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C.P No. 75 of 2002. Case: Citicorp International Finance Corporation Vs Systems America India Ltd. and Ors.. Company Law Board

Judgment Cited in 1 Precedent Map Related
Vincent
Case NumberC.P No. 75 of 2002
CounselFor Appellant: Neeraj Sharma and Roopali Singh and For Respondents: Anupam Tripathi, Sudhir K. Sinha, Sanjeev Sabharwal, Pankaj Tiwari and K.P. Singh
JudgesVimal Yadav, Member
IssueCompanies Act, 1956 - Section 235
Citation(2008) 79 CC 387, 9 CLC 654, 83 SCL 311, 82 CLA 342, 141 CompCas 954
Judgement DateJuly 11, 2007
CourtCompany Law Board

Order:

Vimal Yadav, Member, (At Delhi)

  1. In C.P. No. 75 of 2002 the petitioner has sought an order for investigation into the affairs of the R-1 under section 235 of the Companies Act, 1956 ('the Act') alleging that R-4 and his group have fabricated resolutions and siphoned off funds of R-1 by illegal remittance of US $ 1 million to a wholly owned subsidiary, namely, 'Local Information Service Inc.' in the US which did not even exist at the relevant time (the date of incorporation was stated as 'Applied').

  2. Shri Neeraj Sharma, counsel for the petitioner, pointed out that the petitioner, Citicorp International Finance Corporation ('CIFC'), entered into a subscription-cum- shareholders agreement dated 24th July, 2000 ('the agreement') with respondent Nos. 1 ('the company'), 2 and 4. In terms of the agreement, CIFC by way of a preferential issue subscribed to one million equity shares of the company of the face value of Rs. 10 each for a consideration of Rs. 157 million at the rate of Rs. 157 per equity share at a premium of Rs. 147 per equity share. The said shares were duly issued and allotted by the company to the petitioner and constitute 14.25 per cent of the paid-up and fully issued share capital of the company on date. CIFC's nominee ('the CIFC director'), Mr. Ajay Relan was appointed as an additional director of the company by a resolution of Board of directors passed on 27th September, 2000 by circulation and was subsequently appointed as a director of the company by members at the annual general meeting ('AGM') of the company held on 10th August, 2001. It was pointed out that the articles of association of the company gave certain affirmative rights to CIFC: (a) the chairman of the Board of directors was to be a person acceptable to CIFC (article 81.2); (b) the managing director of the company was to be a person acceptable to CIFC (article 81,3); (c) the quorum of the Board meetings of the company could not be considered valid till such time as the CIFC director is not present (article 81.8); (d) no item listed in article 82 could be discussed or voted upon at any meeting of the Board unless the same had been included in the agenda of the meeting (article 81.12); (e) a circular resolution on a matter enumerated in article 82 required the affirmative vote in writing of the CIFC director (article 81.13); and (f) article 82 when read with articles 81.12 and 81.13 expressly provided that circular resolutions on matters relating to approval of the annual budget of the company including capital expenditure, investment in securities of any other company or subsidiary, revenue expenses, revenue targets and funding plans could neither be discussed or voted upon at any meeting of the Board unless the same had been included in the agenda of the meeting nor could they be passed without the affirmative vote in writing of the CIFC director.

  3. Further, it was pointed out by the counsel that in the meeting of the Board of directors held on 30th November, 2001 that CIFC director attended along with respondent Nos. 4, 5, 6, 7 and 8, the directors passed resolutions, inter alia, for the incorporation of a wholly owned subsidiary of the company in the USA. In connection with the same, the Board also passed a resolution in-principle approving an investment of US$ 1 million to be made in a wholly owned subsidiary in the USA. The resolution giving the in-principle approval was conditional upon: (a) a cut off date to be determined by the Board of the company; and (6) a signed business plan of the company envisaging investment of US$ 1 million in the wholly owned subsidiary to be incorporated at a later stage. It was pointed out that no person was identified to give effect to the resolution since the same pertained merely to an in-principle approval. Furthermore, no source of funds was identified for the purposes of the said investment. The next meeting of the Board of the company was called by notice for the 5th January, 2002 and three directors, namely, CIFC director, respondent No. 4 and respondent No. 5 attended the meeting. The draft minutes of this Board meeting were prepared and circulated by respondent No. 7 via email on 17th January, 2002, to the CIFC director and Mr. J K Basu, an officer of Citibank N A, an affiliate of CIFC. These draft minutes were subsequently debated and discussed by the directors but could not be finalised on account of differences between respondent No. 4 and respondent No. 6 with regard to authority given to respondent No. 6 for operation of bank accounts. As such, the minutes of the Board Meeting of the company held on 5th January, 2002 were never finalised and remained in draft form. Furthermore, the said draft minutes were never confirmed on account of the fact that no Board meeting of the company was held after the Board meeting of 5th January, 2002. The draft minutes of the Board meeting of the company held on 5th January, 2002 and circulated on 17th January, 2002 confirmed the minutes of the Board meeting of the company held on 30th November, 2001. Furthermore, these draft minutes record that the CIFC director asked respondent Nos. 4 and 6 to stop further investment in wholly owned subsidiaries of the company in Canada on account of non-operation of the same after the change in business conditions in the USA post the World Trade Centre attacks on 11th September, 2001. It was pointed out by the counsel that it is expressly recorded in these draft minutes that the CIFC director asked the management of the company to have a signed business plan, which would be strictly adhered to. The business plan, which was one of the pre-conditions to the in-principle approval by CIFC for the infusion of US $ 1 million in the wholly owned subsidiary of the company resolved to be incorporated vide the resolution dated 30th November, 2001, had not been prepared. In response to the draft minutes circulated, respondent No. 4 responded with his comments with regard to the limits for the signatory to the bank accounts of the company. However, respondent No. 4 did not advert or refer to any resolution for changing the authorised signatory to the company's investment with mutual funds in this communication and did not seek the addition or inclusion of any such discussion or resolution to the draft minutes. My attention was drawn to the following essential points which emerge on a perusal of the draft minutes of the Board meeting dated 5th January, 2002: (a) the CIFC director was the chairman of the said Board meeting and the draft minutes were never confirmed by him and do not bear his signatures till date; (b) the agenda for the Board meeting held on 5th January, 2002 did not incorporate the alleged proposed investment in the wholly owned subsidiary in terms of article 81.12 of the articles of association of the company; (c) the CIFC director had instructed to stop any further investment in the subsidiaries on account of poor market conditions post 11th September, 2001; and (d) the CIFC director was made the chairman of the audit committee which has held no meeting or report on the alleged investment of US$ 1 million till date.

  4. Shri Neeraj Sharma, counsel for the petitioner, further pointed out that the CIFC director and representative Mr. J K Basu received an e-mail dated 24th January, 2002 from respondent No. 6, alleging fraud and embezzlement by respondent No. 4 and his family members. It was also alleged that plans were being made by respondent No. 4 in collusion with certain other respondents to somehow siphon the balance US$ 1.2 million which was in the company's accounts at the relevant time. This was followed by another email dated 26th January, 2002 whereby respondent No. 6 again reiterated that outgoings from the company's Indian and US bank accounts were not in control. He apprehended that in the absence of signed minutes of the Board meeting of the company held on 5th January, 2002 that authorised him to operate the accounts, monies were being rapidly withdrawn. Upon being questioned by the CIFC director regarding the allegations above, respondent No. 4 denied any wrongdoing and offered to agree to an audit of the company, its branch office in the US and also of respondent No. 4's associates and affiliates companies in the US, which offer was accepted by the CIFC director who immediately initiated steps to conduct the audit of the company and its branch office in the US. On 7th February, 2002 another email was addressed by respondent No. 6 to the CIFC director and Mr. J K Basu about the fraud and embezzlement being perpetrated by respondent No. 4 and his family members on CIFC. On being confronted by the CIFC director, respondent No. 4 offered on 19th February, 2002 to buy back 6 per cent of the shares of the company held by CIFC, albeit he continued to deny allegations of fraud in the manner in which the affairs of the company were being conducted. However, subsequently, this offer to buy back 6 per cent of the CIFC shareholding was not given to CIFC. On 6th February, 2002 respondent No. 4 addressed another email to the CIFC director and Mr. J K Basu whereby he denied any attempts to siphon monies from the company. On the contrary aspersions were cast on respondent No. 6. By way of this communication respondent No. 4 offered that an audit of the company be carried out. In the bona fide belief that the express representations made by respondent No. 4 were true, CIFC mandated Ernst and Young (P.) Ltd. to carry out the audit of the company respondent No. 4 was also informed about the appointment of Ernst and Young (P.) Ltd. vide email dated 27th February, 2002. This was followed by an initial information request by Ernst and Young on 6th March, 2002 to respondent No. 4. However, the audit of the company and its subsidiaries in USA as represented by respondent No. 4 was evaded by respondent No. 4 on several occasions and the same was not permitted to be...

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