TMI Blog2000 (5) TMI 1018X X X X Extracts X X X X X X X X Extracts X X X X ..... out certain financial mismanagement in the affairs of the Shaw Wallace Co. Ltd. 3. The petition under section 397/398 and the Central Government s petition under section 408 of the Act were heard together by the CLB and disposed of by an order dated 27-7-1998 which has been impugned in the present appeals. 4. By its impugned order the CLB directed the Board of Shaw Wallace Co. Ltd. (SWC) to be frozen to 9 (nine) members with 4 (four) Directors nominated by the CLB; two on the petition filed under section 397/398 and the other two on the petition filed under section 408 . Certain other directions regarding investigation to be made by the Board of SWC itself into the charges of mismanagement were also given. 5. Four (4) sets of appeals were filed on behalf of the SWC and Manohar Rajaram Chhabaria (MRC) assailing the impugned order. SWC filed two appeals, one against the order of CLB under section 408 petition and the other appeal against the petition under section 397/398. Likewise MRC filed two appeals. 6. Also, the Employees Federation filed an appeal against the said order of CLB (APOT No. 770 of 1998) in relation to the petition filed by them under section 39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c Limited etc. by which company had incurred huge losses. Further, the distribution charges for the products of the company was increased manifold and this way funds were diverted through the medium of distributors for the personal benefit of the promoters. A sum of ₹ 10 crores was paid to Golden Tobacco Limited (GTC) for purported advertisement of company s products while no such advertisement was actually done. The company also manipulated the accounts in relation to a transaction of purchase and sale of certain software, from Dunlop India Limited at a price of ₹ 30 crores and reported as if the same software had been sold to Jumbo Global Limited, a company belonging to MRC for ₹ 47 crores. Actually, neither the purchase price was paid nor the sale price was realised. The company has purchased jewellery worth ₹ 50 lacs and booked the same in the name of other Chhabaria Companies. In the year 1993, the company announced a strategic plan known as Vision 2000 and a lot of expenditure was incurred to give a wide publicity for the same. To implement this plan, even though proposals were initiated for issue of GDR and public/right issues, nothing came out a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock Exchange. There have been press reports that this money has been siphoned by MRC through hawala route . This investment was done without the knowledge/permission of the Board. It is also seen that some of these companies were shown to have ceased to be subsidiaries. Another bad investment made by the company is a Charminar Breweries in Andhra Pradesh wherein prohibition was going to be introduced. The investment in this company is of the order of ₹ 14 crores. Over 400 executives have been sent out of service in the year 1995 since they were not towing the line of MRC in his nefarious activities of siphoning of funds. A large amount of money is being spent on MRC out of the company funds. The company had advanced money to another company namely, Jumbo (Res. 50) for purchase of the shares of the company, thus violating the provisions of section 77 of the Act. To avoid detection, MRC has arranged to transfer the shares from the name of Res. No. 50 to Res. No. 51. It is also averred in the petition that ever since MRC came into the picture by acquiring a large percentage of shares in the company, the company is being systematically freezed, bringing the company to a posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... violations of the provisions of sections 211(2), 209(2), 143 and 303 of the Companies Act; the loans raised by the company stood at ₹ 353.62 crores as on 30-6-1995 and the company has given loans and advances to the tune of ₹ 280.51 crores The amounts shown above are exponentially higher than what was in the previous many years. Therefore, it is alleged in the petition that the practice of borrowings of short-term funds and lending the same for long-term is against the principles of prudent financial management; the interest burden has gone up by 859 per cent in the last three years and it has had the effect of crippling the company; even the stand of the company that funds were given to subsidiaries for acquiring shares in other companies does not stand to scrutiny, inasmuch as, against ₹ 124.63 crores lent to the subsidiaries during 1994-95, the subsidiaries purchased shares in other companies only to the extent of ₹ 20 crores; the turnovers of the new subsidiaries for the years 1993-94 and 1994-95 are not commensurate with the investments made to acquire the new subsidiaries, the company is in the practice of having profitable subsidiary companies like Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany as also in the residential premises of Directors. Summing up these allegations, the Central Government has averred that there has been continuous gross financial mismanagement against sound business principles resulting in the affairs of the company being conducted in a manner oppressive to the shareholders and prejudicial to the interest of the company and public interest. Accordingly, it has sought for appointment of 8 Government Directors for a period of three years to safeguard the interest of the respondent-company, shareholders and the public interest. 12. We should first dispose of the question as to the maintainability of the appeal being APOT No. 770 of 1998 preferred by the Employees Federation. 13. It has been contended by Mr. Mukherjee, the learned senior counsel on behalf of the SWC, that the appeal filed under section 10F without a true copy/ certified copy of the order appealed against, is not maintainable. In other words, it is contended, that in case of non-compliance with the provisions of Order 41, Rule 1 of the Code of Civil Procedure, 1908, a mandatory provision, the appeal is not maintainable. The Court, it was further contended, has no power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all appeals under section 10F of the Act. Rule 6 of the Companies (Court) Rules, makes the procedural provision of the Code of Civil Procedure applicable to the appeal filed under section 10F of the Act. It is thus clear that only procedural and not the substantive provisions of the Code of Civil Procedure alone would apply. For the said reasons, the High Court Rules of the original side of this High Court will have no application to an appeal under section 10F. 18. Order 41, Rule 1 of the Code of Civil Procedure is a procedural provision and would, therefore, apply to all appeals under section 10F of the Act. Under the said rule, every appeal has to be preferred in the form of memorandum signed by the appellant or his pleader and has to be accompanied by a copy of the decree appealed form and of the judgment on which it is founded. Rule 1 empowers the Appellate Court to dispense with the filing of the judgment but there is no jurisdiction in the Appellate Court to dispense with the filing of the decree. In Jagat Dhish Bhargava v. Jawahar Lal Bhargava AIR 1961 SC 832, it was held in law the appeal is not so much against the judgment as against the decree; that is why arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of limitation arises, the same would also require to be adjudicated upon. In the instant case, no decree has accompanied the filing of the memorandum. Though the memorandum of appeal has been preferred within the statutory period of limitation prescribed for filing an appeal, there does not appear to be any practice in the CLB with regard to drawing up of a decree. It was accompanied by a xerox copy of the order appealed against. It is not in dispute that the xerox copy of the order has been made from the true copy of the order of CLB which was made available to it by the CLB. When the objection was taken as to the competency of the appeal, the original true copy of the order was tendered in Court at the time of hearing of the appeal on 9-2-2000. 21. Apart from rule 6 of the Companies (Court) Rules also in terms of clause 37 of the Letters Patent of this Court the procedures laid down under the Code of Civil Procedure would apply. Order 41, Rule 1 of the Code of Civil Procedure mandates that a memorandum of appeal should be accompanied by a judgment and decree. There is no provision for drawing up of a decree by the CLB. In such a situation, under the provisions of the Code of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33 would apply. 25. In Superintending Engineer v. B.Subba Reddy AIR 1999 SC 1747, it has been held : 24 From the examination of these judgments and the provisions of section 41 of the Act, and order 41, rule 22 of the Code, in our view, the following principles emerge : ( 1 ) Appeal is a substantive right. It is a creation of the statute. Right to appeal does not exist unless it is specifically conferred. ( 2 ) Cross-objection is like an appeal. It has all the trappings of an appeal. It is filed in the form of memorandum and the provisions of Rule 1 of order 41 of the Code, so far as these relate to the form and contents of the memorandum of appeal apply to cross-objection as well. ( 3 ) Court-fee is payable on cross-objection like that on the memorandum of appeal. Provisions relating to appeals by an indigent person also apply to cross-objection. ( 4 ) Even where the appeal is withdrawn or is dismissed for default, cross-objection may nevertheless be heard and determined. ( 5 ) The respondent even though he has not appealed may support the decree on any other ground but if he wants to modify it, he has to file cross-objection to the decree which object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to contend that the finding of the High Court in regard to the absence of reasonable and probable cause or malice-(upon which the decree for pecuniary damages in B and C Schedules was based) can be attacked by the respondents for the purpose of sustaining the decree of the High Court refusing to pass a decree for non-pecuniary damages as per A Schedule. The filing of cross-objections against the adverse finding was not obligatory. There is no res judicata . Point 1 is decided accordingly in favour of the respondent-defendants. (p. 3575) 28. In the appeals being A.C.O. No. 87 of 1998- Shaw Wallace Co. Ltd. v. Union of India and A.C.O. No. 86 of 1998 Manohar Rajaram Chhabaria v. Union of India, the following questions arise for consideration : ( i )Whether past and concluded transactions can form the basis of proceedings under section 408 of the Act ; ( ii )Can proceedings under section 408 of the Act proceed along with a petition under sections 397 and 398 of the Act, particularly when the proceedings under section 408 of the Act was instituted subsequent to the proceedings under sections 397 and 398 of the Act and was instigated by the petitioners therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rders passed by the CLB under section 408. As noticed (supra), by the orders under appeal, the CLB gave directions for appointment of two Directors by the Central Government in the company in question. 31. In Paragraph 5 of the order under appeal, the CLB has set out the summary of grounds on which the Central Government had sought for appointment of Government Directors (extracted supra ). 32. As the CLB is the final fact-finding authority, the conclusions arrived at have to be given due weight and unless the same are held to be perverse, no interference with the same is warranted. It would, therefore, be convenient to first record the conclusions arrived at by the CLB with respect to the various charges levelled against the company in its petition filed by the Central Government : ( i ) Sales promotion expenses :- The allegation of the Central Government was that sales promotion expenses increased from 4.7 crores in 1989-90 to ₹ 21.08 crores in 1993-94; remuneration paid to sales promoters went up from ₹ 23 lakhs to ₹ 11 lakhs (sic) during the corresponding period. It was observed that from the report of Inspector appointed under section 209A, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of interest on loans given to subsidiaries which are not wholly owned or if the company has waived interest in respect of these companies, SWC should take immediate remedial action to ensure that adequate rate of interest is charged and interest waived is recovered. 33. We have only referred to those charges and the findings supra of the CLB which have gone, in our view, against the company and its management. We did not consider it necessary to refer to the various other charges levelled by the Central Government in its petition as no appeal has been preferred by the Central Government itself. Some of the charges being common, the other charges shall be considered while dealing with the other appeals. 34. In giving the directions, the CLB has observed and in our view rightly so that the underlying purpose of section 408 is to safeguard the interest of the company or its shareholders or the public interest by appointment of the Government Directors with a view to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interest of the company or public interest. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of turnover of Directors is highly undesirable. 38. Further disturbing fact noticed by the CLB was with respect to the disqualification made by the auditors in the last two annual reports. The CLB held as under : . . .According to the auditors, many of the assets were not ascertainable nor the liabilities and the perusal of the qualifications show that such unascertainable amounts run into crores of rupees. May be as suggested by Shri Ganesh, due to the largeness and the complexities of the business of the company, collation and collection has become difficult, but in times of communication revolution, we cannot accept this excuse. The company has also indulged in manipulating the accounts to show artificial profits through fictitious transactions. Further, from the periodical reports on statutory compliance, copies of which were filed during the hearing, we find that in this area also a lot is to be done. 39. The CLB has further held as follows : . . .The company has also proposed certain measures of raising finance. All these attempts to be successful, which would put the company back on rails without any impediment, it is essential that the creditors, lenders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed of such funds immediately. ( vii )Large scale payments on account of alleged sales promotion expenses, the same being a decoy for diversion of funds to MRC. ( viii )Purchase of useless software from Dunlop at an inflated price and subsequent booking of profits by showing sale thereof without consideration being actually received. ( ix )Illegal payments and/or commissions to ostensible third parties. ( x )Investment in Guwahati companies made and large scale loans obtained by company without reference to the Board of Directors. ( xi )Admitted failure to comply with mandatory statutory requirements. ( xii )Defrauding the Revenue by failing to pay statutory dues. ( xiii )Fraudulent conduct by company in failure to repay its creditors and even small individual depositors. ( xiv )Useless expenditure incurred including buying of ladies jewellery. 43. With regard to the Guwahati companies, the CLB examined the questions and rejected the contention that these companies are paper companies or they are not in existence. However, on the issues whether any investment was actually made and whether the same was a smokescreen designed to siphon off money, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time, i.e., after the financial year was over, the conclusion arrived at by the CLB, was that the entire transaction was purely for the purpose of showing a glossy picture about the performance of Dunlop and SWC; the CLB held it to be the grave act of manipulating the accounts of the company to show artificial profits. ( iv ) MDPL Sales. -The company (SWC) agreed for G.T.C. advertising the brands of SWC at the rate of Re. 1 per pack on which stickers highlighting the brands of SWC would be fixed. G.T.C. obtained the money from the company (SWC) without having advertised the products of the company. The CLB concluded that the internal control system and supervisory system in the company are not at a desirable level. 44. Mr. Banerjee, the learned counsel for the respondents, however, contended that the CLB was required to give its conclusions on the material available on record. It was the submissions of Mr. Banerjee that in holding that the CLB cannot go into the allegation of mismanagement when other authorities have started investigations into the matter should that the CLB failed to exercise the jurisdiction vested in it by law. 45. In view of observations of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l on record. 51. Therefore, in the instant case, it cannot also be said that the CLB had appointed the Directors without satisfying the condition precedent laid down in the Act or that the power exercised by it was in excess of its jurisdiction. 52. In the matter under sections 397-398, the substantive relief claimed was for supersession of Board, removal of M.R. Chhabaria from the Board and for ordering an investigation into the affairs of the company. The allegations on which the application is founded was in respect of alleged acts of mismanagement. The CLB, rightly in our view, considered the same as one under section 398, and, therefore, restricted its enquiry to the extent of the provisions contained in section 398. Under that section, the grievance to be made out is that the affairs of the company, subject-matter of enquiry, are being conducted in a manner prejudicial to the public interest or in a manner prejudicial to the interest of the company. If the CLB arrived at such conclusion, then it can take recourse to the provisions of section 402 to mould the relief. The jurisdiction and powers under section 402 are twofold. Firstly, the CLB has the power to set righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irections issued by the CLB are preventive in nature. The CLB observed that the effect of whatever happened earlier continued and was likely to continue, the same would be against the interest of the company. As noticed supra , the object of sections 398 and 408 is to safeguard the company, the directions issued were remedial measures. The CLB did not base its conclusions in issuing such directions on the data based on events of mismanagement or failure of business decision or imprudent acts. The CLB merely took note of the fact that the company s affairs are being conducted in a manner prejudicial to the interest of the company. The findings arrived at by the CLB cannot be characterised as perverse or based on no material. The conditions precedent for taking action must show that the affairs are being conducted in a manner which is either oppressive or prejudicial to the company or public interest. The condition precedent for exercising the power is satisfied in the instant case. 56. In South India Viscose Ltd. v. Union of India [1982] 52 Comp. Cas. 247 (Delhi), the CLB in that case assumed that if there was some contravention of some provisions of the Act, it was suffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Bench of this Court in Mohta Bros. (P.) Ltd. v. Calcutta Landing Shipping Co. Ltd. [1970] 40 Comp. Cas. 119 held that when an uncertain allegations of oppression or mismanagement do not entitle a petitioner to ask the Court to embark upon an investigation into the affairs of the company in the hope that in consequences of such investigation something will turn up which will enable the Court to grant relief to the petitioner. The inability on the part of the shareholders who have no access to the books of company to furnish full particulars is not a ground for directing an investigation into the affairs of the company or for giving any other relief. Such is not found in the instant case. The CLB rejected the prayer for investigation but granted relief under sections 402 and 408 based upon the conclusions arrived at by it and referred to supra. 60. The case in point is Shakti Trading Co. (P.) Ltd. v. Union of India [1985] 57 Comp. Cas. 789 (Delhi), wherein it was held as follows : . . . The powers of the Central Government under sections 408 and 409 are preventive in nature. The powers are exercised in order to see that in future the affairs of the company are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiaries. The board of directors were not even aware of the huge debt accumulated by the company. The acts of commission and omission, it was noticed, have been going on in the matter of financial management of the company, and the effect of the same was all pervasive. The very existence of the company, it was noticed, is under threat due to a large number of winding up petitions. We concur with the view of CLB that it was a fit case where intervention of the CLB was warranted to safeguard the interest of a company as well as the interest of the members of the company and also the public interest. It is in those circumstances that certain directions had been issued also to the restructured Board to investigate into matters and to set right the same. We, therefore, also for this reason reject the arguments advanced by Mr. Banerjee, the learned counsel for the employees-respondents, that the CLB was not justified in entrusting to the Board certain functions to investigate which it should have itself either investigated or superseded the Board in its entirety. 62. It was next contended that the proceedings under section 408 and the proceedings under section 397/398 could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the proceedings under sections 397 and 398 had been filed with improper motive or that the same had been financed by competitors. There is no material on record to substantiate the said contentions. The only record relied upon by the learned counsel and reference to which has been made is to certain bills of lawyers during stay at Delhi. From the same, it cannot be inferred that the lawyers had been financed by the competitors when it has been explained that on those dates the lawyers had attended to various other matters of other clients pending before the Delhi High Court. 67. Lastly, it was sought to be urged by Mr. Sen, the learned senior counsel for the appellants, that the contesting respondents are an insignificant minority in the shareholding of SWC. In proceedings under section 397/398, it was contended, these are best settled by directing the minority group to sell its shareholding. It was urged that the direction issued by the CLB in the matter under section 397/398 was erroneous besides being untenable. If at all, the only direction that could have been issued by the CLB was to direct the minority shareholders to sell their shares and for the majority sharehol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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