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In Re: East India Hotels Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKolkata High Court
Decided On
Case NumberCompany Application No. 291 of 1977 connected with Company Petition No. 476 of 1977
Judge
Reported in[1980]50CompCas381(Cal)
ActsCompanies Act, 1956 - Sections 58A and 633(2); ;Companies (Acceptance of Deposits) Rules, 1975 - Rule 3(2)
AppellantIn Re: East India Hotels Ltd.
Advocates:Asutosh Law, Adv. for Registrar of Companies;S.B. Mukherjee, Sr. Adv. and ;Anindra Mitra, Adv.
DispositionApplication dismissed
Excerpt:
- .....was a non-banking and non-financial company, to receive public deposits. thereafter the reserve bank of india for the first time formulated certain directions for regularisation of acceptance of deposits from the public. in accordance with the said direction, it appears that the company had deposits in excess at the end of march, 1974. the company in the meantime by an application dated 29th march, 1973, made before the reserve bank prayed for exemption from application as to the direction for deposits, in view of the special circumstances of this company. it is further stated that pending the said application before the reserve bank the company was advised by the reserve bank to secure deposits by creating trusts in favour of banking institutions. accordingly in march, 1974, the.....
Judgment:

Salil K. Roy Chowdhury, J.

1. This is an application under Section 633(2) of the Companies Act, 1956, for an order excusing and relieving the petitioner of the negligence, defaults and non-compliance with the directions contained in Section 58A of the Companies Act, 1956, and Companies (Acceptance of Deposits) Rules, 1975, and from all liabilities thereunder and for consequential reliefs.

2. The petitioners presented this application on the 26th of July, 1977. On that date an order for maintaining status quo in the meantime was passed and subsequently directions for filing affidavits were given which were extended from time to time and, thereafter, the matter was adjourned from time to time and ultimately, appeared in the list for hearing.

3. The petitioners are the directors of the company, East India Hotels Ltd., which was incorporated as a public limited company and having its registered office at No. 4, Mango Lane, Calcutta. The authorised capital of the company is Rs. 10 crores, the issued capital is Rs. 8,65,79,340 and the subscribed capital is Rs. 4,57,429.23 in cumulative preference shares, redeemable cumulative preference shares, ' A ' redeemable cumulative preference shares and equity shares as stated in para. 4 of the petition. The objects of the company, as from the name, it appears are, inter alia, to own and operate hotels and provide services in the field of hotel management. The company owns and operates at present a chain of luxury hotels throughout India and also in foreign countries and amongst those are Oberoi Sheraton in Bombay, Oberoi Inter Continental in New Delhi, Oberoi Grand in Calcutta and Oberoi Palace in Sri Nagar. It is stated that these hotels have not only helped in providing the base for the growth of tourism industry in the country and in creating a valuable source of earning foreign exchange but these have also carved out in the realm of international hotel and tourism industry a special place for the country, as possessing technical know-how and expertise in the field of hotel management. It is also stated that the company entered into foreign collaboration with the world famous international group of hotels for its hotel in New Delhi and with another world famous group of hotels, being the Sheraton group of hotels, for its Bombay unit not so much to supplement its own expertise in the field of hotel management but to obtain funds in the foreign currencies which were critically needed for the import of capital goods for the construction of those two hotels and also to avail of global reservation and membership facilities offered by those two groups for attracting greater number of tourists in India. It is alleged that in order to provide for funds for its said five star deluxe luxury hotels it had to project its funds based on factors of costs then applicable. It also projected for finance to the extent of about Rs. 6,50,00,000 and accepted a contribution of Rs. 2 crores from the shareholders through fresh capital and from U.S.A.I.D. (Long Term Loan) of Rs. 4,50,00,000. The cost ultimately swelled to Rs. 12 crores on account of diverse factors including increase in number of rooms, change in design, increase in the costs of construction and material, labour, equipment and furniture and fittings as there was delay in receiving the funds and in the meantime the company had to obtain short-term deposits. The first deposit of about Rs. 31,00,000 were accepted by the company in 1965 from the public to meet the overrun costs of Oberoi Inter-Continental. In the years 1966-67 in order to meet the costs and expenses of renovation of the company's Oberoi Grand Hotel at Calcutta and other hotels, the company had also to accept term deposits from the public. Even after the company's hotels went into operation for the first four years the companysuffered loss which in the aggregate was Rs. 256.81-lakhs. In the result, the public deposit position as on 31st of March, 1976, stood at Rs. 22 crores or thereabout.

4. It is stated that until December, 1971, there was no restriction on the company, which was a non-banking and non-financial company, to receive public deposits. Thereafter the Reserve Bank of India for the first time formulated certain directions for regularisation of acceptance of deposits from the public. In accordance with the said direction, it appears that the company had deposits in excess at the end of March, 1974. The company in the meantime by an application dated 29th March, 1973, made before the Reserve Bank prayed for exemption from application as to the direction for deposits, in view of the special circumstances of this company. It is further stated that pending the said application before the Reserve Bank the company was advised by the Reserve Bank to secure deposits by creating trusts in favour of banking institutions. Accordingly in March, 1974, the company was the first to secure deposits to safeguard the interest of the depositors, and the company created trusts of 1,300 lakhs of which 950 lakhs were in favour of the Bank of India and 350 lakhs were in favour of the United Bank of India. During the pendency of the said application the Companies Act, 1956, was amended and Section 58A of the Companies Act, 1956, came into force and, furthermore, the Companies (Acceptance of Deposits) Rules, 1975, became operative. The said Rules came into force on 3rd February, 1975. It now appears that admittedly the company has certain excess beyond the limit fixed by the Companies (Acceptance of Deposits) Rules, 1975, under Rule 3(2)(i) and Rule 3(2)(ii). In view of the said excess deposits the company made an application before the Govt. of India on the 5th May, 1977, for exemption from the operation of Section 58A of the Companies Act, 1956, until 3Ist March, 1982, alternatively for a period of 5 years to bring down the deposits to the permissible limit and a direction for accepting further deposits to repay the existing deposits without in any way affecting the over-all position. In the said application the company also prayed for personal hearing.

5. The company, in a supplementary affidavit filed by Ramlal Chowdhury affirmed on the 22nd April, 1978, pursuant to the leave of the court in para. 10 and various sub-paragraphs thereunder, has given the grounds under what circumstances the deposits were accepted and for what purpose and what were the steps the company took pending the disposal of the representation application before the Central Government for exemption to be granted under Section 58A, of the Companies Act, 1956. The said representation for exemption asked for several prayers being granted which are set out in para. 11 and various sub-paragraphs of the said supplementary affidavit affirmed on the 22nd April, 1978, on behalf of the petitioners. It appearsthat by a letter dated 21st May, 1977, from the Director, Department of Company Affairs, the company was intimated that their request for exemption from the operation of the provisions of Section 58A of the Companies Act cannot be accepted. It is alleged that the said decision was intimated to the company without giving it any personal hearing nor any reasons were stated in the said letter dated 21st May, 1977, rejecting the company's prayer for exemption as aforesaid.

6. It appears that, immediately after the company's prayer for exemption was rejected by the Central Govt., it took legal opinion from eminent jurists and lawyers and, thereafter, secured the excess amount of deposit. It appdars that in the meantime on the 26th July, 1977, the present application was moved and direction to maintain status quo pending the application was given by the court and after various extensions to file affidavits and adjournment for hearing of the application, the matter came up for hearing.

7. Mr. S.B. Mukherji, learned counsel appearing for the petitioner, placed the above facts before the court and the affidavits and annexures including a cyclostyled copy of the declaration of trust dated 27th September, 1977, between the Bank of India as the trustees and the depositors as the beneficiaries whereby the said deposits have been secured. In the said supplementary affidavit the petitioners have annexed a chart showing the ceiling on the deposits as actual position from the commencement of the Companies (Amendment) Act, 1974, wherefrom it appears that admittedly there were certain excess deposits under Rule 3(2)(ii) and Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 1975. But the position at the present moment, i.e., at the time of the hearing of the application after securing the said deposits by the deed of trust in favour of Bank of India, Bombay, and United Bank of India, Calcutta, as stated in para. 3 of the said supplementary affidavit affirmed on the 22nd April, 1978, there is no longer any excess deposits as the deposits having been secured those have become loans secured and, therefore, under Expln. 1 to Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 1975, those ceased to be deposits and, therefore, the said provisions of Section 58A of the Companies Act and the Companies (Acceptance of Depotits) Rules, 1975, have no application as within the meaning of the said section and the said Rules loans secured by the creation of mortgage, charge or pledge of any of the assets of the company and part thereof cannot be within the meaning of the word ' deposit ' in the said Rules. Further, it was submitted that the directors of the company, having regard to the facts of this case, acted honestly and reasonably and taking into consideration all the circumstances in which the company was put they should be relieved or excused on such terms as the court may think fit and proper.

8. There is no dispute that at certain points of time the company accepted deposits in excess of the limit fixed by Section 58A and the said Rules under the Companies (Acceptance of Deposits) Rules, 1975, as in the petition and also in the supplementary affidavit the said fact is clearly admitted. Mr. Mukherji submitted that in the special and peculiar circumstances of the case it cannot be said that the petitioners have not acted reasonably and honestly and that they should not be relieved and, therefore, he submitted that an order should be made as prayed for.

9. Mr. A.C. Law, learned counsel appearing for the Registrar of Companies, submitted that the company has admittedly committed default and violated the provisions by accepting deposits in excess of the limit fixed by the said Act under Section 58A of the Companies Act and also under the Companies (Acceptance of Deposits) Rules, 1975, He further submitted that on the date of making this application the default was continuing but by subsequently securing the said deposits the company cannot get out of the mischief of the said Act and the Rules by converting the deposit into a loan secured within the meaning of Expln. 1 to Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 1975. Mr. Law submitted that if it is permitted then any company will act on the same fashion and thereby render the provisions of the said Section 58A and the Companies (Acceptance of Deposits) Rules, 1975, meaningless and nugatory and the same can be evaded. With due respect to Mr. Law's submissions if any one can arrange his matter in a manner which is lawful to take his case out of the mischief of any provisions of the Act, it certainly cannot be said to be evasion and, therefore, if in this case it can be said that the deposits, as soon as the same were secured by mortgage within the meaning of Expln. I to Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 1975, the same ceased to be deposits within the meaning of Section 58A and the Companies (Acceptance of Deposits) Rules, 1975, it cannot be said to be a violation and evasion of the said provision but lawful avoidance of the consequence of the said provisions by taking it out of the operation of the said statute and rules.

10. Mr. Law submitted that the wordings of the said Expln. 1 is that in order to be exempted the loan and security must be together and not deposits first and subsequently secured by mortgage or otherwise. In my view, such a construction is not warranted from the wording of the said Explanation in the Companies (Acceptance of Deposits) Rules, 1975, or the definition of the word ' deposit ' in Rule 2, Sub-rule (b) and various clauses thereunder. Mr. Law's contention is this that the company cannot avoid the consequence of a default already committed even by subsequent rectification of the same by securing the deposits and converting the same into a loan secured by the mortgage, etc., within the meaning of Expln. 1 to Rule 3(3) of the Companies (Acceptance of the Deposits) Rules, 1975. In myview that is too broad a proposition, as each case has to be decided on its own facts. After considering the entire circumstances of a particular case if the court comes to a conclusion that the petitioner has acted reasonably and honestly then they may be relieved either wholly or in part, on such terms as the court may think fit and proper for the acts of negligence, default, etc. That is the clear position of Section 633 of the Companies Act, 1956.

11. Therefore, the whole question in this case is whether the petitioners should be given relief having regard to the facts and circumstances of this case and whether they ought fairly to be excused on the ground that they have acted honestly and reasonably. In other words, can the petitioner be said to have acted honestly and reasonably in the facts and circumstances of the case As the default is admitted and the acceptance of deposit is in violation, that is, in excess of the permissible limit witnin the meaning of Section 58A of the Companies (Acceptance of Deposits) Rules, 1975, which came into operation on the 3rd February, 1975, can the petitioners be relieved of such default, breach and negligence. As I have already narrated the facts, it cannot be disputed that the company had acquired an international reputation and is running a chain of five-star hotels in India, as stated above, which naturally involves large sums of money and for raising adequate finance the company had to accept such deposits. The company, it appears has foreign collaborations and acquired technical know-how and expertise for running big hotels, both in India and abroad and thereby earning large amount of foreign exchange through tourism and otherwise for our country. It also transpires that the petitioner has taken all reasonable and possible steps including making an application before the Reserve Bank of India being dated 5th day of May, 1977, inter alia, for granting exemption under Section 58A(7)(a)(ii) and the same was only rejected by a letter dated the 21st May, 1977, by the Reserve Bank of India. It further appears that the company by a letter dated the 25th May, 1977, asked for personal hearing and also there were other prayers in the same application for exemption before the Reserve Bank of India dated the 5th May, 1977, which has not been dealt with by the Reserve Bank of India. After rejection of the application for exemption by the Reserve Bank of India, as aforesaid, the company took the opinion of eminent jurists and lawyers and also made the present application and obtained an order for maintaining the status quo on the 27th July, 1977. In the meantime, in September, 1977, the company has secured the said deposits and thereby the excess deposits were wiped out and it became no longer the deposit under Section 58A of the Companies Act read with the Companies (Acceptance of Deposits) Rules, 1975. The deposits are defined in Rule 2(b) and various clauses thereunder and in the Companies Act and also in Rule 3of the Companies (Acceptance of Deposits) Rules, 1975, the limits thereof are set out and it appears that the company at a certain point of time had certain deposits within the meaning of Rule 3(2)(i) and Rule 3(2)(ii) of the Companies (Acceptance of Deposits) Rules, 1975. The same will also appear from the chart annexed to the supplementary affidavit affirmed on 22nd April, 1978, by Ramlal Chowdhury. But the company had secured the said deposits by creating the trust by the trust deed in September, 1977, as stated in para. 3 of the said supplementary affidavit of Ramlal Chowdhury affirmed on 22nd April, 1978. A cyclostyled copy of trust deed was produced before the court and kept on the record. It appears that there is no longer any deposits in excess of the said Companies (Acceptance of Deposits) Rules, 1975, read with Section 58A of the Companies Act, 1956, as the said amount could not be within the definition of deposit, according to Expln. 1 to Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 1975. The said Expln. 1 is set out hereunder :

' Explanation 1: For the purposes of this rule 'deposit' shall not include any loan secured by the creation of a mortgage, charge or pledge of any of the assets of the company or part thereof, if the amount of such loan does not exceed 25 per cent, of the market value of the assets which constitute the security for the loan.'

12. Therefore, it is quite clear that if the loan is secured in terms of the said Explanation, then the same cannot be said to be deposits within the meaning of the said Companies (Acceptance of Deposits) Rules, 1975. Here, admittedly, the company has secured the deposits and it appears prima facie that the same is indeed in compliance with the said Explanation as the amount of the loan does not exceed 25 per cent, of the market value of the asset which constitutes the security for the loan and the two nationalised banks, being the United Bank of India and the Bank of India having been appointed the trustees for the beneficiaries being the depositors specifically securing the said loans which were made by deposit with the company. It appears that the said deposits cannot be said to be in violation of the Companies (Acceptance of Deposits) Rules, 1975, as these were not deposits any longer but loans secured by the mortgage, etc., under Expln. 1 to Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 1975, and, therefore, it cannot be said that the petitioner have not taken all possible steps for the purpose of regularising or making good the default by accepting deposits in excess of the limit under Section 58A of the Companies Act read with Companies (Acceptance of Deposits) Rules, 1975. Firstly, they applied for exemption before the Reserve Bank of India along with other directions by their letter dated 5th May, 1977. But the Reserve Bank of India only rejected the prayer for exemption but didn't intimate about its decision in respect of the other prayers of the company. The said rejection of granting exemp-tion under Section 58A(7)(a)(ii) was intimated by the Reserve Bank of India only by its letter dated 21st May, 1977. Immediately thereafter the company has made this application under Section 633(2) of the Companies Act, 1956, and has taken opinions of eminent lawyers and jurists and in September, 1977, they have secured the said deposit by a trust in favour of the Bank of India and the United Bank as stated above and thereby the said deposits have become loans secured by mortgage, etc., under Expln. 1 to Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 1975. As I have already observed, anybody is free to arrange his matter in a lawful manner and thereby he can take his matter out of the mischief of any statute and that cannot constitute an evasion or violation of any Act and if it is lawfully permissible, the same cannot be said to be illegal or evasion. It appears to me that the company has made up the default by securing the deposits as aforesaid and, therefore, the said deposits ceased to be deposits any more within the meaning of Companies (Acceptance of Deposits) Rules, 1975, and there is no further violation of the said Section 58A of the Companies Act, 1956, read with the Companies (Acceptance of Deposits) Rules, 1975. In that view of the matter, the only question remains whether the petitioner should suffer the consequence of the default which was admittedly committed and continued till the said deposits were secured by the trust, as aforesaid. In my view, taking a practical view of the matter and having regard to the circumstances of the case, which I have set out before while narrating the facts, the petitioners must be held to have acted honestly and reasonably and they ought fairly to be excused and the court should relieve them subject to their paying the cost of this application to be assessed at the maximum figure and there will be no point in prosecuting the petitioner for the default which they have admittedly committed but no longer continued, that is, they have made up their default by creating a charge in favour of the depositors and there is no objection on the part of the depositors by any process by any one of them and, therefore, it is reasonable to hold that the depositors have accepted the said security and thereby the deposits have become a secured loan within the meaning of Expln. 1 to Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 1975. Further, two nationalised banks have been appointed as the trustees for the said depositors who are beneficiaries and, therefore, it appears also that the said security is within the meaning of Expln. 1 to Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 1975. No useful purpose will be served by prosecuting the person who has defaulted but acted honestly and bona fide and has made up the default lawfully by creating security for the depositors for whose benefit the said Section 58A and the Companies (Acceptance of Deposits) Rules, 1975, have been framed. I have no doubt in my mind after carefully considering the facts of the case that the petitioner has acted reason-ably and honestly and they fairly ought to be relieved subject to the terms which I am imposing on them.

13. In the result, there will be an order in terms of prayers (a), (b) and (c). The said relief will only cover the petitioner's liability for any default committed in respect of the period which is the subject-matter of the present application. The petitioner will pay the cost of this application, which is assessed at Rs. 3,000 to the advocate on record for the respondent, Registrar of Companies, West Bengal, within a week from this date. In default of such payment of cost within the time, as aforesaid, the application stands dismissed with the said cost.


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