TaxTMI 
TaxTMI 
1997 (9) TMI 631
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....o. 3, Rani Yogeshwan Kumari, respondent No. 4. Shri Vikramaditya Singh, respondent 5, and A. Subramanian, financial controller of the company respondent No. 6. During the pendency of the proceedings, it was intimated that A. Subramanian had died and as such his name was deleted from the array of respondents. It should be noted that the petitioner is the elder brother of respondent No. 2 and respondent No. 4 and family disputes had started even before the demise of their father, viz., Maharana Bhagawat Singh, on November 3, 1984. 2. The company was incorporated on March 2, 1963, as a private company and has now become a public company under Section 43A(1A) of the Act. The paid-up capital of the company as per the petition consists of 3,140 equity shares of Rs. 1,000 each which were held as follows : Maharana Bhagwat Singh on behalf of HUF 2,288 shares ; Maharana Mahendra Singh (petitioner) 426 shares ; Shri Amar Singh 426 shares ; Total 3,140 shares. 3. As per the respondent-company, the total capital includes further 1,284 shares issued as rights shares. 4. The various allegations contained in the petition can be classified into the following ....
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....his property to East India Hotels Company Ltd., and in the alternative if the lease is already entered into then to restrain from acting on the same. (8) To declare as having no effect, all documents regarding the transfer of upper portion of Shivnivas Palace. (9) Ordering refund of Rs. 55 lakhs taken by respondent No. 3 through a prejudicial agreement with the company and to declare that such act was without authority. (10) Appointing a special auditor to audit the books of account of the company for the past years. (11) To pass such orders to bring to an end the matters complained of. 6. The matter was heard on a number of days when counsel for the petitioners, Shri Ganguly argued on the various allegations made in the petition and also pressed for the reliefs sought for. Shri Mukherjee, senior advocate for the respondents, while questioning the maintainability of the petition on various grounds also completed his arguments refuting the various allegations and also argued against granting any of the reliefs. When the turn of the petitioner's counsel to reply came, there was a change of counsel and Shri Ganesh, advocate, appeared for the ....
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....e register and investigation into the shareholding has not been pressed by the petitioner the prayers in this application became infructuous. Another application, namely, C. A. No. 131 of 1994, came to be filed on behalf of respondent No. 1 alleging that the power of attorney holder on behalf of the petitioner is guilty of forgery and fabrication of false evidence and making false statements on oath. The applicants, therefore, prayed for either initiating criminal proceedings or granting liberty to the applicants to initiate appropriate criminal proceedings. No reply is available on record in respect of this application. In any case the respondents are not fettered by us in any way from initiating any appropriate criminal proceedings if advised for which our permission is not essential. Hence, this application does not require any consideration by us. Yet another application namely C. A. No. 76 of 1995 came to be filed on behalf of the petitioners seeking a restraint on the respondent-company from passing certain resolutions to regularise certain investments made by the company prior to its becoming a public company under Section 43A(1A) in Shikarbadi Hotels (P.) Ltd. According to ....
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....epair and maintenance for 1991-92, are very high. Hence, an investigation was sought. 14. As regards the second allegation it is stated that the company entered into an agreement dated September 30, 1983, based on the board resolution of June 25, 1983, and September 30, 1983, with the other company. This agreement between the company and the other company, namely, Lake Shore Palace Hotel (P.) Ltd., inter alia, provided that certain facilities would be created in the other hotel and the income thereof would be shared equally by the company and the said other company. The petitioner could come to know of this agreement and relevant resolutions only on an inspection on an order granted by the Rajasthan High Court in the company petition. According to the petition, the various clauses of the agreement show that a sum of Rs. 55 lakhs was to be advanced interest free to the other company, for a period of 30 years. In fact, the money was spent to facilitate, help, and improve the activities of a competitor to the prejudice of the company. According to the agreement, the repayment of this sum of Rs. 55 lakhs was to be made at the rate of Rs. 2 lakhs per year for the first 25 years and a....
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....f the same standard, (ii) It is further reiterated that no bogus or personal expenses had been debited in the company's account and the allegation is vague and without details. As regards repairs and maintenance it includes expenses on all buildings, plant and machinery, furniture, fixtures, office equipment, etc. The expenses under this head not only include repairs of Lake Palace Hotel but also other hotels belonging to the company like Fateh Prakash, to make it into a deluxe hotel as it was in the custody of a receiver from 1984-88, Garden Hotel Restaurant which was put into operation after renovation, repairs of Jagmandir, a property which was not repaired for the past fifteen years. In addition, expenses were also incurred on Aodhi Hotel to make it a hotel of standard. As regards law and professional charges, communication and miscellaneous expenses, according to the reply there is absolutely no exaggeration. The petitioner himself is responsible for expenses under this head consequent to the litigation initiated by him in collusion with the Taj group. It is further stated that since the petitioner has not spelt out as to how these expenses are unreasonable, he cannot seek....
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.... but there was no space to provide the above facilities and acquiring the facilities outside the island would have involved a very heavy investment and inconvenience. During this period, since respondent No. 3 was developing a five star deluxe hotel across the lake, it was considered worthwhile and expedient to arrive at an arrangement for sharing some of the facilities. It was in this context that the agreement was entered into so that the hotel can be saved from being degraded. Subsequently, as respondent No. 3 was not able to provide all the required facilities and the company did not get sufficient returns, the agreement was mutually altered so that a repayment of Rs. 2 lakhs every year could be obtained and the payment of charges amounting to Rs. 2 lakhs annually to be paid by respondent No. 1-company for sharing the facilities was waived. Accordingly, since 1984-85, repayment was being made at Rs. 2 lakhs per annum and the company was also getting half share of income accruing to the other company by use of some of the facilities created by the agreement. Further, in October 1993, it was decided to terminate the agreement and notice was given to respondent No. 3 accordingly a....
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....onciling the two sets of figures, i.e., expenses incurred in running of Lake Palace Hotel with the expenses as reflected in the profit and loss account. With regard to the expenses on repairs and maintenance, it was explained that subsequent to the expenses reflected in the operation of Lake Palace Hotel, further expenses of Lake Palace Hotel included in other heads were regrouped and adjusted by the auditors. In addition in the final profit and loss account expenses incurred on Garden Hotel, Jagmandir, Aodhi Hotel, Fateh Prakash and Haridasji Ki Magri were also included. The details of such adjustments were also shown in the statements attached with the affidavit. According to Shri Mukherjee, the petitioner had access to the figure of expenses booked in the operation of Lake Palace Hotel as maintained by the Taj group which was operating the hotel but he has not gone into the further adjustment as approved by the auditors of the company. 24. The figures as submitted by the respondent-company through the affidavit and as explained by Shri Mukherjee were further challenged by Shri Ganesh, by pointing out, that these adjustments have not been reflected anywhere in the books and ar....
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....stments in other companies in which the respondents group are interested to the extent of Rs. 75 lakhs which is detrimental and prejudicial to the interest of respondent No. 1-company and its shareholders. This matter was raised on receipt of a notice for an EOGM for approval of the investment made by the company in Shikarbadi Hotels (P.) Ltd. On receipt of the notice, the petitioner examined the balance-sheets for the years 1991, 1992 and 1993, and came to know, that, during the year 1991, investment of Rs. 75 lakhs in five companies had been made as follows : (Rs.) (1) Application money for 1,500 equity shares for Shikarbadi Hotel (P.) Ltd. 15,00,000 (2) Application money for 14 per cent redeemable/ cumulative preference shares in Mumal Finance Co. (P.) Ltd. 25,00,000 (3) Application money for 14 per cent redeemable, cumulative preference shares in Genda Finance and Trading (P.) Ltd. 10,00,000 (4) Application money for 14 per cent redeemable, cumulative preference shares of Sumal Finance and Investment (P.) Ltd. &....
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....tely as it was not a legal requirement. 30. We have carefully considered the allegations of the petitioner in the pleadings and oral submissions as well as the written reply and oral arguments on behalf of the respondents. In view of the petitioner not pressing the other allegations and consequent reliefs, our findings are confined to the allegations regarding low profitability, inflation of expenses by manipulation and misappropriation, unfairly prejudicial agreement with respondent No. 3 and imprudent investments in unprofitable companies in which respondent No. 2 was stated to be interested. In view of these allegations the prayer of the petitioner is to order a detailed investigation and special audit. 31. Before going to the merits, we shall consider the question of maintainability as raised by the respondents. It is an admitted fact that the petitioner is a member of the respondent-company and left to himself is entitled to file a petition. The case of the respondent-company is that the petitioner whose shareholding is less than 10 per cent has raised in the present petition more or less identical issues which were raised before the Rajasthan High Court in a Section 397....
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....party is at the back of the entire proceedings, legally this cannot be a ground to challenge the maintainability though the Bench may on being satisfied that this is a misuse of the forum dismiss the petition for such reason. On the other hand, a petition cannot be maintained with only an interested party in the front with the member silently at the back. In the present case, since ultimately the grounds are confined to matters similar to proceedings as in investigations through prayer for special audit, we considered it appropriate to deal with the petition on these issues as it concerns the interest of the shareholders at large of a company. Thus, we do not uphold the challenge to maintainability on any of the grounds. 33. Now, coming to the merits of the case, as regards low profitability, the limited allegation is that the profitability of the respondent-company's hotel is not comparable with that of other hotel companies. In this connection the petitioner has not provided any relevant figures of profitability of other hotel companies or explained as to how the performance is poor. This allegation is, therefore, vague and imprecise. We have also noted that the respondent....
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....break up of expenses and the regrouping of the figures but also explained on a year to year basis as to why certain increases in expenses have occurred. While such elaborate explanations were provided by the respondents the petitioners allegations have remained vague and not satisfactorily substantiated. In fact, as regards repair expenses there was even an admission in the rejoinder, that the petitioner was not aware that the company is operating the Fateh Prakash and Garden Hotels. From the pleadings, it is also evident that the petitioner has never called for the details which he could have done even as a member in the annual general meeting. We also note that subsequent to the expenses incurred on the other hotels, the revenue from these hotels shows an upward trend, thus signifying, to an extent, the justifiability of these expenses incurred on these hotels. 36. Apart from the above, the expenses of the company have all been duly audited and certified by professional chartered accountants. Even the regrouping of the expenses have now been certified by the auditors. Instances, if any, of inflation of expenses by mixing up personal expenses with company expenses are specifica....
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....case, the company appears to have obtained the approval of the board of directors at a meeting for which due notice was stated to have been served on the petitioner, he being a director of the company at that time. Though, normally, such intercorporate loans of private companies are not critically looked into, when such transaction is being questioned in a petition under Section 397/398, it is necessary to consider whether any prejudice is caused to the company or members concerned. Though the board of directors is the best judge in taking commercial decisions in a company, any transaction in which mala fides are alleged in a proceeding under Section 397/398, the details of such transaction have to be looked into. From the details, if it is found that if any undue benefit accrues to any one at the expense of the company, the matter has to be tested strictly on the merits. In the present case, the petitioner is a shareholder in respondent No. 1-company. Respondent No. 3-company is a private company in which the petitioner has no interest but the managing director and two other directors have interest. If a transaction of interest free loan though approved by the board of directors i....
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....party could be made without his consent. In this connection it is necessary to point out that respondent No. 3 is not totally an outsider. It is a company in which respondent No. 2 has substantial interest. The agreement has had a continuing adverse effect on the company due to interest liability on the amount of Rs. 55 lakhs. Besides, respondent No. 3 has been a party to these proceedings. Even though the agreement was terminated in 1993, the full amount was liquidated only during the pendency of the proceedings before us. In view of these facts, we do not consider that objections of counsel in this regard are well founded. 39. The loan transaction as referred to above is reflected clearly in the books of account and also commented upon by the auditors of the company. The petition has not also alleged further transaction beyond this single transaction. After giving our ruling on this transaction, there is nothing further to be done on this matter as a special audit. 40. Through a subsequent application, the petitioner has also alleged, that, certain intercorporate investments have been made in companies in which respondent No. 2 was interested which are prejudicial to the in....