before the company law board - Company Law Board Mumbai Bench

5and M/s.Vishwa Extrusions Pvt. Ltd. in which R2 was directly and/orindirectly interested and the said act is in total contravention of the provisionsof Sec.283 (1) (h) (i) of the Act. The R2 had no explanation to offer since itwas stated that he vacated his office due to the said contravention.Accordingly the Board directed the R6 being the MD to take appropriateaction that the R2 be directed to repay the amount of loans advanced to theabove entities immediately. The Board further authorized the R6 to operatethe bank accounts. Form 32 in regard to cessation of office of director by R2was duly filed with ROC. b. Board Meeting held on 27.8.2003. It is to saythat as a counterblast to the decisions taken in the Board Meeting held on4.8.2003, a purported Board Meeting was held on 27 th August, 2003 attendedby R2 & R3 only. The quorum was absent. Decisions were taken andresolutions were passed in the said purported meeting to the effect that (i) R6& R7 ceased as Directors for non payment of calls in arrears underSec.283(1)(f) of the Act (ii) R4 and R5 were appointed as AdditionalDirectors (iii) R3 was appointed as Managing Director in place of R6.However, as per Inspection Report no notice convening the Board Meetingon 27 th August, 2003 was given to any other directors especially to ShriA.K.Sanghi, Shri N.V.S. Murthy, Mr.Harish A. Sahu (R6) and Mrs.(Dr.)Devila H. Sahu (R7) and there was no requisite quorum. R2 havingvacated his office of directorship under the provisions of Sec. 283(1)(h)(i) ofthe Act had ceased to be a director who could not convene the meeting orparticipate in any proceedings of the Board or pass any resolutions. (ii) R2having vacated his office of directorship and the R3 being the only otherCP 28/2010Union vs Gwalior

6person in that meeting, no meetings have taken place at all; no business couldbe legally transacted at that meeting for want of quorum. c. Whether R6 &R7 have ceased to be directors and have vacated their office?: In terms ofSec.283(1)(f) of the Act, a date should be fixed as the last date for makingpayment of the call. If the director does not make payment of call moneywithin six months from the last date fixed for payment, the director ceases tobe director and vacates his office of directorship. It is to say that as perArticle 18(1) & (2) of the AOA notice for calls in arrears shall be given bythe Board of directors at least 30 days in advance. No proof was produced bythe Respondents 2 & 3 with respect to the notice. Therefore, there is nojustification to invoke the provisions of Sec.283(1)(f) of the Act. It appearsR2 & R3 herein, in collusion and with ulterior motive to get rid of the R6 &R7, carried out the proceedings and usurped taking control and managementof the company and its assets wrongfully and against law provisions. d.Loans advanced to entities in which R2 had direct and indirectinterest. During the period 1996 to 2002 the Company advanced loansto M/s. Central India Sulphonators, a Sole Proprietorship concern of R2.During the period 2003 the Company advanced loan to M/s.VishwaExtrusions Pvt.Ltd., a Private Company in which majority of shares areheld by R2 and his family. During the year 2002 the Companyadvanced loans to M/s.Flora Finnin Pvt.Ltd. in which R2 is a directorand to Mrs.Pragati Awasthi wife of R4 before he was appointed asAdditional Director on 27.8.2003. No Board resolution was passed inCP 28/2010Union vs Gwalior

7this regard under Sec.292(1)(e) of the Act. Rs.6,00,000/- was advancedas loan to M/s.Man Singh International Limited during the year ending31.3.2001 in violation of Sec.292(1)(e) of the Act. The aforesaid loansaggregating to Rs.64 lacs were diverted by the Company for the personalbenefit of R2 & R3 who are the only beneficiaries in the deal. R6 hasstated in his complaint that all these payments have been made by R2without the knowledge and consent of R6 or approval of the Board ofDirectors. e. Misappropriation of funds of the Company upon sale ofproperty: A sum of Rs.10 lacs was advanced to M/s. Ansal HousingInfrastructure Ltd., Bhopal for purchase of immovable property by R1.No transfer of property has taken place and the said amount has beenwritten off as doubtful debt. f. Salaries drawn from two companiesby R2. R2 while acting as Whole Time Director in R1 also got himselfappointed as a Whole Time Director in M/s. Nisha Polymers IndustriesLtd. for a period five years and was drawing remuneration from both thepublic companies in contravention of the provisions of Section 269 ofthe Act. g. Fabrication of records regarding notice to be issued tothe Members for the meeting: Shri Harish K. Sahu complained thatAnnual Accounts for the years 2002, 2003 signed by R2 and R3 asdirectors were not distributed to all the shareholders of R1 in which 80%of the shares are held by the public. h. Wongful claim ofdepreciation and accounts not correct and true. Depreciation has beenwrongly provided in the accounts on a car, cost of which has been debited toCP 28/2010Union vs Gwalior

8R6. Non appointment of Company Secretary. Since 30 th July, 2004 theCompany has not appointed any Whole Time Company Secretary andthereby violated the provisions of Sec.383A of the Act. The Learned Counselfurther submitted that R1 is a listed Company in which Respondent Directorshold 16.88% shares along with their family members and the balance about80% shares of the Company is held by the Public. The mismanagement in theCompany has adversely affected the interest of public who have put in theirhard earned money in the capital of the Company based on projections of theworks and finances given in the prospectus. The directors who have, in law,vacated their office of directorship have been holding the reigns of the affairsand the concept of good governance is missing. In fact, the presentmanagement appears to be indulging in siphoning of funds, misappropriatingthe assets and funds of the company to their own interest with impunity to thelaw provisions highly detrimental to the interest of the public. TheRespondent No.2 & 3 appeared to be the beneficiaries of suchmismanagement. The net worth of the Company stands grossly eroded,considering the facts that the accumulated losses have exceeded Rs.8.7 croresduring the year ended 31.3.2005, Rs.9.44 crores during the year ended31.3.2006, Rs.9.93 crores during the year ended 31.3.2007 and Rs.9.86crores during the year ended 31.3.2008 which is more than the paid up capitaland free reserves of the respective years. He submitted that the R1 Companyis referred to BIFR and the same is pending.4. Respondent No.1 to 5 filed their reply to the petition. Shri RajKumar Adukia, Learned PCS appearing on their behalf submitted that theCP 28/2010Union vs Gwalior

9present petition is not maintainable as it is barred by limitation in as much asthe present petition has been filed after a lapse of about seven years and nocontinuing cause of action of maintaining the present petition has beendemonsratably established in the present petition. The petition is filed byUnion of India through Regional Director, Western Region, Mumbai byrelying heavily on false and self serving complaints filed by Shri Harish K.Sahu(R6) who was the ex-managing Director of the Company and who wasresponsible for the alleged defaults made by the Company u/s 295, 297 and299 of the Act and who had siphoned off an aggregate sum of Rs.97.64 lacsof the Company.5. It is submitted that Shri Harish K.Sahu (R6) on whose false andfrivolous complaint, the Registrar of Companies, Gwalior initiatedproceedings against the R1 and which has culminated in filing of the presentpetition, was not removed as Director and as Managing Director as alleged.R6 & R7 had vacated their office as directors under Sec.283(1)(f) of the Actand ceased to be director of the Company by operation of law. R6 was theManaging Director of the Company till 6.8.2003 and during his tenure asManaging Director he himself had entered into transactions with someentities and advanced loans by issuing cheque on behalf of the Company. R6being Managing Director and responsible for day to day conduct andmanagement of the affairs of the Company took all decisions himself; and R2& R3 being his younger brothers had obeyed R6 as they had full faith in himas their elder brother. During the course of inspection under Sec.209A of theAct, the petitioner has raised several queries on various alleged violations andCP 28/2010Union vs Gwalior

10sought replies from R6 ( old Board) and from R2 & R3 (New Board). TheR6 gave false replies and agreed with the findings of the Inspecting Officer’sreport. It is denied that R2 has ceased to be a director and has vacated hisoffice on 4.8.2003 for contravention of the provisions of Sec.295 and 299 ofthe Act, as alleged. The petitioner has deliberately suppressed the true andcorrect facts about loan of over Rs.17.12 lacs to M/s. Central IndiaSulphonators and a loan of over Rs.11.05 lacs to M/s.Vishwa ExtrusionsPrivate Limited which were allegedly given by Sanil P. Sahu (R2) withoutinforming the Board of Directors of the Company and resulted into defaultu/s 295 and 299 of the Act. The true facts about the transactions with theabove mentioned firm/Company are as under: LOAN TO CENTRALINDIA SULPHONATORS: It was R6 who was Managing Director of theCompany at the time when alleged loan was given to Central IndiaSulphonators and he himself had signed and issued the following chequesfrom the Company’s bank account No.31361 with State Bank of India,Kamla Nagar, Delhi.Cheque No. Dated Amount in lacs256594 8.9.1994 15.70261459 2.11.1994 6.00261463 12.11.1994 5.502641466 13.11.1994 7.50The above mentioned cheques were deposited by Central India Sulphonatorsinto their Bank Account No.31362 with State Bank of India, Kamla NagarBranch, Delhi which was also operated by R6. Though R2 was shown asCP 28/2010Union vs Gwalior

11sole proprietor of Central India Sulphonators, it was the R6 who was themain beneficiary as he was alone operating bank account No.31362. Thecheques were issued by R6 without the knowledge of R2. It is denied that R2had not disclosed his interest in the Central India Sulphonators as is evidentfrom the prospectus issued by the Company during its Second Public Issue in1994. The relevant disclosure at page No.11 of the prospectus is as under:“Central India Sulphonators is a proprietorship concern of Mr.Sanil P. Sahu,a promoter Director of the Company, for manufacturing Acid Slurry atMalanpur, which commenced production in November, 1991”. R2 has beendisclosing his interest in other companies/firms since beginning every yearand such disclosures have been made by other directors of the Company also.In fact it is Mr.Harish K. Sahu (R6) the Ex-Managing Director who did notdisclose his interest to the Central Government as its beneficial owner. Thealleged violation took place in 1994 and a long period had already expired.No amount is due from Central India Sulphonators in the books of theCompany which has also been verified by the petitioner from the books ofaccounts for the years 2002-03 to 2005-06 produced during the inspection.LOAN TO VISHWA EXTRUSION PRIVATE LIMITED:CP 28/2010Union vs GwaliorIt is deniedthat the Company had given any loan to Vishwa Extrusion Pvt.Ltd. as theCompany has entered into transaction of its finished products with thecompany. Moreover, Vishwa Extrusion was not a Private Limited Companyat the relevant time. It was a Public Limited Company and became PrivateLimited Company from 10.4.2003 and therefore the provisions of Sec.299 donot apply with respect to the captioned transactions. R2 has made full

12disclosures at all relevant times and it was the responsibility of the Ex-Managing Director, Mr.Harish K. Sahu to obtain the requisite approval of theBoard, shareholders and the Central Government for any non compliance.From the above it is apparent that R2 had not contravened theprovisions of Sec.295 and 299 of the Act as he was not managing the day today affairs of the Company when the alleged defaults had occurred.6. It is further denied that the meeting of the Board of Directors on27.8.2003 was held without proper notice and without there being therequisite quorum. The notice for the said Board Meeting was dispatched on19.8.2003 and the Meeting was held on 27.8.2003 with proper quorum. Inthe said meeting R3 was appointed as Managing Director of the Companyand all statutory compliances such as filing of Form 32, filing of Form 25Cwith ROC were duly complied with. The R4 and R5 were validly appointedas Additional Directors in the Board Meeting held on 27.8.2003 and therewas no irregularity in their appointment as alleged. R6 was not allegedlyremoved as Managing Director by R2 & 3 with effect from 6.8.2003 as hevacated his office as director being disqualified to act as director u/s 283(1)(f)of the Act. Since R6 vacated his office by operation of law and becamedisqualified u/s 283(1)(f) of the Act, the question of his acting as Director oras Managing Director w.e.f. 6.8.2003 does not arise and hence the questionof preventing him to act in the said capacity also does not arise.7. It is further submitted that the new Board of the R1 had givenExplanation on all the alleged issues such as: BOARD MEETING HELDON 4 th AUGUST, 2003CP 28/2010Union vs GwaliorIt is refuted that R2 had vacated his office of

13directorship due to alleged contravention of the provisions ofSec.283(1)(h)/(i). The meeting of Board of Directors held on 4 th August,2003 was not legally and validly convened Board Meeting and hence theproceedings of the said Board Meetings are illegal and non est. R6 hadcommitted grave acts of financial irregularities and has misappropriated andsiphoned a sum of Rs.97.84 lacs of the Company for his personal benefits andgains. R6 also ceased as Director and as Managing Director for non paymentof calls in terms of provisions of Sec.283(1)(f) of the Act. BOARDMEETING HELD ON 27.08.2003. It is refuted that no notice convening theBoard Meeting on 27.8.2003 was given to other Directors or there was norequisite quorum in the said meeting as alleged. Two directors namely SanilP. Sahu (R2) and Anil P.Sahu (R3) were present in the meeting and therequirement of the quorum in terms of Section 287 i.e. 1/3 rd of the totalstrength or two Directors, whichever is higher was met as the Company hadonly four Directors on its Board namely Shri A.K.Sanghi, Sanil P.Sahu, AnilP.Sahu and Shri N V S Murthy. WHETHER THE RESPONDENTS NO.6& 7 HAVE CEASED TO BE DIREICTORS AND HAVE VACATEDTHEIR OFFICE: It is submitted that all legal requirements, includingfixation of date, notices, etc. for making calls and payment of calls in arrearswere fully complied with. It is emphatically refuted and denied that nodocumentary proof was produced by R2 & R3 in this regard. The respondents1 to 5 denied each and every allegation made in the petition and prayed thisBench to dismiss the petition.7. Respondents 6 to 9, filed affidavit in reply dated 1.6.2010.It isCP 28/2010Union vs Gwalior

14submitted that the petition has been filed by Union of India upon completionof inspection of the affairs of the Company and working of the managementwhich was carried out by the office of the Regional Director, WR, Mumbai,on a complaint filed by (R6) and bears the result of the inquiry andinvestigation and also actions taken in different forum on the wrongscommitted by the concerned directors. The shares of the company were listedon the Stock Exchanges at Mumbai, Indore and Delhi in or about December,1985. The shares were regularly transacted upto 2002, the last transactionwhen the shares of the company were traded being in Mumbai. The lastquotation was at Rs.1.50/- per share. The management and control werevested in the Board of Directors of the company steered by R6 as itsManaging Director, appointed as such on 1.7.1984. The Board of Directorsconsisted of the following which for the purpose of this petition before thisforum are divided into two parts as follows:Group 1 DirectorsName of the DirectorAppointed on(i) Shri Harish K.Sahu (R6) 29.10.1982(ii) Mrs.(Dr.) Devila Sahu (R7)-do-(iii) Shri Jitendra Kapoor (R8) 22.9.2003(iv) Shri Dilip C.Parekh (R9)Group 2 DirectorsName of the Director-do-Appointed on(i) Shri Sanil P.Sahu(R2) 29.10.1982Whole Time Director w.e.f. 20.12.1990CP 28/2010Union vs Gwalior

15(ii) Shri Anil P.Sahu (R3) 29.10.1982(iii) Shri Sudhir Awasthi (R4) 27.8.2003(appointed in the meeting held illegallyby R2 & R3 calling it a Board Meeting)(iv) Shri Naresh Mangal (R5) 27.8.2003(appointed in the meeting held illegallyby R2 & R3 calling it a Board Meeting)8. It is submitted that duly convened Board meeting of Directors ofR1 was held on 4 th August, 2003. It was noted that R2 disbursed variousloans to three companies namely M/s.Flora Infotech Private Limited,M/s.Flora Fenin Private Limited and M/s.Vishwa Extrusion Private Limitedin which the said Mr. Sanil P. Sahu (R2) and his family held direct andindirect interest. The said loans were granted without knowledge of the Boardof Directors and without disclosure of interest by R2 in those companies,much less with the prior approval of the Central Government, in crassviolation of the provisions of Sec.295 and 299 of the Act. The RegionalDirector has filed prosecution proceedings against R2 under Sec .283(1)(h) ofthe Act. The Board of Directors authorized R6 to take appropriate action andit was also directed that Mr.Sanil P.Sahu (R2) shall repay the loan amountalong with interest to the Company. As a counter blast to the above decisionof the Board in its meeting held on 4.8.2003, R2 and 3 held a so called BoardMeeting on 27.8.2003 for which no notice was given to any other directorsbefore holding the said meeting. None of the Respondent Nos. 6,7,8,9,10 and11 who were the only other directors were informed of the said meetingCP 28/2010Union vs Gwalior

16convened much less sending prior valid notice for the meeting alleged tohave been held on 27.8.2003. This so called meeting which did not have therequired quorum present, passed resolutions (a) removing the R6 asManaging Director effective from 6 th August, 2003 as ceasing to be directorunder the provisions of Sec. 283(i)(f) of the Act for being in arrears inpayment of calls; (b) appointing R3 as Managing Director effective from 27 thAugust, 2003 and (c) appointing R4 and R5 as Additional directors effectivefrom that date. The Group 2 directors forcibly took over management andcontrol of R1 Company. R6 communicated to the ROC, Gwalior about theillegal happenings in the Company and the fact that R2 and R3 had usurpedthe company’s management by illegal means. As Managing Director of theCompany, R6 was aware that the Board of Directors had never called uponthe shareholders including R6 to pay up the calls in arrears and therefore,there could be no default by R6 in not paying up the calls in arrears. Theprovisions of Sec.283(i)(f) did not apply at all to the case of directors beingR6 and R7 in the petition.9. It is further submitted that the wrong doings of R2 and R3 aredemonstrated through the inquiry and investigations carried out by the officeof the Regional Director and the action proposed are taken against suchwrongs of R2 and R3 which have been made part of the petition by thepetitioners. From 2003 to 2009, Group 2 Directors with the reins ofmanagement in their hands have driven R1 to sickness and thereby filedreference under the provisions of Sec.15 of Sick Industrial Companies(Special Provisions) Act, 1986 before the BIFR. In the audited accounts ofCP 28/2010Union vs Gwalior

17the Company for the Financial Year 2004-2005, the management has debiteda total amount of Rs.337.05 lacs as doubtful recovery. This includes the badand doubtful debts as such classified and bad receivable of loans etc.. Thesaid sum of Rs.337.05 lacs debited to accounts among other things, includes(a) Rs.62 lacs due from M/s.Nisha Polymers Industries Limited in which theDirectors of R1 have direct and indirect interest and the said company isactive and solvent; (b) Rs.10 lacs due from M/s. Ansal Housing Corporationfrom whom the R4 viz. Mr.Sudhir Awasthi acquired a house and disposedthe same for profits in his name in which transaction the said sum of Rs.10lacs has been obviously adjusted; (c) Rs.5.56 lacs from M/s.Flora FinenPrivate Limited in which R2 and R3 are shareholders and directors and (d)Rs.4.25 lacs due from Mr.Anil Sharma, a director of M/s.Flora InfotechPrivate Limited and also M/s.Flora Finen Private Limited in which the R2and R3 have direct and indirect interest. The financial position of theCompany and its functioning under the management of the Group 2 directorshas deteriorated year after year and the Company has now filed a referencebefore BIFR under the provisions of Sick Industrial Companies (SpecialProvisions) Act for working out financial or industrial reconstruction of theCompany craving for concessions from various authorities including theBanks and Financial Institutions.9. Respondents 6 to 9 have filed further affidavit in reply in additionto the reply dated 1.6.2010.CP 28/2010Union vs GwaliorAt the outset it is submitted that the initials ofMr.Anil P.Sahu i.e. R3 seem to be forged. The same is evident from the copyof salary certificate dated 27.5.2002 which shows that the initials of R3 are

18different from the ones affixed on the reply. Thus, the reply of R2 to R5 isliable to be rejected on this ground alone. In fact R2 to R5 are in the habit offorging and fabricating the records. R2 had gone to the extent of forging andusing fake stamps of postal authorities and filing the forged and fabricateddocuments with ROC, Gwalior to prove illegal service of audited balancesheet of the year 2002-03 to 13497 public shareholders. The prosecution forthe alleged offences leveled against R6 to R9 is not maintainable in law. Inview of the provisions of law R6 to R9 were/are not officers responsible forthe alleged offenses. It is denied that petition is filed by relying on false orserving complaints filed by R6. Complaints filed by R6 are true and correctand duly corroborated by documentary evidence. The Inspecting Officer hasbeen rather very lenient towards R2 to R5. R2 has not realized that he wasfull time director and director of a public limited company having a greatresponsibility to operate and work honestly as per law. R2 and R3 cannotclaim their ignorance of Company Law as both of them are qualifiedChartered Accountants. It is denied that R6 had siphoned of Rs.97.64 lacs orany amount of the Company and R2 to R5 should be put to strict proofthereof.10. Heard the Learned Counsel, PCS appearing for the respectiveparties and perused pleadings, documents filed in their support. Afteranalyzing the pleadings, the following issues are felt for considerationand the same are need to be addressed.CP 28/2010Union vs Gwalior

191) Whether Board Meetings dated 4.8.2003 and 27.8.2003 arevalidly held?with law?2) The loans advanced by the Company whether in accordance3) Whether the respondents mismanaged the affairs of theCompany and thereby mis-utilized the funds of the Company?in office?4) Any contravention of Law committed by the directors while11. The Learned PCS appearing for the respondents 1 to 5 raised anobjection with regard to maintainability of the petition on the groundthat the R1 Company was referred to the BIFR and the same is pendingbefore the BIFR, therefore, it is bar to adjudicate the matter by thisBench or any other forum in view of Sec.22 of SICA 1985. In view ofthe preliminary objection raised by the respondents, it is necessary todecide the same. It is an admitted fact that the R1 Company has beenreferred to the BIFR and the BIFR declared the R1 Company a sickindustrial Company in terms of Sec.3(1)(o) of Sick Industrial Companies(Special Provisions) Act, 1985 and directed not to dispose off, lease out,encumber or alienate in any way any of its fixed assets or current assetswithout specific prior approval of BIFR under Sec.22A of the Act.Whether this Bench has any bar in adjudicating the matter filed underSec.397-398 and other provisions of the Companies Act by the Union ofIndia. In this regard the relevant provision i.e. Sec.22 of SICA 1985CP 28/2010Union vs Gwalior

20expressly provides “suspension of legal proceedings, contracts etc.”From the reading of the above provision it is clear that “when an inquiryunder Sec.16 is pending or any scheme referred to under Sec.17 is underpreparation or consideration or a sanctioned scheme is underimplementation or where an appeal under Sec.25 relating to an industrialcompany is pending, then, notwithstanding, anything contained in theCompanies Act or any other law or the Memorandum and Articles ofAssociation of the industrial company, no proceedings for the windingup of the industrial company or for execution, distress or the like againstany of the properties of the Industrial Company or for the appointmentof a receiver in respect thereof, no suit for the recovery of money or forthe enforcement of any security against the Industrial Company or ofany guarantee in respect of any loans or advance granted to the industrialcompany, shall lie or be proceeded with further, except with the consentof the Board or as the case may be, the Appellate Authority. ” From theabove it is clear that no proceedings for winding up or for execution,distress or appointment of receiver and no suit for recovery of moneycould be initiated against the Industrial Company. In the present casethe petition is filed by the Union of India against the directors seekingdirections to declare the Board Meeting dated 27.8.2003 is invalid andsought direction to the respondents to repay the monies advanced toseveral entities. Therefore, the reliefs which are sought in the petitionare for the benefit of the Public Company and will not attract any of theCP 28/2010Union vs Gwalior

21clauses mentioned in Sec.22 of the SICA 1985. Therefore, I am of theview that this Bench can proceed with the matter.12. Now I deal with the issue No.1. :CP 28/2010Union vs GwaliorThe contention of the respondents 6 to 9 is that the BoardMeeting dated 4 th August, 2003 was a properly convened meeting of theBoard of Directors and it was chaired by A.K.Sanghi, the then NonExecutive Chairman of the Company and it was attended byRespondents 2,3,6 & 7.From the minutes it is apparent that amongother items it was discussed about the loans advanced to Flora InfotechPrivate Limited, Flora Finin Private Limited and Vishwa ExtrusionsLimited in which R2 was the executive director who was directly orindirectly interested and the said loans were in contravention of theprovisions of Sec.292, 295 and 299 of the Companies Act and thereby itwas resolved that the respondent No.2 ceased to be the director and alsoExecutive director of the Company by operation of Law pursuant to theprovision of Sec.283(1)(h)(i) of the Companies Act. It was also decidedthat the Respondent No.6 who was the Managing Director may takeappropriate action against the 2 nd Respondent and it was also decidedthat R2 shall repay the amounts of loan due to the Company forthwithalong with interest. From the minutes and its attendance sheet it isapparent that four directors along with the Chairman present in themeeting have signed the attendance sheet and it is not in dispute withregard to the said meeting. Having full quorum of the meeting I hold

22that the meeting is validly held meeting. With regard to the BoardMeeting dated 27.8.2003 the Respondents 6 to 9 contended that the saidmeeting was a counter blast to the decisions taken in the Board Meetingdated 4 th August, 2003. On perusal of the minutes of the meeting, it isseen that R2 and 3 have attended the meeting and shown their positionas Whole Time Director and Director respectively. R4 and 5 have alsoattended the meeting as Special Invitee. The grievance of theRespondents 6 to 9 was that no notice for the said meeting given to theother directors and the Respondent No.2 ceased to be a director,therefore, the meeting was invalid for want of quorum on the ground thatthe Respondent No.3 only attended the meeting. There is no proof toestablish that the notice was given to the other directors. The decisionstaken in the Board Meeting dated 4 th August, 2003 were valid and legaland there is no challenge to the said decision by the 2 nd respondent. Inpursuance of the said decision, the 2 nd Respondent ceased to be adirector and the Respondent No.3 being the only other director cannotconvene and hold the meeting and if it was held, is deemed to be illegaland invalid. I hold that the Board Meeting dated 27 th August, 2003 isinvalid meeting for want of quorum and all the decisions taken thereinare illegal and invalid and the same are set aside. Accordingly the issueis answered.CP 28/2010Union vs Gwalior

2313. Now I deal with Issue No.2, 3 and 4 collectively:The allegation of the petitioner is that the Company advancedloans to various entities without approval of the Board of Directors andthe Central Government in accordance with law. It is further allegedthat the 2 nd Respondent was directly and indirectly interested in thoseentities. The petitioner had given the details that various loans havebeen advanced to M/s. Central India Sulphonators a sole proprietorshipconcern of R2 and the same has been confirmed by M/s.S.K.Sharma &Company, Auditors. The 2 nd respondent in his reply stated that when theloan was given to Central India Sulphonators, the R6 was the ManagingDirector at that time and he himself had signed and issued the chequesand the said cheques were deposited by that Company in to their BankAccount. The Respondent No.6 simply denied the allegation and had notgiven any reasonable explanation. The Inspecting Officer in his reportconfirmed that the loans advanced to the Central India Sulphonators bythe 2 nd Respondent while acting as whole time director of R1 and thesaid Company was a proprietorship of R2. It was also confirmed thatthe loan was given without informing the Board of Directors of R1 andwithout taking approval/permission of the Central Government asrequired under Sec.295 of the Act. It is to be noted that both group ofdirectors mainly the Respondent No.2 and 6 have not denied that theloans have been given to CIS. It is not in dispute that the R6 was theManaging Director at that point of time. Sec.295 of the Companies ActCP 28/2010Union vs Gwalior

24provides that without prior approval of the Central Government, directlyor indirectly, no loan can be made to any director of the lendingCompany/relative of any such director/ firm in which any such directoror relative is a partner. It has been established that the CIS was aproprietorship concern and at one point of time the said body was apartnership concern. The loan has been given to CIS in which thedirector of R1 Company is interested. In view of the clear provision,Sec.295 is squarely attracted against the directors, thereby renderedthemselves vacated from their directorship u/s 283 (1)(h) of the Act.Apart from ceasing to be directors, both the directors i.e. the R2 being asWhole Time Director and the R6 being as Managing Director areresponsible for the loans advanced to the CIS without the approval of theBoard and the Central Government thereby both the directors are equallyliable to refund the loan amount to the R1 with interest, if the same hasnot been repaid to the R1 Company.CP 28/2010Union vs GwaliorThe petitioner alleged that for the financial year ending i.e.31.3.2003 a loan of Rs.11,50,898.52 has been advanced to M/s.VishwaExtrusions Private Limited in which majority of shares are held by R2and his family. The 2 nd respondent denied the allegation and stated thatthe said Company was not a private limited company at the relevanttime, however, became a private limited company from 10.4.2003,therefore, Sec.299 does not apply with respect to the said transaction. Itis further stated that R2 has made disclosure at all relevant times and it

25was the responsibility of the ex-managing director i.e. R6 to obtain therequisite approval of the Board and the Central Government for any noncompliance. The R2 also stated that the present management had fullyrecovered the entire amount due from Vishwa Extrusion PrivateLimited. The R6 simply stated that he was not aware of the amounttransferred to Vishwa Extrusion Private Limited by the R1 Company.However, he states that 99% of the shares in the said Company wereheld by R2, therefore, R2 to 5 with malafide intention transferred theamount to the Vishwa Extrusion Private Limited. The InspectingOfficer also confirmed that the loan was given to Vishwa ExtrusionPrivate Limited by R2 while he was acting as Whole Time Director ofR1. It was also confirmed that R2 holds majority shares in VishwaExtrusion Private Limited and confirmed that the loan was given withoutinforming the Board of Directors of R1 and without taking approval ofthe Central Government, thereby liable for contravention of Sec.299 ofthe Act. It is not in dispute that loan is given to Vishwa ExtrusionPrivate Limited by the 2 nd Respondent, therefore, he is liable to refundthe said amount to the R1 Company along with interest.However, in the Counter it has been stated by him that the amount hasbeen fully recovered. There is no denial to the said averment by any ofthe other respondents. Whatever may be the position, the 2 nd respondentis liable to refund the loan amount to the R1 Company with interest if itis not recovered/repaid.CP 28/2010Union vs Gwalior

26CP 28/2010Union vs GwaliorThe petitioner further alleged that for the year ending31.3.2002 a loan amounting to Rs.13,28, 818/- was advanced toM/s.Flora Infotech Private Limited in which R2 is a director and alsoalleged that for the year ending 31.3.2002 a loan amounting toRs.7,05,782/- has been advanced to M/s.Flora Finin Private Limited inwhich R2 is a director. The R2 filed his counter and denied that he wasdirectly or indirectly interested in the alleged loan made to the abovecompanies. He stated that Flora Infotech Private Limited was asubsidiary of R1 which was originally promoted by Anil Sharma. It isstated that the said fact was disclosed in the Annual Accounts of theCompany as required under Sec.212(2) of the Act.. On the other handthe Respondent No.6 denied that the Flora Infotech was a subsidiary ofR1. It is stated that there is no fulfillment of being a subsidiary companyby the said Flora Infotech. The Inspecting Officer in his enquiry soughtclarification with regard to Flora Infotech being a subsidiary of R1.However, there is no conclusion by the Inspecting Officer with regard towhether Flora Infotech was a subsidiary of R1 or not. On considering therival contentions, the conclusion is drawn that as per the admission ofthe 2 nd respondent, the Flora Infotech became subsidiary of R1 Companyon 11.12.2002 and therefore the amount outstanding as unsecured loanas on 31.3.2002 squarely falls within the ambit of Sec.295 of the Act..The said company was incorporated in the months of May, 2000 andfrom its articles it is ascertained that R2 was the first director and one of

27the subscribers to the Memorandum of Association holding 100 sharesout of 200 shares. The 2 nd respondent who advanced the unsecured loanto M/s.Flora Infotech has contravened the provisions of law and alsoliable for refund of the said amount with interest to R1 Company, if it isalready not repaid.The allegation in respect of M/s.Flora Finin is concerned, the 2 ndRespondent denied that he was directly or indirectly interested in thesaid Company. It is stated that Flora Finin was an associate of R1 andhe was not holding any shares in his individual capacity and he was anominee director of the said Company. The 6 th respondent also admittedthe fact that the Flora Finin was an associate company. The inspectingofficer also confirmed that Flora Finin was a subsidiary of R1 but hesought clarification on various points. However, the Inspecting Officercould not draw any conclusion. From the perusal of Return of Allotmentin Form 2 dated 12.12.2002 filed by Flora Finin Private Limited clearlyreveals that on 11.12.2002 500 equity shares of Rs.10/- each has beenallotted in favour of R2. Therefore from the above it is clear that the R2is holding shares in Flora Finin in his individual capacity only andtherefore, the loan granted in favour of Flora Finin Private Limitedattracts Sec.295 and failure to obtain prior permission of CentralGovernment for granting such loans by R1 would render R2 to vacatehis office of directorship in R1 as per the provisions of Sec .283(1)(h) .CP 28/2010Union vs Gwalior

28Apart from the above the R2 is also liable for refund of loan amountwith interest to the R1 Company, if it is already no refunded.CP 28/2010Union vs GwaliorThe petitioner has further alleged that an amount of Rs.9lacs was advanced to Mrs.Pragati Awasthi wife of R4 before he wasappointed as additional director on 27.8.2003 and no board resolutionwas passed in that regard.It was also alleged that Rs.6 lacs wasadvanced as loan to Man Singh International Limited during the yearending on 31.3.2001 in violation of Sec.292(1)(e) of the Act.Withrespect to the said allegations, the Respondent No.2 in his counter statedthat loan appears to have been given in the year 1999 whereas R4 wasappointed as Additional Director in the Board Meeting held on27.8.2003, it is stated that there was no debit balance appearing when R4was appointed as additional director. It was further contended that whenthe loan was advanced, the R6 was the Managing Director and he wasonly responsible for day to day management of the Company and theRespondent No.2 and 3 cannot be held responsible for the saidcontravention. With regard to loan advanced to Man Singh InternationalLimited is concerned, the R2 and 3 denied the said allegation and statedthat the R6 was the Managing Director at that point of time and he alonecan explain how the said advance was given to Man Singh InternationalLimited. The 6 th respondent has not denied the saidaverment/allegations, therefore, it is presumed that the loans have beenadvanced to the above i.e. Mrs. Pragati Awasthi and M/s.Man Singh

29International Limited by the Company during the period theRespondents were acting as directors of the R1 Company. Therefore,they are liable to refund the amounts along with interest to the Companyif it is not already repaid. The respondents being the directors of the R1Company are responsible for misappropriation of funds andmismanaging the affairs of the Company. They contravened theprovisions of law and also failed to discharge the duties being directorsin their fiduciary capacity. Therefore, I hold that the directors areresponsible for the mismanagement and misappropriation of funds of theR1 Company and direct them to make the good the default committed bythem. Though, I hold that the Board Meeting dated 27.8.2003 is illegal,however, from the above findings, it is unequivocal that the directorsmiserably failed their duties and caused loss to the Company and thegeneral public. Therefore, in exercise of powers conferred under Sec.402of the Companies Act, to regulate the affairs of the Company, I dissolvethe Board of R1 Company forthwith and hereby direct the Ministry ofCorporate Affairs to take appropriate and necessary action in appointingindependent Board of Directors for smooth functioning of the day to dayaffairs of the Company. Till such time and to protect the interest of theshareholders and public at large, it is hereby directed the Ministry ofCorporate Affairs to take custody of all the statutory registers, records,books of accounts and other documents of the R1 Company forth with.Accordingly the issue is answered. It is needless to say that actionCP 28/2010Union vs Gwalior

30should be taken against the defaulting directors who contravened theprovisions of law.With the above the CP is disposed off. All interim ordersstand vacated. No orders as to cost.Dated this the 12 th day of November, 2011(KANTHI NARAHARI)MEMBERCP 28/2010Union vs Gwalior