 as the order in that petition is under appeal. Therefore, the petition deserves to be dismissed.
11. In rejoinder, Shri Choudhary submitted: It is wrong to say that the ultimate result of investigation is filing of a petition under Sections 397/398 or filing of a winding up petition. If it is established in the investigation that the respondents are guilty of siphoning of funds of the company, criminal action can be taken against them. The petitioner is not seeking a roving enquiry but has placed concrete materials for this Bench to satisfy itself that prima facie the respondents are guilty of siphoning of funds of the company. Therefore, to unearth the misdeeds of the 2nd respondent, investigation should be ordered.
12. I have considered the matter carefully. The admitted position is that this petition was filed during the pendency of CP 86 of 1997 and was not pressed for a long time. Shri Choudhary extensively pointed out to various adverse findings of this Bench in the order on CP 86 of 1997 to urge that the affairs of the company are not being carried on in a manner that it should be carried on. Admittedly, the order in that petition is under appeal and has not readied any finality. Even otherwise, since the present petition is a separate petition, it has to stand on its own footing as the findings in this petition will have to be based on the allegations contained in this petition. In the present petition, the petitioner has made three allegations - expenditure on building, increase in liabilities and purchase and leasing of equipments. As far as the expenditure on building is concerned, I do not find any merit in the allegation of the petition that by allegedly incurring the expenditure on building, the 2nd respondent has siphoned of funds of the company. A perusal of the annual accounts of the company indicates that there had always been building work in progress account right from 1994-95 onwards. In the balance sheet as on 31st March, 1998, I find that the figure of capital work in progress has come down to Rs. 41.9 lacs from Rs. 127 lacs as on 31st March, 1997. Taking this into consideration and also the certificate by the Chartered Accountant that increase in the building account as on 31st March, 1998 was on account of transfer of work in progress figures to the building account, I do not find any merit in the contention of the petitioner that the 2nd respondent has siphoned of funds in this regard. As far as increase in liabilities is concerned, even though, in absolute terms there is increase, but as a percentage of the gross income of the company, it is much lower than the previous years. Even otherwise, increase in the figure of liabilities does not indicate siphoning of funds of the company. As far as purchase/leasing of equipments is concerned, I do agree with the petitioner that the invoices do not contain all the details that an invoice should contain. But the absence of the details cannot lead to a presumption that the purchases are bogus. All the amounts spent on the purchases/lease of equipments should have been accounted for in the books of accounts under the respective heads and should have been scrutinized by the statutory auditors. If the invoices are bogus, the auditors would have pointed out the same. Rather in the present case, the Chartered Accountant has given a certificate at Annexure -19 that all the lease payments and purchases of equipments are genuine. Under the circumstances and in the absence of other un-refutable materials, I do not find any substance that by bogus purchases/lease of equipments, the respondents have siphoned of funds of the company.
13. In terms of Section 235 read with Section 237 of the Act, an order of investigation is to be made inter alia on the ground that in the opinion of this Bench, the persons in management are guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members. The object of an investigation is to discover something which is apparently not visible to the naked eye. In Delhi Flour Mills Co. Ltd. (45 CC 33), Delhi High Court has held that where a petition discloses merely facts which are apparent from the balance sheet of a company, an investigation will not be ordered and that at least prima facie evidence should exist concerning circumstances which would lead to the conclusion that an investigation is necessary. Shri Choudhary relied on the decision of this Bench in Eswar Usha Corporation v. Rachimen Silk Limited (1997 CC 778) to urge that an order of investigation should be made on the basis of the allegations made in the petition. The facts of that case cannot be compared with the present ones. In that case the company was a public listed company, it had not filed balance sheets for a number of years, it had not disclosed material facts in the proceedings pending before this Board under Sections 397/398 of the Act and therefore this Board ordered investigation. In the present case, the respondents have satisfactorily explained all the allegations made in the petition. In regard to the allegations contained in the additional affidavit, since these allegations have already been raised in the appeal proceedings before Calcutta High Court, I am not considering the same.
14. Accordingly, in view of the foregoing findings on the allegations. I do not find any scope for ordering an investigation into the affairs of the company and accordingly the petition is dismissed.