Full Text
Through : Dr.Manmohan Sharma and Mr. Anurag Pratap, Advs.
Through: Mr. Alok Agarwal, Mr. Sanjeev Singh and Ms. Pramanshi, Advs. for R-1.
HON'BLE MR. JUSTICE I.S.MEHTA GITA MITTAL, J.
JUDGMENT
1. The instant case manifests the difficulties which a peeved statutory auditor can create for a company, if he is removed from his office. Having knowledge of all intricate details about the working of the company,, he can misuse the same and make distortions thereon by virtue of his position and resort to exploitative complaints to statutory government authorities and initiate malicious litigation as in the present case to prevent the company from functioning orimplementing decision.
2. The appellant hereby challenges the order dated 20^^ February, 2013 passed by the learned Company Judge approving a merger between the respondent nos.l and 2 companies. The appellant also assails the order dated 23'"'^ April, 2013 rejecting Co.App.No.51/2013 Page 1of18 2015:DHC:10843-DB C.A.No.645/2013 seeking modification ofthe court order accepting the scheme.
3. Before commencing with arguments, we had directed both sides to file detailed written submissions with reference to thecourt pagination. Both sides have filed the written submissions and exchanged the same.
4. We had also called for the record of Co.Pet.No.275/2011 which has been received.
5. Dr. Manmohan Sharma, learned counsel for the appellant as well as Mr. Alok Agarwal, learned counsel for the respondent no.l have been heard at length. They have carefully taken us through the paper book of this appeal as well as the records of Co.Pet.No.275/2011. We have given our considered thought to this matter.
6. We note hereunder certain undisputed dates. The Basti Sugar Mills Co. Ltd. (respondent no.l herein) was incorporated in the year 1956 under the provisions ofthe Companies Act, 1956 for undertaking the business ofrunning ofa sugar mill in the state of Uttar Pradesh while the respondent no.l maintained its registered office at Delhi.
7. Shri H.K. Chadha (appellant herein) was a statutory auditor ofthe company (hereinafter referred to as a 'company'). In the year, 1973, he acquired eight shares ofthe company and thereupon became a shareholder as well.
8. It appears that the appellant was a statutory auditor to another company - M/s Gangeshwar Ltd. Aggrieved by his Co.App.No.51/2013 Page 2of18 removal from the statutory auditorship of M/s Gangeshwar Ltd., Sh. H.K. Chadha filed a W.P.(C)No.3141/1999. This writ petition was dismissed by an order passed on 25^*^ August, 2000 against the appellant.
9. An amendment came to be incorporated in the Companies Act, 1956, bringing Section 226 sub-section 3(e) on the statute book w.e.f. 13^^ December, 2000 whereby a shareholder was rendered disqualified from being appointed or continuing as the statutoryauditor ofthe same company. As a result Shri H.K. Chadha, a shareholder was rendered disqualified from continuing as the statutory auditor of the respondent no.1.
10. Here we enter into the realm ofdisputes between the parties to the present litigation. At this stage, the appellant's son, Mr. Raman Chadha, started claiming that he had purchased the eight shares of the respondent no.l from his father on the 9^^ of April
2001. Mr. Raman Chadha claimed that he had sent atransfer deed on the 9'*' ofApril 2001 along with the eight shares ofthe company held in the name ofhis father Shri H.K. Chadha, allegedly seeking transfer thereofin his name in the share register. The respondent no. 1 company staunchly refuted this contention.
11. It appears that premised on this claim of having sought transfer ofthe eight shares into his name, Shri Raman Chadha, son of the appellant, filed a petition under Section 111 of the Companies Act before the Company Law Board seeking Co.App.No.51/2013 3of18 rectification in the shareholder register of the respondent no. 1 company asserting that the eight shares stood transferred to him. This petition was dismissed by the Company Law Board by a detailed order dated 9^^ September, 2011, inter alia holding that the documents relied upon by Shri Raman Chadha seemed to be selfserving documents prepared with the motive to get over the statutory prohibition against the appellant being appointed to the statutory auditorship ofthe respondent no. 1for the reason that he was ashareholder. We extract para 12 ofthis order from the record ofthe Company Law Board which reads as under: "12. Considering the facts of this case it is noted that no case has been made out under Section 112 of the Act, the Petitioner's claim is untenable, as the Manapins Director, who is said to have colluded with the Petitioner and his father (Sh. H.K. Chadha who also was the Statutory Auditor of the Respondent Company), cannot be said to be the person issuing certificated instrument and having been authorized to issue such so called instrument of transfer on the company's behalf The petitioner's claim of deemed cprtification fails and the case of the respondents' resardins the alleged collusion is prima facie made out, the documents seem to self-servine documents prepared with the motive to 2et over the debarring provisions of a statutory auditor, this fmdins is confirmed hv the fact that the normal procedure for transferhas not been followed by thepetitioner and his father, the statutory auditor ofthe company. There isno answer to the respondents contention that the reverse side of the share certificate does not have valid transfer endorsement, there is nosealas well. There is no question of the respondent company replying to the petition allowing or refusing oftransfer when theproper Co.App.No.51/2013 / documents have not been filed with the company, the receipt is by a company secretary, Manasins Director is directly endorsing and returnins it to the petitioner, this is certainly not the normal procedure followed in a company. The chronology of events and the manner and the timing of the claim all indicate towards this proxy litigation to set an entry in the company as a Statutory Auditor, get the disquahfication removed retrospectively. Such a proxy litigation cannot be permitted. There is no dispute with the case law cited, but each case turns on its own facts. In the present case in law and on facts the petitioner's case fails, the respondents' contentions including the list of shareholders in the Annual Returns filed with the ROC which is a prima facie evidence remains unrebutted, uncontroverted" (Emphasis by us)
12. It is contended by Mr. Alok Agarwal, learned counsel for respondent no.l, that the claim through his son Shri Raman Chadha and the petition was really a desperate attempt on the part of the appellant to continue to function as a statutory auditor of the company.
13. We also note that Shri Raman Chadha's appeal in this court assailing the order dated 9^*^ September, 2011 was dismissed by the learned Company Judge on the 2"^^ ofFebruary 2012 holding thus: "In fact, the Share Certificate as well as the Share Transfer Form relied upon by Mr. Chawla, learned counsel for appellant do not bear any transfer number, ledger folio number as well as stamp/seal of the company. Even with regard to the non-production of the original Share Transfer Register, the respondent company has given a legally valid explanation. Moreover, this Court has also perused the annual Co.App.No.5r/2013 Page[5] of 18 rPturns filed contemvornneouslv in accordance with movisions hy the mevious management of the respondent company with the Registrar of Companies for the year 2002, 2003, 2004 and 2005. The certified copies ofthe said records clearly show that it is the avpellant-Detitioner's father who is the chnrehnlder of the respondent company and not the nppeilnnt-netitioner. Consequently, this Court is ofthe opinion that the CLB in paragraph 11 ofthe impugned order has riffhtly concluded that these documents ''rnmpletelv demonstrate the falsity ofthe case filed by the petitioner.",., x (Emphasis byus)
14. These orders were not assailed any further and have attained finality. In view thereof, the prohibition contained in Section 226(3)(e) of the Companies Act, 1956 would clearly operate against the appellant and he stood disqualified from being appointed as astatutory auditor ofthe respondent company.
15. The record of the case reflects that on the 31'' of October 2005, 99% of the ownership, management and control of the company came into the hands of M/s Phenil Sugars Pvt. Ltd. (hereinafter referred to as "transferee company").
16. So far as the appointment ofastatutory auditor to replace the appellant is concerned, the annual general meeting of the Basti Sugar Mills Co. Ltd. was held on 30*^^ December, 2006 when the shareholders appointed anew statutory auditor'.
17. It appears that one ofthe shareholders ofthe company filed a suit on the original side ofthis court seeking an injunction against appointment ofthe new statutory auditor. Against the proceedings Co.App.No.51/2013 Page 6of18 in the suit, the appellant filed RFA(OS)No.l33/2006 entitled Mr. H.K. Chadha v. Basti Sugar Mills Co. Ltd. wherein the Division Bench of this court by an order dated 16^^ May, 2007 upheld the appointment ofanew auditor.
18. In the meantime, so far as the affairs ofthe company are concerned, the applications being Co.App.(M)No.71/2011 and Co.App.(M)No.67/2011, as the first motion applications, were filed under Sections 391 to 394 of the Companies Act, 1956 by Basti Sugar Mills Co. Ltd. and M/s Phenil Sugars Pvt. Ltd. respectively, proposing a scheme of merger of Basti Sugar Mills Co. Ltd. (transferor company) with M/s Phenil Sugars Pvt. Ltd. (transferee company). By way of these applications, directions were sought from the learned Company Judge for convening meetings ofall the shareholders, secured creditors and unsecured creditors of the transferor and transferee company. These meetings were permitted by the learned Single Judge by an order dated 5'' April, 2011 following due process.
19. The scheme ofmerger was granted approval in the meetings i shareholders, secured creditors and unsecured creditors of the transferor and transferee company on the 12^^ ofMay 2011.
20. It appears that at this stage, an application being Co.App.No.909/2011 was filed in the first motion petition by Shri H.K. Chadha, the appellant seeking impleadment as well as stay or the cancellation of the meetings of the shareholders. This application was disposed of by the court by an order dated 18^^ May, 2011 noting that the meeting ofthe shareholders had already Co.App.No.51/2013 ^ >6 been held on the 12^^ of May 2011. The appellant was given opportunity to raise objections at the second motion stage to the proposed merger as well as to forward his objections to the Regional Director as well as Registrar of Companies for their consideration.
21. It is noteworthy that the learned Company Judge had noted that there were no secured creditors of the transferee company and inasmuch as the shareholders and unsecured creditors of the transferee company had already conveyed their consent to the merger, dispensation was granted for holding their meetings.
22. The second motionpetitions under Sections 391 to 394 were filed by the Basti Sugal Mills Co, Ltd. as a transferor and M/s Phenil Sugars Pvt. Ltd. as a transferee being Co.Pet.Nos.275- 76/2011 respectively.
23. Shri H.K. Chadha (the appellant herein) filed CA No.2168/2011 in Co.Pet.No.276/2011, an application again seeking to be impleaded as a respondent, as well as objections to the merger.
24. The record ofthe case shows that the Regional Director filed an affidavit/representation on the 18^*^ ofAugust 2011 stating that it had not received any objection from Mr. H.K. Chadha in terms of the order dated 18^'' May, 2011. Reference was made in the representation ofthe Regional Director that inspection ofthe books of account and record ofboth the companies had been conductedin 2008 as well as to certain violations of the statute. The Regional Director had also pointed outthatpursuant to the applications made Co.App.No.51/2013 Page 8of18 by the transferor andtransferee companies, all violations have been permitted to be compounded by the competent authority. The Regional Director has also stated that both companies had since filed E-Form 21 along with the orders under Section 621A of the Companies Act.
25. Keeping in view the submissions of the appellant, by an order passed on 23"^ November, 2011, the learned Company Judge directed the Regional Director to file a supplementary affidavit within four weeks clearly dealing with the objections raised by the appellant in CA.No.2168/2011. The record of the learned Company Judge shows that on 4'*^ January, 2012, the Regional Director filed a further affidavit after examining the copies received from the appellant.
26. Dr. Manmohan Sharma, learned counsel for the appellant submits that the Regional Director had termed the allegations made by his client as very serious and that the matter was not free from doubt. Mr. Alok Agarwal, on the other hand, contends that the learned Single Judge has dealt specifically in the impugned order with each and every allegation and only after being ftilly satisfied had proceeded to pass the order dated 20^*^ February, 2013 permitting the scheme of merger and allowing Co.Pet.Nos.275- 76/2011.
27. In answer to our query, we are informed that ever since, Basti Sugar Mills Co. Ltd. has ceased to existand its management, properties and control stand vested in M/s Phenil Sugars Pvt. Ltd. which is carrying on its business in accordance with the statutory Co.App.No.51/2013 Page 9of18 compliance. Shri H.K. Chadha, the appellant does not dispute this position. No complaint or objection is pointed out to the working ofthe company,
28. Dr. Manmohan Sharma, learned counsel for the appellant submits that the appellant had filed a writ petition in this court being W.P.(C)No.4058/2010 making the following prayers: "1. Direct the Respondent No.l and 2 to initiate promptly legal action against the Respondent No.4, as may be required under the provisions ofCompanies Act and report the action taken to this Hon 'ble Court.
2. direct the Respondents No.l not to take on record the profit and loss accounts and the balance sheets which were shown as duly adopted by the shareholders ofRespondent No.4 its AGMheld on 30"^ July, 2007.
3. direct the Respondents No.2 to get the profit and loss accounts and balances sheets duly auditedfrom the petitionerfor itsfinancial year 2005, 2006 and onwards till the conclusion ofthe AGMs ofthe Respondents No.4 held on 29.09.2004 and 30.09.2005.
4. declare the AGM of Respondents No.4 held on 30'^ July, 2007 and all its decisions as null and voidfor not serving the mandatory notice to the Petitioner as statutory auditor.''"'
29. Dr. Manmohan Sharma, learned counsel for the appellant submits that in this writ petition, the learned Single Judge by an order dated 20^*^ September, 2010 passed the following directions: "1. Counsels for the Respondents pray for and are granted four weeks' time to file their respective replies. Rejoinder thereto, if any, be filed within two weeks thereafter.
2. In the meanwhile, any action taken will be subject eo.App.No.51/2013 to the result ofthe petition.
3. List on 25^*^ January, 2011." (Emphasis by us)
30. Mr. Alok Agarwal, learned counsel for respondent no.l submits that in fact, the prayers made in the writ petition are identical to the prayers which were made before the learned Company Judge and have been rejected. It is submitted that the learned Single Judge, seized of with the writ petition, would be bound by the adjudication of the learned Company Judge and now A- by the orders in the present appeal. We refrain from commenting thereon. It shall be open for learned counsel for the respondent to make such submission as and when the writ petition is taken up for consideration.
31. The appellant assails the order dated 20**^ February, 2013 on factual objections only. On behalf of the appellant, Dr. M.M. Sharma has primarily contended that his objections have been overlooked by the learned Company Judge.
32. The respondent no. 1 contends that all objections raised by the appellant were without any substance and have been rightly rejected by learned Company Judge.
33. The respondent has placed before us a tabulation of the objections raised by the appellant before the learned Single Judge as well as in the grounds of appeal before us. The tabulation contains the response of the company as well as details of the para numbers in which they have been dealt with in the impugned order.
34. We have carefrilly examined the impugned order. For the Co.App.No.51/2013 Page 11 of18 J' sake of expediency, we extract in a tabulation the objections of the appellant, response of the company and the consideration by the learned Company Judge hereunder: Objections
MCA with regard to AGMS purportedly not held. Further, that AGM s of 2004 and 2005 of Basti cannot be taken as concluded. Therefore, as AGMs not concluded therefore, the Appellant should be taken to have continued as Auditor till date Response of the Respondents The appellant did not finalise accounts for 2004 and 2005. Suddenly after two years on 09.10.2006, appellant issued a qualified audit report. Pertinently, on 31.10.2005, complete ownership management and control of respondent company stood transferred from Narang Group to Phenil. Thus Auditor was unhappy with the change and hence the malicious report. Ground is extremely vague and general in nature. In any case all updated balance sheets were filed before the Company Court. Fictitious complaints were made.. Inspections were held by RD. In fact, 2004-2005 AGMs were sought to be scuttled by HK Chadha by not completing the accounts. RD gave its report. The report negates claims of appellant. Where considered in the impugned order Considered in paragraph 17 to 20 at page 27. Ground general. Yet the impugned order in its entire body ! deals specifically about accounts and returns. Considered in p^agraph 8, paragraph ' 18, paragraph 20
D. RD had taken note of allegations of HK Chadha and called it very serious and not free from doubt. RD had also requested the court to deal with these allegations as court may deem fit and proper The company court did not deal with the allegations.
E. AGMs not conducted
F. AGMs not conducted for
2004-2005
G. AGMs not conducted for
2004-2005
H. NOC not obtained from
DSE J&K Matter should have been investigated U/s 237 and by police Each of the objections/allegations of H K Chadha have been dealt in our concise written submissions dated 28.01.2013 at' pages 284 to 289 of Vol IofCo.Pet.276 of 2011 Ground is Repetitive and vague Ground is repetitive and vague Ground is repetitive and vague NOC requirement is only directory. Also Basti Sugar Ltd. Had taken all steps, but DSE being defunct did nothing. Farfetched perverse allegations and demands These allegations pertain to: i. Civil Lines property ii. Some shareholder holding 32% share iii. Some other shareholder vivek sehgal etc. iv. Some forgery of letter v. Siphoning of flinds etc. The above allegations together with the bonafides of the applicant, have all been dealt with in the impugned order from paragraph 21 onwards. Considered in paragraph Considered in paragraphs 18 and 27 18,19 and 20 28 and 29 24 and 25
35. Reliance was placed in the proceedings in the Company Court on the judgment reported at (2005) 125 Company Cases 289 (AP), Compact Power Sources P. Ltd v. HBL Nife Power Systems Ltd. The learned Single Judge has correctly applied the law and held that the listed company was only required to give a scheme/petition to the stock exchange at least one month before presenting the scheme under Sections 391 and 394 of the Act and that the failure ofthe stock exchange to respond would not prevent the scheme from being approved. The learned Single Judge has extracted from the judicial precedent relied upon as well.
36. The appellant does not challenge the findings returned by the learned Single Judge.
37. So far as the exercise ofjurisdiction by the Company Board under Sections 391 and 394 of the Act is concerned, we also rely upon the enunciation of the applicable principles by the Supreme Court of India in the judgment reported at (1997) 1 SCC 579, Miheer H. Mafatlal v. Mafatlal Industries Ltd. wherein the court held as follows: "29.... In view ofthe aforesaid settled legal position, therefore, the scope and ambit of the jurisdiction of the Company Court has clearly got earmarked. The following broad contours ofsuchjurisdiction have emerged:
1. The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(l)(a) have been held.
2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391 sub-section (2).
3. That the meetings concerned of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters isjust and fair to the class as a whole so as to legitimately bind even the dissenting members ofthat class.
4. That all necessary material indicated by Section 393(l)(a) is placed before the voters at the meetings concerned as contemplated by Section 391 sub-section (1).
5. That all the requisite material contemplated by the proviso of sub-section (2) of Section 391 of the Act is placed before the Court by the applicant concerned seeking sanction for such a scheme and the Court gets satisfied about the same.
6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real puipose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously Xray the same.
7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that ofthe latter comprising the same class whom they purported to represent.
8. That the scheme as a whole is also found to be just, fair and reasonable fi-om the point of view of prudent nien ofbusiness taking a commercial decision beneficial ^ to the class represented by them for whom the scheme is meant.
9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. ^3 Co.App.No.51/2013 Page 15 of18 -•J- The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction. The aforesaid parameters of the scope and ambit of the jurisdiction of the Company Court which is called upon to sanction a scheme of compromise and arrangement are not exhaustive but only broadly illustrative of the contours of the Court's jurisdiction."
38. The learned Company Judge has relied upon the above enunciation of law and found that the objections of the appellant were devoid of any merit. It was also noted that no other objection has been received and consequently, the proposed scheme was accepted.
39. As noted above, the Regional Director has pointed out that statutory violations by Basti Sugar Mills Ltd. stand compounded in accordance with law. Despite opportunity by court order, Shri H.K. Chadha submitted no further objections to the Regional Director or to the Official Liquidator. These offices appear to have examined the merger proposal and not objected to the same. They do not assail the order dated 20^^ February, 2013 of the learned Company Judge approving the same. No illegality in the impugned order is pointed out by any authority. No objection in the fiinctioning of the companies or the working of the merger is even alleged by the authorities concerned.
40. We find that other than the eight shares held by the appellant - Shri H.K. Chadha, 99.99% shareholders are in agreement with the "3 merger. All creditors, bankers etc. of the respondent company have also approved the merger and there is no objection at all by them till date to the functioning of the merged company. The appellant holding merely eight shares is litigating as he is clearly peeved at his removal as statutory auditor and that the petition as well as appeal against the merger has been filed maliciously and malafide.
41. The appellant found that by statutory operation, he being a shareholder, could not continue as the statutory auditor of the \ respondent no.l. He then dishonestly tried to perpetuate this appointment by setting up a false claim of transfer of his shareholding to his son Shri Raman Chadha. Much litigation, as extracted above, was generated, clearly at the instance of the appellant utilising the name ofhis son as a shield.
42. From the above narration of facts, we find substance in the contention of Mr. Alok Agarwal, learned counsel for the respondent that the objections of the appellant were motivated and malafide and stem out of malice because of his removal as a ^ • statutory auditor. A Chartered Accountant by profession, such actions on the part of the appellant are in utmostbad faith. For this reason, apart from the appeal being devoid of legal merit, the appellant deserves to be burdened with heavy costs.
43. The malafide of the appellant has led to several proceedings before the Company Law Board, one suit on the original side, a regular first appeal before the Division Bench, a writ petition before the Single Judge, applications/objections in the proceedings Co.App.No.51/2013 Page 17 of18 4^ under Sections 391 and 394 of the Companies Act at both stages and the present appeal before a Division Bench ofthis court. The appellant is represented by very senior and able legal experts. Clearly, he is a person ofsufficient means, who is able to afford such malicious litigation. Shri H.K. Chadha thus has the capacity topay reasonable costs tothe other side as well.
44. Valuable judicial time has been caused to be squandered on this meritless litigation at the instance of the appellant who must also compensate the system. This is possible by making a deposit towards legal aid, the expense whereof are borne by the state. Legal aid is a constitutional right of poor and disadvantaged litigants and provided institutionally by this court.
45. The appeal is dismissed with costs to be paid by the appellant which are quantified at Rs.50,000/- to the contesting respondent. The appellant shall additionally deposit Rs.25,000/- as costs with the Delhi High Court Legal Services Committee for burdening this court with this malafide mischievous appeal. These costs shall bedeposited within four weeks from today. SEPTEMBEI^,2015 aj Co.App.No.5l/2013 iTAMIT^?tL, J EHTA, J '••V I? "