Case: BEML Ltd. Vs BEML Midwest Ltd. and Ors.. Company Law Board

JudgesK.K. Balu, Vice Chairman
IssueCompanies Act, 1956 - Sections 397, 398, 402, 403 and 406
Citation[2009] 149 CompCas 570 (CLB)
Judgement DateJanuary 23, 2009
CourtCompany Law Board

Order:

K.K. Balu, Vice Chairman

  1. The petitioner has invoked the equitable jurisdiction of the Company Law Board under Sections 397, 398, 402, 403 and 406 of the Companies Act, 1956 ("the Act") with a view to bringing to an end the matters complained of in the affairs of M/s. BEML Midwest Ltd. ("the company") and claiming against respondents Nos. 3 to 5 and 7, the following reliefs:

    (a) to declare that the acts of respondents Nos. 3 to 5 are prejudicial to the interest of the company and are oppressive against the petitioner and public at large;

    (b) to declare that respondents Nos. 3 to 5 have failed in their fiduciary duties towards the company and direct respondents Nos. 2 to 5 to reimburse a sum of Rs. 11 crores to the company along with interest at the rate of 24 per cent, from April 1, 2008, up to date of repayment;

    (c) to appoint an investigator to enquire into misfeasance and misdemeanours committed by respondents Nos. 3 to 5;

    (d) to appoint a committee of management in supersession of the board of directors of the company and designate Mr. V. R. S. Natrajan, chairman of the company as chairman of the committee of management;

    (e) to appoint an independent auditor in the place of the statutory auditor of the company;

    (f) to declare that the incidents narrated constitute oppression of the petitioner, mismanagement of the affairs of the company and are against the public interest and interest of the petitioner-company;

    (g) to declare that respondents Nos. 3 to 5 and 7 have violated the provisions of the memorandum of association inasmuch as diverting the funds of the company into a company where respondents Nos. 2 to 4 have substantial interest constituting mismanagement and direct respondents Nos. 3 to 5 and 7 to repay the amounts defalcated from the funds of the company in favour of the company;

    (h) to direct the sale of shares of respondents Nos. 2 to 5 in the company to the petitioner or its nominee at the valuation, which may be made by a chartered accountant appointed by this Board; and

    (i) to direct action against respondents Nos. 3 to 5 for acts of misfeasance and fraud and order recovery of sum due from them as per report of the investigator and punish them.

  2. The petitioner apprehending that (a) respondents Nos. 3 to 5 will deal 2 with the capital of the company for their sole benefit in a manner prejudicial to the interest of the company; (b) the petitioner's rights will be defeated; (c) the petitioner will suffer irreparable hardship and injury; (d)the board meetings are being called by persons who have already ceased to be directors of the company; and (e) there is likelihood of breach of statutory compliances for the year ended March 31, 2008, has sought for the following interim reliefs:

    (a) to appoint a committee of management by superseding the board of directors of the company and designate Mr. V. R. S. Natrajan as chairman of the committee;

    (b) to restrain the company from holding board meetings without the consent of this Board and on the agenda to be fixed by this Board;

    (c) to restrain respondents Nos. 3 to 5 from representing, acting or holding out as directors of the company;

    (d) to restrain respondents Nos. 3 to 5 from operating bank accounts of the second respondent-company; and

    (e) to appoint an independent auditor to investigate into the affairs of the company.

  3. The applicant-petitioner has taken out an application as early as on October 3, 2008 in C. A. No. 24 of 2008 under regulations 17 and 44 of the Company Law Board Regulations, 1991 read with Order 6, Rule 17 of the Code of Civil Procedure, for amending the company petition, by incorporation of certain facts which came to light and some new developments which have taken place, subsequent to filing of the company petition, in support of which, Shri S.S. Naganand, learned senior counsel submitted:

    Respondents Nos. 2 to 5 and Shri B. Mukunda Reddy, senior-vice president who is under suspension, caused financial loss to the company by entering into on forward contracts for export receivables without authority of the board of directors of the company. The second respondent has booked the forward contracts through the third respondent without subsisting or anticipated export receivables of the company merely based on a general contract agreement signed between M/s. General Nice and the company. The company already suffered a loss of Rs. 246.40 lakhs and is posed with a potential loss of Rs. 902.30 lakhs for the period between September 2008 and March 2009, based on the forward contract transactions, in terms of a communication dated September 19, 2008, of the company's banker. Respondents Nos. 3 to 5 and Shri B. Mukunda Reddy are personally liable for such losses of the company.

    The common intention of respondents Nos. 2 to 4 and 7 in defrauding the petitioner and the company is manifest from several of the documents filed with the Registrar of Companies, particulars of which are set out in the amendment application.

    The third respondent has misrepresented the strength of the second respondent and further suppressed the true holding structure and the nature as well as extent of inter-company transactions, establishing the perverse and diabolical financial arrangements between the group companies, the true financial health as well as performance of the second respondent on which the petitioner relied upon and concealed the real net worth of the group companies. Respondents Nos. 2 to 5 suppressed the true position of related party transactions, which are stated in detail by the applicant. The manipulated turnover and investment among the various group companies have defrauded not only the applicant but also the statutory authorities.

    Respondents Nos. 2 and 3 were found guilty under Section 138 of Negotiable Instruments Act, 1881, by the Metropolitan Magistrate Court, Mumbai, on August 8,2008 and thereby they were to suffer simple imprisonment for four months, during which time the shareholders agreement was finalised between the parties. This was concealed by the third respondent, with a view to defraud the company.

    Shri B. Mukunda Reddy is threatening the officials of the petitioner, who are attending to the matters relating to the company.

    The second respondent dubiously got allotted the shares to itself which ought to have been allotted in favour of the sixth respondent, under a subsisting agreement between respondents Nos. 2 and 6 under the pretext that it was not willing to take up its portion of the shareholding. The grievances of the sixth respondent have been conveyed by the sixth respondent in a communication of September 2008, sent to the chairman of the company and the third respondent. The Company Law Board may take cognisance of the wrongful allotment of shares of the sixth respondent in favour of the second respondent, especially when the sixth respondent expressed its willingness to participate in the shareholdings of the company.

    The third respondent issued a letter dated July 26, 2008, appointing Shri Birendra Kumar Sinha as chief executive officer (CEO) of the company and when he reported on September 18, 2008, to the chairman of the company, the third respondent, without any authority cancelled the appointment of the CEO, which brought the company's operations to a grinding halt. This move is an effort to reinstate the suspended senior vice-president.

  4. In view of the foregoing, the applicant is claiming the following additional prayers:

    (a) to grant extension of time for holding annual general meeting and exempt the nominee directors of the petitioner from penal provisions, in view of their inability to discharge the duties under the Act;

    (b) to allow the nominee directors of the petitioner to run the day-today affairs of the company including operation of bank account till disposal of the petition;

    (c) to disqualify and remove respondents Nos. 3 to 5 who are the nominees of the second respondent on the board of company on account of various wilful mismanagement of the affairs of the company, resulting in financial losses, threatening the very existence of the company, and without prejudice to their personal liability to make good the losses;

    (d) to direct the auditors to commence audit of accounts compiled, based on available information;

    (e) to recommend for appointment of auditors under Section 224(3) read with Section 224A(2) in case of continuing failure of auditors to commence audit of accounts compiled, based on available information;

    (f) to appoint two nominees of the sixth respondent in place of two nominees of the second respondent as directors on the board of the company, pending transfer/allotment of such number of shares so as to make the shareholding of the petitioner at 45 per cent, and the sixth respondent at 26 per cent, of paid-up share capital of the company as conceived originally;

    (g) to restrain respondents Nos. 2 to 5 from interfering with the conduct of the affairs of the company;

    (h) to restrain respondents Nos. 2 to 5 from indulging in activities/ threats prejudicial to the interests of the company and harmful to nominees of the petitioner;

    (i) to restrain respondents Nos. 2 to 5 and their agents and henchmen from unauthorised entry except for inspection based on reasonable notice in writing given to the company in order to ensure that the documents and records are not tampered with; and

    (j) to restrain respondents Nos. 2 and 3 from managing companies including but not limited to the company under Section 203 of the Act, in view of the previous conviction by the court and also in view of the dubious financial arrangements within the group companies having significant impact on security of banking facilities extended to respondents Nos. 2 and 7 and other group companies.

    5 Pending final decision on the main petition, the applicant prayed for the following additional interim reliefs:

    (i) to direct holding of the board meeting of the company by fixing the...

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