TaxTMI 
TaxTMI 
1993 (8) TMI 291
X X X X Extracts X X X X
X X X X Extracts X X X X
.... interest as persons who are ostensibly involved in the company have no experience or technical expertise relating to business of the company. It is also alleged that the management is seeking to transfer the shares held by the ostensible owners to some other persons whereby there is likely to be a change in the composition of the board of directors which would be prejudicial to the public interest and detrimental to the interest of the company and its bona fide shareholders. The petitioners have further complained that whereas the 6,75,587 shares lodged by them and their group for registering the transfer were rejected in 1989 on the ground that their induction will be prejudicial to the interests of the company, the directors have indiscriminately registered the transfers lodged by various parties in order to perpetuate themselves in the management of the company. In addition, certain allegations have also been made about GIL management in respect of loss of foreign exchange/improper deployment of funds relating to construction contracts. 2. There are 17 respondents. Respondents Nos. 1 to 16 have become shareholders during the period September, 1988, to February, 1992, and som....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rgued that the petitioners were involved in corporate takeover since 1986 and in the judgment given by the Company Law Board on September 18, 1990, in the proceedings under Sections 247 and 250 of the Companies Act, initiated by Bhavi Investments (respondent No. 2) with respect to the shares acquired by the petitioners and certain others in GIL, it was found that the acquisition of shares by the petitioner companies which are directly or indirectly under the control of Shri Chhabria was prejudicial to the interests of GIL and also public interest and, therefore, the Company Law Board issued orders freezing the voting rights of eight petitioner companies in respect of the disputed shares. He also pointed out that by orders dated November 26, 1991, and January 22, 1992, under Section 22A of the Securities Contracts (Regulation) Act, 1956, the Company Law Board confirmed the decision of the board of directors and rejected the transfer of shares in favour of the petitioner companies in respect of the same shares. It was contended that these findings are binding on the petitioners as they are party to the above petitions/proceedings. He pointed out that the allegation that as many as se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the Bombay High Court. The jurisdiction of the Company Law Board under Sections 247 and 250 is a discretionary jurisdiction and the Company Law Board should not take cognizance of this petition as there is deliberate suppression of facts and by passage of time, the petitioners have acquiesced and there is no cause of action and, therefore, discretion should not be exercised in favour of the petitioners. Shri Chinoy also submitted that even if the power is considered as one suo motu, as a demurrer he referred to the guidelines issued by the Central Government in connection with the exercise of the powers under Section 237 of the Companies Act and pointed out that these, guidelines are also applicable in respect of use of power under Section 247. In support of this, he also referred to Ramaiya's Commentary on Company Law (11th Edition) page 741. While pointing out that all these matters raised in the present petition were also before the Company Law Board, in the proceedings under Section 247/250 filed by Bhavi Investments, Shri Chinoy admitted that there were no oral arguments in the proceedings as these issues and these matters were only stated in the written statements filed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n created and the petitioners had chosen earlier not to challenge the transfers, it is not permissible for the petitioners to raise these old matters again in view of the earlier orders of the Company Law Board. He also supported the arguments advanced by Shri Chinoy that the petition is not maintainable on the principles of res judicata and constructive res judicata as the petitioners had opportunity in the earlier proceedings to raise objections which they are now raising and the failure to raise such objections or appeal against the final orders of the Company Law Board or the Bombay High Court precludes the petitioners from raising it now as third party rights have been created. 9. Shri S. B. Mookherjee, senior counsel appearing on behalf of the petitioners, stated that on behalf of the respondents preliminary objections regarding the maintainability of the petition have been raised on the ground of res judicata/constructive res judicata, demurrer, delay and suppression of facts. Regarding res judicata and constructive res judicata, Shri Mookherjee argued that the present proceedings are not adversary proceedings and the subject-matter of the present petition was not heard i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt proceedings. Shri Mookherjee contested the arguments advanced by the respondents about the applicability of the departmental guidelines on Section 237 of the Companies Act as also applicable to matters in the present proceedings under Section 247. Shri Mookherjee pointed out that prior to the 1988 amendment, the Company Law Board was exercising the power as a delegate of the Central Government. However, from May 31, 1991, the Company Law Board have become an independent authority an.d not as delegate of the Central Government and, therefore, the departmental guidelines will not be applicable. Shri Mookherjee also referred to Order 14, Rule 2 of the Civil Procedure Code, 1908, and pointed out that the issues involved in the present proceedings are not questions of pure law but also of fact and, therefore, cannot be dismissed at the preliminary stage. In this connection, Shri Mookherjee referred to the decision of the Supreme Court in Major S. S. Khanna v. Brig. F. J, Dillon, AIR 1964 SC 497, in which it was held that under Order 14, Rule 2, where issues both of law and of fact arise in the same suit, the court should try all the issues especially when the decision on issues even ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ht, even if an interim order was obtained by suppression of material facts, it cannot be dismissed in limine as not maintainable without going into the merits of the case. Shri Mookherjee argued that in view of this, the suppression of material facts cannot be a ground for dismissing the petition in limine. He further pointed out that while the Company Law Board decision has been referred to in the petition, the decision of the Bombay High Court, which only relates to points relating to mismanagement, is not a material fact so far as grounds made out in the petition for existence of good reasons to find out the true identity of the owner of these shares are concerned. 12. Regarding the arguments of delay, Shri Mookherjee referred to the text of Section 247(1A) and pointed out that the section provides for looking into past transfers of shares and, therefore, such plea is not barred by limitation. He also pointed out that the main question involved is regarding the illegality of transfers and, therefore, since no personal interest of the petitioners is involved, the principle of laches/acquiescence will not be applicable. Shri P. C. Sen, senior advocate, also appearing on behalf ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....been obtained by the petitioners by such a deceit, if any. It is also a fact that while acquisition of some of the shares involved in the present proceedings was mentioned in the earlier proceedings after the hearing was concluded, neither were any parties heard on these matters nor did the Company Law Board have an opportunity to evaluate and decide these allegations. The statement that these shares were acquired as a defensive reflex action is just an observation and not a fact finding relating to the acquisition of shares. Since the issues involved in the two proceedings are different, the question of res judicata does not arise in this case. There is also no suppression of material facts. 15. In view of this we hold that the petition is maintainable. While coming to the conclusion we have also been guided by the observations of the Supreme Court in D.P. Maheshwari v. Delhi Administration, AIR 1984 SC 153, which states that Tribunals and courts should consider whether part adjudication is really necessary to avoid woeful consequences. 16. We heard Shri Mookherjee on the inconsistencies in the replies filed by the respondents and GIL, the doubtful nature of the resources in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the company and public interest. 18. It is also contended that since the identity of the real owner is being carefully concealed, it is necessary to enquire into the sources of funds by the various companies and the controlling hand behind the said companies and the nexus between the present board of directors of GIL and the said companies. It was submitted that there are good reasons to appoint one or more inspectors to investigate and report on the membership of GIL in respect of the impugned shares, for the purpose of determining the identity of the true persons who are or have been financially interested in the success or failure of the companies and who are or have been able to control and materially influence the policy of the company, by reason of the control of the aforesaid shares. 19. In support of the above prayer for investigation the petitioners have also set out certain alleged financial embezzlements, fraud and mismanagement detrimental to the interests of shareholders, employees and public interest. These include avoidable payment in foreign exchange for sub-contracts in connection with the construction of a 3-star hotel in Moscow ; misuse of an imported tunne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....250 against the petitioners. 22. At the time of filing of the petition, these 5.31 lakhs shares were being held by the following seven entities : (figures in lakhs) (figures in lakhs) 1. Banares Beads 0.25 - 2. Motivala 0.24 - 3. Prashant 0.90 1.39 1.39 (Banares group) 4. Mogra 1.00 - 5. Lakhani 0.80 - 6. Cuckoo 1.05 - 7. Bhavi _ 1.07 5.31 23. In the acquisition and transfer of these shares during 1988-92, a large number of corporate entities were involved which have been made respondents in the present proceedings. However, GIL shares held by the respondents, Mahavir Fire-bricks, Mahavir Refractories and Mahavir Business Service Private Limited, were disposed of prior to 1989. Similarly, though the acquisition of GIL shares made by Peerless General Finance and Investment Co. Limited, which is not a party to the present proceedings and acquisition by Motor and General Finance Limited (MGF), respondent No. 7 (who has not filed an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Rs. 26.33 lakhs. 24. The funds borrowed were ultimately paid from the sale proceeds of the shares which included a receipt of Rs. 65,00,000 from Peerless General Finance and Investment Co. Ltd. The shares were partly sold to Peerless in April, 1989, and partly to the Kumri group in November, 1989, and subsequently all came to be held by seven entities mentioned above. In this case also when GIL shares were held by the company, GIL directors, Shri H. S. Nageshwaran and Shri N. R. Krishnan, were inducted in the board of directors and they ceased to be directors once the shares were sold. The company has claimed that it has made a small profit of Rs. 10,000 in the purchase and sale of GIL shares. 25. From the additional information, it is evident that the payment of Rs. 50 lakhs towards the cost of the shares was made out of remittances received from Abhim Investments Pvt. Ltd. From the additional information filed by Cuckoo (respondent No. 16), it is evident that Abhim Investments Pvt. Ltd. is an associate company of the Rajan group and it is also stated to be holding 7,500 shares of GIL purchased on May 11, 1992. 26. Having dealt with the facts relating to four respondent c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation filed by the company, during the year 1988-89 when the GIL shares were acquired, the company has obtained unsecured loans to the extent of about Rs. 4.51 crores from the Premier Consolidated Capital Trust of India Ltd. It is also stated that during 1992-93, when additional 35,000 shares were acquired at a cost of about Rs. 56 lakhs unsecured loans were obtained from Mogra Investments Pvt. Ltd.--Rs. 12 lakhs, Prudential Securities and Financial Trust Pvt. Ltd.--Rs. 56 lakhs, besides Rs. 50 lakhs from Shreejee Real Properties Pvt. Ltd. As per the affidavit filed by the company (Bhavi) Shreejee Real Properties Pvt. Ltd. is a company associated with Shri N. C. Dave who is an industrialist of repute (having been the chairman of Swan Mills Ltd.) and who has also been appointed as director of GIL on January 30, 1991. From the above unsecured loans the cost of Rs. 56 lakhs has been met. The directors' report for the year ended March 31, 1990, also indicates that Shri T. N. Kumri was one of the directors of Bhavi during the year 1988-89. The additional information also indicates that as on March 31, 1992, besides loans from Prudential Securities, the company had also outstandin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as in the case of Cuckoo the advance was still outstanding. 28. After carefully perusing the averments made in the petition as well as the additional information supplied by the respondents as per our directions and further keeping in view the provisions of sections 247 and 250 of the Companies Act, 1956, the following two main issues emerge for our decision. (i) Whether there is likelihood of a change in the composition of the board of directors of the company consequent upon transfer of shares (already made, likely to be made) and if so whether imposition of restrictions is warranted. (ii) Whether it appears to the Company Law Board that the true persons who are or have been-- (a) financially interested in the success or failure of the company are different from the apparent shareholders ; (b) able to control or materially influence the policies of the company are different from the persons who are apparently in the control of the management of the company ; and if so whether it warrants a declaration for investigation under Section 247(1A), with or without restrictions as provided under Section 250(2) of the Act. 29. The arguments advanced on behalf of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hhabrias from acquiring control of GIL. Referring to the consideration amount paid for acquiring these shares, Shri Mookherjee pointed out that the acquisition of shares was made at exorbitant prices even after knowing the litigations in which the company was involved and these investments cannot be of a genuine investor who would not stake his funds in such a situation unless there is an ulterior motive. It was also submitted that companies with no resources, with meagre paid-up capital as low as Rs. 30 have claimed to have acquired shares, worth crores of rupees. Referring to the additional information submitted by the respondents, Shri Mookherjee submitted that though the sources of finance for purchase of shares were indicated, they are mostly in the nature of unsecured loans which could not have been given to the companies without any net worth, without the backing of the creditworthiness of some party ; even the interest rates compared to the market rates are unusually moderate. He pointed out that Mogra, Lakhani and Cuckoo do not have any business activity and some of the companies do not have any other investments excepting the investment in GIL shares. Thus, the set up is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iled investigation by a team of officers and which cannot be done in a proceeding before us just by calling for documents and information. 31. Shri G.L. Sanghi, senior advocate, appearing on behalf of the petitioners, submitted that the jurisdiction of the Company Law Board in this case is one of suspicion. The meagre paid-up capital, insignificant operations, the nature of the transactions, and the identical nature of the pattern of financing the acquisitions of GIL shares and common source of intercorporate loans, all go to establish clearly the interconnection between Mogra, Lakhani and Cuckoo. On going through all the information submitted by the respondents, further questions arise which could be better dealt with in a detailed investigation and hence, the Company Law Board should exercise its powers to order a detailed investigation. He also cited a decision in S. R. Nayak v. Union of India, and 5 other cases, AIR 1991 SC 1420 ; [1991] 72 Comp Cas 651 (SC), to establish that changing situations should be taken into account by an authority in arriving at conclusions. 32. Shri T. R. Andhiyarujina, senior advocate appearing on behalf of the Banares group of companies, subm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rranged till these funds were forthcoming. He further stated that Mrs. Lakhani has valuable properties worth Rs. 2 crores for the sale of which permission was given by the income-tax authorities which goes to show that she is a person of sound financial standing and could finance the acquisition of the shares. He submitted that though there are no manufacturing companies under the Lakhani group, they are the leading distributors of engineering items manufactured by leading engineering companies. He further submitted that since the order from Khaitan Agro could not be executed according to the specification prescribed by the buyer, the advance had to be refunded though the same has been used to finance temporarily the purchase of the shares. In response to our specific query whether there is any interconnection between Mogra and Beccarose Perfumes and Beauty Products Ltd. who had advanced a loan of Rs. 100 lakhs to Mogra, Shri A. K. Sen stated that there is no interconnection between the directors of these companies and the directors of Beccarose Perfumes and Beauty Products Ltd. He also stated that neither Mogra nor Lakhani had any other investments and the purpose behind the inves....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... been appealed against. The other remaining allegations about mismanagement have not been substantiated nor any arguments were advanced to support these. He offered clarification about the allegations of loan by GIL to suppliers and stated that it was only an intercorporate deposit of Rs. 15 lakhs to a supplier company, viz., Mahavir Refractories (respondent No. 4), Mahavir Refractories is a supplier of fire bricks and a substantial amount (over Rs. 10 lakhs) was due to respondents Nos. 4 and 5. As the entire supplies were not completed, an intercorporate deposit of Rs. 15 lakhs was placed for one year which was duly repaid within a year's time. As regards the allegation of disposal of immovable properties, he clarified that the company sold its land at Mysore for Rs. 2.4 crores and the same has been accounted. It has been explained that the transaction was approved by the annual general meeting in 1988 but due to the interim order of the Bombay High Court it has held it in abeyance till 1992. In 1992, after the disposal of the petition by the Bombay High Court the company made the sale after publishing a notice in newspapers. Shri Chinoy submitted that the working results of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he last change was made after the expiry of the period in which the Company Law Board order was in operation, i.e., after December 18, 1991. 37. Since, about 22 per cent. shares had passed from hand to hand escorted by the management, the complainants have an apprehension that the shares are not finally resting anywhere but are likely to be further transferred which might result in prejudicial changes in composition of the board of directors. The petitioners in para 30 of their petition have stated that "it is reliably learnt that the management is seeking to transfer the shares held by the ostensible owners detailed in paras 13 and 14 to some other persons as a result whereof there is likelihood of a change in the composition of the board of directors which would be prejudicial to public interest and detrimental and prejudicial to the interests of the company and its bona fide shareholders". What is incomprehensible is that though the petitioners have complained against the present management, they are also averse to the change in the composition of the board of directors as evidenced from the above averments. 38. We. find that apart from this expression of apprehension ther....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Act read as follows ;-- "Where a transfer of shares in a company has taken place and as a result thereof a change in the composition of the board of directors of the company is likely to take place and the Company Law Board is of the opinion that any such change would be prejudicial to the public interest, it may, by order, direct that-- (a) the voting rights in respect of those shares shall not be exer-cisable for such period not exceeding three years as may be specified in the order ; (b) no resolution passed or action taken to effect a change in the composition of the board of directors before the date of the order shall have effect unless confirmed by the Company Law Board." 40. In order to attract this provision, three conditions are required to be fulfilled : (a) transfer of shares must have taken place ; (b) because of such transfer of shares a change in the board of directors is likely to take place ; and (c) in the opinion of the Company Law Board such a change is prejudicial to the public interest. In this case, after the transfer of the impugned shares, change in the composition of the board of directors has already taken place and that too with t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any Law Board should come to the conclusion that in order to find out the true identity of these persons an investigation is necessary and make a declaration to that effect. 43. We have carefully considered the contents of the complaint, scrutinised the additional information and heard the arguments of learned counsel from both the sides. The only issue to be decided is whether the material placed before us calls for an investigation of the membership of the GIL under Section 247(1A) of the Companies Act. It is an admitted fact that all the respondents have made a categorical statement on affidavit, that the main objective of acquiring GIL shares was to resist the attempted take-over by the Chhabrias. It is also on record that when the GIL shares were held by the four respondent corporate entities, which were used as temporary "parking places", the directors of GIL were brought on the board of these corporate entities and part of the financing for the purchase of GIL shares was arranged with the help of corporate entities under the direct or indirect control of persons who are or were in the management of GIL. The complainant has also alleged that the volume of shares acquired c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hase and sale of GIL shares, the net worth of these companies and profit or loss of these companies as per the balance-sheet figures is as follows : (Rs. in lakhs) Name of the company Number of GIL shares purchased/ sold Profit/ loss on sale of shares (Rs.) Net worth as on 31-3-92 (Rs.) Profit and loss as per balance-sheet 31-3-90 31-3-91 31-3-92 1. Sri Theertha 45,954 +00.10 -06.57 " -02.60 * 2. Excalibur Consolidated 1.01,042 +06.01 +00.16 " 00.09 3. Excalibur Securities 1,84,402 -04.75 -38.39 -19.62 * -00.93 -02.02 4. Prudential Securities 1,89,751 -33.00 -86.80 -42.84 * -14.01 -28.85 For period from 1-7-1989 to 31-3-1990. "As on 31-3-1990. 45. As on March 31, 1992, Prudential Securities has Rs. 92.23 lakhs as unpaid interest and Excalibur Securities Rs. 72.95 lakhs. No clarification regarding unpaid interest on the funds borrowed for purchase of shares was given by these companies in the replies filed before us nor their advocates who were present during the hearing ut....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nducted in the board of directors and most of them are either professionals working in the company or have industrial experience and some of them were connected with GIL in some way prior to their induction in the board of directors. The managing director, Shri T. N. Subba Rao, and his family members who held 52,501 shares sold all except 700 shares to Mogra and Bhavi and Mr, Rajan who was appointed as a director on February 14, 1991, replaced Subba Rao as managing director on May 17, 1991. As on March 2, 1989, when the earlier proceedings before the Company Law Board under Section 247/250 were initiated, the board of directors consisted of eight directors out of which five are still directors but now the number of directors has gone up to 12. The dates of induction of new directors indicate that out of three directors Shri S. Dayal, Nageshwaran and Krishnan inducted on June 7, 1989, only Dayal still continues and Nageshwaran and Krishnan who were directors on "interloper" companies used for temporary parking of shares are no longer on the GIL board. Dave, Gupta, Rajan and Ashok Kumar were inducted in January/February, 1991, much before Lakhani, Cuckoo, Mogra acquired substantial s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions in a complaint are not sufficient to appoint an inspector to investigate the affairs of a company. The material placed before the Company Law Board should be such as to satisfy the Company Law Board that a deeper probe into the company's affairs is desirable to establish the identity of true persons which is also desirable in the interests of the company itself. In this connection we have also to consider the main focus of the complaint. The reliefs sought in the complaint are two fold, namely, investigation under Section 247 and orders under Sections 250(2) and 250(3) of the Companies Act, 1956. Orders under Section 250(2) as contemplated under that sub-section are of interim nature. The only relief which is substantive in nature is to restrain under Section 250(3), the change in the composition of the board of directors by reason of the impugned shareholding. 48. We have already concluded that no case has been made out for relief under Section 250(3) or (4) as prayed for in the complaint and, therefore, the complaint in the proceedings under Section 250 stands dismissed. If no case is made out under Section 250(3) and (4) and that proceeding is closed, can we still or....