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2012 Supreme(Mad) 4405
MADRAS HIGH COURT
K.B.K.Vasuki, J.
M/s. Sterling Holiday Resorts (India) Ltd. - Appellants
Versus
Central Government Secretary to the Government of India Ministry of Company Affairs New Delhi. - Respondents
C.M.A.3647 of 2005
Decided On : October 30, 2012
Advocate Appeared:
For R1: Mr.M.Gopikrishnan
The main legal point established in the judgment is that the power under Section 408 of the Companies Act should be sparingly invoked under extraordinary circumstances, and subsequent developments in a company's financial position should be considered before appointing government-appointed directors.
Headnote:
Company Law Board - Appointment of Directors - Section 408 of the Companies Act - Summary of Acts and Sections: Section 408 of the Companies Act empowers the Central Government to appoint directors to safeguard the interests of the company, its shareholders, or the public. The appointment can be made when the company's affairs are conducted in an oppressive or prejudicial manner. The judgment discusses the application of Section 408 and the subsequent developments in the company's financial position.
Fact of the Case:
The case involves a dispute over the appointment of directors on the Board of Directors of a company. The company faced financial difficulties and was directed by the Company Law Board to appoint two directors. The company and one of the directors appealed against this decision.
Finding of the Court:
The Court found that the Company Law Board's decision to appoint directors was erroneous and set it aside. The Court considered the subsequent developments in the company's financial position and the steps taken to remedy the situation. It concluded that the company's position did not warrant intervention by the government-appointed directors.
Issues: The substantial questions of law considered by the Court included the correctness of the Company Law Board's decision, the exercise of jurisdiction under Section 408, and the failure to consider subsequent developments and remedial measures taken by the company.
Ratio Decidendi: The Court held that the power under Section 408 should be invoked sparingly under extraordinary situations and that the subsequent developments in the company's financial scenario were not adequately considered by the Company Law Board. It concluded that the company's position did not warrant the induction of government-appointed directors.
Final Decision: The appeal was allowed, and the impugned order of the Company Law Board was set aside. The Court emphasized that the decision did not prejudice the interests of the company's stakeholders and the public, and the Central Government could approach the Company Law Board for appropriate relief in the future.
C.M.A.No.3647 of 2005 is filed by respondents 1 and 9 in C.P.No.36 of 2002 against the order of Company Law Board directing 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.
2. The few facts which are relevant for consideration herein are that M/s. Sterling Resorts and Hotels India Ltd. was incorporated on 22.05.1986 as a Private Limited Company. Thereafter, it was converted into a Public Limited Company with effect from 11.12.1989. The company is a first to launch time share product. The first product was structured as "Property Time Share" in and under which the buyer has the right of joint ownership of a specified apartment in a specified resort for a week every year for perpetuity and during 1992, the product was changed to Vacation Time Share which offered the member the right of usage of the apartment in a specified resort for one week every year for 99 years. It had all the standard features of the timeshare like split, advance, accumulate, postpone, exchange, sell, rent, gift, bequeath etc. As the timeshare concept was relatively unknown and holidays were not a high priority category for most Indians, a strategy of market creation was followed initially with prices kept reasonably low to penetrate the market and to bring about an acceptability of product in the market. In due course, the company established itself as India's No.1 Holiday and Resort Company and during 1994-95, M/s. Sterling Resorts and Hotels (India) Ltd. was amalgamated with M/s.Sterling Holiday Resorts company pursuant to the order of this Court, dated 25.04.1995. The amalgamation was mainly for the benefit of the Company by using combined resources, such as, company reserves, manpower and cash flows of the two companies to contribute to increase in volume of activities which in turn to contribute to the growth and profitability in the resulting Company which is not only in the interest of the company and also in the interest of the public. The Company had been working with the long term objectives and visions to protect the value of time share holders and has as of now twelve resorts in full operation in different places. The Company started developing concerted promotional campaigns using conventional as well as unconventional vehicles and allocated more funds for advertising and other promotional activities. However, during 1994, the company earned leading name in the Holiday and Tourism Industry and the Company's resorts were also affiliated with Resorts Condominium International, which is a leading holiday exchange company. The Company also entered into an arrangement with M/s. Days Inn Worldwide including USA. The Company had all the located facilities to correct the needs of various segments of customers in India and abroad. The customer requests were given priority and effectively attended to. The company was able to declare dividend up to 1996.
3. While so, the Company incurred heavy loss, as a result, the Company had negative networth and the Company was not able to redeem non-convertible debentures and not able to pay matured deposits and other secured and unsecured creditors. They received complaints not only from the Debenture Holders and also from Time Share Allottees relating to delay in allotment of time share accommodation to its members. There were also complaints regarding diversion of funds to other sisters companies detrimental to the interest of the company. The High Court also ordered special audit of the Company through Special Auditor M/s.Jegadeesan & Co., appointed by the High Court. The report of the Special Auditor pointed out number of acts of commission and omission amounting to mismanagement, misapplication and misappropriation of funds detrimental to the interest of minority shareholders of the company and amounting to oppression. The Central Government in view of such complaints received against the Company invoked
