2014 (3) TMI 1100 - Board - Companies Law

Oppression and mismanagement - no information of money the petitioner invested in R-l Company - accountability - Investment of petitioner s money in the form of subscription money - Held that - Every transaction the management enters with third parties shall be as clear as daylight. This transaction of putting 123.5 crores in R-7 is nothing but changing hands from left to right because R-7 is wholly owned subsidiary of R-4 this R-4 is in the absolute control and management of Kabul Chawla (R-5) the same R-4 is the holding company to R-2 which is holding 49.90% shareholding in R-1 company. The same Chawla (R-5) who is in direct control of R-4 is the nominee director of R-1 Company Therefore it is clear money has gone into R-7 for the benefit of one person that is Mr. Kabul Chawla (R-5). On seeing the picture available in this case it appears as though R1 was brought into existence and made the petitioner invest money in R1 to make business in R7 Company with the money of the petitioner. Here the petitioner put in its money five years ago nothing has happened in R-1 Company. It has virtually remained a shell company but whereas the money invested by the petitioner - about 123.50 Crores has gone into R-7 company and R-7 company has been carrying its business which is nothing but alter ego of Chawla who is managing R-1 company. When the petitioner asked for the inspection and audit of the accounts financials of R-7 Company it has virtually refused to provide any clue as to what has been happening to the investment made by the petitioner. Since it is abundantly clear that R-4 R-7 R-8 & R-9 and other companies are alter egos of R-5 who is managing R-l Company he is under obligation to explain to the petitioner as to what is happening with the money the petitioner invested in R-l Company. The conduct of R-5 and R-6 continuing as directors in R1 Company clearly discloses that they are not inclined to disclose the information relating to the money invested by the petitioner though it is clear that R7 has come into existence for the benefit of Chawla. The conduct of R5&6 who are running all these companies is oppressive and prejudicial to the interest of the petitioner. This Bench is of the opinion that the petitioner has prima facie satisfied this Bench that investment of petitioner s money in the form of subscription money of R1 in R-7 as per articles of association is a related transaction. Though the petitioner agreed to let this money go into R-4 or its subsidiaries it does not mean the respondents are not under obligation to disclose every information relating to its money it shall also give assurance to the petitioner that its money is safe and being used for the good of R1 Company. This Bench has not passed any restraint order against the assets of R-7 company because R-10 to R-20 have around 55 acres in the name of them and I believe the value of the land today may be much higher than the investment of the petitioner. If any restraint order is passed against the fixed assets of R-7 company involved in development it will have further ramifications over the rights of others. In view of the reasons above mentioned hereby direct that 1. Deloitte is hereby appointed to audit R1 and R7 Companies and complete audit within two months hereof therefore R2-6 are hereby directed to cooperate Deloitte to audit as directed by this Bench. 2. R1 Company is directed to maintain status quo over the shareholding board pattern and fixed assets if any pending disposal of the case. 3. The remuneration shall be paid to the Deloitte by R1 company as agreeable to Deloitte in default the petitioner is at liberty to pay the remuneration and collect the same from R1 company thereafter. 4. R10 to 20 companies are hereby directed not to create any third party rights over the company land pending disposal of the company petition.

Summary

Issues Involved:
1. Investment Misuse and Non-Disclosure
2. Delay in Business Commencement
3. Related Party Transactions and Financial Irregularities
4. Denial of Shareholder Rights
5. Unauthorized AGM
6. Risk of Asset Depletion
7. Jurisdiction and Maintainability of Petition

Issue-wise Detailed Analysis:

1. Investment Misuse and Non-Disclosure:
The petitioner invested Rs. 123.5 Crores in R-1 company, expecting the funds to be used for setting up an SEZ for IT services. However, the funds were diverted to R-7 (Triangle) without the petitioner's knowledge or consent. Despite repeated requests, R-2 to R-6 did not provide any information about the use of these funds. The respondents refused to allow an audit by one of the big four accounting firms, raising concerns about financial transparency and potential misuse of funds.

2. Delay in Business Commencement:
R-1 company, despite being established in 2008, has not commenced any business operations. The petitioner alleged that R-2 to R-6 deliberately kept R-1 as a shell company, frustrating the petitioner's investment. The respondents failed to transfer the land in Faridabad to R-1 company, which was supposed to be part of the initial agreement. The respondents' lack of action and interest in setting up the business was evident from their delayed and insincere efforts to obtain stamp duty exemption.

3. Related Party Transactions and Financial Irregularities:
The petitioner accused R-2 to R-6 of engaging in related party transactions that were not at arm's length, using the petitioner's investment for their benefit. The funds were allegedly round-tripped among various entities controlled by Kabul Chawla (R-5), including R-7, R-8, and R-9. The respondents' refusal to appoint an external auditor and provide financial transparency further supported the petitioner's allegations of financial irregularities and misuse of funds.

4. Denial of Shareholder Rights:
The petitioner claimed that R-2 to R-6 continuously denied basic shareholder rights, including access to information about the business plan, financial transactions, and compliance with legal requirements. Despite several requests, the respondents failed to provide the Annual Operation Business Plan or any supporting documents, raising concerns about the management's transparency and accountability.

5. Unauthorized AGM:
The petitioner highlighted an incident where the respondents' nominee directors held an AGM on 24.9.2012 without the petitioner's presence, despite agreeing to postpone it to 27.9.2012. This act of holding the AGM in the petitioner's absence further demonstrated the respondents' disregard for the petitioner's rights and interests.

6. Risk of Asset Depletion:
The petitioner expressed concerns about the potential creation of third-party rights over the valuable assets of R-7 (Triangle). The petitioner feared that any depletion or dilution in the valuation of Perpetual Investments India Triangle would negatively impact the valuation of R-1 and render the financing of the company project impossible. The respondents' refusal to provide information about the investments and their utilization added to the petitioner's apprehensions.

7. Jurisdiction and Maintainability of Petition:
The respondents argued that the petition was not maintainable concerning R-7, as the petitioner was not a shareholder of R-7 and there was no probity between the petitioner and R-7. They contended that the affairs of R-7 could not be a subject matter of the petition, as R-1 held less than 5% CCPS in R-7. However, the court found that R-5 (Kabul Chawla) controlled all the respondent companies, making them alter egos of R-5. The court held that the unfairness in R-1 was a result of unfairness in R-7, justifying the inclusion of R-7 in the proceedings.

Conclusion:
The court observed that the petitioner's investment was misused and diverted to R-7 without proper disclosure or accountability. The respondents' actions were found to be oppressive and prejudicial to the petitioner's interests. The court directed an audit of R-1 and R-7 by Deloitte, ordered the maintenance of the status quo over the shareholding and fixed assets of R-1, and restrained R-10 to R-20 from creating third-party rights over the company land pending the disposal of the petition.