CO.APPEAL (SB) 15/2006 Page no.1 REPORTABLE IN THE HIGH COURT OF DELHI AT NEW DELHI COMPANY JURISDICTION COMPANY APPEAL (SB) NO. 15/2006 DATE OF DECISION: 20th December, 2006 M/s Shonkh Technologies Limited ....... Appellant. Through Mr. Ganesh, Sr. Advocate, Mr. Krishna Kumar & Ms. Lupaulu Gangmei, Advocates VERSUS Union of India and Others ....... Respondent. Through Ms. Manisha Dhir & Ms. Shantha Narang, Advocates. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA 1. Whether Reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporter or not ? YES CO.APPEAL (SB) 15/2006 Page no.2 3. Whether the judgment should be reported in the Digest ? YES SANJIV KHANNA, J : 1. M/s Shonkh Technologies Ltd. (hereinafter referred to as the appellant) in the present appeal under Section 10F of the Companies Act, 1956 (hereinafter referred to as Act) has impugned order dated 20.4.2006 passed by the Company Law Board in CP No.37/2003. By the impugned order, learned Company Law Board has allowed the petition under Section 237 (b) of the Act seeking investigation into the affairs of the appellant. 2. In the grounds of appeal as originally filed, no question of law was framed. Subsequently, an application for amendment was filed to incorporate specific questions of law. This application was allowed vide order dated 06.10.2006 and it was directed that the questions of law mentioned in the application will be treated as part of the main appeal. As many as 18 questions of law have been framed by the appellant. 3. The appellant had submitted that the impugned order was perverse, based on no findings/evidence and the conditions prerequisite to direct CO.APPEAL (SB) 15/2006 Page no.3 investigation under Section 237 (b) of the Act are not satisfied in the present case. Reliance was placed upon the two judgments of the Supreme Court in M/s Barium Chemicals and Another versus Company Law Board and others (AIR 1967 SC 295) and Rohtas Industries Ltd. versus S.D. Aggarwal and Ors. (AIR 1969 SC 707). 4. Learned Additional Solicitor General appearing for Union of India in his brief argument submitted that an appeal under Section 10F of the Act is maintainable only on question of law and the findings and decision given by the Company Law Board were findings of fact. No question of law arises. 5. On the basis of submissions made, the following question of law is framed for being answered Whether order dated 20.4.2006 passed by Company Law Board is perverse and whether conditions of section 237(b) of the Companies Act,1956 are satisfied in the present case? 6. The appellant was incorporated on 04.9.1998 as a Public Limited company. Certificate of commencement of business was obtained on 08.9.1998. The main objects of the appellant are to do business in the fields of electronics, electrical, technical, mechanical developing, marketing software system, solutions, designing etc. 7. By an agreement dated 15.7.2000, the appellant sold the entire business undertaking to another company M/s Shree Jee Yatayat CO.APPEAL (SB) 15/2006 Page no.4 (India) Ltd. (hereinafter referred to as SYIL). Business undertaking of the appellant was valued at Rs.1,10,25,64,745/- in the business purchase agreement dated 15.7.2000 between the appellant and SYIL. This business purchase agreement also specifically records that as SYIL had agreed to purchase the undertaking “net of all liabilities” and the past arrears of taxes, charges, levies, outstanding dues and claims, free of all encumbrances. (see Annexure G to the appeal fled before this Court). 8. No amount was paid to the appellant for transfer of the entire business undertaking. SYIL did not pay any consideration for purchase of the business undertaking. On the other hand, the shareholders of the appellant were allotted 1,52,73,093/- of shares of Rs.10/- each in SYIL, as value received for transfer of the undertaking by the appellant. This allotment to the shareholders of the appellant in SYIL was made at a premium of Rs.60/- per share. In other words, the appellant transferred it's entire business undertaking minus all past liabilities to SYIL of value of Rs.1,10,25,64,754/-, with the shareholders of the appellant acquiring the shares of face value of Rs.15,27,30,930/- in SYIL (see Annexure-G of the appeal avernments made in para IX of the application filed before the Company Law Board and para 2 of the impugned order). 9. Thus, SYIL acquired a business undertaking which was valued at more than Rs.110 crores by allotting 1,52,73,093/- shares of Rs.10/- each to the shareholders of the appellant or for about Rupees 15.27 crores (approximately). The shareholders of the appellant, paid premium of Rs.60/- per share of SYIL. Even if we take this premium of Rs.60/- per share into consideration, there was shortfall of Rs. 3,28,37,141/- (Rs 110,25,64,745-value of the undertaking minus Rs. 106,97,27,604.05 – alleged value of the shares received). CO.APPEAL (SB) 15/2006 Page no.5 10. Allotment of shares did not result in any monetary outflow or payment by SYIL. Paid up capital of SYIL increased. 11. The appellant was a private limited company but shares of SYIL were listed. In the report given by the Securities and Exchange Board of India (hereinafter referred to as SEBI) and as mentioned in para 2(a) of the order dated 20.04.2006, shares of SYIL were not traded between 13th May, 1999 to 9th August, 2000. On 13th May, 1999, they were last traded for Rs.2.15 per share. Prior to the said date in 1999, the shares were traded in the range of Rs.2/- to Rs.7/-. Therefore, on the date when business purchase agreement dated 15th July, 2000 was entered into, the last traded price of the share of SYIL of face value of Rs.10/- each was for Rs.2.15 i.e. the share was traded at discount of Rs.7.85 per share. Market value of each share of face value of Rs.10/- on 15th July, 2000 was only Rs.2.15/-. Shockingly, the shares of SYIL were alloted to the shareholders of the appellant at the premium of Rs.60/- per share, when actually the allotment should have been at a discount. 12. Securities and Exchange Board of India in it's report has also pointed out that preferential allotment to the shareholders of the appellant at the premium of Rs.60/- per share for each share of face value of Rs.10/-, was taken as the basis by the Bombay Stock Exchange to fix the base price for the shares of SYIL, after acquisition of the business undertaking of the appellant. 13. The report of the SEBI also shows that the scrip price of the SYIL jumped thereafter from Rs.75.55 on 9th August, 2000 to Rs.463.30 on 28th September, 2000.The trade was however on very low volumes. It attracted circuit filter level of 8% on each day i.e. rose by 8% from the previous closing on each trading day during the period 9th August, 2000 to 28th September, 2000. The price increased from Rs.75/- to Rs.463/- CO.APPEAL (SB) 15/2006 Page no.6 in this short period of time. Thereafter, there was increase in volumes but the price started falling and reached Rs.210/- on 3rd November, 2000. Subsequently, the price moved between Rs.220/- to Rs.330/-. The relevant portion of the report of the SEBI is as under:- “As indicated in the earlier report, the period of investigation was divided into 2 stages based on price/volume movements. Stage 1 covered the period August 9, 2000 to September 28, 2000 (Sett. Nos. 20- 27) when the price moved up very sharply (almost at circuit filter level i.e. at 8% higher than the closing price of the previous day). The price increased from Rs.70/- to Rs.445/- in a very short period of time. This price increase was on low volumes. Stage 2 covered the period September, 29, 2000 to March 2, 2001 when the fell from high of around Rs./440/- to Rs. 265/-. This stage was characterised by sharp increase in volumes. The shares of the company were not traded between 13th May, 1999 to 9th August, 2000. The last trade was at Rs.2.15 on 13th May, 1999. Prior to this date the scrip was trading in the range of Rs.2/- to Rs.7/-. For the new shares of the company (which were allotted on a preferential allotment basis to the shareholders of the unlisted company as consideration for purchase of the business undertaking), the BSE had fixed base price of Rs.70/-. This was derived from the price at which shares were allotted to shareholders or erstwhile Shonkh Technology Ltd. The price of scrip went up from Rs.75.55 on August 9, 2000 to Rs.463.30 on September, 28, 2000 on very low volumes. After September 29, 2000 and upto December 8, 2000, there was an increase in volumes but the price started falling and reached Rs.210/- on 3rd November, 2000. Thereafter, the prices were moving in a narrow range of Rs.220/- to Rs.350/- accompanied with large volumes. The price volume data is as shown in Annexure A.” CO.APPEAL (SB) 15/2006 Page no.7 The yearly high-low of the prices is as given below:- Year High (Rs.) Date Low (Rs.) Date 1999 6.4 10.05.1999 2.15 13.05.1999 2000 445.5 27.09.2000 75.55 09.08.2000 2001 315 13.02.2001 199.7 25.01.2001 14. The shares of SYIL prior to acquisition of business undertaking of the appellant and allotment of shares to the shareholders of the appellant, to the extent of 89.35% in volume terms, were held by the following shareholders:- Sr. No. Name of the Shareholder No. of Shares % 1. Virendra Jain 9800 0.44% 2. Virendra Jain (Jtly) Rina Jain 1200000 53.57% 3. Laxmi Jain 250000 11.16% 4. Sushma Jain 300000 13.39% 5. Laxmi Jain (Jtly) Satyapal Jain 75450 3.37% 6. Anand Jain (Jtly) Sushma Jain 141000 6.29% 7. Ankit Jain (Jtly) Virendra Jain 25230 1.13% TOTAL 2001480 89.35% CO.APPEAL (SB) 15/2006 Page no.8 15. It is, therefore, clear that prior to “acquisition of the business undertaking of the appellant”, SYIL though a listed company was closely held and almost the entire shareholding was held by the said seven shareholders. These shareholders of SYIL substantially gained by acquiring the business undertaking of the Appellant valued at Rs.110 crores by allotting shares of SYIL having market value of Rs.2.15/- at a premium of Rs.60/- per share of face value of Rs.10/-. I may mention here that as per the balance sheet of SYIL for the period ending 31st March, 2000, the said company had brought forward losses of Rs.28,80,000/-. 16. It may be relevant to state here that in the due diligence report given by Amar Chand & Mangaldas & A. Shroff & Co. dated 10th October, 2000 in the case of SYIL, it has been recorded as under:- “SYIL does not presently have any employees and therefore does not have any registered code number under the Provident Fund or the Employees State Insurance legislations. The same may be required pursuant to the business transfer whereby the employees of STL will be transferred to SYIL. SYIL did not apply for registration as an NBFC even when it was carrying out NBFC activities. It has not applied for any exemption either.” CO.APPEAL (SB) 15/2006 Page no.9 17. As per 'due diligence report' given by Amarchand Mangaldas Suresh S. Shroff and Co., Sales Tax Registration of SYIL had been cancelled. SYIL did not also have any certificate under the Shop and Establishment Act. The said company had not maintained complete and accurate corporate register in accordance with the relevant provisions pertaining to disclosure of interest of directors. Further SYIL had been carrying on activities as a non-banking financial company though it was not registered as a non-banking financial company with the Reserve Bank of India. These violations were serious. 18. It was repeatedly argued before me on behalf of the appellant that the avernments in the petition and the finding given by the Company Law Board that the appellant had suffered loss of Rs.104.77 Crores due to transfer of business to SYIL is unsubstantiated. It is not the figure but whether there was loss suffered that is material and relevant. It was argued that Company Law Board has failed to appreciate and understand that full value of the undertaking was paid by SYIL by allotment of shares to the shareholders of the appellant. It was submitted that it was not necessary for SYIL to pay sale consideration to the appellant and allotment of shares to the shareholders of the appellant was for valuable consideration. This argument over looks the facts and figures stated above. In paragraph VIII of the petition under CO.APPEAL (SB) 15/2006 Page no.10 Section 237(b) it was alleged that the appellant had incurred loss of Rs.104.77 crores due to transfer of business to SYIL. The question is not whether shares were allotted to appellant or the shareholders of the appellant, but what was the corresponding market value of the shares allotted in lieu of transfer of undertaking by the appellant to SYIL. Admittedly, as per agreement for purchase dated 15th July, 1999, the total value of the undertaking was Rs.110.25 crores and for transfer of the said undertaking shares of face value of Rs.10/- each were allotted in SYIL at a premium of Rs.60/- per share but the market value of these shares as per last quoted price was Rs.2.15. 19. The above facts are startling by themselves and justify investigation under Section 237 (b) of the Act into the affairs of the appellant. The above facts are virtually un-rebutted and un-challenged. These facts are not new but are duly mentioned and recorded by the Ld. Company Law Board in its order while referring to the submissions of the parties and its findings. I have only collated them. I have gone into the factual aspects as the appellant has questioned the findings of the tribunal on the ground that the same are perverse and completely contrary to evidence on record. In view of the evidence and material discussed above, this portion of the question has to be answered against the appellant. CO.APPEAL (SB) 15/2006 Page no.11 20. The second aspect of the question framed above relates to interpretation of section 237(b) of the Act and whether on the findings the provision has been rightly invoked. 21. Section 237(b) of the Act reads as under:- (b) may do so in its opinion or in the opinion of the Board 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. 22. Section 237(b) of the Act can be invoked and is without prejudice to the powers of the Central Government under Section 235 of the Act. The said Section has three different CO.APPEAL (SB) 15/2006 Page no.12 clauses. Conditions mentioned in any of the three clauses should be satisfied for directing investigation under section 237(b) of the Act. The first clause requires satisfaction of the Company Law Board that the business of the company is being conducted with the intent to defraud its creditors, shareholders or any other person. It also comes into operation when business of the company is being conducted for fraudulent or unlawful purpose or when a company is formed for the said purpose or when business is being conducted in a manner oppressive to its members. Secondly, the provision can be invoked when a person concerned with the formation or management of the affairs of the company is guilty of fraud, misfeasance or other misconduct towards the company or its members. The words “other misconduct” widens the scope of the said provision. Thus conduct, which is not strictly fraud and misfeasance but conduct which is dis-honourable, unprincipled and shameful is also covered by the said sub- clause. The third clause applies when all information in respect of the affairs of the company is not given to it's members. CO.APPEAL (SB) 15/2006 Page no.13 23. For Section 237 (b) of the Act to be invoked there should be “circumstances suggesting” that the conditions mentioned in the three sub-clauses are satisfied. A final, definitive opinion, therefore, is not required at the stage of passing of an order under Section 237(b). The reason is apparent because investigation is still to be conducted. The provision is essentially of an exploratory character. What is to be decided at this stage is whether exploration/investigation is required and should be ordered. The words “circumstances suggesting” cannot be interpreted to mean conclusive proof. Otherwise, the provision will be rendered nugatory and completely toothless. Investigation is not required if facts are already established. At the same time, the legislature has been careful to use the words “defraud”, “fraudulent”, “unlawful purposes”, “misfeasance”,” other misconduct” “lack of information”, etc. “Circumstances suggesting” must necessarily indicate fraud, misfeasance or like conduct or activities on the part of the company. The provision cannot be lightly invoked on mere suspicion. Supreme Court in the case of Rohtas Industries versus S.T. Aggarwal and others reported in (1969) 1 SCC 325 has held that the words CO.APPEAL (SB) 15/2006 Page no.14 “circumstances suggesting” require inference of enumerated kind which should be demonstrable. It is not sufficient to merely assert that circumstances exist without specifying the material and evidence. The words “circumstances suggesting” do not support the construction that even existence of circumstances is a matter of subjective opinion. Referring to Shelat, J.'s opinion in the case of Barium Chemicals Ltd. and another versus Company Law Board reported in AIR 1967 SC 295, distinction was drawn between subjective process and formation of opinion and existence of circumstances on which the opinion is founded. The said judgment also explains the scope of judicial review in cases where discretionary administrative orders are under challenge. (Section 237(b) of the Act, after amendment, however requires a quasi judicial order to be passed by the Company Law Board and investigation can be ordered by the said Board, if the conditions specified in the three sub-clauses are satisfied.) In the said case, the Supreme Court came to the conclusion that the opinion formed was wholly irrational as there was no evidence with regard to the market price of CO.APPEAL (SB) 15/2006 Page no.15 the shares of Albion Plywoods Ltd. on or about 6th May, 1960 though allegation had been made and accepted by the Central Government that the shares were sold for inadequate consideration on 6th May, 1960.This was the foundation of the administrative order passed by the Central Government. It was held that without material and evidence, Central Government had presumed fraud in the sale of the shares. Suspicion by itself, in these circumstances, it was held was not justification to precipitate action. However, the Supreme Court also noticed that in Barium Chemicals (supra), there was difference of opinion between A.K. Sarkar, C.J. and Madholkar, J. on the one side and Hidayatullah, J. and Shelat J. on the other side. In Barium Chemicals (supra), the Supreme Court, while dealing with the question whether the said provision falls foul of the fundamental right to carry on business under Article 19(1) (g) of the Constitution of India, held that investigation when ordered was bound to cause inconvenience and affect credit worthiness of a company but the provision was reasonable. It was held that the aforesaid provision cannot be regarded as an unreasonable restriction on right of a CO.APPEAL (SB) 15/2006 Page no.16 party to carry on business. Reference in this regard was made to the judgement of the Supreme Court in the case of Raja Narayanlal Bansilal versus Maneck Phitoz Mistry (1961) 1 SCR 417 wherein it has been held as under:- “30. ...A company is a creature of the statute. There can be no doubt that one of the objects of the Companies Act is to throw open to all citizens the privilege of carrying on business with limited liability. Inevitably the business of the company has to be carried on through human agency, and that sometimes gives rise to irregularities and malpractices in the management of the affairs of the company. If persons in charge of the management of companies abuse their position and make personal profit at the cost of the creditors, contributories and others interested in the company, that raises a problem which is very much different from the problem of ordinary misappropriation or breach of trust. The interest of the company is the interest of several persons who constitute the company, and thus persons in management of the affairs of such companies can be classed by themselves as distinct from other individual citizens. A citizen can and may protect his own interest, but where the financial interest of a large number of citizens is left in charge of persons who manage the affairs of the companies it would be legitimate to treat such companies and their managers as a class by themselves and to provide for necessary safeguards and checks against a possible abuse of power vesting in the managers. If the relevant provisions of the Act dealing with enquiries and investigations of the affairs of the companies are considered from this point of view there would be no difficulty in holding that Article 14 is not violated either by Section 239 or Section 240 of the new Act.” CO.APPEAL (SB) 15/2006 Page no.17 24.The above observations made almost half a century ago are perhaps more relevant today. With opening up of the economy and deregulation, we have had cases where by employing ingenuous methods and tactics some dishonest persons have managed to intrude and evade safeguards in force. Common man is today making huge investments in the stock market and shares. His interest is paramount. Reasonable invasion, once grounds for investigation exit, into right to carry on business, to protect interest of common man is justified. There is no incongruous friction between the two. Success of liberalisation depends upon the regulatory and supervisory machinists weeding out the unscrupulous and the corrupt and not to protect them. What is required is not a fragile but a robust supervisory framework, which is just and fair. 25.The main pillar of free market economic system, is integrity and full, correct, true and open information. Without integrity and reliable information, free market economic system can lead to frauds, mismanagement and ultimately collapse. Integrity and information can be achieved through CO.APPEAL (SB) 15/2006 Page no.18 internal self controls and independent verifiable financial information. However, system of external checks is recognized and accepted as imperative necessity. Progressive economic liberalization with increasing emphasis on trade facilitation has also led to some increase in misuse of the facilities/concessions. Scams and manipulations of share prices, and insider trading, on at- least two occasions has caused losses with general public and institutions taking the brunt. The complexion of economic fraud has changed dramatically. It has become complex and much more difficult to unravel and uncover. Investigation to un-cover frauds once grounds exits are required. In this climate, courts have to tread carefully and strike a fine balance between free market system and enforcement- a natural corollary to liberalization. 26.Other contentions raised by the appellant with reference to section 237(b) of the Act and the impugned order directing investigation may now be noticed. It was submitted by the appellant that separate proceedings were initiated under different enactments, the object and purpose being to CO.APPEAL (SB) 15/2006 Page no.19 investigate into the affairs of the appellant. Reference was made to the report given by SEBI, investigation done by CBI and proceedings under Section 209A of the Act and it was submitted