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Central Government v/s Peerless General Finance & Investments Co. Ltd.

    C.P. NO. 57 OF 1997

    Decided On, 04 December 1998

    At, Company Law Board Principal Bench New Delhi

    By, MEMBER

    H.S. Phoolka and Arun Arora for the Petitioner. S. Sarkar, Ms Indrani Roy, A. Chatterjee and B. Lahiri for the Respondent.

Judgment Text


1. The Central Government has filed this instant reference under section 408 of the Companies Act, 1956, for appointment of the Government Directors on the Board of the Peerless General Finance & Investment Co. Ltd. (Company). The company was served with a copy of the reference received from the Government with the direction to file its reply on the reference and accordingly it did so.

2. According to the Central Government, the RBI had conducted an inspection of the company under section 45 N of the Reserve Bank of India Act, 1934, between the period from 19-9-1995 to 18-11-1995 with respect to financial position of the company as on 31-3-1995. The inspection report revealed major disquieting features relating to regulatory compliance of the company, its financial condition as well as the operational management more particularly, with reference to the following:

?The regulatory compliance in relation to various provisions of the Residuary Non Banking Companies (Reserve Bank) Directions, 1987 is not at all satisfactory.

The financial position of the company is also far from satisfactory in as much as there has been considerable erosion in realizable value of assets in view of significant increase in the non-performing segments of loan portfolio.

The operational management of the company is not effective and several deficiencies in the methods of operation have been observed.

The company has not rectified several serious deficiencies brought out during the earlier inspections by RBI on the financial position of the company as on 31-3-1993.?

3. The reference further elaborates the various observations made by the RBI in the Inspection report and on the basis of the same the Central Government has alleged that the affairs of the company have not been managed with sound business principles and prudent commercial practices and, therefore, according to the Central Government the affairs are being carried on in a manner which is prejudicial to the interests of the company, the public interest and interest of the depositors and also oppressive to the members of the company. Accordingly, the Central Government has sought for an authority to appoint directors to effectively safeguard the interest of the company, its shareholders and the public interest, and to prevent the affairs of the company being conducted 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 to public interest.

4. Initially, the company filed an application seeking time to file a detailed reply on the ground that the RBI had recently conducted another inspection and since the Central Government reference has been based on the report of the RBI on the inspection conducted in 1995, the report for 1997 would be relevant. Later, the company filed its detailed reply. In its reply it has taken a stand that, when the CLB had ordered appointment of four Government Directors on the company earlier, on an appeal, this order was quashed by a single Judge of the Calcutta High Court and an appeal by the Central Government before the Division Bench is still pending. The appeal filed by the Central Government is confined to two findings in the judgment of the single judge viz whether the RBI is the exclusive controlling authority for companies like the respondent company and whether action under section 408 can be initiated only on the basis of materials existing on the date of invocation of the said provisions and not on the basis of and of an apprehended situation in the future. Since the appeal is pending, it has been prayed by the company that the instant reference should be kept in abeyance till the disposal of the appeal. Further, since the petition is based on the position prevailing in 1995 and not with reference to the state of affairs at the time of filing of reference, the same is not maintainable. It has also been stated in the reply that after 1995 there has been a substantial change in the composition of the Board of Directors and certain reputed persons have been inducted into the Board and as such there is no need to appoint Government Directors at this juncture. The reply also counters the various allegations made in the reference.

5. When the matter was heard, Shri H.S. Phoolka, the Advocate for the Central Government took us through the various allegations in the petition and submitted that even the report on the latest inspection conducted by the RBI in 1997 with reference to the financial position of the company as on 31-3-1997 does not disclose appreciable improvement in the working of the company and as such the affairs of the company are still being carried on in a manner which is prejudicial to the interests of the company, shareholders and the public interest and as such the Government Directors should be appointed on the Board. He also referred to the report of an inspection conducted under section 209 A pointed out that all is not well with the affairs of the company.

6. Shri Sarkar, the Senior Advocate appearing for the company raised certain legal issues with regard to the jurisdiction of the CLB under section 408 in respect of a residuary non-banking financial company. (RNFC) According to him, after the amendment to the RBI Act in 1997, RBI has full powers to regulate the affairs of these companies including the power to require such companies to change the composition of Directors. He referred to the earlier judgment of the single Judge of the Calcutta High Court (now in appeal) wherein the learned Judge held that when the RBI has the statutory powers to give directions in public interest, by necessary implication, the general power of the CLB under section 408 was excluded to that extent. He submitted that in view of the RBI having power to require RNFCs to change the composition of the Board of Directors, the CLB will have no jurisdiction under section 408. He also submitted that in a writ filed before the Nagpur Bench of the Bombay High Court seeking for super-session of the Board of Directors of the company, the High Court dismissed the petition on the basis of an affidavit filed by the RBI wherein the RBI has stated that it was monitoring the affairs of the company. Therefore, Shri Sarkar submitted that when RBI is monitoring the functioning of the company there is no need for appointment of Government Directors. He further submitted that during the last two years, the company has inducted into the Board five eminent persons with a view to ensure that their expertise is available for conducting the affairs of the company more effectively, and efficiently. He further submitted that there has been no complaints from any members of the public or depositors regarding the affairs of the company and therefore appointment of the Government Directors at this juncture would send wrong signals and would adversely affect the image of the company.

7. We have considered the pleadings and arguments. We do not propose to enter into any dialogue regarding our powers under section 408 in respect of RNBFCs. We shall restrict ourselves to the factual position as found in the various affidavits filed before us. Since the reference has been based on an inspection report by the RBI, it is appropriate to refer to its affidavit before Nagpur Bench of the Bombay High Court in the writ petition 3708 of 1997, the basis on which the Nagpur Bench dismissed the writ petition. In its affidavit dated 28-1-1998 the RBI, which had been arrayed as the 1st respondent, and the company as the 5th respondent, has averred as follows:

"In this connection, it is submitted that the respondent No. 5 is carrying on the business of RNBC as defined in RNBC (Reserve Bank) Directions, 1987 hereinafter referred to as "Directions". It is necessarily, therefore, bound to comply with the above said Directions. This answering respondent is inspecting the company regularly and constantly monitoring its affairs by calling for various statutory returns and statements, as required under the Directions. This monitoring is essential in order to protect the interest of the depositors and also it is necessary in the public interest. Inspections have been carried on periodically in accordance with the provisions of Section 45N of the Reserve Bank of India Act, 1934. The last inspection has been carried out between 20th August, 1997 to 22st November, 1997 with reference to the financial position of respondent No. 5 on 31st March, 1997.

Prior to this Inspection, this answering respondent had also carried out the inspection in 1993 and 1995. In the inspection of 1995 it was noticed that the liability of respondent No. 5 to its depositors was not truly reflected in its books. Besides this, there were also violations and non-compliance of several provisions of directions issued in this regard.

As a sequel to this inspection, there were series of discussions and meetings with the executives of respondent No. 5 and as a result, this answering respondent, amongst others, required respondent No. 5 to change the constitution of its Board of Directors by inducting therein the professionals experts so that the management could he carried out in a sound professional manner. [Emphasis supplied]

As a result, the respondent No. 5 started acting upon the suggestions and directions and as a result thereof it was noticed in the inspection of 1997 that there was a sharp decline in idle funds in as much as average cash and bank balances in terms of days deposit collection declined from 20 days in 1994-95 to 16 days in 1995-96 and further to 10 days in 1996-97. The average yield on investments also improved from 9.92% in 1995-96 to 11.21% in 1996-97. The rate of slippage of performing advances to NPAs sharply declined from 12.1% in 1995-96 to 4.3% in 1996-97. The net margin on deployment of funds which was negative in 1994-95 and 1995-96 turned positive at 6.37 crores in 1996-97. It was also seen that the Management Information System in the company has improved with the top management keeping regular track of its state of affairs to a reporting system covering certain vital areas of operations. The position in respect of compliance with provisions of various paragraphs of RNBC Directions, 1987 has also improved. The company was found to have complied with provisions of paragraph 4.4 (A), 5.6(2), 12 and 18 of RNBC Directions, 1987."

The answering respondent further says that, right from 1995 i e., after the inspection in that year, this respondent has been constantly monitoring the affairs of the company by requiring it to submit quarterly compliance report as regards rectifying adverse features particularly, in respect of regulatory requirement. Besides this, it is also requiring the respondent No. 5 to submit periodical statements regarding recovery of bad debts and advances (non-performing assets). The embargo has been put on respondent No. 5 in respect of any investment by it, except in the approved category and also with prior approval in non-approved categories.

It will thus be obvious that this answering respondent is very much alive on the stock to its statutory duty vis a vis the financial affairs of the respondent No. 5. As a matter of fact it will be seen from what is stated above, that it is constantly monitoring the assets of respondent No. 5 vis a vis its liability towards the depositors."

8. From the above affidavit it is evident that the RBI has required the company to change the constitution of its Board of Directors by inducting professional experts and as a matter of fact the company has inducted two former chairmen of the State Bank of India, an eminent advocate of the Supreme Court, a well known corporate professional and a reputed Chartered Accountant. The directors so appointed are:

Shri D.N. Ghosh - Former Chairman of the State Bank of India (with effect from 12-8-1996)

Shri S.M. Dutta - Former Chairman of Hindustan Level Ltd. (with effect from 12-8-1996)

Shri J.B. Dadachandji - Senior Advocate of the Supreme Court of India (with effect from 12-8-1996)

Shri Dipankar Basu - Former Chairman of State Bank of India (with effect from 11-5-1998)

Shri Amal C Chakraborti - Former senior partner of S R Batliboi and Company, Chartered Accountants (with effect from 29-8-1998).

9. It is also found from the affidavit filed by the company on 10-11-1998 that, by a letter dated 7-8-1998 the RBI has directed the company to constitute a supervisory committee of the Directors, an audit committee of the Board with a reputed Chartered Accountant as a member, an investment committee with the Directors having expertise in investment decisions and accordingly, such committees have already been constituted. It is also seen from this affidavit that since March, 1986 five official meetings have been held with the RBI besides informal meetings between senior executives of the company and the RBI. In addition to the committees as directed by the RBI, the company has also set up Directors Recovery Committee and Subsidiary Review Committee. It is also averred in the affidavit that since August, 1996 there have been 17 meetings of the Board of Directors, 31 meetings of the Committee of Directors, 14 meetings of Directors Recovery Committee. The company has also stated that it is in the process of appointment of whole time professional Directors on its Board with a view to professionalise the day to day management.

10. In view of the changed circumstances, from what was prevailing in 1995 on the basis of which this reference has been made and considering the active monitoring now being done by the RBI, and various actions taken by the company consequent to the directions issued by the RBI for toning up the conduct of aff

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airs of the company including induction of five new expert professional directors, we have to examine whether there is justification to order appointment of directors by the Central Government, in terms of Section 408. As per section 408 the purpose of appointment of Government Directors is to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial interest to the company or to the public interest. In the present case, even though we have not examined the allegations in the reference in detail, since the company, on its own, by inducting reputed professionals in various fields, has taken remedial steps to tone up the working of the company, which is also reflected in the latest inspection report of the RBI and its affidavit before the Nagpur Bench of the High Court, we do not find any reason to order appointment of Government Director at this juncture especially when the RBI is monitoring the affairs of the company on a continuous basis. However, since we have not gone into the various allegations in detail, we grant liberty to the Central Government, if later, it were to find, either on its own or through a feed back from the RBI, that there has been no substantial improvement in conducting the affairs of the company, to move us with additional material including whatever material that has been placed before us in the reference as well as in the rejoinder. 11. With the above observations, we dispose of this reference without any order.