Company Law Board
Karedla Suryanarayan And Ors. vs Sri Ram Dass Motor Transport Pvt. Ltd. ... on 18 December, 1997
Equivalent citations: [1998]92COMPCAS275(CLB)
ORDER
1. The petitioners in C. P. No. 15 of 1994 in the matter of Sri Ram Das Motors Limited (company) filed under Section 397/398 of the Companies Act, 1956, have filed this application, C. A. No. 65 of 1996, seeking various reliefs,, inter alia, the appointment of an administrator to manage the affairs of the company. Later, through another application, C. A. No. 67 of 1997, the petitioners have sought for amendment to the said application, viz., 65 of 1996.
2. Dr. Debi Prasad Pal, senior advocate, appearing for the petitioners, even though the application contains various allegations, restricted his arguments on the following two allegations only for the prayer for the appointment of an administrator.
3. One relates to the donation of Rs. 10 lakhs, made by the company to one Sri Srinivasa Charity Trust. According to him, this trust was wound up through a resolution of the trustees on May 20, 1992, while the donation to the trust was made during the year 1994-95. In other words, according to him, the donation was made to a non-existing trust and thus this amount of Rs. 10 lakhs had been siphoned off by the second respondent who is the chairman and managing director of the company as well as the managing trustee of Sri Srinivasa Charity Trust. Relying on a copy of the resolution of the trust, he stated that on May 30, 1992 (annexure "A" to the rejoinder), there was a resolution for winding up of the trust as on May 30, 1992, and consequent transfer of all assets and liabilities to Sri Srinivasa Educational Society. Therefore, according to him, when the trust had been wound up as early as on May 30, 1992, the question of making any donation to this trust in the year 1993-94 did not arise. Therefore, he submitted that this is an act of grave mismanagement done with a view to siphon off the company's funds, meriting appointment of an administrator to safeguard the funds of the company.
4. The second allegation, as advanced by him, relates to the alleged siphoning off of funds by diversion of various automobile parts manufactured by the company without accounting for the same in the books of the company. Reading out from the annual report of the company for the year 1994-95, he pointed out the discrepancies in the figures of certain items of automobile parts, like kingpin, pistonpins, tierod pins etc. Reading out from the figures, he pointed out that there is a huge difference between the opening stock plus production minus sales plus closing stock. According to him, the difference which is very substantial in number, obviously had been diverted without being accounted for and the sale value thereof has been siphoned off by the second respondent. The value of such unaccounted and diverted items would run into crores of rupees which is a clear case of misappropriation of company funds, which, unless checked through the appointment of an administrator, would prejudicially affect the interest of the company and its shareholders.
5. Shri Raghavan appearing for the respondents, at the outset, raised a preliminary objection that the petitioners cannot travel beyond, the allegations made in the petition and the reliefs sought for in the main petition, through fresh allegations in a subsequent application. To the proposition that subsequent events cannot be agitated in a Section 397/ 398 petition, he relied on Mohta Brothers Pvt, Ltd. v. Calcutta Landing and Shipping Co. Ltd. [1970] 40 Comp Gas 119 (Cal) and Asoha Betelnut Co. Pvt. Ltd. v. M. K. Chandrakanth [1997] 88 Comp Cas 274 (Mad). However, he submitted notwithstanding his objection, that even on the merits, the prayer of the petitioner for appointment of an administrator cannot be considered.
6. As far as the first allegation regarding donation is concerned, he submitted that the copy of the resolution dated May 30, 1992, filed by the petitioner is a fabricated one. Referring to annexure R-l to the reply to the application, he submitted that this annexure is the copy of the resolution passed on that, date by the trustees wherein there is no mention about winding up of the trust. Comparing the said annexure and also annexure "A" to the rejoinder filed by the petitioners, he pointed out that, while the first two paragraphs of both the annexures are similar, the later portion of the annexures are different from each other. While annexure "A" has a paragraph relating to winding up of the trust, there is no such resolution in annexure "R-l". Annexure "R-l" relates only to authorising the managing trustee, i.e., respondent No. 2, to take all steps to sponsor Sri Srinivasa Educational Society. The minutes of this meeting have been signed by the petitioner himself as could be seen from annexure "R-l". Even otherwise, he submitted that the trust is still in existence and he in this connection referred to the income-tax return filed in respect of this trust at annexure "R-4" and also the income-tax exemption certificate issued by the Income-tax Officer dated March 6, 1995, at R-3. Therefore, he urged that the donation of Rs. 10 lakhs had been made to an. existing trust and as a matter of fact this amount is still held as deposit in the bank account maintained by the said trust.
7. In relation to the second allegation relating to discrepancies alleged in the figures of production, sales etc. of the automobile parts manufactured by the company, he submitted that the company manufactures over 400 automobile parts and it is not possible to indicate detailed figures of opening stock, production, sale and closing stock of each item quantity wise. The practice of giving the quantity wise figures as found in the annual accounts of 1994-95 has been going on for a very long time, even when the petitioner was a director on the board of the company and had been certified by the auditor of the company also. The petitioner, during his period of functioning as a director, had approved the annual report which contained similar information in earlier years and as such cannot question the validity now. He also submitted that the sales figures in money value indicated in the annual report include the value of all the items sold including the items which, according to the petitioners, had been diverted. He also submitted that if the allegation of the petitioners were to be true, then including the value of such items, the turnover of the company should be of the order of over Rs. 80 crores which can never be attained when the cost of material purchased is only of the order of Rs. 20 crores. Therefore, he submitted that there is absolutely no substance in the allegations which would call for appointment of an administrator.
8. Dr. Pal, countering the arguments of Shri Raghavan submitted that it is not a general proposition that subsequent events cannot be alleged in a Section 397/398 petition. To this proposition, he relied on Khimji M. Shah v. Batilal tiamodardas Modi [1990] 67 Comp Cas 185 (Bom), Inder Kumarjain v. Osra Bottling Co. (P.) Ltd. [1977] 47 Comp Cas 194 (Delhi) and Promode Kumar Mittal v. Southern Steel Ltd. [1980] 50 Comp Cas 555 (Cal). He also questioned the authenticity of the signature of the petitioner in annexure R-l. According to him, the petitioner never signed any minutes of the meeting of the trust and the signature is a fabricated one. He maintained that annexure "A-1" is the correct version of the minutes by which the trust stood wound up on May 30, 1992, and respondent No. 2, by making a donation of Rs. 10 lakhs to this trust, had siphoned off the Said amount. He reiterated his submissions in relation to the discrepancies in the figures of automobile parts.
9. We have considered the arguments of counsel. Shri Raghavan has raised an issue relating to whether subsequent events could be agitated in a Section 397/398 petition, There have been diverse decisions on this aspect by different High Courts. While Shri Raghavan referred to a few cases to advance his arguments that subsequent events cannot be agitated, Shri Pal referred to certain decisions according to which even subsequent events could be taken into consideration. Since, now the matters relating to Section 397/398 are solely within the jurisdiction of the Company Law Board, we would like to settle this issue once for all in the following terms.
10. A Section 397/398 petition has to stand on its own on the basis of the allegations contained in the petition. Subsequent events brought on record alone, in case the main petition fails on the merits, cannot entitle a person to any relief. In case the allegations in the main petition are proved, then the subsequent events may be taken into consideration by the Company Law Board in moulding suitable reliefs. Since, on most of the occasions, when subsequent events are sought to be brought on record either through an amendment to the main petition or through an application, certain interim reliefs are also sought for, as happened in this application. Since in such cases, the main petition itself would be pending and there would have been no occasion for us to find out whether the petitioners have made out a case for grant of relief thereof, any interim relief prayed for in such applications containing subsequent events could only be related to maintenance of status quo in regard to the affairs of the company. No relief which would upset the status quo can be granted when the allegations in the main petition are yet to be assessed by the Company Law Board. Thus, our conclusion, on the issue of subsequent events, is that there is no bar to subsequent events being brought on record and being considered by us also but such consideration would be only to mould the relief to be granted in case the petitioner succeeds in the main petition and any interim relief granted, based on subsequent events, would be limited to status quo being maintained in regard to the affairs of the company.
11. Now, coming back to the issues before us, the trust is not a party in these proceedings and which of the minutes of the trust as produced by the petitioner or respondents are correct is not a matter for us to decide. What we are concerned with now is, whether there was a donation and if so, whether the same has been given to an existing trust or to a non-existing trust. If such a donation is purported to have been made to a non-existing trust, then -the allegation of the petitioner would require consideration. It is evident from the independent records produced by the respondents at R-3 and R-4, that the said trust continued to be in existence even in the year 1995-96. Therefore, the factum of the trust being in existence has been established. Further, about the existence of the trust, the respondents have pointed out with reference to a letter written by the petitioner, that even the petitioner admitted, by his own version, that the trust was in existence during 1994-95 and that he was a trustee of that trust. Considering all these facts, we are of the view that the petitioner has not been able to establish that the donation has been made to a non-existing trust
12. As far as the second issue is concerned, even though it appears that there is force in the arguments of Dr. Pal, we find that the company has been following a consistent policy for over a period of time during which the petitioner as a director of the company has approved the same mode of furnishing the information relating to the in-house production of automobile parts without any question. Year after year, the same has been certified by the auditors also. We also find from the reply filed by the respondents at annexures R-6 and R-7, wherein they have given complete details regarding the quantity of the production, sales and closing stock of the items which are in dispute. The automobile parts produced by the company are subject to both sales tax as well as excise duty. The discrepancies as pointed out in the physical quantity, by the petitioner, are so large that it is inconceivable that these items had gone out of the factory without the knowledge of the sales tax or excise authorities. If the petitioner had shown us that the sales figures as per the annual accounts would be the same, without considering the value of the items alleged to have been diverted, then perhaps we would have been convinced that there had been diversion. They have not done so. On the other hand, Shri Raghavan has pointed out that if such quantities were to be taken in the sales figures, it would go over Rs. 80 crores which would be ridiculous compared to the cost of material. We made a pointed question to Shri Raghavan whether the company will be in a position to produce a statement reconciling the figures of production, sales and closing stock to compare the same with the' monetary value of sales shown in the annual accounts, he readily agreed to do so. Therefore, even though we are prima facie of the opinion that the petitioner has not made out a case establishing that there has been diversion of stock from the factory without being accounted for in the books of account, yet in view of the statement made that full particulars would be given, we do not propose to give a finding on this allegation at this point of time. But at the same time, considering that the company has been consistently following the same method of exhibiting the physical quantity in the annual report for a long time, we do not consider that the discrepancies in the stock as pointed out by Shri Pal could be taken as an act of such a grave mismanagement as would warrant appointment of an administrator at this interim stage when the petition is still to be heard.
13. The company will furnish a statement of reconciliation during the next hearing, as undertaken by Shri Raghavan to enable us to take a view on this allegation.
14. With the above observation, we reject the prayer of the petitioner for appointment of an administrator at this interim stage based on allegations relating to subsequent events.