(Prayer: Appeal filed under Section 10-F of the Companies Act, 1956 against the order of the Company Law Board dated 10.8.2005 made in C.P.No.36 of 2002)

1. C.M.A.No.3647 of 2005 is filed by respondents 1 and 9 in C.P.No.36 of 2002 against the order of Company Law Board directing the Central Government to appoint two Directors on the Board of Directors of the Company for a period of two years from the date they assume charge.

2. The few facts which are relevant for consideration herein are that M/s. Sterling Resorts and Hotels India Ltd. was incorporated on 22.05.1986 as a Private Limited Company. Thereafter, it was converted into a Public Limited Company with effect from 11.12.1989. The company is a first to launch time share product. The first product was structured as Property Time Share in and under which the buyer has the right of joint ownership of a specified apartment in a specified resort for a week every year for perpetuity and during 1992, the product was changed to Vacation Time Share which offered the member the right of usage of the apartment in a specified resort for one week every year for 99 years. It had all the standard features of the timeshare like split, advance, accumulate, postpone, exchange, sell, rent, gift, bequeath etc. As the timeshare concept was relatively unknown and holidays were not a high priority category for most Indians, a strategy of market creation was followed initially with prices kept reasonably low to penetrate the market and to bring about an acceptability of product in the market. In due course, the company established itself as Indias No.1 Holiday and Resort Company and during 1994-95, M/s. Sterling Resorts and Hotels (India) Ltd. was amalgamated with M/s. Sterling Holiday Resorts company pursuant to the order of this Court, dated 25.04.1995. the amalgamated was mainly for the benefit of the Company by using combined resources, such as, company reserves, manpower and cash flows of the two companies to contribute to increase in volume of activities which in turn to contribute to the growth and profitability in the resulting Company which is not only in the interest of the company and also in the interest of the public. The Company had been working with the long term objectives and visions to protect the value of time share holders and has as of now twelve resorts in full operation in different places. The Company started developing concerted promotional campaigns using conventional as well as unconventional vehicles and allocated more funds for advertising and other promotional activities. However, during 1994, the company earned leading name in the Holiday and Tourism Industry and the Companys resorts were also affiliated with Resorts Condominium International, which is a leading holiday exchange company. The Company also entered into an arrangement with M/s. Days Inn Worldwide including USA. The Company had all the located facilities to correct the needs of various segments of customers in India and abroad. The customer requests were given priority and effectively attended to. The company was able to declare dividend up to 1996.

3. While so, the Company incurred heavy loss, as a result, the Company had negative networth and the Company was not able to redeem non-convertible debentures and not able to pay matured deposits and other secured and unsecured creditors. They received complaints not only from the Debenture Holders and also from Time Share Allottees relating to delay in allotment of time share accommodation to its members. There were also complaints regarding diversion of funds to other sisters companies detrimental to the interest of the company. The High Court also ordered special audit of the Company through Special Auditor M/s. Jegadeesan & Co., appointed by the High Court. The report of the Special Auditor pointed out number of acts of commission and omission amounting to mismanagement, misapplication and misappropriation of funds detrimental to the interest of minority shareholders of the company and amounting to oppression. The Central Government in view of such complaints received against the Company invoked Section 408 of the Act and approached the Company Law Board to direct the Central Government to appoint the majority of directors on the Board of Directors of the Company in order to restore and improve good corporate Governance and prudential norms in the Respondent Company and to prevent further diversion of funds and assets stripping and to enable the company to recover the funds which were either invested or given as loan and advance to other groups of companies and to prevent further mismanagement of the company and misapplication of the funds and to prevent oppression of minority shareholders and to safeguard the interest of fixed deposit holders, time share allottees and that of public.

4. The Company petition was seriously resisted by the Company and its directors who filed detailed counter about incorporation of company, its objects, background of present and past directors, capital structure, products, schemes offered, pricing, mode of sale facilities available, reasons due to which the company committed default in honoring its commitments, various actions taken, benefits derived from various investments in group of companies, additional investments received from other sources, steps taken to discharge liabilities of all and to remedy the grievances of Time Share allottees, present status of the company both in the matter of discharge of its liability and in the matter of growth of business, about the future plans for revival of the company and the absence of any element of mala fide warranting intervention of the Government through Directors appointed by the Government. In short, the counter filed by the Company sought to meet out all the issues raised in the complaints received against the company which is the cause of action for filing the company petition. The company also sought to answer the allegations regarding various irregularities mentioned in the Special Auditors report and explained the same and pointed out as to how the Special Auditors report though was again verified through another auditor who was appointed by the High Court to go into the report of the Special Auditor and it was found not to be based on no correct information.

5. However, the Company Law Board by the impugned order rejected the companys contention and ordered company petition by directing the Central Government to appoint two directors on the Board of Directors of the Company for a period of two years on the ground that the present state of affairs of the company justifies the conclusions of Special Auditor M/s. Jagadeesan and Co. and the Central Government is justified in approaching the Court to appoint the Directors on the Board of the Company. Aggrieved against the same, the company and one of the directors of the Company preferred the present appeal before this Court.

6. The Company Appeal is admitted and argument was heard on the following substantial questions of law:

"1. Whether the Company Law Board was right in holding that the affairs of the 1st Appellant Company were being conducted in a manner oppressive to its members or in a manner prejudicial to the 1st Appellant company and its shareholders warranting exercise of powers under Section 408

2. Whether the Company Law Board was correct in exercising jurisdiction under Section 408 of the Companies Act and in directing appointment of two Directors on the Board of the 1st Appellant in the light of the facts and circumstances of the present case

3. Whether Company Law Board failed to consider the well settled principle that jurisdiction under Section 408 could only be exercised in extraordinary circumstances since it had the effect of interfering with the management of a Company

4. Whether the impugned order of the Company Law Board is erroneous by reason of mis-appreciation of relevant documents and failure to advert to material documents and facts

5. Whether Company Law Board erred in not taking note of plan of action and steps taken by the 1st Appellant to remedy the short falls if any and to improve its operations and to make it debt free

7. Heard both sides and perused the records.

8. The order of the Company Law Board (hereinafter shortly referred to as CLB) under challenge is made in exercise of its powers under Section 408 of the Companies Act. The relevant provisions of law under Section 408 of the Companies Act empowers the Central Government to appoint such number of persons as the CLB may, by order in writing, specify as being necessary to effectively safeguard the interests of the company or its shareholders or the public interests, to hold office as directors thereof for such period, not exceeding three years on any one occasion. The locus standi to invoke Section 408 is available either to the Central Government or not less than one hundred members of the company or of members of the company holding not less than one-tenth of the total voting power. The appointment can be made only when it is necessary 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 to the interests of the Company or public interest.

9. Here, in this case, the Company Law Board is approached by way of Company Petition not by members of the Company, but, by the Central Government, who is compelled to approach the Company Law Board in pursuance of the complaint made by Timeshare Owners Welfare Association about the delay in allotting accommodation to Timeshare allottees as per time share agreement and also on the basis of special auditors report which is the outcome of special audit held by M/s. Jegadeesan & Co., Chartered Accountant as directed by the High Court vide order dated 10.08.1999 and 10.03.2000. The Special Auditor has, in the report, pointed out the following shortfalls and remedial measures.

a. The company excess assets needs to be sold to discharge debts and liabilities of the Company from the outcome of sale proceeds

b. no transaction with the group of companies can be entered into without proper resolution and proper safeguards

c. The appointment of independent audit director in charge of finance and operation under Internal Control and Internal Audit procedures which are lacking should be made effective.

d. The development revenue expenses, which is also the expenses incurred by the company is shown under the wrong heading Miscellaneous Expenses, which is likely to increase the value of fixed assets and does not reflect the actual assets position.

e. The Company may not get fresh share capital or investment by reason of the present financial position of the company.

f. The future prospects of the company will be strengthened only through remedial measures to settle the grievances of time share customers and to discharge liabilities of the debtors. The assets and liabilities position of the company, as such, may not be able to repay loans taken from the group companies unless the debts of secured and unsecured creditors and legitimate dues of further group of companies are settled from the amount realized from group of companies without touching the profits of company or sale proceeds of the properties or revenue sales of future. Therefore, the intervention of the court is, according to the Central Government, essential through appointment of Directors by Court to have effective control of the Board of Directors in the interest of General Body of owners and time share creditors.

10. The Central Government has also in the Company Petition as referred to above received complaints from the fixed deposit holders and time share allottees about the failure to repay the matured deposit to the fixed deposit holders and about the delay, refusal and non-allotment of accommodation to the Timeshare Allottees in time by the company. The report of inspection held in pursuance of the complaints regarding various acts of procedural violations committed by the company resulted in initiation of penal action.

11. The status of the company as referred to above on the date of filing of the petition is not seriously disputed by the company. The learned senior counsel appearing on behalf of the company would only bring it to the notice of this Court the failure of the Company Law Board to appreciate the status of the company through unstinted efforts taken by the company for infusion of more capital and to discharge the liabilities of all and to recover receivable dues to the company and to improve the financial position of the Company on all aspects in order to safeguard the interest and benefits of all concerned.

12. The learned Senior Counsel for the appellant has also, through affidavit filed before this Court drawn the attention of this Court about further steps taken on the part of the company to bring more funds to make it debt free company and to increase positive net worth of the company and about considerable extent of success attained over the period of few years.

13. The learned Senior Counsel for the appellant also by relying upon the judgments reported in (1) 2004 (8) SCC 76 [LQ/SC/2004/1203] =2005-1-L.W.766 Kedar Nath Agrawal (Dead) and another vs. Dhanraji Devi (Dead) by LRs (2) 2009 (10) SCC 197 [LQ/SC/2009/1960] = 2010-2-L.W.809 in Jai Prakash Gupta (Dead) through LRs and Riyaz Ahamad and another argued that though the basic rule is that the rights of the parties as on the date of institution of the suit should be determined or proceeding and the suit/action should be tried at all stages on the cause of action as it existed at the commencement of the suit/action, it does not mean that events happening after institution of a suit/proceeding cannot be considered at all, and a court of law may take into account subsequent events and it is the power and duty of the Court to consider changed circumstances, in the following circumstances:

(i) the relief claimed originally has by reason of subsequent change of circumstances become inappropriate; or

(ii) it is necessary to take notice of subsequent events in order to shorten litigation; or

(iii) it is necessary to do so in order to do complete justice between the parties.

14. In the first authority, the appeal was allowed by setting aside the order under challenge which is made without taking into account subsequent event and the Supreme Court has while doing so observed that the High Court committed an error of law and jurisdiction in not taking into account the subsequent event and remitted the matter for fresh disposal in accordance with law and after considering the subsequent event, in the light of observations made by the Supreme Court. The same view is applied by the Supreme Court in the subsequent judgment, wherein, the Supreme Court permitted one of the parties to file an application for amendment of original application for the purpose of incorporating the fact arising out of subsequent development with further direction issued to the High Court to arrive at a positive conclusion on the bona fide need of the landlord at present and the comparative hardship of the parties on the basis of the subsequent development. Both this Court and the parties herein are bound by the observations of Supreme Court and the same is applicable to appropriate cases involving identical factual situation.

15. As rightly argued by the learned senior counsel for the appellant, the present case is a fit case wherein the Company Law Board ought to have appreciated the relief sought for by the Central Government in the light of the allegations raised in the complaint which is the basis of the company petition and in the light of subsequent development and the steps taken and improvements made by the company to remedy the situation and the current status of the company on the date of passing of the order. Applying the views of Supreme Court, the appellate Court is of the view that it is also the duty and jurisdiction of this Court to rectify the error, if any, committed by the Company Law Board and to decide the correctness of order of the Company Law Board by duly taking into consideration subsequent developments, if any.

16. As already referred to above, the Company Law Board has thought it fit to direct the Central Government to appoint two directors upon the Board of Directors of the Company for the following reasons.

1. The Company failed to discharge its liabilities towards Fixed Deposit Holders and secured and unsecured Debtors.

2. The Company failed to take any steps to recover the amounts advanced from the group of Companies and write it off to the benefit of group of companies and detrimental to the interest of group of company.

3. The company made investments in group of companies without any return or with insignificant return.

4. The company incurred huge loss and hereafter, the company has only negative net worth and the company financial position is such that no one is ready to invest funds either by way of share capital or by way of investment. The expenditure of the company is on increase without making any business. The company is also guilty of various procedural violations resulting in initiation of penal action and the same evidence all is not well with the company.

17. It is seriously contended by the learned Senior Counsel for the appellant that all the grounds which prompted the Central Government to seek appointment of Directors by the same leading to the impugned order by CLB, appointing directors for a period of two years are remedied through infusement of further investment and changes effected in the board by replacing ex-directors with more qualified, efficient, knowledgeable and experienced new directors and through repayment of various class of debtors and various phase of actions to revive and restore the company business activities in a time phase manner by bringing more funds from outsiders etc. The learned Senior Counsel for the appellant has also submitted statement of settlement of dues made to other companies who filed company petitions and settlement made to banks and creditors and OTS made to Banks, Institutions & Creditors and settlement of employee dues, statutory dues and intercorporate loan and creditors dues. The affidavit along with relevant particulars is filed through one S.Sidharth Shankar, who was the former Joint Managing Director of the appellant Company and present Vice Chairman of the Company.

18. The perusal of the records would reveal that the Company incurred loss due to general recession during 1996 to 1998. The Company during 2009-2010 received an amount of Rs.49.32 crores from 3 overseas companies by names M/s.Indus Hospitality Holdings Ltd. 2 M/s. India Harizon Fund Ltd. and 3. M/s.India Discovery Fund and also an Indian investor namely M/s.Blue Ocean Investment Trust by way of allotment of equity shares to them. The company was able to pay dues to the depositors, creditors, contractors, banks, financial institutions, dues to employees, statutory dues to the authorities etc. excepting two institutions namely, IFCI and GIIC. The company received further investment totally 97 crores during 2010-2011. The company was also able to realize further 25 crores and the property worth about Rs.9 crores have already been taken over. According to the affidavit, the Company is debt free baring two institutional debtors as above referred to and few other creditors in respect of whose claims disputes are pending. The statement of settlement filed by the applicant on 17.06.2010 furnishes all the particulars of those whose claims are settled by the company. As per the statement, Rs.134,60,86,166/- is paid out of total outstanding of Rs.199,07,81,263/-.

19. As per the changes brought in the board of Directors, representatives of the new investors are inducted in the board and there are now six independent Directors hailing from different business and different professions, viz., Practicing Chartered Account, Secretary in AVS College and also Senate member in Bharathidasan University, Practicing Advocate, Retired Vice-president from M/s.Greeves Cotton and Company and ex-special Director in M/s.Ahok Leyland Ltd. who are more educated and qualified.

20. The affidavit of the Vice-chairman would further reveal that the qualifications pointed out by the statutory auditors for the previous years are duly addressed by Company in their annual report of subsequent years which compelled the statutory auditors to withdraw all the audits already pointed out. It is further revealed that the appellant Company is in the growth mood and has taken all steps by replacing management with whole new and talented team and by having tie up with leading tours and travels company in India and abroad for marketing its product so as to attract more investment from the investors to enable the company to complete all the projects. It is also pointed out in para-19 of the affidavit that the equity share of 10 which was quoted around Rs.6 per share prior to 2005, is now quoted between Rs.80 to 90 per share. It is also pointed out that no individual time share allottees or fixed deposit holders or other class of creditors have, except approaching the appropriate forum for recovery of amount, made any complaint of any mismanagement or oppression detrimental to the interest of minority shareholders. The Company has in the counter filed before the Company Law Board addressed each and every problem pointed out by the petitioner and addressed the same with all details about actions taken to remedy the situation and the present improved status. The appellant in the memorandum of grounds raised herein explained the benefits derived from investments made in group of companies which according to the company petition and the Company Law Board not prudent investment with no return or without direct return. As far as acts of commission and omission resulting in initiation of penal action referred to in the inspection report is concerned, the same are admittedly compounded with the permission and except few procedural violations, no other serious violation or any other acts of commission or omission are pointed out amounting to act of serious irregularities or act of malpractice by the company.

21. Thus the overall picture of the present position of the Company as displayed before this Court, if viewed in the light of particulars mentioned in the affidavit would substantially support the contention raised on the side of the appellant. The Company through all efforts taken to improve its business and financial growth moving towards development process and reasonable time is warranted to rectify all errors. As a matter of fact, it is no bodys case that the Company is not in operational path on the other hand as per the particulars available herein, the holiday resorts of the company are in operation in twelve places without any complaints and the loans and advances made by the group of companies are duly secured with immovable properties through either agreement of sale or power of attorney and till date, no threat caused to such security offered in favour of the company. The annual report for the years 2010-11, 2011-12 would show that the companys negative net worth is duly converted into positive net worth to the tune of above 70 crores.

22. The learned Central Government standing counsel by relying upon the comparative statement showing the state of affairs of the company during 2008-2009, 2009-10, and 2010-11 under specified captions would contend that the Companys financial position was not improved but was only deteriorated and its expenses is not commensurate with income and provision of huge amount is made for bad and doubt debts, advances and the Company has not provided for compounding penal interest, which is likely to have to impact upon all losses, as such the situation is not improved to recall the order directing the Central Government to appoint the Directors. Whereas the Government raised in the latest affidavit filed by the company has duly addressed all the clarifications raised in the counter and other qualification pointed out and particulars and explanation offered in the affidavit and the statement of settlement are sufficient enough to accept the contention raised on the side of the appellant that the companys position is not such warranting intervention of Court or Central Government. This Court finds mush force in the argument advanced on the side of the learned Senior Counsel for the appellant that the management of every company running on loss through its board of directors need not be interfered with by court appointed or Government appointed directors and the activities of companies resulting in loss need not necessarily construe either as prejudicial to the interest of the company or oppression of minority shareholders of the Company.

23. Here is the case wherein the company has been throughout consistently pleaded for its revival and restoration of its original status that too on its own efforts and any intervention in any manner, when the grievance of all concerned are rectified and when there is no further complaint from any other quarters, amounts to unwarranted interference into the affairs of the company either by the court or by the Government. As it is well laid down, that the power under Section 408 has to be invoked sparingly under extraordinary situation, no such extraordinary situation is existing in the present case either on the date of the impugned order or thereafter. The subsequent event which changed the entire financial scenario of the company and style of functioning of the company is omitted to be taken note of by CLB. As rightly pointed out by the learned senior counsel, the Company Law Board has on one hand appreciated the genuine endeavor taken by the company in introducing new products and upgrading its resorts for benefit of its customer to achieve its object, but failed to devolve upon the same in detail to arrive at a correct final conclusion. Such failure on the part of Company Law Board in appreciating all the relevant factors resulted in an erroneous order. The present factual scenario prevailing in the company, in my considered view, does not warrant induction of government appointed board of directors of the company. Thus, all the questions of law raised herein are accordingly answered and the impugned order stands set aside. In the event of the impugned order being set aside, the same will in no way prejudice either the members of the company, time share allottees shareholders and creditors of the company or the public, Central Government Public. Further, there is no limitation or restriction imposed upon the Central Government to approach the Company Law Board for appropriate relief if similar situation arises in future, as such, recalling the impugned order in the given situation will be in the interest of shareholders, timeshare allottees, creditors and also public who will be ultimately benefited by the particulars offered by the company on its revival. Thus, for the reasons stated above, it is but more appropriate to set aside the impugned order of CLB.

24. In the result, the appeal is allowed by setting aside the impugned order of the company law board.