Company Law Board
Cholamandalam Investment & Finance Co. ... vs Amaravathi Sri Venkatesa Paper Mills ... on 9 August, 2002
JUDGMENT
K.K. Balu, Member
1. The petitioner holding 12 per cent of the paid-up share capital of M/s Amaravathi Sri Venkatesa Paper Mills Limited ('the Company') has filed this petition under Section 235/397/398 Schedule XI read with Sections 402 and 403 of the Companies Act, 1956 ('the Act') alleging oppression and mismanagement in the affairs of the Company. The main acts of oppression and mismanagement relate to violations of the provisions of the Act, non-compliance with the accounting standards issued by the Institute of Chartered Accountants of India (ICAI), non-clarification of huge cash balances at the end of the financial years improper recording of minutes of the annual general body meetings, inefficient management, imprudent investment and dividend policies, poor cash management, improper drawing of the Balance Sheet and Profit and Loss account, non-adoption of uniform depreciation policy, increase of operational cost, irrational import of raw materials at huge cost etc., resulting in huge losses.
2. Shri N.R. Sridharan, the whole-time Practising Chartered Accountant and Authorised Representative of the petitioner company, while initiating his arguments submitted that the petitioner, being a non-banking financial company used to make investments in shares and debentures of several companies to derive benefits, like dividends, bonus etc. Accordingly, the petitioner has invested in the equity shares of the Company in the Year 1995 and presently holds 3,63,272 snares at a cost of Rs. 44 per share including a premium of Rs. 34 per share. The investments made in the equity shares of the Company did not fetch any return for the last six years on account of inefficient management of the Company. The petitioner could neither get any representation on the Board of the Company. The affairs of the Company are being conducted against the interest of the members, the Company and public interest. Shri Sridharan drew our attention to several of the irregularities in day to day affairs of the Company by making reference to audited balance sheet of the Company for the years ended 31-3-1998, 31-3-1999 and 30-6-2000 as under:
* The Company failed to clarify the issues raised by the petitioner's representative at the annual general body meeting held on 29-12-2000, but, recorded the minutes as though the resolutions passed unanimously at the said AGM, violating the provisions of Section 193 of the Act.
* The net-worth of the Company has been sliding year after year from Rs. 1079.78 lakhs during the year ended with 31-3-1998 to Rs. 986.12 lakhs during the year ended 30-6-2000.
* The Company has incurred huge losses with Rs. 162.55 lakhs during the year 1998, Rs. 33.52 lakhs in 1999 and Rs. 72.43 lakhs for the year ended with 30-6-2000.
* Though the production and turnover of the Company marginally increased, the Company failed to declare dividend for the years 1997-98, 1998-99 and 1999-2000 on account of gross mismanagement of the affairs of the Company by the respondents 2 to 6.
* The huge investments to the tune of Rs. 83.82 lakhs made by the Company in its group companies have not yielded any dividend for the last several years. The resolutions passed by the Company for these investments are bald and violative of the provisions of old Section 372.
* The Company has not complied with the relevant accounting standard issued by ICAI relating to valuation of the investments, namely, the diminution in value of investments between market value and cost has not been provided in the financial statements for the year ended 30-6-2000, in which case, the loss for the year in profit and loss account is under stated, while the reserves in balance sheet to that extent is over stated. This is in violation of the provisions of Section 211(3C)of the Act.
* The Company has paid a sum of Rs. 20,76,000 as sponsorship fee on the issue of equity shares during the period ended with 30-6-2000 without any justification and in violation of the provisions of the Act.
* The Company has been keeping huge cash balances and unrealized cheques at the end of two years, viz. 31-3-1999 and 30-6-2000 and is poor in working capital management.
* In terms of Accounting Standard 2 (revised), the Company has changed its method of valuation of finished goods to include proper overheads as against the earlier practice of valuing the finished goods at market rate, thereby the value of finished goods is lower by Rs. 45,05,849 with a similar impact on the loss for the relevant year.
* The Company valued the finished goods in the past years at market price instead of market price or cost whichever is lower. However, from the balance sheet, it is observed that the finished goods were valued at cost or net realizable value whichever is lower. Thus, the Company has been following inconsistent and erratic methods of valuation of its finished goods.
* The Company has started claiming since the year 1999-2000, excise duty element as part of cost for the purpose of valuing closing stock of finished goods. But in the past, the Company was accounting excise duty only on clearance of goods from the factory.
* The Company has shown huge selling expenditure of Rs. 213.07 lakhs, which includes the excise duty of Rs. 65.41 lakhs. However, the Company has not given any break-up for the balance of expenditure amount incurred by the Company.
* The expenses incurred on account of discounts to the tune of Rs. ____ (sic) per tonne are rather exorbitant which do not correlate with the sale effected by the Company. The Company has neither furnished the basis for such huge discount and particulars of the persons to whom discounts were allowed.
* The balance sheet of the Company for the year ended 30-6-2000 shows that the Company has provided an amount of Rs. 1,86,536 by way of "depreciation shortly provided previous year". This disclosure is not in accordance with the relevant accounting standard. Accordingly, the balance sheet and profit and loss account does not show a true and fair view of the state of affairs of the Company.
* There is a huge difference between book depreciation provided for by the Company and depreciation under Section 350 of the Act year after year. The Company has been claiming a very low depreciation in the books with the main intention of showing less book loss while it was claiming a very high depreciation for arriving at more net loss. This is not a good accounting practice.
* The operational cost of the Company has been increasing year after year and does not take effective steps to control the cost reduction and the Company is unable to manage its affairs efficiently.
* The Company has been spending huge amounts in importing raw-materials instead of indigenous raw-material which increased the cost of raw-material enormously. The Company has failed to induct qualified and competent professionals either as the Managing Director or the whole-time director.
* The respondents 3 and 4, close relatives of the second respondent having no knowledge of paper industry are on the board of the Company.
* The Company failed to send notice to the petitioner for the 40th annual general meeting held on 29-12-2001.
3. Shri R. Vidhya Shankar, Advocate appearing for respondents 1, 2 and 4, while denying the acts of oppression and mismanagement in the affairs of the Company, has submitted that the petition is motivated and not in the interest of the Company or its members. The petitioner has been requesting the Company to buy-back their shares from time to time, on refusal of which the petitioner has come forward with the present petition, with a view to stifle the promoters of the Company. He pointed out that mere non-payment of dividend or lack of representation on the Board by the petitioner cannot amount to an act of oppression and mismanagement. The entire allegations in the petitioner pertain to the accounts for the financial years ended 31-3-1998, 13-3-1999 and 30-6-2000. He further pointed out that the accounts for the period ended 30-6-2000 were unanimously adopted at the annual general body meeting held on 29-12-2000 after clarifying and considering the queries raised by the petitioner's representative. The petitioner is a party to the resolution for adoption of the accounts at the annual general meeting held on 29-12-2000. The petitioner is, therefore, estopped from questioning the accounts for the period ended 30-6-2000. He further pointed out that the Company had sent notices to all its members including the petitioner for the 40th general body meeting held on 29-12-2001 and also caused public notice in local newspapers. The petitioner was aware of the said AGM, but did not participate in the annual general body meeting of members of the Company for which the Company cannot be blamed. He further pointed out that the petitioner had secured return on their investment by way of two bonus issues and dividends declared for the years, ended 31-3-1995, 31-3-1996 and 31-3-1997. The petitioner cannot have any grievances that he has not been taken of the board of directors of the Company, especially when it is the prerogative of the general body to decide the Constitution of the Board. The performance of the Company has been adversely affected on account of the recession faced by the paper industry since the year 1997. Consequently, the average price realization per metric tonne was declining from time to time till the year 1999-2000. The drop in price realization was common in the paper industry for the last four years. Simultaneously, there was a substantial increase in the raw-material cost and in power tariff over the years, resulting in the huge losses incurred by the Company. In this connection, he pointed out that the big mills were not able to make profits in the year 1999-2000 and could make profits only during the financial year 2000-2001. He pointed out that quite a few mills became sick companies. The Company after having suffered all these years could make a profit of about Rs. 30 lakhs and also increase the surplus reserve during the financial year ended 31 -3-2001. In regard to the investments, he pointed out that the Company has not violated the accounting standard No. 13 and accordingly the balance sheet as at 30-6-2000 has accounted for the investment as long-term investment at cost. Any temporary decline in the value of the investment need not be provided for in the accounts as per Clause 32 of the A.S. 13. Moreover, as per note 7 on accounts of the Schedule 17 investments stated at cost and temporary diminution in their value is not recognized. He drew support from the Note-15 in the Auditor's Report on accounts which states that no provision is made in the account for the difference between the cost and market value, since the difference is considered to be of a temporary nature and not of a permanent one. The Company made investments in the group companies after passing the requisite resolution under the relevant provisions of the Act. The book value per share of three of the group companies is more than the cost of the investment. He justified the investments in other companies. The reversionary trend has affected these companies also and therefore, there is no fault in the investment policy of the Company. The Company paid the sponsorship fees for the services rendered by Indbank Merchant Banking Services Limited in the matter of private placing of equity shares and in taking steps to list the shares of the Company on OTCEI. This sponsorship fee is the subject-matter of disclosure in the balance sheets for the year 1994-95. The accounts have been duly adopted and at the respective annual general meeting with the petitioner's representative voting of adoption of accounts. This issue cannot be re-agitated in the petition. The Company is justified in keeping cash balances to meet lorry freight charges in relation to its four branches and seven depots. He pointed out that there is no mis-statement in the balance sheet in respect of valuation of closing stock, finished goods etc. During the years from 1969 to 1999, the Company had valued stores, spares, raw materials etc. at cost, finished goods at actual price/market price. After 1-4-1999, the finished goods are valued at cost or net realizable value whichever is less, stores and spares etc. are valued at cost in terms of Accounting Standard No. 2. Accordingly, finished goods are valued in the balance sheet as at 30-6-2000 at cost. As per Guidance Note on Accounting Treatment on Excise Duty, the value of excise duty has to be added to the value of closing stock of finished goods, in which case, the excise duty payable has to be shown as expenditure in the Profit and Loss Account in order to set forth, the true and fair view in the Profit and Loss Account. The depreciation for the year ended 30-6-2000 has been duly charged in accordance with accepted accounting practice after duly providing for the depreciation short-charged for the previous year. The depreciation short-charged aggregating Rs. 1,86,536 was on account of an error in calculation in the previous year. Shri Vidhya Shankar justified increase in costs of operation during the years 1997-98,1998-99 and 1999-2000. According to him, the balance sheet as at 30-6-2000 is for 15 months' period when the prior year balance sheets are for 12 months' period. Moreover, the production for the year 1999-2000 was also higher in comparison to the previous years, he further justified the increase in cost for the following reasons :--
(a) The increase in cost of power and fuel is attributable to the increase in tariff.
(b) The increase in repairs and maintenance expenditure on account of age of the machinery as well the increase in production.
(c) Selling expenditure of Rs. 213.70 lakhs for the period ended 30-6-2000 includes the excise duty amount of Rs. 65.41 lakhs payable on the closing stock of the finished goods in accordance with the new accounting standards.
(d) Increase in travelling and vehicle maintenance is virtually on account of increase in the fuel prices.
(e) The Company was constrained to offer discounts during the financial years 1998-99 and 1999-2000 in consonance with the trend in the paper industry, without which, the Company would not have been able to liquidate the stock, which would have resulted in administrative overheads.
(f) The continuous operation of effluent water treatment plant resulted in power consumption, tariff of which has increased from time to time.
Shri Vidhya Shankar has urged that the increase in cost is not on account of any mismanagement of the affairs of the Company. Shri Vidhya Shankar justified the import of waste paper on the ground that the quality of the waste paper is superior, the waste paper could be secured in bulk quantities on soft credit terms. The price is also very competitive. He further pointed out that the second respondent, being the promoter holding 51 per cent of the equity share capital of the Company was appointed as Managing Director at the 39th annual general meeting of the Company. He was mainly responsible for the increased production during the years 1990--1997, who cannot be blamed on account of recession in the industry. The petitioner's representative is also a party to the resolution for reappointment of the second respondent as the Managing Director and therefore the petitioner cannot now question the appointment of second respondent as Managing Director. Similarly, the respondents 3 and 4 were appointed as directors by the shareholders at the annual general meeting. He further pointed out that the third respondent and fourth respondent with vast experience in the paper industry, have been directors of the Company since inception and 1984 respectively. Shri Vidhya Shankar pointed out that the allegations made in the petition entirely relate to the details disclosed in the balance sheet of the Company and that the petitioners have not made out any act of oppression and mismanagement in the affairs of the Company. According to him, mere non-compliance with the provisions of the Statute and unintended violations cannot amount to acts of oppression and mismanagement, in support of which he relied upon the following decisions :
(i) Mohta Bros. (P.) Ltd. v. Calcutta Landing & Shipping Co. Ltd. [1970] 40 Comp. Cas. 119 (Cal.) to state that full particulars must be given by a petitioner in an application of alleged acts of oppression or mismanagement. The vague and uncertain allegations of oppression or mismanagement do not entitle a petitioner to ask the Court to embark upon an investigation into the affairs of a company in the hope that in consequence of such investigation, something will turn up which will enable the court to grant relief to the petitioner.
(ii) Chander Krishan Gupta v. Pannalal Girdhari Lal (P.) Ltd. [1984] 55 Comp. Cas. 702 (Delhi) to state that there must have been continuous acts on the part of the majority shareholders oppressive to the minority to 'grant any relief under Section 397 and mere isolated acts and stray illegal acts could not amount to oppression.
(iii) MM Dua v. Indian Dairy & Allied Services (P.) Ltd. [1996] 86 Comp. Cas. 657 (CLB) - to show that the petitioner must set out full particulars of allegations of oppression or mismanagement to claim relief under Section 397/398.
4. Shri A.K. Mylsamy, Advocate appearing for the sixth respondent has denied the allegations of acts of oppression and mismanagement put forth by the petitioner. He categorically stated that the Company has rectified the defects pointed out by the petitioner and that the violations do not continue any more. He further pointed out that the Company has been carrying out the business in accordance with the decision taken by the Board of Directors from time to time. The proceedings of the general meetings and board meetings are being duly conducted and the minutes are properly recorded, in which case, the decisions taken at such meetings are validly made and cannot be questioned by the petitioner in 397/398 proceedings. He, therefore, sought for dismissal of the petition.
5. We have considered the pleadings and oral submissions made by Counsel for the petitioner as well as respondents.
6. A careful perusal of the records reveal that the petitioner being a non-banking financial company has been making investments in shares and debentures of several companies from time to time with the object of reaping the benefits like dividend, bonus etc. The petitioner, in the course of its normal business has invested in the shares of the first respondent Company and at present the petitioner is holding 3,63,272 shares of the Company which includes the bonus shares made by the Company. The grievances of the petitioner are that the investments made in the equity shares of the Company did not fetch any return for the last six years and that the petitioner could not get any representation on the Board of the Company. It appears that the petitioner was concerned with his investment in the Company as borne out by its letter dated 29-9-1999 addressed to the Company (R-l enclosed to the counter). It is not disputed that the Company made two bonus issues in October, 1995 and May, 1996 by virtue of which the original shareholding of the petitioner has increased from 1,33,200 equity shares to 3,63,272 equity shares. It is also not disputed that the Company declared dividend for the years ended 31-3-1995, 31-3-1996 and 31-3-1997. Admittedly, the Company started making losses from 1997 onwards. There are materials made available to show that the paper industry was hit by the economic recession since the year 1997 and that the Company is not an exception. The price realization of the Company was found to be decreasing from year to year. The functioning of the Company adversely affected on account of among other things increase in the raw material cost, power tariff resulting in the losses suffered by the Company till the period 1999. Though the Company could make a marginal profits for the year ended 31-3-2001, it could not declare dividend at the intervention of its bankers. The minutes of the 39th annual general meeting held on 29-12-2000 of the Company (Annexure R-3) reveal that the petitioner's representative had raised certain queries in relation to the valuation of the closing stock, the hike in prices in purchase of waste paper, increase in discounts, advances in group/ associated companies, increase in selling expenses, purchase of waste paper from any group/associated company etc. It further reveals that the Chairman of the meeting clarified the queries raised by the petitioner's representative in detail and thereafter the resolution adopting the director's report, profits and loss account ended 30-6-2000 together with balance sheet and the audited report was unanimously passed. At the very same annual general meeting, the second respondent was elected as the Managing Director and the respondents 3 and 5 were elected as directors of the Company. We find that the petitioner is agitating the very same issues raised and resolved at the annual general meeting held on 29-12-2000. The minutes of the 38th annual general meeting of the Company (Annexure R-2) held on 27-9-1999 also reveal that profit and loss account together with the balance sheet for the year ended 31-3-1999 was unanimously adopted at the said meeting, wherein the petitioner's representative was present. In the circumstances, the petitioner cannot have any grievance in regard to the accounts of the Company for these years. The investments made by the Company do not seem to have violated the accounting standards as borne out by the report of the auditors. It is left to the wisdom of the board of directors of the Company to make investments provided they adhere to the statutory norms. The mere fact that such investments do not bring profits to the Company cannot be a ground for oppression. However, it is observed that the investments made by the Company yielded dividend for certain period, which is not disputed by the Company. The grievances of the petitioner on account of payment of sponsorship fees keeping huge cash balances, valuation of closing stock of finished goods, increase in cost of operation on account of power and fuel, repairs and maintenance, selling expenditure, travelling and vehicle maintenance and extending of discounts, import of waste paper, in our view, cannot be construed to be the acts of mismanagement. The petitioner has merely culled these details from the annual accounts for the period ended with 31-3-2000, which, in our view, satisfactorily explained by the Company. The accounts have been duly adopted at the respective annual general meeting of the Company. The appointment of the Managing Director and directors has been made duly at the relevant annual general meeting of the Company, which cannot be re-agitated in the petition. These acts do not amount to acts of oppression. Shri Mylsamy has categorically stated that the violations pointed out by the petitioner do not continue. For violations, if any, of provisions of the Act, the regulatory authority will initiate such action as may be deemed fit. In the circumstances, the petition does not survive and accordingly dismissed, without any order as to costs.