1. The Central Government has filed this company petition under Section 408 of the Companies Act, 1956 ("the Act'-) seeking to appoint Government directors on the board of directors of M/s Sterling Holiday Resorts (India) Limited ("the Company") on account of, inter-alia, the complaints received from deposit holders as well as time share members, financial irregularities and contravention of several provisions of the Act, noticed during the course of inspection of the books of account and other records of the Company in the middle of 2000 and as brought out by the qualifications made by the statutory auditors in their report dated 30.03.2001, forming part of the annual report for the year ended 31.12.2000.
2. Shri Mohan Parasaran, learned Additional Solicitor General, while initiating his arguments, submitted that the Company incorporated in May 1986 as a private limited company, became a public limited company with effect from December 1989 and is presently engaged in developing holiday resorts and leasing/selling resorts on time sharing basis. The Company had incurred huge losses to the tune of several crores of rupees during the year ended 30.06.1998, 30.06.1999 and 31.12.2000. The accumulated losses as on 31.12.2000 after appropriation of the entire general reserves amounted to Rs. 76.04 crores, whereby the entire paid up share capital of the Company of Rs. 23.22 crores stood completely eroded. The accumulated losses as at 30.06.2002 increased to Rs. 161.58 crores. The Company has not paid dividend since June 1998.
The Company failed to redeem the debentures which ought to have been redeemed in December, 1997 incurring disqualification of the directors of the Company under Section 274(1)(g) of the Act, from being appointed as directors of any other public company. The total amount payable to the debenture holders as at 30.06.2002 exceeded an amount of Rs. 8.65 crores.
The Company, instead of redeeming 5,00,000 preference shares, converted the same into Sterling Holiday Time Share Units at the cost of other time-share membe Rs. The Company had as at 31.12.2000 accepted fixed deposits from the public to the tune of Rs. 7.50 crores, but failed to repay the deposits on maturity to the depositors resulting in a large number of complaints preferred by the depositors with the Company Law Board (CLB). The CLB by an order dated 06.11.1998, directed the Company to repay the fixed deposits to the depositors in accordance with the scheme approved by it. However, the Company disobeyed the order of the CLB by not repaying the deposits as per the approved scheme, which would amount to mismanagement of the affairs of the Company. The petitioner launched criminal prosecution against the Company and its officers in default for non-repayment of the deposits in violation of Section 58A, despite the order made by the CLB.The Company failed or delayed in allotment of accommodation of the time share members, at several destinations in terms of the time share agreement, in spite of collecting monies from such time share membe Rs. The Company collected amounts for constructing various other resorts, which are not in operation on account of non-completion of construction, forcing the Company to cater those time-share members with the existing resorts.
The Company had invested in the shares of its group companies, viz., Sterling Holiday Finvest Limited, Sterling Holiday Home Finance Limited, Sterling Holiday Financial Services Ltd. and Sterling Middle East WLL to the tune of Rs. 3.27 crores as at 30.06.1999 with a meager return of Rs. 53,9807- and Rs. 2,200 for the years ended 30.06.1999 and 31.12.2000. These investments amounted to systematic diversion of the Company's funds.
As at 31.12.2000, the debts due to the Company under sundry-debtors amounted to Rs. 28.96 crores and the loans and advances recoverable amounted to Rs. 54.70 crores, which included an amount of Rs. 13.89 crores from Sterling Tree Magnum India Limited and Rs. 11.37 crores due from M/s Sterling Holiday Resorts International Limited (SHRIL). The Company failed to initiate any action to realize the outstanding dues from SHRIL. The chances of recovery of these advances are bleak. The interest amount due on inter-corporate deposits, financial institutions amounted to Rs. 46.87 crores. Thus, the Company could not recover the huge outstanding loans granted to its group companies and dues from sundry debtors and others, with the result the Company's, funds have been blocked, causing huge loss of interest. The Company could not meet the interest liability in favour of the banks, financial institutions and others to the tune of several crores, which resulted in winding up petitions against the Company at the instance of several of the creditors put of which some of the petitions are pending before the High Court of Madras. The provident fund and other statutory dues remained unpaid.
The Company had entered into an agreement with M/s Days Inn Worldwide Inc., USA for maintaining the various resorts of the Company, but the same has not been renewed by the Company, as provided in the agreement, which is prejudicial to the interest of the time shareholde Rs. The Company had violated the provisions of Sections 211, 217(2A), 217(3) 58A read with Rules 3A, 4 & 9 of the Companies (Acceptance of Deposits) Rules, 1975 ("the Rules). The statutory auditors in their report dated 30.03.2001 forming part of the annual report for the year ended 31.12.2000 have qualified their report on the following accounts: - o non-provision of interest on ICDs/Loans from banks, financial institutions, overdue interest; o non-payment of dues to Provident Fund and Employees State Insurance Corporation; o delay/non-payment of matured deposits and non maintenance of liquid assets under Rule 3A of the Companies (Acceptance of Deposit) Rules 1975 etc.
M/s Jagadeesan & Co., Chartered Accountants, pursuant to the orders dated 10.08.1999 and 10.03.2000 of the High Court of Madras made in CA No. 267/99 carried out the special audit of the Company and arrived at, inter-alia, the following conclusions: - (i) The Company needs to sell its excess assets towards discharge of its debts and liabilities.
(ii) The Company while dealing with its group companies failed to follow proper safeguards ensuring proper utility of the Company's funds for its business purpose.
(iii) The Company lacked the internal control and internal audit procedures.
(iv) The Company transferred revenue expenses to work in progress periodically but shown the same under "Miscellaneous Expenses", which is not in consonance with the accounting principle, and does not reflect the real position of the Company's assets.
(v) The board of directors of the Company should be strengthened to ensure that a court appointed director/directors takes effective part in the superintendence and control of the board of directors, protecting the general body of creditors and the time share owne Rs. (vi) The future prospects of the Company is solely dependent upon the earnestness of the Company to pay-off its debts, relieving itself of huge interest burden.
(vii) The advances made by the Company to its group companies must be realized to meet its secured and unsecured creditors and thereafter the liabilities of its group companies.
The learned Solicitor General, while concluding his arguments reiterated that the above state of affairs of the Company would justify the appointment of Government directors in order to - (a) safeguard the interests of members of the Company; (b) redress grievances of time share members for accommodation, (c) prevent oppression of minority shareholders of the Company, (d) safeguard the assets of the Company and prevent assets stripping by the present board of directors, (e) repay the public deposits, (f) prevent further mis-management, mis-application of funds, mis-utilisation of funds, mis-appropriation of funds, (g) restore and improve good corporate governance and prudential norms in the Company and (h) recover the funds which were invested in other group companies either as contribution to their equity or as loans and advances.
The learned Additional Solicitor General in support of his claim relied on the following decisions:Rohtas Industries Ltd. v. S.D. Agarwal 1969 Supreme Court 707 -to show that the Central Government may appoint one or more competent persons as inspectors to investigate the affairs of a company under Section 237, if the Central Government forms an Opinion that there are circumstances suggesting that the business of the company is being conducted with intent to defraud its creditors' members or any other persons, or otherwise for a fraudulent or unlawful purpose or in a manner oppressive to any member or that the company was formed for any fraudulent or unlawful purpose or that the persons concerned in the formation or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its membe Rs.Union of India v. Swadeshi Cotton Mills Co. Ltd. - to show that if the CLB, a specialized body with responsibility to watchdog corporate process, reaches a definite conclusion that the affairs of a company are being conducted in a manner oppressive to any member or in any manner prejudicial to the interests of the Company or the public interest, it may authorise the Central Government to appoint directors on the board of the Company.
Furthermore, in a company of considerable financial dimensions and involved in operations using public resources as investment, (it) naturally becomes the concern not merely of the Company Law Board but also of the economic process of the country in authorizing the Central Government for appointment of Government directo Rs.Government of India v. Leafin India Ltd. (2002) 38 SCL 121 - to show that when five of the directors had resigned and Managing Director was absconding it is clearly established that there is no board to conduct affairs of the Company and when there had been systematic diversion of funds by directors of the company through various front companies, the CLB authorised the Central Government to appoint five directors on the board of the company.
o Union of India v. Vikas WSP Limited 2004 CLC 1391 - to show that when the material placed before the CLB is such that a deeper probe into the affairs of the company is desirable in the interests of the company and the affairs of the company are not transparent and doubts have been created in the minds of share holders and public at large, the CLB authorised the Central Government to appoint directors on the Board of directors of the Company.
3. Shri P.H. Arvindh Pandian, learned Counsel and Shri N.R. Sridharan, Practicing Chartered Accountant and Authorised Representative of the respondents, while opposing the prayer for appointment of Government directors on the board of the Company, refuted the charges as either false or do not any longer exist. The Company is the market leader in time shares for the past several years and owns as many as twelve resorts to meet the needs of the time share membe Rs. While the promoters as at 30.06.2002 hold 50.99% of the paid up capital, the institutional investors 2.63% and 46.38% is held by the Indian public and othe Rs. The Company has been managed by a board of directors, being core professionals of merits are not relatives. The ICICI nominee who was on the board since 1996-97 to 2000-2001 is no more a director of the Company. The Company declared dividend during the years 1988-89 to 1995-96 at the rates varying from 10% to 35% aggregating 188% of dividend. The shares of the Company listed in the stock exchange were quoted during December, 2004 at the price ranging from Rs. 15.10/- to Rs. 26.80/-. The Company achieved several milestones and achievements by launching several products, operating a number of resorts as well as schemes and rendering professional services of catering the needs and necessities of the time share membe Rs. The Company's business strategy includes (a) delivery of high quality products enhanced by international affiliations and widening of such products; (b) marketing and expanding network of offices; (c) expansion of resort locations, and business management; (d) integration of branches, improving MIS systems etc. The Company owns more than 1000 apartments spread across the country and one lakh of customers are being offered affordable and hassle-free holidays in India as well as abroad through its several of the products, viz., Vacation Time Shares, Happy Vistas Holiday Units, Sterling Silver Streak Share Plan, Sterling Starter Holiday Plan, Sterling Millenium Club, Sterling Flexi Club Holiday Units Plan etc.
The Company emerged as the world's largest time share sellers, selling during the years 1995-96, 25,000 time share weeks and won several awards for several of its achievements. The Company entered into an arrangement with M/s Days Inn Worldwide Inc., USA for maintenance of the existing resorts, which, however, could not be renewed for various reasons. There has been no loss to the investors, no prejudice caused to the public by virtue of the statutory violations and there is no pending complaint from any depositor or investor and there has been no personal gain obtained by the directo Rs. In these circumstances, the appointment of Government directors on the board of the Company would affect the functioning of the Company. The learned authorized representative, in support of his claim, relied upon the Government's policy statements on the appointment of government directors on the board of directors of a company. Accordingly, it is necessary that the powers under Section 408 can be invoked by the Central Government only in those genuine cases, where minority shareholders can show prime facie with documentary and other evidence that there has been gross mismanagement or undue oppression requiring quick intervention and that for the proper management of the company, it is essential that the Central Government should appoint one or two directors on the board of the company as may be necessary in the interest of the company as a whole to improve its management. The mismanagement must be continuing at the time of making the order. The Calcutta High Court in Peerless General Finance and Investment Co. Ltd. v. Union of India (1991) 71 CC 300 held that "Powers under Section 408 of the Companies Act, 1956, can be exercised only when the appropriate authority is satisfied that the affairs of the company are being conducted in a manner prejudicial to the interest of the company and to public interest on the basis of sufficient evidence on record. Such a power cannot be exercised by the Central Government merely on the basis of an opinion that the affairs of the company are being conducted in a manner which was prejudicial to the interest of the company or the public. The meaning of the word "satisfy" cannot be equated with the word ''opinion". "Satisfy" in the context in which it is used, means that there must be sufficient evidence and the standard of proof that is required is the proof which ordinarily satisfies any unprejudiced mind beyond reasonable doubt, objectively and not subjectively.
Power under Section 408 cannot be lightly exercised, inasmuch as it affects the rights of the board of directors to run the affairs of the company under the ordinary law. Such action cannot be allowed to be taken on the basis of mere speculative findings." The apex court in South India Viscose Ltd. v. Union of India (1982) 52 CC 247, while examining the scope of Section 408 held that the exercise of the power under Section 408 has grave consequences and that must inevitably have a serious effect on the reputation and credibility of the management of the Company and, therefore, such power must be exercised very sparingly and only when the requisite conditions, viz., that the affairs of the company are being conducted in a manner which is oppressive to any members or in a manner which is prejudicial to the interests of the Company or to public interest are fully complied with.
The Central Government has power to take action under Section 408 only when the affairs of the Company are conducted in a manner prejudicial to the interests of the Company or to the public interest or in a manner which is oppressive to any members of the Company as held in Sakthi Trading Co. P. Ltd. v. Union of India (1985)57 CC 789.
Shri Sridharan, learned Authorised Representative, while meeting the charges leveled against the respondents submitted: The preference shares for an amount of Rs. 5 crores placed privately by M/s. Bajaj Auto Limited (BAL) were converted with its mutual consent into Sterling Holiday Time Share Units and accordingly time shares certificates were issued. BAL had waived the entire dividend amount of Rs. 2.97 crores and thus, this issue stands settled in full. The conversion of preference shares into time share units would not affect any time share members, especially when allotments for accommodation are made on a first-cum-first served basis in terms of the procedure evolved by the Company for reservation of accommodation. Furthermore, the overall occupancy of all the resorts put together is around 35% and, therefore, there is more than adequate scope to accommodate BAL holiday requirements. At the same time, BAL has not made use of the resort facilities. The provisions of Section 80A of the Act relating to redemption of irredeemable preference shares are inapplicable to the preference shares issued in favour of BAL, since the preference shares were issued as early as in the year 1996. However, as and when profits are accrued, the Company would create Capital Redemption Reserve in respeel of me preference shares already redeemed. The non-convertible debentures issued in favour of Can Bank Mutual Fund (CBMF); Bank of Punjab Limited (BPL) and Citi Corp Securities and Investments Limited (CCSIL) have been redeemed in part. The Company has entered into a Memorandum of Understanding (MOU) for repayment of the non-convertible debentures, which still remain unredeemed with CBMF and BPL separately.
The Company is negotiating with CCSIL for an amicable settlement by way of part payment of cash and partly by way of properties of the Company.
At present the Company is liable only to the extent of Rs. 4,31,375; Rs. 2.40crores and Rs. 2,87,60,000 in favour of CBMF, BPL and CCSIL respectively, as affirmed by the Chairman and Managing Director of the Company in his affidavit dated 11.02.2005. The Company is adhering to the terms of the MOU entered into with the respective debenture holders / credito Rs. The Company never stopped repayment to the deposit holde Rs. As on date, all the matured/claimed deposits have been fully repaid. The Company during the period between the year 2000 and October 2002 had received in all 66 complaints from the time share allottees which were promptly responded to the satisfaction of such custome Rs. The investigation report neither indicates any complaint received from the time share allottees, nor reveals any investigation conducted by the competent authority on any such complaint received from the time share allottees. Therefore, merely the complaints reportedly received from the time share allottees cannot be the basis for invoking the provisions of Section 408. The Company has developed several products for the benefit of time share allottees and their interests are always taken care by the Company, without giving room for any complaint. The application made by the Sterling Resorts Time Share Owners' Welfare Association ("the association") (C.A. No. 93/2003) for its impleadment as a party to the present proceedings does not lie, since the association has no locus standi to file an application under Section 408. An application can be made by not less than one hundred members of the Company or members holding not less than one-tenth of the total voting power therein. Consequently, the association members not being shareholders of the Company cannot make any such application.
The company petition is based on the qualifications made by the statutory auditors in their report dated 30.03.2001 on the accounts of the Company for the year ended 31.12.2000. The auditors' qualifications have arisen mainly because of the differences in perception between the board of directors and the statutory auditors and many of the qualifications are not really in contravention of the provisions of the Act, affecting the regular operations of the Company. Shri Sridharan, the learned Authorised Representative, in response to the qualifications of the statutory auditors, set out in the company petition reported as under : (a) The Company should make provision in the accounts only for "permanent fall in long-term investments" in terms of accounting standard 13. The board of directors of the Company was of the opinion that no provision need be made for other investments, as there was no "permanent fall in long-term investments". Accordingly, the Company did not make any provision for diminution in the value of investments at the relevant point of time.
(b) The Company already entered into arrangements with debenture holders for redemption of the debentures over a period of time and accordingly the Company would be in a position to redeem the debentures. By virtue of Section 274(1)(g) the directors became disqualified to be appointed as directors in any other public company. There is, however, no restriction in continuing the directorship in the Company. Even against this background, the directors have initiated necessary steps and reached settlement in majority of the debenture holde Rs. (c) The Company during the financial year ended 31.12.2000 had effected the change in the accounting policy in respect of time-share members on receipts basis, instead of accrual basis, resulting in reduction in income amounting to Rs. 7.35 crores. This change in the accounting policy became necessary for better depiction of the financial results of the Company.
(d) The Company during the year ended 31.12.2000 could not make provision of interest on inter-corporate deposits and loans taken from banks as well as financial institutions on account of the financial constraints faced by it. 1 lowever, the Company has been negotiating with the institutional creditors, banks and inter-corporate depositors for one-time settlement of the various liabilities.
(e) The Company already settled the Provident Fund; Employees State Insurance dues and other dues payable to the statutory authorities.
(f) All the matured/claimed deposits were fully repaid, by the Company. There are no pending complaints from any of the deposito Rs. The statutory violations reportedly committed by the Company relate to (a) violation of Sections 211, 217(3) and 217(2A); (b) non-compliance of Section 58A read with the Companies (Acceptance of Deposits) Rules, 1975 and (c) non-compliance of Section 292(1)(e) read with Section 292(4) and Section 370(1)(a) of the Act, which are essentially procedural issues. All these violations have already been duly compounded in accordance with Section 621 A. No one has been prejudiced on account of those reported violations.
The Company invested in the year 1996 to the tune of Rs. 8,27,702 in Sterling Middle East WLL (SMEW), Bahrain, its own subsidiary. SMEW was not initially performing well, but at present it has shown better results with operating profits. The performance of SMEW is expected to improve with substantial yield on the investment made by the Company, The Company had acquired during the year 1994-95 shares of Manchanda Resorts Private Limited (MRPL) for a face value of Rs. 45,65,000/- for the purpose of owning a resort in Kulu-Manali. This asset forms part of the Company's operation and the resort is contributing to the overall business of the Company. The Company made investments during the years 1994-95 and 1995-96 in its group companies, viz., (i) Sterling Holidays Finvest Ltd., (ii) Sterling Securities and Futures Limited; (iii) Sterling Resorts Home Finance Limited; and (iv) Sterling Holiday Financial Services Limited aggregating an amount of Rs. 1.67 crores.
These companies are Non-Banking Finance Companies (NBFCs) and their performance since the year 1998 has not been encouraging on account of overall recession in the economy and also of poor business faced by-:- the NBFCs. The Company invested to the tune of Rs. 1,05,00,000/- in the equity shares of M/s. ITC Agrotech Finance and Investments Limited.
This company has not fared well. Consequently, the Company made provision for diminution in value for the entire amount of investments in the books of account of the Company for the financial year ended 30.06.2002. All these investments were made in the normal course of business and in accordance with the provisions of the Act, with bonafide and genuine intention. The low level yield out of these investments is purely on account of the business risk faced by the respective companies. Thus, these investments would not amount to diversion of the Company's funds.
The Company had extended an advance amount of Rs. 11.96 crores to Sterling Holiday Resorts (International) Limited (SHRIL) for genuine and bonafide business purpose. SHRIL has huge fixed assets and therefore, the recovery of the outstanding advances will not pose any problem to the Company.
The Company faced as many as 13 winding up company petitions at the instance of its creditors out of which only 2 company petitions are presently pending and the Company could either settle or enter into appropriate Memorandum Of Understanding with the remaining credito Rs. The Madras High Court appointed M/s. Jagadeesan and Co., Chartered Accountants on account of the various winding up petitions, to carry out an independent due diligence audit of the Company. In view of the serious objections filed by the Company on the report of the Special Auditor, the High Court, in order to get clear facts directed M/s.
Fraser and Ross, Chartered Accountants to submit a report on the same reference. M/s. Fraser and Ross Chartered Accountants seemed to have concluded that the report submitted by M/s. Jagadeesan and Co., are not based upon directions given by the High Court. However, in view of the special audit reports, the winding up petitions came to be withdrawn.
The Company is unable to declare dividend since the year 1997 due to recession in the tourism industry, apart from the other economic facto Rs. The Company has been earning operating profits during the year ended 31.03.2000, 30.06.2002, 30.09.2003 and 31.03.2004, but incurring losses on account of interest burden, depreciation etc. The accumulated losses suffered by the Company and its inability to pay dividend cannot be a ground for the appointment of government directo Rs. The decision of the -apex court in Rohtas Industries v. S.D. Agarwal (supra) is in relation to the power of inspection under Section 237 and is not applicable to the facts of the case. Similarly, the decision in Government of India v. Leafin India Limited (supra) does not benefit the petitioner. For these reasons, the learned Authorised Representative sought to dismiss the company petition.
4. The learned Additional Solicitor General in his rejoinder submitted:- The serious observations of the inspecting officials and the statutory auditors have been brushed aside on the ground that they relate to procedural issues. The investment and other decisions cannot be justified on the ground of prudent business decision of the board of directors of the Company. The Company ought to have taken corrective action in realization of the investments and advances, closure of the huge outstandings and in pursuing the affairs of the Company in the interests of its membe Rs. The observations and conclusions of M/s Jagadeesan & Co., Chartered Accountants have not been erased by M/s Fraser & Ross, Chartered Accountants and the irregularities set out in the company petition remain unexplained. Thus, the affairs of the Company are not being prudently carried in the interests of the Company. There must be some checks and balances over the affairs of the Company, by appointment of a couple of directors on the board of the Company.
5. I have considered the pleadings and elaborate submissions of the learned Senior Counsel. The issue before me is whether the Central Government be authorized to appoint directors on the board of directors of the Company on the facts and in the circumstances of the present case? Section 408(1) dealing with the powers of the Central Government to prevent oppression and mismanagement in the affairs of the company, empowers the Company Law Board to direct appointment of directors by the Central Government on the board of the company, in order to safeguard the interests of the company or its shareholders or the public interest. The CLB, on a reference made to it by the Central Government or on an application of not less than one hundred members of the company or of the members of the company holding not less than one-tenth of the total voting power therein to make such appointment.
The powers under Section 408 can be exercised provided the CLB is satisfied that the affairs of the company are being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or in the public interest, as held in South India Viscose Ltd. v. Union of India and Peerless General Finance and Investment Co. Ltd. v. Union of India (supra). The Delhi High Court while considering the powers of the Central Government to take action under Section 408 in Sakthi Trading Co. P. Ltd. v. Union of India (supra) held that the powers under Section 408 being preventive in nature should be exercised in order to see that in future the affairs of the company are conducted in a manner which are not prejudicial to the interests of the company, its members or to the public interest. The requirement of making an enquiry under Section 408, can relate to past acts too, especially when, such past conduct, whose impact continue or would reasonably be assumed to continue to operate in a manner prejudicial to the interests of the company or public interest, as held by this Board In re: Bilaspur Spinning Mills and Industries Limited. In this background, the prayer made by (a) The Sterling Resorts Time Share Owners' Welfare Association to implead itself as a party to the present proceedings; and (b) Central Government to appoint directors on the board of the Company must be considered.
The Sterling Resorts Time Share Owners' Welfare Association members are admittedly not shareholders of the Company. By virtue of Section 408, apart from the Central Government, it is only the requisite number of members, viz., one hundred members of the Company or the members holding not less than one-tenth of the total voting power therein are empowered to invoke Section 408. The Association failed to satisfy this statutory requirement. Moreover, the present company petition is not under Section 397 or 398, but under Section 408 and therefore, the Association cannot invoke the provisions of 405 to implead itself as a respondent to the proceedings before me. Hence the prayer made by the association is declined.
The grounds set out for invoking the jurisdiction of Section 408 in the present case by the Central Government are manifold. They include - (i) non-repayment of matured deposits, (ii) non-allotment of time-share accommodation to members; (iii) contravention of the provisions of the Act; (iv) diversion of funds and (v) other irregularities and financial mismanagement in the affairs of the Company as borne out by the report of the statutory auditors of the Company and the special audit report of M/s Jagadeesan & Co., Chartered Accountant etc.
It is on record that the Company, as on 30.11.1998 had 2,530 deposits with an aggregate deposit amount of Rs. 422.57 lakhs. The Company was unable to repay the matured deposits due to liquidity crunch faced by it. The CLB received a number of complaints from depositors under Section 58A(9) of the Act for non-repayment of matured deposits, upon which by an order dated 06.11.1998, the Company was directed to repay all the deposits together with interest thereon within the period specified therein. The Company failed to repay the deposits in full in terms of the order dated 06.11.1998. However, the Chairman and Managing Director of the Company in his affidavit dated 22.06.2005 affirmed that the Company has repaid all the matured/claimed deposits except the deposit amount of Air Force Group Insurance Society, New Delhi. It is observed that the Company had entered into u Memorandum of Understanding with Air Force Group Insurance Society on 02.08.2002 for repayment of the deposit amount of Rs. 2.34 crores over a period of 34 months. Accordingly, the Company has settled the entire deposit amount along with interest due and payable to Air Force Group insurance Society, as seen from the "No Due Certificate" dated 13.07.2005 issued by latter. It is reported that the unclaimed deposits would be transferred to the Investors Education and Protection Fund, in accordance with the relevant provisions of the Act. Thus, it is seen that the Company has repaid all its deposits, of course, not within the time stipulated by the CLB in its order dated 24.12.1998. Similarly, the complaints of the time-share members are remedied by the Company, the fact of which remains undisputed. The Company being in service industry, is bound to receive complaints from its time share members, but at the same time, heavy duty is cast on the Company to meet the expectation of such membe Rs. It is on record that the Company has been introducing new products and upgrading its resorts for the benefit of its customers and is genuinely endeavouring to achieve its objects.
The inspection of the Company's books of account and other records reveal several statutory contraventions, as detailed here below: (a) The company had advanced a sum of Rs. 40 lakhs to M/s Sterling Interiors and Designers Private Limited, without any board resolution in violation of Section 292(1)(e) and without any special resolution as required under Section 370(1)(a).
(b) The Company had accepted an amount of Rs. 1,18,0007- by way of deposits during the period between 09.10.1997 and 24.10.1997 when no advertisement or statement in lieu of advertisement was in force in violation of the Companies (Acceptance of Deposits) Rules, 1975.
(c) The board of directors failed to include in their report forming part of the balance sheet as at 30.06.1998, particulars of the names and nature of duties of its employees in violation of Section 217(2 A).
(d) The Company had not deposited or invested 15% of its deposits at the end of 31.03.1997, 31.03.1998, 31.03.1999, 31.03.2000 and 31.03.2001 in any scheduled bank, Government securities, as required under Rule 3A of the Companies, (Acceptance of Deposits) Rules, 1975.
(e) M/s Sterling Resorts and Hotels (India) Limited was amalgamated with the Company, by an order dated 25.04.1995 of the Madras High Court, but the order approving the scheme of amalgamation was not annexed to the Memorandum of the Company in violation of Section 391(4).
(f) The board of directors failed to give the fullest information and explanation to the adverse remarks made by the auditors in their reports on the Company's accounts for the year ended 30.06.1998 and 30.06.1999 on innumerable accounts, resulting in violation of Section 217(3), as set out herebelow: o No provision has been made for the diminution of Rs. 97,25,554 in the value of permanent investments (Note No. 10).
o No provision has been made for interest of Rs. 2,48,36,637/-due on inter-corporate deposits accepted by the Company (Note 17).
o Advance subscription towards customer facilities, referred to under accounting policies have been shown separately instead of under current liabilities and provisions, which is in variance with the form prescribed in Schedule VI to the Act (Note 6).
o New project expenses referred, to under accounting policies have been shown under current assets instead of miscellaneous expenditure (Note 14(a).
o Adequate liquid assets, required under the provisions of Rule 3A of the Companies (Acceptance of Deposits) Rules 1975 have not been maintained. Acceptance/Renewal of deposits aggregating to Rs. 1,18,000/- during the period from 09.10.1997 to 24.10.1997 have been done after the current of the previous advertisement had expired.
o There has been some delay and default in repayment of deposits on maturity when claimed by the deposito Rs. o Provident fund and the employees state insurance dues aggregating to Rs. 1,14,91,630/- have not been deposited with the appropriate authorities.
o The Company has an internal audit department in carrying out the internal audit of the Company's books of accounts, the scope of whose work needs to be strengthened so as to commensurate with the size of the Company and nature of its business.
o The company invested in 190 equity shares of M/s. Behrain Diners Rs. 50/- each in M/s., Sterling Middle East, WLL, a foreign company.
The auditors in their report dated 06.10.1998 on the accounts of M/s. Sterling Middle East WLL have expressed a view referring to the note No. l to the financial statements which discussed factors that raised doubts about the ability of the Company to continue as a going concern: o Provision has not been made in the accounts for the interest on inter - corporate deposits.
o Provision has not been made in the accounts for the penal interest payable to some banks/financial institutions and other financial companies: o Provision has not been made in the accounts for diminution in the value of investments to the extent of Rs. 1,27,04,937/-.
o Provision has not been made in the accounts for additional amounts payable to provident fund authorities for belated payment of contributions.
o Provision for the gratuity and superannuation, provision made during the year towards liability for the gratuity and superannuation benefit to the employees has not been funded with the Life Insurance Corporation of India (Note No. 8, Schedule 14).
o In respect of Noida property under lease, the agreement provides for the determination of lease with certain penalities provided in the agreement in the event of default in the payment of the lease premium. There has been default in the payment of lease premium and the company has been informed that the enforcement clause will be waived and the formal letter is awaited (Note No. 9 (iii).
o The originals of the title deeds of various properties have been deposited with the various bankers and financial institutions as security for the loan facilities availed from them and relative entries for the charges were made in the register of charges. The original title deeds of various properties have not been verified by the auditors, since they have been deposited with the various bankers and financial institutions as security for the loan availed by the company (Note No. 9 (iv).
o Certificates of the confirmation of balances as at 30.06.1999 have not been received from the Bank and financial institutions (Note No. 12 (a).
o Letters from parties confirming balances have been forwarded and replies are yet to be received (Note No. 12(b).
o A sum of Rs. 2,47,62,531/- to suppliers of goods and services remaining unadjusted due to non completion of supplies of goods/services, mainly on the account of suspension of projects for whom the supplies/services are intended and will be capitalised on completing the projects (Note No. 13(11).
o An amount of Rs. 10,88,11,506/- ( Rs. 24,22,79,287/- due from M/s.
Sterling Holiday Resorts International Limited in respect of certain loans and capital work-in- progress transferred to them and advances made to them for expenditure, and these have been considered as good and recoverable as the company is in the process of taking back the possession of the lands and other fixed assets transferred to them.
The Company estimates that the value of such assets will adequately cover the total amount due from the other company taking in account certain properties to be given to the company to be adjusted against advances (Note No. 13 (III).
o Item (i), (iii) and (vi) above are supported by sale agreements for certain properties in favour of the company, valuation report by an approved valuer and legal opinion to the effect that the company has acquired perfect marketable title to these properties for its development activities (Note No. 13 (VII).
o A sum of Rs. 7,35,85,032/- is due from a company in respect of advance given to it for the processing of raw cashew nuts for export. The company contemplates initiation of criminal proceedings against the party as advised by the counsel who is of the view that the company will be able to recover the amount as there has been wrongful diversion of the goods of the company. The defendant company is now negotiating for a settlement and hence, the amount is considered good and recoverable (Note No 13(iv).
o An amount of Rs. 4,15,17,437/- is due from the resort companies for the amount advanced to them for maintenance of the resorts. In view of the good improvement in the operational results of the resorts, the company is of the view that it will be in a position to recover this amount and is hence, considered good and recoverable (Note No 13(v).
o The projects are put on hold and are to be continued after improvement in the present economic climate in India. The company is of the view that there is no deterioration in the constructions shown under work-in-progress and its present value will not be less than what has been stated in the balance sheet (Note No 14(b).
o The amount due to Small Scale Industrial Units has not been identified in the absence of detail (Note No 15).
o The assets of the company have not been covered by Insurance against any risk excepting motor vehicles. While some of the vehicles are covered under Comprehensive Risk Policy, the other vehicles are covered against third party liability as required by the Motor Vehicles Act (Note No 20).
o Arrears of dividend on preference shares Rs. 1,70,00,000 ( Rs. 85,00,000/-)(Note No 22).
o No provision has been made for the diminution of Rs. 1,27,04,937/- ( Rs. 97,25,554/-) in the value of the long term investment (Note No 10).
o On account of non provision of interest on inter corporate deposits aggregating to Rs. 5,14,68,625/-(including Rs. 2,48,36,637/- relating to previous year) penal interest due to banks amounting to Rs. 34,04,000/-, penal interest to financial institutions amounting to Rs. 5,22,26,000/- and to others amounting to Rs. 19,73,000/-referred to in Schedule XIV resulted in the under statement of loss by Rs. 13,17,76,562/- overstatement of assets by Rs. 1,27,04,937/- and under statement of liabilities by Rs. 11,90,71,625/-(Note No. 18).
o Interest on term loans and other borrowings relating to projects are capitalized.
o Advance subscription towards customer facilities referred to under accounting policies has been shown separately, instead of under current liabilities and provisions, which is not in the form prescribed in Schedule VI to the Act.
o New project expenses referred to under accounting policies have been shown under current assets, instead of miscellaneous expenditure (NoteNo. 14(a).
o Adequate liquid assets required under the provisions of Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975 have not been maintained.
o There has been delay in repayment of matured deposits. The Company law Board Southern Region Bench Chennai by its order dated 06.11.1998 permitted to the Company to repay the deposits together with the interest at 12% per annum from the date of maturity to the date of repayment in the phased manner and this has not been adhered to.
o Provident Fund and Employees State Insurance Dues aggregating Rs. 1,61,80,820/- have not been deposited with the appropriate authorities. The Asst. provident Commissioner has granted time for payment in instalments subject to payment of additional amount for belated payment.
o There were no undisputed amounts payable in respect of Income Tax, Wealth Tax, Customs Duty and Excise duty outstanding for a period of more than six months from the date they became payable. Sales Tax demand amounting to Rs. 66,842/- is outstanding for the period of more than six months.
(g) The balance sheet of the Company as at 31.03.1997, 31.03.1998 and 31.03.1999 did not disclose the true and fair view of the affairs of the Company on account of non-compliance with the requirements of Section 211 as under: o an amount of Rs. 24,18,45,412 is shown as sales less returns in the balance sheet as at 30.06.1998; as the Company had been rendering services, the gross income received from services rendered/supplied should have been shown as income as required under Section 211 read with part II of Schedule VI of the Act.
o The advance subscription towards customer facility referred to under accounting policies had been shown in the Company's balance sheet as at 30.06.1998 and 30.06.1999 separately instead of under "current liabilities and provisions", in variance with the norms prescribed in . Schedule VI of the Act (Note 6).
o No provision was made for diminution of Rs. 97,25,554/- in the value of permanent investment and the Company's accounts for the years 30.06.1997, 30.06.1998 and 30.06.1999.
o Certificate of confirmation of balances had not been received from certain financial institutions and banks in respect of the amounts due to them for the years ended 31.03.1998 and 31.03.1999.
o The sale deeds were not registered in favour of the company in respect of certain properties acquired by the company amounting to Rs. 24,48,10,170/- and were still pending.
o New project expenses referred to under Accounting Policies were shown under "Current Assets" instead of showing under the head "Miscellaneous Expenditure".
o Advances amounting to Rs. 2,47,62,531/- to suppliers of goods and services were not adjusted as on 30.06.1998 and 30.06.1999.
o A sum of Rs. 57,08,40,420/- and Rs. 39,79,30,442/-respectively had been shown as "Sundry Debtors" in the balance sheets as at 30.06.1997 and 30.06.1998, but no classification had been made as debtors fully secured and debts considered good for which the company had no security other than the debtor's personal security as required under Part I of Schedule VI of the Act.
o The Company had shown an amount of Rs. 150,57,11,232/-and Rs. 122,15,99,235/- respectively in its balance sheets as at 30.06.1998 and 30.06.1997 on account of secured loans; but the company had not shown separately the interest account under the head secured loans and the nature of security offered in each case; and o the Company in its balance sheet as at 30.06.1998 under item No. 17 had stated that no provision had been made for interest of Rs. 2,48,36,687/- due on inter-corporate deposits accepted by the company.
The Company and its officers in default have compounded the above violations in terms of Section 621 A. Though the violations which have been compounded are procedural in nature, yet the consequence of those statutory violations and irregularities would continue to operate in a manner prejudicial to the Company. The instances of qualification by the statutory auditors enumerated hereabove, many of which admittedly formed part of their report for the previous years too, as borne out by the averments contained in para 20,1 (page 53) of counter statement of the respondents. These violations would indicate that all is not well with the management that the respondents are not serious about rectification of the irregularities and that they have not been carrying on the affairs of the Company in strict compliance with the statutory provisions of the Act. It shall be borne in mind that for carrying out the objects to safeguard the interests of the Company, it must be ensured that the shareholders are given a reasonable return, workers are paid their dues and the applicable statutes and regulations are properly complied with, which are not found duly satisfied by the board of directors of the Company. Against this background, the Company with considerable financial dimensions and involved in operations using public resources, it becomes the concern of not merely of the CLB, but also of the economic process of the country as held in Union of India v. Swadeshi Cotton Mills Co. Ltd. (supra) to protect the interests of the shareholders and public interest.
The grievance of the Company with regard to the special audit report of M/s Jagadeesan & Co., Chartered Accountants is that they have not answered many of the issues referred to them as part of terms of reference, but made uncalled for suggestions in their report. M/s Fraser &. Ross, Chartered Accountants, in their report placed before the Madras High Court reported that the special audit report of M/s Jagadeesan & Co. is not based on the direction given by the High Court.
It shall be borne in mind that many of the remedial measures suggested by M/s Jagadeesan & Co., whether warranted or not, assume relevance in the light of several of the existing irregularities. They are - o The Company needs to sell its excess assets towards discharge of the liabilities.
o The Company, while entering into transaction with its groups companies must maintain at arms length.
o The Board of directors should be strengthened by appointing independent directo Rs. o The future prospects of the Company are dependent upon its paying off its dues to the banks, financial institutions and other credito Rs. o The advances made by the Company to its group companies must be realised to pay off the secured, unsecured creditors, etc.
The Company had invested monies in the shares of its group companies as well as other companies. The aggregate investments outstanding during the years ended 30.06.1997; 30.06.1998; 30.06.1999, 31.12.2000, 30.06.2002, 30.09.2003 and 31.03.2004 accounted for Rs. 3.41 crores, Rs. 3.30 crores, Rs. 3.28 crores, Rs. 3.28 crores, Rs. 3.26 crores, Rs. 2.21 crores and Rs. 2.21 crores respectively. However, it is observed that provision has been made in respect of these investments of Rs. 2.20 crores for diminution in value as at 31.03.2004, showing the balance of investments of only Rs. 33,000/-. Thus, the entire investments made by the Company over a period of time are immensely doubtful of realization causing enormous prejudice to the interests of the shareholders and accordingly the Company's profits stand dwindled, at the cost of the shareholde Rs. The yield on these investments amounted to only Rs. 8,01,905/-, Rs. 1,00,296/-, Rs. 53,980/-, Rs. 2,200/-, Rs. 1,100/-, Rs. 770/- and Rs. 770/- for the years ended between the 30.06.1997 and 31.03.2004 respectively. It is far from doubt that the return on investments made for all these years is of little significance, when compared to the amount of investments made by the Company. The investment decision is, no doubt, a commercial decision of the board of directors of Company, yet, its never yielding investments resulted in the affairs of the Company being conducted in a manner oppressive to the members and prejudicial to the interests of the Company, warranting immediate remedial measures as held in Union of India v. Swadeshi Cottons Mills Co. Ltd. (supra).
There are huge outstanding advances aggregating Rs. 98.85 crores due to the Company, as reflected in the annual report for the year 2003-04, out of which Rs. 66.43 crores are doubtful of recovery, as reported by the statutory auditors in their report dated 28.06.2004. All these advances, save an amount of Rs. 13.89 crores due as at 31.03.2004 from Sterling Tree Magnum India Limited are found reflected in the balance sheet of the Company, since the year ended 30.06.1999. These sticky advances without any sign of recovery for the past several years, apart from costing heavily the shareholders, are oppressive and prejudicial in nature, warranting immediate corrective measures. The Company has not indicated any plan of action in realization or regularization of these outstanding advances. The interests of the Company and its shareholders could be safeguarded only when timely and appropriate steps are initiated in this behalf.
The Company is at present indebted to the tune of several crores of rupees. The balance sheet for the year ended 31.03.2004 discloses secured loans of Rs. 155 crores and unsecured loans of Rs. 24 crores, as against the outstanding loans during the previous period, as detailed hereunder:----------------------------------------------------------PERIOD SECURED LOANS UNSECURED LOANS (Rs. in crores) (Rs. in crores)As at 30.09.2003 148 23.49As at 30.06.2002 143 19.58As at 3 1.12.2000 108 18.00As at 30.06.1999 193 17.33As at 30.06. 1998 159 16.59As at 30.08.1997 122 30.00---------------------------------------------------------- The future prospects of the Company and its shareholders largely dependent upon its plan of action in liquidating its huge liabilities.
The respondents are reportedly negotiating with the banks for one time settlement of the outstanding dues, but there has been increase of the liabilities from time to time. The Company has entered into settlement with debenture holders, but the debentures still remain unredeemed in full. The operating profits of the Company are inadequate to meet the existing liabilities. The networth of the Company got eroded. The Company admittedly could not declare dividend since the year 1997. The Company and its shareholders would gravely be prejudiced and financially affected on account of the investments with little yield, sticky advances and multiplying loans, without any concrete plan to meet its onerous commitments, attracting the preventive jurisdiction of the CLB under Section 408. The present state of affairs of the Company, justifying the conclusions of M/s Jagadeesan & Co., would create doubts in the minds of the shareholders and public at large, in which case, there is every justification to authorize the Central Government to appoint directors on the. board of the Company as held in Union of India v. Vikas WSP Limited (2004) CLC 1391. The Madras High Court, while considering the power of the Central Government under Section 408 in S. Ashok v. Tamilnadu Mercantile Bank Ltd. (2005) 66 CLA 473 held that "The power conferred on the Central Government under Section 408 of the Act is intended to effectively safeguard the interest of the company, its shareholders and the public interest and to prevent oppression and mismanagement. Thus, the powers conferred under Section 408 are extraordinary in nature as the said powers require the Central Government virtually to step in and interfere with, the day-to-day management of the company through its nominated directors in the case of oppression or mismanagement or a complaint that the company is being managed in a manner prejudicial to the company's interest or public Interest.
I, therefore, find justification in the prayer of the Central Government that to prevent further erosion of the funds of the Company, to recover and realise the sticky advances, investments and pay-off or reduce the outstanding dues, Government directors should be appointed.
It would be adequate, in my view, if two directors are appointed on the board of the Company by the Central Government, who will along with the existing directors take corrective steps and manage effectively the affairs of the Company, removing the prejudices faced by the Company arid its shareholde Rs. Accordingly, I direct the Central Government to appoint two directors on the board of directors of the Company for a period of two years from the date they assume charge. With these directions, the company petition and the application (CA 93/2003) stand disposed of.