Company Law Board
Central Government vs Carews Pharmaceuticals Limited on 15 March, 2004
Equivalent citations: (2004)3COMPLJ432(CLB), [2004]52SCL560(CLB)
ORDER
S. Balasubramanian, Chairman
1. The Central Government has filed this petition under Section 408 read with Sections 397/398 of the Companies Act, 1956 alleging that the affairs of M/s Carews Pharmaceuticals Limited (the company) are being conducted in a manner prejudicial to the interest of the company, public interest and oppressive to its members. This petition was mentioned on 24.1.2003 and directions were issued to the respondents to file their replies. The 3rd and 4th respondents have filed their affidavits. The 3rd respondents has submitted that even though he was a director on the Board, he was never involved in the day to day management and administration of the company and that he had resigned from the Board effective from 7th December 2000. The 4th respondent has filed a similar affidavit. The petitioner has submitted that a copy of the petition was served on the 2nd respondent but no reply has been filed by him. As far as the 1st respondent, namely the company is concerned, the petitioner has submitted that the petition could not be served on the company since the registered office was found locked.
2. On the day of hearing, none from the respondents' side was present in spite of notice and therefore the matter was heard ex-parte. The learned counsel appearing for the petitioner, going through the petition submitted: On a complaint regarding the affairs of the company, an inspection under Section 209A of the Companies Act was carried out. The Inspection Report brought out a number of instances of mismanagement such us assignment of trade mark, siphoning of funds, discarding of assets at huge losses, inter corporate deposits etc. The net worth of the company was positive as on 31st March, 1997 at Rs. 286.94 lacs and as on 31.3.1998, it became negative at Rs. 912.50 lacs. In view of this, the Board of Directors of the company at a meeting held on 21st Dec. 1998 had formed an opinion that the company had become sick and accordingly referred the matter to BIFR. The main product of the company marketed under the brand name was "Combiflam". This trade mark was assigned and transferred by the company to M/S Roussel India Limited by a deed of assignment executed on 15th May, 1998 for a sum of Rs. 1000. While doing so, it also entered into a non -compete agreement with Roussel India Limited against a compensation of Rs. 20 crores only, even though there were bids at higher amounts from other parties. One Arthur Anderson had valued the aforesaid trade mark at Rs. 25 to 30 crores. Since this product generated most of the revenue of the company, the Board must have obtained the consent of the shareholders for sale of the trade mark in terms of Sections 293(1)(a) of the Act. However, the company did not do so. Further, the company is having a court case with the Government of India over a demand of Rs. 710.27 lacs made by the Government for over charging the prices of "Combiflam". But no leave of court was taken for selling the trademark. It was admitted in the proceedings before BIFR that the company had received higher offers for the trademark but the company thought it prudent to sell the brands to Roussel India Limited to avoid disputes with Roussel from whose parent company, this trademark was obtained in 1988 for a consideration of Rs. 101/-. This stand of the company is wrong in as much as the original assignment deed did not contain any stipulation that this trademark had to be sold back only to M/S Roussel India Limited and by selling this for rupees 1000 only, the Board of Directors have acted against the interest of the company and have also evaded payment of capital gain tax otherwise payable on acceptance of the highest bid.
3. He further submitted: On 2.7.1998, the company entered into a users agreement on payment of Rs. 150 lacs to UB Limited and Rs. 100 lacs to McDowell Company Ltd. for use of the brands "Kingfisher" and McDowell" in respect of Mineral Water. The company did not have any infrastructure to manufacture mineral water but paid Rs. 250 lacs to these two companies. Ultimately, the company did not manufacture mineral water at all. Of the Rs. 250 lacs, the company had received back Rs. 200 lacs in the month of December, 1998 and January, 1999 and the balance Rs. 50 lacs is still lying with UB Limited. When the company was having financial crisis, this huge amount would have been given only as a financial accommodation to these two companies in the guise of a non starter project exhibiting very clearly financial mismanagement. In addition to this, the company also paid Rs. 75 lacs to Asian Age paper for an advertisement campaign in respect of the mineral water when the company had not even installed any capacity to manufacture mineral water. The proposed advertisement campaign was approved by the Board in its meeting held on 25th June, 1998. This is nothing but diversion of company's funds.
4. The company has discarded many of its assets at a very low fraction of even their written down values. As against written down value of Rs. 128.33 lacs as on 31st March, 1998, the company sold these assets for a total consideration of only Rs. 4.22 lacs. Whether any of the buyers of the aforesaid assets was connected to the company directors was not ascertainable from the records made available to the company inspector. Even though the company has justified the sale of the assets at a low price on the ground that they were old and obsolete, this defence is not convincing. In August, 1998, the company had made inter corporate deposits of Rs. 250 lacs to Likith Steels Private Limited despite its severe financial crisis. This grant of ICD was approved by the Board in its meeting 19.8.1998. According to the company, this ICD was given purely with an intent to gain interest at 18% and was given for a short period of 90 days. However, it is found that no interest was received by the company on this deposit. A sum of Rs. 120 lacs was paid as an advance to one Sreenivas Trust in September, 1998 free of interest. This advance remains un recovered as on date and this payment of advance was approved in a Board Meeting held on 19th August, 1999. The company's explanation that this amount was given for the purpose of providing drinking water under Sathya Sai Drinking Water Supply Scheme, since it was a noble cause is not satisfactory in as much as the company itself was sick. The Inspecting Officer found that the company had given substantial loans and advances to various body corporates and as on 31.3.1999, the amount recoverable was Rs. 965.17 lacs out of which an amount of Rs. 904.19 lacs was due from UB Pharmaceuticals Limited. No Board resolution is available approving these loans and advances as required under Section 292 of the Act. No interest was charged on any of the loans and advances. Thus, the company has not only violated the provisions of law in giving these loans and advances but has also acted against the interests of the company.
5. Summing up his arguments, the learned counsel submitted that in all the company has disbursed nearly about Rs. 7 crores to different corporate bodies over a short period of only 3 months. Out of this amount, only Rs. 200 lacs have been recovered. Thus, the Board of Directors of the company have acted in a manner prejudicial to the interest of the company and as such the present Board of Directors of the company should be dismissed and in terms of Section 408 of the Act, Government Directors should be appointed on the Board of the company so that they could take effective steps to recover the money due to the company.
6. I have considered the matter. Out of the 4 respondents, the company could not be served a copy of the petition as the office premises were found locked, two directors have filed affidavits that they have already resigned from the Board and another director has not chosen to file any reply to the petition. From the narration in the petition, it is quite obvious that substantial funds of the company have been diverted to other body corporate and as per the petition nearly Rs. 5 crores are yet to be recovered/adjusted. I also find from the petition that BIFR has rejected the reference made by the company. In the absence of any defence justifying the various actions of the company, I have to necessarily to go by the allegations that there have been gross financial mismanagement in the company. Therefore, I find justification in the prayer in the Central Government that to protect the interest of the company, the present Board should be removed and the Government directors should be appointed. Since two directors have on their own resigned, I direct the Central Government to appoint 4 directors on the Board of the company for a period of 3 years so that they could take effective steps in recovering the money due to the company.
7. The petition is disposed of with above directions with no order as to cost.