2012 (8) TMI 692 - HC - Companies Law

Compensated by way of interest on the outstanding loan as ordered by CLB - from the year 1983 until the date of repayment at the rate of interest at which the funds were borrowed after adjustment for any share of profit already passed on - Held that - the CLB could not have ordered recovery of interest over the amount advanced under the agreement dated 30.09.1983 because such an order essentially resulted in modification of the terms of the agreement between the parties; and such a modification could not have been made without the consent of the appellant company in view of clause (e) of Section 402 of the Act. Worthwhile it shall be to refer to the scheme of the relevant provisions as contained in Part-A of Chapter VI of the Act on the powers of Company Law Board for prevention of the oppression and mismanagement. The CLB, in the present case, though has ordered a fundamental modification in the terms of the agreement between the appellant company and the respondent No. 2 company but then, the consent of the appellant company, the third party for the purpose of clause (e) of Section 402, was not obtained. Neither the order impugned records so nor there is any other material on record to show that any such consent was obtained - directions to recovery of interest from the appellant company by the respondent No.2 company, is set aside CLB appears to have proceeded rather on the wrong assumption that according to the auditor s report of the year 1988-89, the appellant company was not possessing many facilities and that the facilities were not availed by the respondent No. 2 company as appears that the pronoun it , as used by the auditor in his report, was taken by the CLB to mean as if the appellant company was not possessing many of the facilities. The report, read as a whole, makes it clear that the expression it does not possess referred to the respondent No. 2 company, in whose regard the audit report was being made, and not to the appellant company.

Issues Involved:
1. Allegations of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956.
2. Validity and implications of the 'common facilities' agreement dated 30.09.1983.
3. Direction to recover interest on the interest-free financial assistance provided under the agreement.
4. Request for a special audit of the company's accounts.

Issue-wise Detailed Analysis:

1. Allegations of Oppression and Mismanagement:
The respondent No. 1 filed a company petition under Sections 397 and 398 of the Companies Act, 1956, alleging various acts of oppression of minority shareholders and mismanagement by the persons in charge of the respondent No. 2 company. The petition was initially filed in the High Court but was later withdrawn to seek a more efficacious remedy before the Company Law Board (CLB).

2. Validity and Implications of the 'Common Facilities' Agreement:
The CLB examined the agreement dated 30.09.1983, under which the respondent No. 2 company provided an interest-free financial assistance of Rs. 55 lacs to the appellant company. The agreement was intended to facilitate certain facilities for the respondent No. 2 company, which were necessary for maintaining its Five Star Deluxe Category status. However, the CLB found that the agreement was prejudicial to the respondent No. 2 company as the facilities were not fully provided, and the duration of the loan (30 years) was unduly long, causing financial strain on the respondent No. 2 company.

3. Direction to Recover Interest:
The CLB directed the respondent No. 2 company to recover interest from the appellant company at the prevailing bank rates on the outstanding loan amount. This direction was based on the finding that the interest-free loan was prejudicial to the respondent No. 2 company and its members. The CLB noted that the agreement had been terminated, and the loan repaid, but considered it appropriate to compensate the respondent No. 2 company by way of interest.

4. Request for Special Audit:
The CLB rejected the petitioner's allegations of manipulation of accounts, inflation of expenses, and misappropriation of funds, concluding that there was no concrete evidence to warrant a special audit. The CLB was satisfied with the genuineness of the expenses and found no grounds for a special audit.

High Court's Judgment:

Modification of Agreement Without Consent:
The High Court found that the CLB's order to recover interest essentially modified the terms of the agreement dated 30.09.1983, which could not have been done without the consent of the appellant company as per clause (e) of Section 402 of the Act. The Court emphasized that any modification of an agreement with a third party requires the consent of the concerned party, which was not obtained in this case.

Misreading of Auditor's Report:
The High Court noted that the CLB had misinterpreted the auditor's report, which stated that the respondent No. 2 company did not possess certain facilities, not the appellant company. The Court found that some facilities were indeed provided by the appellant company, and the CLB's conclusion was based on an improper reading of the auditor's report.

Conclusion:
The High Court concluded that the CLB's order directing the recovery of interest from the appellant company was unsustainable. The Court set aside the part of the impugned order dated 15.09.1997 that directed the respondent No. 2 company to recover interest from the appellant company. The appeal was allowed, and no costs were imposed.

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