2000 (8) TMI 1006 - HC - Companies Law

Issues Involved:
1. Validity of the Central Government's approval for the removal of the statutory auditor under section 224(7) of the Companies Act, 1956.
2. Allegations of irrelevant and extraneous considerations in granting approval.
3. Compliance with statutory provisions under section 224(7).
4. Alleged misappropriation and defalcation of funds by the management.
5. Validity of the extraordinary general meeting held on 5-12-1998.
6. Loss of confidence in the statutory auditors by the management.

Detailed Analysis:

1. Validity of the Central Government's Approval for Removal of the Statutory Auditor:
The petitioners challenged the Central Government's order dated 12-4-1999, which granted approval for the removal of the statutory auditor under section 224(7) of the Companies Act, 1956. The court found that the approval was subject to further approval by the shareholders, which was subsequently obtained with an overwhelming majority. Therefore, the Central Government's approval was deemed valid.

2. Allegations of Irrelevant and Extraneous Considerations:
The petitioners argued that the Central Government's approval was based on irrelevant and extraneous considerations. The court, however, did not find merit in this argument. It was noted that the shareholders, holding more than 95% of the equity stock, had approved the removal, indicating that the decision was not based on irrelevant considerations.

3. Compliance with Statutory Provisions under Section 224(7):
The petitioners contended that the statutory provisions under section 224(7) were not complied with, particularly the requirement for previous sanction before the proposal was considered in the general body meeting. The court observed that there was no statutory bar on holding a prior meeting to approve the resolution for making the application to seek the Central Government's consent. The subsequent approval by the shareholders validated the process.

4. Alleged Misappropriation and Defalcation of Funds:
The petitioners alleged serious misappropriation and defalcation of funds by the management, claiming that their removal was sought due to their inconvenient questions. The court noted that the transactions in question occurred prior to the current management taking over and that an Audit Committee had been appointed to investigate these issues. The statutory auditors had accepted the Audit Committee's recommendations and made necessary adjustments in the accounts, indicating that the issues had been addressed.

5. Validity of the Extraordinary General Meeting Held on 5-12-1998:
The petitioners questioned the validity of the extraordinary general meeting held on 5-12-1998, arguing that it was held without the previous consent of the Central Government. The court found that the meeting was held to authorize the Board to submit an application for obtaining the Central Government's sanction, which was subsequently granted and approved by the shareholders. Therefore, the meeting and the subsequent process were deemed valid.

6. Loss of Confidence in the Statutory Auditors by the Management:
The court recognized that the statutory auditors had lost the confidence of the management, which was evident from the history of litigation and the repeated observations in the auditors' reports. The court found that the statutory auditors' objections were raised belatedly and appeared to be an attempt to resist their removal after falling out with the management.

Conclusion:
The court concluded that the impugned order was fully justified and in accordance with the law. The writ petition was dismissed, with the court finding no grounds for interference in the exercise of extraordinary writ jurisdiction.

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