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TMI Blog2004 (6) TMI 631X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent of ₹ 78 crores which is a huge sum considering the fact that it had not loaned such sum in its recent past, that too, to an investment viz. M/s Classic Credit Ltd, a company belonging to Ketan Parikh Group, which was in the share market operations which is a high risk and volatile business. In spite of the risk profile of the borrower, the directors of the company went ahead and loaned such a huge sum only on the strength of Balance Sheet of M/s Classic Credit, without obtaining any security whatsoever and thus endangering the shareholders' interest. The company had received back only ₹ 50 crores and is yet to receive balance amount of ₹ 28 crores for which, even though it received a cheque from Classic Credit Limited, the same has been dishonored. The company is unlikely to receive this amount as KP Group of companies went broke due to Stock Market scam in 2001. Even though there is a disclosure in the Balance for the year ended 31st March 2001, yet, the company had stated therein that it was confident of recovering the amount, however without disclosing the grounds on which the company had formed that opinion, as, by the balance sheet date, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same on 27.2.2001 to Classic Credit Limited. The manner in which this amount of ₹ 78 crores was raised and transferred by the company to Classic Credit which is a company of Ketan Parekh in haste, clearly indicates that the lending was meant for some other purpose than being a genuine business transaction. Even though in the proposal to UTI, the company had represented that the amount was required for brand promotion expenses, pre payment of outstanding ECB and expansion of Mahad Plant, it diverted the funds to Classic Credit Limited. Ketan Parekh utilized this amount for transactions in the stock market which resulted in a scam. Even though the company has received ₹ 50 crores back, yet, the balance ₹ 28 crores is yet to be received as the cheque for this amount given by Classic Credit Limited had bounced. Giving such a huge sum without any security and losing ₹ 28 crores in the process reflect a grave act of financial mismanagement on the part of the company. The company cannot be allowed to play with the funds of the banks and its investors. The company has become one of the instruments by which Ketan Parekh could manipulate the stock market. From the rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the majority shareholder. His removal from directorship and the new allotment were both set aside. Tea Brokers P. Ltd. v. Hamendra Prosad Barooah (1998 5 Comp L J 463 Cal.). 4. Where a conduct affected the revenues/profits/output/return to investors, it was held that it amounted to a conduct prejudicial to public interest. N.R. Murty v. Industrial Development Corporation of Orissa (1977 47 Com Case 38. ( 5. ) Shri Chaudhary, Senior Advocate appearing for the respondents submitted: The only allegation in the petition relates loaning of ₹ 78 crores-to M/s Classic Credit. There is not even a whisper of allegation in the petition of any other act of either oppression or mismanagement. Having found that with a single allegation the petition may not be maintainable, the petitioner filed an affidavit enclosing therewith a copy of the letter of the Inspecting Officer dated 14.9.2001 to the company to show as if there were many irregularities/violation of the provisions of the Act. The petitioner did not choose to file a copy of the reply given by the company by a letter dated 24.9.2001, explaining the stand of the company on each and every alleged irregularity/violation of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard of Directors of the company assessed that, advancing this amount to Classic Credit for a very short period would not involve any special risk and accordingly loaned this amount which was not needed for any immediate use by the company. In the process the company was also assured of 16% interest. In view of the credit worthiness of M/s Classic Credit and also of the fact that seeking for and creation of security would take considerable time, the Board did not insist on any security. Parking of surplus idle funds for short periods with the view to earn interest, is not uncommon. The very fact that a sum of ₹ 50 crores was returned within a period of three days by M/s Classic Credit would vindicate the decision of the Board of Company. Unfortunately, even though Classic Credit remitted balance amount of ₹ 28 crores by a cheque, it bounced, as by that time the stock market scam had come to light and the bank accounts of all Ketan Parikh companies had been frozen. However, with a view to protect the interest of the company, it has already initiated proceedings under Section 138 of the Negotiable Instruments Act and has also been obtaining acknowledgement of debt from Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tition is the briefest petition that has been filed before this Board under Sections 397/398 or under Section 408 of the Act. The main petition consists of 6 pages of which the only allegation relating to the loaning of ₹ 78 crores by M/s Kopran, runs to two pages. No supporting documents, like the inspection report (the source of knowledge), or a copy of the preliminary report of SEBI, Balance Sheet of Kopran etc had been filed with the petition, even though they were filed subsequently. One of the basic principles of pleadings, that too in a petition under Sections 397/398 or under Section 408, that full particulars including all the materials relevant for deciding the petition which are available with the petitioner should be disclosed in the petition itself. (Re Clive Mills co Ltd -34 cc 731 Cal: Bengal Lakshmi Cotton Mills Ltd- 35 CC 187: M.M. Dua v. Indian Dairy & allied Services P Ltd-86 CC 657CLB ). In the present case more, and more materials were added by and by even though they were always available with the petitioner. By a subsequent affidavit, the petitioner, on the basis of a notice issued by the inspecting officer to the company, contended that the contents of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s within a period of 3 days. According to the company, the bouncing of cheque for ₹ 28 crores was on account of detection of the stock market scam and consequent freezing of bank accounts of Classic Credit, while according to the petitioner, Classic Credit had gone broke and had no funds to meet this liability. In either event, even if the company had taken security, it might not have been able to enforce the same. Therefore, the only issue for consideration is whether the company could have at all parked funds raised for some specific purpose, with a third party. There are catena of judgments to the effect that a judicial forum cannot sit on judgment on business/ commercial decisions which are within the ambit of the powers of the Board of Directors unless the power has been used for an ulterior motive or with an intent to defraud the company or to bestow an undue advantage to an outsider or in breach of the fiduciary duties of the directors. The admitted position in the present case is that, till the stock market scam came into light, Ketan Parekh had a good reputation, on the basis of which the company had lent this amount. If it had been established that the Board of dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has dealt with the Financial Position and Working Results for 3 years and he had opined that the "working results appear to be satisfactory". ( 9. ) The petitioner has pointed out, subsequent to the filing of this petition, by filing a copy of the letter dated 14.9.2001 issued to the company that there were instances of violations of other provisions of the Act during the year 2000-2001, which would indicate that the affairs of the company are mismanaged. I have already indicated at para 4 of this order, the various Sections in respect of which the petitioner has alleged violation. THE requirements of all these Sections are procedural, violation of which cannot lead to a conclusion that such violations are prejudicial to the interest of the company or public interest. Most of these Sections provide for penalties for violation and are compoundable and it is stated that the company/directors have already applied for compounding. THE petitioner has relied on Konakan Chemicals P.Ltd case to state that violation of statutory provisions and Articles would constitute mismanagement. In that case, the company was a private company, and the allegations in that petition related to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a manner "which is prejudicial to the interest of the company ......". The expression in the present tense and not in future or past. The Company Law Board cannot interfere on the basis that a company in future would be acting in a manner prejudicial to public interest". As I have pointed out earlier, the acts complained of either relate to a single act of commercial misjudgment or violations of procedural requirements. For the proposition that even a single act could warrant action under Sections 397/398, the petitioner has relied on Tea Brokers case. That case related to allotment of additional shares and the Court held that even though the allotment of further shares was a single act, it had continuous effect. Therefore, that case has no bearing on the present case. In Re Macro case, the company had a single director and his action regarding some property deal was questioned by the petitioner While holding that the Court cannot interfere with the commercial judgment of the Board, but considering the fact that the Board had only one director, it directed him to purchase the shares held by the petitioner. Thus, this case also has no application in the present case. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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