TMI Blog2006 (5) TMI 540X X X X Extracts X X X X X X X X Extracts X X X X ..... n therewith guilty or fraud, misfeasance, persistent negligence or default in carrying out their obligations and functions under the law or breach of trust or that the business of the company is not or has not been conducted by the respondents in accordance with sound business principles or prudent commercial practices. This reference has now been made with a request that Company Law Board may inquire into the case and record a decision as to whether or not the respondents referred to above are fit and proper persons to hold the office of MD or Director(s) or any other office connected with the conduct and management of the company. 2. Such opinion is alleged to have been formed on the basis of an inspection of the books of accounts of the company in terms of Section 209A of the Act by the Central Government carried out on the basis of a preliminary report of the SEBI on the Stock Market Scam in 2001, on the main ground that the Company had loaned a sum of ₹ 78 crores to one M/s Classic Credit Limited, a group company of Shri Ketan Parekh, who was involved in the Stock Market Scam in 2001 and that in the process the company had lost 28 crores, exhibiting fraud, misfeasance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its reply too has admitted that sum of ₹ 78 crores, in fact, was given on loan to M/s Classic Credit Ltd., a company under the control and management of Shri Ketan Parekh and that for lending the huge sum of ₹ 78 crores to Ketan Parekh entity called M/s Classic Credit Ltd., the company had diverted its own internal resources which otherwise would have been utilized for working capital thereby jeopardizing efficiency and literally handing over the company's affairs on platter to Ketan Parekh entity by sinking the entire liquidity of the company. Further it was pointed out that the company has also admitted that no guarantee, security, or otherwise in any other form surety was taken from the Ketan Parekh entity. It was pointed out that without any previous knowledge, relation, association, as admitted by the company, lent more than ten times of its worth (net worth = share capital + reserve and surplus including accumulated profits -secured loans -accumulated losses) to absolutely unknown, unrelated person without any safety and security of return of principal amount and without any assessment of the worthiness of the Ketan Parekh entity. This goes to establish tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relying on Canadian Land Reclaiming and colonizing Co. (Coventry and Dizon's case), (1880) 14 Ch. D. (CA) Misfeasance according to James LJ mans misfeasance in the nature of a breach of trust, that is to say, it refers to something which the officer of such company has done wrongly by misapplying or retaining in his own hands any moneys of the company or by which company's property has been wasted or the company's credit improperly pledged. It must be some act resulting in some actual loss to the company. Further, relying on the decision in Alok Kumar Jain v. Union of India (1973) 43 Company Cases 68, 89 (Cal) the petitioner pointed out that the formation of the opinion by the Central Government is a subjective process and cannot be questioned or challenged by a party aggrieved by the action taken by the Central Government and that the only question that the Court can look into is the existence of materials to justify formation of such opinion. It was further reiterated by the counsel for the petitioner that the lending of such a huge amount of ₹ 78 crores with no past history without any mortgage, pledge or security to M/s Classic Credit Ltd, goes to prove t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under Rule 986 vide Bombay High Court's order dated 15.3.2005, It was further argued that the formation of the opinion may be a subjective process, but it is always open to the court, here the Company Law Board, being called upon to make an inquiry in a proceeding of reference under Section 388B and Chapter IVA of the Companies Act, 1956, to find out whether there are proper materials for the formation of such opinion, and also the manner and the method by which such an opinion has been formed. It was submitted that in making such inquiry under Chapter IVA of the Companies Act, the Company Law Board should make an independent assessment of the circumstances as alleged, and examine whether such circumstances suggest a case of fraud, misfeasance, negligence or that the acts complained of were done ignoring sound business principles or prudent commercial practices. 5. I have considered the pleadings and arguments of the counsels and also the written submissions filed by them, wherein they have also referred to some decided cases. This petition has been filed by the Central Government under Section 388B of the Act. The power of referring to the Company Law Board for enquiry i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given an opportunity of a fair hearing before the tribunal. An aggrieved person will also have the right of appeal to High Court, and before removing a person from office, the Central Govt. will give him due notice to explain his position and make a representation. This section gives vast powers to the Company Law Board and is applicable in any case; (1) where in the opinion of the Government there is fraud, misfeasance, persistent, negligence or default or breach of trust on the part of a person concerned in the conduct and management of a company's affairs. The word 'persistent' was inserted before the word 'negligence' by the Select Committee, following the use of expression in the Jenkins Committee Report on Company Law Reform in the United Kingdom, where that committee laid stress on 'persistent negligence or default; (2) where the conduct and management of the business of a company are not in accordance with sound business principles or prudent commercial practices; (3) where the company is conducted and managed in a manner injurious or damaging to the interests of the trade, industry, or business in which the company is engaged; (4) where the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as pleaded that the Limitation Act is equally applicable to proceedings before the CLB being a quasi-judicial authority, which exercises the same powers and authority as used to be exercised by the High Court with regard to this provisions of law. The respondents have contended that there was no subsisting cause of action or legally conferrable right in 2004 when the present application was filed. The counsel for the Union of India, the applicant, has submitted that the Limitation Act is not applicable to proceedings under Section 388B of the Act before the Company Law Board, as the Company Law Board is not a Court. It was also argued that the Companies Act is a comprehensive legislation providing substantive law besides limitation and procedures. The counsel for the petitioner further submitted that if the Limitation Act is applied or delay and latches are being resorted to reject the application under Section 388B, it would then simply defeat the purpose of incorporating Section 388B in the Act, i.e. protection of public interest at large. I am inclined to agree with the counsel for the petitioner. Under the provisions of the Companies Act, the Company Law Board is a court in a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to a conduct effecting the revenues/profits/output/return to investors and it amounted to a conduct prejudicial to public interest. The counsel for the respondents has drawn my attention to the JPC report at para 11.6 notes that Department of Company Affairs had pointed out that the company had not violated the provisions of law relating to .transfer of this amount to Classic Credit. Therefore, the Board of Director cannot be accused of mismanagement for having taken a commercial decision just because a part of the amount loaned by the company bonafide, has not yet come back to the company. There are no allegations in the petition that any of the directors is guilty of misappropriation or siphoning off of funds. The allegations of the petitioner that the respondent directors are endangering the shareholders' interest and that the directors had acted negligently are totally misplaced and wrong. The matter regarding loan of ₹ 78 crores to M/s Classic Credit Limited has also been examined in CP No. 9/2003 by this Board wherein it was held that ... as seen from the report of the JPC, the company had not violated any provisions of the Act in lending this amount to M/s Class ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was availing of the loan to manipulate the stock market, then, the lending of money would have been not only be for a fraudulent purpose but also be against public interest. However, there is nothing on record to show or establish that in any of the reports of various agencies including JPC which probed into the stock market scam, there is any observation that the company had the knowledge that Ketan Parekh was manipulating the stock market and by lending this amount, the company had abetted him in doing so. None of these reports mentions that the company had any dealings with Ketan Parekh or his companies other than the solitary instance impugned in the petition. In the absence of any ulterior motive of any nature established against the board of directors, it could, at the best be held, that the board was guilty of commercial misjudgment or had taken an unwise decision, as the amount of ₹ 28 crores is still to be realized back. It has been held that commercial misjudgments will not amount to oppression even if they have adverse effect on the price of the share of the company (Rutherford, In re(1994) BCC 876). The Supreme Court has observed, in the celebrated Needle Industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd business principles and prudent commercial practices. In lending the amount of ₹ 78 crores, the act of the Board could at best be declared as an action of commercial mismanagement or an unwise decision. It is not the petitioner's case that this decision of the Board of Directors was not within the legitimate powers of the Board or that the Board had violated any provision of law. I find that the petitioner has not established that by the single act of lending money and violating the provisions of certain Sections of the Act in the year 2000-2001 the company is being managed in a manner prejudicial to the interest of the company or to the public interest and that it amounts to fraud misfeasance, persistent negligence and further that the respondents have not conducted the affairs of the company in accordance with sound business principles and prudent commercial practices warranting removal of the MD and directors of the company. On the facts of the case, the MD and the directors of the company cannot be held to be unfit and improper persons to hold the office of MD/Directors or any other connected with the conduct and management of the company. 10. In view of the afo ..... 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