TMI Blog1997 (4) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... e shares in the company were distributed to four brothers including the petitioner at 25 per cent each. The company has taken a building known as Laxmi Insurance Building (premises) on a long lease from the LIC, wherein the restaurant was being run. Shri K. Balram, respondent No. 2, the eldest of the four brothers was designated as managing director of the company. Since the family had private liabilities, it was decided, through three board resolutions dated April 9, 1989, June 1, 1989, and April 25, 1990, to borrow, from Indian Bank, Rs. 32 lakhs, 18 lakhs and 10 lakhs, respectively to meet the liabilities. Finding that this amount was not sufficient to meet the private liabilities, other measures were explored and finally an agreement was entered into with the Indian Bank to give the premises on a long lease on a monthly rental of Rs. 6 lakhs. The bank also agreed to advance a sum of Rs. 36 lakhs being six months' rent and also a loan of Rs. 3.6 crores. This was approved at the board meeting held on October 25, 1990. The allegation of the petitioner is that, after this agreement to borrow money, there had been a visible change in the attitude of respondent No. 2 resulting in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssal Commission wherein it has passed adverse remarks against respondent No, 2 and respondent No. 3 relating to diversion of funds. He has also complained of non-filing of the annual report, non-keeping of records at the registered office of the company, etc. Finally, he has prayed that all the transfers of funds of the company maintained by respondent No. 3 should be declared null and void, directing respondents Nos. 2 and 3 to restore all the funds transferred without proper authority, removal of the second respondent from the post of MD, direction for convening the general body meeting of the company and auditing the annual accounts of the company. 3. Respondents Nos. 1 and 2 have filed a common reply. They have raised a preliminary objection that the petitioner has already taken other proceedings-one in the State Consumer Redressal Forum--and one in the Madras High Court. The Consumer Forum has already dismissed the petition and in the suit, the cause of action and relief sought are similar to the one in the instant petition before us and as such the Company Law Board should not proceed with the petition. They have also pointed out that the petitioner has suppressed the mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting on the presence of outsiders who are not legally entitled to be present in a board meeting. While the petitioner has chosen to implead the MD as respondent No. 2, he has not done so in respect of the other two shareholder directors nor has he produced any affidavits from those directors to substantiate the allegations made by the petitioner. As far as the holding of the annual general meeting is concerned, the meeting for 1988-89 was held on September 30, 1990, and for 1990-91 on September 30, 1991. All business except relating to adoption of accounts was transacted in these meetings. Further meetings on September 30, 1991, September 30, 1992 and September 29, 1993, could not be held due to the restraint order passed by the Company Law Board. It is not correct to say that the minutes of the meetings have been fabricated as if the meetings were held on account of the fact that there was delay in filing of the returns with the ROC. 4. As far as utilisation of Rs. 32 lakhs, Rs. 18 lakhs and Rs. 10 lakhs is concerned, it is averred that the entire amount was spent to meet the liability of the company and that too on the basis of resolutions passed by the Board at which the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s against the bank levelling the same allegations and as such the Company Law Board should not deal with these allegations against the bank. It is also stated that the Consumer Redressal Forum has already decided against the petitioner stating that the bank was justified in acting in accordance with authorisation by the company. 7. When the matter was taken up for hearing, Shri T. K. Seshadri, advocate for the respondents, raised a preliminary objection, that, in view of a suit having been filed by the petitioner in the Madras High Court containing similar allegations, this matter should not be proceeded with. He cited a number of cases to reinforce his arguments that since there is a pending suit filed prior in time, this matter should not be proceeded with. His arguments were supported by Shri Shekhar Shetye, counsel for Indian Bank. Counsel for the petitioner, Shri Dushyant Dave, argued to state that the suit was essentially against the bank and not against the company or other respondents and that the relief sought in that suit was a limited one and as such the suit and the petition before the Company Law Board cannot be construed as parallel proceedings. We are not elaborat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o financial mismanagement. 10. The allegation regarding financial mismanagement/misappropriation of funds could further be divided into three groups : one relating to drawal of Rs. 60 lakhs comprising (a) Rs. 32 lakhs drawn on April 11, 1989 ; (b) Rs. 18 lakhs drawn on April 27, 1989 ; and (c) Rs. 10 lakhs drawn on October 16, 1990. All these drawals had been made before the agreement was entered into with respondent No. 3 for leasing out the premises. This agreement was signed on December 21, 1990. In other words, whatever was the outstanding liability of the company on this date in the bank account frdm which Rs. 60 lakhs was drawn, the same was known to the petitioner and he had given his consent to such outstanding. In view of this, without going into the contentions of the petitioner and respondent No. 2 in regard to the correctness of the proper utilisation of these amounts, we do not propose to deal with the same on the ground that the petitioner has concurred to the outstanding liability to the bank which included these drawals also. 11. The second group of allegations relates to the utilisation of the loan and rental advance given by respondent No. 3 to the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondents, without the knowledge of the petitioner and in collusion with the bank had appropriated, out of the loan and rental advance, more than what had been authorised in the letter of authorisation and agreement and the excess appropriation was either diverted to discharge the liabilities of respondent No. 2 or firms in which he was a partner or misappropriated by respondent No. 2. 14. The contention of counsel for the company as well as the bank is that the authorisation to adjust was not only with reference to the amount outstanding as on September 30, 1990, but to adjust even the subsequent additions to the liabilities till the exhaustion of the funds provided under loans and rental advance and as such there was no infringement of the provisions of the agreement. 15. A close reading of the agreement as well as the letter of authorisation signed by all the four directors would clearly indicate that the bank was authorised to adjust only the outstanding amount as on September 30, 1990, with further interest thereon. Not only have the words outstanding liability been used more than once, even the amount outstanding has been specifically provided in the agreement and the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... September 30, 1990, after adjustment of interest waiver to find out the exact excess adjustment, if any, in these accounts. In other words, it is obvious that the accounts of various Sitaram Rao group entities had been adjusted with more money than what was due as on September 30, 1990. 17. Now the question that arises is whether the company/bank was right in adjusting more than what was in the agreement. This poses a very important question as to whether the company and its directors were at all entitled to take over the liability of entities with which the company did not have any business dealings. 18. As per the agreement with the bank, the bank was authorised to adjust the outstanding liability of not only the respondent company but also a sum of about Rs. 1.08 crores as on September 30, 1990, shown as outstanding in respect of 11 other accounts standing in the name of other entities maintained in the Nariman Point branch, Bombay, as well as the Purasawakkam branch at Madras. 19. The outstandings in respect of these accounts as on September 30, 1990 was as follows : (Rs.) 1. K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a view that since there are only four shareholders in the company and that they had all agreed to clear the liabilities of other entities in which all of them are in one way or other interested, the agreement, though apparently against the interest of the company, may not be held irregular. But at the same time, looking into the contents of the agreement, we are of the view that any amount that was adjusted over and above the amount that was due as on September 30, 1990, after interest remission should be held to be irregular and does not have the sanction of all the shareholders. From the statements, we find that the bank had committed an error and has thus exceeded the authority given by the company by adjusting more amount than what was due on these accounts as on September 30, 1990, and as such it is responsible for the error committed by it and, therefore, should rectify the same by correcting these accounts. As we have already pointed out, since there are no details as to what was the exact amount after remission of interest as on September 30, 1990, we hereby direct the bank to rework all these accounts and find out what was the exact amount due as on September 30, 1990, aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated July 23, 1993, by which only three directors had been made joint signatories and all these three directors had participated in the board meetings held on those dates when authorisation for drawals were given. According to the petitioner, since the resolution dated March 27, 1989, was modified only on July 23, 1993, any authorisation to draw money from the bank by three directors during the intervening period is irregular. As far as this allegation is concerned, the company was not right in transferring Rs. 10 lakhs to Hotel Dasaprakash since the petitioner was not a party to the decision and since this amount is beyond the scope of the agreement between the four directors to set off the liability of this hotel as on September 30, 1990, the board will take action to recover the amount from Hotel Dasaprakash. 33. As far as the other drawals are concerned, it is seen from the pleadings and supporting documents that they were all made after a fresh resolution of the board of directors on July 23, 1993. As such, prima facie, these are authorised and cannot be set aside. The auditors of the company shall examine these payments and in case any payment is found to be not for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of any serious consequence was taken in these meetings stated to have been held by the respondents excepting authorisation for transfer of funds and changing the signatories for the purpose of bank operations in July 1993. As regards the other allegations with regard to violation of various provisions of the Companies Act, they mainly relate to accounts and holding of the annual general meetings. Since the details of the bank operations are already before us and since we have given necessary directions with regard to the withdrawals from the bank there is nothing further for us to intervene on this issue. By our interim order dated September 26, 1994, we restrained the company from holding any board meetings till the final disposal of the petition since the company was not carrying on any business. By another order we had also restrained the company from holding annual general meetings in respect of the accounts for the years 1989-90 and 1990-91. In view of our restraint order in respect of board meetings obviously subsequent annual general meetings also could not have been held. With our directions as regards the payments from the funds of the company to be accounted for properl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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