K.K.Balu, - (1.) THE petitioners collectively holding in excess of 10% of the issued capital of the Ambattur Saswatha Nidhi Limited ("the Company") aggrieved on account of certain acts of mismanagement have invoked in the present petition the provisions of Section 398 of the Companies Act, 1956 ("the Act"), seeking the following reliefs: a) to investigate into the affairs of the Company; and b) to appoint an independent director to manage the affairs of the Company.
(2.) Shri G. Porselvam, learned Authorised Representative of the petitioners has complained of the following acts of mismanagement in the affairs of the Company: • The Company has been lending monies, on the security of properties in and around Ambathur, to persons without any credit worthiness and adequate securities in violation of Clause 2 of the object clause of Memorandum of Association, resulting in delayed repayment of loans availed by the borrowers. • The respondents misappropriated the funds of the Company by writing off the loans extended to the friends and relatives of the directors. • The respondents have abused their fiduciary position and failed to perform their fiduciary obligations protecting the interests of the Company. The Compliance Certificate for the year ended 31.03.2003 speaks of the irregularities in the affairs of the Company. • The respondents with a view to enhance their holdings, wrongfully obtained shares from the small investors by effecting the transfers in their name, without proper execution of the transfer forms, and by allotment of shares in connivance with Harihara Subramanian, a staff member employed by the Company. The board of directors have misused their position to enrich themselves and the employees through unfair means. • The respondents have violated various statutory provisions of the Act by (a) allotment of shares in favour of the second respondent and his relatives without obtaining any approval from the board of directors; (b) not filing consent as required under Section 264 by the respondents to act as directors; and (c) not serving any special notice in terms of Section 257 for appointing a person other than the retiring director nor accepted any deposit from the person or from the members, proposing him to the office of director. • The employee cost of the Company is much higher when compared to the cost incurred by other companies engaged in similar activities. The board of directors have shown little attention and caution in controlling the costs. • The Company has entered into a labour agreement with the employees. However the inflation index of "Dearness Allowance" was deliberately miscalculated at 5.60 instead of 5.05 in the wage agreement drafted in the year 1997. This resulted in excess payment of salary, bonus and other allowances since the year 1997 thereby incurring a loss of Rs. 1.56 lakhs every year. Shri R. Shankaranarayanan, learned Counsel appearing for the respondents opposed the Company petition on the following among other grounds: • The petitioners must plead and establish that the affairs of the Company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the Company in accordance with Section 398(1)(a) of the Act. The petitioners are bound to prove the continuous process of management of affairs, which is prejudicial to the interest of the company. Isolated, unsubstantiated, past and concluded transactions cannot be brought within the scope of Section 398(1)(a) of the Act. The petitioners are disgruntled shareholders having personal grievances against the respondents 2 & 3, which cannot be ventilated in the present proceedings. The petitioners are not complaining of any corporate wrong and the petition being an abuse of process of law cannot be entertained. The petitioners 1 & 2 were on the board of directors of the Company in the year 2001 but never complained of any of the grievances at any prior point of time. The alleged irregularities are not supported by any documentary proof. • The Company has been granting loans to members on personal and other securities in terms of the bye laws and articles of association of the Company. There is no prohibition for grant of loans on the strength of the securities, which are located outside Ambathur. The nature, location and realisability of securities are matters falling within the realm of commercial decisions taken in the course of the management of day-to-day affairs of the Company. The loans sanctioned by the Company from time to time are adequately secured and appropriate steps are being taken against the borrowers including the borrowers complained of by the petitioners. The Company is not exposed to any risk in this behalf. • The respondents never abused their fiduciary position in diligently carrying on the day-to-day affairs of the Company. The respondents did not unlawfully acquire any shares from the small investors in connivance with any staff members as claimed by the petitioners. There is no illegality committed by the respondents in acquiring the shares from Sri Harihara Subramanian and other small investors especially when there is no bar for any director to acquire shares of the Company. The petitioners have grievances against Sri Harihara Subramanian and therefore, baseless allegations have been made against him. The transactions between the respondents and Harihara Subramanian not tainted with any illegality cannot be the subject matter of the present petition. All the transfers in favour of the respondents were done in accordance with the law and in the form in which they have been transferring shares for the past three decades. The first petitioner had also acquired shares of the Company on becoming a director and his holding along with his family members accounts for 4975 shares. There is no explanation from the first petitioner in regard to his holding in the Company. • The Company has not violated any of the provisions of the Act, as borne out by the Compliance Certificate dated 03.09.2003 issued by a Company Secretary in practice for the financial year ended 31.03.2003. The only observation in the certificate that "the company has not closed its Register of Members, though it has declared dividend during the Financial Year" is a curable irregularity. • The Company had arrived at a settlement with the employees in terms of the Industrial Disputes Act, 1947 with bonafide intention to maintain industrial harmony, which cannot be construed as an act prejudicial to the interests of the Company. The Company strictly followed the settlement reached with the employees, including payment of dearness allowance under intimation to the statutory authority, as confirmed by the advocate of the Union in his communication dated 03.07.2003. The board of directors decided to give good salary to the staff members, which cannot be made the subject matter of the present proceedings.
(3.) I have considered the pleadings and arguments advanced on behalf of the parties. The issues which, arise for my consideration, are whether the petitioners have made out a case under Section 398 and if so, whether the petitioners are entitled for the reliefs claimed in the company petition. The main grievances of the petitioners are in relation to (a) improper lending policy adopted by the Company; (b) breach of fiduciary obligations by the directors; (c) wrongful acquisition of shares of the Company; (d) misappropriation of funds of the Company; (e) violation of the statutory provisions of the Act; (f) higher employee cost; and (g) wrongful implementation of the labour agreement. The lending and other policies are entirely left to the collective wisdom of the board of directors of the Company and do not warrant any judicial interference, unless the policies lack complete bonafides. The mere alleged irregularities in the loan portfolio of the Company cannot be the basis for the present company petition. The initiative taken by the Company in realising the outstanding dues in respect of the specified loan accounts has not been denied by the petitioners. The purported breach of the fiduciary obligations on the part of the directors, apart from lacking details, remains without being established by the petitioners. The grievances, which are bald and vague, cannot be remedied in any proceedings. The petitioners have not produced any material to establish that the acquisition of shares of the Company by the respondents by way of allotment or transfer is either prohibited or wrongful. The specific plea that the first petitioner, while he was a director, acquired quite a number of shares of the Company remains un-repudiated by them. The alleged statutory violations are lacking details. However, it is well settled that any violation of statutory rights is not amenable to the jurisdiction of Section 398 of the Act. The Competent Authority is at liberty to take appropriate action for any such violations. It is on record that dearness allowance and other allowances are paid to the employees in terms of the Memorandum of Settlement dated 30.08.2000 entered into between the Company and the Tamilnadu Nidhi's Employees' Union, the -fact of which has been confirmed by the latter's advocate in his communication dated 03.07.2003 addressed to the Company. The affidavit sworn to by the Secretary of the Company, in this behalf remains undisputed by the petitioners, inspite of the opportunity afforded to them. The petitioners cannot, therefore, make any grievances on account of payment of salaries to the employees of the Company. The grievances on account of the excess employee cost of the Company are not sustained by evidence so as to provide any relief against mismanagement. When charges of misappropriation are raised, full particulars of the acts complained of must be set out in the pleading, without which, such charges should be ignored without investigating such general charges. The petitioners have neither made out as to how the Company's interests have been unfairly prejudiced on account of the purported acts of mismanagement in the affairs of the Company, in which case the CLB cannot invoke the jurisdiction of Section 398 of the Act. At this juncture, it is absolutely relevant to point out that in the course of the proceedings, M/s M. Anand Kumar and Associates, Chartered Accountants have been appointed to verify the records of the Company, in the light of the alleged irregularities for necessary rectification by the Company. The Chartered Accountants completed the verification process and their relevant observations on the purported irregularities are as under: (i) The outstanding loan amount of Rs. 1.75 lakhs in the name of R. Govindaswamy is fully covered by the security. (ii) The transfer of shares in favour of the second respondent and Harihara Subrarnanian are found to be in order. (iii)The allotments of shares in favour of the second respondent have been approved at the board meetings held on 26.07.2002 and 07.12.2002. The first petitioner was a party to those resolutions. (iv)No specific statutory violations have been brought to the notice of the Chartered Accountants. A careful analysis of the grievances of the petitioners would show that they either constitute past and concluded transactions or transactions lacking substance or details, which cannot be the basis for a petition under Section 398. Any general charges of misappropriation of funds, mismanagement or other improper conduct in the management of the Company's affairs do not justify this Board in making any order as such vague allegations. There is no material to show that the affairs of the Company are conducted in a manner prejudicial to the interests of the Company or to the public interest, in the absence of which the petitioners have no locus standi to apply to the CLB for an order under Section 398 of the Act. For these reasons, the prayer for ordering an investigation into the affairs of the Company or for appointing an independent director to regulate the affairs of the company in future does not merit any consideration and consequently stands rejected. Accordingly, the company petition is disposed of. No order as to costs.;