Company Law Board
Union Of India (Uoi) vs Premier Automobiles Ltd. And Ors. on 26 February, 2007
Equivalent citations: [2007]141COMPCAS50(CLB), (2007)2COMPLJ83(CLB), [2007]76SCL409(CLB)
ORDER
S. Balasubramanian, Chairman
1. Alleging that the affairs of Premier Automobiles Ltd. (the company) are not being conducted and managed in accordance with sound business principles or prudent commercial practices, the Central Government has filed this petition under Sections 388B and 408 of the Companies Act, 1956 (the Act) seeking for removal of the existing directors and also for appointment of Government directors. The entire petition is based on the report of the inspecting officers who had inspected the records of the company in the year 1998-99. The allegations in the petition are:
(1) Managing Director, Shri M.V. Doshi, entered into an exhaustive articles of agreement with Fiat Auto SPA Italy for sale of Kurla plant without any specific authority and without disclosing the agreement to the board and to the shareholders.
(2) Non-maintenance of proper accounting of UNO car booking money to the tune of Rs. 610 crores and furnishing misleading figures/information at various places. Further, the company has failed to furnish full particulars relating to receipts, accounting, utilization and balance of UNO car booking money.
(3) Transfer of Kalyan and Kurla plants without obtaining the sanction of the High Court under Sections 391 and 394 of the Act.
(4) Non-furnishing of complete information to the inspecting officer during the course of inspection.
(5) Making a statement in the director's report dated 9.9.1996 for the year ending 31.3.1996 that the entire purchase consideration for the transfer of Kalyan plant has been received when in fact it was/is not so.
(6) Diversion of funds to the extent of Rs. 5 crores to a company in which directors are interested in the form of logo licence fees.
(7) Drawal of managerial remuneration in excess of limits prescribed under Sections 198, 269 and 310 read with Schedule XIII of the Act without previous approval of the Central Government as required under Section 198(4) of the Act.
(8) Borrowing monies from Citibank in excess of the delegated powers granted by the board.
(9) Furnishing of misleading information to the shareholders in the 52nd annual general meeting regarding the issue of corporate guarantee in the form of comfort letter to the financial institution.
(10) Furnishing contradictory and misleading information at the time of inspection.
2. This petition was filed on 17.2.2004 and was mentioned on 1.3.2004. The respondents filed CA 124 of 2004 seeking for copies of inspection reports, basis on which this petition has been filed and also sought for disclosure of records relating to formation of opinion by the Government in terms of Section 388(1Bs) of the Act. When this application was heard, the Government claimed that the inspection report was a privileged document and as such the same cannot be directed to be furnished to the respondents. By a detailed order dated 6.9.2004 [Central Government v. Premier Automobile Ltd. and Ors. (2005) 7 Comp LJ,| 485 (CLB)], I directed the Central Government to furnish a copy of the inspection report and also held that it was not necessary that the documents relating to formation of opinion needed to be furnished to the respondents. This order was taken on an appeal before the Bombay High Court, which left the decision regarding furnishing of documents relating to formation of opinion to this Board at the time of final hearing. One Shri Silesh Mehta filed CA 369 of 2004 seeking to intervene in this matter on the ground that he had the support of shareholders holding 12 lakh shares and that he had made complaints before the Central Government about the affairs of the company and these complaints have also been enquired into by the inspecting officers and, therefore, he had vital interest in the proceedings. By an order dated 25.5.2005 [Union of India v. Premier Automobiles Ltd. and Ors. (2005) 10 Comp LJ 319 (CLB)], I rejected his application on the ground that in a proceeding under Section 388B pf the Act, this Board has to consider only the material placed before the Central Government to give a decision whether or not the respondents were fit persons to hold the office of director or any other office connected with the conduct and management of any other company and that, in the absence of any provision in Section 388B to implead other parlies, the application cannot be considered.
3. At the time of final hearing, Shri Sanjay Aggarwal, counsel for the Central Government, submitted: This petition has been filed under Section 388B(1)(b) of the Act on the ground that the business of the company has not been conducted and managed in accordance with sound business principles or prudent commercial principles. Shri M.V. Doshi, the managing director, the 11th respondent, entered into a sale agreement with Fiat Auto SPA, Italy for transfer of the company's business at Kurla without the knowledge and approval of the board. The respondents have relied on the general power of attorney given to Shri Doshi. The power of attorney was given to him in his capacity as the ED on 10.4.1994 but not in his capacity as the managing director, yet he had entered into the agreement in his capacity as MD which he became in 1997. Even in terms of clauses 32 and 33 of the power of attorney, the power conferred is only to sell a part of the property of the company, yet, he had disposed of the entire business of the company. Further, the company has alleged that agreement with Fiat Auto dated 4.7.1997 was only an MoU, yet, it had been treated as an agreement on which basis Kurla business was transferred. Since the shareholders' approval was received only in November, 1997, the agreement entered into in July, 1997 could not have been acted upon. Only in the board meeting held on 17.7.1997, the board had authorized the transfer of Kurla business as a running business to Fiat Auto. Therefore, the MD could not have entered the sale agreement on 4.7.1997. This clearly shows that the MD had acted without approval of the board. Even though the respondents contend that the document dated 4.7.1997 is an MoU and not an agreement, clause 14.9 of that document would indicate that it was nothing but a full fledged sale agreement. Therefore, it is abundantly clear that the MD had transferred the Kurla business without the approval of either the board or the shareholders or the financial institutions. Further, the business of the company was transferred without obtaining sanction of the High Court under Section 391/394 of the Act. The sanction of the High Court was a must as the interest of creditors, investors and depositors were involved as the transfer was to a new company including all assets and liabilities. In other words, whole of the undertaking had been sold squarely attracting the provisions of Section 391/394 of the Act: [K. Venkat Rao v. Rockwood (India) Ltd. (2002) 1 Comp LJ 519 (AP)] : (2002) 46 CLA 243 (AP).
4. The learned Counsel further submitted: The company had accepted over Rs. 610 crores as booking money for supply of UNO cars. Since the company could not supply the cars, the booking money had to be refunded to those who had booked the car. The company has not been able to clearly quantify the amount due to the persons who had booked for UNO car as different figures have been shown as due in different documents. In the agreement dated 4.7.1997, total overdue refunds is shown as Rs. 77.77 crores, in the board meeting held on 17.7.1997, it is shown as Rs. 69 crores and in the deed of assignment dated 30.3.1998 as on 29.9.1997, it is shown as Rs. 92.4 crores. Likewise, the amount for live bookings is shown as Rs. 311.5 crores, Rs. 211 crores and Rs. 273.2 crores, respectively. Even during the inspection, the company was not in a position to reconcile the difference and indicate the exact amount. This would indicate that the company is not having any proper books of accounts.
5. The learned Counsel further submitted: During the inspection, the company had failed to furnish full information as sought for by the inspecting officer in spite of repealed requests. Further, out of the total purchase consideration to be received from the new company, a sum of Rs. 12 crores is yet to be received and the company has not given any explanation for the same. The company has entered into an agreement with Pal Enterprises (P) Ltd. for providing license to use the logo 'PAL group'. For this, the company was to pay a sum of Rs. 5 crores. Since this amount has been paid to a company in which the directors are interested, in the guise of logo fees, the company has diverted Rs. 5 crores for the benefit of the directors.
6. Summing up his arguments, Shri Aggarwal submitted that this is a fit case wherein this Board should record a decision that Shri Doshi and other members of the board are not fit and proper persons to hold office of directors or any other office connected with the conduct and management of any company and that directions should be given to Central Government to appoint such number of directors as this Board may deem fit on the board of the company for a period of 3 years to safeguard the interest of the shareholders, creditors and public at large.
7. Shri Makhija, Advocate, appearing for the respondents, submitted: The petition is neither maintainable nor sustainable as no sufficient material has been given lo form an opinion either under Section 388B or under Section 408. For filing a petition under Section 388B, formation of an opinion to move this Board under any of the instances under that section is a sine qua nan. The non-application of mind by the Central Government is evident from the petition itself as under paragraph 6.3, the instances noted are under 'violation of Section 388B of the Companies Act, 1956'. There can be no violation of this section. Secondly, the entire petition is based on the inspection carried out during the period April 1998 to June 1999. The inspection report was submitted on 7.6.1999 and the Central Government sought for a draft petition from the RD by a letter dated 25.8.1999 but the reference to CLB was made only in February 2004. Thus, there is enormous delay and laches on the part of the Central Government to file this petition. It is on record that the inspection was ordered on a priority basis on receipt of a complaint from a shareholder. Even then, the Central Government has slept over the same for over 5 years without explaining the reason for the delay in filing this petition. Even though, in the rejoinder, it has been explained that the delay was on account of the time taken for collection of the documents, the same cannot be accepted as other than a copy of the balance sheet and a part of the inspection report, nothing has been annexed with the petition. As a matter of fact, it is the company which has annexed all the documents in its reply. Further, to file a petition under Section 388B, existence of circumstances on the day of filing of the petition is a pre-requisite. The entire petition has been filed on the basis of events that took place in 1998 about which the Central Government had the knowledge. Therefore, forming an opinion in 2004 is not only perverse but not bona fide. The entire petition has been filed on the basis of suspicion and conjuncture [conjecture?] notwithstanding the fact that the inspecting officer was given every piece of information that he sought for. Having invoked Section 388B in the petition, in the rejoinder, the Central Government has invoked Sub-section (a) by alleging fraud, misfeasance, etc., however without particulars. Fraud means actual dishonesty and mere perception is not sufficient. For alleging misleasance, the Central Government should have established that there has been actual loss lo the company. Likewise, to allege fraud, the petitioners should establish that the directors had acted dishonestly.
8. The learned Counsel further submitted: The Central Government has filed an affidavit on 19.12.2005 regarding formation of an opinion by the Central Government. Other than stating that, as per the direction of the then Secretary to the Government of India, this petition was filed, there is no information as to when and how the opinion was formed. As a matter of fact, by a letter dated 25.8.1999, addressed to the Regional Director, Mumbai, Central Government had asked him to submit a draft petition under Section 388B. This it self would show that there was complete non-application of mind by the Central Government. In the same letter, reference had also been made to complaints of one Shri Mehta at whose behest obviously the inspection was carried out and this petition had been filed. The learned Counsel submitted that some of the allegations made in the petition are not even supported either by the inspection report or by the decisions taken by the Central Government. For instance, one of the allegations in the petition is that the company had not complied with the provisions of Section 391/394 of the Act. In the supplementary inspection report dated 21.10.1999, the inspecting officer has very clearly observed that the company had complied with the provisions of Section 293(1)(a) of the Act clearly indicating that the provisions of Sections 391/394 are not applicable in the transfer of Kurla plant and the inspection report also says that the provisions of Section 370 are not applicable. As a matter of fact, even the Department of Company Affairs, in its letter dated 27.1.2000, has advised the RD not to pursue the matter relating to Section 293(1)(a) of the Act. By a letter dated 21.8.2001, the RD had sought for directions to conduct a special audit, as had been suggested by the Ministry in its earlier communication. This would indicate that the Central Government was not clear as to whether to file a petition under Section 388B or to conduct a special audit. It is rather surprising that, by a letter dated 23.2.2004, that is, after filing of the petition, the Central Government had sought for various documents from the RD in relation to the allegations made in the petition. It is surprising that the Central Government could form an opinion without even having the basic documents forming part of the allegations. This would also very clearly indicate non-application of mind by the Central Government. In the letter of Shri Mehta dated 7 March 2004 wherein he had thanked the Government for filing this petition, he had also sought that the Government should inform this Board that he should be allowed to intervene in the matter. This would also indicate that without any application of mind, purely on the basis of a private complaint, this petition has been filed.
9. On merits, the learned Counsel submitted: The foundation of the petition is that the managing director had no authority to enter into an MoU for the sale of Kurla unit. II is on record that the 11th respondent was earlier the executive director (ED) of the company. Me had been given a power of attorney on 28.5.1994 which empowered him to sell or otherwise dispose of any property of the company and also to sign, execute, etc., of agreements relating to the sale. He became the managing director (MD) of the company in 1997. Except that the nomenclature from ED to MD had been changed, all his powers continued to be the same. Therefore, entering into an MoU under the authority given by the power of attorney as ED cannot be questioned. It has been argued that, by the MoU, the properly had been transferred without the approval of the shareholders. A reading of the MoU would show that the same was subject to shareholders' approval under Section 293 and also subject to many conditions precedent which were very specifically provided in clause 7.2 of the MoU. Whether it is an MoU or Agreement has to be decided more on the basis of the substance and not on the basis of the form. Even assuming that it was an agreement, the petitioner has not established any prejudice to the company or shareholders or creditors. The financial institutions have approved the same and thereafter the shareholders approved the same on 26.11.1997. Only on 30.3.1998, after receipt of all approvals, deed of assignment was executed on 30.3.1998 as is evident from the deed of assignment at Annexure R-12 which also bears the acknowledgement for payment of stamp duty on 27.3.1998 (Rs. 1.3 crores). Therefore, the basic premise of this allegation that, by the agreement, Kurla Plant had been sold/transferred, is incorrect. Insofar as the need for the spin off is concerned, the reason was communicated to the Central Government by a letter dated 23.4.1998 (Annexure R-2). It was explained that in a board meeting held on 20.1.1997, various options relating to restructuring of Kurla operations were discussed and, finally, after further discussions in the board meeting held on 24.9.1997 and 17.7.1997, the board decided to seek the approval of shareholders in an EoGM to be convened on 9.9.1997 for transfer of Kurla plant. A very detailed explanatory statement indicating therein the scenario relating to automotive industry, the advantages of hiving off of the Kurla unit, to the shareholders and the company and the proposal as a whole had been fully explained. In addition, the chairman also wrote to all the shareholders in this regard before the meeting (Annexure R-9). From the minutes of the adjourned EoGM on 26.11.1997, it could be seen that 495 shareholders had attended the meeting and a detailed discussion took place on the proposal after which the resolution was passed by majority of the shareholders by show of hands. As a matter of fact, Shri Mehla attended this meeting and various queries raised by him were replied. Thus, it is evident that the allegation relating to sale of the Kurla plant is not based on facts and had been made for the sake of making it.
10. The learned Counsel further submitted that insofar as the allegation relating to UNO cars is concerned, the only allegation is that, at different points of time, different figures had been given as outstanding. There is no allegation that, by this, any money had been siphoned off. In the petition, the Central Government has found differences in the figures given in the agreement, the minutes of the board meeting on 17.7.1997 and the deed of assignment. It is to be noted that as far as the figures relating to the booking amount is concerned, the same figure of Rs. 610.4 crores has been shown in all the three. Insofar as the figures relating to cancellation, refunds made, overdue refunds and live bookings are concerned, in the agreement, it has been specifically stated that the figures were approximate. In the board meeting also, the figures were noted as approximate. Only, in the deed of assignment, the correct figure had been shown. Further, Fiat had undertaken the entire regarding the UNO car and Fiat had also written to all those who bad booked for the UNO cars about its liability towards refund. In view of Fiat having undertaken this liability, so far there is no complaint against the company in this regard from anyone.
11. In regard to [as far as?] the next allegation that full information had not been given to the inspecting officers is concerned, such a complaint is completely baseless. Whatever information was sought for by the inspecting officers, the same was furnished. The very fact that the Central Government has not indicated as to what information that was sought was not furnished would indicate that it is just a bald allegation.
12. Regarding non-receipt of full consideration for -the sale of Kurla plant is concerned, the learned Counsel submitted: I he allegation of the petitioner in this regard has arisen out of the statement of the board in its 51st Annual Report that the company had received Rs. 162.19 crores being the cash consideration from the joint venture company and the second annual report of joint venture company wherein it has been stated that the figures were under reconciliation. The fact is that the company had received the amount but the joint venture company has perhaps not incorporated the figures pending reconciliation. Therefore, in the annual report, no false statement had been made by the company as alleged. Insofar as the license fee of Rs. 5 crores for the logo is concerned, the inspecting officer had only pointed out that whether the provisions of Section 77 had been complied with. There is no allegation of either diversion or mis-utilization of funds of the company. In a board meeting held on 28.5.1999, the board decided, giving cogent reasons, to enter into a license agreement for use of the logo 'PAL group'. This decision being a managerial decision entered into for the benefit of the company, cannot amount to mismanagement. As a matter of fact, even the Central Government has not alleged that the license agreement is either a bogus or a sham agreement. Insofar as managerial remuneration is concerned, the company had applied to the Central Government for approval but unfortunately it was not pursued. However, the offense has already been compounded on 10.7.2006. In regard to the allegation that the company had borrowed money from Citibank in excess of the delegated power granted by the board, it is a single line allegation without any particulars. In a board meeting held on 6.12.1996 (Annexure R-21), the board had approved mobilizing of Rs. 600 million from Citibank for meeting the expenses in completion of the paint shop at Kurla and capital expenditure plan for modernization of Kurla plant. Therefore, this allegation itself would show that the Central Government has not gone through the records of the company. The other allegation is that in the 52nd Annual General Meeting, misleading information has been given to the shareholders regarding issue of corporate guarantee in the form of comfort letter to the financial institutions. This allegation would also show that there is complete non-complete non-application of mind. Giving a comfort letter does not amount of giving a corporate guarantee to be covered under Section 370 of the Act. A bald allegation, without particulars, has been made that, at the time of inspection, the company has furnished contradictory and misleading information. As is evident from the reply of the company that, at the time of inspection, whatever was needed by the inspecting officer was furnished in full.
13. Summing up his arguments, the learned Counsel submitted that the Central Government has sought for removal of all the directors and also for passing an order against all of them in terms of Section 388B of the Act. From the allegations in the petition, it is clearly evident that no specific allegation has been made against any of the directors for an order against them in terms of Section 388B. The entire petition is founded on the spin off of Kurla plant which if the company had not effected by now the company would have gone for winding up. Therefore, the entire board of directors has acted in the interest of the company and not against its interest as alleged by the Central Government. Therefore, this petition not only being of devoid of merits but also not maintainable, should be dismissed.
14. The learned Counsel relied on the following cases in support of his submissions:
(1) A.P. Jain v. Fnridabad Metal Udyog (P) Ltd. (1998) 5 Comp LJ 561 (CLB): Even though the provisions of Limitation Act are not applicable to a proceeding before CLB, yet, it has to lake into consideration unexplained delay in prosecuting a proceeding.
(2) Union of India v. R.C. Bhargava (1998) 4 Comp LJ 374 (CLB). Delay and laches would be fatal to a proceeding initiated under Section 388B.
(3) Samant v. Bombay Stock Exchange : A writ petition on the ground of delay and laches can be justifiably dismissed.
(4) MCD v. Raj Kumar : Institutionalized lethargy cannot be any ground to explain the laches of more than one year. Merely because the bureaucratic machinery in MCD moves slowly cannot be a ground for condoning laches.
(5) Ashoka Marketing Ltd. v. Union of India (1981) 51 Comp Cas 634 (Del)(DB) : : If it is established that there were no material upon which the authority could form a requisite opinion, the court may infer that the authority did not apply its mind to the relevant facts. The requisite opinion is then lacking and the condition precedent to the exercise of the power under Section 237(b) is not fulfilled.
(6) Rampnr Distillaries and Chemicals Co. Ltd. v. Company Law Board : If in reaching its satisfaction, the Central Government misapprehends the nature of the condition or proceeds upon irrelevant materials or ignores relevant materials, the jurisdiction of the court to examine the satisfaction is not excluded.
(7) AP Stale Civil Supplies Corpn. v. Delta Oil and Fats Ltd. (1997) 3 Comp LJ 146 (CLB): A mere statement of facts based on auditors report without any corroborative evidence will not assist in framing the requisite opinion.
(8) Punjab Agro Industries Corporation Ltd. v. Superior Genetics Ltd. (2002) 1 Comp LJ 187 (CLB): A petition can be dismissed for want of proper and adequate material to enable forming of an opinion that an order of investigation should be made.
15. I have considered the pleading and arguments of the counsel. The petition is a combined petition filed both under Sections 388B for removal of the directors and under Section 408 for appointment of Government directors. Section 388B reads:
388B. Reference to Company Law Board of cases against managerial personnel- (1) Where in the opinion of the Central Government there are circumstances suggesting-
(a) that any person concerned in the conduct and management of the affairs of a company is or has been in connection therewith guilty of fraud, misfeasance, persistent negligence' or default in carrying out his obligations and functions under the law, or breach of trust; or
(b) that the business of a company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices; or
(c) that a company is or has been conducted and managed by such person in a manner which is likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; or
(d) that the business of a company is or has been conducted and managed by such person with intent to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purposes or in a manner prejudicial to public interest, the Central Government may state a case against the person aforesaid and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a decision as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.
16. Section 408 reads:
[408. Powers of Government to prevent oppression or mismanagement-] (1) Notwithstanding anything contained in this Act, the Central Government may appoint such number of persons as the Tribunal may, by order in writing, specify as being necessary to effectively safeguard the interests of the company, or its shareholders or the public interests to hold office as directors thereof for such period, not exceeding three years on any one occasion, as it may think fit, if the Tribunal on a reference made to it by the Central Government or on an application of not less than one hundred members of the company or of the members of the company holding not less than one-tenth of the total voting power therein, is satisfied, after such inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in order to prevent the affairs of the company [from] being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest:....
17. Section 388B is perhaps the most punitive section in the Companies Act. I! this Board were to come to the conclusion that any director is found to be guilty of any of the instances as in Sub-sections (a) to (d) of that section, he could not only be barred from functioning as a director of the company in question, he could also be declared to be unqualified to be appointed to hold any managerial position in any other company also for a period of five years. Therefore, to ensure that such a person does not continue to be in management, quickest action has to be taken once the Central Government has enough material to form an opinion to invoke the provisions of Section 388B. In other words, these provisions are more preventive in nature then curative. The admitted fact in the present case is that the entire petition is based on an inspection report dated 9 June 1999 but the petition was filed only on 17.2.2004. Thus, by the time the petition was filed, the whole matter had become stale and as such the basic premises under which the provisions of these two sections could be invoked no longer existed at the time of filing this petition. In the rejoinder, it is averred the petition has been filed in time and the inadvertent delay, if any, may be condoned which has resulted due to compiling various documents and for filing this petition, and due to absolute scarcity of staff.' This cannot be a possible explanation for the delay of 5 years. Shri Makhija rightly referred to the judgment of Delhi High Court in MCD v. Raj Kumar , that institutionalized lethargy cannot be any ground to explain the laches of more than one year. In Union of India v. R.C. Bhargava (1998) 4 Comp LJ 374 (CLB) this Board has held that delay and laches would be fatal to a proceeding initiated under Section 388B. Thus, the petition suffers from delay and laches which cannot be condoned in the absence of justifiable reasons.
18. To invoke the provisions of Section 388B, the Central Government has to form an opinion that there are circumstances suggesting one or more of the instances indicated in Sub-sections (a) to (d) of Section 388B. In other words, the condition precedent is the availability of the material to form the opinion. In Ashokn Marketing Ltd. v. Union of India (1981) 51 Clomp Cas 634 (Del)(DB) : , wherein the formation of opinion in terms of Section 237(b) was in issue, it was held that if it is established that there were no material upon which the authority could form a requisite opinion, the court may infer that the authority did not apply its mind to the relevant facts. The requisite opinion is then lacking and the condition precedent to the exercise of the power under Section 237(b) is not fulfilled. Similarly, in Rampur Distillarirs and Chemicals Co. Ltd v. Company Law Board , the Supreme Court has held that if in reaching its satisfaction, the Central Government misapprehends the nature of the condition or proceeds upon irrelevant materials or ignores relevant materials, the jurisdiction of the court to examine the satisfaction is not excluded.
19. Thus, it is essential to examine whether, the Central Government has formed its opinion to invoke the provisions of Section 388B on sufficient materials. The petition filed by the Central Government consists of 14 pages including the affidavit. In addition it contains a copy of the notice issued to the company by the inspecting officer on 26 March 1999 containing 10 pages and also a part of the 52nd Annual Report. No other supporting materials have been annexed with the petition not even a copy of the inspection report on the basis of which allegations have been made in the petition. When the company sought for a copy of the inspection report by an application, the same was resisted by the Central Government on the ground that the same was a privileged document, which contention was rejected by me. The reason given for the delay in filing this petition is that relevant documents had to be collected; as a matter of fact, no document has been annexed with the petition. This itself would show that the Central Government has formed the opinion without sufficient material. In paragraph 9 of the inspection report dated 7.6.1999, it is the inspecting officer who had opined that the case was a fit one under Section 388B of the Act. As a matter of fact, by a communication dated 25.8.1999, the Central Government had asked the Regional Director to prepare a draft petition under Section 388B. Further, it is not clear as to when the Central Government formed the opinion, i.e., in 1999 or in 2004. In the additional affidavit dated 19.12.2005, it is only averred that, on the directions' of the then Secretary, this petition was filed. If it had formed the opinion in 1999, then, as I have already pointed out, it has not justified the delay in filing this petition. If it had formed the opinion in 2003-04 that is, just before filing of the petition, the opinion had been formed on stale and no longer continuing state of affairs of the company. Further, in either case, the admitted fact is that the Central Government did not have all the necessary documents to form the opinion. Therefore, the prerequisite to exercise the powers under Section 388B is lacking. The non- application of the mind of the Central Government is also evident from the fact that it had sought the removal of all the directors without specific allegations against each one of them.
20. Coming to the merits of the case, it is seen from the petition that the ground on which this petition has been filed is that that the affairs of the company are not being conducted and managed in accordance with sound business or prudent commercial practices. This is practically the Sub-section (b) of Section 388B. To substantiate this allegation, nothing has been placed before me to show any adverse effect on the interests of the company/shareholders or creditors. In the rejoinder which also contains just four pages, the Central Government has alleged that the management of the company is not only guilty of fraud, misfeasance and persistent negligence and in default in carrying out its obligations and functions as defined in law but is responsible for the breach of trust and the persons in control of the affairs are responsible for this breach of trust. This is a settled law that for alleging fraud, misfeasance, etc., there should be proper material to substantiate the same. The absence of any particulars in regard to this allegation, Shri Makhija is fully justified in calling this allegation as a 'bald allegation'. As a matter of fact, from the pleadings and arguments, it is abundantly clear that not only the Central Government could not prove any of the allegations made in the petition, but, on the other hand, the company has disproved each and every allegation. Regarding sale of Kurla unit, it is not the case of the Central Government that the sale of Kurla unit was prejudicial to the interests of the company/shareholderscreditors but the allegation is that the MD did not have the authority to enter into the agreement itself. The very fact that the board and the general body had approved the same and the stand of the company is that but for the same the company itself would have gone for winding up would show that the sale was in the interest of everyone concerned. The other allegations are all so inconsequential that they could never merit invoking either the provisions of Section 388B or Section 408. Even then, in respect of all these allegations, the company has satisfactorily explained its position with which I fully agree. Only if the Central Government had taken into consideration all the materials placed before it by the company on the allegations, it would/could not have filed this petition.
21. Accordingly, the petition is dismissed on the grounds that it suffers from delay and laches, that the prerequisite of availability of material for forming the opinion is lacking and that, on merits, every allegation, instead of being proved by the Central Government, has been disproved by the company. The only purpose that this petition has [was?] served-is that enormous time, money and efforts have been wasted in prosecuting, defending and adjudicating this petition.