SMT. RANJANA GARG & Ors. v. VIKAS TELECOM LTD & Ors.

Mr. Kunal Vajani and Mr. Sumeet Lall, Advocates for R -17 /Citicorp Finance (India) Ltd. CORAM: HON'BLE MR. JUSTICE MANMOHAN % ORDER 08.03.2011

1. The present two appeals have been filed under Section 1 OF of the Companies Act, 1956 (for short 'the Act') challenging the order dated 24th February, 2011 passed by the Company Law Board (for short 'the Board') whereby the Board not only rejected the appellants' application for withdrawal of the company petition with costs of Rs. 10,000/- but also superseded the Board of Directors and appointed an administrator to run and manage M/s. Vikas Telecom Ltd. (hereinafter referred to as 'respondent-company'). The Board vide the impugned order froze the bank accounts and directed continuance of status-quo order against the respondent-company.

2. Mr. C.A. Sundaram, learned senior counsel appearmg for appellants in Co. A. (SB) 12/2011 submitted that the Board committed a grave error in not allowing the withdrawal of the company petition under Sections 397 and 398 of the Act, when all the 100% Co. A. (SB) 11-1212011 Page2 of /I shareholders of respondent-company had settled their disputes. He further submitted that Sections 397 and 398 of the Act confers special rights on only the shareholders of a company and after the execution of the said settlement, the company petition filed before the Board was not maintainable. He pointed out that though initially the withdrawal application was based on the said settlement agreement, yet later on the parties had requested for an unconditional simplicitor withdrawal and consequently, the Board had no jurisdiction to proceed further with the matter.

3. Mr. Sundaram further submitted that in effect, the Board by the impugned order had allowed the relief sought for by one of respondent-company's creditors, namely, Citicorp Finance (India) Ltd., in an application filed by it under Section 9 of the Arbitration and Conciliation Act, 1996.

4. Mr. Ashok H. Desai, learned senior counsel for appellants in Co. A. (SB) 1112011 submitted that by the impugned order the petition filed under Sections 397 and 398 of the Act had been allowed whereas, in fact, only an application for withdrawal of company petition had been argued before the Board. He pointed out that the Co. A. (.'iB) ll-1212011 Page 3 of!! Board in the impugned order had repeatedly referred to alleged arguments of the petitioner which in fact were never urged but were merely extracted from the original company petition. Consequently, he submitted that the Board while hearing the withdrawal application had disposed of the main company petition and that too, by appointing an administrator.

5. On the other hand, Mr. Rajiv Nayar, learned senior counsel appearing for Citicorp Finance (India) Ltd. defended the impugned order passed by the Board. He submitted that by virtue of Regulation 38 of the Company Law Board Regulations, 1991 read with Section 237(b) of the Act, the Board was competent to reject even an application for simplicitor withdrawal of petition filed under Sections 397 and 398 of the Act. Mr. Nayar further submitted that this was a fit case for appointment of an administrator as huge amount of monies had been siphoned off by the directors and the shareholders of the respondent-company. In this connection, he laid emphasis on the internal audit report. prepared by the auditor of the respondent company. The relevant portion of the audit report relied upon by Mr. Nayar is reproduced hereinbelow:- Co. A. (SB) ll-12/20JJ Page4 ofll Agarwal Kamal Kumar & Associates 13-B, NS Marg, Daryaganj, New Delhi-110002 Sf. No. IV.

1. Observation Recommendation Follow up & Progress done by the Mana!(ement Remark by internal auditor Loan Given to related body corporate Loan to related company As per section 295 of the Companies Act, 1956, No without company approval Central Government can lend money a) any private company of which any such director is a director or member, b) any body corporate, the directors, managing manager accustomed accordance directions or instructions of the board or of any director or directors of the lending company. director whereof asking During our internal audit program we noticed that the company has entered into an agreement advances too for the supply of material along with work contract to the three parties. On agreements, no agreements are provided to us. No work as well as supply has been made by the parties so far. These advances are pending for a period of more than two years. In the absence of agreement and no fulfillment advances may be treated as loan to the body corporate through lifting of Corporate Veil. agreement The information has been noted by us. These funds should be brought back with in the company immediately. Gross violation of section 295 to 301 of the companies Act, 1956. Required permission from the central government is not there. Section 2(22)(e) of the Income Tax Act, 1961 may be attracted. Loan taken from the bank cannot be invested as share application money in the other companies. This is a diversion of funds for the purpose other than the purpose it is taken for which is a violation of one of the clause of CARO report. The company has given advances and invested in share application out of lease deposits from Tenants and amount of Debenture Subscription As per the Debenture Subscription Agreement the Company, out of Rs. 120.00 Crores can useRs. 50.00 Croresfor business and operations. The said amount accumulating to Rs. 76.47 Crores has been invested in companies as share application money for growth of business of the company. However the company received refund Rs. 90.00 Lacs from Sadhavi Properties Pvt. Ltd. and Rs. 60.00 Lacs from Shiv Durga Buildwell Pvt Ltd. Copy of Debenture Subscription Agreement is attached as Annexure 5. Co. A. (SB) 11-12/2011 Page 5 of11 ? But in the current year the company has converted these advances application investment in the respective companies. As per section 2(22)(e) of Tax Act, Income advances made be treated as deemed income to the extent of accumulated profits. Detail of the parties is as under: S. No. Name of Amt. as Remark Company Advance (Rs.)_ 7,10,16,655 2,80,00,000 8, 00, 00, 000 6,50,00,000 6,38,00,000 Qualitron Commodities Ltd. Ruchika Trexim 4,20,00,000 Ltd. Spectrum Distributors Ltd. GTX Real Tech Pvt. Ltd. Mace! in Consulting Pvt. Ltd. Taxi/a Knowledge Development Pvt. Ltd. Taxi/a Knowledge Infrastructure Pvt. Ltd. Aanchal Properties Pvt. Ltd. Chitrakoot Mercandise Pvt. Ltd. Mahagauri Buildtech Pvt. Ltd. Mangalaya Buildtech Pvt. Ltd. Marutinandan 5, 00, 00,000 2, 00, 00,000 1' 00, 00, 000 31,50,000 50,00,000 72,50,00,000 Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money Investment As Share a) b) c) d) e) f) g) h) i) j) k) I) Co. A. (SB) 11-12/2011 m) n) o) p) q) r) s) t) u) v) w) x) y) I7,45,25,000 I,85,00,000 I, I8, 75,000 3, 00, 00, 000 Sales 6,00,000 93,75,000 Properties Pvt. Ltd. Morgan Properties Pvt. Ltd. Prabhuram Buildwell Pvt. Ltd. Rasraj Ltd. Royal Fragrance Pvt. Ltd. Sadhavi Properties Pvt. Ltd. Sanjani Buildwell Pvt. Ltd Shiv Buildwell Pvt. Ltd. Shree Aadhaya 40,00,000 Buildwell Pvt. Ltd. Shri Narvada 60,00,000 Developers Ltd. Sonal Developers Pvt. Ltd. Sry Financial Services Ltd. Taxi/a Gurukul Pvt. Ltd Vishnu Buildwell Pvt. Ltd Total Durga 62,50,000 62,50,000 I' 00, 00,000 I,50,00,000 2, 7I,50,000 76,47,41,655 Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share Application money. Investment As Share AJ2Plication money. Investment As Share Application money. Investment As Share Application money.

6. Mr. S.L. Gupta, learned counsel appearing for State Bank of India (SBI), which is the lead consortium of banks that have advanced a sum in excess of Rs. 340 Crores, submitted that running of an LT. park Is an extremely technical and specialised job and the Co. A. (SB) 11-I212011 Page 7 of II administrator who had no past experience in the said field could not ( run the same in effective and efficient manner. He further contended that in case the second phase of the project was not completed expeditiously then the project would become unviable and the huge loans advanced by the banks would become unserviceable. Mr. Gupta reposed confidence in the management of the respondent-company.

7. Mr. Gupta pointed out that Citicorp Finance (India) Ltd. had subscribed to respondent-company's debenture worth Rs. 120 Crores. According to him, out ofRs. 120 Crores, a sum ofRs. 70 Crores was to be utilised by the respondent-company for construction purposes and Rs. 50 Crores was to be utilised for other business purposes. Consequently, according to him, Rs. 50 Crores advanced by Citicorp Finance (India) Ltd. could have been utilised by respondent-company to advance loans and make investments.

8. Mr. Gupta lastly submitted that the only way to immediately resolve the present impasse was to ensure that the sum of Rs. 76.47 Crores, alleged to have been diverted by respondent-company, be brought back to the respondent-company so that the said money can be utilised for completion of the project undertaken by the respondent- Co. A. (SB) 11-12/2011 Page 8 ofll company.

9. At this stage, Mr. Rajiv Nayar, learned semor counsel for Citicorp Finance (India) Ltd. submitted that in the event, the appellants and/or entities to whom loans had been advanced or in whom monies had been invested agreed to refund to respondent company the aforesaid amount of Rs. 76.47 Crores within a time bound period, he would have no objection to the present appeals being allowed. However, he clarified that his offer was without prejudice to the rights and contentions of Citicorp Finance (India) Ltd. in the petition filed by it against respondent-company under Section 9 of Arbitration and Conciliation Act, 1996.

10. Both Mr. Sundaram and Mr. Desai, on instructions, stated that without admitting to the correctness of the allegations made either by Citicorp Finance (India) Ltd. or by their internal auditors and with a view to put an end to the controversy in the present litigation, the present appellants undertake to this Court that the abovementioned amount ofRs. 76.47 Crores shall be brought back into the respondent company within a period of six months. In fact, the appellants have even furnished today in Court affidavits on behalf of all shareholders Co. A. (SB) Jl-12/20Jl Page 9 of II ' . If of the respondent-company undertaking to this Court that within a period of six months from today, the amount of Rs. 76,47,41,000/ (Rupees Seventy Six Crores Forty Seven Lacs and Forty One Thousand only) shall be brought back into the respondent-company either by the companies in which the aforesaid amounts had been invested or by members/shareholders of the respondent-company. The said undertaking furnished by the appellants is accepted by this Court and they are held bound by the same.

11. Learned senior counsel for appellants further stated that to ensure full transparency and accountability during the next period of six months, they have no objection if an observer is appointed by the SBI to attend all board meetings of the respondent-company.

12. Accordingly, SBI is directed to appoint one of its Deputy General Managers as an Observer to attend all board meetings of respondent-company till the aforesaid amount is brought back into the respondent-company. The Observer would have the authority to examine any relevant record of the respondent-company.

13. To put the controversy at rest, it is clarified that in the event the undertakings given to this Court are violated then the impugned order Co. A. (SB) 11-1212011 Page JOofll {y of the Board shall come into operation within a period of one week thereafter.

14. Keeping in view the aforesaid consensus arrived at between the parties, the present appeals and applications as well as company petition filed before the Board stand disposed of in the above terms. All the interim orders passed by the Board stand vacated forthwith. If the Administrator has taken over charge of the respondent-company, he is directed to forthwith hand back the same to the management of the respondent-company.

15. Before parting with this order, I would like to place on record my appreciation for the services rendered by all learned counsel in the matter as without their help, the present litigation could not have been expeditiously resolved. Needless to say, delay in disposal of the present appeals would have led to stalling of an infrastructural project, which could cause huge economic loss to not only the shareholders and its creditors but also to the society at large. Order dasti. MARCH 08, 2011 m MA~,.t Co. A. (SB) ll-12120Jl Page II of I!