2017 (3) TMI 1007 - Tri - Companies Law

Tribunal Orders Audit for Financial Irregularities, Upholds Resolutions

The Tribunal ordered an audit by Price Waterhouse Coopers to investigate financial irregularities and upheld resolutions passed in Extra-Ordinary General ... Oppression and mismanagement - validity of shareholders' commercial decision - sufficiency of notice and participation in company meetings - vacation of directorship for non-attendance under section 283(g) of the Companies Act, 1956 - inspection and audit of company accounts by an independent auditor - related party transactions and potential siphoning of company funds - remedial and restitutory powers to recover loss from persons responsibleSufficiency of notice and participation in company meetings - validity of shareholders' commercial decision - EOGMs dated 16.03.2013 and 15.02.2016 were not set aside for want of notice or mala fides; majority shareholders' consistent decision to remain in analogue mode was to be respected and not interfered with by the Tribunal. - HELD THAT: - The petitioners had clear knowledge of the EOGM dated 16.03.2013 (letter of 15.03.2013) and chose not to attend; correspondence and subsequent notice compliance in respect of the 2016 EOGM (including court-approved notice) show opportunity for participation. Established authority supports that where shareholders had necessary opportunity to participate, the object of notice provisions is satisfied. The Tribunal has no expertise to overturn consistent commercial decisions of majority shareholders and will not normally compel a company to adopt a course of business contrary to the shareholders' decision at this belated stage. Consequently the complaints about insufficiency of notice and mala fides in calling the EOGMs do not justify invalidation of the meetings or interference with the commercial decision to continue analogue operations. [Paras 5]Claims to set aside the EOGMs and to compel digitalization were rejected; the shareholders' consistent decision to remain in analogue mode is upheld.Vacation of directorship for non-attendance under section 283(g) of the Companies Act, 1956 - Petitioner No. 1 is not entitled to a declaration that he continues as a director; his office was treated as vacated for non-attendance of board meetings. - HELD THAT: - Petitioner No. 1 admittedly did not attend board meetings after August 2008 and did not obtain leave of absence. Respondents relied on notices and board records to show non-attendance. On those facts the Tribunal cannot accede to the prayer declaring Petitioner No. 1 as continuing director. [Paras 6]Prayer to declare Petitioner No. 1 as continuing Managing Director/director is rejected.Fabrication of documents - Allegation of forgery of Petitioner No. 1's signature on annual returns and balance sheets was not established on the record. - HELD THAT: - Respondents explained that the documents were signed by Respondent No. 5 and that Petitioner No. 1's name appears in his capacity as director. Petitioners failed to establish fabrication; the Tribunal did not find sufficient evidence to accept the forgery claim. [Paras 6]Forgery/fabrication allegations in respect of those filings are not accepted.Issue of bonus share certificates - The company is directed to issue bonus share certificates to the petitioners who are entitled to them, within a specified time. - HELD THAT: - Respondents admitted that bonus share certificates pertaining to the 30.03.2009 resolution were in their possession and undertook to issue them; petitioners had not been given the certificates for logistic reasons and raised the matter belatedly. In view of the admission, the Tribunal directed issuance of the share certificates within 30 days of receipt of the order if not already issued. [Paras 8]Respondent No. 1 company to issue the bonus share certificates to the petitioners within 30 days from receipt of the order, if not already issued.Related party transactions and potential siphoning of company funds - inspection and audit of company accounts by an independent auditor - remedial and restitutory powers to recover loss from persons responsible - Prima facie financial irregularities and possible siphoning through related party transactions were found; an independent audit from financial year 2008-09 onwards was ordered and the auditor was empowered to examine, hear parties and report losses to enable recovery from responsible persons. - HELD THAT: - Petitioners produced multiple indicia suggesting use of Respondent No. 1's premises, diversion of invoices prior to formal JVA, related party payments to shareholders and disproportionately large technical/support charges, and alleged contracts with entities not in existence at the time. Respondents relied on board approvals and cheque payments but failed to place adequate supporting resolutions or specific explanations for many transactions. Given the prima facie nature of the irregularities and the technical nature of accounting inquiries, the Tribunal held that an independent audit by a qualified firm was necessary. The auditors were directed to examine accounts from 2008-09 onwards, afford hearings to both parties, and quantify any loss; amounts found to be recoverable were to be recovered from responsible persons' resources and returned to the company. Respondent Nos. 3 to 7 were directed to grant inspection, assist the auditor and fix auditor remuneration in consultation with the company. M/s Price Water Cooper was appointed and directed to submit a report within three months. [Paras 9, 10, 11]Appointment of an independent auditor (M/s Price Water Cooper) to audit accounts from 2008-09 onwards; directors to provide inspection and assistance; auditor to report within three months and losses, if any, to be recovered from responsible persons.Final Conclusion: The petition is partly allowed: claims to set aside the EOGMs and to declare continuity of Petitioner No. 1 as director are rejected; the company is directed to issue outstanding bonus share certificates; an independent audit (by M/s Price Water Cooper) of accounts from 2008-09 onwards is ordered to ascertain any loss from related party transactions or misuse of assets, with directions to assist the auditor and recover any loss from responsible persons; liberty granted for implementation difficulties. No order as to costs. Issues Involved:1. Illegal holding of Extra-Ordinary General Body Meeting (EOGM) on 16th March 2013.2. Fabrication of documents and wrongful cessation of Petitioner No. 1 as Director.3. Non-allotment of dividend/profit to the Petitioners.4. Non-issue of bonus shares to Petitioners.5. Siphoning of funds of Respondent No. 1 company through related party transactions and acts of mismanagement.Detailed Analysis:1. Illegal Holding of Extra-Ordinary General Body Meeting (EOGM) on 16th March 2013:The Petitioners alleged that the EOGM on 16th March 2013 was called with mala fide intentions to transfer the business of Respondent No. 1 to Respondent No. 9 under the guise of digitalization. They claimed no notice was served, and the meeting was stage-managed. The Respondents countered that the Petitioners had knowledge of the EOGM and chose not to attend. The Tribunal found that the Petitioners did have knowledge of the meeting and failed to attend, thus cannot complain about the notice's insufficiency. The resolutions passed in the EOGMs held on 16th March 2013 and 15th February 2016 were upheld as they were decided by the majority shareholders who consistently decided not to participate in digitalization.2. Fabrication of Documents and Wrongful Cessation of Petitioner No. 1 as Director:The Petitioners alleged that documents filed with the Registrar of Companies for financial years ending 31st March 2008, 2009, and 2010 were fabricated with forged signatures of Petitioner No. 1. The Respondents clarified that the documents were signed by Respondent No. 5, and the Petitioners failed to establish fabrication. Regarding the cessation of Petitioner No. 1 as Director, the Tribunal found that Petitioner No. 1 failed to attend any Board meetings after August 2008 without obtaining leave of absence, leading to the automatic vacation of his office under Section 283(g) of the Companies Act, 1956.3. Non-Allotment of Dividend/Profit to the Petitioners:The Petitioners contended that no dividends were declared, and profits were siphoned off. The Respondents argued that the decision not to declare dividends was made to utilize funds for future expansion. The Tribunal referred to case law establishing that non-declaration of dividends is a collective Board decision and not oppressive. However, an audit was ordered to ensure proper utilization of retained profits.4. Non-Issue of Bonus Shares to Petitioners:The Petitioners claimed that they were not informed about the issuance of bonus shares. The Respondents admitted that bonus share certificates were not issued for logistical reasons and assured issuance. The Tribunal directed Respondent No. 1 to issue the share certificates pertaining to the bonus shares within 30 days from the order's receipt.5. Siphoning of Funds of Respondent No. 1 Company Through Related Party Transactions and Acts of Mismanagement:The Petitioners alleged misuse of Respondent No. 1's infrastructure by Respondent No. 9 and siphoning of funds through related party transactions. The Tribunal found prima facie evidence of financial irregularities and ordered an independent audit by Price Waterhouse Coopers to ascertain the exact loss caused to the company. The audit would cover financial years from 2008-09 onwards, and any loss found would be recovered from the responsible parties.Conclusion:The Tribunal ordered an audit by Price Waterhouse Coopers to investigate financial irregularities, with directions for cooperation from Respondent Nos. 3 to 7. The Tribunal upheld the resolutions passed in the EOGMs and dismissed the Petitioners' claims regarding the cessation of Petitioner No. 1 as Director. The Tribunal directed the issuance of bonus shares to the Petitioners and partially allowed the petition without any order as to costs.