2019 (9) TMI 895 - Tri - Companies Law

Tribunal Orders Probe into Company's Funds Misuse and Fraud

The Tribunal ordered an investigation into the affairs of the 1st Respondent Company under Section 213(b) of the Companies Act, 2013, due to prima facie ... Oppression and mismanagement - misutilization of funds - main controversy involved in the Petition is that the Respondents have not utilised the proceeds of the IPO as per the terms and conditions of the IPO mentioned in the Prospectus and Respondent No. 2 along with other Respondents has diverted the proceeds of the IPO to other entities which are under his control to defraud the members/investors of the 1st Respondent Company, which is a public listed Company - pre-requisites provided under Section 237(b) of the Companies Act, 1956. HELD THAT:- The powers conferred under Section 237(b) of the Companies Act, 1956 [Section 213(b) of the Companies Act, 2013] on the Tribunal are administrative in nature and can be exercised on the basis of the existence of circumstances as specified in the clause. The existence of the circumstances is a condition precedent as stipulated under Section 213(b), on the basis of which a prime facie honest opinion could be formed for ordering an investigation into the affairs of the company. In other words the order for investigation into the affairs of the company can only be made on the satisfactory grounds, which are available on the record of the case file. In the case on hand the 1st Respondent Company during the year 2010-2011, had availed secured loans of ₹ 37.81 Crores as per the cash flow statement from banks in addition to public issue proceeds of ₹ 73.60 Crores. The fact that the 1st Respondent Company has negative cash flow of ₹ 40.87 Crores under cash flow from operations clearly proves that the 1st Respondent Company has not utilized these IPO proceeds and loans from banks for the 1st Respondent Company but only diverted the same to its group companies - there are financial mis-management of funds of the 1st Respondent Company covertly disbursed to group entities for their own use and benefit through one of its group entity, RPPL, since the same could not have been done directly through the 1st Respondent Company. Thus, the 1st Petitioner and the respondents have allegedly diverted the funds of the 1st Respondent Company to their associates and companies and matters are pending before the different judicial forums. Thus, there exist the circumstances which prima facie suggest that the business of the company is being conducted with intent to defraud its members and the amount collected through IPO has been diverted to the associates and companies by the 1st Petitioner and the Respondents, which amounts to fraud played on the investors, which points out that the management of 1st Respondent company along with 1st Petitioner is guilty of fraud, misfeasance or other misconduct towards the company and its members - In the light of the circumstances stated, this tribunal is satisfied that it necessary to order the investigation into the affairs of the 1st Respondent Company under the provisions of Section 213(b) of the Companies Act 2013. The Central Government is hereby directed to appoint one or more competent persons as Inspectors to conduct investigation into the affairs of the 1st Respondent Company, as expeditiously as possible for filing report and on receiving the report, to follow the course of action as provided in law. Issues Involved:1. Allegations of mismanagement and oppression by the current Board of Directors.2. Diversion of IPO proceeds and secured loans by the Respondents.3. Compliance with Sections 295, 297, and 372A of the Companies Act, 1956.4. Allegations of fraud and misfeasance by both Petitioners and Respondents.5. Request for investigation into the affairs of the 1st Respondent Company under Section 237(b) of the Companies Act, 1956.Issue-wise Detailed Analysis:1. Allegations of Mismanagement and Oppression:The Petitioners sought relief under Sections 397, 398, 235(2), and 237(b) of the Companies Act, 1956, alleging that the current Board of Directors (Respondent Nos. 2 to 9) were not fit to manage the company and had engaged in oppressive and mismanaged practices. They requested the supersession of the current Board and the appointment of an independent Board of Directors.2. Diversion of IPO Proceeds and Secured Loans:The Petitioners alleged that the 1st Respondent Company, Ravi Kumar Distilleries Limited (RKDL), raised Rs. 73.60 Crores through an IPO and Rs. 37.81 Crores through secured loans but did not utilize these funds for the company's operations. Instead, the funds were allegedly diverted to group companies controlled by Respondent No. 2. The Petitioners provided detailed instances of such diversions, including advances to related entities and misrepresentation of fund utilization in financial statements.3. Compliance with Sections 295, 297, and 372A of the Companies Act, 1956:The Petitioners argued that the 1st Respondent Company violated Section 295 by not obtaining prior approval from the Central Government for loans to related entities. They also claimed non-compliance with Section 372A, which restricts loans to other bodies corporate beyond certain limits and mandates interest rates not lower than the prevailing bank rate. The Respondents admitted to related party transactions but claimed these were done at arm's length and were compoundable offenses under Section 621A.4. Allegations of Fraud and Misfeasance by Both Parties:The Respondents countered the Petitioners' allegations by accusing Mr. Anil Agrawal, the Managing Director of the 1st Petitioner, of fraudulently siphoning off Rs. 34.79 Crores from RKDL using blank signed cheques and forms. They alleged that Mr. Agrawal forged documents and transferred funds to his associates, thereby defrauding the company. The Respondents also claimed that the Petitioners had dubious motives and had acquired shares in violation of SEBI guidelines.5. Request for Investigation under Section 237(b):The Tribunal examined whether a case was made for ordering an investigation into RKDL's affairs under Section 237(b) (corresponding to Section 213(b) of the Companies Act, 2013). The Tribunal found sufficient prima facie evidence of fraud, mismanagement, and diversion of funds by both Petitioners and Respondents. The Tribunal noted that the business was conducted with intent to defraud members and that funds collected through the IPO were misused.Conclusion:The Tribunal, satisfied with the existence of circumstances suggesting fraud and mismanagement, ordered an investigation into the affairs of RKDL under Section 213(b) of the Companies Act, 2013. The Central Government was directed to appoint inspectors to conduct the investigation and report on the diversion of funds and misfeasance by those in management. The order aimed to bring the responsible parties to justice and recover the siphoned funds for the benefit of the company's investors and creditors.