TMI Blog2006 (6) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and the said Company was run by the 2nd respondent as Managing Director, by looking after day-to-day affairs of the Company. Though the Company did well from its incorporation in the year 1982 and made profits over the period of six years, but however, during the years 1989-90 and 1990-91 due to mismanagement of the 2nd respondent, the Company suffered huge losses and the entire reserves that were built up as well as share capital was eroded completely. Since the said losses happened due to the mismanagement of the 2nd respondent-management, audit was conducted for the year 1989-90 and the said audit report shows that the 2nd respondent had in fact committed illegalities so as to cause loss to the Company to his benefit. 3. An application was filed by the Corporation under section 235(2) of the Act, seeking an order for investigating into the affairs before the Company Law Board. The Corporation relied upon the Management Audit Report as well as statutory Audit Report for the year 1990-91, which clearly points out the misdeeds of the Managing Director, the 2nd respondent herein, therefore, sought for an order for investigating into the affairs. But, however, the respondents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discretion against the appellant-corporation. Since the Company Law Board had exercised its discretion on consideration of the material on record, the said discretionary order does not warrant any interference by this Court in the present appeal. The learned counsel also contended that the Company Law Board gave categorical findings that the Corporation failed to substantiate its claim with respect to the alleged mismanagement or misdeeds said to have been committed by the 2nd respondent as Managing Director of the Company by filing any comparative statement with respect to the working of other similarly placed companies. In the absence of any such material, the impugned order does not call for any interference. The learned counsel also relied upon various decisions in support of his contention, which shall be considered later. 6. Admittedly, the appellant/applicant A.P. State Civil Supplies Corporation Limited is a Company fully owned by the Government of Andhra Pradesh, which was formed with an object of procuring as well as distribution of essential commodities to the public. In the policy of the State to develop agro based industries, the State owned Corporation along with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract for supply of Oil 1,77,650-00 Total : 19,07,589-85 7. As per the said Management Auditor Report, an amount of Rs. 19,07,589.85ps was suffered at loss to the Company because of the mismanagement of the Managing Director, the 2nd respondent herein. Had this amount was not caused loss to the Company, the Company would have declared a profit of Rs. 12,26,947.85ps as against the loss declared of Rs. 6,80,642.00. Similarly the statutory audit report for the year 1990-91 also shows similar losses caused to the Company under as many as 14 items specified in the said auditor s report. In view of the above losses caused, the Corporation approached the Company Law Board with an application under section 235(2) of the Act, seeking for an order of investigation into the affairs of the Company. 8. The said application was contested by the contesting respondents, contending that after the first Management Auditor s report dated 16-10-1990, the 2nd respondent submitted certain explanations with reference to the items found against him, basing on that the Management Auditor submitted another report dated 31-12-1990, as per which, the original findings ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd report. From the said explanation, it is clear that by the date of the audit that was conducted by the Management auditor, there was no rectification as was alleged. The alleged rectification, if any, was said to have been made only after the auditor s report, which is apparently made in order to cover up the illegality. 11. The second item relates to shortage of oil in oil production. The allegation against the management is that due to mismanagement short production of oil was shown to a tune of Rs. 18,33,886. The explanation given by the respondents is not clear. They simply stated that the opening balance of bran was 535.46 MT and thereafter the respondents did not even state what is the quantity of bran that was purchased during the year and what was the content as per the estimation and what was the real production. The respondents gave only hypothetical explanation showing that there was an excess production of 72.541 MT. It is not known how even the management auditor has accepted this explanation when the respondents did not give exact quantities of rice bran of different varieties that had been purchased during the year. 12. Similarly excess of closing stock wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transport charges from the millers from whom M/s. Srinivasa Trading Company was purchasing are borne by the Company. It was also found that the transport charges from the traders godown or stock point to the Company are to be borne by the Company. The Management Auditor was also found that though the Directors are interested in the transactions, no disclosure of interest was made in the Board of Directors meeting, which is mandatory under the provisions of the Act. The Management Auditor has also arrived at the excess sale consideration paid to the tune of Rs. 2,07,743.85ps, working out the excess sale consideration paid at Rs. 5 over and above the rates at which the Company paid to other similarly placed suppliers. 14. It was also found that excess transport charges were paid to the Bomboo Dust Transportation. The Bomboo Dust which was used as substitute to coal, was transported from the suppliers point through the lorry owned by Smt. J. Lakshmi, the Director of the Company and the wife of the Managing Director. The transport charges are being paid at the rate of Rs. 75 per MT, there is no written agreement between the Company and the owner of the lorry. The vehicle was used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 to Rs. 17,200, how the Company could settle at higher rate of Rs. 17,500 per metric tonne, for which there was no explanation. 16. Similarly, for the year 1990-91 the statutory auditor found almost identical defects such as shortage in oil production, shortage in yield, inflated stocks by filing statements to the State Bank of India availed higher credit facility and in fact had drawn the amounts from the State Bank of India, basing on the higher credit facility provided showing inflated stocks which were subsequently found not available even by the Bank. With reference to the said statutory audit report, there was absolutely no explanation by the 2nd respondent, and in fact even the Company Law Board did not consider this report, but merely observed that the Corporation did not produce any material to substantiate its claim of misappropriation by the 2nd respondent. It is stated that even the Company Law Board found that the 2nd respondent had effected heavy withdrawals over Rs. 67 lakhs from the State Bank of India by showing inflated stocks though such stocks were not in fact available to give as security. But, however, further found that the Corporation did not produce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank St. Actuals Bank St. Actuals Bank St. Actuals Bank St. Actuals MT MT MT MT MT MT MT MT 1990 April 146.261 99.324 1056.793 1225.410 218.170 193.883 452.464 187.535 May 122.987 102.528 965.786 1249.568 335.277 201.108 427.030 2.760 509.050 June 141.911 75.027 1031.979 1186.641 165.458 32.204 443.590 19.320 July 144.111 52.065 831.559 1118.708 446.497 50.379 179.866 9.135 August 132.096 43.254 781.173 539.339 522.914 61.264 121.968 2.400 September 114.139 18.957 908.381 625.399 541.352 55.420 91.675 2.090 October 115.751 20.559 778.415 475.933 580.427 98.660 97.594 8.005 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the Company itself effected payment of Rs. 1,77,650 by way of settlement of sale transaction of oil and it is not known how if certain amounts were due to the Company from the said M/s. Amrit Banaspati Company Limited, the Company has not adjusted against the amounts due from it. The above irregularities noted by both the Management Auditor as well as Statutory Auditor clearly show that there is a prima facie case of fraud played on the Company by its Managing Director so as to cause loss to the Company, therefore, the said irregularities requires a deeper and thorough investigation by the appropriate authorities. Therefore, the view taken by the Company Law Board may not be proper and just in coming to conclusion that the Corporation did not substantiate its allegations by producing additional material, hence there is no case for ordering investigation, as contemplated under section 235 of the Act. 20. At this juncture, it would be appropriate to refer to the judgments relied upon by the counsel for the parties. 21. The learned counsel for the appellant relied upon a decision of this Court in Uunet India Ltd. v. I.C. Rao [1998] 93 Comp. Cas. 41 (AP) where a learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting" cannot be dissociated without making it impossible for the Board to form an "opinion" at all. The formation of an opinion must, therefore, be as to whether there are circumstances suggesting the existence of one or more of the matters in sub-clauses ( i ) to ( ii ) and not about anything else. 24. Further it was observed in para 20, to sum up, then, our conclusions may be stated thus : The discretion conferred on the Central Government by section 237( b ) to order at investigation and delegated by it to the Company Law Board is administrative, that it could be validly exercised by the Chairman of the Board by an order made in pursuance of a rule enacted by the Central Government under section 642(1) read with section 10E(5), that the exercise of the power does not violate any fundamental right of the company, that the opinion to be formed under section 237( b ) is subjective and that if the grounds are disclosed by the Board the Court can examine them for considering whether they are relevant. 25. In Rohtas Industries Ltd. v. S.D. Agarwal AIR 1969 SC 707 the Apex Court while considering the scope of enquiry under sections 235 to 237 of the Act, observed : "The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 237 have been conferred on the Central Government in the faith that it will be exercised in a reasonable manner. The Department of the Central Government which deals with companies is presumed to be an expert body in company law matters. Therefore, the standard that is prescribed under section 237( b ) is not the standard required of an ordinary citizen but that of an expert. Hence, if the Court comes to the conclusion that no reasonable authority would have passed the impugned order on the material before it, then the same is liable to be struck down." (p. 611) 27. In Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634 , a Division Bench of the Delhi High Court, while considering the scope of section 237 of the Act, observed that the words in the opinion of the Central Government in section 237( b ), indicate that the opinion must be formed by the Central Government and it is implicit that the opinion must be an honest opinion. Again, an action, not based on circumstances suggesting an inference of the enumerated kind, will not be valid. In other words, the enumeration of the inferences which may be drawn from the circumstances postulate the absenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is desirable in the interests of the company itself such as would result in proceedings being taken under sections 242 to 244. No investigation could be ordered merely because a shareholder feels aggrieved about the manner in which the company s business is being carried on. 31. From the above decisions it is clear that before ordering appointment of Inspectors for investing into the affairs of the Company, there must be material to prove prima facie that certain irregularities are committed, or fraud has been played on the Company by the Directors and the decision has to be taken subject to the satisfaction on the material placed and not otherwise. Therefore, the facts of the present case have to be examined in the light of the above decisions. 32. The Corporation, which filed the application under section 235 of the Act, pleaded that the Managing Director and other Directors have mismanaged the affairs during the years 1989-90 and 1990-91 so as to cause loss to the Company in question by completely eroding the profits that are accumulated over a period of years as well as the share capital contributed by both the Corporation and the Directors. For the first time, as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt as well as the statutory audit, it is no doubt true that the Company Law Board has got discretion to order for appointment of Inspectors, but such discretion has to be exercised judiciously. Here, in the present case, the Company Law Board simply negatived the claim of the Corporation for ordering an investigation on the ground that the Corporation did not bring on record any further evidence to support their case. But in the light of the material already available, no further material is required, and the material already on record prima facie proves that irregularities have been committed by the Management, especially where transactions were carried out with the persons, who are closely related to the Managing Director and the Directors, which had resulted in monetary loss to the Company in question. 33. Under the above circumstances, the impugned order passed by the Company Law Board is set aside and the application of the Corporation is ordered, directing the Central Government to appoint one or more Inspectors to investigate into the affairs of the Company in question viz. , M/s. Delta Oils and Facts Limited so as to make necessary investigation as to its affairs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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