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TMI Blog2012 (8) TMI 692X X X X Extracts X X X X X X X X Extracts X X X X ..... company, the third party for the purpose of clause (e) of Section 402, was not obtained. Neither the order impugned records so nor there is any other material on record to show that any such consent was obtained - directions to recovery of interest from the appellant company by the respondent No.2 company, is set aside CLB appears to have proceeded rather on the wrong assumption that according to the auditor's report of the year 1988-89, the appellant company was not possessing many facilities and that the facilities were not availed by the respondent No. 2 company as appears that the pronoun "it", as used by the auditor in his report, was taken by the CLB to mean as if the appellant company was not possessing many of the facilities. The report, read as a whole, makes it clear that the expression "it does not possess" referred to the respondent No. 2 company, in whose regard the audit report was being made, and not to the appellant company. - S.B. COMPANY APPEAL NO. 1 OF 1998 - - - Dated:- 2-7-2012 - DINESH MAHESHWARI, J. M.S. Singhvi And Hemant Dutt for the Appellant. JUDGMENT 1. This appeal under Section 10-F of the Companies Act, 1956 ('the Act') is directe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on but the final submissions having been confined to the following four prayers:- "1. Framing a scheme for the management and control of the company so that R-2 ( respondent No. 3 herein ) is divested of his power to control. 2 to 8. ( not pressed ) 9. Ordering refund of Rs. 55 lakhs taken by R-3 ( the appellant herein ) through a prejudicial agreement with the company and to declare that such act was without authority. 10. Appointing a Special Auditor to audit the books of accounts of the company for the past years. 11. To pass such orders to bring to an end the matters complained of." 4. The CLB also took note of the crux of the allegations ultimately pressed on behalf of the petitioner in the following:- "The two allegations which were ultimately pressed on behalf of the petitioner relate to (a) clandestine manipulation of accounts, fraudulent inflation of expenses and misappropriation of funds (b) misuse of the position by R-2 and other directors for entering into an agreement with R-3 wholly prejudicial and against the interest of the company. In addition, the allegation of investment of substantial funds of the company in other companies were also considered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cording to the petitioner, was commercially inexpedient and wholly one sided; and the terms thereof were against the interest of the advancing company and its shareholders. It was also stated by the petitioner that no facilities were actually created as per the agreement and only after institution of the petition that the respondent company proceeded to take some action. 8. The submissions of the petitioner were replied on behalf of the advancing company in the manner that the petitioner had the notice of the meetings dated 25.06.1983 and 30.09.1983 where the agreement in question was finally approved. It was stated that the Department of Tourism, Government of India, which had classified Lake Palace Hotel in Five Star Deluxe Category, withdrew such classification in the year 1973; and the company was required to file a fresh application for being rated in Five Star Deluxe Category. For this purpose, according to the respondent, certain compulsory and essential services and amenities were to be provided but for the hotel being located on an island, the company could not possibly provide for such facilities like proper swimming pool, beauty parlour, health club, indoor and outdo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract could not be questioned in the petition under Section 397/398 of the Act and no modification in the agreement with third party could be made without its consent to which, the CLB observed that the respondent No. 2 before it (respondent No. 3 herein) was having substantial interest in the appellant company as well; that the agreement had had a continuing adverse effect on the advancing company due to the interest liability; and that the appellant company had been a party to the proceedings; and further that the full amount was liquidated only during the pendency of the proceedings. The CLB though found no case for ordering special audit but considered it proper to issue directions with regard to payment of interest by the appellant company. The considerations, observations, findings, and the directions of the CLB in this regard read as under:- "Inter corporate loans and investments by private companies are not very closely regulated by company law as it is done in case of public companies. In other words the law is comparatively relaxed as far as private companies are concerned. In this case the company appears to have obtained the approval of the board of directors at a mee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultaneously borrowing money at market rates of interest. In the circumstances, even though the entire loan has now been repaid, it is appropriate that R-1 company should be compensated by way of interest on the outstanding loans for the entire period from 1993 till the date of repayment at the same rate of interest at which it had borrowed funds from the banking system after adjusting for any share of profits already passed on. Accordingly we direct R-1 shall immediately take action to recover from R-3, interest at the then prevailing bank rates on the outstanding loan amount after adjusting for repayments from time to time and share of profits, if any, passed on to R-1 company. At this juncture we note the objections of the Counsel for the respondents that a concluded contract cannot be questioned in a 397/398 petition and that no modification in an agreement with a third party could be made without his consent. In this connection it is necessary to point out that R-3 is not totally an outsider. It is a company in which R-2 has substantial interest. The agreement has had a continuing adverse effect on the company due to interest liability on the amount of R. 55 lakhs. Besides, R-3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd having failed to raise the matter in any of the Board's meetings, had clearly acquiesced in the agreement and it was not open for him to challenge the past and concluded transactions; and the baseless challenge was also rendered redundant with the contract having been terminated on 09.10.1993. It is also the ground of the appeal that the CLB has erred in assuming, with reference to the auditor's report for the year 1988-89, that the appellant company was not possessing many facilities; and such observations had been of misreading of the auditor's report wherein reference was made to the facilities not possessed by the respondent No.2 company and not the appellant company. It has also been contended that there was no reason or justification with the CLB for passing the order for payment of interest against the appellant company in this matter where the respondent No. 1 earlier filed the petition before this Court and withdrew the same seven years later for no plausible reason, and then, in these de novo proceedings too, either several of the prayers were not pressed by the petitioner or the imprecise allegations were rejected by the CLB itself. 12. It is noticed that this app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, on the other, namely:- ( i ) the managing director, ( ii ) any other director, ( iii ) and ( iv )** ** ** ( v ) the Manager, Upon such terms and conditions as may, in the opinion of the Tribunal , be just and equitable in all the circumstances of the case; ( e ) the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned; ( f ) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under section 397 or 398, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference; ( g ) any other matter for which in the opinion of the Tribunal it is just and equitable that provision should be made." ( Note : At the time of dealing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver might be or might have been the general powers of CLB in the petition under Sections 397/398 of the Act, so far modification of an agreement between the company and a third party was concerned, the CLB could not have ordered its modification without the consent of such third party. 17. The CLB, in the present case, though has ordered a fundamental modification in the terms of the agreement between the appellant company and the respondent No. 2 company but then, the consent of the appellant company, the third party for the purpose of clause (e) of Section 402, was not obtained. Neither the order impugned records so nor there is any other material on record to show that any such consent was obtained. On the contrary, the record shows that an argument in regard to the aforesaid requirements of the consent of the appellant company was advanced before the CLB but the same was negatived with the observations that the respondent No. 3 was having a substantial interest in the appellant company who was party to the proceedings; and that the agreement had a continuous adverse effect on the company (respondent No. 2); and that despite termination of the agreement in the year 1993, ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his report, was taken by the CLB to mean as if the appellant company was not possessing many of the facilities. The report, read as a whole, makes it clear that the expression "it does not possess" referred to the respondent No. 2 company, in whose regard the audit report was being made, and not to the appellant company. In fact, the respondent No. 2 company was to be made available some such facilities which were not possessed by "it" i.e., the respondent No.2; and such facilities were to be made available by the appellant company. Of course, it transpires from the record that "all" the requisite facilities were not made available by the appellant company to the respondent No. 2 company; but it does appear at the same time that some of the facilities were indeed made available; and it is difficult to conclude that the appellant company was not possessing the requisite facilities. The order impugned, obviously, proceeds on an unjustified deduction on an improper reading of the relevant document. 20. The reasons foregoing appear sufficient to conclude this appeal and there appears no necessity of entering into any other aspect of the matter as urged on behalf of the appellant, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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