2014 (4) TMI 1322 - HC - Companies Law

Company shareholders win investigation order after firm fails listing compliance and keeps investors uninformed for years under Section 237

T. Kannan, Uma Kannan and Visalakshi Kannan Versus Shapre Infotech India Ltd. And R. Nagaraj Sharma, Chenai

The Madras HC allowed a petition by company shareholders seeking investigation into the company's affairs under Section 237 of the Companies Act, 1956. ... Seeking declaration that the affairs of the first respondent company ought to be investigated by Inspector or Inspectors appointed by the Central Government and to further direct the Central Government to appoint as many Inspectors as required to investigate into the affairs of the first respondent company and submit a report thereof - HELD THAT:- A reading of Section 237 of the Companies Act, 1956 makes it clear that it enables the Central government to appoint inspectors to investigate the affairs of a company in case of two eventualities. Firstly, when the company has by a special resolution requested the Central Government to do so, or the Court by order has declared that the affairs of the company ought to be so investigated by an Inspector appointed by the Central Government. Secondly, the section gives a discretion to the Central Government to consider whether such an investigation is called for and it may do so after consideration of circumstances suggesting the conduct of the business in the manner set out in sub clauses (i), (ii) and (iii) to clause (b) of the above section. It is under Section 237(a)(ii) of the Companies the present application has been filed. There is nothing on record produced by the respondents to show that the suspension of trading in equity shares has been revoked or steps have been taken to comply with the listing agreement. Therefore, the apprehension in the minds of the petitioners regarding listing of shares appears to be bona fide - The petitioners, being shareholders of the first respondent/company, it is stated are kept in dark and are not informed of any major activities of the first respondent/company like amalgamation, listing and de-listing of shares. All that the respondents claim is that due notice has been sent to the petitioners and they are not responsible for the non delivery of such notices. The only reason stated by the respondents so far for non compliance of the order passed by this Court earlier is “bulkiness of the records required” and that by no stretch of imagination can be accepted to be genuine ground for a period of over five years. The facts, as presented, clearly make out a case for this Court to direct the Central Government to order investigation into the affairs of the first respondent/company, more particularly in view of the fact that the first respondent/company has not furnished the information in respect of its affairs, which it is reasonably expected to furnish - the petitioners have made out a prima facie case to direct the Central Government to appoint Inspector or Inspectors to investigate into the affairs of the first respondent/company. The Central Government is directed to investigate into the affairs of the first respondent/company by appointing an Inspector or Inspectors, as they deem fit, as per the provisions of the Companies Act, and submit a report to this Court - Petition allowed. Issues Involved:1. Non-receipt of notices for meetings and financial documents by shareholders.2. Alleged non-compliance with listing and de-listing requirements.3. Allegations of financial mismanagement and lack of transparency.4. Appointment of Chartered Accountants for account verification.5. Non-cooperation by the respondents in providing documents for verification.6. Application of Section 237 of the Companies Act, 1956 for investigation.Issue-wise Detailed Analysis:1. Non-receipt of Notices and Financial Documents:The petitioners, who are shareholders of the first respondent company, claimed they did not receive notices for Annual General Meetings or Extraordinary General Meetings. They alleged that despite the company's involvement in significant activities like amalgamation and listing, which require shareholder approval, they were deprived of their rights due to non-receipt of notices. The respondents countered by stating that notices were dispatched through the Postal Department, and their responsibility ended there. They maintained that all necessary documents were available for inspection at the Registrar of Companies.2. Alleged Non-compliance with Listing and De-listing Requirements:The petitioners contended that the first respondent company had not listed its shares on the Bombay Stock Exchange and National Stock Exchange as promised. They also alleged that a resolution to de-list shares from certain stock exchanges was passed without their knowledge, violating SEBI guidelines. The respondents argued that any de-listing would comply with SEBI guidelines and claimed transparency in their transactions.3. Allegations of Financial Mismanagement and Lack of Transparency:The petitioners accused the second respondent of increasing his emoluments and misusing his position, while the company failed to declare dividends despite increased foreign earnings. They also alleged that loans and guarantees were taken without their knowledge, and the shares were not being traded. The respondents asserted that the decision to declare dividends rests with the Board of Directors and denied any wrongdoing.4. Appointment of Chartered Accountants for Account Verification:The court, considering the serious allegations, appointed M/s. Annamalai Associates, Chartered Accountants, to verify the accounts of the first respondent company. This decision was challenged by the respondents, but the Division Bench upheld the appointment, clarifying that it did not amount to an investigation but was necessary to ascertain the correctness of the balance sheets.5. Non-cooperation by the Respondents:Despite multiple requests from the Chartered Accountants, the respondents failed to provide essential documents like vouchers, bank statements, and compliance details. The Chartered Accountants reported their inability to verify the accounts due to the lack of cooperation from the respondents, who cited the 'bulkiness of the records required' as a reason for non-compliance.6. Application of Section 237 of the Companies Act, 1956:The court examined Section 237, which allows for the appointment of inspectors to investigate a company's affairs if ordered by the court or if there are circumstances suggesting fraudulent or oppressive conduct. Given the respondents' non-cooperation and the serious nature of the allegations, the court found a prima facie case for investigation under Section 237(b)(i) and (iii). The court directed the Central Government to appoint inspectors to investigate the affairs of the first respondent company and submit a report.In conclusion, the court allowed the company petition, directing an investigation into the affairs of the first respondent company by the Central Government, highlighting the need for transparency and accountability in corporate governance.