HIGH COURT OF MADRAS
K. Muthusamy
v/s.
S. Balasubramanian
Co. Appeal No. 6 of 2009
February 21, 2011
JUDGMENT
1. 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 Nos. 9 and 10, Mr. C. Umashankar, learned counsel for the twenty-second respondent and Mr. Neelakandan, learned counsel for the twenty-third 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 (P.) 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 seventeenth respondent herein.
4. The family had another business venture run by another closely held company by name Annai Mookambigai Flour Mills P. Ltd., which borrowed funds from Karur Vysya Bank. The loan was secured by a corporate guarantee executed by Aruna Theatres and Enterprises (P.) 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 Debts Recovery Tribunal passed an order on May 17, 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 He has now been replaced by Mr.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, respondent Nos. 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 respondent Nos. 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 :
“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 Rajah v. Soverign Dairy Industries Ltd. [2001] 106 Comp Cas 191 (CLB) 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 August 9, 2007, made in C. A. No. 41 of 2007;
(ii) Shri R. Aghoramurthy, chartered accountant, Chennai, (mobile No. 9444322347) is authorised to carry out an investigative audit of the accounts of the company for the period from April 1, 2000 to March 31, 2005, by scrutinising 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 utilisation 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 April 30, 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 March 31, 2009. The matter will be heard on May 15, 2009, at 2.30 p.m., 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, respondent Nos. 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. 1 of 2009.
8. On April 21, 2009, while ordering notice in the appeal, this court granted a limited interim order, paragraphs 3 to 5 of which read as follows :
“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 scrutinise 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 June 11, 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 February 25, 2009, passed by the Company Law Board till June 22, 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 learned counsel appearing for the respondents wanted to peruse the report and make submissions, the said request was stoutly opposed by 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 learned senior counsel for the appellants, reminiscing the official secrets regime of the 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 up to 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 P. Ltd., was incorporated as a private limited company on November 9, 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 six 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 six brothers above named floated two more private limited companies and four partnership firms. Thus they had seven business concerns in all.
(c) Out of the six subscribers, only one by name S. Paramasivan Pillai is now alive. All the other five 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 :
