The Supreme Court has sought response from the government as to why its two directors should be appointed on the Morepen Laboratories’ board even after its complete financial turnaround.

Seeking setting aside of the National Company Law Appellate Tribunal’s April 25 order that continued the erstwhile Company Law Board’s order July 2005 order appointing two government directors, Morepen said there was no longer any rationale in law or necessity for continuing the directions under the old law, “which is an extraordinary measure and cannot be applied mindlessly”.

A Bench led by Justice Dipankar Datta while issuing notice to the Ministry of Corporate Affairs said “prima facie it appears that subsequent events have not been taken note of by the NCLT and the NCLAT, despite a clear indication” about it in its July 2019 order.

Meanwhile, the contempt proceedings initiated by the government before the NCLT shall remain stayed, it ordered.

Senior counsel AM Singhvi and counsel Debmalya Banerjee, appearing for Morepen, argued that both the NCLAT and the National Company Law Board had failed to apply its mind to the subsequent facts that its financial health and overall governance under its earlier management bolstered the proposition that there was absolutely no need for any government directors on its board.

While the Himachal Pradesh High Court had in May 2007 upheld the CLB’s order, the Supreme Court in July 2007 had asked the parties to maintain status quo, which continued till July 2019 when the appeals were disposed of.However, during the interregnum, Morepen’s circumstances changed. It became debt free and profitable in terms of its corporate debt restructuring package, Morepen told SC. “Infact, when the SC had passed the status quo order allowing the non-government appointed directors to run its affairs, the company’s debt reduced from Rs 750 crore to Rs 5 crore between 2006 to 2018 and then became completely debt free, with promoters infusing Rs 100 crore and a US-based private equity fund also bringing in Rs 170 crore to pay off the lenders. Around 40 lenders withdrew their cases in the Debt Recovery Tribunal,” the appeal said.Subsequently, Morepen approached NCLT, Chandigarh Bench, seeking modification of the CLB’s 2005 order on the grounds that financial turnaround completely negated the need for appointment of government directors. However, both NCLT and NCLAT rejected the company’s plea and admitted the government’s contempt petition against the company, its CMD and directors.