BEFORE THE COMPANY LAW BOARD
PRINCIPAL BENCH
(Dated: 1st May
2002)
Present: 1. Justice A.K. Banerji, Chairman
2. Shri S. Balasubramanian,
Vice Chairman
In the matter of Companies
Act, 1956-Sections 397/398
In the matter of M/S
Paharpur Cooling Towers Ltd. & Ors.
M/S Swadeshi Polytex Limited
PETITIONERS:
1. M/S Paharpur
Cooling Towers Ltd.
2. M/S Doypack
Systems Pvt.Ltd.
3. M/S
Selectopack Pvt. Ltd.
RESPONDENTS:
1. M/S Swadeshi
Polytex Limited
2. M/S National
Textile Corporation (UP) Ltd.
3. M/S National
Textile Corporation Ltd.
Present on behalf of
parties:
1. Dr. Abhishek Singhvi,
Sr. Advocate
.. for petitioners
2. Shri Gopal Jain,
Advocate
.. for petitioners
3. Shri B.S. Banthia,
Advocate
.. for respondents
4. Shri T.S. Chaudhary,
Advocate
.. for respondents
5. Shri K.M. Chadha,
CMD-NTC
.. for respondents
(Date of final hearing:
1.4.2002)
S. BALASUBRAMANIAN:
1.
The petitioners collectively holding
28% shares in M/S Swadeshi Polytex Limited ( the company) have filed this petition under Sections 397/398 of the Companies
Act, 1956 ( the Act) alleging acts of oppression and mismanagement in the affairs of the
company.
2. The facts of
the case are that the 2nd and 3rd respondents came to be vested with
33.6% shares in the company by an order of the Supreme Court in 1988. The 2nd respondent is a subsidiary of
the 3rd respondent. The financial
institutions hold 15% shares and the general public, the balance 23.4% shares.
The paid up capital is Rs.3.9 crores as against the authorized capital of Rs.25
crores. The main business of the company is
the manufacture of polyester staple fibre (PSF)
. Even though the company was doing well till 1996-97, the factory of the company remained
closed from 21.9.98. Presently, it has
become a sick company in terms of SICA. The
total liability of the company is of the
order of about Rs 25 crores. The Board of the
company consists of three of the nominees of the petitioners and four of the nominees of
the respondents and two nominees of the financial institutions. Since the respondents are Government companies,
the petitioners have been negotiating with the Government for purchasing the shares held
by the respondents and also for revival of the company
on their own. However, the same has
not fructified so far, one of the main reasons being the insistence of the Government that
the petitioners should arrive at a settlement with workers which the petitioners have not
been able to do.
3. The main
grievances of the petitioners in the petition are that the nominee directors of the
respondents, being in majority on the Board, have been conducting the affairs of the
company detrimental to the interest of the
company. Various subsidiaries of the 3rd respondent have been
purchasing PSF from the company at a price much
lower than the market price and that these units have not cleared their bills and the
outstanding of these units is of the order of over Rs.20 crores. The Board is not taking any action to recover the
dues in as much as these units belong to the respondents.
If the dues are recovered, the financial position of the company could improve. Due
to inaction of the management, DRT recovery proceedings against the company have been
decided ex-parte and the assets of the company have been ordered to be auctioned. The Chairman of the company being a nominee of the
respondents has also been trying to dispose of the valuable assets of the company at
prices much lower than what could be obtained
for the properties and as a matter of fact, disposal of the properties would upset the
revival process. In the same way, even
proceedings initiated by the workers for payment of wages were not contested by the
management. In a winding up proceedings initiated by a creditor,
even though the amount claimed by him is disputed, the company did not contest and as a
matter of fact, the Board of Directors, in spite of the protest by the nominee directors
of the petitioners, passed a resolution not to oppose the winding up petition. With these the allegations, the petitioners have
sought for various reliefs.
4. Dr. Singhvi,
Sr. Advocate appearing for the petitioners submitted: The majority of directors being the
nominees of the respondents are conducting the affairs of the company in breach of their
fiduciary duties as directors of the company. These
directors are wearing two hats – one as directors of the company and another as
employees/directors of the respondent companies. Thus, there is a conflict of interest and
these directors, forgetting their fundamental duties of trusteeship towards the company,
are acting in favour of the respondent companies. This is evident from the fact that the
main product of the company – PSF – is being sold to these respondent companies
at a substantial discount and the dues from the respondent companies and their associates
amounting to over Rs.20 crores is not being collected, resulting in a financial crunch. On
the proposition that Board of Directors of a company should owe allegience only to the
company in which they are the directors and should not act on the dictates of another
company even if it is a subsidiary of that company ( Ferruccio Sias Vs. J. Manga Ram Mukhi – 1994 1 CLJ 345
Del.).
5. He further
submitted: The majority of the Board constituting the nominees of the respondent companies
has closed down the factory from 30.9.1998 in spite of protests by the nominee directors
of the petitioners and now they are
interested in getting the company wound up. In
respect of a winding up petition filed by a creditor, even though the claims made by the
creditor are disputed, the Board has decided not to contest the winding up petition
notwithstanding the objection raised by the nominee directors of the petitioners. By not
contesting the winding up proceedings, the nominee directors of the respondents have paved
way for the civil death of the company. This
is not withstanding the fact that the petitioners are keen to revive the company by
additional investments. Such a decision not to contest the winding up proceedings is a
gross act of oppression i.e. the petitioners clearly exhibiting that the majority
directors have no loyalty to the company.
6. Further, in an
EOGM held on 21.2.2000, it was resolved that a report as under Section 23 of Sick
Industrial Companies (Special Provisions) Act be submitted to BIFR in view of erosion of
the net worth of the company, but no reference has so far been made and taking advantage
of this, the Chairman of the company, being a nominee of the respondents, has started
disposing of the properties of the company that too at prices lower than the best prices
that could be obtained for these properties.
7. He further
submitted: The mismanagement of the company is apparent from the fact that the company
failed to represent itself before the Deputy Labour Commissioner, Ghaziabad in the court
proceedings initiated by some of the employees resulting in the authority passing recovery certificates. If the company had contested, it could have
brought to the notice of the authority that most of the claims by the employees were
invalid and that adjustments have to be made against various advances given to the
workers. Now the Chairman of the company uses
these certificates as justification for disposal of the assets of the company. Further, on
an application made by the State Bank of India and Bank of India before DRT Delhi,
ex-parte recovery certificates have been issued for about Rs.4.5 crores with 18% interest. Only after the ex-parte orders, the company woke
up to find that the claim by the banks had been in excess of over Rs.60 lacs and
thereafter filed an objection memo before the
DRT. The DRT has authorized the decree
holders to sell very valuable properties of
the company towards that claim.
8. Summing up his
arguments, Dr. Singhvi submitted that the conduct of the nominee directors of the
respondent companies is burdensome, harsh and oppressive to the petitioners. The petitioners have, time and again, offered to
purchase the shares of the respondents with a view to revive the company by additional
investments. Instead of considering the
suggestion of the petitioners, these nominee directors are paving way for destroying the
substratum of the company- by closing the company, not opposing the winding up
proceedings, not contesting the DRT and
Labour Court proceedings and selling the
properties of the company. Therefore, the
Board of the company should be superceded and
an administrator should be appointed or else the respondents should be directed to sell
their shares to the petitioners on an valuation to be made by an independent valuer. It
has been held by Delhi High Court in Chander
Krishan Gupta Vs. Pannalal Girdhari Lal Private Ltd. ( 55
CC 702 ) that if the affairs of the company are conducted
in a manner prejudicial to the interest of the company and the majority shareholders, they
could be directed to sell their shares to the minority shareholders. In the same manner, since the respondent
companies, even though in majority are not interested in revival of the company, they
should be directed to sell their shares to the petitioners who are interested in reviving
the company.
9. Shri Chadha,
Chairman of the company appearing in person submitted: The nominee directors of the
petitioners have been on the Board for a very long time and they were actively
participating in the affairs of the company and as such they are fully aware of the
situation prevailing in the company. It
is incorrect to allege that the subsidiaries of NTC owe
more than Rs.20 crores to the company. As is
evident from Annexure –‘C’ to the petition, the amount due from NTC
subsidiary corporation is only about Rs.20 lacs. In addition, the NTC subsidiaries have to
pay interest on the delayed payments and dues, but the same could not be recovered due to
non reconciliation of accounts. However, as against an outstanding of about Rs.75 lacs towards
principal, an amount of about Rs.55 lacs was paid between September, 2000 to April, 2001
to meet the liabilities towards wages etc. Therefore, it is wrong to say that NTC
subsidiaries owe substantial amount to the company. As
far as substantial discount on PSF supplied to NTC companies is concerned, the same was a
commercial decision taken on only one occasion for the supplies made during the period
from April to June, 1989 and the rate was the same at which NTC subsidiaries were
purchasing PSF from other suppliers. Therefore,
the allegation that the nominee directors of the company are favouring NTC subsidiaries is base less. As far as the decision
not to contest the winding up proceedings is
concerned, the Board considered this matter in a Board Meeting held on 30.6.2000. The
Board considered the fact that the company had no funds and that raising of funds by sale
of properties is also not possible due to the proceedings before DRT and Allahabad High
Court and as such the Board should not oppose the winding up proceedings as suggested by
the IDBI nominee. Therefore, it is wrong to
contend that the NTC nominees alone had decided not to oppose the winding up proceedings.
Such a decision had to be taken in view of the dire financial position of the company. As
far as the desire of the petitioners to revive the company on their own is concerned, the
respondents were willing to sell their shares to the petitioners subject to the condition
that the petitioners should reach an
agreement with the workers. Therefore, with the view to assist the petitioners in this
regard, the Board authorized the nominee
directors of the petitioners to have a
dialogue with the workers but they could not reach an agreement. In regard to the DRT
proceedings, the company has already filed an
appeal against the order of the DRT. As far as reference to BIFR is concerned, the
company has already filed Form – ‘C’ under Section 26 of SICA. In regard to the allegation relating to sale of
properties , the company has no option but to do so for clearing workers liabilities and
the properties are proposed to be sold on most competitive basis.
10. Summing up his arguments,
Shri Chadha submitted that the running of the company has become unviable and therefore,
the factory had to be closed. The reasons for closure are that the cost of production is
much higher than the market prices as the technology used by the company is outdated,
marketing difficulties, lack of adequate infrastructure, shortage of raw materials, non
availability of required funds etc. While the
respondent companies have no objection in selling their shares to the petitioners, but the respondent companies being Government entities
are very much concerned with the welfare of the workers.
Unless and until the petitioners reach an amicable settlement with the workers, the
respondent companies and cannot sell their
shares to the petitioners. Such a pre
condition is absolutely necessary as failing such a settlement, the petitioners, in view
of the non viability of the company, are likely to strip
the valuable assets of the company which would be detrimental to the interest of
the workers. He also pointed out that the
total liability of the company as on date is over Rs. 25crores . Accordingly, he submitted that the petition
should be dismissed and the interim order restraining the company from selling its assets
should be vacated.
11. Some representatives of the
Swadeshi Polytex Limited Employees Welfare Sang appearing before us explained the plight
of the workers after the factory was closed. According
to them, quite a few of the workers died in poverty and many of them are without basic
necessities of life. They also complained
about the conduct of the directors nominated by the petitioners to state that they were
acting against the workers while NTC directors have been trying to help the workers to the
maximum possible extent. According to them, handing over the company to the
petitioners’ group would not be in the interest of the workers.
12. We have considered the
pleadings and arguments of the counsel. The
main thrust of the arguments of the petitioners is that the nominee directors of the
respondents, in breach of their fiduciary duties, are
favouring NTC subsidiaries and thus are acting
against the interest of the company. They have cited the case of discount offered to NTC
subsidiaries and also non recoveries of dues
from them. In regard to discuounts, only one
solitary instance has been cited. It is a sale of PSF during the period April to June,
1989. In this regard, we have seen a copy of
note recorded by the then Chairman of the company ( a nominee of NTC ) at page=====
wherein, in respect of the demand of NTC to
charge Rs.76 per Kg. as against the contract price of Rs.79.75 Kg. for 335 tonnes supplied
during the month of June, 1989, he has authorized charging of Rs.76 per kg. for 117
tonnes. From the note we find that the
Chairman had taken a commercial decision based on the fact that the prevailing market rate
of PSF as could be obtained from other suppliers was Rs 76 per Kg and that too he allowed
this price only for 117 tonnes and not on the entire supply of 335 tonnes. Thus we do not
find any element of favouring NTC subsidiaries. Further from a solitary instance
of a commercial decision which took place over a decade back, we cannot come to the conclusion that the nominee
directors of the respondents are favouring their own subsidiaries by grant of uncalled for
rebate. Another instance of favoritism allegedly shown to the subsidiaries of NTC is that
the nominee directors of the respondents have not taken any action to recover dues of over
Rs.20 crores. On this allegation, the petitioners have
relied on Annexure –‘C’ of the petition wherein there is a letter from NTC
dated 25.2.2001 indicating that an amount of Rs.20.42 lacs was payable by NTC Subsidiaries
Corporation to the company. The statement attached therewith indicates that the interest
on the outstanding as on 16.4.2001 was of the order of Rs.2.89 crores. In this letter,
there is also a request for waiver of interest on dues payable by NTC Subsidiary
Corporation. Therefore, we are not in a position to understand how the petitioners allege
that an amount of over Rs.20 crores is recoverable from NTC Subsidiaries. Anyhow, since the principal amount due is only
Rs.20 lacs, the company should take steps to
recover the same at the earliest and in regard to waiver of interest, the Board should
consider the financial position of the company while taking a decision on the same keeping
in mind their fiduciary duties to the company.
13. The next allegation of the
petitioners is that by not contesting the winding up proceedings in spite of protest by
the nominee directors of the petitioners, the nominee directors of the respondents have
paved the way for civil death of the company and this, according to the petitioners, is a
severe act of oppression as well as mismanagement. According
to them, the amount claimed by the creditors who have filed the winding up petition is
disputed and as such the petition should have been contested. However, we find from the minutes of the
meeting on 30th June, 2000, that the Company Secretary had informed the Board
that the amount claimed was approximately
correct. We do not have the details of the amount claimed by the creditor who has filed
the winding up petition to ascertain as to whether with the financial position of the
company, the claims could have been settled. If
the amount had been small and payable, the Board of Directors could not and should not
have taken the decision not to contest the winding up proceedings. From the minutes of the Board Meeting, we
find that it is Shri Harish Chandra, a representative of
IDBI who had suggested that it would not be appropriate for the company to oppose
the winding up proceeding with which the majority had agreed. While taking the decision, the Board had
considered other pending proceedings before DRT and Allahabad High Court and formed an
opinion that the company did not have sufficient
funds to meet its liabilities. Event though,
a nominee director of the petitioners had protested against the proposal, which he
conveyed through a letter dated 30.6.2000(Annexure D), we do not find any remedial measure
suggested in that letter. Under the circumstances, the
only issue for our consideration is whether the Board could have taken this decision when
the petitioners had already expressed, as early as in November, 1999 their desire to revive the company after purchasing the shares
of the respondents. This aspect will be considered later.
14. As far as the allegations
relating to the DRT and the Labour Court proceedings which resulted in
these authorities passing ex-parte orders, we find substance. By not contesting the DRT proceedings, even
according to the company, the DRT has passed decree for an excess amount of Rs.60 lacs
which could have been avoided if the company had contested the same. Likewise, in respect of the proceedings before the
Labour Commissioner also, if the contention of the petitioners that the Labour
Commissioner had no jurisdiction or that he had passed orders against the provisions of
law, the company should have contested these proceedings.
In the reply filed by the company, nothing has been placed as to why these
proceedings were not contested. Since we find
that the company has already filed an appeal before the DRT, it should pursue the same
vigorously and suitable action regarding the order of Labour Commissioner should be taken.
15. In so far as the closure of
the factory is concerned, we find that the factory remained closed from September, 1998.
There is nothing on record to show that during the intervening period of over 3 years, the petitioners having 3 representatives on the Board did something to
revive the company. The Chairman of the
company has justified the closure of the factory on various grounds as elaborated as a
part of his arguments and
none of the grounds has been countered by the petitioners.
Further, the petitioners are not justified in taking up this issue of closure of
the factory after over 3 years alleging that the same is mismanagement especially when
they have 3 directors on the Board and have been participating in the Board meetings.
16. Yet another allegation of
the petitioners is that the Chairman of the company is disposing of the assets of the
company. As a matter of fact, on an
application made by the petitioners, by an order dated 22.11.2001, we restrained the Board
of Directors from implementing the decision to dispose of the assets of the company. The complaint of the petitioners in this regard is
two fold. One is that the sale of the assets
would prejudicially affect the revival process and the second is that the assets are being
sold at much lower price than the best price that could be obtained. We find that the
company has proposed to sell a flat at Peddar Road and a flat at Bajaj Bhavan, Mumbai and
the purpose for sale of these properties is to clear the workmen dues. It is not uncommon
for a company to sell its idle/non performing assets in case of financial difficulties. As a mater of fact, we find from Annexure –H
– a letter written by Shri Gaurav Swarup a director of the 1st petitioner
to the Minister of Textiles – that even at the time of revival, non performing assets
like properties in Mumbai would have to be
sold to clear accumulated liabilities, workers dues etc. Therefore, since the purpose of
the sale of these non performing assets is for clearing the liabilities, we do not think
that the disposal of these assets would be against the interest of the company or the
revival process. As far as the apprehension
of the petitioners that these assets are likely to be sold at lower than the best prices
is concerned, to ensure transparency in sale of these assets, we direct that before
disposal of any asset, the matter should be considered in a Board Meeting.
17. Having given our findings,
the question of reliefs to be granted arises. The prayer of the petitioners for
appointment of an administrator would not in any way pave way for revival of the company.
The admitted position is that the factory of the company is closed and that it has become
a sick company and that substantial liabilities are outstanding. Therefore, to revive the
company substantial infusion of funds would be necessary, which could be done only by
those holding substantial shares. Admittedly,
the respondent companies being the holders of the largest bloc of shares of about 34% are
not interested in revival of the company obviously for want of funds and as a matter of
fact, they support winding up of the company. As rightly pointed out by Dr Singhvi,
winding up of the company would be prejudicial to the interest of the company, its workers
and the members. When the petitioners holding 28% shares are interested to revive the
company, which would be in the interest of all concerned, it is but appropriate that they
be given a chance to do so. For doing so,
they would like to acquire the shares held by the respondents, so that the petitioners
become majority shareholders. From the correspondence that the petitioners had with the
Government of India in this regard, we find that the respondents are not averse to selling
their shares. However, they desire that the petitioners should reach a settlement with
workers. We find substance in this stand of the respondents. Since the respondent
companies are Government companies, it is but natural that they would like to protect the
interest of the workers as it has happened in all cases of disinvestments by the
Government. Even though Dr Singhvi contended that in a proceeding under Section 397/98,
there is no need to consider the arguments of the workers, yet, in the present case, the
company remains closed and the dues to the workers have become substantial. No smooth
revival is possible without an agreement with the workers.
Therefore, we are of the view that the petitioners should come to a settlement with
the workers within a period of 3 months and place the agreement before the Board of
Directors. Once the petitioners come to a settlement with the workers, the respondent
companies should disinvest their shares in favour of the petitioners on a valuation to be
made by an independent valuer acceptable to both
the parties.
18. With the above directions,
we dispose of this petition. For the period
of next 3 months, we restrain the company from disposing of any of the performing assets
of the company as it would affect the proposal of revival in case the petitioners are in a
position to arrive at a settlement with the workers. However, such a restraint order would
not apply for sale of non performing assets, like the flats in Mumbai etc as the proceeds
would go to liquidate the liabilities of the company.
Yet, to ensure that the company gets the right price for these properties, the
Board’s approval should be obtained regarding the consideration at which these
properties are to be sold and the manner of utilization of the proceeds. Out of the
proceeds received, the Board should also consider clearing the admitted dues of the
creditor who has filed the winding up petition so that those proceedings do not stand in
the way of revival of the company.
19. The petition is disposed of
in the above terms. All interim orders are vacated.
(S. Balasubramanian)
(A.K. Banerji)