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TMI Blog2023 (4) TMI 1143X X X X Extracts X X X X X X X X Extracts X X X X ..... endent Auditor as claimed by him. In the instant case allegations had been made about wrongdoings and mismanagement in the affairs of the Company and the CLB directed for preparation of the Independent Auditor s Report which was to be submitted to it by the Independent Auditor. The NCLT (as the successor tribunal of CLB) ought to have taken note of, and examined and considered the contents of the report and provided adjudication. To have kept the Auditor s Report in sealed cover on the ground that Auditor s fees was not paid does not appear to be the correct course of action, as there was no necessity to link the two issues, moreso when the CLB had itself ordered for conduct of independent audit and submission of the final report to the CLB. As is noted in the pleadings in the original company petition and also in this appeal, the reason for undertaking investigation in the company was spelt out and a prayer was made for such investigation. Once the prayer was accepted by the CLB, and an investigation was carried out by the Independent Auditor, and the CLB had fixed the case for further consideration, the NCLT (to whom the Audit Report had been submitted) ought to have looked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Nos.3 4 : Mr. Jayant K. Mehta, Senior Advocate Ms. Geetika Sharma and Ms. Smiti Verma, Advocate JUDGMENT (Virtual Mode) [Per.: Dr. Alok Srivastava Member (Technical) 1. The present Company Appeal TA No. 87 of 2021 [earlier registered as CA (AT) No. 129 of 2019] has been filed against the final order dated 22.3.2019 (in short Impugned Order ) passed by the National Company Law Tribunal, Bengaluru Bench in CP No. 59/2014 (T.P. No. 66 of 2016) whereby the NCLT has dismissed the Company Petition filed by the Appellants. 2. In brief, the facts of the case as stated and argued by the Appellants, are that the Appellants Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy are minority shareholders of Respondent No. 1 Company (R-1) each holding 38,000 equity shares i.e. individually holding 13.68% of the issued, subscribed and paid-up capital of the Company. Further, the Appellants are also directors of R-1 Company. Appellants have further stated that due to a number of illegal and oppressive acts of Respondents No 2 to 5( in short R-2 , R-3 , R-4 and R-5 respectively), the Appellants filed CP No. 59 of 2014 (TP No. 66 of 2016) before the Company Law Board, Che ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Report is not appropriate consideration of the prayers made by the Appellants in the original company petition. Furthermore, he has claimed that the NCLT also erred in holding that the shares allotted to R-3 and R-4 and transactions relating to land were in accordance with law and aggrieved by the Impugned Order the Appellants have filed the appeal. 4. We heard the arguments of the Learned Counsels for all the parties and perused the record. 5. The Learned Counsel for Appellants has argued that the Appellants are minority shareholders in R-1 Company and they have filed Company Petition under Sections 397, 398, 402, 403, 406 and 409 of the Companies Act, 2013 against the Respondents, who are majority shareholders holding 64% of shareholding, challenging their actions regarding mismanagement in R-1 Company. The Learned Counsel for Appellants has further argued that by the Impugned Order, the NCLT has erroneously dismissed the CP No. 59 of 2014 (TP No. 66 of 2016) without considering the Final Audit Report submitted by the Independent Auditor M/s. Brahmayya and Company, Chartered Accountant, whereas notably the Chartered Accountant was appointed on the orders of the CLB for cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the Auditor would directly furnish a copy of the Final Audit Report to the parties, including the petitioners i.e. Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy, after payment of balance of Auditor s fees and the petitioners were granted liberty to file a fresh case in case the findings in the Auditor s report give any cause of action, and additionally all the pending IAs were dismissed without giving due consideration. The Learned Counsel for Appellants has submitted that investigation into the affairs of R-1 Company was ordered by the CLB and once the Final Audit Report was submitted to the CLB, it was necessary that the findings of the report were made available to the respective parties and adjudication was done in the light of the findings of the Auditor s report. Therefore, the NCLT has erred in closing CP No. 129 of 2019 and dismissing it without even looking at the contents of the Audit Report which include glaring instances of misconduct and wrongdoings in the management in the affairs of the R-1 Company, which was an important prayer in CP No. 59 of 2014. He has further contended that filing of a fresh petition would only result in unnecessary litigation, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Income-Tax proceedings where documents were produced before the Hon ble High Court but not noticed by the Hon ble High Court in its order, and therefore an order remanding case for consideration by the Hon ble High Court was made out 12. The Learned Senior Counsel for R-3 and R-4 has further contended that remand of the case to NCLT is not a matter of right and can be done only if the pleadings are present in the original Company Petition and all the parties, whose names and actions appear in the Final Audit Report, are joined in the petition as necessary parties. In this connection, he has cited the judgment of Hon ble Supreme Court in the case of Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. (2021 3 SCC 475), wherein it is held that in the absence of necessary pleadings, the question of remand will not make any difference since all the respective parties, who are necessary parties, should have been impleaded in the petition and only thereafter adjudication can be done on the contents of the Report and in the present case the persons against whom allegations have been made and findings rendered by the chartered accountant were not arrayed as parties in the original ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , wherein it is held that the issue requiring the payment of premium is not evidenced by any document and nowhere it is shown that the allotment of shares made to R-3 and R-4 was conditional upon payment of premium for shares allotment, and moreover, the petitioners namely, Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy were in control of the Company as directors, who allotted the shares and therefore, R-2, R-3 and R-4 cannot be held responsible and liable for any non-payment of premium. He has further referred to the Board s resolution allotting the shares, which has the signatures of both Shri M.N. Pratap Reddy and Shri M. Kiran Kumar Reddy and further in the additional documents filed by Diary No. 21249, the Form 2 regarding allotment of 177800 shares clearly shows that no premium was paid or was expected to be paid. On this basis, he has claimed that no relief or prayer is left for consideration in the original CP No. 59/2014 and therefore the appeal deserves to be dismissed. 16. The Learned Senior Counsel for R-2 has also argued that the shares were allotted in December 2011, whereas all transactions in the Audit Report relate to the period 2007 to 2010, when the mini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein it is held that a commercial contract approved by the respondents stands outside the ambit of sections 397 and 398 of the Companies Act, 2013 and failure to act in terms of the contract cannot be said to have amounted to oppression and mismanagement. 19. On the request of the Learned Counsels of the parties, we decided to hear the parties on merits too, since the appeal had been pending for quite some time, and we felt that after deciding the issue regarding remand of the matter to the NCLT, we could then consider the appeal on merits based on the findings in the Audit Report, if it was found necessary. Therefore, we will firstly take up the issue of remand on which arguments have been advanced by the Learned Counsels for rival parties. The arguments presented by the Learned Counsels on merits of the case are, therefore also being noted here. 20. While advancing arguments on the grounds of merits, the Learned Counsel for Appellants has claimed that the Respondents in the original Company Petition had given their consent for investigation to be carried out in the affairs of the Company by an Independent Auditor, as is recorded in para 3 of the CLB s order dated 13.10.2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ALL and TISSPL were made for the services which were rendered by the two companies in accordance with their contractual arrangement with R-1 Company and further the Appellants had approved all the payments. He has also claimed that M/s. Brahmayya and Company, the auditor appointed by the CLB favoured the Appellants and therefore, the Report prepared by them contains findings against the respondents which should not be relied upon. 23. We will first consider the arguments put forth by the rival parties on the issue whether the matter requires to be remanded to the NCLT for considering the issues that arise in the Final Audit Report. If the answer to this question is not in the affirmative and we do not find the case fit for remand, only then shall we consider the appeal on the merits of the findings of the Audit Report. 24. In doing so, we first look at the pleadings and reliefs sought in CP No. 59/2014, which is the genesis of this appeal. The prayers made in CP No. 59/2014 are as follows:- 8. Reliefs: Wherefore, the Petitioners pray that this Hon'ble Board may be pleased to pass on order: a. Declare that the Board Meetings dated 06.09.2014 and 20.09.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other incidental expenses to the Independent Auditor as claimed by him. 26. It is further noted that the order relating to the appointment of M/s. H.C. Kincha and Company, Chartered Accountant as Independent Auditor of R-1 Company was modified vide order dated 7.7.2015, and M/s. Brahmayya and Company, Chartered Accountant were appointed as Auditor to carry out the audit of R-1 Company and submit a report within a period of 30 days to the Bench. By an order dated 23.7.2015, the Company Law Board modified its earlier order dated 7.7.2016 and directed that the Independent Auditor M/s. Brahmayya and Company, Chartered Accountant shall carry out audit of the books of accounts of R-1 Company for the period 1.4.2007 to 31.3.2014. 27. The Independent Auditor furnished the Draft Audit Report to the parties vide e-mail dated 16.1.2017 and also furnished hard copy of the Draft Audit Report to the concerned parties. Thereafter, it is noted that the matter of payment of the Auditor s fees was considered by NCLT in CP No. 59/2014 and vide order dated 18.7.2017, the following order was given regarding payment of the Auditor s fees:- Only final report is to be submitted by the Auditor to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered by the NCLT in CP No. 59/2014 by order dated 19.1.2018, which was carried to NCLAT in appeal by CA(AT) No 77 of 2018, wherein the Appellate Tribunal was pleased to pass the final order as follows:- 28. In the course of arguments, we toyed with idea if the 7th Respondent appearing in person through Mr. N.S. Sudarshan Gupta would consider voluntarily accepting to reduce the fees to some extent. The 7th respondent fairly stated that it would accept the orders of the Tribunal and another Rs.4 or 5 lakhs may be reduced. However, going through the material on record and the impugned order for which the audit was involved and the mandays Company Appeal (AT) No.77 and 121 of 2018 which were required to be spent as well as the expenditure made on audit of sister concerns, we feel it would be improper for us to reduce fees, least it set a precedent and generating litigations with the hope of getting reduction through the Tribunal by agitating the fees. When the auditor is showing the fees on the basis of ICAI norms we find it improper to interfere. The appellants are also not with clean hands and plead insufficiency of money in their accounts and when the NCLT directed that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Final Audit Report. 33. It is also worth noting that the CLB while considering prayer 8(b) from among the main reliefs sought in CP No. 59/2014 had directed for appointment of an Independent Auditor, who was to submit his final report to the Bench within a period of 30 days. It was also directed in the said order that the Company shall pay the remuneration and other incidental expenses to the Independent Auditor as claimed by him. Notably, this order was given in the light of the consent given by both the parties, which is recorded in para 3 of the Impugned Order as follows:- With regard to the investigation to be carried out in the affairs of the Company is concerned, he submitted that the respondents have no objection in appointment of an independent auditor by this Bench to audit the books and accounts of the Company to ascertain the truth as alleged by the petitioners as prayed in para 8(b) of the main reliefs. 34. It is thus clear that the order for appointment of Independent Auditor to look into the accounts of R-1 Company and furnish draft audit report to the petitioners and Respondents was given with consent of the rival parties and it was also directed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the all these suggests that Extra Ordinary General meeting as ordered by NCLT be convened after convening the Board Meeting and giving proper notice in accordance with provisions of Companies Act, 2013. After approval of the Board, the specific agenda with statement in accordance with section 102 of Companies Act, 2013 to consider the proposal to sell the property based on Auction through the newspaper and online modes be placed before Extra-Ordinary General Meeting. An Independent Administrator be appointed by the NCLT in order to have a proper voting by poll and not by show of hands and all material facts in relation to sale of the property be placed in the Extra Ordinary General Meeting and all the deliberations are properly recorded. Based on the decision of Extra Ordinary General meeting the sale of property of the Company, if approved, be acted upon. The requirement of the Appellant herein to be the joint signatory to an agreement to sell or to a sale deed according to the impugned order is therefore removed. The NCLT is to review Independent Administrator's report for proper disposal of the cases at hand. We accordingly remand back the matter to NCLT, Hyderabad. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this behalf, the requirements where for can neither be denied nor disputed. 41. The above-cited observations are distinguishable as in the said case, the original company petition required complete pleadings for proper adjudication, whereas in the instant case allegations had been made about wrongdoings and mismanagement in the affairs of the Company and the CLB directed for preparation of the Independent Auditor s Report which was to be submitted to it by the Independent Auditor. The NCLT (as the successor tribunal of CLB) ought to have taken note of, and examined and considered the contents of the report and provided adjudication. To have kept the Auditor s Report in sealed cover on the ground that Auditor s fees was not paid does not appear to be the correct course of action, as there was no necessity to link the two issues, moreso when the CLB had itself ordered for conduct of independent audit and submission of the final report to the CLB. 42. We also note the following observations made by Hon ble Supreme Court in the judgment in the matter of Syeda Rahimunnisa (supra) :- 36. It is a settled principle of law that in order to claim remand of the case to the trial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment has been attempted to be made out by the petitioners. However, in the facts of the case it becomes difficult to take a different view as has been expressed both by CLB as also by the High Court. 44. Admittedly, Respondent 5 is a majority shareholder in Respondent 1 Company and at the same time the EPC contract has also been given by Respondent 1 Company to Respondent 5, to which transaction Petitioner 2, Shri R.V.R. Chowdhary, was also a party in his capacity as Vice-Chairman of Respondent I Company. Besides being a party to the decision to give the EPC contract to Respondent 5, Petitioner 2 was also instrumental in payment of large sums of money being made to Respondent 5 which estops him from alleging that Respondent 2 Company had been siphoning off the funds of Respondent 1 Company without diligently performing its part of the contract. 45. There is substance in Mr Raghavan's submissions that the EPC contract given to Respondent 5 by Respondent 1 was a commercial contract and stands outside the ambit of Sections 397 and 398 of the Companies Act. Failure to act in terms of the contract cannot be said to have amounted to either oppression or mismanagement by Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e report had been prepared on the orders of CLB and submitted to NCLT and then carry the proceedings further after considering the report. Therefore, when the Appellants filed an IA to obtain a copy of the final report, the NCLT ought to have taken note and ensured adequate and proper consideration of the IA which, to our mind, was not done in an appropriate manner. Thus, the way the Final Audit Report in which the issue of the report was taken care of by the NCLT left a lot to be desired. 49. In the light of the above, we are inclined to hold the view that once the Final Audit Report was submitted to NCLT by the Independent Auditor and the quantum of their fees was not interfered by NCLT, it was incumbent on NCLT to open the Final Audit Report from the sealed cover and consider its findings, as the consideration of the investigation into the affairs of the Company would have given justice to the parties in a fair manner. 50. In the facts and circumstances of the case and the arguments of rival parties, we are of the clear opinion that the interest of the parties and requirement of justice would be met, if the matter is remanded to NCLT with the direction that the Final Audit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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