2021 (1) TMI 1175 - Tri - Companies Law

Seeking direction to respondent not to deposit the amount due against them, in any bank account of respondent No. 1-company, which cannot be operated upon under the joint signature of the petitioner - siphoning of funds - illegal monetary benefits by manipulating records of the company - section 242(4) of the Companies Act, 2013 - HELD THAT - It is the case of respondent No. 2 that the applicants are indulging in forum shopping and Bench hunting as the applicants have filed Regular Civil Suit No. 117 of 2020 before the learned Civil Judge, Senior Division, Wardha, with similar prayers, viz., to close the account of PNB and not to act upon instructions of respondent No. 1/company. However, the Wardha Court refused to grant interim relief. Similar prayer is made in the company petition as well as I. A. No. 664 of 2020 and I. A. No. 989 of 2020, which amounts to forum shopping. Respondent No. 2 further averred that the applicants failed to get any relief from either of the forums and the applicants are indulging in forum shopping and Bench hunting. Respondent No. 2 has further alleged that the applicants have siphoned off an amount of ₹ 56 crores unto themselves and their relatives. Applicant No. 1 alone had diverted ₹ 3.28 crores to himself and his related parties. Respondent No. 2 has further alleged that cause of action arose prior to filing of the company petition. The applicant cannot raise issues, which relate prior to filing of petition, as provided under Order 2, rule 2 of the Code of Civil Procedure. Respondent No. 2 further submitted that the courts will not interfere in the internal affairs of the company as long as the company functions under the articles of association - In order to avoid more diversion of funds by the applicant acting solely, the board of directors in their meeting dated June 18, 2020 passed a resolution to receive all the funds in the account maintained with Yes Bank account and instructed the debtors accordingly. It is directed that the bank account of respondent No. 1 maintained with Punjab National Bank (PNB), Wardha as well as the bank account maintained with Yes Bank be operated by one representative from each group, viz., one signatory from the applicants' group and one signatory from the respondents' group. Accordingly, one signatory from each group shall be nominated for operating the accounts henceforth. This arrangement shall be applicable to new accounts, if any, opened hereafter by respondent No. 1/company. This arrangement shall govern until the parties resolve the differences amicably - allegations levelled by the applicants and the respondents against each other on the financial irregularities require investigation by the Registrar of Companies. Accordingly, the Registrar of Companies are directed to conduct an investigation into the affairs of the company, initiate action against the directors or persons responsible for irregularities, if any found, for siphoning off funds as alleged. Application disposed off.

Summary

Issues Involved:
1. Allegations of financial mismanagement and fund diversion.
2. Operation of bank accounts and board resolutions.
3. Forum shopping and bench hunting.
4. Internal management and majority rule principle.
5. Interim relief and investigation by Registrar of Companies.

Detailed Analysis:

1. Allegations of Financial Mismanagement and Fund Diversion:
The petitioners alleged that respondents Nos. 2 to 4 were misleading customers to deposit funds into a Hyderabad bank account rather than the company's Punjab National Bank (PNB) account in Wardha, with the intent to misuse these funds. They claimed that respondents had diverted funds amounting to ?2,91,35,000 and ?96,72,500 into their personal accounts. Additionally, they alleged that during 2019-20, ?1,08,67,433 and ?79,77,999 were collected from debtors without providing information to the petitioners. The respondents countered by alleging that the applicants themselves had diverted funds to their relatives and misused their authorization to operate bank accounts, resulting in significant financial mismanagement.

2. Operation of Bank Accounts and Board Resolutions:
The petitioners sought to prevent the respondents from making unilateral decisions regarding the company's bank accounts, alleging that a board meeting on November 19, 2019, reversed a prior resolution requiring four directors' signatures for transactions over ?1,000, thereby authorizing only two directors. They also alleged that respondents decided to wind up the Wardha branch and factory without proper authorization. The respondents argued that the board resolution was valid and had been in operation for over a year, and that the applicant No. 1 was solely operating the PNB account, contrary to the board's directive.

3. Forum Shopping and Bench Hunting:
The respondents accused the petitioners of forum shopping and bench hunting, noting that similar prayers were made in Regular Civil Suit No. 117 of 2020 before the Civil Judge, Senior Division, Wardha, and in I.A. No. 664 of 2020. They pointed out that the Wardha Court refused to grant interim relief, and the petitioners failed to obtain relief from either forum. The respondents alleged that the petitioners were attempting to misuse legal proceedings to their advantage.

4. Internal Management and Majority Rule Principle:
Respondent No. 2 argued that courts should not interfere in the internal management of the company as long as it functions within its articles of association. They cited the "majority rule principle" from Foss v. Harbottle and the Supreme Court decision in Rajamundry Electric Supply Corporation Ltd. v. A. Nageswara Rao to support their position. They contended that the company had not violated any provisions of the articles of association, and thus, intervention was unwarranted.

5. Interim Relief and Investigation by Registrar of Companies:
The Tribunal directed that the company's bank accounts with PNB, Wardha, and Yes Bank be operated by one representative from each group (applicants and respondents) until the parties resolve their differences. The Tribunal also ordered an investigation by the Registrar of Companies into the alleged financial irregularities, with a report to be submitted within six months. The interim arrangement would remain in place until the investigation is completed and appropriate action is taken.

Conclusion:
The Tribunal's order aimed to ensure fair management of the company's financial affairs by requiring joint operation of bank accounts and initiating an investigation into the alleged financial mismanagement. This balanced approach sought to protect the company's interests while addressing the serious allegations raised by both parties.