Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
Despite the clear regulations in
the Companies Act, 1956 as to how every Company should record its transactions,
maintain books of account and should submit the approved Financial Statements
with the ROC, financial transactions in some closely held companies would be
really interesting to note and dealing with the cases of this kind would really
be very complicated. The logic behind the settled accounting principles, the
provisions of Companies Act, 1956 dealing with maintenance of accounts,
Accounting Standards etc., can very easily be understood. Every Company is
expected to be transparent, expected to provide true picture of financial
issues to the shareholders and also expected to comply with the regulations
with regard to preparation and submission of financial statements with the
authorities like ROC in the interests of the Company and also in public
interest. Financial transactions in some closely held Private Companies would
really be interesting and we can see routing the Company’s financial
transactions through personal Bank Accounts of Directors or the Shareholders.
This is why, most of the times, even if there exist procedural irregularities
in the Companies with regard to financial issues, those are not taken so seriously
at times. For example, there can be going concern which is a closely held
company doing business for so many years and if any disputes come among the
shareholders suddenly, the adjudicating authority may try to ascertain the true
facts in the Company and much emphasis may not be laid on technicalities. This
is a very complicated issue to deal with. We know the limitations of auditing
and we know that it is very easy to find some procedural irregularity in any
company with regard to recording financial transactions or maintenance of Books
of Account. If these procedural irregularities lead to serious consequences
except in exceptional cases, then, many closely held Private Companies may not
survive. It is true that the provisions of Companies Act, 1956 are not
directory and mandatory and we know the importance of providing true financial
picture of the Company to the shareholders; and as such the consequences of
procedural violations can be dealt with strictly as provided under the
provisions of the Companies Act, 1956.
An observation or noting of Delhi
High Court in Tarlok Chand Khanna And Another vs. Raj Kumar Kapoor And Others,
1983 54 CompCas 12 Delhi, ILR 1982 Delhi 156 regarding the maintenance of
personal Bank Accounts by the shareholders in the Company and the reference is
as follows:
“The opening of this account was
an apparent sequel to the instructions by Khanna to the existing banker of the
company with regard to the disputes that had surfaced between the two groups
and which may have possibly led to the disruption of normal banking channel for
the conduct of the business of the company. In any event, whatever the
compulsions for the opening of this account, it was nevertheless the account of
the company and even though operated upon by Kapoor exclusively, he is
answerable to the company for the various transactions reflected in this
account. In any event, all the directors of a company who are conducting the
business of the company on its behalf or in its name are always accountable to
the company for the funds or property of the company that they deal with in the
course of the discharge of their duties. There was also some controversy as to
how much funds each of the groups had made available to company in addition to
their respective contributions to the capital. Some of the credits to which the
groups are entitled are apparently duly reflected in the books of account of
the company. It is possible that some of the credit entries may be exaggerated
or fictitious as was alleged on behalf of Khanna with regard to the period
during which has group had remained ousted from the management of the company
and the affairs of the company were being managed by Kapoor. These matters can
be adequately dealt with on the completion of the account of the company and
the preparation and audit of the balance-sheet and profit and loss account of
the company to date. If any of the groups is not satisfied with the accounts or
their audit, they would be entitled to raise these matters in the next meting
of the Board, as also indeed, in general meeting of the company and solicit an
appropriate decision at any of the two levels to ensure that the rights and
liabilities of the directors and the creditors of the company qua the company
are properly reflected in the balance-sheet and they dealt with accordingly.”
Evidentiary value:
When there is litigation by or
against the Company; and where there exist disputes among shareholders, the
Books of Account and Financial Statements play a key role in determining the
dispute. Because, the presumption normally is that the every company records
true transactions as required under the provisions of Companies Act, 1956 and
the presumption is rebuttable. Dealing with the evidentiary value of Books of
Account and the burden of the management when there is litigation against the
management, the Orissa High Court in Shanti Prasad Jain vs. Kalinga Tubes Ltd.
And Ors, AIR 1962 Ori 202, was pleased to observe as follows:
“In the present case, undoubtedly
all these facts were within the special knowledge of those in the management of
the Company at the time and by reason of non-production of the relevant
documents, the petitioner is entitled to the benefit of presumption against the
Company. The petitioner had made an application filed on April 5, 1961 for
production of documents including Cash Books and ledger Books of the Company
for the year 1958; on the said application this Court made an order on April 7,
1961 directing the Company to produce the said documents as mentioned in the
said petition; the Books of Account for the year 1958 were not produced by the
Company; in any event it was for the Company to tender the Books of Account of
the year 1958 in evidence and get them exhibited in court. The Company having
failed to do so the Court can draw an adverse inference against the Company.”
Allegations of Mismanagement:
Every one knows as to how the
financial transactions are recorded in many Private Limited Companies and how
the books of account are maintained despite clear provisions with regard to
maintenance of Books of Account by the Company under the provisions of
Companies Act, 1956. When the dispute comes between or among the shareholders,
at times, it is very easy for the aggrieved shareholder to make-out a prima
facie case of mismanagement under section 398 of Companies Act, 1956. It is
true that every Company should record transactions correctly and should
maintain proper Books of Account. It is also true that the every Company should
get the accounts audited, approved in the AGM as provided and should file the
Financial Statements with the Registrar of Companies (ROC) as required.
However, the procedural irregularity in maintenance of Books of Account etc.,
will not provide a right to the shareholders or the minority shareholders to
file a petition under section 397/398 of the Companies Act, 1956 except in
exceptional cases. If this is allowed, then, many companies may not function and
in many companies, an investigation is to be ordered. But, however, it is very
difficult to allege something against the people in control of the Company
based on the procedural irregularities in recording the financial transactions
and in maintaining the Books of Account as required. It is also true that the
Books of Account too can be used as evidence and to draw inferences. There
can’t be any hard and fast rule in this regard.
Though it is settled that a
petition under section 397/398 of the Companies Act, 1956 alleging oppression
and mismanagement in the Company is not maintainable solely based on procedural
irregularities, it is very difficult to ascertain as to whether the
irregularity was deliberate or accidental. The Madras High Court in S. Seetharaman
and Others Vs. Stick Fast Chemicals Private Limited and Others, 1998 (93) CC
507, 1999 (32) CLA 480, 1999 (32) CLA 273, dealing with a case of oppression
under section 397 of the Companies Act, 1956, was pleased to observe as
follows:
“In a petition filed under
Section 397 of the Companies Act, the petition should contain all material
facts. In case of fraud, mismanagement oppressive conduct, etc., full and
complete particulars must be alleged in the petition. Subsequent affidavits are
not enough. The petitioner must plead all material facts necessary for granting
the relief as prayed for. Facts arising subsequent to the filing of the
petition cannot be relied upon. The validity of the petition will be judged on
the facts alleged therein and existing at the time of its presentation. Lack of
essential allegations in a petition cannot be made up by leading evidence.
"Oppression" according to the dictionary meaning is any act exercised
in a manner burdensome, harsh and wrongful. Oppression may take various forms
like lack of probity and fair dealing in the affairs of the company to the
prejudice of some portion of its members. The section confers wide power on the
court to deal with such a situation in an equitable manner which it did not
have in the case of a company prior to the passing of the Companies Act, 1948.
To obtain any relief under this section a petition must show that the
oppression arises from the way in which the affairs of the company are
conducted or is attributable to an act or omission on the part of the company.
Where a shareholder repaid a loan taken by the company from its bank without
informing the company and took a transfer of the company security it was held
not to be oppression as the shareholder had acted in a personal capacity and
the conduct did not alter the position of the company. Relief may be granted
under Section 397 of the Act only against the continuous acts on the part of
the majority shareholders oppressive to the minority. Some isolated and illegal
act do not amount to oppression. Denial of the right of inspection or other
rights of a shareholder or failure to comply with formalities required in the
matter of giving notice of a general body meeting or refusal to declare more
than a moderate rate of dividend even though the profits earned justified a
higher rate of dividend cannot taken by themselves amount to oppression. Denial
to shareholders of access to the books is not oppression because there is
adequate remedy against such denial in the Act. Merely because the petitioner
who had a substantial shareholding was excluded from management, it cannot be
said that there was oppression against a shareholder.”
Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
