T. Kannan vs Shapre Infotech India Ltd.

R. Sudhakar, J.—This company petition is filed under section 237(a)(ii) of the Companies Act, 1956, read with rule 11(9) of the Companies (Court) Rules, 1959, to declare that the affairs of the first respondent-company ought to be investigated by an inspector or inspectors appointed by the Central Government and to further direct the Central Government to appoint as many inspectors as required to investigate into the affairs of the first respondent-company and submit a report thereof. The facts in a nutshell are as under : The petitioners are shareholders of the first respondent-company, holding 1,66,666 shares. The petitioners had subscribed for the said shares based on the assurance given by the first respondent-company that the petitioners would have good returns on their shares and that the shares would also be listed on other stock exchanges, apart from Madras, Bangalore and Hyderabad Stock Exchanges.

It is the case of the petitioners that from the beginning, they have not received notice from the first respondent-company regarding convening of annual general meetings or extraordinary general meetings. Even though the first respondent-company involved in various activities like amalgamation, listing, de-listing, etc., for which the approval of the shareholders is required as per the provisions of the Companies Act, the respondents have not sent any notices to the petitioners, depriving them of their valuable right as shareholders.

It is stated that the petitioners sent a notice to the second respondent on December 23, 2004, marking a copy to the Registrar of Companies, regarding non receipt of the balance-sheet and notices for the annual general meetings. The second respondent sent a reply on January 3, 2005, stating to have enclosed the copies of the balance-sheets for the years 2001-02, 2002-03 and 2003-04; copy of the scheme of amalgamation; and copy of the extraordinary general meeting notice, which according to the petitioners are incomplete and bereft of particulars. It is stated that the petitioners did not receive the balance-sheets and annual reports for the years 2004-05 and 2005-06.

Based on the said letter dated December 23, 2004, copy of which was also addressed to the Registrar of Companies, the Registrar of Companies called for a reply from the first respondent-company regarding the irregularities and non-compliances. The first respondent, enclosing a copy of the letter dated January 3, 2005, addressed to the first petitioner, stated that they have complied with all the requirements under law. In the said communication, the second respondent has also stated that the company is in the process of getting its shares listed on the Bombay Stock Exchange and National Stock Exchange, but till date the shares of the first respondent have not been listed in the said exchanges and no compliances have been reported at the Registrar of Companies.

It is the case of the petitioners that the first respondent-company appears to have passed a resolution as early as in the year 2003 to de-list its shares from the Stock Exchanges, without informing the petitioners of such decision. It is stated that the move to de-list the shares of the first respondent/company is in violation of the guidelines of the SEBI. To ascertain regarding de-listing of shares, the petitioners addressed a letter to the Madras Stock Exchange on November 28, 2006. By letter dated November 30, 2006, the Madras Stock Exchange stated that even though the shares of the first respondent-company are listed as on that date, the trading of its shares have been suspended on account of non-compliance of the listing agreement.

It is stated that the first respondent-company has been executing many offshore projects by availing additional term loans and enhancing the working capital. It is the petitioners'' case that even though the director''s report would reveal that the foreign earnings of the first respondent-company have increased, it has not declared any dividend so far. It is their case that the second respondent is increasing his emoluments by misusing his position and keeping the investors in the dark. It is further pleaded that the first respondent has taken loans, given guarantees and increased the working capital, unbeknownst to them and shares of the first respondent-company are not being traded.

Under such circumstances, the present company petition is filed for the relief stated supra.

In the counter affidavit filed by the respondents, it is averred as under:

"It is stated that the second respondent is a non-executive director of the first respondent-company. It is stated that all the documents are available for inspection at the office of the Registrar of Companies and nothing has been concealed by the respondents. It is their case that the respondents have never persuaded the petitioners to invest in the equity shares of the first respondent-company and any investment in shares is subject to the risk of earning in the business carried on by the company."

It is further stated that the respondents are not responsible for the non-delivery of the notices and their role ends with the despatch of notices through the Postal Department. It is their case that the meetings of the shareholders were convened before involving in activities like amalgamation, listing and de-listing, and thus, their transactions are transparent. It is their case that the first respondent did not flout the SEBI Guidelines and they will duly comply with the procedure contemplated.

It is the case of the respondents that the right to declare or not to declare dividend vests on the board of directors of the first respondent/company and the petitioners have no right to force the first respondent/company to declare dividend.

It is pleaded that based on vague allegations the petitioners have filed this company petition and the same has to be dismissed outright.

This court, by order dated December 10, 2008, made in this company petition, after considering the fact that ordering investigation into the affairs of the first respondent-company would have serious consequences and ramifications, thought it fit to appoint independent chartered accountants to understand the seriousness of the allegations made by the petitioners, so as to enable the court to reach a prima facie conclusion as to the course of action that has to be taken. Accordingly, M/s. Annamalai Associates, Chartered Accountants, was appointed as chartered accountants to go through the accounts of the first respondent-company and file a report, apart from verifying the correctness of the balance-sheets of the first respondent-company. The first respondent-company was directed to submit their accounts for the years 2004 to 2007, apart from all other relevant documents, to the chartered accountants.

Aggrieved by the above order dated December 10, 2008, the respondents preferred O.S.A. No. 71 of 2009, pleading that directing the chartered accountant to verify the correctness of the balance-sheet would amount to ordering an investigation as such, even before any final order is passed in the company petition. A Division Bench of this court, by judgment dated April 17, 2009, while dismissing the appeal observed that verification of the correctness of the balance-sheet does not arise at that stage and directed the chartered accountants to peruse the accounts relating to the balance-sheet for the years 2004 to 2007 and file a report as to the actual statement of accounts reflected in the balance-sheet.

Thereafter, the respondents filed C.A. No. 744 of 2010 seeking an interim order restraining the chartered accountants from verifying the balance-sheets of the first respondent-company. It was pleaded by the respondents that the chartered accountants sought for certain details to complete the assignment, which would only show that the chartered accountants would go into the correctness of the balance-sheet. By order dated April 7, 2010, this court dismissed the said application, holding that the details sought for by the chartered accountant are in consonance with the direction issued by the Division Bench of this court in the order dated April 17, 2009, in O.S.A. No. 71 of 2009.

Challenging the order dated April 7, 2010, passed in C.A. No. 744 of 2010, the respondents preferred an appeal in O.S.A. No. 392 of 2010, contending, inter alia, that the chartered accountants cannot go into the correctness of the previously audited accounts. A Division Bench of this court, by judgment Shapre Infotech India Ltd. and R. Nagaraj Sharma, Chairman and Managing Director, Shapre Infortech India Ltd. Vs. T. Kannan, Uma Kannan, Visalakshi Kannan rep. by her Power of Attorney T. Kannan and Annamalai Associates, Chartered Accountants, , dismissed the appeal, holding that the checklist of items called for by the auditors is in consonance with the direction issued by the Division Bench and it would not amount to investigation by the auditors.

In this backdrop of the case, this court has heard the rival contentions of Mr. R. Venkatavaradan, learned counsel appearing for the petitioners and Mr. K. Ramasamy, learned counsel appearing for the respondents and perused the documents filed.

Before proceeding further, it would be apposite to refer to the relevant provision, namely section 237 of the Companies Act, 1956, which reads as under:

"237. Investigation of company''s affairs in other cases.--Without prejudice to its powers under section 235, the Central Government--

(a) shall 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--

(i) the company, by special resolution; or

(ii) the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

(b) may do so if, in its opinion or in the opinion of the Tribunal, there are circumstances suggesting--

(i) that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose;

(ii) that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii) that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director or the manager, of the company."

A reading of the said provision makes it clear that it enables the Central Government to appoint inspectors to investigate the affairs of a company in case of two eventualities. Firstly, when the company has by a special resolution requested the Central Government to do so, or the court by order has declared that the affairs of the company ought to be so investigated by an Inspector appointed by the Central Government. Secondly, the section gives a discretion to the Central Government to consider whether such an investigation is called for and it may do so after consideration of circumstances suggesting the conduct of the business in the manner set out in sub clauses (i), (ii) and (iii) to clause (b) of the above section. It is under section 237(a)(ii) of the Companies Act the present application has been filed.

It is not in dispute that the petitioners are shareholders of the first respondent-company and thus, they are entitled to knock the doors of this court. At this juncture, it is relevant to refer to a letter dated February 9, 2005, addressed to the Registrar of Companies by the first respondent-company which reads as under:

"With reference to the above, we would like to state that as required by the statutes, every year we have complied with all the formalities of sending the documents to the shareholders before convening annual general meeting. However, we have again forwarded copies of the balance-sheet and other documents as required by the shareholder Mr. T. Kannan. Kindly note that as mentioned in our reply addressed to the shareholder, we would like to confirm that the company has taken all the necessary steps to get listed with NSE/BSE at the appropriate times in the interest of the shareholders and the organisation. We are enclosing herewith a copy of the above said letter addressed to the shareholder for your ready reference and record."

It is not in dispute that even as on date, the respondents have not taken any steps to get listed with NSE/BSE. That apart, the Madras Stock Exchange Ltd., in the communication dated November 30, 2006, addressed to the first petitioner has stated that even though equity shares of the first respondent/company are listed in their exchange, trading in the equity shares of the company has been suspended from April, 2006, in view of the non-compliance of listing agreement. There is nothing on record produced by the respondents to show that the suspension of trading in equity shares has been revoked or steps have been taken to comply with the listing agreement. Therefore, the apprehension in the minds of the petitioners regarding listing of shares appears to be bona fide.

The respondents have also not denied the allegation made by the petitioners that the respondents are taking steps to de-list the shares from the stock exchanges. They only stated that the de-listing of shares shall be done in accordance with the SEBI Guidelines. The petitioners, being shareholders of the first respondent-company, it is stated are kept in dark and are not informed of any major activities of the first respondent-company like amalgamation, listing and de-listing of shares. All that the respondents claim is that due notice has been sent to the petitioners and they are not responsible for the non-delivery of such notices.

This court, by order dated December 10, 2008, after considering the nature of allegations levelled against the respondents by the petitioners, thought it fit to appoint chartered accountants. Subsequent to the same, the respondents were granted further time by the Division Bench of this court. Even though five years have lapsed, the respondents have not complied with the directions given by this court to furnish the relevant particulars to the chartered accountants.

The chartered accountants appointed by this court, vide letter dated January 27, 2014, addressed to the Deputy Registrar (Original Side), High Court, Madras, have stated that despite series of requests made on their behalf to the respondents to submit vouchers; bills; bank statements; complete set of annual returns with director''s report and auditor''s report; details of compliance with company law requirements, etc., the respondents have not submitted the same till date. Under such circumstances, the chartered accountants, in the said report, averred as under:

"(a) We regret to inform the honourable High Court our inability to carry out the honourable High Court''s direction for verification of accounts of M/s. Shapre Infotech India Ltd., in the absence of details. We, therefore, are unable to form and express an opinion regarding the accounts of the said company.

(b) We request the honourable High Court to relieve us of the duties of verification of accounts of Shapre Infotech India Ltd., and allow us to adjust the part fee received from the respondent and petitioner (Rs. 10,000 each) towards the services rendered so far."

The only reason stated by the respondents so far for non compliance of the order passed by this court earlier is "bulkiness of the records required" and that by no stretch of imagination can be accepted to be genuine ground for a period of over five years. The facts, as presented, clearly make out a case for this court to direct the Central Government to order investigation into the affairs of the first respondent-company, more particularly in view of the fact that the first respondent-company has not furnished the information in respect of its affairs, which it is reasonably expected to furnish. The conduct of the business of the first respondent/company is oppressive to it members and the non-co-operation of the first respondent/company with the chartered accountants, despite series of orders of the court, clearly goes to show that the respondents intend to thwart the attempts of the court to do substantial justice to either parties. If the respondents had nothing to hide and the first respondent/company is run in a transparent manner, there is no reason for the first respondent/company to withhold information to the chartered accountants. However, this court is able to perceive that the intention of the respondents is to delay the process of compliance of the orders of this court. The number of applications and appeals filed to stall the verification of accounts by the chartered accountants clearly goes to show that it is a case of total non-cooperation, with an intention to hide the relevant materials. Therefore, section 237(b)(i) and (iii) of the Companies Act, 1956, gets attracted. The petitioners have made out a prima facie case to direct the Central Government to appoint Inspector or Inspectors to investigate into the affairs of the first respondent-company. For the foregoing reasons, this company petition is allowed and the 16 Central Government is directed to investigate into the affairs of the first respondent-company by appointing an Inspector or Inspectors, as they deem fit, as per the provisions of the Companies Act, and submit a report to this court.