BEFORE THE COMPANY LAW BOARD

PRINCIPAL BENCH

NEW DELHI

 

C.P.No.31 of 2000

 

                 Present: 1. Justice A.K. Banerji, Charirman

2. Shri S. Balasubramanian, Vice Chairman

 

In the matter of Companies Act, 1956-Sections 237 (b)

AND

In the matter of State Bank of India, Hissar

Versus

M/S Aravali (India) Limited

 

Present on behalf of parties:

1. Shrk Kuldeep Kumar, Advocate               .. for petitioner

2. Shri Sushil Kumar, Advocate                         .. for petitioner

3. Shri Nagender Vashisht, Advocate               .. for respondents

4. Shri D.P. Garg, Dy.Manager,SBI              .. for petitioner

 

O R D E R

(Date of final hearing:  27.2.2000 )

 

S. BALASUBRAMANIAN:

 

1.     This is a petition filed by State bank of India, Hissar, under Section 237 (b)  of the Companies Act, 1956 ( the Act) seeking for investigation into the affairs of M/S Aravali (India) Limited ( the company). A summary of the petition is as follows: The present liability of the company towards the bank is Rs.15 crores.  Since the bank found that there were contradictions in the stock statements submitted by the management, it engaged a firm of Chartered Accountants to carry out an inspection of the books of accounts of the company.  The report of the Chartered Accountants reveals various financial irregularities committed by the company.  The company had pledged its stock of PVC Resin of 2,64,600 Kgs lying in the Godown as in Feb. 1997. The key of the Godown was with the bank. Since the company had not taken delivery of the stock from the bank, the stock should have been intact.  However, during an inspection it was found that there was a shortage of 37800 Kgs.   It was also noted during the inspection that 2 walls of the Godown had been demolished and re-constructed and that the bags containing Resin were found to have been re-stitched.  Therefore, it is obvious that the company had clandestinely removed the stock.  In the same way, in respect of Ratera Unit, as per the Stock Statement furnished by  the company on 21.8.1998, there should have been a stock of 3,80,371 Kgs of PVC Resin.  However the inspection revealed actual stock of only 1,60,000 Kgs, thus, showing a shortage of 2, 20,731 kgs.  Thus, the company should have removed the stock without the knowledge and authority of the bank and the management should have pocketed the money.  Further, as per the Stock Statement furnished to the bank, the value of the stock was Rs.756.41 lacs while as per the Balance Sheet figure, it was only Rs.319.47 lacs. Thus, the company is manipulating the records and siphoning of the funds.  It was also noticed by the Chartered Accountants that the company was receiving cash in excess of Rs.20,000/- against the provisions of law.  In one instance, there were cash transactions of over Rs.43 lacs in respect of one M/S Vardhman Tubes Limited.  This would indicate that the accounts of the company cannot be relied upon.  Further, without the knowledge and consent of the bank, the company is having other bank accounts only with a view to divert the funds of the company. 

2.     The company has filed its reply refuting the allegation of the shortage of the stock on the ground that none of the company representative was present at the time of stock taking nor the stock statement prepared by the Chartered Accountants was countersigned by any of the representatives of the company.  According to the company,  the bank has already filed a criminal case in the court of Judicial Magistrate, Hissar making similar allegations as in this petition.  It has also pointed out that the bank has also moved the Debt Recovery Tribunal (DRT) for realizing the bank dues.  It has also challenged the invocation of the provisions of Section 237 ( b) of the Act on the ground that none of the ingredients of this Section has been satisfied. 

3.     Shri Sushil Kumar, Advocate appearing for the bank while reiterating the allegations made in the petition, submitted that the manner in which the affairs of the company  are being conducted with a view to defraud the bank which is a public financial institution would reveal that the  management is guilty of fraud and misfeasance.  Therefore, he submitted that there is every justification to order an investigation into the affairs of the company. 

4.     Shri Nagender Vashist appearing for the company submitted that the only substantial allegation in this petition relates to the shortage in the stock of PVC Resin. During the verification by the Chartered Accountants, none from the company was present and as a matter of fact the bank has carried out further inspections and has not found out any discrepancy. He pointed out that because of the satisfactory performance of the company, the bank has increased its limits from Rs.80 lacs to Rs.15 crores over a period of 5 years.  The SBI Mutual Fund, Haryana Financial Corporation, HSIDC which are all public financial institutions,  have shares in the company when shares were allotted to them for a premium of Rs.5/- in the public issue made.  Ordering an investigation on the basis of unfounded allegations would be against the interest of the company and as such this petition should be dismissed.

5.     We have considered the pleadings and arguments of the counsel. This petition has been filed under Section 237(b) of the Act. This Section provides for an order for investigation under certain circumstances.  The main circumstances envisaged in the Section are that the business of the company is being conducted with  intend to defraud its creditors, that the persons concerned with the formation of the company or the management of its affairs have been guilty of fraud, misfeasance or other misconduct towards the company or the members have not been given all the information with respect to the affairs of the company.  From the allegations in the petition, the only circumstance under which this petition has been based is that the affairs of the company are being conducted with intend  to defraud its creditors.  The foundation of the petition is that the inspection carried out by a Chartered Accountant which revealed shortage of stock in the godowns of the company and the apprehension is that the material found short has been diverted and the proceeds siphoned of by the management.  According to the company, when   the stock verification was done  by the Chartered Accountant, none from the company was associated and as such no reliance should be placed on this inspection report.   We find that the alleged shortage in the stock was noticed in the year 1998 where after, according to the company, the bank has carried out further inspections without any adverse report.  As per the provisions of Section 237 (b) of the Act, an order of investigation could be passed on account of established material that the affairs of the company are being carried out with intent to defraud creditors.  In the present case, the shortage of raw material is not admitted by the company nor the Annual Reports of the company audited by the statutory auditors indicate any such shortage.  There is nothing on record to show that the Bank had taken up the matter of shortage of stock with the company.  Further, the bank has already filed a criminal case against the company and has also moved the Debt Recovery Tribunal for realization of the outstanding from the company. Further, we also note that the company has nominees of HFC and HSIDC on the Board of Directors of the company.  Under the circumstances, we are of the view that the solitary instance of un-admitted shortage of stock cannot lead us to form an opinion that the company's affairs are being conducted with intent to defraud creditors and exercise our discretionary power to order an investigation. Accordingly, the petition is dismissed.

 

 

 

(S. Balasubramanian)                                                                (A. K. Banerji)

 

New Delhi, the 27^th April, 2001