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TMI Blog2000 (5) TMI 1018X X X X Extracts X X X X X X X X Extracts X X X X ..... ort allegedly brought 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 sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 Rs. 30 crores and reported as if the same software had been sold to Jumbo Global Limited, a company belonging to MRC for Rs. 47 crores. Actually, neither the purchase price was paid nor the sale price was realised. The company has purchased jewellery worth Rs. 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 and instead, other profitable bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 Rs. 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 position where it is unable to pay its debts. Such acts are h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act; the loans raised by the company stood at Rs. 353.62 crores as on 30-6-1995 and the company has given loans and advances to the tune of Rs. 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 Rs. 124.63 crores lent to the subsidiaries during 1994-95, the subsidiaries purchased shares in other companies only to the extent of Rs. 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 Tezpore Tea Company Ltd. and Maharashtra Distillery Limited and acquiring new companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 to waive this requirement. 14. The above contentions are sought to be countered by Mr. Banerjee, the learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dure 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 article 156 of the Limitation Act prescribes a period to 90 days for such appeals and provides that the period commences to run from the date of the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh 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 Civil Procedure the operative portion of the judgment itself can be construed to be a decree. It was, therefore, obligatory on the part of the appellant to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 objections he could have taken earlier by filing an appeal. Time for filing objection which is in the nature of appeal is extended by one month after service of notice on him of the day fixed for hearing the appeal. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 therein; and (iii)When there is a prior civil suit in respect of similar allegations pending in a competent Court which is a representative suit, would proceedings under section 408 of the Act lie on the self-same allegations before the CLB" ? 29. The questions which have been rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught 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 Rs. 21.08 crores in 1993-94; remuneration paid to sales promoters went up from Rs. 23 lakhs to Rs. 11 lakhs (sic) during the corresponding period. It was observed that from the report of Inspector appointed under section 209A, he had come to the conclusion that there was no abnormality in such higher sales promotion expenses and also with regard to the payment made to sales promoters. The CLB accepted the same. However, on the issue whether there have been any kickbacks, the CLB observed as follows: ". . . We find that certain other authorities have already been looking into this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 35. The CLB was dealing with the two matters analogously. One filed under section 397/398 and the other by the Central Government under section 408. The CLB, has also considered and examined whether the affairs of the company are being carried on in a manner prejudicial to the interest of the company or public interest or oppressive to the members of the company and if so, how the same could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 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 and the public at large repose faith and confidence in the management of the company, which unfortunately is at the lowest ebb today. The effect of whatever happened earlier continues as on date and is likely to continue for some more time, which will be against the interest of the company. The main object of sections 397/398 and 408 is to safeguard a company by suitable remedial measures. Thus, we find that there is every ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 observed that the fact of purchase of shares is not disputed by any one and was in fact the foundation of the allegations. The CLB observed that the petitioners have not furnished the full particulars and the company also did not produce full details. The statutory auditors of the subsidiaries companies which had invested in these shares, it was observed, have stated that the certificates were not available for physical verification as they were reported to have been sent for consultation. As regards the prosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany (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 CLB, quoted supra, the contention of Mr. Banerjee is without substance. It is not a case of failure of exercise of jurisdiction by the CLB. The inferences that could have been drawn from the material on record have been so drawn. It is based thereon, inter alia, that certain directions have been issued to the board of directors, apart from appointment of Directors. 46. We have taken into consideration only those allegations as relevant to the matter under sections 397 and 398 on which a conclusion has been arrived at by the CLB against the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 right the wrongs and secondly, it has power to issue directions to prevent occurrence of such wrong in the future. The CLB, thus, is competent to pass orders or issue directions, both corrective and preventive in nature. 53. The CLB has considered in detail the questions of supersession of the Board. It was noticed that when the petition was filed, there were 10 Directors, all of whom have been impleaded; two whole-time Directors and two part-time Directors had resigned. Thereafter, the composition of the Board was five (5) Directors and one nominee of CLB. One Ravi Jain was inducte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial 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 sufficient by itself to establish that the said actions were prejudicial to the interest of the company. In that case, the directions were issued by the CLB on arriving at a conclusion that the certain transactions were not wise or that certain transactions were not prudent or that they did not comply with the requirements of certain provisions of the Act. The Supreme Court quashed and set aside the order of the CLB. The said case is distinguishable on the facts of the instant case and the conclusions arrived at by the CLB in the present case. It is significant that the Supreme Court in that case observed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 conducted in a manner which are not prejudicial to the interest of the company, members and to the public interest. An order under section 408 may not be able to cure the illegal or prejudicial acts which may have already been performed by the company and its Directors, but it can try and prevent repetition of such acts in future by appointing the Directors of the company. . . ." (p. 804) 61. The power under section 408 is extraordinary and admits of no doubt and the same can be exercised only upon satisfaction that the affairs of the company are grossly mismanaged or where it is felt that quick action is needed. The power under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 have been investigated simultaneously. The statutory power which vested in the Central Government to appoint Directors had been delegated under the Act to the CLB under section 408. Likewise under provisions of section 398 a forum has been provided to the shareholders. By hearing both matters analogously the statutory rights of the respective parties have been recognised and to avoid multiplicity of proceedings or conflict in the decisions in the two matters, the same have been heard analogously and disposed of. It cannot be contended based upon any principle of law that merely because a group of shareholders initiate proceedings under section 39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shareholders to purchase the same. Reliance for the said proposition has been placed upon the judgments of this Court in Bajrang Prasad Jalan v. Mahabir Prasad Jalan AIR 1999 Cal. 156 and Mahabir Prasad Jalan v. Bajrang Prasad Jalan [1999] 2 Comp. LJ. 71 (Cal.). The said two cases relied upon by Mr. Sen are of no assistance in the facts and circumstances of the case on hand. The matters in these cases pertain to two rival groups of a family holding shares in the various companies. In that case, it was found that there had been acts of "operation by the majority shareholders on the minority shareholders". It was observed that the Court in proceedings under section 397/398 may ..... 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