THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Company Petition No.109 of 2008 Dated : 07-07-2011 Between: B.Manpal Reddy S/o B.Narayan Reddy R/o Maruthi Nagar, Moula-Ali, Hyd. …Petitioner A n d The Secretary, Government of India and others ..Respondents THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Company Petition No.109 of 2008 ORDER: This company petition has been taken out by B.Manpal Reddy under Section 237(a) (i) and (ii) of the Companies Act, 1956 read with Rule 9 of the Company (Court) Rules, 1959, seeking direction to the Secretary, Government of India, Ministry of Corporate Affairs, New Delhi-1st respondent and Regional Director (Southern Region), Ministry of Corporate Affairs, Chennai-2nd respondent to appoint an Inspector for investigation into the affairs of M/s.Palamoor Agro Complex Limited-4th respondent and file a report thereof. 2. The petition averments, in brief, are:- The 4th respondent company- M/s.Palamoor Agro Complex Limited was incorporated on 11.5.1994 with Registration No.01- 17512. The registered office of the company is situated at Plot No.43, Flat No.412, R.R.Estates, Huda Complex, Saroornagar, Hyderabad. The main objects of the company are:- to carry on trade, manufacturing of fruit papain and pulp apart from other incidental objects set forth in the Memorandum of Association. The authorized share capital of the company is Rs.50,00,000/- divided into 5,00,000 shares of Rs.10/- each. The paid up capital of the company as on the date of its incorporation was Rs.800/-. The petitioner has contributed Rs.7,40,000/- as its pre-incorporation expenditure and spent some amount after its incorporation. He raised funds to meet the pre- incorporation expenses by borrowing money from his relatives, namely, G.Vittal Reddy, Sri K.Madhusoodan Reddy and 22 others. He invested the amounts borrowed from his relations in purchasing lands for the company and raising its infrastructure. He also paid Rs.4,95,000/- towards Technology transfer etc. The amount spent by him is reflected in Income tax returns of self and his wife for the financial year 1995-96. The petitioner acquired Ac.99.04 gutas in Revalli village, Mahabubnagar and Ac.04.20 guntas in Kadthal village of Mahabubnagar District. Though the 5th respondent is a promoter Director of the company, he did not evince any interest in its affairs such as pooling of resources for expansion, raising infrastructure etc. The affairs of the company were found to be financially not sound. Therefore, investors demanded return of their investment and they extremely pressurized the petitioner to return their investment. The company entered into agreement with the investors in July, 1996 promising them to repay the sums along with interest and executed bonds and promissory notes in their favour. Supporting such indemnification, post dated cheques were issued in their favour by the petitioner in the capacity of the Managing Director of the company. The total amount covered under the post dated cheques was Rs.11,50,000/-. The company undertook to return the money to the investors on or before 31.12.1996 The petitioner returned money to some of the investors. The amount returned by the petitioner to the investors are as under:- a) Rs.2,55,000/- to Sri Madhusudan Reddy through cheque drawn on Union Bank of India, Panjagutta Branch on 09-02- 1997; b) Rs.80,000/- to Smt. Manjula Reddy through cheque bearing No.1415205 drawn on the Bank of India, Saroornagar branch on 11.3.1997; c) Rs.60,000/- to Sri Madhusudan Reddy through cheque bearing No.1415206 drawn on Bank of India, Saroornagar branch on 11.3.1997; d) Rs.30,000/- to Sri Rama Linga Reddy through cheque bearing No.1415207 drawn on Bank of India, Saroornagar branch. 3. The cheques issued by the company to some of the investors towards repayment of the money invested by them came to be dishonoured for insufficiency of funds. It resulted in initiation of prosecution under the provisions of Section 138 of N.I.Act. One Vijaya Bhaskar Reddy filed a complaint against the petitioner and the 4th respondent on the file of IV Metropolitan Magistrate Court, Hyderabad. The learned Magistrate took the complaint on file as C.C.Nos.504, 505, 506, 507 and 508 of 1997. All the cases ended in compromise consequent on the petitioner making payment of Rs.3,20,000/- by drawing the money from his personal account in State Bank of Hyderabad, Metropolitan City Courts Complex, Nampally at Hyderabad. Another group of investors filed seven complaints under Section 138 of Negotiable Instruments Act represented through GPA Mr.Ram Mohan Reddy against the company and the petitioner in the capacity of the Managing Director. The complaints were taken on file by IV Metropolitan Magistrate, Criminal Courts Complex, Nampally, at Hyderabad as C.C.No.479, 480, 481, 482, 483, 484 and 768 of 1997. All the cases resulted in conviction of the petitioner. 4. Aggrieved by the conviction and sentences passed in the above-referred cases, the petitioner filed appeals in the Court of Metropolitan Sessions Judge, Nampally, Hyderbaad. The appeals ended in dismissal. Thereupon, the petitioner preferred Criminal Revision cases being Crl.R.C.Nos.452, 453, 454, 455, 456, 457 and 458 of 2001 and all the criminal revision cases came to be disposed of, consequent of the offence being compounded on 21.12.2005. 5. The petitioner in the capacity of the Managing Director of the company was its authorized signatory to the instruments on behalf of the company. However, respondents 5 to 10 filed some fictitious balance sheets relatable to the company. They resorted to lure third parties to purchase the company’s properties by transfer or otherwise. The petitioner, on coming to know that respondents 5 to 10 engineered resignation allegedly tendered by the petitioner in 2002, made a complaint to the Registrar of Companies; Hyderabad (3rd respondent) complaining about the fraud played by respondents 5 and 6. The 5th respondent has filed a memo in Form No.32 as if the petitioner resigned as director of the company on 7.10.2002. Induction of the respondents 7 to 10 in the Board of Directors of the company is against the spirit of the statutes of the company. Induction of respondents 7 to 10 without the consent of the petitioner since he is majority share holder and also Managing Director-cum- investor is not legal and proper. Respondents 7 to 10 have no valid authority to be the Directors of the company. The paid up capital of the company is Rs.800/- and the share balance money is Rs.11,50,000/- and the loan is to a tune of Rs.13,00,000/- Except the amount subscribed at the time the incorporation of the company, there is no other contribution from any of the unofficial respondents. The petitioner made a complaint against A.P.B.S.Shastry, a Chartered Accountant who certified the balance sheets without looking into the factual aspects. The unofficial respondents conspired together to liquidate the assets of the 4th respondent company. As such, they are liable for penal action for violation of Sections 209, 210, 211, 215, 220 and 628 of the Companies Act, 1956. The petitioner made a complaint to 3rd respondent to initiate expeditious action against the unofficial respondents. The 3rd respondent acted upon the complaint after great persuasion made by the petitioner, conducted inspection and submitted report under Section 209 A of the Companies Act, 1956 on 31.10.2008. The unofficial respondents have sold the company’s properties to an extent of Ac.4.20 guntas in Kadthal village of Mahabubnagar District to one Chalapathy Group for a consideration of Rs.22,00,000/- and appropriated the money for their personal benefit. It was reflected in the balance sheet dated 31.3.2006 and in the audit report dated 22.8.2006 as if the company paid Rs.16,20,000/- as an advance to 9th respondent and a sum of Rs.5,50,000/- to 5th respondent for meeting day-to-day expenses of the 4th respondent company. As per the balance sheets, the 5th respondent allegedly provided unsecured loan of Rs.31,61,000/- as on 31.3.2006 to the company and revenue worth Rs.17,82,000/- is shown to have been earned by the company by cultivating and selling Jatropha seeds. Indeed all the lands of the company are kept barren and fallow and they are unfit for cultivation. Having come to know of the sale of the company’s property , the petitioner filed O.S.No.202 of 2006 on the file of Senior Civil Judge, Mahabubnagar challenging the validity of such sale. The property covered under the sale deed was already under order of attachment issued by VII Senior Civil Judge, City Civil Court, Hyderabad in O.S.Nos.941, 942 and 943 of 1999. The petitioner secured interim orders in O.s.No.202 of 2006 restricting the unofficial respondents from alienating or creating any third party interest over the company’s property. The company‘s property, which remained unencumbered is Ac.99.04 guntas worth Rs.2.5 crores. The unofficial respondents are contemplating to sell away the said land to Real Estate company, namely, Marg Projects and Infrastructure Limited based at Chennai. The petitioner also reliably learnt that the unofficial respondents have taken some token advance from the said company. If the unofficial respondents are permitted to proceed with their illegal actions, they would create third party interest over the company’s properties. The petitioner earlier filed C.P.No.85 of 206 and the said company petition ended in dismissal for non prosecution and the said non-prosecution occasioned due to the proposal for compromise by the unofficial respondents with the petitioner. The 5th respondent, on behalf of the 4th respondent, reported no objection in the proceedings before the revenue authorities taken out by the petitioner challenging mutation on the concocted Form No.32 before the Revenue Divisional Officer, Mahabubnagar. The 3rd respondent issued several notices to unofficial respondents on the complaints made by the petitioner requiring their attendance on 12.6.2007 in connection with the inspection of accounts relating to 4th respondent company. But the unofficial respondents, for the reasons best known to them, neither appeared before the 3rd respondent nor offered any reasonable reply for their non-compliance. The absence of the 4th respondent is being contradicted by respondents 5 and 6 with an intent to defraud its creditors and other persons connected with it. Hence, direction has been sought for by the respondents to appoint an Inspector to investigate into the affairs of the 4th respondent company and file a report. 6. Notice to respondents came to be ordered on 31.12.2008. Respondents 1 to 3, 5, 6, 9, 7, 8 and 10 filed counter affidavits. 7. Respondents 1 to 3 are unofficial respondents. They filed common affidavit. Henry Richard, Registrar of Companies has sworn to the common counter affidavit filed on behalf of respondents 1 to 3. It is stated in the counter affidavit that the 1st respondent was originally incorporated in the office of 3rd respondent on 11.4.1994 as “M/s. Palmoor Agro Complex Limited” and subsequently altered its name to “M/s. Palamoor Agro Complex Limited” on 14.7.1994. The authorized capital of the 4th respondent company was Rs.50,00,000/- divided into 5,00,000 equity shares of Rs.10/- each. The subscribed and paid up capital of the company was Rs.800/- divided into 80 equity shares of Rs.10/- each, subscribed by 8 members, including the petitioner-Sri B.Manpal Reddy, who has subscribed for 10 equity shares of Rs.10/- each. The first directors as per the Articles of Association filed at the time of Incorporation are I) B.Manpal Reddy, 2) S.Ramesh Reddy and 3) R.Manohar Rao. The 4th respondent company filed balance sheets for the years 1994-95 to 31.3.2006. The said balance sheets were signed by two Directors, viz., S.Ramesh Reddy and R.Manohar Rao, who were Directors since incorporation. As per the balance sheet, as at 31.3.1995, 31.3.1996 and 31.3.1997, the paid up capital of the company was shown as Rs.10,00,000/- divided into 1,00,000 equity shares of Rs.10/- each. In the balance sheets as at 31.3.1998, 31.3.1999 and 31.3.2000, the paid up capital of the company was increased and shown as Rs.17,08,910/- divided into 1,70,891 equity shares of Rs.10/- each. No balance sheets and annual returns have been filed with the Registrar of Companies subsequent to 30th September 2006. As per the latest annual return made up to 30.9.2006, the share holding pattern of the company is as under:- B.Manpal Reddy 10 S.Ramesh Reddy 21363 G.Nagabhushanam 10 R.Manohar Rao 21361 G.Padma 10 G.Saidulu 10 G.Alwal Reddy 10 G.Mahender Reddy 21361 B.Sudhakar Reddy 21351 N.Srinivas 28469 A.Mahesh 28468 T.Achary 28468 ___________ 170891 ____________ As per the said Annual Return, Sri S.Ramesh Reddy and Sri R.Manohar Rao, Sri B.Sudhakar Reddy, Sri A.Mahesh, Sri T.Achary and Sri N.Srinivas were the Directors of the 4th respondent company and the petitioner’s name was not found as Director. There is no Form No.32 evidencing cessation of the petitioner from the post of Director available in the records. The 4th respondent company has filed one Form No.23 on 10.01.2007 signed by S.Ramesh Reddy, Director of the Company for the resolution passed by the share holders on 2-1-2007 approving the disposal of company’s land at Revally and Timmanapally villages, Midgil Mandal, Mahabubnagar District. No shares have been allotted to the petitioner even though he has claimed in the petition that he has brought several thousands of rupees into the company. 8. In the additional counter affidavit filed on behalf of the 2nd respondent, it is stated that the 3rd respondent sent inspection report dated 31.1.2008 of the Inspecting Officer to the office of the Regional Director, Southern Region, Ministry of Corporate Affairs –2nd respondent on 06.2.2008. The 2nd respondent issued instructions to the Registrar of Companies, A.P.,. Hyderabad to issue show-cause notice and file prosecutions in respect of the violations under Part-B viz., under Sections 209(1), 211 (2 counts) and 217(1)(d) of the Companies Act, 1956. The 2nd respondent also forwarded copy of the Ministry’s instructions issued vide letter No.F.No.1/72/2008-CL.II, dated 12.12.2008 to the Registrar of Companies, A.P for taking action against the company and its Directors/Officers for violations under Part-A, viz., under Sections 209A (8), 295 and 628 of the Companies Act. The 3rd respondent issued Show-cause notices for the violations stated in the inspection report. 9. Respondents 5 and 6 stated in the counter-affidavit reporting no objection for appointment of Inspector for investigation into the affairs of the company. For better appreciation, I may refer relevant portion of the counter-affidavit filed by the 5th respondent, which reads as hereunder: “10. I submit that no allotment was made to respondents 7 to 10 the statement made pertaining to allotment of shares etc. are absolutely false. I submit that no share certificates were issued to them by company and they never made any payments to company towards share application money. Later in order to defraud the company the above persons also opened a bank account bearing No.1930 with Canara Bank, Dilsukhnagar Branch, only for the purpose of drawing amounts paid by M/s.CHALAPATHI ESTATES PVT. LTD. towards sale consideration as above discussed, and on the very same day the amounts were withdrawn. The above balance sheets are only purposed to sell away company’s properties and not for any other, since the respondents 7 to 10 with aid of false documents were successful in selling company’s property as above discussed they have also resorted to sell away company’s property in REVALLI Village to an extent of Ac.100 wanted to enter into a bargain with a Chennai based real estate company namely MARG PROJECTS & INFRASTRUCTURE LIMITED. I have objected it and it appears that in order to make the deal the above named persons have also gone to Chennai. Now that they are threatening me not to disclose any fact and certify the above discussed false documents to be true, so that the land in subject will be sold to the above named company and the sale proceeds can be distributed amongst us. I have refused to give consent to any fraud further likely to be committed and I have also warned the above named persons that I would disclose it to police as well to the other concerned authorities. 11. In connection with the notices sent by 3rd respondent to me I have offered the same as that of my counter through my letter dated 19.01.09. In the light of above it is prayed that this Honourable Court may be pleased to order for appointment of Inspector for investigation by investigating into the affairs of the company and pass such other order or orders as deemed fit and proper in the circumstances of the case.” 10. The counter-affidavit of the 6th respondent is almost in similar lines as that of the 5th respondent and he too reported no objection for appointment of Inspector for investigating into the affairs of the company. 11. The 9th respondent also reported no objection for appointment of Inspector for investigating into the affairs of the company. Paras.10 and 11 of the counter-affidavit of the 9th respondent need to be noted and they are thus: “10. I submit that no allotment was made in my favour and no share certificate is awarded to me by the 4th respondent company. I submit further in reply that respondents 7, 8 and 10 with aid of false documents were successful in selling company’s property as above discussed they have also resorted to sell away company’s property in REVALLI village to an extent of Ac.100 wanted to enter into a bargain with a Chennai based real estate company namely MARG PROJECTS & INFRASTRUCTURE LIMITED and consulted me with that regard when I refused to assist and take part they are threatening me not to disclose any fact and certify the above discussed false documents to be true, so that the land in subject will be sold to the above named company and the sale proceeds can be distributed amongst us. I have refused to give consent to any fraud further likely to be committed on petitioner and 4th respondent company. 11. In further reply I submit that I have come to know from the balance sheets filed by the 4th respondent for the financial year 2005-06 that an amount of Rs.16,20,000/- was given to meas advance from the actual sale consideration, which was never given to me, though a cheque for that sum was tendered on my name I have every proof that the amount was given to respondents 7, 8 & 10 because I have in turn tendered cheques from my account to them on the very same day, and in the same year it is also shown that the company also has done trade of JATROPHA which is absolutely false . It was shown in the said balance sheet that company earned a profit of Rs.13,00,000/- out of such trade is also false. For the reasons stated as above it is prayed that this Honourable Court may be pleased to order for appointment of inspector for investigating into the affairs of the company and pass such other order or orders as deemed fit and proper in the circumstances of the case.” 12. Respondents 7, 8 and 10 filed common counter-affidavit. A Mahesh-8th respondent has sworn to the counter-affidavit. It is stated in the counter affidavit that the petitioners have no right to file the petition against the respondents as he has resigned as the director of the company in 2001 and the same has been accepted in the year 2002 and therefore, he has no locus standi to file the petition against these respondents. It is also stated in the counter-affidavit that the petitioner earlier filed Company Petition No.85 of 2006 and the same ended in dismissal for non-prosecution and so also the suit filed by him in the Senior Civil Judge’s Court, Mahaboobnagar, and therefore, the present petition deserves no consideration. 13. Though the respondents 7, 8 and 10 filed counter-affidavit, they did not choose to participate in the proceedings. The petitioner deposited Rs.1,00,000/- as initial amount towards the costs and expenses for conducting investigation in pursuance of the direction given by this Court on 12.11.2009. 14. Heard learned counsel appearing for the petitioner and learned Assistant Solicitor General appearing for the respondents 1 to 3. 15. Learned counsel appearing for the petitioner submits that the petitioner is a promoter director of the 4th respondent company and he invested Rs.7,50,000/-; Rs.4,60,000/- and Rs.4,95,000/- by borrowing money from his relations and the said amount came to be spent for the purpose of acquiring Ac.99.04 guntas at Revelli Village and Ac.4.20 guntas in Kadthal village of Mahboobnagar District. He would also submit that the respondents 7, 8 and 10 mis-utilized the funds of the company and diverted proceeds to their personal benefit and mis- managed the affairs of the company and they even resorted to liquidate the property of the company by executing sale deeds in favour of third parties and thereupon, the petitioner filed a suit and obtained interim relief. The learned counsel took me to the various representations made by the petitioner to the Registrar of Companies- 3rd respondent complaining the misdeeds of the respondents 7, 8 and 10. He also took me to the Inspector’s inspection report, wherein various lapses of the company committed have been pointed out. When the Inspector sought to get certain information from B.Sudhakar Reddy-7th respondent, the 7th respondent did not choose to furnish the necessary records. By referring the Inspector’s Report, learned counsel appearing for the petitioner submits that the petitioner made out a valid ground for seeking necessary direction to the Central Government to appoint an Inspector for investigating into the affairs of the company. In support of his submissions, reliance has been placed on the judgment of this Court in Uunet India Ltd & Ors. v.I.C.Rao & Ors.[1]. 16. Learned Assistant Solicitor General appearing for the respondents 1 to 3 submits that the petitioner has an alternative remedy of approaching the Company Law Board seeking the self- same relief and therefore, this Company Petition deserves to be dismissed. 17. I have gone through the Inspection Report and the material brought on record. Various lapses have been pointed by the Inspector in the Inspection Report. Indisputably, no balance sheets have been placed before the statutory authorities subsequent to 30.09.2006. The affairs of the Company are kept in dormant and unless investigation is taken up by the competent authority, the true affairs of the company cannot be known. 18. Section 237 of the Companies Act, 1956, reads as hereunder: “237.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 intend 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 above Section indicates that this Court is competent to direct the Central Government to appoint Inspector to investigate into the affairs of the company. In these circumstances, I am inclined to direct the Central Government to appoint Inspector/s to investigate into the affairs of the company and the inspector/s so appointed shall report thereon to the Central Government making the things clear so as to enable the parties, what course of action they opt to take and also enabling the authorities to take such steps as are necessary. 19. Accordingly, the Company Petition is allowed with costs. __________________________ B. SESHASAYANA REDDY, J Date: 07th July, 2011. RAR/Cs THE HON'BLE SRI JUSTICE B. SESHASAYANA REDDY Company Petition No.109 of 2008 Date:07th