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TMI Blog2006 (6) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company and the said Company was run by the 2nd respondent as Managing Director, by looking after day-to-day affairs of the Company. Though the Company did well from its incorporation in the year 1982 and made profits over the period of six years, but however, during the years 1989-90 and 1990-91 due to mismanagement of the 2nd respondent, the Company suffered huge losses and the entire reserves that were built up as well as share capital was eroded completely. Since the said losses happened due to the mismanagement of the 2nd respondent-management, audit was conducted for the year 1989-90 and the said audit report shows that the 2nd respondent had in fact committed illegalities so as to cause loss to the Company to his benefit. 3. An application was filed by the Corporation under section 235(2) of the Act, seeking an order for investigating into the affairs before the Company Law Board. The Corporation relied upon the Management Audit Report as well as statutory Audit Report for the year 1990-91, which clearly points out the misdeeds of the Managing Director, the 2nd respondent herein, therefore, sought for an order for investigating into the affairs. But, however, the respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discretion against the appellant-corporation. Since the Company Law Board had exercised its discretion on consideration of the material on record, the said discretionary order does not warrant any interference by this Court in the present appeal. The learned counsel also contended that the Company Law Board gave categorical findings that the Corporation failed to substantiate its claim with respect to the alleged mismanagement or misdeeds said to have been committed by the 2nd respondent as Managing Director of the Company by filing any comparative statement with respect to the working of other similarly placed companies. In the absence of any such material, the impugned order does not call for any interference. The learned counsel also relied upon various decisions in support of his contention, which shall be considered later. 6. Admittedly, the appellant/applicant A.P. State Civil Supplies Corporation Limited is a Company fully owned by the Government of Andhra Pradesh, which was formed with an object of procuring as well as distribution of essential commodities to the public. In the policy of the State to develop agro based industries, the State owned Corporation along with pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company because of the mismanagement of the Managing Director, the 2nd respondent herein. Had this amount was not caused loss to the Company, the Company would have declared a profit of Rs. 12,26,947.85ps as against the loss declared of Rs. 6,80,642.00. Similarly the statutory audit report for the year 1990-91 also shows similar losses caused to the Company under as many as 14 items specified in the said auditor's report. In view of the above losses caused, the Corporation approached the Company Law Board with an application under section 235(2) of the Act, seeking for an order of investigation into the affairs of the Company. 8. The said application was contested by the contesting respondents, contending that after the first Management Auditor's report dated 16-10-1990, the 2nd respondent submitted certain explanations with reference to the items found against him, basing on that the Management Auditor submitted another report dated 31-12-1990, as per which, the original findings against the 2nd respondent were omitted in respect of three of eight items, and further there was substantial reduction with reference to two other items and thus, as per his own findings, instead of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to have been made only after the auditor's report, which is apparently made in order to cover up the illegality. 11. The second item relates to shortage of oil in oil production. The allegation against the management is that due to mismanagement short production of oil was shown to a tune of Rs. 18,33,886. The explanation given by the respondents is not clear. They simply stated that the opening balance of bran was 535.46 MT and thereafter the respondents did not even state what is the quantity of bran that was purchased during the year and what was the content as per the estimation and what was the real production. The respondents gave only hypothetical explanation showing that there was an excess production of 72.541 MT. It is not known how even the management auditor has accepted this explanation when the respondents did not give exact quantities of rice bran of different varieties that had been purchased during the year. 12. Similarly excess of closing stock was shown as on 31-3-1990 to the tune of Rs. 8,51,510. The Management Auditor found that the sales as per the production records was 1671.803 MT, whereas as per the Invoices and Sales Register it was 1721.204 MT, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to be borne by the Company. The Management Auditor was also found that though the Directors are interested in the transactions, no disclosure of interest was made in the Board of Directors meeting, which is mandatory under the provisions of the Act. The Management Auditor has also arrived at the excess sale consideration paid to the tune of Rs. 2,07,743.85ps, working out the excess sale consideration paid at Rs. 5 over and above the rates at which the Company paid to other similarly placed suppliers. 14. It was also found that excess transport charges were paid to the Bomboo Dust Transportation. The Bomboo Dust which was used as substitute to coal, was transported from the suppliers point through the lorry owned by Smt. J. Lakshmi, the Director of the Company and the wife of the Managing Director. The transport charges are being paid at the rate of Rs. 75 per MT, there is no written agreement between the Company and the owner of the lorry. The vehicle was used throughout the year and transported around 2,400 MT. The Auditor's report shows that local enquiries reveal that transport charges were at Rs. 50 per tonne as per the prevailing market rate. Thus, an excess of Rs. 60,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as shortage in oil production, shortage in yield, inflated stocks by filing statements to the State Bank of India availed higher credit facility and in fact had drawn the amounts from the State Bank of India, basing on the higher credit facility provided showing inflated stocks which were subsequently found not available even by the Bank. With reference to the said statutory audit report, there was absolutely no explanation by the 2nd respondent, and in fact even the Company Law Board did not consider this report, but merely observed that the Corporation did not produce any material to substantiate its claim of misappropriation by the 2nd respondent. It is stated that even the Company Law Board found that the 2nd respondent had effected heavy withdrawals over Rs. 67 lakhs from the State Bank of India by showing inflated stocks though such stocks were not in fact available to give as security. But, however, further found that the Corporation did not produce any other independent material to substantiate its claim that only the present Company has suffered loss while other similarly placed units have made profits. The said observation of the Company Law Board may not be proper and ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 528 965.786 1249.568 335.277 201.108 427.030 2.760 509.050 June 141.911 75.027 1031.979 1186.641 165.458 32.204 443.590 19.320 July 144.111 52.065 831.559 1118.708 446.497 50.379 179.866 9.135 August 132.096 43.254 781.173 539.339 522.914 61.264 121.968 2.400 September 114.139 18.957 908.381 625.399 541.352 55.420 91.675 2.090 October 115.751 20.559 778.415 475.933 580.427 98.660 97.594 8.005 November 106.139 10.947 925.155 618.063 415.298 97.321 89.589 - December 146.882 32.040 1105.533 771.177 584.267 144.670 97.594 10.015 1991 January 107.560 12.282 832.503 405.447 529.260 260.225 215.529 144.655 February 137.416 25.098 858.835 339.785 525.228 279.521 110.604 61.665 March 129.699 23.496 697.571 189.516 581.597 279.150 145.027 76.038 There is no explanation from the 2nd respondent as to the above discrepancies. 18. The Statutory Audit Report for the year 1990-91 reveals that sales of De-oiled bran was effected in favour of M/s. Venkatarama Poultry Farm, Undrajavaram at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture, it would be appropriate to refer to the judgments relied upon by the counsel for the parties. 21. The learned counsel for the appellant relied upon a decision of this Court in Uunet India Ltd. v. I.C. Rao [1998] 93 Comp. Cas. 41 (AP) where a learned Single Judge of this Court while considering the scope of the enquiry under section 237 of the Act held that it must deal only with the said power, which is expressly conferred on the Company Court to order investigation, which is one of the modes for getting the investigation by the Central Government. It was held that the Court while considering an application under the said provision has no power to pass any other interim orders or otherwise. 22. In S. Indrasena Reddy v. Indo Rock Granites Ltd. [C.P. No. 140 of 1997, dated 8-11-2000] the Company Judge of this Court while considering an application under section 237 of the Act, while denying the other reliefs that are sought for, ordered the application directing the Central Government to appoint on or more competent persons as Inspectors to inspect the affairs of the respondent-company. 23. The learned counsel for the respondents, on the other hand, relied upon the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidering whether they are relevant. 25. In Rohtas Industries Ltd. v. S.D. Agarwal AIR 1969 SC 707 the Apex Court while considering the scope of enquiry under sections 235 to 237 of the Act, observed : "The power conferred on the Central Government under section 235 as well as under section 237(b) is a discretionary power whereas the Central Government is bound to appoint one or more competent persons as Inspectors to investigate the affairs of a company, and to report thereon in such manner as the Central Government may direct if the company by special resolution or the Court by order declares that that the affairs of the company ought to be investigated by an Inspector appointed by the Central Government under section 237(a)( i)(ii). It may be noted that before the Central Government can take action under section 235 certain pre-conditions have to be satisfied. In the case of an application by members of the company under clause (a) or (b) of section 235, the same will have to be supported by such evidence as the Central Government may require for the purpose of showing that the applicants have good reasons for requiring the investigation, and the Central Government may, before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing an inference of the enumerated kind, will not be valid. In other words, the enumeration of the inferences which may be drawn from the circumstances postulate the absence of a general discretion to go on a fishing expedition to find evidence. The formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. 28. The question whether circumstances have been shown to exist from which, reasonably, an inference of the nature contemplated by the provision can be drawn is a matter for judicial consideration. It is not sufficient for the Board to merely allege some facts which raise some suspicion in order to enable it to enter into a fishing expedition or to undertake an investigation as a result of which possibly some case could be made out against the company. The term "fraud" connotes actual dishonesty and, however, much the Court may disapprove of a personal conduct, it must consider whether the person has been guilty of dishonesty. Misfeasance results from an act or conduct in the nature of a breach of trust or an act resulting in a loss to the company. Misconduct of promoters or directors as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumulated over a period of years as well as the share capital contributed by both the Corporation and the Directors. For the first time, as the Company had declared huge loss during the years under reference, the Management auditor was appointed to go into the irregularities and in fact the Management Auditor found for the year 1989-90 that irregularities have been committed so as to cause loss to the Company. The irregularities are in the nature of causing loss to the Company while benefiting the persons, who are in the management. Though it was claimed that the second respondent-Managing Director submitted his explanation to the first Management Auditor's report, basing on which certain of the findings recorded against the 2nd respondent in the original report were diluted, though with reference to certain of the allegations, they were found even after the explanation against the 2nd respondent. Therefore, it was contended before the Company Law Board that there is no cause for further investigation into the matter. But even the statutory audit report for the year 1990-91 is almost on the same lines as that of the first management auditor's report, where it was found that the Man ..... X X X X Extracts X X X X X X X X Extracts X X X X
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