1. The Central Government has filed this petition in terms of Section 408 read with Section 397/398 of the Companies Act, 1956 ( the Act) seeking for appointment of six Government directors for a period of 3 years on the Board of M/S Morepen Laboratories Ltd. (the company) on various grounds, more particularly, the failure of the company in repaying the public deposits.
2. A summary of the petition is: The company is a listed company engaged in the business of manufacturing antibiotics, drugs and intermediaries. The Board of the company consists of 6 directors of which 2 represent financial institutions. The company had been accepting fixed deposits from 1993 to meet its long terms working capital requirements but from October, 2002, the company has failed to repay the matured deposits. The total deposits remaining to be repaid to the public stood at Rs. 156.19 crores. Since a number of depositors filed applications under Section 58A(9) of the Act, the Company Law Board framed a scheme for repayment of all the deposits. The company has not been adhering to the scheme given by the Company Law Board. A number of complaints are being received by the Central Government from various depositors complaining of non adhering to the scheme framed by the Company Law Board. The Registrar of Companies, Jalandhar has already filed a prosecution against the company and officers in default in terms of Section 58A of the Act. The company has also failed to redeem cumulative redeemable preference shares which were due for redemption during the year 2002-2003. Likewise, it has also defaulted in redemption of non convertible debentures. Even though the company has failed in its obligations to servicing public deposits, debentures and preference shares, it has diverted over Rs. 67 crores as investment in associate companies. The company has made a provision for over Rs. 126 crores in regard to outstanding debtors while in the previous year, the amount was only about Rs. 84 lacs. The company has violated the provisions of Section 205 of the Act by not transferring Rs. 5.88 lacs to Investors' Education and Protection Fund. It has also violated the provisions of Section 209 by not providing for about Rs. 72 crores in respect of interest on secured/unsecured loans. There are violations of the provisions of Sections 211 read with Schedule VI, Section 217, 269, 297, 293(1)(a), 372A, 418 and 628 of the Act. The financial mismanagement is apparent from the fact that while the company was making profit till 31.3.2002, it incurred a huge loss of over Rs. 198 crores for the year ended on 30.9.2003. During this period, the company has also created huge liabilities. Even though the company has filed an application under Section 391 of the Act before Himachal Pradesh High Court with regard to rescheduling of payments to its creditors, the creditors' meeting and the fixed depositors' meeting have not yet been held. DRT, New Delhi has restrained the company from utilizing the proceeds of US Dollars 15.25 millions raised through GDR. Instead of repaying the matured public deposits, the company has passed a resolution to issue equity shares to the depositors and by this means the depositors' interest has been affected. On the basis of these allegations, the Government has sought for the appointment of 6 directors for a period of 3 years to effectively safeguard the interest of the respondent company, shareholders, investors, depositors, creditors and public at large.
3. When the petition was mentioned on 1.2.2005, the company was directed to file its reply indicating therein the status of the compliance of the order of this Board framing a scheme for repayment of public deposits. In the hearing held on 12.4.2005, it was noted that in spite of the directions to file its reply by 15.3.2005, the company had not done so and accordingly time to file the reply was extended upto 20.4.2005. While the company filed its reply later, it had not indicated in its reply the status of the repayment of deposits. The matter was finally heard and concluded on 1.6.2005 at which time I suggested to the counsel for the company that it would be in the interest of the company itself, in view of its dire financial situation, to have some directors appointed by the Central Government and adjourned the matter to 16.6.2005 for the company to react to my suggestion. On that day, while filing an affidavit on merits of the case, Shri Chaudhary, the learned counsel for the company, also gave a list of five names of individuals suggesting that if any two from this list could be appointed as government directors, the company would have no objection. He also submitted that if his request is not accepted, then the matter be decided on merits. I declined to accept this suggestion as it would be against the spirit of the provisions of Section 408 of the Act and decided to pass this order.
4. In the reply to the petition, the company has taken two preliminary objections - one is that this Board has no jurisdiction to entertain the petition, as in terms of Companies ( Second Amendment) Act, 2002 which came into effect from 1.4.2003, only the National Company Law Tribunal has the jurisdiction and the second objection is that the Central Government has no locus standi to invoke the provisions of Sections 397/398 of the Act along with Section 408 of the Act on the ground that the provisions of Sections 397/398 can be invoked only by a shareholder qualified under Sections 399. It is further stated in the reply that since the company has already moved the High Court of Himachal Pradesh under Section 391 of the Act proposing an omnibus scheme for composition and arrangement with its creditors, the interest of the public deposit holders would also be taken care of. Further, since the Central Government has already initiated criminal proceedings for non compliance with the order of this Board, the present proceedings should be stayed. According to the company, the default in repayment of deposits has occurred due to causes beyond the control of the company and that even its efforts to repay the public deposits out of the proceedings of GDR have not fructified as the company has been restrained by DRT from utilizing these funds. The main cause for the financial difficulties of the company was that the company had patented a drug known as Loratadine, the original patented of which was to expire in 2000. However, the original patented was extended twice causing a serious set back in the business of the company. The company has denied some of the allegations and has justified the action taken in respect of the remaining allegations.
5. Shri Rajiv Shakdher, advocate appearing for the Central Government submitted: The affairs of the company are being conducted in a manner prejudicial to the interest of the holders of public deposits and creditors. Even though, the Company Law Board has framed a scheme for repayment of deposits in consultation with the company, yet, the scheme is not being followed and the Government is receiving a number of complaints from the depositors. Instead of repaying the public deposits, the company has unilaterally decided to issue shares against the deposits which is not in the interest of the depositors. The financial position of the company is precarious due to its diversion of funds to its associate companies. In the petition, details of violations of various provisions of the Act have been elaborated which would indicate that the affairs of the company are not being carried on in accordance with law. In Central Government v. Carewes Pharmaceuticals Ltd., 121 CC 238, this Board directed appointment of Government directors in the case of financial mismanagement. Likewise, in view of the various allegations made in the petition, this Board should appoint majority directors on the Board so as to ensure that the affairs of the company are being carried on in accordance with law.
Such appointment is necessary as a preventive measure so that the financial position of the company does not erode further.
6. Shri Abhishek Kalla, Advocate appearing for the company submitted: There has been no financial mismanagement in the company even though there is financial mismatch and default in repayment of deposits. This occurred due to the reasons beyond the control of the company. With a view to improve the financial position of the company, it had raised Rs. 72 crores by way of GDR but the proceeds could not be utilized due to DRT injunction. The financial difficulties are not due to either siphoning of or diversion of funds but due to the business risk that the company had to take. With a view to protect the interest of all concerned, the company has already filed a petition under Section 391 before the Himachal Pradesh High Court and once the scheme proposed is approved by the High Court, the interest of all concerned would be taken care of. The very fact that the company could raise Rs. 72 crores by way of GDR, it would indicate the standing of the company. The company has referred itself to Corporate Debt Restructuring Cell constituted by the RBI and is in the process of deliberations among its various creditors. The company has entered into several manufacturing tie ups in various countries and also is in the process of manufacture of variety of bulk drugs. The company is hopeful of coming out of its financial crisis at the earliest. The appointment of Government directors at this stage would send wrong signals and would not be in the interest of the company. Further, the company has already two directors appointed by the financial institutions who could monitor the affairs of the company. Since the powers under Section 408 of the Act are extraordinary, unless and until this Board is satisfied that the affairs of the company are grossly mismanaged, the powers should not be exercised. The company has explained each and every allegations made in the petition and as such even on merits, no ground exists for appointment of Government directors.
7. I have considered the pleadings and arguments of the counsel. At the outset, I reject the preliminary objections raised by the company. The plea of the company that this Board has no jurisdiction to entertain a petition under Sections 397/398/408 of the Act is unsustainable.
Section 10FB providing for constitution of National Company Law Tribunal has not yet been notified and as such it has not come into operation and therefore Company Law Board continues to have the jurisdiction to deal with the matters under Sections 397/398 and 408 of the Act. As far as the locus standi of the Central Government to file this petition is concerned, it is to be noted that in terms of Section 401 of the Act, the Central Government has the right to apply under Sections 397/398 of the Act.
8. As far as the merits of the case are concerned, the admitted fact is that the company is in great financial difficulties and it has not even been able to comply with the scheme given by this Board for repayment of public deposits. It is also a matter of fact that a number of complaints are being received from the depositors regarding non compliance of the order of this Board by the company. The provisions of Section 408 of the Act is not only curative but also preventive in nature. Even though the Central Government has elaborated various instance of non compliance with the provisions of the Act, yet, I do not propose to go into each and every allegation other than noting that the financial position of the company is extremely precarious which is evident from the fact that the company had to frame a scheme of compromise in terms of Section 391 and also it has submitted itself to CDR and proceedings are pending before DRT. The public perception about the company is on the low ebb. In Central Government v. Shaw Wallace Co. Ltd., 1998 4 CLJ 311 wherein a number of instances of financial mismanagement had been alleged, this Board while holding that those allegations had not been established, yet, noted that the financial position of that company was precarious and the public perception about that company was negative, and therefore directed the Central Government to appoint 2 Government directors on the Board of the company. It is appropriate to extract the certain portions of the observations made by this Board in that case: "Therefore, we are of the view that in addition to whatever grounds the courts have held to justify appointment of Government directors, we may add that when the acts of directors/company have brought the affairs of a company to a stage wherein its existence is under threat due to financial difficulties, then such a situation would definitely be prejudicial to the interest of the company and its members satisfying the parameters of Sections 408 and 398" --------- "During the last two years, after filing of these petitions and on our appointing two of our nominees on the board, not only has there been transparency in the affairs of the company, there have been some checks and balances. Confidence building is the need of the day as far as this company is concerned. The company has proposed a scheme of arrangement to the Calcutta High Court and as per the scheme, the liabilities are to be discharged over a period of time. The company has also proposed certain measures of raising finance. For all these attempts to be successful, which would put the company back on the rails without any impediment, it is essential that the creditors, lenders and the public at large repose faith and confidence in the management of the company, which unfortunately is at, the lowest ebb today. The effect of whatever happened earlier continues as on date and is likely to continue for some more time, which will be against the interest of the company. The main object of Sections 39/3987 and 408 is to safeguard a company by suitable remedial measures. Thus, we find that there is every justification to restructure the board of directors of the company so that the interest of the company is safeguarded. ---------- "If we examine the way in which the affairs of the company have been conducted bringing the company to a near financial collapse, the ratio in Sakthi Trading Co.
Pvt. Ltd.'s case [1985] 57 Comp Cas 789 (Delhi) is directly applicable.
In that case, as already stated, it was held that an order under Section 408 may not cure the illegal or prejudicial acts which may have already been performed by the company but preventive steps could be taken to ensure that such repetitions do not recur, by appointment of Government directors. In this connection, it is worthwhile to examine whether relief under Sections 397/398 and 408 can be granted only if it is shown that there is an element of fraud, misfeasance or breach of trust in the conduct of affairs of the company to bring the same within the definition of mismanagement. In none of these sections, the word "mismanagement" has been used except that the title to Chapter VI of Part IV of the Companies Act under which these sections appear, reads as "prevention of oppression and mismanagement". All these sections speak of the affairs of the company being conducted in a manner prejudicial to the interest of the company, or to the members or to the public interest. Therefore, what we have to examine is, whether, the conduct of the affairs of a company is prejudicial to the interest of the company, etc. The manner and nature of such conducting the affairs, in our view, is not the foundation for grant of relief under these sections. No doubt, in some of the cases, cited by counsel for the respondents, the courts have held otherwise but, such observation might have been with reference to the facts and circumstances of those cases.
In our considered, view, the only examination that is necessary under these sections, is whether, a case has been made out to show that the affairs of a company are being conducted in a manner prejudicial to the interest of the company, shareholders or the public interest and one way of making out a case is showing that the state of affairs of a company on the date of presentation of the petition is such that the same is prejudicial to the interest of the company and that such state of affairs has been brought about by acts of commission and omission by the directors/company. Should the petitioners be in a position to show that such state has been brought about by acts of fraud, misfeasance or breach of trust, then of course, relief in drastic nature might be called for. Therefore, we are of the view that in addition to whatever grounds the courts have held to justify appointment of Government directors, we may add that when the acts of directors/company have brought the affairs of a company to a stage wherein its existence is under threat due to financial difficulties, then such a situation would definitely be prejudicial to the interest of the company and its members satisfying the parameters of Sections 408 and 398. The said order of this Board was taken on an appeal before the Calcutta High Court which upheld the directions of this Board and the SLP filed against the judgment of the Calcutta High Court was dismissed by the Supreme Court. Thus, there is a precedent to appoint Government directors with the view to build a public confidence in a company which due to its unsatisfactory financial position is unable to meet its liabilities towards its creditors, more so towards general public having deposits in the company. Thus in the present case, there is every justification to appoint government directors which would also definitely be advantageous to the company in pursuing the case before the High Court, CDR and DRT.9. The Central Government has sought for appointment of 6 directors with the view to have the majority on the Board. It is on record that the company has already two nominees of the financial institution and therefore, I am of the view, that appointment of 2 government directors would suffice to monitor and assist the company. Accordingly, I direct the Central government to appoint two directors on the Board of the company for a period of 3 years.