Company Law Board
Allianz Securities Limited vs Regal Industries Limited on 29 February, 2000
Equivalent citations: [2002]110COMPCAS764(CLB)
ORDER
S. Balasubramanian, Vice-Chairman
1. The petitioner-company along with its associates holding about 44.70 per cent shares in Regal Industries Ltd. ('the company') have filed this petition under Sections 397/398 of the Companies Act, 1956 ('the Act') alleging acts of oppression and mismanagement in the affairs of the company.
2. Brief facts of the case are that the petitioner entered into an agreement with the 2nd respondent to sponsor a bought out deal of the company. As per this deal, the petitioner was to acquire certain number of shares in the company which would be later on offloaded in the market. Even though there is a dispute as to the number of shares which the petitioner ought to have acquired, yet, the fact is that the petitioner acquired 6.75 lakh shares of Rs. 10 each at a premium of Rs. 5 per share aggregating to Rs. 1.0125 crore. This amount was paid in three instalments. As per the agreement, the petitioner was entitled to nominate a director on the Board of the company. Accordingly, one Shri Avinash Gupta was nominated as a director. Later, a memorandum of understanding ('MoU') was entered into by the petitioner with the company for public issue cum offer for sale by which, in addition to the sale of the shares held by the petitioner of 6.75 lakh shares, the petitioner would also act as an issuer for public issue of 5 lakh shares. In the meanwhile, the company issued bonus shares at 7:10 by which the holding by the petitioner's group went up from 6.75 lakh shares to 11.475 lakh shares. In view of this, another MoU was entered into between the petitioner and the company on 21 February, 1996, by which the petitioner was to often for sale 11.475 lakh shares at par and arrange for public issue of 13.8 lakh shares at par. On 23 February, 1996, an agreement was entered into between the company and the petitioner by which the petitioner was to provide consultancy services on various areas on a lumpsum consideration of Rs. 13.5 lakh. It appears that the sale and public offer did not materialise and differences had arisen between the petitioner and the company resulting in filing of this petition with various allegations.
3. The allegations contained in the petition relate to non-holding of annual general meetings ('AGM'), non-presentation of annual account, non-supply of annual reports to the petitioner, falsification of books of account, diversion of funds to sister companies, violations of the provisions of Income-tax Act, 1961, Central Excise and Salt Act, 1944, Indian Contract Act, 1872 and the sponsorship agreement. On the basis of these allegations, various relief have been sought, inter alia, including handing over of the management of the company to the petitioner, conducting a special audit, ordering an investigation into the affairs of the company and removal of the directors from the group of the 2nd respondent.
4. When the petition was mentioned on 23 July, 1997, the counsel for the petitioner sought certain interim reliefs ex parte. Since the Bench was not inclined to pass any order ex parte, the matter was posted for hearing to 8 August, 1997, on which date the counsel for the respondents undertook to give inspection of books and statutory records to the petitioner and the matter was fixed for hearing on 18.11.1997. On that date, it was reported that the company had not given inspection, and as such, further directions were given that the inspection should be given on 28 November, 1998. On this day, since no rejoinder had been filed by the petitioner and since none represented the petitioner on that day, the petition was dismissed for non-prosecution. Later, the petitioner filed an application for restoration of the petition and as respondents had no objection to the restoration, the petition was restored by an order dated 6.5.1998. When the matter was taken up on 3.7.1998 for hearing, the petitioner complained that the company had not given inspection in spite of the directions contained in our order dated 18.11.1997. Since the company had not given the full inspection, directions were given on 11.9.1998 that the inspection should be given in the presence of the Bench Officer at the registered office of the company. The Bench Officer reported that while certain records were given for inspection, the 2nd respondent refused to give inspection of statutory records and also intimated that the books of accounts for 3 years had been destroyed in fire and could not be given for inspection. In our order dated 1.4.1998 [1.4.1999?], in view of the refusal of the 2nd respondent to give inspection in spite of our directions, we directed him to be present in person on the next date of hearing on 22.4.1998 [22.4.1999?] to explain his conduct. He was also directed to produce certain records of the company for our perusal. When he was present on 22.4.1999, even though he tendered his apology for disobeying our earlier orders regarding inspection, we directed him to deposit Rs. 2,000 out of his personal funds to the Legal Aid of Delhi High Court, which he did. The records brought were given for inspection to the petitioner. In the meanwhile, the petitioner had filed a few applications complaining about non-supply of records for inspection and praying for taking action against the 2nd respondent. In the meanwhile, the respondents also filed an application C.A. 197 of 1998 alleging that the petitioner had filed a forged document dated 19.12.1994 termed as 'sponsorship agreement' at pages 136 to 142 of the petition to show as if the petitioner was to invest in 6.75 lakh shares. According to the respondents, actually, on that day, a sponsorship agreement was entered into by which the petitioner was to invest in 12.57 lakh shares as annexed at page 14 of the application. Therefore, it was prayed in the application that action should be initiated against the petitioner under Section 340 read with Section 195 of the Code of Criminal Procedure.
5. Shri Mathur, Advocate, for the petitioner, initiating his arguments on the petition, submitted that the contention of the 2nd respondent that the petitioner had agreed to invest in 12.87 lakh shares is wrong. No doubt, earlier, there was an understanding to this effect, yet, finally, the petitioner agreed to invest only in 6.75 lakh shares as per the sponsorship agreement dated 19.12.1994. He pointed out that the subsequent event would indicate that not only the petitioner, but also the respondent had acted only on this agreement. In this regard, he referred to the MoU dated 14.8.1995 (Annexure V) and the consultancy agreement dated 23.2.1996 (Annexure VIII) wherein the investment made by the petitioner has been indicated as 6.75 lakh shares. He also submitted that the consideration towards these shares was made in instalments from February, 1995, to April, 1995. He, therefore, submitted that no point of time has the respondent claimed that the petitioner had complied with the terms of the alleged sponsorship agreement by which the petitioner was to invest in 12.87 lakh shares. Therefore, he submitted that there is no substance in the application CA 197 of 1998 filed by the respondent.
6. Dealing with the merits of the case, the learned counsel pointed out that even though the petitioner was a major shareholder in the company, yet, no notice of general body meetings had been received by it. Further, even though, originally, the petitioner had one nominee director, as per the sponsorship agreement, no notice for any Board meeting was sent to him. On the resignation of the nominee director, it was agreed that the petitioner would have the right to appoint two nominee directors and, accordingly, the petitioner nominated two directors later. However, even these directors were not given notices for any meetings. Thus, the petitioner who was induced to invest substantial money in the company is being kept in dark about the affairs of the company. He further pointed out that even though the petitioner, in terms of the sponsorship agreement, had obtained Securities and Exchange Board of India ('SEBI') approval for listing the shares and furnished a draft prospectus to the company, yet, due to non-furnishing of the full particulars and the balance sheet, no further action could be taken for listing the shares. Therefore, the responsibility for non-implementation of the sponsorship agreement squarely rests with respondents.
7. Shri Mathur further pointed out that after the petitioner invested in the shares of the company instead of using the funds for implementing the project, these funds were diverted to one Khurana Foam Sales, a proprietorship of the 2nd respondent, by way of loans. Further, a sum of Rs. 60 lakh invested in the shares of one Esteem Capital and Management Services Ltd. This company is controlled by the 2nd respondent. Further, it transpired from the inspection of the account books of the company that substantial cash was withdrawn from the cash account in 1997-98, only for the purpose of meeting the personal use of the 2nd respondent. He further submitted that the 2nd respondent has not disclosed that there was a raid by the Excise Department on the premises of the company before the petitioner was invited to invest in the shares of the company. He further submitted that even though the 2nd respondent had agreed to give inspection of documents, later, he claimed that the records of the company have been destroyed in a fire. All the attempts by the 2nd respondent to avoid giving inspection was only with a view to hide the mismanagement in the company and as such the Company Law Board should order an investigation into the affairs of the company and also remove the 2nd respondent as a director of the company.
8. Shri Jain, Senior Advocate, appearing for the respondents, submitted that the petition has been filed with a view to avoid/prevent the respondents from taking action against the petitioner for not having fulfilled its obligations under the sponsorship agreement by which the petitioner was not only to invest in 12.87 lakh shares, but also get the shares listed. He also pointed out that the company has already filed a civil suit against the petitioner for not complying with the terms of the sponsorship agreement and in turn the petitioner has also filed a civil suit for claiming the amount invested by it in the shares of the company. Therefore, he contended that the petition is not a bona fide one, and as such, should not be entertained.
9. On merits of the case, he submitted that it is incorrect to allege that the company was not issuing notices for the Board meetings. As per the agreement dated 19 December, 1994, the petitioner was to have a director on the Board of the company only upto the date of allotment of shares. After the allotment of shares, Shri Avinash Gupta resigned from the directorship on 9 August, 1996. Till such time he was a director, notices for Board meetings were regularly sent to him. Even though there was no obligation on the part of the company to have the nominees of the petitioner after the allotment, yet the petitioner forced two of its nominees on the Board, and they were also regularly sent notices for the Board meetings. But they were not attending the Board meetings. Instead of attending the meetings, they started writing letters to the company. He further submitted that the company has been regular in conducting all statutory meeting including general body meetings for which notices were sent to the petitioner. Therefore, it is wrong on the part of the petitioner to allege that general body meetings are not being held by the company. In regard to alleged diversion of funds of the company, he submitted that certain trade advances were given to Khurana Sales, and the same stand adjusted. Giving of trade advance, he contended, cannot be said to be in violation of provision of the Act, as well as investment in Esteem Capital and Management Services Ltd. Shri Jain submitted that the same is in accordance with the provisions of the Act, and not by way of diversion of funds of the company. In regard to the allegation that the company had not disclosed the raid by Central Excise Authorities, Shri Jain pointed out that the company had not disclosed the raid by Central Excise Authorities, Shri Jain pointed out that the petitioner was fully aware of the same as the draft prospectus prepared by the petitioner, thus, contained this information.
10. Summing up his arguments, Shri Jain contended that this petition does not disclose any cause of action and as such, should be dismissed. In regard to the prayer for investigation, he submitted that the petitioner has not furnished any material to warrant an order of investigation. According to him, by seeking an order of investigation, the petitioner is seeking a roving inquiry which is not permitted in our proceedings under Section 397/398.
11. We have considered the pleading and arguments of the counsel. We do not propose to decide as to which of the two sponsorship agreements, both dated 19th December, 1994, is a valid agreement and which is a fabricated one, as it is beyond the purview of our jurisdiction under Section 397/398. In a Section 397/398 petition, what we are concerned [with] is whether the acts complained of are oppressive or could be termed as mismanagement? Any dispute regarding private agreements for investment in shares has to be agitated in a civil suit and we find that both the sides have already filed civil suits. Therefore, we do not propose to deal with this issue in this order, especially, in view of the fact that both the sides have filed civil suits in regard to the same.
12. The main allegations of the petitioner is that no AGM of the company has been held and that the directors nominated by the petitioner are not receiving any notices for the Board meetings and that there have been diversion/siphoning [off] of the funds of the company. In regard to holding of AGMs and non-issue of notices to the nominees of the petitioners, the respondents deny these allegations. In view of the fact that the petitioner has not alleged that any decision detrimental to the interests of the shareholders of the company had been taken in the Board meetings held without notice to its nominees, we do not consider it necessary at this point of time to examine whether notices have been issued as contended by the company or not, as alleged by the petitioner. In a Section 397/398 proceeding, the Company Law Board should endeavour to put an end to the acts complained of. In view of this, to ensure that these allegations do not recur in future, we direct the company to issue notices for the general body meetings by registered post at the company's cost to the petitioner. As far as Board meetings are concerned,till such time the petitioner has its nominees on the Board, notices for Board meetings together with agenda should be sent to these nominees at least 7 days before the dates of the meetings. In regard to the prayer for investigation, the petitioner has alleged that there have been violation of the provisions of the Income-tax Act, Employees 'Provident Funds Act, Central Excises and Salt Act and the Companies Act. We find that certain proceedings have been initiated by the Income-tax Authorities, Central Excise Authorities and the provident fund authorities and as such, further investigation in these matters by the Company Law Board would only result in duplication. As far as investigation on account of siphoning [off] of funds of the company is concerned, the allegations relate to diversion of funds of the company to Khurana Foam Sales and Investment and Esteem Capital and Management Services Ltd. In the rejoinder, the petitioner has furnished the details, of outstandings against Khurana Foam Sales as Rs. 1.23 crore and the company had in [its] possession cheques issued by this firm to the extent of Rs 1.28 crore as on 31 March, 1996, but these cheques were never deposited. Thus, according to the petitioner, the firm had been advanced substantial amounts of funds detrimental to the interest of the company. We find that, in the same rejoinder, it has been noted that, as on 31 March, 1997, the amount due from this firm was of the order of Rs. 17.63 lakh. Thus, we find that the dues have come down from Rs. 1.23 crore to about Rs. 17 lakh. In the draft prospectus, at page 30, it has been stated that the main business of this firm is trading in raw rubber and, if it is so, the company engaged in the business of rubberised coir mattresses could very well be having trade relationship with the firm. Further, we also note that other than alleging that the cheques issued by the firm and remaining to be encashed on 31 March, 1996, had not been encashed by the company, no details have been given in the petition. In regard to investment in Esteem Capital and Management Services Ltd. of Rs. 60 lakh, the interest of the respondents in this company has been noted in the draft prospectus at page 31. The allegation of the petitioner in this regard is that the petitioner was not taken into confidence at the time of investment in this company and that this investment is in contravention of the provisions of the memorandum of association. Since this is a matter of fact as to whether there is violation of the provisions of memorandum of association or not, the same does not call for any investigation. Another allegation relating to the prayer for investigation is that substantial amount of money has been siphoned off by the 2nd respondent for his personal use. In the absence of any particulars to substantiate this allegation, we are not taking cognizance of the same. Accordingly, the prayer for investigation into the affairs of the company is rejected. In regard to the contempt application filed by the petitioner against the 2nd respondent for not having given inspection in spite of the directions by this Bench, we have already ordered him to pay a sum of Rs. 2,000 to the Legal Aid of Delhi High Court which he had already done and as such, no further order is called for on this application.
13. The petition is disposed of in the above terms. No order as to cost.