Company Law Board
Shri Inder Mohan Sansi vs Classic Apparels Ltd. And Shri P.T. ... on 11 February, 2003
Equivalent citations: (2003)3COMPLJ254(CLB), [2003]45SCL198(CLB)
ORDER
S. Balasubramanian, Vice Chairman
1. The petitioner holding 30% shares in M/s Classic Apparels Limited (the company) has alleged various acts of oppression and mismanagement in the affairs of the company more particularly in relation to the financial affairs of the company.
2. Shri Tikku, Advocate appearing for the petitioner reading through the petition submitted: The second respondent, being the Managing Director of the company, has been running the company as if it is his own and has been misappropriating the funds and properties of the company. In a contract with one M/s Computronics International Limited, the second respondent has misappropriated a sum of Rs. 138 lakhs by raising bogus bills and without supplying any goods. In the contract to the above company, a sum of Rs. 350 lakhs was received as advance out of which a sum of Rs. 80 lakhs is shown to have been adjusted as sales which is not reflected in the books of accounts. After paying a part of the advance back, still a sum of Rs. 138 lakhs is payable to that company which is found to have been misappropriated by the second respondent. He has also violated the provisions of FERA. A sum of Rs. 111.46 lakhs was due from Export Sales from a company in Germany which was not realized in cash but was adjusted against certain other export advances received from one Sports & SKI (UK). There have been certain under hand dealings in these transactions out of which the second respondent must have received some monetary benefit. For the years 1997-99, the service charges for services rendered had been realized in cash by making bogus debit entries in respect of these charges. He has also manipulated the books of accounts by under valuing the value of stock and also the quantum of stock. Further the second respondent has also been diverting the business of the company to his own entities - Amber Garments, Hari Mahindra Archana Exports and PTA Exports resulting in loss of business to the company. Many of the export orders received by the company had been diverted to these entities and all the export benefits legitimately belonging to the company were diverted to these entities. However, from the benefits derived by M/s Amber Garments in which the son of the petitioner is also a partner, was not given any share. In all, over a sum of Rs. 25 lakhs earned by M/s Amber Garments was pocketed by the second respondent. Originally the statement of accounts for the year 1998-99 as approved by the Board and signed by the petitioner indicated the value of the stock on hand at Rs. 2.98 crores. However, without the knowledge and approval of the petitioner a second set of accounts was prepared in which the value of stock was reduced by Rs. 55 lakhs. In these accounts, it is indicated that the petitioner had signed the same, while in fact he did not sign the same. Thus the second respondent had misappropriated stock worth Rs. 55 lakhs. In view of these discrepancies, the petitioner advised that the accounts should be audited by another independent auditor which suggestion was not accepted. In the year 1997-98 the company imported certain machinery out of the funds provided by IDBI, which was never received by the company and was disposed off by the second respondent for undisclosed amount and had been pocketed by him, even though the same is shown as a part of the assets of the company in the books of accounts of the company and certified by the auditor. This machinery was imported on EPCG licence and therefore, the company was obligated to Export 75% of its manufactured products. Out of exports worth Rs. 445 lakhs, the respondents purchased finished garments worth 324 lakhs during 1998-99 and the company's unit was being used to render service to the proprietary concerns of the second respondent.
3. The learned counsel further submitted that: The proceedings initiated by IDBI and Canara Bank before the DRT claiming Rs. 14 crores and Rs. 7.5 cores from the company would clearly establish the financial mismanagement by the 2nd respondent. Further, the acts complained of against the second respondent in this petition would also clearly establish that he is unfit to continue as the Managing Director and as such an independent person should be appointed to take control of the company and with a view to protect the interest of the financial institution. In addition, an independent auditor should be appointed to investigate into the financial affairs of the company. The Bench may also consider that with a view to put an end to the acts complained of the respondents may be directed to purchase the shares held by the petitioner on a proper valuation.
4. Ms. Mohana, Advocate for the respondents, reading through the reply submitted: None of the allegations of the petitioner is sustainable. The petitioner has been actively associated with the management of the company as a director and therefore was/is in the full know of the affairs of the company. The motive of the petition is that there are certain disputes regarding M/s Amber Garments in which the petitioner and his group have interest, and as a counter blast to those disputes, he has filed this petition. Further his son had been the General Manager of the company looking after day to day affairs and as such he cannot allege mismanagement on the part of the second respondent. In so far as Rs. 138 lakhs in dispute with M/s Computronics is concerned, the matter was referred to an Arbitrator by Delhi High Court and as per the award given by the Arbitrator, this amount has become payable to M/s Computronics and as such there is no basis to allege that there had been misappropriation by the second respondent. As a matter of fact this amount became payable only because the petitioner had given a credit note to M/s Computronics in the name of the company without the authority of the Board. Therefore, it is he who has acted against the interest of the company. As far as violation of the provisions of FERA in regard to Rs. 111.46 lakhs due from a German customer is concerned, there is no basis in this allegation. The company had effected exports to the tune of about 3.1 lakhs US dollars to this customer in Germany. Since the bills sent for collection were dishonored by this customer, after a series of negotiations with this customer and M/s Sports and SKI (UK) which had given substantial advance of about 5.2 lakhs US Dollars for supplies to be made by the company, it was agreed that the dues from the German customer could be adjusted against the advance remitted by M/s Sports and SKY (UK). Proper endorsements in this regard were made in the foreign inward remittance challans as per the copy enclosed at exhibit R-4. Therefore, but for this adjustment, the company would have had to initiate proceedings in German Courts against the German customer. Therefore, to allege that this action of second respondent is against the interest of the company is baseless or that the second respondent had violated the provisions of FERA. As far as the allegation relating to service charges is concerned, the company had been carrying out job work of Dying for various customers for which bills raised on them. Due to the local dye used by the company, there were major complaints of defective quality due to which many of the customers raised debit bills against the company resulting in reduction in the service charges receivable by the company. The copies of various debit notes enclosed at Exhibit R-5 would vouch for the same. Therefore, there is neither falsification in the accounts of the company nor any benefit taken out by the second respondent. As far as discrepancy in the stock of about Rs. 55 lakhs is concerned, a perusal of exhibit R-13 would indicate that there is absolutely no difference in the quantitative particulars and the variation between two sets of accounts is due to the value assigned to the stock on hand. When the quantity details are the similar in both the stock on hand. When the quantity details are the similar in both the accounts, the question of alleged misappropriation of stock does not arise. The second sets of accounts namely the balance sheet the profit and loss account showing the correct value of stock were approved by the Board and also by the General Body. It is admitted that the second set of accounts were not signed by the petitioner but were shown to have been signed by him only with the view to get his approval later on as there were no material differences between the two sets of accounts. As far as the allegation relating to division of the business of the company to other entities is concerned, the factual position is that M/s Amber Garments had become defunct in 1997-98 and since the company needed financial accommodation, the credit facilities of M/s Hari Mahindra Archana Exports and PTA Exports were utilized by the company by routing the export transactions through these firms. The accounts of these firms at Exhibit R-9 to R-12 would indicate that these firms had very meagre profit and the entire benefit of using these firms had gone to the company. In so far as the allegation relating to sale of the machinery imported under EPCG licence is concerned, the allegation is denied. The petitioner has not given any details about the machinery. The company had duly complied with the export obligations. As far as DRT proceedings are concerned, the failure of the company to pay the dues was due to reasons beyond the control of the company and cannot be construed as arising out of mismanagement.
5. I have considered the pleadings and arguments of the counsel. Most of the allegations in the petition relate to alleged financial mismanagement of the company by the second respondent. The main prayers in the petition are that the second respondent should be removed as the Managing Director and that he should be directed to reimburse the company all moneys misappropriated by him and that the present auditor should be removed and an independent auditor should be appointed to audit the accounts. I do not find any scope to grant any of the above prayers for reasons stated hereinafter.
6. The petitioners alleged that the second respondent has siphoned of Rs. 1.38 crores in connection with the dealings with M/s Computronics International Limited. From the narration of the allegation it is not clear as to how the petitioner alleges that the second respondent has misappropriated this amount. It is on record that there was an ongoing dispute between the company and M/s Computronics which was referred to an arbitrator by Delhi High Court and now the arbitrator has decided the matter in favour of M/s Computronics and the company has been directed to pay Rs. 1.38 crores to Computronics alongwith interest and cost. Therefore, there is no substance in the allegation of the petitioner that the second respondent has misappropriated Rs. 1.38 crores. As far as the second allegation that the second respondent had acted in violation of the provisions of FERA I do not find much substance in this allegation. The respondents have produced relevant documentary evidence to show that the entire transaction had taken place through banking channels and as rightly pointed out by the respondent but for their efforts of getting the dues adjusted against advance from M/s Sports and SKY (UK), this amount of Rs. 111.46 lakhs would have become irrecoverable without initiating proceedings in Germany. In other words the respondents have acted in the interest of the company and as such this allegation is not established. In regard to alleged receipt of service charges in cash and making bogus debit entries, the respondents have explained with documentary evidence of the debit notes received from the customers that due to defective dye the customers have raised debit bills against the original bills for service charges. In view of this explanation nothing survives on this allegation. Yet another allegation is in regard to diversion of business of the company to his own entities by the second respondent. In case of a complaint of diversion of business, some materials/particulars should be provided to examine such an allegation. Mere expression of doubts/suspicion would not suffice. According to the respondents the export business was routed through this entities only with a view to avail of the credit facilities that these entities had with them. The respondents have also produced the annual accounts of some of the entitles to show that these entities have not derived any undue benefits from such routing of business of the company. I find substance in this explanation. In regard to the alleged misappropriation of stock worth Rs. 55 lakhs, the main ground of the petitioner for this allegation is that the stock value shown in the annual accounts for the year 1998-99 signed by him is more by Rs. 55 lakhs compared to the second sets of accounts not approved by him. This allegation would have merited examination but for the fact that the quantity of stock of both the sets of accounts is the same except that the value assigned to the stock was lower in the second set of accounts than the first set of accounts. As long as there is no quantitative difference the question of misappropriation of the stock does not arise. As far as the allegation relating to sale of imported machinery and consequent pocketing of the sale value by the second respondent is concerned, the petitioner has not furnished any details regarding the identity of such machinery without which no enquiry could be made. In regard to the failure to comply with the requirements of EPCG licence, this is a matter which has to be examined by the concerned authorities.
7. From the findings that I have given above in respect of the allegations in the petition, it is apparent that the petitioner has not been able to establish any act of mismanagement on the part of the second respondent. The mere fact that there are proceedings before DRT does not indicate that there has been financial mismanagement on the part of the second respondent as the inability of the company to clear its debts could be for any other reason. Under the circumstances, there is no scope to grant any of the prayers of the petitioner. However, since the petitioner has expressed his desire to go out of the company by selling his shares which would put an end to the disputes between the parties once for all, the 2nd respondent, if so willing, is at liberty to purchase the shares of the petitioner at a mutually acceptable price.
8. Petition is accordingly disposed on in the above terms.