2018 (10) TMI 339 - Tri - Companies Law

Direction on Central Government for appointment of an inspector for comprehensive enquiry of the affairs of the respondent company in order to protect the interest of creditors of respondent company - Held that - In the present case applicant has shown that the respondent company had given interest free loans and advances in crores to its group companies, whereas it was paying interest to the banks for the moneys borrowed and outstanding. There is no material on record to suggest that respondent had taken steps to recover the advances in order to revive the cash flows and stability of the company. Balance sheets of the company itself depict that there had been diversion of funds. On this count alone, prima facie adverse opinion can be formed that the affairs of the company are being conducted with a view to defraud the creditors. Applicant bank has also shown that there has been diversion of funds from short term sources to long term uses. That apart considerable reduction in stocks suggest that the recoveries from the stocks/receivables have been diverted. The petitioner also has pointed out that false sale and purchase transactions of goods have been made to defraud the creditors. As further revealed that though there was realisation of the stock receivables but there has not been any corresponding reduction in the working capital limits, which suggests mismanagement in the affairs of the company. In addition, applicant bank has placed on record the details of adverse comments made in the audited balance sheets of the company to show the following violations The company is in default u/s. 252 and Sec. 383 of the Companies Act, 1956, regarding non-complying with the minimum directors and appointments of the company secretary.The company is not regular in paying statutory dues like PF, ESI, Income Tax, Custom duty etc. The Company has not internal audit system; its audit committee is not functioning. The company has not filed audited balance sheet for 2013 whereas, the same was signed and accepted by the AGM on 20.07.2013. Not only the company has collected huge amount from the creditors but also has failed to repay the debts and the aforementioned facts prima facie show that the business of the company was being conducted to deceive its creditors. Admittedly the petitioner bank deals with public money and has come to the Tribunal bona-fide. There should not be slightest indication of a likelihood of prejudice to the public interest. Mismanagement of the affairs of the company including syphoning of funds have caused prejudice to the creditors. There are allegations of manipulation of accounts which raises inference of misappropriation and diversion of funds with intent to defraud its creditors as described in sub-clause (i) of sub-section (b) of Section 213 of the Companies Act, 2013. Material on record suggests that deeper probe in the affairs of respondent company is necessary. In view of above the company petition is allowed by holding that it is a fit case to direct Central Government to take steps to investigate in to the affairs of respondent company M/s. Surya Pharmaceutical Limited.

Summary

Issues Involved:
1. Petition for appointment of an inspector under Section 237(b) of the Companies Act, 1956.
2. Allegations of financial irregularities and diversion of funds by the respondent company.
3. Respondent's defense against the allegations.
4. Jurisdiction and maintainability of the petition.
5. Examination of evidence and grounds for investigation.

Issue-Wise Detailed Analysis:

1. Petition for Appointment of an Inspector:
The petitioner, Central Bank of India, filed a petition under Section 237(b) of the Companies Act, 1956, seeking a direction for the appointment of an inspector to conduct a comprehensive inquiry into the affairs of the respondent company to protect the interests of its creditors.

2. Allegations of Financial Irregularities and Diversion of Funds:
The petitioner alleged that the respondent company had executed various security/loaning documents to secure credit facilities but failed to repay dues, leading to the classification of its loan account as a Non-Performing Asset (NPA) on 24.05.2012. The petitioner found financial irregularities in the respondent's audited balance sheets for the financial years ending on 31.03.2011, 31.03.2012, and 31.03.2013. It was alleged that there was a diversion of short-term funds to long-term uses, interest-free loans to group companies, and mismanagement of receivables and stocks.

3. Respondent's Defense Against the Allegations:
The respondent company opposed the petition, stating that it had been a profit-making company until the financial year 2010-11 but faced financial stress due to various factors such as economic slowdown, currency devaluation, and delays in debt recovery. The respondent claimed that the refusal of further loans and working capital by the consortium of banks, including the petitioner, compounded its financial stress, forcing it to scale down and eventually close its operations. The respondent also highlighted that it had approached the Corporate Debt Restructuring (CDR) mechanism and that a detailed investigation by reputed consultants had already been conducted, which found the company technically viable.

4. Jurisdiction and Maintainability of the Petition:
The tribunal noted that Section 213 of the Companies Act, 2013, empowers it to investigate the affairs of a company on an application made by any person, including creditors. The tribunal found the petition maintainable, rejecting the respondent's objections regarding delay, forum shopping, and the applicability of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), as SICA had been repealed.

5. Examination of Evidence and Grounds for Investigation:
The tribunal examined the evidence and found that the petitioner had shown prima facie evidence of the respondent company giving interest-free loans to group companies while paying interest on borrowed funds, indicating a diversion of funds. The tribunal also noted the reduction in stocks without a corresponding reduction in working capital limits, suggesting mismanagement. Adverse comments in the audited balance sheets, such as defaults in statutory dues and non-compliance with corporate governance norms, further supported the petitioner's case. The tribunal concluded that there were sufficient grounds to order an investigation into the affairs of the respondent company.

Conclusion:
The tribunal allowed the petition, directing the Central Government to appoint an inspector to investigate the affairs of the respondent company, M/s. Surya Pharmaceutical Limited. The registry was instructed to take follow-up steps accordingly, and a copy of the order was to be served to the parties.