S. Balasubramanian, Chairman - (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 Peerless General Finance and Investment Company Limited (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 Reserve Bank of India had conducted an inspection of the company under Section 45N of the Reserve Bank of India Act, 1934, between the period from September 19, 1995 to November 18, 1995, with respect to the financial position of the company as on March 31, 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 inasmuch as there has been considerable erosion in realisable 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 the Reserve Bank of India on the financial position of the company as on March 31, 1993. The reference further elaborates the various observations made by the Reserve Bank of India 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 from 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.
(3.) INITIALLY, the company filed an application seeking time to file a detailed reply on the ground that the Reserve Bank had recently conducted another inspection and since the Central Government reference has been based on the report of the Reserve Bank 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 Company Law Board 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 Reserve Bank of India is the exclusive controlling authority for companies like the respondent company and whether action under Section 408 of the Companies Act, 1956, 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 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.;