TMI Blog1997 (3) TMI 630X X X X Extracts X X X X X X X X Extracts X X X X ..... apital of the respondent-company and the private co-promoters contributed the balance 50 per cent. In addition, the petitioner-corporation also provided a bridge loan of ₹ 10 lakhs. As per the joint venture agreement, the petitioner-corporation had the right to appoint its nominee director as the chairman and Ramarhandra Rao was designated as managing director. The company was under the direct management and supervision of Ramachandra Rao as its managing director till he was removed by the majority decision of the shareholders at an extraordinary general meeting in 1992. 3. It is the contention of the petitioner, that, till 1988, the unit was making good progress and there were no cash losses. In the year 1989, there was glaring and prominently noticeable mismanagement by Ramachandra Rao. Therefore, the board of directors decided to conduct a management audit to examine the correctness of the heavy losses, reported for the first time in the history of the company. The management audit brought out the following irregularities : (i) No production registers of the company were maintained from April to August, 1990, with the result the discrepancy if any between physical ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave any policy on sales like calling for tenders or getting quotations for selling or fixing the sales prices. The sales were made at the discretion of the managing director and there was no counter check on the selling prices. Moreover, the entire sales were made for cash and the prices ranged widely from ₹ 900 per MT onwards. In addition, there were discrepancies in the quantitative figures of stock as they had not been agreed/tallied between production records and sales invoices/sales register. Whereas the production records showed the production during the year as 1660.971 MT, on a comparison of closing and stocks with the sales invoices and opening stocks a production of 1,715,811 MT emerged. A discrepancy of 54.840 MT in production is unexplained. (xi) During the year, the company paid conveyance charges of ₹ 54,750 to the managing director for using his car for which no approval was taken from the board. In addition, the company paid the die-sel charges on the car for the entire period. (xii) It is further stated in the petition that though the managing director has given explanation on the points raised in the management audit report, the board was not sat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as shown in the annual accounts, the same was revised to a profit of ₹ 12.26 lakhs. However, in the revised management audit report, as against ₹ 12.26 lakhs profit arrived at as per the first management audit report, the same auditor, after considering the explanation given by respondent No. 2, computed the loss at ₹ 2.93 lakhs. Even for this figure, respondent No. 2 had advanced his reservation. The petitioner had completely suppressed the second management audit report and as a matter of fact the annual accounts for 1989-90 had been unanimously approved taking into consideration the second management audit report. Therefore, having adopted this report unanimously in the board in which the representative of the petitioner was also present, they cannot raise any allegation in the petition now, especially when even the general body had approved the annual accounts. The reason for the company going into the red in the year 1989-90 was on account of shortage of raw materials resulting in lower capacity utilisation. Even after taking over the company after resignation of respondent No. 2 and the voluntary resignation of respondents Nos. 3 and 4, the petitioner has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm an allegation for investigation. (iv) As far as other allegations like shortage of oil excess of stock and loss in contract for supply of oil are concerned, the respondent has stated that since these allegations have arisen out of the first management audit report, and as these issues have been dropped by the auditor himself, in his second report the respondent has nothing to offer as explanation. (v) The loss of ₹ 47 lakhs incurred during the year 1990-91 was due to factors beyond the control of the company like shortage of raw material and acute shortage of power in Andhra during this year and is not on account of any mismanagement on the part of respondent No. 2 and as a matter of fact these issues were discussed in the meeting of the board of directors as well as the general body meeting before the accounts for the year were adopted. (vi) As regards the allegation relating to the report of State Bank of India, it has already filed a civil suit O. S. No. 105 of 1993 and the trial is yet to commence. 8. To sum up, the respondent has submitted that under the chairmanship of the petitioner-corporation, accounts for 1990-91 had been approved and it has not made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. Citing a similar issue that arose in Professional Grade Components Limited, In re [1995] 5 CLJ 514 (CLB) in which the Company Law Board held that adverse comment by the auditor in a special audit report involving irregularities during the tenure of a person as managing director does not call for an order of investigation. He also relied on Delhi Flour Mills Co. Ltd., In re : S.L. Verma v. Delhi Flour Mills Co. Ltd. [1975] 45 Comp Cas 33 (Delhi) in which the Delhi High Court held that unless there is material to show that the fall in profits was due to mismanagement and that there was something which was not apparently visible to the naked eye, an order of investigation cannot be made. In the present case, Raju argued to state that the report of the management auditor is available with the company and the petitioner-corporation being in charge of the company, could initiate whatever action it wants to, against respondent No. 2 even without any investigation. 12. We have considered the pleadings and arguments of counsel. The company was incorporated in the year 1982 and as per the own version of the petitioner, respondent No. 2 was the managing director right from the beginnin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for him to disclose his interest as per Sections 299(iii) and 302 of the Companies Act. 13. Admittedly, the present management of the company is controlled by the petitioner-corporation. They have also conducted a management audit and the areas of the alleged financial impropriety have already been made available by the management auditor. Respondent No. 2 has categorically stated in his reply that the year 1990-91 had been a bad year due to nonavailability of raw material as well as power shortage in the State of Andhra Pradesh. The petitioner-corporation should have commented on these explanations inasmuch as in its own admission, the petitioner-corporation has stated that the company had been doing well in earlier years and had also built up sufficient reserves. A comparative statement of the performance of similarly placed companies during the relevant period vis-a-vis the respondent-company would have enabled us to form a prima facie opinion as to whether there has been mismanagement in the company which would call for a thorough investigation. Unfortunately, no such information has been made available to us, to enable us to form an opinion that the company has incurred hu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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