IN THE HIGH COURT OF JUDICATRE AT MADRAS DATED: 21-02-2011 CORAM: THE HONOURABLE MR. JUSTICE V. RAMASUBRAMANIAN Company Appeal No.6 of 2009 1.K.Muthusamy 2.P.Durai ...... Appellants. vs. 1.S.Balasubramanian 2.P.Kannan 3.K.Murugan 4.S.Murugan 5.K.Muthukrishnan 6.Aruna Theatres and Enterprises Private Limited 7.S.Venkatachalam 8.Hon'ble Mr.Justice K.P.Sivasubramaniam (Retd.) (Amendment carried out pursuant to Court Order passed in M.P.No.20 of 2009 dated 23.6.2009) 9.N.Sankaranarayanan 10.N.Arunchalathammal 11.P.Muthurajeswari 12.M.Shanmugasundari 13.G.Vasugi 14.R.Lakshmi 15.Dr.Uma Shankari 16.M.Indira Muthuvel 17.S.Paramasivam Pillai 18.M.Paramasivam 19.D.Anantha Valli 20.V.Manthiram 21.S.Saraswathi 22.K.Shanmugasundaram 23.Mr.N.Gomathinayagam .... Respondents. Appeal preferred under Section 10F of the Companies Act, 1956, against the order in Company Petition No.64 of 2006 dated 25.2.2009, on the file of the Company Law Board Additional Principal Bench Chennai. For Appellants : Mr.T.K.Seshadri, Senior Counsel. For Respondent-3 : Mr.P.H.Arvind Pandian For Respondent-6 : Mr.Satish Parasaran For Respondents-9&10 : Mr.A.K.Raghavelu For Respondent-22 : Mr.Neelakandan For Respondent-23 : Mr.C.Umashankar https://hcservices.ecourts.gov.in/hcservices/ JUDGMENT This is an appeal filed under Section 10F of the Companies Act, 1956, challenging an order passed by the Company Law Board in C.P.No.64 of 2006, instituted under Sections 397, 398, 402 and 403 read with Sections 235, 237 and Schedule XI of the Companies Act, 1956. 2. I have heard Mr.T.K.Seshadri, learned Senior Counsel for the appellants, Mr.P.H.Arvind Pandian, learned counsel for the third respondent, Mr.Satish Parasaran, learned counsel for the sixth respondent, Mr.A.K. Raghavelu, learned counsel for respondents 9 and 10, Mr.C.Umashankar, learned counsel for the 22nd respondent and Mr.Neelakandan, learned counsel for the 23rd respondent. 3. Six brothers by name S.Narayanan Pillai, S.Subramaniam Pillai, S.Karuppasamy Pillai, S.Paramasivam Pillai, S.Sundaram Pillai and S.Kalyanasundaram Pillai promoted Aruna Theatres and Enterprises Pvt Ltd., as a private limited company in the year 1979. Out of the six brothers, 5 are no more. The lone surviving brother is the 17th respondent herein. 4. The family had another business venture run by another closely held company by name Annai Mookambigai Flour Mills (Private) Limited, which borrowed funds from Karur Vysya Bank. The loan was secured by a corporate guarantee executed by Aruna Theatres and Enterprises Pvt Ltd. For the default committed by them, the bank initiated proceedings in O.A.No.178 of 2004, before the Debts Recovery Tribunal. Pending the main application, the DRT passed an order on 17.5.2005 in I.A.No.414 of 2004, appointing Justice K.Swamidurai (Retd.) as Receiver/Administrator. He has now been replaced by Mr.Justice K.P.Sivasubramaniam (Retd.), as Receiver and he is now in charge of the business of the company. 5. In the meantime, the respondents 1 to 5 herein, filed C.P.No.64 of 2006 (out of which the present appeal arises) on the file of the Company Law Board, under Sections 397, 398, 402 and 403 read with Sections 235, 237 and Schedule XI of the Act, seeking the following reliefs:- (a) to direct the respondents 2 to 4 to restore the money and property which have been retained and misapplied and to compensate such sum to the assets of the company on account of misfeasance and breach of trust in relation to the company; (b) to appoint one or more competent persons to investigate into the affairs of the company for the period from 2000 to 2005 and submit a report before this Bench; (c) to dissolve the present Board of Directors and call for an extraordinary general meeting of the company to constitute a new Board of Directors; (d) to declare all the resolutions passed at the Board meetings since January 2003 as null and void; and (e) to pass such other further orders in the interest of the company and its shareholders. 6. After enquiry, the Company Law Board passed an order, the operative portion of which reads as follows:- https://hcservices.ecourts.gov.in/hcservices/ "12. In view of my foregoing conclusions and in exercise of the powers vested in Sections 397 and 398 read with Section 402 of the Act, as envisaged in Harikumar Raja vs. Sovereign Dairy Industries Ltd and others (supra) and with a view to bringing to an end the acts complained of by the aggrieved shareholders, thereby regulating the conduct of the company's affairs, it is ordered as under: (i) The present Board of Directors comprising of the petitioners will continue to carry on the management of affairs of the company, in strict compliance with the articles of association, subject to the stipulations (i) to (iii) imposed in the order dated 9.8.2007 made in C.A.No.41 of 2007; (ii)ShriR.Aghoramurthy, Chartered Accountant, Chennai, (Mobile No.9444322347) is authorized to carry out an investigative audit of the accounts of the company for the period from 1.4.2000 to 31.3.2005 by scrutinizing the books of account, vouchers and other connected records of the company and on hearing submissions of all the connected parties. The Chartered Accountant will submit a report on the financial transactions of the company for the relevant period, which shall include all the receipts, payments, expenses incurred on behalf of the company, together with the fund utilization thereof and irregularities, if any, and serve copies of the report on all the parties, who are bound by the report of the Chartered Accountant. The whole process shall be completed by 30.4.2009. The company will bear the Chartered Accountant's remuneration and towards this end, an initial amount of Rs.50,000/- may be paid by 31.3.2009. The matter will be heard on 15.5.2009 at 2.30 PM for issue of appropriate consequential directions, after hearing the parties concerned, to safeguard the interests of the company and its members. 13. With the above directions, the company petition and all the connected applications stand disposed of, however reserving the right to issue necessary directions, in terms of this order. No order as to costs." 7. Challenging the said order, the respondents 2 and 3 before the Company Law Board have come up with the present appeal. Pending appeal, the appellants also sought stay of the order of the Company Law Board in M.P.No.1of 2009. 8. On 21.4.2009, while ordering notice in the appeal, this Court granted a limited interim order, paragraphs-3 to 5 of which read as follows:- https://hcservices.ecourts.gov.in/hcservices/ "3. Having regard to the rival contentions, this Court feels that as an interim measure it is suffice if the appointed Chartered Accountant is directed to scrutinize the books of account and vouchers and other concerned records of the company and make an interim report on his findings about the various transactions and submit the interim report in a sealed cover to this Court on or before 11.6.2009. Such course of action will not cause any prejudice to the rights of the appellant herein pending consideration of the appeal before this Court. 4. It is hereby made clear that the Chartered Accountant shall not part with the interim report to the parties in the appeal. In view of the orders of this Court, there shall be an order of interim stay of the order dated 25.2.2009 passed by the Company Law Board till 22.6.2009. It is further made clear that while preparing the report, the Chartered Accountant shall not call for the views or response from any of the parties on this matter. 5. Since the records are already with the Receiver appointed, the same shall be handed over to the Chartered Accountant to scrutinise the records. The Receiver shall offer explanation as regards any doubt on which the Chartered Accountant may seek clarification from the Receiver." 9. In pursuance of the above interim order, the Chartered Accountant appointed by the Company Law Board filed his Interim Investigative Report in a sealed cover in June 2009. Though all the learned counsel appearing for the respondents wanted to peruse the report and make submissions, the said request was stoutly opposed by the learned Senior Counsel appearing for the appellants. As a matter of fact, I even suggested in the course of hearing that a perusal of the Interim Report by all the parties would clear the air of suspicion about the conduct of the affairs of the company and that the opening of the seal on the Interim Report would show whether it contains a can of worms or a can of juice. But the appellants were not prepared to take chances. In the days when the right to information has acquired new dimensions, the appellants contended that when the very appointment of the Chartered Accountant by the Company Law Board is assailed as wholly illegal, any exercise undertaken by such Chartered Accountant is also illegal and hence the Interim Report submitted by him should not even be looked into. The contention of the learned Senior Counsel for the appellants, reminiscing the Official Secrets regime of the https://hcservices.ecourts.gov.in/hcservices/ colonial past, was that even this Court should not open the sealed cover, but confine it to the dustbin. In view of such a stiff opposition, which in my opinion, bordered on adamancy, I did not open the sealed cover, but permitted the learned counsel on both sides to make submissions only on the correctness and validity of the order of the Company Law Board. As a matter of fact, despite the fact that forbidden fruit is the sweetest, I also imposed upon myself, a restriction not to see the Report at all, till I prepared this judgment upto the concluding part. I decided to keep the sealed cover submitted by the auditor in tact, so that the issues raised in the appeal could be addressed independently. I will come back to the issue of opening or not opening the sealed cover submitted by the auditor, at the end of the discussion, if it becomes necessary. 10. With the above background, let me now take a dive into the pool of contentions, whose water appears to be murky. 11. The facts leading to the disputes between the parties, are as follows:- (a) M/s.Aruna Theatres and Enterprises Pvt. Ltd., was incorporated as a Private Limited Company on 9.11.1979. Six persons by name (i) S. Narayana Pillai (ii) S.Subramania Pillai (iii) S.Karuppasamy Pillai (iv) S. Paramasivam Pillai (v) S.Sundaram Pillai and (vi) S.Kalyanasundaram Pillai, all of whom were the children of one N.Sankaranarayana Pillai and S.Anandammal, subscribed to 1,266 equity shares each, in the said company. In other words, the 6 subscribers to the Memorandum of Association, together held 7,596 shares (at the rate of 1,266 shares each). (b) Apart from promoting the aforesaid company, the 6 brothers above named floated two more private limited companies and 4 partnership firms. Thus they had 7 business concerns in all. (c) Out of the 6 subscribers, only one by name S.Paramasivan Pillai is now alive. All the other 5 have died, each leaving behind several legal heirs. The equations and the under currents which keep the flame of litigation between the parties burning forever, can be well understood only if we get the details of the legal heirs of each of the 5 out of 6 deceased subscribers to the Memorandum of Association. Therefore, the details are given as follows:- https://hcservices.ecourts.gov.in/hcservices/ S.Narayana Pillai (Late) N.Arunachal atammal (Wife) V.Muthulauk shmi- Daughter (Late) V.Manthiram C.Aruna N.Sanakaran arayanan- Son N.Gomathina yagam-Son S.Saraswath i-Daughter N.Lakshmana n-Son (Late) L.Chinnamma l L.Aruna L.Vellammal L.Muthulaks hmi K.Subha- Daugther S.Subramani a Pillai (Late) S.Shanmugat hammal-Wife (Late) S.Muthuvel- Son S.Sankaran- Son S.Venkatach alam-Son S.Anandha Saraswathi- Daughter M.Bhagavath i-Daughter S.Ramalinga m-Son S.Narayanan -Son S.Muthulaks hmi- Daughter S.Murugan- Son S.Paramasiv an-Son S.Selvaraj- Son S.Karuppasw amy Pillai (Late) K.Parameswa ri Ammal- Wife (Late) K.Muthulaks hmi- Daughter S.Indira- Daughter K.Vadivel Murugan-Son K.Muthukris hnan-Son K.Muthu Selvakumar- Son S.Paramasiv an Pillai P.Bhagavath i Ammam (Late) P.Mani-Son P.Durai-Son B.Muthulaks hmi- Daughter P.Kannan- Son S.Anandhi- Daughter P.Krishnamu rthy-Son S.Meena- Daughter S.Sundaram Pillai (Late) S.Gomathi Ammal-Wife M.Shanmugas undari- Daughter P.Muthuraje swari- Daughter G.Vasuki- Daughter S.Balasubra manian-Son R.Lakshmi- Daughter R.Umasankar i-Daughter S.Kalyanasu ndaram Pillai (Late) K.Ulageswar i Ammal- Wife (Late) K.Muthuswam i-Son V.Anandhi- Daughter K.Shanmuga Sundaram- Son M.Sundari- Daughter S.Sankari- Daughter K.Murugan- Son R.Vallidevi -Daughter (d) When the Tamil Nadu Housing Board promoted the Ashok Nagar Neighbourhood Scheme, a plot measuring an extent of 23 grounds and 1,930 sq. fts., was earmarked for Cinema Theatre and an adjoining plot measuring an extent of 5 grounds and 800 sq. ft., was earmarked for a Petrol Bunk. These two properties were allotted to the company. On these two properties, a Multiplex Cinema Theatre, a Kalyana Mandapam and a Petrol Bunk were constructed by the company. (e) On 28.6.2002, M/s.K.Muthuswamy, P.Durai and S.Venkatachalam, who are the appellants 1 and 2 and the 7th respondent in this appeal, executed a registered Lease Deed in respect of 13,200 sq. ft., of land, on which the Kalyana Mandapam is located, for a period of 10 years on a monthly rent of Rs.50,000/- in favour of the son of K.Muthuswamy (first appellant herein). https://hcservices.ecourts.gov.in/hcservices/ (f) Similarly, the land on which the Petrol Bunk is located, was also sold by M/s.K.Muthuswamy, P.Durai and S.Venkatachalam, who are the appellants 1 and 2 and the 7th respondent in this appeal, to and in favour of K. Muthuswamy and his wife by a Sale Deed dated 1.9.2003 for a sum of Rs.60 lakhs. However, the possession of the Petrol Bunk site could not be taken, on account of the refusal of the tenant M/s.Aruna Agencies, to vacate the Petrol Bunk. (g) One of the companies promoted by the 6 brothers, by name Annai Mookambigai Roller Flour Mills Pvt. Ltd., had earlier availed a term loan and working finance facility from the Karur Vysya Bank. Apart from the first charge created on the movables of the borrower company in favour of the Bank, the company in question viz., Aruna Theatres and Enterprises Pvt. Ltd., also gave a corporate guarantee in favour of the said Bank, in addition to mortgaging the Theatre Complex to the Bank. When the borrower company committed default, the Bank initiated recovery proceedings in O.A. No.178 of 2004. Pending the main application, the Bank sought the appointment of a Receiver to collect the income from the Theatre Complex and the Tribunal appointed Justice K.Swamidurai (Retd.), as a Receiver. (h) The Receiver so appointed filed 3 reports, in the second half of the year 2006, before the Debts Recovery Tribunal, pointing out certain facts. Thereafter, contending that the facts disclosed in those reports established oppression and mismanagement, the respondents 1 to 5 herein filed a petition in C.P. No.64 of 2006 on the file of the Company Law Board, Additional Principal Bench, Chennai, under Sections 397, 398, 402 and 403 read with Sections 235 and 237 and Schedule XI, seeking various reliefs, indicated in para-5 above. Originally, the company was impleaded as the first respondent and M/S K.Muthuswamy, P.Durai and S.Venkatachalam (who are the appellants 1 and 2 and the 7th respondent in this appeal) were impleaded as respondents 2 to 4 in the Company Petition C.P.No 64 of 2006. The Receiver appointed by the DRT was impleaded as fifth respondent. However, in the course of hearing of the company petition before the CLB, all the other shareholders also got impleaded as respondents 6 to 20. (i) The acts of oppression and mismanagement complained of by the respondents 1 to 5 herein in their petition C.P.No.64 of 2006 were (1) the leasing out of the Kalyana Mandapam to the son of the first appellant herein on 28.6.2002 for a rent far below the market value (2) the sale of the Petrol Bunk in favour of the first appellant and his wife for a consideration of Rs.60 lakhs (3) the receipt of Rs.99,000/- per month by the first appellant, as interest on the sale consideration fixed for the Petrol Bunk, on the ground that the possession of the property could not be taken (4) the appropriation of the rent (license fee) paid by RPG Cellular Company, for the tower installed in the terrace of the Kalyana Mandapam building, by the son of the first appellant (5) the salary drawn unauthorisedly by the first appellant, claiming to be the Managing Director and (6) the failure to conduct Annual General Meetings from the year 2001 and the failure to file annual returns. It is to be pointed out that after the appointment of the Receiver by the Debts Recovery Tribunal, the payment of Rs.99,000/-, allegedly towards interest, to the first appellant and his wife, was stopped since 1.6.2006. Similarly, the receipt of the rent/license fee by the son of the first appellant from RPG Cellular Company has also been stopped. https://hcservices.ecourts.gov.in/hcservices/ (j) Apart from pleading the above direct acts of mismanagement, the respondents 1 to 5 herein also pleaded certain circumstances, as pointing out mismanagement. According to the respondents 1 to 5 herein, the income of the company rose upto Rs.4 crores immediately after the Receiver took over, while it remained at Rs.2 crores, when it was under the management of the appellants herein. The Receiver also reported that the company had received Rs.45.10 lakhs as advance from the tenants of the shops, while the Income Tax Return filed by the appellants for the assessment year 2004-2005 accounted only for a sum of Rs.15 lakhs towards the advances, indicating thereby that there was siphoning of the funds. (k) It was also pleaded by the respondents 1 to 5 herein in their company petition that the first appellant released films in the theatres, not in the name of the company, but in the name of his wife who was running a concern by name Kanthimathi Films and Investments, after taking advances from the company. The appellants did not screen films for several shows in the theatres during the period from 1.4.2005 to 18.6.2006, thereby causing losses. (l) The company petition was hotly contested by the appellants herein, first on the ground of maintainability and also on merits. The Company Law Board rejected the objection relating to maintainability, after a survey of the case law on the point and on a consideration of the plain language of the statute. Thereafter the Company Law Board took up for consideration, each one of the acts of mismanagement complained of and came to a prima facie conclusion that the business of the company had been conducted in a manner oppressive of the members of the company at the hands of persons in management. The Company Law Board also came to the conclusion that the surplus income shown by the Receiver prima facie supported the charge of mismanagement, requiring a detailed investigation by an independent agency. Even while holding so, the Company Law Board was careful enough to hold that the process of any investigation would certainly involve the grant of adequate opportunity of hearing to all the parties. It is only after reserving such a right of opportunity to the appellants that the Company Law Board passed the order, which is the subject matter of the appeal herein. 12. At the initial stages, the very maintainability of the present appeal was also questioned by the respondents. Therefore, the learned Senior Counsel appearing for the appellants invited my attention to Section 10F of the Companies Act, 1956 and contended that there are questions of law arising out of the impugned order of the Company Law Board and that therefore, the present appeal is maintainable. 13. But I do not think that the question of maintainability of the present appeal should detain us for a long time. Section 10F of the Companies Act, 1956, is not akin to Section 100 of the Code of Civil Procedure. Section 10F entitles any person aggrieved by any order of the Company Law Board to file an appeal to this Court against such decision on any question of law. Section 10F does not use either the expression substantial question of law or the expression substantial question of law of public importance. The present appeal certainly rises a question of law, as to whether the company petition was maintainable before the Company Law Board or not and whether in the absence of the continuance of https://hcservices.ecourts.gov.in/hcservices/ the alleged acts of misconduct on the date of filing of the petition, a petition for oppression and mismanagement was maintainable. Therefore, I will take it that the appeal is maintainable. 14. Assailing the order of the Company Law Board, the learned Senior Counsel for the appellants raised the following contentions:- (i) The Receiver appointed by the Debts Recovery Tribunal had taken over charge of the management of the theatres with effect from 19.6.2006. He admittedly stopped the alleged acts of oppression and mismanagement thereafter. The Company Petition was filed subsequently in November 2006. Consequently, there were no continuing acts of oppression and mismanagement as on the date of filing of the company petition in November 2006. In the absence of continuing acts of oppression and mismanagement as on the date of filing of the company petition and when the appellants were not in management at that time, the petition was not maintainable. (ii) The order passed by the Company Law Board was not merely based upon the allegations made in the company petition by the respondents 1 to 5 herein. Some of the newly impleaded respondents made fresh set of allegations in their counter statements before the Company Law Board, which have also been taken into account by the Company Law Board in violation of the law relating to pleadings and evidence. The relief granted by the Board was based upon an entirely new case neither pleaded nor proved. (iii) The findings recorded by the Company Law Board on the alleged acts of mismanagement pleaded by the complainants, were erroneous and were not continuing as on the date of filing of the petition. (iv) The Company Law Board cannot order investigation under Section 237 (b), in a petition under Sections 397, 399 and 402. In any case, the essential requirements of Section 237(b) are also not satisfied. (v) The Company Law Board erred in reaching conclusions on the basis of the report of the Receiver appointed by the Debts Recovery Tribunal. The Receiver was appointed to carry on the administration and management, with prospective effect and hence the reports filed by him in respect of the events of the past, were of no value. (vi) The act of the Company Law Board in accepting photo copies of certain documents filed by the parties, after the conclusion of the arguments, without either a proper pleading and proof or an opportunity to the appellants, was violative of the procedure prescribed by law. Therefore, the findings recorded on the basis of these documents are wholly illegal. (vii) The order of the Company Law Board bye-passing the directions issued by this Court in CMA No.1900 of 2007 is erroneous. So long as the Receiver appointed by the Court is in charge of the management, the present Board of Directors cannot act independently. (viii) The Company Law Board erred in accepting the complaint of Vadivel Murugan, who was not a party to the proceedings, without any kind of evidence or affidavit. From the above contentions, it can be deciphered that the following questions of law would arise for consideration in this appeal : i. Whether in the light of the appointment of a Receiver and in the absence of continuing acts of oppression and mismanagement upto the date of filing of the petition, the petition under Section 397/398 was https://hcservices.ecourts.gov.in/hcservices/ maintainable? ii. Whether the Company Law Board was right in deciding the petition on the basis of new facts pleaded by newly impleaded respondents, without adhering to the rules relating to pleadings and evidence, which are applicable to proceedings before the Board by virtue of Sections 10E(4C), 10E(4D), 10E(5) and 10E(6) of the Act ? iii. Whether the findings of the Company Law Board on the six acts of oppression and mismanagement complained of by the respondents 1 to 5 herein, were based upon any acceptable evidence or were perverse ? iv. Whether the order of the Company Law Board directing an investigative audit, in terms of Section 237(b), is in tune with the requirements of Clauses (i), (ii) and (iii) of Section 237(b) and whether in a petition under Section 397/398, such an investigation could be ordered ? v. Whether the reports filed by the Receiver appointed by the Debts Recovery Tribunal could be taken to be