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2013 (5) TMI 518 - HC - Companies LawMismanagement of the affairs of company - allegations of conducting affairs of the company in a manner prejudicial to public interest, causing oppression to the members of the company - legality of the existing financial transactions of the company, which the petitioners contend is impermissible having regard to the object clause contained in the memorandum of the company - plea against CLB to conduct the investigation - Held that - Mere investment of the funds of the company in financial products in this case would not constitute violation of the object clause of the memorandum. The CLB, however, has not come to any finding in that regard, but on the other hand, directed appointment of the said audit firm to ascertain profits made by HVL in relation to dealings through Lodha Capital Market Ltd., and PLC Securities Ltd. As regards the allegation that HVL is an interested party, it was submitted on his behalf that this point was not taken in the pleadings and the provisions of Section 299 of the Act is not applicable in the instant case. Case of the appellant as well as HVL is that the said section applies in the event there is an arrangement or agreement between two companies but so far as investment in mutual fund is concerned, the agreement or contract is between the appellant and the mutual fund and subclause (6) of Section 299 of the Act also does not apply as HVL does not hold two per cent or more of the share capital of both the companies. So far as this issue is concerned, again the matter has to be remanded to the CLB for further consideration as CLB does not appear to have had examined applicability of the aforesaid provision in detail. So far as the transactions themselves are concerned, mere involvement of the company in CBLO or MIBOR linked debentures or investment in mutual funds through the two finance companies per se would not warrant an order or investigation. It does not appear again that the CLB had examined that issue in detail but investigator was appointed on being satisfied that the company was conducting business through entities connected with one of the Directors. It would be within the inherent jurisdiction of the CLB to take assistance of specialized agencies where having regard to nature of information required, it may lack specific expertise or infrastructural support. But such investigation is to be directed only after a case is made out of prima facie mismanagement and oppression in connection with a company in relation to the subject on which investigation is being directed, and only after such case is established, again prima facie by the petitioners, who seek investigation about large scale misapplication or unauthorized application of company s funds. As in the instant case no sufficient materials were available before the CLB for directing investigation. As petitioners sought to demonstrate referring to the annual reports of the company for different years, the manner of employment of funds. But while exercising this court jurisdiction under Section 10F of the Act over a judgment of the CLB in an interlocutory proceeding, I do not think I ought to embark upon such a factual enquiry. For the reasons indicated above, stay granted permanently that part of the order of the CLB by which investigation is directed by the audit firm. Till the matter is reexamined by the CLB, or any further direction is passed by the CLB in the light of observations made in this judgment, status quo ought to be maintained so far the proposed Special Resolution for amending the object clause in the memorandum of the company is concerned. Liberty to the petitioners to apply before the CLB for particulars pertaining to borrowing and application of funds of the company over which there is allegation of misuse. If such application is made, the same shall be dealt with by the CLB in accordance with law.
Issues Involved:
1. Jurisdiction of the Company Law Board (CLB) to consider subsequent events without formal amendment of pleadings. 2. Legality of the proposed amendment to the object clause of the company's memorandum. 3. Legality of the company's existing financial transactions and whether they constitute mismanagement. 4. Authority of the CLB to direct an investigative audit. Issue-wise Detailed Analysis: 1. Jurisdiction of the CLB to Consider Subsequent Events Without Formal Amendment of Pleadings: The appellants argued that the CLB lacked jurisdiction to consider facts arising after the filing of the main petition without a proper amendment of the pleadings. They cited the Supreme Court's rulings in *Manoharlal (Dead) by LRs Vs. Ugrasen (Dead) by LRs & Ors.* and *Gurdial Singh & Ors. Vs. Rajkumar Aneja & Ors.*, which emphasize that relief cannot be granted without a specific prayer and that proper procedure must be followed for amending pleadings. However, the court noted that the CLB had allowed the amendment by an order dated 25th September 2012, and it was permissible to introduce subsequent events if they were consequential to the main dispute. The court concluded that the acts complained of in C.A. No. 302/2011 were related to the core allegations of mismanagement and oppression and thus could be considered by the CLB. 2. Legality of the Proposed Amendment to the Object Clause of the Company's Memorandum: The respondents challenged a postal ballot notice for amending the object clause to allow the company to engage in new business activities. The court examined Section 17 of the Companies Act, which permits alteration of the object clause to enable the company to carry on its business more economically or efficiently or to combine new business with the existing one. The court found that the CLB's presumption that entering the money market would be detrimental to the company was not supported by sufficient material. The court held that the CLB should reexamine whether the proposed business could be conveniently or advantageously combined with the existing business of the company. 3. Legality of the Company's Existing Financial Transactions and Whether They Constitute Mismanagement: The respondents alleged that the company was already engaging in financial transactions beyond its object clause, constituting mismanagement. The CLB appointed Ernst & Young to conduct an investigative audit. The court noted that mere investment of idle funds in financial instruments does not constitute mismanagement. However, if such investments become the main activity, it could be considered a violation of the object clause. The court directed the CLB to reexamine whether the financial transactions constituted mismanagement and to consider the applicability of Section 299 of the Companies Act regarding the involvement of HVL. 4. Authority of the CLB to Direct an Investigative Audit: The appellants argued that the CLB lacked authority to direct an investigative audit, citing Sections 235, 240, 247, and 250 of the Companies Act, which vest such power with the Central Government. The court acknowledged that the CLB could direct investigation under Section 403 of the Act read with Clause 46 of the 1991 Regulations and Rule 14 of Order 11 of the Code of Civil Procedure. However, the court found that sufficient materials were not available before the CLB to warrant an investigative audit. The court stayed the CLB's order directing the audit and allowed the petitioners to apply for particulars regarding the company's financial transactions. Conclusion: The court disposed of the appeal, directing the CLB to reexamine the issues concerning the proposed amendment to the object clause and the legality of the company's financial transactions. The court stayed the investigative audit and maintained the status quo regarding the proposed special resolution until further directions from the CLB. The petitioners were given liberty to apply for particulars on the company's financial transactions, which the CLB would handle in accordance with the law.
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