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TMI Blog2007 (7) TMI 702X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Company; (d) non-payment of (i) salaries to staff; (ii) statutory liabilities, (iii) electricity bills of the hospital; and (iv) non-honouring of a large number of cheques issued on behalf of the Company; (e) unauthorised payment of (i) several lakhs of rupees towards commission; and (ii) interest on account of Multhani and Marvari Loans; (f) failure to discharge huge loan amounts availed by the Company from its bankers and financial institutions; (g) committing various financial irregularities and incurring of huge expenses for expansion of the project as well as personal use, without authority of the board of directors; (h) non-placing of true financial position of the Company before the board of directors; and (i) unlawful surrendering of transplantation licence of human organs and closing of dialysis department, have invoked the equitable jurisdiction of the Company Law Board under Sections 397 and 398 of the Companies Act. 1956 ("the Act"), seeking the following reliefs: (i) to declare that the second respondent ceased to be director of the Company, on account of violation of Section 295 of the Act and that she vacated her office as director, by virtue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akhs of rupees, in terms of her instructions by way of notes to cash counter of the hospital; I.O.Us, self cheques and loans for payments to various parties towards discharge of her personal borrowings. The amounts so drawn by the second respondent are nothing but loans availed from the Company in violation of Section 295 of the Act. By virtue of this section, no loans should be availed by the second respondent, from the Company without obtaining prior permission of the Central Government and therefore, she automatically vacated her office as director pursuant to Section 283(1)(h) of the Act. Consequently, the board of directors at the meeting held on 31.07.2003 revoked the second respondent's powers as managing director of the Company, upon which she has now disposed of her shares in the Company. The special audit report of Shri V. Chandrasekharan & Associates, Chartered Accountants. Chennai clearly shows that the second respondent owed to the Company as on 31.07.2003 an aggregate sum of ₹ 1.73,47,917/-. The second respondent must be surcharged for diversion of the Company's funds and she is bound to bring back all the amounts withdrawn by her from the Company for di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease deed, however, without verifying the true contents. The registered lease deed dated 20.10.1992 cannot be substituted by any unregistered instrument and therefore, the unregistered lease deed was rescinded by the board of directors of the Company and called upon the respondents 2, 3 & 7 to bring back the excess rent and the lease advance of ₹ 100 lakh received by them. In view of Section 68 of the Indian Evidence Act, 1872, the CLB cannot take cognisance of any unregistered lease deed. Section 107 of the Transfer of Property Act, 1882 provides that a lease of immovable property from year to year, or for any term exceeding one year or reserving a yearly rent, can be made only by a registered instrument. Section 109 envisages that if the lessor transfers the property, the transferee steps into the shoe of the lessor and shall possess all rights and liabilities of the lessor in respect of the subsisting tenancy, as held by the Kerala High Court in Hajee K. Assainar and Co. v. Chacko Joseph . By virtue of Section 17(1)(d) of the Registration Act. 1908 any lease of immovable property from year to year or for any term exceeding one year, or reserving a yearly rent shall be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to Shri K. Shanmugam, brother of the fourth respondent was leased out to seventh respondent, which carried out certain additions and renovations therein. By an agreement of sale dated 27.08.1992, the seventh respondent and Shri K. Shanmugam had agreed to sell this property for a sum of ₹ 145 lakh in favour of the Company, out of which a sum of ₹ 62 lakh was payable to Shri K. Shanmugam and the balance of ₹ 83 lakh to the seventh respondent. The sale shall be completed within six months from the date of sale agreement, namely. 27.08.1992. Though, the entire sale consideration of ₹ 145 lakh was paid as agreed, in terms of a communication dated 02.05.2002 addressed by the Company in favour of the Income Tax Department, yet no sale deed was registered in its name. At the same time, the second respondent had subsequently executed a fresh agreement of sale in favour of the Company for a consideration of ₹ 430 lakh, as a power agent of Shri K. Shanmugam. pursuant to a registered power of attorney dated 10.12.1999, without disclosing the earlier power of attorney dated 27.08.1992 given by Shri K. Shanmugam, in respect of the property, (Door No. 149. Luz Chur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion fund, insurance fund contributions, etc. The circular communications dated 14.07.2003 and 21.07.2003 issued by the second respondent indicate that staff members of the hospital have been advised to wait for the salaries and further operation theatre could not be utilised for want of electricity. The second respondent surrendered the licence of the Company for organ transplant, as per the communication dated 08.08.2003 of the office of Director of Medical and Rural Health Services, Chennai-600 006. Consequently, dialysis department was closed and kidney transplantation came to be stopped at the hospital, at the instance of the second respondent, gravely affecting a large number of patients undergoing kidney transplantation as well as profitability of the hospital. The second respondent is wholly responsible for all the financial irregularities in the affairs of the Company and thus, her conduct is prejudicial to public interest and oppressive of its members, which would justify the making of a winding up order on the ground that it is just and equitable that the Company should be wound up. However, any such order of winding up against the Company will unfairly prejudice the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease deposit of ₹ 100 lakh. The respondents 1 to 3 and 7 must be restrained from disturbing possession of the Company in any manner pursuant to the registered lease deed dated 20.10.1992. The second respondent having ceased to be director, must be directed to surrender ill cheque books, original records and licences granted by various authorities in favour of the Company. The second respondent must bring back an amount of ₹ 285 lakh, being the difference in sale consideration of the property, bearing door No. 149, Luz Church Road, Chennai-600 004. The Company's shares are listed in the Chennai and Mumbai Stock Exchanges. There are nearly 11,000 shareholders and therefore, the Bench-may pass appropriate order, as sought by the petitioners in terms of para VIII (b), (d), (h), (i) & (j) of company petition safeguarding the interests of the Company and its shareholders, for grant of which the books of account of the Company are in no way required. 3. Sri Uma Shankar, learned Counsel appearing for the respondents 2, 3 & 7 while opposing the company petition submitted: 3.1 The petitioners are colluding with respondents 4 to 6 while seeking reliefs under Section 397/398 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orting to unethical practices, acted contrary to provisions of the statute in connivance with intermediaries in organ transplant operations and brought a bad name to the hospital, thereby causing serious prejudices to the lives of patients undergoing treatment in the dialysis department, as borne out by several adverse reports which appeared against the hospital in local dailies. In these circumstances, the second respondent, with a view to protect image of the hospital, surrendered the licence to run the renal department, in favour of the Director of Medical Services. 3.4 The second respondent did not raise the monthly rent in respect of the property bearing No. 148, Luz Church Road, Chennai-600 004 from ₹ 40.000/- to ₹ 4 lakh, after becoming the managing director and owner of the said property. The monthly rent was never ₹ 40.000/- but there were periodical changes in payment of rent, as borne out by the balance sheet of the Company for the years between 1997-98 and 2004-2005. The registered lease deed dated 20.10.1992 was not at all acted upon by the parties to the lease deed and the rents were never paid as per the registered lease deed When the second respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither paid or kept by the lessee with the lessor in terms of the unregistered lease deed, which has been neither substantiated by any documentary proof This respondent is in agreement with the proposition that any lease above eleven months is compulsorily registerable, in absence of which it is inadmissible in evidence. However, the case laws cited in this behalf on behalf of the petitioners are not applicable to the facts of the present case, especially when, the parties have never acted upon the registered lease deed, but on the other hand paid rents for more than eight months, pursuant to the unregistered lease deed dated 20.11.2002. which however, came to be reversed in the books of account of the Company, after removal of the second respondent from the office of managing director of the Company. When the Company failed to pay rent, the second respondent initiated eviction proceedings before the Rent Control Court, wherein it was clearly indicated that the monthly rent for the property in question is ₹ 4 lakh and therefore, the Company cannot take advantage on account of the lease deed being unregistered one. The Company failed to pay ₹ 68 lakh as directed by the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that no opportunity of hearing has been afforded by any of them, while verifying the books of account. The petitioners without production of books of account and without any proof cannot seek for reimbursement of the amounts allegedly diverted by the second respondent. The private financiers have filed a number of civil suits against the second respondent for recovery of the outstanding dues, of which more than 50 civil suits involving an aggregate sum of ₹ 70 lakh have been settled by the second respondent and necessary steps have also been taken for recovery of the said sum from the Company. When the second respondent was removed from the office of managing director, the Company owed an amount of ₹ 270 lakh to her. as borne out by the statement of accounts produced before the Bench. At no point of time, the second respondent availed any loan from the Company to discharge her personal loans. The Company was forced to resort to borrowings from money lenders in view of refusal by the banks to lend any money to the Company. All the withdrawals by way of I.O.U's are not loans taken by the second respondent from the Company. These represent the transactions relatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained by the Company before submitting their reports. Therefore, there is no possibility on the part of the second respondent for removing any books of account or minutes book of the board meeting maintained by the Company. The second respondent neither has nor can have custody of the books of account and statutory records of the Company. The respondents 2, 3 & 7 through their counsel caused a notice dated 10.02.2006 calling upon the petitioners to produce the original minutes of the board meetings, books of accounts, original least and sale deeds, vouchers, etc. for which Counsel for the petitioners in his communication dated 15.02.2006 simply conveyed that his clients are not in possession of the records sought by the petitioners. The sixth respondent in his affidavit of March, 2006 falsely stated that he is advised to report that the original minutes of the board and general meetings have been removed by the second respondent. The statement of the sixth respondent is not reliable, as it was hearsay and not admissible in evidence. The second petitioner, b} way of counter, in a proceeding initiated by the second respondent in C.S. No. 549 of 2006, before the High Court of Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration on account of sale of the property (Door No. 149, Luz Church Road, Chennai-600 004) cannot be sustained on the basis an affidavit from Shri K. Shanmugam, and the petitioners cannot plead the case of Shri K. Shanmugam. 3.8 The unregistered lease deed dated 20.11.2002 has been approved by the board of directors and acted upon by them. The lease deposit of ₹ 100 lakh is a mere book entry and never paid by Company and therefore, there is no question of reimbursement of the lease deposit amount of ₹ 100 lakh. Moreover, the prayer for cancellation of the unregistered lease deed dated 20.11.2002 and refund of ₹ 100 lakh being the lease deposit by the respondent 2, 3 & 7, will not arise, in view of pendency of the appeal proceedings before the High Court, which arose on account of the Rent Control proceedings. The claim of the petitioners for an order of injunction restraining the respondents 1 to 3 & 6 from in any manner disturbing possession of the Company, pursuant to the registered lease deed dated 20.10.1992 cannot be considered unless and until the proceedings before the High Court are finally adjudicated. 3.9 The second respondent neither violated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oners provided she is given an opportunity of personal scrutiny of such records and the second respondent will abide by any findings of the auditor. Similarly, the second respondent has no objection for (i) supersession of the board of directors of the Company; (ii) appointment of an administrator or a committee of management to look after the day to day affairs of the Company; and (iii) appointment of an auditor to conduct an investigation in regard to the purported diversion of funds of the Company to discharge the personal borrowings of the second respondent. 3.11 The object of Section 397 is to bring to an end the acts complained of by the aggrieved shareholders. Any application under Section 397(1) will be only when the Company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members. Thee must be both specific pleading and proof by the petitioner regarding the requirement prescribed in Section 397(2)(b) of the Act failing which, no petition can be entertained, as held in Asoka Betelnut Co. Private Limited v. M.K. Chandrakanth (1998) 1 Camp L.J. 325 (Mad). This requirement is missing in the present case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since a prima facie conclusion has to be reached based on certain materials before ordering any investigation. In the absence of full particulars, the court will decline to embark upon investigation into charges of fraud and misconduct. The petitioners have neither brought out any facts which would justify the making of a winding up order, on the ground that it was just and equitable that the Company should be wound up nor made out that such a winding up order would unfairly prejudice the petitioners non-existence of which is fatal to the petition, as held in Suhhash Chand Aggarwal and Anr. v. Associated Limestone Limited and Ors. (1998) 2 Comp LJ 329. 312. The second respondent paid an amount of ₹ 33 lakh to R.R. Associates in June, 2002 for availing a loan of ₹ 18 crore from 1WF & RC for the purpose of settling the amount due to the Dhanalakshmi Bank Limited and for improving the hospital. The Company's bankers, namely, Dhanalakshmi Bank Limited and Punjab National Bank conveyed their no objection in July 2002, in favour of IWF&RC for sanctioning credit facilities to the Company. When the credit facilities were to be extended by IWF&RC to the Company, all probl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of Property Act, 1882 a lease of immovable property determines, by implied surrender. The explanation to Clause (f) of Section 111 reads thus: "A lessee accepts from his lessor a new lease of the property leased to take effect during the continuance of the existing lease. This is an implied surrender of the former lease, and such lease determines thereupon." The Supreme Court in Shah Mathuradas Maganlal & Co. v. Nagappa Shankarappa Malage and Ors. held that if the lessee accepts a new lease that itself is a surrender under Section 111(f) of the Transfer of Property Act. 1882, which can also be implied from consent of the parties or from such facts as the relinquishment of possession by the lessee and taking over possession by the lessor. Relinquishment of possession operates as an implied surrender. The Calcutta High Court held in Muhammad Ibrahim v. Bani Madhah Mullick and Ors. held that if a lessee accepts a new contract of tenancy, it operates as a surrender of the old tenancy, for a new lease cannot be granted unless the old is surrendered. Such a surrender takes place by operation of law and the intention of the parties is immaterial. The Kerala High Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , she did not cease to be director. The internal auditor as well as the court appointed auditor never offered any opportunity of hearing to this respondent or second respondent, while verifying the books of account of the Company and finalising the reports on the purported diversion of funds by the second respondent. Hence, none of the reports is binding either the second respondent or fourth respondent. The Company has filed a civil suit before the Madras High Court against the second respondent for the same reliefs claimed in the present proceedings and therefore, this Bench has to await the judgment and decree of the High Court. There cannot be parallel proceedings in respect of the same facts and issues. Moreover, the disputed issues cannot be dealt with, on the strength of affidavits and a detailed oral enquiry and trial are necessary to adjudicate issues. 5.6 The plea of respondents 5 & 6, being directors from the inception raised in regard to the unregistered lease deeds that they did not verify the contents of the deed, but signed on account of their confidence reposed on the second respondent would show that the respondents 5 & 6 are in hand and glove with the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laborated elsewhere, leading to huge losses, suffered by the Company. It is observed that the board of directors considered at the meeting held on 31.07.2003, details of series of financial irregularities in the affairs of the Company at the instance of the second respondent and on detailed discussions. unanimously recorded that - (a) all withdrawals by the second respondent are contrary to Section 295 of the Act; and (b) she has consequently vacated her office as a director by virtue of Section 283(1)(h). Thereafter, the Company, through one of its directors, namely, the sixth respondent herein, who is supporting the cause of the petitioners in the present company petition, has filed a civil suit in C.S. No. 562 of 2003 before the High Court of Judicature at Madras in August, 2003, praying for a judgment and decree - (i) to declare that the defendant (second respondent herein) had ceased to be a director of the Company, since she has violated Section 295 of the Companies Act: and (ii) to restrain her from acting as a managing director/director and making any representation that she is a director of the Company. The High Court by an order dated 29.05.2004 made in O.A. No. 675/2003 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd above ₹ 40,000/- per month as well as lease deposit of ₹ 100 lakh. However, according to the second respondent, the Company neither acted upon the registered lease deed nor paid any lease advance, but the increased rent was paid from time to time with approval of the board of directors, which ultimately culminated into the unregistered lease deeds dated 20.1 1.2002. The registered lease deed dated 20.10.1992, which came into effect from 07.08.1992. is admittedly for a period of 30 years and contemplates yearly rent of ₹ 4,80,000/-. The balance sheets of the Company produced for various years disclose, among other things, the expenses incurred towards "lease rent", as under: Sl. No. Balance Sheet for the year ended Lease Rent per annum Remarks 1. 31.03.1993 8,40,000 Balance Sheet signed by respondents 2, 3 & Dr. A. Venugopal and Company Secretary 2. 31.03.1994 10.85,280 Not produced 3. 31.03.1995 8,40,000 Balance Sheet signed by respondents 2, 3, Dr. A Venugopal and Company Secretary. 4. 31.03.1996 10,20,000 Balance Sheed signed by respondents 2 & d and Geetha Rajkumar Menon 5. 31.03.1997 9,40,000 Balance Sheet signed by respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 01.12.2002 with monthly rent of ₹ 4,00,000/- and lease deposit of ₹ 100 lakh, as stipulated therein. These unregistered lease deeds are found to be executed and signed on behalf of the Company-lessee, by the respondents 5 and 6, according to whom, only one lease deed was' signed, however, without verifying the true contents therein. The respondents 5 and 6 being doctors with high degree of literacy, such a plea shall not be at their instance. The unregistered lease deeds with all the discrepancies, as rightly pointed out by Shri Uma Shankar, learned Counsel, are not forthcoming inspite of the notice dated 10.02.2006, given on behalf of the respondents 2, 3, and 7. While the enhanced rent at the rate of ₹ 4,00,000/- per month was reportedly paid by the Company, in terms of the unregistered lease deed dated 20.11.2002, the amount of rent paid over and above ₹ 40,000/- per month came to be reversed in the books of account of the Company, immediately after removal of the second respondent from the office of managing director, as borne out by the ledger extracts (lease rent payable - the respondents 3 & 7) maintained by the Company. The balance sheet for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amely door No. 149, Luz Church Road, Chennai-600 004, as reflected in the balance sheet for the year ended 3 1.03.2002. The respondents cannot disown the balance sheet figures, as mere book entries. In view of this, the petitioners cannot make any demand for repayment of the lease deposit of ₹ 100 lakh from the respondents 2, 3 & 7. 9. By virtue of an agreement dated 27.8.1992 the seventh respondent and K. Shanmugham being owners had agreed to sell the property, namely, bearing door No. 149, Luz Church Road, Chennai-600 004 in favour of the Company for an amount of ₹ 145 lakh and the entire sale consideration was admittedly paid as stipulated therein. Nevertheless, no sale deed was registered in favour of the Company by the second respondent as a power agent of K. Shanmugham. At the same time, the second respondent had executed a fresh agreement of sale on behalf of her principal, namely, K. Shanmugham in favour of the Company in respect of the same property for ₹ 430 lakh, upon which a sale deed came to be registered on 13.03.2002 in favour of the Company. There has been no proper explanation for having registered the property for an amount of ₹ 430 lakh, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 269 UL(1) of the Income Tax Act conveying no objection to transfer the property for a consideration of ₹ 430 lakh would show that the sale consideration paid by the Company was fair and therefore, the charges of oppression made on account of sale of the property do not merit any consideration. 10. The petitioners are making claim against the second respondent for huge sums of money by way of I.O.Us, self cheques, cash withdrawals, payment of interest to banks, Marwaris and Muthanis, etc. without any authority of the board of directors of the Company. The second respondent owed to the Company as on 31.07.2003 an amount of ₹ 1.73 crore in terms of the special audit report of Shri B. Chandrasekharan & Associates. Chartered Accountants, Chennai, whereas, the investigation audit report of Shri N.R. Suresh, appointed pursuant to the order dated 17.12.2003 of the High Court of Madras made in O.S.A. No. 342 of 2003 and CMP No. 15297 of 2003 indicates that the second respondent indebted to the Company to the extent of only ₹ 21.93 lakh. Thus, there is a vast difference in the quantum of amount which is said to be payable by the second respondent in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any primary records including the original minutes of the board meeting and books of account to substantiate the serious charges of unauthorised raising of loans and misappropriation of funds by the second respondent, despite the fact that Sri V. Chandrasekharan & Associates, and Shri N.R. Suresh, Chartered Acountant, verified the relevant records while determining the outstanding amount due from the second respondent. The second respondent was prohibited from functioning as managing director, by virtue of an order of the High Court in the suit (C.S. No. 562 of 2003) filed by the Company. The second respondent was admittedly allowed to take away her personal belongings from the Company's premises in the presence of an advocate commissioner appointed by the High Court. Furthermore, the second petitioner categorically pleaded in C.S. No. 549 of 2006 on the file of the High Court of Madras initiated by the second respondent that the books of accounts are available in their office. 11. In these circumstances, the Bench is bound to draw adverse inference against the petitioners and respondents 5 to 6 for non-production of books of account and the minutes of various board meetin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Ors. v. Best Vestures Trading Private Limited (Supra). In this context, the appreciation of the board of directors of the Company on account of the services rendered by the second respondent, as reflected in the directors' report forming part of the annual report for the year ended 31.03.2002 assumes relevance, which reads thus:... "During the year under review, the Company has achieved the total collection of ₹ 907. 14 lakhs, registering an increase of 17% compared to the previous year. Further, the Company, as promised earlier, has purchased in is name the, immovable property hearing Door No. 149. Luz Church Road, Chennat-600 004, thereby fulfilling its long term wish. Also the Company under the stewardship of the Chairperson and Managing Director. Mrs. Chitra Chokalingam has declared and paid for the first time in the Company's history, a modest dividend of 5% on its paid up capital for the year 2001-02 after fully wiping out all its accumulated losses." ...Any charges of mismanagement and siphoning of funds cannot be adjudicated in the absence of full facts and no order of any investigation can be made as held in Ravi Shankar Taneja v. Motherson Tripl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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