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2016 (6) TMI 218 - DELHI HIGH COURT

2016 (6) TMI 218 - DELHI HIGH COURT - TMI - Investigation u/s 235(2) to investigate the affairs of a company - CLB quashed the investigation proceedings - Maintainability of appeal - Held that:- The present appeal oversteps its statutory applicability. What is undisputed is that the appellant fails to meet the threshold of 10% share of the total voting power as is necessary under section 235 of the Act. Therefore, that is his first impediment in directing an investigation and the application und .....

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would not be applicable.

The impugned order has recorded that, according to the respondents, there was some deed of settlement signed on 12.07.2010 and that the respondents had invested an amount of ₹ 12.7 crores whereas the appellants had made investment of only ₹ 1 lakh at the time of incorporation of the said company, which amount has already been paid back to him by the investors' group of companies. Any investigation under Rule 235 of the Act would be a fact finding .....

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hat the circumstances under Section 237 do not exist to warrant an investigation. - CO.A.(SB) 39/2013 - Dated:- 2-6-2016 - MR. NAJMI WAZIRI J For the Appellants: Ms Manmeet Kaur, Mr Yashvardhan Bandi & Mr Manan Chaddha, Advs.. For the Respondents: Mr U.K. Chaudhary, Sr. Advocate with Mr Naveen Dahiya & Mr Himanshu Vij., Advocates. MR. NAJMI WAZIRI J 1. This Company Appeal, preferred under section 10F of the Companies Act, 1956, (hereinafter .....

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eld a total of 10,000 equity shares of ₹ 10 each, they held 100% of the total voting power of the Respondent No. 12-company thus the petition under section 235 was maintainable; they claimed to have noticed several irregularities in the affairs and day-to-day running of the respondent No. 12-company; that the respondents had carried out various E-form filings with the ROC without obtaining proper approval from the Board of Directors and shareholders of the company. These alleged irregulari .....

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providing an explanatory statement for the same. iv. Forcing appellant Nos. 2 and 3 to resign from the Board of Directors without their consent. v. Allotting shares of the company to companies based in Kuwait. vi. Fraudulently changing the registered address of the company three times. vii. Filing irregular balance sheets from 2005 to 2011. 3. The appellants contend that an investigation under section 235 of the Companies Act ought to be car .....

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thereon in such manner as the Central Government may direct. (2) Where- (a) in the case of a company having a share capital, an application has been received from not less than two hundred members or from members holding not less than one- tenth of the total voting power therein, and (b) in the case of a company having no share capital, an application has been received from not less than one- fifth of persons on the company' s register of members, the Comp .....

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ompanies Act before the CLB. Vide the impugned order dated 03.07.2013, the CLB reasoned as under: 6. After going through the contents of the Petition, replies, rejoinders and arguments (oral and written), prima facie, it is clear that the Petitioners were initially the shareholders with 100% voting power in the company. However, the petitioners have alleged that Respondent No.1 has filed E-form with the ROC for the appointment of R-2 as Executive Director, resignation of Petitioner N .....

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and 31.32011. All these allegations and irregularities are based on the documents filed by the company with Registrar of Companies and these returns/forms are available within public domain. As such, facts/violations/irregularities have been observed by examination of papers/returns/documents/forms of the company available on the Portal of Ministry of Corporate Affairs. In this context, the observations made in the case of Binod Kumar Kasera Versus Nandlall & Sons Tea Industries (P) Ltd. &am .....

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hese matters have also been taken up with the various law enforcing agencies including SHO, Safdarjung Police Station, New Delhi, SHO Kalkaji Police Station, New Delhi, Economic Offences Wing, New Delhi, Registrar of Companies, Hon'ble Judical First Class Magistrate Court-I, Kochi and Chief Metropolitan Magistrate, Saket District Court, New Delhi. Under these circumstances, it is inferred that the Petitioners have already observed and collected evidences pertaining to the violations, irregul .....

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tes and the said amount of ₹ 1 lakh has already been paid to the Petitioners in the year 2004 itself. However, the main grievances of Petitioners relate to dilution of shareholding of the Petitioners, removal of Petitioner No.2& 3 from the directorship and appointment of Respondent No.2 as Executive Director and prima facie, documents/returns/forms pertaining to these controversial matters are available on the Portal of the Ministry of Corporate Affairs and the same can be used for act .....

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view of this, the balance of convenience does not go in favour of the petitioners and hence, the prayer made in the petition for ordering investigation u/s 235 of the Companies Act, 1956 does not stand on merits. As such, the prayer for ordering investigation u/s 235 of the Companies Act, 1956 is hereby rejected. 7. The Company Petition is disposed of accordingly. Interim reliefs, if any, are hereby vacated. 8. No order as to cost. 5. Aggrieved by this order, .....

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own in the case of Rupak Gupta and Ors. v. Banaras House Pvt. Ltd. and Ors., C.P. No. 75(ND)/2012 which held that the sanctity of affidavits must be strictly adhered to. In the written arguments before the CLB (annexed as Annexure P-11 to this appeal) the following objection was taken: The Petitioners wish to highlight that this special power of attorney, on the basis of which Shri Anshuk Pasricha has sworn the affidavit is neither notarise, nor apostilled nor attested as mandatorily .....

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aw. For that reason alone, the Short Reply field on behalf of Respondent No.12 before this Hon'ble Bench taken be taken on record since it suffers from the infirmity that it does not have a legally sworn affidavit. It is the submission of the Petitioners that this Hon'ble Bench may therefore disregard each and every averment made in the said reply and not place any reliance on the same. 7. The learned counsel for the appellants submits that the impugned order has not even ref .....

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rt in Union Bank of India v. Naresh Kumar and Ors., (1996) 6 SCC 660 and this Court in Mahesh Nathani v. Sir Edward Dunlop Hospitals India Limited, 2005 (82) DRJ 136 which have held that defects relating to authorization of power of attorneys can be cured and ratified even at the appellate stage. Mahesh Nathani (supra) held: 22. It is thus clear that the petitioner has confirmed that Mr. Gulati was appointed his attorney by executing attorneys dated 16th July, 1997 and 27th December, .....

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court in the case of J.S. Bhalla v. G.J. Bhawnani 23(1983) DLT 125 or in the case of Shantilal Khushalda and Bros. Pvt. Ltd. v. Smt. Chandanbala Sughir Shah and Anr. (Vol.77) 1993 Company Cases 253 (Bombay) shall also be of no avail. If the earlier power of attorney was not stamped as per Indian Law, it was a mere irregularity which could be cured. The Supreme Court in the case of United Bank of India v. Naresh Kumar and Ors. (1996) 6 SCC 660 went to the extent of holding that such ratification .....

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ion of the appellants is untenable and is therefore rejected. 10. The learned Senior Advocate for the respondents has raised a preliminary objection that this petition is not maintainable because the appellants have also filed C.P. No. 133/2013 before the CLB through which they have availed the proper remedy under sections 397 and 398 of the Act. He contends that the prayers in C.P. No. 133/2013 are of wider amplitude and encompass even the prayers of the present petition, rendering t .....

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d party. He relies on the case law laid down by the Calcutta High Court in Mayank Kocher v. Transport & Handling Equipments MFG. Co. P. Ltd, (2008) 143 Comp Cas 601 (CLB). While discussing section 235 of the Act, the order records that: Under this Section directing an investigation is only analogous to the issue of a fact finding commission by a civil court for looking into accounts or making an investigation and does not amount to a judgment within Clause .....

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of section 10F is wide enough to cover even these administrative decisions. 12. The appellants contend that not ordering an investigation despite a preliminary observation of irregularities in the running of the company cannot be maintained. The Court however notes that the CLB has not made any adverse observations against the affairs of the Company accept for recording the allegations of the appellant and instead it has observed that Section 235 cannot be used to initiate investigat .....

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ion. He further contends that an investigations under section 235 is neither criminal in nature nor is it to be conducted by police; that the requirement of a minimum shareholding under section 235 has to be read liberally and cannot be a bar to the present proceedings because a similar requirement is stipulated under section 399 of the Act with respect to applications under section 397 and 398. He contends that this principle should be liberally interpreted and extended to also apply to investi .....

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n under this section is similar to the appointment of a fact finding commission. He relies upon the judgement in Shri Kishan Khariwal vs. The Ganga Nagar Industries Ltd. & Ors., [2004] 118 Comp Cas 626 which held that where the dispute related to reduction of shareholding to less than 10%, the same would not be a bar under section 399. It held: This Board has always taken the view that if the shareholding of the petitioners is reduced below 10% of account of further issue of shar .....

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only a loan from the companies M/s Al Futtooh Investment Company, M/s Hamoor International Trading and M/s Kuwait Investment Projects Company. The appellants refer to the Foreign Inward Remittance Certificates (FIRCs) which would indicate that the money came into the country in the form of borrowings from the abovementioned Kuwaiti companies. They submit that the respondents have failed to produce any documentary evidence to show any connection between respondent Nos. 1 and 2 with the three abo .....

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n Direct Investment against equity in the respondent No.12-company. The respondents place reliance upon the Foreign Inward Remittance Certificates (FIRC), which show the contribution made by the respondents. 16. The learned Senior Advocate submits that, in any case, the appellants do not qualify the threshold criteria of holding a minimum of one-tenth of the total voting power in the respondent-No.12 company, as required under section 235(2) of the Act; that it is an admitted fact tha .....

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nvestigation has to meet the minimum qualification, namely, that it should be from not less than 200 members or from members holding not less than one tenth of the total power. According to the petitioners, the total paid up capital was ₹ 50.52 lakhs and their holding was within the limits. The respondents, however, contend that, on the date of petition, the paid up capital was ₹ 75 lakhs. From a scrutiny of Form No. 2 within regard to the additional paid up capital was ₹ 75 la .....

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year ended 31.03.1992 reflecting the paid up capital as ₹ 75 lakhs, the voting strength was determined by reckoning the paid up capital of ₹ 75 lakhs. As such, on the date of filing of the petition, i.e., 17 November, 1992, the petitioners held less than one-tenth of the total voting power and so could not maintain this application under section 235 of the Act. We, however, in view of the circumstances as set out in the petition and the various pleadings ast(sic) the facts, having r .....

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ave gone through the pleadings and heard learned counsel for both the parties and it is observed that the petitioner has not fulfilled the conditions laid down for filing petitions under Section 235 as the present petition under Section 235 has not been filed by 200 members or from members holding not less than one tenth of the total voting power. Accordingly, the company petition No. 46/2003 is not maintainable under Section 235(2) and the same is dismissed being not maintainable. 1 .....

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before it had sought could be more meaningfully conducted in proceedings under Section 111 or under Sections 397 and 398 of the Act. What the Company Law Board implied was that there would be a logical consequence of such investigation if ordered in the course of Section 111 or Sections 397 and 398 proceedings in that upon investigation and the result thereof, the petitioner's right to relief could be assessed. 9. It is beyond question that an investigation under Section 237 can .....

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panies Act and asserts that the legislative intent behind these sections is unambiguous, insofar as section 235 requires an application for investigation to be received from members holding not less than one-tenth of the total voting power in the company whereas Section 399 requires an application from members holding not less than one-tenth of the issued share capital of the company. To support his proposition he relies upon the ratio of Mayank Kocher vs. Transport & Handling Equipments Mfg .....

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take copies of the documents of the respondent-company. Reliance is placed on the judgment of the hon'ble Delhi High Court in the case of V.V. Purie v. E.M.C. Steel Ltd. [1980] 50 Co. Cas 127, wherein it is held that a person having no manner of interest or concern in the company as a shareholder, creditor or otherwise, has no locus standi to prefer an application to the court for an order under Section 237(a)(ii) of the Companies Act, 1956, declaring that the affairs of a company ought to .....

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learned Senior Advocate for the respondent submits that the Calcutta High Court was of the opinion that any report under Section 235 is more in the nature of an investigative report; it is a matter of finding facts and is not a judicial order, and therefore the analogy to this appeal would not lie in the present case. He contended that the proper and effective remedy for the appellants would lie under Section 397 and 398 of the Act. He also contended that the appellants are concealing the fact t .....

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at in cases of allegations of fraud on the part of the directors of a company, an investigation must be carried out if there is prima facie evidence of any intent to defraud, fraudulent or unlawful activities, or instances of misconduct. The judgment observes as under: 39. Coming back to Section 237(b), in finding out its true scope, we have to bear in mind that that section is a part of the scheme referred to earlier and therefore the said provisions takes its colour from Sections 23 .....

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ered that the power in question is a reasonable restriction in the interest of the general public. 22. The appellants further rely upon the dicta of Raghunath Swarup Mathur v. Har Swarup Mathur & Ors., (1970) 40 Comp Cas 282 (All), wherein it was held that in appropriate cases, a probe under Sections 235 to 237 may be a necessary prelude to proceedings under Sections 397 to 399 of the Act. It reads as under: 28. Before concluding, I may indicate a procedure which coul .....

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8 of the Act, as laid down by Section 243 of the Act, or, for recovery of damages in respect of any fraud, misfeasance, or other misconduct in the management of the company's affairs, where this is necessary in public interest, as provided by Section 244 of the Act. It could, therefore, be urged, in cases where a detailed inquiry into the conduct of the affairs of a company is called for, that a petition under either Section 397 or Section 398 of the Act, without applying for such an inquiry .....

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the filing of petitions under Sections 235 and 397 is to prevent frivolous litigation. They argue that the requisite shareholding for filing petitions shall not be permitted to be used as a protective shield by wrongdoers who mismanage and play frauds on companies. According to the appellants, what is required is that there must be enough material on record so as to raise a doubt regarding instances of foul play in the management of the affairs of the company and that, as also observed by the C .....

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tainable. Furthermore, in section 397 and 398 of the Act, which deals with application for relief in cases of oppression and mismanagement respectively, required the applicant to have at least 10% of the issued share capital. It is only in applications under Section 397 and 398 of the Act, where the challenge in such applications is to reduction of the issues share capital itself, through oppression or mismanagement then the threshold of 10% would not be applicable. 25. The Court wou .....

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e existence of circumstances as enumerated in the said section. This means that if the CLB comes to the conclusion that circumstances as mentioned in S237 do not exist, or that it is not possible to form such an opinion of the existence of such circumstances on the basis of available facts and allegations made by the applicant, then no investigation will be warranted. 26. The present impugned order has taken into consideration the facts taken on record as well as the alle .....

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e process of investigation. Therefore it formed the opinion that the circumstances mentioned in S. 237 did not exist so as to trigger any investigation. The Court finds that in the circumstances the CLB had taken into the available facts on record and the conclusion arrived at cannot be faulted. 27. The impugned order has relied upon the judgment of the Kerala HC in Mrs U.A. Sumathy and Anr. v. Dig Vijay Chit Fund (P) Ltd., 1983 53 CompCas 493 (Ker) which held that section 235 does n .....

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asis of the records, like the balance sheet of the company, an investigation would not be ordered. Hence, there must exist at least a prima facie evidence that the affairs of the company are being run in a fraudulent and unlawful way so as to defraud its creditors or is contrary to the interest of the company itself which would lead to the conclusion that an investigation would be necessary. Mere allegation of a disgruntled shareholder would not be a sufficient ground to order an investigation. .....

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company were subsequently allegedly removed/ displaced from the said voting power by respondent no.1 appointing its two executive directors accepting resignation of appellant no. 2 and 3 from the post of Director; increase in the authorized capital from ₹ 1 lac to ₹ 1.40 crores; allotment of shares on various dates, change in the registered office of the company thrice over; holding of AGM at shorter notices without consent of 100% of the shareholders; the information was already av .....

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ents would have to be, at best, examined by the proceedings under Section 397 and 398 of the Act. The objective of investigation under section 235 of the Act is to unearth and find out the new material or data. Since no further information beyond the aforesaid documents pertaining to the company is likely to be obtained, the impugned order rightly rejected the application. It also recorded that regarding other violations, complaints have already been filed before the law enforcing ag .....

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o the naked eye and where a petition discloses merely facts which are apparent from the Balance Sheet of the company, an investigation will not be ordered. The appellants have already approached the relevant authorities for relief. section 235 cannot be an exercise of roving inquiry, nor could it be invoked by any person, who does not meet the threshold of 10% voting power because the repercussions of an investigation would have wide ramifications, it could cast a shadow upon the functioning of .....

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