2007 (5) TMI 339 - HC - Companies Law

Issues Involved:
1. Default in repayment of matured deposits by the company.
2. Appointment of Government Directors under Section 408 of the Companies Act.
3. Compliance with the Company Law Board (CLB) orders.
4. Allegations of fund diversion and improper maintenance of accounts.
5. Arguments regarding the impact of appointing Government Directors on the company's credibility.

Issue-wise Detailed Analysis:

1. Default in repayment of matured deposits by the company:
The company, incorporated in 1984 and reconstituted as a Public Limited Company in 1992, faced issues repaying public deposits invited in 1993. The CLB concluded on 8-8-2003 that the company defaulted in payments from October 2002, with Rs. 16,183.76 lakhs owed to 85,921 depositors. Despite various options presented by the company to discharge its liabilities, the CLB ordered a structured repayment plan, which the company failed to comply with.

2. Appointment of Government Directors under Section 408 of the Companies Act:
The Central Government filed a petition under Section 408, read with Sections 397 and 398, seeking the appointment of six Government Directors due to the company's failure to repay deposits and alleged fund diversion. The CLB, after considering the case, ordered the appointment of two Government Directors to monitor and assist the company for three years. The company contested this, while the Union of India sought the appointment of six Directors.

3. Compliance with the Company Law Board (CLB) orders:
The company failed to comply with the CLB's order dated 8-8-2003, which had attained finality. The company's explanations for non-compliance, including issues with exporting 'Loratadine' and restrictions on utilizing global depository receipts, were rejected as these circumstances existed when the CLB order was passed. The company was found to have diverted funds instead of repaying public debts.

4. Allegations of fund diversion and improper maintenance of accounts:
The company was alleged to have diverted over Rs. 65 crores to associate companies and made unexplained provisions for writing off Rs. 126 crores in outstanding debts. The company's accounts were not properly maintained, as noted by its Chartered Accountants. The court found these actions prejudicial to public interest, justifying the appointment of Government Directors under Section 408.

5. Arguments regarding the impact of appointing Government Directors on the company's credibility:
The company argued that appointing Government Directors would affect its credibility. However, the court held that public interest must prevail over the company's concerns. The appointment of Government Directors was deemed necessary to prevent future mismanagement and ensure proper conduct of the company's affairs.

Conclusion:
The court dismissed both appeals, upholding the CLB's order to appoint two Government Directors. It directed the company to hold a Board of Directors meeting within two months, associating the appointed Directors, with their three-year term starting from the first meeting. The purpose of Section 408 was emphasized as ensuring proper management rather than giving the Government majority control.

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