1997 (3) TMI 630 - Board - Companies Law

Summary

Issues Involved:
1. Allegations of financial mismanagement and misappropriation by the former managing director.
2. Request for an investigation under Section 235(2) of the Companies Act, 1956.
3. Validity and relevance of the management audit reports.
4. Responsibility and actions of the petitioner-corporation post-allegations.
5. Legal precedents and their applicability to the case.

Issue-wise Detailed Analysis:

1. Allegations of Financial Mismanagement and Misappropriation by the Former Managing Director:
The petitioner, A. P. State Civil Supplies Corporation Ltd., alleged that the former managing director, respondent No. 2, mismanaged the company, Delta Oils and Fats Limited, causing significant financial losses. Specific irregularities highlighted included the absence of production registers, unexplained debits to transportation charges, shortages in oil stock, excess stock discrepancies, inflated transportation charges, and preferential transactions with Srinivasa Trading Company, which was linked to the managing director. The petitioner claimed these actions resulted in substantial financial discrepancies and losses, including a notable loss of Rs. 47 lakhs in 1990-91.

2. Request for an Investigation under Section 235(2) of the Companies Act, 1956:
The petitioner sought an investigation into the affairs of the respondent-company during the tenure of the former managing director, citing prima facie evidence of dishonesty and mismanagement. The petitioner argued that only a thorough investigation by the Company Law Board could uncover the extent of the alleged malpractices and misappropriations.

3. Validity and Relevance of the Management Audit Reports:
The management audit report initially identified several financial irregularities, which were later revised after explanations from respondent No. 2. The revised report reduced the loss from Rs. 6.8 lakhs to Rs. 2.93 lakhs and cleared some allegations. Respondent No. 2 argued that the petitioner suppressed the second audit report, which had been unanimously approved by the board, including the petitioner's representatives. The respondent contended that the losses were due to external factors like raw material shortages and power issues, not mismanagement.

4. Responsibility and Actions of the Petitioner-Corporation Post-Allegations:
The petitioner-corporation, which controlled the company post-allegations, was criticized for not taking adequate steps to revive the company or address the alleged mismanagement. Despite the management audit findings, the petitioner did not provide comparative performance data of similarly placed companies or detailed accounts analysis to substantiate the need for an investigation. The respondent noted that the petitioner failed to accept offers to purchase shares or lease the unit, contributing to the company's decline.

5. Legal Precedents and Their Applicability to the Case:
The respondent cited precedents where adverse comments by auditors did not justify an investigation. In Professional Grade Components Limited, the Company Law Board held that adverse comments in a special audit report did not warrant an investigation. Similarly, in Delhi Flour Mills Co. Ltd., the Delhi High Court ruled that unless there was material evidence of illegal actions causing profit declines, an investigation was not justified. The judgment emphasized that the purpose of Section 237 (analogous to Section 235) was not to probe the economic workings of a company unless prima facie evidence indicated illegal actions.

Judgment:
The Company Law Board dismissed the petition, concluding that the petitioner-corporation failed to provide sufficient corroborative evidence to justify an investigation. The judgment highlighted that the petitioner did not counter the explanations provided by respondent No. 2 or substantiate the alleged irregularities with comparative data. The Board noted that the petitioner, now controlling the company, could initiate criminal or civil actions independently if not satisfied with the explanations. The decision was consistent with previous rulings that emphasized the need for prima facie evidence of illegal actions to warrant an investigation under Section 235.