ORDER
1. Urban Improvement Company Private Limited, New Delhi (hereinafter referred to as “the company”) was incorporated in 1963, with the main object of development of residential colonies. A colony with an area of about 434 acres named “Greenfields Colony”, situated in district Faridabad, was to be developed by the company. The company is a closely held one with only nine shareholders. However, since no worthwhile progress had been achieved even though a large number of plots had been booked and advances taken from the public and for other reasons, the Company Law Board under successive orders beginning from 1976, had been appointing Government directors in this company under the provisions of Section 408 of the Companies Act, 1956 (hereinafter referred to as “the Act”). In 1976, originally, the Company Law Board had invoked its powers under Section 408 of the Act having regard to the various allegations against the management including its indifferent attitude towards development of the colony and diversion of funds through investment in and loans to its directors/sister concerns. The Company Law Board, vide its latest order dated June 10, 1988, directed appointment of seven Government directors under Section 408 of the Act in the said company, having regard to the totality of the circumstances including the stage of development and the need for the company to successfully pursue the law suits pending against the shareholders or companies in which the shareholders or their relations are interested parties, and expressed the view that involvement of shareholders in the management of the company would be prejudicial to public interest, the interest of the plot-holders and the company. In terms of the
aforesaid order of this Board dated June 10, 1988, the tenure of the Government directors is expiring on June 21, 1991. The Central Government, in the Department of Company Affairs, have made a reference dated April 23, 1991, under Sub-section (1) of Section 408, to this Board to consider and decide the appointment of such number of Government directors, and for such period as may be deemed fit to effectively safeguard the interest of the company, the plot-holders and public interest, inter alia, on the grounds, namely :
(i) that the company has since been making steady profits and has been able to bring down the accumulated loss to Rs. 30.34 lakhs by the end of December, 1990. The loss by the end of March, 1991, is estimated at Rs. 29 lakhs ;
(ii) that the company has filed law suits against the erstwhile shareholder-directors or companies owned by or in partnership owned by them, in which they have pecuniary interest (a list of the five cases filed against them has been enclosed with the reference). A total sum of Rs. 13.73 lakhs, belonging to the company, was diverted by these parties. Besides, the company is involved in litigation with a number of plot-holders, who have refused to clear their dues within permissible periods, leaving no option to the company but to cancel their allotments. In February, 1991, the company has filed a writ petition, in public interest, in the High Court of Punjab and Haryana for not clearing the zoning/service plans of the colony by the Government of Haryana;
(iii) that the original works relating to development of internal services such as laying and construction of roads, storm water drains, sewerage and water supply are complete in all respects. Ninety five per cent. of electrification works are also complete. The Government directors are well-equipped to take the project to its successful culmination ;
(iv) that the shareholders of the company do not take any interest in its affairs and barring a few occasions, the quorum has never been complete in any of the annual general meetings and every year the company has to take recourse to the provisions of Section 167 of the Companies Act, 1956, to comply with the mandatory requirements of the law ;
(v) that the relations between the plot-holders (numbering about 3,500) and the Government directors are excellent. They have reposed their faith in the existing company management and the future of the company and its plot-holders is safe in the hands of the Government directors ; and
(vi) that in view of the totality of the circumstances, reversion of the company to the erstwhile shareholder-directors will seriously jeopardise the interest of the plot-holders as also the interest of the company and public interest.
2. Pursuant to the aforesaid reference, a notice was issued by this Board to the company, the seven Government directors, Greenfield Plot-holders’ Association and nine shareholders of the company, along with a copy of the reference made by the Central Government.
3. Replies have been filed by the company, Mrs. Kanta Grover, Government director and senior vice-president of the Greenfields Plot-holders’ Association and Lt. Genl. R.A. Loomba, another Government director, in support of continuing the appointment of Government directors. Mrs. Grover has emphasised that reversion of the company to the shareholder-directors will be a retrograde step and will result in the company relapsing into its original sorry state of affairs and will put in jeopardy the genuine interest of the company as well as its 3,500 odd plot-holders. The Plot-holders’ Association, in its reply, has suggested that the strength of the new board of directors be kept to the minimum, say, three directors to bring about economy in expenditure and one representative of the Association be also appointed on the board of the company. Two affidavits dated May 25, 1991, and May 30, 1991, have been filed on behalf of Shri Prakash B. Dialdas, a shareholder holding two shares in the company, opposing the appointment of Government directors under Section 408 of the Act. In the affidavit dated May 25, 1991, it is stated that the present board of directors have not acted in the interest of the shareholders, the company and the plot-holders and have misconducted its affairs. Its existing auditors, Sinha and Sinha Co., chartered accountants, were removed and they have filed a writ petition in the High Court. It is also stated that Shri Dialdas has arrived at an agreement with First Custodian Fund Ltd. (hereinafter referred to as “the FCFL”) under which the FCFL has agreed to take over the majority control of the company and has an option to purchase the balance shares of the subject-company. The FCFL has promised to bring proper professional management to the company and to take all necessary steps to ensure that the interests of the company, the existing plot-holders and the shareholders are protected. In regard to the pending suits against the shareholder-directors and their firms/companies, the FCFL has agreed to bring in funds to the extent involved in the suits (Rs. 13.73 lakhs) by way of an interest-free loan to the company pending decision in the suits, if this is made a condition in the order of this Board. Further, the FCFL has promised to complete the development of the land and to assist the plot-holders to obtain loans from housing finance institutions. It is also stated that the FCFL is willing to abide by any reasonable condition/direction that may be imposed by this Board and will be agreeable to one representative each of the plot-holders, the Government of Haryana, and one independent person (other than any present member of board of directors) may also be inducted on the board
of directors. In the affidavit dated May 30, 1991, it is stated on behalf of Shri Prakash B. Dialdas that the present management has forfeited the plots without any reasonable cause and disposed of them in a manner that raises many questions. Allegations were also made about the sale of plots Nos. 59 and 60 in Ward 1-B at Adipur, admeasuring 2,527 and 2,669 sq. yds respectively, which were sold by the company recently at a price of Rs. 90 per sq yd., when a confirmed offer of Rs. 105 per sq yd., accompanied by a bank draft was available. Similarly, Green Park Land at Delhi, which is shown to have fetched Rs. 2 lakh’s only, is in reality worth at least ten times the recorded value. A copy of the probate, obtained from the Bombay High Court, dated June 23, 1990, in respect of the will of the late Bhai Pratap Dialdas, holding 251 shares in the company, appointing Mrs. Mohini Mohan Assumal, as the executrix of the said will, was also filed, claiming that Shri Prakash B. Dialdas, the nephew of Bhai Pratap Dialdas, is the owner of 95 per cent. of the shares of the company.
4. The matter was heard on May 27 and 31, 1991. The replies filed by all the parties were exchanged with each other, as directed by this board. At the hearing, Shri Ashok A. Advani, Advocate, appearing on behalf of Shri Prakash B. Dialdas, submitted that, on the grounds on which the reference has been made by the Central Government, the provisions of Section 408 of the Act cannot be invoked. He also submitted that the company has not yet made available its balance-sheet for the year ending March 31, 1991, and the mere fact that the company is making profits is no ground for appointing Government directors. In regard to the pending law suits, he submitted that the FCFL is prepared to advance loan for the amount for which these suits are pending against the shareholder-directors or the company/firms in which they are interested. He also submitted that, for the last several years, the company has been stating that the development works of the colony are complete and that no development work was undertaken during the tenure of the present directors. Once the FCFL becomes a shareholder in the company, in respect of which transfer deeds will be filed shortly, the new shareholding company will take interest in its affairs. He also referred to the sale of actionable rights of 14 plots at Gandhidham (Gujarat), sold for a paltry amount. He further referred to the sale of two industrial plots at Aditpur and suspected that the sale price received by the company is much less than the market rates. Shri Advani also submitted that he may be allowed to inspect the company’s records so that he may be able to give details about the manner in which the present directors have been conducting its affairs. He also prayed that Sinha and Sinha Co., chartered accountants, be allowed to place such facts, as are in their knowledge, on record and that they may be issued notice in these proceedings.
Shri Advani also submitted that the company has sold plots and thereby frittered away the assets of the company. He prayed that the management of the company be directed that the company may not dispose of its assets. Shri Advani relied on the cases of Sakthi Trading Co. P. Ltd. v. Union of India [1985] 57 Comp Cas 789 (Delhi), Vinod Kumar v. Union of India [1982] 52 Comp Cas 211 (Delhi) and South India Viscose Ltd. v. Union of India [1982] 52 Comp Cas 247 (Delhi). He observed that the Government directors cannot be heard in these proceedings. While concluding his arguments, he submitted that in case this Board decides to invoke the provisions of Section 408 of the Act, only three directors be appointed representing the plot-holders, the Central Government and the Government of Haryana. He was also not averse to any order that may be passed to protect the interest of the plot-holders and the shareholders.
5. Shri K.S. Bhatnagar, a Government director appearing on behalf of the company, stated that the Greenflelds Colony has 3,465 residential plots and 246 commercial plots (covering an area of about 244.50 acres). Considering the average price of Rs. 800 per sq yd. for residential plots and Rs. 2,000 per sq. yd. for commercial plots, the value of the plots comes to about Rs. 99.14 crores. In addition, the colony has a cinema plot whose value will be about Rs. 98 lakhs. He further submitted that, during his tenure as part-time chairman, the company has made steady progress and has been able to reduce its accumulated losses as under :
Financial year
Operating profits (+)
loss (-) for the year(Rs. in lakhs)
Accumulated losses(Rs. in lakhs)
1985-86
(+) 0.11
39.65
1986-87
(+) 1.36
39.04
1987-88
(+) 16.06
30.71
1988-89
(-) 1.80*
32.53
1989-90
(+) 7.55
31.80
1990-91
(+) 16.20*
22.95
(unaudited)
*Loss for the year 1988-89 and consequently, increase in accumulated loss as on March 31, 1989, was on account of provision for Rs. 11.88 lakhs made for the royalty payment to the Haryana State which was not accepted by the income-tax authorities and was, accordingly, reversed in the accounts of 1990-91.
6. Shri Bhatnagar further submitted that the original development work in the colony is more or less complete and emphasis now is on the maintenance of the completed works to keep them safe from undue damage/deterioration. The installation of transformer sub-stations, which had earlier been put off intentionally on security considerations, is on hand. The only part which would then be left over is the construction of 66 KV sub-station in the colony, for which requisite land has been provided to the Haryana State Electricity Board (HSEB) and the HSEB propose to include it in the ensuing year’s budget. He further stated that the zoning and service plans of the colony have not yet been approved by the Government of Haryana in spite of best efforts and the company has filed a writ petition in the High Court at Chandigarh, which is pending. Once these plans are approved, the building activity can start. He also stated that the surplus funds of the company have been invested in scheduled Government banks, UTI, SBI and PNB mutual funds. He further stated that the shareholders of the company do not take interest in the affairs of the company and the last annual general meeting for the financial year 1989-90, held on December 29, 1990, had to be adjourned for want of quorum and like in the past years, only one shareholder was present. Consequently, an application has been made under Section 167 of the Act for holding the annual general meeting. He also stated that accounts for the year ending March 31, 1991, have been finalised and are still unaudited, as no auditors have been appointed in the annual general meeting and so long as the audited accounts are not available, the same cannot be forwarded to the shareholders. In regard to the allegations made by Shri Advani’s clients, he stated that Plot No. U-20, measuring 351 sq. yds. in Green Park Extension, was encroached upon by unauthorised squatters and the company had decided to sell the plot after negotiations with the squatters on an “as is where is” basis in 1987 at Rs. 1,000 per sq yd with regard to sale of actionable rights of 14 plots at Gandhidham (Gujarat), Shri Bhatnagar stated that these plots were acquired by the company by an agreement dated March, 26, 1962, from M. Dialdas and Sons for Rs. 54,633. The company has been paying development charges, etc., to SRC Ltd., since then. In 1981, it was learnt that Mr. Balram Dialdas, in whose name a few plots were booked, was trying to dispose of the plots. The company filed a suit in the civil court at Bhuj (Kutch) against SRC Ltd., and the allottees. The court granted a stay restraining the parties from disposing of these plots. The company sold the actionable rights in respect of these plots after seeking legal opinion, having regard to the fact that the company had no certain nature of legal title due to lack of proper evidence, for Rs. 9.5 lakhs in January, 1988, after advertising in the newspapers and after negotiations with the parties. Shri Mangharam Sipahimalani, the attorney
of Shri Prakash Dialdas and Shri Balram Dialdas, who has filed affidavits in these proceedings on behalf of Shri Prakash B. Dialdas, had made an offer of Rs. 4.5 lakhs in 1987, for purchase of these rights. In regard to the sale of two industrial plots (plots Nos. 59 and 60) of approximately 2,600 sq. yds. each owned by the company at Aditpur (Gujarat), he stated that it was not possible to manage this property from New Delhi and the SRC Ltd. had threatened that any encroachment or its seizure by the Government for not being developed/utilised would be the responsibility of its owners. The company called for offers in respect of these plots by publication of notice in newspapers on September 9, 1989, and offers were required to reach the company by October 5, 1989. The company received four offers by the scheduled date, which were considered. The alleged offer made by the attorney of Shri Prakash Dialdas of Rs. 105 per sq yd. was not received by the company. However, an offer from Shri Mangharam Sipahimalani through his company, Vijay Manufacturing Pvt. Ltd., along with two others, was received after the scheduled date and the same was rejected. Shri Bhatnagar’s submission was that all the sales were made with the approval of the board of directors of the company and in its best interests. He also submitted that the company is engaged in the sale/purchase of land and its 190 unsold plots are its “stock-in-trade” and not its assets. The company had to sell these plots to maintain liquidity and for meeting its liabilities. Shri Bhatnagar also stated that there appears to be a dispute between the legal heirs (daughters of Bhai Pratap Dialdas and the executrix, Mrs. Mohini Mohan Assumal) about his will. One of the daughters of Bhai Pratap Dialdas, Mrs. Manjari Kripalani (in Miscellaneous Petition No. Nil of 1990 and in Petition No. 41 of 1973 filed in the High Court of Judicature at Bombay), has obtained a stay from the court, vide order dated July 20, 1990, restraining Mrs. Mohini Mohan Assumal and others from acting on the probate dated June 22, 1990.
7. Shri T.R. Saluja, Joint Secretary, appearing on behalf of the Greenfield Plot-holders’ Association, submitted that the Government-nominated directors have made a healthy turn around of the financial health of the company. He submitted that, in public interest, the tenure of the Government directors be continued beyond June 21, 1991.
8. We have carefully considered the material on record and the submissions made on behalf of the parties. We are not required to examine the conduct of the Government directors in these proceedings. These aspects can be considered by the Central Government while appointing directors. We are also of the view that since these are not adversary proceedings, the Government directors and all those who may assist this board be given an opportunity of being heard.
9. At the outset, we may deal with the request made by Shri Advani, advocate, appearing on behalf of Shri Prakash Dialdas, for allowing inspection of the company’s records and for issue of notice to Sinha and Sinha and Co., chartered accountants. This Board has to consider the grounds specified in the reference made by the Central Government and it is not necessary for his clients to look into the records of the company. His client being a shareholder of the company is otherwise not entitled to inspect its books of account. Sinha and Sinha and Co., chartered accountants were the auditors of the company till the year ended on March 31, 1989. The Regional Director has since appointed M. P. Malhotra and Co., chartered accountants, for the subsequent year under Section 224(3) of the Act as no auditor was appointed in the annual general meeting held on June 2, 1990, and the writ petition filed by Sinha and Sinha and Co., is presently sub judice before the Delhi High Court. It was open to Sinha and Sinha and Co. to qualify their report in the accounts. We are, therefore, of the considered view that both these prayers cannot be allowed.
10. We find that the Government-nominated directors have been conducting the affairs of the company in the best interests of the company and the plot-holders. Five suits are pending against the erstwhile shareholders-directors and the companies/firms owned by them and it is necessary that these cases are prosecuted with diligence and without further delay. It is noted that the shareholders have not taken any interest in the affairs of the company and have not been attending the annual general meeting barring one or two shareholders. It has been submitted by Shri Advani that about 95 per cent. of the shares are held by Shri Prakash Dialdas and his family members and the shareholding has been acquired by the FCFL at a consideration of about Rs. 60 lakhs, pending compliance with procedural requirements as to transfer of these shares. It is surprising that these shares have been acquired at a very exorbitant price, even though the company has a negative net worth. Admittedly, the majority of shareholders of the company have now no interest left in running the affairs of the company.
11. During the course of hearing, Shri Advani referring to the three cases, argued that the exercise of the powers under Section 408 must be exercised sparingly and only when the requisite conditions of the section are fully complied with. The Government nominated directors have brought the colony at a level that building activity can start as soon as the zoning/service plans are approved by the State Government. The plot-holders have also pleaded for continuation of the Government-appointed directors and do not want any association of the management through its shareholders. The original purpose sought to be achieved by invoking the provisions of Section 408 in this company
in 1976 has not yet been fulfilled. In a similar case of W. H. Brady and Co. Ltd., this Board has invoked the provisions of Section 408 of the Act, as a suit was pending against the majority shareholders. The Bombay High Court held that till the said suit comes to an end, there could be no question of handing over the reins of the company into the hands of the major shareholders. In this view of the matter, it was observed by the court, that the fact that some of the loans have been returned by the company was not relevant. In another case of Jokai India Ltd., the company had to recover about Rs. 7 crores from its subsidiary company in the U.K. It was observed by this Board, vide order dated July 3, 1986, that the powers under Section 408 are preventive in nature and an element of public interest is embedded in the obligation of the board of directors of the company to successfully prosecute the case pending in the Calcutta Court. We are of the considered view that it will be against the interest of the company and the plot-holders to give the control to the shareholders, in the present case, as the company has filed several suits against the sister concerns of majority shareholders whose past performance has been wholly unsatisfactory. In case the control is given to the shareholders, these suits are not likely to be pursued. It also appears that the majority shareholders are more interested in completing the transaction of sale of shares to the FCFL than in completing the project.
12. It has been represented on behalf of the company that every year the annual general meeting of the company is convened and in the absence of quorum, the company has to take recourse to the provisions of Section 167 of the Act to call the annual general meeting. In this way, the appointment of auditors is delayed. Shri K.S. Bhatnagar stated that Sinha and Sinha and Co. were the auditors of the company for six years and the last accounts audited by them related to the year ended on March 31, 1989. The accounts for the subsequent year were audited by M.P. Malhotra and Co., chartered accountants, appointed under Section 224(3) of the Act by the Regional Director, vide order dated November 13, 1990. His submission was that like Government companies, the auditors of this company should be appointed for a period not exceeding three years. We are in agreement with the view expressed by Shri Bhatnagar. Under Section 408(6) of the Act, the Central Government has now ample powers to issue such directions to the company as it may consider necessary or appropriate, including directions to remove or appoint auditors.
13. Having regard to the facts and circumstances of this case, we are of the view that it will be against the interests of the company and the plot-holders to give back the control of the company to the shareholders, as the company has filed suits against its shareholders/shareholder interested companies and firms aggregating to Rs. 13.73 lakhs and further that its shareholders have
not taken any interest in its affairs, in the past. In view of the foregoing, in exercise of the powers conferred on the Company Law Board under Sub-section (1) of Section 408 of the Act, we hereby direct that four persons be appointed by the Central Government on the board of directors of Urban Improvements Company Private Limited for a further period of three years with effect from June 22, 1991, one of whom shall be the part-time chairman and will preside over the meetings of the board of directors.