1996 (10) TMI 514 - Board - Companies Law

Summary

Issues Involved:
1. Misfeasance and misconduct in business operations.
2. Oppression of members and creditors.
3. Diversion of funds.
4. Non-recovery of loans and advances.
5. Decrease in production and loss of orders.
6. Unauthorized expenditure.
7. Financial mismanagement and wasteful expenditure.
8. Need for further investigation under Section 237(b) of the Companies Act, 1956.

Detailed Analysis:

1. Misfeasance and Misconduct in Business Operations:
The company was accused of stopping the supply of essential raw materials to its factories from 1991-92 onwards, leading to idleness among workers and a halt in production at Jamshedpur and Pune factories. The management failed to foresee and address a shortage of working capital, resulting in significant losses and the inability to declare dividends for 1991-92.

2. Oppression of Members and Creditors:
The company's actions were deemed oppressive to its members and creditors. This included the diversion of funds raised through debentures for unrelated uses and the failure to recover substantial loans given to unconnected companies, exacerbating the financial crisis.

3. Diversion of Funds:
The company raised Rs. 35 crores through debentures intended for specific projects, which were subsequently shelved. The funds were diverted for other uses, which the new management admitted. The diversion of funds was a significant point of contention, as it indicated potential mismanagement and misuse of resources.

4. Non-recovery of Loans and Advances:
The company made advances totaling Rs. 508.98 lakhs to various unrelated entities, with no recovery efforts despite being in a financial crisis. Loans were given to multiple parties, including Esjay Commercial Ltd., B.D. Khaitan & Co., and others, with neither the principal nor interest being realized.

5. Decrease in Production and Loss of Orders:
The production of power cables decreased sharply in 1991-92 and 1992-93 due to raw material shortages. The company failed to execute an order from SOVKABLE, Moscow, and lost an Iranian order worth about Rs. 20 crores due to a shortage of working capital. The new management confirmed these issues, attributing some to external factors like the disintegration of the Soviet Union.

6. Unauthorized Expenditure:
The company spent Rs. 77.32 lakhs on constructing a temple at Jamshedpur, exceeding the Board-approved limit of Rs. 50 lakhs. This unauthorized expenditure was admitted by the new management, highlighting a breach of authority.

7. Financial Mismanagement and Wasteful Expenditure:
The company incurred losses due to increased raw material costs, non-productive payments, and heavy financial charges on borrowed capital. The new management admitted these issues, confirming the allegations of financial mismanagement.

8. Need for Further Investigation under Section 237(b):
Despite a detailed inspection under Section 209A, the Board concluded that further investigation under Section 237(b) was necessary. The investigation would extend beyond the books of accounts to the entire affairs of the company, including related companies. The investigation aimed to determine whether the mismanagement was intentional and benefited specific individuals at the expense of the company and its stakeholders.

Conclusion:
The judgment concluded that the affairs of the company warranted investigation under Section 237(b) of the Companies Act, 1956. The investigation was deemed necessary to uncover the extent of mismanagement, potential fraud, and the involvement of any individuals in the diversion of funds and wasteful expenditure. The Central Government was urged to expedite the investigation to address the substantial loss caused to various stakeholders.