ORDER
S. Balasubramanian, Chairman
1. The Central Government has filed this reference under Section 408 of the Companies Act seeking the directions of the Company Law Board to the Central Government to appoint nine directors on the board of Dunlop India Limited (company).
2. According to the Central Government, there have been various acts of mismanagement and instances of diversion of funds of the company resulting in the company becoming sick. It is alleged in the reference that such acts on the part of the management clearly establish that the affairs of the company have been conducted in a manner prejudicial to the interest of the company and its shareholders/investors, workers and the public and as such to prevent such mismanagement in the affairs of the company, the Central Government should be directed to appoint nine directors on the board of the company.
3. When the matter was taken up for hearing, Shri Phoolka, Central Government standing counsel, took us through various allegations contained in the petition. According to him, the Central Government, while conducting an inspection of the company under Section 209A of the Companies Act on the basis of complaints received from Dunlop Workers’ Union, noticed various instances of diversion of funds of the company and mismanagement. He pointed out that the company had transferred certain assets and granted certain loans to the subsidiaries amounting to Rs. 45 crores and these companies were later amalgamated with Shaw Wallace Properties Ltd. (SWPL), a subsidiary of Shaw Wallace and Co. In consideration for such amalgamation, the company only received shares/preference shares and debentures of Shaw Wallace Properties Limited. One of the subsidiaries of this company, viz., DIL Properties Limited, which was amalgamated with Shaw Wallace Properties Limited had a number of valuable real estates and also shares in some companies. In the guise of amalgamation, these properties and shares were transferred to SWPL. In the same way, in the four companies which were merged with SWPL, the company had given a loan of Rs. 29.55 crores which should have been in the normal course recovered from SWPL. However, instead of doing so, SWPL had allotted preference shares, equity shares and debentures.
4. The company acquired shares in Falcon Tyres Limited for a sum of Rs. 2.17 crores. At the time when the shares were acquired, Falcon was a sick company. Thus, there has been unnecessary diversion of funds to a sick company. Further, he submitted that the shares acquired in this company work out to about 56 per cent, of the paid-up capital of that company and as such the investment in the shares required approval of the Central Government under Section 372 of the Companies Act which the company failed to obtain. He also further stated that the company has been indiscriminately giving loans and advances to various companies including its subsidiaries out of borrowed funds which has resulted in acute cash problems for the company. Further, he also submitted that the company has not been charging any interest on the loans granted to the subsidiaries while it has to pay interest on such borrowings.
5. Referring to para. 2.16 of the reference, he stated that this company has paid advance of Rs. 22 lakhs and Rs. 23 lakhs, respectively, to Sun Carbon Limited and Fast Track Sports Limited which had little business and these amounts are likely to turn into bad debts. According to him, unmindful of the quantum of amount involved, the company has been squandering the company’s funds. He further submitted that during the year 1994, the company had provided about Rs. 7.86 crores in the form of bill discounting to four associated companies and no effective steps have been taken to recover the amount. Out of this, a large sum of Rs. 7.16 crores is due from Shaw Wallace Company Ltd. Drawing our attention to para. 2.15.4, he stated that the company sold “Dunlop House” in Mumbai, for a sum of Rs. 150 crores to Dunlop Investment Limited and also a land and building at Chennai, to the same company for a sum of Rs. 20 crores. As against the total consideration of Rs. 170 crores, the company received only a sum of Rs. 1 lakh in cash and the balance of Rs. 169.99 crores has been received in the form of zero interest optionally convertible secured debentures. While this has been done for the purpose of increasing the company’s income during the year 1996 it has also resulted in the valuable properties of the company being hived off. This way, the company has shown a book profit of over Rs. 169 crores, thus, misleading the shareholders, depositors and the financial institutions as if the company has performed well during this year.
6. He further submitted that in the year 1989, a sum of Rs. 14 lakhs was donated by the management to one Chabaria Trust in Mumbai and a sum of Rs. 55 lakhs to one Vidya Pratisthan, Maharashtra. In spite of repeated enquiries, the company has not been in a position to furnish details of the activities of these entities which clearly show that the funds of the company have been diverted/misutilised. He also submitted that the management has been guilty of transferring valuable properties of the company at negligible prices. Drawing our attention to para. 2.15 of the reference, he stated that 36,000 sq. mtrs. of land belonging to the company was sold to Dunlop Industrial Finance Limited for a sum of Rs. 1.38 lakhs in the year 1993. The sale of such a valuable property at a throwaway price is completely against the interest of the company.
7. Summing up his arguments, Shri Phulka argued that the company is being controlled by Shri M. R. Chabaria (MRC), chairman of the company who by utilising his position has been guilty of diversion of funds of the company to various other companies under his control. He complained that in the guise of amalgamation with Shaw Wallace Properties Limited, MRC has taken away four valuable subsidiaries of the company. Further, he submitted that MRC has been controlling the affairs of the company through remote control as he has not visited India for over a year. Due to the acts of financial impropriety and mismanagement by the existing management more particularly by MRC, the company has been declared sick and a large number of workers are on the roads as no wages have been paid to them for quite some time as all the factories belonging to the company remained closed. Such gross financial mismanagement has resulted in non-repayment of public deposits and payment of other statutory dues like PF, ESI, etc. In view of the gross mismanagement, the financial institutions have lost their faith in the management and they are not prepared to help the company with induction of any funds. Relying on Sakthi Trading Co. P. Ltd. v. Union of India [1985] 57 Comp Cas 789 (Delhi), he submitted that the powers under Section 408 are preventive in nature and to ensure that the affairs of the company are not conducted in a manner which is against the interest of the company, its members or public interest, the Company Law Board can direct the Central Government to appoint directors on the board of the company. He further submitted that even though the company has been declared sick and is under the purview of the BIFR, the powers of the Company Law Board to direct appointment of directors is not in any way curtailed. For this proposition, he relied on Deputy Commercial Tax Officer v. Corromandal Pharmaceuticals [1997] 89 Comp Cas 1 ; AIR 1997 SC 2027. Therefore, he submitted that to build up the confidence of the public, workers and financial institutions, it is absolutely necessary that the Central Government should be directed to appoint nine directors on the board of the company who would be in a position to assist the management to revive the company.
8. S. N. Mookherjee, advocate, going through the various allegations made in the reference submitted that most of the allegations in the reference relate to the period before 1993, and as such are belated to be agitated now. Further, the allegation relating to amalgamation of four companies with Shaw Wallace Properties Ltd. cannot be questioned in this reference inasmuch as the scheme of amalgamation was sanctioned by the Calcutta High Court after taking into consideration the no-objection report submitted by the Central Government before that court. Since the entire process of adjustment between the companies involved in the amalgamation has been sanctioned by the High Court as per the scheme submitted, the same cannot be questioned before the Company Law Board as the order of the High Court sanctioning the amalgamation is a judgment in rem and binding on every one. For this proposition, he relied on CIT v. Dalmia Magnesite Corporation [1999] 96 Comp Cas 792 (SC) infra and AIR 1934 Lahore 515. Further, he stated that the allegation that over Rs. 45 crores were diverted to the subsidiaries is not correct as in 1993, the company assigned loans and advances of Rs. 35.08 crores over due since 1989, to five of its subsidiaries against zero interest debentures out of which four subsidiaries owing Rs. 29.55 crores were merged with SWPL and the zero interest debentures of the remaining subsidiary company were squared up in 1995-96, thus, the company is not in any way prejudiced in this regard.
9. As far as investment in Falcon Tyres is concerned, Shri Mookherjee, submitted that this company was a sick company and Dunlop decided to revive this company by acquiring substantial shares after which with the technical assistance given by Dunlop the company has become a profitable company and over a period of three years from 1994 to 1997, Dunlop has earned over Rs. 7 crores by way of royalty, commission and dividend as against an initial investment of Rs. 2.17 crores. Further, he stated that the Falcon facilities are being used by Dunlop for manufacture of two-wheeler tyres. Therefore, the allegation of the Central Government that the investment in Falcon was a bad decision is not correct.
10. In regard to the allegation relating to Fast Track Sports Limited and Sun Carbon Limited, he submitted that the amount of Rs. 22 lakhs invested in Sun Carbon Limited was pursuant to a joint venture agreement between the West Bengal Industrial Development Corporation and the company for setting up a Carbon Black Development Project in Haldia, on an understanding that Dunlop would contribute 44.9 per cent, shares in the project company. Therefore, it was a commercial decision taken to set up a new project along with a State Government company. In the same way, Fast Track Sports Limited was incorporated in 1994, for manufacture and marketing of sports goods, etc., in collaboration with certain reputed foreign parties with their technical and financial collaboration. Since the potential for such goods is enormous, the company thought it fit to subscribe to the share capital of this company with proper authorisation from the board of directors.
11. As far as the allegation relating to bill discounting facility of Rs. 7.86 crores given to four associated companies is concerned, the learned counsel stated that most of such funds are due from SWC in respect of which a scheme of arrangement with the creditors is pending before the Calcutta High Court and by reason of the order passed under Section 391(6) of the Act, no steps can be taken at present for recovery of the amount. In regard to the donations made to various trusts, the submission of learned counsel is that as a part of supporting trusts with social objectives, the company has been making donations and except in one such trust, no one in the company is interested in the affairs of any of the trusts. By making the donations, the company has obtained tax benefits. Even otherwise as a large corporate enterprise, the company has to support charitable cause.
12. As far as the sale of Dunlop House and landed properties in Chennai is concerned, he submitted that this issue has become academic inasmuch as the proposed sale stands cancelled and whatever profit was projected consequent on the sale had been reversed on account of which the company has been declared sick. The sale could not be completed due to the company’s inability to obtain various clearances. As far as sale of valuable land at Rs. 1.38 lakhs to Dunlop Industrial Finance Limited is concerned, he stated that the sale was for the purpose of development of the property out of which the company has taken possession of eight flats worth about Rs. 4 crores. Thus, by the sale of the property, the company has benefited immensely.
13. Summing up his arguments, Shri Mookherjee, submitted that the various allegations made in the reference relate to a period before 1993, at which time the company was doing extremely well. The financial difficulties of the company are not due to any mismanagement or acts of the management but for reasons beyond the control of the company, like, high man power cost, over capacity established in the country for tyre manufacture, inadequate working capital provided by banks, high cost of raw material etc. According to him as against the industrial norm of the labour cost of about 5 per cent, on the turn over, the percentage of labour cost in the company works out to 13 per cent. He further stated that during the last two years, all the tyre manufacturing companies have fared badly in view of recession in the market. To substantiate his arguments in this regard, he furnished a detailed statement to indicate that the sickness is more due to causes outside the control of the management and not due to alleged mismanagement or financial impropriety.
14. Dealing with the prayer for appointment of Government directors, Shri Mookherjee and Shri Ganesh, advocates for the directors of the company, submitted that the company having become sick and being under the purview of the BIFR, the Company Law Board should refrain from approving the appointment of any Government directors especially when the BIFR has itself appointed a director on the board of the company. Even though, the BIFR passed an order for revival of the company under Section 17(3) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), on an appeal, this order has been stayed by the AAIFR as the management proposes to revive the company under Section 17(2) of the Sick Industrial Companies (Special Provisions) Act. While both of them agreed that there is no bar to the Company Law Board considering the prayer of the Central Government, even though the company is under the purview of the BIFR, yet they submitted that such an appointment, instead of furthering the cause of revival, would only create apprehension in the minds of all concerned that all is not well with the company and as such may estrange them from contributing for the revival of the company. Shri Ganesh further submitted that since all the allegations relate to a back period, many of the directors who were in position during that period have ceased to be directors now and presently, in addition to the BIFR nominee, Shri Virender Prakash, who has held various positions in the Government as an IAS officer and R. N. Tripathi, ex-MD of Life Insurance Corporation who is a financial institutions nominee, four directors have joined the board in 1997 or 1998. In other words, according to him, presently the board has a BIFR nominee, a financial institutions nominee and four other new directors who are not in any way connected with the affairs of the company during the alleged period of mismanagement. Therefore, he submitted that there is no scope for appointment of Government directors. Further, relying on Sakthi Trading Co. P. Ltd. v. Union of India [1985] 57 Comp Cas 789 (Delhi) wherein it was held that an order under Section 408 may not be able to cure the illegal and prejudicial acts which may have been performed by the company and its directors but it can be used to prevent repetition of such acts in future by appointment of directors on the company, he stated that now that there is a watch dog appointed by the BIFR, he will be in a position to ensure that nothing goes wrong in the affairs of the company. Relying on Peerless General Finance and Investment Co. Ltd. v. Union of India [1991] 71 Comp Cas 300 (Cal), he submitted that powers 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 and action cannot be taken on the basis of speculative findings. Relying on Vinod Kumar v. Union of India [1982] 52 Comp Cas 211 (Delhi), he stated that action under Section 408 is preventive in nature and in the absence of any material that the company would be mismanaged, the question of appointing Government directors does not arise. He further stated relying on South India Viscose Ltd. v. Union of India [1982] 52 Comp Cas 247 (Delhi) that the powers under Section 408 should be used very sparingly as any order under this section would have serious effect on the reputation and credibility of the management. Shri Ganesh pleaded that both the factories of the company remained closed and the management has already taken steps to seek the approval of the BIFR to revive the company under Section 17(2) of the Sick Industrial Companies (Special Provisions) Act and appointment of any director at this stage would prejudicially affect the revival process. Further, he also submitted that on the various allegations made in the petition, the then existing directors of the company have already filed a petition before the Calcutta High Court under Section 633 of the Act against notices issued by the Registrar of Companies and the High Court has injuncted the Registrar from taking any action pursuant to the notices issued. Therefore, he submitted that if any order is to be issued on the basis of these allegations it would mean as if the allegations have been proved while actually action against these allegations has already been stayed by the High Court. He also submitted, rebutting the stand of the counsel for the Central Government relying on Deputy Commercial Tax Officer v. Corromandal Pharmaceuticals [1997] 89 Comp Cas 1 ; AIR 1997 SC 2027, that Section 24 of the Sick Industrial Companies (Special Provisions) Act provides for initiating misfeasance proceedings against the promoters of the company in case it is established that sickness has been brought about by the acts of the management. He, therefore, submitted that since the BIFR has not formed any opinion as specified in Section 24 of the Sick Industrial Companies (Special Provisions) Act, the Company Law Board should not form an opinion and appoint Government directors.
15. We have considered the pleadings and the arguments of the counsel. The main allegation in the reference relates to certain loans and advances made to the subsidiaries of this company which were later amalgamated with SWPL. This amalgamation proposal contained certain arrangements by which the company, instead of recovering the loans and advances from SWPL in cash, received preference shares, equity shares and debentures, which according to the Central Government is against the interest of the company. It is on record that after amalgamation, these subsidiaries were wound up by the order of the High Court. Before sanctioning the amalgamation, the High Court has taken on record the “no objection report” given by the official liquidator and the Central Government. Therefore, even assuming that the arrangement as sanctioned by the High Court is prejudicial to the interest of the company, yet, as rightly pointed out by learned counsel for the company recourse has to be taken under the liberty granted by that court itself in its order and the Company Law Board cannot examine the issue in this proceeding. Further, we also note that the amalgamation was sanctioned by the High Court some time in 1994, and even to reopen the issue at this point of time, it is not permissible due to undue delay. Apart from this allegation, the other main allegation is regarding sale of Dunlop House and certain properties in Madras. While we are fully convinced that accounting for the sale was more for the purpose of window dressing the accounts of the company, yet in view of the same now having been abandoned, consequent to which the company has been declared sick, this issue has become irrelevant. In regard to the investment in Falcon Tyres Limited, the counsel for the company have proved with facts and figures that this investment has proved to be a commercially prudent investment. As far as the donations made to certain charitable institutions are concerned, we find that these donations were made as early as in 1989, and as such a belated one to be agitated in the present proceedings. The investment in Sun Carbons Limited and Fast Track Sports Limited which took place before 1992, being commercial decisions not involving substantial amount, need not be considered either as an act of mismanagement or as an act of financial impropriety. Other allegations in the petition are insignificant. However, we do note that an amount of over Rs. 17 crores is recoverable from SWPL and a sum of over Rs. 7 crores from Shaw Wallace Limited, totalling to about Rs. 24 crores. The company has taken a stand that due to the scheme proposed by Shaw Wallace Limited under Section 391 of the Companies Act before the Calcutta High Court, these amounts can be recovered only in terms of the proposal. These amounts are due from these companies right from 1995, while the scheme was submitted to the Calcutta High Court some time in 1998. In other words, no action seems to have taken to recover this amount for over three years and the only presumption we can draw for the inaction is that all these companies are under the control of the same person, viz., MRC. One of the reasons attributed by the company for its sickness is that there has been no sufficient funding by the bank. If it is so, we do not understand as to why the company has not taken effective steps to recover the dues of over Rs. 24 crores from SWC/SWPL. No doubt, the company has furnished a detailed statement as to why the company has become sick, yet, we are of the view that the company should have taken more effective steps to overcome such difficulties as the sign of sickness must have been looming large before the board of directors for quite some time, since, no company can become sick overnight.
16. Now the issue for our consideration is whether, on the basis of material placed before us and on the basis of our findings, we should direct the Central Government to appoint directors on the Board and if so, the number of such directors. While, we have earlier given our findings on the allegations most of which are in favour of the company, yet, the failure to recover over Rs. 24 crores due from SWPL and SWC and not taking effective steps to ward off the ensuing sickness are squarely against the board of directors. The arguments of the counsel for the company has been that presently there are six new directors including one appointed by the BIFR and another by the financial institution as their nominee who can monitor the activities of the company and as such there is no need for any Government directors. Shri Ganesh, also referred to certain decided cases and the scope of and the circumstances under which Government directors can be appointed under Section 408 of the Act. His another stand is that since the company’s prayer for revival of the company under Section 17(2) of the Sick Industrial Companies (Special Provisions) Act is pending before the AAIFR, if the AAIFR grants the permission, then, it would be MRC who will be taking all steps to revive the company and appointment of Government directors at this stage would jeopardize the revival process.
17. This is a very peculiar case, wherein, there are two proceedings relating to the company, one before the BIFR and another before us. While the counsel from both the sides agreed that BIFR proceedings do not stand in the way of the Company Law Board exercising its powers under Section 408, yet, we have to keep in mind the purpose and object of the provisions of Section 408. The main purpose of the provisions of this Section is to effectively safeguard the interest of the company or its shareholders or public interest and also to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interest of the company or to public interest. For exercising the powers, first the Company Law Board has to be satisfied that the affairs of the company are being conducted in a manner prejudicial to the interest of the company, members or public interest. From the conclusions that we have arrived at on the allegations in the reference, it may be seen that on the main allegation relating to the dealings with the subsidiaries, we have expressed our inability to look into the same in view of the High Court sanctioning the amalgamation and upheld the other major allegation of not recovering over Rs. 24 crores, as dues, from SWPL and SWC. In regard to other allegations, we have not held the same against the management.
18. In this connection it is worthwhile referring to the observation of the Principal Bench of the Company Law Board in Central Government v. Shaw Wallace Co. Ltd. [1998] 31 CLA 254, at paragraph 45. “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 the directors/company have brought the affairs of a company to a state 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 present case is still worse in the sense the company has been declared a sick company and its factories remain closed, the workers are not being paid their wages and the banks have shut their doors as far as financial assistance is concerned. In the normal circumstances, in view of the company having become sick due to the inaction of the management to avert the same by timely remedial action, we would have held that in the interest of the company its workers and the public interest, with a view to bring about confidence in the company, it is essential to appoint Government directors on the board of the company. However, in the present case, during the pendency of the proceedings before us, the BIFR has declared the company as a sick company and has appointed an operating agency under Section 17(3) of the Sick Industrial Companies (Special Provisions) Act on June 22, 1998. In exercise of its powers under Section 16(4), it has also appointed a special director on the board of the company. Section 16(4) of the Sick Industrial Companies (Special Provisions) Act reads as follows : “……. it (BIFR) may appoint one or more persons to be. a special director or special directors of the company for safeguarding the financial or other interests of the company or in the public interest”. Even though BIFR has the power to appoint one or more special director, in the present case, it has chosen to appoint one such director. While we do not attach much importance to the four new directors who have been appointed on the Board by the management itself, the very fact that BIFR has appointed a special director to safeguard the financial and other interest of the company cannot be taken lightly. In a recent similar case of Peerless General Finance and Investment Co. Ltd. [1999] 95 Comp Cas 846 (CLB), in which the Central Government prayed for appointment of Government directors under Section 408 of the Act, we took a view that when the RBI was constantly monitoring the activities of the said company, there was no need to appoint Government directors at this stage and we gave the liberty to the Central Government to move Company Law Board at any time in future if the performance of the company did not improve. The main allegation in the reference is that the company funds have been diverted and its properties have been disposed of. We find from the BIFR proceedings dated June 22, 1998, that the company has been restrained from disposing of any of its assets and the question of diversion of funds also would not arise as the company has no funds even for its pressing commitments towards workers, wages, etc. The question of carrying on the business, under these circumstances, would arise only when a revival scheme is sanctioned by the BIFR. Since the BIFR has appointed a special director to safeguard the financial and other interests of the company, whatever purpose is sought to be achieved through the provisions of Section 408, the same has been ensured by the BIFR by appointing its own special director. We called for the details of the board meetings held during the last two years from which we find that the special director appointed by BIFR, Shri Virender Prakash has attended every board meeting held after his appointment. As we held in Peerless’ case [1999] 95 Comp Cas 846 (CLB), when another agency, in this particular case, a desig-nated judicial forum has taken cognizance of the present state of affairs of the company and has appointed its own special director on the board of the company with a view to protect the financial and other interests of the company, an object covered under Section 408 of the Act, we are of the view that, in line with judicial propriety, we should refrain from passing any order in exercise of our powers under Section 408 even assuming that the ingredients of Section 408 have been fully satisfied in the present case. Accordingly, we dispose of this reference without any order.
