2017 (3) TMI 1007 - Tri - Companies Law

Siphoning of funds by commercial transaction/agreements with related parties - misdeeds committed by Directors - Held that - There appears financial irregularities in the company which is prejudicial to the interest of the company. However, all the loss to the company on account of financial irregularities can be ascertained by an appointment of an Independent auditor who may conduct the audit of the company from the financial year 2008-09 and onwards to find out the exact loss caused to the company on account of siphoning, related party transactions and other misdeeds, committed by Directors of the Company. As it is expert job we have not entered in details of allegations except few samples to conclude that there is prima facie case of financial mismanagement. Auditor shall enquire into the loss, if any, caused to the company and such loss, to be recovered from the party whoever is found responsible, from his/their personal resources and the amount so recovered will be paid to the Company. Respondent Nos. 3 to 7, Directors of Respondent No. 1 company are directed to provide inspection of accounts and records of Respondent No. 1 company to the Auditor and also to the Petitioners who are shareholders of Respondent No. l company. The auditor shall give opportunity of hearing to both the parties. Respondent Nos. 3 to 7 directors of Respondent No. 1 company are directed to assist the auditor and furnish relevant documents as and when asked for. The auditors shall fix their remuneration in consultation with the Respondent No. 1 Company, to be paid by Respondent No. 1 Company. In case of any difficulty in implementation of the directions, liberty is given to file appropriate application before this Tribunal. In the light of aforesaid discussions M/s. Price Water Cooper is appointed as an independent auditor, who shall comply the aforesaid directions and submit its report within three months.

Issues Involved:
1. Illegal holding of Extra-Ordinary General Body Meeting (EOGM) on 16th March 2013.
2. Fabrication of documents and wrongful cessation of Petitioner No. 1 as Director.
3. Non-allotment of dividend/profit to the Petitioners.
4. Non-issue of bonus shares to Petitioners.
5. Siphoning of funds of Respondent No. 1 company through related party transactions and acts of mismanagement.

Detailed Analysis:

1. Illegal Holding of Extra-Ordinary General Body Meeting (EOGM) on 16th March 2013:
The Petitioners alleged that the EOGM on 16th March 2013 was called with mala fide intentions to transfer the business of Respondent No. 1 to Respondent No. 9 under the guise of digitalization. They claimed no notice was served, and the meeting was stage-managed. The Respondents countered that the Petitioners had knowledge of the EOGM and chose not to attend. The Tribunal found that the Petitioners did have knowledge of the meeting and failed to attend, thus cannot complain about the notice's insufficiency. The resolutions passed in the EOGMs held on 16th March 2013 and 15th February 2016 were upheld as they were decided by the majority shareholders who consistently decided not to participate in digitalization.

2. Fabrication of Documents and Wrongful Cessation of Petitioner No. 1 as Director:
The Petitioners alleged that documents filed with the Registrar of Companies for financial years ending 31st March 2008, 2009, and 2010 were fabricated with forged signatures of Petitioner No. 1. The Respondents clarified that the documents were signed by Respondent No. 5, and the Petitioners failed to establish fabrication. Regarding the cessation of Petitioner No. 1 as Director, the Tribunal found that Petitioner No. 1 failed to attend any Board meetings after August 2008 without obtaining leave of absence, leading to the automatic vacation of his office under Section 283(g) of the Companies Act, 1956.

3. Non-Allotment of Dividend/Profit to the Petitioners:
The Petitioners contended that no dividends were declared, and profits were siphoned off. The Respondents argued that the decision not to declare dividends was made to utilize funds for future expansion. The Tribunal referred to case law establishing that non-declaration of dividends is a collective Board decision and not oppressive. However, an audit was ordered to ensure proper utilization of retained profits.

4. Non-Issue of Bonus Shares to Petitioners:
The Petitioners claimed that they were not informed about the issuance of bonus shares. The Respondents admitted that bonus share certificates were not issued for logistical reasons and assured issuance. The Tribunal directed Respondent No. 1 to issue the share certificates pertaining to the bonus shares within 30 days from the order's receipt.

5. Siphoning of Funds of Respondent No. 1 Company Through Related Party Transactions and Acts of Mismanagement:
The Petitioners alleged misuse of Respondent No. 1's infrastructure by Respondent No. 9 and siphoning of funds through related party transactions. The Tribunal found prima facie evidence of financial irregularities and ordered an independent audit by Price Waterhouse Coopers to ascertain the exact loss caused to the company. The audit would cover financial years from 2008-09 onwards, and any loss found would be recovered from the responsible parties.

Conclusion:
The Tribunal ordered an audit by Price Waterhouse Coopers to investigate financial irregularities, with directions for cooperation from Respondent Nos. 3 to 7. The Tribunal upheld the resolutions passed in the EOGMs and dismissed the Petitioners' claims regarding the cessation of Petitioner No. 1 as Director. The Tribunal directed the issuance of bonus shares to the Petitioners and partially allowed the petition without any order as to costs.

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