TMI Blog1996 (10) TMI 514X X X X Extracts X X X X X X X X Extracts X X X X ..... 7(b) ; and (c) the company being a public company and the interests of a large number of shareholders and employees involved besides the creditors and as such, if justifiable ground exists we should not shy away from exercising our jurisdiction under this section for technical reasons. The Department of Company Affairs was asked by us as to why the Department on its own should not have appointed inspectors to investi gate the affairs of the company in exercise of the powers under section 235(1) of the Act. The Department has stated in its reply that this could be invoked by them only on the basis of a report by the ROC under section 234(6) and since such a report is not available they are not able to exercise their powers under section 235(1) of the Act. Consequently, the Department insisted on our considering the matter under section 237(b) of the Act. Though a Report from ROC under section 234(6) is just a formality in this case and since ROC is a part of the Department of Company Affairs and based on the elaborate details available on detailed inspection by the Regional Director, a formal report could have been obtained and the powers invoked, as the department was reluctant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of power Cables Div. decreased sharply in 199192 and 199293 and the decrease was on account of shortage of raw material. The company could not also execute an order in 199293 from SOVKABLE, Moscow. (vi)A sum of ₹ 77.32 lakhs was spent on construction of a temple at Jamshedpur. (vii)The quantity of raw material per tonne of cable manufactured was highest in 199091 as compared to the previous year for which no plausible explanation was forthcoming. (viii)On account of shortage of working capital, the production of Jellyfilled cable, the company lost an Iranian Order worth about ₹ 20 crores. (ix)The company made advance to Dytron India Ltd. amounting to ₹ 875.80 lakhs, no attempt was made to realise the amount from the said company and it ultimately went into winding up. (x)The company has given loans to the following parties: (1)Esjay Commercial Ltd. (2)B.D. Khaitan Co. (3)R.K.B.K. Holdings (P.) Ltd. (4)Geo Miller and Co. (P.) Ltd. (5)Usha International (6)Panagarh Engg. Works (P.) Ltd. (7)Avantika Commercial Co. Ltd. (8)Sudershan Commercial Ltd. (9)Deep Commercial Ltd. but neither the principal loan nor the amount of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve got the benefit of a reply from the company after the new management has taken over with an affidavit signed by the Wholetime Director appointed by the Financial Institutions with regard to the various points raised in the showcause notice. The reply from the company based on the records currently available in respect of the transactions covered by the reference admits some of the allegations as already brought out in the reference. A brief summary of the reply admitting the allegations is given below: (i)With regard to the justification of the earlier management for the declining production in the year 199293 attributing extraneous reasons like credit squeeze, severe power cuts and depression in the market, it is stated that these reasons are not consistent with im proved performance of other cable companies for the same period. Besides, the management obtained an additional ₹ 11 crores approximately from banks in 199192 as compared to the previous year. As regards the justification of loss due to power cuts the reply states that no significant power cuts took place during the relevant time. Thus, the allegation is substantiated by the new management. (ii)As regards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the records. 5. From the papers made available to us it is clear that detailed inspection has been carried out by the Regional Director of the Deptt. of Company Affairs under section 209A in respect of all the above issues based on complaints by the employees union. Opportunity has also been provided to the management of the company to explain the various allegations against the company. On a scrutiny of the inspection report under section 209A, it is found that practically a detailed scrutiny has been carried out in respect of all the matters referred to above. The company has also given its replies to the various issues raised by the Regional Director at the time of inspection which has been verified by us with the reply given by the new Management under the financial institutions. Hence, a valid question which may be raised is what further investigation in respect of these matters can bring about which the earlier report under section 209A has already not covered? In the above connection we have to look into the whole scheme of the Companies Act with regard to investigation and its consequences. Investigation is ordered if a prima facie opinion is formed by the CLB that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference there is a technical snag inasmuch as this section could be invoked only on a report made by the ROC under subsection (6) of section 234, i.e., a report by the Registrar based on information called by him from the company in exercise of his powers. Since the present report was made by the Joint Director in the Office of Regional Director, the Central Government has refrained from exercising its powers under section 235. On the other hand, it has made use of the facility available under section 237(b) to make a reference with all the particulars for the CLB to form an opinion whether an investigation is warranted. The reference also states that the Calcutta High Court in its order dated 1811994 in which the Court had desired that the CLB should decide about the ordering of investigation under section 237 which was an order on a writ petition filed by the Staff Association. In view of these it is necessary for us to examine whether there are circumstances suggesting that the business of the company is being/has been conducted in the manner as contemplated in that section and whether an opinion in this regard could be formed. 6. The power under section 237( b) is a discr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y managed. The matter to be investigated is whether the above deeds in particular diversion of funds and wasteful expenditure was intentional and was to benefit any particular person or persons concerned with the management of the Company. A strong suspicion arises in this direction particularly because the Company was successful all along under the same management. Moreover, a normal prudential management would not involve the funds of the Company in this manner. In order to establish whether the acts were intentional and have really gone to the benefit of one or a few at the expense of the investing public, institutions and employees, appropriate action may have to be initiated. Courts have not hesitated in such instances to invoke the powers to order investigation. For instance: (a)In Modi Industries Ltd. v. Union of India [1982] 52 Comp. Cas. 589, the Delhi High Court has observed that in order to order an investigation there may be some circumstances which would lead to the inference that there has been some fraud, misfeasance, breach of trust or misconduct which requires investigation. It is not necessary that the persons concerned should be actually guilty but at least th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to warrant the investigation. It may be only through a detailed probe that the intention, if any behind the above acts resulting in substantial loss to various interests in society through the company could be established. If the above acts were done intentionally (mens rea) adverse consequences may follow including penalising the guilty. Establishing mens reais the purpose behind any legal framework of this kind, it is essential to invoke such provisions where the funds of public and creditors are vested in the hands of a few individuals for the benefit of the former. We should not stand in the way of invoking the applicable provisions of law having already found that irreparable loss has been caused to various sections of Society apparently by bad management. We, therefore, are of the opinion that the affairs of the Company have to be investigated in respect of the years 199091, 1991 92 199293 including the role if any of financial institutions in this regard. The Central Government shall also give the necessary approval under section 240(1A) expeditiously. Since substantial time is already lost on technicalities we urge the department of company affairs to carry out the invest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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