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TMI Blog2023 (4) TMI 1143X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 59/2014 (T.P. No. 66 of 2016) whereby the NCLT has dismissed the Company Petition filed by the Appellants. 2. In brief, the facts of the case as stated and argued by the Appellants, are that the Appellants Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy are minority shareholders of Respondent No. 1 Company (R-1) each holding 38,000 equity shares i.e. individually holding 13.68% of the issued, subscribed and paid-up capital of the Company. Further, the Appellants are also directors of R-1 Company. Appellants have further stated that due to a number of illegal and oppressive acts of Respondents No 2 to 5( in short "R-2", "R-3", "R-4" and "R-5" respectively), the Appellants filed CP No. 59 of 2014 (TP No. 66 of 2016) before the Company Law Board, Chennai seeking certain reliefs, which included, inter-alia, declaration of Board meetings dated 6.9.2014 and 20.9.2014 to be invalid in law and all resolutions passed therein to be null and void, direction for investigation to be carried out in the affairs of the Company including misconduct by Shri Venkata Rami Reddy, declaration of appointment of R-5 as Additional Director to be made null and void, and certain other reliefs. The C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he record. 5. The Learned Counsel for Appellants has argued that the Appellants are minority shareholders in R-1 Company and they have filed Company Petition under Sections 397, 398, 402, 403, 406 and 409 of the Companies Act, 2013 against the Respondents, who are majority shareholders holding 64% of shareholding, challenging their actions regarding mismanagement in R-1 Company. The Learned Counsel for Appellants has further argued that by the Impugned Order, the NCLT has erroneously dismissed the CP No. 59 of 2014 (TP No. 66 of 2016) without considering the Final Audit Report submitted by the Independent Auditor M/s. Brahmayya and Company, Chartered Accountant, whereas notably the Chartered Accountant was appointed on the orders of the CLB for conducting an Independent Audit of the wrongdoings of Respondents and mismanagement in the Company on the part of R-2 to R-4 in collusion with Mr. Venkata Rami Reddy, the Company Secretary. He has stated that the Final Audit Report submitted by the Independent Auditor after obtaining the comments and views of all the parties against whom various acts of mismanagement and misappropriation had been found, and by order dated 18.7.2018, R-1 Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Counsel for Appellants has submitted that investigation into the affairs of R-1 Company was ordered by the CLB and once the Final Audit Report was submitted to the CLB, it was necessary that the findings of the report were made available to the respective parties and adjudication was done in the light of the findings of the Auditor's report. Therefore, the NCLT has erred in closing CP No. 129 of 2019 and dismissing it without even looking at the contents of the Audit Report which include glaring instances of misconduct and wrongdoings in the management in the affairs of the R-1 Company, which was an important prayer in CP No. 59 of 2014. He has further contended that filing of a fresh petition would only result in unnecessary litigation, when the CP No. 59 of 2014 had been filed on the grounds of oppression and mismanagement and at least the contents of the Final Audit Report should have been noticed and adjudicated upon by the NCLT rather than passing a blanket order for dismissing CP No. 59 of 2014. 8. The Learned Counsel for Appellants has also argued that once the Final Audit Report prepared by M/s. Brahmayya and Company, the Chartered Accountant has seen and adjudicate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties, whose names and actions appear in the Final Audit Report, are joined in the petition as necessary parties. In this connection, he has cited the judgment of Hon'ble Supreme Court in the case of Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. (2021 3 SCC 475), wherein it is held that in the absence of necessary pleadings, the question of remand will not make any difference since all the respective parties, who are necessary parties, should have been impleaded in the petition and only thereafter adjudication can be done on the contents of the Report and in the present case the persons against whom allegations have been made and findings rendered by the chartered accountant were not arrayed as parties in the original company petition. 13. The Learned Senior Counsel for R-3 and R-4 has also claimed that after the order dated 29.10.2018, whereby the NCLT directed the parties to pay the audit fee, the company paid its share, but the petitioners (Appellants in the appeal) did not pay their share and therefore, the Report continued to remain in sealed cover. On other issues raised in the company petition, he has stated that the arguments about the transfer of shares has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any non-payment of premium. He has further referred to the Board's resolution allotting the shares, which has the signatures of both Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy and further in the additional documents filed by Diary No. 21249, the Form 2 regarding allotment of 177800 shares clearly shows that no premium was paid or was expected to be paid. On this basis, he has claimed that no relief or prayer is left for consideration in the original CP No. 59/2014 and therefore the appeal deserves to be dismissed. 16. The Learned Senior Counsel for R-2 has also argued that the shares were allotted in December 2011, whereas all transactions in the Audit Report relate to the period 2007 to 2010, when the mining lease was in operation, but in 2011 the mining activity was stopped after the order of Hon'ble Supreme Court in another matter. He has further contended that the Auditor was prejudiced against the Respondents. He has further pointed out that whenever monies were paid to ALL and TISSPL, the cheques were signed by the Appellants who cannot complain about their own acquiescence in such payments. He has further claimed that IA No. 923/2022 which was not submitted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and of the matter to the NCLT, we could then consider the appeal on merits based on the findings in the Audit Report, if it was found necessary. Therefore, we will firstly take up the issue of remand on which arguments have been advanced by the Learned Counsels for rival parties. The arguments presented by the Learned Counsels on merits of the case are, therefore also being noted here. 20. While advancing arguments on the grounds of merits, the Learned Counsel for Appellants has claimed that the Respondents in the original Company Petition had given their consent for investigation to be carried out in the affairs of the Company by an Independent Auditor, as is recorded in para 3 of the CLB's order dated 13.10.2014, and the Final Audit Report was submitted in a sealed cover to the NCLT, but it was kept as such just on the ground that the audit fees was not paid in full which is a flimsy ground, and so the prayers made by the Appellants in the original company petition remained to be adjudicated upon. 21. The Learned Counsel for Appellants has further stated that the Auditor's final report is now open and before this Appellate Tribunal, and the Executive Summary and the detailed fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put forth by the rival parties on the issue whether the matter requires to be remanded to the NCLT for considering the issues that arise in the Final Audit Report. If the answer to this question is not in the affirmative and we do not find the case fit for remand, only then shall we consider the appeal on the merits of the findings of the Audit Report. 24. In doing so, we first look at the pleadings and reliefs sought in CP No. 59/2014, which is the genesis of this appeal. The prayers made in CP No. 59/2014 are as follows:- "8. Reliefs: Wherefore, the Petitioners pray that this Hon'ble Board may be pleased to pass on order: a. Declare that the Board Meetings dated 06.09.2014 and 20.09.2014 to be invalid in law and all resolutions passed thereat to be null and void; b. Directing investigation to be carried out in to the affairs of the company including the misconduct committed by Shri. Venkata Rami Reddy in accordance with section 406 read with Schedule XI of the Companies fin Act, 1956 and direct the Respondents 2 to 4 to restore to the company all rah funds misapplied or retained by them including the company funds gran illegally diverted showing them as payments due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlier order dated 7.7.2016 and directed that the Independent Auditor M/s. Brahmayya and Company, Chartered Accountant shall carry out audit of the books of accounts of R-1 Company for the period 1.4.2007 to 31.3.2014. 27. The Independent Auditor furnished the Draft Audit Report to the parties vide e-mail dated 16.1.2017 and also furnished hard copy of the Draft Audit Report to the concerned parties. Thereafter, it is noted that the matter of payment of the Auditor's fees was considered by NCLT in CP No. 59/2014 and vide order dated 18.7.2017, the following order was given regarding payment of the Auditor's fees:- "Only final report is to be submitted by the Auditor to the Tribunal. The Auditors have submitted a claim for Rs. 36.00 lakhs towards their fee including service tax. The Auditors already did some work with regard to verifying the accounts of the Company and therefore, some amount is to be paid to the Auditors out of the claim which is subject to passing a final order as we have heard both sides about the fee to be payable to Auditor basing on their claim. Since already the Auditors have submitted interim report and final report is to be submitted after completing the rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, going through the material on record and the impugned order for which the audit was involved and the mandays Company Appeal (AT) No.77 and 121 of 2018 which were required to be spent as well as the expenditure made on audit of sister concerns, we feel it would be improper for us to reduce fees, least it set a precedent and generating litigations with the hope of getting reduction through the Tribunal by agitating the fees. When the auditor is showing the fees on the basis of ICAI norms we find it improper to interfere. The appellants are also not with clean hands and plead insufficiency of money in their accounts and when the NCLT directed that they can have the money by recovering what their dues are from their sister concern, the appellants, come up in appeals. We do not find that the impugned order has given any cause to the appellant in Company Appeal (AT) No. 121 of 2018 to file the appeal.". 29. For such reasons we proceed to pass the following orders:- "Company Appeal (AT) No.77/2018 as well as Company Appeal (AT) No.121 of 2018 both are dismissed. In the circumstances no orders as to costs." 30. Therefore, it is quite clear from the above-mentioned order th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 of the Impugned Order as follows:- "With regard to the investigation to be carried out in the affairs of the Company is concerned, he submitted that the respondents have no objection in appointment of an independent auditor by this Bench to audit the books and accounts of the Company to ascertain the truth as alleged by the petitioners as prayed in para 8(b) of the main reliefs." 34. It is thus clear that the order for appointment of Independent Auditor to look into the accounts of R-1 Company and furnish draft audit report to the petitioners and Respondents was given with consent of the rival parties and it was also directed that the Final Audit Report, after taking into account the comments of both the parties, shall be submitted to the Bench within a period of thirty days, and furthermore, there was direction to the Company to pay the remuneration and other incidental expenses to the Independent Auditor as claimed by him. 35. We note that after this order dated 13.10.2014 passed by the CLB, the matter was posted for 10.12.2014. This is a clear indication that the issue of submission of the Final Audit Report and the consideration thereof was to be done by the CLB. It is, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and not by show of hands and all material facts in relation to sale of the property be placed in the Extra Ordinary General Meeting and all the deliberations are properly recorded. Based on the decision of Extra Ordinary General meeting the sale of property of the Company, if approved, be acted upon. The requirement of the Appellant herein to be the joint signatory to an agreement to sell or to a sale deed according to the impugned order is therefore removed. The NCLT is to review Independent Administrator's report for proper disposal of the cases at hand. We accordingly remand back the matter to NCLT, Hyderabad." 39. The judgment in the above-stated case of Om Prakash Auvlla (supra) directed for remand of the case so that the NCLT could do proper consideration and appreciation of the Independent Administrator's report. In the facts of the present case too, consideration of the Independent Auditor's report has not been done by the NCLT, and hence, this judgment supports the contention of the Appellants. 40. We also peruse the observation in Hon'ble Supreme Court's judgment in the matter of Sangramsinh P. Gaekwad (supra) which was cited the Learned Senior Counsel for R-2 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntents of the report and provided adjudication. To have kept the Auditor's Report in sealed cover on the ground that Auditor's fees was not paid does not appear to be the correct course of action, as there was no necessity to link the two issues, moreso when the CLB had itself ordered for conduct of independent audit and submission of the final report to the CLB. 42. We also note the following observations made by Hon'ble Supreme Court in the judgment in the matter of Syeda Rahimunnisa (supra) :- "36. It is a settled principle of law that in order to claim remand of the case to the trial court, it is necessary for the appellant to first raise such plea and then make out a case of remand on facts. The power of the appellate court to remand the case to the subordinate court is contained in Order 41 Rules 23. 23-A and 25 CPC. It is, therefore, obligatory upon the appellant to bring the case under any of these provisions before claiming a remand. The appellate court is required to record reasons as to why it has taken recourse to any one out of the three Rules of Order 41 CPC for remanding the case to the trial court. In the absence of any ground taken by the respondents (the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also instrumental in payment of large sums of money being made to Respondent 5 which estops him from alleging that Respondent 2 Company had been siphoning off the funds of Respondent 1 Company without diligently performing its part of the contract. 45. There is substance in Mr Raghavan's submissions that the EPC contract given to Respondent 5 by Respondent 1 was a commercial contract and stands outside the ambit of Sections 397 and 398 of the Companies Act. Failure to act in terms of the contract cannot be said to have amounted to either oppression or mismanagement by Respondent 1. At best it can be said that Respondent I had been used as a tool or mechanism by Respondent 5 to acquire benefits for itself, which in the instant case, does not appear to be so. having regard to the fact that one of the petitioners in the company petition was himself responsible for such payments being made." 45. The above judgment is distinguishable on the basis of the fact that in the Incable Net (Andhra) Ltd. (supra) matter, the contracts entered into by the Respondents were a relevant factor in the original company petition and at the heart of the pleadings, whereas in the present case the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ependent Auditor and the quantum of their fees was not interfered by NCLT, it was incumbent on NCLT to open the Final Audit Report from the sealed cover and consider its findings, as the consideration of the investigation into the affairs of the Company would have given justice to the parties in a fair manner. 50. In the facts and circumstances of the case and the arguments of rival parties, we are of the clear opinion that the interest of the parties and requirement of justice would be met, if the matter is remanded to NCLT with the direction that the Final Audit Report submitted by M/s. Brahmayya and Company, Chartered Accountant be made available to the parties by NCLT and after due consideration of the Final Audit Report, which should include opportunity to the parties to be heard, necessary appropriate orders should be passed. 51. The rival parties had also presented their arguments on the merits of their case in view of the findings of the Final Audit Report. Having now decided that the matter should be remanded to the NCLT, we do not wish to enter into consideration of the findings of the Audit Report and examine the responsibility and liabilities of the respective parties ..... X X X X Extracts X X X X X X X X Extracts X X X X
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