K.K Balu, Vice-Chairman:— 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) Ltd. (“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 March 30, 2001, forming part of the annual report for the year ended on December 31, 2000.

2. Shri Mohan Parasaran, learned Additional Solicitor General, while initiating his arguments, submitted that the company incorporated in June 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 June 30, 1998, June 30, 1999 and December 31, 2000. The accumulated losses as on December 31, 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 June 30, 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 June 30, 2002 exceeded an amount of Rs. 8.65 crores.

3. 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 members.

4. The company had as at December 31, 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 Company Law Board by an order dated November 6, 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 Company Law Board 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 Company Law Board.

5. 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 members. 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 to those time-share members with the existing resorts.

6. The company had invested in the shares of its group companies, viz., Sterling Holiday Finvest Ltd., Sterling Holiday Home Finance Ltd., Sterling Holiday Financial Services Ltd. and Sterling Middle East WLL to the tune of Rs. 3.27 crores as at June 30, 1999 with a meagre return of Rs. 53,980 and Rs. 2,200 for the years ended June 30, 1999 and December 31, 2000. These investments amounted to systematic diversion of the company's funds.

7. As at December 31, 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 Ltd. and Rs. 11.37 crores due from M/s. Sterling Holiday Resorts International Ltd. (SHRIL). The company failed to initiate any action to realise the outstanding dues from SHRIL. The chances of recovery of these advances are bleak. The interest amount due on intercorporate 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 out of which some of the petitions are pending before the High Court of Madras. The provident fund and other statutory dues remained unpaid.

8. 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 shareholders.

9. The company had violated the provisions of sections 211, 217(2A), 217(3), 58A read with rules 3A, 4 and 9 of the Companies (Acceptance of Deposits) Rules, 1975 (“the Rules”). The statutory auditors in their report dated March 30, 2001 forming part of the annual report for the year ended December 31, 2000 have qualified their report on the following accounts:

• non-provision for diminution in the value of investments;

• non-redemption of debentures on due dates;

• overstatement of loss by Rs. 7.34 crores;

• non-provision of interest on ICDs/loans from banks, financial institutions, overdue interest;

• non-payment of dues to Provident Fund and Employees' State Insurance Corporation;

• non-provision of gratuity;

• delay/non-payment of matured deposits and non-maintenance of liquid assets under rule 3A of the Companies (Acceptance of Deposits) Rules, 1975, etc.

10. M/s. Jagadeesan and Co., chartered accountants, pursuant to the orders dated August 10, 1999 and March 10, 2000 of the High Court of Madras made in C.A No. 267 of 1999 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 principles, 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 owners.

(vi) The future prospects of the company are 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 realised to meet its secured and unsecured creditors and thereafter the liabilities of its group companies.

11. 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 mismanagement, misapplication of funds, misutilisation of funds, misappropriation 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] 39 Comp Cas 781 : (1969) 1 SCC 325 : AIR 1969 SC 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 members.

Union of India v. Swadeshi Cotton Mills Co. Ltd., [1979] 49 Comp Cas 74 (SC) : (1978) 4 SCC 295 : AIR 1978 SC 1818—to show that if the Company Law Board, a specialised 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 authorising the Central Government for appointment of Government directors.

Secretary to the Government of India v. Leafin India Ltd., [2002] 38 SCL 121 (CLB)—to show that when five of the directors had resigned and the 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 Company Law Board authorised the Central Government to appoint five directors on the board of the company.

Union of India v. Vikas WSP Ltd., [2005] 124 Comp Cas 781 (CLB) : [2004] CLC 1391—to show that when the material placed before the Company Law Board 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 shareholders and public at large, the Company

Law Board authorised the Central Government to appoint directors on the board of directors of the company.

12. Shri P.H Arvindh Pandian, learned counsel and Shri N.R Sridharan, practising 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 members. While the promoters as at June 30, 2002 hold 50.99 per cent, of the paid-up capital, the institutional investors 2.63 per cent, and 46.38 per cent, is held by the Indian public and others. 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 per cent, to 35 per cent, aggregating 188 per cent, 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 members. 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 Millennium 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 directors. In these circumstances, the appointment of Government directors on the board of the company would affect the functioning of the company. The learned authorised 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 prima 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 Comp Cas 300 (headnote): held that “powers under section 408 of the Companies Act 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.”

13. The Delhi court in South India Viscose Ltd. v. Union of India, [1982] 52 Comp Cas 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 Comp Cas 789 (Delhi).

14. Shri Sridharan, learned authorised representative, while meeting the charges levelled against the respondents submitted: The preference shares for an amount of Rs. 5 crores placed privately by M/s. Bajaj Auto Ltd. (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 come 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 per cent, 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 respect of the preference shares already redeemed. The non-convertible debentures issued in favour of Can Bank Mutual Fund (CBMF); Bank of Punjab Ltd. (BPL) and Citi Corp Securities and Investments Ltd. (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. 2.40 crores 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 February 11, 2005. The company is adhering to the terms of the MoU entered into with the respective debenture holders/creditors.

15. The company never stopped repayment to the deposit holders. 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 customers. 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 of 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.

16. The company petition is based on the qualifications made by the statutory auditors in their report dated March 30, 2001 on the accounts of the company for the year ended December 31, 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 holders.

(c) The company during the financial year ended December 31, 2000 had effected the change in the accounting policy in respect of time-share members on receipt 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 December 31, 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. However, the company has been negotiating with the institutional creditors, banks and intercorporate 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 com pany. There are no pending complaints from any of the depositors.

17. 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 with 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 621A No one has been prejudiced on account of those reported violations.

18. 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 Ramchand Resorts (P.) Ltd. (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 Ltd.; (iii) Sterling Resorts Home Finance Ltd.; and (iv) Sterling Holiday Financial Services Ltd. 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 Ltd. 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 June 30, 2002. All these investments were made in the normal course of business and in accordance with the provisions of the Act, with bona fide 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.

19. The company had extended an advance amount of Rs. 11.96 crores to Sterling Holiday Resorts (International Limited) for genuine and bona fide business purpose. SHRIL has huge fixed assets and, therefore, the recovery of the outstanding advances will not pose any problem to the company.

20. The company faced as many as 13 winding up company petitions at the instance of its creditors out of which only two company petitions are presently pending and the company could either settle or enter into appropriate memorandum of understanding with the remaining creditors. 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 factors. The company has been earning operating profits during the year ended March 31, 2000, June 30, 2002, September 30, 2003 and March 31, 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 directors. The decision of the apex court in Rohtas Industries Ltd. v. S.D Agarwal, [1969] 39 Comp Cas 781 : (1969) 1 SCC 325 : AIR 1969 SC 707 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 Secretary to the Government of India v. Leafin India Ltd., [2002] 38 SCL 121 (CLB) does not benefit the petitioner. For these reasons, the learned authorised representative sought to dismiss the company petition.

21. 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 realisation of the investments and advances, closure of the huge outstandings and in pursuing the affairs of the company in the interests of its members. The observations and conclusions of M/s. Jagadeesan and Co., chartered accountants have not been erased by M/s. Fraser and 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.

22. I have considered the pleadings and elaborate submissions of learned senior counsel. The issue before me is whether the Central Government be authorised 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 Company Law Board, 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 Company Law Board 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, [1982] 52 Comp Cas 247 (Delhi) and Peerless General Finance and Investment Co. Ltd. v. Union of India, [1991] 71 Comp Cas 300 (Cal). 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, [1985] 57 Comp Cas 789 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 Bilaspur Spinning Mills and Industries Ltd., In re. In this background, the prayer made by (a) the Sterling Resorts Time Shareowners' 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.

23. The Sterling Resorts Time Shareowners' 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 section 405 to implead itself as a respondent to the proceedings before me. Hence the prayer made by the association is declined.

24. 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 and Co., chartered accountants, etc. It is on record that the company, as on November 30, 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 Company Law Board 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 November 6, 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 November 6, 1998. However, the chairman and managing director of the company in his affidavit dated June 22, 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 a memorandum of understanding with Air Force Group Insurance Society on August 2, 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 Dues Certificate” dated July 13, 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 Company Law Board in its order dated December 24, 1998. Similarly/the complaints of the time-share members are remedied by the company, the fact of which remains undisputed. The company being in the 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 members. 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.

25. 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 (P.) Ltd., 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. 1,18,000 by way of deposits during the period between October 9, 1997 and October 24, 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 June 30, 1998, particulars of the names and nature of duties of its employees in violation of section 217(2A).

(d) The company had not deposited or invested 15 per cent, of its deposits at the end of March 31, 1997, March 31, 1998, March 31, 1999, March 31, 2000 and March 31, 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) Ltd. was amalgamated with the company, by an order dated April 25, 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 June 30, 1998 and June 30, 1999 on innumerable accounts, resulting in violation of section 217(3), as set out herebelow:

(i) Auditor's remarks for the year ended June 30, 1998:

No provision has been made for the diminution of Rs. 97,25,554 in the value of permanent investments (Note No. 10).

No provision has been made for interest of Rs. 2,48,36,637 due on intercorporate deposits accepted by the company (Note 17).

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).

New project expenses referred to under accounting policies have been shown under current assets instead of miscellaneous expenditure (Note 14(a)).

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 October 9, 1997 to October 24, 1997 have been done after the current of the previous advertisement had expired.

There has been some delay and default in repayment of deposits on maturity when claimed by the depositors.

Provident fund and the employees' State insurance dues aggregating to Rs. 1,14,91,630 have not been deposited with the appropriate authorities.

The company has an internal audit department in carrying out the internal audit of the company's books of account, the scope of whose work needs to be strengthened so as to be commensurate with the size of the company and nature of its business.

The company invested in 190 equity shares of M/s. Behrain Dinars Rs. 50 each in M/s. Sterling Middle East, WLL, a foreign company. The auditors in their report dated October 6, 1998 on the accounts of M/s. Sterling Middle East, WLL have expressed a view referring to the Note No. 1 to the financial statements which discussed factors that raised doubts about the ability of the company to continue as a going concern.

(ii) Auditor's remarks for the year ended June 30, 1999:

Provision has not been made in the accounts for the interest on intercorporate deposits.

Provision has not been made in the accounts for the penal interest payable to some banks/financial institutions and other financial companies.

Provision has not been made in the accounts for diminution in the value of investments to the extent of Rs. 1,27,04,937.

Provision has not been made in the accounts for additional amounts payable to provident fund authorities for belated payment of contributions.

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).

In respect of Noida property under lease, the agreement provides for the determination of lease with certain penalties 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)).

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 of 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)).

Certificates of the confirmation of balances as at June 30, 1999 have not been received from the bank and financial institutions (Note No. 12(a)).

Letters from parties confirming balances have been forwarded and replies are yet to be received (Note No. 12(b)).

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(III)).

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 into account certain properties to be given to the company to be adjusted against advances (Note No. 13(III)).

Items (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)).

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 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)).

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)).

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)).

The amount due to small scale industrial units has not been identified in the absence of details (Note No. 15).

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).

Arrears of dividend on preference shares Rs. 1,70,00,000 (Rs. 85,00,000) (Note No. 22).

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).

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).

Interest on term loans and other borrowings relating to projects are capitalised.

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.

New project expenses referred to under accounting policies have been shown under current asset's, instead of miscellaneous expenditure (Note No. 14(a)).

Adequate liquid assets required under the provisions of rule 3A of the Companies (Acceptance of Deposits) Rules, 1975 have not been maintained.

There has been delay in repayment of matured deposits. The Company Law Board, Southern Region Bench, Chennai by its order dated November 6, 1998 permitted to the company to repay the deposits together with the interest at 12 per cent, per annum from the date of maturity to the date of repayment in the phased manner and this has not been adhered to.

The internal audit has not been carried out during the year.

Provident fund and employees state insurance dues aggregating to Rs. 1,61,80,820 have not been deposited with the appropriate authorities. The Assistant Provident Fund Commissioner has granted time for payment in instalments subject to payment of additional amount for belated payment.

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 March 31, 1997, March 31, 1998 and March 31, 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:

An amount of Rs. 24,18,45,412 is shown as sales less returns in the balance-sheet as at June 30, 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 to the Act.

The advance subscription towards customer facility referred to under accounting policies had been shown in the company's balance-sheet as at June 30, 1998 and June 30, 1999 separately instead of under “current liabilities and provisions”, in variance with the norms prescribed in Schedule VI to the Act (Note 6).

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 June 30, 1997, June 30, 1998 and June 30, 1999.

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 March 31, 1998 and March 31, 1999.

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.

New project expenses referred to under accounting policies were shown under “current assets” instead of showing under the head “miscellaneous expenditure”.

Advances amounting to Rs. 2,47,62,531 to suppliers of goods and services were not adjusted as on June 30, 1998 and June 30, 1999.

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 June 30, 1997 and June 30, 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 to the Act,

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 June 30, 1998 and June 30, 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

The company in its balance-sheet as at June 30, 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.

26. The company and its officers in default have compounded the above violations in terms of section 621A. 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 Company Law Board, but also of the economic process of the country as held in Union of India v. Swadeshi Cotton Mills Co. Ltd., (1978) 4 SCC 295 : AIR 1978 SC 1818 to protect the interests of the shareholders and public interest.

27. The grievance of the company with regard to the special audit report of M/s. Jagadeesan and 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 and Ross, chartered accountants, in their report placed before the Madras High Court reported that the special audit report of M/s. Jagadeesan and Co. is not based on the directions given by the High Court. It shall be borne in mind that many of the remedial measures suggested by M/s. Jagadeesan and Co., whether warranted or not, assume relevance in the light of several of the existing irregularities. They are—

The company needs to sell its excess assets towards discharge of the liabilities.

The company, while entering into transaction with its group companies must maintain at arms length.

The board of directors should be strengthened by appointing independent directors.

The future prospects of the company are dependent upon its paying off its dues to the banks, financial institutions and other creditors.

The advances made by the company to its group companies must be realised to pay off the secured, unsecured creditors, etc.

28. 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 June 30, 1997; June 30, 1998; June 30, 1999, December 31, 2000, June 30, 2002, September 30, 2003 and March 31, 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 March 31, 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 realisation causing enormous prejudice to the interests of the shareholders and accordingly the company's profits stand dwindled, at the cost of the shareholders. 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 June 30, 1997 and March 31, 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 Cotton Mills Co. Ltd., [1979] 49 Comp Cas 74 : (1978) 4 SCC 295 : AIR 1978 SC 1818.

29. 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 June 28, 2004. All these advances, save an amount of Rs. 13.89 crores due as at March 31, 2004 from Sterling Tree Magnum India Ltd. are found reflected in the balance-sheet of the company, since the year ended June 30, 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 realisation or regularisarion 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.

30. The company is at present indebted to the tune of several crores of rupees. The balance-sheet for the year ended March 31, 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 (Rs. in crores) Unsecured loans (Rs. in crores) As at 30th September, 2003 148 23.49 As at 30th June, 2002 143 19.58 As at 31st December, 2000 108 18.00 As at 30th June, 1999 193 17.33 As at 30th June, 1998 159 16.59 As at 30th August, 1997 122 30.00

31. 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 Company Law Board under section 408. The present state of affairs of the company, justifying the conclusions of M/s. Jagadeesan and Co., would create doubts in the minds of the shareholders and public at large, in which case, there is every justification to authorise the Central Government to appoint directors on the board of the company as held in Union of India v. Vikas WSP Ltd., [2005] 124 Comp Cas 781 : [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] 127 Comp Cas 351 (Mad) : [2005] 66 CLA 473 held that (page 364): “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.”

32. The future prospects of the company and its shareholders are 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 net worth of the company got eroded. The company admittedly could not declare dividend since the year 1997.

33. 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 and its shareholders. 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 (C.A No. 93 of 2003) stand disposed of.