SECTIONS 236 AND 237
Investigation of company’s affairs in other cases
[1972] 42 Comp. Cas. 63 (Guj.)
HIGH COURT OF
Alembic Glass Industries Ltd., In
re
D.A. Desai, J.
COMPANY PETITION NO. 11 OF 1971
August 2, 1971
S.N. Shelat for the Petitioner.
J.M.
Thakore and with G.N. Shah for the Respondent.
D.A.
Desai, J.—The
petitioner is a shareholder of Alembic Glass Industries Ltd.,
"(i) to pass appropriate order or direction
regarding the investigation to be made by appointing investigator and/or
auditors to inquire into and report regarding the affairs and the conduct of
the company including the transaction of purchases since 1966 ; and
(ii) to
direct the Central Government to order investigation under section 237 of the
Companies Act."
Number
of allegations have been made in the petition alleging that the business of the
company is being conducted with intent to defraud its creditors, members or any
other persons and is otherwise fraudulent and in a manner oppressive to its
members. The allegations can be broadly summarised under three heads:
(i) that the managing agents have without
the permission or sanction of the board of directors purchased capital assets
in excess of the prescribed limit and also sold the capital assets in excess of
the prescribed limits, such as purchase of aeroplane, setting up of the plant
at Bangalore and purchase and sale of one Ambassador car:
(ii) flagrant violation of the provisions
contained in section 372 by purchasing the shares of Alembic Chemical Works
Company Ltd. and M/s. Dharak Ltd.; and
(iii) purchases at inflated price from certain
specified firms in which Mr. Ramanbhai B. Amin, a partner of the firm of
managing agents, namely, Nishechi Services, has vital interest. The petitioner
has further stated that he has brought all these malpractices to the notice of
the Central Government and requested the Central Government to take action
under section 237 of the Companies Act to appoint an inspector to investigate
into the affairs of the company, but the Central Government has neither taken
any action nor cared to inform him what action it proposed to take in respect
of the allegations made by the petitioner in his applications and letters sent
by him to the Central Government. The petitioner has stated that therefore he
has been constrained to file this petition under section 237(a)(ii) for the
aforementioned reliefs.
On
the petition being presented a notice prior to its admission was ordered to be
issued to the company in response to which the respondent appeared and filed a
short affidavit, inter alia, contending that this court has no jurisdiction to
entertain the petition under section 237(a)(ii) of the Companies Act.
Section
237 of the Companies Act reads as under :
"237.
Investigation of company's affairs in other cases.—Without prejudice to its
powers under section 235, the Central Government—
(a) shall appoint one or more competent persons
as inspectors to investigate the affairs of a company and to report thereon in
such manner as the Central Government may direct, if—
(i) the
company, by special resolution ; or
(ii) the court, by order, declares that the
affairs of the company ought to be investigated by an inspector appointed by
the Central Government; and
(b) may
do so if, in the opinion of the Central Government, there are circumstances
suggesting—
(i) that the business of the company is
being conducted with intent to defraud its creditors, members or any other
persons, or otherwise for a fraudulent or unlawful purpose, or in a manner
oppressive of any of its members, or that the company was formed for any
fraudulent or unlawful purpose; or
(ii) that persons concerned in the formation
of the company or the management of its affairs have in connection therewith
been guilty of fraud, misfeasance or other misconduct towards the company or
towards any of its members ; or
(iii) that the members of the company have not
been given all the information with respect to its affairs which they might
reasonably expect, including information relating to the calculation of the
commission payable to a managing or other director, the managing agent, the
secretaries and treasurers, or the manager, of the company."
Group
of sections commencing from section 235 and ending with section 251 are grouped
together under the heading "Investigation". Section 235 confers power
upon the Central Government to appoint an inspector to investigate the affairs
of any company and to report thereon in such manner as the Central Government
may direct in the circumstances mentioned in the section, namely:
(a) in the case of a company having a share
capital, on the application either of not less than 200 members or of members
holding not less than one-tenth of the total voting power therein ;
(b) in the case of a company not having a
share capital, on the application of not less than one-fifth in number of the
persons on the company's register of members ;
(c) in the case of any company, on a report
by the Registrar under sub-section (6) or sub-section (7) read with sub-section
(6) of section 234.
Section
236 prescribes the manner of making the application as provided for by section
235. Under section 237, obligation is cast on the Central Government to appoint
an inspector to investigate the affairs of the company if—
(i) the
company adopts a special resolution to that effect and conveys it to the
Central Government; or
(ii) the court by its order directs the
Central Government to appoint an inspector to investigate into the affairs of a
company.
Clause
(b) of section 237 enables the Central Government to suo motu appoint an
inspector to investigate the affairs of a company if the conditions set out in one or other of the sub-clauses of clause (b)
are satisfied. By the present petition, the petitioner has invoked the
jurisdiction of this court under section 237(a)(ii).
The learned
Advocate-General appearing for the company contended that this court has no
jurisdiction to appoint an inspector to investigate the affairs of the company
and, therefore, prayer (a) in the petition is beyond the jurisdiction of this
court. It must straightaway be conceded that under section 237 this court has
no jurisdiction to appoint an inspector to investigate the affairs of any
company. Looking to the scheme of the section: commencing from section 235, it
is crystal clear that the power to appoint an inspector to investigate the
affairs of any company vests in the Central Government. The Central Government
can be moved to exercise that power in the manner provided for in section 235
by a requisite number of members or by the Registrar. Even in that case, the
Central Government is not bound to appoint an inspector. Clause (b) of section
237 enables the Central Government to appoint an inspector to investigate the
affairs of the company suo motu. However, that power can be exercised on the
subjective satisfaction of the Central Government with regard to all or any of
the matters set out in the three sub-clauses of clause (b). The Central
Government is under an obligation to appoint an inspector if one or the other
conditions specified in clause (a) of section 237 is satisfied. Two conditions
are :
(i) that the
company adopts a special resolution to that effect; or
(ii) that the
court by its order directs the Central Government to appoint an inspector.
Section 237 leaves no room
for doubt that this court exercising jurisdiction under the Companies Act has
no power to appoint an inspector. Therefore, prayer (a) by which the petitioner
wants this court to appoint an inspector cannot be granted.
It was next urged that
prayer (b) is premature. By prayer (b) the petitioner wants this court to
direct the Central Government to appoint an inspector to investigate the
affairs of the company. As the first limb of the argument it was urged that
even according to the allegations made by the petitioner he has already
approached the Central Government to appoint an inspector and as that
application has not been finally decided, this court should not proceed to make
any order under section 237(a)(ii) even if it has jurisdiction to pass such
order. It is undoubtedly true that the petitioner has approached the Central
Government and has sent various applications, letters and affidavits requesting
the Central Government to take action against the company in exercise of the
powers conferred upon the Central Government under section 237(b). But at this
stage, on the demur, the question is : whether this court has or has no
jurisdiction to entertain an application under section 237(a)(ii) and in an appropriate
case to make an order
directing the Central Government to appoint an inspector. That the court, in
its wisdom, in a given case, may not pass an order under section 237(a)(ii) is
entirely a different matter. The larger question argued was that this court
cannot entertain a petition simpliciter under section 237 (a)(ii) unless the
party has first approached the Central Government drawing its attention to
various malpractices committed in the administration of the affairs of the
company and after the Central Government declines to take action under section
237(b). This will immediately raise a question : whether the powers conferred
upon the court under section 237(a)(ii) can only be exercised after the Central
Government has declined to exercise powers under section 237(b). In other
words, is it obligatory or incumbent upon a party before approaching this court
under section 237(a)(ii) to first approach the Central Government and only
after the Central Government declines to take any action, this court's
jurisdiction can be invoked and the court can exercise jurisdiction under
section 237(a)(ii). The construction of clause (a) of section 237 suggested by
the learned Advocate-General would make the approach to the Central Government
under section 237(b) a condition precedent to the court exercising jurisdiction
under section 237(a)(ii). There is no warrant for this construction. There is
nothing in the language of section 237 which indicates that a person invoking
the court's jurisdiction under section 237(a)(ii) must, first, as a necessary
condition before coming to the court, approach the Central Government, invite
the attention of the Central Government to the various malpractices committed
in the administration of the affairs of the company, and only after the Central
Government declines to take any action in the matter, that he can invoke this
court's jurisdiction under section 237(a)(ii). That would be, in fact, putting
a fetter upon the power of this court, which the section does not provide, nor
should the court by necessary implication read into section 237 any such fetter
on the power of this court. Let it be distinctly understood that the court may
in a given case decline to exercise jurisdiction under section 237(a)(ii) till
the Central Government disposes of the matter pending before it under section
237(b); but that is entirely different from saying that no one can come to this
court unless he first approaches the Central Government under section 237(b).
That would be unduly limiting the jurisdiction of the court which the
legislature has not thought fit to put, to delimit or circumscribe.
The
language of section 237(a) is clear and unambiguous and admits of no
construction by which any fetter or limit can be put on the jurisdiction of
this court to entertain a petition for giving a direction to the Central
Government to appoint an inspector to investigate the affairs of the company.
Once the court makes an order, it is obligatory upon the Central Government to
appoint an inspector. There are three distinct methods by which a party
desirous of getting the affairs of a company investigated may get an inspector
appointed by the Central Government. If the requisite number of members are
available, application can be made under section 235. Any one who is unable to
collect the requisite number of members may bring to the notice of the Central
Government various malpractices committed in the administration of the affairs
of a company and the Central Government may act suo motu under section 237(b).
In the aforementioned two cases the question of appointment of an inspector is
within the discretion of the Central Government. But there is a third mode
legislatively recognised and mandatory in character by which an inspector can
be got appointed by the Central Government and that is where the special
resolution to that effect is adopted by the company, or where the court makes
an order to that effect.
The
legislature has conferred wide jurisdiction on this court to entertain a
petition under section 237(a)(ii). In fact, the power of the Central Government
to appoint an inspector suo motu under section 237(b) is limited to its
subjective satisfaction in respect of one or other matters contained in three
sub-clauses of clause (b). The legislature in its wisdom has not put any such
condition before the court can make an order, though the court may in its
wisdom expect prima facie proof of some of these conditions on the subjective
satisfaction of which the Central Government would appoint an inspector before
directing the Central Government to appoint an inspector. While conferring
jurisdiction on the court to direct the Central Government to appoint an
inspector, the legislature has not thought fit to circumscribe the discretion
or jurisdiction in any manner. It would, therefore, be utterly inappropriate to
curtail or circumscribe or fetter the jurisdiction of this court by reading
into the section something which is not there.
The
learned Advocate-General, however, in support of the construction canvassed for
by him, urged that section 237 must be read subject to section 235 or section
237(b). It was urged that only if a requisite number of members gathered
together as required by section 235 and approached the Central Government or
anyone can draw the attention of the Centra] Government to the affairs of the
company under section 237(b), on the Central Government being satisfied about
one or the other thing set out in the three clauses of section 237(b), the
Central Government may appoint an inspector. It is, therefore, not possible to
conceive that the legislature would confer such wide jurisdiction upon the
court under section 237(a)(ii), as to enable anyone to bypass these two
sections. It was also urged that wherever the legislature wanted a single
person to come to the court to take action against the company, it has in terms
so provided. But, in all other cases, action against the company being
representative action, one or the other individual should not be permitted to
invoke the jurisdiction of the court which would have the tendency to open the
flood-gates of litigation. As a corollary, it was urged that a petition under
sections 397 and 398 for reliefs against oppression of minority shareholders
can only be filed if and only if certain number of members gather together and
come to the court as required by section 399. Approaching the matter from this
angle and proceeding further, it was urged that it would not be appropriate to
read section 237 in isolation but it must be read subject to section 235. The
scheme of sections 235, 236 and 237 is quite clear and unambiguous. The
requisite number of members can request the Central Government to appoint an
inspector. The legislature also conferred power upon the Central Government to
appoint an inspector suo motu. But the legislature also thought fit to confer
jurisdiction on the court to examine the allegations against a company even at
the instance of a single shareholder, and, if satisfied, to direct the Central
Government to appoint an inspector. By putting this construction, which appears
to be grammatically correct and in consonance with the spirit of section 237,
there should be no apprehension of opening the flood-gates of litigation.
Whenever the court directs a thing to be done, there is judicious investigation
of allegations by a judicially trained mind and reason is the hallmark of
judicial approach, fairplay and moderation. A party who comes to this court
requesting the court to direct the Central Government to appoint an inspector
will have to satisfy the judicial conscience that there has been such
mal-administration in the affairs of the company, and that some one should at
least look into the malpractices. In my opinion, the apprehension appears to be
unfounded. Therefore, it appears that neither section 235 nor section 237
controls section 237(a)(ii) and this court has jurisdiction to entertain a
petition under section 237(a)(ii) notwithstanding the fact that the party
invoking the jurisdiction of this court has not approached the Central
Government and notwithstanding the fact that the Central Government has taken
no action on such an application already made to it. The petition, therefore,
cannot be said to be premature or liable to be thrown out on this ground.
The
learned Advocate-General invited my attention to the practice in
"If
the board of trade refuse to appoint an inspector, a member may apply to the
court for an order under section 165(a)(ii)"
From
this observation, an attempt was made to urge that approaching the board of
trade is a condition precedent to the court exercising jurisdiction under
section 165(a)(ii). The observation cannot be construed to that effect because
of an earlier observation in the same Chapter at page 681. There the author has
observed as under:
"An
application for an order is made by originating motion (R.S.C. 1965, Ord. 102,
r. 4). Such an order may further be made by the court of its own motion in any
proceeding before it."
Pennington
on Company law, at page 557, has observed:
"The
board of trade must appoint an inspector to investigate the affairs of a
company if a meeting of its members by special resolution, or the court, by
order, declares that its affairs ought to be so investigated."
It
is further observed that, thus, if an individual member fails to persuade the
board to appoint an inspector, of its own motion, or if the requisite fraction
of members fails to persuade the board to do so, an application may be made to
the court to reverse the board's decision. Gower, in his Principles of Modern
Company Law, third edition, at page 606, has observed as under:
"It
is very uncommon for an application to be made to the court for an order since
it is cheaper, quicker and normally easier to apply direct to the board to exercise
their power under section 165(b)."
It
thus appears that even though ordinarily a single shareholder would be too
unwilling to take proceedings in a court of law invoking the court's
jurisdiction under section 237(a)(ii) and, therefore, would prefer to go to the
Central Government, yet there is nothing in the language of the section or in
the practice indicated hereinabove to lead to the conclusion that no one can
come to the court without first going to the Central Government. Entertaining
of an application directly by the court without insisting upon the applicant
going to the Central Government would not indicate that thereby the individual
is allowed to bypass some of the statutory provisions of law.
It
was next urged that the court can make an order as envisaged by section
237(a)(ii) not by entertaining an independent petition from any petitioner but
the court, while examining the affairs of the company in respect of some other
proceedings against the same company, may in order to give full relief and to
effectively adjudicate upon the issues raised before it direct the Central
Government to appoint an inspector. It was urged that one cannot conceive of an
application simpliciter under section 237(a)(ii) for directing appointment of
an inspector by the Central Government but power under section 237(a)(ii) can
only be exercised where the court has seizin upon the affairs of a company on
account of some other proceeding pending in the court against that company. I
fail to see anything in the language of section 237(a)(ii) indicating that a
petition simpliciter for an action under section 237(a)(ii) cannot be
entertained but that power conferred by section 237(a)(ii) can only be
exercised by the court against the company in respect of whom some other
proceeding is pending in the court and the court considers it proper to direct
appointment of an inspector. My attention was drawn to the commentary by A.
Ramaiya in A Guide to the Companies Act, sixth edition, page 408, where the
author has observed that the order of the court referred to in clause (a)(ii)
may be passed in any proceeding in which the court has seizin of the company's
affairs. This commentary cannot be read to mean that existence or pendency of
some proceeding other than the one for taking action under section 237(a)(ii)
is sine qua non so that the court would have seizin over the affairs of the
company and then alone in such a proceeding, in order to effectively dispose of
that proceeding, the powers under section 237(a)(ii) can be exercised. On the
contrary, it only indicates that even in the absence of a petition simpliciter
for an action under section 237(a)(ii) for directing the Central Government to
appoint an inspector, the court while hearing some other proceeding against a
company in the course of which the court is satisfied that an inspector to
investigate the affairs of the company should be appointed, the court may
without any application to that effect proceed to pass such an order. If the
court has such wide power to exercise jurisdiction under section 237(a)(ii) in
another proceeding against the same company, there is no justification for
holding that a petition simpliciter under section 237(a)(ii) cannot be
entertained by the court. Viewed from this angle, the observations of the
Allahabad High Court in Raghunath Swarup Mathur v. Har Swarup Mathur would not be
of any assistance. In that case, while dismissing a petition under sections 397
and 398, it was observed that no case is made out for making an order under
section 237(a)(ii).
Lastly,
I would also like to point out that rule 11(9) of the Companies (Court) Rules,
1959, provides that the court can be moved under section 237 by a petition.
That, of course, is not decisive. But if the construction that I put upon
section 237 is correct, the fact that a petition is prescribed for moving the
court may also point in the same direction.
Thus,
upon a proper construction of section 237, a petition can be filed under
section 237(a)(ii) of the Companies Act for a prayer that the Central
Government be directed to appoint an inspector to investigate the affairs of
the company. Prayer (b) is to that effect and, therefore, the petition is one
which can be entertained.
As no further facts have been set out in the affidavit, the petition is accepted and admitted and notice of the petition should be issued to the company. Costs of this hearing would be costs in the cause.
[1976] 45 Comp. Cas. 33 (
D.K.KAPUR. J.
COMPANY PETITION NO. 71 OF 1972
JUNE 7, 1974
Satish
Chandra for the Petitioner.
Ved Vyas and A.N. Khanna for Respondent Nos. 1
to 5.
H.S. Bhatia for the Central Government.
D.K. Kapur, J.—This is a petition under section 237 of the Companies Act,
1956 (hereinafter called "the Act"), instituted by a shareholder of
M/s. Delhi Flour Mills Company Ltd., which prays for an order by the court
directing that the affairs of the said company, M/s. Delhi Flour Mills Company
Ltd., be investigated by an inspector appointed by the Central Government. Five
other persons have been joined as respondents to the petition. They are the
managing director of the company, two other directors of the company, Shri R.P.
Jain (chief executive of the company) and the secretary of the Company Law
Board. Notice of this petition was given to the first five respondents as well
as the Registrar of Companies. Later, notice was also given to the Central
Government on whose behalf Shri H.S. Bhatia, Assistant Registrar of Companies,
appeared. He also appeared on behalf of the Registrar of Companies. Shri H.S.
Bhatia stated that the Central Government was not making any representation in
respect of this petition. The Registrar of Companies filed a reply in the form
of an affidavit. A reply was also filed by the company in the form of an
affidavit and a further affidavit was filed by the petitioner.
Subsequently, an
application, C.A. No. 5 of 1974, was moved by the first respondent (Delhi Flour
Mills Co. Ltd.), in which it was urged that the petition was entirely
misconceived and was not maintainable, inter alia for the reason that the
Central Government alone could direct investigation and section 237(a)(ii) of
the Companies Act, 1956, was not available to a private party for the purpose
of getting the affairs of a company investigated by an inspector appointed by
the Central Government, except if there were other proceedings pending before
the court such as proceedings under sections 397 and 398 of the Act. It was
urged that the court had no jurisdiction to make an order directing the
investigation of the affairs of the company as this jurisdiction was
exclusively reserved to the Central Government. In this petition, it was submitted
that the preliminary point should be decided in the first instance. Notice of
this application was given to the petitioner and I directed that this question
should be determined as a preliminary matter. On hearing this question, I came
to the conclusion that the question of maintainability should not be restricted
only to the point whether the petitioner could move the court and obtain an
order, but it should also be considered as to whether the court could act on
the application of the petitioner as framed in the present case. With a view to
determining the question of maintainability, I have gone through the pleadings
of the petition as appearing in the petition and have tried to determine
whether on the material placed before the court in the petition itself, the
court was entitled to order an investigation into the affairs of the first
respondent. I may mention straightaway that Mr. Satish Chandra, learned counsel
for the petitioner, did state that he had further material which would support
an investigation in the affairs of the first respondent. But I did not permit
this to be placed on record in the form of a further affidavit or a
replication. I was of the view that the court had to consider, on the material
in the petition, whether the petition was maintainable as such. I shall first
deal with the question raised specifically in C.A. No. 5 of 1974, as to whether
the petition praying for the investigation of the affairs of a company can be
moved as an original petition in the court. In this respect, learned counsel
for the petitioner cited Deodatt Purshottam Patel v. Alembic Glass Industries
Ltd.,
wherein it was held that there was nothing in the language of section 237 to
show that the jurisdiction conferred by that section could only be exercised in
respect of a company when some other proceedings were pending in the court. I
fully agree with this decision and I see no reason why the petition praying for
an investigation should not be filed even though no other proceedings are
pending. It is another matter that the court may be very cautious in ordering
investigation, if such a petition is moved, but the jurisdiction of the court
seems to be preserved by section 237(a)(ii) of the Act. Moreover, the Companies
(Court) Rules, 1959, also indicate that such a petition is maintainable. In
rule 11, the proceedings, which may be moved by applications to the company
court, have been divided into two categories, some of which are to be
instituted on petition, and some of which have to be commenced by judge's
summons. There is a list of 23 applications which are to be instituted on
petitions. These petitions are to be tried in a different manner from judge's
summons. In the list of 23 applications, the 9th entry is: "Applications
under section 237 for an order that the affairs of a company are to be
investigated." Thus, it appears that applications for the investigation of
the affairs of a company can be instituted by themselves as original petitions
in the court and it is so contemplated by the Companies (Court) Rules. Mr.
Satish Chandra, learned counsel for the petitioner, has contended that such
petitions must be tried fully before an order is given as to whether investigation
should be ordered or not. I do not want to express any opinion on this question
at this stage. It appears to me that the very object of moving a petition under
section 237 of the Act to the court is to order an investigation by an
inspector to be appointed by the Central Government. This decision requires no
previous investigation by the court. However, I am prepared to say that there
might be a case before the court when an investigation of a preliminary
character may be necessary by the court before the petition is adjudicated
upon.
I am, at the present
moment, concerned with the other question which arises in this case concerning
the applicability of section 237 of the Act. I have to determine whether the
present case is one which could be ordered to be investigated by the Central
Government through an inspector. For this purpose, I will shortly state what is
set out in the petition. Before I do so, I may also state that the nature of an
investigation to be ordered depends very much on the power of the Central
Government which would be exercised if the court so orders. For instance, the
consequences of an order directing investigation have to be seen from the
various provisions which govern such questions. Sections 235, 236 and 237 of
the Act only state the manner in which the investigation is to be commenced.
But, once the investigation is ordered, then the subsequent provisions of the
Act come into operation. Section 237 of the Act sets out the powers of the
inspector to make an investigation and sections 240 and 240A of the Act deal
with various matters which have to be dealt with by the inspector and provide
for examination of the books and seizure of the documents, etc. Section 241 of
the Act deals with the report of the inspector and sections 242, 243 and 244 of
the Act deal with what is to be done once a report has been made. Under section
242 of the Act, a prosecution can be ordered. Under section 243 of the Act, an
application for winding up of the company on a petition under sections 397 and
398 of the Act can be instituted. Under section 244 of the Act, proceedings for
recovery of damages or property can be instituted. Now, the result of an
investigation, to my mind, can result in other prosecutions or an application
for winding up or an application under sections 397 and 398 of the Act or a
suit for recovery of damages or any property, which has been misapplied on
account of misfeasance or mismanagement. Therefore, before an investigation can
be ordered by the court, there seems to be some sort of material required,
which would result in proceedings being taken of the manner prescribed by
section 242, 243 or 243 of the Act. It is unnecessary to order an investigation
merely because a shareholder feels aggrieved at the manner in which the company's
business is going on. It is in this light that I propose to analyse the
allegations contained in the petition.
The substance of the
petition can be divided into three portions. The first portion, commencing from
para 8.1, deals with the profits made by the company in four separate financial
years ending 31st October, 1966, 31st October, 1967, 31st October, 1968, and
31st October, 1969. The figures for purchase and sales disclosed by the company
are set out as well as net profits. According to the petition, the net profits
had fallen from Rs. 13 lakhs in 1966 to only Rs. 1.74 lakhs in 1969, which
showed mis-management and misconduct on behalf of the respondents. The
petitioner stated that it should be discovered as to where the profits had been
eaten up and the responsibility should be fixed for the same. I need hardly say
that the profitability of a company varies from year to year and depends on
such things as price, cost of labour, cost of electricity and other factors
which vary from year to year. I do not think that the purpose of section 237 of
the Act is to order an investigation into the economic working of a company. On
the other hand, the purpose of such an investigation is to see whether
allegations concerning mismanagement, misappropriation or other illegal acts
are justified. I do not think that this allegation (in this petition) can be
considered as one which can be directed to be investigated by an inspector
appointed by the Central Government. If, on the other hand, there is some
material to show that the fall of profits is due to illegal acts, then an
investigation may be ordered in a suitable case. I, therefore, reject this
ground as being insufficient to order an investigation.
The next ground or portion
set out in paragraph 8 3 is that certain persons have been appointed senior
executives and have been paid huge salaries. The persons are named in the
paragraphs. The persons mentioned are stated to be near relations of respondents
Nos. 2 and 5, i.e., the managing director and the chief executive of the
company. In fact, one of the persons named is the chief executive himself. I
think no investigation is necessary for the purpose of determining the salaries
of the persons employed by the company. There are sufficient number of
provisions of the Act guarding the shareholders from unauthorised appointments
of employees, who are relatives of directors. If there has been any breach of
those provisions of the Act, the petitioner should seek his remedy elsewhere.
This is also not a matter which, in my opinion, requires investigation by an
inspector.
I now come to the third
portion of the petition, which is concerned with the fact that the
respondent-company is a holding company of Indian Hardware Industries Ltd. It
is stated in the petition that Indian Hardware Industries Ltd. is a company
registered in the Union Territory of Delhi in which Delhi Flour Mills Company
Ltd. holds shares worth Rs. 4,15,879 25 and has also advanced a loan of Rs.
23,66,883 19 to that company. It is stated that for the year ending 31st
October, 1966, the directors have forgone interest on the loan whereas in the
loans and advances entered in the balance-sheet it is stated that the matter of
interest has been deferred till an amalgamation has taken place between the
first respondent and Indian Hardware Industries Ltd., and in the subsequent
balance-sheets, it is stated that there was no provision for the interest on
the loan advanced to the subsidiary company. It is claimed that the total
amount recoverable from the subsidiary company (Indian Hardware Industries
Ltd.) totalled to about Rs. 47 lakhs as on 31st August, 1972. In the next
paragraph of the petition, paragraph 8.7, it is claimed that the investment by
Delhi Flour Mills Co. Ltd. (hereinafter called the "holding
company"), in the shares of the subsidiary company and the advance of the
loan to the same company suggests serious misconduct and certain grounds are
given as to why this is so. I may now deal with these grounds.
It is firstly stated that
large borrowings had been made by the holding company in the form of deposits
and debentures from the open market for the purpose of making investments in
the subsidiary company and high interest had been paid on those loans. The
figures for 1966, 1967, 1968 and 1969 are given and show that the debentures
and deposits varied between Rs. 22 lakhs and Rs. 29 lakhs approximately in
these four years. The next ground was that the directors of the first
respondent were behaving as despotic owners by investing about seven times the
paid up capital of the holding company in the subsidiary company without
earning interest, much less dividend and this was detrimental to the
shareholders of the holding company, the first respondent. The third point made
is that the shareholders of the subsidiary company are mainly relations and
employees of the directors of the holding company and, thus, the advances were
made to that company for benefiting their own family members at the expense of
the minority shareholders of the first respondent, the holding company.
Although the allegations
made in the petition show that a considerable investment has been made by the
holding company in the subsidiary company, which has not so far matured in any profits
and is in fact causing a loss to the holding company, I do not think that this
is a matter which can be treated as an illegality under the Act. It is open,
under the provisions of the Act, for one company to own a considerable portion
of the shareholding of a subsidiary company. This is just as any private
individual may make an investment in a company. It is an unfortunate matter
that the subsidiary company has not shown the requisite profitability that
would justify such a large investment. However, in order to justify an
investigation in this matter, it would have to be shown that the amount had
been misappropriated in some way or there had been some misfeasance or some
other illegality. To put it in another way, here may be a case where a company
makes a large investment, which results in a loss, but the loss is bona fide.
There may be another case in which a large investment is made with the object
of transferring assets dishonestly to some other person. There is not even an
allegation in the petition that the investment in the subsidiary company has
been made for the purpose of passing on the assets of the holding company in
some dishonest or illegal manner to the subsidiary company or to some other
persons connected with the subsidiary company. The only facts disclosed in the
petition raise a question that the holding company, i.e., the first respondent,
has made a large investment in a subsidiary company, which does not appear to
have fructified so far into a profitable venture. It is quite possible that, in
the years to come, the subsidiary company may start doing well. It is not
possible on the material in the petition to say that any facts are disclosed
which would justify an investigation. After all, what has the inspector to
investigate ? Is he to merely ascertain that large sums of money are invested ?
This is a known fact. It is patent from the balance-sheets of the holding
company which has also included the balance-sheets of the subsidiary company.
Along with the petition, the petitioner has filed the accounts of the Delhi
Flour Mills Company Ltd. for the years 1966, 1967, 1968 and 1969. These are
annexures "C-1" to "C-4". Each one of these printed books
also set out the balance-sheets of Indian Hardware Industries Ltd. for the
corresponding periods. For instance, in the balance-sheet of Delhi Flour Mills
Company Ltd. for the year ending 31st October, 1966, the balance-sheet of M/s.
Indian Hardware Industries Ltd. as on 30th June, 1966, is enclosed. From
the balance-sheet of Indian Hardware Industries Ltd. ending on 30th June, 1969,
I find that there was a carry-forward loss of Rs. 1,89,833-87 which was reduced
to Rs. 89,44672. The balance-sheet for the period ending 30th June, 1966,
showed a carry-forward loss of Rs. 3,38,508.54. This shows that Indian Hardware
Industries Ltd. had a loss of about Rs. 3 50 lakhs prior to 1966, which was
reduced to about Rs. 89,000 in 1969. Naturally, a new industry does not make
profits immediately. There is, therefore, some justification for the petitioner
to say that the directors of the first respondent have not made a profitable
venture and have not been wise in making an investment in the subsidiary
company. But lack of wisdom is not something that can be investigated under
section 237 of the Act. What is required to be investigated is some
malpractice. It is the absence of the allegation regarding such malpractices
that is fatal to the petitioner's case. I see no object in the court ordering
an investigation into some thing which is really apparent from reading the
balance-sheets annexed to the present petition. I, therefore, say that on the
present material this is not a sufficient ground for ordering investigation of
the affairs of the first respondent.
There is a subsidiary
question raised in the petition in paragraph 8.9. This states that a sum of Rs.
6,57,275.48 has been advanced to Delhi Flour Mills Syndicate, the sole selling
agents, who are not doing any work for the first respondent and, therefore,
this is not justified. I need hardly say that this is an insufficient matter
for investigation, because this is a known fact. Even if this allegation is
true, it is something concerning which the petitioner can get relief by moving
the appropriate court. I see no reason why this matter requires investigation
by an inspector appointed by the Central Government.
To my mind, the object of
investigation is quite different from the one which has impelled the petitioner
to move this petition. The purpose of investigation is to discover something
which is not apparently visible to the naked eye. If, for instance, the
petitioner had brought out some malpractice in the working of the first
respondent, which would raise an inference of dishonesty or malfeasance or
misfeasance or misappropriation or some such similar ground which would lead to
an inference of mismanagement or oppression, etc., then the court might
consider making an order for investigation. Even in such a case, it might be
that the petitioner had a sufficient remedy by applying for a winding-up order
or by applying under sections 397 and 398 of the Act. The whole question would
depend on the circumstances disclosed in the petition.
One serious misgiving has
been in my mind concerning the present petition which I may now set out. It is
open to any petitioner to move the court for an order of investigation against
the company. He need not be a shareholder, he need not have any personal
interest; he may be a complete stranger and yet he can move the court seeking
an order for investigation of the affairs of a company. If the court has to
deal with all such petitions, the court may be literally flooded with them. It
is, therefore, necessary for the court to act most cautiously on the question
of considering whether the affairs of a company need investigation. It is for
this purpose and this reason that I have considered this point from the point
of view of maintainability rather than on the material that might be found if
an investigation was actually ordered. It is quite possible that if a
particular company is investigated some other facts may arise or be discovered.
Such facts might justify an investigation. On such an argument, the affairs of
all companies could be investigated throughout the country. In order to prevent
such an unusual situation arising, I think that the court has to act with the
greatest caution when acting under section 237 of the Act. It is to be noticed
that the Central Government has the power under section 235, read with section
237 of the Act, to order investigation into the affairs of a company. This
power has been the subject-matter of a large number of judicial decisions. In
Barium Chemicals Ltd. v. Company Law Board,
the Supreme Court had opportunity to deal with what were the circumstances that
would justify an opinion by the Central Government that the affairs of a
company needed investigation. It was observed that at least prima facie
evidence should exist concerning the circumstances which would lead to the
conclusion that an investigation was necessary. Therefore, I am of the view
that although the aforementioned interpretation of sections 235 and 237 of the
Act is restricted to the Central Government, a similar test must also be
applied by the court when dealing with this type of case. There also must be
circumstances before the court, which lead to an inference that there has been
the type of malpractice by the first respondent or its directors, which would
justify an investigation of its affairs. For the purpose of determining whether
the petition is maintainable it is sufficient to state the circumstances stated
in the petition, and I feel that these circumstances are not sufficient in the
present case to lead to an inference, even on reading the petition, that the
affairs of the first respondent need an investigation.
By a subsequent
application, learned counsel for the petitioner brought to my notice a decision
of this court in B.M. Bajoria v. Union of India.
This authority does not seem to advance the case of the petitioner at all. It
was concerned with an inspection of a company made under section 209(4) of the
Act. That section authorises an officer of the Central Government to inspect
the books of account of a company. In the course of the judgment some reference
was made to section 237 of the Act on account of the fact that it was urged
that a police report should not be filed as a result of the inspection of the
accounts under section 209 of the Act, but the same could only be utilised for
the purpose of filing a complaint if an investigation had first been carried
out and a complaint filed under section 242. This argument was rejected by the
court. I can see nothing in this judgment which leads to an inference that the
court has to order investigation into the affairs of the company irrespective
of whether there is any material to justify such an investigation.
In the circumstances, I
come to the view that the allegations made in the petition are insufficient to
maintain this petition. I make it clear that this conclusion is based only on
the allegations contained in the petition. It by no means debars the petitioner
from relying on other material for the same purpose. The petition is
accordingly rejected on the ground that it does not disclose a cause of action.
There will be no costs.
[1983] 54 COMP CAS 370 (KER.)
HIGH COURT OF KERALA
v.
Mathrubhumi Printing and
Publishing Co. Ltd.
M.P. MENON J.
COMPANY PETITION NO. 11 OF 1979
SEPTEMBER 9, 1981
M.
Ramanatha Pillai for the Petitioner.
P.K. Kurien and K.A. Nayar for the Respondent.
M.P. Menon J.—This is a petition under s. 237(a)(ii) of the Companies
Act. The petitioner is a member of a company, and he wants an order declaring
that its affairs require investigation by an inspector appointed by the Central
Govt. Before going into the facts of the case, it is necessary to examine under
what circumstances such a declaration could be made.
Section 237 of the Act
reads :
"Investigation of
company's affairs in other cases.—Without prejudice to its powers under section
235, the Central Government—
(a) shall appoint one or more competent persons as inspectors to investigate
the affairs of a company and to report thereon in such manner as the Central
Government may direct, if—
(i) the company,
by special resolution ; or
(ii) the court, by order, declares that the affairs of the company
ought to be investigated by an inspector appointed by the Central Government;
and
(b) may do so if, in
the opinion of the Central Government, there are circumstances suggesting—
(i) that the business of the company is being conducted with
intent to defraud its creditors, members or any other persons, or otherwise for
a fraudulent or unlawful purpose, or in a manner oppressive of any of its
members, or that the company was formed for any fraudulent or unlawful purpose;
(ii) that persons concerned in the formation of the company or the
management of its affairs have in connection therewith been guilty of fraud,
misfeasance or other misconduct towards the company or towards any of its
members ; or
(iii) that the members of the company have not
been given all the information with respect to its affairs which they might
reasonably expect, including information relating to the calculation of the
commission payable to a managing or other director, the managing agent, the
secretaries and treasurers, or the manager, of the company."
Counsel suggests that the
discretion conferred on the court under cl. (a)(ii) is wide and uncontrolled
and that the court can pass an order whenever it is satisfied, on a scrutiny of
the materials placed before it, that an investigation is called for. The
petitioner can prove his allegations before the inspector, when one is
appointed, it is said : the court is only to see whether prima facie they have
substance. But the question still remains on what kind of material the court
can act. Going by the section, the inspector is to investigate into the affairs
of the company, and not into the specific allegations made by a petitioner,
suggesting thereby that the allegations or the materials should be such as to
satisfy the court about the need for such an investigation. Section 237(b)
enumerates the circumstances under which the Central Govt. can suo motu order a
similar investigation ; and the discretion there is not uncontrolled. The
Central Govt., before exercising its power thereunder, should form an opinion
that circumstances suggesting the existence of one or other of the matters
specified in sub-cls. (i) to (iii) are there. It should form an opinion that
there are circumstances to suggest—
(i) that the business of the company is being carried on with
intent to defraud its members, or otherwise for a fraudulent or unlawful
purpose ; or
(ii) that it is carried on in a manner
oppressive of its members ; or
(iii) that the company itself was formed for a
fraudulent or unlawful purpose; or
(iv) that the persons concerned with its formation or management
are guilty of fraud, misfeasance or other misconduct in connection with the
formation or management; or
(v) that due information is withheld from
the members.
It is not as if a member can make any
allegation and the Central Govt. can order an investigation on being satisfied
that it calls for a further probe. The nature of the allegations must have
relevance to the matters enumerated in cl. (b). The question then is, is the
situation different when the court has to decide under cl. (a) about the
desirability of an investigation ?
The answer to my mind lies
partly in the history of company law, and partly in some of the other
provisions of the Act. A company is an association of men or women for trading,
more or less like a partnership. In a partnership, the members are few, and
each has confidence in the other. When the members participating in the
association are few, their relationship can be worked out within the . confines
of contract and agency. But when their number is large, a different form of
organisation will be necessary. In the initial stages, these unincorporated
bodies were developing in
In Foss v. Harbottle [1843]
2 Hare 461, it was held that the courts could not normally interfere with the
internal management of the company at the instance of a minority of members
dissatisfied with the conduct of its affairs by the majority. This approach was
sought to be justified on various grounds. The first was that the members who
had contracted to abide by the decision of the majority could not complain
against something to which they had agreed. The second was that the majority
alone knew what was good for the association or company, and that the court's
views could not be imposed on them. And the third was that as the company was a
separate juristic person, it alone, or at least only a majority of its members,
could complain of any injury to it, and not a minority. In Salomon v. Salomon
& Co. [1897] AC 22, the House of Lords went to the extreme of refusing to
discover dummies and nominees behind the veil of incorporation, by placing
emphasis on the separate legal personality of the company. In spite of the fact
that free trans-ferability of shares is one of the important features of any
company, it was held
in In re Gresham Life Assurance Society : Ex fiarte Penney [1872] 8 Ch App 446, that where the articles of association vested
an absolute discretion in the directors of a company to refuse to recognise a
transfer of shares, the court would presume that the directors had exercised
the power bona fide. They could not be compelled to disclose reasons for their
refusal, unless want of good faith was affirmatively established by a
petitioner. Dishonesty, fraud, bad faith, breach of trust and the like were the
minimum to be established by individual shareholders before they could get any
equitable relief from the Chancery courts ; in all other cases, the contract
was supreme.
The various provisions of
the Companies Act relating to minority protection have to be examined in the
above background if their true content is to be discovered. Chapter VI deals
with "oppression and mismanagement". Section 397 enables the minority
shareholders to approach the court with a grievance that the company's affairs
are being carried on in a manner oppressive to them, and s. 398 provides for a
like complaint that the affairs of the company are carried on in a manner
prejudicial to public interest or to the interests of the company. Oppression
or mismanagement, in the context, have been understood as conduct involving
lack of probity or bona fides. When the directors of a company with their
majority support conduct themselves in a manner inequitable, i.e., when their
conduct is tainted with lack of probity or selfish interest (as distinct from
the interests of the company and the public), the court can step in and rectify
matters. What lies behind the statutory provisions is a breach of the fiduciary
duties the majority is supposed to honour and the basis of the complaint itself
is that there is a breach of such duties. Section 408 confers a similar power
on the Central Govt. to rectify matters, if the minority is able to satisfy
that authority that similar circumstances verging on breach of trust are there.
Winding up is another remedy available to minority shareholders when they find
that those in management of the company have failed in their duties, some of
which are statutory and some, fiduciary. Section 433(f), in particular, makes a
provision for winding up on "just and equitable" grounds. Section 542
is an instance where even a single contributory can approach the court, in the
course of the winding up of a company, for a declaration that the persons in
management be held liable for fraudulent conduct of business. Misfeasance
proceedings contemplated by s. 543 are also intended to assess and recover
damages from persons responsible for a misapplication of the company's funds
and properties, and for breach of trust. The thread running through all these
provisions is the existence of a duty on the part of those in control of the
affairs to conduct themselves more or less like trustees, and a liability to
account when they are in breach thereof. When the majority of shareholders find
that the directors are acting improperly or that the company's affairs are
mismanaged, they could remove the directors in a general meeting; they need not
go to court. But when the minority has a similar grievance, all that they can
do is to approach the court. The provisions are thus intended to protect
minority interests on the footing, and on the only footing, that their rights
are being trampled upon in an inequitable or unconscionable manner. They are
thus exceptions to the rule in Foss v. Harbottle [1843] 2 Hare 461, that a
minority cannot ordinarily invite the court to look into the internal affairs
of a company. And each of the exceptions rests on the principle that
dishonesty, fraud, want of good faith, misfeasance, breach of trust and the
like are remediable in equity, irrespective of contractual obligations.
The provisions of ss. 235
to 251 dealing with "investigation" recognise only another form of
the remedy available to the minority shareholders. While ss. 235 to 237 deal
with the circumstances under which investigation could be ordered, ss. 238 to
241 deal with inspectors, their powers and the report they have to make. Once
the report is made, follow-up measures are contemplated by ss. 242 to 244.
Section 242 provides for the prosecution of those found criminally liable.
Section 243 empowers the Central Govt., through a person authorised by it, to
apply for a winding-up on "just and equitable" grounds or to apply
for the removal of the oppression and mismanagement. And s. 244 conceives of
proceedings in misfeasance. The purpose of the investigation is thus to find
out whether those in charge of the affairs of a company are guilty of illegal
conduct or of conduct trenching upon breach of fiduciary obligations. That is
way s. 237(b) speaks of unlawful purpose, fraud, oppression, misfeasance and
misconduct. Whether it be under s. 235 when the Central Govt. acts on the
application of a group of members, or under s. 237 when it acts suo motu or
under orders of court, the machinery for investigation is to be set in motion
only in the context of a complaint regarding breach of duties which equity has
imposed on the majority.
If the above be the true
position, it follows that in proceedings under s. 237(a)(ii), the court will
look into only those allegations which have a bearing on the fiduciary duties
of the majority, or their duty to abide by the law. of course, the court need
not satisfy itself that the allegations are true, it is enough if a prima facie
case is made out. No investigation can be ordered merely because the
petitioning shareholder feels aggrieved about the manner in which, the
company's affairs are being carried on, or because the court thinks that they
could be better managed. The remedy being equitable, the court has also to
satisfy itself that the petitioner has come to court bona fide for obtaining
redres-sal, and not for any other purpose. An isolated instance of
mismanagement, already remedied, could not also justify the passing of an order
under s. 237(a)(ii).
As to the facts of the
case, the petitioner is a shareholder of the Mathrubhumi Printing and
Publishing Company Ltd.,
Though a number of
allegations are raised in the petition, Mr. Ramanatha Pillai for the petitioner
pressed only some of them at the hearing ; and I am dealing with only those
allegations.
The first relates to the
alleged theft or loss of newsprint. At the 54th annual meeting held on January
29, 1977, a member complained that a large quantity of newsprint belonging to
the company was stolen and sold in black market by some people. Since the
management took no action, the question was again raised at the 55th meeting
held on March 27, 1978. A committee was thereupon appointed to go into the
matter and at the 56th annual meeting, the convenor of the committee informed
members that there was a prima facie case. These are the bare averments in
para. 3 of the petition. There is no allegation that the directors or their
friends or relatives were involved, or that the management attempted to cover
up the matter. At the most, the allegation is that there was some theft or loss
some time during 1975-76 and that the management has failed to take any action.
Exhibit A-2 is the report
of the committee. It is dated July 21, 1979, and was made available to the
company in August, 1979. The petitioner was examined as P.W. 1 in January,
1981, and by this time he could refer to its contents also. Still, all that he
has said in evidence is that 7 to 8 tons of newsprint were stolen or otherwise
lost in 1974, and that in spite of Ex. A-2 report, the management has not taken
any action.
Exhibit A-2 shows that
according to the then manager, Sri Krishnan Nair, he was authorised to dispose
of waste newsprint (discoloured, sticky, broken, with no tensile strength), and
that he had allowed the watchman, Beeran Haji, to keep a lorry load in a
separate godown, pending disposal, as the company's godowns were full. The
value of the waste was fixed by the press superintendent and, after sale, the
proceeds were made over to the company. Beeran Haji, however, was not sure
whether the reels were waste. The committee came to the conclusion that the
transaction was not above suspicion, though there was no evidence of theft as
such ; it was not at any rate impressed by Sri Krishnan Nair's version. It is
even possible to think that in the opinion of the committee, Krishnan Nair was
in some way responsible for the loss. The committee also noted that after the
alleged incident, the machinery for dealing with waste newsprint had been
improved. There is also evidence to show that waste can legitimately go up to
12%, that the percentage for the company during the relevant period was around
9%, and that all the rest of the paper was used and accounted for as good
quality, according to the Audit Bureau of Circulation. Even assuming that the
allegation of theft or loss is true, and that Ex. A-2 contains any specific
finding, it is difficult to see what useful purpose would be served by ordering
an investigation at this distance of time into an alleged theft of 1974. The
petitioner was aware when he came to this court that the committee was looking
into the matter ; it was not as if the management had hushed it up or had
failed to take any action. Exhibit A-2 discloses that even if there was some
scope for malpractice in 1974, the machinery for dealing with waste newsprint
has since been strengthened and streamlined. The committee itself does not
place the blame on the directors then in management; and the matter was allowed
to be raised and discussed at three general body meetings, suggesting thereby
that there was no attempt to stifle minority criticism or to suppress anything.
In any event, the material available is insufficient to disclose a prima facie
case regarding breach of fiduciary duties. I may add that the petitioner
himself had suggested at the 56th meeting that a "memorial" be
created to honour ex-manager, Krishnan Nair, for the valuable services rendered
by him while in service.
The next complaint is about
irregularities and corruption in the purchase of a flat at Bombay. All that is
stated in para. 4 of the petition is that there was such an allegation and that
the committee had enquired into it. The petitioner's evidence as P.W. 1 does
not also take us any further. Exhibit A-2 shows that the flat was purchased
during the tenure of Sri V. M. Nair, and that the administrative officer of the
company was responsible for negotiating the deal. According to this officer, he
had acted under the instructions of Sri V. M. Nair. The majority of the
committee recorded that though this could not be verified, as Sri Nair was no
more alive, there was reason to think that sufficient care was not taken. One
of the members of the committee dissented, and indicated that the attempt was
only to malign the old management. The company's lawyers, who examined Ex. A-2
report, expressed the opinion that there was nothing but suspicion and no
action could be taken on its basis. After a careful reading of Ex. A-2, I am
inclined to agree with this view. Of course, the majority had made an
observation in Ex. A-2 report that the title obtained was not perfect and that
the full consideration was paid before getting the title deed. When Mr.
Ramanatha Pillai high lighted this aspect at the hearing, I directed the
management to produce the title deed. But when it was produced along with
certain other documents, it was contended that production of documents at that
stage could not be allowed. I am not inclined to take such a technical view of
the matter because if that be the case, most of the allegations in the petition
could only be considered as vague and unspecific. Some of them could not even
be considered as allegations. The petitioner's attempt may be to settle some
scores with the present management, but so far as the court is concerned, the
attempt should be to find out whether the mino rity shareholders have anything
real to complain of. I am, therefore, marking the documents as Exs. C-1 to
C-10. The title deed, Ex. C-1, dis closes that transfer of flats in Bombay was
being made by transferring shares in the building company and that the company
herein acquired the concerned shares on the day the consideration was paid. Sri
V. M. Nair himself has signed Ex. C-1. The flat is admittedly in the exclusive
and undisturbed possession of the company. On the materials available,
therefore, I am unable to hold that misfeasance, misconduct, breach of trust or
fraud have been established, prima facie, in regard to this trans action.
Another case is about the
writing off of large sums as bad debts, and the allegation in the petition is
only this :
"It is also seen from
Ex. P-1 proceedings that large sums are written off in the financial year to
which Ex. P-1 relates."
There is no complaint, at
least in the pleadings, that the amounts were recoverable, or that they were
written off in order to benefit the directors or their favourites, or that the
action was in any other way irregular or improper. Exhibits C-2 to G-10 show
that the Board had decided to write off the amounts concerned at three
different sittings. The amounts were outstanding from advertisers, agents and
other people numbering about 160, Exhibit P-1 referred to in the petition is Ex.
A-1 minutes of the 56th annual meeting; and the only question at the meeting
relating to writing off was whether charges for printing the Janata Party
posters for the Chickmaga-loor election were also included in the amounts
written off. The suggestion was denied and it was pointed out that the election
itself was held during the previous financial year and that printing charges
for posters had been fully realised. An Interesting interlude was a suggestion
by someone that only printing charges due from the Congress party were being
written off in the past. The amount written off during the year in question was
Rs. 1,02,623. For the year ended July 31, 1977, the amount written off was
higher. A large amount is seen written off during 1979-80 also. Taking into
account the business turnover and the accounting practice of the company, it
cannot be said that anything unusual had taken place during Ex. A-1 year. The
auditors had raised no objection and the general body had approved the
accounts. In my opinion, this allegation of the petitioner is devoid of any
merit.
The next grievance relates
to the purchase of some land at Trivan-drum. There was no reference to such a
complaint either in the petition or in the reply affidavit filed in September,
1979. The point was raised in para. 4 of the reply affidavit dated October 23,
1980, in the following manner :
"It may also be kindly
noted that Sri Damodaran who is found to be one of the employees responsible
for the deal in respect of the purchase of the flat in Bombay has again been
allowed to participate effectively in the transaction regarding the purchase of
property by the company in Trivandrum which again is a reckless venture whereby
the company is put to loss."
The evidence of P.W. 1 is
to the effect that the land was purchased for starting the Trivandrum edition
of the newspaper and that it is kept vacant, while the Trivandrum edition is
being published from some other premises. There is also a statement that more
than one lakh of rupees was spent for acquiring land in a marshy area. But when
it came to argument, the point stressed was that it was an unwise policy to
have acquired land and then depended on other premises for the Trivandrum
edition. The company has produced documents to show that land in the
neighbourhood is being sold at three times the rate it had paid. It is also
explained that the equipment and machinery for the Trivandrum press had
arrived, and that their erection and the publication of the Trivandrum edition
could not have been postponed. The evidence discloses that about one crore of
rupees was set apart for the Trivandrum edition, and that there was a prolonged
strike and lock-out in the meanwhile. There is thus no material to hold that
the investment of about a lakh of rupees in land, to be eventually used for
housing the Trivandrum project, was a reckless venture or a foolish adventure.
Paragraphs 5 and 5A of the
petition deal with another charge, and that relates to the appointment of one
Sri Manakalath as public relations manager of the company in June, 1978. It is
alleged that he was appointed without a board resolution and without inviting
applications for the post, and that lie was allowed to draw large sums as T.A.
advance without vouchers. It was, however, conceded at the hearing that the
managing director was competent to appoint such officers without the Board's
sanction and that there was no practice of inviting applications for such
posts. The person concerned was working at Madras as the company's advertisement
representative, and there is evidence to show that his appointment as P.R.M.
was followed by an increase in advertisement revenues. The main attack was
directed against payment of advances. R.W. 1 has given evidence that all
payments were effected only against vouchers and that bills and accounts were
being subsequently presented, verified and adjusted. The auditors have raised
no objection. The reports of the directors and auditors, as also the
balance-sheet and profit and loss accounts, were duly passed during every year.
Counsel referred to some discrepancy in one of the answers given at the 56th
annual general meeting, but the control and supervision of finances and
accounts should normally be left to those in charge and the auditors, subject
to acceptance by the general body. There is no evidence regarding any
particular disbursement or voucher, even if such a matter could be gone into in
proceedings like the present.
Another matter raised in
paras. 5 and 5A concerns the appointment of one C.G.K. Reddi as adviser. The
allegation is that he entered into an agreement with a foreign concern for the
monopoly supply and distribution of the company's publications and that this
was done without the sanction of the Reserve Bank and to the detriment of the
company. My attention has not been drawn to any passage in the evidence of PAY.
1 dealing with want of Reserve Bank sanction or detriment to the company. All
that was said by P.W. 1 was that the agreement had not benefited the company
and that there was some litigation. It was also added that there was no board
resolution authorising Sri Reddy to enter into the contract. The company's
answer is that Reddy was appointed as adviser for one year for modernising the
company and planning the Trivandrum project. He had acquired experience as
general manager of the "Deccan Herald" and as business manager of the
"Hindu". The evidence of R.W. 1, along with the documents produced,
show that Reserve Bank permission had been obtained, that the agreement was
entered into with the full concurrence of the managing director after effecting
modifications suggested by him, and that the arrangement had come to an end
within a matter of days because of some ban ordered by the U.A.E. government.
There is no evidence of litigation loss, detriment, illegality or even
unauthorised dealing. This complaint should also, therefore, fail.
Another allegation which,
if proved, would have been a matter of some substance, is about the appointment
of one Sri P. V. Chandran as the director of the company. What is argued is
that he was a partner in a firm of advertisers with which the company had
dealings, and that he was appointed in violation of s. 299 of the Companies Act
inasmuch as his interest in that business was not disclosed. But the allegations
in paras. 9 and 9A of the petition make no reference to s. 299, but only to the
extending of credit facilities to the firm as a "non-accredited"
advertising agent. From the evidence, however, it is clear that such agents are
also given credit facilities, though for a shorter term. The decision to
appoint Sri Chandran as director was taken at the board meeting held on May 14,
1978 ; he was not present at the meeting. Exhibit B17 dated July 14, 1978, is a
letter from Chandran, in reply to the company's letter dated June 2, 1978,
disclosing his interest in the firm. R. W. 1 says that though the firm was a
valuable customer, no fresh contract was given to it after Sri Chandran was
appointed as director. He resigned from the firm by the end of March, 1979. Violation
of s. 299 is thus not made out.
Paragraph 7 of the petition
complains of the company's attempt to borrow one crore of rupees, when it has a
paid up capital of less than nine lakhs only. The interest liability would be
too much for the company, it is averred. It is added that "in the peculiar
circumstances now obtaining in the company, there is every reason to suspect
the bona fides of the management in the matter". The company's answer is
that newspaper business had become highly competitive with other papers like
Malyala Manorama starting editions from different centres and that it was,
therefore, decided to expand the company's business by starting a Trivandrum
edition of the Malhrubhumi and that the borrowing was intended to raise funds
for the purpose. The decision to borrow was actually taken at an extraordinary
general meeting held on June 23, 1969. It was unanimous and the petitioner was
also a party to it. If this be the true position, I fail to see how he could
challenge the bona fides of the decision, and how it could be said that that
anyone is guilty of breach of fiduciary duties.
The last complaint is that
"information regarding the affairs of the company and its working are
purposely withheld from the members"; and the company's answer is that
members of the company have access to all the records of the company as laid
down in the Companies Act. P. W. I has no case that any particular information
he wanted has been withheld. What is suggested by counsel is that some of the
questions asked by members at the 56th meeting (Ex. A-1) remained unanswered.
Disclosure is no doubt one of the fundamental principles underlying the
formation and working of a company. Members have a right to know how the
company's affairs arc conducted. Creditors would also like to learn about its
financial position. Even members of the public are interested, at least from
the point of view of future investment. The Companies Act, therefore, provides
for maintenance of registers, books, records and for publication and compulsory
disclosure of accounts duly audited. Every company should have a registered
office and that office must maintain the memorandum and articles of
association, register of directors, of members, and other books and files
regarding share capital and other matters. The accounts should be audited every
year and annual returns are to be submitted. Charges should be registered. All
these are available for inspection by members of the company and even by the
public. The audited accounts have to be placed before the annual general body
for the information of the members. The directors have to report every year to
the shareholders in general meeting. Extraordinary general body meetings are
also held. These are some of the provisions of the Act which insist on supply
of information to members and others. But that does not mean that every
question asked at every general meeting should be forthwith answered, without
even considering whether they relate to the affairs of the company as
understood in law, and whether it would be possible to answer such questions
without due notice. A business organisation like a company cannot function like
a legislative assembly, if only for the reason that the powers of the directors
and the members in general body are denned. Section 237(b)(iii) speaks of
"information with respect to its affairs which they might reasonably
expect", i.e., the information sought for must be about the affairs of the
company and something which could reasonably be expected to be supplied. No
attempt has been made before me, either in the course of evidence or at the
hearing, to point out that any particular information of such a character has
been withheld.
On an anxious consideration
of the materials on record and the arguments advanced, and even overlooking the
unsatisfactory nature of the pleadings, I am unable to hold that circumstances
suggesting the existence of fraud, illegality, misfeasance, misconduct, etc.,
have been made out even prima facie, so as to relax the rule in Foss v.
Harbottle [1843] 2 Hare 461 and direct an investigation into the internal
affairs of the company. The company petition is, therefore, dismissed, but
without costs.
[1988] 64 COMP. CAS. 603 (BOM.)
HIGH COURT OF
v.
S. W. PURANIK AND G. G. LONEY, JJ.
WRIT
PETITION NO. 1629 OF 1986
DECEMBER 17, 1986
V. R. Manohar
for the petitioner.
Ramesh Darda for the
Respondents.
JUDGMENT
The judgment of the court
was delivered by
S. W. Puranik J.—The petitioner—M/s. Hariganga Cement Limited— is a public
limited company duly incorporated and registered under the Companies Act, 1956,
and this petition by the said company is directed against the common order
bearing reference No. 20/1/86-CL-I, dated July 31, 1986, passed by respondent
No. 1, the Company Law Board, in a petition filed before it under section 250
read with sections 237 and 247 of the Companies Act, 1956, as well as a
petition filed under sections 408 and 409 of the Companies Act, 1956. By the
said impugned order, the Company Law Board has directed investigation into the
affairs of the petitioner company (hereinafter referred to as "the
company") under section 237 of the Companies Act, while dismissing the
application under sections 408 and 409 of the Companies Act, and partially
allowing the application under sections 237, 247 and 250 of the Companies Act.
Brief facts leading to the
present petition may be stated as follows:
The petitioner-company was
promoted for setting up a mini cement plant in Chandrapur District of
Maharashtra State and was incorporated in March, 1979. The plant has been set
up and has gone into production from the end of June, 1986. The said company is
financed by various financial institutions including nationalised banks,
Industrial Development Bank of India (IDBI), Industrial Credit and Investment
Corporation of India Ltd. (ICICI), Industrial Finance Corporation India (IFCI)
and Investment Corporation of Maharashtra Ltd. (ICM).
One Shri T. L. Arora, a
non-resident Indian, was the director of the said company from June, 1981, to
March, 1986, and is also a shareholder holding 20,000 equity shares in his own
name and 20,000 equity shares held by him jointly with his wife. The said Shri
Arora, it is alleged by the company, started creating difficulties in the
management of the company with the sole object of taking over the control and
management of the company. It is further alleged that he retired from the
office of the director by rotation on March 31, 1986, and failed to get himself
re-elected to the board of directors. It is then alleged by the company that
the said Arora and his associates went to the extent of proposing a resolution
at the annual general meeting held on March 31, 1986, for the removal of Shri
G. R. Agarwal, chairman and Shri O. P. Agarwal, director, of the company who
were the main promoters of the petitioner company, and sought to get two of his
associates as directors in the resulting vacancies. The said resolution failed
as it could not be proposed and seconded.
As already stated above,
the annual general meeting of the company was scheduled on March 31, 1986, when
one Shri K. R. Batra, another shareholder, filed an application under sections
237, 247 and 250 of the Companies Act before the Company Law Board. Shri T. L.
Arora also filed an application under sections 408 and 409 of the Companies
Act. The allegations made in these applications were substantially the same.
Some of the allegations made in the above applications may be stated as
follows;
(1) That the chairman and his brother had diverted funds of the
company and siphoned off the same through a series of transactions to other
sister concerns;
(2) That the
annual general meeting of March 31, 1986, was mis conducted; and
(3) That Shri G. R. Agarwal had invested over Rs. 25 lakhs in the
names of poor and illiterate villagers of Jeetpura, Haryana, in the sums of Rs.
10,000 to Rs. 25,000 each, even though those persons had no resources. It is,
therefore, Shri G. R. Agarwal, who is actively control ling the affairs of the
company on the basis of such bogus shares.
To substantiate these
allegations, the said Arora had collected signatures and thumb impressions and
statements from the said villagers who have stated that they had never applied
for such shares.
Respondent No. 1, the
Company Law Board, on hearing both the parties, passed the following order:
"25. In regard to the maintainability of an
application under section 409 of the Act, the condition precedent is that the
application should be made either by a director, managing director or other
persons holding certain positions as mentioned in section 409. Since Shri Arora
did not hold any of these positions at the relevant time and it has also not
been shown that any of his co-applicants held the same when the application was
made, it is clear that the said application is not maintainable.
26. With regard to the application under
section 408, it may be mentioned that applicant No. 2 has not been able to
prove most of the allegations and in particular the one relating to advances of
Rs. l.64 crores said to have been given to companies connected with Shri G. R.
Agarwal. The remaining transactions have been reasonably explained by the
respondents. It is also significant that the financial institutions are
actively associating themselves with conducting the affairs of the company and
have suggested professionalisation of the board of directors, described in
para. 11, supra, and appointment of concurrent auditors. These should
adequately take care of proclivity, if any, towards mismanagement and we do not
think if any further preventive action under section 408 of the Companies Act
is warranted.....".
It may not be out of place
to mention here that before the above order was passed by respondent No. 1, the
Company Law Board, the petitioner-company who was respondent therein had been
duly served notice and they had filed their detailed statement and explanations
before the Company Law Board. All the allegations in the applications of Mr.
Arora and Batra, were denied. The Company Law Board, while rejecting both the
applications of Mr. Arora and Batra, made only one adverse observation to the
effect that satisfactory answers to the allegations that a large number of
villagers had been put up as a front by Sri G.R. Agarwal have not been
furnished. Thus, it appears to be the only reason given by the Company Law
Board that it was not satisfied with the replies given on behalf of the
petitioner-company.
We have detailed the
findings arrived at by respondent No. 1, the Company Law Board, from paragraphs
25 and 26 of its order, wherein it may be noticed that the application under
section 409 of the Companies Act was not maintainable and in regard to the
other applications under section 408, it was stated that the applicants have
not been able to prove most of their allegations, while the remaining
transactions have been reasonably explained by the respondent therein. The
Company Law Board has also taken into account all the facts that financial
institutions were actively associating themselves with the affairs of the
company and that these should adequately take care of proclivity, if any,
towards mismanagement and that no further preventive action under section 408
of the Companies Act is warranted.
In spite of the above
categorical finding, the Company Law Board, in para 27 of the impugned order
states as follows:
"27. However, in regard to the request for
investigations under sections 237, 247 and 250, satisfactory answers to the
allegations that a large number of villagers had been put up as a front by Shri
G. R. Agarwal have not been furnished. It is also seen that the IDBI ordered
some investigations into the affairs of the company. Therefore, a probe, inter
alia, into the related issue of purchase of shares by the villagers seems
necessary. Since this is an important point on which we are not satisfied with
the replies from the company, we feel necessary that the affairs of the company
should be investigated with a view to ascertain the correctness or otherwise of
the various allegations made in the petitions including the aforesaid".
An operative order annexed
to the impugned order, however, states that "there are circumstances
suggesting that the persons concerned in the management of its affairs have
been guilty of misconduct towards the company, and some of its members, more
specifically, certain villagers of Jeetpura in Haryana; and whereas the Company
Law Board considered it necessary to appoint an inspector to investigate into the
affairs of the company and report thereon...hereby appoints Shri V. Govindan,
Joint Director (Inspection), Department of Company Affairs, Shastri Bhavan, New
Delhi, as inspector to investigate into the affairs of the company and to
report to the Company Law Board...".
It is to be noted that even
in the final conclusions in paragraph 27, the Board has held that no
satisfactory answer was given in respect of benami shareholders, and that a
probe, inter alia, into the related issue of purchase of shares by the said
villagers seems necessary. The Board further directed that the affairs of the
company should be investigate with a view to ascertain the correctness or
otherwise of the various allegations made in the petitions including the
aforesaid.
Shri V. R. Manohar, learned
counsel for the petitioner-company, attacked the impugned order as arbitrary,
whimsical, irrational and perverse. He criticised the same as an order which is
a result of total non-application of mind on the part of respondent No. 1. He
also contended that on the basis of the available facts and circumstances which
were placed before respondent No. 1-Board, it was impossible for any reasonable
person, much less the Company Law Board, to opine therefrom suggestive of the
things mentioned in clauses (i), (ii) and (iii) of section 237(b) of the
Companies Act. According to the petitioner, the impugned order certainly is
contrary to the findings recorded by respondent No. 1, Company Law Board,
itself. The impugned order has also no nexus with the finding recorded in the
body of the impugned order. Further, no reasonable body of persons, properly
versed in law, could have passed the impugned order and, hence, the impugned
order can be branded as arbitrary and capricious.
Shri Ramesh Darda, learned
counsel for the respondents, Company Law Board, and the Union of India,
supported the impugned order. According to him, there were sufficient
circumstances and facts brought on record, which were sufficient for the Board
to act and direct investigation into the affairs of the company. In so far as
the contention of the petitioner-company that while in the body of the order
the Board had decided to order inquiry only in respect of the bogus shares held
benami in the names of villagers in Haryana, yet the final order directs
investigation into the entire affairs of the company, is concerned, Shri Darda
stated that apart from the said allegations and documents of the villagers, two
applications of Shri Arora and Batra were also before the Board contending
several allegations in the matter of management of the affairs of the company.
He further submitted that the subjective satisfaction arrived at by the Board
on the basis of these facts cannot be challenged before this court. At the time
of hearing of this petition, we had secured the records and papers which were
before respondent No. 1, when it had passed the impugned order. With the
assistance of both the counsel, we have perused all the documents in detail.
Some of the principles
governing the orders passed by the Company Law Board under section 237(b) of
the Companies Act may be borne in mind. The earlier view of the Supreme Court
in State of Madras v. C. P. Sarathy, AIR 1953 SC 53, was not approved
subsequently. In the said decision in 1953, the Supreme Court had held that
"whenever a provision of law confers certain power on an authority on its
forming a certain opinion on the basis of certain facts, the courts are
precluded from examining whether the relevant facts on the basis of which the
opinion is said to have been formed in fact existed". This decision in
1953 has been overruled by the subsequent decision of the Supreme Court in the matter of Rohtas
Industries Ltd. v. S. D. Agarwal [1969] 39 Comp Cas
781; AIR 1969 SC 707, in which the Supreme Court have observed that the 1953
decision cannot be considered as authority for this preposition. It was further
held by the Supreme Court, approving the decision in Barium Chemicals' case
[1966] 36 Comp Cas 639; AIR 1967 SC 295 that (at page 800 of 39 Comp Cas):"...the
existence of circumstances suggesting that the company's business was being
conducted as laid down in sub-clause (i) or the persons mentioned in sub-clause
(ii) were guilty of fraud or misfeasance or other misconduct towards the
company or towards any of its members is a condition precedent for the
Government to form the required opinion and, if the existence of those
conditions is challenged, the courts are entitled to examine whether those
circumstances were existing when the order was made. In other words, the
existence of the circumstances in question is open to judicial review though
the opinion formed by the Government is not amenable to review by the
courts". Thus, even though the subjective opinion formed by the Company
Law Board is not amenable to challenge, the judicial courts can certainly look
at the circumstances as to whether they were existing, or if they were
existing, whether they had any nexus with the opinion formed by the Company Law
Board.
It is well settled that the
discretionary powers under section 237(b) of the Companies Act must be
exercised honestly and not for corrupt or ulterior purposes. The authority must
form the requisite opinion honestly and after applying its mind to the relevant
materials before it. In exercising the discretion, the authority must have
regard only to circumstances suggesting one or more of the matters specified in
sub-clauses (i), (ii) and (iii) of section 237(b) of the Companies Act. It must
act reasonably and not capriciously or arbitrarily. It will be an absurd
exercise of discretion, if, for example, the authority forms the requisite
opinion on the ground that the director in charge of the company is a member of
a particular community. Within these narrow limits, the opinion is not
conclusive and can be challenged in a court of law. (refer paragraph 45 of
Rohtas Industries Ltd.'s case [1969] 39 Comp Cas 781; AIR 1969 SC 707, at pages
802, 803). The Supreme Court has also observed in the above case at paragraph
46 (at page 803) that: "If it is established that there were no materials
upon which the authority could form the requisite opinion, the court may infer
that the authority did not apply its mind to the relevant facts. The requisite
opinion is then lacking and the condition precedent to the exercise of the
power under section 237(b) is not fulfilled".
On perusal of the records
and papers, we find that the applications of Shri Batra and Arora have been
rejected and could not be considered as they were not supported by affidavits.
However, the Company Law Board seems to have relied upon the so called
documents or statements of some villagers from Haryana, inter alia, contending
that they had never applied for the shares of the petitioner-company nor had
they contributed any amount. The true copies of the said documents are at
annexures E, F, G and C to this petition. Scrutiny of the said documents shows
that the affidavits are not by the shareholders themselves, but by some of the
relatives of the recorded shareholders'. Some of the affidavits are not even
sworn and are mere chits bearing thumb impressions or signatures of the
villagers. Such documents, in our opinion, cannot form the basis of even the
purported existence of any material before the Company Law Board.
In the return filed on behalf
of respondent No. 1, the Company Law Board, it has been sought to be contended
that apart from the documents purporting to be the statements of the benami
village shareholders, two applications of S/Shri Batra and Arora were also
before the Board, which contained serious allegations regarding mismanagement
of the affairs of the petitioner-company. Shri Darda, learned counsel for the
respondents, has also taken the same stand during his arguments. We do not find
that such a contention can be accepted at all, for the simple reason that the
speaking order passed by the Board at annexure A clearly brushes aside the
applications filed by Batra and Arora, and they have categorically concluded
that most of the allegations in the applications were not substantiated,
whereas the remaining allegations have been duly explained by the company. The
only material, on the basis of which the impugned order is passed, is the
statement of the villagers from Haryana and if that is the only circumstance
which was in existence at the time of the passing of the opinion by the Board,
then no additional circumstance can be placed now during the arguments. or in
the return. The opinion formed by the Board is squarely based only on the
statement of the alleged villagers from Haryana, and we have already found that
the said statements have no nexus with the mismanagement of the affairs of the
petitioner-company. In fact, even if the allegations in the villagers'
statement may be true, it may amount only to an offence by the individual
person concerned, who has secured the benami shares in the name of the said
villagers. It does not reflect on the management of the 'affairs of the
company. For such an act of holding unauthorised benami shares, there are
independent provisions under the Companies Act for taking action against such
shareholder who has secured benami shares.
The discretionary powers
vested in the Company Law Board under section 237(b) of the Companies Act are
of a very wide nature and the said powers have to be exercised with great
cirumspection and retrospection and in a judicious manner: The powers under
section 237 have been conferred on the Central Government in the faith that it
will lie exercised in a reasonable manner. The Department of the Central
Government which deals with companies is presumed to be. an expert body in
company law matters. Therefore, the standard that is prescribed under section
237(b) is not the standard required of an ordinary citizen but that of an
expert. Hence, if the court comes to the conclusion that no reasonable
authority would have passed the impugned order on the material before it, then
the same is liable to be struck down.
The formation of the
opinion under section 237 of the Companies Act by the Central Government is
subjective, but the existence of circumstances relevant to the inference as the
sine qua non for action must be demonstrable. It is not reasonable to say that
the clause permits the Government to say that it has formed the opinion on
circumstances which, it thinks, exist. Since the existence of
"circumstances" is a condition fundamental to the making of an
opinion, the existence of the circumstances, if questioned in court, has to be
proved at least prima facie. It is not sufficient to say that circumstances
exist but give no clue as to what they are, because the circumstances must be
such as to lead to a conclusion of certain definiteness. When it is challenged
that the opinion has been formed mala fide or upon extraneous or irrelevant
matters, the respondent must disclose before the court, the circumstances which
will indicate that his action was within the four corners of his own powers.
We have already observed
that none of the circumstances which could have led to the conclusion arrived
at by respondent No. 1-Board were in existence. On the other hand, we have seen
from the return and from the oral submissions of learned counsel for
respondents that certain reasons have been added now to substantiate the
opinion formed by respondent No. 1-Board. Such reasons, stated afterwards,
cannot justify the order in retrospect, if they were not available to the
authority at the time of exercising its powers in arriving at the opinion. In
fact, other circumstances which were before the court were already considered
and rejected.
As stated earlier by us,
even though wide powers have been conferred on respondent No. 1, the Company
Law Board, yet they must be exercised in a reasonable manner. It is pertinent
to note that such an order has an adverse effect on the reputation and
credibility of the petitioner-company and may cause grave prejudice to its
affairs and may also give rise to consequences which could not be allowed to
take place at the cost of the petitioner-company's interest. The Company Law
Board, in its speaking order (annexure A) has also observed that several
financial institutions, such as, IDBI, ICICI, IFCI, etc., have actively
associated themselves with the management of the company, and are duly
respresented on the board of directors and that should take adequate care of any
proclivity, if any, towards mismanagement of the company.
In view of the above
discussion, we have no hesitation to strike down the impugned order at annexure
A and its operative part appointing an Inspector for investigation into the
affairs of the petitioner-company.
In the result, the writ
petition is allowed. Rule made absolute as above. In the circumstances of the
case, there shall be no order as to costs.
[1970] 40 COMP. CAS. 282 (ALL)
HIGH COURT OF
v.
M. H. BEG, J.
COMPANY PETITION NO. 15 OF 1967
NOVEMBER 18, 1969
S. S. Bhatnagar for the petitioner.
Gopal
Behari, L. N. Pandey and CM. Srivastava for the respondent.
M.
H. Beg, J.—Raghunath
Swarup Mathur and his four sons are the petitioners before this court under
sections 397 and 398 of the Companies Act, 195(3 (hereinafter referred to as
the Act). The petitioners fulfil the requirements of section 399 of the Act for
filing a petition under sections 397/398 of the Act as they hold more than
one-tenth of the paid up capital of the Co-operative Co. Ltd., Nawabganj,
So
far as H. S. Mathur, opposite party No. 1, the former managing director, is
concerned, it is in evidence that a suit was filed by the company for the
recovery of Rs. 15,621 from him on the ground that he had illegally drawn Rs.
825 as salary as a managing director from April 1, 1961, to October 27, 1962,
without obtaining either the sanction of the Central Government as required by
section 269(2) of the Act, or the sanction of the company under section 317 of
the Act. Another ground on which the amount was alleged to have been illegally
paid to him is that the company made no profits from March, 1961, to March,
1962, so that the opposite party was said to be bound to refund the amount
under section 309(5) of the Act because his appointment did not have the
approval of the Central Government under section 198(4) of the Act. This claim,
however, having formed the subject-matter of a suit by the company which was
dismissed by the Civil Judge, Saharanpur, the case of the contesting opposite
parties is that the suit was rightly dismissed as the salary was paid to the
opposite party No. 1 after obtaining the required sanction under the law and
that no appeal was filed as the decision of the civil judge was correct. The
petitioners alleged that the suit was dismissed owing to collusion between the
contesting opposite parties. In other words, the petitioners want to reopen the
case by means of this petition on vague allegations of fraud and collusion of
which particulars are wanting to sustain the plea.
Another
ground of attack against the opposite party No. 1 is that the accounts were not
kept properly during his term of office as managing director and that the audit
reports from 1959 to 1962 and a letter written by the Registrar of Companies,
U.P., dated March 16, 1963 (annexure "D") show that "there were
embezzlements and corruption on a large scale." No audit report supports a
charge of this character. Indeed, the petitioners have themselves alleged that
the auditors are colluding with the contesting opposite parties to whitewash
and conceal the contesting opposite parties' illegal acts. A perusal of a copy
of the above-mentioned letter, filed by the petitioners themselves, shows that
the Registrar had asked for information and accounts on the ground that
accounts had not been properly maintained, as required by section 209 of the
Act. This information was required to be furnished within ten days of the
receipt of the letter. There is no mention there of any embezzlement,
corruption or fraud. The letter also indicates that the appointments of K. S.
Mathur, opposite party No. 2, either as general manager or as secretary, being
irregular for contravening the provisions of sections 310 and 314, the company was required
to give information about the steps taken to obtain refund of excess payments.
Information was also required to be given, within ten days, whether steps had
been taken to regularise increase of the sitting fees of directors from Rs. 25
to Rs. 100 per meeting by obtaining the approval of the Central Government
under section 310 of the Act or to show that the excess amount paid had been
refunded.
The
only specific item mentioned by the petitioners of alleged embezzlement is that
an annual expenditure of fuel was shown as ranging from Rs. 7,000 to about Rs.
14,000 in different years whereas it was said to be always less than Rs. 100
every year. It was, however, stated in the petition that, in the balance sheet,
the expenditure for fuel had been shown as amalgamated in subsequent years with
expenditure for "steam coal". The counter-affidavit of the contesting
opposite parties shows that they furnished details of all expenditure to the
Registrar, but, as the Registrar was not satisfied, the company was prosecuted
under sections 216 and 218 of the Act for failure to furnish information from
1958 to 1961 and that the managing director was convicted. As regards the
alleged expenditure on the specific item of fuel, the contesting opposite
parties ascertained that it was always correctly shown and that large
variations in the amount shown were due to substitution of coal in place of
other fuel in subsequent years. Apparently, only the other fuel was shown
separately as "fuel" in some years and the petitioners have picked
upon this item due to the resulting confusion. Another ground taken is that
petitioner No. 1 filed a complaint against opposite, parties Nos. 1 and 2 under
sections 465/477A, Indian Penal Code, for falsification of the attendance
register, but the petitioners themselves state that this case was compromised
on 15th March, 1963.
Similar
allegations are made against K. S. Mathur and J. S. Mathur, opposite parties
Nos. 2 and 3. The allegations are either unsupported by particulars or relate
to some irregularity which had already been the subject-matter of attention of
the Registrar of Companies or the Company Law Board so that the irregularity
was either cured or condoned. And, once, the managing director was actually
convicted, as already mentioned, for infringement of sections 216/218 of the
Act. The allegation against K. S. Mathur, opposite party No. 2, in particular,
was that expenses on office and administration by him and on repairs and
maintenance were excessive. This allegation is also controverted by the
contesting opposite parties. The correctness of the allegation that the
balance-sheet ending March, 1964, did not show the purchase of any machinery or
plant, whereas the addition of Rs. 8,055.37 is shown in purchases, is also
denied by the contesting opposite parties. The allegations relating to
particular heads of expenditure as unjustified or incorrect are vague and
general. No specific instances
or details of falsification of accounts with regard to particular transactions
could be furnished. Every allegation, whether in relation to any particular
head of expenditure or of a more general and sweeping character, is met by a
counter assertion so that it is not possible to determine which version is true
without an elaborate and detailed examination of the accounts and taking of evidence
including oral evidence.
The
allegation that the auditors have been colluding or conspiring with the
contesting opposite parties has not been substantiated. It is significant that,
among the charges levelled by the petitioners against the contesting opposite
partie.3, is that writ petitions were filed in this court by them as well as in
the Supreme Court against the reinstatement of petitioner No. 1 as ordered by
the
On
the above-mentioned allegations, the petitioners have prayed for the removal of
opposite party No. 2 from the office of the managing director and of the other contesting
opposite parties from directorship of the company. They pray that petitioner
No. 1 may be appointed the managing director and that the other directors may
be chosen by this court from amongst the petitioners or other shareholders
"as this hon'ble court may deem fit and proper". They ask for orders
directing opposite party No. 1 to refund a sum Rs. 15,021 paid to him from
April 1, 1961, to February 27, 1962, and the alleged excess of managerial
remuneration paid to opposite parties Nos. 2 and 3 from April 1, 1961, up to
the date of the petition on the ground that these payments violated sections
198 and 309 of the Companies Act. They also pray that opposite parties Nos. 1
to 3 "be forbidden to hold any office of profit in the company along with
respondents Nos. 4, 5 and 6". Furthermore, petitioner No. 1 has claimed
compensation for loss of pay due to illegal termination of his service and the
award of gratuity to him "when due for his 25 years or more of service
" and also that he be reinstated in his post. The petitioners have also
applied, presumably as one of the alternative modes of relief, for the
appointment of an investigating officer to examine the affairs of the company
with regard to the alleged mismanagement and " bungling" of accounts
and embezzlement and to assess the loss to the company from the activities of
the opposite parties Nos.
1 to 6, and, it is prayed, that such of the opposite parties as are "found
responsible" be ordered to be prosecuted in a court of law.
It
is evident from the allegations of the two sides, and, particularly from the
reliefs claimed, that the petitioners' whole object is that this court should
interfere with the internal management of the company and set right the alleged
mismanagement by appointing petitioners and others of their liking to manage
the company in place of the contesting opposite parties, who should, according
to the petitioners, be punished for their alleged misdeeds. The case of the
contesting opposite parties, on the other hand, is that the petition is a mala
fide attempt by disgruntled and outvoted individuals to injure the company for
fanciful wrongs alleged to have been done to them. They allege that the
petitioners' sole object is that the management of the company should be handed
over to an outvoted minority of shareholders led by the first petitioner, a
former employee of the company and the father of the other petitioners. The
circumstances in which the petition is made, some of the allegations made in
it, and the reliefs claimed in it certainly indicate that the motives of the
petitioners may be questionable. It may be that the dominant object of the
petitioners is to secure control of the company and to punish the contesting
opposite parties for actions which are not liked by the petitioners whose
personal interests are injured. Nevertheless, if a case for any order under
either section 397 or section 398 of the Act is made out, the petitioners'
motives or objects will not matter.
Section
397 of the Act undoubtedly empowers this court to make such orders "as it
thinks fit" but only "with a view to bringing to an end the matters
complained of". The matters complained of must be proved to establish :
"(a) that the company's affairs are being conducted in a manner prejudicial
to public interest or in a manner oppressive to any member or members ; and (b)
that to wind up the company would unfairly prejudice such member or members,
but that otherwise the facts would justify the making of a winding up order on
the ground that it was just and equitable that the company should be wound
up." It is, therefore, an essential prerequisite for a petitioner under
section 397 of the Act to prove that, apart from any prejudice to the interests
of members, a winding up order would be justified in equity. Although, grounds
of justice and equity elude categorisation and must necessarily be left to be
decided on the particular facts of each case, yet, well recognised tests have
to be applied in deciding what they are, and the language used in section 397
indicates that just and equitable grounds for a winding up must not only exist,
but they must be sufficiently compelling so as to "justify" a winding
up order.
Section
443(2) of the Act makes it clear that the court may refuse to exercise its
discretionary power to order a winding up on the ground that it is just and
equitable to do so if more suitable alternative remedy for obtaining relief is
there. It enacts :
"Where
the petition is presented on the ground that it is just and equitable that the
company should be wound up, the court may refuse to make an order of winding
up, if it is of opinion that some other remedy is available to the petitioners
and that they arc acting unreasonably in seeking to have the company wound up
instead of pursuing that other remedy."
Indeed,
the principle that the existence of a more efficacious alternative mode of
relief, which could be adopted, justifies refusal to exercise the discretionary
power invoked is of more general application. It applies to other kinds of
discretionary powers. It will be observed that powers contained in both
sections 397 and 398 of the Act are discretionary.
Section
398 of the Act does not contain the express restriction, found in section 397
of the Act, that facts proved must justify a winding up order. It is,
therefore, difficult to see the object of putting cases of existing injury to
public interest in section 397 as well as in section 393. It was enough to put
such cases in section 398, the range of which is not confined to cases in which
winding up orders would be justified. In cases falling under section 398(1)(b),
action can be taken to prevent even likelihood of injury in future either to
the interests of a company or to public interest. But, in so far as powers
under section 397 as well as section 398 are discretionary, the principle is
equally applicable to both that the exercise of such power should be refused
where a more suitable or efficacious means of redress is open to a complainant.
Another rule, flowing from the very nature of powers under sections 397 and 398
of the Act, is that interference with internal management of companies should
take place only on good and compelling grounds.
Learned
counsel for the contesting opposite parties relied on Smt. Soma Vati Devi Chand
v. Krishna Sugar Mills Ltd.,
to contend that the jurisdiction of the court, under sections 397 and 398 of
the Act, described as "summary" by the learned counsel, does not
extend to determination of contested questions of fact requiring
"investigation". The case cited deals with the jurisdiction of the
court under section 155 of the Act relating to rectification of register of
members. The principle contained there is not applicable to the wide equitable
jurisdiction conferred by sections 397 and 398 of the Act. If courts have
refused to enter into contested questions of fact in proceedings under sections
397 and 398, it is not because there is a limitation upon the jurisdiction of
the court confining it to uncontested questions of fact. Indeed, such a
restriction upon the powers of the court would defeat the very object of a
remedial power which can rarely be exercised without contest on facts. But,
inasmuch as the jurisdiction of the court under the Act is, as a matter of
practice and generally applied rules, exercised on the basis of evidence tendered through
affidavits, it is possible to refuse the exercise of discretionary power on the
ground that more detailed and necessary oral and documentary evidence can be
conveniently produced in another type of proceeding which may be available on
the facts of a particular case. Exceptional cases can, however, arise in which
detailed adduction of oral and documentary evidence, in proceedings under sections
397 and 398 of the Act, may be the only way of administering justice
efficaciously.
In
In re Bengal Luxmi Cotton Mills Ltd.,
the Calcutta High Court refused to exercise its jurisdiction on the ground that
suits already filed, in which detailed evidence could be led on contested
questions of fact, were more suitable, in the circumstances of the particular
case, than "summary" proceedings under sections 397 and 398 of the
Act, in which evidence by affidavits is given, for trial of questions raised.
It, however, indicated that if suits had not been already filed, the position
may have been different. It did not deny itself the jurisdiction to try
contested questions of fact by adduction of detailed evidence if the suits had
not been filed. In other words, it applied a rule applicable to exercise of
discretionary power, but, as the jurisdiction to embark on an elaborate
inquiry, if justified by the circumstances of the case, was there, I doubt,
with great respect, whether the jurisdiction can be correctly described as a
"summary" jurisdiction.
In
K. R. S. Narayana Iyengar v. T. A. Mani ,
Ramaswami J. pointed out, by a reference to legislative history, that the
object of sections 397 and 398 of the Act, was to arm courts with power to
prevent winding up orders by imposing solutions upon the company in cases
where, in the absence of such provisions, there could be no alternative to
winding up. In Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute
Mills Co. Ltd.,
Bhagwati J. interpreted sections 397 and 398 of the Act as meant primarily for
preventive action against continuing wrongs under which past or concluded
transactions could be set aside only in exceptional cases where past
transactions formed the basis of or were inseparably linked up with a
continuing wrong. In Bengal Luxmi Cotton Mills case B. C. Mitra J. went so far as to hold that:
"......to
make an order under section 397 or section 398 on the ground that a criminal
complaint has been made against the directors or even on the ground that the
directors had been convicted of a criminal offence, would be introducing into
the law relating to companies, matters which are entirely foreign to company
law and administration, and beyond the ambit of the jurisdiction which this
court exercises."
What the learned judge really meant seemed to be that powers of the court under sections 397 and 398 of the Act were neither intended to operate as substitutes for punitive criminal proceedings nor could be invoked solely because the directors of a company had made themselves criminally liable to be prosecuted.
In
Shanti Prasad Jain v. Kalinga Tubes Ltd.,
the Supreme Court had occasion to consider the scope of sections 397 and 398 of
the Act before the amendments of both these sections in 1963. As regards
section 397 of the Act, it quoted with approval the views expressed by English
courts, on the corresponding section 210 of the English Companies Act of 1948,
which were held to be applicable here. The cases cited were : Elder v. Elder
and Watson,
George Meyer v. Scottish Co-operative Wholesale Society Ltd.,
Scottish Co-operative Wholesale Society Ltd. v. Meyer (Meyer's case
in appeal in the House of Lords) and In re H. R. Harmer Ltd. Their Lordships of our Supreme Court pointed
out, inter alia (page 364) :
"The
oppression of which a petitioner complains must relate to the manner in which
the affairs of the company concerned are being conducted ; and the conduct
complained of must be such as to oppress a minority of the members (including
the petitioners) qua shareholders."
They
also said (page 366):
"The
circumstances must be such as to warrant the inference that 'there has been, at
least, an unfair abuse of powers and an impairment of confidence in the probity
with which the company's affairs are being conducted, as distinguished from
mere resentment on the part of a minority at being outvoted on some issue of
domestic policy'."
Mere
lack of confidence and differences between two groups were insufficient for
action under section 397. After considering the scope of section 398, their
Lordships held (page 375) :
"On
such application being made, if the court is of opinion that the affairs of the
company are being conducted as aforesaid or that by reason of any material
change as aforesaid in the matter of management or control of a company, it is
likely that the affairs of the company will be conducted as aforesaid, the
court may, with a view to bringing to an end or preventing the matters
complained of or apprehended, make such order as it thinks fit. This section
only comes into play, as the marginal note shows, when there is actual
mismanagement or apprehension of mismanagement of the affairs of the company.
It may be contrasted with section 397 which deals with oppression to the
minority shareholders, whether there is prejudice to the company or not."
As
already observed by me, after the amendments of sections 397 and 398 in 1963,
prejudice to public interest can form a ground of action either under section
397 or under section 398 of the Act. The scope of remedial action under either
of the two sections could be said to have become more extended as a result.
Nevertheless, the powers vested in the court continue to be discretionary and
are designed for removal of an existing and not past oppressive or prejudicial
course of conduct of the affairs of the company. They are, in my opinion,
primarily intended for preventive purposes. The object of the exercise of these
powers is either to prevent a winding up or to remove the continuation of harm
or reasonable probability of injury to the interests of the company or to the
wider public interests. Past acts and transactions may either afford evidence
of what may be reasonably apprehended in future or may have to be undone only
to prevent or remove what had wrongfully originated in the past but continues
to exist and provides a sustainable cause of action at the time when the
petition is filed. Purely punitive action, as distinct from preventive remedial
action, does not fall directly within the purview of these provisions although
certain forms of punitive action, such as those mentioned in Schedule XI, which
is applied by section 406 of the Act to proceedings under sections 397 and 398
of the Act, may indirectly result from them. Although the amplitude of the
remedial powers of the court, under sections 397 and 398, should not be
curtailed in such way as to hamper the jurisdiction to suppress the mischiefs
aimed at, yet, the court has to be careful and astute enough to prevent a
misuse of the provisions of sections 397 and 398 by a party, lest a remedy
proposed and adopted to overcome an alleged mischief becomes a source of
greater oppression and harm than the one sought to be removed or prevented.
The
petition before me may now be examined in the light of the foregoing discussion
of the law applicable to such petitions. It would not be unfair to describe the
petition, in substance, as little more than a catalogue of charges for past
alleged misdeeds of the first three opposite parties. The charges against
opposite party No. 1, the former managing director, relate to the period in
which he served the company in that capacity and begin with : "That Shri
H.S. Mathur, respondent No. 1, is unfit to act as a director on the following
grounds." The subject-matter of these charges has already been mentiond
above. Similarly, charges against opposite parties Nos. 2 and 3 set out their
past acts as grounds of their unfitness to act as the managing director and
director respectively. Sections 397 and 398 of the Act are not meant for such
purely punitive action.
As
regards the claims of petitioner No. 1, as a former employee of the company,
the petitioners only disclosed, in the petition, that the company had filed
writ petitions against the orders of a labour court reinstating the petitioner,
which were dismissed. But, other facts, that petitioner No. 1 had to
subsequently retire, having attained the age of superannuation, that there was
an arbitration award on the dispute arising between the parties on this question and on the claim
for gratuity, and that a writ petition directed against that award was
dismissed by this court, were revealed by the opposite parties. The claims of
petitioner No. 1, made in his capacity as a former employee only, who had
worked as an engineer of the company, for an order of reinstatement and payment
of gratuity to him, are not only shown to be concluded by previous orders in
other proceedings but are utterly misplaced in proceedings under sections 397
and 398 of the Act which are only open to a member as a shareholder of the
company. Such claims have nothing to do with claims for relief against any
unfair or unjustifiable agreements which may have to be set aside or modified,
under section 402(d) and (e) of the Act, as necessary consequences of orders
under sections 397 and 398 of the Act.
A
glance at the representations filed on behalf of the Central Government, under
section 400 of the Act, shows that the claims for refund of salaries paid to
opposite parties alleged to have been irregularly appointed without sanction of
the Central Government, are also not well founded as the company either
obtained the required approval or the excess payments were refunded. No
question of setting aside a decree of a civil court, dismissing any such claim,
could arise on the allegations of any fraud or collusion in such a case. The
Central Government also seemed satisfied with the auditors' reports on the
company's balance-sheets which, according to its representations dated November
28, 1967, were not adverse or qualified reports for the two preceding years.
Several
issues, including those on the alleged unfitness of each of the three opposite
parties to act as directors, were framed in this case. The petitioners were
given full opportunity, under the orders of this court, to examine the records
of the company, under the supervision of a commissioner, so as to provide
particulars of alleged "embezzlements and corruption" and
mismanagement. They could do nothing more than to cite four audit reports, for
the years 1960-61, 1961-62, 1962-63 and 1963-64, of which copies were filed,
revealing certain irregularities and defects, which were certainly brought out,
in accounts kept and expenses shown as incurred, during the term of office of
the opposite party No. 1, as managing director, which lasted until 1965.
Therefore, after hearing arguments of both sides at some length, the first and
preliminary issue in the case was reframed as follows :
"On
allegations made by both sides and the material on record is this a fit case
for any order either under section 397 or section 398 of the Companies Act
?"
The
preliminary issue was reframed so as to embrace matters covered by other issues
also. It did not seem necessary to decide any other issue before deciding this
issue. Mr. P. C. Srivastava, learned
counsel for the petitioners,
who obtained time for further preparation of arguments of this issue, put in
considerable industry and argued the case for his clients with commendable
fairness and ability. He was, however, unable to convince me that any order,
either under section 397 or section 398 of the Act, could be passed by this
court in this case.
Those
complaints of the petitioners against the conduct of the affairs of the company
by the contesting opposite parties which could be supported by some particulars
relate to a period before September 30, 1965, when a new managing director was
elected. The petition in this court was filed on August 23, 1967. Delay, if
considerable and unexplained, is enough to defeat equities and to justify a
refusal to exercise discretionary powers. In this case, delay is both
considerable and unexplained so far as any question of giving relief against
the alleged mismanagement before September 30, 1965, is concerned. Moreover,
alleged mismanagement up to 1965 could not, as already indicated, be said to be
even relevant unless reasonably correlated to a prospect of mismanagement in
and after 1967.
The
only past transaction or event which could be said to affect the present and
future management of the company was the election at the general meeting of the
company held on September 30, 1965. The petitioners allege that only fourteen
members were present at it. A copy of the minutes (annexure "M" to
the counter-affidavit) shows that fifteen out of twenty-five members were
present. The petitioners allege that proxies were not allowed to be utilised at
the meeting. The minutes disclose that ten members voted through proxies. The
election of opposite party No. 1 as director was challenged on the ground that
his proposer, Hari Mohan Mathur, opposite party No. 4, who is admitted to be a
shareholder, had no right to propose a name for the office of a director. This
objection appears to be utterly baseless. At least nothing was shown to
substantiate the objection. It was also alleged that opposite party No. 2
received only two votes in his favour when he stood for directorship and that
two votes were cast against him. This is clearly contradicted by the minutes of
the meeting. It is also inconsistent with the petitioners 'allegation about the
contesting opposite parties' control over a number of members which certainly
exceeds two. The copy of the minutes of the meeting also discloses that
petitioner No. 1 was present and stood for election to the office of a director
but failed and left the meeting without signing the minutes. The petitioners
allege that entries in the minutes book are false. But, they have not filed
affidavits of any other members present at the meeting. And, they waited for
nearly two years, during which another general meeting and fresh elections of
directors had taken place, before applying to this court. They could not,
therefore, be held to have made out a case for believing that the contesting
opposite parties are not legally authorised to
conduct the affairs of the company.
The minutes of the general
meeting of September 30, 1965, show that a dividend of 20% was declared for the
year ending March 31, 1965. The counter-affidavit filed on behalf of the
petitioners, together with the replies in the rejoinder-affidavit, show that,
whatever may have been the position in the past, the company is carrying on a
profitable business now. Even if some "bungling", as the petitioners
call it, had taken place in the keeping of accounts in the past, this would not
justify a winding up order. As the Supreme Court pointed out in Rajahmundry
Electric Supply Corporation Ltd. v. Nageswara Rao ,
proof of some mismanagement, even if it extends to misappropriation of funds by
directors, may not justify a winding up order where the company is a sound
profit earning concern. The reason for this is clear. The proper remedy in such
cases lies in suitable proceedings against delinquent directors and not by a
winding up order which is directed against the company. In the instant case,
neither an "oppression" of a minority nor circumstances justifying a
winding up could be established. Therefore, section 397 of the Act would not
apply. And, as the contested charges of some mismanagement in the past, even if
proved, are not enough to establish an existing injury to the interests of the
company or to public interest, or, the likelihood of such injury in future, no
action under section 398 of the Act can be taken.
Before concluding, 1 may
indicate a procedure which could, in appropriate cases, be held to be a
necessary prelude to proceedings under sections 397 and 398. Sections 235 to
237 of the Act empower the Central Government to appoint one or more inspectors
to investigate the affairs of a company and to submit a report, which is made
legally admissible evidence, by section 246 of the Act, in proceedings before a
court of law. Such a report could provide the basis of action by the Central
Government against a company under either section 397 or section 398 of the
Act, as laid down by section 243 of the Act, or, for recovery of damages in
respect of any fraud, misfeasance, or other misconduct in the management of the
company's affairs, where this is necessary in public interest, as provided by
section 244 of the Act. It could, therefore, be urged, in cases where a
detailed inquiry into the conduct of the affairs of a company is called for,
that a petition under either section 397 or section 398 of the Act, without
applying for such an inquiry, under section 236 of the Act, is premature.
Learned counsel for the
petitioners contended that this is a fit case in which at least a declaration
by order of this court, under section 237(a)(ii) of the Act, that an
investigation by an inspector is needed, is called for. After having considered this submission
seriously, I have reached the conclusion
[1983] 53 COMP. CAS. 493 (KER)
HIGH COURT OF KERALA
v.
Dig Vijay Chit Fund (P.) Ltd.
M. P. Menon J.
COMPANY PETITION NO. 23 OF 1978
July 1, 1980
M. Ramanatha Pillai for the
Petitioners.
Mani
J. Meenattoor for the Respondent.
M.P. Menon J.—This is a petition filed by the two members of the Dig
Vijay Chit Fund (P.) Ltd. under s. 237 of the Companies Act, 1956, for a
declaration that the affairs of the company require investigation by an
inspector appointed by the Central Govt.
The main business of the
company is in kuries and in money-lending. The first petitioner, along with six
other shareholders, had earlier filed a petition for winding up it, but that
was dismissed on the ground that they had other remedies, and that the prayer
for winding-up was unreasonable in the circumstances disclosed. The present is
a resort to one of the other remedies available.
The allegations in the
petition are broadly the following : The chief agent and the directors of the
company are utilising their position to oppress the other shareholders. The
chief agent and his relatives hold 72 shares and the directors control another
122. In April, 1972, the company fraudulently sold 64 shares, belonging to
seven members, who were not supporting the directors; and these shares were
purchased by the relatives of the directors and the chief agent. The group in
management has been misappropriating the company's funds, destroying valuable
records to cover up their misdeeds, causing loss to the company by declining to
proceed against debtors, and writing off bad debts after privately collecting
amounts from the concerned debtors. Some particulars relating to the alleged
misappropriation, destruction of records, etc., are furnished, and there is
also a general allegation that the company has been incurring losses as a
result of all the above.
The company has denied all
these allegations in its counter-affidavit. The 2nd petitioner has been
examined as P.W. 1 and Exs. A-1 to A-6 have been marked on the side of the
petitioners. The company has examined its present managing director as R.W. 1,
and marked Exs. B-1 to B-7.
Sections 235 to 246 of the
Companies Act, 1956, deal with the investigation of the affairs of a company.
Under s. 235, the Central Govt. is given power to appoint inspectors for the
purpose; and the power is to be exercised either on the application by members
or on the basis of a report by the Registrar under s. 234. Section 236 provides
that members applying under s. 235 should furnish evidence to show that they
have "good reason for requiring the investigation ". Clause (a) of s.
237 obliges the Central Govt. to arrange for an investigation when the company,
by special resolution, or the court, by order, declares that an investigation
is called for, while cl. (b) confers a discretion on the Government to do so
when the circumstances enumerated thereunder are found to exist. Sections 238
to 241 deal with inspectors, their powers and the report they have to make.
Sections 242 to 244 specify the follow-up measures the government could take on
the basis of the reports. Prosecution of persons found criminally liable,
moving the court for winding-up or for relief from oppression, and initiation
of misfeasance and other proceedings are some of the measures contemplated.
Section 245 provides for the expenses of investigation, and s. 246 declares
that the inspectors' reports shall be admissible as evidence in legal proceedings.
An analysis of the above provisions indicates that appointment of inspectors is
a matter in the discretion of the Govt. under s. 236, and also cl. (b) of s.
237; but in cases governed by s. 237(a), the Government has a duty to act. The
machinery for inspection could be set in motion on the request of members under
s. 236, only when a certain percentage of the total number of members apply;
the Central Govt. cannot aet when the strength of those who apply is below the
minimum prescribed. But what about an application to the court under s.
237(a)(ii)? Can the court order an investigation irrespective of the number of
members who seek to invoke its power ?
Section 237 does not in
terms speak of an application to be filed in court; but r. 11(a)(9) of the
Companies (Court) Rules, 1959, conceives of such an application. In Raghunath
Swarup Mathur v. Har Swamp Mathur [1970] 40 Comp Cas 282, the Allahabad High
Court observed thus (at p. 296):
"As the declaration
sought amounts to a direction to the Central Government, it should only be
granted either where a party, having applied to the Central Government for an
investigation, has failed despite sufficient grounds shown for it, or, when the
court finds that a proceeding before it, under either section 397 or section
398 of the Act, cannot satisfactorily terminate without such an
investigation".
But it appears from the
decision of the Delhi High Court in Delhi Flour Mills Co. Ltd., In re [1975] 45
Comp Cas 33, that a prior application to the Central Govt. under s. 236, or the
pendency of proceedings under ss. 397 and 398, are not conditions precedent for
exercising the court's power under s. 237(a)(ii). The
The present proceedings are
only for the purpose of deciding whether the affairs of the company should be
looked into by the inspectors. And, according to counsel for the petitioners,
it is not necessary for his clients to prove their allegations before this
court; they could prove them before the inspectors. NO doubt, cl. (a)(ii) of s.
237 does not lay down what circumstances are to be proved before the court and
on what materials the court could act. But that does not mean that mere
allegations are sufficient. A court can act only on the materials placed before
it; and those materials should at least be such as to satisfy the court that a
deeper probe into the company's affairs is desirable in the interests of the
company itself. According to the Delhi High Court in Delhi Flour Mills Co.
Ltd.'s case [1975] 45 Comp Cas 33 (Delhi), noticed above, the materials should
be such as would result in proceedings being taken under ss. 242 to 244; no
investigation could be ordered merely because a shareholder feels aggrieved
about the manner in which the company's business is being carried on. The scope
of s. 237 was considered by me in C. P. No. 22 of 1978 decided on 29-1-1980. [P.
Sreenivasan v. Yoosuf Sugar Abdulla & Sons
(P.) Ltd. [1983] 53 Comp Cas 485 (Ker)], in the following terms (at p. 489):
"The section conceives
of three situations where the Central Government can appoint inspectors for
investigation. The first is when the company itself declares that such an
investigation is necessary. The second is when the court makes an order. And
the third is when, the Central Govt. forms an opinion that the circumstances
enumerated in cl. (b) exist. The first is easy to understand; when the company
itself wants an investigation, the Central Govt. need not stop to enquire why.
The third can also be understood because when suo motu action is proposed to be
taken by the Government, it shall not act arbitrarily, but only consistent with
the guidelines laid down. But what about the second situation, where the court
has to make an order? Mr. Ramanatha Pillai for the petitioner suggests that the
power and the discretion of the court are uncontrolled; it can direct an
investigation whenever it suspects that all is not well with the company.
Whether the apprehensions of the court are true or not is a matter to be found
by the investigating inspectors, and the court is not to insist on evidence. It
appears to me that this is too broad a statement. Investigation of the
company's affairs by the Department of Trade in England has always been
understood as a statutory exception to the rule in Foss v. Harbottle [1843] 2
Hare 461, that the internal affairs of a company is a matter for the majority,
and a dissatisfied minority cannot seek outside interference. The Companies Act
provides for the protection of minorities in three ways: (i) by giving them a
right to complain against oppression, (ii) by permitting them to act on behalf
of the company when it is wound up, as in the case of misfeasance proceedings,
and (iii) by enabling them to obtain remedies indirectly through investigation.
The court's discretion under section 237 is, therefore, to be exercised only
when it is satisfied that the minority has made out at least a prima facie case
that the rule in Foss v. Harbottle [1843] 2 Hare 461, requires relaxation in
the interests of the company. The Calcutta High Court has held in In re
Patrakola Tea Co. Ltd., AIR 1967 Cal 406, that before the company court orders
an investigation under section 237(a)(ii), the petitioner should make out a
strong case in relation to one or other of the matters referred to in clause
(b). In other words, the circumstances enumerated in clause (b) are material
for the exercise of the court's discretion also. The discretion is certainly a
judicial one and is to be exercised only when a minority acts in the interests
of the company as a whole".
It is in the above
background ,that I propose to examine the allegations made and the evidence
adduced herein.
As regards
misappropriation, two specific instances are referred to in para. 5 of the
petition. The first is that in 1971, the then managing dire-tor, Sri
Chandrasekharan, had drawn an amount of Rs. 3,000 from the "Anamath
account" when there was no deposit with the company in his name. The
company's answer in para. 8 of its counter-affidavit is that Mr.
Chandrasekharan had drawn an amount of Rs. 3,000 on September 23, 1971, when he
had a credit balance of only Rs. 602.99, but that he had subsequently made
deposits of Rs. 1,534 and Rs. 2,300 in November and December, 1971. The
correctness of this statement is not disputed in the petitioners' reply
affidavit. And a mere entry in the suspense account is not sufficient to
establish misappropriation. The concerned account books have not been called
for; and neither Mr. Chandrasekharan nor the person who made the entry has been
cited to explain it. No attempt has also been made to bring out what the powers
of the managing director were in matters of this kind. P. W. 1, who was himself
a managing director of the company for some time, made only a bare reference to
the entry in the course of his evidence; he did not even say that the amount
was misappropriated or lost to the company.
The second instance relates
to the compromise effected in O.S. 137/70, filed by the company against one
Francis for the recovery of Rs. 680; and the allegation is that the party had
produced a receipt showing that the amount had been paid personally to the
managing director, Mr. Namboodiri-pad, and that the suit was compromised
without crediting the amount in the company's accounts. But the documents
produced tell a different tale. Exhibit B-1 dated November 16, 1970, discloses that
P.W. 1, who was then the managing director of the company, had authorised R.W.
1, who was then its secretary, to compromise the suit, though the party had
produced a "false receipt". Exhibit B-3 shows that an amount of Rs.
498 was credited in P.W. 1's suspense account with the company on the next day.
According to R.W. 1, the party had produced in court a false receipt and when
he was threatened with criminal action, he offered to settle the matter by
paying Rs. 500. The matter was settled with the concurrence of P.W. 1 and the
amount (less Rs. 2 for expenses) was credited in his suspense account as per
Ex. B-3, pending filing of a compromise petition before the court. Exhibit A-2
is a certified copy of the compromise petition filed on November 6, 1971, and
Ex. A-1 is a compromise decree. The petitioners' case that Sri Namboodiripad
had received payment and issued a receipt and that the suit was compromised
when this was brought to light, does not stand scrutiny in the light of the
admitted circumstance that P.W. 1 himself was aware that the receipt was a
false one and that the compromise was effected on the footing that it was not
genuine. Misappropriation is a serious matter, and the evidence available is
insufficient to establish even a prima facie case.
The allegations relating to
destruction of records and the fraudulent transfer of the 64 shares were not
pursued at the time of hearing. P.W. 1 did not in his evidence even make
mention about the destruction of any records; and a suggestion thrown at R.W. 1
during his cross-examination about "removal" of records was promptly
denied. The same is the position regarding the 64 shares said to have been
fraudulently transferred.
The next allegation relates
to the writing off of Rs. 22,074 and Rs. 14,476, respectively, as bad debts, in
the profit and loss account marked as Exs. A-4 and A-5; and the case attempted
to be made out is that the directors and the chief agent had actually received
payment of the amounts and had thereafter attempted to cover up the misappropriation
by making it appear that they were bad debts. Exhibits A-4 and A-5 do show that
the amounts were written off; but there is nothing but the assertion of P.W. 1
to suggest that any officer of the company had actually received payments as
alleged. P.W. 1 stated in cross-examination that the amounts written off
included Rs. 800 due from one Sachidanandan, Rs. 750 from Ummer, Rs. 600 from
Ayyappan and Rs. 700 from Madhavan; but Sachidanandan alone had told him that
he had paid the amount to the company. P.W. 1 had no other knowledge or
information about the alleged payments. The company's case, on the other hand,
is that the amount written off in Ex. A-4 represents arrears of kuri
collections and amounts due under promissory notes from over 400 persons,
considered as irrecoverable. The company had conducted more than 100 chitties
and made a large number of other advances; and some amounts were being written
off from time to time. Exhibit B-4, the minutes book, indicates that the amount
was written off as per Board's resolution dated November 9, 1973. Exhibit A-4,
the audited accounts, must have been approved by the general body also. That
apart, the list of bad debts referred to in the Board's resolution is Ex. B-5
and it contains particulars of 446 debts due from chit subscribers, the amounts
varying from Rs. 2.50 to Rs: 118. Sachidanandan's name is not there, and no
debt exceeding Rs. 118 is seen written off. The debts in Ex. A-5 were also
written off by a Board's resolution, and, according to R.W. 1, those were
amounts due from employees (bill collectors), who were going about making
collections. They had left the services of the company and they had no assets.
It is usual for men in a business of this type to periodically write off
irrecoverable debts. In the present case, it was done by resolutions duly
passed by the Board, and obviously approved by the general body of members. The
accounts were duly audited and filed with the Registrar. The evidence is
totally insufficient to raise even a serious suspicion that anything else had
been done.
The only other point raised
is that the company has been incurring loss year after year; but no
investigation could be ordered unless that result is linked with fraud,
misfeasance, mismanagement, oppression and the like. The loss might be an
ordinary business risk: It may be noticed that the company's paid up capital
and membership have risen by at least one hundred per cent between 1976 and
1978. The petitioners are only two out of 1,312 members. The company has also a
case that the first petitioner is the wife of a dismissed employee and that the
2nd is annoyed by a notice demanding payment of some amounts due from him. It
is unnecessary to go into this aspect because, even otherwise, the attempt of
the petitioners has only been to show that something suspicious had taken place
between 1971 and 1975.
In, my view, therefore, no
case for the issue of a direction under s. 237(a)(ii) is made out, and the
petition has to fail. It is accordingly dismissed, but without any order as to
costs.
[1990] 68 Comp. Cas. 641 (Kar.)
High
Court OF Karnataka
v.
P.P. BOPANNA J.
COMPANY PETITION NO. 3 OF 1986
September 10, 1987
Udaya Holla for the Petitioners.
G.B.
Chandregowda and K. Lakshminarayana Rao for the Respondent.
G.S.
Rao for Opposing creditor.
JUDGMENT
P.P.
Bopanna J.—This
company petition is filed by the creditors of an unregistered company which is
carrying on business under the name and style of Madras Sapper Ex-Servicemen's
Rehabilitation Association. There are six petitioners and all are creditors of
this unregistered company (hereafter referred to as "the company").
Petitioner
No. 1 is the creditor of the company in a sum of Rs. 16,11,908.51, petitioner
No. 2 is the creditor of the company in a sum of Rs. 1,72,949.03, petitioner
No. 3 is the creditor in a sum of Rs. 7,90,284.94, petitioner No. 4 is the
creditor in a sum of Rs. 1,98,752.79 and petitioner No. 6 is the creditor in a
sum of Rs. 1,46,042.78. Thus, in all, an aggregate amount of Rs. 33,49,262.58
is admittedly due from the company to these petitioners since 1984.
The
case of the petitioners is that these amounts have been outstanding in spite of
repeated demands and, therefore, they are entitled to 12% interest on the
amounts due to them from the respective dates for the supply of timber made by
them to this company. It should be noted at this stage that this company was
registered under the Societies Registration Act with no share capital. The
object of this company is to rehabilitate the ex-servicemen by engaging them in
the manufacture of a variety of goods and products made out of wood. Therefore,
they required a constant supply of raw material in the shape of timber and cut
pieces of timber and towards this requirement, the petitioners have admittedly
supplied the necessary raw material from time to time. Though the company had
commenced its business in the year 1966, it does not appear to have made much
progress as could be seen from the notice of the special general meeting held
on December 26, 1985, at its headquarters in
It
was resolved further that the company be dissolved with effect from April 1,
1986, in accordance with article 28 of the articles of association read with
section 22 of the Karnataka Societies Registration Act after receipt of the
sanction from the State Government and necessary action be taken to dispose of
the assets of the company and discharge the outstanding liabilities thereof to
the extent feasible in the order of priority set out below:
(a) Secured
creditors, if any.
(b) Costs,
charges and expenses of dissolution.
(c) All revenues, taxes, cesses and rates
due to the Central and the State Governments and to a local authority.
(d) All
wages/salaries and other amounts accrued and have become due as per service
conditions.
(e) All
amounts due in respect of contributions payable by the employer.
(f) Compensation/gratuity
due to employees as per rules.
(g) Creditors.
The
other resolutions are not relevant for the purpose of this case.
These
resolutions were passed on December 26, 1985, and this petition was filed on
January 15, 1986. The petitioners presumably have come to know of the
resolution directing the closure of the business carried on by the company and,
therefore, apprehending that there would be a fraudulent preference of
creditors by the company, they have filed this petition under the provisions of
section 582 read with sections 439 and 444 of the Companies Act, 1956 (in
short, "the Act").
The
petitioners have alleged that the order of priority in the matter of payment of
the debts of the company is not just and equitable and that there are no
secured debts at all; that the total liabilities of the company as on December
10, 1985, is Rs. 56,59,595.43; that the assets of the company consist of only
the factory, its machinery and the movables; though the company is unable to
pay its creditors, it is actually allowing its creditors to take back the
materials supplied to it and if some of the creditors are given access to the
properties of the company, there would be a virtual scramble among them to take
away as much as possible, leaving the petitioners and other creditors at the
mercy of the company as there would be no assets at all to satisfy their
claims. The petitioners have averred that they have served notices as required
under the Act on the company, but in spite of such notices, the company has not
discharged the debts due to the petitioners. On these grounds, the petitioners
have sought the winding up of the company.
A
preliminary objection was taken by the company that the company petition was
not maintainable under the provisions of section 583 of the Act. This objection
was overruled by this court by its order dated August 8, 1986. The
company has filed its statement of objections partly denying certain averments
made by the petitioners and partly admitting certain other averments in the
company petition. But the fact that the company is due in a sum of Rs. 33 lakhs
odd to the petitioners is not disputed. Therefore, whether on this admitted
fact, this is a fit case for winding up could be decided on the basis of the
affidavits and documents on record. Parties have also not sought for any oral
evidence to be adduced in support of their contentions.
In
the statement of objections filed by the company, it is submitted that the
outstanding liabilities and the order of priority are fixed in accordance with
law; that there is no scope for any injustice to any party; that the total
liability of the company is to the tune of Rs. 283,93,934.15 as on September
30, 1985; that the company is taking proper steps to see that the debts are
paid off as much as possible and that all possible and positive steps to
minimise the hardship to its 255 workmen and the creditors are being taken by
the board of directors; that the company had already resolved to close down the
factory and necessary application for permission to close down the industry is
pending before the Government. In para 14 of its objection statement, the
company has admitted that the balance-sheet for the year 1985 shows two loans
as secured loans, namely, Rs. 52 lakhs from the DGR (Director General of
Resettlement, Ministry of Defence) and Rs. 5 lakhs from the Karnataka Sainik
Board.
The
workmen of the company have come on record in the light of the decision of the
Supreme Court in National Textile Workers Union v. P. R. Ramakrishnan [1983] 53
Comp Cas 184 (SC). They have filed a detailed statement of objections opposing
the winding up of the company. According to them, the petition for winding up
is wholly misconceived inasmuch as the company is still a viable business
undertaking and with proper management and sufficient infusion of working
capital, the industry that is run by the company could be put back on the
rails, that the company has sustained losses only due to mismanagement and lack
of professional expertise in the management of its business, that the claims of
the workers should weigh heavily with the company court before an order of
winding up could be made, that the petitioners, if at all they want to realise
the amounts due to them, could always approach the civil court and obtain
decrees and execute the same against the assets of the company. Mr. G. S. Rao
appearing for the workmen has put up a spirited challenge to the petitioners'
prayer. He has relied on a number of uncontroverted facts and figures in
support of the objections of the workmen to the winding up of the company.
According to him, the accumulated losses were not due to lack of production.
The losses were because of the fact that the supplies were made by the factory on
the basis of the lowest tender quoted which was not commensurate with the cost
of the production, that the company had not availed itself of the concessions
offered by the State Government for the supply of the raw materials but had
always chosen to get raw materials from private parties; therefore the rates
would be naturally higher than the Government rates and that the financial
position of the company had worsened because of continuous losses. He has also
relied on the figures given in the balance-sheet as on April 7, 1986
(unaudited), and he has submitted that while the liabilities to be discharged
are Rs. 56,595.43 as on December 10, 1985, the assets as per the books are the
factory with the machinery and the movables and if the same are revalued, their
worth will be Rs. 214.33 lakhs leaving a deficit of Rs. 110.33 lakhs. But this
deficit could be made up by proper management of the business of the company.
He has accused the management of the company of mismanaging the resources and
finances of the company. He has stated that the management instead of taking
steps to improve the efficiency by bringing structural changes to run the
factory on sound business lines by creating capital, and employing persons of
practical experience in finance, costing, inventory management, production and
planning and also inducting experts at the board level to run the factory on
sound lines by improving production and productivity, had taken a decision to
close down the factory after obtaining the permission of the Ministry of
Defence. According to him, if competent personnel are employed by the company
instead of depending on service officers who have absolutely no knowledge of
running a business concern, the company could be made commercially viable and,
therefore, it would not be just and equitable to wind up the company. He says
that what is required is toning up the top management at the board level and
also at the departmental heads' level. He has suggested a number of steps for
the better management of the company by which the winding up of the company
could be averted. He has maintained that the winding up is not just and
equitable since the workmen will be unemployed if winding up orders were to be
made and this court should keep in view the directive principles laid down in
the Constitution and avoid loss of employment to the workmen who are in
employment with the company. He has relied on the observations of the Supreme
Court in National Textile Workers' case [ 1983] 53 Comp Cas 184 in which it is
observed that though there is no specific provision in the Act permitting the
workers to oppose an order of winding up, the directive principles of the
Constitution and also the social and economic conditions of the workmen should
be kept in view and the workers also should be heard before an order of winding
up could be made.
The
learned counsel for the petitioner, Mr. Holla, has submitted that though the
decision of the Supreme Court in National Textile Workers' Union [1983] 53 Comp
Cas 184 is an authority for the proposition that the workers have a locus
standi to oppose the winding up petition, that decision does not lay down any
guidelines for this court for exercising its jurisdiction under section 433
read with section 439 of the Companies Act in the matter of winding up. He
placed reliance on the decision of the Supreme Court, in Harinagar Sugar Mills
Co. Ltd. v. M. W. Pradhan [1966] 36 Comp Cas 426 (SC). But learned counsel for
the workmen has relied on the Sick Industrial Companies (Special Provisions)
Act, 1985 (in short "the Sick Companies Act") and also the provisions
of the Act dealing with the investigation into the affairs of a company under
section 235 and other relevant sections in support of the plea that this court
should take into consideration the social and economic aspects involved in this
case.
It
is well-settled that the remedy under section 433 read with section 439 of the
Companies Act is an equitable as also a discretionary remedy. It is also
well-settled that the provisions of sections 433 and 439 providing for an order
of winding up on the creditors' petition is one mode of enforcing payment of a
just debt due by the company. This position of law cannot be challenged despite
the observations made by the Supreme Court in National Textile Workers'
"A winding up
petition is a perfectly proper remedy for enforcing payment of a just debt. It
is the mode of execution which the court gives to a creditor against a company
unable to pay its debts".
"This
view is supported by the decision in Bowes v. Hope Life Insurance and Guarantee
Co. [1865] 11 HLC 389, In re, General Company for Promotion of Land Credit
[1870] 5 LR Ch App. 363 (380) and In re National Permanent Building Society
[1869] 5 LR Ch App. 309. It is true that a winding up order is not a normal
alternative in the case of a company to the ordinary procedure for the
realisation of the debts due to it'; but none the less, it is a form of
equitable execution. Propriety does not affect the power but only its exercise.
If so, it follows that in terms of clause (d) of rule 1 of Order XL of the Code
of Civil Procedure, a receiver can file a petition for winding up of a company
for the realisation of the properties, movable and immovable, including debts,
of which he was appointed the receiver. In this view, the respondent had power
to file the petition in the court for winding up of the company".
In
the light of this ruling of the Supreme Court, the petitioners' right to
approach the court for an order of winding up cannot be doubted and since the
debt due to the petitioner is admitted by the company, the only point for consideration
is whether this is a fit case for winding up the company, regard being had to
the objections filed by the company as also by the workmen employed by
respondent No. 1.
The
objections of the company, in my view, do not merit any serious consideration.
They had already approached the authorities concerned for the closure of the
undertaking. As a matter of fact, the Union of India which was financing the
company all these years had moved this court for vacation of the interim order
granted against the closure and that interim order was also vacated. The Union
of India has come on record in these proceedings as a supporting creditor and
the State Government has also come on record as a supporting creditor. No other
creditors of the company despite the advertisement of the petition have entered
appearance with a view to oppose the prayer for winding up. Therefore, the only
person or group of persons who have an interest in opposing the petition are
the workmen and their case will have to be considered in the light of the
provisions of the Sick Companies Act and section 237 and the other relevant
provisions of the Companies Act as urged by learned counsel for the workmen.
I
will first deal with the provisions of the Sick Companies Act. This Act came
into force on January 8, 1986 (See [ 1985] 58 Comp Cas (St.) 303):
The
Statement of Objects and Reasons of this Act read as:
"The
ill effects of sickness in industrial companies such as loss of production,
loss of employment, loss of revenue to the Central and State Governments and
locking up of investible funds of banks and financial institutions are of
serious concern to the Government and the society at large. The concern of the
Government is accentuated by the alarming increase in the incidence of sickness
in industrial companies. It has been recognised that in order to fully utilise
the productive industrial assets, and to afford maximum protection of
employment and optimize the use of funds of the banks and financial
institutions, it would be imperative to revive and rehabilitate the potentially
viable sick industrial companies as quickly as possible. It would also be
equally imperative to salvage the productive assets and realise the amounts due
to the banks and financial institutions, to the extent possible, from the
non-viable sick industrial companies through liquidation of those
companies".
With
these Objects and Reasons, this Act was promulgated by the Central Government and
it applies to a scheduled industry mentioned in the First Schedule to the
Industries (Development and Regulation) Act, 1951. A "sick industrial
company" is also defined in section 2(0) of that Act".Sick industrial
company" means an industrial company (being a company registered for not
less than seven years) which has at the end of any financial year accumulated
losses equal to or exceeding its entire net worth and has also suffered cash
losses in such financial year and the financial year immediately preceding such
financial year. Under section 3(d), "company" means a company as
defined in section 3 of the Companies Act, 1956 (1 of 1956), but does not
include a Government company as defined in section 617 of that Act. This
petition was filed, as noticed earlier, by an unregistered company which is not
a company as defined under section 3 of the Act. An unregistered company can
invoke the provisions of winding up under Chapter II of the Act. The definition
of the word "company" under section 3 of the Act does not include an
unregistered company. So the right of an unregistered company to invoke the
provisions of sections 433 and 439 is a special right conferred under Chapter
II in terms of the provisions of sections 582 and 583 of the Act. Therefore,
the Sick Companies Act does not in any manner control the proceedings for
winding up of an unregistered company under Chapter II of the Act. Whether this
Act applies for the purpose of reviving the respondent No. 1 company does not
arise for consideration in a winding up petition even if the winding up is
ordered by this court. Hence for the purpose of this petition, it is
unnecessary for this court to go into the various provisions of the Sick
Companies Act as also the schemes envisaged for the revival of sick industries
under this Act.
That
takes me to the next contention of learned counsel for the workmen that this is
a fit case where an investigation into the affairs of the company under the
provisions of section 237 of the Act should be ordered. The provisions of
section 235 of the Act authorise the Central Government to appoint one or more
competent persons as inspectors to investigate the affairs of any company and
to report thereon in such manner as the Central Government may direct. Under
section 235(1), the Central Government can appoint an inspector in regard to a
company having a share capital, on the application either of not less than two
hundred members or of members holding not less than one-tenth of the total
voting power therein. On a plain reading of section 235(1) and (2), it is clear
that the provisions of section 235 would not be applicable to an unregistered
company. Therefore, it is not open to the workmen to contend that it is a fit
case where this court should make a direction to the Central Government to
investigate into the affairs of the company. However, it is contended by
learned counsel for the workmen that section 237(a) (ii) of the Act provides
that:
"Without prejudice to its powers under section 235, the Central Government —
(a) shall appoint one or more competent
persons as inspectors to investigate the affairs of a company and to report
thereon in such manner as the Central Government may direct, if —
(ii) the court, by order, declares that the
affairs of the company ought to be investigated by an inspector appointed by
the Central Government; and".
The
word 'company' as it occurs under section 237 is only relatable to a company
which is covered by section 235. If section 235 is not applicable to an.
unregistered company, section 237 is equally not applicable to that company.
Even otherwise, the Central Government itself having supported the winding up
of the company in question, section 235 of the Companies Act is not applicable
to the facts of this case, and under section 237, I do not think that it is a
matter which requires investigation through the orders of this court, since
this company was managed throughout by a board consisting of Central Government
officials in the Ministry of Defence.
Learned
counsel for the workmen has relied on the decision of the Privy Council in the
case of D. Davis ir Co. Ltd. v. Bruns Wick (Australia) Ltd., and reported in
[1936] 6 Comp Cas 227. That is a case of winding up under the just and
equitable clause of the New South Wales Companies Act, 1899. But the
petitioners' case is not solely dependent on the provisions of the just and
equitable clause in section 433 of the Act. It is well-settled that an order of
winding up could be made on any one of the grounds mentioned in section 433. If
the petitioners had based their case solely on the just and equitable clause,
the decision of the Privy Council would have definitely supported the case of
the workers. As noticed earlier, the petitioners have mainly based their case
on the undisputed debt due to them to the tune of Rs. 32 lakhs odd. This debt
remained unpaid in spite of the statutory notice. That apart, the total
cumulative losses of the company on the date of the petition is Rs. 2 crores 50
lakhs and the total liabilities of the company is Rs. 3 crores 25 lakhs. In the
circumstances, the chances of the petitioners realising these debts by going to
the civil court and by having recourse to the attachment of the assets of the
company are also very remote. Therefore, the petitioners have to rest content
with whatever they can recover in the winding up proceedings, regard being had
to the rights of the secured creditors and the wages due to the workers. The
debts due to the secured creditors will have to be investigated in the winding
up proceedings.
The
company court would be traversing beyond its jurisdiction to go into the
various aspects of the rehabilitation of the company from the workers' point of
view in order to arrive at a just conclusion. But I would have been inclined to
consider their case seriously, if there had been a definite proposal to pay the
petitioners' debts with interest either in a lump sum or in instalments. The
suggestions made by the workmen are all laudable but the chances of revival
without the Central and State Governments' aid are almost nil. In the
circumstances, this court cannot and should not allow the petitioners to wait
indefinitely to recover the debts due to them by refusing an order of winding
up. Therefore, it is a fit case for winding up and it is ordered accordingly.
The
petitioners shall deposit a sum of Rs. 2,000 with the official liquidator
within a period of two weeks to meet the contingent expenses. The petitioners
shall take out an advertisement of this order in one issue of Deccan Herald
within 14 days from the date of receipt of this order.
Office to draw up the order in the requisite form. Parties to bear their own costs in this petition.
[1998]
93 COMP. CAS. 41 (AP)
HIGH COURT OF ANDHRA PRADESH
v.
I.C. Rao
B. SUBHASHAN REDDY J.
Company Petition No. 24 of 1994
DECEMBER 14, 1994
T. Ramakrishna Rao and Ms. T. Balajayashree for the Petitioners.
A.
Krishna Murthy and Y. Jaganmohan for the Respondent.
JUDGMENT
B.
Subhashan Reddy, J.—This company petition is filed under section 237(a)(ii) of the
Companies Act, 1956, invoking this court's jurisdiction to declare that the
affairs of the first petitioner-company, namely, Uunet India Ltd., are fit to
be investigated by an inspector appointed by the Central Government. In support
of the said relief, several allegations are made that the respondents,
particularly, respondents Nos. 1 and 2 have committed acts contrary to the
company law as also the memorandum and articles of association of the first
petitioner-company.
The
first petitioner-company is hereinafter referred to as "the company".
The company was firstly incorporated as a private limited company on May 25,
1990, and later on a resolution was passed on May 3, 1993, to convert the same
into a public limited company and it was incorporated as a public limited
company with effect from November 25, 1993. The authorised capital which was
hitherto Rs. 10 lakhs was raised to Rs. 1 crore. Petitioner No. 2 and
respondent No. 1, who were hitherto managing director and joint managing
director respectively, were both appointed as managing directors in the annual
general meeting held on February 6, 1993, for a period of five years. Even
before that, Mr. N. Ch. Subba Raju, who was the director, had resigned and in
his place, Dr. B. Achanti was appointed as NRI director on November 22, 1992.
The same was approved by the annual general body meeting held on July 6, 1993.
Respondents
Nos. 2 and 3 are the father and the maternal grandfather, respectively, of the
first respondent. Respondent No. 2 was projected as the alternate director to
Dr. Mrs. Vijayalakshmi Achanti who is the wife of Dr. B. Achanti, NRI director
on the board of directors of the company. The second respondent had
participated in the board meetings and also had performed some functions. The
petitioners dispute the position of the second respondent as alternate
directors to Dr. Vijayalakshmi Achanti and questioned his consequential acts of
participation in the affairs of the company as illegal and unauthorised. The
meeting of the board of directors said to have been held on September 20, 1993,
October 4, 1993, March 31, 1994, April 7, 1994, and April 24, 1994, are
disputed by petitioners Nos. 2 to 6. With regard to the meeting held on July 4, 1993, the
petitioners admit the same only to the extent of passing of resolution to raise
funds for purchase of the cars of Maruti Van and Ambassador. The petitioners
claim that they had convened a board meeting on April 6, 1994, proceded by
notice dated March 25, 1994, and that the said meeting was held at Hotel
Krishna Oberoi to transact the business of the company. It is stated that in
the said meeting dated April 6, 1994, resolutions were passed (a) appointing
petitioners Nos. 4 to 6 as directors of the company ; (b) to change the
registered office of the company from the residential premises of the first
respondent to the business office in Software Technology Park, HUDA Complex,
Maithrivanam, Ameerpet, Hyderabad ; (c) for allotment of 24,500 equity shares
to the applicants whose share applications were pending with the company ; (d)
to change the authorised signatory to operate the bank account in the name of
the second petitioner jointly with the sixth petitioner instead of the previous
signatories, i.e., the second petitioner and the first respondent. This meeting
and the validity of the same is disputed by the respondents. In fact, impugning
the same a suit was filed in O.S. No. 458 of 1994, on the file of the court of
the Additional Judge, City Civil Court, Hyderabad, on April 21, 1994, seeking a
declaration that defendants Nos. 3 and 4 (petitioners Nos. 4 and 5) are not the
directors of the company and D-5 (petitioner No. 6) is not the
additional/alternate director of the company and to cancel or forfeit the
shares allotted to the petitioners and to declare that the board meeting was
not held on April 6, 1994, and not to take cognizance of any resolution passed
in the said alleged meeting dated April 6, 1994. Two interlocutory applications
Nos. 593 and 594 were filed seeking restraint orders against petitioners Nos. 2
to 6. In I.A. No. 593 of 1994, the court of the 1st Additional Judge, City
Civil Court, Hyderabad, granted injunction on April 22, 1994, restraining
petitioners Nos. 2 to 6 from holding any board meetings, passing any
resolutions, casting any votes, issuing any share capital or increasing the
authorised share capital, operating the bank account of the petitioner-company
or interfering in the day-to-day affairs of the company and from entering into
the company from time to time including the general body meeting, In I.A. No.
594 of 1994, the said court issued injunction orders restraining petitioners
Nos. 2 to 6 from paying any amounts in respect of cheques, instruments,
whatsoever of any nature presented by or through or signed by any one of the
above petitioners whether jointly or severally in respect of account No. 387.
The said order was also passed on April 22, 1994. Against the order passed in
I.A. No. 593 of 1994, petitioners Nos. 2 to 8 had preferred CMA No. 580 of
1994, before this court and this court by order dated April 28, 1994, allowed the same by
converting it to a revision under article 227 of the Constitution of India when
an objection was raised by the respondents that on the ground of pecuniary
jurisdiction the said appeal was not maintainable in this court and is only
maintainable in the court of the Chief Judge, City Civil Court, Hyderabad.
Against the said order in the CMA, the respondents have preferred LPA No. 96 of
1994, and a Division Bench of this court by order dated May 3, 1994, allowed
the same setting aside the order passed by the learned single judge with
directions to file a CMA before the lower appellate court. Pursuant to the
same, CMA No. 92 of 1994 was filed before the Vacation Judge,
Respondents
Nos. 3 and 4 have filed O.S. No. 1111 of 1994, on the file of the court of the
IV Additional Judge,
(a) perpetual injunction restraining them
from holding any board meetings of the first defendant-company (first
petitioner herein) excepting holding a board meeting for the purpose of calling
the annual general body meeting, passing any resolutions, taking any policy
decisions, issuing or allotting any shares or increasing the authorised share
capital or operating any of the bank accounts in the name of the company at
Hyderabad or branches elsewhere and from doing any acts prejudicial to the
interests of the company ;
(b) to appoint a receiver for taking
inventory of the property of the company ;
(c) to declare all the board resolutions
passed by the defendants subsequent to June 14, 1994, excepting the board
meeting for the purpose of calling the annual general body meeting of the
company as null, void and inoperative ; and
(d) to declare that the appointment or
co-option of any director other than those elected in the annual general body
meeting as null, void and inoperative.
The
cause for filing the said suit is stated from paragraphs 8 onwards in the
plaint of the said suit. The said suit is still pending.
Serious
dispute is raised by the petitioners with regard to the status of the second
respondent as an alternate director to Mrs. Vijayalakshmi Achanti. His
participation and actions by virtue of the said status is assailed as being
illegal and void. In fact, it is averred that Mrs. Vijayalakshmi Achanti was
never appointed as NRI director and that there is no resolution to that effect
and that there was no occasion to appoint the second respondent as alternate
director to her. It is alleged by the petitioners that the first respondent
with an evil design of capturing the financial control of the company, hatched
a conspiracy along with his father, i.e., the second respondent herein and his
group by illegally appointing the second respondent as alternate director in violation
of the provisions of company law and the articles of association and that in
that process, he concocted the holding of meetings of the board of directors
with the alleged quorum of two directors on September 20, 1993, October 4,
1993, March 31, 1994, April 7, 1994, and April 24, 1994, and that in the said
meetings, the minutes were concocted by the second respondent in the status of
chairman of the said meetings and that there was no service of notice or agenda
on the directors of the company before the meetings said to have been conducted
on the aforementioned dates.
Detailing
the above, the petitioners plead that all the aforesaid actions of respondents
Nos. 1 and 2 are nothing short of mismanagement of the company and that the same
warrants investigation by an Inspector appointed by the Central Government
under section 237(a)(ii) of the Companies Act, 1956. Pending consideration of
the said plea for investigation under the above legal provision, the
petitioners have sought for several other prayers as a part of the main relief
and also interim prayers. It is apt to extract the main prayer sought for by
the petitioners, as also the other prayers along with the said main prayer and
also interim reliefs while filing the company petition and also reliefs which
are sought to be added
by way of amendment under Order 6, rule 17 of the Civil Procedure Code, 1908,
in the company applications.
Prayers
originally sought for in Company Petition No. 24 of 1994 :
(1) That the affairs of the company
conducted by respondents Nos. 1 and 2 in the administration of the company and
in the financial operations of the company, be investigated by an inspector to
be appointed by the Central Government and consequently direct the Central
Government to appoint an Inspector to investigate into the affairs of the
company conducted by respondents Nos. 1 and 2 ;
(2) To declare the alleged board meetings
dated September 20, 1993, October 4, 1993, March 31, 1994, April 7, 1994, April
21, 1994, April 24, 1994, or any other alleged board meetings said to have been
held by respondents Nos. 1 and 2 and the alleged resolutions passed therein as
illegal, and inoperative in law ;
(3) To declare the notice dated May 19,
1994, issued to the members of the petitioner-company convening the annual
general body meeting on June 14, 1994, as illegal and inoperative in law ;
(4) To declare that respondent No. 2 is not
a validly appointed alternate director of the petitioner-company and
consequently all the actions purported to have been done by him in respect of
the affairs of the petitioner-company as null and void ; and
(5) To declare that the meeting held on
April 6, 1994, at the instance of petitioners Nos. 2 to 6 and the resolutions
passed therein as valid and operative.
Interim
reliefs sought for :
(1) Restraining respondents Nos. 1 and 2 by
an order of temporary injunction from conducting the proposed annual general
body meeting on June 14, 1994, and from conducting ordinary business and
special business and passing resolutions mentioned in the said notice in
pursuance of the notice dated May 19, 1994, to the members of the
petitioner-company.
(2) Restraining respondents Nos. 1 and 2 by
an order of temporary injunction from holding any board meetings, passing any
resolutions, casting any votes, issuing any share capital or increasing the
authorised share capital, or to operate any bank accounts in the name of the
company or its branches and to do any acts prejudicial to the interests of the
petitioner-company.
(3) Restraining respondent No. 2 by an order
of temporary injunction from interfering in the day to day administration of
the company or from entering into the petitioner-company's premises or its
branches.
(4) Directing respondents Nos. 1 and 2 to
keep all the records of the company, account books of the company, bank account
books and office seals of the company in the registered office premises of the
petitioner-company at HUDA complex, Mythrivanam, Ameerpet, Hyderabad, and pass
such other order or orders deemed fit in the interests of justice.
Additional
prayers sought for in C.A. No. 228 of 1994 by way of amendment :
(1) To
declare that respondents Nos. 3 and 4 are not the shareholders of the company ;
(2) To
declare that O.S. No. 1111 of 1994 is illegal and inoperative in law.
(3) To declare all the actions already taken
by respondents Nos. 1 to 4 and other alleged shareholders belonging to the
group of respondents Nos. 1 and 2 pursuant to the alleged board meetings
mentioned above and the resolutions passed therein as invalid and inoperative
in law.
(4) To direct respondents Nos. 1 to 4 and
other alleged shareholders belonging to the group of respondents Nos. 1 and 2
not to take any further action pursuant to the above alleged board meetings
pending investigation by the Inspector to be appointed by the Central
Government into the affairs of the company conducted by respondents Nos. 1 and
2.
(5) That respondent No. 1 be directed not to
convene board meetings or general body meetings, pass any resolutions, cast any
vote, issue any share capital or increase the authorised share capital or
growing (sic) any third party rights or alienate the properties of the company
and not to operate any of the bank accounts of the company or its branches and
not to do any acts prejudicial to the interests of the company pending
investigation by the Inspector to be appointed by the Central Government ; and
(6) Respondent No. 1 be directed to hand
over all the cheques and other negotiable instruments drawn in favour of the
company by the customers and others and bank pass-books and cheque books of the
company which are in his custody to petitioner No. 2 and also hand over all the
business and administrative records, account books along with vouchers of payments and receipts
which are in the custody to petitioner No. 2 pending investigation by the
inspector to be appointed by the Central Government.
Further
additional prayers sought for by amendment in C.A. No. 268 of 1994 :
(1) To
declare respondent No. 1 as disqualified to act as the managing director of the
petitioner-company.
(2) To direct respondents Nos. 1 and 2 to
keep all the business records, account books, bank accounts, cheque books and
pass-books of the company in the head office of the company at 505-B, HUDA
complex, Mythrivanam, Ameerpet, Hyderabad.
(3) To direct respondents Nos. 1 and 2 to
produce all the accounts of income and expenditure of the Calcutta branch
office of the company from July, 1993, to-date.
(4) To declare that the alleged allotment of
1,32,800 shares on September 20, 1993, and 90,700 shares on March 31, 1994, and
also the issue of alleged share certificates in favour of the alleged
shareholders by respondents Nos. 1 and 2 are invalid and inoperative in law.
(5) To declare the notice dated September 1,
1994, issued to the board of directors of the company and the notice dated
September 24, 1994, issued to the members of the company by respondents Nos. 2,
3, 4 and the proposed respondent No. 5 calling for the extraordinary general
body meeting and also the holding of the extraordinary general body meeting on
October 20, 1994, and the resolutions if any passed in the said extraordinary
general body meeting are invalid and inoperative in law ; and
(6) To declare that the civil suit O.S. No.
458 of 1994, filed by respondent No. 1, before the 1st Additional Judge, City
Civil Court, as illegal and unsustainable in law.
The
petitioners had also filed several company applications. In C.A. No. 101 of
1994, filed by the petitioners, this court by order dated June 13, 1994, passed
injunction orders restraining respondents Nos. 1 and 2 from conducting the
annual general body meeting scheduled on June 14, 1994, from conducting
ordinary business and special business and passing resolutions mentioned in the
said notice dated May 19, 1994, and restraining respondents Nos. 1 and 2 from
holding any board meetings, passing any resolutions, casting any votes, issuing
any share capital or increasing
the authorised share capital or operating any bank accounts in the name of the
company and doing any acts prejudicial to the interests of the company or from
entering into the company's premises or its branches pending the disposal of
the company petition.
Respondents
Nos. 1 and 2 had filed C.A. No. 106 of 1994, to vacate the said order. This
court passed a limited order on June 29, 1994, permitting respondents Nos. 1
and 2 to deposit the cheques given in the list and to disburse the amounts
given in the list annexed thereto by operating the current account of the company
with the Bank of India, Khairatabad branch and the respondents were directed to
file a copy of the bank statement after completion of the transactions. The
petitioners had filed C.A. No. 127 of 1994 to review the said order and by
order dated July 13, 1994, this court disposed of the same to the effect that
the expenditure by respondents Nos. 1 and 2 shall not exceed Rs. 10,73,247.80.
Against said orders, the petitioners had preferred OSA No. 24 of 1994, before
the Division Bench and by order dated October 6, 1994, the Division Bench had
dismissed the same by making the following observations :
"In
view of the fact that expenditure to the extent of Rs. 10 lakhs and odd has
already been incurred by the second respondent in pursuance of the impugned
order passed by the learned company judge, it is not for us to enter into the
merits of the order, particularly, as the proceedings are still pending before
the company judge. Whether or not the expenditure to the extent of Rs. 7,73,000
was authorised by the board of directors and whether it was an urgent
expenditure are questions which may have to be considered by the company judge
before whom the proceedings are pending. Any observations made by us on the
merits of the matter may affect the proceedings before the learned company
judge and at this stage, we think it appropriate to order, in the particular
circumstances of the case, that the objections raised before us by learned
counsel for the petitioners may be raised before the learned company judge at
the appropriate time in accordance with law so that the same be considered by
him. It was further urged by learned counsel for the appellants that the
application for a direction to the second respondent to deposit the cheques in
the account of the company in terms of the order passed by the learned company
judge may be disposed of and a direction be issued to the respondents to comply
with the order passed by the learned company judge in that regard. Since we are
disposing of the main appeal itself, we are not obliged to decide the
interlocutory application as it is still open to the applicant to raise
grievance before the learned company judge in that regard too."
The
petitioners have filed the following other applications :
(a) C.A No. 115 of 1994—to appoint a commissioner
to make local investigations at the registered office premises at 505-B
Mythrivanam, Ameerpet, Hyderabad, and the residential premises of respondents
Nos. 1 and 2 at 27 on Road No. 10, Jubilee Hills, Hyderabad, and office
premises at Anu Capital and Investments Limited, Hyderabad, 203, Concord
Apartments, Somajiguda, Hyderabad, and to make an investigation of all the
records, computer equipment, furniture, communicating equipment, etc., of the
company.
(b) C.A. No. 116 of 1994—directions to respondents
Nos. 1 and 2 to produce upon oath all the documents including account books of
the company in their possession and power as stated in the notice dated June
25, 1994, issued by the petitioners and to keep the said records and accounts
in the safe custody of the Registrar of the High Court or in the alternative to
direct respondents Nos. 1 and 2 to give inspection of the same and to permit
the petitioners to take out xerox copies of the same.
(c) C.A. No. 121 of 1994—directions against
respondents Nos. 1 and 2 to make discovery on oath of the documents which are
or have been in their possession and power relating to the company and the
matters in dispute in the company petition.
(d) C.A. No. 191 of 1994—to strike off the
defence of the respondents on the ground of non-compliance with the order dated
July 6, 1994, passed by this court directing counsel for the respondents to
file an affidavit of documents.
(e) C.A. No. 224 of 1994—to stay all further
proceedings in O.S. No. 1111 of 1994, on the file of the court of the IVth
Additional Judge, City Civil Court, Hyderabad, and to declare that the said
suit is illegal and invalid in law. Interim stay was granted by this court on
September 12, 1994, against which respondents Nos. 3 and 4 filed OSA No. 32 of
1994, but the Division Bench by order dated October 20, 1994, dismissed the
same by directing the respondents to move the company judge for vacating the
said order.
(f) C.A. No. 218 of 1994—to authorise and
allow the petitioners to operate the bank account of the company by depositing
the cheques/DDs and other negotiable instruments received from the customers in
favour of the company and also to operate the said account to incur expenditure
of the company from time to time and to direct respondents Nos. 1 and 2 to make
over and deliver all the cheques, drafts, bills and other negotiable
instruments received from the customers of the company, bank pass books and
other documents relating to the bank accounts of the company in the custody and
possession of respondents Nos. 1 and 2 to petitioner No. 2, to direct
respondents Nos. 1 and 2 to make over and deliver all the business records of
the company, account books and any other documents of the company which are in
the custody and possession of respondents Nos. 1 and 2 to petitioner Nos. 2.
(g) C.A. No. 246 of 1994—to stay the holding
of the meeting convened by respondents Nos. 2 to 5 pursuant to the impugned
notice dated September 1, 1994. The said meeting was scheduled on October 10,
1994, and by order dated October 19, 1994, this court had allowed the meeting
to go on, but directed that if any resolution is passed, the same shall not be
given effect to until further orders. The said order is subsisting as on today.
(h) C.A. No. 247 of 1994—directions against
respondents Nos. 1 and 2 to deposit all the cheques, drafts and other
negotiable instruments drawn in favour of the company and also to file the
statement of said cheques, drafts and negotiable instruments and to direct
respondents Nos. 1 and 2 to make over and deliver to petitioner No. 2 all the
bank pass-books, cheque books and documents relating to the bank accounts of
the company and all the business records of the company, account books of the
company and any other documents of the company in the custody and possession of
respondents Nos. 1 and 2.
(i) C.A. No. 251 of 1994—directions against
respondents Nos. 1 and 2 to make over and deliver all the cheques, drafts and
bills and other negotiable instruments, etc., as pleaded in the other related
petitions.
(j) C.A. No. 256 of 1994—to implead the
Registrar of Companies and the Secretary, Department of Company Affairs, Union
of India, as respondents Nos. 6 and 7 in the company petition.
(k) C.A. No. 257 of 1994—directions to the
Registrar of Companies to dispose of the application seeking extension of time
for holding the annual general meeting of the company within a week or
alternatively to direct the Registrar of Companies to extend the time for a
period of three months from October 6, 1994, for holding the annual general
meeting of the company.
(l) C.A. No. 267 of 1994—directions against
the Registrar of Companies to give inspection of all the documents of the
company with the said Registrar detailed in the annexure and to direct the said
Registrar to produce
the said documents at the time of the hearing of the company petition.
The
respondents filed a counter controverting the allegations made by the
petitioners. They contend that several reliefs sought for are beyond the scope
of section 237 of the Companies Act. They state that the civil suits filed by
them are not barred and that the orders passed by the civil court are valid and
operative. They assert that the second respondent was validly appointed as
alternate director and that his participation in the meetings and the actions
and resolutions are all true and valid and are binding and that the board
meetings which are specified above and disputed by the petitioners are held
properly preceded by notice and agenda and to the knowledge of petitioners Nos.
2 and 3. Further, the respondents dispute the truth and validity of the board
meeting said to have been held by the petitioners on April 6, 1994, which is,
of course, subject matter of O.S. No. 458 of 1994, on the file of the court of
the 1st Additional Judge, City Civil Court, Hyderabad, referred to supra. The
respondents raised a jurisdictional issue with regard to the maintainability of
the company petition itself and filed C.A. No. 144 of 1994, to decide the same
as a preliminary issue. The first respondent has also filed C.A. No. 217 of
1994, seeking a direction to permit him to incur an expenditure of Rs.
18,08,462.47 to run the day to day affairs of the company and to operate the
said bank account of the company.
Mr.
T. Ramakrishna Rao, learned counsel for the petitioners, vehemently contends
that on the dates specified, no meetings were held by the respondents and that
all the said meetings and resolutions said to have been passed are fabricated
and cooked-up and that there was no quorum to hold the said meetings and that
the second respondent was not at all the alternate director and was further
disqualified in view of the order of this court dated September 2, 1994, in CRP
No. 2034 of 1994. He further submits that for holding a board meeting seven clear
days notice is necessary and the same was not at all issued for holding any of
the above meetings projected by the respondents. He contends that the two
suits, i.e., O.S. No. 458 of 1994, filed by respondents Nos. 1 and 2 and O.S.
No. 1111 of 1994, filed by respondents Nos. 3 and 4 in the civil court are not
at all maintainable. He further contends that respondents Nos. 3, 4 and 5 are
not at all the shareholders and respondent No. 2, holds only 10 shares worth
Rs. 100 and that it is incomprehensible that respondent No. 2 who holds such a
minimum of 10 shares worth Rs. 100 can act as alternate director taking
important decisions relating to company affairs. He has taken me to the various sections of the
Companies Act like sections 72, 73, 75, 193 and articles 68, 69, 173, 96, 98,
99, 101, 114, 115, 119, 120, 128, 130, 150 of the articles of association and
related provisions and submits that the respondents have flagrantly violated
the said provisions. He further submits that this court, as a company court, has
got ample jurisdiction to grant the prayers sought for and that the words
"affairs of the company" should not be understood in a limited sense,
but it has to be construed in a comprehensive and a liberal sense embracing all
the affairs of the company. He questions the allotment of shares of 1,32,800 on
the ground that even though the date is shown as September 30, 1993, it is not
communicated within the specified time as contemplated under section 75 of the
Companies Act and that the same was communicated only on April 7, 1994. He
further submits that there cannot be any allotment of shares without
application and that such applications are absent, apart from the fact that the
shareholders were not communicated about the allotment of shares. He further submits
that the first respondent was disqualified to be a managing director of the
company as he was already a managing director of another company and that
simultaneous managing directorship is impermissible under clause (d) of Part I
of Schedule 13 to the Companies Act. He pleads that to undo the wrongs
committed by respondents Nos. 1 and 2, this court can invoke its inherent
powers to issue appropriate directions in the interests of justice and also to
grant the prayers in the interlocutory applications, apart from granting the
other prayers. Mr. T. Ramakrishna Rao, learned counsel for the petitioners, has
cited the judicial precedents in British India Corporation v. Robert Menzies
[1936] 6 Comp Cas 250 ; AIR 1936 All 568, Jiyajeerao Cotton Mills Ltd. v. Company
Law Board [1969] 39 Comp Cas 856 (MP), Selvaraj (V.) v. Mylapore Hindu
Permanent Fund Ltd. [1968] 38 Comp Cas 153 ; AIR 1968 Mad 378, Manabendra Shah
(H.H.) v. Official Liquidator, Indian Electrim Tools Corporation Ltd. [1977] 47
Comp Cas 356 (Delhi), Chandigarh Tourist Syndicate P. Ltd., In re [1978] 48
Comp Cas 267 (Punj), Century Flour Mills Ltd. v. S. Suppiah [1975] 45 Comp Cas
444 (Mad) [FB], Pravin Kantilal Vakil v. Rohini Ramesh Save [1985] 57 Comp Cas
31 (Bom) and Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp
Cas 548 (SC) in support of his contentions.
Mr.
A. Krishna Murthy, learned counsel for respondents Nos. 1 and 2, counters the
argument of counsel for the petitioners and contends that even though initially
an objection was raised with regard to the maintainability of the company
petition, in view of the several allegations made against the respondents, the
respondents now concede for a direction to the Central Government for investigation by
an inspector into the affairs of the company as prayed in prayer (a) of the
company petition and that all other reliefs are unsustainable and are beyond
the scope of the petition under section 237 of the Companies Act. He takes me
to sections 235, 237, 397, 398, 399, 10F, 391, 394, 395, 400 to 407 and
particularly, pointing out to the amendments brought to the above legal
provisions. He also cites articles 115(c), 132 and 78. He states sections 290
and also 175 coupled with article 78 and section 260 and argues that in the
absence of the chairman, the members can elect a chairman. He submits that all
interlocutory applications have got no nexus with the main application under
section 237. He also submits that the allegations made in the company petition
are very vague. He submits that the first respondent is not a managing director
of two companies as argued by learned counsel for the petitioners, but the
other concern which deals in process control and instrumentation is a
proprietary concern and not a company. He submits that the order in the CRP
cannot be construed as res judicata determining the rights of the parties
finally and the same also does not bind the second respondent as he was not a
party to the same and that in any event, the same is now set at naught by the
Supreme Court. He cites the decisions rendered in Amirtharaj v. Ramiah Nadar
[1968] 38 Comp Cas 337 (Mad), R. Prakasam v. Sree Narayana Dharma Paripalana
Yogam [1980] 50 Comp Cas 611 (Ker), Rajendra Menon (R.R.) (No. 2) v. Cochin
Stock Exchange Ltd. [1990] 69 Comp Cas 256 (Ker).
Mr.
Y. Jaganmohan, learned counsel for respondents Nos. 3 to 5, adopts the
arguments of Mr. A. Krishna Murthy.
In
British India Corporation v. Robert Menzies [1936] 6 Comp Cas 250 ; AIR 1936 All
568, a Division Bench of the Allahabad High Court was dealing with the power of
the company court for directing the furnishing of a copy of the register of
members of the company to a shareholder thereof. A rule framed by the Allahabad
High Court in exercise of the rule making power under the Companies Act, was
also a question for consideration. Basing on that, Mr. T. Ramakrishna Rao,
learned counsel for the petitioners submits that even though there is no
specific provision in the Companies Act, a company court is having the
jurisdiction to enforce compliance with the provisions of the Act in all
matters concerning the company. I am afraid, I cannot countenance this argument
for the reason that my jurisdiction is invoked only for the purpose of directing
investigation under section 237(a)(ii) of the Companies Act, and I have to deal
only with the said power which is expressly conferred on the company court to order investigation
which is one of the modes, the other modes being by a company voluntarily inviting
such an investigation or the Central Government under clause (b) of section 237
of the Act directing such an investigation on formation of opinion that such an
investigation is warranted. In Jiyajeerao Cotton Mills Ltd. v. Company Law
Board [1969] 39 Comp Cas 856 (MP), a Division Bench of the Madhya Pradesh High
Court was dealing with the power of the company court to interfere with the
order of the Government ordering investigation under section 237(b)(ii). The
same is inapplicable to the case on hand. In V. Selvaraj v. Mylapore Hindu
Permanent Fund Ltd. [1968] 38 Comp Cas 153 ; AIR 1968 Mad 378, the court was
dealing with the matters contemplated by sections 166, 186 and 256 of the
Companies Act regarding the powers of the company court to give directions for
appointment of an independent chairman for the annual general body meeting as
the said meeting could not be convened because of the disputes. This decision
has got no bearing on this case. In H.H. Manabendra Shah v. Official
Liquidator, Indian Electrim Tools Corporation Ltd. [1977] 47 Comp Cas 356, the
Delhi High Court held that a written application for allotment of shares is
necessary before a person can be entered as a member in the register of
shareholders. This proposition cannot be doubted. But, there is a statutory
presumption under section 164 of the Companies Act, and it is for the
petitioners to rebut the same in the investigation to be conducted. It is for
the authorities, either the investigating officials or the Central Government, to
consider as to whether there is compliance with regard to the provisions of the
Act and also the articles of association pointed out by the petitioners. In
Chandigarh Tourist Syndicate P. Ltd., In re [1978] 48 Comp Cas 267, the Punjab
High Court entertained an application under section 151 of the Civil Procedure
Code, 1908, read with rule 9 of the Companies (Court) Rules, 1959, seeking a
direction against the outgoing managing director to hand over the records, keys
of the almirahs and the cash on hand relating to the company to the newly
elected managing director. The said case has got no application to the instant
case, as still the claim and rival claims of removal of the directors and
induction of new directors including that of managing director has got to be
investigated and such a stage did not come. Handing over the records or other
properties of the company will only be a consequent step after the above
process is done. In Century Flour Mills Ltd. v. S. Suppiah [1975] 45 Comp Cas
444, the Full Bench of the Madras High Court dealt with the difference between
a stay order and an injunction and undid an illegal act done in convening the
extraordinary general body meeting of the shareholders in spite of the stay
order. This has also got no application in the instant case. In Pravin Kantilal Vakil v. Rohini
Ramesh Save [1985] 57 Comp Cas 31 (Bom) the interpretation of sections 391 and
392 of the Companies Act, fell for consideration which in no way is concerned
with this case. In Life Insurance Corporation of India v. Escorts Ltd. [1986]
59 Comp Cas 548, the Supreme Court dealt with the nature of a share as to
whether it is a movable property and allied aspects like shareholders' rights,
transferability etc., as also the foreign exchange regulations which have got
no bearing on this case.
In
Amirtharaj v. Ramiah Nadar [1968] 38 Comp Cas 337 (Mad), Justice T. Ramaprasada
Rao of the Madras High Court was dealing with the power relating to
investigation contemplated under section 235 of the Companies Act, 1956, with
the corresponding old provisions of the Companies Act, 1913, and concisely
speaking, the statement of law made is that the company court dealing under
section 237(a)(ii) is empowered to direct the Central Government to order
investigation and after passing such an order, the company court ceases to have
jurisdiction to adjudicate on other aspects. A similar view was taken in R.
Prakasam v. Sree Narayana Dharma Paripalana Yogam [1980] 50 Comp Cas 611 (Ker).
The said proposition of law was reiterated further in Rajendra Menon (R.R.)
(No. 2) v. Cochin Stock Exchange Ltd. [1990] 69 Comp Cas 256 (Ker).
A
company is an artificial being existing only in the contemplation of law. Being
a mere creature of law, it possesses only those properties which the charter of
its creation confers upon it, either expressly or as incidental to its very
existence. The Companies Act contemplates several provisions. But, I am now
concerned only with one provision, i.e., section 237(a)(ii), under which the
power of this court is invoked for directing the Central Government to order
investigation by the concerned inspectors. The company court itself is not
invested with any powers of investigation under the above provision and all
that it can do is to consider the plea of the petitioners as to whether it is a
fit case to direct the Central Government to do so. Section 237 conceives of
three situations, where the Central Government can appoint inspectors for
investigation. The first is when the company itself declares that such an investigation
is necessary, the second is when the court makes an order and the third is when
the Central Government forms an opinion that circumstances enumerated in clause
(b) exist. This court is concerned only with the second aspect, i.e., whether
circumstances exist to issue directions to the Central Government which power
is traceable to section 237(a)(ii) and it is invoked by the petitioners.
Passing such an order for
investigation is neither judicial nor quasi judicial. Such an order will not
determine the rights of the parties. It only paves the way for action to be
initiated either by the parties or by the Central Government or authorities
specified. In fact, it was held that an order of the company court directing
investigation under section 237(a)(ii) is not a judgment within clause 15 of
the Letters Patent and is not appealable. A Division Bench of the Madras High
Court in Ramiah Nadar v. Amirtharaj, [1962] 32 Comp Cas 52 ; AIR 1962 Mad 163,
laid down the said proposition. The same is based on the authoritative
pronouncement of the Constitution Bench of the Supreme Court in Narayanlal v.
M.P. Mistry, AIR 1961 SC 29. When an order by the company court directing
investigation in exercise of the powers under section 237(a)(ii) of the
Companies Act, is not a judgment determining the rights of the parties, it is
ununderstandable as to how the plea with regard to other prayers can be
considered at all, as they are not specifically conferred on this court under
section 237 of the Companies Act. Even interlocutory prayers cannot be
considered as it cannot be said that they are ancillary to the grant of the
main prayer. It is needless to mention that all interlocutory applications
seeking interim orders are only steps-in-aid for final adjudication. But, when the
final adjudication itself is not a judgment, seeking interim prayers or prayers
unrelated to section 237(a)(ii) are wholly misconceived. Further, the
investigation with regard to fact-finding includes within its scope
contravention of legal provisions and that is yet to be done. Before the
investigation is done and a fact-finding is recorded, it is premature for this
court to express opinion one way or the other. Even after the investigation is
conducted and the report is submitted to the Central Government, it is for the
Central Government to move in the matter and take appropriate action, for, this
court becomes functus officio once an order is made directing the Central
Government to appoint officers for investigation into the affairs of the
company. The purpose of investigation is not to investigate into the economic
working of a company. The purpose is to see whether the allegations concerning
mismanagement, misappropriation or other illegal acts are justified. The High
Court exercising jurisdiction under section 237(a)(ii) has no power to appoint
an inspector to investigate the affairs of a company. When the court directs
the Central Government to appoint inspectors to investigate a company's affairs
and when the inspector submits a report to the Government, it is only the
Government that can move matters as it thinks fit and the party who prompted
the court to issue the order under section 237(a)(ii) cannot seek relief on the
basis of and on a consideration
of the report. In the instant case, a dispute is raised telling upon the
interests of the company and its shareholders and status of
directors/additional directors or alternate directors, as also the managing
director and holding of the meetings, passing of the resolutions and validity
thereof and a fact-finding regarding the truth or otherwise of the allegations
made by the petitioners may be necessary and further the respondents themselves
do not resist such an investigation and in fact, Mr. A. Krishna Murthy, learned
counsel for respondents Nos. 1 and 2, submits that in view of the allegations
made, respondents Nos. 1 and 2 are prepared to face the same investigation in
order to have a clear cut fact finding in that regard and Mr. Y. Jaganmohan;
learned counsel appearing for the other respondents also concurs with the
submission of Mr. A. Krishna Murthy.
In
the circumstances, I am inclined to direct the Central Government to appoint
inspector/s to investigate into the affairs of the company and the inspector/s
so appointment shall report thereon to the Central Government making things
clear so as to enable the parties, what course of action they opt to take and
also enabling the authorities to take such steps as are necessary. It is
needless to mention that for the matters not enumerated under the Companies
Act, to be dealt with by the authority/the company court/the Company Law Board,
the civil courts' jurisdiction under section 9 of the Civil Procedure Code,
1908, is not barred. But this aspect as to whether the civil suits in O.S. Nos.
458 of 1994 and 1111 of 1994 are maintainable or not is not for adjudication of
this court for the reasons stated supra, as this proceeding is only a truncated
one specifically dealing with the aspect to order investigation under section
237(a)(ii) and it is for the petitioners to raise the pleas with regard to
maintainability of the above civil proceedings and if such contentions are
taken, they will be dealt with as triable issues.
For
the reasons aforestated, except relief No. 1 for directing the Central
Government to make an investigation in exercise of the powers under section
237(a)(ii) of the Companies Act, the other prayers, be they in the kind of main
prayers or interlocutory, are unsustainable. It is for the investigating agency
to take such steps as contemplated in the relevant provisions of the Companies
Act, for effective investigation and reporting. The civil suits and
interlocutory applications therein and the CMAs arising out of the
interlocutory applications shall be disposed of by the civil courts on their
own basis and in accordance with law. The order dated October 19, 1994,
directing not to give effect to the resolutions, if passed, on October 20, 1994, are vacated and if any
resolutions are passed on October 20, 1994, they will take effect in accordance
with law. In the circumstances, the Secretary, Company Affairs, Government of
India, who has been impleaded as respondent No. 6 is directed to appoint
competent persons as inspector/s to investigate into the affairs of the first
petitioner-company touching upon the aspects mentioned above, within three
months from the date of the receipt of this order. It is for the Central
Government to take such consequent action as deemed fit depending upon the
result of the said investigation.
Ms. Balajayashree, learned counsel representing the petitioners, at the time of delivery of the judgment, has apprised me that W.P. No. 20440 of 1994, has been filed by the petitioners in this court impugning the proceedings of the Registrar of Companies dated November 2, 1994, and that the operation of the said order has been suspended by this court. She also states that another WPMP No. 25890 of 1994, has been filed seeking permission to the petitioners to hold the annual general meeting and that the same is pending. I refrain from making any comments with regard to the institution of the said writ petition or the interim order passed, as also the pendency of the WPMP and it is for the concerned learned judge to deal with the same. So far as this company petition is concerned, the same is finally disposed of with the directions mentioned above. No costs.
[1980] 50 COMP. CAS. 127 (
HIGH COURT OF
v.
E. M. C. Steel Ltd.
S. RANGANATHAN, J.
C.P. NO. 96 OF 1977
DECEMBER 22, 1978
Satish Chandra, for the Petitioner.
Ved Vyas and A.P. Jain, for the Respondent.
Ranganathan J.—This is a petition under s. 237
of the Companies Act seeking an order for an investigation into the affairs of
E.M.C. Steel Ltd. (hereinafter referred to as "the company"). Sri Ved
Vyas appearing for the respondents raised two preliminary objections to the
maintainability of the 'petition:—(1) that the petitioner has no locus standi
to file a petition under s. 237; and (2) that the allegations in the petition
and the circumstances in which the petition has been filed show that the
petition is mala fide and intended only to harass the respondent by setting in
motion a fishing enquiry into the affairs of the company. I am disposing of by
this order only these two preliminary objections which, if upheld, would result
in the petition being dismissed in limine.
The first respondent, the company, was incorporated
on August 21, 1971, as a private limited company but became a public company on
December 28, 1973. The paid-up capital of the company is rupees five lakhs
being the amount fully paid up on its 50,000 equity shares of the face value of
Rs. 10 each. Of these 49,996 shares are held by M/s. Electrical Manufacturing
Company Ltd. (hereinafter referred to as "the holding company") and
the remaining four shares are held by three individuals. Respondents Nos. 2 to
6 are directors of the company.
The petitioner is the attorney of Smt. Savitri Devi
Maini and her five daughters who owned premises No. 11,
In the meantime, the petitioner has moved this
petition under s. 237 of the Companies Act seeking investigation into the
affairs of the first respondent-company. The allegations on the basis of which
the investigation is sought for may be summarised as follows :
(i) The
company has availed itself of huge financial credit from, the Allahabad Bank,
(ii) The
fifth respondent had developed political contacts and by virtue of association
with persons in power abused his influence in business matters.
(iii) The
balance-sheet and the profit and loss account and auditors' report of the
company disclosed a state of affairs which called for investigation.
(iv) The sum of Rs. 53,625 had been misappropriated by the 5th respondent.
For these reasons it prayed that this court should
direct the Central Govt. to appoint an inspector to carry out an investigation
into the affairs of the company.
I may at once state that of the two preliminary
objections raised by Sri Ved Vyas there is no substance in the second objection
that the petition is mala fide and intended only to harass the respondents. It
is no doubt true that some broad allegations have been made in paras. 18 and 19
of the petition making certain allegations against the respondents which may
not be quite material for the disposal of the petition. But I do not think that
the mere fact that such allegations have been made can result in the dismissal
of the petition on the grounds suggested by Sri Ved Vyas. If otherwise the
petitioner has made out a case for an investigation into the affairs of the
company I do not think that the petition can be dismissed because the
petitioner is motivated in filing the petition either in view of the pending
litigation between the two parties or in view of the grievance of the
petitioner that the respondents had taken advantage of certain political
situations in their dealings with him.
It is common ground that, apart from the one
transaction above referred to in respect of which the petitioner has already
filed a suit, the petitioner has no manner of interest in, or concern with, the
affairs of the company as a shareholder, creditor or otherwise. This being so,
the question raised is whether the petitioner has any locus standi to present this
petition under s. 237 of the Act, to ask for an investigation into the affairs
of the company.
Section 237 appears in Chap. I of Part VI of the
Companies Act which contains general provisions for the management and
administration of the company. This Chapter deals with several topics under
this head such as the maintenance of
registers, the filing of annual returns, the conduct of meetings and
proceedings, the qualifications and restraints on management personnel and
their remuneration, the manner of maintenance of accounts and audit of the
company and includes also provisions regarding the investigation into the
affairs of the company. Under the sub-heading "Investigation", the
Act makes two important provisions for enabling an investigation into the affairs
of a company which are contained in ss. 235 and 237 of the Act. Section 235
enables the Central Govt. to appoint inspectors to investigate the affairs of
the company on an application being made by a specified minimum number of the
members of the company or on a report by the Registrar under s. 234 of the Act.
Where the members of the company seek an order from the Central Govt., the
Central Govt. can require evidence to show that the applicants have good
reasons for requiring the investigation. Where the Central Govt. moves on the
basis of a report of the Registrar that will be because in the opinion of the
Registrar certain account books and documents of the company disclose an
unsatisfactory state of affairs or do not disclose a full and fair statement of
the matters to which the documents relate, or because he is of opinion, on
materials placed before him by any contributory or a creditor or any other
person interested, that the business of the company is being carried on in
fraud of its creditors or of persons dealing with the company or otherwise for
a fraudulent or unlawful purpose.
Section 237
is the provision with which we are concerned in the present case. The section
reads:
"Without
prejudice to its powers under section 235, the Central Government—
(a) shall appoint one or more competent persons
as inspectors to investigate the affairs of a company and to report thereon in
such manner as the Central Government may direct, if—
(i) the
company, by special resolution; or
(ii) the court, by order, declares that the
affairs of the company ought to be investigated by an inspector appointed by
the Central Government; and
(b) may
do so if, in the opinion of the Central Government, there are circumstances
suggesting—
(i) that the business of the company is
being conducted with intent to defraud its creditors, members, or any other
persons, or otherwise for a fraudulent or unlawful purpose, or in a manner
oppressive of any of its members, or that the company was formed for any
fraudulent or unlawful purpose;
(ii) that persons concerned in the formation
of the company or the management of its affairs have in connection therewith
been guilty of fraud, misfeasance or other misconduct towards the
company or towards any of its members; or
(iii) that
the members of the company have not been given all the information with respect
to its affairs which they might reasonably expect, including information
relating to the calculation of the commission payable to a managing or other
director, the managing agent, the secretaries and treasurers, or the manager,
of the company."
This section enables the Central Govt. to appoint
inspectors to investigate the affairs of a company in two sets of
circumstances. In the first eventuality, namely, where the company has by a
special resolution requested the Central Govt. to do so or the court by order
has declared that the affairs of the company ought to be so investigated, the
Central Govt. has no option but to appoint an inspector. The second part of the
seption gives a discretion to the Central Govt. to consider whether such an
investigation is called for and it may do so after consideration of
circumstances suggesting the conduct of the business in the manner set out in
sub-cls. (i), (ii) and (iii) of cl. (b) of the above section. It is under
sub-cl. (ii) of cl. (a) of this section that the present application has been
filed.
The clause is couched in very wide language. It does
not specifically impose any conditions or spell out any requirements to be
satisfied before a petitioner comes to court or the court directs the
appointment of an inspector. Nevertheless, can it be said that there are
certain implicit or inherent limitations on the exercise by the court of its
power under this clause ? An attempt was made earlier unsuccessfully to read
into the section one such limitation. It was argued that the court cannot
exercise such a power unless it is already in seisin of some other matter
relating to the company and the request for investigation is made to the court
incidentally in the course of such proceedings. But this argument was rejected
by the Gujarat High Court in the case of Alembic Glass Industries Ltd., In re
[1972] 42 Comp. Cas. 63. It is sufficient to read the third para of the
head-note in that decision appearing at page 63 :
"There is nothing in the language of section
237(a)(ii) indicating that a petition simpliciter for action under section
237(a)(ii) cannot be entertained, and that the power conferred by section
237(a)(ii) can only be exercised by the court against a company in respect of
which some other proceeding is pending in the court and the court considers it
proper to direct appointment of an inspector."
The same view was taken by Kapur J. in the case of
Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp. Cas. 33 (Delhi).
In view of the above decisions, Shri Ved Vyas stated
that he would not press that argument here but he contended that, however wide
the language of s. 237 may be, it should not be so construed as to vest an
absolute and unlimited right in a complete and total stranger who has no manner
of interest in or connection with a company to seek an investigation into its
affairs. Before considering this contention, it is necessary to refer to the
observations of Kapur J. in the case of Delhi Flour Mills Co. Ltd., In re
[1975] 45 Comp. Cas. 33 (Delhi), which according to Shri Lekhi, have already
decided the point. No doubt, Kapur J. observed in that case (p. 41) :
"One serious misgiving has been in my mind
concerning the present petition which I may now set out. It is open to any
petitioner to move the court for an order of investigation against the company.
He need not be a shareholder, he need
not have any personal interest; he may be a complete stranger and yet he can
move the court seeking an order for investigation of the affairs of a
company. If the court has to deal with all such petitions, the court may be
literally flooded with them. It is, therefore, necessary for the court to act
most cautiously on the question of considering whether the affairs of a company
need investigation." (Emphasis
added).
But that was a case of a petition filed by a shareholder of the company and the learned judge had no occasion to deal with the issue of locus standi now raised. The observations were made in a different context and, in fact, they show that the learned judge was also emphasising the necessity of exercising great caution and restraint in invoking the aid of the section,
After deep consideration, I have come to the
conclusion that the argument of Shri Ved Vyas has to be accepted. The courts
are intended to provide redress to litigants who complain of the infringement
of their legal rights and, in the absence of very clear words in a statute, it
may not be construed as conferring on any person a right to move a court when
no legal injury has been caused to him. The legal maxim ubi jus ibi remedium
has two facets. It signifies, in the first place, that whenever the law gives a
right or prohibits an injury, the person who is injured or whose right is
infringed will have a remedy of action in the courts. The converse of this
proposition is equally true, viz., that there is no remedy by way of legal
action unless there is the infringement of a legal right to demand that an act
shall not be clone. The common law as well as the several statutes create
rights and duties and they also provide for certain remedies against the
violation of the rights or non-performance of the duties. The provisions for
remedies have to be construed as intended for seeking remedies against the
infringement of the legal rights. Where a person has no legal interest, he has
no grievance in the eye of law and he cannot seek intervention of the court.
It is the above principle that has been applied by
the courts even while interpreting the scope of prerogative writs and they have
always insisted that the person who approaches the court must be one whose
legal rights are affected and who has a legal grievance. This position has been
reiterated in a series of decisions of the Supreme Court. In Chiranjilal
Chaudhari v. Union of India [1950] SCR 869 ; [1951] 21 Comp. Cas. 33, 54 (SC) Mukherjea
J. observed :
"To make out a case under this article, it is
incumbent upon the petitioner to establish not merely that the law complained
of is beyond the competence of the particular legislature as not being covered
by any of the items in the legislative lists, but that it affects or invades
his fundamental rights guaranteed by the Constitution, of which he could seek
enforcement by an appropriate writ or order. The rights that could be enforced
under article 32 must ordinarily be the rights of the petitioner himself who
complains of infraction of such rights and approaches the court for relief.
This being the position, the proper subject of our investigation would be what
rights, if any, of the petitioner as a shareholder of the company have been violated
by the impugned legislation."
In State of Orissa v. Madan Gopal Rungta [1952] SCR
28 the High Court had not decided the respective merits of the rival
contentions between the parties as it was of opinion that the matter could be
satisfactorily gone into in the course of a suit. However, the court passed an
order on the writ petitions giving certain directions. The Supreme Court held
that the language of art. 226 did not permit the High Court to pass an order of
the nature above mentioned. Kania C.J. observed (p. 33):
"The language of the article shows that the
issuing of writs or directions by the court is not founded only on its decision
that a right of the aggrieved party under Part III of the Constitution
(Fundamental Rights) has been infringed. It can also issue writs or give
similar directions for any other purpose. The concluding words of article 226
have to be read in the context of what precedes the same. Therefore the
existence of the right is the foundation of the exercise of jurisdiction of the
court under this article."
In Calcutta Gas Company (Proprietary) Ltd. v. State
of West Bengal, AIR 1962 SC 1044, the applicant-company had been appointed
under an agreement as the manager of another company (Oriental Gas Company
Ltd.) which owned an industrial undertaking for the manufacture and sale of
fuel gas in Calcutta. The West Bengal Legislature enacted the Oriental Gas
Company Act, 1960, providing that the said undertaking should stand transferred
to the State Govt. for five years for management and control and notifications
were passed in pursuance thereof. The applicant by a petition under art. 226
sought to impugn the constitutional validity of the said Act. The first
question that fell to be considered was whether the appellant had the locus
standi to file the petition under art. 226 of the Constitution. Subba Rao J.
(as he then was) stated the principle thus (p. 1047):
"The argument of learned counsel for the
respondents is that the appellant was only managing the industry and it had no
proprietary right therein and, therefore, it could not maintain the
application. Article 226 confers a very wide power on the High Court to issue
directions and writs of the nature mentioned therein for the enforcement of any
of the rights conferred by Part III or for any other purpose. It is, therefore,
clear that persons other than those claiming fundamental rights can also
approach the court seeking a relief thereunder. The article in terms does not
describe the classes of persons entitled to apply thereunder ; but it is
implicit in the exercise of the extraordinary jurisdiction that the relief
asked for must be one to enforce a legal right. In State of Orissa v. Madan
Gopcd Rungta [1952] SCR 28 this court has ruled that the existence of the right
is the foundation of the exercise of jurisdiction of the court under art. 226
of the Constitution. In Chiranjilal Chaudhari v. Union of India [1950] SCR 869;
[1951] 21 Comp. Cas. 33 (SC), it has been held by this court that the legal
right that can be enforced under art. 32 must ordinarily be the right of the
petitioner himself who complains of infraction of such right and approaches the
court for relief. We do not see any reason why a different principle should
apply in the case of a petitioner under art. 226 of the Constitution. The right
that can be enforced under art. 226 also shall ordinarily be the personal or
individual right of the petitioner himself, though in the case of some of the
writs like habeas corpus or quo war ran to this rule may have to be relaxed or
modified. The question, therefore, is whether in the present case the
petitioner has a legal right, and whether it has been infringed by the
contesting respondents."
The above decisions show that in spite of the wide
language of art. 226 and in spite of the fact that art. 32 is also intended to
ensure the protection of fundamental rights, the courts have held that only a
person who has a legal right and who is prejudicially affected by a particular
legislation or act can approach the court for obtaining the relief under the
said provisions. This is a general principle which should apply in respect of
any petitioner approaching a court for redress.
Shri Lekhi argued that s. 237 appears in the context of
a number of statutory provisions which are intended to regulate the management
and administration of companies in public interest. He took me broadly through
the various allegations made against the company. He pointed out that,
according to the petition, the annual accounts and balance-sheet of the company
contained various aspects which required explanation and clarifications. The
annual reports showed that the company had been obtaining funds from the bank
and diverting it to the holding company and that the company had opened a
foreign bank account and presumably violating the provisions of the Foreign
Exchange Regulation Act. These are matters affecting public interest. He also
points out that s. 237(a) does not contain any restrictive provisions such as
the provision regarding a minimum number of persons who can approach the
Central Govt. under s. 235. He submits that no limitations should be inferred
or presumed to exist and that it should be held that it is open to any member
of the public to come forward and file a petition that the affairs of a public
company are not being properly managed and that an investigation into its
affairs should be directed by the court. He submits that the mere consideration
that a wide interpretation of s. 237 would open the flood gates of litigation
cannot be taken to be a relevant consideration for interpreting the wide and
unrestricted language of s. 237.
To take the last point first, I agree that if the
section can be read as envisaging beyond all doubt that it will be open to any
person to come to the court and seek an investigation into the affairs of any
company, the courts should not be deterred from giving that interpretation
merely because it might open the flood gates of litigation, for where the
statute is clear, the court should give effect to the right created and should
not restrict that right merely in order to minimise litigation. But where the
language of the section is not so clear and where there is nothing in the
scheme of the Act to warrant the giving of an altogether too liberal and wide
an interpretation I think it is legitimate to take into consideration the fact
that such a wide interpretation might result in a spurt of litigation by
persons having no direct interest or concern in the subject-matter thereof.
I have already pointed out that, on general
principles, it would not be correct to read the section as authorising any man
in the street to seek orders for investigation into the affairs of a company,
merely because it is a public company and its affairs are, in his opinion,
being conducted to the detriment of public interest. The interest which the
person may have as a member of the public in the purity of the administration
of public companies is too remote and intangible for the infraction of which he
may move a court. That apart, I do not think that s. 237 is capable of such a
wide interpretation even when read in the context of the scheme and the various
other provisions of the Companies Act. There are several provisions of the
Companies Act which contemplate restrictions and provisions to safeguard the
interests of the public. A contravention of the provisions of the Act would
also be an offence which can lead to a criminal prosecution. Nevertheless,
whenever there is a violation of the statute, a right to seek redress from the
courts is conferred only upon the statutory authorities who are entrusted with
the supervision of the companies or on members, creditors or other persons
interested in the company. Under ss. 397 and 398, where the affairs of a
company, inter alia, are being conducted in a manner prejudicial to the public
interest, the intervention of the court may be sought but only by a specified
number of members of the company though even a smaller number may apply subject
to certain conditions and restrictions. A petition for the winding up of a
company even where such winding up is occasioned by the conduct of its affairs
in disregard of the statute and to the detriment of public interest, can be
presented only by the company, its creditors or contributories or by the
designated officers of the Govt. Where a company is being wound up and it
appears that the business of the company has been carried on in a fraudulent
manner, only the liquidator, creditor or contributory can seek appropriate
orders from the court against the persons who are alleged to have been parties
to the carrying on of the business in the manner aforesaid. Thus, the scheme of
the Act does not seem to envisage that, merely because a company is a public
company, it would be open to any member of the public to move the court for
directions.
The recent decision of the House of Lords in Gouriet
v. Attorney-General [1977] 3 WLR 300 is of some relevance in this context. The
Post Office Act and the Telegraph Act in England made it an offence for persons
engaged in the business of the post office wilfully to delay or omit to deliver
postal packets and messages in the course of transmission and for any person to
solicit or endeavour to procure another person to commit such an offence. The
executive council of the union of post office workers resolved to call on its
members not to handle mails to South Africa during a particular week and
similar action was also proposed by other trade unions. The plaintiff, Gouriet,
sought the Attorney-General's consent to act as plaintiff in relator
proceedings for an injunction to restrain the postal union from the above
course but the Attorney-General withheld his consent. Thereafter, the plaintiff
issued a writ of summons in his own name and applied to the judge in chambers
for an injunction in the same terms. The injunction in the terms sought for was
granted by the Court of Appeal by invoking a very wide language of O. 15, r. 16
of the Rules of the Supreme Court which read as follows (p. 327):
"No action or other proceeding shall be open to
objection on the ground that a merely declaratory judgment or order is sought
thereby, and the court may make binding declarations of right whether or not
any consequential relief is or could be claimed."
The above decision was reversed by the House of Lords
for several reasons but we are concerned here only with the application of the
principle that a person whose rights as a private individual are not affected
cannot seek an injunction even if it be to present what he considers to be a
threatened breach of law or even the commission of an offence.
At the outset, Lord Wilberforce explained the scope
of a relator action (p. 310) :
"A relator action—a type of action which has
existed from the earliest times—is one in which the Attorney-General, on the
relation of individuals (who may include local authorities or companies) brings
an action to assert a public right. It can properly be said to be a fundamental
principle of English Law that private rights can be asserted by individuals,
but that public rights can only be asserted by the Attorney-General as
representing the public. In terms of constitutional law, the rights of the
public are vested in the Crown, and the Attorney-General enforces them as an
officer of the Crown. And just as the Attorney-General has in general no power
to interfere with the assertion of private rights, so in general no private
person has the right of representing the public in the assertion of public
rights. If he tries to do so his action can be struck out.
An appeal was made to the Year Books to controvert
this universally accepted proposition. Examples can be found of cases, in early
times, where subjects were allowed to assert in the courts rights of the Crown
(see Year Books Series, Vol. XVII, Ed.
II, 1314-15, Selden Society ed. W. C. Bol-land). But all these cases
were cases asserting, through writs of quo warranto or analogous writs, claims
of a nature which in modern times came to be made by prerogative writs, or
cases concerned with some proprietary right of the Crown : They were not cases
of individuals asserting rights belonging to the public. No instance of this
could be brought forward, whether in ancient or modern times."
and expressed his conclusion thus (p. 316):
"I shall content myself with saying that, in my
opinion, there is no support in authority for the proposition that declaratory
relief can be granted unless the plaintiff, in proper proceedings, in which
there is a dispute between the plaintiff and the defendant concerning their
legal respective rights or liabilities either asserts a legal right which is
denied or threatened, or claims immunity from some claim of the defendant
against him or claims that the defendant is infringing or threatens to infringe
some public right so as to inflict special damage on the plaintiff."
Viscount Dilhorne, referring to O. 15, r. 16 above
mentioned, pointed out (p. 327):
"It does not provide that an action will lie
whenever a declaration is sought. It does not enlarge the jurisdiction of the
court. It merely provides that no objection can be made on the ground only that
a declaration is sought. In my opinion it provides no ground for saying that
since 1883 the courts have had jurisdiction to entertain an action instituted
by a person other than the Attorney-General who does not claim that any
personal right or interest will be affected and who is seeking just to protect
public rights."
At page 332, Lord Diplock observed :
"The only kinds of rights with which courts of
justice are concerned are legal rights; and a court of civil jurisdiction is
concerned with legal rights only when the aid of the court is invoked by one
party claiming a right against another party, to protect or enforce the right
or to provide a remedy against that other party for infringement of it, or is
invoked by either party to settle a dispute between them as to the existence or
nature of the right claimed. So for the court to have jurisdiction to declare
any legal right it must be one which is claimed by one of the parties as
enforceable against an adverse party to the litigation, either as a subsisting
right or as one which may come into existence in the future conditionally on
the happening of an event."
Lord Fraser had this to say (p. 352):
"....the plaintiff has expressly disclaimed any
special interest and has sued simply as a member of the public. In the field of
public rights I find confirmation in several of the cases that were cited to us
for my view that there was no difference in the extent of the court's
jurisdiction in actions by private persons according to whether the action
claims an injunction or a declaration..........
The case of London Association of Shipowners and
Brokers v. London and India Docks Joint Committee [1892] 3 Ch 242 (CA), might
at first sight appear to support a wider power to make declarations but that is
not really so. All the learned judges who took part in the decision thought the
plaintiffs would only be entitled to a declaration if their private rights were
being injured or threatened..........all the cases cited to us where
declarations concerned with public rights were made at the instance of private
parties suing alone were cases in which either their private rights were
affected or they had suffered special damage by the infringement of the public
rights."
The above extracts contain an enunciation of the
general principle that the courts will not entertain action on behalf of
private persons to enforce the observance of public rights and duties unless
they have a personal interest in the matter and unless their rights and
interests are in some way affected. I think that even in the interpretation of
s. 237 this basic limitation should be treated as implicit and the section
should not be given an interpretation which would make it possible for persons
to start litigation in respect of what does not concern them. The section
should be so interpreted as to enable relief to be obtained only by some person
whose rights have been affected by the manner in which the affairs of the company
have been conducted or accounts maintained and has, therefore, a grievance in
the eye of law for which he seeks relief from the court. There is ample scope
for the invocation of s. 237 by persons whose rights are infringed or affected
and whose interests need to be projected or safeguarded by an investigation—a
creditor who is unable to move the Central Govt. under s. 235; member or
members who, though aggrieved, are unwilling to move the Central Govt. or
unable to fulfil the requirements of s. 236 and hence unable to move the
Central Govt.; members who approach the Central Govt. under ss. 235 and 237(b)
and are aggrieved by the rejection of their applications ; a company which
wants an investigation but is unable to have a special resolution passed. These
are some illustrations of persons who would be able to move the court u/s.
237(a). It is, therefore, not as if the scope of the remedy enacted by this
provision would be unreasonably curtailed or would become illusory by reading
into the section an implied limitation to exclude persons having no manner of
interest or concern with the company, from availing of it.
For the above reasons I uphold the preliminary objection raised by the respondent to the maintainability of the petition and dismiss the petition in limine. There will, however, be no order as to costs.
[2002] 37 scl 804 (ker.)
High
Court of Kerala
v.
M. Ebrahimkutty
J. B.
Koshy and K. Padmanabhan Nair, JJ.
M.
F.A. No. 1273 of 1998 (B)
March 25,
2002
Section 237, read with section 10, of the
Companies Act, 1956 - Investigation of company’s affairs in other cases -
Whether ‘Court’ referred to in section 237 is court having jurisdiction under
section 10 and no other court - Held, yes - Whether under section 237(a)(ii),
court can appoint directly inspector(s) to investigate into affairs of company
- Held, no - Whether court can only make a declaration that affairs of company
ought to be investigated by an inspector appointed by Central Government -
Held, yes - Whether power of Company Law Board under section 237(b) is a bar to
exercise of discretionary jurisdiction of court under section 237(a)(ii) -
Held, no - Whether mere allegations are insufficient to support an application
to court to act under section 237(1)(ii) and material placed before court
should be such as to satisfy court that a deeper probe into affairs of company
is desirable in interests of company itself - Held, yes - Whether court can
pass a declaration under section 237(a) for a fishing expedition - Held, no -
Whether an isolated instance of mismanagement is enough for court to declare
that an investigation is required - Held, no - Whether existence of
circumstances described under section 237(b) may sway court to pass an order
under section 237(a)(ii) also but it is not always mandatory that court can
pass a declaration only if conditions under section 237(b) exist - Held, yes -
Whether power of court under section 237(a)(ii) is equal to power of CLB under
section 237(b) - Held, no - Whether unlike CLB, there are no restrictions
placed on Court even though Court will exercise its judicial discretion only on
sufficient materials and only after it is convinced that situation warrants an
investigation in interest of company as a whole - Held, yes - Whether when a
discretionary order under section 237(a)(ii) is passed by proper court with
jurisdiction, unless there are compelling grounds appellate court will not
interfere - Held, yes
Facts
The respondent was an equity
shareholder and the promoter of the appellant-company. He was also appointed as
the Chairman of the company. Subsequently, the company came out with public
issue which was subscribed in excess of 14 times the offer. Thereafter, the
respondent filed petition under section 237(a)(ii) before the Company Judge
seeking to direct the Central Government to appoint inspectors to investigate
into the affairs of the company. It was alleged that no first annual general
meeting of the company was held as convened in time.
The managing director, ‘M’ had
been fraudulently mismanaging the company in utter disregard of the interest of
the shareholders and was acting in an autocratic and oppressive manner. He
created false and fabricated documents with nefarious motive to oust the
respondent and other members of the board of directors who opposed the
misutilisation and misappropriation of public funds. He created documents and
minutes purporting to remove the petitioner and others who opposed the
mismanagement and oppression. Though on the public issue, shares were over
subscribed to the tune of 14 times and huge amounts were collected from the
public, shares were neither allotted properly nor amounts refunded to the
applicants whose application for shares were not accepted.
It was further alleged that 1200
complaints had been filed against ‘M’ by the subscribers to whom the amounts
were not refunded and that ‘M’ had misappropriated, misutilised and mismanaged
the funds collected through public issue and diverted the funds for his private
purposes. The company opposed the petition. The Company Judge found that the
submission of the Central Government supported the respondent’s allegations and
concluded that a deeper probe was necessary and passed an order declaring that
affairs of the company ought to be investigated by an inspector appointed by
the Court itself.
On appeal :
Held
By virtue of the power under
section 237(a)(ii), the Court cannot appoint directly inspector or inspectors
to investigate the affairs of the company but only make a declaration that the
affairs of the company ought to be investigated by an inspector appointed by
the Central Government. Once such an order is passed it is mandatory for the
Central Government to conduct such investigation by appointing competent
persons as inspectors.
The court referred to in section
237 in the court having jurisdiction under section 10 and no other Court or a
Court hearing writ petitions. Petition was filed before the competent company
court in the instant case. It is true that mere allegations are not sufficient
to support an application to the Court to act under section 237(a)(ii), and the
material placed before the Court should be such as to satisfy the Court that a
deeper probe into the affairs of the company is desirable in the interests of
the company itself. In other words, Court will not pass a declaration under
section 237(a) for a fishing expedition. But Court is entitled to see whether
on the basis of the material brought before the Court, a declaration is to be
made or not. An isolated instance of mismanagement is not enough for the Court
to declare that an investigation is required. The material placed before the
Court should be such as to satisfy the Court that a deeper probe into the
company affairs is desirable in the interests of the company itself. The
judicial conscience must be satisfied that there has been maladministration in
the affairs of the company warranting an investigation.
Existence of alternative remedy
also can be taken as a condition for refusing to exercise the discretionary
jurisdiction in appropriate cases, but it cannot operate as an absolute bar. No
where in section 237 it is stated that Court cannot be approached under section
237(a)(ii) before approaching CLB under section 237(b). It is true that after
amendment of section 237(b) (Companies Amendment Act, 1988 with effect from
31-5-1991), the CLB has power to direct the Central Government to appoint
inspectors to investigate into the affairs of the company if circumstances
mentioned in sub-clause (i), (ii) or (iii) of section 237(b) exist. But, the
CLB must be satisfied that such circumstances exist. Power of the CLB under
section 237(b) is not a bar in exercising the discretionary jurisdiction of the
Court under section 237(a)(ii). No such condition was made out by the
Legislature for exercising the jurisdiction by the company court under section
237(a)(ii) even though Court will take such a course only if circumstances
warrant.
Before passing an order under
section 237(a)(ii), Court should be satisfied that there are sufficient
materials to show that affairs of the company is in such a way that an
investigation is necessary. The existence of circumstances described under
section 237(b) may sway the Court to pass an order under section 237(a)(ii)
also. But it is not always mandatory that Court can pass a declaration only if
the conditions under section 237(b) exist. No such restrictions are placed by
the Legislature even though Court will exercise its judicial discretion only on
sufficient materials and only after the Court is convinced that situation
warrants an investigation in the interest of the company as a whole. For a
minority shareholder or a person legally interested in the affairs of the
company it may not always be possible to place all materials alleged by him.
But investigation is necessary to disclose something which is not apparently
visible. If all materials are already available, there is no scope for further
investigation. At the same time, existence of circumstances must warrant
reasonably so as to invoke jurisdiction of the Court. Power of the Court under
section 237(a)(ii) is not equal to the power of the CLB under section 237(b).
Unless any one of the circumstances as mentioned in section 237(b) exist, the
CLB cannot order an investigation, but no such restriction is placed on the
Court.
It was argued that once the
company court passes a discretionary declaration under section 237(a)(ii) for
appointment of an inspector for investigation, it cannot set aside as it is not
a judicial or a quasi-judicial order and is not appealable. The Court is not
appointing inspectors by itself. Order does not deter the rights of the
parties. The order is also appealable under section 483. But when a
discretionary order under section 237(a)(ii) is passed by the proper court with
jurisdiction, unless there is compelling grounds appellate court will not
interfere. In other words, if there is no prima facie material at all before
the Court and Court ordered investigation under section 237(a)(ii) as a fishing
expedition, appellate court will interfere. But it is settled law that if order
is passed after considering the materials available, normally appellate court
will not interfere with the discretionary order passed by a competent court
with jurisdiction.
In the instant case, there were
sufficient material for the Company Judge to pass the impugned order. In any
event, when the company court passed the impugned order on materials available
in the case, on the facts of the case it could not be stated that an
interference by appellate court was warranted. This was an appropriate case
where discretionary order had been passed by the court by exercising powers
under section 237(a)(ii). No interference was called for.
Cases referred to
Delhi Flour Mills Co. Ltd., In re
[1975] 45 Comp. Cas. 33 (
K.P. Dandapani for the Appellant. P.S. Sreedharan Pillai,
M.P. Mohammed Aslam, S. Abdul Salam and Tom K. Thomas for the
Respondent.
Judgment
J.B. Koshy, J.—First respondent in this appeal (referred in this
judgment as the petitioner for convenience) filed a petition under section 237
of the Companies Act, 1956 (‘the Act’) to direct the Central Government to
appoint one or more competent persons as inspectors by declaring that the
affairs of the Premier Plantations Ltd., first appellant (‘as company’) ought
to be investigated and to report thereon within a specified time limit. Before
going into the facts of the case we may first discuss the power of this Court
under section 237(a)(ii). Section 237 reads as follows :
“Investigation of company’s
affairs in other cases. - Without prejudice to its powers under section 235,
the Central Government—
(a) shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—
(i) the
company, by special resolution; or
(ii) the Court, by order, declares that the
affairs of the company ought to the investigated by an inspector appointed by
the Central Government; and
(b) may
do so if, in the opinion of the Company Law Board, there are circumstances
suggesting—
(i) that the business of the company is
being conducted with intent to defraud its creditors, members or any other
persons, or otherwise for a fraudulent or unlawful purpose, or in a manner
oppressive of any of its members, or that the company was formed for any
fraudulent on unlawful purpose;
(ii) that persons concerned in the formation
of the company or the management of its affairs have in connection therewith
been guilty of fraud, misfeasance or other misconduct towards the company or
towards any of its members; or
(iii) that the members of the company have not
been given all the information with respect to its affairs which they might
reasonably expect, including information relating to the calculation of the
commission payable to a managing or other director or the manager, of the
company.”
A reading of the above section
will show that power given under section 237 to the Central Government is
independent and operates without prejudice to its powers under section 235 of
the Act. But under section 237(a) the Central Government can appoint an
inspector for investigating the affairs of the company only if the company
passes a special resolution for it or if an order is passed by the Court. Under
section 237(b) the CLB is also empowered to do so in certain special
circumstances required the Central Government to conduct investigation. By
virtue of the power under section 237(a)(ii), the Court cannot appoint directly
inspector or inspectors to investigate the affairs of the company but only make
a declaration that the affairs of the company ought to be investigated by an
inspector appointed by the Central Government. Once such an order is passed it
is mandatory for the Central Government to conduct such investigation by
appointing competent persons as inspectors—Delhi Flour Mills Co. Ltd., In re
[1975] 45 Comp. Cas. 33 (
2. The Court referred to in section 237 is the Court having jurisdiction
under section 10 of the Act and no other Court or a Court hearing writ
petitions. Petition was filed before the competent company court in this case.
It is true that mere allegations are not sufficient to support an application
to the court to act under section 237(a)(ii). The material placed before the
Court should be such as to satisfy the Court that a deeper probe into the
affairs of the company is desirable in the interests of the company itself as
held by this Court in P. Sreenivasan v. Yoosuf Sagar Abdullah & Sons (P.)
Ltd. [1983] 53 Comp. Cas. 485. In other words, the Court will not pass a
declaration under section 237(a) for a fishing expedition. But the Court is
entitled to see whether on the basis of the material brought before the Court,
declaration is to be made or not Modi Industries Ltd. v. Union of India [1982]
52 Comp. Cas. 589 (Delhi). An isolated instance of mismanagement is not enough
for the Court to declare that an investigation is required. The material placed
before the Court should be such as to satisfy the Court that a deeper probe
into the company affairs is desirable in the interests of the company itself.
The judicial conscience must be satisfied that there has been misadministration
in the affairs of the company warranting an investigation.
3. It was argued by the counsel for the appellants that in Safia Usman v.
Union of India [2000] CLC 110 a single Judge of this Court held that without
exhausting the remedy under section 237(b), the Court cannot exercise power
under section 237(a)(ii). A reading of this decision shows that proper relief
was not asked in the petition as required under section 237(a)(ii) and company
itself was not impleaded as a party. Existence of alternate remedy also can be
taken as a condition for refusing to exercise the discretionary jurisdiction in
appropriate cases, but it cannot operate as an absolute bar. Nowhere in section
237 it is stated that court cannot be approached under section 237(a)(ii)
before approaching the CLB under section 237(b). It is true that after
amendment of section 237(b). (Companies Amendment Act, 1988 with effect from
31-5-1991), the CLB has power to direct the Central Government to appoint
inspectors to investigate into the affairs of the company if circumstances
mentioned in sub-clause (i), (ii) or (iii) of section 237(b) exit. But, the CLB
must be satisfied that such circumstances exit as held by the Apex Court in
Barium Chemicals Ltd. v. CLB AIR 1967 SC 295. Before amendment, this power was
with the Central Government itself. See also Rohtas Industries Ltd. v. S.D.
Agarwal AIR 1969 SC 707. Power of the CLB under section 237(b) is not a bar in
exercising the discretionary jurisdiction of the Court under section 237(a)(ii).
No such condition was made out by the Legislature for exercising the
jurisdiction by the company court under section 237(a)(ii) even though Court
will take such a course only if circumstances warrant. Another decision pointed
out is the decision of the learned single Judge of this Court R.V. Mohammed v.
Trichur Heart Hospital Ltd. [2000] CLC 258. What was held in that decision is
the Court cannot order an investigation by appointing an inspector, but under
section 237(a)(ii) the Court can, if circumstances warrant, by an order makes a
declaration that the affairs of the company ought to be investigated by an
inspector appointed by the Central Government and on making such declaration
the Central Government has no option but has to appoint an inspector to investigate
the affairs of the company. No other hypertechnical view is possible in view of
the clear wording of section 237(a). As held by the Gujarat High Court in
Alembic Glass Industries Ltd.’s case (supra) :
“The Legislature has conferred
wide jurisdiction on this court to entertain a petition under section
237(a)(ii). In fact, the power of the Central Government to appoint an
inspector suo motu under section 237(b) is limited to its subjective
satisfaction in respect of one or other matters contained in three sub-clauses
of clause (b). The Legislature in its wisdom has not put any such condition
before the court can make an order, though the court may in its wisdom expect
prima facie proof of some of these conditions on the subjective satisfaction of
which the Central Government would appoint an inspector. While conferring
jurisdiction on the court to direct the Central Government to appoint an
inspector, the Legislature has not thought fit to circumscribe the discretion
or jurisdiction in any manner. It would, therefore, be utterly inappropriate to
curtail or circumscribe or fetter the jurisdiction of this court by reading
into the section something which is not there.” (p. 68)
4. Another decision pointed out by the learned counsel for the appellants
in the Apex Court decision in Sri Ramdas Motor Transport Ltd. v. Tadi
Adhinarayana Reddy [1997] 90 Comp. Cas. 383. There a writ petition was filed
seeking direction for investigation by the Central Bureau of Investigation. The
Apex Court held that in view of the specific remedies under sections 43A, 234,
235, 237, 397 and 398 of the Act, a writ petition will not lie. It is not a
matter of public interest and remedy available under the Act shall be availed
of. Here the petitioner has approached under section 237 and it cannot be held
that petition is not maintainable. Scope and power of company court under
section 237(a)(ii) was not discussed in that decision. Ofcourse under section
237(a)(ii), Court’s would insist upon solid factual base and mere allegations are
insufficient. It was held by this court in Mrs. U.A. Sumathy v. Dig Vijay Chit
Fund (P.) Ltd. [1983] 53 Comp. Cas. 493, that :
“... No doubt, clause (a)(ii) of
section 237 does not lay down what circumstances are to be proved before the
court and on that materials the court could act. But that does not mean that
mere allegations are sufficient. A court can act only on the materials placed
before it; and those materials should at least be such as to satisfy the court
that a deeper probe into the company’s affairs is desirable in the interests of
the company itself...”(p. 496)
The powers under section
237(a)(ii) were considered by Justice M.P. Menon in the decisions in P.
Sreenivasan’s case (supra). In that decision it was held as follows :
“The section conceives of three
situations where the Central Government can appoint inspectors for
investigations. The first is when the company itself declares that such an
investigation is necessary. The second is when the court makes an order. And
the third is when the Central Government forms an opinion that the
circumstances enumerated in clause (b) exist. The first is easy to understand :
when the company itself wants an investigation, the Central Government need not
stop to enquire why. The third can also be understood because when suo motu
action is proposed to be taken by the Government, it shall not act arbitrarily,
but only consistent with guidelines laid down. But what about the second
situation, where the court has to make an order ? Mr. Ramanatha Pillai for the
petitioner suggests that the power and the discretion of the court are
uncontrolled; it can direct an investigation whenever it suspects that all is
not well with the company. Whether the apprehensions of the court are true or
not is a matter to be found by the investigating inspectors, and the court is
not to insist on evidence. It appears to me that this is too broad a statement.
Investigation of the company’s affairs by the Department of Trade in England
has always been understood as a statutory exception to the rule in Foss v.
Harbottle [1843] 2 Hare 461 that the internal affairs of a company is a matter
for the majority, and a dissatisfied minority cannot seek outside interference.
The Companies Act provides for the protection of minorities in three ways (i)
by giving them a right to complain against oppression, (ii) by permitting them
to act on behalf of the company when it is wound up, as in the case of
misfeasance proceedings, and (iii) by enabling them to obtain remedies
indirectly through investigation. The Court’s discretion under section 237 is,
therefore, to be exercised only when it is satisfied that the minority has made
out at least a prina facie case that the rule in Foss v. Harbottle [1843] 2
Hare 461, requires relaxation in the interest of the company...” (p. 489)
We agree with the above
observation that before passing an order under section 237(a)(ii) the Court
should be satisfied that there are sufficient materials to show that affairs of
the company is in such a way that an investigation is necessary. We also note
that existence of circumstances described under section 237(b) may sway the
Court to pass an order under section 237(a)(ii) also. But we are of the opinion
that it is not always mandatory that the Court can pass a declaration only if
the conditions under section 237(b) exist. No such restrictions are placed by
the Legislature even though the Court will exercise its judicial discretion
only on sufficient materials and only after the court is convinced that situation
warrants an investigation in the interest of the company as a whole. We also
note that for a minority shareholder or a person legally interested in the
affairs of the company, may not always be possible to place all materials
alleged by him. But investigation is necessary to disclose something which is
not apparently visible. If all materials are already available, there is no
scope for further investigation. At the same time, existence of circumstances
must warrant reasonably so as to invoke jurisdiction of the Court. Power of the
Court under section 237(a)(ii) is not equal to the power of the CLB under
section 237(b). Unless any one of the circumstances as mentioned in section
237(b) exist, the CLB cannot order an investigation, but no such restriction is
placed on the Court.
5. As facts are concerned, according to the petitioner, he is an equity
shareholder of 5,16,000 equity shares of the company. The company was
incorporated on 12-12-1990 as a private limited company and the petitioner was
one of the promoters of the company. By resolution dated 5-1-1991 the company
resolved to take over the assets and liabilities of T.P. Muralidharan &
Associates and the amount outstanding in the credit of partners account, both
capital and current account as on 31-12-1990 should be taken as the amount
contributed by them towards share capital and necessary share certificates
should be issued to them. The company was engaged in the plantation of tea,
coffee, cardamom and pepper. It was converted into a public limited company on
28-1-1991. Thereafter it came out with public issue of 36 lakhs equity shares
of Rs. 10 each for cash at par. Subscriptions of shares were received about 14
times of the declared public issue. As per clause 11(A) of the articles of
association, the subscribers to the memorandum of association were appointed as
directors. The petitioner and the second appellant herein were subscribers of
the memorandum of association. The second appellant was appointed as the
managing director. (We are referring the second appellant as ‘managing
director’ in this judgment.) Though, as per clause 16 of the memorandum of
association, all directors except the managing director for the time being were
to retire from office at the first annual general meeting of the company, no
annual general meeting of the company has been held or convened in time. Though
a document styled as first annual report and accounts of 1991 was published on
31-2-1992, no such meeting of the company was held at 3 p.m. on 25-4-1992 at
the registered office of the company as mentioned in the notice attached to the
report and accounts of 1991. The managing director had been fraudulently
mismanaging the company in utter disregard of the interest of the shareholders
and was acting in an autocratic and oppressive manner. He began to create false
and fabricated documents with nefarious motive to oust the petitioner and other
members of the board of directors who opposed the misutilisation and
misappropriation of public funds. He created documents and minutes purporting
to remove the petitioner and others who opposed the mismanagement and
oppression. Though on the public, issue shares were oversubscribed to the tune
of 14 times and huge amounts were collected from the public, shares were
neither allotted properly nor amounts refunded to the applicants whose
application for shares were not accepted. It is understood that 1200 complaints
are filed before the jurisdictional court in Bombay against the managing
director by the subscribers to whom amounts were not refunded. It was also
stated that for non-convening of the meeting and not filing balance sheet for
the period 1992 to 1996 many proceedings are pending. Share value of the
company was depleted to nil from Rs. 70 and company has been de-listed in the
Stock Exchange. The managing director had misappropriated, musutilised and
mismanaged the funds collected through public issue and diverted the funds for
his private purposes ignoring the purpose for which the company was
incorporated. The authorities who are entrusted to supervise and control the
management of the company and to prevent misuse of public funds are not
discharging their duties properly.
6. The appellants opposed the above petition and submitted that there is no
locus standi to file the above petition as he was no more a shareholder at the
time of filing the petition. It was stated that he was the Chairman of the
company till 28-5-1993 only. General body meetings were held properly and the
excess amount collected for share capital was returned without delay. All
allegations against the second respondent as managing director of the company
was denied and it was also submitted that no case is made out by the petitioner
for an order of investigation by the court under section 237.
7. Before going into the merits of the case we may also consider the
argument regarding locus standi of the petitioner. It is not disputed that he
was the first chairman of the company. He owns 5,16,000 equity shares.
According to the company, the above shares were transferred. It is the
contention of the petitioner that documents were created by the appellant to
oust the petitioner and other members who opposed the misutilisation and
misappropriation of funds, especially received from public placement of shares.
This, according to him, is one of the matter to be investigated. Admittedly, he
was a promoter of the company. Counter statement filed by the third respondent
reveals further facts, which we will consider later, would show that the
petitioner is substantially interested in the affairs of the company. In such
circumstances, he cannot be turned as person having no manner of interest or
concern in the company as held by the Delhi High Court in V.V. Purie v. E.M.C.
Steel Ltd. [1980] 50 Comp. Cas. 127. As we have already held the question is
whether sufficient materials are there for the Court to hold prima facie that a
deeper investigation is required on the facts of the case and being a
discretionary remedy to be exercised with much caution, sufficiency of
materials has to be proved.
8. Based on the decision in Uunet India Ltd. v. I.C. Rao [1998] 93 Comp.
Cas. 41 (AP). It was argued that once the company court passes a discretionary
declaration under section 237(a)(ii) for appointment of an inspector for
investigation, it cannot set aside as it is not a judicial or a quasi-judicial
order and is not appealable. The court is not appointing inspectors by itself.
Order does not deter the rights of the parties. We are of the view that the
order is also appealable under section 483 of the Act. But when a discretionary
order under section 237(a)(ii) is passed by the proper Court with jurisdiction,
unless there is compelling ground appellate court will not interfere. In other
words, if there is no prima facie material at all before the Court and the
Court ordered investigation under section 237(a)(ii) as a fishing expedition,
appellate court will interfere. But it is settled law that if order passed
after considering the materials available, normally appellate court will not
interfere with the discretionary order passed by a competent court with
jurisdiction. Therefore, we may come to the facts of the case.
9. On behalf of the fourth respondent the Central Government (third
respondent) a counter affidavit was filed. Averments in the same really support
the petitioner’s allegations. With regard to shareholders register of the
petitioner, it is submitted in paragraph 2 of the counter affidavit that :
“... it is respectfully submitted
that Premier Plantation Ltd. was incorporated on 12-12-1990 as a private
limited company. The said company had became a public company under section 44
of the Companies Act with effect from 28-1-1991.... The memorandum and articles
of association of the said company show that the petitioner herein was one of the
promoters of the company. Since the said company was a listed company and since
the company was not regular in filing the returns in compliance of the
provisions of the Companies Act, 1956 at the third respondent’s office, the
respondents 3 and 4 are not posted with the facts regarding the shareholding
position of the petitioner. The petitioner has alleged that the shares held by
him had been fraudulently transferred by the second respondent...
It was stated in the prospectus
that the first respondent-company was incorporated by taking over the assets
and liabilities of a partnership firm, viz., T.P. Muralidharan & Associates
which was engaged in the plantation of Tea, Coffee, Cardamom and Pepper. It was
stated further that the firm was in operation for about 11 months before taken
over by the first-respondent-company and the operations of the firm during the
said period was profitable. As found from the prospectus, the total income of
the firm was Rs. 121 lakhs on which its net profit was Rs. 82 lakhs. It was
further stated in the prospectus that on taken over of the firm by the company,
the extent of the amounts standing at the credit of the partners capital
account was amounted to Rs. 240 lakhs and equity shares of Rs. 240 lakhs had
been allotted by the first-respondent-company to the partners of T.P.
Muralidharan & Associates as on 15-1-1991 is as under :
|
|
Name |
No. of Shares allotted
|
|
|
|
|
for other than cash |
|
|
1. |
M. Ibrahimkutty |
516000 |
|
|
2. |
T.P.Muralidharan |
|
516000 |
|
3. |
K.P. Basheer |
240000 |
|
|
4. |
C.M. Subair |
240000 |
|
|
5. |
Mrs. Sukumari |
210000 |
|
|
6. |
T.P. Ratnakumari |
210000 |
|
|
7. |
Mrs. Zahida |
210000 |
|
|
8. |
Smt. T.P. Kunhamina |
210000 |
|
|
9. |
Mr. Joseph Pudussery |
48000 |
|
|
|
|
2400000 |
|
|
|
|
|
|
[Emphasis supplied]”
10. With regard to the allegation that due to public issue of shares, Rs.
24.74 crores was over subscribed and it was not refunded, it is stated as
follows :
“. . . In terms of the public issue
every application for shares was to be for a minimum of 100 shares of its
multiples and a sum of Rs. 5 per share was to be paid towards application
money. The issue was oversubscribed and the total shares application money
received by the first-respondent-company was Rs. 27.90 crores as against the
share allotments made for Rs. 3.16 crores. Hence a sum of Rs. 24.74 crores had
to be refunded to the unsuccessful applicants. It is revealed from the
Director’s Report formed part of the balance sheet as at 31-3-1996 of the
first-respondent-company that only Rs. 1 crore had been paid for the estate to
Bank of Tokyo out of the capital of Rs. 3.60 crores raised through the public
issue and as a result, the possession of the Estate was restored to the Receiver
because of the non-payment of the balance money.” [Emphasis supplied]
11. With regard to non-conducting of annual general body meeting in time and
non-filing of the balance sheet, it is clear from the counter affidavit that
first annual general body meeting was held on 25-4-1992 and the second annual
general body meeting was held only on 19-3-1997 for adopting the accounts for
31-3-1993 to 31-3-1996, it is stated as follows :
“. . . As regards the averments
made in this paragraph that no annual general meeting of the
first-respondent-company had been convened till filing of this petition, it is
submitted that the audited financial statements filed at the third respondent’s
office show that the annual general meetings for adopting the said accounts
were held as follows :-
|
1. |
For B/S. as at |
31-12-1991 |
First AGM on 25-4-1992 at 3.00
PM |
|
2. |
-do- |
31-3-1993 |
Second AGM on 19-3-1997 at 10.30
AM |
|
3. |
-do- |
31-3-1994 |
Third AGM on 19-3-1997 at 11.30
AM |
|
4. |
-do- |
31-3-1995 |
Fourth AGM on 19-3-1997 at 2.00
PM |
|
5. |
-do- |
31-3-1996 |
Fifth AGM on 19-3-1997 at 3.00
PM |
Since the first-respondent-company
has a large number of shareholders as it had gone for public issue, the AG meetings
held on 19-3-1997 for adopting the accounts for 31-3-1993 to 31-3-1996 cannot
be believed to be properly held in compliance of the provisions of section 166
of the Companies Act...” [Emphasis supplied]
Again it was
stated as follows :
“The first-respondent was not
regular in filing the statutory returns with the third respondent as required
under the Companies Act. Prosecution cases were filed against the first and
second respondents for not filing the balance sheets of the first respondent at
the third respondent’s office. Cases were filed for not filing the balance
sheet as at 31-3-1993, 31-3-1994, 31-3-1995 in time. The second respondent had
filed the said balance sheets with the third respondent only on 23-5-1997. The
total number of cases filed by the third respondent against first respondent
and second respondent under various provisions of the Companies Act are as
follows :
|
No. of Prosecution |
Section
|
Results
|
|
3 |
220(3) |
Pleaded guilty |
|
3 |
162 |
-do- |
|
7 |
113(2) |
-do- |
|
74 |
73(2B) |
Pending. |
[Emphasis
supplied]”
12. With regard
to diversion of funds collected through public issues, it was stated as follows
:
“. . . But some of the mistakes
committed by the first and second respondents at the time of public issue
appear to be wilful and doubted to be for undue benefits. It was stated in the
prospectus that the refund will be made to the unsuccessful applicants by
cheque or demand draft drawn on any of bankers to the issue. The first
respondent had opened the refund account with ANZ Grindlays Bank, Mumbai - 1,
which was not include as bankers to the issue as per the prospectus. ANZ
Grindlays Bank has filed a suit, O.S. No. 431 of 1993 against the
first-respondent before the Sub-Court, Ernakulam; for recovery of a sum of Rs.
1,05,29,947.70. It was found from the statement of the refund that the
first-respondent had transferred a sum of Rs. 2,02,93,904 from the refund
account on 8-5-1992 for making payments to the following parties :-
(i) Issued
D.D. for Rs. 1 crore in favour of Bank of Tokyo.
(ii) Transferred
Rs. 75,00,000 to the account of Fairgrowth Financial Services Ltd., Bangalore.
(iii) Rs. 27,92,294 was issued to the
first-respondent by way of pay order and was encashed by it.” [Emphasis
supplied]
Further it was stated as follows :
“...the prospectus issued by the
first respondent on 18-12-1991 shows that the object of the issue was to
provide a part of the funds required for acquiring the tea estate along with
the processing plant which was being operated by the first-respondent on lease.
The total area proposed to be acquired was about 1900 acres. Cost of the
project was worked out as under :
Cost
of acquisition of tea estate : Rs. 265 lakhs
Development
expenditure : Rs. 15 lakhs
Plant
and machinery : Rs. 45 lakhs
But it is not clear from the
accounts of the company that the funds collected in the public issue had been
utilised as proposed in the prospectus. Further it was stated in the prospectus
that the first-respondent-company was incorporated by taking over the assets
and liabilities of the partnership firm, which was engaged in the plantation of
Tea, Coffee, Cardamom, Pepper etc. It was further mentioned that on the date of
taken over of the firm by the company, the amount available at the credit of
the partners in the capital account was Rs. 240 lakhs and equity shares of Rs.
240 lakhs had been allotted to the partners of the said firm. The firm had
leasehold rights in the properties possessed by it at the time of taken over by
the first-respondent-company. It is not clear from the records available with
the third respondent as to whether the lease had been transferred in favour of
the first-respondent. Annexure A-5 to the petition revealed that lease was not
transferred in the name of the company. In this connection it is to be noted
that the Central Bank of India had filed a suit O.S.No. 11 of 1994 for recovery
of the secured loans given to the partnership firm amounting to Rs. 327 lakhs.
It is stated in the auditors report of the first-respondent-company that the
Central Bank of India had not approved the taken over of the partnership firm
Muralidharan & Associates by the first respondent....” [Emphasis supplied]
13. In fact, paragraph 10 of the counter affidavit shows that third
respondent has also suggested an inspection under section 209A of the Act in
1997 itself as it needs detailed inspection. But it was not done because of the
pre-occupation of the Inspecting Officer and filing of this case and
investigation under section 237 will be more detail. A statement of about 70
criminal cases pending against the company under section 73(2B) of the Act was
also filed by the third respondent. Statements in the counter filed by the
third and fourth respondents show that it is a case where deeper investigation
is warranted. We are not reiterating the averments of the third respondent. The
Tribunal will be revealed the investigation. But there are prima facie
materials to order a declaration for investigation.
14. On these
prima facie facts, the learned Company Judge held as follows :
“All these facts and materials on
record clearly establish that there are sufficient materials available on
record in support of the various allegations made by the petitioner in the
petition regarding the mismanagement of the first respondent, diversion of
funds, failure to comply with the statutory obligations etc. warranting a
deeper probe into the affairs of company . . .”
On the basis of my finding that
there are sufficient materials on record warranting an order under section
237(a)(ii) of the Companies Act to direct the fourth respondent to investigate
into the affairs of the company as provided under section 237(a) of the
Companies Act. Hence this petition is allowed. The fourth respondent is
directed to appoint one or more competent inspectors to investigate the affairs
of the first-respondent-company under section 237(a) of the Companies Act and
to report within a specified time limit. . .”
Thus, the company court on consideration of
the materials found that a deeper probe is necessary and passed an order
declaring that affairs of the company ought to be investigated by an inspector
appointed by the Court itself.
15. We are of
the opinion that there are sufficient materials for the company judge to pass
the above order. In any event, when the company court passed the above order on
materials available in the case, on the facts of this case it cannot be stated
that an interference by the appellate court is warranted. This is an
appropriate case where discretionary order has been passed by the Court by
exercising powers under section 237(a)(ii). No interference is called for.
The appeal is dismissed.
[2002]
37 scl 804 (ker.)
High
Court of Kerala
v.
M. Ebrahimkutty
J. B.
Koshy and K. Padmanabhan Nair, JJ.
M.
F.A. No. 1273 of 1998 (B)
March 25,
2002
Section 237, read with section 10, of the
Companies Act, 1956 - Investigation of company’s affairs in other cases -
Whether ‘Court’ referred to in section 237 is court having jurisdiction under section
10 and no other court - Held, yes - Whether under section 237(a)(ii), court can
appoint directly inspector(s) to investigate into affairs of company - Held, no
- Whether court can only make a declaration that affairs of company ought to be
investigated by an inspector appointed by Central Government - Held, yes -
Whether power of Company Law Board under section 237(b) is a bar to exercise of
discretionary jurisdiction of court under section 237(a)(ii) - Held, no -
Whether mere allegations are insufficient to support an application to court to
act under section 237(1)(ii) and material placed before court should be such as
to satisfy court that a deeper probe into affairs of company is desirable in
interests of company itself - Held, yes - Whether court can pass a declaration
under section 237(a) for a fishing expedition - Held, no - Whether an isolated
instance of mismanagement is enough for court to declare that an investigation
is required - Held, no - Whether existence of circumstances described under
section 237(b) may sway court to pass an order under section 237(a)(ii) also
but it is not always mandatory that court can pass a declaration only if
conditions under section 237(b) exist - Held, yes - Whether power of court
under section 237(a)(ii) is equal to power of CLB under section 237(b) - Held,
no - Whether unlike CLB, there are no restrictions placed on Court even
though Court will exercise its judicial discretion only on sufficient materials
and only after it is convinced that situation warrants an investigation in
interest of company as a whole - Held, yes - Whether when a discretionary order
under section 237(a)(ii) is passed by proper court with jurisdiction, unless
there are compelling grounds appellate court will not interfere - Held, yes
Facts
The respondent was an equity
shareholder and the promoter of the appellant-company. He was also appointed as
the Chairman of the company. Subsequently, the company came out with public
issue which was subscribed in excess of 14 times the offer. Thereafter, the
respondent filed petition under section 237(a)(ii) before the Company Judge
seeking to direct the Central Government to appoint inspectors to investigate
into the affairs of the company. It was alleged that no first annual general
meeting of the company was held as convened in time.
The managing director, ‘M’ had
been fraudulently mismanaging the company in utter disregard of the interest of
the shareholders and was acting in an autocratic and oppressive manner. He
created false and fabricated documents with nefarious motive to oust the
respondent and other members of the board of directors who opposed the
misutilisation and misappropriation of public funds. He created documents and
minutes purporting to remove the petitioner and others who opposed the
mismanagement and oppression. Though on the public issue, shares were over
subscribed to the tune of 14 times and huge amounts were collected from the
public, shares were neither allotted properly nor amounts refunded to the
applicants whose application for shares were not accepted.
It was further alleged that 1200
complaints had been filed against ‘M’ by the subscribers to whom the amounts
were not refunded and that ‘M’ had misappropriated, misutilised and mismanaged
the funds collected through public issue and diverted the funds for his private
purposes. The company opposed the petition. The Company Judge found that the
submission of the Central Government supported the respondent’s allegations and
concluded that a deeper probe was necessary and passed an order declaring that
affairs of the company ought to be investigated by an inspector appointed by
the Court itself.
On appeal :
Held
By virtue of the power under
section 237(a)(ii), the Court cannot appoint directly inspector or inspectors
to investigate the affairs of the company but only make a declaration that the
affairs of the company ought to be investigated by an inspector appointed by
the Central Government. Once such an order is passed it is mandatory for the
Central Government to conduct such investigation by appointing competent
persons as inspectors.
The court referred to in section
237 in the court having jurisdiction under section 10 and no other Court or a
Court hearing writ petitions. Petition was filed before the competent company
court in the instant case. It is true that mere allegations are not sufficient
to support an application to the Court to act under section 237(a)(ii), and the
material placed before the Court should be such as to satisfy the Court that a
deeper probe into the affairs of the company is desirable in the interests of
the company itself. In other words, Court will not pass a declaration under
section 237(a) for a fishing expedition. But Court is entitled to see whether
on the basis of the material brought before the Court, a declaration is to be
made or not. An isolated instance of mismanagement is not enough for the Court
to declare that an investigation is required. The material placed before the
Court should be such as to satisfy the Court that a deeper probe into the
company affairs is desirable in the interests of the company itself. The
judicial conscience must be satisfied that there has been maladministration in
the affairs of the company warranting an investigation.
Existence of alternative remedy
also can be taken as a condition for refusing to exercise the discretionary
jurisdiction in appropriate cases, but it cannot operate as an absolute bar. No
where in section 237 it is stated that Court cannot be approached under section
237(a)(ii) before approaching CLB under section 237(b). It is true that after
amendment of section 237(b) (Companies Amendment Act, 1988 with effect from
31-5-1991), the CLB has power to direct the Central Government to appoint
inspectors to investigate into the affairs of the company if circumstances
mentioned in sub-clause (i), (ii) or (iii) of section 237(b) exist. But, the
CLB must be satisfied that such circumstances exist. Power of the CLB under
section 237(b) is not a bar in exercising the discretionary jurisdiction of the
Court under section 237(a)(ii). No such condition was made out by the
Legislature for exercising the jurisdiction by the company court under section
237(a)(ii) even though Court will take such a course only if circumstances
warrant.
Before passing an order under
section 237(a)(ii), Court should be satisfied that there are sufficient
materials to show that affairs of the company is in such a way that an
investigation is necessary. The existence of circumstances described under
section 237(b) may sway the Court to pass an order under section 237(a)(ii)
also. But it is not always mandatory that Court can pass a declaration only if
the conditions under section 237(b) exist. No such restrictions are placed by
the Legislature even though Court will exercise its judicial discretion only on
sufficient materials and only after the Court is convinced that situation
warrants an investigation in the interest of the company as a whole. For a
minority shareholder or a person legally interested in the affairs of the company
it may not always be possible to place all materials alleged by him. But
investigation is necessary to disclose something which is not apparently
visible. If all materials are already available, there is no scope for further
investigation. At the same time, existence of circumstances must warrant
reasonably so as to invoke jurisdiction of the Court. Power of the Court under
section 237(a)(ii) is not equal to the power of the CLB under section 237(b).
Unless any one of the circumstances as mentioned in section 237(b) exist, the
CLB cannot order an investigation, but no such restriction is placed on the
Court.
It was argued that once the
company court passes a discretionary declaration under section 237(a)(ii) for
appointment of an inspector for investigation, it cannot set aside as it is not
a judicial or a quasi-judicial order and is not appealable. The Court is not
appointing inspectors by itself. Order does not deter the rights of the
parties. The order is also appealable under section 483. But when a discretionary
order under section 237(a)(ii) is passed by the proper court with jurisdiction,
unless there is compelling grounds appellate court will not interfere. In other
words, if there is no prima facie material at all before the Court and Court
ordered investigation under section 237(a)(ii) as a fishing expedition,
appellate court will interfere. But it is settled law that if order is passed
after considering the materials available, normally appellate court will not
interfere with the discretionary order passed by a competent court with
jurisdiction.
In the instant case, there were
sufficient material for the Company Judge to pass the impugned order. In any
event, when the company court passed the impugned order on materials available
in the case, on the facts of the case it could not be stated that an
interference by appellate court was warranted. This was an appropriate case
where discretionary order had been passed by the court by exercising powers
under section 237(a)(ii). No interference was called for.
Cases referred to
Delhi Flour Mills Co. Ltd., In re
[1975] 45 Comp. Cas. 33 (
K.P. Dandapani for the Appellant. P.S. Sreedharan Pillai,
M.P. Mohammed Aslam, S. Abdul Salam and Tom K. Thomas for the
Respondent.
Judgment
J.B. Koshy, J.—First respondent in this appeal (referred in
this judgment as the petitioner for convenience) filed a petition under section
237 of the Companies Act, 1956 (‘the Act’) to direct the Central Government to
appoint one or more competent persons as inspectors by declaring that the
affairs of the Premier Plantations Ltd., first appellant (‘as company’) ought
to be investigated and to report thereon within a specified time limit. Before
going into the facts of the case we may first discuss the power of this Court
under section 237(a)(ii). Section 237 reads as follows :
“Investigation of company’s
affairs in other cases. - Without prejudice to its powers under section 235,
the Central Government—
(a) shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—
(i) the
company, by special resolution; or
(ii) the Court, by order, declares that the
affairs of the company ought to the investigated by an inspector appointed by
the Central Government; and
(b) may
do so if, in the opinion of the Company Law Board, there are circumstances
suggesting—
(i) that the business of the company is
being conducted with intent to defraud its creditors, oppressive of any of its members, or that the
company was formed for any fraudulent on unlawful purpose;
(ii) that persons concerned in the formation
of the company or the management of its affairs have in connection therewith
been guilty of fraud, misfeasance or other misconduct towards the company or
towards any of its members; or
(iii) that the members of the company have not
been given all the information with respect to its affairs which they might
reasonably expect, including information relating to the calculation of the
commission payable to a managing or other director or the manager, of the
company.”
A reading of the above section
will show that power given under section 237 to the Central Government is independent
and operates without prejudice to its powers under section 235 of the Act. But
under section 237(a) the Central Government can appoint an inspector for
investigating the affairs of the company only if the company passes a special
resolution for it or if an order is passed by the Court. Under section 237(b)
the CLB is also empowered to do so in certain special circumstances required
the Central Government to conduct investigation. By virtue of the power under
section 237(a)(ii), the Court cannot appoint directly inspector or inspectors
to investigate the affairs of the company but only make a declaration that the
affairs of the company ought to be investigated by an inspector appointed by
the Central Government. Once such an order is passed it is mandatory for the
Central Government to conduct such investigation by appointing competent
persons as inspectors—Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp. Cas. 33
(Delhi), and in Alembic Glass Industries Ltd., In re [1972] 42 Comp. Cas. 63
(Guj.).
2. The Court referred to in section 237 is the Court having jurisdiction
under section 10 of the Act and no other Court or a Court hearing writ
petitions. Petition was filed before the competent company court in this case.
It is true that mere allegations are not sufficient to support an application
to the court to act under section 237(a)(ii). The material placed before the
Court should be such as to satisfy the Court that a deeper probe into the
affairs of the company is desirable in the interests of the company itself as
held by this Court in P. Sreenivasan v. Yoosuf Sagar Abdullah & Sons (P.)
Ltd. [1983] 53 Comp. Cas. 485. In other words, the Court will not pass a
declaration under section 237(a) for a fishing expedition. But the Court is
entitled to see whether on the basis of the material brought before the Court,
declaration is to be made or not Modi Industries Ltd. v. Union of India [1982]
52 Comp. Cas. 589 (Delhi). An isolated instance of mismanagement is not enough
for the Court to declare that an investigation is required. The material placed
before the Court should be such as to satisfy the Court that a deeper probe
into the company affairs is desirable in the interests of the company itself.
The judicial conscience must be satisfied that there has been misadministration
in the affairs of the company warranting an investigation.
3. It was argued by the counsel for the appellants that in Safia Usman v.
Union of India [2000] CLC 110 a single Judge of this Court held that without
exhausting the remedy under section 237(b), the Court cannot exercise power
under section 237(a)(ii). A reading of this decision shows that proper relief
was not asked in the petition as required under section 237(a)(ii) and company
itself was not impleaded as a party. Existence of alternate remedy also can be
taken as a condition for refusing to exercise the discretionary jurisdiction in
appropriate cases, but it cannot operate as an absolute bar. Nowhere in section
237 it is stated that court cannot be approached under section 237(a)(ii)
before approaching the CLB under section 237(b). It is true that after
amendment of section 237(b). (Companies Amendment Act, 1988 with effect from
31-5-1991), the CLB has power to direct the Central Government to appoint
inspectors to investigate into the affairs of the company if circumstances
mentioned in sub-clause (i), (ii) or (iii) of section 237(b) exit. But, the CLB
must be satisfied that such circumstances exit as held by the Apex Court in
Barium Chemicals Ltd. v. CLB AIR 1967 SC 295. Before amendment, this power was
with the Central Government itself. See also Rohtas Industries Ltd. v. S.D.
Agarwal AIR 1969 SC 707. Power of the CLB under section 237(b) is not a bar in
exercising the discretionary jurisdiction of the Court under section 237(a)(ii).
No such condition was made out by the Legislature for exercising the
jurisdiction by the company court under section 237(a)(ii) even though Court
will take such a course only if circumstances warrant. Another decision pointed
out is the decision of the learned single Judge of this Court R.V. Mohammed v.
Trichur Heart Hospital Ltd. [2000] CLC 258. What was held in that decision is
the Court cannot order an investigation by appointing an inspector, but under
section 237(a)(ii) the Court can, if circumstances warrant, by an order makes a
declaration that the affairs of the company ought to be investigated by an
inspector appointed by the Central Government and on making such declaration
the Central Government has no option but has to appoint an inspector to
investigate the affairs of the company. No other hypertechnical view is
possible in view of the clear wording of section 237(a). As held by the Gujarat
High Court in Alembic Glass Industries Ltd.’s case (supra) :
“The Legislature has conferred
wide jurisdiction on this court to entertain a petition under section
237(a)(ii). In fact, the power of the Central Government to appoint an
inspector suo motu under section 237(b) is limited to its subjective
satisfaction in respect of one or other matters contained in three sub-clauses
of clause (b). The Legislature in its wisdom has not put any such condition
before the court can make an order, though the court may in its wisdom expect
prima facie proof of some of these conditions on the subjective satisfaction of
which the Central Government would appoint an inspector. While conferring
jurisdiction on the court to direct the Central Government to appoint an
inspector, the Legislature has not thought fit to circumscribe the discretion
or jurisdiction in any manner. It would, therefore, be utterly inappropriate to
curtail or circumscribe or fetter the jurisdiction of this court by reading
into the section something which is not there.” (p. 68)
4. Another decision pointed out by the learned counsel for the appellants
in the Apex Court decision in Sri Ramdas Motor Transport Ltd. v. Tadi
Adhinarayana Reddy [1997] 90 Comp. Cas. 383. There a writ petition was filed
seeking direction for investigation by the Central Bureau of Investigation. The
Apex Court held that in view of the specific remedies under sections 43A, 234,
235, 237, 397 and 398 of the Act, a writ petition will not lie. It is not a
matter of public interest and remedy available under the Act shall be availed
of. Here the petitioner has approached under section 237 and it cannot be held
that petition is not maintainable. Scope and power of company court under
section 237(a)(ii) was not discussed in that decision. Ofcourse under section
237(a)(ii), Court’s would insist upon solid factual base and mere allegations
are insufficient. It was held by this court in Mrs. U.A. Sumathy v. Dig Vijay
Chit Fund (P.) Ltd. [1983] 53 Comp. Cas. 493, that :
“... No doubt, clause (a)(ii) of
section 237 does not lay down what circumstances are to be proved before the
court and on that materials the court could act. But that does not mean that
mere allegations are sufficient. A court can act only on the materials placed
before it; and those materials should at least be such as to satisfy the court
that a deeper probe into the company’s affairs is desirable in the interests of
the company itself...”(p. 496)
The powers under section
237(a)(ii) were considered by Justice M.P. Menon in the decisions in P.
Sreenivasan’s case (supra). In that decision it was held as follows :
“The section conceives of three
situations where the Central Government can appoint inspectors for
investigations. The first is when the company itself declares that such an
investigation is necessary. The second is when the court makes an order. And
the third is when the Central Government forms an opinion that the
circumstances enumerated in clause (b) exist. The first is easy to understand :
when the company itself wants an investigation, the Central Government need not
stop to enquire why. The third can also be understood because when suo motu
action is proposed to be taken by the Government, it shall not act arbitrarily,
but only consistent with guidelines laid down. But what about the second
situation, where the court has to make an order ? Mr. Ramanatha Pillai for the
petitioner suggests that the power and the discretion of the court are
uncontrolled; it can direct an investigation whenever it suspects that all is
not well with the company. Whether the apprehensions of the court are true or
not is a matter to be found by the investigating inspectors, and the court is
not to insist on evidence. It appears to me that this is too broad a statement.
Investigation of the company’s affairs by the Department of Trade in England
has always been understood as a statutory exception to the rule in Foss v.
Harbottle [1843] 2 Hare 461 that the internal affairs of a company is a matter
for the majority, and a dissatisfied minority cannot seek outside interference.
The Companies Act provides for the protection of minorities in three ways (i)
by giving them a right to complain against oppression, (ii) by permitting them
to act on behalf of the company when it is wound up, as in the case of
misfeasance proceedings, and (iii) by enabling them to obtain remedies
indirectly through investigation. The Court’s discretion under section 237 is,
therefore, to be exercised only when it is satisfied that the minority has made
out at least a prina facie case that the rule in Foss v. Harbottle [1843] 2
Hare 461, requires relaxation in the interest of the company...” (p. 489)
We agree with the above
observation that before passing an order under section 237(a)(ii) the Court
should be satisfied that there are sufficient materials to show that affairs of
the company is in such a way that an investigation is necessary. We also note
that existence of circumstances described under section 237(b) may sway the
Court to pass an order under section 237(a)(ii) also. But we are of the opinion
that it is not always mandatory that the Court can pass a declaration only if
the conditions under section 237(b) exist. No such restrictions are placed by
the Legislature even though the Court will exercise its judicial discretion
only on sufficient materials and only after the court is convinced that
situation warrants an investigation in the interest of the company as a whole.
We also note that for a minority shareholder or a person legally interested in
the affairs of the company, may not always be possible to place all materials
alleged by him. But investigation is necessary to disclose something which is
not apparently visible. If all materials are already available, there is no
scope for further investigation. At the same time, existence of circumstances
must warrant reasonably so as to invoke jurisdiction of the Court. Power of the
Court under section 237(a)(ii) is not equal to the power of the CLB under
section 237(b). Unless any one of the circumstances as mentioned in section
237(b) exist, the CLB cannot order an investigation, but no such restriction is
placed on the Court.
5. As facts are concerned, according to the petitioner, he is an equity
shareholder of 5,16,000 equity shares of the company. The company was
incorporated on 12-12-1990 as a private limited company and the petitioner was one
of the promoters of the company. By resolution dated 5-1-1991 the company
resolved to take over the assets and liabilities of T.P. Muralidharan &
Associates and the amount outstanding in the credit of partners account, both
capital and current account as on 31-12-1990 should be taken as the amount
contributed by them towards share capital and necessary share certificates
should be issued to them. The company was engaged in the plantation of tea,
coffee, cardamom and pepper. It was converted into a public limited company on
28-1-1991. Thereafter it came out with public issue of 36 lakhs equity shares
of Rs. 10 each for cash at par. Subscriptions of shares were received about 14
times of the declared public issue. As per clause 11(A) of the articles of association,
the subscribers to the memorandum of association were appointed as directors.
The petitioner and the second appellant herein were subscribers of the
memorandum of association. The second appellant was appointed as the managing
director. (We are referring the second appellant as ‘managing director’ in this
judgment.) Though, as per clause 16 of the memorandum of association, all
directors except the managing director for the time being were to retire from
office at the first annual general meeting of the company, no annual general
meeting of the company has been held or convened in time. Though a document
styled as first annual report and accounts of 1991 was published on 31-2-1992,
no such meeting of the company was held at 3 p.m. on 25-4-1992 at the
registered office of the company as mentioned in the notice attached to the
report and accounts of 1991. The managing director had been fraudulently
mismanaging the company in utter disregard of the interest of the shareholders
and was acting in an autocratic and oppressive manner. He began to create false
and fabricated documents with nefarious motive to oust the petitioner and other
members of the board of directors who opposed the misutilisation and
misappropriation of public funds. He created documents and minutes purporting
to remove the petitioner and others who opposed the mismanagement and
oppression. Though on the public, issue shares were oversubscribed to the tune
of 14 times and huge amounts were collected from the public, shares were neither
allotted properly nor amounts refunded to the applicants whose application for
shares were not accepted. It is understood that 1200 complaints are filed
before the jurisdictional court in Bombay against the managing director by the
subscribers to whom amounts were not refunded. It was also stated that for
non-convening of the meeting and not filing balance sheet for the period 1992
to 1996 many proceedings are pending. Share value of the company was depleted
to nil from Rs. 70 and company has been de-listed in the Stock Exchange. The
managing director had misappropriated, musutilised and mismanaged the funds
collected through public issue and diverted the funds for his private purposes
ignoring the purpose for which the company was incorporated. The authorities
who are entrusted to supervise and control the management of the company and to
prevent misuse of public funds are not discharging their duties properly.
6. The appellants opposed the above petition and submitted that there is no
locus standi to file the above petition as he was no more a shareholder at the
time of filing the petition. It was stated that he was the Chairman of the
company till 28-5-1993 only. General body meetings were held properly and the
excess amount collected for share capital was returned without delay. All
allegations against the second respondent as managing director of the company
was denied and it was also submitted that no case is made out by the petitioner
for an order of investigation by the court under section 237.
7. Before going into the merits of the case we may also consider the
argument regarding locus standi of the petitioner. It is not disputed that he
was the first chairman of the company. He owns 5,16,000 equity shares.
According to the company, the above shares were transferred. It is the
contention of the petitioner that documents were created by the appellant to
oust the petitioner and other members who opposed the misutilisation and
misappropriation of funds, especially received from public placement of shares.
This, according to him, is one of the matter to be investigated. Admittedly, he
was a promoter of the company. Counter statement filed by the third respondent
reveals further facts, which we will consider later, would show that the
petitioner is substantially interested in the affairs of the company. In such
circumstances, he cannot be turned as person having no manner of interest or
concern in the company as held by the Delhi High Court in V.V. Purie v. E.M.C.
Steel Ltd. [1980] 50 Comp. Cas. 127. As we have already held the question is
whether sufficient materials are there for the Court to hold prima facie that a
deeper investigation is required on the facts of the case and being a
discretionary remedy to be exercised with much caution, sufficiency of materials
has to be proved.
8. Based on the decision in Uunet India Ltd. v. I.C. Rao [1998] 93 Comp.
Cas. 41 (AP). It was argued that once the company court passes a discretionary
declaration under section 237(a)(ii) for appointment of an inspector for
investigation, it cannot set aside as it is not a judicial or a quasi-judicial
order and is not appealable. The court is not appointing inspectors by itself.
Order does not deter the rights of the parties. We are of the view that the
order is also appealable under section 483 of the Act. But when a discretionary
order under section 237(a)(ii) is passed by the proper Court with jurisdiction,
unless there is compelling ground appellate court will not interfere. In other
words, if there is no prima facie material at all before the Court and the
Court ordered investigation under section 237(a)(ii) as a fishing expedition,
appellate court will interfere. But it is settled law that if order passed
after considering the materials available, normally appellate court will not
interfere with the discretionary order passed by a competent court with
jurisdiction. Therefore, we may come to the facts of the case.
9. On behalf of the fourth respondent the Central Government (third
respondent) a counter affidavit was filed. Averments in the same really support
the petitioner’s allegations. With regard to shareholders register of the
petitioner, it is submitted in paragraph 2 of the counter affidavit that :
“... it is respectfully submitted
that Premier Plantation Ltd. was incorporated on 12-12-1990 as a private
limited company. The said company had became a public company under section 44
of the Companies Act with effect from 28-1-1991.... The memorandum and articles
of association of the said company show that the petitioner herein was one of
the promoters of the company. Since the said company was a listed company and
since the company was not regular in filing the returns in compliance of the
provisions of the Companies Act, 1956 at the third respondent’s office, the
respondents 3 and 4 are not posted with the facts regarding the shareholding
position of the petitioner. The petitioner has alleged that the shares held by
him had been fraudulently transferred by the second respondent...
It was stated in the prospectus
that the first respondent-company was incorporated by taking over the assets
and liabilities of a partnership firm, viz., T.P. Muralidharan & Associates
which was engaged in the plantation of Tea, Coffee, Cardamom and Pepper. It was
stated further that the firm was in operation for about 11 months before taken
over by the first-respondent-company and the operations of the firm during the
said period was profitable. As found from the prospectus, the total income of
the firm was Rs. 121 lakhs on which its net profit was Rs. 82 lakhs. It was
further stated in the prospectus that on taken over of the firm by the company,
the extent of the amounts standing at the credit of the partners capital
account was amounted to Rs. 240 lakhs and equity shares of Rs. 240 lakhs had
been allotted by the first-respondent-company to the partners of T.P.
Muralidharan & Associates as on 15-1-1991 is as under :
|
|
Name |
No. of Shares allotted
|
|
|
|
|
for other than cash |
|
|
1. |
M. Ibrahimkutty |
516000 |
|
|
2. |
T.P.Muralidharan |
|
516000 |
|
3. |
K.P. Basheer |
240000 |
|
|
4. |
C.M. Subair |
240000 |
|
|
5. |
Mrs. Sukumari |
210000 |
|
|
6. |
T.P. Ratnakumari |
210000 |
|
|
7. |
Mrs. Zahida |
210000 |
|
|
8. |
Smt. T.P. Kunhamina |
210000 |
|
|
9. |
Mr. Joseph Pudussery |
48000 |
|
|
|
|
2400000 |
|
|
|
|
|
|
[Emphasis supplied]”
10. With regard to the allegation that due to public issue of shares, Rs.
24.74 crores was over subscribed and it was not refunded, it is stated as
follows :
“. . . In terms of the public
issue every application for shares was to be for a minimum of 100 shares of its
multiples and a sum of Rs. 5 per share was to be paid towards application
money. The issue was oversubscribed and the total shares application money
received by the first-respondent-company was Rs. 27.90 crores as against the
share allotments made for Rs. 3.16 crores. Hence a sum of Rs. 24.74 crores had
to be refunded to the unsuccessful applicants. It is revealed from the
Director’s Report formed part of the balance sheet as at 31-3-1996 of the
first-respondent-company that only Rs. 1 crore had been paid for the estate to
Bank of Tokyo out of the capital of Rs. 3.60 crores raised through the public
issue and as a result, the possession of the Estate was restored to the
Receiver because of the non-payment of the balance money.” [Emphasis supplied]
11. With regard to non-conducting of annual general body meeting in time and
non-filing of the balance sheet, it is clear from the counter affidavit that first
annual general body meeting was held on 25-4-1992 and the second annual general
body meeting was held only on 19-3-1997 for adopting the accounts for 31-3-1993
to 31-3-1996, it is stated as follows :
“. . . As regards the averments
made in this paragraph that no annual general meeting of the
first-respondent-company had been convened till filing of this petition, it is
submitted that the audited financial statements filed at the third respondent’s
office show that the annual general meetings for adopting the said accounts
were held as follows :-
|
1. |
For B/S. as at |
31-12-1991 |
First AGM on 25-4-1992 at 3.00
PM |
|
2. |
-do- |
31-3-1993 |
Second AGM on 19-3-1997 at 10.30
AM |
|
3. |
-do- |
31-3-1994 |
Third AGM on 19-3-1997 at 11.30
AM |
|
4. |
-do- |
31-3-1995 |
Fourth AGM on 19-3-1997 at 2.00
PM |
|
5. |
-do- |
31-3-1996 |
Fifth AGM on 19-3-1997 at 3.00
PM |
Since the first-respondent-company
has a large number of shareholders as it had gone for public issue, the AG
meetings held on 19-3-1997 for adopting the accounts for 31-3-1993 to 31-3-1996
cannot be believed to be properly held in compliance of the provisions of
section 166 of the Companies Act...” [Emphasis supplied]
Again it was
stated as follows :
“The first-respondent was not
regular in filing the statutory returns with the third respondent as required
under the Companies Act. Prosecution cases were filed against the first and
second respondents for not filing the balance sheets of the first respondent at
the third respondent’s office. Cases were filed for not filing the balance
sheet as at 31-3-1993, 31-3-1994, 31-3-1995 in time. The second respondent had
filed the said balance sheets with the third respondent only on 23-5-1997. The
total number of cases filed by the third respondent against first respondent
and second respondent under various provisions of the Companies Act are as
follows :
|
No. of Prosecution |
Section
|
Results
|
|
3 |
220(3) |
Pleaded guilty |
|
3 |
162 |
-do- |
|
7 |
113(2) |
-do- |
|
74 |
73(2B) |
Pending. |
[Emphasis
supplied]”
12. With regard
to diversion of funds collected through public issues, it was stated as follows
:
“. . . But some of the mistakes
committed by the first and second respondents at the time of public issue
appear to be wilful and doubted to be for undue benefits. It was stated in the
prospectus that the refund will be made to the unsuccessful applicants by
cheque or demand draft drawn on any of bankers to the issue. The first
respondent had opened the refund account with ANZ Grindlays Bank, Mumbai - 1,
which was not include as bankers to the issue as per the prospectus. ANZ
Grindlays Bank has filed a suit, O.S. No. 431 of 1993 against the
first-respondent before the Sub-Court, Ernakulam; for recovery of a sum of Rs.
1,05,29,947.70. It was found from the statement of the refund that the
first-respondent had transferred a sum of Rs. 2,02,93,904 from the refund
account on 8-5-1992 for making payments to the following parties :-
(i) Issued
D.D. for Rs. 1 crore in favour of Bank of Tokyo.
(ii) Transferred
Rs. 75,00,000 to the account of Fairgrowth Financial Services Ltd., Bangalore.
(iii) Rs. 27,92,294 was issued to the
first-respondent by way of pay order and was encashed by it.” [Emphasis
supplied]
Further it was stated as follows :
“...the prospectus issued by the
first respondent on 18-12-1991 shows that the object of the issue was to
provide a part of the funds required for acquiring the tea estate along with
the processing plant which was being operated by the first-respondent on lease.
The total area proposed to be acquired was about 1900 acres. Cost of the
project was worked out as under :
Cost
of acquisition of tea estate : Rs. 265 lakhs
Development
expenditure : Rs. 15 lakhs
Plant
and machinery : Rs. 45 lakhs
But it is not clear from the
accounts of the company that the funds collected in the public issue had been
utilised as proposed in the prospectus. Further it was stated in the prospectus
that the first-respondent-company was incorporated by taking over the assets
and liabilities of the partnership firm, which was engaged in the plantation of
Tea, Coffee, Cardamom, Pepper etc. It was further mentioned that on the date of
taken over of the firm by the company, the amount available at the credit of
the partners in the capital account was Rs. 240 lakhs and equity shares of Rs.
240 lakhs had been allotted to the partners of the said firm. The firm had
leasehold rights in the properties possessed by it at the time of taken over by
the first-respondent-company. It is not clear from the records available with
the third respondent as to whether the lease had been transferred in favour of
the first-respondent. Annexure A-5 to the petition revealed that lease was not
transferred in the name of the company. In this connection it is to be noted
that the Central Bank of India had filed a suit O.S.No. 11 of 1994 for recovery
of the secured loans given to the partnership firm amounting to Rs. 327 lakhs.
It is stated in the auditors report of the first-respondent-company that the
Central Bank of India had not approved the taken over of the partnership firm
Muralidharan & Associates by the first respondent....” [Emphasis supplied]
13. In fact, paragraph 10 of the counter affidavit shows that third
respondent has also suggested an inspection under section 209A of the Act in
1997 itself as it needs detailed inspection. But it was not done because of the
pre-occupation of the Inspecting Officer and filing of this case and investigation
under section 237 will be more detail. A statement of about 70 criminal cases
pending against the company under section 73(2B) of the Act was also filed by
the third respondent. Statements in the counter filed by the third and fourth
respondents show that it is a case where deeper investigation is warranted. We
are not reiterating the averments of the third respondent. The Tribunal will be
revealed the investigation. But there are prima facie materials to order a
declaration for investigation.
14. On these
prima facie facts, the learned Company Judge held as follows :
“All these facts and materials on
record clearly establish that there are sufficient materials available on
record in support of the various allegations made by the petitioner in the
petition regarding the mismanagement of the first respondent, diversion of
funds, failure to comply with the statutory obligations etc. warranting a
deeper probe into the affairs of company . . .”
On the basis of my finding that
there are sufficient materials on record warranting an order under section
237(a)(ii) of the Companies Act to direct the fourth respondent to investigate
into the affairs of the company as provided under section 237(a) of the
Companies Act. Hence this petition is allowed. The fourth respondent is
directed to appoint one or more competent inspectors to investigate the affairs
of the first-respondent-company under section 237(a) of the Companies Act and
to report within a specified time limit. . .”
Thus, the company court on consideration of
the materials found that a deeper probe is necessary and passed an order
declaring that affairs of the company ought to be investigated by an inspector
appointed by the Court itself.
15. We are of
the opinion that there are sufficient materials for the company judge to pass
the above order. In any event, when the company court passed the above order on
materials available in the case, on the facts of this case it cannot be stated
that an interference by the appellate court is warranted. This is an appropriate
case where discretionary order has been passed by the Court by exercising
powers under section 237(a)(ii). No interference is called for.
The appeal is dismissed.
[1972] 42 Comp. Cas. 63 (Guj.)
HIGH COURT OF
Alembic Glass Industries Ltd., In re
D.A. Desai, J.
COMPANY PETITION NO. 11 OF 1971
August 2, 1971
S.N. Shelat for the Petitioner.
J.M. Thakore and with
G.N. Shah for the Respondent.
JUDGMENT
D.A.
Desai, J.—The
petitioner is a shareholder of Alembic Glass Industries Ltd.,
"(i) to pass appropriate order or direction
regarding the investigation to be made by appointing investigator and/or
auditors to inquire into and report regarding the affairs and the conduct of
the company including the transaction of purchases since 1966 ; and
(ii) to
direct the Central Government to order investigation under section 237 of the
Companies Act."
Number
of allegations have been made in the petition alleging that the business of the
company is being conducted with intent to defraud its creditors, members or any
other persons and is otherwise fraudulent and in a manner oppressive to its
members. The allegations can be broadly summarised under three heads:
(i) that the managing agents have without
the permission or sanction of the board of directors purchased capital assets
in excess of the prescribed limit and also sold the capital assets in excess of
the prescribed limits, such as purchase of aeroplane, setting up of the plant
at Bangalore and purchase and sale of one Ambassador car:
(ii) flagrant violation of the provisions
contained in section 372 by purchasing the shares of Alembic Chemical Works
Company Ltd. and M/s. Dharak Ltd.; and
(iii) purchases at inflated price from certain
specified firms in which Mr. Ramanbhai B. Amin, a partner of the firm of
managing agents, namely, Nishechi Services, has vital interest. The petitioner
has further stated that he has brought all these malpractices to the notice of
the Central Government and requested the Central Government to take action
under section 237 of the Companies Act to appoint an inspector to investigate
into the affairs of the company, but the Central Government has neither taken
any action nor cared to inform him what action it proposed to take in respect
of the allegations made by the petitioner in his applications and letters sent
by him to the Central Government. The petitioner has stated that therefore he
has been constrained to file this petition under section 237(a)(ii) for the
aforementioned reliefs.
On
the petition being presented a notice prior to its admission was ordered to be
issued to the company in response to which the respondent appeared and filed a
short affidavit, inter alia, contending that this court has no jurisdiction to
entertain the petition under section 237(a)(ii) of the Companies Act.
Section
237 of the Companies Act reads as under :
"237.
Investigation of company's affairs in other cases.—Without prejudice to its
powers under section 235, the Central Government—
(a) shall appoint one or more competent persons as
inspectors to investigate the affairs of a company and to report thereon in
such manner as the Central Government may direct, if—
(i) the
company, by special resolution ; or
(ii) the court, by order, declares that the
affairs of the company ought to be investigated by an inspector appointed by
the Central Government; and
(b) may
do so if, in the opinion of the Central Government, there are circumstances
suggesting—
(i) that the business of the company is
being conducted with intent to defraud its creditors, members or any other
persons, or otherwise for a fraudulent or unlawful purpose, or in a manner
oppressive of any of its members, or that the company was formed for any
fraudulent or unlawful purpose; or
(ii) that persons concerned in the formation of
the company or the management of its affairs have in connection therewith been
guilty of fraud, misfeasance or other misconduct towards the company or towards
any of its members ; or
(iii) that the members of the company have not
been given all the information with respect to its affairs which they might
reasonably expect, including information relating to the calculation of the
commission payable to a managing or other director, the managing agent, the
secretaries and treasurers, or the manager, of the company."
Group
of sections commencing from section 235 and ending with section 251 are grouped
together under the heading "Investigation". Section 235 confers power
upon the Central Government to appoint an inspector to investigate the affairs
of any company and to report thereon in such manner as the Central Government
may direct in the circumstances mentioned in the section, namely:
(a) in the case of a company having a share
capital, on the application either of not less than 200 members or of members holding
not less than one-tenth of the total voting power therein ;
(b) in the case of a company not having a
share capital, on the application of not less than one-fifth in number of the
persons on the company's register of members ;
(c) in the case of any company, on a report
by the Registrar under sub-section (6) or sub-section (7) read with sub-section
(6) of section 234.
Section
236 prescribes the manner of making the application as provided for by section 235.
Under section 237, obligation is cast on the Central Government to appoint an
inspector to investigate the affairs of the company if—
(i) the
company adopts a special resolution to that effect and conveys it to the
Central Government; or
(ii) the court by its order directs the
Central Government to appoint an inspector to investigate into the affairs of a
company.
Clause
(b) of section 237 enables the Central Government to suo motu appoint an
inspector to investigate the affairs of a company if the conditions set out in one or other of the sub-clauses of clause (b)
are satisfied. By the present petition, the petitioner has invoked the
jurisdiction of this court under section 237(a)(ii).
The learned
Advocate-General appearing for the company contended that this court has no
jurisdiction to appoint an inspector to investigate the affairs of the company
and, therefore, prayer (a) in the petition is beyond the jurisdiction of this
court. It must straightaway be conceded that under section 237 this court has
no jurisdiction to appoint an inspector to investigate the affairs of any
company. Looking to the scheme of the section: commencing from section 235, it
is crystal clear that the power to appoint an inspector to investigate the
affairs of any company vests in the Central Government. The Central Government
can be moved to exercise that power in the manner provided for in section 235
by a requisite number of members or by the Registrar. Even in that case, the
Central Government is not bound to appoint an inspector. Clause (b) of section
237 enables the Central Government to appoint an inspector to investigate the
affairs of the company suo motu. However, that power can be exercised on the
subjective satisfaction of the Central Government with regard to all or any of
the matters set out in the three sub-clauses of clause (b). The Central
Government is under an obligation to appoint an inspector if one or the other
conditions specified in clause (a) of section 237 is satisfied. Two conditions
are :
(i) that the
company adopts a special resolution to that effect; or
(ii) that the
court by its order directs the Central Government to appoint an inspector.
Section 237 leaves no room
for doubt that this court exercising jurisdiction under the Companies Act has
no power to appoint an inspector. Therefore, prayer (a) by which the petitioner
wants this court to appoint an inspector cannot be granted.
It was next urged that
prayer (b) is premature. By prayer (b) the petitioner wants this court to
direct the Central Government to appoint an inspector to investigate the
affairs of the company. As the first limb of the argument it was urged that
even according to the allegations made by the petitioner he has already
approached the Central Government to appoint an inspector and as that
application has not been finally decided, this court should not proceed to make
any order under section 237(a)(ii) even if it has jurisdiction to pass such
order. It is undoubtedly true that the petitioner has approached the Central Government
and has sent various applications, letters and affidavits requesting the
Central Government to take action against the company in exercise of the powers
conferred upon the Central Government under section 237(b). But at this stage,
on the demur, the question is : whether this court has or has no jurisdiction
to entertain an application under section 237(a)(ii) and in an appropriate case
to make an order
directing the Central Government to appoint an inspector. That the court, in
its wisdom, in a given case, may not pass an order under section 237(a)(ii) is
entirely a different matter. The larger question argued was that this court
cannot entertain a petition simpliciter under section 237 (a)(ii) unless the
party has first approached the Central Government drawing its attention to
various malpractices committed in the administration of the affairs of the
company and after the Central Government declines to take action under section
237(b). This will immediately raise a question : whether the powers conferred
upon the court under section 237(a)(ii) can only be exercised after the Central
Government has declined to exercise powers under section 237(b). In other
words, is it obligatory or incumbent upon a party before approaching this court
under section 237(a)(ii) to first approach the Central Government and only
after the Central Government declines to take any action, this court's
jurisdiction can be invoked and the court can exercise jurisdiction under
section 237(a)(ii). The construction of clause (a) of section 237 suggested by
the learned Advocate-General would make the approach to the Central Government
under section 237(b) a condition precedent to the court exercising jurisdiction
under section 237(a)(ii). There is no warrant for this construction. There is
nothing in the language of section 237 which indicates that a person invoking
the court's jurisdiction under section 237(a)(ii) must, first, as a necessary
condition before coming to the court, approach the Central Government, invite
the attention of the Central Government to the various malpractices committed
in the administration of the affairs of the company, and only after the Central
Government declines to take any action in the matter, that he can invoke this
court's jurisdiction under section 237(a)(ii). That would be, in fact, putting
a fetter upon the power of this court, which the section does not provide, nor
should the court by necessary implication read into section 237 any such fetter
on the power of this court. Let it be distinctly understood that the court may
in a given case decline to exercise jurisdiction under section 237(a)(ii) till
the Central Government disposes of the matter pending before it under section
237(b); but that is entirely different from saying that no one can come to this
court unless he first approaches the Central Government under section 237(b).
That would be unduly limiting the jurisdiction of the court which the
legislature has not thought fit to put, to delimit or circumscribe.
The
language of section 237(a) is clear and unambiguous and admits of no
construction by which any fetter or limit can be put on the jurisdiction of
this court to entertain a petition for giving a direction to the Central
Government to appoint an inspector to investigate the affairs of the company.
Once the court makes an order, it is obligatory upon the Central Government to
appoint an inspector. There are three distinct methods by which a party
desirous of getting the affairs of a company investigated may get an inspector
appointed by the Central Government. If the requisite number of members are
available, application can be made under section 235. Any one who is unable to
collect the requisite number of members may bring to the notice of the Central
Government various malpractices committed in the administration of the affairs
of a company and the Central Government may act suo motu under section 237(b).
In the aforementioned two cases the question of appointment of an inspector is
within the discretion of the Central Government. But there is a third mode
legislatively recognised and mandatory in character by which an inspector can
be got appointed by the Central Government and that is where the special
resolution to that effect is adopted by the company, or where the court makes
an order to that effect.
The
legislature has conferred wide jurisdiction on this court to entertain a
petition under section 237(a)(ii). In fact, the power of the Central Government
to appoint an inspector suo motu under section 237(b) is limited to its subjective
satisfaction in respect of one or other matters contained in three sub-clauses
of clause (b). The legislature in its wisdom has not put any such condition
before the court can make an order, though the court may in its wisdom expect
prima facie proof of some of these conditions on the subjective satisfaction of
which the Central Government would appoint an inspector before directing the
Central Government to appoint an inspector. While conferring jurisdiction on
the court to direct the Central Government to appoint an inspector, the
legislature has not thought fit to circumscribe the discretion or jurisdiction
in any manner. It would, therefore, be utterly inappropriate to curtail or
circumscribe or fetter the jurisdiction of this court by reading into the
section something which is not there.
The
learned Advocate-General, however, in support of the construction canvassed for
by him, urged that section 237 must be read subject to section 235 or section
237(b). It was urged that only if a requisite number of members gathered
together as required by section 235 and approached the Central Government or
anyone can draw the attention of the Centra] Government to the affairs of the
company under section 237(b), on the Central Government being satisfied about one
or the other thing set out in the three clauses of section 237(b), the Central
Government may appoint an inspector. It is, therefore, not possible to conceive
that the legislature would confer such wide jurisdiction upon the court under
section 237(a)(ii), as to enable anyone to bypass these two sections. It was
also urged that wherever the legislature wanted a single person to come to the
court to take action against the company, it has in terms so provided. But, in
all other cases, action against the company being representative action, one or
the other individual should not be permitted to invoke the jurisdiction of the
court which would have the tendency to open the flood-gates of litigation. As a
corollary, it was urged that a petition under sections 397 and 398 for reliefs
against oppression of minority shareholders can only be filed if and only if
certain number of members gather together and come to the court as required by
section 399. Approaching the matter from this angle and proceeding further, it
was urged that it would not be appropriate to read section 237 in isolation but
it must be read subject to section 235. The scheme of sections 235, 236 and 237
is quite clear and unambiguous. The requisite number of members can request the
Central Government to appoint an inspector. The legislature also conferred
power upon the Central Government to appoint an inspector suo motu. But the
legislature also thought fit to confer jurisdiction on the court to examine the
allegations against a company even at the instance of a single shareholder,
and, if satisfied, to direct the Central Government to appoint an inspector. By
putting this construction, which appears to be grammatically correct and in
consonance with the spirit of section 237, there should be no apprehension of
opening the flood-gates of litigation. Whenever the court directs a thing to be
done, there is judicious investigation of allegations by a judicially trained
mind and reason is the hallmark of judicial approach, fairplay and moderation.
A party who comes to this court requesting the court to direct the Central
Government to appoint an inspector will have to satisfy the judicial conscience
that there has been such mal-administration in the affairs of the company, and
that some one should at least look into the malpractices. In my opinion, the
apprehension appears to be unfounded. Therefore, it appears that neither
section 235 nor section 237 controls section 237(a)(ii) and this court has
jurisdiction to entertain a petition under section 237(a)(ii) notwithstanding
the fact that the party invoking the jurisdiction of this court has not
approached the Central Government and notwithstanding the fact that the Central
Government has taken no action on such an application already made to it. The
petition, therefore, cannot be said to be premature or liable to be thrown out
on this ground.
The
learned Advocate-General invited my attention to the practice in England in
respect of an application made under section 165 which is a corresponding
section in the English Companies Act, 1948. It was urged that the practice as
grown up in England does indicate that an application under section 165(a)(ii)
which is in pari materia with section 237(a)(ii) will not be entertained until
the party coming to the court has first approached the board of trade and the
board of trade has refused to appoint an inspector. My attention was drawn to
Palmer's Company Law, 21st edition, page 683, where the author has observed as
under :
"If
the board of trade refuse to appoint an inspector, a member may apply to the
court for an order under section 165(a)(ii)"
From
this observation, an attempt was made to urge that approaching the board of
trade is a condition precedent to the court exercising jurisdiction under
section 165(a)(ii). The observation cannot be construed to that effect because
of an earlier observation in the same Chapter at page 681. There the author has
observed as under:
"An
application for an order is made by originating motion (R.S.C. 1965, Ord. 102,
r. 4). Such an order may further be made by the court of its own motion in any
proceeding before it."
Pennington
on Company law, at page 557, has observed:
"The
board of trade must appoint an inspector to investigate the affairs of a
company if a meeting of its members by special resolution, or the court, by
order, declares that its affairs ought to be so investigated."
It
is further observed that, thus, if an individual member fails to persuade the
board to appoint an inspector, of its own motion, or if the requisite fraction
of members fails to persuade the board to do so, an application may be made to
the court to reverse the board's decision. Gower, in his Principles of Modern
Company Law, third edition, at page 606, has observed as under:
"It
is very uncommon for an application to be made to the court for an order since
it is cheaper, quicker and normally easier to apply direct to the board to
exercise their power under section 165(b)."
It
thus appears that even though ordinarily a single shareholder would be too
unwilling to take proceedings in a court of law invoking the court's
jurisdiction under section 237(a)(ii) and, therefore, would prefer to go to the
Central Government, yet there is nothing in the language of the section or in
the practice indicated hereinabove to lead to the conclusion that no one can
come to the court without first going to the Central Government. Entertaining
of an application directly by the court without insisting upon the applicant
going to the Central Government would not indicate that thereby the individual
is allowed to bypass some of the statutory provisions of law.
It
was next urged that the court can make an order as envisaged by section
237(a)(ii) not by entertaining an independent petition from any petitioner but
the court, while examining the affairs of the company in respect of some other
proceedings against the same company, may in order to give full relief and to
effectively adjudicate upon the issues raised before it direct the Central
Government to appoint an inspector. It was urged that one cannot conceive of an
application simpliciter under section 237(a)(ii) for directing appointment of
an inspector by the Central Government but power under section 237(a)(ii) can
only be exercised where the court has seizin upon the affairs of a company on
account of some other proceeding pending in the court against that company. I
fail to see anything in the language of section 237(a)(ii) indicating that a
petition simpliciter for an action under section 237(a)(ii) cannot be entertained
but that power conferred by section 237(a)(ii) can only be exercised by the
court against the company in respect of whom some other proceeding is pending
in the court and the court considers it proper to direct appointment of an
inspector. My attention was drawn to the commentary by A. Ramaiya in A Guide to
the Companies Act, sixth edition, page 408, where the author has observed that
the order of the court referred to in clause (a)(ii) may be passed in any
proceeding in which the court has seizin of the company's affairs. This
commentary cannot be read to mean that existence or pendency of some proceeding
other than the one for taking action under section 237(a)(ii) is sine qua non
so that the court would have seizin over the affairs of the company and then
alone in such a proceeding, in order to effectively dispose of that proceeding,
the powers under section 237(a)(ii) can be exercised. On the contrary, it only
indicates that even in the absence of a petition simpliciter for an action
under section 237(a)(ii) for directing the Central Government to appoint an
inspector, the court while hearing some other proceeding against a company in
the course of which the court is satisfied that an inspector to investigate the
affairs of the company should be appointed, the court may without any
application to that effect proceed to pass such an order. If the court has such
wide power to exercise jurisdiction under section 237(a)(ii) in another
proceeding against the same company, there is no justification for holding that
a petition simpliciter under section 237(a)(ii) cannot be entertained by the
court. Viewed from this angle, the observations of the Allahabad High Court in
Raghunath Swarup Mathur v. Har Swarup Mathur would not be
of any assistance. In that case, while dismissing a petition under sections 397
and 398, it was observed that no case is made out for making an order under
section 237(a)(ii).
Lastly,
I would also like to point out that rule 11(9) of the Companies (Court) Rules,
1959, provides that the court can be moved under section 237 by a petition.
That, of course, is not decisive. But if the construction that I put upon
section 237 is correct, the fact that a petition is prescribed for moving the
court may also point in the same direction.
Thus,
upon a proper construction of section 237, a petition can be filed under
section 237(a)(ii) of the Companies Act for a prayer that the Central
Government be directed to appoint an inspector to investigate the affairs of
the company. Prayer (b) is to that effect and, therefore, the petition is one
which can be entertained.
As no further facts have been set out in the affidavit, the petition is accepted and admitted and notice of the petition should be issued to the company. Costs of this hearing would be costs in the cause.
[1962] 32 COMP. CAS. 52 (MAD.)
v.
N.K. R.K. Amirtharaj
RAMACHANDRA IYER, OFFG. CJ. AND RAMAKRISHNAN
J.
JULY 10, 1961
RAMACHANDRA IYER, OFFG. C.J.-This is an appeal form the order of Ramaswami J. in O.P.No. 272 of 1952 direction the Government of India to appoint one or ore competent persons as inspectors to investigate into the affairs of the Nadar Press Ltd., Sivakasi, and to report thereon for further action to be taken under section 242 of the Companies Act of 1956, if it appears to the central Government that such action should be taken thereunder. the substantive application, namely, O.P.No 272 of 1952, was filed under section 153C of the Indian Companies Act,1913, for obtaining an order appointing an administrator or receiver to take charge of the business, properties and assets of the company, for terminating the service of the managing director and other director, who were in charge of the affairs of the company, and for certain other reliefs on the footing that there was mismanagement of the4 company be the board of directors and that the affairs of the company were conducted in a manner detrimental to the interest of the company and its shareholders.
During the
course of hearing of the petition the learned judge tentatively came to the
conclusion that the materials on record made out an overwhelming prima facie
case for ordering investigation into the affairs of the company by the
machinery; provided under the Indian Companies Act. The learned judge,
therefore, called for a report form the officers appointed by the central
Government under the provisions of section 237 of the Indian Companies Act.
Some of the directors of the company feeling aggrieved by the order directing
an investigation, have filed this appeal.
A preliminary
objection to the maintainability of the appeal s taken of behalf of the
respondent of the ground that the order of the learned judge does not amount to
a judgment within the meaning of the term in clause 15 of the Letters Patent.
In order to
appreciate the contention, it is necessary firs5 to ascertain the scope of
section 237 of the Act, That section provides for investigation of the
company’s affairs in certain cases and provides that the Central Government
shall appoint one or more competent person as inspector to investigate the
affairs of the company and to report thereon in such ;manner ;as ;the Central
Government may; direct, if the court by order declares that the affairs of the
company ought to be investigated by an inspector appointed by the Central
Government. the nature of the jurisdiction of the Government in as analogous
case has been considered in the judgment of the Supreme out in Raja Narayan
Bansilal v. Maneck Phiroz Mistry. that case was concerned with an enquiry under
section 234 of the Indian companies Act. Their Lordships if the supreme Court
observed :
“Thus the
scope of the enquiry contemplated by section 234 is clear ; wherever the
Registrar has reason to believe that the affairs of the company are not
properly carried on he is empowered to make an enquiry into the said affairs.
Similarly under section 235 inspectors are appointed to investigate the affairs
of any company and report thereon. the investigation carried on by the
inspectors is no more than the work so a cat-finding commission.”
What the
leaned judge in the instant case should be held to have directed is the issue
of a fact-finding commission in terms of section 237 of the At for the purpose
on investigation. If on the basis of the report of the inspectors the
Government come to the conclusion that any action shod be taken in regard to
the management of the company, the court would consider the same. If the
Government do not consider that any further action is necessary, the appellant
could have no grievance whatsoever.
Mr.
Thyagarajan appearing of the appellant contends that as section 237 speaks of a
declaration by court, it should necessarily involve an adjudication, which
would greatly or adversely affect the company’s reputation and the direction
contained in the order of the learned judge would have a wider significance
than that of a mere fact-finding commission. We are unable to agree with the
contention. For he purpose of direction an investigation under section 237 the
court has to find certain preliminary facts. but the finding of the court is
not a final one : it cannot affect either the company or its directors. A mere
direction to investigate cannot cannot give rise to a legal grievance. In our
opinion, the order of the learned judge directing the issue of investigation is
something analogous to the issue of a commission for the purpose of looking
into the accounts of the parties.
In Tuljaram Row
v. Alagappa Chettiar, it was observed that an order direction evidence to be
taken on commission would not be a judgment so as to be appeable. The
characteristic of a judgment has been considered in detail by Govinda Menon J.,
as he then was, in Central Brokers v. Ramnarayana Poddar and Co. The learned
judge laid down two tests to find out whether the adjudication in a particular
case is a judgment within the meaning of clause 15 or not. The test were :
(I) whether the order terminates suit or
proceedings , and (2) whether it affects the merits of the controversy between
the parties in the suit itself. that view was followed in Union of India v.
Shanmugha Nadar, a judgment to which one of us wa a party. It s sufficient for
the purpose of this case to consider whether the second of the two tests has
been satisfied.
Mr.
Thyagarajan for the appellant contends the in so far as the learned judge has
declared that there is a case for investigation, it must be held that ;the
merits of the controversy have in a way bee adjudicated upon. We have earlier
pointed out that the learned judge has merely sated that there is a prima facie
case for further investigation, by the Government under the provisions of
section 237. it cannot obviously be said that the merits of the case have been
finally disposed of . There is a possibility of the management being vindicated
at the investigation ; even other8se the results of the investigation would
laid only to the initiation of appropriate proceeding. WE are therefore not satisfied
that the order of the learned judge in this case fulfill the test laid down in
the various cases as to what a judgment is. In our opinion an order by court
directing the investigation under the provisions of section 237 of the Indian
Companies Act will not amount to a judgment ;within the ;meaning of the term
“judgment” in clause 15 of the Letters patent so as ;to entitle an aggrieved
partly to appeal therefrom.
The appeal
fails and is dismissed with costs
Appeal
dismissed.
[1984]
56 COMP. CAS. 284 (KER.)
HIGH COURT OF KERALA
v.
Kuttanad Rubber Co. Ltd.
V. KHALID AND G. BALAGANGADHARAN NAIR, JJ.
M.F.A. Nos. 96 and 104 of 1981
OCTOBER 18, 1982
C.M.
Devan, N.S. Sundararaman, K.V.R. Shenoi, P.K. Kurien, K.A. Nayar and E.R. Venkiteswaran
for the Appellants.
Mani J. Meenattoor, M.M. Abdul Aziz and Chacko J. Kallivayalil for the Respondents.
The judgment of the court
was delivered by
Khalid J.—These two appeals are against the judgment of the learned company
judge in C.P. No. 19 of 1974 and C.P. No. 8 of 1976 which were heard together,
filed under ss. 397 and 398 of the Companies Act, 1956. In the first petition,
the prayers were for removal of the present director and secretary from the
management of the company, to restrain the company by an order of injunction
from effecting sale of the 53 acres of land and to appoint at least two
directors from the petitioner's group, while the prayers in the other petition,
inter alia, were to remove the second and third respondents from the management
of the company, to direct the second respondent to make good the loss illegally
pocketed by him out of the sale proceeds of the 53 acres of estate and to
appoint an administrator to look after the affairs of the company. The main
allegations against the respondents were: (i) that 53 acres of rubber estate
were sold without valid necessity, (2) dividends were not declared to create a
situation of inducing the minority shareholders to part with their shares, (3)
slaughter tapping and double tapping were resorted to unnecessarily and the
amounts derived from them were not accounted in the books of the company, (4)
timber trees were cut and sale proceeds were not accounted, (5) the son of the
secretary was appointed as superintendent removing the then incumbent adopting
an improper procedure, and (6) the workers of the company and its smoke house
were used for the purpose of the son's estate. Though the petitions raised
various other grounds also, the learned judge considered only such of the
allegations as were pressed before him at the time of hearing. Six witnesses
were examined on behalf of the petitioners and two on behalf of the
respondents. A commissioner was appointed and he also gave evidence. After
considering the evidence in the case, the learned judge felt that the evidence
adduced was not sufficient to grant reliefs to the petitioners and dismissed
the petitions observing that the petitions might have been filed because two of
the petitioners wanted to settle some old scores with the secretary. Even so,
the learned judge felt in view of the grave allegations made against the
director and in view of the suspicious nature of the transactions which formed
the subject-matter of the petitions, an investigation into the affairs of the
company was necessary and, consequently, issued a direction to the Central
Government, under s. 237(a)(ii) of the Act to
appoint an inspector to investigate the affairs of the company. The appeals are
directed against the judgment dismissing the petitions. A memorandum of
cross-objection is filed against the direction made under s. 237(a)(ii) of the
Act.
The sole petitioner in C.P.
No. 19 of 1974 is P.W. 4. C.P. No. 8 of 1976 was originally filed by the first
petitioner. The second petitioner is impleaded on June 1, 1976. The first
petitioner was examined as P.W. 1 and the second petitioner as P.W. 2. P.W. 3
is a dismissed employee of the estate. P.W. 5 is the son of a former director.
P.W. 6 was examined to prove certain documents. R.W. 1 was the superintendent
of the estate till 1974 and R.W. 2 is the secretary. P.W. 4, the petitioner in
C.P. No. 19 of 1974, was a director of the company from December 31, 1954, to
January 18, 1972. P.W. 2 the second petitioner in C.P. No. 8 of 1976, was a director
from 1971 to 1976. At the relevant time he was also the manager of the estate.
Both P.Ws. 2 and 4 ceased to be directors of the company on account of their
absence from three consecutive meetings of the board of directors. P.W. 4 filed
O.S. No. 779 of 1971 before the Allppey Munsiff's Court against his removal
from the board of directors. The suit was subsequently dismissed. Thereafter,
he filed O.S. No. 420 of 1972 for a declaration that he continued as a
director. This suit also was dismissed. It was, thereafter, that he filed C.P.
No. 19 of 1974. P.W. 2 filed O.S. No. 642 of 1976 in the Alleppey Munsiff's
Court for a declaration that he continued as a director of the company. That
suit also was dismissed. It is submitted that an appeal is pending.
One Joseph Chacko was the
founder of the company. The main asset of the company is the rubber estate
known as Pazhuthadam Rubber Estate with a planted area of over 450 acres. P.W.
4 is a grandson of the founder. In C.P. No. 19 of 1974, the allegations were mostly
directed against the secretary and also P.W. 2. P.W. 2 is the son of the
secretary's maternal grandfather. The old superintendent R.W. 1 was also
related to the founder. The parties are in one or the other way related to one
another.
The petitioners put forward
their case on the basis that they belonged to the minority group of
shareholders and that by various acts the majority group was oppressing them.
According to them, they were denied access to the books of the company, the
books were manipulated to suit the convenience of the directors and the affairs
of the company were conducted in a manner harmful to the interests of the
company. The case of the petitioners is denied by the company. According to the
company, there was never any attempt to acquire weak shares at low value,
reserves were built up for being used in replantation, that during the relevant
time when the impugned transactions took place the petitioners were active in
the affairs of the company,
that all transactions were placed before the general body, that the sale of 53
acres was necessitated since the company was badly in need of funds and that
the petition was filed without any bona fides.
The
learned judge has discussed the facts and evidence of the case in great detail.
We will briefly advert to the allegations and the evidence bearing on them and
examine whether the findings entered on each of the allegations pressed at the
hearing need interference at our hands. Before examining the evidence in the
case to consider whether the petitioner is entitled to any relief, and whether
the judgment rendered by the learned judge needs interference, we will have to
examine the correctness of a proposition of law put formed by the appellant's
counsel in M.F.A. No. 96 of 1981. The contention raised is as follows:
There
is a fiduciary relationship between a director and the company. A director,
therefore, has always to act in good faith vis-a-vis the company. When the
action of such a director is impeached on the ground that it lacked good faith,
the person who makes the accusation need only adduce prima facie evidence in
support of the accusation and once such evidence is adduced, the burden shifts
to the director or directors to satisfactorily rebut the accusation by
acceptable evidence. In other words, in such cases, there is a reversal of the
normal rule of burden of proof. This contention was largely rested on s. 111 of
the Indian Evidence Act.
It
is necessary first, to understand the scope of the fiduciary nature of the
relationship on which this argument is built. Directors have been held to be
sometimes agents of the company. They are also understood to be trustees so far
as the company's property and its funds in their hands are concerned. Courts of
law have considered and treated them as trustees of money which comes into
their hands and once it is proved that they have misapplied or misused such
money, they were held liable to make good those monies. In Regal (
"Directors
of a limited company are the creatures of statute and occupy a position
peculiar to themselves. In some respects they resemble trustees, in others they
do not. In some respects they resemble agents, in others they do not. In some
respects they resemble managing partners, in others they do not."
The
House of Lords considered various authorities dealing with this question, and
it was decided that the powers of the directors were in some sense fiduciary in
relation to the company. On the facts of that case, directors who had made some profits by virtue of their
position involving a cinema house and a subsidiary company, it was held that
the rule of equity which insists on those who by user of a fiduciary position
make a profit should account for it, is not dependent on fraud or absence of
bona fides but by virtue of their position as trustee. In Selangor United
Rubber Estates Ltd. v. Cradock [1968] 2 All ER 1073 (Ch D) the first question
of law discussed was how far the directors are trustees of the company's funds
and while answering this question, the discussion proceeded on the assumption
that there existed a fiduciary relationship between the director and the
company which is clear from the following observation (p. 1091):
"It is clear and not
disputed that they owe a fiduciary duty to the company to apply its assets only
for the purpose of the company and are, therefore, liable for breach of that
duty; but the question how far they are trustees bears on the question how
other defendants can be made liable as constructive trustees as claimed.
On occassion directors have
been said to be trustees and on occasion not to be trustees."
The following observation
In re
"Again, directors are
called trustees. They are no doubt trustees of assets which have come into
their hands, or which are under their control, but they are not trustees of a
debt due to the company. . . . . .A director is the managing partner of the
concern, and although a debt is due to the concern I do not think it is right
to call him a trustee of that debt which remains unpaid, though his liability
in respect of it may in certain cases and in some respects be analogous to the
liability of a trustee. So much for the question of unpaid debts."
And the discussion on this
question was wound up as follows:
"So, in my view, in
general as in this case a credit in a company's bank account which the
directors are authorised to operate are moneys of the company under the control
of those directors and are held by them on trust for the company in accordance
with its purposes."
Gower's Principles of
Modern Company Law, fourth edition, contains the following passage (p. 572):
"The fiduciary duties
of directors are, basically, identical with those applying to any other
fiduciary and discussed in works on Trusts and Agency. Such duties have,
indeed, already been dealt with briefly in connection with another type of
fiduciary peculiar to company law, the promoter. But the relevant rules have
received particular elaboration in relation to directors and the practical
importance of the subject makes it desirable to discuss it here in greater
detail."
"Directors, once their
appointments take effect, are fiduciaries and must, therefore, display the
utmost good faith towards the company in their dealings with it or on its
behalf." (p. 575)
From the above discussion,
it has to be held that there exists a sort of fidudiary relationship between
the directors and the company and that law requires the directors to deal with
the monies and properties of the company as trustees. The contention that the
appellants put forward on this basis is that once the fiduciary relationship
mentioned above is accepted, the burden to satisfy the court of the good faith
in transactions, the bona fides of which are questioned by a shareholder,
shifts to the director and that the shareholder need only adduce some prima
facie evidence. For this purpose, strong reliance was placed on s. 111 of the
Indian Evidence Act. It is useful to read the section itself before considering
the scope of its operation:
"111. Proof of good
faith in transactions where one parly is in relation of active confidence.—Where
there is a question as to the good faith of a transaction between parties, one
of whom stands to the other in a position of active confidence, the burden of
proving the good faith of the transaction is on the party who is in a position
of active confidence."
Normally, the law presumes
prima facie in favour of deeds duly executed. Therefore, when the validity of a
transaction on the ground of fraud, undue influence, etc., falls to be decided
imputing bad faith, the burden is on the person who challenges it. The
exception to this rule comes where fiduciary relationship subsists between the
contracting parties. The scope of s. 111 has to be understood before applying
it. It has no application except as between parties to the transaction in
question. The section contemplates a transaction between two persons, one of
whom has an advantage over the other, who puts trust in him. In order to bind
persons with the rigour of proof contained in the section, the party who seeks
its benefit must prove that the other party is in a position of active
confidence. The two illustrations given to the section give some guide to
appreciate cases where the section could be pressed into service. The section
has been used in cases of "medical practitioner and patient, spiritual
director and penitent, trustee and cestui que trust, husband and wife, guardian
and ward, agent and principal and the like". The court always looks to the
possibility of exercise of dominion and influence by the one who receives
benefit over the other who is denied of it. The concept of active confidence
must inform the court before extending the benefit of the section to a
transaction in question. The words "active confidence" normally
indicate that the parties to the transaction are such that one is bound to
protect the interest of the other. A volume of
case-law is available where this section had been used in cases where
pardanashin and quasi-pardanashin ladies are involved to the transactions
impugned. We have tried in vain to get at any case where the rigour of the
burden of proof in-built in the section had been extended to transactions
entered into by the directors of the company, the bona fides and validity of
which were questioned by a shareholder. In our view, this filed has remained
virgin for the very good reason that such a plea is not available in cases like
this. This is a contention not raised before the learned judge, nor in the
memorandum of appeal before us. The transactions before us are those entered
into between directors and third parties, not between the appellants and the
directors between whom there does not exist any fiduciary relationship. The
section has application only between contracting parties. A company
incorporated under the Companies Act functions within the confines of the
provisions of that Act and a company differs from a proprietary concern only to
the extent that its activities are governed by the provisions of the Act. A
proprietary concern is not answerable to any one for what it does, but a
company is answerable to the Government as well as to its shareholders when the
directors act against the provisions of the Act and to the proved detriment of
the company or its shareholders. If the appellants' contention is to be
accepted, any shareholder can throw some mud at a director by filing an
application like the one filed in this case, adduce some evidence and then
insist upon the company to satisfy the court that the allegation is not correct
and thus stifle the activities of the company. The learned judge was not
prepared to accept the evidence adduced as sufficient to substantiate the
allegations made against the directors, indirectly holding that the burden of
proving the allegations satisfactorily is on the petitioners. On a careful
consideration of this contention, which we have permitted the appellants'
counsel to argue before us, though not raised before, we hold that the burden
to satisfactorily establish the accusations against the directors is upon those
who question their validity and there is no reversal of burden as contemplated
in s. 111 of the Indian Evidence Act.
One other question of law
also has to be disposed of before entering into the evidence in' the case. The
learned judge, as already stated, directed the Central Government to appoint an
inspector to investigate the affairs of the company under s. 237(a)(ii) of the
Act since he felt that the company was not functioning in a proper manner. The
Inspector appointed by the Central Government has submitted his report to the
court as enjoined by the section. The memorandum of cross-objection filed
relates to this direction by the learned judge and the counsel for the company
submits before us that this cross-objection is not pressed because the report
has already been filed. The attempt of the appellants' counsel in both the
appeals is to invite us to go into the report
to treat it as additional evidence, to be considered along with the evidence
already on record, to displace the findings entered by the learned company
judge and to persuade us to allow the appeals. The appellant in M.F.A. No. 96
of 1981 has also filed an application, C.M.P. No. 19643 of 1982 under 0. 41, r.
27 and s. 151, CPC, to admit the inspection report as additional evidence in
the case. The respondent has filed a counter-affidavit and has strongly opposed
reception of the report as additional evidence and reading passages from the
report to supplement the evidence already on record. In view of this objection,
we allowed the counsel on both sides to make their submissions regarding this
aspect of the case. The appellants' case is based on s. 246 of the Companies
Act, which reads as follows:
"246. A copy of any
report of any inspector or inspectors appointed under section 235 or 237
authenticated in such manner, if any, as may be prescribed, shall be admissible
in any legal proceeding as evidence of the opinion of the inspector or
inspectors in relation to any matter contained in the report."
It is submitted that this
section is very wide in its scope and permits the admissibility of the report
in any legal proceeding as evidence of the opinion of the inspector in relation
to any matter contained in the report. An appeal from the judgment of the
company judge is a legal proceeding. Such a proceeding is not excluded from the
operation of s. 246. This court, sitting in appeal, will be perfectly
justified, according to him, in looking into the report for the purpose of
satisfying itself of the validity or the bona fide nature of the grounds set
forth in the petition in supplementation to the evidence already on record. The
respondents' counsel submits that this is totally impermissible and that s. 246
cannot be pressed into service for admitting the report obtained as per a
direction under s. 237 in an appeal from the judgment in which such a direction
was given. He took us through the various sections of the Act in reinforcement
of this submission and to satisfy us of the use to which such a report can be
put under the Act. According to him, the learned company judge becomes functus
officio once a direction under s. 237 is given. He cannot be invited to look
into a report submitted pursuant to such a direction after the main petition is
disposed of. If his jurisdiction is so restricted, the jurisdiction of the
appellate court would be also similarly restricted. In other words, if
examination of the contents of the report by the judge who gave the direction
is not permissible in law, a court sitting in appeal over the judgment will
also be not permitted to look into that report. According to him, the
provisions of the Act lay down how the report can be used. If the request of
the appellant is to be accepted, that would amount to inviting this court
to displace the judgment of the learned judge by some
material secured after the judgment when the learned judge found that the
materials available before him were not sufficient to give relief to the
petitioner; If this court is to interfere with the judgment of the learned
judge relying upon the report, that would result in the deletion of the direction
made under s. 237 without an attack by the appellant against that direction. We
find force in this submission.
We will examine the scope
of the report under s. 237 presently. Section 237 enables the Central
Government or the court to appoint one or more competent persons as inspectors
to investigate into the affairs of a company. The court exercises its powers
under s. 237 when it finds that the afffairs of the company ought to be
investigated by an inspector appointed by the Central Government, on being
satisfied that such investigation is necessary though the evidence on record is
not sufficient to give relief to the aggrieved party. Under s. 241, the
inspectors have to submit a final report to the Central Government on the
conclusion of the investigation. Where the inspectors are appointed under s.
237 in pursuance of an order of the court, a copy of the report has to be
furnished to the court. While under s. 235 appointment of inspectors by the
Central Government when circumstances mentioned in the said section exist is
discretionary, the appointment under s. 237 is mandatory. Section 242 provides
for initiating prosecution against persons for any offence disclosed from the
report submitted by the inspector. Section 243 enables the Central Government to
file a petition for the wnding up of the company, or to file an application for
an order under s. 397 or s. 398 or both, a petition for the winding up and an
application under s. 397 or s. 398. It has to be noted that the use of the
report obtained under s. 237 is restricted; it can only be by the Central
Government and not by any other person, for example, a shareholder. But the
Central Government can cause an application to be made either for winding up in
a case falling under s. 243, under s. 439(1)(f), or an application under s. 397
or s. 398, under s. 401, by any person authorised by it in this behalf. The
attempt of the appellants before us is to make use of the report in a manner
not contemplated by the Act. The report could be made use of only by the
Central Government in the manner provided in s. 243. Section 244 provides for
proceedings being taken for the recovery of damages if from any such report as
aforesaid, it appears to the Central Government that proceedings ought, in the
public interest, to be brought by the company or any body corporate whose
affairs had been investigated. The scheme contained in the above provisions
makes it clear that a machinery is provided to use the report that an inspector
submits after investigation into the affairs of the company either at the
instance of the Central Government or at the instance of the court. A direction
by a court to appoint an inspector for investigation into the affairs of the
company is necessitated only when the court finds it difficult to pass an
effective order in an application under s. 397 or s. 398. To use such a report
at the appellate stage to displace the order of the original court would be to
set at naught the effect of the various provisions enabling the Central
Government to act on the report. To do so would be to violate the various
sections quoted above.
The nature of the report
that an inspector makes has also to be considered in this context. He has power
to summon persons whom he thinks could give useful information. He takes their
statements behind the back of persons to be affected. The persons whom he
questions are not cross-examined by persons who will be affected. What he
submits is his opinion on the materials so collected. To say that this court
can at the appellate stage look into the statements so taken and the opinion so
expressed, and then on the strength of those materials should interfere with
the judgment of the learned judge, would be to exalt the opinion submitted by
the inspector over the decision of the learned judge, which, according to us,
is totally impermissible and not contemplated under the Act. When proceedings
are initiated on the strength of this opinion, the affected party will get a
right to challenge the various particulars of the report and even a right to
get the persons from whom statements were taken to be cross-examined. If we
allow the report to be looked into, that would be in denial of an opportunity
to the affected party to challenge the report. If the challenge against the
various items of the report is to be permitted, this court will have to convert
itself into a company court of original jurisdiction. The Central Government
has to consider various aspects including public interest before starting any
proceeding on the strength of this report. We, therefore, feel no difficulty in
disallowing the use of the report at the appellate stage. In Nadar Press Ltd.
In re: N.K.R.K. Amirtharaj
v. N.P.S.N. Ramiah Nadar [1968] 38 Comp Cas 337 (Mad), the scope and applicability of s. 237 came up for
consideration and the following extract in page 343, with which we agree, can
be usefully quoted:
"The above conclusion
of mine can also be reached by applying the provisions of the new Act. When the
court by order declared that the affairs of the company ought to be
investigated by an inspector and directed the Central Government to appoint an
inspector to go into such details, then there is an exhaustion of the
jurisdiction of this court in so far as this application is concerned, and it
is for the Central Government to take up the matter in their hands after
receipt of the report of the inspector and do such things as are necessary and
expedient in public interest..........It should be, however, remembered that
once an inspector is appointed and the inspector, after enquiry, submits a
report, it is for the Central Government to
act, and it is no longer open to a person, who prompted the court to issue an
order under section 237(a)(ii), to call upon such court after the investigation
report of the inspector, to consider the said report once again and give him
such reliefs which, according to him, he is entitled to. This is not provided
under the Act........."
What remains in this
connection is the application filed by the appellant in M.F.A. No. 96 of 1981
as C.M.P. No. 19643 of 1982 under O. 41 r. 27 for reception of the report as
additional evidence. What is produced is a copy of a copy. There was some
controversy before the learned vacation jude when the matter came before him
about the admissibility of the copy. We do not think it necessary to consider
the question, nor to examine whether the application to admit additional
evidence is based on satisfactory grounds, for the reason that we have already
held that the document attempted to be produced cannot be admitted in evidence
in this proceeding. Hence CM.P. No. 19643 is dismissed.
We will consider the gounds
of attack one by one. Before doing so, it would be relevant to bear in mind the
fact that the petitioner in C.P. No. 19 of 1974 was a director of the company
from December 31, 1954, to January 18, 1972 (examined as PW-4), and the second
petitioner in C.P. No. 8 of 1976 (examined as PW-2) was a director from 1971 to
1976 and was also during that period the manager of the estate. The acts of
oppression and acts resulting in financial loss and misappropriation took place
at the time PW-2 was with the company and to a small extent while PW-4 was with
the company. It has also to be noted that PW-2 did not figure as a petitioner
originally when C.P. No. 8 of 1976 was filed and got himself impleaded
subsequently in June, 1976. The fact that both PWs. 2 and 4 had moved the civil
court for their reliefs against the loss of their directorship by filing suits
and had got worsted in them, can also be kept in mind (though one of the cases
is pending in appeal now) while considering the acceptability of the evidence
adduced by them.
The most important allegation
against the respondents relates to the sale of 53 acres of rubber estate. The
case about the sale was not clearly set out in the first petition. The petition
was subsequently amended incorporating the prayer to set aside the same or to
order recovery of Rs. 5,30,000 from the directors. In fact, the sale took place
months before the filing of that petition. In the second petition, the
allegation against the sale contains better details. It is said that this sale
was by private negotiations and that by this sale, the secretary got unduly
enriched to the extent of Rs. 4,00,000 with corresponding loss to the company.
The sale was unnecessary and no sanction from the general body was obtained.
The amount realised on paper did not represent the real consideration. The
company met this allegation with the plea that sale
was necessary and an advertisement was not taken out informing the sale to the
public to avoid unnecessary labour agitations. The property sold was not fully
planted and was in part rocky. PW-2 at all relevant times was actively
participating in the negotiations for the sale and it was he who executed the
sale deeds.
The minutes of the board
meeting recorded in Ext. B1 during the relevant period when the sale took place
will have to be looked into to appreciate the rival contentions regarding the
sale. PW-2 was appointed manager of the estate on April 12, 1972. This decision
was taken at the meeting of the board held on April 12, 1972. At the meeting of
the board on November 7, 1973, RW-2 and PW-2 furnished an estimate of the
immediate financial requirements for the estate, which included funds for
clearing off an overdraft liability and for day-to-day working, payment of
provident fund arrears, installing a motor and putting up of workers' quarters.
The board felt that there was no possibility of getting loan on reasonable
terms. This led to the decision to sell a part of the estate described as
immature, non-yielding poor area. A block of 53 acres was pointed out by PW-2
as poor and hilly. The board thereupon authorised PW-2 and RW-2 to contact
prospective buyers and report. At the next meeting held on January 12, 1974,
PW-2 and RW-2 submitted a detailed report about prospective buyers. Some offers
were also produced. The board discussed the matter and authorised PW-2 to
execute sale deeds at the rate of Rs. 5,000 per acre and hand over possession
to specified persons. All the sale deeds were executed by PW-2 at Kottayam at
his residence. The execution of the document is seen to be between 6 p.m. and
midnight on May 17, 1974, the District Registrar having been brought to his
residence for the purpose. Exts. B5 to B15 are the sale deeds, the sale being
at the rate of Rs. 5,000 per acre. According to the allegation in C. P. No. 19
of 1974, the normal price for an acre of planted area would be Rs. 15,000. By
this fraudulent and surreptitious sale, the company had lost Rs. 5,30,000. In
C. P. No. 8 of 1976, the allegation is that the sale was in fact for Rs. 12,500
per acre and that the secretary had pocketed as illegal gain a sum of Rs.
3,97,500. PW-4 deposed that the sale was effected without advertisement and
without authorisation from the general body, that the area was well planted and
yielding, and that two of the purchasers had told him that they had paid at the
rate of Rs. 12,500 per acre. PW-1 has no direct knowledge of this. His evidence
is based on hearsay. PW-2 admits having executed the sale deeds in the presence
of the Registrar at his residence. He was unwell at the time. Some of the purchasers
told him that the real consideration was Rs. 12,500 per acre. He signed the
documents as directed by the secretary and his son and was not permitted to read them. Consideration
was received by the secretary and his son. The other material witness regarding
the sale is PW-6. He had sold away 82.50 acres of planted area belonging to him
for Rs. 9,50,000 in 1975. The documents are Exts. A-31, A-32 and A-33. He had
never seen the company's estate which is eight miles away from his own. He
deposed that the market for rubber was not attractive during 1973-74 and there
was a sudden jump in 1975. RW-1 deposed that parcels of another estate
adjoining the estate in question were sold away at Rs. 5,000 per acre in 1973.
The 50 acres sold by the company in 1974 were not being tapped at that time but
they were about to be. Sales in 1974 varied between Rs. 5,000 and Rs. 6,000. He
himself had eight acres of rubber which he sold after he left the services of
the company at Rs. 6,000 per acre. RW-2, the secretary, deposed that PW-2 took
a leading part in both the transactions, that the price of Rs. 5,000 was fixed
after negotiations by PW-2, that it was PW-2 who arranged for the execution of
the documents and that he was giving false evidence deliberately. The learned judge
felt that the above evidence gave room for suspicion that all was not well with
the transaction. According to him, the consideration of Rs. 12,000 shown in
Exts. A-1 to A-33 for the rubber estate, eight miles away, in 1975 and Rs.
5,000 shown in 1975 for the estate in question gave room to suspect whether the
documents in question showed the correct consideration. Even so, the learned
judge felt that he was unable to find sufficient evidence to hold that the area
was actually sold at Rs. 12,500 per acre and that the secretary had pocketed
the difference. The learned judge was not prepared to accept the version given
by PW-2. He held that PWs. 1 and 4 had only hearsay knowledge, thereby holding
that the allegation under this head was not proved beyond doubt.
The
respondents' counsel found fault with the observations made by the learned
judge about the disparity between the consideration in the document in question
and Exts. A-31 to A-33 to be abnormal, and stated that the evidence clearly
indicated the transaction to be bona fide and beyond reproach. In particular he
stated that the said observation by the learned judge was without properly
considering Exts. B-28 and B-29, two documents of sale in the year 1973 of an
estate adjoining the estate in question. In these two documents, the
consideration shown was Rs. 5,000 in the year 1973. According to respondents'
counsel, if these documents were looked into, the learned judge would have been
satisfied that the consideration shown in the documents impugned was fair and
reasonable.
It
is not correct to say that the learned judge had not adverted to this sale
evidenced by Exts. B-28 and B-29. He refers to the evidence of R.W. 1 who had
deposed about the sale of parcels of Kollankulam estate for Rs. 5,000 per acre
in 1973 and did not rely upon it as that was hearsay information. It is true that direct reference is not made
about these two documents. It may be that the respondents' counsel is justified
in stating that these two documents which came into existence in 1973 represent
a bona fide transaction and the consideration therein showed reasonable price.
But no one connected with these documents was examined and, therefore, the
details given in the said two documents cannot be made use of to contend that
the amount shown in the impugned documents as consideration is fair. If these
two documents had been proved, the respondent would have been in a better
position to press them in support of his case of sufficiency of consideration
for the sale deeds in question. Under these circumstances, the observation of
the learned judge that the evidence of R.W. 1 is only hearsay, is correct. We
have considered the evidence in the case regarding the impugned sale deeds. The
evidence of P.W. 1 is of no consequence. The evidence of P.W. 2 cannot impress
any court of law because he stands self-condemned on account of his active
participation in all the affairs of the company during the relevant period.
Exhibit B1, the minutes of the board meeting at the time he was the manager, which
is a book maintained statu-torily, contains the various decisions taken at
various meetings. He had the temerity of denying the signature of the chairman
in the minutes. This is the only method available to him to get rid of the
effect of the minutes. This minutes book was produced in O.S. No. 642 of 1976
filed by him. We do not think it necessary to go deep into the case of P.W. 2
of the alleged forged signature of the chairman because, according to us, that
is only a desperate attempt at this stage to explain the adverse circumstances
against him. We have looked into the minutes book ourselves. We find the
signature of the chairman, who is no more, in the minutes of the meetings at
which he presided. We find the signature of the successor-chairman in the
meetings at which he presided'. The minutes book, as already stated, is a book
the maintenance of which the Companies Act insists. If Ext. B1 is accepted, it
has to be found that P.W. 2 knew at all relevant times about the proposal to
sell 53 acres of land and that he had taken active part in the negotiations and
the ultimate execution of the sale deed. His evidence that the actual
consideration was Rs. 12,500 and that this amount was paid in the presence of
the Registrar cannot, for a moment, be accepted. There was no reason why he
should have been a mute spectator when Rs. 12,500 per acre changed hands while
actually the document showed only Rs. 5,000 per acre as consideration. Nobody
has been examined to prove the actual payment of consideration of Rs. 12,500
though P.Ws. 2 and 4 would depose that some persons had mentioned as to them.
The evidence of P.W. 4 also is not trustworthy. P.W. 6 is a witness examined on
the petitioner's side. He proxed Exts. A-31 to A-33. He deposed that the price
of rubber till 1974 was not appreciable and that there was a speedy rise in the
price of rubber in
1975. By saying so, he justified the difference between the prices in the sale
deeds in question and his sale deeds. He was not treated hostile. This evidence
was made use of by the respondents to explain the difference in consideration
between the two sets of documents. R.W. 1 has to be treated as a disinterested
witness. His cause is seen espoused by the petitioners. The case of the
petitioners was that an experienced superintendent like R.W. 1 was
unceremoniously eased out to give way for the appointment of R.W. 2's son. This
case would show that the petitioners did not have any complaint against R.W. 1.
However, R.W. 1 does not support the petitioner's case. According to him, the
consideration shown in the documents is fair having regard to the rubber price
at that time. He himself had sold 8 acres of rubber estate. He deposed about
the sale of the adjoining rubber estate in 1973; possibly, the reference was to
Exts. B-28 and B-29. It is true, that the learned judge has not made pointed
reference to these two documents. These documents came into existence in 1973.
R.W. 2 has deposed about the circumstances under which the sale took place and
about the actual consideration received. The evidence adduced by the
petitioners, in our view, is not sufficient to establish either that sale was
unnecessary or that the consideration shown in the documents does not represent
the actual consideration received. We, therefore, hold, in agreement with the
learned judge, that the allegation that the sale was effected with ulterior
motives, to enrich the respondent, not showing the actual consideration has not
been satisfactorily proved.
Before
considering the other allegations, we may in passing refer to the allegation
that R.W. 1, the former supperintendent of the estate, was driven out of office
in order to accommodate the secretary's son, the third respondent, and to get
at the shares held by R.W. 1 and his relatives. R.W. 1 gave evidence to the
contrary. According to him, he went out voluntarily. He wanted better terms.
The board did not accede and hence he resigned. All these are evident from the
minutes of the board meeting held on January 12, 1974. His shares were
purchased by P.W. 2 and his wife. Therefore, the case of exerting pressure on
R.W. 1 and the alleged removal cannot persude us to hold that it was done to
accommodate P.W. 2's son and cannot pass muster in view of the evidence of R.W.
1 himself.
One
other allegation was that the secretary and his group were keeping share
certificates with them in order to prevent transmission of shares in favour of
the legal representatives of deceased shareholders. This alle gation is not
supported by any evidence. Not even a single case had been mentioned though an
attempt was made to say that the signature of the former chairman in some share
transfer forms was different from the admitted
signature. The learned judge felt unimpressed by this case because some of
those transfer forms were used to transfer shares in favour of P.W. 2 himself.
Another important allegation made by the petitioners is that dividends were not
declared for a long time with the avowed intention of compelling the minority
shareholders to transfer their shares and facilitating cornering of shares by
the secretary and his dependants. It is true that dividends were not admittedly
declared from 1962-63 to 1971-72. But the allegation made is disproved by the
fact that the petitioners did not succeed in citing one single instance of a
transfer of share below par. P.W. 1 purchased some shares in 1971 at Rs. 100
per share. According to P.W. 4, the shares were worth Rs. 400 each in 1968. The
evidence in the case indicates that after 1971-72, dividends ranging from 2.4
to 40% were declared.
The learned judge then
examined the case that the secretary and his relatives tried to corner the
shares by the device of non-declaration of dividends. As rightly pointed out by
the learned judge, there is nothing wrong if a person tries to purchase shares
which are being sold. In paragraph 20, the learned judge discussed in detail
the relationship between the parties and the number of shares held by them in
the estate. It is seen that the majority shares in the company were always held
by members of the Kanjooparambil and Kalappurakkal families. The petitioner in
C.P. No. 19 of 1974 held only 10 shares in 1950. But he acquired 60 shares in
March, 1958, and 8 shares in July, 1968. The first petitioner in C.P. No. 8 of
1976 acquired 173 shares in 1971 and the second petitioner started purchasing
shares from 1971. The secretary, his wife, sons and daughters acquired 320
shares during the period when dividends were not declared. But the evidence
shows that most of the transferors were related to the transferees. After
discussing this evidence, the learned judge observed, according to us, with
respect, rightly, that the transfer of shares was never below par, was not a
one-way traffic and that there was nothing unusual or abnormal, susceptible of
being characterised as oppression or mismanagement in relation to the transfer
of these shares. The conclusion is that the non-declaration of dividend did not
affect the value of the shares and in fact the value at all times had remained
above par.
In C.P. No. 19 of 1974
there was one other allegation that the transfers to the contingency reserve,
working capital reserve and gratuity reserve were either illegal or fraudulent.
We were taken through the balance-sheet, etc., by the appellants' counsel in
his attempt to satisfy us that these allegations were bogus, and was only to
deplete the funds of the company and for undue enrichment of the secretary. The
learned judge was not impressed with these allegations. No acceptable evidence
was adduced to substantiate the case of bogus
reservations. Building up reserves cannot be characterised as mismanagement.
Companies sometimes require it. In the absence of acceptable materials, we are
in agreement with the learned judge holding that this allegation has not been
made out and cannot be pressed into service in support of an application under
s. 397 or s. 398. The two other remaining allegations related to double tapping
and slaughter-tapping.
The allegation about double
tapping is that though double tapping was carried on, the yield therefrom was
not accounted, and that payments to the workers under this head were not
entered in the company's accounts, the suggestion being that the respondents
were appropriating the extra yield to themselves. According to the respondents,
double tapping was never resorted to. Sometimes, extra tapping was arranged and
that too when the season was favourable and the yield good. Without giving any
importance to the nomenclature, we see from the materials on record that some
sort of tapping other than normal was being carried on on some occasions. This
being the admitted case, what this court is concerned with is the enquiry
whether the income from this extra tapping was being entered in the accounts or
not. We have already indicated that the evidence of P.W. 1 is unserviceable
because he deposed what he heard from others. P.W. 2 would say that the income
was being siphoned away without being brought into the accounts. P.W. 3 is a
dismissed employee. He spoke about double tapping; but did not say that yield
was not being accounted for in the company's books. P.W. 4 has no complaint in
this regard. As against this evidence, there is the evidence of R.Ws. 1 and 2
who would say that the yield was being duly accounted for in the company's
books. Some suspicion was sought to be created with reference to Exts. B-30 and
B-31 and Exts. A-4 to A-8 in reinforcement of the appellants' case. Exts. A-4
to A-8 are demands made by the workers for higher rates of wages for extra
tapping. These show that extra-tapping, if any done, was not a secret affair.
Ext. B-30, "extra-tapping file", discloses that wages were being paid
for extra-tapping. Ext. B-31 shows that during certain periods in 1974-75, the
yield was about 50% more than the average. According to the respondents, during
this period, extra-tapping was done. P.Ws. 2 and 4, who were intimately
connected with the company for a long time as directors, could have adduced
better evidence in support of this allegation. Their evidence cannot inspire
confidence in a court for the reason that they chose to make this allegation
after losing their directorship. In any case,' the evidence is not sufficient
to make out this allegation. From some of the books that we looked into, we
find that the excess yield had been accounted for. We agree with the learned
judge that the petitioners did not succeed to make out a case on this ground
either.
Slaughter-tapping,
according to the respondents, is a process of recent origin, in the sense of an
act of mismanagement. The petitioners' case is that slaughter-tapping was
resorted to without the matter being brought to the notice of the board of
directors and tenders being invited. We do not propose to discuss the evidence
in this regard in detail, for the evidence is not sufficiently persuasive to
hold that the petitioners have made out a case on this ground. The company came
into existence in 1910. Rubber plantation began in 1912. There is evidence to
show that the rubber board recommended replanting the estate in 1960 with
better plants. Slaughter-tapping started somewhere in 1952 and was completed in
1970. During 1952-1971, the process of replanting went on. From 1962 onwards
slaughter-tapping was being arranged directly by the company itself and
sometimes through reliable contractors. According to the respondents, it is not
necessary to invite tenders always. It is for the board of directors to decide
as to how the slaughter tapping is to be done. The complaint that the entire
income from slaughter tapping was being suppressed has not been satisfactorily
made out. The learned judge observed that the audited balance-sheet produced
showed that at least part of it was being accounted for. He was not prepared to
accept the evidence in this regard. He felt that the petitioners should have adduced
better evidence especially because P.Ws. 2 and 4 who were directors during a
long period would have been in the know of things at that time. We have
examined the evidence ourselves. We find it difficult to accept the evidence of
P.Ws. 2 and 4 in support of this ground. Their evidence throughout is suspect.
They have not succeeded in making out a clear case of underhand dealings by the
respondents by way of slaughter-tapping. We do not find any material persuasive
enough to disagree with the findings of the learned judge on this ground also.
The next allegation relates
to cutting and removing valuable teak and rosewood trees without bringing the
sale proceeds in the company's account. This complaint has not been properly
pleaded in the petitions. Despite this, the learned judge was inclined to
consider the complaint, if evidence was made available. According to him, the
evidence was far from satisfactory. Sufficient details regarding the number of
trees cut, the time at which they were cut, the approximate loss occasioned to
the company, etc., were not proved. If it was done between 1957 and 1976, P.Ws.
2 and 4 were equally guilty as the respondents for this. The evidence of P.W. 1
as usual is worthless. The evidence of P.Ws. 2 and 4 cannot be relied upon for
this purpose in the absence of other acceptable corroborative evidence. R.W. 1
admitted that some trees standing on the boundaries were cut and sold during
replantation, while R.W. 2 stated that the timber was used for estate purposes.
Nothing turns out on this inconsistency when the petitioners have failed to
make any specific allegation either in the pleadings or in the evidence.
Exts.C-1 and C-2, the commission reports, only show that some trees were cut
years ago and some others more recently. No attempt was made by the petitioners
to establish the manner in which the misappropriation on this account was
caused. The evidence of R.W. 2 that some of the trees were used for putting up
sheds, etc., might be suspicious. Some trees were seen stacked in a portion of
the estate also. ' But such suspicion alone is not sufficient to pass an order
of the kind that the petitioners request for. We agree with the learned judge
that evidence is far from satisfactory to prove this allegation.
The third respondent is the
son of the secretary. The allegation against him is two-fold. According to the
petitioners, R.W. 1 was eased out unceremoniously to find a place for him. The
petitioners were also participants in this move. It is not necessary to examine
this in detail because R.W. 1 himself has deposed that the resigned the job
voluntarily since the company did not favourably respond to the terms that he
put forward. Regarding the method of appointment of the third respondent also,
a detailed discussion is not necessary since at the time when he was appointed,
P.W. 2 was very much in the picture and his appointment was after due
publicity. The second allegation against him is that workers of the company and
its smoke-house were used for the purpose of his estate in the adjoining area.
This case cannot be true because the estate of the third respondent has its own
smoke-house. That the services of the workers were availed of for the estate of
the third respondent has not been satisfactorily proved. The only attempt made
is to construct a case on certain note books and diaries, Exts. A-1 and A-14
and A-15 to A-17 seized by the tax authorities, where there is some noting
about a 45th Block. No one connected with these note books and diaries was
examined. Whether this 45th Block is third respondent's estate or not, is
itself a matter not free from doubt. The allegation has not been satisfactorily
made out nor is the evidence sufficient to hold that the resources of the
company were being diverted for the benefit of this estate.
It is true that dividends
were not declared from 1962-63 to 1971-72. This allegation was made to support
the further allegation that it was deliberately done to corner the shares. We
have already shown that the shares did not suffer from devaluation and that no
evidence was made available to show that any transfer of shares took place
below par. That there was deliberate attempt on the part of the company to
oppress the minority shareholders by non-declaration of dividends has not been
made out, though, in our opinion, no satisfactory explanation was given why
dividends were not declared even during the period when the company was making
profit.
We
have considered the entire evidence in detail. We agree with respect with the
conclusions of the learned judge that the evidence is not sufficient to give
any of the reliefs that the petitioners have prayed for. The dissatisfaction of
a minority of shareholders with the conduct of the affairs of the company by
the majority will not normally persuade a court to interfere with the
management. It is only when the court has before it reliable evidence where the
majority acts against the provisions of the articles of association of the
company or of the statute governing it or unconscionable use of the majority's power
resulting or likely to result in financial loss or where action which could be
characterised as unfair and improper is made, that the court will exercise its
powers under s. 397 or s. 398 of the Companies Act. Every kind of oppression
cannot be remedied by the court. The oppression must be such as to justify the
winding-up of the company on just and equitable grounds, since the words used
are "are being conducted". The action complained of must be a
continuous one and not either an isolated or a stale one. Once the court is
satisfied that the complaint is made without bona fides and to settle old
scores or with the sole intention of mud-slinging, no orders under s. 397 or s.
398 will be passed. The court must have strong grounds before it to order a winding
up. An order under s. 397 or s. 398 can be supported only if such grounds are
present. The fact that the complaining parties were themselves participants in
the alleged activities will be one of the factors to dissuade the court from
exercising its powers under the section. Delay and acquiescence in the acts
complained of will also be circumstances against the grant of reliefs. The
powers of the court under s. 402 are wide. But the courts have always exercised
restraint in interfering with the affairs of the company, for the affairs of
the company are normally its own concern and the concern of its shareholders.
It is only when the facts and evidence before the court are such as to persuade
it to hold that interference with the affairs of the company is necessary that
it would exercise its powers. The interest of public good will always be kept
by the court in mind. But the concept of public interest will preponderate over
the autonomy of a company and the management under the articles of association
and within the confines of the provisions of the Companies Act, only if such
evidence is available before the court. Stray cases of mismanagement or even a
few cases of mismanagement without sufficient proof will not lead a court to
entrust the powers of the management of a company in the interest of public
good, to strangers appointed by the court. Disgruntled shareholders there will
always be. Courts will not listen to them unless they make out a persuasive
case of oppression and mismanagement. The provisions of the Companies Act,
especially Chapter VI, are not meant to convert the company court into a super structure supervising all its activities and affairs.
Since the powers are wide, they have to be exercised with utmost restraint. In
this case, we have the spectacle of two disgruntled directors who had
themselves been participants in the various acts of mismanagement alleged
figuring with injured innocence as complainants before the court. This
circumstance itself to a large extent demolishes the bona fides of the
allegations put forward. This fact would not have influenced us if there was
reliable evidence to show that the respondents acted to the peril of the
company and indulged in acts amounting to oppression of the minority
shareholders and if the petitioners had made out sufficient grounds justifying
the winding up of the company. We hold that the learned judge was justified in
dismissing the petitions. As already indicated, the direction to appoint an
Inspector, though challenged in the memorandum of cross-objection, has to stand
since the memorandum is not pressed.
In the result, the appeals
and the memorandum of cross-objections are dismissed without costs.
Counsel for the appellants
in both the appeals make an oral application for grant of certificate for leave
to the Supreme Court. We are not satisfied that these two appeals involve any
substantial question of law of general importance, which, in our opinion, needs
to be decided by the Supreme Court. Certificate refused.
[1974]
44 COMP. CAS. 106 (
high court of
Indian Express (
v.
Chief Presidency Magistrate
VeerasWami, C.J.
a0nd Paul, J.
WRIT APPEAL NOS. 554 AND 555 OF 1971
AND 69 TO 72 OF 1972 AND C.M.P. NOS. 4262,
4263, 4029
AND 4030 OF 1972
M. K. Nambiar, A. R. Ratnanathan
and K. C. Rajappa for the Appellants.
Sivam
for Habibulla Badsha, F. S. Nariman and
K. Parasaran for the Respondents.
Writ Appeals Nos. 554/71, 69/72 and 70/72 are directed against the judgment of Ramaprasada Rao J. dismissing the Writ Petitions Nos. 1916/71, 1917/71 and 1918/71 preferred under article 226 of the Constitution of India for the issue of writs of certiorari calling for the records in RC. No. 2/71-SIV relating to the warrants issued by the Chief Presidency Magistrate, Egmore, Madras, dated June 7, 1971, and to quash the said warrants, while writ Appeals Nos. 555/71, 71/72 and 72/72 are directed against the judgment of Ramaprasada Rao J. dismissing Writ Petitions Nos. 2394, 2395 and 2396 of 1971 preferred under article 226 of the Constitution of India for the issue of writs of mandamus directing the first respondent therein, the Company Law Board, to withdraw the complaint lodged by it with the Central Bureau of Investigation and to refrain from prosecuting their investigation or taking any further action in the matter of the alleged violation of sections 420, 477 and 120-B of the Indian Penal Code in relation to the appellant-companies.
The first appellants in
these writ appeals, namely, the Indian Express (
During August-September, 1969, one Mr.
N. H. Iyer, an officer of the Company Law Board, inspected the books of
accounts of the Express Newspapers Private Ltd.,
It was contended in these
first batch of writ petitions that owing to mala fide, perverse and
unreasonable political motives and on extraneous and irrelevant considerations,
this group of newspapers has been discriminated against and singled out for
hostile and unequal treatment as compared to other newspapers and the
petitioners were being prosecuted by the Government because of the attitude of
the ruling party against the group of the newspapers owned by the group
companies and in this process the Company Law Board, the Central Bureau of
Investigation and its officers were being used as instruments of oppression
against the petitioners and there were no grounds at all for searching the
premises of the petitioners or for seizing the documents. The main contention
raised in the second batch of writ petitions was that the Companies Act of 1956
is a code the intrinsic nature of which is that it is exhaustive in regard to
matters specifically provided for therein and as such the specific procedure
prescribed therein on receipt of the report under section 209(4) of the
Companies Act has to be followed and the Company Law Board cannot invoke the
provisions of the Criminal Procedure Code and resort to the agency of the
police for making an investigation under the provisions of the Criminal
Procedure Code, and prosecuting the offenders for offences committed by the
officers of the company in relation to the affairs of the company, even though
those offences would also be offences under the Indian Penal Code, and in
laying the information before the police for them to investigate and prosecute,
the Company Law Board had acted illegally or without jurisdiction in the sense
that it had done an act which was impliedly prohibited and consequently the
information laid before the Central Bureau of Investigation should be considered
as non est and as a result thereof the registering of that information as a
First Information Report by the Special Police Establishment and the subsequent
action taken by the police during the course of their investigation such as the
applying for and obtaining search warrants and searching the premises of the
appellants, should be held to be without jurisdiction. These contentions did
not find acceptance at the hands of the learned judge, Ramaprasada Rao J.
Mr. M. K. Nambiar, on
behalf of the appellants, has contended before us that the Companies Act being
a self-contained Code and a consolidating and amending Act, prescribing in
detail the mode of investigation into and prosecution by the Company Law Board,
in respect of any offences committed in relation to the companies' affairs,
recourse to any investigation or prosecution by the police under the Code of
Criminal Procedure is by necessary intendment prohibited and the Company Law
Board being a creature of the statute, it can, as a statutory authority,
exercise only such powers as are vested in it by the Companies Act and when the
Companies Act has conferred no powers on the Company Law Board to prefer a
complaint to the police for investigation and prosecution under the Code of
Criminal Procedure, any complaint laid by the Company Law Board with the police
for such investigation and prosecution in respect of any offences which appear
to have been committed in relation to the companies' affairs, would be ultra
vires its powers and would be wholly void and consequently the investigation
and prosecution by the Central Bureau of Investigation in pursuance of such a
complaint would be illegal, void and wholly without jurisdiction and even if
the finding of Ramaprasada Rao J. that the Company Law Board had the power to
make a complaint to the police like any other citizen under the Criminal
Procedure Code is correct, it would follow that the Company Law Board would
have the choice of two procedures in respect of persons similarly situate, one
procedure being more advantageous to the persons involved than the other, the
act of the Company Law Board in choosing the procedure which is less
advantageous to the persons involved would be violative of article 14 of the
Constitution and further the Central Bureau of Investigation has no
jurisdiction to investigate into the complaint, since section 3 of the Delhi
Special Police Establishment Act is void by reason of excessive delegation and
there is no proof of consent accorded by the Madras Government for the investigation
by the Central Bureau of Investigation as required by entry 8, List I, of the
Constitution. It must be stated at this juncture that the last mentioned
proposition was not pressed before Ramaprasada Rao J., as the learned judge
himself has observed in his judgment. Hence the appellants in Writ Appeals Nos.
554 and 555/71 have filed C.M.Ps. Nos. 4262 and 4263/72 for permission to raise
that ground as an additional ground, in these appeals. But in view of the fact
that this ground was not pressed before the learned judge, we are not
permitting the appellants to raise that ground before us and C.M.Ps. Nos, 4262
and 4263/72 are, therefore, dismissed. The contention that the act of the
Company Law Board in laying a complaint to the police is violative of article
14 of the Constitution was also not raised before the learned judge; but
C.M.Ps. Nos. 4029 and 4030 of 1972 have been filed before us, seeking
permission to raise that ground as an additional ground of appeal. Mr. Nambiar,
the learned counsel for the appellants, has contended that this ground being a
pure question of law can be raised at a late stage, even in appeal and where
such a question of law is raised as an additional ground, it is in the
discretion of the High Court either to allow it or not. In support of that
contention of his, he has cited the decision of the Supreme Court in Chittoori
Subbanna v. Kudappa Sublanna .
There it was held by the Supreme Court:
"A pure question
of law not dependent on the determination of any question of fact should be
allowed to be raised for the first time in the grounds of appeal by the first
appellate court. Such pure questions of law are allowed for the first time at later
stages also. Where a new point not taken in the grounds of appeal is sought to
be raised as an additional ground by a substantive application for that
purpose, the High Court has discretion to allow the application or refuse it.
But the discretion exercised by the High Court will not be interfered with
except for good reasons, for example, where the court acts capriciously or in
disregard of any legal principle".
The Supreme Court has, in
that decision, referred to the following observations of Lord Watson in Connecticut Fire Insurance Co.
v. Kavanagh :
"'When a question of law is raised for the
first time in a court of last resort upon the construction of a document, or upon
facts either admitted or proved beyond controversy, it is not only competent
but expedient in the interests of justice to entertain the plea. The expediency
of adopting that course may be doubted, when the plea cannot be disposed of
without deciding nice questions of fact, in considering which the court of
ultimate review is placed in a much less advantageous position than the courts
below'".
It has been pointed out by
Mr. Nambiar that this additional ground has arisen because of the finding of
the learned judge that there are two procedures allowed by law for the Company
Law Board to adopt in the matter of investigation into and prosecution of the
offenders in regard to offences committed by the officers of the company in
relation to the affairs of the company and as such in the interests of justice
the appellants should be allowed to raise that additional ground as a pure
question of law. In the circumstances, we are inclined to allow this additional
ground of appeal to be urged before us. C.M.Ps. Nos. 4029 and 4030 of 1972 are
ordered accordingly.
The learned Additional
Solicitor-General appearing on behalf of the Company Law Board has, however,
urged before us that section 5(1) of the Code of Criminal Procedure is not
subject to or controlled by any other law and all offences under the Indian
Penal Code have to be investigated into and tried only under the provisions of
the Code of Criminal Procedure and there is also no explicit provision in the
Companies Act that offences under the Indian Penal Code in relation to
companies shall be investigated only under the provisions of the Companies Act
and there is also no provision in the Companies Act relating to laying of
information to the police and as such the laying of the complaint to the
Central Bureau of Investigation by the Company Law Board was within the
competence of the Company Law Board and was in accordance with law. He has
pointed out that there is a vital difference between laying of the information
before the police by the Company Law Board, followed by an investigation under
the Criminal Procedure Code and an investigation into the affairs of a company
by the Company Law Board under the provisions of the Companies Act followed by
a prosecution under section 242 of the Companies Act and has argued that the
scope of the aforesaid two procedures are different and, in the circumstances
of this case, if thought fit, the Company Law Board was well within its right
in laying the information before the police and the police who have not only a
statutory right, but are also statutorily bound, to investigate into the
information so received, have rightly carried on the investigation under the
provisions of the Code of Criminal Procedure and the issue of the search
warrants by the learned Chief Presidency Magistrate, on the facts placed before
him by means of the application filed by Mr. Charanjiv Lall and by his
statement on oath before the learned Chief Presidency Magistrate, and after
applying his mind to those facts and on being satisfied, is in accordance with
law. He has futher argued that there is nothing in the Companies Act to
indicate that section 5(1) of the Code of Criminal Procedure would be
applicable to all offences committed in relation to the affairs of a company,
nor is there anything in the Companies Act to indicate that the Central
Government is prevented from laying a First Information Report, if an offence
is disclosed on the report of an inspection made under section 209(4) of the
Companies Act or otherwise and there is no obligation cast on the Company Law
Board to follow the procedure starting with an inspection under section 209(4)
of the Act and ending with the inspector's report under section 241 of the Act
and that in fact there is no obligation cast on the Company Law Board to order
an investigation under section 235 of the Act, after an inspection under
section 209(4) of the Act and actually there is no link between an inspection
under section 209(4) and an investigation under section 235 and that section
242 of the Companies Act is merely an enabling provision and it does not
restrict or control either complaints filed by third persons or the power of
the police to investigate under the provisions of the Code of Criminal
Procedure. He has further argued that assuming that section 242 of the
Companies Act is exhaustive of the subject with which it deals, the subject so
dealt with is prosecution for criminal offences disclosed in an inspection
report of an investigating officer under section 235 or 237 of the Companies
Act and it does not control or affect or provide for the laying of information
before the police in respect of cognizable offences under the Indian Penal Code
disclosed as a result of an inspection under section 209(b) of the Companies
Act or otherwise. He has lastly urged that executive action taken under valid
provisions cannot be violative of article 14 of the Constitution of India,
especially when neither section 242 of the Companies Act nor the provisions of
the Code of Criminal Procedure are contended to be violative of article 14 of
the Constitution of India.
Undoubtedly, the inherent
nature of a Code is that it is exhaustive in regard to the matters specifically
provided for in it. The Indian Companies Act is an Act to consolidate and amend
the law relating to companies and certain other associations.
"The purpose of a
consolidating statute is to present the whole body of the statutory law on a
subject in complete form, repealing the former statutes". (Halsbury's Laws
of England, third edition, volume 36, page 366).
The essence of a code is to
be exhaustive on the matters in respect of which it declares the law and it is
not the province of a judge to disregard or go outside the letter of the
enactment according to its true construction. The whole scheme of the Companies
Act is to ensure proper conduct of the affairs of companies in public interest,
and the preservation of the image of the company in the eyes of the public, and
in the interests of the members of the company and also the creditors to ensure
that the affairs of the company are conducted in a proper manner and its
transactions are above suspicion. It is to ensure this that the various
provisions under the Companies Act have been devised and returns have been
prescribed for the purpose of enabling a close watch to be kept in regard to
the transactions of the company and in regard to the manner in which its
affairs are conducted. Section 209(4) of the Companies Act enjoins the books of
account and other books and papers to be kept open to inspection by any director
during business hours and also to be kept open for inspection during business
hours,—
(i) by the
Registrar, and
(ii) by any
officer of Government authorised by the Central Government in this behalf.
Under section 233A, powers
have been given to the Central Government to direct special audit of the
accounts in certain cases and powers have been granted under other provisions
for the Registrar of Companies to call for information and explanation when he
thinks that any such information or explanation is necessary on perusing any
document which a company is required to submit under the provisions of the Act
and a duty is cast on all persons who are officers of the company to furnish
such information or explanation to the best of their power to the Registrar and
if no information or explanation is furnished within the time specified or if
the information or explanation furnished is, in the opinion of the Registrar,
inadequate, the Registrar may by order in writing call on the company to
produce before him for his inspection such books and papers as he considers
necessary within such time as he may specify in the order and a duty is cast on
the company and all persons who are officers of the company to produce such
books and papers; and the refusal or neglect to furnish any such information or
explanation or to produce any such books and papers is made an offence
punishable with a fine and power is given to the court trying that offence to
make an order on the company for production before the Registrar of such books
and papers as in the opinion of the court may reasonably be required by the
Registrar for the purpose as referred to above on the application of the
Registrar and on receiving any writing containing the information or
explanation or any book or paper, the Registrar may annex that writing, book or
paper and if such information or explanation is not furnished within the
specified time or if on perusing such information or explanation or the books
and papers produced, the Registrar is of opinion that the document referred to
above together with such information or explanation or such books and papers
discloses an unsatisfactory state of affairs or does not disclose a full and
fair statement of any matter to which the document purports to relate, the
Registrar shall report in writing the circumstances of the case to the Central
Government. Sub-section (7) of section 234 further confers power on the
Registrar to call on the company to furnish in writing any information or
explanation on matters specified in the order, within such time as he may
specify therein, if it is represented to the Registrar on materials placed
before him by any contributory or creditor or any other persons interested,
that the business of the company is being carried on in fraud of its creditors
or of persons dealing with the company or otherwise for a fraudulent or
unlawful purpose.
Then under section 235 of
the Companies Act the Central Government is given the power and discretion to
appoint one or more persons as inspectors to investigate the affairs of any
company and to report thereon in such manner as the Central Government may
direct,—
(a) in the case of a company having a share
capital, on the application either of not less than two hundred members or of
members holding not less than one-tenth of the total voting power therein;
(b) in the case of a company not having a
share capital, on the application of not less than one-fifth in number of the
persons on the company's register of members;
(c) in the case of any company, on a report
by the Registrar under sub-section (6), or sub-section (7) read with
sub-section (6), of section 234.
Then
section 237 of the Act says that, without prejudice to its powers under section
235, the Central Government—
"(a) shall appoint one or more competent
persons as Inspectors to investigate the affairs of a company and to report
thereon in such manner as the Central Government may direct, if—
(i) the
company, by special resolution; or
(ii) the
court, by order,
declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and
(b) may do so if, in the opinion of the
Central Government, there are circumstances suggesting—
(i) that the business of the company is being
conducted with intent to defraud its creditors, members, or any other persons,
or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of
any of its members, or that the company was formed for any fraudulent or
unlawful purpose; or
(ii) that persons concerned in the formation of
the company or the management of its affairs have in connection therewith been
guilty of fraud, misfeasance or other misconduct towards the company or towards
any of its members; or
(iii) that the members of the company have not been
given all the information with respect to its affairs which they might
reasonably expect, including information relating to the calculation of the
commission payable to a managing or other director, the managing agent, the secretaries
and treasurers, or the manager, of the company".
Section
239 says :
"(1) If an inspector appointed under section
235 or 237 to investigate the affairs of a company thinks it necessary for the
purposes of his investigation to investigate also the affairs of —
(a) any other body corporate which is, or has at
any relevant time been, the company's subsidiary or holding company, or a
subsidiary of its holding company, or a holding company of its subsidiary;
(b) any other body
corporate which is, or has at any relevant time been, managed—
(i) by any person as managing agent or as secretaries and
treasurers or as managing director or as manager, who is, or was at the
relevant time, either the managing agent or the secretaries and treasurers or
the managing director or the manager of the company; or
(ii) by any person who is, or was at the relevant time, an
associate of the managing agent or secretaries and treasurers of the company;
or
(iii) by any person of whom the managing agent
or secretaries and treasurers of the company is, or was at the relevant time,
an associate;
(c) any other body corporate which is, or has at any relevant time
been, managed by the company or whose board of directors comprises of nominees
of the company or is accustomed to act in accordance with the directions or
instructions of—
(i) the company;
or
(ii) any of the
directors of the company; or
(iii) any company any of whose directorships is
held by the employees or nominees of those having the control and management of
the first mentioned company; or
(d) any person who is or has at any relevant time been the company's
managing agent or secretaries and treasurers or managing director or manager or
an associate of such managing agent or secretaries and treasurers, the
inspector shall, subject to the provisions of sub-section (2), have power so to
do and shall report on the affairs of the other body corporate or of the
managing agent, secretaries and treasurers, managing director, manager or
associate of the managing agent or secretaries and treasurers, so far as he
thinks that the result of his investigation thereof are relevant to the
investigation of the affairs of the first mentioned company.
(2) In the case of any body corporate or
person referred to in clause (b)(ii), b(iii), (c) or (d) of sub-section (1),
the inspector shall not exercise his power of investigating into, and reporting
on, its or his affairs without first having obtained the prior approval of the
Central Government thereto:
Provided that before
according approval under this sub-section, the Central Government shall give
the body corporate or person a reasonable opportunity to show cause why such
approval should not be accorded".
Section 240 makes provision
for the production of documents and evidence before the inspector so appointed
and casts a duty on all officers and other employees and agents of the company,
and where the company is or was managed by a managing agent or secretaries and
treasurers, on all officers and other employees and agents of the managing
agent or secretaries and treasurers, and where the affairs of any other body
corporate or of a managing agent or secretaries and treasurers, or of an
associate of a managing agent or secretaries and treasurers, are investigated
by virtue of section 239, on all officers and other employees and agents of
such body corporate, managing agent, secretaries and treasurers, or associate,
and where such managing agent, secretaries and treasurers or associate is or
was a firm, on all the partners in the firm, to preserve and to produce to an
inspector or any person authorised by him in this behalf with the previous
approval of the Central Government, all books and papers of, or relating to,
the company or, as the case may be, of or relating to the other body corporate,
managing agent, secretaries and treasurers or associate, which are in their
custody or power and otherwise to give to the inspector all assistance in
connection with the investigation which they are reasonably able to give. That
section gives power to the inspector to examine on oath any of the persons
referred to above and any other person with the previous approval of the
Central Government in relation to the affairs of the company, etc. Power is
conferred also by means of section 240A for the seizure of documents by the
inspector. Then, under section 241, provision is made for making a report by
the inspector on the conclusion of the investigation made under section 239. These
provisions have been devised to enable the Central Government to keep a close
watch over the affairs of the companies in the interests of the members of the
company, the creditors, etc. Section 242 provides for the prosecution of any
person who has, in relation to the company or in relation to any other body
corporate, managing agent, secretaries and treasurers, or associate of a
managing agent or secretaries and treasurers whose affairs have been
investigated by virtue of section 239, been guilty of any offence for which he
is criminally liable. The section says that on a consideration of the report
made under section 241, the Central Government may, after taking such legal
advice as it thinks fit, prosecute such person for the offence; and it shall be
the duty of all officers and other employees and agents of the company, body
corporate, etc., to give the Central Government all assistance in connection
with the prosecution which they are reasonably able to give.
It is contended by Mr.
Narabiar on behalf of the appellants that by reason of the incorporation of the
above provisions, recourse to the laying of information before the police for
their investigating under the provisions of the Code of Criminal Procedure into
offences under the Indian Penal Code appearing to have been committed in
relation to the affairs of the company is impliedly barred and the Company Law
Board is bound to carry on investigation under the aforesaid provisions of the
Companies Act and, eventually, under section 242, prosecute the person against
whom offences have been disclosed as a result of such inspection or
investigation by an inspector made under the provisions referred to above. But,
then, it should be noted that even assuming that section 242 of the Companies
Act is exhaustive of the subject with which it deals, that is, prosecution for
criminal offences disclosed on a report of an investigation made under section
235 or 237, there is no provision in regard to the laying of information before
the police for the police to investigate under the provisions of the Code of
Criminal Procedure where cognizable offences under the Indian Penal Code are
disclosed on an inspection under section 209(4) of the Companies Act and as
such in our view section 242 of the Act does not control or affect the laying
of information before the police in respect of cognizable offences under the
Indian Penal Code disclosed as a result of an inspection under section 209(4)
of the Act or otherwise. Section 242 is the culmination of an investigation started
under section 235 or 237 of the Act. Where no such investigation has been
started under section 235 or 237, there is no question of section 242 coming
into operation. Now, in the case before us, no investigation under section 237
had been started. It was only as a result of a report of an inspection made
under section 209(4) by Mr. Puri that the Central Government laid the
information before the police for investigation under the provisions of the
Code of Criminal Procedure in regard to the cognizable offences under the
Indian Penal Code which there were grounds to believe had been committed in
relation to the affairs of the company. It may be noted that there is no
provision for a report to be sent on an inspection of the books of account,
etc., of the company made under section 209(4). The report made by Mr. Puri
after his inspection of the accounts, etc., under section 209(4) is, therefore,
only an administrative report to apprise the Central Government of the state of
affairs of the company. Mr. Puri, no doubt, recommended investigation under
section 237; but the Central Government thought it fit and expedient to lay
information before the police so that the police may investigate under the
provisions of the Code of Criminal Procedure inasmuch as cognizable offences
under the Indian Penal Code were disclosed, presumably because such an
investigation by the police under the provisions of the Code of Criminal
Procedure would be more effective. We can see nothing in the provisions of the
Companies Act which would even by implication bar a recourse to the laying of
the information before the police for the purpose of investigation and action
under the Code of Criminal Procedure when there are reasonable grounds for
believing that cognizable offences under the Indian Penal Code had been
committed in relation to the affairs of the company. It cannot be said that the
Companies Act is exhaustive even in the matter of investigation into cognizable
offences under the Indian Penal Code committed in relation to the affairs of a
company. In fact, the Act does not touch that aspect at all.
Nevertheless, Mr. Nambiar
contends that what the statute does not expressly or impliedly authorise is to
be taken to be prohibited. No doubt, " statutory corporations have such
rights and can do such acts only as are authorised directly or indirectly by
the statutes creating them", while " non-statutory corporations,
speaking generally, can do everything that an ordinary individual can do unless
restricted directly or indirectly by statute".
"The powers of a
corporation created by statute are limited and circumscribed by the statutes
which regulate it, and extend no further than is expressly stated therein, or
is necessarily and properly required for carrying into effect the purposes of
its incorporation, or may be fairly regarded as incidental to, or consequential
upon, those things which the legislature has authorised. What the statute does
not expressly or impliedly authorise is to be taken to be prohibited".
(Vide Halsbury's Laws of England, third edition, volume 9, pages 59, 62 and
63).
But, then, we are of the
opinion that the laying of information before the police by the Company Law
Board on a perusal of the inspection report under section 209(4) of the
Companies Act is necessarily and properly required for carrying into effect the
purpose of the information of the Board and may be fairly regarded as
incidental to or consequential upon those things which the legislature has
authorised. We do not think that the laying of information before the police in
this case contravenes the principles in Taylor v. Taylor that where power is given to do a thing in a
certain way the thing must be done in that way or not at all and that the other
methods of performance are necessarily forbidden. It has been recognised in
Rohtas Industries Ltd. v. S. D. Agarwal that the power conferred on the Central
Government under section 235 as well as under section 237(b) is a discretionary
power. Consequently, it is left to the Central Government to refrain from
ordering an investigation into the affairs of a company under section 237(b).
Only if it chooses to order an investigation under section 237(b) then that
investigation would culminate in action being taken under section 242. There is
nothing in the Companies Act which would either expressly or impliedly prohibit
the Central Government from laying information to the police in lieu of
ordering an investigation under section 237(b). Mr. Nambiar admitted that there
is no express prohibition regarding investigation by police; but he contended
that according to the principles of interpretation of statues there is an
implied prohibition. We are unable to see any such implied prohibition on an
interpretation of the relevant provisions of the Companies Act.
In M. Vaidyanathan v.
Sub-Divisional Magistrate, Erode ,
a similar argument appears to have been advanced while challenging the act of
the Registrar of Companies in making a complaint to the police against the
officers of the company without availing himself of the powers vested in him by
section 234 and other relevant provisions of the Act. It was observed in that
decision that:
"Section 242(1) of the Companies Act is
only an enabling provision as the use of the word 'may' in the passage 'the
Central Government may, after taking such legal advice as it thinks fit,
prosecute such a person for the offence' indicates. By itself section 242(1)
does not divest a police officer of the jurisdiction conferred upon him either
under section 154, 156 or 157, Criminal Procedure Code. No more than section
630 of the Act, does section 242 bar the exercise of the jurisdiction of the
police to investigate into a complaint of the commission of cognizable offences
punishable under sections 406 and 409, Indian Penal Code".
Another argument advanced
by the learned counsel for the appellants is that the source of the power of
the police to investigate is the statute itself, namely, the Criminal Procedure
Code, but the statute itself may limit that power, as for example section 195,
and equally so another statute may limit that power. We are, however, unable to
accept this argument, for, in our view, there is nothing in the Companies Act
which limits the power of the police to investigate under the Criminal
Procedure Code.
In B. M. Bajoria v. Union
of India it was held that :
"There is nothing in
section 237 of the Companies Act, 1956, which makes it imperative for the
Government to order investigation into the affairs of the company when the
Government does not consider the necessity of further probe and is already in
possession of facts which in its opinion show the commission of an offence by
an officer of the company or other person in respect of the assets of the
company. There is, in such an event, no legal bar to the officer of the Company
Law Board or other Government officer concerned making a report to the
police.......
There is nothing in section
242 or the other provisions of the Companies Act, 1956, to point to the
conclusion that no prosecution can be launched or no report can be made to the
police in respect of an alleged act of embezzlement or malfeasance by an
individual connected with a company without recourse to an investigation under
section 235 or section 237".
We are in respectful agreement with these observations.
It must also be noted that
under section 237(b) of the Companies Act it is not mandatory on the part of
the Central Government to order an investigation into the affairs of a company
and to call for a report thereon even if, in the opinion of the Central
Government, the circumstances mentioned under sub-section (b) of section 237
exist. The section says that the Central Government may appoint one or more competent
persons to investigate the affairs of a company and to report thereon if, in
the opinion of the Central Government, there are circumstances suggesting
fraud, misconduct, etc., in the affairs of the company. No obligation is,
therefore, cast on the Central Government to follow the procedure starting with
an investigation under section 237 and culminating in a prosecution under the
provisions of section 242 and there is no provision which would prevent the
Central Government from laying the information before the police if a
cognizable offence under the Indian Penal Code is disclosed on an inspection
made under section 209(4) or otherwise.
The provisions of the
Companies Act do not exclude any of the provisions of the Criminal Procedure
Code in respect of laying of information before the police in regard to any
investigation by the police into cognizable offences under the Indian Penal
Code where such cognizable offences were committed in relation to the affairs
of a company. In the absence of clear and unambiguous language, intention to
alter the existing law should not be imputed to the legislature (vide Craies on
Statute Law, fifth edition, at pages 114 and 115). The law does not favour
repeal of statute by implication and, therefore, a later statute should not be
construed as repealing an earlier one without express words or by necessary
implication. (Vide Maxwell on the Interpretation of Statutes, tenth edition,
page 170 and Craies on Statute Law, fifth edition, page 337).
"Unless two statutes
are so plainly repugnant to each other, that effect cannot be given to both at
the same time, a repeal will not be implied,..". (Vide Kutner v. Phillips ).
There are no provisions in the Companies Act and in the Criminal Procedure Code which can be said to be so plainly repugnant to each other that effect cannot be given to both at the same time. In our view, there is no provision in the Companies Act which would by necessary implication exclude the provisions of the Criminal Procedure Code relating to laying of information to the police in regard to an investigation by the police into cognizable offences under the Indian Penal Code committed in relation to the affairs of a company.
In Daltnia Jain Airways
Ltd. v. Union of India it was held :
"Investigation under section 137 of the Indian Companies Act, 1913, is very different in scope from the investigation under the Code of Criminal Procedure and it is difficult to hold that by enactment of sections 137 to 141 A, the legislature intended to abrogate the provisions contained in Chapter XIV of the Criminal Procedure Code when offences have been committed in relation to the companies. It is not possible to say that the provisions of the Criminal Procedure Code cannot stand together with the provisions relating to investigation in the Companies Act and the proceedings under the Companies Act do not necessarily conflict with those under the Criminal Procedure Code. The proceedings started under section 137 onwards are not exclusively or primarily criminal. The investigation under these provisions is only into the affairs of the company which may disclose several liabilities of the officers of the company or may disclose commission of criminal offences".
In
Northern India Caterers (Private) Ltd. v. State of Punjab it has been observed
by the Supreme Court that :
"The rule of construction is that where a
statute provides in express terms that its enactment will repeal an earlier Act
by reason of its inconsistency with such earlier Act, the latter may be treated
as repealed. Even where the later Act does not contain such express words, if
the co-existence of the two sets of provisions is destructive of the object
with which the later Act was passed, the court would treat the earlier
provision as impliedly repealed.........But repeal by implication is not
generally favoured by courts".
Under section 5(1) of the Code of Criminal Procedure, all offences under the Indian Penal Code shall be investigated, inquired into, tried and otherwise dealt with according to the provisions of the Criminal Procedure Code. Section 5(2) states that all offences under any other law shall be investigated, inquired into, tried and otherwise dealt with according to the same provisions, but subject to any enactment for the time being in force regulating the manner or place of investigating, inquiring into, trying or otherwise dealing with such offences. Therefore, if, in relation to the affairs of a company, offences under the Indian Penal Code are disclosed, they shall be investigated, inquired into, tried and otherwise dealt with according to the provisions of the Criminal Procedure Code while offences under the Companies Act disclosed in relation to the affairs of a company could be investigated, inquired into, tried and otherwise dealt with according to the Criminal Procedure Code, but subject to the provisions in the Companies Act regulating the laying or place of investigating, inquiring into, trying or otherwise dealing with such offences.
In Emperor v. Khwaja Nazir
Ahmed the Privy Council has observed:
"Just as it is essential that every one
accused of a crime should have free access to a court of justice so that he may
be duly acquitted if found not guilty of the offence with which he is charged,
so it is of the utmost importance that the judiciary should not interfere with
the police in matters which are within their province and into which the law
imposes upon them the duty of enquiry. In India.... there is a statutory right
on the part of the police, under sections 154 and 156, to investigate the
circumstances of an alleged cognizable crime without requiring any authority
from the judicial authorities, and it would............be an unfortunate result
if it should be held possible to interfere with those statutory rights by an
exercise of the inherent jurisdiction of the court........"
Even assuming that the
Company Law Board acted outside its powers when it laid information before the
police to investigate and if necessary prosecute the persons involved in the
commission of cognizable offences under the Indian Penal Code in relation to
the affairs of the company, that would not in any way detract from the power of
the police to act on that information and commence investigation and carry it
through to its logical conclusion. The Criminal Procedure Code is not concerned
with the personality of the person who lays the first information report; and
it is only concerned with the quality of the information. In M. Vaidyanathan v.
Sub-Divisional Magistrate, Erode ,
it was held that even if there was any irregularity or any illegality attendant
on the letter of the Registrar of Companies which laid the information before
the police and which was treated as a complaint by the police for the purpose
of investigation, neither the jurisdiction to investigate nor the exercise
thereof by the police officer could be affected.
Any person can lay
information before the police and if such information could be believed to be
authentic and discloses cognizable offences, the police are bound to
investigate into the same. Any individual can set the law in motion by laying
information before the police or by preferring a complaint to the court. In the
present case before us, the information laid before the police was signed by
the Under-Secretary to the Government of India and on receipt of the
information the police have registered the case and took up investigation into
the case as they are empowered to do. When any individual can lay information
before the police in respect of the commission of cognizable offences for the
police to investigate, we are not able to see how any disability could attach
to the information laid in this case, merely because under the provisions of
the Companies Act no power is conferred on the Company Law Board or the Central
Government to lay such information before the police.
Mr. Nambiar has argued
that, assuming that two courses were open to the Central Government or the
Company Law Board,
(1) to
order an investigation into the affairs of the company under the provisions of
section 237, or
(2) lay
information before the police,
the
action of the Central Government or the Company Law Board in choosing the
latter course is violative of article 14 of the Constitution of India. This
ground was not urged before Ramaprasada Rao J., but we have permitted this
additional ground to be raised before us, even though in our opinion this
ground is untenable as we shall later show. Mr. Nambiar, while enlarging on the
aforesaid argument of his, has pointed out that the procedure of ordering an
investigation into the affairs of a company under section 237 of the Companies
Act and then proceeding under section 242 of the Act is a procedure more
advantageous to the persons involved than the procedure of laying information
before the police and thereby entrusting the investigation and further action
thereon to the police and as such the choosing of the latter procedure is
discriminatory. Mr. Nambiar has pointed out that as between the aforesaid two
procedures there are six vital differences :
(1) Under the provisions of the Companies
Act, only competent persons would be ordered to investigate into the matter
whereas under the Criminal Procedure Code any police officer could investigate
into the same;
(2) Under the provisions of the Companies
Act even the order of the Government directing investigation under section 237
is subject to judicial review as has been held in Rohtas Industries Ltd. v. S.
D. Agarwal whereas the laying of information before the
police is not an act that is subject to judicial review;
(3) When an investigation is conducted under
the provisions of the Companies Act, under the orders of the Government, a
report of the investigation has to be given to the party, but there is no
provision under the Criminal Procedure Code for the accused to be given a copy
of any report of the investigation;
(4) The Company Law Board, which consists of
experts, reviews such a report made after an investigation into the affairs of
a company and that itself is a guarantee that the matter would be properly
considered before a prosecution is launched against the persons involved;
(5) The
Company Law Board is bound to take legal advice after the report is submitted;
and
(6) The Company Law Board being a wing of
the Central Government is the highest authority in the land and, as such, if it
prosecutes under the provisions of section 242, such a prosecution would be on
adequate grounds and for proper reasons.
But
then, in our opinion, the provisions of the Criminal Procedure Code provide
ample safeguards for a fair investigation to be carried on. Though the Company Law Board may consist of experts in
regard to company matters, so far as investigations into offences under the
Indian Penal Code are concerned, we are unable to see how police officers could
not be equated to the position, though not of experts, at least of persons well
experienced in the matter of investigation into offences. Further, the
provision under section 242 of the Companies Act enabling the Central Government
to take legal advice is only an enabling provision and it gives a discretion to
the Central Government to take legal advice or not before prosecuting
offenders. There is no duty cast on the Central Government to take legal advice
after reviewing the report of investigation before prosecuting the offenders.
In the case of an investigation by the police after the police sends the final
report and the court takes cognizance of the offences disclosed in the final
report, copies of all the statements recorded during the investigation as also
documents on which the prosecution proposed to rely have to be furnished to the
accused persons before the commencement of the enquiry or trial. We do not
agree that the procedure laid down under the Companies Act is more advantageous
to the persons involved than the procedure laid down by the Criminal Procedure
Code. In our view, the scope of the two procedures is entirely different and
would apply to different sets of circumstances and cannot even be construed as
parallel to each other. Therefore, we are of the view that the act of the
Central Government or the Company Law Board in laying the information to the
police is not violative of article 14 of the Constitution.
The net result is that we
find that there are no grounds at all to issue a writ in the nature of mandamus
or any suitable direction directing the department of company affairs to
withdraw the complaint lodged by it with the Central Bureau of Investigation or
to refrain from prosecuting such investigation or taking further action in
respect of the information so laid. Consequently, Writ Appeals Nos. 555/71,
71/72 and 72/72 are dismissed with costs.
In the other batch of writ
appeals, we have to straightaway state that there is no lack of bona fides on
the part of the Central Government or the police in setting the process of
investigation into motion. The argument that the warrants issued by the first
respondent, the learned Chief Presidency Magistrate, were not in accordance
with law cannot be accepted. The first respondent had examined Mr. Charanjiv
Lall on oath and only after being satisfied that the documents called for were
necessary for the purpose of investigation and would not, as asserted by Mr.
Charanjiv Lall, be produced by the company if called upon so to do, the learned
Chief Presidency Magistrate issued the search warrant after applying his
judicial mind to the question. The learned Magistrate was not bound to record
his reasons in writing. All that section 96 of the Criminal Procedure Code requires
is that the Magistrate must have reason to believe that such is the state of
affairs or, in other words, the Magistrate must be satisfied that there is
necessity for the search warrant to be issued, as otherwise the thing would not
be produced. The Criminal Procedure Code gives power to a police officer to
request for the issue of a search warrant if he has reasonable grounds for
believing that such search was required for the purposes of investigation into
the offence which he is authorised to investigate; and Mr. Charanjiv Lall who
applied for the search warrant appraised the learned Chief Presidency
Magistrate of the necessary materials on the basis of which a search warrant
was required and the Magistrate was satisfied as to the necessity for such a warrant
and then issued it. That being so, the act of the Magistrate in so issuing the
search warrant would not be open to judicial review under article 226 of the
Constitution. Further, as pointed out by the learned judge Ramaprasada Rao J.,
the search warrants have already been executed. It would be futile now to issue
a writ quashing the issuance of the warrant. Therefore, we see no grounds at
all to issue a writ of certiorari to quash the search warrants dated June 7,
1971. Consequently, Writ Appeals Nos. 554/71, 69/72 and 70/72 are dismissed
with costs. Counsel's fee Rs. 500 in the first of the appeals. No fee in the
others.
[1983] 54 COMP CAS 370 (KER.)
HIGH COURT OF KERALA
v.
Mathrubhumi Printing and
Publishing Co. Ltd.
M.P. MENON J.
COMPANY PETITION NO. 11 OF 1979
SEPTEMBER 9, 1981
M. Ramanatha Pillai for the Petitioner.
P.K. Kurien and K.A. Nayar for the Respondent.
M.P. Menon J.—This is a petition under s. 237(a)(ii) of the Companies
Act. The petitioner is a member of a company, and he wants an order declaring
that its affairs require investigation by an inspector appointed by the Central
Govt. Before going into the facts of the case, it is necessary to examine under
what circumstances such a declaration could be made.
Section 237 of the Act
reads :
"Investigation of
company's affairs in other cases.—Without prejudice to its powers under section
235, the Central Government—
(a) shall appoint one or more competent persons as inspectors to investigate
the affairs of a company and to report thereon in such manner as the Central
Government may direct, if—
(i) the company,
by special resolution ; or
(ii) the court, by order, declares that the affairs of the company
ought to be investigated by an inspector appointed by the Central Government;
and
(b) may do so if, in
the opinion of the Central Government, there are circumstances suggesting—
(i) that the business of the company is being conducted with
intent to defraud its creditors, members or any other persons, or otherwise for
a fraudulent or unlawful purpose, or in a manner oppressive of any of its
members, or that the company was formed for any fraudulent or unlawful purpose;
(ii) that persons concerned in the formation of the company or the
management of its affairs have in connection therewith been guilty of fraud,
misfeasance or other misconduct towards the company or towards any of its
members ; or
(iii) that the members of the company have not
been given all the information with respect to its affairs which they might
reasonably expect, including information relating to the calculation of the
commission payable to a managing or other director, the managing agent, the
secretaries and treasurers, or the manager, of the company."
Counsel suggests that the
discretion conferred on the court under cl. (a)(ii) is wide and uncontrolled
and that the court can pass an order whenever it is satisfied, on a scrutiny of
the materials placed before it, that an investigation is called for. The
petitioner can prove his allegations before the inspector, when one is
appointed, it is said : the court is only to see whether prima facie they have
substance. But the question still remains on what kind of material the court
can act. Going by the section, the inspector is to investigate into the affairs
of the company, and not into the specific allegations made by a petitioner,
suggesting thereby that the allegations or the materials should be such as to
satisfy the court about the need for such an investigation. Section 237(b)
enumerates the circumstances under which the Central Govt. can suo motu order a
similar investigation ; and the discretion there is not uncontrolled. The
Central Govt., before exercising its power thereunder, should form an opinion
that circumstances suggesting the existence of one or other of the matters
specified in sub-cls. (i) to (iii) are there. It should form an opinion that
there are circumstances to suggest—
(i) that the business of the company is being carried on with
intent to defraud its members, or otherwise for a fraudulent or unlawful
purpose ; or
(ii) that it is carried on in a manner
oppressive of its members ; or
(iii) that the company itself was formed for a
fraudulent or unlawful purpose; or
(iv) that the persons concerned with its formation or management
are guilty of fraud, misfeasance or other misconduct in connection with the
formation or management; or
(v) that due information is withheld from
the members.
It is not as if a member can make any
allegation and the Central Govt. can order an investigation on being satisfied
that it calls for a further probe. The nature of the allegations must have
relevance to the matters enumerated in cl. (b). The question then is, is the
situation different when the court has to decide under cl. (a) about the
desirability of an investigation ?
The answer to my mind lies
partly in the history of company law, and partly in some of the other
provisions of the Act. A company is an association of men or women for trading,
more or less like a partnership. In a partnership, the members are few, and
each has confidence in the other. When the members participating in the
association are few, their relationship can be worked out within the . confines
of contract and agency. But when their number is large, a different form of
organisation will be necessary. In the initial stages, these unincorporated
bodies were developing in
In Foss v. Harbottle [1843]
2 Hare 461, it was held that the courts could not normally interfere with the internal
management of the company at the instance of a minority of members dissatisfied
with the conduct of its affairs by the majority. This approach was sought to be
justified on various grounds. The first was that the members who had contracted
to abide by the decision of the majority could not complain against something
to which they had agreed. The second was that the majority alone knew what was
good for the association or company, and that the court's views could not be
imposed on them. And the third was that as the company was a separate juristic
person, it alone, or at least only a majority of its members, could complain of
any injury to it, and not a minority. In Salomon v. Salomon & Co. [1897] AC
22, the House of Lords went to the extreme of refusing to discover dummies and
nominees behind the veil of incorporation, by placing emphasis on the separate
legal personality of the company. In spite of the fact that free
trans-ferability of shares is one of the important features of any company, it was held in In re Gresham Life
Assurance Society : Ex fiarte Penney [1872] 8 Ch
App 446, that where the articles of association vested an absolute discretion
in the directors of a company to refuse to recognise a transfer of shares, the
court would presume that the directors had exercised the power bona fide. They
could not be compelled to disclose reasons for their refusal, unless want of
good faith was affirmatively established by a petitioner. Dishonesty, fraud,
bad faith, breach of trust and the like were the minimum to be established by
individual shareholders before they could get any equitable relief from the
Chancery courts ; in all other cases, the contract was supreme.
The various provisions of
the Companies Act relating to minority protection have to be examined in the
above background if their true content is to be discovered. Chapter VI deals
with "oppression and mismanagement". Section 397 enables the minority
shareholders to approach the court with a grievance that the company's affairs
are being carried on in a manner oppressive to them, and s. 398 provides for a
like complaint that the affairs of the company are carried on in a manner
prejudicial to public interest or to the interests of the company. Oppression
or mismanagement, in the context, have been understood as conduct involving
lack of probity or bona fides. When the directors of a company with their
majority support conduct themselves in a manner inequitable, i.e., when their
conduct is tainted with lack of probity or selfish interest (as distinct from
the interests of the company and the public), the court can step in and rectify
matters. What lies behind the statutory provisions is a breach of the fiduciary
duties the majority is supposed to honour and the basis of the complaint itself
is that there is a breach of such duties. Section 408 confers a similar power
on the Central Govt. to rectify matters, if the minority is able to satisfy
that authority that similar circumstances verging on breach of trust are there.
Winding up is another remedy available to minority shareholders when they find
that those in management of the company have failed in their duties, some of
which are statutory and some, fiduciary. Section 433(f), in particular, makes a
provision for winding up on "just and equitable" grounds. Section 542
is an instance where even a single contributory can approach the court, in the
course of the winding up of a company, for a declaration that the persons in
management be held liable for fraudulent conduct of business. Misfeasance proceedings
contemplated by s. 543 are also intended to assess and recover damages from
persons responsible for a misapplication of the company's funds and properties,
and for breach of trust. The thread running through all these provisions is the
existence of a duty on the part of those in control of the affairs to conduct
themselves more or less like trustees, and a liability to account when they are
in breach thereof. When the majority of shareholders find that the directors
are acting improperly or that the company's affairs are mismanaged, they could
remove the directors in a general meeting; they need not go to court. But when
the minority has a similar grievance, all that they can do is to approach the
court. The provisions are thus intended to protect minority interests on the
footing, and on the only footing, that their rights are being trampled upon in
an inequitable or unconscionable manner. They are thus exceptions to the rule
in Foss v. Harbottle [1843] 2 Hare 461, that a minority cannot ordinarily
invite the court to look into the internal affairs of a company. And each of
the exceptions rests on the principle that dishonesty, fraud, want of good
faith, misfeasance, breach of trust and the like are remediable in equity,
irrespective of contractual obligations.
The provisions of ss. 235
to 251 dealing with "investigation" recognise only another form of
the remedy available to the minority shareholders. While ss. 235 to 237 deal
with the circumstances under which investigation could be ordered, ss. 238 to
241 deal with inspectors, their powers and the report they have to make. Once
the report is made, follow-up measures are contemplated by ss. 242 to 244.
Section 242 provides for the prosecution of those found criminally liable.
Section 243 empowers the Central Govt., through a person authorised by it, to
apply for a winding-up on "just and equitable" grounds or to apply
for the removal of the oppression and mismanagement. And s. 244 conceives of
proceedings in misfeasance. The purpose of the investigation is thus to find
out whether those in charge of the affairs of a company are guilty of illegal
conduct or of conduct trenching upon breach of fiduciary obligations. That is
way s. 237(b) speaks of unlawful purpose, fraud, oppression, misfeasance and misconduct.
Whether it be under s. 235 when the Central Govt. acts on the application of a
group of members, or under s. 237 when it acts suo motu or under orders of
court, the machinery for investigation is to be set in motion only in the
context of a complaint regarding breach of duties which equity has imposed on
the majority.
If the above be the true
position, it follows that in proceedings under s. 237(a)(ii), the court will
look into only those allegations which have a bearing on the fiduciary duties of
the majority, or their duty to abide by the law. of course, the court need not
satisfy itself that the allegations are true, it is enough if a prima facie
case is made out. No investigation can be ordered merely because the
petitioning shareholder feels aggrieved about the manner in which, the
company's affairs are being carried on, or because the court thinks that they
could be better managed. The remedy being equitable, the court has also to
satisfy itself that the petitioner has come to court bona fide for obtaining
redres-sal, and not for any other purpose. An isolated instance of
mismanagement, already remedied, could not also justify the passing of an order
under s. 237(a)(ii).
As to the facts of the
case, the petitioner is a shareholder of the Mathrubhumi Printing and
Publishing Company Ltd., Calicut, a company engaged - in the printing and
publishing of, mainly, the Malayalam daily newspaper "Mathniobhnmi"
from Calicut, Cochin and Trivandrum. The late Mr. V. M. Nair was the managing
director of the company till his death in May, 1977. He was occupying that
position at least from 1958 and on his death, there was a change in management.
One M. J. Krishna Mohan succeeded him and continued in office till November,
1979, when he too passed away. The present managing director is a cousin of
Krishna Mohan, The company petition was filed in June, 1979, i.e., after the
death of Sri V. M. Nair and while Krishna Mohan was alive. The petitioner was
the advertising representative and special correspondent (or part-time news
reporter) for the newspaper at Bangalore. The arrangement regarding news
reporting was terminated in February, 1978. The advertising agency was also
terminated by April 1, 1979. He had filed a suit against the company ; that was
dismissed, but the matter is pending in appeal. He had raised certain claims
before the Labour Court and there he succeeded ; but the company has challenged
the decision in writ proceedings. An industrial dispute, and a criminal
complaint filed by the company against him, are also said to be pending. What
is relevant to notice is that the relationship between the petitioner and the
present management of the company is somewhat strained, and that the company
petition itself was filed soon after his advertising agency was terminated.
And, if the proceeding of the 56th annual meeting of the company is any
guidance, there are at least two groups among the members, one supporting the
present management and another loyal to the old.
Though a number of
allegations are raised in the petition, Mr. Ramanatha Pillai for the petitioner
pressed only some of them at the hearing ; and I am dealing with only those
allegations.
The first relates to the
alleged theft or loss of newsprint. At the 54th annual meeting held on January
29, 1977, a member complained that a large quantity of newsprint belonging to
the company was stolen and sold in black market by some people. Since the
management took no action, the question was again raised at the 55th meeting
held on March 27, 1978. A committee was thereupon appointed to go into the
matter and at the 56th annual meeting, the convenor of the committee informed
members that there was a prima facie case. These are the bare averments in
para. 3 of the petition. There is no allegation that the directors or their
friends or relatives were involved, or that the management attempted to cover
up the matter. At the most, the allegation is that there was some theft or loss
some time during 1975-76 and that the management has failed to take any action.
Exhibit A-2 is the report
of the committee. It is dated July 21, 1979, and was made available to the
company in August, 1979. The petitioner was examined as P.W. 1 in January,
1981, and by this time he could refer to its contents also. Still, all that he
has said in evidence is that 7 to 8 tons of newsprint were stolen or otherwise
lost in 1974, and that in spite of Ex. A-2 report, the management has not taken
any action.
Exhibit A-2 shows that
according to the then manager, Sri Krishnan Nair, he was authorised to dispose
of waste newsprint (discoloured, sticky, broken, with no tensile strength), and
that he had allowed the watchman, Beeran Haji, to keep a lorry load in a
separate godown, pending disposal, as the company's godowns were full. The
value of the waste was fixed by the press superintendent and, after sale, the
proceeds were made over to the company. Beeran Haji, however, was not sure
whether the reels were waste. The committee came to the conclusion that the
transaction was not above suspicion, though there was no evidence of theft as
such ; it was not at any rate impressed by Sri Krishnan Nair's version. It is
even possible to think that in the opinion of the committee, Krishnan Nair was
in some way responsible for the loss. The committee also noted that after the
alleged incident, the machinery for dealing with waste newsprint had been
improved. There is also evidence to show that waste can legitimately go up to
12%, that the percentage for the company during the relevant period was around
9%, and that all the rest of the paper was used and accounted for as good
quality, according to the Audit Bureau of Circulation. Even assuming that the
allegation of theft or loss is true, and that Ex. A-2 contains any specific
finding, it is difficult to see what useful purpose would be served by ordering
an investigation at this distance of time into an alleged theft of 1974. The
petitioner was aware when he came to this court that the committee was looking
into the matter ; it was not as if the management had hushed it up or had
failed to take any action. Exhibit A-2 discloses that even if there was some
scope for malpractice in 1974, the machinery for dealing with waste newsprint
has since been strengthened and streamlined. The committee itself does not
place the blame on the directors then in management; and the matter was allowed
to be raised and discussed at three general body meetings, suggesting thereby
that there was no attempt to stifle minority criticism or to suppress anything.
In any event, the material available is insufficient to disclose a prima facie
case regarding breach of fiduciary duties. I may add that the petitioner
himself had suggested at the 56th meeting that a "memorial" be
created to honour ex-manager, Krishnan Nair, for the valuable services rendered
by him while in service.
The next complaint is about
irregularities and corruption in the purchase of a flat at Bombay. All that is
stated in para. 4 of the petition is that there was such an allegation and that
the committee had enquired into it. The petitioner's evidence as P.W. 1 does
not also take us any further. Exhibit A-2 shows that the flat was purchased
during the tenure of Sri V. M. Nair, and that the administrative officer of the
company was responsible for negotiating the deal. According to this officer, he
had acted under the instructions of Sri V. M. Nair. The majority of the
committee recorded that though this could not be verified, as Sri Nair was no
more alive, there was reason to think that sufficient care was not taken. One
of the members of the committee dissented, and indicated that the attempt was
only to malign the old management. The company's lawyers, who examined Ex. A-2
report, expressed the opinion that there was nothing but suspicion and no
action could be taken on its basis. After a careful reading of Ex. A-2, I am
inclined to agree with this view. Of course, the majority had made an
observation in Ex. A-2 report that the title obtained was not perfect and that
the full consideration was paid before getting the title deed. When Mr.
Ramanatha Pillai high lighted this aspect at the hearing, I directed the
management to produce the title deed. But when it was produced along with
certain other documents, it was contended that production of documents at that
stage could not be allowed. I am not inclined to take such a technical view of
the matter because if that be the case, most of the allegations in the petition
could only be considered as vague and unspecific. Some of them could not even be
considered as allegations. The petitioner's attempt may be to settle some
scores with the present management, but so far as the court is concerned, the
attempt should be to find out whether the mino rity shareholders have anything
real to complain of. I am, therefore, marking the documents as Exs. C-1 to
C-10. The title deed, Ex. C-1, dis closes that transfer of flats in Bombay was
being made by transferring shares in the building company and that the company
herein acquired the concerned shares on the day the consideration was paid. Sri
V. M. Nair himself has signed Ex. C-1. The flat is admittedly in the exclusive
and undisturbed possession of the company. On the materials available,
therefore, I am unable to hold that misfeasance, misconduct, breach of trust or
fraud have been established, prima facie, in regard to this trans action.
Another case is about the
writing off of large sums as bad debts, and the allegation in the petition is
only this :
"It is also seen from
Ex. P-1 proceedings that large sums are written off in the financial year to
which Ex. P-1 relates."
There is no complaint, at
least in the pleadings, that the amounts were recoverable, or that they were
written off in order to benefit the directors or their favourites, or that the
action was in any other way irregular or improper. Exhibits C-2 to G-10 show
that the Board had decided to write off the amounts concerned at three
different sittings. The amounts were outstanding from advertisers, agents and
other people numbering about 160, Exhibit P-1 referred to in the petition is
Ex. A-1 minutes of the 56th annual meeting; and the only question at the
meeting relating to writing off was whether charges for printing the Janata
Party posters for the Chickmaga-loor election were also included in the amounts
written off. The suggestion was denied and it was pointed out that the election
itself was held during the previous financial year and that printing charges
for posters had been fully realised. An Interesting interlude was a suggestion
by someone that only printing charges due from the Congress party were being
written off in the past. The amount written off during the year in question was
Rs. 1,02,623. For the year ended July 31, 1977, the amount written off was
higher. A large amount is seen written off during 1979-80 also. Taking into
account the business turnover and the accounting practice of the company, it
cannot be said that anything unusual had taken place during Ex. A-1 year. The
auditors had raised no objection and the general body had approved the
accounts. In my opinion, this allegation of the petitioner is devoid of any
merit.
The next grievance relates
to the purchase of some land at Trivan-drum. There was no reference to such a
complaint either in the petition or in the reply affidavit filed in September,
1979. The point was raised in para. 4 of the reply affidavit dated October 23,
1980, in the following manner :
"It may also be kindly
noted that Sri Damodaran who is found to be one of the employees responsible
for the deal in respect of the purchase of the flat in Bombay has again been
allowed to participate effectively in the transaction regarding the purchase of
property by the company in Trivandrum which again is a reckless venture whereby
the company is put to loss."
The evidence of P.W. 1 is
to the effect that the land was purchased for starting the Trivandrum edition
of the newspaper and that it is kept vacant, while the Trivandrum edition is
being published from some other premises. There is also a statement that more
than one lakh of rupees was spent for acquiring land in a marshy area. But when
it came to argument, the point stressed was that it was an unwise policy to
have acquired land and then depended on other premises for the Trivandrum
edition. The company has produced documents to show that land in the
neighbourhood is being sold at three times the rate it had paid. It is also
explained that the equipment and machinery for the Trivandrum press had
arrived, and that their erection and the publication of the Trivandrum edition
could not have been postponed. The evidence discloses that about one crore of
rupees was set apart for the Trivandrum edition, and that there was a prolonged
strike and lock-out in the meanwhile. There is thus no material to hold that
the investment of about a lakh of rupees in land, to be eventually used for
housing the Trivandrum project, was a reckless venture or a foolish adventure.
Paragraphs 5 and 5A of the
petition deal with another charge, and that relates to the appointment of one
Sri Manakalath as public relations manager of the company in June, 1978. It is
alleged that he was appointed without a board resolution and without inviting
applications for the post, and that lie was allowed to draw large sums as T.A.
advance without vouchers. It was, however, conceded at the hearing that the
managing director was competent to appoint such officers without the Board's
sanction and that there was no practice of inviting applications for such
posts. The person concerned was working at Madras as the company's
advertisement representative, and there is evidence to show that his
appointment as P.R.M. was followed by an increase in advertisement revenues.
The main attack was directed against payment of advances. R.W. 1 has given
evidence that all payments were effected only against vouchers and that bills
and accounts were being subsequently presented, verified and adjusted. The
auditors have raised no objection. The reports of the directors and auditors,
as also the balance-sheet and profit and loss accounts, were duly passed during
every year. Counsel referred to some discrepancy in one of the answers given at
the 56th annual general meeting, but the control and supervision of finances
and accounts should normally be left to those in charge and the auditors, subject
to acceptance by the general body. There is no evidence regarding any
particular disbursement or voucher, even if such a matter could be gone into in
proceedings like the present.
Another matter raised in
paras. 5 and 5A concerns the appointment of one C.G.K. Reddi as adviser. The
allegation is that he entered into an agreement with a foreign concern for the
monopoly supply and distribution of the company's publications and that this
was done without the sanction of the Reserve Bank and to the detriment of the
company. My attention has not been drawn to any passage in the evidence of PAY.
1 dealing with want of Reserve Bank sanction or detriment to the company. All
that was said by P.W. 1 was that the agreement had not benefited the company
and that there was some litigation. It was also added that there was no board
resolution authorising Sri Reddy to enter into the contract. The company's
answer is that Reddy was appointed as adviser for one year for modernising the
company and planning the Trivandrum project. He had acquired experience as
general manager of the "Deccan Herald" and as business manager of the
"Hindu". The evidence of R.W. 1, along with the documents produced,
show that Reserve Bank permission had been obtained, that the agreement was entered
into with the full concurrence of the managing director after effecting
modifications suggested by him, and that the arrangement had come to an end
within a matter of days because of some ban ordered by the U.A.E. government.
There is no evidence of litigation loss, detriment, illegality or even
unauthorised dealing. This complaint should also, therefore, fail.
Another allegation which,
if proved, would have been a matter of some substance, is about the appointment
of one Sri P. V. Chandran as the director of the company. What is argued is
that he was a partner in a firm of advertisers with which the company had
dealings, and that he was appointed in violation of s. 299 of the Companies Act
inasmuch as his interest in that business was not disclosed. But the
allegations in paras. 9 and 9A of the petition make no reference to s. 299, but
only to the extending of credit facilities to the firm as a
"non-accredited" advertising agent. From the evidence, however, it is
clear that such agents are also given credit facilities, though for a shorter
term. The decision to appoint Sri Chandran as director was taken at the board
meeting held on May 14, 1978 ; he was not present at the meeting. Exhibit B17
dated July 14, 1978, is a letter from Chandran, in reply to the company's
letter dated June 2, 1978, disclosing his interest in the firm. R. W. 1 says
that though the firm was a valuable customer, no fresh contract was given to it
after Sri Chandran was appointed as director. He resigned from the firm by the
end of March, 1979. Violation of s. 299 is thus not made out.
Paragraph 7 of the petition
complains of the company's attempt to borrow one crore of rupees, when it has a
paid up capital of less than nine lakhs only. The interest liability would be
too much for the company, it is averred. It is added that "in the peculiar
circumstances now obtaining in the company, there is every reason to suspect
the bona fides of the management in the matter". The company's answer is
that newspaper business had become highly competitive with other papers like
Malyala Manorama starting editions from different centres and that it was,
therefore, decided to expand the company's business by starting a Trivandrum
edition of the Malhrubhumi and that the borrowing was intended to raise funds
for the purpose. The decision to borrow was actually taken at an extraordinary
general meeting held on June 23, 1969. It was unanimous and the petitioner was
also a party to it. If this be the true position, I fail to see how he could
challenge the bona fides of the decision, and how it could be said that that
anyone is guilty of breach of fiduciary duties.
The last complaint is that
"information regarding the affairs of the company and its working are
purposely withheld from the members"; and the company's answer is that
members of the company have access to all the records of the company as laid
down in the Companies Act. P. W. I has no case that any particular information
he wanted has been withheld. What is suggested by counsel is that some of the
questions asked by members at the 56th meeting (Ex. A-1) remained unanswered.
Disclosure is no doubt one of the fundamental principles underlying the
formation and working of a company. Members have a right to know how the
company's affairs arc conducted. Creditors would also like to learn about its
financial position. Even members of the public are interested, at least from
the point of view of future investment. The Companies Act, therefore, provides
for maintenance of registers, books, records and for publication and compulsory
disclosure of accounts duly audited. Every company should have a registered
office and that office must maintain the memorandum and articles of
association, register of directors, of members, and other books and files
regarding share capital and other matters. The accounts should be audited every
year and annual returns are to be submitted. Charges should be registered. All
these are available for inspection by members of the company and even by the
public. The audited accounts have to be placed before the annual general body
for the information of the members. The directors have to report every year to
the shareholders in general meeting. Extraordinary general body meetings are
also held. These are some of the provisions of the Act which insist on supply
of information to members and others. But that does not mean that every
question asked at every general meeting should be forthwith answered, without
even considering whether they relate to the affairs of the company as
understood in law, and whether it would be possible to answer such questions
without due notice. A business organisation like a company cannot function like
a legislative assembly, if only for the reason that the powers of the directors
and the members in general body are denned. Section 237(b)(iii) speaks of
"information with respect to its affairs which they might reasonably
expect", i.e., the information sought for must be about the affairs of the
company and something which could reasonably be expected to be supplied. No
attempt has been made before me, either in the course of evidence or at the
hearing, to point out that any particular information of such a character has
been withheld.
On an anxious consideration
of the materials on record and the arguments advanced, and even overlooking the
unsatisfactory nature of the pleadings, I am unable to hold that circumstances
suggesting the existence of fraud, illegality, misfeasance, misconduct, etc.,
have been made out even prima facie, so as to relax the rule in Foss v.
Harbottle [1843] 2 Hare 461 and direct an investigation into the internal
affairs of the company. The company petition is, therefore, dismissed, but
without costs.
[1982] 52 Comp. Cas. 589 (
High Court of
v.
Union of
D. K. KAPUR AND YOGESWAR
DAYAL, JJ.
CIVIL WRIT PETITION NO. 378
OF 1977.
APRIL 9, 1980
G.L. Sanghi , A.T. Patra
and B. Mohan for the petitioner.
K.N. Kataria for the Respondents.
D.K. Kapur, j—The petitioner-company is a
public limited company which was originally known as Modi Sugar Mills Ltd., but
at present it carries on business of various types, i.e., sugar, vanaspathi,
steel, electrodes, lantern, gases, distillery and soap. The balance-sheets for
the years 1971-72 to 1975-76 which are on record show that the share capital is
more than Rs. 2.5 crores and there are reserves in the neighbourhood of Rs. 3
crores. The petitioner has challenged an order issued on 12th May, 1977, by the
Company Law Board which reads as follows:
" No. 2/4/77-CL. I
Government of
Ministry of Law, Justice & Company Affairs,
Department of Company Affairs,
(Company Law Board)
Shastri Bhavan, 'A' Wing, 5th Floor,
WHEREAS in
the opinion of the Company Law Board there are circumstances suggesting that
the persons concerned with the management of the company named as Modi
Industries Limited having its registered office at Modinagar District, Meerut,
Uttar Pradesh (hereinafter referred to as the company) have in connection
therewith been guilty of fraud, misfeasance or other misconduct towards the
company/or its members :
And whereas the
Company Law Board is further of the opinion that inspectors should be appointed
to investigate into the affairs of the company.
NOW, therefore,
in exercise of the powers conferred by clause (b) of section 237 of the
Companies Act, 1956 (Act 1 of 1956), read with section 10E(1) of the said Act,
and the notification of the Government of India in the Department of Company
Affairs, No. G.S.R. 443(e) dated the 18th October, 1972, the Company Law Board
hereby appoints S/Shri Jagdish G. Wadhwan, Amolak Lal Bajaj and Harish Kumar,
Chartered Accountants, C/o. M. Pal & Company, 4850/24, Ansari Road, New
Delhi-2, as inspectors to investigate into the affairs of the company and to
report thereon pointing out all the irregularities and contraventions of the
Companies Act, 1956, and/or any other law and the person or persons responsible
for such irregularities and contraventions.
2. The Inspectors shall investigate into the affairs of the company in respect of the years 1971-72 to 1975-76 and complete the investigation and submit six typed copies of their report to the Company Law Board on or before 31st December, 1977. The Company Law Board hereby reserves the right to extend the above-mentioned date from time to time and when considered necessary.
3. The Inspectors shall be entitled to a consolidated remuneration of 70,000 (rupees seventy thousand only) and other incidental out of pocket expenses actually incurred.
By order of the Company Law Boord
Sd. N. L. Pillay
Under Secretary to the Company Law Board.
No. 2/4/77/CL. I.
Copy forwarded to :—
|
1. Shri Jagdish C. Wadhwan |
C/o M/s.
M. Pal & Co
|
|
|
4850/24, |
|
2. Shri Amolak Lal Bajaj J |
New Delhi-2. |
|
3. Shri Harish Kumar |
|
|
4. M/s.
Modi Industries Limited, Modinagar, District
|
|
|
5. Regional
Director, Company Law Board, |
|
|
6. The
Registrar of Companies, |
|
|
7. File No. 3/15/76-CL-I Branch. |
|
|
8. CL. II Branch |
|
|
9. Guard File. |
|
Sd. N.
L. Pillay
|
|
|
Under-Secretary to the Company Law Board. " |
|
The said order was issued under s. 237 of the
Companies Act, 1956, which gives the Central Govt. considerable powers to order
the investigation into the affairs of a company for particular purposes. The
said section also gives to the court power to order the investigation into the
affairs of the company. There are three ways in which the power under s. 237
can be invoked. The company may pass a special resolution to that effect or the
court may order the same. In such cases there is no restriction to the power
being exercised, but in the case of the Central Govt., the power is
circumscribed by s. 237(b) which shows that the Central Govt. can order the
investigation only if there are circumstances suggesting either that the
business of the company was being conducted with intent to defraud its
creditors, members or any other persons, or otherwise for unlawful purposes,
etc., or that the persons concerned in the formation or management of its
affairs have been guilty of fraud, misfeasance or misconduct or that members of
the company have not been given information which they might reasonably expect
and so on. In the present case, the opening words of the order show that the
opinion of the Company Law Board was that there are circumstances suggesting
that persons connected with the management of the company have been guilty of
fraud, misfeasance or other misconduct towards the company or its members. The
order moreover provides that the persons appointed to carry out the
investigation have to look into the affairs of the company and make a report
pointing out all irregularities and contraventions of the provisions of the
Companies Act or any other law, and also, the person or persons responsible for
such irregularities and contraventions. It is contended before us that the
order merely sets out the words of the section and does not point out the
circumstances that might have come to the notice of the Company Law Board.
Also, the report required from the chartered accountants appointed to carry out
the investigation is concerned with the irregularities and contraventions of
the Companies Act, 1956, and other law, which means the investigation is not
limited to fraud, misfeasance or misconduct.
A large number of cases have been brought to our
notice concerning the manner in which the courts have examined orders passed by
the Central Govt. and the Company Law Board under s. 237 of the Act. The
leading judgments on this point have been referred to us. They are, Barium Chemicals Ltd. v. Company Law Board
[1966] 36 Comp Cas 639; AIR 1967 SC 295 and Rohtas Industries Ltd. v. 5. D.
Agarwal [1969] 39 Comp Cas 781; AIR 1969 SC 707. In each case, the
Supreme Court had occasion to examine the manner in which s. 237 of the Act is
to be applied to a given set of facts. In addition, there is a comparatively
recent unreported judgment of this court where a Division Bench has examined a
petition similar to the one before us which is Ashoka Marketing Ltd. v. Union
oj India, Civil Writ Petition No. 918 of 1974, decided on 26th April, 1978,
since reported in [1981] 51 Comp Cas 634 (Delhi).
In has been pointed out by learned counsel for the
petitioner that in all these three cases the order passed under s. 237 by the
Central Govt. was quashed on the ground that circumstances did not exist which
would suggest that any person connected with the management had been guilty of
fraud, misfeasance or misconduct.
The procedure of law laid down in these three
judgments have been pointed out to us and it has been stressed that the
circumstances which may give rise to the opinion are not only to be
subjectively determined by the person or persons expressing the opinion, but
must also be objectively shown to exist. It has been stressed before us that we
should examine the existence of the circumstances as claimed in the affidavit
filed on behalf of the respondents and also the explanation given in the
affidavit filed on behalf of the petitioner in reply to the said affidavit.
As it happens, the counter-affidavit of Shri N. L.
Pillay, Undersecretary of Law, Justice and Company Affairs, has been filed in
reply to the petition, but later another affidavit, being the affidavit of Shri
S. Balaraman, Under-Secretary, Government of India, Ministry of Law, Justice
and Company Affairs, has been filed which is dated 4th December, 1979. The
first affidavit was filed on 29th October, 1977; it did not give any particular
material in regard to the question whether circumstances existed. Probably,
that is why the second affidavit had to be filed. The affidavit of Shri S. Balaraman
is, therefore, the one to be considered regarding the circumstances which
warranted the passing of an order under s. 237 of the Act. This affidavit
refers to the circumstances under several headings : (1) working of the steel
unit, (2) working of gas and chemical units, (3) working of distillery unit,
(4) working of sugar unit, (5) working of vanaspati unit, and (6) working of
soap unit. The purpose of this affidavit is to bring to the notice of the court
that there are certain circumstances specifying malpractices.
In reply to this, a rejoinder affidavit dated 14th
January, 1980, has been filed, which is the affidavit of Shri A. K. Jain,
Company Secretary of the petitioner-company. This is a detailed document
referring to a number of facts, the object of which is to show that the
circumstances alleged to exist do not in fact exist, or at least the
circumstances are quite different from what are alleged to exist. As we are to
follow the procedure followed in the three judgments referred to, it may be now
useful first to state the legal position which emerges from the judgments.
In Rohtas Industries' case [1969] 39 Comp Cas 781 ;
AIR 1969 SC 707, the order is reproduced at p. 785 (p. 709 of AIR) of the report.
It seems to be exactly in the same terms as in the present case. An affidavit
being the affidavit of Shri Rabindra Chandra Dutt, Secretary to the Govt. of
India, Ministry of Finance, Department of Company Affairs and Insurance, and
Chairman, Company Law Board, was filed in opposition in the Patna High Court.
In this affidavit, reference was made to the report of the Commission of
Enquiry headed by Justice Vivian Bose dated 15th June, 1962, and certain
complaints received by the department concerning the misconduct of the
management. It is noteworthy that the Patna High Court had dismissed the writ
petition on the ground that it was not open to judicial review and the opinion
of the Central Govt. was conclusive. However, in view of the judgment in the
Barium Chemicals' case [1966] 36 Comp Cas 639 (SC) and on an interpretation of
the law, the Supreme Court went into the allegations, particularly the
circumstances relating to certain transactions. It was concluded that the
investigation in question would not have been ordered except for the fact that
Shri S. P. Jain was associated with the company. On the legal question, it was
held as follows (p. 800 of 39 Comp Cas):
"Coming back to section 237(b), in finding out
its true scope we have to bear in mind that that section is a part of the
scheme referred to earlier and, therefore, the said provision takes its colour
from sections 235 and 236. In finding out the legislative intent we cannot
ignore the requirements of those sections. In interpreting section 237(b) we
cannot ignore the adverse effect of the investigation on the company. Finally,
we must also remember that the section in question is an inroad on the powers
of the company to carry on its trade or business and thereby an infraction of
the fundamental right guaranteed to its shareholders under article 19(1)(g) and
its validity cannot be upheld unless it is considered that the power in
question is a reasonable restriction in the interests of the general public. In
fact the vires of that provision was upheld by a majority of the judges
constituting the Bench in Barium Chemicals' case [1966] 36 Comp Cas 639, [1966]
Supp SCR 311; AIR 1967 SC 295, principally on the ground that the power
conferred on the Central Government is not an arbitrary power and the same has
to be exercised in accordance with the restraints imposed by law. For the
reasons stated earlier, we agree with the conclusion reached by Hidayatullah
and Shelat JJ. in Barium Chemicals' case that the existence of circumstances
suggesting that the company's business was being conducted as laid down in
sub-clause (i) or the persons mentioned in sub-clause (ii) were guilty of fraud
or misfeasance or other misconduct towards the company or towards any of its
members is a condition precedent for the Government to form the required
opinion and if the existence of those conditions is challenged, the courts are
entitled to examine whether those circumstances were existing when the order
was made. In other words the existence of the circumstances in question are
open to judicial review though the opinion formed by the Government is not
amenable to review by the courts. As held earlier, the required circumstances
did not exist in this case."
The court then considered whether any reasonable
authority, much less an expert body like the Central Govt., could have made the
impugned order on the basis of the material before it and came to the following
conclusion (p. 801 of 39 Comp Cas):
"We do not think that any reasonable person,
much less any expert body like the Government, on the material before it, could
have jumped to the conclusion that there was any fraud involved in the sale of
the shares in question. If the Government had any suspicion about that
transaction it should have probed into the matter further before directing any
investigation. We are convinced that the precipitate action taken by the
Government was not called for nor could be justified on the basis of the
material before it. The opinion formed by the Government was a wholly
irrational opinion."
The judgment in the other Supreme Court case, Barium
Chemicals Ltd. [1966] 36 Comp Cas 639 ; AIR 1967 SC 295, which is earlier,
proceeds on an even more detailed examination of the law and come to the
conclusion that the opinion to be formed must be based on circumstances and
moreover the law required that the existence of the circumstances must be
demonstrated, as held by Hidayatullah J. at p. 661 (p. 309 of AIR) of the
report:
"An action, not based on circumstances suggesting
an inference of the enumerated kind will not be valid. In other words, the
enumeration of the inferences which may be drawn from the circumstances,
postulates the absence of a general discretion to go on a fishing expedition to
find evidence. No doubt the formation of opinion is subjective but the
existence of circumstances relevant to the inference as the sine qua non for
action must be demonstrable. If the action is questioned on the ground that no
circumstances leading to an inference of the kind contemplated by the section
exists, the action might be exposed to interference unless the existence of the
circumstances is made out. As my brother Shelat has put it trenchantly:
'It is not reasonable to say that the clause
permitted the Government to say that it has formed the opinion on circumstances
which it thinks exist....'
Since the existence of 'circumstances' is a condition
fundamental to the making of an opinion, the existence of the circumstances, if
questioned, has to be proved at least prima facie. It is not sufficient to
assert that the circumstances exist and give no clue as to what they are
because the circumstances must be such as to lead to conclusions of certain
definiteness. The conclusions must relate to an intent to defraud, a fraudulent
or unlawful purpose, fraud or misconduct or the withholding of information of a
particular kind. We have to see whether the chairman in his affidavit has shown
the existence of circumstances leading to such tentative conclusions. If he
has, his action cannot be questioned because the inference is to be drawn
subjectively and even if this court would not have drawn a similar inference
that fact would be irrelevant. But if the circumstances pointed out are such
that no inference of the kind stated in s. 237(b) can at all be drawn that
action would be ultra vires the Act and void."
This quotation would show that there has to be an
objective demonstration of the circumstances, but if the circumstances are
shown to exist then the question whether the opinion is rightly or wrongly
formed is not the subject of judicial review.
The same view has materially been adopted by the
Division Bench of this court in deciding Ashoka Marketing Ltd.'s case [1981] 51
Comp Cas 634.
There is another case decided by myself, S. L. Verma
v. Delhi Flour Mills Co. Ltd. [1975] 45 Comp Cas 33 (Delhi), wherein it has
been pointed out that even the court has to be careful when applying its power
under s. 237 although there is no apparent limit in the section.
Having now stated the manner in which the court is to
act, it is necessary to examine the facts of the case with a view to
determining whether circumstances do in fact exist which could lead to the
formation of the opinion. In order to examine the affidavits filed in this case
setting out the circumstances that are said to exist, it is also necessary to
be quite clear as to for what purpose these affidavits are being examined. No
doubt, we are to examine the existence of certain circumstances. But, what are
those circumstances ? It is interesting to note that from the very beginning
legislation regarding companies has been directed towards the prevention of
certain evils, which came into existence, almost simultaneously with the great
rise of private financial enterprises or business corporations. The great
success of the East India Company had been followed by the South Sea Company in
the latter part of the 17th Century. The South Sea Company had proved to be a
fraudulent venture described as a company for scheming rather than trading. The
Bubble Act, 1720, was the first positive legislation to suppress the formation
of companies formed as mere ingenious legal devices for deceiving the public.
On the other hand, too much control over the formation of companies would also
affect capital formation and floatations for innocent purposes, so a great deal
of legislation has resulted. As the Companies Act in India is largely based on
the English Companies Act, it would not be out of place here to mention that s.
237, as it now exists in the Companies Act, 1956, is practically the same as s.
165 of the English Companies Act, 1948. The subsequent sections dealing with
the powers during investigation, the production of documents and the
proceedings and report of the inspectors are also more or less the same. In
England, the power to direct an investigation is given to the Board of Trade.
The same principle has been applied in India by giving the power to the Company
Law Board, though in the Act it is stated to be a power of the Central Govt.
It may be pointed out that before 1948, the Companies
Act did not make any provision in England for ordering an investigation into
the affairs of a company. In fact, the history of company law legislation shows
that the original doctrine of economic liberalism and laissez faire has
gradually vanished so as to permit the public being protected from fraud and
exploitation. There was a time when the court would not interfere in the
internal management of a company ; it would not interfere in disputes between
shareholders and would leave the determination of the rights of shareholders
entirely to the brute majority as represented by majority shareholders. This
has all been altered in various ways. Sections 397 and 398, as they now exist
in the Act, enable the court to protect minority rights. Ample powers to
prevent oppression of the minority or to prevent the misuse of the company's
funds against the public interest or to prevent mismanagement and other evils
now exist.
Nevertheless, it cannot be denied that corporations are
run in such a way that it is difficult for a small shareholder or for other
persons belonging to the public getting inside information as to the actual
manner in which the funds collected from the public are being employed by the
persons who are in-charge of the management of the company. As at present,
there are several powers available to various authorities under the Act in
addition to those granted to the company court to protect the interests of the
shareholders and the general public.
Under s. 209 of the Act, accounts have to be kept by
a company in a particular manner. Those accounts are open to inspection by a
director during business hours. The account books have to be preserved along
with the vouchers relevant to each entry in good condition for a period of not
less than eight years. Under s. 209A the books of account and other papers of
the company are open to inspection during business hours by the Registrar of
Companies or by an officer who is specially authorised by the Central Govt. in
this behalf. Such an inspection can be made without giving any notice to the
company concerned. Great powers are given to the person making an inspection
under this section. He can take copies of books of account and other books and
papers; he can use the power of a civil court for discovery and production and
can examine on oath. There are penalties provided if the company makes default
in complying with the directions given in the inspection. If a director or
officer of a company is convicted of an offence under the section, he vacates
his office and is disqualified for a period of five years. This section came
into effect from 1st February, 1975.
In addition, a company is to disclose its annual
accounts and balance-sheet at a general meeting as provided by s. 210, et seq.
Auditors have to be appointed who examine the books of account of a company for
the purpose of audit and the nature of the report is specifically provided for
in the Act.
In addition to this protection of the shareholders by
and through audit of the accounts by a chartered accountant, the Central Govt.
has the power under s. 233A to order a special audit in certain cases. This
section shows that the Central Govt. can order a special audit when the affairs
of the company are not being managed in accordance with sound business
principles, etc., or a company is being managed in a manner likely to cause
injury or damage, etc., to the business, or the financial position of the
company is in danger. Under s. 233B, a cost accountant can be appointed. These
provisions were introduced in the Act in 1960 and 1965, respectively. In
addition to this, there is the power to order investigation under s. 237 with
which we are concerned.
This introduction is not out of place in the
circumstances of the present case because the facts show that in the present
case in January, 1971, an order was passed by the Company Law Board under s.
209(4) appointing Shri Suresh Behari to inspect the books of account and other
papers of the petitioner-company. According to the petitioner, nothing was
revealed by this special inspection.
On 24th January, 1973, the Company Law Board issued a
notice under s. 233A, which appears as annex. B to the petition. It states that
an inspection of the books and records of the company had been made under s.
209A(4) and according to that inspection certain transactions had taken place
which showed that the company was not being managed in accordance with sound
business principles and prudent commercial practices. A large number of
allegations regarding alleged malpractices was set out in this document but the
same need not mentioned in extenso.
In reply to the show-cause notice a detailed reply
was given which is annex. C. This reply was considered by the Company Law Board
and the petitioner-company was represented by an advocate, Shri G. S. Shah.
Eventually, in May, 1974, the Central Govt. decided that no special audit was
necessary.
It is then stated in the petition that a further
inspection of the books of account and other books of the company was made for
the period January, 1975, to May, 1975, and all information required by the
inspector was supplied. Nothing more was done as a result of this inspection
till the notice was issued on 12th May, 1977, which relates to the period
covered by the years 1971-72 to 1975-76, which would also appear to be the
period covered by the inspection made by the inspectors under s. 209. Learned
counsel for the petitioner has stressed the fact that there could hardly be any
need for an investigation when even a special audit had been dropped as stated
above.
Although the facts would suggest that the Company Law
Board is reopening the matter which it appears to have closed earlier,
nevertheless we have to examine the affidavit in detail to see what is actually
stated. It would make very little difference if the inspection or audit or
other steps taken earlier did not reveal anything or were dropped. I now
proceed to examine the contents of the affidavit of Shri S. Balaraman under the
various headings mentioned in that affidavit.
Working of
the steel unit.
Under this heading, it is stated in the affidavit
that this is the major investment by the company. It is claimed that the
working results were not satisfactory during the years in question. In 1970-71,
there was a profit of Rs. 129.10 lakhs, in 1971-72 a profit of Rs. 60.26 lakhs,
in 1972-73 a profit of Rs. 0.066 lakhs, and in 1973-74 a loss of Rs. 67.53
lakhs. It is claimed that the lesser profit for 1971-72 was also due to the
adjustment of scrap of the book value of Rs. 12.60 lakhs in the books of the
company. It is claimed that this is not correct. The explanation given to the
various authorities is contradictory. It is stated that the working results of
the steel unit show that the melting losses are increasing, and also,
consumption of electricity, graphite electrodes and other materials is
increasing per metric tonne without any satisfactory explanation. It is claimed
that this indicates the possibility of selling the material outside the books
or the processing of scrap of other parties at the cost of the company.
Therefore, it is necessary to investigate the truth particularly, as there was
no satisfactory explanation for adjustment of the scrap.
There was some difficulty in understanding the case
made out in the affidavit under this heading. The fact that Rs. 12.60 lakhs had
been adjusted is not in doubt, but the circumstances set out do not reveal what
are the circumstances which would show fraud, misconduct or misfeasance. These
terms have been analysed in the judgment of Sbelat J. in Barium Chemicals
Ltd.'s case [1966] 36 Comp Cas 639 (SC). They are also set out in s. 543 of the
Companies Act, 1956. The words used in s. 237 are as follows :
"237.
Investigation of company's affairs in other cases.—Without prejudice to
its powers under section 235, the Central Government—
(a) shall
appoint one or more competent persons as inspectors to investigate the affairs
of a company and to report thereon in such manner as the Central Government may
direct, if—
(i) the company, by special resolution ; or
(ii) the court, by order,
declares that the affairs of the company ought to be
investigated by an inspector appointed by the Central Government ; and
(b) may do so if, in the opinion of the Central
Government, there are circumstances suggesting—
(i) that
the business of the company is being conducted with intent to defraud its
creditors, members or any other persons, or otherwise for a fraudulent or
unlawful purpose, or in a manner oppressive of any of its members, or that the
company was formed for any fraudulent or unlawful purpose ;
(ii) that
persons concerned in the formation of the company or the management of its
affairs have in connection therewith been guilty of fraud, misfeasance or other
misconduct towards the company or towards any of its members ; or
(iii) that
the members of the company have not been given all the information with respect
to its affairs which they might reasonably expect, including information
relating to the calculation of the commission payable to a managing or other
director, the managing agent, the secretaries and treasurers, or the manager,
of the company."
We are concerned with sub-cl. (b)(ii). The
circumstances must show that some persons connected with the management have
been guilty of fraud, misfeasance or other misconduct towards the company. The
words "been guilty" are strong words. So, there must be some
circumstances which would lead to the inference that there has been some fraud,
misfeasance, breach of trust or other misconduct which requires investigation.
The fact that a certain adjustment has been made in the books of account is not
a concealed occurrence.
In order to understand the point involved, we have
examined the affidavit filed in reply to these allegations. This reveals that
the fall in profits was occasioned by rise in the cost of raw materials and
increased conversion cost. There was also a drastic power cut in the State of
Uttar Pradesh which decreased the production of steel from 73,297 tons in
1971-72 to 27,208 tons in 1973-74. It was claimed that the increase in melting
loss was due to the nature of the scrap purchased and technical matters
regarding various types of scrap, such as heavy scrap, light or turning scrap
has been given. It is claimed that the petitioner-company was forced to
purchase low quality scrap due to circumstances. As far as the claim regarding
Rs. 12.60 lakhs adjustment is concerned, it is pointed out that the Collector
of Central Excise had also claimed that Rs. 12.60 lakhs worth of scrap had been
removed from the factory without payment of excise duty, but the matter had
been dropped as there was no surreptitious production and removal by the
petitioner-company. The Income-tax Officer had added Rs. 70 lakhs to the income
of the petitioner on the same or similar allegations, but the Appellate
Assistant Commissioner by an order dated 5th August, 1977, had held that the
allegation of unaccounted production or sale could not be sustained. The
reasons given for this were : (a) the accounting and quantitative records of
the assessee maintained from purchase to the stage of finished products, (b)
the employment of a large number of workers and staff without whose connivance
the products could not obviously be removed or sold, (c) the fact that bonus
was payable based on production. Furthermore, the operations were handled by
outside contractors and quantitative records of finished goods fully reconciled
with outside contractor's wage bills. No discrepancy in the record had been
pointed out, and there was no evidence of any unaccounted sale of finished
goods.
From this affidavit and the circumstances of the case
we have to determine whether there is any objective fact rather than subjective
fact to show that any steel had been surreptitiously removed after producing
the same. The explanation offered by counsel for the petitioner was that it is
customary to check the stock at the end of the accounting period and it is only
on the basis of verification that the stock of scrap was reduced by Rs. 12.60 lakhs.
It is pointed out that the scrap is bought in bulk and consumed periodically.
It is only when the stock is to be accounted for at the end of the year that a
stock-taking is made. The exact position, therefore, is that the adjustment of
Rs. 12.60 lakhs is merely a verification of the actual existing state of
affairs rather than any change in the actual stock-in-hand (of scrap).
It is, therefore, plain that there are two
possibilities which are stated to be the circumstances under this heading.
There is the adjustment of Rs. 12.60 lakhs worth of scrap and there is a fall
in the rate of profit, etc. By themselves, these facts cannot show the
existence of any fraud, misfeasance or other misconduct. These are not
circumstances, but mere guesses. It cannot be objectively stated that any
reasononable person could say that this shows that there has been fraud or
misconduct. In fact, the point becomes much easier to understand when one
examines the profit and loss account for the year ending 31st October, 1972. The
raw materials consumed in that year were Rs. 19,83,96,747.93. In the year
1975-76, the raw materials were Rs. 22,22,54,888.84. When raw materials worth
crores of rupees are consumed in a year, it would obviously be very difficult
to maintain an exact check on the actual stock of any raw material and,
therefore, it is not surprising that a discrepancy is likely to occur if
ascertained at the end of the financial year. It cannot be said that an open
and clear statement in the books of account regarding the adjustment and the
existence of the same can lead to an inference that there has been fraud,
misconduct or misfeasance. It must also be understood that when the goods leave
the factory they have to pass the excise authorities. Without some
contravention being discovered or ascertained it cannot be said that any
circumstances exist. Certainly, if some steel was found to have escaped excise
or some other facts tended to show that the scrap had been otherwise removed,
circumstances might have been different. So, this particular circumstance is
not sufficient to sustain the order.
Working of
gas and chemical units
Under this heading, it is claimed in the affidavit
that the company produces oxygen, nitrogen and acetylene gas. The company had
purchased 23,125 cylinders, but 631 cylinders had been lost and there is a
dispute about 443 other cylinders. It was claimed that 375 of these cylinders
had been lost by the Delhi agent, M/s. Modi Industries Agency and Industrial
Gas Distributors, of which 353 had been lost in the year 1970-71. It is claimed
that these cylinders are being used the Delhi agent for their own business who
are taking advantage of the goodwill of the company and selling Modi gas. In
connection with acetylene gas, it is claimed that the company started 30 MT. of
calcium carbide which was later on treated as having been received for the
purpose of processing. These allegartions are refuted in the affidavit in
reply. It is stated that the lost cylinders had been paid for. A copy of the
agreement with the agent has also been filed. It is stated that the replacement
cost of these cylinders had been received. It cannot be said that these
allegations can show circumstances of the type mentioned in s. 237.
With regard to the other allegation concerning the diversion
of 30 MT. of calcium carbide, it is stated that there is nothing in the record
of the company to show this and no reasonable man could come to such a
conclusion. It appears that the explanation of the company is correct. No
material has been placed before us to show how and where these 30 MT. of
calcium carbide are mentioned except in the affidavit. It may be recalled that
in the Barium Chemical's case [1966] 36 Comp Cas 639 (SC), and in the Rohtas
Industries case [1969] 39 Comp Cas 781 (SC) specific allegations regarding the
transactions were placed before the court. But, the mere allegation that 30 MT.
is reported to have been treated as being received from another is not enough.
Who is the person who made this report ? Where were these 30 MT. of calcium
carbide removed and for whom ? It appears that the allegation is completely
vague.
Working of distillery unit
Under this heading, it is claimed that 600 cylinders
other than those used for other gases have been lost. It is claimed that the
cylinders were still in use and there was a diversion of the profits of this
business to some one else. Again, no specific material has been brought to show
the existence of objective circumstances. In the affidavit-in-reply, it is
stated that there has been a fall in the production of calcium carbide because
customers' cylinders used to be utilised for this purpose. However, it appears
to be admitted that some cylinders were lost because they were not returned by
the agent, as they were not returned to the agent by customers. In the
affidavit, it is stated that carbon-dioxide was a bye-product from fermentation
of molasses and was not of such good quality as to be used by big customers
like Coca-Cola and Gold Spot. Actual figures showing that the number of cylinders
supplied by customers for filling carbon-dioxide gas had fallen from 4,495 to
968 in the period 1969-70 to 1972-73, are also set out. It is then stated that
due to a letter written by the Chief Inspector of Explosives of India, Nagpur,
the filling of customers' cylinders was discontinued as customers could not
produce certificates of fitness. Furthermore, the allegation that any
carbon-dioxide was sold outside the books of the company is stated to be
totally false and baseless because Central Excise is payable on the production
and selling of carbon-dioxide and the excise department has not found anything
wrong in the books of the company.
It does seem that the allegations are vague and
indefinite. What do the allegations mean ? Some cylinders are missing, but the
explanation is similar to the one given regarding the other cylinders. As far
as the fall of production is concerned, an explanation has been offered. The
Company Law Board is not concerned with the quantum of production, but with the
question whether an inference can be raised from circumstances showing the
existence of fraud, misconduct, etc. It cannot possibly be said that the
carbon-dioxide is being manufactured and sold outside the books of the company
without some other circumstances being shown to exist concerning this fact. So,
the circumstances set out in the affidavit would not justify the order under
this heading.
It is alleged in the affidavit that as the cylinders
are reported to be lost but the employment of cylinders shows that they are in
use, hence this business was being done outside the books of the company. As
explained by the company, this would mean that the carbon-dioxide is being
smuggled out of the premises of the company in spite of the excise department.
As no facts appear in the affidavit showing that any cylinders have been found
to have been smuggled out, this appears to be merely a conjecture rather than a
circumstance.
Working of
sugar unit :
Under this heading, the irregularities alleged to exist
are : (a) in the manner in which items have been classified, (b) it is alleged
that certain repairs are of a capital nature which should have been capitalised
and this has resulted in fall in production, (c) the stores account did not
tally with the stores ledger maintained in the head office, so the company was
not maintaining proper control over the stores, (d) the consumption record of
firewood and coal showed some discrepancies, (e) the costing record was not
maintained in accordance with the Cost Accounting Rules. As is obvious, all
these circumstances are concerned with the manner in which account books are
maintained. These allegations are characterised entirely as baseless in the
affidavit-in-reply. It is pointed out that the Registrar of Companies had by a
letter dated 20th July, 1977, raised similar points with specific instances and
the whole matter was clarified to the Registrar. It was there stated that the
accounts of the company were correctly maintained. A quotation from that letter
is set out in the affidavit filed by the company. It is sufficient for the
purposes of this petition to say that there may be a difference between the
department and the company as to how the accounts should be maintained, but
this cannot possibly lead to an inference that there has been a breach of trust
or fraud, etc. So, this ground does not appear to disclose any circumstances
which would be relevant for an order under s. 237.
Working of
vanaspati unit:
Under this heading, the irregularities pointed out in
the affidavit are : (a) details of commission amounting to Rs. 20,575.78 on the
purchase of tin plates could not be obtained at the time of inspection, (b) the
report has shown wide fluctuations in the refining loss. In the absence of
satisfactory explanation there was a possibility of underhand dealings. So, a
further probe was necessary, (c) vanaspati was sold on some favourable terms to
a firm, M/s. Banarsidas Ramniwas of New Delhi, which is owned by relatives of
one of the managing directors of the company. Some favours had also been given
to this firm, (d) irregularities had been noticed in the sale and distribution
of vanaspati which is not in conformity with the orders issued by the State
Govt. under the Defence of India Rules. In reply to this the affidavit of the
company raises the following points :
(a) With regard to the allegation concerning commission, it is stated that this is only a book adjustment as simultaneous credit is given under the advice of the Calcutta Sales Depot. The commission is neither an expenditure nor a receipt by the company.
(b) As regards the refining loss, technical reasons are given ; some loss takes place because the oil used in the production of vanaspati is purchased from Delhi, Hyderabad and Rajasthan. In some cases excessive impurities are contained. Refining losses depend on a number of factors, namely, the quality of oil, suspended impurities, muscilage, power failure and efficiency of workers. It is claimed that the refining losses increase due to more free fatty acid content. It is stated that the Appellate Assistant Commissioner, Central Range, Meerut, by an order dated 30th March, 1978, had held that the refining losses were not excessive.
(c) As regards the sale to M/s. Banarsidas Ramniwas of New Delhi, it is claimed that there is no relationship of the directors of the company within the meaning of the Companies Act. It is claimed that the price of vanaspati fluctuates from day to day and hour to hour and in no case was a lesser rate charged. As far as credit facilities are concerned, it is stated that similar facilities are given to other firms, namely, Salig Ram Nagar Mal, Hapur, and Mangal Sen Faquir Chand, Baraut.
As regards (d) it is claimed that no breach has taken place.
Again, all these allegations are vague and of an
indefinite type. Although the allegations have been denied, it does appear that
the same are wholly irrelevant for the purposes of s. 237(b) as alleged in the
affidavit-in-reply. The main purpose, object and necessity for applying s. 237
is to ascertain irregularities which show breach of trust, misconduct or
misfeasance and allegations of a different type cannot be made a substitute for
the necessary circumstances.
Working of
soap unit
The last heading under which the allegations are made
refer to soap. It is alleged that the soap transferred from the vanaspati unit
does not reconcile with that received by the soap unit. It is further claimed
that import of stainless steel rods from a company in Derbyshire, U.K., and
Monel Wire from a firm in Paris were made in the year 1972-73, as actual user,
but when this material was found to be defective or unsuitable it was sold to
parties in Bombay, resulting in a profit to the company. It is alleged that the
sale was made without the permission of the Chief Controller of Imports and
Exports. In reply, the affidavit states that there is no difference between the
soap sent by the vanaspati unit and that received by the soap unit. This matter
has also been considered by the income-tax authorities and the decision of the
Inspecting Assistant Commissioner is quoted. It is pointed out that the
Income-tax Officer had considered that 3.92 MT. was the difference and had
claimed that this was due to suppressed production, but the Inspecting
Assistant Commissioner had held that the Income-tax Officer had failed to
notice the opening stock and the closing balance and there was a mistake by the
Income-tax Officer. Thus, this very objection was rejected by the income-tax
department.
As regards the sale of imported goods, it is pointed
out that by selling the defective material at a profit, the company has acted
as a prudent businessman and this could not be a point for an order under s.
237(b).
Again, it appears that no circumstances justifying an
investigation can be said to exist and no reasonable man could have ordered an
enquiry into the alleged breach of trust, misfeasance or misconduct.
These are in all the allegations which have been
minutely examined for the purpose of ascertaining whether any of them would justify
an investigation. In reaching the conclusion that there are no circumstances to
justify an investigation it has to be kept in view that an investigation is
made when an offence is claimed to exist. If one compares the case of a
criminal offence, first, there must be a report about the commission of an
offence which may be by complaint or by police report. Once, it is found that
there is an offence or an apparent offence then a prima facie case exists for
making an investigation. Similarly, there must be some kind of facts
objectively existing which show that an offence of the type mentioned ia s.
237(b) has taken place. It must be kept in view that the offences mentioned in
s. 237(b) are of a serious nature. Fraud in the running of a company or misconduct
or misfeasance by the management of the same are serious matters. The directors
of a company are in the position of trustees. They are responsible like
trustees. The allegations we have referred to deal with the manner in which the
business is being conducted. Whether one considers the steel unit and the
allegation concerning the possibility of production existing outside the books
of the company or one considers the gas and chemical unit and the possibility
of the cylinders being used for making clandestine sales of gases, or the
possibility in the distillery unit of carbon-dioxide being manufactured
secretly or if one considers the vanaspati unit or the soap unit, it is not
possibilities that have to be ascertained but realities. The section is not intended
to deal with a roving and fishing enquiry with a view to establishing that
there has been a fraud or misconduct or misfeasance. The offence must be there
and then the investigation can take place. An investigation for finding out
whether there has been an offence means that the investigation is made in the
circumstances which do not justify it. Allegations of the type made in the
present case can be made in the case of practically every single company which
would mean that the Central Govt. would have unrestricted powers of ordering
investigation.
It is noteworthy that most of the points, and
probably all the points, have been separately looked into by the income-tax
department while determining the income and running of the company. Similarly,
the excise department which is-concerned with the realisation of excise duty is
also deeply concerned with the manner in which the goods produced by the
petitioner-company are taken out of the factory. If neither of these
departments have been able to ascertain that any of the products of the company
have been taken out secretly or there is a manufacture outside the books of the
company, it is still possible that those departments have been hood-winked or
have not noticed some additional circumstances which have come to light during
the investigation carried out under s. 209A or the other provisions of the
Companies Act, which have been noticed above. However, the most noteworthy
feature of this case is that a special audit under s. 233A which was proposed
was dropped after considering the books of the company. As all the facts under
consideration relate to the years 1971-72 to 1975-76, it does appear that no
new material had come to light which did not exist earlier.
The result of all this analysis would show that the
requirements of the section as pointed out by the Supreme Court in the
aforementioned judgments have not been fulfilled. The circumstances which must
exist objectively have not been shown to exist. It would thus follow that we
have to accept the present petition and quash the order passed by the Company
Law Board exercising the powers of the Central Govt. under s. 237(b) of the
Act. We accordingly issue a writ to quash the order dated 12th May, 1977,
whereby inspectors were appointed to make an investigation into the affairs of
the company. The petitioner will get costs of this petition. Counsel's fee Rs.
500.
[2002]
37 scl 804 (ker.)
High
Court of Kerala
v.
M. Ebrahimkutty
J. B.
Koshy and K. Padmanabhan Nair, JJ.
M.
F.A. No. 1273 of 1998 (B)
March 25,
2002
Section 237, read with section 10, of the
Companies Act, 1956 - Investigation of company’s affairs in other cases -
Whether ‘Court’ referred to in section 237 is court having jurisdiction under
section 10 and no other court - Held, yes - Whether under section 237(a)(ii),
court can appoint directly inspector(s) to investigate into affairs of company
- Held, no - Whether court can only make a declaration that affairs of company
ought to be investigated by an inspector appointed by Central Government -
Held, yes - Whether power of Company Law Board under section 237(b) is a bar to
exercise of discretionary jurisdiction of court under section 237(a)(ii) -
Held, no - Whether mere allegations are insufficient to support an application
to court to act under section 237(1)(ii) and material placed before court
should be such as to satisfy court that a deeper probe into affairs of company
is desirable in interests of company itself - Held, yes - Whether court can
pass a declaration under section 237(a) for a fishing expedition - Held, no -
Whether an isolated instance of mismanagement is enough for court to declare
that an investigation is required - Held, no - Whether existence of
circumstances described under section 237(b) may sway court to pass an order
under section 237(a)(ii) also but it is not always mandatory that court can
pass a declaration only if conditions under section 237(b) exist - Held, yes -
Whether power of court under section 237(a)(ii) is equal to power of CLB under
section 237(b) - Held, no - Whether unlike CLB, there are no restrictions
placed on Court even though Court will exercise its judicial discretion only on
sufficient materials and only after it is convinced that situation warrants an
investigation in interest of company as a whole - Held, yes - Whether when a
discretionary order under section 237(a)(ii) is passed by proper court with
jurisdiction, unless there are compelling grounds appellate court will not
interfere - Held, yes
Facts
The respondent was an equity
shareholder and the promoter of the appellant-company. He was also appointed as
the Chairman of the company. Subsequently, the company came out with public
issue which was subscribed in excess of 14 times the offer. Thereafter, the
respondent filed petition under section 237(a)(ii) before the Company Judge
seeking to direct the Central Government to appoint inspectors to investigate
into the affairs of the company. It was alleged that no first annual general
meeting of the company was held as convened in time.
The managing director, ‘M’ had
been fraudulently mismanaging the company in utter disregard of the interest of
the shareholders and was acting in an autocratic and oppressive manner. He
created false and fabricated documents with nefarious motive to oust the
respondent and other members of the board of directors who opposed the
misutilisation and misappropriation of public funds. He created documents and
minutes purporting to remove the petitioner and others who opposed the
mismanagement and oppression. Though on the public issue, shares were over
subscribed to the tune of 14 times and huge amounts were collected from the
public, shares were neither allotted properly nor amounts refunded to the
applicants whose application for shares were not accepted.
It was further alleged that 1200
complaints had been filed against ‘M’ by the subscribers to whom the amounts
were not refunded and that ‘M’ had misappropriated, misutilised and mismanaged
the funds collected through public issue and diverted the funds for his private
purposes. The company opposed the petition. The Company Judge found that the
submission of the Central Government supported the respondent’s allegations and
concluded that a deeper probe was necessary and passed an order declaring that
affairs of the company ought to be investigated by an inspector appointed by
the Court itself.
On appeal :
Held
By virtue of the power under
section 237(a)(ii), the Court cannot appoint directly inspector or inspectors
to investigate the affairs of the company but only make a declaration that the
affairs of the company ought to be investigated by an inspector appointed by
the Central Government. Once such an order is passed it is mandatory for the
Central Government to conduct such investigation by appointing competent
persons as inspectors.
The court referred to in section
237 in the court having jurisdiction under section 10 and no other Court or a
Court hearing writ petitions. Petition was filed before the competent company
court in the instant case. It is true that mere allegations are not sufficient
to support an application to the Court to act under section 237(a)(ii), and the
material placed before the Court should be such as to satisfy the Court that a
deeper probe into the affairs of the company is desirable in the interests of
the company itself. In other words, Court will not pass a declaration under
section 237(a) for a fishing expedition. But Court is entitled to see whether
on the basis of the material brought before the Court, a declaration is to be
made or not. An isolated instance of mismanagement is not enough for the Court
to declare that an investigation is required. The material placed before the
Court should be such as to satisfy the Court that a deeper probe into the
company affairs is desirable in the interests of the company itself. The
judicial conscience must be satisfied that there has been maladministration in
the affairs of the company warranting an investigation.
Existence of alternative remedy
also can be taken as a condition for refusing to exercise the discretionary
jurisdiction in appropriate cases, but it cannot operate as an absolute bar. No
where in section 237 it is stated that Court cannot be approached under section
237(a)(ii) before approaching CLB under section 237(b). It is true that after
amendment of section 237(b) (Companies Amendment Act, 1988 with effect from
31-5-1991), the CLB has power to direct the Central Government to appoint
inspectors to investigate into the affairs of the company if circumstances mentioned
in sub-clause (i), (ii) or (iii) of section 237(b) exist. But, the CLB must be
satisfied that such circumstances exist. Power of the CLB under section 237(b)
is not a bar in exercising the discretionary jurisdiction of the Court under
section 237(a)(ii). No such condition was made out by the Legislature for
exercising the jurisdiction by the company court under section 237(a)(ii) even
though Court will take such a course only if circumstances warrant.
Before passing an order under
section 237(a)(ii), Court should be satisfied that there are sufficient
materials to show that affairs of the company is in such a way that an
investigation is necessary. The existence of circumstances described under
section 237(b) may sway the Court to pass an order under section 237(a)(ii)
also. But it is not always mandatory that Court can pass a declaration only if
the conditions under section 237(b) exist. No such restrictions are placed by
the Legislature even though Court will exercise its judicial discretion only on
sufficient materials and only after the Court is convinced that situation
warrants an investigation in the interest of the company as a whole. For a
minority shareholder or a person legally interested in the affairs of the
company it may not always be possible to place all materials alleged by him.
But investigation is necessary to disclose something which is not apparently
visible. If all materials are already available, there is no scope for further
investigation. At the same time, existence of circumstances must warrant
reasonably so as to invoke jurisdiction of the Court. Power of the Court under
section 237(a)(ii) is not equal to the power of the CLB under section 237(b).
Unless any one of the circumstances as mentioned in section 237(b) exist, the CLB
cannot order an investigation, but no such restriction is placed on the Court.
It was argued that once the
company court passes a discretionary declaration under section 237(a)(ii) for
appointment of an inspector for investigation, it cannot set aside as it is not
a judicial or a quasi-judicial order and is not appealable. The Court is not
appointing inspectors by itself. Order does not deter the rights of the
parties. The order is also appealable under section 483. But when a
discretionary order under section 237(a)(ii) is passed by the proper court with
jurisdiction, unless there is compelling grounds appellate court will not
interfere. In other words, if there is no prima facie material at all before
the Court and Court ordered investigation under section 237(a)(ii) as a fishing
expedition, appellate court will interfere. But it is settled law that if order
is passed after considering the materials available, normally appellate court
will not interfere with the discretionary order passed by a competent court
with jurisdiction.
In the instant case, there were
sufficient material for the Company Judge to pass the impugned order. In any
event, when the company court passed the impugned order on materials available
in the case, on the facts of the case it could not be stated that an
interference by appellate court was warranted. This was an appropriate case
where discretionary order had been passed by the court by exercising powers
under section 237(a)(ii). No interference was called for.
Cases referred to
Delhi Flour Mills Co. Ltd., In re
[1975] 45 Comp. Cas. 33 (
K.P. Dandapani for the Appellant. P.S. Sreedharan Pillai,
M.P. Mohammed Aslam, S. Abdul Salam and Tom K. Thomas for the
Respondent.
Judgment
J.B. Koshy, J.—First respondent in this appeal (referred in
this judgment as the petitioner for convenience) filed a petition under section
237 of the Companies Act, 1956 (‘the Act’) to direct the Central Government to
appoint one or more competent persons as inspectors by declaring that the
affairs of the Premier Plantations Ltd., first appellant (‘as company’) ought
to be investigated and to report thereon within a specified time limit. Before
going into the facts of the case we may first discuss the power of this Court
under section 237(a)(ii). Section 237 reads as follows :
“Investigation of company’s
affairs in other cases. - Without prejudice to its powers under section 235,
the Central Government—
(a) shall appoint one or more competent persons
as inspectors to investigate the affairs of a company and to report thereon in
such manner as the Central Government may direct, if—
(i) the
company, by special resolution; or
(ii) the Court, by order, declares that the
affairs of the company ought to the investigated by an inspector appointed by the
Central Government; and
(b) may
do so if, in the opinion of the Company Law Board, there are circumstances
suggesting—
(i) that the business of the company is
being conducted with intent to defraud its creditors, members or any other
persons, or otherwise for a fraudulent or unlawful purpose, or in a manner
oppressive of any of its members, or that the company was formed for any
fraudulent on unlawful purpose;
(ii) that persons concerned in the formation
of the company or the management of its affairs have in connection therewith
been guilty of fraud, misfeasance or other misconduct towards the company or
towards any of its members; or
(iii) that the members of the company have not
been given all the information with respect to its affairs which they might
reasonably expect, including information relating to the calculation of the
commission payable to a managing or other director or the manager, of the
company.”
A reading of the above section
will show that power given under section 237 to the Central Government is
independent and operates without prejudice to its powers under section 235 of
the Act. But under section 237(a) the Central Government can appoint an
inspector for investigating the affairs of the company only if the company
passes a special resolution for it or if an order is passed by the Court. Under
section 237(b) the CLB is also empowered to do so in certain special
circumstances required the Central Government to conduct investigation. By
virtue of the power under section 237(a)(ii), the Court cannot appoint directly
inspector or inspectors to investigate the affairs of the company but only make
a declaration that the affairs of the company ought to be investigated by an
inspector appointed by the Central Government. Once such an order is passed it
is mandatory for the Central Government to conduct such investigation by
appointing competent persons as inspectors—Delhi Flour Mills Co. Ltd., In re
[1975] 45 Comp. Cas. 33 (Delhi), and in Alembic Glass Industries Ltd., In re
[1972] 42 Comp. Cas. 63 (Guj.).
2. The Court referred to in section 237 is the Court having jurisdiction
under section 10 of the Act and no other Court or a Court hearing writ
petitions. Petition was filed before the competent company court in this case.
It is true that mere allegations are not sufficient to support an application
to the court to act under section 237(a)(ii). The material placed before the
Court should be such as to satisfy the Court that a deeper probe into the
affairs of the company is desirable in the interests of the company itself as
held by this Court in P. Sreenivasan v. Yoosuf Sagar Abdullah & Sons (P.)
Ltd. [1983] 53 Comp. Cas. 485. In other words, the Court will not pass a
declaration under section 237(a) for a fishing expedition. But the Court is entitled
to see whether on the basis of the material brought before the Court,
declaration is to be made or not Modi Industries Ltd. v. Union of India [1982]
52 Comp. Cas. 589 (Delhi). An isolated instance of mismanagement is not enough
for the Court to declare that an investigation is required. The material placed
before the Court should be such as to satisfy the Court that a deeper probe
into the company affairs is desirable in the interests of the company itself.
The judicial conscience must be satisfied that there has been misadministration
in the affairs of the company warranting an investigation.
3. It was argued by the counsel for the appellants that in Safia Usman v.
Union of India [2000] CLC 110 a single Judge of this Court held that without
exhausting the remedy under section 237(b), the Court cannot exercise power
under section 237(a)(ii). A reading of this decision shows that proper relief
was not asked in the petition as required under section 237(a)(ii) and company
itself was not impleaded as a party. Existence of alternate remedy also can be
taken as a condition for refusing to exercise the discretionary jurisdiction in
appropriate cases, but it cannot operate as an absolute bar. Nowhere in section
237 it is stated that court cannot be approached under section 237(a)(ii)
before approaching the CLB under section 237(b). It is true that after
amendment of section 237(b). (Companies Amendment Act, 1988 with effect from
31-5-1991), the CLB has power to direct the Central Government to appoint
inspectors to investigate into the affairs of the company if circumstances
mentioned in sub-clause (i), (ii) or (iii) of section 237(b) exit. But, the CLB
must be satisfied that such circumstances exit as held by the Apex Court in
Barium Chemicals Ltd. v. CLB AIR 1967 SC 295. Before amendment, this power was
with the Central Government itself. See also Rohtas Industries Ltd. v. S.D.
Agarwal AIR 1969 SC 707. Power of the CLB under section 237(b) is not a bar in
exercising the discretionary jurisdiction of the Court under section
237(a)(ii). No such condition was made out by the Legislature for exercising
the jurisdiction by the company court under section 237(a)(ii) even though
Court will take such a course only if circumstances warrant. Another decision
pointed out is the decision of the learned single Judge of this Court R.V.
Mohammed v. Trichur Heart Hospital Ltd. [2000] CLC 258. What was held in that
decision is the Court cannot order an investigation by appointing an inspector,
but under section 237(a)(ii) the Court can, if circumstances warrant, by an
order makes a declaration that the affairs of the company ought to be
investigated by an inspector appointed by the Central Government and on making
such declaration the Central Government has no option but has to appoint an
inspector to investigate the affairs of the company. No other hypertechnical
view is possible in view of the clear wording of section 237(a). As held by the
Gujarat High Court in Alembic Glass Industries Ltd.’s case (supra) :
“The Legislature has conferred
wide jurisdiction on this court to entertain a petition under section
237(a)(ii). In fact, the power of the Central Government to appoint an
inspector suo motu under section 237(b) is limited to its subjective
satisfaction in respect of one or other matters contained in three sub-clauses
of clause (b). The Legislature in its wisdom has not put any such condition
before the court can make an order, though the court may in its wisdom expect
prima facie proof of some of these conditions on the subjective satisfaction of
which the Central Government would appoint an inspector. While conferring
jurisdiction on the court to direct the Central Government to appoint an
inspector, the Legislature has not thought fit to circumscribe the discretion
or jurisdiction in any manner. It would, therefore, be utterly inappropriate to
curtail or circumscribe or fetter the jurisdiction of this court by reading
into the section something which is not there.” (p. 68)
4. Another decision pointed out by the learned counsel for the appellants
in the Apex Court decision in Sri Ramdas Motor Transport Ltd. v. Tadi
Adhinarayana Reddy [1997] 90 Comp. Cas. 383. There a writ petition was filed
seeking direction for investigation by the Central Bureau of Investigation. The
Apex Court held that in view of the specific remedies under sections 43A, 234,
235, 237, 397 and 398 of the Act, a writ petition will not lie. It is not a
matter of public interest and remedy available under the Act shall be availed
of. Here the petitioner has approached under section 237 and it cannot be held
that petition is not maintainable. Scope and power of company court under
section 237(a)(ii) was not discussed in that decision. Ofcourse under section
237(a)(ii), Court’s would insist upon solid factual base and mere allegations
are insufficient. It was held by this court in Mrs. U.A. Sumathy v. Dig Vijay
Chit Fund (P.) Ltd. [1983] 53 Comp. Cas. 493, that :
“... No doubt, clause (a)(ii) of
section 237 does not lay down what circumstances are to be proved before the
court and on that materials the court could act. But that does not mean that
mere allegations are sufficient. A court can act only on the materials placed
before it; and those materials should at least be such as to satisfy the court
that a deeper probe into the company’s affairs is desirable in the interests of
the company itself...”(p. 496)
The powers under section
237(a)(ii) were considered by Justice M.P. Menon in the decisions in P.
Sreenivasan’s case (supra). In that decision it was held as follows :
“The section conceives of three
situations where the Central Government can appoint inspectors for
investigations. The first is when the company itself declares that such an
investigation is necessary. The second is when the court makes an order. And
the third is when the Central Government forms an opinion that the
circumstances enumerated in clause (b) exist. The first is easy to understand :
when the company itself wants an investigation, the Central Government need not
stop to enquire why. The third can also be understood because when suo motu
action is proposed to be taken by the Government, it shall not act arbitrarily,
but only consistent with guidelines laid down. But what about the second
situation, where the court has to make an order ? Mr. Ramanatha Pillai for the
petitioner suggests that the power and the discretion of the court are
uncontrolled; it can direct an investigation whenever it suspects that all is
not well with the company. Whether the apprehensions of the court are true or
not is a matter to be found by the investigating inspectors, and the court is
not to insist on evidence. It appears to me that this is too broad a statement.
Investigation of the company’s affairs by the Department of Trade in England
has always been understood as a statutory exception to the rule in Foss v.
Harbottle [1843] 2 Hare 461 that the internal affairs of a company is a matter
for the majority, and a dissatisfied minority cannot seek outside interference.
The Companies Act provides for the protection of minorities in three ways (i)
by giving them a right to complain against oppression, (ii) by permitting them
to act on behalf of the company when it is wound up, as in the case of
misfeasance proceedings, and (iii) by enabling them to obtain remedies indirectly
through investigation. The Court’s discretion under section 237 is, therefore,
to be exercised only when it is satisfied that the minority has made out at
least a prina facie case that the rule in Foss v. Harbottle [1843] 2 Hare 461,
requires relaxation in the interest of the company...” (p. 489)
We agree with the above
observation that before passing an order under section 237(a)(ii) the Court
should be satisfied that there are sufficient materials to show that affairs of
the company is in such a way that an investigation is necessary. We also note
that existence of circumstances described under section 237(b) may sway the
Court to pass an order under section 237(a)(ii) also. But we are of the opinion
that it is not always mandatory that the Court can pass a declaration only if
the conditions under section 237(b) exist. No such restrictions are placed by
the Legislature even though the Court will exercise its judicial discretion
only on sufficient materials and only after the court is convinced that situation
warrants an investigation in the interest of the company as a whole. We also
note that for a minority shareholder or a person legally interested in the
affairs of the company, may not always be possible to place all materials
alleged by him. But investigation is necessary to disclose something which is
not apparently visible. If all materials are already available, there is no
scope for further investigation. At the same time, existence of circumstances
must warrant reasonably so as to invoke jurisdiction of the Court. Power of the
Court under section 237(a)(ii) is not equal to the power of the CLB under
section 237(b). Unless any one of the circumstances as mentioned in section
237(b) exist, the CLB cannot order an investigation, but no such restriction is
placed on the Court.
5. As facts are concerned, according to the petitioner, he is an equity
shareholder of 5,16,000 equity shares of the company. The company was
incorporated on 12-12-1990 as a private limited company and the petitioner was one
of the promoters of the company. By resolution dated 5-1-1991 the company
resolved to take over the assets and liabilities of T.P. Muralidharan &
Associates and the amount outstanding in the credit of partners account, both
capital and current account as on 31-12-1990 should be taken as the amount
contributed by them towards share capital and necessary share certificates
should be issued to them. The company was engaged in the plantation of tea,
coffee, cardamom and pepper. It was converted into a public limited company on
28-1-1991. Thereafter it came out with public issue of 36 lakhs equity shares
of Rs. 10 each for cash at par. Subscriptions of shares were received about 14
times of the declared public issue. As per clause 11(A) of the articles of association,
the subscribers to the memorandum of association were appointed as directors.
The petitioner and the second appellant herein were subscribers of the
memorandum of association. The second appellant was appointed as the managing
director. (We are referring the second appellant as ‘managing director’ in this
judgment.) Though, as per clause 16 of the memorandum of association, all
directors except the managing director for the time being were to retire from
office at the first annual general meeting of the company, no annual general
meeting of the company has been held or convened in time. Though a document
styled as first annual report and accounts of 1991 was published on 31-2-1992,
no such meeting of the company was held at 3 p.m. on 25-4-1992 at the
registered office of the company as mentioned in the notice attached to the
report and accounts of 1991. The managing director had been fraudulently
mismanaging the company in utter disregard of the interest of the shareholders
and was acting in an autocratic and oppressive manner. He began to create false
and fabricated documents with nefarious motive to oust the petitioner and other
members of the board of directors who opposed the misutilisation and
misappropriation of public funds. He created documents and minutes purporting
to remove the petitioner and others who opposed the mismanagement and
oppression. Though on the public, issue shares were oversubscribed to the tune
of 14 times and huge amounts were collected from the public, shares were neither
allotted properly nor amounts refunded to the applicants whose application for
shares were not accepted. It is understood that 1200 complaints are filed
before the jurisdictional court in Bombay against the managing director by the
subscribers to whom amounts were not refunded. It was also stated that for
non-convening of the meeting and not filing balance sheet for the period 1992
to 1996 many proceedings are pending. Share value of the company was depleted
to nil from Rs. 70 and company has been de-listed in the Stock Exchange. The
managing director had misappropriated, musutilised and mismanaged the funds
collected through public issue and diverted the funds for his private purposes
ignoring the purpose for which the company was incorporated. The authorities
who are entrusted to supervise and control the management of the company and to
prevent misuse of public funds are not discharging their duties properly.
6. The appellants opposed the above petition and submitted that there is no
locus standi to file the above petition as he was no more a shareholder at the
time of filing the petition. It was stated that he was the Chairman of the
company till 28-5-1993 only. General body meetings were held properly and the
excess amount collected for share capital was returned without delay. All
allegations against the second respondent as managing director of the company
was denied and it was also submitted that no case is made out by the petitioner
for an order of investigation by the court under section 237.
7. Before going into the merits of the case we may also consider the
argument regarding locus standi of the petitioner. It is not disputed that he
was the first chairman of the company. He owns 5,16,000 equity shares.
According to the company, the above shares were transferred. It is the
contention of the petitioner that documents were created by the appellant to
oust the petitioner and other members who opposed the misutilisation and
misappropriation of funds, especially received from public placement of shares.
This, according to him, is one of the matter to be investigated. Admittedly, he
was a promoter of the company. Counter statement filed by the third respondent
reveals further facts, which we will consider later, would show that the
petitioner is substantially interested in the affairs of the company. In such
circumstances, he cannot be turned as person having no manner of interest or
concern in the company as held by the Delhi High Court in V.V. Purie v. E.M.C.
Steel Ltd. [1980] 50 Comp. Cas. 127. As we have already held the question is
whether sufficient materials are there for the Court to hold prima facie that a
deeper investigation is required on the facts of the case and being a
discretionary remedy to be exercised with much caution, sufficiency of materials
has to be proved.
8. Based on the decision in Uunet India Ltd. v. I.C. Rao [1998] 93 Comp.
Cas. 41 (AP). It was argued that once the company court passes a discretionary
declaration under section 237(a)(ii) for appointment of an inspector for
investigation, it cannot set aside as it is not a judicial or a quasi-judicial
order and is not appealable. The court is not appointing inspectors by itself.
Order does not deter the rights of the parties. We are of the view that the
order is also appealable under section 483 of the Act. But when a discretionary
order under section 237(a)(ii) is passed by the proper Court with jurisdiction,
unless there is compelling ground appellate court will not interfere. In other
words, if there is no prima facie material at all before the Court and the
Court ordered investigation under section 237(a)(ii) as a fishing expedition,
appellate court will interfere. But it is settled law that if order passed
after considering the materials available, normally appellate court will not
interfere with the discretionary order passed by a competent court with
jurisdiction. Therefore, we may come to the facts of the case.
9. On behalf of the fourth respondent the Central Government (third
respondent) a counter affidavit was filed. Averments in the same really support
the petitioner’s allegations. With regard to shareholders register of the
petitioner, it is submitted in paragraph 2 of the counter affidavit that :
“... it is respectfully submitted
that Premier Plantation Ltd. was incorporated on 12-12-1990 as a private
limited company. The said company had became a public company under section 44
of the Companies Act with effect from 28-1-1991.... The memorandum and articles
of association of the said company show that the petitioner herein was one of
the promoters of the company. Since the said company was a listed company and
since the company was not regular in filing the returns in compliance of the
provisions of the Companies Act, 1956 at the third respondent’s office, the
respondents 3 and 4 are not posted with the facts regarding the shareholding
position of the petitioner. The petitioner has alleged that the shares held by
him had been fraudulently transferred by the second respondent...
It was stated in the prospectus
that the first respondent-company was incorporated by taking over the assets
and liabilities of a partnership firm, viz., T.P. Muralidharan & Associates
which was engaged in the plantation of Tea, Coffee, Cardamom and Pepper. It was
stated further that the firm was in operation for about 11 months before taken
over by the first-respondent-company and the operations of the firm during the
said period was profitable. As found from the prospectus, the total income of
the firm was Rs. 121 lakhs on which its net profit was Rs. 82 lakhs. It was
further stated in the prospectus that on taken over of the firm by the company,
the extent of the amounts standing at the credit of the partners capital
account was amounted to Rs. 240 lakhs and equity shares of Rs. 240 lakhs had
been allotted by the first-respondent-company to the partners of T.P.
Muralidharan & Associates as on 15-1-1991 is as under :
|
|
Name |
No. of Shares allotted
|
|
|
|
|
for other than cash |
|
|
1. |
M. Ibrahimkutty |
516000 |
|
|
2. |
T.P.Muralidharan |
|
516000 |
|
3. |
K.P. Basheer |
240000 |
|
|
4. |
C.M. Subair |
240000 |
|
|
5. |
Mrs. Sukumari |
210000 |
|
|
6. |
T.P. Ratnakumari |
210000 |
|
|
7. |
Mrs. Zahida |
210000 |
|
|
8. |
Smt. T.P. Kunhamina |
210000 |
|
|
9. |
Mr. Joseph Pudussery |
48000 |
|
|
|
|
2400000 |
|
|
|
|
|
|
[Emphasis supplied]”
10. With regard to the allegation that due to public issue of shares, Rs.
24.74 crores was over subscribed and it was not refunded, it is stated as
follows :
“. . . In terms of the public issue
every application for shares was to be for a minimum of 100 shares of its
multiples and a sum of Rs. 5 per share was to be paid towards application
money. The issue was oversubscribed and the total shares application money
received by the first-respondent-company was Rs. 27.90 crores as against the
share allotments made for Rs. 3.16 crores. Hence a sum of Rs. 24.74 crores had
to be refunded to the unsuccessful applicants. It is revealed from the
Director’s Report formed part of the balance sheet as at 31-3-1996 of the
first-respondent-company that only Rs. 1 crore had been paid for the estate to
Bank of Tokyo out of the capital of Rs. 3.60 crores raised through the public
issue and as a result, the possession of the Estate was restored to the Receiver
because of the non-payment of the balance money.” [Emphasis supplied]
11. With regard to non-conducting of annual general body meeting in time and
non-filing of the balance sheet, it is clear from the counter affidavit that
first annual general body meeting was held on 25-4-1992 and the second annual
general body meeting was held only on 19-3-1997 for adopting the accounts for
31-3-1993 to 31-3-1996, it is stated as follows :
“. . . As regards the averments
made in this paragraph that no annual general meeting of the
first-respondent-company had been convened till filing of this petition, it is
submitted that the audited financial statements filed at the third respondent’s
office show that the annual general meetings for adopting the said accounts
were held as follows :-
|
1. |
For B/S. as at |
31-12-1991 |
First AGM on 25-4-1992 at 3.00 PM |
|
2. |
-do- |
31-3-1993 |
Second AGM on 19-3-1997 at 10.30 AM |
|
3. |
-do- |
31-3-1994 |
Third AGM on 19-3-1997 at 11.30 AM |
|
4. |
-do- |
31-3-1995 |
Fourth AGM on 19-3-1997 at 2.00 PM |
|
5. |
-do- |
31-3-1996 |
Fifth AGM on 19-3-1997 at 3.00 PM |
Since the first-respondent-company
has a large number of shareholders as it had gone for public issue, the AG meetings
held on 19-3-1997 for adopting the accounts for 31-3-1993 to 31-3-1996 cannot
be believed to be properly held in compliance of the provisions of section 166
of the Companies Act...” [Emphasis supplied]
Again it was stated as follows :
“The first-respondent was not
regular in filing the statutory returns with the third respondent as required
under the Companies Act. Prosecution cases were filed against the first and
second respondents for not filing the balance sheets of the first respondent at
the third respondent’s office. Cases were filed for not filing the balance
sheet as at 31-3-1993, 31-3-1994, 31-3-1995 in time. The second respondent had
filed the said balance sheets with the third respondent only on 23-5-1997. The
total number of cases filed by the third respondent against first respondent
and second respondent under various provisions of the Companies Act are as
follows :
|
No. of Prosecution |
Section
|
Results
|
|
3 |
220(3) |
Pleaded guilty |
|
3 |
162 |
-do- |
|
7 |
113(2) |
-do- |
|
74 |
73(2B) |
Pending. |
[Emphasis supplied]”
12. With regard
to diversion of funds collected through public issues, it was stated as follows
:
“. . . But some of the mistakes
committed by the first and second respondents at the time of public issue appear
to be wilful and doubted to be for undue benefits. It was stated in the
prospectus that the refund will be made to the unsuccessful applicants by
cheque or demand draft drawn on any of bankers to the issue. The first
respondent had opened the refund account with ANZ Grindlays Bank, Mumbai - 1,
which was not include as bankers to the issue as per the prospectus. ANZ
Grindlays Bank has filed a suit, O.S. No. 431 of 1993 against the
first-respondent before the Sub-Court, Ernakulam; for recovery of a sum of Rs.
1,05,29,947.70. It was found from the statement of the refund that the
first-respondent had transferred a sum of Rs. 2,02,93,904 from the refund
account on 8-5-1992 for making payments to the following parties :-
(i) Issued
D.D. for Rs. 1 crore in favour of Bank of Tokyo.
(ii) Transferred
Rs. 75,00,000 to the account of Fairgrowth Financial Services Ltd., Bangalore.
(iii) Rs. 27,92,294 was issued to the
first-respondent by way of pay order and was encashed by it.” [Emphasis
supplied]
Further it was stated as follows :
“...the prospectus issued by the
first respondent on 18-12-1991 shows that the object of the issue was to
provide a part of the funds required for acquiring the tea estate along with
the processing plant which was being operated by the first-respondent on lease.
The total area proposed to be acquired was about 1900 acres. Cost of the
project was worked out as under :
Cost of acquisition of tea estate : Rs.
265 lakhs
Development expenditure : Rs.
15 lakhs
Plant and machinery : Rs.
45 lakhs
But it is not clear from the
accounts of the company that the funds collected in the public issue had been
utilised as proposed in the prospectus. Further it was stated in the prospectus
that the first-respondent-company was incorporated by taking over the assets
and liabilities of the partnership firm, which was engaged in the plantation of
Tea, Coffee, Cardamom, Pepper etc. It was further mentioned that on the date of
taken over of the firm by the company, the amount available at the credit of
the partners in the capital account was Rs. 240 lakhs and equity shares of Rs.
240 lakhs had been allotted to the partners of the said firm. The firm had
leasehold rights in the properties possessed by it at the time of taken over by
the first-respondent-company. It is not clear from the records available with
the third respondent as to whether the lease had been transferred in favour of
the first-respondent. Annexure A-5 to the petition revealed that lease was not
transferred in the name of the company. In this connection it is to be noted
that the Central Bank of India had filed a suit O.S.No. 11 of 1994 for recovery
of the secured loans given to the partnership firm amounting to Rs. 327 lakhs.
It is stated in the auditors report of the first-respondent-company that the
Central Bank of India had not approved the taken over of the partnership firm
Muralidharan & Associates by the first respondent....” [Emphasis supplied]
13. In fact, paragraph 10 of the counter affidavit shows that third
respondent has also suggested an inspection under section 209A of the Act in
1997 itself as it needs detailed inspection. But it was not done because of the
pre-occupation of the Inspecting Officer and filing of this case and investigation
under section 237 will be more detail. A statement of about 70 criminal cases
pending against the company under section 73(2B) of the Act was also filed by
the third respondent. Statements in the counter filed by the third and fourth
respondents show that it is a case where deeper investigation is warranted. We
are not reiterating the averments of the third respondent. The Tribunal will be
revealed the investigation. But there are prima facie materials to order a
declaration for investigation.
14. On these
prima facie facts, the learned Company Judge held as follows :
“All these facts and materials on
record clearly establish that there are sufficient materials available on
record in support of the various allegations made by the petitioner in the
petition regarding the mismanagement of the first respondent, diversion of
funds, failure to comply with the statutory obligations etc. warranting a
deeper probe into the affairs of company . . .”
On the basis of my finding that
there are sufficient materials on record warranting an order under section
237(a)(ii) of the Companies Act to direct the fourth respondent to investigate
into the affairs of the company as provided under section 237(a) of the
Companies Act. Hence this petition is allowed. The fourth respondent is
directed to appoint one or more competent inspectors to investigate the affairs
of the first-respondent-company under section 237(a) of the Companies Act and
to report within a specified time limit. . .”
Thus, the company court on consideration of
the materials found that a deeper probe is necessary and passed an order
declaring that affairs of the company ought to be investigated by an inspector
appointed by the Court itself.
15. We are of
the opinion that there are sufficient materials for the company judge to pass
the above order. In any event, when the company court passed the above order on
materials available in the case, on the facts of this case it cannot be stated
that an interference by the appellate court is warranted. This is an appropriate
case where discretionary order has been passed by the Court by exercising
powers under section 237(a)(ii). No interference is called for.
The appeal is dismissed.
companies
act
[2005]
61 SCL 33 (bom.)
High
Court of
Panther Fincap & Management
Services Ltd.
v.
Central
Government, Union of
S.U.
Kamdar, J.
Appeal
Nos. 1 to 14 of 2005
In
Company Petition Nos. 34, 36, 38, 39, 40, 44, 49, 52, 56, 60, 64, 65, 67 and 68
of 2003
March 31,
2005
Section 237 of the Companies Act, 1956 -
Investigation of company’s affairs in other cases - Whether if a company while
conducting business has acted in a fraudulent or unlawful manner, then such
company will fall within net of section 237(b)(i) irrespective of fact whether
it is a running concern or close down subsequently for any reason whatsoever -
Held, yes - Whether merely because material, on basis of which investigation is
being undertaken, is identical to material which is subject-matter of
investigation by other authority, it cannot be stated that both authorities
cannot simultaneously investigate pursuant to power conferred on them under
their respective statutes - Held, yes - On sudden collapse of stock market,
Joint Parliamentary Committee directed SEBI to make investigation against
appellant-companies - SEBI found that due to concerted transactions between
appellants and ‘K’, who was moving spirit behind companies, there was a
ultimate collapse of stock market - Consequent to said collapse, Global Trust
Bank (GTB) and UTI had been subjected to serious financial difficulties and
were ultimately bailed out by Government - Central Government, relying on
report of SEBI and report of inspectors carrying out inspections under section
209A, sought permission of CLB for investigation into affairs of
appellant-companies under section 237 - Whether in facts and circumstances of
case, Central Government had not only sufficient material but also had a strong
prima facie case for ordering investigation under section 237(b)(i) - Held, yes
Facts
There was a sudden crash in stock-exchange
which was attributed and alleged to one ‘K’. Allegedly, the appellant-companies
were controlled and owned directly or indirectly by the said ‘K’. With the
crash of the stock market, there had simultaneously been a crash of Madhavpura
Co-operative Bank (MCB), Global Trust Bank (GTB) and UTI and thousands crore of
rupees had been siphoned off from the system. With a hue and cry from the
public, a Joint Parliamentary Committee (JPC) was constituted to investigate
the said stock exchange crash. Apart from that, SEBI was also directed to carry
out investigations and to take appropriate action within provision of the
Securities & Exchange Board of India Act, 1992. In the meantime, the
respondent, in exercise of power under section 209A, carried out inspection of
books of account of the appellants. In these circumstances and based on the
material gathered from three basic sources, namely, the report of the JPC, the
interim report of the SEBI investigation and, thirdly the reports pursuant to
the investigation under section 209A, the respondent in a company petition
sought permission of the CLB to investigate affairs of the company in exercise
of power under section 237(b)(i). The appellants objected the application on
ground that the purpose and object of investigation having already been
achieved by carrying out investigation by authorities such as CBI, SEBI and
Department of Company Affairs under section 209A, further investigation under
section 237 was not necessary and it would affect the appellants prejudicially.
Rejecting the objection of the appellants, the CLB allowed the company petition
and permitted the Department of Company Affairs to carry out investigation
under section 237(b)(i) in the affairs of each of the appellant-companies.
On appeal, it was also contended by the
appellants that once the business of the company had ceased to be in operation
for any reason whatsoever voluntarily or otherwise, then the respondents had no
jurisdiction to initiate and/or exercise jurisdiction vested in them by virtue
of the proceedings under section 237(b)(i); and that the respondents had not
made out prima facie case for investigation under section 237(b)(i).
Held
The provisions of investigation under section
237(b)(i) are being introduced by the Parliament with the intention to prevent
persons who enter the business in the guise of corporate entities to carry on
fraudulent business with a view to harm the public interest. [
Essentially, the provisions of section 237 are
meant to see that the defrauding of the public at large is not being carried on
under the guise of the corporate affairs. Plain and simple reading of the said
section would indicate that the words used ‘is being conducted’ are used in the
context of the fraudulent or unlawful business conducted by the company in
course of running of their business. It does not mean that once the business is
conducted in unlawful and fraudulent manner and if it is closed down, the power
of the Central Government of ordering investigation under section 237(b)(i)
stood revoked or ceased to have effect. The word ‘is being conducted’ has to be
read along with the words ‘fraudulent or unlawful purpose’ and if it is so
read, it is clear that the word ‘is being conducted’ is used with the intention
to indicate that when the business of the company was conducted, it was
conducted for unlawful purpose. Any person can conduct the business for
fraudulent or unlawful purpose and before it is detected would close down the
business of the company and in fact escape the consequences as contemplated
under section 237(b)(i). It is not uncommon that there are companies who are
fly by night operators in a booming economy of
The true and correct interpretation of section
237(b)(i) would only mean that if the company while conducting the business has
acted in a fraudulent or unlawful purpose, then such companies will fall within
the net of section 237(b)(i) irrespective of the fact that whether it is a
running concern or close down subsequently for any reason whatsoever because
under the provisions of section 250A it is specifically provided that
investigation may be initiated under section 237(b)(i) notwithstanding that the
application is made under sections 397 and 398 or it has passed a special
resolution for voluntary winding up of such a company.
In any event on a true and proper construction
of the section, it cannot be held that the business of company should be
conducted in praesentis for the purpose of ordering investigation by the Central
Government under section 237(b)(i). [
Even otherwise on facts, the respondent had
been able to establish that the business of the company was not totally stopped
though undoubtedly it had been seriously affected by virtue of the orders passed
by the SEBI and stock exchange of suspension of the brokerage license,
suspension or freezer of bank account and collapse of MCB and GTB. [
That could not be treated as business of the
company was not carried on and/or the same was closed down for reasons beyond
the control of the appellant, i.e., by virtue of the passing of the orders of
various authorities such as SEBI, CBI and other Central Government authorities.
The business of the company was conducted even today even though at a very low level.
It could not be said that the business of the company had ceased to be in
operation. The word ‘is being conducted’ under section 237(b)(i) even if it is
so interpreted, as contended by the appellant, it should be and must mean that
the business of the company has come to a total stop and no activities of the
company are carried on. Such situation arises only when the company is wound up
either by voluntary winding up or compulsory winding up as provided under the
Act. In the aforesaid circumstances even on the facts of the instant case, the
business of the company was being carried on and, therefore, the provisions of
section 237(b)(i) squarely applied to the case which would mean that the order
passed by the CLB was legal and valid and on this ground did not require any
interference by the Court. [
On the facts of the instant case, it was not
in dispute that there had been a stock market collapse in the year 2001 and the
appellants had indulged in large number of share dealings and trading. It was
also not in dispute that the MCB and GTB had collapsed in view of the stock
market scam. The respondents had produced before the CLB in support of the
application for investigation under section 237(b)(i) a report of the JPC
investigating said scam. The respondents had also produced the report and/or
order passed by the SEBI against the appellants and ‘K’ who was moving spirit
behind the appellant-companies. The Central Government had also, in support of
the application, relied upon the reports which were filed by the inspectors in
the course of carrying out investigation under section 209A. The Central
Government had also relied upon large number of breaches of the provisions of
the Act by the various companies in support of investigation. Therefore, not
only there was a material in the form of aforesaid reports, documents and
orders but a more than prima facie case had been made out for investigation of
the appellant companies. The JPC had in fact directed the investigation against
these entities by the SEBI or the Central Government. However, the appellant
canvassed that there was no material which could be used by the respondent in
respect of the investigation because each of the authorities was entitled to
conduct its own investigation on the basis of aforesaid report and, therefore,
the same material could not be utilized for the purpose of ordering
investigation by the Central Government under section 237(b)(i). The contention
of the appellant could not be accepted for the simple reason that it is possible
that the material can be common or identical in course of various
investigations embarked upon by the various authorities. It did not mean that
the respondents were not entitled to use the material which had been unearthed
or found in the course of the investigation by any other authorities. The
material in the instant case was glaring. There was a serious collapse of the
stock exchange in 2001. The SEBI, on investigation, had found that all the
entitles had entered into typical type of transactions in concert with each
other so as to ultimately result in collapse of the stock market. Consequently,
large amount of public fund had been eroded. Consequent upon the collapse of
the GTB, even UTI had been subjected to serious financial difficulties and was ultimately
required to be bailed out by the Government. These were very serious
circumstances and there was a plethora of material to indicate that the
companies, which were subject to investigation under the provision of section
237(b)(i), had played some role, the consequence of which had resulted as
mentioned above. Therefore, the Central Government had not only sufficient
material but also had a strong prima facie case for ordering investigation. It
has been well settled by the various decisions of the
The jurisdiction and the power of the various
investigating authorities derived from the jurisdiction vested in them by the
various legislations or statutes; the authority which is doing the inquiry
and/or conducting the investigation is required to carry out investigation
keeping in mind the legal provisions and legal limitations which are stipulated
under the respective statute. Undoubtedly, it can be that there may be an
overlapping investigation but such an eventuality cannot prevent any
investigating authority from carrying out investigation in respect of their
jurisdiction conferred on them under the statute. The investigation in respect
of the corporate fraud can be initiated and considered by the Central
Government under section 237(b)(i). There is no provision under the SEBI Act in
which any corporate fraud can be investigated by the SEBI. Undoubtedly, it can
be investigated under normal criminal law by the CBI. Merely because the
material, on the basis of which investigation is being undertaken, is identical
to the material which is subject-matter of investigation by the other
authority, it cannot be stated that both the authorities cannot simultaneously
investigate pursuant to power conferred on them under their respective
statutes. Every authority is entitled to investigate even may be in respect of
the same material as well as from the angle and facet in which they have been
asked to carry out investigation. It was possible that the SEBI might be
investigating the same material on the ground of breach of the various
provisions of the SEBI Act and other security related legislations whereas the
Central Government, Department of Company Affairs could consider and/or
investigate the fraud and/or breach of various provisions of law in the light
and context of the provisions of the Act, might be in respect of the same
material. [
The Central Government having constituted the
Serious Fraud Investigation Office and if it desired to carry out investigation
in respect of the affairs of the appellant-companies without any mala fide
intention, then it was not possible to stall the investigation merely on the
basis of contentions and arguments advanced by the appellant that all the
authorities could not be permitted to carry out the investigation
simultaneously in respect of the very same material. Therefore, every authority
is entitled to carry out investigation, may be, in respect of the same material
insofar as they do not exceed the jurisdiction conferred on them in their
respective statute. [
The Court cannot and should not usurp the
jurisdiction vested in the Central Government to form an opinion and come to a
conclusion as to whether the investigation is necessary or not. Limited
jurisdiction or power conferred on the Court is to ascertain whether there is a
material in support of the opinion arrived at by the Central Government and/or
the said exercise is not a mala fide exercise of power. In the facts of the
instant case, it could not be said that the exercise of power under section 237
by the Central Government was mala fide. There was a plethora of material and
in view of that, the investigation ordered by the Central Government in
exercise of power conferred under section 237(b)(i) could not be interfered. [
In view of the above, there was no substance
in these appeals and same were, accordingly, dismissed.
Cases referred to
Barium Chemicals Ltd. v. CLB [1966] 36 Comp.
Cas. 639 (SC) (para 11), Rohtas Industries Ltd. v. S.D. Agarwal [1969] 1 SCC
325 (para 13), Ashoka Marketing Ltd. v. Union of
N.H. Seerval and Vinod Parekh for the Appellant. B.H. Desai and Sethna
for the Respondent.
Judgment
1. Economic
progress usher with it economic perversity such as the land scam, Petrol Pump
Scam, import export scam, Hawala scam, security scam, shares and stocks scam,
bank scam etc. With the passage of time the method of committing these scams
has been more involved and more complex and are woven into various webs. Thus
as a collary thereto investigations into such scams are also required to be
more scientific, more intrinsic and more detailed with the help of the experts.
Corporate frauds and corporate misconduct are also another facet of such scams.
Companies are being floated and are disappearing into thin air making the
common man poorer and poorer by thousands of crores of rupees. These 16 appeals
are challenging an order passed by the company law board under which it has
ordered an investigation into one of such alleged scams under section 237(b)(i)
of the Companies Act which is being known as Ketan Parekh - Stock scam of 2001.
2. Few facts
dealing with the complex question of law which have been raised by the
appellant in the present proceedings are briefly narrated as under :
3. In 2001
there was a sudden crash in the stock market i.e., the sudden increase in the
prices over the board securities in the period 1999-2000 and then sudden crash
of the stock market is attributed and alleged to one Mr. Ketan Parekh. It is
alleged that he by his conduct through his various entities and companies has
committed fraud which led to the said crash in the stock market. It is also
alleged that the 14 companies in the present appeals are entities which are
controlled and owned directly or indirectly by the said Ketan Parekh, who is
the alleged King-player in the stock exchange scam of 2001. There are also
allegations that with the crash of the stock market, there has simultaneously
been a crash of the Madhavpura Co-operative Bank, Global Trust Bank and UTI and
thousands of crores of rupees have been siphoned off from the system. With a
hue and cry from the public the Lok Sabha on 26-4-2001 constituted the
Parliamentary Committee as fact-finding committee to investigate the said 2001
Stock Exchange crash. The terms of reference of the said Joint Parliamentary
Committee have been enlarged on 3-8-2001 and inquiries pertaining to the crash
of UTI were also made part of the said Joint Parliamentary Committee. The Joint
Parliamentary Committee has given their report and has inter alia recommended
in paras 11 to 35 of the report that the investigations must be carried out in
respect of 6 corporate groups belonging to Ketan Parekh and that the Department
of Company Affairs has been informed that 6 out of 10 corporate groups have transferred
huge amount to entities and associates of Ketan Parekh and this aspect requires
investigation. Joint Parliamentary Committee has also simultaneously directed
SEBI to carry out investigations to take appropriate action within the
provisions of Security Exchange Board India Act, 1992 as amended from
time-to-time (hereinafter referred to as ‘the SEBI Act’).
4. On
25-6-2001 the respondents issued a letter to the appellants seeking inspection
of the books of account of the appellant in exercise of power conferred under
section 209A of the Companies Act. After carrying out certain initial
investigations on the reference of the company on 25-11-2001 a preliminary
finding report was filed by the respondent with the Central Government. On
19-11-2004 the respondents set out various details and inquiries with the
appellant company seeking various information. This inspection under section
209A of the Companies Act has been partly carried out and is still in progress.
5. On
2-5-2003 the Company Petition No. 39 of 2003 was filed by the respondent with
the Company Law Board seeking permission to investigate the affairs of the
company in exercise of power conferred under section 237(b)(i) of the Companies
Act. The application is inter alia based on the interim report of the various
irregularities of the SEBI as well as certain irregularities which came to the
light by virtue of inspection under section 209A of the Companies Act. The said
petition is also based on a report of the Joint Parliamentary Committee. Thus in
nutshell the application which has been initiated under section 237(b)(i) is
based on the material gathered from three basic sources namely, the report of
the Joint Parliamentary Committee, the interim report of the SEBI investigation
and thirdly the reports pursuant to the investigation under section 209A of the
Companies Act. The petition which is filed on 2-5-2003 by the respondent in
detail sets out the various findings on the aforesaid three reports and the
material gathered by the said authorities as required for the purpose of
carrying out investigation under section 237(b)(i). This petition dated
2-5-2003 was served on the company on 16-5-2003. It is the case of the
petitioner that on 20-7-2003 they applied to the Company Law Board for a
certified true copy of the SEBI report and other documents which are relied
upon by the respondent in the said company petition before the Company Law
Board. On 12-7-2003 the appellant herein sought a transfer of the proceedings
from the Principal Bench of the Company Law Board, New Delhi to the Western
Region Bench of the Company Law Board at Mumbai. Simultaneously they have also
applied for inspection of the various documents which are referred to and/or
relied upon by the respondent in the said company petition. On 24-11-2003 the
appellant company filed a reply inter alia opposing the petition which was
filed under section 37(b)(i) of the Companies Act. It was inter alia alleged
that the powers sought to be exercised by the Company Law Board are likely to
seriously affect the interest of the company. The various allegations made in
the company petition were denied. It was contended that the stock market crash
which took place some time in or about 2001 was not due to acts on the part of
Ketan Parekh but in fact he along with his entitles have suffered losses in the
range of about Rs. 3,000 crores to Rs. 4,000 crores. It was further contended
that if there was any evidence regarding misuse of funds of banks and financial
institutions then the appellant cannot be penalised for the same but it is in
fact the duty of the Reserve Bank of India to regulate and over see the
functions of the banks and financial institutions affecting the financial
matters and that the consequence of the failure on the part of the RBI cannot be
attributed to the appellant herein. Insofar as the allegation that there is
intention of the company to conduct its business with an intention to defraud
its creditors, members and other members or for a fraudulent or unlawful
purpose is concerned, the appellant has contended that the word ‘intention’
would mean that the someone was deceived by the respondents deliberately and in
preplanned events to their advantage and it assumes a guilty mind and there has
to be an unlawful gain by such an evil design on the part of the appellant
herein. It was contended that the crash of the stock market in 2001 was merely
a drastic melt down of the share prices due to a declining trend in global
share market which has also inflicted heavy financial losses to the appellant
companies. It is further contended that the drastic fall in the share prices
cannot be foreseen by the appellant and they themselves are the victims of melt
down and not the beneficiaries of the same. Thus the allegation of carrying on
business for defrauding the creditors and/or for fraudulent or unlawful purpose
were denied. It has been further contended that the purpose and object of
investigation has already been achieved by carrying out investigations by the
authorities such as SEBI, CBI and Department of Company Affairs under section
209A of the Companies Act and therefore a further investigation in the matter
by the said investigating authorities appointed by the Central Government under
section 237(b)(i) is neither necessary nor efficacious and it would only affect
the interest of the appellant company prejudicially. The respondents on the
other hand in their rejoinder have placed extensive reliance upon the
inspection report of the CBI and Joint Parliamentary Committee and also the
inspection carried out by the Department of Company Affairs under section
209(A). Even a certain extract of the JPC report has been annexed to the said
rejoinder.
6. After
hearing the parties the Company Law Board has passed an impugned order on
27-9-2004. By the impugned order the Company Law Board has inter alia held that
there is a ground made out for carrying out investigation under section
237(b)(i). It has been further held that there are serious allegations of fraud
and scams by these corporate entities and there is substantive material in
support of the said allegations to conduct support the investigation under
section 237(b)(i) of the Companies Act. Thus the Company Law Board allowed the
company petition and permitted the Department of Company Affairs to carry out
investigation under section 237(b)(i) in the affairs of each of the appellant
companies. This order dated 22-9-2004 which is a common order passed in respect
of all of the sixteen appeals before me is the subject-matter of challenge
before me. These are the appeals filed under section 10F on the ground that
certain substantive questions of law arise in the present case and require
determination of this Court.
7. Learned
counsel for the appellant has framed three substantial questions of law in
support of his argument which are briefly enumerated as under :
(i) Whether it is a condition precedent for exercise of power
under section 237(b)(i) of the Companies Act that the business of the company
should be in operation as on the date when the power is sought to be exercised
by the respondent or that once the business of the company has ceased to be in
operation for any reason whatsoever voluntarily or otherwise, then the
respondents have no jurisdiction to initiate and/or exercise jurisdiction
vested in them by virtue of the proceedings under section 237(b)(i) ?
(ii) Whether on the facts of the present case the respondents have
made out prima facie case for investigation or alternatively there is a
material available for exercising jurisdiction by the respondent under section
237(b)(i) ?
(iii) Whether in view of simultaneous investigations carried out by
SEBI, CBI and Department of Company Affairs under section 209A the respondent
ought not be permitted to launch a fresh investigation in exercise of power
under section 237(b)(i) of the Companies Act on same material and on same facts
?
8. Before I
deal with the aforesaid substantial questions of law as framed by the learned
counsel for the appellant I feel that it is necessary that the relevant
provisions of the Act which are germane to the aforesaid questions of law must
be set out. Some of the relevant provisions are reproduced as under :
“209A. Inspection of books of account, etc.,
of companies.—(1) The books of account and other books and papers of every company
shall be open to inspection during business hours—
(i) by the Registrar, or
(ii) by such officer of the Government as may
be authorised by the Central Government in this behalf;
(iii) by such officers of the Securities and
Exchange Board of India as may be authorised by it :
Provided that such inspection may be made
without giving any previous notice to the company or any officer thereof:
Provided further that the inspection by the Securities
and Exchange Board of India shall be made in respect of matters covered under
sections referred to in section 55A.
(2) It shall be the duty of every director, other officer or employee
of the company to produce to the person making inspection under sub-section
(1), all such books of account and other books and papers of the company in his
custody or control and to furnish him with any statement, information or
explanation relating to the affairs of the company as the said person may
require of him within such time and at such place as he may specify.
(3) It shall also be the duty of every director, other officer or
employee of the company to give to the person making inspection under this
section all assistance in connection with the inspection which the company may
be reasonably expected to give.
(4) The person making the inspection under
this section may, during the course of inspection,-
(i) make or cause to be made copies of books
of account and other books and papers, or
(ii) place or cause to be placed any marks of identification thereon
in token of the inspection having been made,
(5) Notwithstanding anything contained in any other law for the time
being in force or any contract to the contrary, any person making an inspection
under this section shall have the same powers as are vested in a civil court
under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit, in
respect of the following matters, namely:—(i) the discovery and production of
books of account and other documents, at such place and such time as may be
specified by such person; (ii) summoning and enforcing the attendance of
persons and examining them on oath; (iii) inspection of any books, registers
and other documents of the company at any place.
(6) Where an inspection of the books of account and other books and
papers of the company has been made under this section, the person making the
inspection shall make a report to the Central Government or the Securities and
Exchange Board of India in respect of inspection made by its officers.
(7) Any officer authorised to make an inspection under this section
shall have all the powers that a Registrar has under this Act in relation to
the making of inquiries.
(8) If default is made in complying with the provisions of this section,
every officer of the company who is in default shall be punishable with fine
which shall not be less than fifty thousand rupees, and also with imprisonment
for a term not exceeding one year.
(9) Where a director or any other officer of a company has been
convicted of an offence under this section he shall, on and from the date on
which he is so convicted, be deemed to have vacated his office as such and on
such vacation of office, shall be disqualified for holding such office in any
company, for a period of five years from such date.”
“234. Power of Registrar to call for
information or explanation.— (1) Where, on perusing any document which a
company is required to submit to him under this Act, the Registrar is of
opinion that any information or explanation is necessary with respect to any
matter to which such document purports to relate, he may, by a written order,
call on the company submitting the document to furnish in writing such
information or explanation, within such time as he may specify in the order.
(2) On receipt by the company of an order under sub-section (1), it
shall be the duty of the company, and of all persons who are the officer of the
company, to furnish such information or explanation to the best of their power.
(3) On receipt of a copy of an order under sub-section (1), it shall
also be the duty of every person who has been an officer of the company to
furnish such information or explanation to the best of his power.
(3A)If no information or
explanation is furnished within the time specified or if the information or
explanation furnished is, in the opinion of the Registrar, inadequate, the
Registrar may by another written order call on the company to produce before
him for his inspection such books and papers as he considers necessary within
such time as he may specify in the order; and it shall be the duty of the
company, and of all persons who are officers of the company, to produce such
books and papers.
(4) If the company, or any such person as is referred to in sub-section
(2) or (3), refuses or neglects to furnish any such information or explanation
or if the company or any such person as is referred to in sub-section (3A)
refuses or neglects to produce any such books and papers,-
(a) the company and each such person shall be punishable with fine
which may extend to five thousand rupees and in the case of a continuing
offence, with an additional fine which may extend to five hundred rupees for
every day after the first during which the offence continues; and
(b) the Court trying the offence may, on the application of the
Registrar and after notice to the company, make an order on the company for
production before the Registrar of such books and papers as in the opinion of
the Court, may reasonably be required by the Registrar for the purpose referred
to in sub-section (1).
(5) On receipt of any writing containing the information or explanation
referred to in sub-section (1), or of any book or paper produced whether in
pursuance of an order of the Registrar under sub-section (3A) or of an order of
the Court under sub-section (4), the Registrar may annex that writing book or
paper, or where that book or paper is required by the company, any copy or
extract thereof, to the document referred to in sub-section (1); and any
writing or any book or paper or copy or extract thereof so annexed shall be
subject to the like provisions as to inspection, the taking of extracts and the
furnishing of copies, as that document is subject.
(6) If such information or explanation is not furnished within the
specified time or if after perusal of such information or explanation or of the
books and papers produced whether in pursuance of an order of the Registrar
under sub-section (3A) or of an order of the Court under sub-section (4), the
Registrar is of opinion that the document referred to in sub-section (1),
together with such information or explanation or such books and papers
discloses an unsatisfactory state of affair or does not disclose a full and
fair statement of any matter to which the document purports to relate, the
Registrar shall report in writing the circumstances of the case to the Central
Government.
(7) If it is represented to the Registrar of materials placed before
him by any contributory or creditor or any other person interest that the
business of a company is being carried on in fraud of its creditors or of
persons dealing with the company or otherwise for a fraudulent or unlawful
purpose, he may, after giving the company an opportunity of being heard, by a
written order, call on the company to furnish in writing any information or
explanation on matters specified in the order, within such time as he may
specify therein; and the provisions of sub-sections (2), (3), 3(A), (4) and (6)
of this section shall apply to such order.
|
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(8) The provisions of the section shall apply mutatis mutandis to
documents which a liquidator, or a foreign company within the meaning of
section 591, is required to file under this Act.”
“235. Investigation of the affairs of a company.—(1)
The Central Government may, where a report has been made by the Registrar under
sub-section (6) of section 234, or under sub-section (7) of that section, read
with sub-section (6) thereof, appoint one or more competent persons as
inspectors to investigate the affairs of a company and to report thereon in
such manner as the Central Government may direct.
(2) Where—
(a) in the case of a company having a share capital, an application
has been received from not less than two hundred members or from members
holding not less than one-tenth of the total voting power therein, and
(b) in the case of a company having no share capital, an
application has been received from not less than one-fifth of the persons on
the company’s register of members,
the Tribunal may, after giving the parties an
opportunity of being heard, by order, declare that the affairs of the company
ought to be investigated by an inspector or inspectors, and on such a
declaration being made, the Central Government shall appoint one or more
competent persons as inspectors to investigate the affairs of the company and
to report thereon in such manner as the Central Government may direct.”
“237. Investigation of company’s affairs in
other cases.—Without prejudice to its powers under section 235, the Central
Government-
(a) shall appoint one or more competent persons as inspectors to
investigate the affairs of a company and to report thereon in such manner as
the Central Government may direct, if-
(i) the company, by special resolution;
or
(ii) the Court, by order, declares that the affairs of the
company ought to be investigated by an inspector appointed by the Central
Government; and
(b) may do if in its opinion or in the opinion
of the Tribunal, there are circumstances suggesting—
(i) that the business of the company is being conducted with
intent to defraud its creditors, members or any other persons, or otherwise for
a fraudulent or unlawful purpose, or in a manner oppressive of any of its
members, or that the company was formed for any fraudulent of unlawful purpose;
(ii) that persons concerned in the formation of the company or the
management of its affairs have in connection therewith been guilty of fraud,
misfeasance or other misconduct towards the company or towards any of its members;
or
(iii) that the members of the company have not been given all the
information with respect to its affairs which they might reasonably expect,
including information relating to the calculation of the commission payable to
a managing or other director, or the manager, of the company.”
“250A. Voluntary winding up of company, etc.,
not to stop investigation proceedings.—An investigation may be initiated under
section 235, 237, 239 or 247 notwithstanding that—
(a) an application has been made for an order
under section 397 or section 398; or
(b) the company has passed a special resolution for voluntary
winding up, and no investigation so initiated shall be stopped or suspended by
reason only of the fact that an application referred to in clause (a) has been
made or a special resolution referred to in clause (b) has been passed.”
9. Learned
counsel appearing for appellant has vehemently contended before me that the
proceedings which are initiated by the respondent before the Company Law Board
for investigation under section 237(b)(i) of the Companies Act is totally
without jurisdiction and non est. It has been further contended that the
condition precedent prescribed under the said section having not been complied
with by the Company Law Board was not entitled in law to exercise jurisdiction
under the provisions of section 237(b)(i) of the Companies Act. The learned
counsel has further contended that on true and correct interpretation the
Company Law Board gets jurisdiction to pass an order of investigation only if
the company is carrying on business with the intention to defraud its
creditors, members and/or carrying on business for fraudulent or unlawful
purpose or in a manner oppressive to any of its members in a praesentis. It is
therefore contended that if the company is not carrying on business at present
then irrespective of the fact that during the period when the company was
carrying on business whether the company has conducted business defrauding the
creditors or for a fraudulent or unlawful purpose or in a manner oppressive to
any members the Company Law Board does not acquire jurisdiction to launch
investigation under section 237(b)(i). It has been vehemently contended that
the provisions under section 237(b)(i) must be strictly construed because it is
an inroad in the freedom guaranteed by the Constitution under Article 19(1)(g).
It is contended that it is an interference with the right of the shareholders
to carry on business as guaranteed by the Constitution. It has been contended
that section 237(b)(i) must be so strictly read that unless there is a
compliance with the condition precedent prescribed thereon the Tribunal cannot
exercise power to launch investigation in the affairs of the company, it has
been further contended that only in the last category prescribed under section
237(b)(i) i.e., if the company is formed for any fraudulent and/or unlawful
purpose that it is not necessary that the business of the company should be
carried on at present moment when the investigations are ordered. It has been
contended by the learned counsel for the appellant in alternative to the
aforesaid submission that even if the provisions of section 237(b)(i) are not
so strictly construed as urged by him then also it must be so construed that
save and except the case where the business of the company is voluntarily
closed or the company is voluntarily wound up then only on those cases section
237(b)(i) would be applicable but in all other cases the provisions of section
237(b)(i) would not apply if the business of the company is not carried in
praesentis. It has been further contended that it is immaterial that whether at
the relevant time when the business it was carried on by the company was in
fact carried on for the purpose of defrauding the creditors or members and/or
carried on for fraudulent or unlawful purpose or it is carried on in a manner
oppressive to any of its members and still the Company Law Board will not
permit the investigation by the Central Government under the provisions of
section 237(b)(i) of the Companies Act. It has been strenuously urged by the
learned counsel for the appellant that the power conferred on the Central
Government under section 237(b)(i) is a draconian power interfering with the
business of the company and such power must not be permitted to be utilised
save and except directly in accordance with law and therefore the said
application for investigation when the business is not running in praesentis
cannot be granted.
10. On the facts
of the present case the learned counsel has contended that it is an admitted
position that in respect of some of the appellants who are inter alia carrying
on business of share brokerage their share brokers card has been suspended and
in some of the cases the said card is revoked and/or terminated by the
concerned stock exchange and SEBI and some of the trading firms who were
carrying on business as a share broker have come to a halt and therefore those
companies are not carrying on any business in praesentis and thus the
jurisdiction vested under the Central Government and/or the Company Law Board
to investigate under section 237(b)(i) cannot be exercised in respect of these
companies. It has been further contended that business of the various companies
has also been closed because of the freezing of the bank accounts in parallel
investigations which have been carried out by the SEBI, CBI and Department of
Company Affairs. It has been therefore contended by the learned counsel for the
appellant that even in respect of companies who are not share broking companies
still their business has also come to a total halt and/or for all practical
purposes all these companies are defunct companies and exist only on paper.
Thus according to the learned counsel for the appellant the Company Law Board
ought not to have passed the impugned order since it does not satisfy the
jurisdictional requirements of section 237(b)(i) of the Companies Act. Thus the
learned counsel for the appellant has contended that the argument that these
appellants at the relevant time when they were carrying on business have
committed a scam even if it is taken as true still the said scam cannot be the
subject-matter of investigation under section 237(b)(i) because of closure of
their business for reasons beyond their control. The business of the appellants
have been brought to a halt by an order of SEBI suspending and/or revoking the
licence to carry on business of the company. Thus it is submitted that when
power is exercised under section 237(b)(i) by the Central Government the
company being already defunct companies and not running the business they
cannot be subjected to investigation under the said section.
11. The learned
counsel for the appellants has vehemently contended that the issue urged by him
is directly or squarely covered by the Constitution Bench decision of the Apex
Court in the case of Barium Chemicals Ltd. v. CLB [1966] 36 Comp. Cas. 639. He
has drawn my attention to the following para and has contended that the Apex
Court has clearly held that under section 237(b)(i) as a jurisdictional
requirement for exercising of power of ordering investigation against a company
it is necessary that the company must be carrying on business in praesentis and
it is absolutely immaterial that the company has in past carried on the business
for a fraudulent or unlawful purpose or for defrauding the creditors or any of
the members. The said para reads as under :
“In dealing with this problem the first point
to notice is that the power is discretionary and its exercise depends upon the
honest formation of an opinion that an investigation is necessary. The words
‘in the opinion of the Central Government’ indicate that the opinion must be
formed by the Central Government and it is of course implicit that the opinion
must be an honest opinion. The next requirement is that ‘there are
circumstances suggesting, etc.’ These words indicate that before the Central
Government forms, its opinion it must have before it circumstances suggesting
certain inferences. These inferences are of many kinds and it will be useful to
make a mention of them here in a tabular form :
(a) that the business is being conducted with
intent to defraud-
(i) creditors of the company
(ii) members, or
(iii) any other person;
(b) that the business is being conducted
(i) for a fraudulent purpose,
(ii) for a unlawful purpose;
(c) that persons who formed the company or manage its affairs have
been guilty of-
(i) fraud, or
(ii) misfeasance or other
misconduct-towards the company or towards any of its members;
(d) that information has been withheld from the members about its affairs which might reasonably be expected, including calculation of commission payable to-
(i) managing or other director,
(ii) managing agent,
(iii) the secretaries and treasurers,
(iv) the managers.
These grounds limit the jurisdiction of the
Central Government. No jurisdiction outside the section which empowers the
initiation of investigation, can be exercised. An action, not based on
circumstances suggesting an inference of the enumerated kind, will not be
valid. In other words, the enumeration of the inferences, which may be drawn
from the circumstances, postulates the absence of a general discretion to go on
a fishing expedition to find evidence. . . .” (p. 661)
12. The learned
counsel has vehemently contended that the judgment of the Apex Court as per
majority decision laid down by Hidayatullah, J. is the lead judgment and holds
that the provisions of section 237(b)(i) can only be exercised when the
business is running in praesentis and does not apply when the business of the
company has been closed down for any reasons whatsoever including the reasons
which are beyond the control of the appellant themselves. The learned counsel
has been at pain to convey that the issue which has been raised by him is no
more res integra in view of the judgment of the Constitution Bench and has
contended that the said judgment of the Apex Court is binding on me. According
to the learned counsel for the appellant the aforesaid para in the judgment
holds that the business of the company must be carried on in praesentis for the
purpose which is mentioned in the said section for exercising power by the
Central Government under section 237(b)(i).
13. He has
further contended that the issue was further discussed in subsequent judgment
of the Apex Court in the case of Rohtas Industries Ltd. v. S.D. Agarwal [1969]
1 SCC 325. It has been contended that Apex Court in the aforesaid judgment has
accepted the view taken by Hidayatullah, J. as the correct view. He has relied
upon para 6 of the said judgment. He has also relied upon para 11 where the
Apex Court has approved the view of Hidayatullah, J. in the case of Barium
Chemicals Ltd. (supra). The said paras 6 and 11 reads as under :
“6. The decision of this Court in Barium Chemical’s
case (supra) which considered the scope of section 237(b) illustrates that
difficulty. In that case Hidayatullah, J. (our present Chief Justice) and
Shelat, J. came to the conclusion that though the power under section 237(b) is
a discretionary power the first requirement for its exercise is the honest
formation of an opinion that the investigation is necessary and the further
requirement is that ‘there are circumstances suggesting’ the inference set out
in the section; an action not based on circumstances suggesting an inference of
the enumerated kind will not be valid; the formation of the opinion is
subjective but the existence of the circumstances relevant to the inference of
the enumerated kind will not be valid; the formation of the opinion is sine qua
non or action must demonstratable; if their existence is questioned, it has to
be proved at least prima facie; it is not sufficient to assert that those
circumstances exist and give no clue to what they are, because the
circumstances must be such as to lead to conclusions of certain definiteness;
the conclusions must relate to an intent to defraud, a fraudulent or unlawful
purpose, fraud or misconduct. In other words they held that although the
formation of opinion is subjective but the existence of circumstances relevant
to the inference as the sine qua non for action must be demonstratable; if
their existence is questioned, it has to be proved at least prima facie; it is
not sufficient to assert that those circumstances exist and give no clue to what
they are, because the circumstances must be such as to lead to conclusions of
certain definiteness; that conclusions must relate to an intent to defraud, a
fraudulent or unlawful purpose, fraud or misconduct. In other words they held
that although the formation of opinion by the Central Government is a purely
subjective process and such an opinion cannot be challenged in a Court on the
ground of propriety, reasonableness or sufficiency, the authority concerned is
nevertheless required to arrive at such an opinion from circumstances
suggesting the conclusion set out in sub-clauses (i), (ii) and (iii) of section
237(b) and the expression ‘circumstances suggesting’ cannot support the
construction that even the existence of circumstances is a matter of subjective
opinion. Shelat, J. further observed that it is hard to contemplate that the
Legislature could have left to the subjective process both the formation of
opinion and also the existence of circumstances on which it is to be founded;
it is also not reasonable to say that the clause permitted the authority to say
that it has formed the opinion on circumstances which in its opinion exist and
which in its opinion suggest an intent to defraud or a fraudulent or unlawful
purpose.
11. Coming back to section 237(b) in finding
out its true scope we have to bear in mind that that section is a part of the
scheme referred to earlier and therefore the said provision takes its colour
from sections 235 and 236. In finding out the legislative intent we cannot
ignore the requirement of those sections. In interpreting section 237(b) we
cannot ignore the adverse effect of the investigation on the company. Finally
we must also remember that the section in question is an inroad on the powers
of the company to carry on its trade or business and thereby an infraction of
the fundamental right guaranteed to its shareholders under Article 19(1)(g) and
its validity cannot be upheld unless it is considered that the power in
question is a reasonable restriction in the interest of general public. In fact
the vires of that provision was upheld by majority of the judges Constitution
Bench in Barium Chemicals’ case principally on the ground that the power
conferred on the Central Government is not an arbitrary power and the same has
to be exercised in accordance with the restraints imposed by law. For the
reasons stated earlier we agree with the conclusion reached by Hidayatullah and
Shelat, JJ. in Barium Chemicals’ case that the existence of circumstances
suggesting that the company’s business was being conducted as laid down in
sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud
or misfeasance or other misconduct towards the company or towards any of its
members is a condition precedent for the Government to form the required
opinion and if the existence of those conditions is challenged, the Courts are
entitled to examine whether those circumstances were existing when the order
was made. In other words, the existence of the circumstances in question are
open to judicial review though the opinion formed by the Government is not
amenable to review by the Courts. As held earlier the required circumstances
did not exist in this case.”
14. Apart from
the aforesaid two judgments of the Apex Court the learned counsel has in
support of his contention has also relied upon the judgment of the Delhi High
Court in the case of Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp.
Cas. 634 and the judgment of the Calcutta High Court in the case of New Central
Jute Mills Co. Ltd. v. Dy. Secretary, Ministry of Finance, Department of
Revenue & Company Law [1970] 40 Comp. Cas. 102 (Cal.). By relying upon the
aforesaid two judgments the learned counsel has reiterated the submissions
which are already set out in extentio hereinabove.
15. In the
alternative to the above submissions the learned counsel has raised the issue
of interpretation of section 237(b)(i) and it is contended that assuming that
the judgment of the Apex Court did not hold that the running of a business in
praesentis in the manner set out therein is a condition precedent still
according to him on a plain and simple reading of the section an inescapable
conclusion is that for the purpose of exercising the power under the said
section the business must be a running business and not defunct or closed down
business. On the other hand learned counsel Mr. Desai the learned Additional
Solicitor General appearing for the respondent has contended that the
provisions of section 237(b)(i) cannot be so restrictly interpreted. According
to him it takes in its sweep even a part conduct of the business partially
conducted even if the company has become defunct or it has suspended its
business operation for any reasons whatsoever. It has been further contended by
the learned counsel that the provisions of section 237(b)(i) in its opening
portion provides that the power of the Central Government to appoint one or
more persons as inspector to investigate the affairs of the company and to
report thereon to the Central Government is a power conferred on the respondent
in the public interest and such power of the Central Government ought to be
given full effect for effecting investigation and cannot be so interpreted so
as to defeat the provisions of the Act. It has been further contended that the
word ‘is being conducted’ is in a simple present tense but by using the words
conducted in past tense it has included within its scope even the business
which was carried out for fraudulent purposes in the past. Thus according to
the learned Additional Solicitor General the Central Government would have
jurisdiction to investigate irrespective of the fact that whether the company
is running the business or not. The learned Additional Socilitor General has
further contended that the Court must give purposeful interpretation to the
provisions of section 237(b)(i) and should not interpret the section which
results in absurd consequences. According to the learned counsel the section
cannot be interpreted in a manner which can provide a scope to do the things
which are in fact meant to be prevented by the provisions thereof. Insofar as
the aforesaid authorities are concerned, the learned counsel for the respondent
has contended that the judgment of the Apex Court in the case of Barium
Chemicals Ltd. (supra) does not in any way or manner set out any such
proposition of law as contended by the learned counsel for the respondent i.e.
the company must be running the business in praesentis so as to attract the
provisions of section 237(b)(i). The learned counsel has contended that the
paras referred to by the learned counsel for the appellant did not carve out
any such proposition of law as canvassed by the learned counsel for the
appellant before this Court and therefore the said argument ought not to be
accepted. The learned counsel has further contended that if the interpretation
is given as suggested by the learned counsel for the appellant in most of the
cases, then the company would commit fraud and carry on business for fraudulent
or unlawful purpose and/or to defraud the creditors and before the same can be
detected or investigated they would close down the company and evade
investigation or cases where due to criminal investigation if the business of
the companies has come to a halt then in that event it would escape the
investigation under section 237(b)(i) of the Companies Act. Further more it
would restrict the power of Government to take immediate remedial action of
preventing further fraud being carried on by the company by carrying on
business.
16. Alternatively
the learned counsel solicitor general has contended that in the facts of the
present case in fact the company is carrying on business in praesentis. It has
been contended that the company is neither a defunct company nor has the
company been wound up but it is merely affected by virtue of the various orders
passed by the various authorities affecting the business of the company but is
still in operation. It has been contended that it is admitted by the appellant
themselves in the various documents which are set out on record which indicate
that according to appellant themselves the business is a running business and
not closed down as claimed by the appellant himself and it has been contended
by the learned counsel for the appellant that even if the section is
interpreted as claimed by the learned counsel for the appellant still the order
impugned herein is legal and valid and it satisfies all the requirements of
section 237(b)(i) and this Court in exercise of power under section 10(f) ought
not to inteferere with the said order passed by the Company Law Board and the
appeal should be dismissed.
17. While
considering the rival contentions of the parties insofar as the first question
of law framed by the petitioner is concerned i.e. the power under section
237(b)(i) can only be exercised if the company is carrying on business and does
not apply if the company has closed down its business or by virtue of the
orders passed by various authorities due to it has been forced to close down
its business. I do not agree that the aforesaid issue is no longer a res
integra in view of the judgment of the Apex Court in the case of Barium
Chemicals (supra). On going through the above judgment of the Apex Court, in
which the Apex Court has considered the constitutional validity of section
237(b)(i), I do not find any such proposition of law laid down by the Apex
Court that the power under section 237(b)(i) can only be exercised when the
company was carrying on business in praesentis. The paras on which strong reliance
has been placed by the learned counsel for the appellant in my opinion does not
raise any such issue of law. In the said paras the Apex Court was dealing with
the issue of formation of opinion of the Central Government and requirement of
the material in support thereof while ordering investigation under section
237(b)(i) of the Act. The para clearly indicates that the court was considering
the words in the opinion of the Central Government and was considering that
whether such words suggest in any manner that there should be material in
support. While considering the aforesaid issue the court has analysed the said
sections and has broken in into four parts a, b, c and d therein. Such division
of the section in four parts namely a, b, c and d is nothing else but division
of the plain language of the section as it is. The learned counsel for the
appellant has contended that the Apex Court while considering the section in
parts (a) and (b) as used the words ‘business is being conducted’ indicates
that the court was of the opinion that the investigation cannot be ordered once
the business has been closed down. I do not read any such proposition of law in
the said para which has been set out in the said judgment nor do I find from
the reading of the said judgment that any such issue was ever considered by the
Apex Court. I therefore do not accept the contention of the learned counsel
that the issue whether the investigation can be ordered only when the business
is being conducted must be read in present tense and that the ratio of the
aforesaid judgment in the case of Barrium Chemicals Ltd. (supra) covers the
issue. I therefore reject the contention of the appellants that this issue is
squarely covered and no more res integra by virtue of the judgment of the Apex
Court in the case of Barium Chemicals Ltd. (supra). I am of the opinion that it
is now well settled law that the judgment is an authority only on such
proposition of law which squarely arises in the cases which are squarely dealt
with by the court and that is the only ratio of the judgment which is binding
on me. I do not find any such ratio or proposition of law as agitated by the
learned counsel for the appellant being decided by the Apex Court in the
aforesaid judgment of Barium Chemicals Ltd.’s case (supra). I therefore do not
accept the contention of the learned counsel for the appellants and reject the
same.
18. Once I so
hold that the issue is not covered by the judgment cited by the learned
counsel, then I am required to consider the alternative argument of the learned
counsel for the appellant i.e., on a plain and simple interpretation of section
237(b)(i) of the Companies Act, it is a condition precedent that business must
be a running business ordering investigation under section 237(b)(i). The learned
counsel for the appellant has contended that even on interpretation the section
is clear and unambiguous. It uses the word ‘is being conducted’ which is simple
present tense. Thus according to the learned counsel for the appellant on plain
and simple interpretation of the section itself it is clear that the power
under section 237(b)(i) can be exercised by the authorities only if the
business is conducted in praesentis. Insofar as the arguments on the
interpretation of section 237(b)(i) is concerned it is by now well-settled that
the interpretation of the section as a first principle must be on the basis of
simple and plain language used in the section itself. However, there is a case
at which has been well recognised by the various courts that if interpretation
is likely to result in absurd consequences or it defeats the intention of the
Legislature then in that event purposive interpretation ought to be resorted to
and interpretation should be such to advance the intention of the Legislature
rather than defeating the same. In my opinion the provisions of investigation
under section 237(b)(i) are being introduced by the Parliament with the
intention to prevent persons who enter the business in the guise of corporate
entities to carry on fraudulent business with a view to harm the public
interest. Butterworth in his 5th edition on the company law while tracing out
the background of the similar legislation i.e. English Company Law has inter
alia considered the reason for introduction of such a legislation and while
doing so it has stated as under :
“It is important to know the background of the
legislation. It sometimes happens that public companies are conducted in a way
which is beyond the control of the ordinary shareholders. The majority of the
shares are in the hands of two or three individuals. These have control of the
company’s affairs. The other shareholders know little and/or told little. They
receive the glossy annual reports. Most of them throw them into the wastepaper
basket. There is an annual general meeting but few of the shareholders attend.
The whole management and control is in the hands of the directors. They are
self-perpetuating oligarchy; and are virtually unaccountable. Seeing that the
directors are the guardians of the company, the question is asked : Quis
custodiet ipsos custodies - Who will guard the guards themselves.”
19. Similar are
the provisions under section 237(b)(i) of the Companies Act in India.
Essentially the provisions are meant to see that the defrauding of the public
at large is not being carried on under the guise of the corporate affairs. In
my opinion even on plain and simple reading of the said section would indicate
that the words used ‘is being conducted’ are used in the context of the
fraudulent or unlawful business conducted by the company in course of running
of their business. It does not mean that once the business is conducted in
unlawful and fraudulent manner and if it is closed down the power of the
Central Government of ordering investigation under section 237(b)(i) stood
revoked or ceased to have effect as contended by the learned counsel for the
appellant. The word ‘is being conducted’ has to be read alongwith the words
‘fraudulent or unlawful purpose’ even if it is so read it is clear that the
word ‘is being conducted’ is used with the intention to indicate that when the
business of the company was conducted it was conducted for unlawful purpose.
Even otherwise I am of the opinion that to accept the contention of the
appellant would be to make the said section nugatory and without any effect and
toothless. It is because any person can conduct the business for fraudulent or
unlawful purpose and before it is detected would close down the business of the
company and in fact escape the consequences as contemplated under section
237(b)(i) of the company. It is not uncommon that there are companies who are
fly by night operators in a booming economy of India today. If such an
interpretation is given to section 237(b)(i) then all these companies would
commit fraud and would close down the business and consequently make the
provisions a dead letter on the statue. Apart therefrom it is also difficult to
interpret the section in a manner the learned counsel for the appellant has
called upon me to do because while so interpreted it is necessary that the
Central Government must detect and investigate all such cases of the company
which are conducted in a fraudulent or unlawful purpose in a course when such
conduct is being carried on by the company. I do not think this could be a
legislative intention while enacting the said section 237(b)(i).
20. The
principles of interpretation of statue are well settled. It is repeatedly held
by the Apex Court that the interpretation must be to avoid absurdity and
unrealistic result or consequences of such an interpretation. The Maxwell has
in his book Interpretation of Statutes in the 10th edition as opined as under :
“....if the choice is between two
interpretation, the narrow of which would fails to achieve the manifest purpose
of the legislation, we should avoid a construction which would reduce the
legislation to futility and should rather accept the bolder construction based
on the view that Parliament would legislate only for the purpose of bringing
about an effective result.”
21. The
aforesaid rule of a meaningful and purposeful interpretation of the section to
avoid the absurd consequence is by now well settled in the case of Mangin v.
IRC [1971] All Eng. LR 179 Lord Donvan has stated as under :
“Thirdly, the object of the construction of a
statute being to ascertain the will of the Legislature, it may be presumed that
neither injustice nor absurdity was intended. If therefore a literal
interpretation would produce such a result, and the language admits of an
interpretation which would avoid it, then such an interpretation may be
adopted.”
22. The said
view is also recognised in large number of authorities in India, some of which
can be briefly enumerated as under : In the case of Budhan Singh v. Babi Bux
AIR 1970 SC 1880 in para 9 it is stated as under :
“9. Before considering the meaning of the word
‘held’ in section 9, it is necessary to mention that it is proper to assume
that the law-makers who are the representatives of the people enact laws which
the society considers as honest, fair and equitable. The object of every
legislation is to advance public welfare. In other words, as observed by
Crawford in his book on Statutory Constructions that the entire legislative
process is influenced by considerations of justice and reason. Justice and
reason constitute the great general legislative intent in every piece of
legislation. Consequently, where the suggested construction operates hoarsely,
ridiculously or in any other manner contrary to prevailing conceptions of
justice and reason, in most instances, it would seem that the apparent or
suggested meaning of the statute was not the one intended by the law makers. In
the absence of some other indication that the harsh or ridiculous effect was
actually intended by the Legislature, there is little reason to believe that it
represents the legislative intent.” (p. 1883)
23. In the case
of Nasiruddin v. State Transport Appellate Tribunal AIR 1976 SC 331 where in
the Apex Court has in para 26 as held as under :
“26. The conclusion as well as the reasoning
of the High Court that the permanent seat of the High Court is at Allahabad is
not quite sound. The order states that the High Court shall sit as the new High
Court and the Judges and Division Bench thereof shall sit at Allahabad or at
such other places in the United Provinces as the Chief Justice may, with the
approval of the Governor of the United Provinces appoint. The word ‘or’ cannot
be reads as ‘and’. If the precise words used are plain and unambiguous, they
are bound to be construed in their ordinary sense. The mere fact that the
results of a statute may be unjust does not entitle a court to refuse to give
it effect. If there are two different interpretations of the words in an Act,
the Court will adopt that which is just, reasonable and sensible rather than
that which is none of those things. If the inconvenience is an absurd
inconvenience, by reading an enactment in its ordinary sense, whereas if it is
read in a manner in which it is capable, though not in an ordinary sense, there
would not be any inconvenience at all; there would be reason why one should not
read it according to its ordinary grammatical meaning. Where the words are
plain the court would not make any alteration.” (p. 338)
24. In the case
of Molar Mal v. Kay Iron Works (P.) Ltd. [2000] 4 SCC 285 while reconsidering
the aforesaid principle the Apex Court has held as under:
“The Courts will have to follow the rule of
literal construction which rule enjoins the Court to take the words as used by
the Legislature and to give it the meaning which naturally implies. But, there
is an exception to this rule. That exception comes into play when application
of literal construction of the words in the statute leads to absurdity,
inconsistency, or when it is shown that the legal context in which the words
are used or by reading the statute as a whole, it requires a different meaning.
If the expression ‘entitled to apply again’ as given its literal meaning, it
would defeat the very object for which the Legislature has incorporated that
proviso in the Act inasmuch as the object of that proviso can be defeated by a
landlord who has more than one tenanted premises by filing multiple
applications simultaneously for eviction and thereafter obtain possession of all
those premises without the bar of the proviso being applicable to him. This
could not have been the purpose for which the proviso is included in the Act.
If such an interpretation is given then the various provisos found in
sub-section (3) of section 13 would become otiose and the very object of the
enactment would be defeated. Therefore, the restriction contemplated under the
proviso extends even up to the stage when the Court or the Tribunal is
considering the case of the landlord for actual eviction and is not confined to
the stage of filing of eviction petition only.” (p. 288)
25. Thus in my
opinion the true and correct interpretation of section 237(b)(i) would only
mean that if the company while conducting the business has acted in a
fraudulent or unlawful purpose then such companies will fall within the net of
section 237(b)(i) irrespective of the fact that whether it is a running concern
or close down subsequently for any reason whatsoever I am of the aforesaid
opinion also because under the provisions of section 250(A) it is specifically
provided that investigation may be initiated under section 237(b)(i)
notwithstanding that the application is made under sections 397 and 398 of the
Companies Act or it has passed a special resolution for voluntary winding up of
such a company. In my opinion if section 250(A) is read along with section
237(b)(i) it is without any doubt that the contention of the learned counsel
for the appellant that no investigation can be carried out once the company has
ceased to operate its business. In any event on a true and proper construction
of the section I do not accept the contention of the learned counsel for the
appellant that the business of the company should be conducted in praesentis
for the purpose of ordering investigation by the Central Government under
section 237(b)(i).
26. Even
otherwise on facts the learned counsel for the respondent has been able to
establish that the business of the company is not totally stopped though
undoubtedly it has been seriously affected by virtue of the orders passed by
the SEBI and stock exchange of suspension of the brokerage licence, suspension
or freezer of bank account and collapse of Madhavpura Co-operative Bank and
Global Trust Bank. The learned counsel has drawn my attention to the affidavit
filed by the company before the Company Law Board in which it has been stated
as under :
“3(b) It is incumbent that in order to achieve
this objective, the functioning of the Applicant/Respondent group of companies
ought not to be crippled which situation would inevitably result if the order
dated 27-9-2004 passed by this Hon’ble Board is not amended for the purpose of
determining the real question, as would be evident from the averments made
hereinafter in this application.”
“6. It is stated in this connection that the
following the details of payment made by the Applicant group of companies and
value of Share/Property lying with the Bank :-
Particulars
|
Amt. (Rs. in crores) |
|
|
By Cash/Deposits/Dividend |
27.34 |
|
|
By sale of stocks |
15.18 |
|
|
Paid to Bank of India |
28.92 |
|
|
Total |
|
71.44 |
It may be mentioned that out of the figures
indicated above, even as recently as during the period ranging between 11-9-2004
and 4-11-2004, securities worth Rs. 15,18,02,166.05 (Rupees Fifteen Crores
Eighteen Lacs Two Thousand One Hundred and Sixty Six and paise Five), held by
the Ketan Parekh group with Madhavpura Mercantile Co-operative Bank Limited
were liquidated towards discharging dues towards the said bank by the Ketan
Parekh group.
7. It is also submitted that Shri Ketan V.
Parekh has always co-operated with the Banks even admist his crisis. In spite
of all the accounts frozen by various agencies and a bank on Shri Ketan V.
Parekh and on his various group of companies from carrying out activities in
the capital markets, the aforesaid amounts paid reflects clear intention on the
part of Shri Ketan V. Parekh and his group of companies towards liquidating
dues of bankers, financial institutions, and creditors. Admist such a situation
it would be contrary to public interest if efforts of the Ketan Parekh group of
companies to liquidate bank’s dues are jeopardised in any manner.
10. Admist these fact finding investigations,
to impose another investigation would have the effect of crippling the
functioning of Ketan Parekh Group of Companies and would adversely affect their
capacities to liquidate dues of creditors which would be contrary to public
interest.”
27. Learned
counsel for the respondent has also relied upon the balance sheet of the
various companies which inter alia undoubtedly indicates conduct of some
business though by way of liquidation of the various assets of the company.
However the learned counsel for the appellant has contended that liquidating
the assets and/or conducting the business of the company by calling meetings of
the company cannot be deemed to be conducting the business of the company. He
has relied upon the judgment of the Apex Court in the case of Bengal &
Assam Investors Ltd. v. CIT AIR 1966 SC 1514 particularly para 13 of the said
judgment. The said para 13 of the said judgment reads as under :
“13. Mr. Desai laid a great deal of stress on
the argument that the very fact that a company is incorporated to carry on
investment shows that the company is carrying on business. We are unable to
agree with this contention. Bhagwati, J. observed in Lakshminarayan Ram Gopal
Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 that ‘when a com-pany is
incorporated it may not necessarily come into existence for the purpose of
carrying on a business’. He further observed that ‘the objects of an
incorporated company as laid down in the memorandum of association are certainly
not conclusive of the question whether the activities of the company amount to
carrying on of business.’” (p. 1518)
28. While
considering the aforesaid contention the Apex Court has held that there is
difference between the incorporation of a company and conduct of the business
of the company. In this case the company was only incorporated on the paper but
no business of any nature was conducted by the company. The said judgment has
no application in the facts of the present case where the business of the
company insofar as statutory requirements are concerned of calling meetings,
filing returns, preparing the balance sheet is running. It may be that actual
trading in the stock markets or stock exchanges has come to a halt by
suspension of the trading licence by the SEBI or the business has been
substantially crippled by virtue of freezer of various bank accounts. I am of
the opinion that this cannot be treated as business of the company ‘is not
carried on’ and/or the same ‘is closed down’ for reasons beyond the control of
the appellant, i.e., by virtue of the passing of the orders of the various
authorities such as SEBI, CBI and other Central Government authorities. The
business of the company is conducted even today even though at a very low level,
it cannot be said that the business of the company has ceased to be in
operation. The word ‘is being conducted’ under section 237(b)(i) even if it is
so interpreted as contended by the learned counsel for the appellant it should
be and must mean that the business of the company has to come to a total stop
and no activities of the company are carried on. In my opinion such situation
arises only when the company is wound up either by voluntary winding up or
compulsory winding up as provided under the Companies Act. In the aforesaid
circumstances even on the facts of the present case I am of the opinion that
the business of the company is being carried on and therefore the provisions of
section 237(b)(i) squarely apply to the case which would mean that the order
passed by the Company Law Board is legal and valid and on this ground does not
require any interference by this Court.
29. This takes
me to the second question of law framed by the learned counsel for the
appellant that whether in the present case the Central Government has able to
produce necessary material on evidence to establish that the ground exist for
ordering such an investigation under section 237(b)(i). On the facts of the
present case it is not in dispute that there has been a stock market collapse
in the year 2001 and the appellants herein have indulged in large number of
share dealings and trading. It is also not in dispute before me that the
Madhavpura Co-operative Bank and Global Trust Bank has collapsed in view of the
stock market scam. However appellants have denied their involvement in the
scam. They have on the contrary contended that they are the victims of the
collapse of the share market and not the beneficiaries. The respondents therein
have produced before the Company Law Board in support of the application for
investigation under section 237(b)(i) a report of the Joint Parliamentary
Committee investigating said scam. The respondents have also produced the
report and/or order passed by the SEBI against the appellants and Ketan Parekh
alleged moving spirit behind the 14 companies. The Central Government has also
in support of the application relied upon the reports which are filed by the
inspectors in the course of carrying out investigation under section 209(A).
The Central Government has also relied upon large number of breaches of the
provisions of the Companies Act by the various companies in support of
investigation. In my view not only there is a material in the form of aforesaid
reports, documents and orders but a more than prima facie case has been made
out for investigation of the appellant company. The Joint Parliamentary
Committee has in fact directed the investigation against these entities by the
SEBI or the Central Government. However the learned counsel for the appellant canvassed
that there is no material which can be used by the respondent in respect of the
investigation because each of the authorities are entitled to conduct its own
investigation on the basis of aforesaid report and, therefore, the same cannot
be utilised for the purpose of ordering investigation by the Central Government
under section 237(b)(i). I am not inclined to accept the contention of the
learned counsel for the appellant for the simple reason that it is possible
that the material can be common or identical in the course of various
investigations embarked upon by the various authorities. It does not mean that
the respondents are not entitled to use the material which have been unearthed
or found in the course of the investigation by any other authority. The
material in the present case is glaring. There was a serious collapse of the
stock exchange in 2001. The SEBI on investigation has found that all the
entities have entered into typical type of transactions in concert with each
other so as to ultimately result in collapse of the stock market. Consequently
large amount of public fund has been eroded. Consequent upon the collapse of
the Global Trust even UTI has been subjected to serious financial difficulties
and was ultimately required to be bailed out by the Government. These are very
serious circumstances and there is a plethora of material to indicate that 14
of the entities who are subject to investigation under the provisions of
section 237(b)(i) have played some role the consequence of which has resulted
as mentioned herein above. The learned counsel for the appellant further
contends that there is no need for investigation when there is substantial
material and therefore the power ought not to be exercised merely for the
purpose of exercising under section 237(b)(i). The aforesaid contention is
merely stated to be rejected as devoid of any merits. In my opinion the Central
Government has not only sufficient material but also has a strong prima facie
case for ordering investigation. It has been well settled by the various
decisions of the Apex Court that the Court ought not to interfere at this stage
of investigation by the authorities. The investigation is not a trial of an
offence. It is merely a fact-finding venture. It is no doubt true that in the
context of the companies it is a serious issue because it interferes with their
rights to carry out free trading but it has been held that every right is
coupled with reasonable restrictions and if the company has prima facie carried
out fraudulent activities then obviously it cannot complain about
investigations carried out by the Central Government in exercise of statutory
powers conferred under section 237(b)(i).
30. This leads me to the third question of law
which has been raised by the learned counsel for the appellant.
31. It has been
inter alia contended that the power conferred under the provisions of section
237(b)(i) of the Act must be sparingly exercised and cannot be utilised in
casual manner. It has been contended by the learned counsel for the appellant
that in respect of the so called security scam of 2001 there are already
investigations undertaken by the SEBI, CBI and even the Department of Company
Affairs by ordering investigation under section 209(A). It has therefore been
contended that on the same material and on the same allegations one more
investigation ought not to be ordered by the Central Government nor the Company
Law Board ought to grant a sanction to such an investigation. It is not
contended that the said exercise is in futility and the same is carried on
simultaneously by the various authorities with a view to only affect the
business of the company and thus the same should not be permitted.
32. Learned
counsel for the appellant has taken me through the provisions of the SEBI Act
and has contended that the purpose and scope of inquiry thereunder has been
more extensive and the provisions are more harsh and effective and in view
thereof the inquiry under section 237(b)(i) is meaningless and would achieve no
purpose. It has been therefore contended that once there is an extensive
inquiry undertaken by SEBI in exercise of powers conferred under the SEBI Act
and that the SEBI is supposed to be an expert authority in stock exchange
transactions. It is neither necessary nor permissible to conduct inquiry by the
Department of Company Affairs by invoking powers under section 237(b)(i) of the
Companies Act. It has been urged by the learned counsel for the appellant that
the inquiry ordered and sanctioned by the CBI, is merely to harass the
appellant company and is not meant for achieving any objective and therefore
the court should strike down the Company Law Board order sanctioning the said
inquiry. It has been further contended that the parallel CBI investigation is
also already in progress. The Department of Company Affairs is also conducting
an inspection under section 209(A) and that various prosecutions are already
launched. In view thereof it has been contended that no such investigation
should be permitted by the Central Government in exercise of power under
section 237(b)(i). On the other hand the learned counsel for the respondent has
urged that the investigation is a must looking at the magnitude and the
proposition of fraud which has been alleged to have been committed by all the
sixteen entities and according to the Central Government the moving spirit
behind these companies is Mr. Ketan Parekh. The learned counsel for the
respondent company has drawn my attention to a resolution passed by the
Government of India, Department of Company Affairs being resolution dated
2-7-2003 and it has been contended that by the said resolution the Government
of India has set up a Serious Fraud Investigation Office (SFIO) and it is
required that the corporate frauds should be investigated by the said SFIO. It
is also brought to my attention that under the said resolution the SFIO will be
conferred with the power to investigate in the company because the
investigation under section 237(b)(i) of the Companies Act is entrusted to the
SFIO. The learned counsel for the respondent has further contended that there
are authorities and authorities which require to investigate the various
aspects of fraud committed by the companies like the appellant herein. It has
been contended that the SEBI under the SEBI Act has a restrictive power to
investigate i.e., in respect of security transactions but when it comes to
transaction in respect of banks and other institutions which are not within the
purview and/or jurisdiction of the SEBI and the same are required to be
investigated by the Central Government through the appropriate authority and/or
body. It has been contended that the inquiry under the different acts by the
different authorities are in respect of their respective jurisdiction and
spheres assigned to them under the various legislations and it cannot be stated
in law that merely because the inquiry is in progress by one authority under
one act it should automatically prevent the other authorities from conducting
investigation under a separate statue.
33. I have
considered these rival submissions of the parties and I am of the opinion that
the jurisdiction and the power of the various investigating authorities derived
from the jurisdiction vested in them by the various legislations or statutes,
the authority which is doing the inquiry and/or conducting the investigation is
required to carry out investigation keeping in mind the legal provisions and
legal limitations which are stipulated under the respective statute.
Undoubtedly it can be that there may be an overlapping investigation but in my
opinion such an eventuality cannot prevent any investigating authority from
carrying out investigation in respect of their jurisdiction conferred on them
under the statute. I am also of the further opinion that the investigation in
respect of the corporate fraud can be initiated and considered by the Central
Government under section 237(b)(i) of the Companies Act. I have not been able
to come across any provisions under the SEBI Act in which any corporate fraud
can be investigated by the SEBI. Undoubtedly it can be investigated under
normal criminal law by the CBI. I am further of the opinion that merely because
the material on the basis of which investigation is being undertaken is
identical to the material which is subject-matter of investigation by the other
authority it cannot be stated that both the authorities cannot simultaneously
investigate pursuant to power conferred on them under their respective
statutes. I am of the opinion that every authority is entitled to investigate
even may be in respect of the same material as well as from the angle and facet
in which they have been asked to carry out investigation. It is possible that
the SEBI may be investigating the same material on the ground of breach of the
various provisions of the SEBI Act and other security related legislations
whereas the Central Government, Department of Company Affairs can consider
and/or investigate the fraud and/or breach of various provisions of law in the
light and context of the provisions of the Companies Act may be in respect of
the same material. However, I am of the opinion that the contentions advanced
by the learned counsel for the appellant cannot be accepted particularly in
view of the fact that every authority has been conferred various powers in
their respective legislation. A similar issue aroused before the English Court
under the identical provisions of investigation under the Companies Law and the
Court of Appeal in the case of London United Investments Plc, In re 1992 BCLC 285
equivalent to 1971 All Eng. LR 849 it is held as under :
“The power of the Secretary of State to
appoint inspectors to investigate the affairs of a company and to report is an
important regulatory mechanism for ensuring probity in the management of companies
affairs. That of course is in the public interest. Since the Secretary of
State’s powers under section 432(2) are exercisable where there are
circumstances suggesting fraud, it is likely that in many cases where
inspectors are appointed an investigation by the police or the Serious Fraud
Office could also be appropriate. But the code under the 1985 Act is a separate
code even though it may overlap the field of criminal investigation.”
34. Apart from
the aforesaid position in law : I am also of the further opinion that the
Central Government having constituted the Serious Fraud Investigation Office
and if it desires to carry out investigation in respect of the affairs of the
aforesaid 14 appellant companies without any mala fide intention then it is not
possible to stall the investigation merely on the basis of contentions and
arguments advanced by the learned counsel for the appellant that all the
authorities cannot be permitted to carry the investigation simultaneously in
respect of the very same material. I therefore, reject the contention on behalf
of the appellant in respect of question No. 3 which have been formulated. I am
of the opinion that the answer to this question is that every authority is
entitled to carry out investigation may be in respect of the same material
insofar as they do not exceed the jurisdiction conferred on them in their
respective statute. I therefore answer this question of law accordingly.
35. The learned
counsel for the respondent has drawn my attention to the judgment of the Apex
Court in the case of DDA v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622
and has brought to my attention that the Supreme Court has taken note of the
fact that various frauds are committed by the companies defrauding the public
at large by taking shelter of corporate entities. It has been contended by the
learned counsel for the respondent by relying upon the aforesaid judgment that
it is necessary to lift or pierce the corporate veils and to see who are the
real men behind the veil who are involved in defrauding others under the guise
of corporate entity. It has been contended by the learned counsel for the
respondent that such an exercise can be undertaken by the SFIO while carrying
out investigation under section 237(b)(i) of the Companies Act and the court
must not stole such an investigation. It has been contended by the learned
counsel for the appellant that there are serious allegations in the present
case and thus this Court must refrain from exercising jurisdiction and
interfering with the investigation at this stage. I find considerable substance
in the contention advanced by the learned counsel for the respondent. It is
well settled that the court must be reluctant in interfering in the matter
where the same is still at investigating stage. The Court cannot and should not
usurp the jurisdiction vested in the Central Government to form an opinion and
come to a conclusion as to whether the investigation is necessary or not
limited jurisdiction or power is conferred on the court is to ascertain whether
there is a material in support of the opinion arrived at by the Central
Government and/or the said exercise is not a mala fide exercise of power. In
the facts of the present case I do not consider that the exercise of the
Central Government is mala fide. There is a plethora of material and in view
therein I do not desire to interfere with the investigation ordered by the
Central Government in exercise of power conferred under section 237(b)(i) of
the Act.
36. In view
thereof I find that there is no substance in the present appeals. I accordingly
dismiss all the 14 appeals with cost quantified at Rs. 10,000 each per appeal.
At the request of the learned counsel for the
appellant the statement of the learned counsel for the respondent to maintain
status quo is to continue till 29-4-2005.
In view of the dismissal of the appeals itself
nothing remains in the Company Applications (L) No. 1030 of 2004 to 1043 of
2004 for ad interim orders and the same is dismissed accordingly with no order
as to costs.
[1983] 53 Comp. Cas. 485 (Ker)
High Court OF Kerala
v.
Yoosuf Sagar Abdulla & Sons
(P.) Ltd.
M. P. Menon j.
COMPANY
PETITION NO. 22 OF 1978.
January 29, 1980
M. Ramanatha Pillai for the Petitioner.
M.
M.P. Menon J.—The petitioner, a director and also a manager of Yoosuf
Sagar Abdulla & Sons (P.) Ltd., seeks a declaration under s. 237 of the
Companies Act, 1956, that the affairs of the company ought to be investigated
by the inspector appointed by the Central Govt. Necessary directions to the
Central Govt. are also sought for.
The facts stated and the
allegations made in the petition briefly are these. A foreign national, Yoosuf
Sagar Abdulla, was doing import and export business at
K.V.
Kunhammed has filed a detailed counter-affidavit on behalf of the company
denying all the petitioner's allegations and suggesting that he (the
petitioner), who was actively participating in the management till 1978, has
chosen to make them only because his remuneration was reduced and some of his
powers were curbed during 1977 and 1978. The petitioner has got himself
examined as P.W. 1 and Exs. A-1 to A-3 are marked on his side. The respondent
has produced only some documents and they are Exs. B-1 to B-6.
Counsel
for the petitioner raised the following points at the time of hearing
"(i) the appointment of Ahammed Yoosuf as
managing director in February, 1973, without the sanction of the Reserve Bank
was opposed to the provisions of the Foreign Exchange Regulation Act;
(ii) non-resident equity participation exceeding
40 per cent, is illegal, in view of section 29 of the Foreign Exchange
Regulation Act, 1973 ;
(iii) the raid of 1976 and the consequent
disclosures reveal a state of affairs which requires investigation ; and
(iv) because
of Kunhammed's interest in the rival firm, the company's business has been
going down."
The
above, according to counsel, are circumstances calling for an order under s.
237(a)(ii) of the Companies Act, 1956. Section 237 reads :
"Investigation
of. company's affairs in other cases.—Without prejudice to its powers under
section 235, the Central Government—
(a) shall appoint one or more competent persons
as inspectors to in vestigate the affairs of a company and to report thereon in
such manner as the Central Government may direct, if—
(i) the
company, by special resolution ; or
(ii) the Court, by order, declares that the
affairs of the company ought to be investigated by an inspector appointed by
the Central Government ; and
(b) may
do so if, in the opinion of the Central Government, there are circumstances
suggesting—
(i) that the business of the company is
being conducted with intent to defraud its creditors, members or any other
persons, or otherwise for a fraudulent or unlawful purpose, or in a manner
oppressive of any of its members, or that the company was formed for any
fraudulent or unlawful purpose;
(ii) that persons concerned in the formation
of the company or the management of its affairs have in connection therewith
been guilty of fraud, misfeasance or other misconduct towards the company or
towards any of its members ; or
(iii) that the members of the company have not
been given all the information with respect to its affairs which they might
reasonably expect, including information relating to the calculation of the
commission payable to a managing or other director, the managing agent, the
secretaries and treasurers, or the manager, of the company."
The
section conceives of three situations where the Central Govt. can appoint
inspectors for investigation. The first is when the company itself declares
that such an investigation is necessary. The second is when the court makes an
order. And the third is when the Central Govt. forms an opinion that the
circumstances enumerated in cl. (b) exist. The first is easy to understand:
When the company itself wants an investigation, the Central Govt. need not stop
to enquire why. The third can also be understood because when suo motu action
is proposed to be taken by the Government, it shall not act arbitrarily, but
only consistent with guidelines laid down. But what about the second situation,
where the court has to make an order ? Mr. Ramanatha Pillai for the petitioner
suggests that the power and the discretion of the court are uncontrolled ; it can
direct an investigation whenever it suspects that all is not well with the
company. Whether the apprehensions of the court are true or not is a matter to
be found by the investigating inspectors, and the court is not to insist on
evidence. It appears to me that this is too broad a statement. Investigation of
the company's affairs by the Department of Trade in
Turning to the first point
raised by the petitioner, the answer furnished by the respondent is that in
February, 1973, when Ahammed Yoosuf was appointed managing director, there was
no prohibition against a foreign national being so appointed. The Foreign
Exchange Regulation Act, 1973, was not then in force; and the predecessor
enactment of 1947 contained no such restrictions. Mr. Ramanatha Pillai is
unable to dispute this position ; and it is also seen from Ex. A-1 that the
proposal to appoint Ahammed Yoosuf as managing director was made by the
petitioner himself at the 71st meeting of the Board held on February 14, 1973.
He cannot certainly complain in 1978 about a lawful decision taken by the Board
in 1973 at his own instance, and then seek an investigation on that ground.
As regards non-resident
equity participation, what s. 29 of the FER Act, 1973, lays down is that a
company with more than 40 per cent. "nonresident interest" shall not
carry on in
"It is true that
we had taken some steps to get appropriate permission from the Reserve Bank
under the Foreign Exchange Regulation Act. I do not know whether the Reserve
Bank has denied or given permission."
Thus, an application for
permission has admittedly been made and there is nothing to show that it has
been rejected, and that the company is continuing its activities in spite of
such rejection. It is difficult to accept the petitioner's contention that the
burden of showing that permission has already been obtained is on the
respondent ; the respondent has no such case. Even the petitioner does not
state that the application has been rejected. The respondent's case in the
counter-affidavit is that the matter is still pending with the Reserve Bank ;
and they cannot be called upon to produce an order which has not been passed at
all. The FER Act, 1973, also provides the machinery for its enforcement and it
is idle to think that it will be set in motion only under orders of this court
under s. 237. of the Companies Act. In this view, it is also unnecessary to
consider the respondent's contention that the 51 shares of the deceased founder
could not be taken note of for arriving at the 40% limit.
The third circumstance
relates to the 1976 raid and its consequences. According to the petitioner, the
officers of the Enforcement Directorate raided the business premises of
Kunhammed Koya's firm as also the office of the respondent-company in July,
1976. A typed sheet of paper evidencing transactions to the extent of Rs.
6,75,000 was seized from Koya's office and this indicated that Koya had
concealed, as unaccounted, the company's income to that extent. The amount was
later included in Ex. A-3, balance-sheet for the year ending September 15, 1976
; but the company had never received this amount. It was forced to pay
income-tax for the said amount and to borrow funds for the purpose. Koya also
took his commission for the profit. The petitioner signed Ex. A-3 as a director
only because he was persuaded to do so by Koya and the auditors. But in
cross-examination (as P.W. 1), the petitioner admits that his residence was
also raided and some papers seized, including a file of the year 1972. The
petitioner himself had brought down this paper from
If anything, the above
discloses that the raid was conducted at a time when the petitioner and Koya
were on good terms, and was directed against something which was not the making
of Koya alone. One of the files seized admittedly belonged to a period before
Koya was made a director. It was the petitioner who had brought it down from
Detriment to the company by
reason of Koya's interest in the rival firm also remains a bare allegation ; if
anything, the evidence is opposed to it. The company's business is to import
dates, and to export wood scantlings, coir products, spices and the like. P.W.
1 does not refer to the diversion by Koya of even a single item of import or
export. Before 1973, the company had very little export business ; the business
was practically confined to importing dates of the annual value of Rs. 5 lakhs.
This business continued in the same fashion till 1977, when the system of
"open general licence" was introduced, and it became less attractive.
Obviously, therefore, the import business had not suffered because of Koya's
induction. As for exports, this line of business had picked up only from 1973,
and the maximum amount of business was done in 1974. In 1975 and 1976, the
company got some expert orders, and these were executed by using the licence of
Koya's firm ; the company itself had no export licence. On the export side
also, therefore, the company had not suffered any difficulty because of Koya.
The petitioner knew, when Koya was brought in as director with his active
participation in February, 1973, that the "rival firm" was doing the
same business on a large scale, at least from 1958.
The respondent's case that
the petitioner's present approach to this court is the result of his annoyance
at the board resolutions reducing his remuneration and cancelling his power to
operate bank accounts, need not be minutely examined in view of what has been
stated above. It must, however, be noticed that the petitioner was a party to
Exs.A-1 and A-2, resolutions of 1973, whereunder Ahammed Yoosuff was made
managing director and Koya, the director-in-charge. On his own admission, the
officers of the Enforcement Directorate had reason to suspect his complicity in
the circumstances that led to the 1976 raid. The business of the company had
also not gone down because of Koya's rival interests ; and at any rate, the petitioner
was a full-time salaried director during the period in question. Under these
circumstances, it is difficult to assume that the accusations now made in
regard to these matters are all based on a bona fide apprehension about the
affairs of the company, and not influenced by an anxiety to grind one's own
axe. No circumstance have been brought to light to suggest that the business of
the company is being carried on for fraudulent or unlawful purposes or in a
manner oppressive of the minority, or that those in management (and the.
petitioner is admittedly one among them) have misconducted themselves towards
the company or its members.
I, therefore, dismiss the company petition, leaving the parties to bear their own costs.
[1981] 51
COMP. CAS. 634 (DELHI)
HIGH COURT OF
v.
Union of
T.V.R. TATACHARI, C.J.
AND S. RANGANATHAN, J.
Civil Writ Petition No. 918 of 1974
APRIL 26, 1978
A.K.
Sen , Mrs. Leila Seth and B. Mohan for the Petitioner.
K.M. Kataria for the Respondent.
JUDGMENT
S. Ranganathan, J. —This is a writ petition filed by Ashoka Marketing Ltd.
(hereinafter referred to as "the company" or AML) for the issue of a
writ of certiorari to quash the orders passed on December 31, 1973, June 26,
1974, and July 2, 1974, by the Company Law Board (hereinafter referred to as
"the Board") and an order dated July 2, 1974, passed by the
Government. The Union of India and the Secretary, Ministry of Law, Justice and
Company affairs, have also been made respondents.
The order dated December31,
1973, passed by the Board is an order under s. 237(b) of the Companies Act,
1956, appointing a firm of chartered accountants as inspector to carry out an
investigation into the affairs of the company during the period from March 1,
1966, to December 31, 1973, and "to report thereon to the Company Law
Board pointing out, inter alia, all irregularities and contraventions of the
provisions of the Companies Act, 1956, and of any other law and the person or
persons responsible for such irregularities or contraventions" on or
before June 30, 1974. The reason why the Board considered this action necessary
appears from the first paragraph of the order which contains the preamble:
"Whereas in the
opinion of the Company Law Board there are circumstances suggesting that the
persons concerned in the management of the affairs
of the company have in connection therewith been guilty of fraud, misfeasance
and other misconduct towards the company and its members".
Which is nothing more than a
repetition of the language of s. 237(b)(ii) as to the circumstance warranting
the appointment of an inspector under that provision. The grievance of the
company is that there were no such circumstances in existence on the basis of
which the Board could have formed such an opinion or ordered such an
appointment. In the writ petition, the company has sought to substantiate its
plea on the basis of the following allegations.
The company had been
incorporated in 1948 and was carrying on business as traders, exporters,
selling agents, dealers in stocks, shares and investments and for some time in
the manufacture and sale of plywood. It had also recently commenced a business
in the manufacture and sale of electronic goods. It had built up a very
efficient and effective organisation and had been carrying on its business and
activities scrupulously in accordance with law. It has a respectable board of
directors. It maintained regular books of account and records; its turnover was
increasing from year to year; its profits were reasonable and it was also
declaring reasonable dividends. While so, on April 11, 1963, the Govt. of India
ordered an investigation into its affairs under ss. 237(b) and 249(1) of the
Companies Act, 1956, but this order was quashed by the High Court of Calcutta
by its judgment dated March 7, 1969. In the meantime, the Registrar of
Companies had been making several enquiries and, to the understanding of the
company, he was satisfied with the information and explanation given to him. In
September, 1972, the Board, acting under s. 209(4)(b)(ii) of the Companies Act
had appointed one Sri Sooraj Kapoor, to inspect the company's books. He had
also called for explanation, information and books from the company. The
company's affidavit specifically avers in para. 7:
"So far as your
petitioner is aware there has been no complaint by the inspector of any fraud
and/or misfeasance and/or misconduct and/or irregularity and contravention in
the business or affairs of the company, Nor had, to the knowledge of the
company, any shareholder or creditor of the company made any such allegation.
In these circumstances, the
order dated 31-12-1973 was without any basis or justification".
It is pointed out that the
order does not set out any circumstance or material leading to the formation of
the opinion expressed therein. Therefore, soon after the order was received on
7-1-1974, the company applied to the board for a review of the order setting
out all the above facts, pointing out that the provisions of s. 237 were drastic
and should not be commenced "unless there
are satisfactory grounds supported by relevant and cogent materials and
evidence" and without such materials an inspector should not be given
"arbitrary and untramelled powers to make a fishing inquiry and to investigate
into any affair of your petitioner which is not authorised under the law"
during the period from March 1, 1966, till the date of the order. The company
offered to furnish any information that may be needed in respect of any
particular transactions and prayed that the order for a general investigation
be cancelled. This petition was rejected by the Government and the Company Law
Board and hence this writ petition by which the petitioner requests this court
to quash the order u/s. 237(b) dated December 31, 1973, the letter dated June
26, 1974, by which the Company Law Board extended the period for the
inspector's report till December 31, 1974, and the orders dated February 2,
1974, by which the Board and the Company Affairs Dept. of the Govt. of India
declined to review the order dated December 31, 1973.
Perhaps all that a company
could do at this stage was to deny that there were any circumstances justifying
action u/s. 237 in its case, for the Board does not take the company into
confidence or indicate to it the basis for the action taken by it. It is,
therefore, of the greatest importance that when a company approaches the court
with a writ petition, making out a prima face case that the action u/s. 237 was
not justified, the Board should place before the court all the circumstances
available to it on the record on which the opinion has been formed that the
persons in management were guilty of fraud, misfeasance or misconduct towards
the company and its members. Unfortunately, in this case, the stand of the
Board has been put forward piecemeal in its original counter-affidavit and two
supplemental counter-affidavits filed by it, one before the hearing of the case
started and the other at a considerably advanced stage of the hearing. The
company has also filed more than one rejoinder. In order to understand the full
facts, we have to consider the following seven affidavits, which we shall, for
convenient reference, designate as A-1 to A-7:
|
A-1. |
Reply
affidavit of respondent |
dt. |
31-7-75 |
|
A-2. |
Rejoinder
of petitioner |
" |
25-8-75 |
|
A-3. |
Further
rejoinder |
" |
28-10-76 |
|
A-4. |
Supplemental
reply of respondent |
" |
7-12-76 |
|
A-5. |
Further
rejoinder of petitioner |
" |
22-12-76 |
|
A-6. |
Further
reply of respondent |
" |
13-1-78 |
|
A-7. |
Final
reply of petitioner |
" |
24-1-78 |
The case against the
company was first spelt out in A-1. In para. 10, it was stated that the order
in the instant case had been passed on the basis of seven transactions of the
company which had come to the notice of the Board:
1. Surrender of the sole
selling agency of Jaipur Udyog Ltd.
2. Purchase and sale of
the undertaking of Albion Plywood Ltd.
3.
4. Investment in low
yielding debentures.
5.
6. Unsecured loan of
large amounts to closely connected persons and
7. Write off of three
loans.
As a general preface to
these charges it was stated that the company was one of twelve companies that
belong to a group known as the Sahu Jain group and it was a common tendency of
common block shareholders of such group concerns to benefit each other even if
at the cost of the other shareholders, We have to examine by taking up each of
these "charges" seriatim and analysing the averments of the parties,
whether circumstances have been made out to sustain the action taken by the
Board.
General charge
According to A-1, the
petitioner belongs to a group of companies known as "Sahu Jain
group". It is stated that, according to the report of the Monopolies
Enquiry Commission, 1965, a group of 26 companies has been said to belong to
this business house and that, according to the report of the Industrial
Licensing Policy Enquiry Committee, 1969, there were 29 such concerns. The
respondent has referred to 12 concerns which are mentioned in both the reports
and alleged that they belong to the Sahu Jain group. These concerns are,
besides the petitioner (AML), Albion Plywood Ltd. (APL), Bharat Oversees Pvt.
Ltd. (BOL), Hindustan Vehicles Ltd. (HVL), Jaipur Udyog Ltd. (JUL) Mahespur
Holdings Ltd. (MHL), Parshya Properties Ltd. (PPL), Rohtas Industries Ltd.
(RIL), Shree Kesaria Investments Ltd. (KIL), Shree Rishab Investments Ltd.
(SRIL), New Central Jute Mills Co. Ltd. (NCJ) and Bharat Nidhi Ltd. (BNL).
After setting out the names of these concerns, A-1 alleges "a common
tendency of such shareholders/directors in these concerns to benefit each other
even if at the cost of the other shareholders of the concern".
In reply to the above, the
petitioner-company has stoutly repudiated the existence of any such group as
alleged. It is stated that though a notice was given by the Dept. of Compay
Affairs in 1974, calling upon the petitioner to show cause why action under s.
48(2) of the Monopolies and Restrictive Trade Practices Act, 1969, should not
be taken for default in compliance with the provisions of s. 26 of the said
Act, the proceedings were dropped by a decision communicated on 26th April,
1976. In other words, the same Dept. of Company Affairs had accepted the
position that no case had been made out for treating these concerns as
inter-connected.
Apart from the fact that
the respondent has not answered the point made in the reply or given details to
show that AML is one of the concerns belonging to a closely knit group along
with the 11 others we are of opinion that this general allegation made in A-1
is not helpful in determining the issues in the present case. Merely because
certain companies are said to form a group and there are transactions between these
companies, it cannot be presumed that the transactions are mala fide or that
they were entered into with a view to defraud or otherwise act in a manner
detrimental to some or all of the concerns. No doubt, in considering the nature
of a particular transactions, or the purpose and motive behind it, the
relationship between the parties may be a relevant consideration and while
examining the seven specific charges made against the company, we shall keep
this aspect also in mind to see whether there has been any attempt to act to
the detriment of AML with a view to benefit any of the other concerns
mentioned. But, all that we would like to observe here is, that the approach
indicated in A-l, of starting with a presumption that there must be necessarily
something wrong because the transactions are between companies of the same
group, is not correct. The general charge formulated in A-l, therefore, cannot,
by itself, be a ground justifying the action under s. 237, in the present case,
unless it is substantiated with reference to one or more of the other seven
charges.
Charge
No. 3:
It will be convenient to
take up the first two charges last. Taking up the third charge first, the complaint
against the company is that between September, 1968, and February, 1970, it
sold at a huge loss some of the shares held by it in NCJ, APL, HVL, MHL and
KIL. The sale was at an unnecessarily low price (lower than the market price)
and, in the case of two concerns, was of the controlling interest therein. So,
it is alleged this transaction was "prima facie" against the interest
of the company.
The factual position that
emerges from the various affidavits in regard to these sales is as follows:
(a) In the case of NCJ, the shares were sold at rates varying
from Rs. 4.40 to Rs. 4.50 per share as against the face value of Rs. 10. Though
according to the respondents, NCJ had large reserves and had also earned good
profits, it is admitted that the shares are quoted on the stock exchange and
that the market quotations for the shares at the relevant time ranged between
Rs. 4.56 to Rs. 4.62 per share. The claim of the petitioner-company is that the
shares were sold at the rates quoted at the Calcutta Stock Exchange and this
statement has not been denied by the respondent. Further, it is pointed out
that even on the basis that they had been sold
at rates slightly less than the market value, the transaction was still
beneficial to the company inasmuch as the value of the shares fell from Rs.
4.50 this year to Rs. 3.75 in the subsequent year and, if the company had not
sold the shares when it did, the loss would have been even greater.
(b) In the case of APL and HVL, it is common ground that these
concerns had been incurring huge losses and that their shares were worth less.
Forced to admit this position in A-4, the respondent would still find fault
with the petitioner for having sold thirty-five thousand shares of HVL
"for a nominal amount of Rs. 3,500" 'alleging vaguely that this
"conveys no sense except of getting the set-off against profits for the
purpose of taxation".
(c) In regard to the MHL and KIL, the shares are not quoted on
the stock exchange. The allegations of the respondent that these were transfers
of controlling interest is not correct. The number of shares sold were 23,000
out of 50,000, in the case of KIL, and 16,000 out of 35,000, in the case of
MHL. There is no allegation that the petitioner had earlier transferred shares
in these companies to the same person or associated person so as to give them
controlling interest. Regarding the price, the complaint is that the shares
were sold at Rs. 2.55 and Rs. 2.80, respectively, although the break-up value
of the shares would have worked out to Rs. 15.71 and Rs. 11.58, respectively.
A study of the above facts
would show that the charge that the petitioner had sold the shares at less than
the market price is not borne out by the material on record. This is very clear
in the case of the first three companies. In the case of the last two, no
doubt, the sale price is less than the alleged break-up value. But in the case
of a private limited company, the break-up value does not always or necessarily
furnish a correct clue as to its market value at any particular point of time:
[CWT v. Mahadeo Jalan [1972] 86 ITR 621 (SC)]. There is no other material to
indicate that the actual sale price did not represent the value which those
shares could realise in the open market on the respective dates of sale though
the companies whose shares were sold are said to belong to the Sahu Jain Group,
that fact is of no significance as the sale does not benefit those concerns.
Nor is there any allegation that these shares have been transferred to other
companies of the same group at a favourable price to benefit them at the cost
of the petitioner-company. In regard to this charge, therefore, no
circumstances have been shown to exist which could lead to the formation of an
opinion that there has been some fraud, misfeasance or misconduct on the part
of the management of the petitioner-company.
Charge
No. 4: Investment in low yielding debentures.
The purport of the charge
against the company under this head is not clear. The allegation in A-1 is in
the following terms:
"In June, 1970, the
company purchased from Sri P. Jain, Smt. Indu Jain, Smt. Shushila
Jain, the Bhartiya Gyanpit and the Universal Trust certain debentures worth Rs.
10 lakhs yielding 8% per annum, whereas the loans of the company yielded 11% per annum".
The above allegation can
mean one of two things. The first is that, whereas certain other investments
made by the company by way of loans yielded an interest rate of 11% per annum,
the debentures in question yielded only 8%. But if this were the charge against
the company, that would not be sufficient to attract action under s.237. All
the funds held by the company cannot be invested so as to yield the same
return. Merely because on some investments by way of loans, the petitioner has
been able to get 11% interest, the inference does not follow that an investment
in debentuces yielding 8% must be the result of some fraud, misfeasance or
misconduct on the part of the directors. There is no material to suggest that
all the investments of the company were yielding 11% interest and despite
similar investments being available readily, the petitioner-company purchased
these "low rate" debentures to oblige the vendors. It is also not
alleged that funds yielding higher return were withdrawn for making these
purchases to the detriment of the company.
The other possible
interpretation of the allegation is that, whereas the company had received
advances and deposits and paid interest thereon at 11%, it has invested the
funds drawn from those advances and deposits in debentures which yielded a
smaller return. This contention is met by A-2 which points out the fallacy in
the above line of reasoning. There is no material to correlate the funds
invested by the company in the above debentures with the loans taken by it on
payment of interest at 11%. The resources of the company were not limited only
to such loans. The company had received advances from its customers on which it
paid no interest whatever. It has security deposits on which it was paying
interest at only 6 to 6 1/2%. The surplus funds of the company had to be
invested and there is no material to suggest that the investment in these
debentures was in any way motivated. In fact, the charge does not even allege
that the purchases were made to benefit the vendors who, it would appear, may
be connected with the directors of the petitioner-company. In these
circumstances, therefore, no circumstances have been brought to light for
drawing an inference of fraud, misfeasance or misconduct.
For the first time, in the
reply affidavit, A-4, the respondent, took a fresh point that the debentures
purchased by the company were those of PPL
which, in the year ended January 31, 1970, had incurred a net loss of Rs. 596
lakhs as against its paid up capital of Rs. 5 lakhs. It will be seen that this
is a totally new charge. The original allegation against the company was only
for having made an investment yielding a smaller return and did not even
mention the name of the company whose debentures were purchased. However, A-4
attaches importance to the name and seems to doubt the solvency of the company
the debentures of which have been acquired, perhaps also because it is one of
the concerns of the group according to the respondent. But this criticism has
not been made out by reference to the balance-sheet position of the said
company. As its name indicates it appears to be a property holding company.
There is no information regarding its assets and liabilities. In the case of a
property company it is not unusual that there are only losses in working in the
initial stages of its development before the income from the properties
constructed or held by it starts flowing in. Moreover, debentures are secured
loans and there is not an iota of evidence placed to show that these debentures
were worthless. The fact that PPL is a company of the group will not, per se,
render the debentures worthless or the purchase motivated. A-4 has only
attempted to voice a suspicion of bona fides but backed it by no material on
record. Here also the respondent has failed to make out the existence of
circumstances to show that in purchasing these debentures, the directors of the
company have been guilty of any fraud, misfeasance or misconduct towards the
company or its members. Charge No.5: Purchase and sale of jeeps.
The allegation is that in
November, 1966 and January, 1967, the company purchased twelve jeeps. Seven of
these were sold in March, 1967, and two more in October, 1967. The company
incurred a loss of Rs. 47,000 on the purchase and sale. The jeeps had been insured
only from January to August, 1967. The accounts of the petitioner did not show
any expenses in respect of petrol during the year 1967. From these facts, the
inference is sought to be drawn that the purchase of the jeep was not for the
purposes of the business of the company and that the transactions were not in
the interests of the petitioner-company.
The company's plea is that
the jeeps were purchased and sold under the authority of resolutions passed by
the board of directors. The transaction was in the ordinary course of business
of the company and in order to ensure its smooth running. Though the exact
manner of utilisation of these jeeps had not been indicated in the affidavits,
Sri Sen submitted that the transaction should be judged in the light of the
fact that it was put through at the time of the general elections, that the
jeeps were purchased in business interests, "in order to ensure the smooth
running of the business of the company"
and that no mala fides were involved in the transaction.
We are unable to see how
this transaction can attract the impugned action by the respondent. As
suggested by Sri Sen, there is an explanation for the purchase of the jeeps and
their disposal within a short time. But, even disbelieving this explanation and
assuming the worst, it is a mere instance of purchase and sale by the company
of a certain asset which resulted in a loss to the company. It has not been
explained in what manner this transaction reveals fraud, misfeasance or
misconduct on the part of the persons concerned in the management of the
company. There is no allegation that these jeeps were intended for or utilized
by those persons or that they were sold to them or to other concerns of this
group in which they were interested at concessional rates or the like, Except
that the company had entered into an imprudent transaction, there are no
circumstances of the nature outlined in s. 237(b)(ii).
Charge
No. 6: Loans to certain individuals
The respondent has taken
objection to the advances of loans by the petitioner-company to a number of
persons "who belonged to the Sahu Jain group" to the extent of Rs.
1.26 crores. In particular, it is stated that loans to the extent of Rs. 68.75
lakhs were advanced to one R.G. between August, 1968, and March, 1972, and that
similar loans were also advanced to A.P.J. From these persons Rs. 20 lakhs and
Rs. 95 lakhs, respectively, remained due to the petitioner.. The answer of the
company is that the petitioner had vast resources by way of deposits from
stockists and advances from customers. The investment of these funds among
others by way of loans was part of the business of the company. These were
loans carrying a high rate of interest (as admitted in para. 10(4) of A-1), and
were repayable on demand. It has been denied that any loan in excess of Rs. 20
lakhs was given to R.G. In the case of A.P.J. only Rs. 4.45 lakhs was due and,
in the case of R.G., the entire amount of the loan was repaid by 6th November,
1974.
The petitioner's reply that
these are loans earning a high rate of interest has not been denied. In fact,
one of the earlier charges against the company was that when these loans were
earning a higher rate of interest of 11%, the debentures of P.P.L. carrying 8%
interest should not have been acquired. It is, therefore, inconsistent on the
part of the Board to find fault with the company also for having advanced these
loans. It is not the respondent's suggestion that these persons were not
capable of returning the loans or that the persons concerned in the management
of the company stood to gain in some way as a result of these transactions. The
loans have also been substantially repaid. In these circumstances, we fail to
see how this transaction can attract action under s. 237(b)(ii).
Charge
No. 7: Write off of three loans
According to A-1, the
petitioner-company had advanced in 1963-64, three loans, one, a sum of Rs.
50,000 to Sri K.L.M., two, Rs. 30,000 to Sri T.H.K. and three, Rs. 15,000 to
Shri H.K.M. Neither these loans nor any interest thereon was recovered from
these persons though the interest itself was quite substantial and amounted to
as much as Rs. 46,553. No efforts were made to recover them and a major part
has been written off.
The explanation given by
the company is that these were very respectable and prominent persons in public
life. One of them was a counsel for the company and one of them held a high
office in the State of
All that the materials
placed on record discloses is that the petitioner-company advanced certain
loans which became irrecoverable and had to be written off. The persons to whom
the monies were lent were not relatives or associates of the persons concerned
in the management of the company. They were outsiders and influential people to
whom the company, bona fide, though perhaps imprudently, as events turned out
later, advanced certain monies which had to be written off. We are unable to
conceive how this transaction of the company can be made the basis of a charge
of fraud, misfeasance or misconduct on the part of the directors, etc., towards
the company or its members.
We shall now take up the
first two charges which are the most important. Shri Kataria, in particular,
has placed considerable reliance on the first charge as sufficient by itself to
warrant the action taken. As will be seen later, there is an inter-connection
between the two transactions which may have to be considered together. We
shall, however, set out the facts discussed in respect of each of these charges
separately and then discuss the resultant position that emerges.
Charge
No.1: Surrender of sole selling agency of JUL
The allegation, as set out
in A-l, was that the petitioner had been appointed the sole selling agents of
JUL for the sale of cement for a period of five years from April 1, 1966. From
this agency, the petitioner was deriving an annual return of about Rs. 8 to 10
lakhs. Notwithstanding this, the company surrendered the agency in favour of
BOL, without receiving any compensation for the unexpired period of the agency.
The transaction, therefore, was said to be,
prima facie, against the interests of the company.
On behalf of the
petitioner, it was pointed out by A-2 that this allegation was based on two
misconceptions. The first was that the agency was extremely profitable to the
petitioner-company. This was not so factually. Though the gross commission from
this agency in the accounting years which ended on August 31, 1966, August 31,
1967, and August 31, 1968, amounted to Rs. 92 lakhs, Rs. 108 lakhs and Rs. 8.10
lakhs, respectively, the net income of the company from this source, after deducting
the expenditure incurred for earning the said income, came to only Rs. 1.95
lakhs for the first year and there were actually losses of Rs. 65,000 and Rs.
2.24 lakhs, respectively, for the succeeding two years. Full details of the
computations on the basis of which these figures were arrived at were given in
A-3. It was pointed out that the New Delhi office of the petitioner looked
after this business and also the work of three regional offices at Chandigarh,
Jaipur and Sawaimadhopur. The work for the cement agency at these places was
considerable and involved the setting up of a number of establishments with
sufficient personnel to handle the work efficiently. Though the company also
dealt in certain other commodities such as sale of steel pipes, plywood, paper
and rubber goods, the turnover of cement was the maximum. The turnover in the
other commodities varied between 1 and 2 1/2 per cent, of the cement turnover.
The company, therefore, apportioned the total expenditure on the basis of
turnover and deducted the same to arrive at the net figures referred to
earlier. The second misconception of the respondent, according to the
petitioner, was that the petitioner was entitled to some compensation for the
unexpired period of the agency but had voluntarily forgone the same. This was
also not correct. Under s. 294A(c) of the Companies Act, the agents were not
entitled to compensation on resignation.
The respondent tried to
meet the above case of the petitioner in its affidavits A-4 and A-6. The
correctness of the computation of the expenditure deductible against the
commission income was contested on the following grounds:
(a) The New Delhi office of the petitioner looked after the
cement agency not merely of JUL but also of other brands of cement such as Rohtas,
Portland and Ashoka. The commission earned by the petitioner from JUL was 40%
of the total commission earned by it in 1966-67, and 33% in 1967-68. The
expenditure deductible against the commission received from JUL would,
therefore, be much less than what has been claimed by the company.
(b) The allocation of expenditure on the basis of turnover was
not correct because cement was a commodity in short supply which did not
require any special efforts for sale.
(c) The expenditure taken into account by
the petitioner included the interest paid by the head office which should be
excluded and if this is done the net commission figures would work out to Rs.
4.12 lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 0.22 lakhs in 1968.
(d) As a result of the surrender of the sole
selling agency the petitioner-company's asset position was considerably
affected. It has to call back a loan of Rs. 60 lakhs from NCI and also dispose
of other investments of about Rs. 45 lakhs. Moreover, it had to meet
liabilities to the extent of Rs. 268 lakhs relating to the business of the sole
selling agency and in order to raise this amount it had to sell its plywood
factory for Rs. 57 lakhs, sell debentures for the amount of Rs. 63 lakhs, make
over loans due to it from 9 parties amounting to Rs. 43 lakhs and pay cash of
Rs. 105 lakhs.
These
points have been effectively met by the petitioner-company. Regarding (a) it
has been pointed out that the agencies of Rohtas, Portland and Ashoka cements
were not accounted for in the New Delhi books of the company but were accounted
for in the Calcutta books of the company. The expenditure pertaining to those
agencies was, therefore, not included in the New Delhi books. The Delhi office
was having only the sale of paper, asbestos and certain other commodities in
addition to the sole selling agency of JUL. It is, therefore, not correct to
say that only a part of the commission accounted for in the Delhi books was
attributable to the JUL agency. This contention is also borne out by the copy
of account of the New Delhi office placed on record by the petitioner. The
first point made by the respondent is, therefore, without force. Regarding (b)
there is merely an assertion on behalf of the respondent that the sale of
cement was very easy and did not call for any expenditure on the part of the
company. In A-3, the petitioner-company has set out at very great length the
nature of the activities and functions it had to undertake in relation to the
business of the sole selling agency. A detailed analysis of the expenditure
under various heads was also furnished. In the face of all these details, the
mere assertion that the cement sold itself and that all the expenditure was
unnecessary cannot be accepted. Point (a) made on behalf of the respondent
again has not been substantiated. The interest paid by the company was interest
paid by it on the advances it had received from stockists and purchasers of
cement. The interest is, therefore, expenditure properly debitable against the
commission income and there is no justification for excluding the same from the
P. & L. account. Regarding the other plea that interest received by the
head office has not been taken into account, the respondent has not placed
before us the details of interest earned by the petitioner in relation to the
sole selling agency, which, according to it, should have been included but has
been left out of the account by the petitioner. Apart
from the above lack of material we may also point out that even if, as
contended by the respondent, the expenditure by way of interest is left out of
account, the net profit earned from the sole selling agency would be Rs. 4.12
lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 22,000 in 1968. In other words,
it was a dwindling income and the mere fact of surrender of such a source of
income cannot lead to the adverse inference sought to be drawn by the
respondent.
Coming now to the points
made out in A-6, we find again that the company has given a satisfactory reply.
So far as the recall of a sum of Rs. 60 lakhs from the NCJ is concerned, it is
pointed out that the petitioner-company had advanced Rs. 1,40,00,000 to the
NCJ. The Company Law Board had directed the company to recall the loan in terms
of s. 370 of the Companies Act. Actually, the company applied for extension of
time for the recalling of the above amounts and it was only in pursuance of the
directions of the Company Law Board, dated September 25, 1968, that the sum of
R. 60 lakhs was repaid by the NCJ. This point, therefore, is of no
significance. As to the last point made regarding the sale of the company's
assets, we may point out that the respondent is confusing between the result of
the surrender of the sole selling agency and the cause therefor. Naturally,
when the petitioner-company surrendered the sole selling agency, it had to
repay the security amounts and advances received by it in its capacity as sole
selling agents. This had necessarily to be done by disposing of some assets and
by paying a certain amount of cash. It could also be that some of these assets
may have been acquired out of the moneys received in the course of the sole
selling agency. From the mere fact that, as a result of the transfer of the
sole selling agency, the petitioner had to discharge its liabilities incurred
in relation thereto by the disposal of certain assets and transfer of certain
loans and payment of cash, it cannot follow that the very act of the surender
of the managing agency was inspired by improper motives.
The essence of the case of
the department was that the sole selling agency was a very valuable asset which
no prudent businessman would give up. A point has also been sought to be made
in para. 9 of A-6 that whereas 5,000 out of 15,000 shares of the
petitioner-company are in the hands of nationalised banks, BOL is a private
Ltd. Co., the profits earned by which go to certain individuals who are at the
helm of affairs of the petitioner-company. In considering it to be a valuable
asset, the respondent has gone by the figures of gross commission without
allowing the deduction of any expenditure thereagainst. Even if the expenditure
cannot be allowed to the extent claimed by the petitioner, some expenditure
must be allowed and, even according to the respondent's figures, the income
from this source was dwindling over the years. The respondent's allegation that
BOL is an associated concern has been denied in A-2 and A-6 and no material to
show any close connection or control has been placed on record. In A-3 and A-7,
the petitioner has alleged that, early in 1968, JUL had indicated to it that
they wished to terminate its agency and appoint BOL as its agents and it was in
this context that they had to surrender the agency. Sri Kataria objects to this
allegation made at a late stage being taken into account. There is also nothing
to show that the initiative for terminating the agency came from JUL. So, we
shall leave it out of account. But even ignoring all these submissions of the
petitioner and taking the respondent's case at its best, all that has been made
out is that the petitioner-company gave up a sole selling agency which was
remunerative. But will this alone be a ground for drawing an inference that the
persons in management have been guilty of fraud, misfeasance or misconduct
towards the company? We think not, and this will become clearer if we bear in
mind that this transaction of surrender of the sole selling agency in favour of
BOL was simultaneous with another transaction of surrender of the sole
undertaking of APL, which we are discussing below and consider these two
transactions together. We shall, therefore, proceed to discuss the second
charge against.
Charge
No.2: Purchase and sale of plywood factory
The APL was a losing
concern. It had sustained losses to the tune of Rs. 52.72 lakhs between October
1, 1962, to March 31, 1966. The petitioner-company had advanced loans to APL to
the extent of Rs. 40 lakhs, and on October 31, 1965,a sum of Rs. 41,91,561.64
was due to the petitioner on account of principal and interest from APL.
According to the petitioner, there was no way of recovering this loan and so
the petitioner ultimately decided to purchase the undertaking of APL and carry
on the business in plywood on its own. This proposal was placed before a
meeting of the shareholders of the company held on 21st March, 1966. The
explanatory note attached to the notice of this general meeting contained the
resolution of the company approving the commencement by it of a business in
plywood which was necessary in terms of s. 149 of the Companies Act as amended
by Act 31 of 1965. The block assets were taken over at a value fixed by a
reputed firm of valuers and the other assets were taken over at book value. The
petitioner-company worked the concern for a period of three years but it was
not a very successful experiment. In the period of April 1,1966, to August 31,
1968, during which the petitioner-company ran the business it had to incur a
further loss of Rs. 38.94 lakhs. Eventually, therefore, the company decided
that it was not profitable to continue carrying on the business and it was
decided to dispose of the same. It was about
this time that the surrender of the selling agency of JUL by the
petitioner-company in favour of BOL was also contemplated and it was decided
that the undertaking of APL would also be transferred to BOL. This transaction
was also placed before a meeting of the shareholders of the company held on the
28th September, 1968, and the undertaking was transferred to BOL w.e.f. 1st
October, 1968.
According to the
petitioner, the above undertaking was purchased at a cost of Rs. 77.17 lakhs
and the sale price was Rs. 88.18 lakhs representing the book value of the
various assets as on the date of the sale. If this is correct, there is nothing
even prima facie wrong with the transaction. The respondent's allegation,
however, is that the undertaking was purchased not for Rs. 77.17 lakhs but for
Rs. 88.65 lakhs and sold not for Rs. 88.18 lakhs but only for Rs. 57 lakhs. The
discrepancy in the purchase price is due to the fact that, according to the
respondent, an interest amount of Rs. 3.49 lakhs recoverable from the APL had
not been realised. This has been categorically denied by the petitioner and it
has been asserted in A-7 that interest was duly recovered from APL. It is then
alleged by the respondent that the valuation report on the basis of which the
purchase was effected does not give any basis for the valuation and that an
inspection report showed that it had made a profit of Rs. 11.40 lakhs in the
bargain. The inspection report relied upon has not been placed before us. That
apart, the valuation was got done by a reputed firm of valuers. If the
valuation report did not give the details, it was open to the respondent to
have found out the details from the said firm. It cannot be merely assumed that
this valuation report was a made-up one and that it did not represent the
proper value of the purchased undertaking and that the consideration paid by
the petitioner-company must have been an exaggerated consideration.
While, on the one hand, the respondent criticises the purchase as having been made at an exaggerated price, allegations of a contrary nature are made in regard to the sale transaction of the undertaking in 1968. Here, it is alleged that the sale price was only Rs. 57 lakhs and not Rs. 78.18 lakhs as stated by the petitioner. This allegation has also been denied by the petitioner. The respondent has drawn the inference that the sale price was only Rs. 65 lakhs from the fact that certain liabilities of the petitioner-company to the extent of Rs. 268 lakhs which was transferred to BOL were adjusted in the following manner:
|
|
Rs. |
|
Transfer of debentures |
63 lakhs |
|
Cash paid |
105 lakhs |
|
Loan transferred |
43 lakhs |
|
Price of plywood factory |
57 lakhs |
|
Total |
268 lakhs |
The petitioner has pointed
out in A-7 that this proceeds on a misapprehension. The total sale price was
Rs. 78.18 lakhs as explained in detail in the annexure filed along with A-2 but
only a part of the sale price was adjusted against the sum of Rs. 268 lakhs.
Again, the respondent alleges that the transfer of the undertaking at book
values was not justified and that the unit must have been worth much more in
October, 1968, than in April, 1966. This allegation again is totally
unacceptable. When the petitioner-company wanted to take over the undertaking
of APL, which had suffered serious losses, it was prepared to take over the
same only after having the block assets valued by a reputed firm of valuers.
Having taken over the undertaking, the petitioner conducted the business for a
period of about two years during which it suffered a heavy loss. It was,
therefore, decided to transfer the undertaking to BOL at book value. There is
nothing suspicious about this and the respondent admits in A-4 that it is unable
to attribute any motive for the petitioner not undertaking a revaluation of the
block assets. Thus, the respondent has not been able to make out any
satisfactory reason why the purchase and sale price as claimed by the
petitioner should be disbelieved.
Realising this, perhaps,
the respondent in A-4 poses a question: Why did the company purchase a losing
concern? and concludes that this must have been effected in order to claim a
loss for income-tax purposes, by claiming a set-off of the losses in the business
against its other profits. It will be seen that this allegation overlooks the
fact that that the concern was taken over in lieu of a debt is not denied; it
does not also help the respondent's case. Even assuming that the
petitioner-company took over this losing concern merely in order to reduce its
income-tax burden, the transaction would not be one detrimental to the
interests of the company because admittedly the transaction helped to reduce
the tax liability of the company to the extent of about Rs. 20 lakhs. That
apart, this is merely a vague and wild allegation made by the respondent in an
effort to make out some charge against the company when the charge, as
originally laid, cannot be established.
According to the
petitioner-company, the purchase was for Rs. 77.17 lakhs and the sale for Rs.
88.18 lakhs. If this is so, there is no case at all for the respondent. But even assuming that the undertaking
had been purchased for Rs. 80.65 lakhs and had been sold only for Rs. 57 lakhs,
this would not lead to an inference of any misfeasance, misconduct or fraud on
the part of the management, if looked at against the correct factual
background. It should not be forgotten that this was an undertaking which had
been sustaining losses right from the commencement. The total loss incurred by
it was to the tune of about Rs. 92 lakhs. So, the mere fact that it was sold to
BOL for a price smaller than the purchase price is not sufficient to draw an
inference against the directors or the management of the company. Having regard
to the continuous record of losses, the suggestion made in A-4 that the value
of the undertaking in October, 1968, must have been considerably more than the
value of the undertaking in April, 1966, is obviously absurd and without basis.
We are, therefore, unable to spell out from the circumstances of the
transaction the conclusion sought to be drawn by the respondent.
Moreover, as we have
mentioned earlier, an important circumstance that is relevant in assessing the
real effect of the transactions which form the subject-matter of the first two
charges against the company is that they are really connected transactions.
Both of them took place simultaneously. In or about July, 1978, the company
decided to surrender the sole selling agency of JUL and also decided to
transfer the undertaking of APL to BOL. In fact, the transaction involved a
number of other mutual arrangements and adjustments which have not been
properly examined by the respondent. The petitioner has denied that BOL is a
part of the group, but granting that it was, still one would appreciate that
the two transactions put together do not leave any room for any adverse
inference. Let us assume, as contended by the respondent, that the sole selling
agency of JUL was a profitable one. Let us also assume that the undertaking of
APL was a losing one and had been transferred to BOL at a price lower than the
price for which the petitioner purchased it. All these facts put together could
only amount to this that, as a result of certain understandings in July, 1968,
the petitioner-company transferred to BOL a remunerative undertaking and also
an admittedly losing concern. It cannot, therefore, be postulated that the
management of the petitioner-company had indulged in these transactions with a
view to benefit BOL and its limited shareholders at the cost of the
petitioner-company. It should not also be overlooked that the transaction
relating to APL had, at both stages, been placed before and unanimously
approved by the shareholders of the company. It has been pointed out in A-6
that a substantial proportion of the shares of the petitioner-company was held
by nationalised banks and it cannot be assumed that they voted the proposals
which were patently detrimental to the company's interests.
We have discussed at length
all the materials placed before us by the parties and reached the conclusion
that the action initiated by the respondent against the petitioner-company was
not justified. Sri Kataria, for the respondent, submitted that, at least in
regard to the first two charges, the respondent has shown the existence of some
circumstances which called for further investigation. He submitted that if,
after investigation, the charges were made out, the board would take other
action but that, if the charges could not be substantiated, further proceedings
would be dropped. So, according to him, it was not possible on the material for
this court to say that even the appointment of an inspector to delve into these
matters was not necessary or justified.
We think that the
contention of Sri Kataria proceeds on a misconception of the true scope of s.
237 (b). In Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp Cas 639;
AIR 1967 SC 295, the affidavit of the Board disclosed that (p. 296—AIR
headnote):
"In the conduct of the
company there was delay, bungling and faulty planning of project entailing
double expenditure, continuous losses resulting in sharp fall in prices of the
company's shares and resignation of some of the directors on account of
differences of opinion with the managing director".
On the question whether
these facts could support an order under s. 237(b), Mudholkar J. (speaking for
himself and Sarkar C.J.), observed (AIR headnote p. 296—see also 36 Comp Cas at
p. 692):
"It cannot be said that
from a huge loss incurred by a company and the working of the company in a
disorganised and unbusinesslike way, the only conclusion possible was that it
was due to lack of capability. It was reasonably conceivable that the result
had been produced by fraud and other varieties of dishonesty or misfeasance.
The order did not amount to a finding of fraud. It was to find out what kind of
wrong action has led to the company's illfate that the powers under the section
were given. The enquiry might have revealed that there was no fraud or other
similar kind of malfeasance. It would be destroying the beneficial and
effective use of the powers given by the section to say that the Board must
first have showed that a fraud could clearly be said to have been committed. It
was enough that the facts showed that it could be reasonably thought that the
company's unfortunate position might have been caused by fraud and other
species of dishonest action".
Two other judges, however,
did not agree with this view. Hidayatullah J. (as he then was), expressed
himself as follows. (AIR head note—see also pp. 661, 662 of 36 Comp Cas):
"The words 'in the
opinion of the Central Government' in section 237(b) indicate that the opinion
must be formed by the Central Government and it
is of course implicit that the opinion must be an honest opinion. The next
requirement is that ' there are circumstances suggesting, etc' These words
indicate that before the Central Government forms its opinion it must have
before it circumstances suggesting certain inferences........
Again, an action, not based
on circumstances suggesting an inference of the enumerated kind will not be
valid. In other words, the enumeration of the inferences which may be drawn
from the circumstances, postulates the absence of a general discretion to go on
a fishing expedition to find evidence. No doubt the formation of opinion is
subjective but the existence of circumstances relevant to the inference as the
sine qua non for action must be demonstrable. If the action is questioned on
the ground that no circumstances leading to an inference of the kind
contemplated by the section exists, the action might be exposed to interference
unless the existence of the circumstances is made out... Since the existence of
' circumstances ' is a condition fundamental to the making of an opinion, the
existence of the circumstances, if questioned, has to be proved at least prima
facie. It is not sufficient to assert that the circumstances exist and give no
clue to what they are because the circumstances must be such as to lead to
conclusions of certain definiteness".
Shelat J. had this to say
(See pp. 689, 690 of 36 Comp Cas):
"There must therefore
exist circumstances which in the opinion of the Authority suggest what has been
set out in sub-clauses (i), (ii) or (iii). If it is shown that the
circumstances do not exist or that they are such that it is impossible for any
one to form an opinion therefrom suggestive of the aforesaid things, the
opinion is challengeable on the ground of non-application of mind or perversity
or on the ground that it was formed on collateral grounds and was beyond the
scope of the statute.
Even assuming that the
entire cl. (b) is subjective and that the clause does not necessitate
disclosure of circumstances, the circumstances have in the present case been
disclosed in the affidavits of the Chairman and the other officials. Once they
are disclosed, the court can consider whether they are relevant circumstances
from which the Board could have formed the opinion that they were suggestive of
the things set out in cl. (b)".
Bachawat J. expressed no
views on this aspect of the case.
The scope of the section
was, therefore, again considered by the Supreme Court in Rohtas Industries Ltd.
v. Agarwal [1969] 39 Comp Cas 781; AIR 1969 SC 707 "to sort out the
requirements" of the section. After a review of the several decisions
cited before the court, Hegde J. (speaking for himself and Sikri J., as he then
was), concluded thus (p. 800 of 39 Comp Cas):
"Coming back to
section 237(b), in finding out its true scope, we have to bear in mind that
that section is a part of the scheme referred to earlier and, therefore, the said provision takes its colour from
sections 235 and 236. In finding out the legislative intent we cannot ignore
the requirements of those sections. In interpreting section 237(b) we cannot
ignore the adverse effect of the investigation on the company. Finally, we must
also remember that the section in question is an inroad on the powers of the
company to carry on its trade or business and thereby an infraction of the
fundamental right guaranteed to its shareholders under article 19(1)(g) and its
validity cannot be upheld unless it is considered that the power in question is
a reasonable restriction in the interest of the general public. In fact the
vires of that provision was upheld by a majority of the judges constituting the
Bench in Barium Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311;
AIR 1967 SC 295, principally on the ground that the power conferred on the
Central Government is not an arbitrary power and the same has to be exercised
in accordance with the restraints imposed by law. For the reasons stated
earlier, we agree with the conclusion reached by Hidayatullah and Shelat JJ. in
Barium Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311; AIR 1967 SC
295, that the existence of circumstances suggesting that the company's business
was being conducted as laid down in sub-clause (1) or the persons mentioned in
sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards
the company or towards any of its members is a condition precedent for the
Government to form the required opinion and if the existence of those
conditions is challenged, the courts are entitled to examine whether those
circumstances were existing when the order was made. In other words, the
existence of the circumstances in question are open to judicial review though
the opinion formed by the Government is not amenable to review by the courts.
As held earlier, the required circumstances did not exist in this case".
Bachawat J. was of a
different view. He observed (p. 803 of 39 Comp Cas):
"If it is established
that there were no materials upon which the authority could form the requisite
opinion the court may infer that the authority did not apply its mind to the
relevant facts. The requisite opinion is then lacking and the condition
precedent to the exercise of the power under section 237(b) is not fulfilled.
On this ground I interfered with the order under section 237(b) in Barium
Chemicals v. Company Law Board [1966] Supp SCR 311 at p. 343; 36 Comp Cas 639:
AIR 1967 SC 295 at p.313...... The condition precedent to the exercise of power
under section 237(b) is the opinion of the Government and not the existence of
the circumstances suggesting one or more of the specified matters. To hold that
the factual existence of such matters is a condition precedent to the exercise
of the power is to re-write the section. Section 23 7(b) must be interpreted in the light of its own language and
subject-matter. We miss its real import if we begin by referring to the
construction put by other judges on other statutes perhaps similar but not the
same. The decisions are useful when they lay down principles of interpretation
or give the meaning of words which have become terms of art "
but he agreed with the
conclusion of the majority that, on facts, the order under s. 237(b) was not
maintainable. In that case, the only allegation against the company on the
basis of which the action under s. 237(b) was sought to be supported was that
it had sold certain preference shares at their face value when they could have
been converted into ordinary shares of Rs. 10 each which were then quoted at
Rs. 15 in the stock market. Hegde J. observed (pp. 800, 801 of 39 Comp Cas):
"The next question is
whether any reasonable authority, much less an expert body like the Central
Government, could have reasonably made the impugned order on the basis of the
material before it. Admittedly, the only relevant material on the basis of
which the impugned order can be said to have been made is the, transaction of
sale of preference shares of Albion Plywoods Ltd. At the time when the
Government made the impugned order, it did not know the market quotation for
the ordinary share of that company as on the date of the sale of those shares
or immediately before that date. They did not care to find out that
information. Hence there was no material before them showing that they were
sold for inadequate consideration. If as is now proved that the market price of
those shares on or about May 6, 1960, was only Rs. 11 per share then the
transaction in question could not have afforded any basis for forming the
opinion required by section 237(b). If the market price of an ordinary share of
that company on or about May 6, 1960, was only Rs. 11 it was quite reasonable
for the directors to conclude that the price of the ordinary shares is likely
to go down' in view of the company's proposal to put on the market another
50,000 shares as a result of the conversion of the preference shares into
ordinary shares. We do not think that any reasonable person, much less any
expert body like the Government, on the material before it, could have jumped
to the conclusion that there was any fraud involved in the sale of the shares
in question. If the Government had any suspicion about that transaction it
should have probed into the matter further before directing any investigation.
We are convinced that the precipitate action taken by the Government was not
called for nor could be justified on the basis of the material before it. The
opinion formed by the Government was a wholly irrational opinion. The fact that
one of the leading directors of the appellant-company was a suspect in the eye
of the Government because of his antecedents, assuming without deciding,
that the allegations against him are true, was not a
relevant circumstance. That circumstance should not have been allowed to cloud
the opinion of the Government. The Government is charged with the responsibility
to form a bona fide opinion on the basis of relevant material. The opinion
formed in this case cannot be held to have been formed in accordance with
law".
From the foregoing it will
be seen that the question whether circumstances have been shown to exist from
which, reasonably, an inference of the nature contemplated by the provision can
be drawn is a matter for judicial consideration. It is not sufficient for the
Board to merely allege some facts which raise some suspicion in order to enable
it to enter into a fishing expedition or to undertake an investigation as a
result of which possibly some case could be made out against the company. In
the present case, if at all, there is some content only in the first two
charges. But even there the Board is not clear about the facts and looking at
both the transactions together there are no circumstances brought to light from
which any fraud, misfeasance or misconduct on the part of the management can be
made out. As Shelat J. has pointed out in Barium Chemicals Ltd. v. Company Law
Board [1966] Supp SCR 311; 36 Comp Cas 639; AIR 1967 SC 295/ these expressions
envisage the following types of conduct (AIR headnote):
"The term 'fraud'
connotes actual dishonesty and, however much the court may disapprove of a
personal conduct it must consider whether he has been guilty of dishonesty.
Misfeasance results from an act or conduct in the nature of a breach of trust
or an act resulting in loss to the company. Misconduct of promoters or
directors as understood in the Companies Act means not misconduct of every kind
but such as has produced pecuniary loss to the company by misapplication of its
assets or other act".
In the present case, there
is no basis for any allegation of fraud or misconduct. It cannot even be alleged
that the management has entered into any of the transactions in the nature of a
breach of trust or with a view to cause pecuniary loss to the company. We have,
therefore, no hesitation in concluding that no case for action under s.
237(b)(ii) has been made out.
Before parting with the
case, we should like to point out one further feature in the present case. As
pointed out by the Supreme Court, the circumstances justifying action under s.
237 should exist at the date of the order. In A-1, the respondent only set out
a few broad allegations which were controverted by A-2 and A-3. The respondent
then filed A-4 giving further details and figures and it is not clear why these
were not furnished at the original stage itself. In the original petition, the
company had specifically alleged that the
earlier investigations by the Board, in particular by Sri Suraj Kapur, had
yielded nothing adverse to the company. In the original reply filed by the
respondent (paras. 6 and 7 of A-1) this was not controverted, rather there was
an indefinite statement that the functions of the Registrar of Companies and
Sri Suraj Kapur were limited and they were not required or entitled to make any
complaints regarding fraud or misfeasance, admitting impliedly that the reports
had contained no adverse comments, etc. The additional facts mentioned in A-4
were more in the nature of pointing out of loopholes in the defence put forward
in A-2 and A-3 than a positive case based on definite data. Sri Kataria,
however, stated in court that full details regarding the allegations were
available from the inspection report and that he would place the same before
us. But eventually neither the inspection report nor the facts and details
gathered by the inspector were placed before us. Instead, A-6 was filed. This
no doubt refers to the report of Sri Kapur dated January 12, 1973, and to the
discussions he had with the officers of the company. But A-6 which puts forward
certain additional facts avoids stating specifically that these facts were based
on the results of the inspection report and had been arrived at after due
investigation and enquiries with the company. Even in A-6 the attempt made is
only to raise a cloud of suspicion by referring to a number of facts and
figures without any attempt at analysing them and making out clear factual
charges against the company. The charges are vague and general and do not
attempt to bring home to the directors or persons in management in general or
any of them in particular any conduct of the nature contemplated by s.
237(b)(ii). As pointed out in the case of Barium Chemicals [1966] Supp SCR 311;
36 Comp Cas 639; AIR 1967 SC 295, an allegation that the company had entered
into an unremu-nerative or imprudent transaction cannot suffice to attract s.
237. If the basis of the order under s. 237(b) was only the data furnished in
A-l, the material was woefully inadequate to support the order. But even the
additional facts furnished in A-4 and A-6 do not add much substance to the
charges. We, therefore, hold that the respondent has failed to make out the
existence or circumstances justifying the formation of an opinion that there
was fraud, misfeasance or misconduct on the part of the persons in management
of the company towards the company or its members.
We, therefore, make the
rule absolute and quash the impugned orders marked annexs. C, G, H and I to the
writ petition. The respondents are restrained from giving effect in any manner
to the aforesaid orders against the petitioner-company.
The writ petition is allowed
with costs.
[1970] 40 COMP. CAS. 83 (
HIGH COURT OF
Deputy Secretary, Ministry of
Finance, Dept. of Revenue & Company Law
v.
Sahu Jain Ltd.
D.N. SINHA, C.J.
AND B.C. MITRA, J.
FEBRUARY 18, 1969
B. Das, B. N. Sen and B. Basak for the appellant.
R. C. Deb, Subrata
Roy Chowdury and P. L. Khaitan for the respondent.
B.C.
Mitra, J.—The
respondent is the managing agent of several companies incorporated under the
Indian Companies Act and mentioned in paragraph 1 of the petition. On April 11,
1963, an order was made by the Central Government in exercise of the powers
conferred by sub-clauses (i) and (ii) of clause (b) of section 237 of the
Companies Act, 1956 (hereinafter referred to as "the Act"). In this
order it was recited that whereas the Central Government was of the opinion
that there were circumstances suggesting that the business of the respondent
was being conducted with intent to defraud its creditors, members and other
persons and the persons connected in the management of the respondent's affairs
had in connection therewith been guilty of fraud, misfeasance or other
misconduct towards the respondent or its members or other persons and whereas
the Central Government considered it desirable that an inspector should be
appointed to investigate the affairs of the respondent and to report thereon,
the Central Government in exercise of the powers under the said provisions of
the Act appointed one S. Prakash Chopra, as inspector to investigate the
affairs of the respondent for a certain period mentioned in the order. The
inspector so appointed was to complete the investigation and submit his report
within four months from the date of the order unless the time was extended. On
the very next day the respondent protested in writing against the order and
denied that there were any circumstance justifying the formation of the alleged
opinion by the Central Government. The respondent also requested that
information may be supplied to it regarding materials in the possession of the
Government on the basis of which the alleged opinion was formed by the Central
Government. By a letter dated June 17, 1963, the appellant No. 1 refused to
disclose any materials to the respondent.
The
investigation was not completed within the time fixed by the order and by an
order dated August 9, 1963, the time to submit the report was extended up to
October 31, 1963. A second extension was also granted on October 31, 1963, and
the time of submitting a report was extended up to January 31, 1964. The
investigation, however, was not completed within the extended time and a third
extension was granted by an order dated January 29, 1964, and the time to make
the report was extended till June 30, 1964. On June 30, 1964, however, the
inspector was relieved of his duties and two new persons, namely, S. D. Agarwal
and
The
question involved in this appeal is whether the appellants were justified in
refusing to disclose to the respondent the materials which led the Central
Government to form the opinion as to matters set out in sub-clauses (i) and
(ii) of clause (b) of section 237 of the Act. I set out below the relevant
portion of the statute :
"237
(b) may do so if, in the opinion of the Central Government, there are
circumstances suggesting—
(i) that the business of the company is being
conducted with intent to defraud its creditors, members, or any other persons, or
otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of
any of its members, or that the company was formed for any fraudulent or
unlawful purpose ;
(ii) that persons concerned in the formation of
the company or the management of its affairs have in connection therewith been
guilty of fraud, misfeasance or other misconduct towards the company or towards
any of its members."
On
behalf of the appellants, Mr. Basak contended that the question whether the
circumstances set out in sub-clauses (i) and (ii) of clause (b) set out above
existed was a matter entirely for the subjective satisfaction of the Central
Government. It was argued that the opinion of the Central Government
contemplated by the statute was not justiciable and that the respondent was not
entitled to know if there were any materials in the possession of the Central
Government which justified the formation of the opinion. It was further argued
that if the materials, on which the opinion of the Central Government was
formed, were disclosed at this stage the very purpose and object of the
investigation would be defeated. Evidence of fraud, misfeasance and other
misconduct, it was argued, would be tampered with and destroyed if the
respondent was at this stage informed about the materials on which the opinion
was formed.
It
was next contended by the learned counsel for the appellants that out of the
various matters set out in sub-clauses (i), (ii) and (iii) of clause (b) of
section 237 of the Act, the Central Government had selected two matters, one
from sub-clause (i), namely, intent to defraud creditors, members or other
persons and the matters set out in clause (ii), namely, that persons concerned
in the management of the affairs of the respondent have in connection therewith
been guilty of fraud, misfeasance or other misconduct towards the respondent or
its members. The selection of two matters only out of the various matters set
out in sub-clauses (i), (ii) and (iii), it was submitted, clearly proved that
the Central Government applied its mind to the matter, and having so applied
its mind formed its opinion and thereafter directed the investigation. It was
not a case, therefore, it. was submitted, where the mind was not applied at all
and a sweeping order of investigation made for the purpose of a roving inquiry
to discover materials upon which a case could be founded. But, it was argued,
although the Central Government applied its mind to the matter before directing
investigation, it was not bound, at this stage, to disclose the materials which
it took into consideration in forming the opinion. The investigation, it was
argued, was in the nature of a fact-finding commission and the Central
Government could not be expected to form a conclusive opinion about the intent
to defraud creditors, misfeasance and malpractices of those in charge of the
management of the respondent, without taking into consideration the report of
the investigation, which was likely to bring out relevant materials for the
formation of a fully objective opinion.
Before
dealing with the contentions mentioned above I should refer to the case made
out by the respondent in the petition and the appellant's answer to the charges
in the petition as laid down in the affidavit-in-opposition. The respondent's
first charge is that the impugned order is mala fide, illegal, arbitrary,
capricious, without jurisdiction and ultra vires the Companies Act, 1956. The
second charge is that the Central Government did not and could not form any
opinion as alleged and that the impugned order is perverse and was made in
abuse of statutory powers. The respondent alleges that its business was never
conducted with intent to defraud creditors, members or other persons. It is
next alleged that all the loans and advances obtained by the respondent from
its bankers are fully secured by pledge of securities, and that the unsecured
loans are from directors and shareholders and family members of the directors
of the respondent who are satisfied with the conduct of business of the
respondent. It is next alleged that the respondent did not receive any
complaint from any of its members that they have been defrauded. It is further
alleged that the respondent has only eight members who are the directors and
their family members and an officer of the respondent. With regard to the
charge in the impugned notice that other persons had been defrauded it is
alleged that this charge is mala fide, and devoid of particulars, and has been
deliberately made to harass the respondent. In the next place there is a denial
of the existence of circumstances which could justify the formation of any
opinion on the part of the Central Government that the persons concerned in the
management of the respondent's affairs had been guilty of fraud, misfeasance or
other misconduct.
It
is next alleged that the investigation was continued for a period of nearly 15
months, and that it was unreasonably and unnecessarily prolonged, and for
several months nothing was done to carry on the investigation. It is alleged
that this delay and procrastination in the investigation has caused tremendous
dislocation and loss in the respondent's business and has affected its
reputation. It is next alleged that the impugned order had fixed a period of 4
months within which the inspector was directed to complete the investigation
and submit his report. But the investigation was not completed and the report
was not submitted even after the expiry of 15 months and thereafter, without
completing the investigation, S.P. Chopra, the inspector appointed resigned,
and the appellants Nos. 2 and 3 were appointed inspectors by an order dated
June 13, 1964, and by this order the period of investigation was extended till
December 31, 1964. It is next alleged that the object of the investigation was
to make a roving and fishing enquiry into the respondent's books and records in
the hope that materials would be found on such inquiry for taking action
against the respondent.
In
support of its contention that the order is mala tide the respondent has set
out in the petition particulars in support thereof which are as follows:
(i) One of the managed companies of the
respondent, namely, New Central Jute Mills Company Ltd., submitted an
application for licence to import jute mills machinery for the production of
carpet-backing cloth. The application for import of machinery valued at Rs. 41
lakhs was recommended by the Jute Commissioner for issue of licence for Rs.
28,37,625. After scrutiny of the recommendations of the Jute Commissioner, the
Joint Chief Controller of Imports and Exports, Calcutta, decided to grant 8
licences for the aggregate amount of Rs. 26,69,355 and this decision was
communicated to New Central Jute Mills Company Ltd. In spite of repeated
requests the import licences were not issued, and suddenly without any reason,
by a communication dated May 14, 1964, the Joint Chief Controller of Imports
& Exports informed the said managed company that no licence could be issued
in its favour. No reason was assigned for the refusal nor was the managed
company given any opportunity to show cause against the refusal; but import
licences were issued to various other jute mills who along with the managed
company applied for import licences.
(ii) The said managed company entered into an
agreement with Jute Industries [1961] Company Ltd. of Thailand by which the
managed company agreed to supply technical know-how for setting up a jute mill
in Thailand. This agreement was approved by the Reserve Bank of India. The
managed company also arranged with the Thailand company for sale and export
from India of jute mills machinery of the value of £1,82,628 for installation
of the jute mill in Thailand, upon the managed company agreeing to invest
nearly Rs. 20 lakhs in the share capital of the foreign company out of the sale
proceeds of the machinery. This arrangement was made by the managed company in
the face of strong international competition. The Reserve Bank of India issued
necessary sanction to the managed company for the said investment and the
shareholders of the company at a general meeting also approved of the venture.
Thereafter, on or about February 1, 1964, an application was made under section
372 of the Companies Act, 1956, to the Central Government for necessary
sanction for investment in the shares of a foreign company. By a letter dated
April 4, 1964, the Central Government refused to give sanction and this refusal
was followed by a letter dated May 5, 1964, from the Reserve Bank of India to
the managed company in which it was stated that the bank was advised that the
Central Government had reconsidered the question of investment in the foreign
company and that the proposal for investment in jute mill in Thailand was
rejected and, therefore, the sanction was withdrawn. The managed company
protested to the Central Government against the cancellation of the sanction
but no reply was given by the Central Government.
(iii) Rohtas Industries Ltd., another company
managed by the respondent, is a manufacturer of sugar, cement, asbestos cement,
paper, banaspati, chemicals, etc. The development council for paper pulp and
allied industries took certain decisions for raising the production of paper
during the Third Plan period. Two sub-committees were set up by the council to
examine applications from various paper mills for improving production by
effecting modification and balancing of equipments. The committee accepted
several schemes submitted by seven different manufacturers including Rohtas
Industries Ltd. Accordingly, this company applied to the Ministry of Industries
for grant of industrial licences under the Industries (Development and
Regulation) Act, 1951, for expansion of its pulp and paper factories and the
requisite import licences under the approved schemes along with six other paper
mills. The licencing committee and the capital goods committee of the Central
Government approved the scheme of increasing production of the seven paper
mills. In March, 1961, six of the paper mills received the necessary permission
for importing the balancing equipments from foreign countries and they also
received industrial licences for increasing their output but the Rohtas
Industries Ltd. was refused both the import licence as well as the industrial
licence. Such refusal was made without giving to the company an opportunity to
state its case.
(iv) In February, 1961, Rohtas Industries Ltd.
was granted an industrial licence for 36,000 tons of printing paper and writing
paper and 36,000 tons of pulp annually. Further licences were given to produce
15,000 tons of best quality paper annually. Thereupon the company applied to
the Chief Controller of Imports for necessary import licences but suddenly, by
a letter dated October 7, 1961, the company was asked to show cause as to why
the industrial licence should not be revoked. It was pointed out on behalf of
the company that it had contacted the Export Import Bank for arranging finance
and had sent its experts to Washington for negotiations. Yet, on April 17,
1964, the Central Government wrote to the company that the application for
grant of import licence had been rejected and that the company should surrender
its industrial licence for cancellation.
(v) Simultaneous orders of investigation and
appointment of inspectors were also made with regard to Rohtas Industries Ltd.
and the time to complete the investigation and make the report was also
extended from time to time.
(vi) By a letter dated June 20, 1962, the
Central Government agreed to grant to Jaipur Uddyog Ltd. (another managed
company) a licence for the manufacture of portland cement by setting up a new
industrial undertaking in Rajasthan. Pursuant to this communication the company
took all possible steps for erecting a cement factory at Rajasthan. Thereafter,
on April 4, 1963, the Central Government wrote to the company that the time
schedule for completing the various stages of the work should be furnished to
the Government and if effective steps to the satisfaction of the Government
were not taken within three months the question of cancellation of the approval
letter would be considered. But even before the expiry of the said period of
three months the managed company was suddenly served with a show cause notice
on May 10, 1963, as to why the approval granted to the company for erecting a
cement factory at Rajasthan should not be cancelled. The company showed cause
as called upon, yet, on June 14, 1963, the approval already granted was
suddenly cancelled.
The
instances mentioned above have been cited by the respondent to show that the
impugned order has been made by the Central Government mala fide and the
managed companies of the respondent had been singled out on various occasions
in the past for penal measures arbitrarily and unreasonably taken without any
justification.
I
shall now turn to the affidavit-in-opposition affirmed by appellant No. 1, on
August 29, 1964. It is to be seen how far the allegations made by the
respondent in support of the charges of mala fide, arbitrary and unreasonable
conduct have been met by facts pleaded in the affidavit-in-opposition. It is
also to be seen if any material have been disclosed to show that there were
circumstances suggesting either one or the other of the matters required by
sub-clauses (i), (ii) and (iii) of section 237 (b) of the Act.
The
main contention of the appellants as made out in the affidavit-in-opposition is
that the impugned order was made bona fide and that the opinion of the Central
Government is not justiciable. In answer to the respondent's allegations that
there were no material for formation of an opinion on the part of the Central Government
that the business was conducted with intent to defraud creditors, there is only
a submission that it was only after the investigation was completed that the
true manner in which the business of the respondent was conducted whether with
intent to defraud its members, creditors or others would be revealed. As to the
charge of mala fides there is only a bare denial and as to the allegation that
no complaints had been received by the respondent regarding fraud and
mismanagement from any one, it is alleged that these facts, if proved, are
irrelevant and do not establish that the respondent's business is parried on
correctly and properly. It is, however, admitted in the affidavit that the
investigation has been going on for a period of nearly 15 months.
With
regard to the allegations in the petition to which I have already referred
regarding refusal to grant import licences, industrial licences, revocation of
sanction by the Reserve Bank of India and export of jute mills machinery for
the joint venture in Thailand, it is alleged that the allegations are
irrevelant and such allegations did not concern the Department of Revenue and
Company Law of the Ministry of Finance. There is, however, one assertion to
which I must in particular refer, namely, a submission that the Central
Government is not bound to disclose the reasons for forming its opinion. That
is how a challenge by the respondent that there were no materials for forming
an opinion and that an opinion as required by the statute was never formed was
attempted to be met by the appellants. The deponent it seems was primarily
concerned with one department only of the Central Government, namely, the
Department of Revenue and Company Law of the Ministry of Finance. On behalf of
the Union of India (appellant No. 4) no affidavit was filed to deny or
controvert the allegations made in the petition.
It
is plain to us that on the question whether there were any materials suggesting
either of the matters set out in sub-clauses (i), (ii) and (iii) of section
237(b), the appellants closed and bolted the door. They drew a veil tightly
around them, and they thought, and indeed they still think, that the veil can
neither be pierced nor lifted, to see if materials exist which the statute
required as a pre-condition to the making of an order under section 237(b) of
the Act. Quite apart from the fact that the charges of mala fide, unreasonable
and arbitrary conduct remained unanswered and unrefuted by the appellants, even
by the Central Government who was a party to the writ petition, it is to be
seen if the contention of the appellants can be upheld, bearing in mind the
requirement of section 237(b) of the Act.
This
very question was raised in Barium Chemicals Ltd. v. Company Law Board.
In that case also an order was made under section 237(b) of the Act appointing
inspectors for investigating the affairs of the company. Thereupon the company moved
a writ petition under article 226 of the Constitution and one of the charges in
the petition was that the order was made mala fide. The minority view of the
Supreme Court expressed by Mudholkar J. held that the discretion conferred by
the section was administrative and not judicial since its exercise one way or
the other did not affect the rights of a company nor did it lead to any serious
consequences. It was further held, relying upon Emperor v. Sibnath Banerjee,
that if it could be shown that the board had in fact not formed an opinion its
order could be successfully challenged and that there was a difference between
not forming an opinion at all and forming an opinion upon grounds which could
be regarded as inapt or insufficient or irrelevant. Referring to the loss
suffered by the company the minority view was that this loss arising out of
disorganised and unbusinesslike methods of carrying on business was due to lack
of capability only but that the loss might conceivably have been produced by
fraud and other varieties of dishonesty or misfeasance. The minority held that
the discretion conferred by section 237(b) of the Act was administrative and
that the opinion to be formed under that section was a matter of subjective
satisfaction, but if grounds were disclosed the court could examine them for
considering whether they were relevant. It was also held, however, that the
order could be challenged if it was made mala fide but that in that case it was
not shown to have been so made. On this ground it was held that the attack on
the order failed. The majority, however, consisting of Hidayatullah J. (as he
then was), Bachawat and Shelat JJ., came to a different conclusion.
Hidayatullah
J. (as he then was), after referring to the grounds set out under section
237(b) of the Act, held at page 309 of the report as follows:
"These
grounds limit the jurisdiction of the Central Government. No jurisdiction,
outside the section which empowers the initiation of investigation, can be
exercised. An action, not based on circumstances suggesting an inference of the
enumerated kind, will not be valid. In other words, the enumeration of the
inferences, which may be drawn from the circumstances, postulates the absence
of a general discretion to go on a fishing expedition to find evidence. No
doubt the formation of opinion is subjective but the existence of circumstances
relevant to the inference as the sine qua non for action must be demonstrable.
If the action is questioned on the ground that no circumstances leading to an
inference of the kind contemplated by the section exists, the action might be
exposed to interference unless the existence of the circumstances is made out.
As my brother, Shelat j., has put it trenchantly:
'It
is not reasonable to say that the clause permitted the Government to say that it
has formed the opinion on circumstances which it thinks exist.......'
Since
the existence of 'circumstances' is a condition fundamental to the making of an
opinion, the existence of the circumstances, if questioned, has to be proved at
least prima facie. It is not sufficient to assert that the circumstances exist
and give no clue to what they are because the circumstances must be such as to
lead to conclusions of certain definiteness. The conclusions must relate to an
intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct or the
withholding of information of a particular kind. We have to see whether the
chairman in his affidavit has shown the existence of circumstances leading to
such tentative conclusions. If he has, his action cannot be questioned because
the inference is to be drawn subjectively and even if this court would not have
drawn a similar inference that fact would be irrelevant. But if the
circumstances pointed out are such that no inference of the kind stated in
section 237 (b) can at all be drawn, the action would be ultra vires the Act
and void."
Shelat
J. was of the view that the formation of the opinion by the Central Government
was a subjective process and that this opinion of the Central Government was
not subject to a challenge on the ground of propriety, reasonableness or
sufficiency. But his Lordship also held that the authority was required to
arrive at such an opinion from circumstances suggesting what was set out in sub
clauses (i), (ii) or (iii) and if those circumstances did not exist the
Government could not say that they do exist. His Lordship was further of the
opinion that the expression "circumstances suggesting" could not
support the construction that even the existence of circumstances was a matter
of subjective opinion and that the expression pointed out that there must exist
circumstances from which the authority formed an opinion that they were
suggestive of the crucial matters set out in the three sub-clauses. His
Lordship further went on to hold at page 325 of the report:
"It
is hard to contemplate that the legislature could have left to the subjective
process both the formation of opinion and also the existence of circumstances
on which it is to be founded. It is also not reasonable to say that the clause
permitted the authority to say that it has formed the opinion on circumstances
which in its opinion exist and which in its opinion suggest an intent to
defraud or a fraudulent or unlawful purpose. It is equally unreasonable to
think that the legislature could have abandoned even the small safeguard of
requiring the opinion to be founded on existent circumstances which suggest the
things for which an investigation can be ordered and left the opinion and even
the existence of circumstances from which it is to be formed to a subjective
process... There must therefore exist circumstances which in the opinion of the
authority suggest what has been set out in sub-clause (i), (ii) or (iii). If it
is shown that the circumstances do not exist or that they are such that it is
impossible for any one to form an opinion therefrom suggestive of the aforesaid
things, the opinion is challengeable on the ground of non-application of mind
or perversity or on the ground that it was formed on collateral grounds and was
beyond the scope of the statute."
It
is thus clear that the majority view of the Supreme Court was that while the
formation of the opinion was a matter of subjective satisfaction of the Central
Government, materials leading to the formation of such opinion must exist and,
if challenged in court, must be proved to exist and that if such materials do
not exist the action of the Central Government in directing investigation would
be ultra vires the statute.
In
this case there is no evidence at all that any such materials existed. The
respondent has challenged the appellants on the existence of such materials and
has also charged the appellants with mala fides. There was no response to this
challenge and charge. The appellants declined to disclose any materials, which
could prima facie at any rate have justified the formation of opinion as
required by the statute. That being the position, the order directing the
investigation and the subsequent orders extending the time to submit the report
by the inspectors cannot but be held to be ultra vires section 237(b) of the
Act. In answer to the categorical allegations in ground (e) of the grounds set
out under paragraph 18 of the petition, all that has been stated in paragraph
15 of the affidavit-in-opposition affirmed on August 29, 1964, is that the
Central Government is not bound to express its reasons for forming its opinion.
Far from disclosing any materials, it has not even been alleged that such
materials did exist and were the basis of formation of the opinion. If there
are materials, there may be several reasons arising out of those materials for
formation of the opinion. But even if it is held that the Central Government is
not bound to disclose the reasons for forming its opinion it must be held that
there must exist materials to provide the reasons on which the opinion is
formed.
Formation
of an opinion is undoubtedly a subjective process and on the same materials
different persons may come to different conclusions. It is now well settled
that, in matters such as these, this court will not substitute its opinion for
that of the authority which by statute is required to form the opinion.
Sufficiency or adequacy of materials is also a matter beyond the scope of
inquiry by this court in a writ petition. But, while sufficiency or adequacy of
materials or evidence is a matter into which this court cannot go in a writ
petition, existence of some prima facie materials, at any rate, must be proved
to the satisfaction of the court, if there is a challenge on this question by a
petitioner. The statute requires as a pre-condition to the order of
investigation, firstly, that the Central Government must form an opinion and,
secondly, that in the opinion of the Central Government there should be
circumstances suggesting one or the other of the matters enumerated in clauses
(i), (ii) and (iii) of section 237(b). If the statute merely required that inspectors
may be appointed by the Central Government if in its opinion such inspectors
ought to be appointed and stopped there, the position might have been
different. It might not have been open to a petitioner in that case to argue
that there were no materials for forming an opinion that inspectors ought to be
appointed. But the legislature did not stop at merely requiring the Central
Government to form an opinion, it went very much further and laid down
conditions which must be fulfilled. These conditions are that the opinion of
the Central Government must be based on various existing circumstances. These
circumstances have been specified and enumerated with the full particulars in
clauses (i), (ii) and (iii) of section 237(b). Existence of these circumstances
cannot be a matter of subjective satisfaction of the Central Government where,
as in this case, there is a challenge by the petitioner that not one of the
circumstances suggesting either of the matters set out in the said clauses
exist. This challenge can be met only by satisfying the court that some
materials at least do exist to justify the formation of an opinion by the
Central Government as to the necessity of an investigation.
I
shall now turn to some of the other decisions relied upon by the learned
counsel for the appellants. Reliance was placed upon a decision of the Supreme
Court in Ram Krishna Dalmia v. Justice S. R. Tendolkar.
In that case a notification issued by the Central Government under section 3 of
the Commissions of Inquiry Act was challenged by a writ petition. Sub-section
(1) of section 3 of the Act provides :
"The
appropriate Government may, if it is of opinion that it is necessary so to
do,.... appoint a commission of inquiry for the purpose of making an inquiry
into any definite matter of public importance..."
It
was argued that Parliament or the Government had usurped the functions of the
judiciary inasmuch as they were undertaking to hold an inquiry. This contention
was rejected on the ground that the commission of inquiry could only make
recommendations which were (not) enforceable proprio vigore and therefore there
could be no question of usurpation of the judiciary functions and that, as the
only power of the Commission was to inquire and make a report and embody
therein its recommendation and had no power of adjudication in the sense of
passing an order, the notification could not be challenged on the ground that
the inquiry was made in exercise of judicial functions and for that reason
there was usurpation by Parliament or the Government of the judicial organs of
the Union of India. This decision to our mind is of no assistance to the
appellants as the question in this appeal is whether there were any materials
enumerated in clauses (i), (ii) and (iii) of section 237(b) of the Companies
Act, 1956, for formation of an opinion by the Central Government to direct an
investigation into the affairs of the company. The next case relied upon is a
decision of the Supreme Court in Raja Narayanlal Bansilal v. Maneck Phiroz
Misery .
In that case the Registrar of Companies, in exercise of his power under section
137 of the Indian Companies Act, 1913, wrote to a company, of which the
appellant was the managing agent, that the business of the company was carried
on in fraud, and so he called upon the company to furnish the information which
he required. The Registrar made a report to the Central Government under
section 137(5) of the 1913 Act and this report showed that the affairs of the
company were carried on in fraud of contributories and that the managing agent
who was also the promoter acting under a fictitious name was advancing money to
the several farms owned by the managing agent which were purchased from the
company's funds. It was also stated in the report that between 1942 and 1951
various farm lands were purchased by advancing money from a fictitious account
in the company's books. There was also a statement that the managing agent was
utilising the company for his personal gain and therefore a case had been made
out for an investigation under section 138. In accordance with the
recommendations of the Registrar, the Central Government appointed an inspector
to investigate the affairs of the company. In the meantime, the Indian
Companies Act, 1913, was repealed by the Companies Act, 1956. The managing
agent (appellant) challenged the appointment of the inspector, firstly, on the
ground that he had been appointed under the old Act and had no jurisdiction to
exercise the powers referable to the relevant provisions of the new Act.
Secondly, there was a challenge to the vires of sections 239 and 240 of the new
Act inasmuch as section 240 offended against the guarantee provided by article
20(3) of the Constitution and certain portions of both the sections offending
against article 14. Reliance was placed on the observations in that judgment
that the inquiry was no more than the work of a fact-finding commission and
that the persons who were called upon to submit to the inquiry were not accused
of any offence. These observations, however, were made in repelling the
appellant's contentions that the appointment of the inspector was violative of
article 20(3) of the Constitution. Besides, in that case materials were
disclosed in justification of an order of investigation by appointment of
inspectors. None of the issues now before us were raised in this case. The next
case relied upon was also a decision of the Supreme Court, Stale Trading
Corporation of India Ltd. v. Commercial Tax Officer.
In that case the question decided was that a corporation was not a citizen
under article 1 9 of the Constitution and could not ask for enforcement of
fundamental rights granted to citizens under that article. This decision to our
mind is of no assistance to the appellants because the question of enforcement
of fundamental rights does not arise in this case.
The
next case relied upon by the appellants is also a decision of the Supreme
Court, Associated Cement Companies Ltd. v. P. N. Sharma.
Reliance was placed on that decision for the proposition that the impugned
order was an administrative order and was not amenable to judicial review. In
that case an order was made under the Punjab Welfare Officers (Recruitment and
Conditions of Service) Rules, 1952, directing the appellant to reinstate its
welfare officers and the question raised before the Supreme Court was whether
the State of Punjab exercising its appellate jurisdiction under rule 6(6) of
the said Rules was a tribunal within the meaning of article 136(1) of the
Constitution. The facts in that case and the questions of law raised before the
Supreme Court have nothing to do with the questions now before us in this
appeal and for this reason this decision is of no assistance to the appellants.
Reliance was next placed on another decision of the Supreme Court, Sadhu Singh
v. Delhi Administration.
In that case an order was made under rule 30(1) of the Defence of India Rules,
1962, by the District Magistrate, Delhi, whereby the petitioner was detained in
prison. Thereupon the prisoner moved the Supreme Court for setting aside his
detention and for an order of release. The validity of the detention order was
challenged only on the ground that there, was no confirmation of the order by
the Administrator, Union Territory of Delhi, in the manner provided by rule
3A(6)(b) of the Rules. The appellant's contention that the proceedings for
review were quasi-judicial in character and therefore the prisoner should have
been given an opportunity to make his representations was repelled by the
Supreme Court on the ground that the rule was an emergency measure which
authorised the Government to detain a person without trial with a view to
prevent him from acting to the detriment of public order and safety. It was
further held that the satisfaction of the authority and the confirmation of the
order of detention were not subject to judicial review as the order of detention
without trial was an executive act and that the subjective satisfaction of the
detaining authority was a condition of the making of the order and, if that
condition was shown to exist, the court had no power to inquire into the
sufficiency of the materials on which the order was made or the propriety or
expediency of making the order. I do not sec how this decision is of any
assistance to the applicants in this case as all that was held was that the
making of the order of detention was based on the subjective satisfaction of
the prescribed authority. But in this case the question is not whether the
formation of the opinion by the Central Government is a matter of subjective
satisfaction, as no doubt it is, but whether, having regard to the provisions of
the statute, the Central Government is bound to disclose the reasons if there
is a challenge to the existence of the same. That being the question before us
this decision of the Supreme Court is of no assistance to the appellants.
The
decisions discussed above do not in our view support the contentions of the
appellants in this appeal. Besides it is not necessary for us for the purpose
of this appeal to examine other decisions for upholding the contentions of the
appellants having regard to the decision of the Supreme Court in Barium
Chemicals Ltd. v. Company Law Board,
discussed at length earlier in this judgment. In that case the majority view of
the Supreme Court have been clearly and unambiguously staged by Hidayatullah J.
(as he then was) and Shelat J. and indeed Mr. Basak conceded that if in our
view the majority of the Supreme Court had laid down the law and the interpretation
of section 237(b) of the Companies Act, it was not open to him to raise the
contentions he has raised. We see no reason to do otherwise than to hold that
the majority view of the Supreme Court in Barium Chemicals Ltd. v. Company Law
Board has clearly expressed its view on the
interpretation of section 237(b) of the Companies Act, 1956 and that being so,
the views expressed by the Supreme Court with regard to other statutes which
are not in pari materia with the statute with which we are concerned would
hardly be of any assistance in dealing with the contentions of the appellants
in this appeal.
The
learned Advocate-General for the respondent submitted that it was not open to
the appellant to raise the contentions mentioned above having regard to the
observations of the majority of the Supreme Court in Barium Chemicals Ltd. v.
Company Law Board .
He, however, proceeded further and wanted to support the judgment on certain
grounds, which the court below had held against him. This contention on behalf
of the respondent was dealt with by the court below in the judgment delivered
in Matter No. 272 of 1964, New Central Jute Mills Ltd. v. Deputy Secretary,
Ministry of Finance, Deparment of Revenue and Company Law .
Shortly put, this contention on behalf of the respondent in the court below was
as follows:
By
the Companies (Amendment) Act, 1963, which came into force from January 1,
1964, section 10E was introduced in the Companies Act, 1956. This amendment
provided for the constitution of the Company Law Board and other incidental
matters. By this amendment sub-sections (1) and (2) of section 637 of the
Companies Act, 1956, were also amended and a new sub-section (2A) was
introduced. Sub-section (2A) runs as follows :
"The
provisions of this Act shall apply in relation to the Company Law Board as they
apply in relation to the Central Government in respect of any matter in
relation to which the powers and functions of the Central Government have been
delegated to the Company Law Board."
The
respondent's contention in the court below was that after April, 1964, the
Central Government divested itself of its powers and duties under sections 235
to 250 of the Companies Act and therefore the appointment of I. M. Puri as
co-inspector with S.P. Chopra and the appointment of S.C. Bafna in place of
S.P. Chopra to act as co-inspector with I.M. Puri were all beyond the authority
of the Central Government. The court below, however, repelled this contention
of the respondent and held that in its opinion investigations validly started
by the lawful authority at a time when that authority had not parted with its
powers and duties, did not become invalid proceedings merely because of
subsequent parting of powers. In other words, the investigation started by the
Central Government did not become invalid by reason of the subsequent
delegation of the power by the Central Government to the Company Law Board.
In
support of this contention the learned Advocate-General, firstly, relied upon a
decision of the Judicial Committee, King Emperor v. Sibnath Banerji,
in support of the contention that after the delegation of the powers of the
Central Government under section 237 of the Companies Act, the Central
Government had no power left in its hands to appoint inspectors to continue the
investigation as there was a complete divestiture of the powers created by
section 237. Reliance was next placed on a decision of the Court of Appeal in
England, Blackpool Corporation v. Locker.
In that case the Minister of Health, acting under the provisions of the Defence
(General) Regulations, 1939, delegated his powers to take possession of
dwelling-houses to local authorities by means of circulars which contained
various conditions relating to taking possession. In exercise of this delegated
power the town clerk of a local authority took possession of a house. The owner
of the house notified the local authority that he intended to use the house for
his own residence. The Minister of Health purported to confirm in writing the
action of the town clerk of the local authority in requisitioning the house and
on this question it was held that the Minister when delegating his powers had
for the time being divested himself of those powers and, therefore, had no
power to ratify the requisition made by the town clerk of the local authority
and that neither the corporation nor the town clerk acted as the agents of the
Minister. Reliance was next placed on a Bench decision of this court, K. B.
Mathur v. N. C. Chatterjee.
The
learned Advocate-General also relied upon several other decisions in support of
the contention that after delegation of the powers under section 237(b) of the
Companies Act, 1956, to the Company Law Board, the Central Government was not
competent either to appoint new inspectors or to extend the time of the
inspectors so appointed, to make the report. The decisions on which reliance
was placed were State of Punjab v. Hari Kishan Sharma.
In that case the State Government required all applications for cinema licences
to be forwarded to it for disposal although section 5(1) and (2) of the Punjab Cinemas
(Regulations) Act conferred the jurisdiction to consider and deal with such
applications on the licensing authority. It was held that the State Government
could not convert itself into the original authority to deal with the licences
because section 5(3) of the Act allowed an appeal to the State Government to be
preferred by a person who was aggrieved by the rejection of his application by
the licensing authority. The next case relied upon by the learned
Advocate-General was also a decision of the Supreme Court, Roop Chaned v. State
of Punjab,
in which the majority of the Supreme Court held that when the Government
delegated its power to entertain and decide an appeal under section 21(4) of
the East Punjab Holdings (Consolidation and Prevention of Fragmentation) Act,
19-18, to an officer who pursuant to such delegation heard the appeal and made
an order, such an order was an order of the Government, as it was made under
the statutory power which could only be exercised in terms of the statute. The
next case relied upon is a decision of the English Court of Appeal Lewisham
Borough Council v. Roberts.
The passage relied on is at page 824 of the report where it has been held that
when the Government department delegated its functions to a town clerk under
Regulation 51(5) of the Defence (General) Regulations, 1939, it was putting
some one in its place to do the acts which it was authorised to do and the town
clerk was an agent of the department and a sub-agent of the Crown and that the delegation
to the town clerk was an administrative act so as to enable the administrative
functions of requisitioning to operate smoothly and efficiently. Denning L.J.
differed from the observations of Scott L.J. to the contrary in Blackpool
Corporation v. Locker,
to which I shall presently refer, and observed that the observations of Scott
L.J. were unnecessary for the decision. In Blackpool Corporation v. Locker,
Scott L.J., while dealing with the question of delegation of powers of requisitioning
by a Minister to local authorities, held that the Minister, when delegating his
power had for the time being divested himself of those powers and therefore he
had no power to ratify a purported requisition and neither the local authority
to whom the power is delegated nor its town clerk acted as the Minister's
agent.
The
next contention of the learned Advocate-General was that the impugned order was
made by the Central Government without applying its mind to the matter and in
support of this contention reliance was placed on a decision of the Supreme
Court, Jagannath Misra v. State of Orissa.
In that case a detention order was made under rule 30(1)(b) of the Defence of
India Rules dealing with the question whether the State Government who made the
order applied its mind to the matter. Before making the order the Supreme Court
held that where a number of grounds were the basis of a detention order the
various grounds should be joined by the conjunctive "and" and use of
disjunctive "or" in such a case made no sense and as the word
"or" was used in the impugned order it showed that the order was more
or less a copy of the rule under which it was made without any application of
the mind of the authority concerned to the grounds which applied. On the same
question reliance was also placed on another decision of the Supreme Court, Ram
Manohar Lohia v. Slate of Bihar.
The
learned counsel for the appellants sought to repel the above contention on
behalf of the respondent by contending that there was an implied resumption of
power by the Central Government in appointing the new inspector and extending
the time to make the report. In other words, it was argued that when an
authority, which had delegated its power under a statute made an order which by
reason of the delegation the delegate alone could make, there was an implied
resumption of the power delegated. In support of this contention the learned
counsel for the appellants, firstly, relied upon Huth v. Clarke ,
Lewisham Borough Council v. Roberts and
Gordon, Dadds and Company v. Morris Learned counsel for the appellants also relied
upon a decision of the Supreme Court, Godawari S. Parulekar v. State of
Maharashtra ,
for the proposition that the decision of the Judicial Committee in King Emperor
v. Sibnath Banerji was not an authority for the proposition that
the Governor entirely divested himself of his powers of passing an order and
that the Judicial Committee was dealing with the responsibility of the Governor
for the orders issued by the delegate and that all that the Judicial Committee
held was that the Governor was not responsible for an order of a delegate and
that the Governor could himself act under rule 26 of the Defence of India
Rules.
We
have been told by the learned Advocate-General that the question raised by him
in the appeal in support of the judgment, namely, that once having delegated
its power under section 237(b) of the Act, the Central Government could not
appoint new inspectors, are the main points involved in the next appeal (New
Central Jute Mills Co. Ltd. v. Deputy Secretary, Ministry of Finance )
in which the respondent in this appeal is the appellant. That being so, and. as
we are of the opinion that so far as this appeal is concerned the impugned
order must be struck down on the ground that the Central Government declined to
state if there were any reasons for the formation of the opinion and on the
ground that existence of circumstances which enabled the Central Government to
form an opinion with regard to the matters set out in clauses (i), (ii) and
(iii) of section 237(b) of the Companies Act must be made out as the impugned
order has been challenged on the ground that no such circumstances existed, it
is not necessary for us to go into the other question raised by the parties in
this appeal. We accordingly refrain from expressing any views on the question
of the validity of the Central Government's orders appointing the new
inspectors and extending the time to make the report by the inspectors so
appointed, by reason of the delegation of the powers of the Central Government
to the Company Law Board. In our view the refusal of the Central Government to
disclose the reasons for the formation of the opinion and the failure on its
part to prove the existence of any circumstances that enabled it to form the
opinion with regard to the matters set out in clauses (i), (ii) and (iii) are
sufficient for striking down the impugned order.
In
the result, this appeal fails and is dismissed with costs.
Certified
for two counsel. All interim orders are vacated.
Operation
of this order will remain stayed for six weeks from today, as prayed for.
Sinha
C.J.—I agree.
[1966]
36 COMP.CAS. 543 (
HIGH COURT OF
v.
BANERJEE,
J.
MATTER
NO. 2810 OF 1964
AUGUST
6, 1965
JUDGMENT
The
petitioner-company claims to carry on business as managing agent of certain
public limited companies, namely, Rohtas Industries Ltd., New Central Jute
Mills Co. Ltd., Jaipur Udyog Ltd., Bharat Collieries Ltd., S. K. G. Sugar Ltd.,
Dehri-Rohtas Light Railway Co. Ltd., Plywood Industries Ltd., and Albion
Plywood Ltd. The petitioner-company has a paid up capital of Rs. 5,00,000 and
claims to have built up a general reserve of Rs. 25 lakhs. The
petitioner-company future claims to be running its business on sound principles
and in strict compliance of the provisions of law. These facts are pleaded in
order to emphasise upon the contention that the petitioner-company should have
been treated as beyond reproach. The measure put by the petitioner-company upon
itself is not, however, an agreed measurement and is disputed in the affidavit-
in-opposition.
On April 11,
1963, the Central Government made the following order against the
petitioner-company:
"Whereas
the Central Government is of the opinion that there are circumstances
suggesting that the business of Sahu Jain Limited, a company having its
registered office at 11, Clive Row, Calcutta (hereinafter referred to as the
said company), is being conducted with intent to defraud its creditors, members
or other persons and the persons concerned in the management of its affairs
have in connection therewith been guilty of fraud, misfeasance or other misconduct
towards the said company or its members;
And whereas
the Central Government consider it desirable that an inspector should be
appointed to investigate the affairs of the said company and to report thereon
;
Now,
therefore, in exercise of the several powers conferred by sub- clauses (i) and
(ii) of clause (b) of section 237 of the Companies Act, 1956 ( 1 of 1956), the
Central Government hereby appoints Shri S. Prakash Chopra of Messrs. S. P.
Chopra & Co., Chartered Accountants, 31F Connaught Place, New Delhi, as
inspector to investigate the affairs of the said company for the period from
September 1, 1958, to date and should the inspector so consider it necessary,
also for the period prior to September 1, 1958, and to report thereon to the
Central Government pointing out, inter alia, all irregularities and
contraventions in respect of the provisions of the Companies Act, 1956, or of
the Indian Companies Act, 1913, or of any other law for the time being in force
and person or persons who are responsible for such irregularities and
contraventions;
The
inspector shall complete the investigation and submit six copies of his report
to the Central Government not later than four months from the date of issue of
this order unless time in that behalf is extended by the Central Government;
A separate
order will issue with regard to the remuneration and other incidental expenses
of the inspector."
The
petitioner-company objected to the order in writing on June 12, 1963, in the
following language :
"It is
alleged in the preamble of the said order that the Central Government is of the
opinion that there are circumstances suggesting that our business is being
conducted with intent to defraud our creditors, members or other persons and
the persons concerned in the management of the company's affairs have in
connection therewith been guilty of fraud, misfeasance or other misconduct
towards the company or its members. These allegations are entirely unfounded
and false. We deny that there are any circumstances suggesting as indicated in
the preamble. We feel that the above order has been made because of extraneous
circumstances. If, however, there are any materials in the possession of the
Central Government on the basis of which the Central Government has formed the
above opinion, we would request you to kindly furnish the same to us at the
earliest."
The objection
notwithstanding, the petitioner-company alleges that it did not stand in the
way of investigation. But this was done, it is alleged, without prejudice.
Between April
16, 1963, and June 12, 1963, S.P. Chopra, the inspector, sought for various
information from the petitioner-company which the petitioner alleges were all
supplied in writing firstly by eight letters written between April 18, 1963, to
May 6, 1963, thereafter by two letters written between May 6, 1963, to May 27,
1963, further thereafter by a letter dated May 27, 1963, and lastly thereafter
by two letters dated June 26, 1963, and July 16, 1963. Copies of these letters
are all annexed to the petition. The petitioner-company further alleges that it
gave to S. P. Chopra all co-operation, including preparation of statements and
production of books as and when required. The measure of co-operation alleged
to have been extended is not admitted in the affidavit-in-opposition and
paragraph 12 of the affidavit contains vague and indefinite charges of
obstruction and intimidation by the petitioner-company.
Be that as it
may, the investigation was not completed within the time fixed by the order dated
April 11, 1963, and had to be extended up to October 31, 1963, by an order
dated August 9, 1963, which I set out below :
"In
continuation of the Central Government order of even number dated the 11th
April, 1963, the Central Government hereby extends the time for the completion
of the investigation and for submission of the report by the inspector
appointed to investigate into the affairs of Sahu Jain Ltd., a company having
its registered office at 11, Clive Row, Calcutta, under section 237(b) of the Companies
Act, 1956 (Act 1 of 1956), up to the 31st October, 1963."
How this
extension of time was usefully consumed does not appear but on October 31,
1963, there was a second extension of time granted to complete the
investigation in the following language :
"In
continuation of the Central Government orders of even number dated the 11th
April, 1963, and 9th August, 1963, respectively, the Central Government hereby
extends the time for the completion of the investigation and for submission of
the report by the inspector appointed to investigate into the affairs of Sahu
Jain Ltd., a company having its registered office at 11, Clive Row, Calcutta,
under section 237(b) of the Companies Act, 1956 (Act 1 of 1956), up to the 31st
January, 1964."
This extension
of time also produced no better result and the Central Government extended the
period for a third time by an order dated January 29, 1964, couched in the
following language :
"In
continuation of the Central Government orders of even number dated the 11th April,
1963, 9th August, 1963, and 31st October, 1963, respectively, the Central
Government hereby extends the time for the completion of the investigation and
for submission of the report by the inspector appointed to investigate into the
affairs of Sahu Jain Ltd., a company having its registered office at 11, Clive
Row, Calcutta, under section 237(b) of the Companies Act, 1956 (Act 1 of 1956),
up to the 30th June, 1964."
At this stage,
on February 22, 1964, S.P. Chopra wrote the following letter to the petitioner-company
:
"I am
deputing Shri S. D. Agarwal to check the statements, etc., filed by you with
the account books of the company. He will be visiting
Although
characterising such delegation of authority to investigate as illegal, the
petitioner alleges to have given full facilities to S. D. Agarwal to carry out
his work. This is, however, denied in paragraph 12 of the
affidavit-in-opposition. Nothing further appears to have happened during this
extended period.
On June 30,
1964, the Central Government relieved S.P. Chopra from his appointment, at his
own request, appointed S. D. Agarwal and S. Rajagopalan as co-inspectors in
succession to S.P. Chopra and extended the time to make the report up to
December 31, 1964. The order dated June 30, 1964, is set out hereinafter :
"Whereas
vide Central Government's order of even number dated 11th April, 1963, an
investigation was ordered into the affairs of Sahu Jain Ltd., 11, Clive Row,
Calcutta, under section 237(b) of the Companies Act, 1956 (1 of 1956), and Shri
S. Prakash Chopra of Messrs. S. P. Chopra & Co., Chartered Accounts, 31 F,
Connaught Place, New Delhi, was appointed as inspector for the purpose ;
And whereas
the date for completion of the said investigation and for submission of the
report by the said inspector was first fixed as 30th June, 1964 ;
And whereas
it has been represented to the Central Government that due to refusal of the
company and its officers to produce all books and other papers or to appear
before the inspector for the purpose of examination and other non-co-operative
and dilatory tactics it would not be possible to complete the investigation by
the aforesaid date ;
And whereas
Shri S. Prakash Chopra, inspector, has regretted his inability to continue any
longer with this appointment due to his other professional engagements;
And whereas
after consideration of the aforesaid circumstances and also the magnitude of
the work involved, the Central Government are of the opinion that certain
modifications and additions in the orders already issued are necessary ;
Now,
therefore, in exercise of the powers conferred by sub-clauses (i) and (ii) of
clause (b) of section 237 of the Companies Act, 1956 (1 of 1956), the Central
Government hereby appoints in place of Shri S. Prakash Chopra, Sarvashri S.
Rajagopalan and S. D. Agarwal, Senior Accounts Officers in the Company Law
Board, as co-inspectors. The two inspectors shall have co-extensive powers
which may be exercised by them severally or jointly. The inspectors shall
complete the investigation and submit six copies of their report to the Central
Government by 31st December, 1964."
The
petitioner-company condemns the appointment of co-inspectors as illegal and not
sanctioned by law.
It is alleged
by the petitioner-company that the newly appointed co-inspectors made no demand
upon the petitioner-company for production of books and accounts but
straightaway applied for seizure of books of the petitioner-company under
section 240A of the Companies Act and re-inforced by necessary magisterial
orders effected search and seizure of various books and documents. This action
is condemned by the petitioner company and it is alleged that orders for search
and seizure were obtained by false representation and suppression of materials.
I am, however, not concerned with the propriety of this action in this rule,
which is the subject-matter of another rule issued by this court.
Aggrieved by
the different actions taken, the petitioner-company moved this court under
article 226 of the Constitution, praying for a writ of certiorari for the
quashing of the orders dated April 11, June 30, August 9, October 31, 1963, and
January 29, 1964, for a writ of mandamus restraining the respondents from
giving effect thereto or to any of them, and for a writ of prohibition
restraining the respondents from proceeding under the said orders or any of
them and obtained this rule on July 30, 1964.
During the
pendency of the rule, I am told, there has been a further extension of the
investigation order on December 12, 1964.
Mr. R. C. Deb,
learned advocate for the petitioner, argued the same points in condemnation of
the impugned orders as he did in Matter No. 272 of 1964 (New Central Jute Mills
Co. Ltd. v. Deputy Secretary, Ministry of Finance [1966] 36 Comp. Cas. 512. and
I overrule the arguments for the same reasons as I did in that matter. I do not
repeat the reasonings at this place for the sake of brevity.
Mr. Deb, however,
raised certain other points in this rule, which I need separately consider. In
paragraphs 9 to 12 of the petition, it is alleged :
(a) that all loans and
advances obtained by the petitioner-company from banks are fully secured to the
satisfaction of the bankers ;
(b) that the unsecured
loans are from directors, shareholders and family members of the directors of
the petitioner-company who are fully conversant and satisfied with the conduct
of the business of the petitioner-company;
(c) that the
petitioner-company has only eight members, namely, three directors, their
family members and an officer of the petitioner-company who are all satisfied
with the working of the company ;
(d) that the allegation of intention to
defraud "other persons" is devoid of particulars;
(e) that there were no complaints ever made
against the petitioner- company by anybody.
On the above
basis Mr. Deb contended that there were no circumstances suggesting necessity
of an investigation under section 237(b) of the Companies Act and that the
order for investigation must have been made without legal excuse.
Paragraphs 9
to 12 of the petition are dealt with in paragraphs 8 to 10 of the
affidavit-in-opposition as hereinbelow quoted :
"8.
With reference to paragraph 9 of the petition I do not admit that the business
of the petitioner was not or is not conducted with intent to defraud its
creditors, members or any other persons as alleged or at all. It is submitted
that it is only after the investigation now in progress is completed that the
true manner in which the business of the petitioner is being conducted whether
with intent to defraud its members, creditors or other persons or not will be
revealed. I deny that there were or is no instance which would justify the
formation of any opinion by the Central Government that the petitioner was or
is conducting its business with intent to defraud any of its creditors. I have
no knowledge of and do not admit that the petitioner had no complaint from any
of its creditors regarding the way its business was or is being conducted. Save
as is herein expressly admitted, I deny the correctness of the submissions,
contentions or allegations of the petitioner in the said paragraph 9 of the
petition.
9. With
reference to paragraph 10 of the petition, I have no knowledge of and do not
admit that the members of the petitioner do not include any outsider. Save as
aforesaid, I do not admit the allegations and submissions made in the said
paragraph 10 of the petition.
10. With
reference to paragraphs 11, 12 and 13 of the petition, the charges of mala
fides are denied and the correctness of the submissions and contentions therein
made are disputed. Assuming but not admitting that no complaints or enquiries
were received or made as alleged, it is contended that such fact even if proved
are irrelevant and/or in any event do not establish that the affairs of the
petitioner's business are properly or correctly run."
Now, "not
admitted" is not denial. If any authority is needed, reference may be made
to the judgment, dated February 2, 1949, by A.K. Sarkar J. in Suit No. 366 of
1937 (Jogandra Nath Mullik v. Kanto Mohan Mullik Unreported). "No
knowledge" is worse than "not admitted". That may only indicate
how uninformed the respondents are. Bare denial does not serve any purpose,
where an allegation of fact need be specifically denied. A somewhat affirmative
statement, however, appears in paragraph 6 of the affidavit-in-opposition, in
which it is stated:
"I say
that the Central Government on proper and sufficient grounds formed its opinion
and bona fide made the order dated the 11th April,1963. I submit that the
opinion of the Central Government is not justiciable. I further submit that it
is neither necessary or proper that the order of the 11th April, 1963, should
on the face of it disclose the nature and contents of the materials on the
basis of which the Central Government formed its opinion.
The above
statement has only an assertive value but is not revealing in any measure. I
have held in Matter No. 272 of 1964 (New Central Jute Mills Co. Ltd. v. Dy.
Secy. Unreported) :
The
Government may proceed under section 237(b) only if there are 'circumstances
suggesting' the existence of malpractices envisaged in sub-clauses (i), (ii)
and (iii) of clause (b) in other words, the Central Government must proceed
reasonably and must not be actuated by bad faith or dishonesty, must exclude
from consideration matters which are irrelevant and must act according to law
and not humour."
I have further
held in the decision referred to above:
"An
order of the Central Government under section 237(b) is certainly not
justiciable, if the order has been made by the appropriate authority bona fide
and reasonably, even though the reasons may not fully appeal to a court of law.
It may not also be necessary for the Central Government to recite its
reasonings when making an order under section 237(b). But when the exercise of
the power is challenged as actuated by malice in law, before a court of law
justification for the exercise of the power must not be blanketed from the
court."
I have already
quoted the relevant extracts from the affidavit-in-opposition. That affidavit
in my opinion is unhelpful, evasive and uninformative and is an example of what
an affidavit-in-opposition should not be in a writ matter. The exercise of the
power under section 237(b) has been challenged by the petitioner as done
without legal excuse and specific grounds have been pleaded to show that such
is the case. The affidavit-in-opposition does not reveal any legal excuse. The
respondent merely plead want of knowledge, non-admission of factual statements
and bare denials. I cannot, on such an affidavit, hold that the grievance made
by petitioner must be unfounded.
I have
expressed the view in Matter No. 272 of 1964 (New Central Jute Mills Co.
Ltd.(1966) 36 Comp Cas. 512.) that if the Central Government is to proceed on
"circumstances suggesting" it can merely proceed on hypothesis, that
is to say, on a prima facie theory to be proved or disproved with reference to
facts, later on ascertained. Now, if the character of the investigation is
merely that of a fact-finding commission, as pointed out by the Supreme Court
in Raja Narayan Bansilal v. Maneck Phiroz Mistry (1961) 30 Comp. Cas. 644:
(1961) 1 S.C.R. 417, the Central Government cannot be expected to form a fully
objective opinion about the malpractices mentioned in sub-clauses (i),(ii) and
(iii) of section 237(b) before the investigation brings out relevant materials
for the formation of such opinion. It may merely form the opinion that there
are circumstances, which may be capable of innocent interpretation, but until
so done, suggestively sinister. this is a form of opinion which is lesser in
degree than the self-confident opinion based on reasonable materials, commonly
known as objective opinion but greater in degree than the speculative view,
which goes by the name of subjective satisfaction. Reading the affidavit, I do
not find any material from which I can infer that the Central Government
proceeded even on prima facie materials. I cannot, therefore, ignore the
criticism that there is nothing to indicate that the Central Government had any
legal excuse in making the order and may have proceeded on mere subjective
satisfaction.
I need notice
that the respondents do not claim privilege in respect of the materials on
which they made the order of investigation under section 237(b). They merely
say that it is not necessary to disclose the materials in the order itself.
That may be so, but when called upon to vindicate the making of the order
before a court of law the respondents are not to hold back from the court the
circumstances which suggested to them the necessity for making the order. The
respondents failed to indicate those circumstances before this court, either in
the affidavit-in-opposition or in course of argument. The mere assertion that
they followed the law in making the order and did not act without any legal
excuse is not enough to satisfy the judicial conscience of the court. I am
therefore unable to uphold the order for investigation as made.
Before I leave
this point, I desire to make one position clear. What the petitioner states in
paragraphs 9 to 12 of the petition notwithstanding, it may be possible for the
Central Government to make an order for investigation under section 237(b) if
in its opinion there are circumstances suggesting the necessity for such an
investigation. The allegations contained in paragraphs 9 to 12 of the petition
are not necessarily to be taken at their face value. The Central Government may
have been materials in its possession which may indicate the falsity of the
allegation or the Central Government may have in its possession other materials
which may call for an investigation of the affairs of the company under section
237(b). In the instant case, the respondents fail to justify the order because
they do not elect to say anything useful.
Following the
dictum in Appeal from Original Order No. 209 of 1959 (Daulatram Rawatmull v.
Income-tax Officer-unreported), I might have compelled the respondents to place
before this court the materials which prompted the Central Government to take
action under section 237(b) and determine for myself whether the materials
justified the action taken. I do not, however, propose to do so for two
reasons. In the first place, the investigation was ordered as far back as April
11, 1963, and has made some progress. In the course of the investigation, the
extreme step for search and seizure of documents has been taken. I do not think
that this is an appropriate case where I should try to salvage the
investigation, at this stage, by compelling the respondents to disclose the
materials, if any exist at all. Then again, the Central Government can always
make a fresh order for investigation on circumstances suggesting the propriety
of such an action and justify the same, if called upon to do so.
Before I close
this judgment, I need observe that Mr. Deb strongly argued that after the
establishment of the Company Law Board, the Central Government lost the
jurisdiction to extend the time for investigation or to appoint an inspector or
co-inspector in the vacancy in the inspectorate. I have dealt with this
argument in Matter No. 272 of 1964 (New Central Jute Mills Co. Ltd. (1966) 36 Comp.
Cas. 512) and negatived the contention. I need not repeat my reasonings over
again in this rule for so doing.
In the result,
this rule succeeds and impugned order of investigation is quashed and the
respondents are restrained from giving further effect to the same. Let a
mandate issue accordingly.
Nothing
contained in this judgment shall stand in the way of the Central Government in
making a fresh investigation order according to law.
There will be
no order as to costs.
The operation
of this judgment shall remain stayed for a fortnight.
[1970] 40 COMP. CAS. 102 (
HIGH COURT OF
New Central Jute Mills Co. Ltd.
v.
Deputy Secretary, Ministry of
Finance
Department of Revenue &
Company Law
D.N. SINHA, C.J.
AND B.C. MITRA, J.
APPEAL FROM ORIGINAL ORDER NO. 236 OF 1966
MARCH 7, 1969
R.C. Deb, Subrata Roy Chowdhury and P.L. Khaitan for the
appellant.
Niren De, B. Das and
B. Basak for the respondent.
Sinha,
C. J.—The
appellant in this case is Messrs. New Central Jute Mills Co. Ltd., which is a
public limited company incorporated under the Indian Companies Act, 1913
(hereinafter referred to as "the appellant"), and is an existing
company under the Companies Act, 1956 (hereinafter referred to as the
"said Act"), having its registered office at 11, ('live Row,
Messrs.
Sahu Jain Ltd., of 11, Clive Row,
"237 Without prejudice
to its powers under section 235, the Central Government—
(a) shall appoint one or more competent persons as inspectors to
investigate the affairs of a company and to report thereon in such manner as the
Central Government may direct, if—
(i) the company,
by special resolution ; or
(ii) the court, by order, declares that the affairs of the company
ought to be investigated by an inspector appointed by the Central Government;
and
(b) may do so if, in
the opinion of the Central Government, there are circumstances suggesting—
(i) that the business of the company is being conducted with
intent to defraud its creditors, members, or any other persons, or otherwise
for a fraudulent or unlawful purpose, or in a manner oppressive of any of its
members, or that the company was formed for any fraudulent or unlawful purpose;
(ii) that persons concerned in the formation of the company or the
management of its affairs have in connection therewith been guilty of fraud,
misfeasance or other misconduct towards the company or towards any of its
members;....................."
It would be interesting to
relate here shortly how provisions as to inspection and investigation of the
affairs of companies came to be incorporated in the said Act. The Indian
Companies Act, 1913, was extensively amended in 1936 and thereafter further
amended from time to time. After the World War II, there was a demand for its
drastic revision. In the report of the Company Law Committee, 1952, it was
stated :
"No Jaw, however
well-conceived or well drafted, can be altogether fool-and-knave proof and it
is impossible for any law to protect the fool from the consequences of his acts
or omissions. Nevertheless, we consider that it is the function of law to
prevent dishonest and unscrupulous people from creating conditions and
circumstances, which will enable them to make fools of others. The powers of
inspection and investigation into the affairs of a company, which the Companies
Acts of most countries confer on Government or a quasi-independent authority,
are intend' d primarily as a check on the activities of such people. We
recognise that, in some cases, the use of the powers of inspection and
investigation may, initially, tend to shake the credit of a company and thereby
adversely affect its competitive position, although the allegations against the
company may in the end be found to have been largely unfounded. It is,
therefore, necessary that the investigation provisions of the Act should be so
conceived as to reduce this threat to the credit of companies to a minimum.
This risk should not, however, deter us from considering the desirability of
conferring adequate powers on an appropriate authority to investigate the
affairs of a company, where such investigation is prima facie called for. On
the contrary, we consider it to be in the long term interest of the trade and
industry of this country that such powers should be vested in a competent
authority and exercised energetically, albeit with due caution and fairness in
all cases which require investigation." (Report of the Company Law
Committee, 1952, page 133).
The demand for drastic
action was sought to be made by enacting the Companies Act, 1956, which came
into operation from April 1, 1956. The said Act has been amended several times.
Section 209(4) of the said Act contains provisions for inspection and sections
235 to 251 contain provisions for investigation. I have already mentioned that
on or about the 11th April, 1963, an order was passed under sub-clauses (i) and
(ii) of clause (b) of section 237 of the said Act upon the appellant. The
relevant part of the said order runs as follows :
"Whereas the Central
Government is of the opinion that there are circumstances suggesting that the
business of the New Central jute Mills Ltd., a company having its registered
office at 11, Clive Row, Calcutta (hereinafter referred to as the "said
company"), is being conducted with intent to defraud its creditors,
members or other persons and the persons concerned in the management of its
affairs have in connection therewith been guilty of fraud, misfeasance or other
misconduct towards the said company or its members ;
And whereas the Central
Government consider it desirable that an inspector should be appointed to investigate
the affairs of the said company and to report thereon ;
Now therefore in exercise
of the several powers conferred by sub-clauses (i) and (ii) of clause (b) of
section 237 of the Companies Act, 1956 (Act 1 of 1956), the Central Government
hereby appoint Shri S. Prakash Chopra of M/s. S. P. Chopra and Company,
Chartered Accountants, 31F Connaught Place, New Delhi, as inspector to
investigate the affairs of the said company for the period from April 1, 1958,
to date and should the inspector so consider it necessary also for the period
prior to April 1, 1958, and to report thereon to the Central Government
pointing out inter alia irregularities and contraventions in respect of the
provisions of the Companies Act, 1956, or of the Indian Companies Act, 1913, or
any other law for the time being in force and person or persons who are
responsible for such irregularities and contraventions.
The inspector shall
complete the investigation and submit six copies of his final report to the
Central Government not later than four months from the date of issue of this
order unless time in that behalf is extended by the Central Government.
A
separate order will issue with regard to the remuneration and other incidental
expenses of the inspector."
On
receipt of the said order the appellant wrote to the respondent No. 1 objecting
to the investigation, inter alia, on the ground that the order was unwarranted,
without jurisdiction and made on consideration of extraneous circumstances, and
requested the said respondent to furnish to the appellant the materials on the
basis of which the order had been made. The said respondent by his letter dated
17th June, 1963, repudiated the allegation and refused to disclose any material
as asked for. The said Mr. S.P. Chopra who was appointed inspector was,
however, allowed to commence the investigation but could not complete it within
the period originally fixed and by an order dated 9th August, 1963, the period
originally fixed was extended to 31st October, 1963. On or about the 6th September,
1963, an order was made for inspection by Mr. I.N. Puri under sub-section (4)
of section 209 of the Act. The appellant-company objected to this order also,
but the objection was overruled. By an order dated 31st October, 1963, a
further extension was given to Mr. S.P. Chopra to complete his investigation
and report up to 31st January, 1964. By an order dated 29th January, 1964, a
third extension was given up to 30th June, 1964. By an order dated 12th June,
1964, an additional inspector, Mr. U. N. Puri, was appointed and the two
inspectors were directed to complete the investigation and report by 30th June,
1964, or such date as may be extended from time to time, if and when necessary.
By an order dated 30th June, 1964, Mr. S.P. Chopra was relieved of his duties
at his own request. In that order, it was stated that it had been represented
to the Central Government that the investigation and report could not be
completed within the extended time due to the refusal of the company and its
officers to produce all books and papers or to appear before the inspector for
the purpose of examination, and due to other non-co-operative dilatory tactics.
In his place, Mr. S.C. Bafna was appointed co-inspector with Mr. I.N. Puri and
they were directed to complete the investigation and report by the 31st
December, 1964. On or about the 21st July, 1964, the appellant made an
application to this court under article 226 of the Constitution, praying for a
writ of certiorari for quashing of the order dated 11th April, 1963, and also
the orders dated 6th September, 1963, 12th June, 1964, and 30th June, 1964, and
for a writ of mandamus directing the respondent to recall or rescind the said
orders and for a writ of prohibition restraining the respondents from taking
further steps in the impugned proceedings. A rule was issued on 21st July,
1964. I might mention here that a similar rule was issued in C.R. No. 203 of
1965 (Deputy Secretary, Ministry of Finance v. Sahu Jain Ltd.).
In both these applications the grounds are similar. The rule in Sahu Jain's
case
was heard by Banerjee J. and by his order dated 6th August, 1965, the rule was
made absolute and the impugned orders in that case were quashed and appropriate
writs were issued, making it clear, however, that nothing contained in the said
order would stand in the way of the Central Government making a fresh
investigation according to law. In both these rules, a common point of law was
raised, namely, as to whether, the Central Government, in making an order, was
bound to satisfy the court on the point as to whether, prima facie, grounds
existed for taking action against the companies concerned, in terms of
sub-clauses (i) and (ii) of clause (b) of section 237. In Sahu Jain's case,
the stand taken by the respondent was that the "opinion" of the
Central Government, based on circumstances mentioned in sub-clauses (i) and
(ii) of clause (b), were subjective and it was not bound to disclose, either to
the party concerned or the court, even the prima facie grounds upon which the
opinion was based. In Sahu Jain's case3 a complete blanket was drawn and,
although affidavits were filed, no grounds were disclosed to the court. By his
judgment and order dated 6th August, 1965, the rule in that case was made
absolute and the impugned orders were quashed, mainly on the ground that the
respondents were bound to satisfy the court that there existed prima facie
grounds for making an order under sub-clauses (i) and (ii) of clause (b) of
section 237, and, as this was not done, the orders were defective and without
jurisdiction. In the instant case, the very same attitude has been taken,
namely, that the "opinion" of the Central Government was subjective
and needed no disclosure either to the party or to the court. By an elaborate
judgment the learned judge negatived this contention, but held that in the
affidavit-in-opposition filed by Mr. D.S. Dang, Deputy Secretary to the
Government of India, affirmed on 29th August, 1964, materials were disclosed,
making out a prima facie case that circumstances existed in this case
satisfying the provisions of sub-clauses (i) and (ii) of clause (b) of section
237. This information is stated to be contained in paragraph 4 of the said
affidavit-in-opposition of Mr. Dang, which runs as follows :
"Further
for the greater part of the period under investigation, Messrs. N.C. Jain &
Co., a firm of chartered accountants, were the statutory auditors of the
petitioner. In the same period, members of such firm were also acting as
employees in some of the other concerns belonging to or controlled by Shanti
Prasad Jain and/or members of his family who also control and manage the
petitioner. In the premises, it is contended that the statutory auditors of the
petitioner were not at material times independent and at no material time there
has been a just audit of the petitioner's affairs'."
Banerjee
J. was of the opinion that this statement was sufficient to make the impugned
orders valid. The learned judge said as follows :
"It
appears from the annual report of the petitioner-company for the years 1955 to
1962-63 (all annexed to the petition) that Sahu Jain Ltd. is and has been the managing
agent of the petitioner-company. It is not disputed that Shanti Prasad Jain is
the chairman of the board of directors of Sahu Jain Ltd. The Central Government
appears to entertain the opinion that there are circumstances suggesting that
members of the firm of N.C. Jain & Co., statutory auditors to the
petitioner-company, are employed in other concerns belonging to or controlled
by Shanti Prasad Jain. Now, the value of an audit report depends upon the
independence and integrity of the auditors. If it appears that auditors are
under some sort of obligation to the company, the accounts of which they audit,
there may arise a doubt that the auditors might have discharged their functions
much too indulgently. If such a doubt arises, it cannot be ignored as a doubt
which no reasonable man should entertain. In the affidavit-in-reply the
petitioner no doubt denies that any member or members of the firm of auditors
were employed as alleged. I am not in a position to decide which version is
correct. Be that as it may, paragraph 4 of the affidavit-in-opposition makes
one definite allegation against the petitioner-company and the nature of the
allegation is not such as does not make a reasonable man inquisitive. The
petitioner-company controls very large capital contributed by the public. Its
liabilities by way of loan and otherwise are also considerable. If it does not
do its business honestly and properly, the repercussions on the economics of
the country may be pretty severe. If in the opinion of the Central Government
there are circumstances suggesting that the petitioner-company has been
employing an obliging firm of auditors which may cover up its malpractices, it
cannot be said that the Government did not act reasonably in taking action
under section 237(b) or must have proceeded on a fundamental misconception of
the law and the matter in regard to which the opinion was to be formed."
There
were other grounds argued in support of the rule, but mainly on the ground
stated above, the application failed and the rule was discharged on 4th August,
1965, although no order of to costs was made. It is against this order that
this appeal is directed. In both the cases, a number of authorities were cited,
but the learned judge did not have the opportunity of considering two Supreme
Court decisions which have since come into existence and which are decisive on
the points involved in the two cases, namely, Barium Chemicals Lid. v. Company
Law Board
and an unreported decision, Rohtas Industries Ltd. v. S. D. Agarwall (Civil
Appeals Nos. 2274 to 2276 of 1966, judgment dated 16th December, 1968).
In fact, in Sahu Jain's case ,
an appeal was preferred against the order of Banerjee]. dated 6th August,
1965, and, following the
decision in Barium Chemicals Ltd.
and the other authorities mentioned in the judgment of Mitra J. dated 18th
February, 1969, the decision of Banerjee J. was upheld and the appeal has been
dismissed with costs. In this appeal, we have received further assistance from
the recent judgment of the Supreme Court in Rohlas Industries Ltd. I will now proceed to summarise the findings
in these two cases and apply them to the facts of the instant case, to see
whether the order of Banerjee J. in the instant case dated 4th August, 1965,
can be supported or should be set aside. In the case of Barium Chemicals Lid.
v. Company Law Hoard,
the facts were briefly as follows:
In
1959/60 the appellant No. 2, Balasubramaniam, obtained from the Central
Government two licences for the manufacture of 2,500 and 1,900 tonnes of barium
chemicals per year in the name of Transworld Traders of which he was the
proprietor. He then started negotiations with Kali Chemic of Hanover, West
Germany, to collaborate with him in setting up a plant. While he was so
negotiating, M/s. T.T. Krishnamachari and Company, who were the sole selling
agents of the said German company for some of their products, approached the
second appellant for the sole selling agency of barium products of the plant
proposed to be put up by the second appellant. The second appellant did not
agree. On December 5, 1960, M/s. T.T. Krishnamachari and Co. applied to the
Central Government for a licence for manufacture of barium chemicals. The
second appellant objected to it but in spite of his objections the licence was
granted. In the year 1961, the Barium Chemicals Ltd., the appellant No. 1, was
incorporated with an authorised capital of rupees one crore and an issued
capital of rupees fifty lakhs. Its primary object was to carry on the business
of manufacturing all types of barium compounds. Balasubramaniam, the appellant
No. 2, was appointed the managing director of the company from December 5,
1961. The erection of the plant was undertaken by M/s. L.A. Mitchell Ltd.,
Manchester, in pursuance of a collaboration agreement approved by the Central
Government. In November, 1961, the Central Government granted a licence to the
said company for import of machinery. On or about this time, Mr. T.T.
Krishnamachari, the respondent No. 2, was appointed a Minister and rejoined the
cabinet later on becoming the Minister of Finance and Economic Co-ordination
and thereafter the Finance Minister of India. On August 30, 1962, the licence
granted to M/s. T.T.K. Ltd. was revoked. It is stated that the appellant No. 2
was instrumental in having this done, by speaking to Prime Minister Nehru. On
the other hand, it was stated that M/s. T.T.K. Ltd. had themselves decided to
surrender it. Meanwhile, the appellant No. 1 was not faring well. It was not able
to start work in full capacity and it was found on a survey report made by M/s.
Humphreys and Glasgow (Overseas) Ltd., Bombay, that the planning and design of
the plant erected by the collaborators was defective. The appellant No. 1 gave
notice to M/s. Mitchell Ltd. on April 2, 1965, that if the plant was not
completely installed by June 1, 1965, the company would terminate the
arrangements and seek damages. As a result of it, the Chairman of L.A. Mitchell
Ltd., Lord Poole, visited India and it was agreed that the necessary repairs
would be carried out by the collaborators at an expenditure of £2,50,000 in
addition to the amount already invested by it, and that production would
commence from June, 1965. In the meantime, M/s. Kali Chemie of Hanover started
negotiations for a collaboration agreement and the proposal was that the
appellant No. 1 should be reorganised and its share capital distributed between
Kali Chemie and M/s. T.T.K. Chemicals Ltd. It was also proposed that Kali
Chemie should take over the responsibility of production; the appellant No. 1
would be responsible for the management and M/s. T.T.K. Chemicals Ltd. should
take over the sales promotion. These negotiations, however, came to nothing
owing to the agreement with the original collaborators. On May 19, 1965, the
Secretary of the Company Law Board, under the direction of the Chairman
thereof, issued an order on behalf of the Company Law Board under section
237(b) of the said Act. The relevant part of the order ran as follows:
"
'In the opinion of the Company Law Board there are circumstances suggesting
that the business of M/s. Barium Chemicals Ltd..................is being
conducted with the intent to defraud its creditors, members and other persons ;
and further that the persons concerned in the management of the affairs of the
company have in connection therewith been guilty of fraud, misfeasance and other
misconduct towards the company and its members.
Therefore,
in exercise of the powers vested by clause (b) of section 237 of the Companies
Act, 1956 (1 of 1956), read with the Government of India, Department of
Revenue, Notification No. GSR 178, dated the 1st February, 1964, the Company
Law Board hereby appoint.............as inspectors to investigate the affairs
of the company since its incorporation in 1961...............' "
Pursuant
to the notice, search warrants were obtained and searches were carried out and
documents were seized. The second appellant submitted a representation to the
Board that the company was the first of its kind in India, that it could not go
into production because of defective planning by the collaborators and that the
impugned order had been made on account of trade rivalry between the company
and M/s. T.T. K. and Company, in which the Minister, Mr. T.T. Krishnamachari,
was interested. It was stated that the order was mala fide and it was made on
grounds extraneous to the provisions of section 237(b) of the said Act and at
the instance of the second respondent, Mr. Krishnamachari. As the Board was
determined to proceed with the implementation of the order, an application was
made before the Punjab High Court under article 226 for having the impugned
order quashed and for certain other reliefs. This application failed and
thereupon the appellants appealed to the Supreme Court. On behalf of the
appellants four contentions were raised:
1. That the impugned order dated May
19, 1965, was mala fide and was the result of the personal hostility of the
Minister.
2. The circumstances said to have been found were
extraneous to section 237(b) and could not constitute a basis for the impugned
order and the order was, therefore, ultra vires the section.
3. That
the impugned order was in any case bad as it was passed by the Chairman alone.
4. That the impugned order was bad because section
237 itself was bad as offending against articles 14 and 19(1)(g).
In
the case, there was a majority judgment delivered by Shelat J. allowing the
appeal and setting aside the impugned order, which was agreed with by
Hidayatullah J. (as he then was) and Bachawat J. According to the minority
judgment delivered by Mudholkar J. for himself and Sarkar C.J., it was held
that the exercise of the power did not violate any fundamental rights, that the
opinion to be formed under section 237(b) was subjective, but that, if the
grounds were; disclosed by the Board, the court could examine them for
considering whether they were relevant. That, on the facts of the case, they
appeared to be relevant. It was not shown that it was made mala tide and the
appeal should be dismissed. All the three learned judges constituting the
majority gave their reasons and I shall now refer to the same. All the learned
judges agreed that the impugned provisions were not ultra wires articles 14 and
19(1)(g) of the Constitution and also upon the fact that the charge of mala
fides had not been established. In the present case we need not deal with these
points.
In
the present case we are concerned only with the question as to whether the
provisions of section 237(b)(i) and (ii) are entirely subjective and cannot be
gone into by the court or if the order was objected to on the ground of mala
fides or relevance, the court has jurisdiction to go into the question and to
what extent. If it has jurisdiction to go into the matter, can it be said in
the instant case that the respondents have given a satisfactory answer as to
the objections raised, so as to make out a prima facie case. The observation of
Shelat J., so far as they are relevant on these points, may be summarised as
follows:
(1) The object of section 237 is to
safeguard the interests of those dealing with a company by providing for an
investigation where the management is so conducted as to jeopardize those
interests or where a company is floated for a fraudulent or an unlawful object.
(2) here is no doubt that the
formation of the opinion by the Central Government is a purely subjective
process. There can also be no doubt that, since the legislature has provided
for the opinion of the Government and not of the court: such an opinion is not
subject to a challenge on the ground of propriety, reasonableness or
sufficiency.
(3) But the authority is required to arrive
at such an opinion from circumstances suggesting the existence of circumstances
set out in sub- clauses (i) or (ii) or (iii). The expression
"circumstances suggesting" means that the circumstances need not be
such as would conclusively establish an intent to defraud or a fraudulent or an
illegal purpose. The proof of such an intent or purpose is still to be adduced
through an investigation. But the expression "circumstances
suggesting" cannot support the construction that even the existence of
circumstances is matter of subjective opinion. The law requires that there must
exist circumstances from which the authority forms an opinion that they are
suggestive of the crucial matters set out in the three sub-clauses. The
legislature could not have left to the subjective process both the formation of
opinion and also the existence of circumstances on which it is to be founded.
(4) There must exist circumstances which in
the opinion of the authority suggests what has been set out in sub-clause (i),
(ii) or (iii). If it is shown that the circumstances do not exist or that they
are such that it is impossible for any one to form an opinion therefrom
suggestive of the aforesaid opinion, the opinion is challengeable on the ground
of non-application of mind or perversity or on the ground that it was formed on
collateral grounds and was beyond the scope of the statute.
(5) The words, "reason to believe"
or "in the opinion of", do not always lead to the construction that
these processes do not lend themselves even to a limited scrutiny by the court.
(6) Of course, if there is any question of
mala fides, dishonesty or corrupt purpose, it can be challenged in court and
set aside, but even if it is based on good faith, the authority has to act in
accordance with and within the limits of the legislative powers and its order
can be challenged if it is beyond those limits or if it is based on grounds
extraneous to the legislation or if there are no grounds at all for passing it
or if the grounds are such that no one can reasonably arrive at the opinion or
satisfaction requisite under the legislation. In any one of these
circumstances, it can well be said that the authority did not honestly form its
opinion or that, in forming it, it did not apply its mind.
In
the judgment of Shelat J. it was pointed out that the chairman of the board had
filed an affidavit-in-opposition in which it was stated that the circumstances
upon which the board arrived at the opinion resulting in the impugned order
were as follows:
"(i) there had been delay, bungling and faulty
planning of the project, resulting in double expenditure for which the
collaborators had put the responsibility upon the managing director, petitioner
No. 2:
(ii) since its floatation the company had been
continuously showing losses and nearly 1/3rd of its share capital had been
wiped off;
(iii) that the shares of the company, which to
start with were at premium, were being quoted on the stock exchange at half
their face value; and
(iv) some eminent persons who had initially
accepted seats on the board of directors of the company had subsequently
severed their connections with it due to differences with petitioner No. 2 on
account of the manner in which the affairs of the company were being
conducted."
It
was held that the grounds disclosed in the affidavit of the Chairman did not
establish any intent to defraud or unlawful purpose either in the formation or
conduct of the company or misfeasance or misconduct towards the company or its
members. Delay, bungling or faulty planning could not constitute fraud,
misfeasance or misconduct.
The
relevant findings of Hidayatullah J. (as he then was) may be summarised as
follows:
(1) The power contained in section
237(b) of the said Act is discretionary and its exercise depends upon the
honest formation of an opinion that an investigation is necessary. The words
"in the opinion of the Central Government" indicate that the opinion
must be formed by the Central Government and it is implicit that the opinion
must be an honest opinion.
(2) The next requirement is that "there
are circumstances suggesting, etc." These words indicate that before the
Central Government forms its opinion it must have before it circumstances
suggesting certain inferences. These inferences are as follows :
"(a) that the business is being conducted with intent to defraud—
(i) creditors
of the company, or
(ii) memberr,
or
(iii) any
other person ;
(b) that
the business is being conducted—
(i) for
a fraudulent purpose, or
(ii) for
an unlawful purpose ;
(c) that
persons who formed the company or manage its affairs have been guilty of—
(i) fraud,
or
(ii) misfeasance
or other misconduct towards the company or towards any of the members ;
(d) that information has been withheld from the
members about its affairs which might reasonably be expected, including information
relating to the calculation of commission payable to—
(i) managing
or other director,
(ii) managing
agent,
(iii) secretaries
and treasurers, and
(iv) the
managers."
(3) The above-mentioned grounds limit
the jurisdiction of the Central Government, outside which the power cannot be
exercised. An action not based on circumstances suggesting inferences of the
enumerated kind will not be valid. In other words, the enumeration of the
inferences, which may be drawn from the circumstances, postulates the absence
of a general discretion to go on fishing expeditions to find evidence.
(4) The formation of the opinion is
subjective, but the existence of circumstances relevant to the inference as the
sine qua non for action must be demonstrable. It is not reasonable to say that
the clause permits the Government to say that it has formed the opinion on
circumstances which it thinks exist.
(5) Since the existence of
"circumstances" is a condition fundamental to the making of an
opinion, the existence of the circumstances, if questioned in court, has to be
proved at least prima facie. It is not sufficient to say that the circumstances
exist and give no clue to what they are, because the circumstances must be such
as to lead to conclusion of certain definiteness.
(6) When it is challenged that the opinion
has been formed mala fide or upon extraneous or irrelevant matters, the
respondent must disclose before the court the circumstances which will indicate
that his action was within the four corners of his own powers.
On
the facts, the majority view was that this onus has not been discharged and
that the order was made on extraneous circumstances and the charge of mala
fides was not substantiated. The affidavit of the chairman showed that he
relied on circumstances which showed "delay, bungling and faulty
planning" resulting in "double expenditure", for which the
collaborators had put the responsibility on the second appellant. There was
admitted loss in the running of the undertaking, for which the blame was put on
faulty planning and design by the collaborators. None of these circumstances
showed intent to defraud. That some directors had resigned did not also
establish fraud or misconduct. There might be other reasons for their
resignation. The affidavit of Mr. Dang merely repeated the allegations made by
the chairman and stated that a "deeper probe" was necessary. It did
not prove the existence of circumstances under which the power could be
exercised.
On
the relevant point, Bachawat J. agreed with the views stated above. He
expressed different views on the question of delegation, but we are not
concerned with it in this case.
The
next case to be considered is the unreported decision of Rohlas Industries Lid.
v. S.D. Agarwal.
The facts in that case were briefly as follows : The appellant in the appeals
was a company incorporated under the Indian Companies Act, 1913, some time in
1933 having its registered office at Dalmianagar in Bihar. The authorised
capital was 15 crores and the paid-up capital about 6 crores. On or about the
11th April, 1963, a notice was issued at the instance of the Board upon the
said company under sub-clauses (i) and (ii) of clause (b) of section 237 of the
said Act. Inspectors were appointed and, like the previous case, time was
repeatedly extended. The company applied before the Patna High Court
challenging the said order and a rule was issued under article 226. In that
case also the Chairman, Company Law Board, filed an affidavit-in-opposition.
The circumstances disclosed therein in issuing the said order were as follows:
"(a) Shri S.P. Jain together with his friends, relations and associates
is principally in charge of the management of the petitioner-company. Over a
long period, several complaints had been received by the department, as to the
misconduct of the said Shri S.P. Jain towards companies under his Control and
management. Some of these were referred to and enquired into by a commission of
inquiry headed by Mr. Justice Vivian Bose of the Supreme Court of India, which
in its report dated 15th June, 1962, made adverse findings and observations
against Shri S.P. Jain. Shri S.P. Jain is being prosecuted in the court of
District Magistrate, Delhi, under sections 120B read with sections 409, 465,
467 and 477 of the Indian Penal Code in regard to his misconduct in the
management of what are known as the Dalmia Jain group of companies, and most of
the material upon the basis of which this prosecution was launched was
available to the Central Government on 11th April, 1963. Shri Jain is also
being prosecuted in Calcutta for misconduct in the management of Messrs. New Central
Jute Mills Co. Ltd., a company under the same management as the petitioner, on
the basis of an F.I.K., lodged by the department with the special judge, police
establishment, just before the 11th April, 1963. Shri Jain is also being
proceeded against before the Companies Tribunal under sections 388B and 398 for
misconduct in managing the affairs of M/s. Bennett Coleman & Co. Ltd., and
details as to Shri Jain's misconduct were with the Central Government as on
11th April, 1963.
(b) Complaints
had also been received by the department before 11th April, 1963, specifically
as to the misconduct on the part of the management of the petitioner-company in
the conduct of its affairs."
The
High Court dismissed the writ petition, holding that the opinion formed by the
Central Government was not open to judicial review. From that order there was
an appeal to the Supreme Court. In the Supreme Court, a further affidavit was
filed and the only additional material that was placed before the court were
three complaints received by the Government which were marked as annexures
"A", "B" and "C". At the hearing it was conceded
that the allegations made in annexuie "A" were too vague and could
not have been the basis for making the impugned order. One concrete allegation
made therein related to an event prior to the date from which an enquiry had
been ordered. In fact, it had occurred in 1939, whereas the enquiry was ordered
for a period subsequent to April 1, 1950. The allegations in annexure
"B" were also found to be vague and not relied on. The following
complaint in annexure "C" was relied on :
"The
investments of the company in Albion Plywoods Ltd. and their variations by the
company's managing agents appear to have been done to benefit the managing
agents, their friends and brokers, at the expense of the shareholders. It
appears that the preference shares in this company were sold at the market rate
of Rs. 100 each when these could be converted into ordinary shares of Rs. 10
each which were then quoting at Rs. 15 in the stock market. This and various
other acts of deliberate commissions and omissions require a thorough
investigation so that shareholders in general may have a feeling of security in
the company."
With
regard to the above-mentioned allegations, it appeared that there was no
material before the Board when it issued the order as to who were the partners
of Bagla and Co. to whom the 3,000 preference shares were sold, and
consequently whether the transaction could be said to have been made with a
view to profit the directors of the appellant-company or their relations. Hegde
J. held as follows:
"From
the facts placed before us, it is clear that the Government had not bestowed
sufficient attention to the material before it before passing the impugned
order. It seems to have been oppressed by the opinion that it had formed about
Shri S.P. Jain. From the arguments advanced by the Attorney-General it is clear
that, but for the association of Mr. S.P. Jain with the appellant-company, the
investigation in question, in all probability, would not have been ordered.
Hence, it is clear that in making the impugned order irrelevant considerations
have played an important part."
The
learned judge then proceeded to uphold the vires of the section agreeing with
the decision in Barium Chemicals case and then proceeded to state as follows :
"The
next question is whether any reasonable authority, much less an expert body
like the Central Government, could have reasonably made the impugned order on
the basis of the material before it. Admittedly, the only relevant material on
the basis of which the impugned order can be said to have been made is the
transaction of sale of preference shares of Albion Plywoods Ltd. At the time
when the Government made the impugned order, it did not know the market
quotation for the ordinary share of that company as on the date of the sale of
those shares or immediately before that date. They did not care to mid out that
information. Hence there was no material before them showing that they were
sold for inadequate consideration. If, as is now proved, the market price of
those shares on or about May 6, 1960, was only Rs. 11 per share then the
transaction in question could not have afforded any basis for forming the
opinion required by section 237(b). If the market price of an ordinary share of
that company on or about May 6, 1960, was only Rs. 11, it was quite reasonable
for the directors to conclude that the price of the ordinary shares is likely
to go down in view of the company's proposal to put on the market another
50,000 shares as a result of the conversion of the preference shares into
ordinary shares. We do not think that any reasonable person, much less any
expert body like the Government, on the material before it, could have jumped
to the conclusion that there was any fraud involved in the sale of the shares
in question. If the Government had any suspicion about that transaction it
should have probed into the matter further before directing any investigation.
We are convinced that the precipitate action taken by the Government was not
called for nor could be justified on the basis of the material before it. The
opinion formed by the Government was a wholly irrational opinion. The fact that
one of the leading directors of the appellant-company was a suspect in the eye
of the Government because of his antecedents, assuming without deciding, that
the allegations against him are true, was not a relevant circumstance. That
circumstance should not have been allowed to cloud the opinion of the
Government. The Government is charged with the responsibility to form a bona
fide opinion on the basis of relevant material. The opinion formed in this case
cannot be held to have been formed in accordance with law."
In
the result the appeals were allowed and the orders were set aside. Bachawat J.
described it as a "borderline case". He held that the court had no
power to review the facts us an appellate body, nor could it substitute its
opinion for that of the Government. He, however, came to the conclusion that
there were no materials before the Government on which it could form the
opinion that there were circumstances suggesting fraud, etc., as mentioned in
the impugned order dated May 11, 1963. It can therefore be said that it had
formed the opinion without applying its mind to the materials before it and,
therefore, the opinion formed was in excess of its powers. The learned judge
agreed with the proposed order of Hegde J.
It
is clear, therefore, from the principles which have now been firmly established
in the two Supreme Court decisions mentioned above, that upon being challenged
the respondents must show to the court that prima facie reasons existed and
were considered before the order was made in conformity with the provisions of
sub-clauses (i) and (ii) of clause (b) of section 237 of the said Act. It is
obvious that these reasons must exist when the order was made. It has been
definitely laid down that an order could not be made to commence a fishing
expedition in order to find the reasons for making an order. Reasons, if found
afterwards cannot justify the order in retrospect, if they were not available
to the authority exercising its powers, in arriving at an opinion in conformity
with the provisions stated above.
I
have already stated above that there were two cases which were decided by
Banerjee J. In Sahn Jain's case
the respondent-authorities refused to disclose any reason to this court for
forming the opinion, although it was charged that the reasons were mala fide,
extraneous and irrelevant. That order was manifestly against the principles
laid down in the two cases mentioned above and has now been set aside. The only
distinction in this case is that the learned judge in the court below had found
that in paragraph 4 of the affidavit-in-opposition, certain statements were
made which have been set out above. According to the learned judge, there were
sufficient reasons to uphold the legality of the order made. We have some
doubts as to whether the allegations made amount to fraud, misfeasance, or
misconduct as is required under sub-clauses (i) and (ii) of clause (b) of
section 237. Be that as it may, an objection has been taken by the
Advocate-General, which appears to be fatal to the respondents. He argues with
great force that if the law is that the respondent-authorities must show to the
court that prima facie reasons existed for arriving at the opinion upon which
the impugned order is based, it must be averred and shown that these
circumstances existed at the time when the order was made and that the
authority making the order was aware of them and based its opinion on these circumstances.
Briefly put, the allegation in paragraph 4 is that there has not been adequate
and proper audit of accounts of the appellant, as the auditor's reports were
based on information furnished to them which were defective and the audit was
not made by an independent auditor. It is nowhere stated that this fact came to
be known to the authorities at or before the time when the impugned order was
made, and that the impugned order was made upon the basis of these facts which
came to be known prior to the making of the order. This, of course, would be
fatal because the respondent authorities could not possibly justify the making
of the impugned orders until such an averment was made and substantiated. The
learned judge, in relying on the statements made in paragraph 4 of the
affidavit of Mr. D.S. Dang, affirmed on 29th August, 1964, completely
overlooked this aspect of the matter. The learned counsel on behalf of the
respondents asked for an opportunity to file further affidavits and, in spite
of opposition by the counsel for the appellants,
we,
for the ends of justice, permitted additional affidavits to be filed upon this
point and adjourned the hearing of the case. In fact, the matter was adjourned
several times in order to enable such affidavit to be filed. Now, however,
learned counsel for the respondent is constrained to admit before the court
that his clients are not in a position to file any such affidavit in court. In
our opinion, there can be now no doubt that the respondent-authorities have failed
to discharge the onus of proving even a prima facie case to support the
impugned order. The learned judge in the court below has relied on only one
paragraph of the affidavit-in-opposition and this does not contain the
necessary averments, and is useless for the purpose of the respondents.
The
result is that, applying the tests set out in the two Supreme Court decisions
mentioned above, this appeal should succeed and the judgment and order of the
court below is set aside and the rule is made absolute and the impugned orders
are set aside and/or quashed by appropriate writs and the respondents are
restrained by a writ in the nature of mandamus from giving effect to the same.
This will not, however, prevent them from issuing any further orders in
accordance with law. The appellants are entitled to the costs of the appeal.
Certified for two counsel.
The
operation of this order will remain stayed for six weeks from this date.
B.C.
Mitra J.—I agree.
companies
act
[2005]
61 SCL 33 (bom.)
High
Court of
Panther Fincap & Management
Services Ltd.
v.
Central
Government, Union of
S.U.
Kamdar, J.
Appeal
Nos. 1 to 14 of 2005
In
Company Petition Nos. 34, 36, 38, 39, 40, 44, 49, 52, 56, 60, 64, 65, 67 and 68
of 2003
March 31,
2005
Section 237 of the Companies Act, 1956 -
Investigation of company’s affairs in other cases - Whether if a company while
conducting business has acted in a fraudulent or unlawful manner, then such
company will fall within net of section 237(b)(i) irrespective of fact whether
it is a running concern or close down subsequently for any reason whatsoever -
Held, yes - Whether merely because material, on basis of which investigation is
being undertaken, is identical to material which is subject-matter of
investigation by other authority, it cannot be stated that both authorities
cannot simultaneously investigate pursuant to power conferred on them under
their respective statutes - Held, yes - On sudden collapse of stock market,
Joint Parliamentary Committee directed SEBI to make investigation against
appellant-companies - SEBI found that due to concerted transactions between
appellants and ‘K’, who was moving spirit behind companies, there was a
ultimate collapse of stock market - Consequent to said collapse, Global Trust
Bank (GTB) and UTI had been subjected to serious financial difficulties and
were ultimately bailed out by Government - Central Government, relying on
report of SEBI and report of inspectors carrying out inspections under section
209A, sought permission of CLB for investigation into affairs of
appellant-companies under section 237 - Whether in facts and circumstances of
case, Central Government had not only sufficient material but also had a strong
prima facie case for ordering investigation under section 237(b)(i) - Held, yes
Facts
There was a sudden crash in stock-exchange
which was attributed and alleged to one ‘K’. Allegedly, the appellant-companies
were controlled and owned directly or indirectly by the said ‘K’. With the
crash of the stock market, there had simultaneously been a crash of Madhavpura
Co-operative Bank (MCB), Global Trust Bank (GTB) and UTI and thousands crore of
rupees had been siphoned off from the system. With a hue and cry from the
public, a Joint Parliamentary Committee (JPC) was constituted to investigate
the said stock exchange crash. Apart from that, SEBI was also directed to carry
out investigations and to take appropriate action within provision of the
Securities & Exchange Board of India Act, 1992. In the meantime, the
respondent, in exercise of power under section 209A, carried out inspection of
books of account of the appellants. In these circumstances and based on the
material gathered from three basic sources, namely, the report of the JPC, the
interim report of the SEBI investigation and, thirdly the reports pursuant to
the investigation under section 209A, the respondent in a company petition
sought permission of the CLB to investigate affairs of the company in exercise
of power under section 237(b)(i). The appellants objected the application on
ground that the purpose and object of investigation having already been
achieved by carrying out investigation by authorities such as CBI, SEBI and
Department of Company Affairs under section 209A, further investigation under
section 237 was not necessary and it would affect the appellants prejudicially.
Rejecting the objection of the appellants, the CLB allowed the company petition
and permitted the Department of Company Affairs to carry out investigation under
section 237(b)(i) in the affairs of each of the appellant-companies.
On appeal, it was also contended by the
appellants that once the business of the company had ceased to be in operation
for any reason whatsoever voluntarily or otherwise, then the respondents had no
jurisdiction to initiate and/or exercise jurisdiction vested in them by virtue
of the proceedings under section 237(b)(i); and that the respondents had not
made out prima facie case for investigation under section 237(b)(i).
Held
The provisions of investigation under section
237(b)(i) are being introduced by the Parliament with the intention to prevent
persons who enter the business in the guise of corporate entities to carry on
fraudulent business with a view to harm the public interest. [
Essentially, the provisions of section 237 are
meant to see that the defrauding of the public at large is not being carried on
under the guise of the corporate affairs. Plain and simple reading of the said
section would indicate that the words used ‘is being conducted’ are used in the
context of the fraudulent or unlawful business conducted by the company in
course of running of their business. It does not mean that once the business is
conducted in unlawful and fraudulent manner and if it is closed down, the power
of the Central Government of ordering investigation under section 237(b)(i)
stood revoked or ceased to have effect. The word ‘is being conducted’ has to be
read along with the words ‘fraudulent or unlawful purpose’ and if it is so
read, it is clear that the word ‘is being conducted’ is used with the intention
to indicate that when the business of the company was conducted, it was
conducted for unlawful purpose. Any person can conduct the business for
fraudulent or unlawful purpose and before it is detected would close down the
business of the company and in fact escape the consequences as contemplated
under section 237(b)(i). It is not uncommon that there are companies who are
fly by night operators in a booming economy of
The true and correct interpretation of section
237(b)(i) would only mean that if the company while conducting the business has
acted in a fraudulent or unlawful purpose, then such companies will fall within
the net of section 237(b)(i) irrespective of the fact that whether it is a
running concern or close down subsequently for any reason whatsoever because
under the provisions of section 250A it is specifically provided that
investigation may be initiated under section 237(b)(i) notwithstanding that the
application is made under sections 397 and 398 or it has passed a special
resolution for voluntary winding up of such a company.
In any event on a true and proper construction
of the section, it cannot be held that the business of company should be
conducted in praesentis for the purpose of ordering investigation by the
Central Government under section 237(b)(i). [
Even otherwise on facts, the respondent had
been able to establish that the business of the company was not totally stopped
though undoubtedly it had been seriously affected by virtue of the orders
passed by the SEBI and stock exchange of suspension of the brokerage license,
suspension or freezer of bank account and collapse of MCB and GTB. [
That could not be treated as business of the
company was not carried on and/or the same was closed down for reasons beyond
the control of the appellant, i.e., by virtue of the passing of the orders of
various authorities such as SEBI, CBI and other Central Government authorities.
The business of the company was conducted even today even though at a very low
level. It could not be said that the business of the company had ceased to be
in operation. The word ‘is being conducted’ under section 237(b)(i) even if it
is so interpreted, as contended by the appellant, it should be and must mean
that the business of the company has come to a total stop and no activities of
the company are carried on. Such situation arises only when the company is
wound up either by voluntary winding up or compulsory winding up as provided
under the Act. In the aforesaid circumstances even on the facts of the instant
case, the business of the company was being carried on and, therefore, the
provisions of section 237(b)(i) squarely applied to the case which would mean
that the order passed by the CLB was legal and valid and on this ground did not
require any interference by the Court. [
On the facts of the instant case, it was not
in dispute that there had been a stock market collapse in the year 2001 and the
appellants had indulged in large number of share dealings and trading. It was
also not in dispute that the MCB and GTB had collapsed in view of the stock
market scam. The respondents had produced before the CLB in support of the
application for investigation under section 237(b)(i) a report of the JPC
investigating said scam. The respondents had also produced the report and/or
order passed by the SEBI against the appellants and ‘K’ who was moving spirit
behind the appellant-companies. The Central Government had also, in support of
the application, relied upon the reports which were filed by the inspectors in
the course of carrying out investigation under section 209A. The Central
Government had also relied upon large number of breaches of the provisions of
the Act by the various companies in support of investigation. Therefore, not
only there was a material in the form of aforesaid reports, documents and
orders but a more than prima facie case had been made out for investigation of
the appellant companies. The JPC had in fact directed the investigation against
these entities by the SEBI or the Central Government. However, the appellant
canvassed that there was no material which could be used by the respondent in
respect of the investigation because each of the authorities was entitled to
conduct its own investigation on the basis of aforesaid report and, therefore,
the same material could not be utilized for the purpose of ordering
investigation by the Central Government under section 237(b)(i). The contention
of the appellant could not be accepted for the simple reason that it is
possible that the material can be common or identical in course of various
investigations embarked upon by the various authorities. It did not mean that
the respondents were not entitled to use the material which had been unearthed
or found in the course of the investigation by any other authorities. The
material in the instant case was glaring. There was a serious collapse of the
stock exchange in 2001. The SEBI, on investigation, had found that all the
entitles had entered into typical type of transactions in concert with each
other so as to ultimately result in collapse of the stock market. Consequently,
large amount of public fund had been eroded. Consequent upon the collapse of
the GTB, even UTI had been subjected to serious financial difficulties and was
ultimately required to be bailed out by the Government. These were very serious
circumstances and there was a plethora of material to indicate that the
companies, which were subject to investigation under the provision of section
237(b)(i), had played some role, the consequence of which had resulted as
mentioned above. Therefore, the Central Government had not only sufficient
material but also had a strong prima facie case for ordering investigation. It
has been well settled by the various decisions of the Apex Court that the Court
ought not to interfere at this stage of investigation by the authorities. The
investigation is not a trial of an offence. It is merely a fact finding
venture. It is no doubt true that in the context of the companies it is a
serious issue becuase it interferes with their rights to carry out free trading
but it has been held that every right is coupled with reasonable restrictions
and if the company has prima facie carried out fradulent activities then
obviously it cannot complain about investigations carried out by the Central
Government in exercise of statutory powers conferred under section 237(b)(i).
[Para 29]
The jurisdiction and the power of the various
investigating authorities derived from the jurisdiction vested in them by the
various legislations or statutes; the authority which is doing the inquiry
and/or conducting the investigation is required to carry out investigation
keeping in mind the legal provisions and legal limitations which are stipulated
under the respective statute. Undoubtedly, it can be that there may be an
overlapping investigation but such an eventuality cannot prevent any
investigating authority from carrying out investigation in respect of their jurisdiction
conferred on them under the statute. The investigation in respect of the
corporate fraud can be initiated and considered by the Central Government under
section 237(b)(i). There is no provision under the SEBI Act in which any
corporate fraud can be investigated by the SEBI. Undoubtedly, it can be
investigated under normal criminal law by the CBI. Merely because the material,
on the basis of which investigation is being undertaken, is identical to the
material which is subject-matter of investigation by the other authority, it
cannot be stated that both the authorities cannot simultaneously investigate
pursuant to power conferred on them under their respective statutes. Every
authority is entitled to investigate even may be in respect of the same material
as well as from the angle and facet in which they have been asked to carry out
investigation. It was possible that the SEBI might be investigating the same
material on the ground of breach of the various provisions of the SEBI Act and
other security related legislations whereas the Central Government, Department
of Company Affairs could consider and/or investigate the fraud and/or breach of
various provisions of law in the light and context of the provisions of the
Act, might be in respect of the same material. [Para 33]
The Central Government having constituted the
Serious Fraud Investigation Office and if it desired to carry out investigation
in respect of the affairs of the appellant-companies without any mala fide
intention, then it was not possible to stall the investigation merely on the
basis of contentions and arguments advanced by the appellant that all the
authorities could not be permitted to carry out the investigation
simultaneously in respect of the very same material. Therefore, every authority
is entitled to carry out investigation, may be, in respect of the same material
insofar as they do not exceed the jurisdiction conferred on them in their
respective statute. [Para 34]
The Court cannot and should not usurp the
jurisdiction vested in the Central Government to form an opinion and come to a
conclusion as to whether the investigation is necessary or not. Limited
jurisdiction or power conferred on the Court is to ascertain whether there is a
material in support of the opinion arrived at by the Central Government and/or
the said exercise is not a mala fide exercise of power. In the facts of the
instant case, it could not be said that the exercise of power under section 237
by the Central Government was mala fide. There was a plethora of material and
in view of that, the investigation ordered by the Central Government in
exercise of power conferred under section 237(b)(i) could not be interfered.
[Para 35]
In view of the above, there was no substance
in these appeals and same were, accordingly, dismissed.
Cases referred to
Barium Chemicals Ltd. v. CLB [1966] 36 Comp.
Cas. 639 (SC) (para 11), Rohtas Industries Ltd. v. S.D. Agarwal [1969] 1 SCC
325 (para 13), Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634
(Delhi) (para 14), New Central Jute Mills Co. Ltd. v. Dy. Secretary, Ministry
of Finance, Department of Revenue & Company Law [1970] 40 Comp. Cas. 102
(Cal.) (para 14), Mangin v. IRC [1971] All Eng. LR 179 (para 21), Budhan Singh
v. Babi Bux AIR 1970 SC 1880 (para 22), Nasiruddin v. State Transport Appellate
Tribunal AIR 1976 SC 331 (para 23), Molar Mal v. Kay Iron Works (P.) Ltd.
[2000] 4 SCC 285 (para 24), Bengal & Assam Investors Ltd. v. CIT AIR 1966
SC 1514 (para 27), London United Investments Plc., In re 1992 BCLC 285 (CA) (para
33) and DDA v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622 (para 35).
N.H. Seerval and Vinod Parekh for the Appellant. B.H. Desai and Sethna
for the Respondent.
Judgment
1. Economic
progress usher with it economic perversity such as the land scam, Petrol Pump
Scam, import export scam, Hawala scam, security scam, shares and stocks scam,
bank scam etc. With the passage of time the method of committing these scams
has been more involved and more complex and are woven into various webs. Thus
as a collary thereto investigations into such scams are also required to be
more scientific, more intrinsic and more detailed with the help of the experts.
Corporate frauds and corporate misconduct are also another facet of such scams.
Companies are being floated and are disappearing into thin air making the
common man poorer and poorer by thousands of crores of rupees. These 16 appeals
are challenging an order passed by the company law board under which it has
ordered an investigation into one of such alleged scams under section 237(b)(i)
of the Companies Act which is being known as Ketan Parekh - Stock scam of 2001.
2. Few facts
dealing with the complex question of law which have been raised by the
appellant in the present proceedings are briefly narrated as under :
3. In 2001
there was a sudden crash in the stock market i.e., the sudden increase in the
prices over the board securities in the period 1999-2000 and then sudden crash
of the stock market is attributed and alleged to one Mr. Ketan Parekh. It is
alleged that he by his conduct through his various entities and companies has
committed fraud which led to the said crash in the stock market. It is also
alleged that the 14 companies in the present appeals are entities which are
controlled and owned directly or indirectly by the said Ketan Parekh, who is
the alleged King-player in the stock exchange scam of 2001. There are also
allegations that with the crash of the stock market, there has simultaneously
been a crash of the Madhavpura Co-operative Bank, Global Trust Bank and UTI and
thousands of crores of rupees have been siphoned off from the system. With a
hue and cry from the public the Lok Sabha on 26-4-2001 constituted the
Parliamentary Committee as fact-finding committee to investigate the said 2001
Stock Exchange crash. The terms of reference of the said Joint Parliamentary
Committee have been enlarged on 3-8-2001 and inquiries pertaining to the crash
of UTI were also made part of the said Joint Parliamentary Committee. The Joint
Parliamentary Committee has given their report and has inter alia recommended
in paras 11 to 35 of the report that the investigations must be carried out in
respect of 6 corporate groups belonging to Ketan Parekh and that the Department
of Company Affairs has been informed that 6 out of 10 corporate groups have
transferred huge amount to entities and associates of Ketan Parekh and this
aspect requires investigation. Joint Parliamentary Committee has also
simultaneously directed SEBI to carry out investigations to take appropriate action
within the provisions of Security Exchange Board India Act, 1992 as amended
from time-to-time (hereinafter referred to as ‘the SEBI Act’).
4. On
25-6-2001 the respondents issued a letter to the appellants seeking inspection
of the books of account of the appellant in exercise of power conferred under
section 209A of the Companies Act. After carrying out certain initial
investigations on the reference of the company on 25-11-2001 a preliminary
finding report was filed by the respondent with the Central Government. On
19-11-2004 the respondents set out various details and inquiries with the
appellant company seeking various information. This inspection under section
209A of the Companies Act has been partly carried out and is still in progress.
5. On 2-5-2003
the Company Petition No. 39 of 2003 was filed by the respondent with the
Company Law Board seeking permission to investigate the affairs of the company
in exercise of power conferred under section 237(b)(i) of the Companies Act.
The application is inter alia based on the interim report of the various
irregularities of the SEBI as well as certain irregularities which came to the
light by virtue of inspection under section 209A of the Companies Act. The said
petition is also based on a report of the Joint Parliamentary Committee. Thus
in nutshell the application which has been initiated under section 237(b)(i) is
based on the material gathered from three basic sources namely, the report of
the Joint Parliamentary Committee, the interim report of the SEBI investigation
and thirdly the reports pursuant to the investigation under section 209A of the
Companies Act. The petition which is filed on 2-5-2003 by the respondent in
detail sets out the various findings on the aforesaid three reports and the
material gathered by the said authorities as required for the purpose of
carrying out investigation under section 237(b)(i). This petition dated
2-5-2003 was served on the company on 16-5-2003. It is the case of the
petitioner that on 20-7-2003 they applied to the Company Law Board for a
certified true copy of the SEBI report and other documents which are relied
upon by the respondent in the said company petition before the Company Law
Board. On 12-7-2003 the appellant herein sought a transfer of the proceedings
from the Principal Bench of the Company Law Board, New Delhi to the Western
Region Bench of the Company Law Board at Mumbai. Simultaneously they have also
applied for inspection of the various documents which are referred to and/or
relied upon by the respondent in the said company petition. On 24-11-2003 the
appellant company filed a reply inter alia opposing the petition which was
filed under section 37(b)(i) of the Companies Act. It was inter alia alleged
that the powers sought to be exercised by the Company Law Board are likely to
seriously affect the interest of the company. The various allegations made in
the company petition were denied. It was contended that the stock market crash
which took place some time in or about 2001 was not due to acts on the part of
Ketan Parekh but in fact he along with his entitles have suffered losses in the
range of about Rs. 3,000 crores to Rs. 4,000 crores. It was further contended
that if there was any evidence regarding misuse of funds of banks and financial
institutions then the appellant cannot be penalised for the same but it is in
fact the duty of the Reserve Bank of India to regulate and over see the
functions of the banks and financial institutions affecting the financial
matters and that the consequence of the failure on the part of the RBI cannot
be attributed to the appellant herein. Insofar as the allegation that there is
intention of the company to conduct its business with an intention to defraud
its creditors, members and other members or for a fraudulent or unlawful
purpose is concerned, the appellant has contended that the word ‘intention’
would mean that the someone was deceived by the respondents deliberately and in
preplanned events to their advantage and it assumes a guilty mind and there has
to be an unlawful gain by such an evil design on the part of the appellant
herein. It was contended that the crash of the stock market in 2001 was merely
a drastic melt down of the share prices due to a declining trend in global
share market which has also inflicted heavy financial losses to the appellant
companies. It is further contended that the drastic fall in the share prices
cannot be foreseen by the appellant and they themselves are the victims of melt
down and not the beneficiaries of the same. Thus the allegation of carrying on
business for defrauding the creditors and/or for fraudulent or unlawful purpose
were denied. It has been further contended that the purpose and object of
investigation has already been achieved by carrying out investigations by the
authorities such as SEBI, CBI and Department of Company Affairs under section
209A of the Companies Act and therefore a further investigation in the matter
by the said investigating authorities appointed by the Central Government under
section 237(b)(i) is neither necessary nor efficacious and it would only affect
the interest of the appellant company prejudicially. The respondents on the
other hand in their rejoinder have placed extensive reliance upon the
inspection report of the CBI and Joint Parliamentary Committee and also the
inspection carried out by the Department of Company Affairs under section
209(A). Even a certain extract of the JPC report has been annexed to the said
rejoinder.
6. After
hearing the parties the Company Law Board has passed an impugned order on
27-9-2004. By the impugned order the Company Law Board has inter alia held that
there is a ground made out for carrying out investigation under section
237(b)(i). It has been further held that there are serious allegations of fraud
and scams by these corporate entities and there is substantive material in
support of the said allegations to conduct support the investigation under
section 237(b)(i) of the Companies Act. Thus the Company Law Board allowed the
company petition and permitted the Department of Company Affairs to carry out
investigation under section 237(b)(i) in the affairs of each of the appellant
companies. This order dated 22-9-2004 which is a common order passed in respect
of all of the sixteen appeals before me is the subject-matter of challenge
before me. These are the appeals filed under section 10F on the ground that
certain substantive questions of law arise in the present case and require
determination of this Court.
7. Learned
counsel for the appellant has framed three substantial questions of law in
support of his argument which are briefly enumerated as under :
(i) Whether it is a condition precedent for exercise of power
under section 237(b)(i) of the Companies Act that the business of the company
should be in operation as on the date when the power is sought to be exercised
by the respondent or that once the business of the company has ceased to be in
operation for any reason whatsoever voluntarily or otherwise, then the
respondents have no jurisdiction to initiate and/or exercise jurisdiction
vested in them by virtue of the proceedings under section 237(b)(i) ?
(ii) Whether on the facts of the present case the respondents have
made out prima facie case for investigation or alternatively there is a material
available for exercising jurisdiction by the respondent under section 237(b)(i)
?
(iii) Whether in view of simultaneous investigations carried out by
SEBI, CBI and Department of Company Affairs under section 209A the respondent
ought not be permitted to launch a fresh investigation in exercise of power
under section 237(b)(i) of the Companies Act on same material and on same facts
?
8. Before I
deal with the aforesaid substantial questions of law as framed by the learned
counsel for the appellant I feel that it is necessary that the relevant
provisions of the Act which are germane to the aforesaid questions of law must
be set out. Some of the relevant provisions are reproduced as under :
“209A. Inspection of books of account, etc.,
of companies.—(1) The books of account and other books and papers of every
company shall be open to inspection during business hours—
(i) by the Registrar, or
(ii) by such officer of the Government as may
be authorised by the Central Government in this behalf;
(iii) by such officers of the Securities and
Exchange Board of India as may be authorised by it :
Provided that such inspection may be made
without giving any previous notice to the company or any officer thereof:
Provided further that the inspection by the
Securities and Exchange Board of India shall be made in respect of matters
covered under sections referred to in section 55A.
(2) It shall be the duty of every director, other officer or employee
of the company to produce to the person making inspection under sub-section
(1), all such books of account and other books and papers of the company in his
custody or control and to furnish him with any statement, information or
explanation relating to the affairs of the company as the said person may
require of him within such time and at such place as he may specify.
(3) It shall also be the duty of every director, other officer or
employee of the company to give to the person making inspection under this
section all assistance in connection with the inspection which the company may
be reasonably expected to give.
(4) The
person making the inspection under this section may, during the course of
inspection,-
(i) make or cause to be made copies of books
of account and other books and papers, or
(ii) place or cause to be placed any marks of identification thereon
in token of the inspection having been made,
(5) Notwithstanding anything contained in any other law for the time
being in force or any contract to the contrary, any person making an inspection
under this section shall have the same powers as are vested in a civil court
under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit, in
respect of the following matters, namely:—(i) the discovery and production of
books of account and other documents, at such place and such time as may be
specified by such person; (ii) summoning and enforcing the attendance of
persons and examining them on oath; (iii) inspection of any books, registers
and other documents of the company at any place.
(6) Where an inspection of the books of account and other books and
papers of the company has been made under this section, the person making the
inspection shall make a report to the Central Government or the Securities and
Exchange Board of India in respect of inspection made by its officers.
(7) Any officer authorised to make an inspection under this section
shall have all the powers that a Registrar has under this Act in relation to
the making of inquiries.
(8) If default is made in complying with the provisions of this
section, every officer of the company who is in default shall be punishable
with fine which shall not be less than fifty thousand rupees, and also with
imprisonment for a term not exceeding one year.
(9) Where a director or any other officer of a company has been convicted
of an offence under this section he shall, on and from the date on which he is
so convicted, be deemed to have vacated his office as such and on such vacation
of office, shall be disqualified for holding such office in any company, for a
period of five years from such date.”
“234. Power of Registrar to call for
information or explanation.— (1) Where, on perusing any document which a
company is required to submit to him under this Act, the Registrar is of
opinion that any information or explanation is necessary with respect to any
matter to which such document purports to relate, he may, by a written order,
call on the company submitting the document to furnish in writing such
information or explanation, within such time as he may specify in the order.
(2) On receipt by the company of an order under sub-section (1), it
shall be the duty of the company, and of all persons who are the officer of the
company, to furnish such information or explanation to the best of their power.
(3) On receipt of a copy of an order under sub-section (1), it shall
also be the duty of every person who has been an officer of the company to
furnish such information or explanation to the best of his power.
(3A)If no information or
explanation is furnished within the time specified or if the information or
explanation furnished is, in the opinion of the Registrar, inadequate, the
Registrar may by another written order call on the company to produce before
him for his inspection such books and papers as he considers necessary within
such time as he may specify in the order; and it shall be the duty of the
company, and of all persons who are officers of the company, to produce such
books and papers.
(4) If the company, or any such person as is referred to in sub-section
(2) or (3), refuses or neglects to furnish any such information or explanation
or if the company or any such person as is referred to in sub-section (3A)
refuses or neglects to produce any such books and papers,-
(a) the company and each such person shall be punishable with fine
which may extend to five thousand rupees and in the case of a continuing
offence, with an additional fine which may extend to five hundred rupees for
every day after the first during which the offence continues; and
(b) the Court trying the offence may, on the application of the
Registrar and after notice to the company, make an order on the company for
production before the Registrar of such books and papers as in the opinion of
the Court, may reasonably be required by the Registrar for the purpose referred
to in sub-section (1).
(5) On receipt of any writing containing the information or explanation
referred to in sub-section (1), or of any book or paper produced whether in
pursuance of an order of the Registrar under sub-section (3A) or of an order of
the Court under sub-section (4), the Registrar may annex that writing book or
paper, or where that book or paper is required by the company, any copy or
extract thereof, to the document referred to in sub-section (1); and any
writing or any book or paper or copy or extract thereof so annexed shall be
subject to the like provisions as to inspection, the taking of extracts and the
furnishing of copies, as that document is subject.
(6) If such information or explanation is not furnished within the specified
time or if after perusal of such information or explanation or of the books and
papers produced whether in pursuance of an order of the Registrar under
sub-section (3A) or of an order of the Court under sub-section (4), the
Registrar is of opinion that the document referred to in sub-section (1),
together with such information or explanation or such books and papers
discloses an unsatisfactory state of affair or does not disclose a full and
fair statement of any matter to which the document purports to relate, the
Registrar shall report in writing the circumstances of the case to the Central
Government.
(7) If it is represented to the Registrar of materials placed before
him by any contributory or creditor or any other person interest that the
business of a company is being carried on in fraud of its creditors or of
persons dealing with the company or otherwise for a fraudulent or unlawful
purpose, he may, after giving the company an opportunity of being heard, by a
written order, call on the company to furnish in writing any information or
explanation on matters specified in the order, within such time as he may
specify therein; and the provisions of sub-sections (2), (3), 3(A), (4) and (6)
of this section shall apply to such order.
|
** |
** |
** |
(8) The provisions of the section shall apply mutatis mutandis to
documents which a liquidator, or a foreign company within the meaning of
section 591, is required to file under this Act.”
“235. Investigation of the affairs of a
company.—(1) The Central Government may, where a report has been made by the
Registrar under sub-section (6) of section 234, or under sub-section (7) of
that section, read with sub-section (6) thereof, appoint one or more competent
persons as inspectors to investigate the affairs of a company and to report
thereon in such manner as the Central Government may direct.
(2) Where—
(a) in the case of a company having a share capital, an
application has been received from not less than two hundred members or from
members holding not less than one-tenth of the total voting power therein, and
(b) in the case of a company having no share capital, an
application has been received from not less than one-fifth of the persons on
the company’s register of members, the Tribunal may, after giving the parties
an opportunity of being heard, by order, declare that the affairs of the
company ought to be investigated by an inspector or inspectors, and on such a
declaration being made, the Central Government shall appoint one or more
competent persons as inspectors to investigate the affairs of the company and
to report thereon in such manner as the Central Government may direct.”
“237. Investigation of company’s affairs in
other cases.—Without prejudice to its powers under section 235, the Central
Government-
(a) shall appoint one or more competent persons as inspectors to
investigate the affairs of a company and to report thereon in such manner as
the Central Government may direct, if-
(i) the company, by special resolution;
or
(ii) the Court, by order, declares that the affairs of the
company ought to be investigated by an inspector appointed by the Central
Government; and
(b) may do if in its opinion or in the opinion
of the Tribunal, there are circumstances suggesting—
(i) that the business of the company is being conducted with
intent to defraud its creditors, members or any other persons, or otherwise for
a fraudulent or unlawful purpose, or in a manner oppressive of any of its
members, or that the company was formed for any fraudulent of unlawful purpose;
(ii) that persons concerned in the formation of the company or the
management of its affairs have in connection therewith been guilty of fraud,
misfeasance or other misconduct towards the company or towards any of its
members; or
(iii) that the members of the company have not been given all the
information with respect to its affairs which they might reasonably expect,
including information relating to the calculation of the commission payable to
a managing or other director, or the manager, of the company.”
“250A. Voluntary winding up of company, etc.,
not to stop investigation proceedings.—An investigation may be initiated under
section 235, 237, 239 or 247 notwithstanding that—
(a) an application has been made for an order
under section 397 or section 398; or
(b) the company has passed a special resolution for voluntary
winding up, and no investigation so initiated shall be stopped or suspended by
reason only of the fact that an application referred to in clause (a) has been
made or a special resolution referred to in clause (b) has been passed.”
9. Learned
counsel appearing for appellant has vehemently contended before me that the
proceedings which are initiated by the respondent before the Company Law Board
for investigation under section 237(b)(i) of the Companies Act is totally
without jurisdiction and non est. It has been further contended that the
condition precedent prescribed under the said section having not been complied
with by the Company Law Board was not entitled in law to exercise jurisdiction
under the provisions of section 237(b)(i) of the Companies Act. The learned
counsel has further contended that on true and correct interpretation the
Company Law Board gets jurisdiction to pass an order of investigation only if
the company is carrying on business with the intention to defraud its
creditors, members and/or carrying on business for fraudulent or unlawful
purpose or in a manner oppressive to any of its members in a praesentis. It is
therefore contended that if the company is not carrying on business at present
then irrespective of the fact that during the period when the company was
carrying on business whether the company has conducted business defrauding the
creditors or for a fraudulent or unlawful purpose or in a manner oppressive to
any members the Company Law Board does not acquire jurisdiction to launch
investigation under section 237(b)(i). It has been vehemently contended that
the provisions under section 237(b)(i) must be strictly construed because it is
an inroad in the freedom guaranteed by the Constitution under Article 19(1)(g).
It is contended that it is an interference with the right of the shareholders
to carry on business as guaranteed by the Constitution. It has been contended
that section 237(b)(i) must be so strictly read that unless there is a
compliance with the condition precedent prescribed thereon the Tribunal cannot
exercise power to launch investigation in the affairs of the company, it has
been further contended that only in the last category prescribed under section
237(b)(i) i.e., if the company is formed for any fraudulent and/or unlawful
purpose that it is not necessary that the business of the company should be
carried on at present moment when the investigations are ordered. It has been
contended by the learned counsel for the appellant in alternative to the
aforesaid submission that even if the provisions of section 237(b)(i) are not
so strictly construed as urged by him then also it must be so construed that
save and except the case where the business of the company is voluntarily
closed or the company is voluntarily wound up then only on those cases section
237(b)(i) would be applicable but in all other cases the provisions of section
237(b)(i) would not apply if the business of the company is not carried in
praesentis. It has been further contended that it is immaterial that whether at
the relevant time when the business it was carried on by the company was in
fact carried on for the purpose of defrauding the creditors or members and/or
carried on for fraudulent or unlawful purpose or it is carried on in a manner
oppressive to any of its members and still the Company Law Board will not
permit the investigation by the Central Government under the provisions of
section 237(b)(i) of the Companies Act. It has been strenuously urged by the
learned counsel for the appellant that the power conferred on the Central
Government under section 237(b)(i) is a draconian power interfering with the
business of the company and such power must not be permitted to be utilised
save and except directly in accordance with law and therefore the said
application for investigation when the business is not running in praesentis
cannot be granted.
10. On the facts
of the present case the learned counsel has contended that it is an admitted
position that in respect of some of the appellants who are inter alia carrying
on business of share brokerage their share brokers card has been suspended and
in some of the cases the said card is revoked and/or terminated by the
concerned stock exchange and SEBI and some of the trading firms who were
carrying on business as a share broker have come to a halt and therefore those
companies are not carrying on any business in praesentis and thus the
jurisdiction vested under the Central Government and/or the Company Law Board
to investigate under section 237(b)(i) cannot be exercised in respect of these
companies. It has been further contended that business of the various companies
has also been closed because of the freezing of the bank accounts in parallel
investigations which have been carried out by the SEBI, CBI and Department of
Company Affairs. It has been therefore contended by the learned counsel for the
appellant that even in respect of companies who are not share broking companies
still their business has also come to a total halt and/or for all practical
purposes all these companies are defunct companies and exist only on paper.
Thus according to the learned counsel for the appellant the Company Law Board
ought not to have passed the impugned order since it does not satisfy the
jurisdictional requirements of section 237(b)(i) of the Companies Act. Thus the
learned counsel for the appellant has contended that the argument that these appellants
at the relevant time when they were carrying on business have committed a scam
even if it is taken as true still the said scam cannot be the subject-matter of
investigation under section 237(b)(i) because of closure of their business for
reasons beyond their control. The business of the appellants have been brought
to a halt by an order of SEBI suspending and/or revoking the licence to carry
on business of the company. Thus it is submitted that when power is exercised
under section 237(b)(i) by the Central Government the company being already
defunct companies and not running the business they cannot be subjected to
investigation under the said section.
11. The learned
counsel for the appellants has vehemently contended that the issue urged by him
is directly or squarely covered by the Constitution Bench decision of the Apex
Court in the case of Barium Chemicals Ltd. v. CLB [1966] 36 Comp. Cas. 639. He
has drawn my attention to the following para and has contended that the Apex
Court has clearly held that under section 237(b)(i) as a jurisdictional
requirement for exercising of power of ordering investigation against a company
it is necessary that the company must be carrying on business in praesentis and
it is absolutely immaterial that the company has in past carried on the
business for a fraudulent or unlawful purpose or for defrauding the creditors
or any of the members. The said para reads as under :
“In dealing with this problem the first point
to notice is that the power is discretionary and its exercise depends upon the
honest formation of an opinion that an investigation is necessary. The words
‘in the opinion of the Central Government’ indicate that the opinion must be
formed by the Central Government and it is of course implicit that the opinion
must be an honest opinion. The next requirement is that ‘there are
circumstances suggesting, etc.’ These words indicate that before the Central
Government forms, its opinion it must have before it circumstances suggesting
certain inferences. These inferences are of many kinds and it will be useful to
make a mention of them here in a tabular form :
(a) that the business is being conducted with
intent to defraud-
(i) creditors of the company
(ii) members, or
(iii) any other person;
(b) that the business is being conducted
(i) for a fraudulent purpose,
(ii) for a unlawful purpose;
(c) that persons who formed the company or
manage its affairs have been guilty of-
(i) fraud, or
(ii) misfeasance or other
misconduct-towards the company or towards any of its members;
(d) that information has been withheld from the members about its
affairs which might reasonably be expected, including calculation of commission
payable to-
(i) managing or other director,
(ii) managing agent,
(iii) the secretaries and treasurers,
(iv) the managers.
These grounds limit the jurisdiction of the
Central Government. No jurisdiction outside the section which empowers the
initiation of investigation, can be exercised. An action, not based on
circumstances suggesting an inference of the enumerated kind, will not be
valid. In other words, the enumeration of the inferences, which may be drawn
from the circumstances, postulates the absence of a general discretion to go on
a fishing expedition to find evidence. . . .” (p. 661)
12. The learned
counsel has vehemently contended that the judgment of the Apex Court as per
majority decision laid down by Hidayatullah, J. is the lead judgment and holds
that the provisions of section 237(b)(i) can only be exercised when the business
is running in praesentis and does not apply when the business of the company
has been closed down for any reasons whatsoever including the reasons which are
beyond the control of the appellant themselves. The learned counsel has been at
pain to convey that the issue which has been raised by him is no more res
integra in view of the judgment of the Constitution Bench and has contended
that the said judgment of the Apex Court is binding on me. According to the
learned counsel for the appellant the aforesaid para in the judgment holds that
the business of the company must be carried on in praesentis for the purpose
which is mentioned in the said section for exercising power by the Central
Government under section 237(b)(i).
13. He has
further contended that the issue was further discussed in subsequent judgment
of the Apex Court in the case of Rohtas Industries Ltd. v. S.D. Agarwal [1969]
1 SCC 325. It has been contended that Apex Court in the aforesaid judgment has
accepted the view taken by Hidayatullah, J. as the correct view. He has relied
upon para 6 of the said judgment. He has also relied upon para 11 where the
Apex Court has approved the view of Hidayatullah, J. in the case of Barium
Chemicals Ltd. (supra). The said paras 6 and 11 reads as under :
“6. The decision of this Court in Barium
Chemical’s case (supra) which considered the scope of section 237(b)
illustrates that difficulty. In that case Hidayatullah, J. (our present Chief
Justice) and Shelat, J. came to the conclusion that though the power under
section 237(b) is a discretionary power the first requirement for its exercise
is the honest formation of an opinion that the investigation is necessary and
the further requirement is that ‘there are circumstances suggesting’ the
inference set out in the section; an action not based on circumstances
suggesting an inference of the enumerated kind will not be valid; the formation
of the opinion is subjective but the existence of the circumstances relevant to
the inference of the enumerated kind will not be valid; the formation of the
opinion is sine qua non or action must demonstratable; if their existence is
questioned, it has to be proved at least prima facie; it is not sufficient to
assert that those circumstances exist and give no clue to what they are,
because the circumstances must be such as to lead to conclusions of certain
definiteness; the conclusions must relate to an intent to defraud, a fraudulent
or unlawful purpose, fraud or misconduct. In other words they held that
although the formation of opinion is subjective but the existence of
circumstances relevant to the inference as the sine qua non for action must be
demonstratable; if their existence is questioned, it has to be proved at least
prima facie; it is not sufficient to assert that those circumstances exist and
give no clue to what they are, because the circumstances must be such as to
lead to conclusions of certain definiteness; that conclusions must relate to an
intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In
other words they held that although the formation of opinion by the Central
Government is a purely subjective process and such an opinion cannot be
challenged in a Court on the ground of propriety, reasonableness or
sufficiency, the authority concerned is nevertheless required to arrive at such
an opinion from circumstances suggesting the conclusion set out in sub-clauses
(i), (ii) and (iii) of section 237(b) and the expression ‘circumstances
suggesting’ cannot support the construction that even the existence of
circumstances is a matter of subjective opinion. Shelat, J. further observed
that it is hard to contemplate that the Legislature could have left to the
subjective process both the formation of opinion and also the existence of
circumstances on which it is to be founded; it is also not reasonable to say
that the clause permitted the authority to say that it has formed the opinion
on circumstances which in its opinion exist and which in its opinion suggest an
intent to defraud or a fraudulent or unlawful purpose.
11. Coming back to section 237(b) in finding
out its true scope we have to bear in mind that that section is a part of the
scheme referred to earlier and therefore the said provision takes its colour
from sections 235 and 236. In finding out the legislative intent we cannot
ignore the requirement of those sections. In interpreting section 237(b) we
cannot ignore the adverse effect of the investigation on the company. Finally
we must also remember that the section in question is an inroad on the powers
of the company to carry on its trade or business and thereby an infraction of
the fundamental right guaranteed to its shareholders under Article 19(1)(g) and
its validity cannot be upheld unless it is considered that the power in
question is a reasonable restriction in the interest of general public. In fact
the vires of that provision was upheld by majority of the judges Constitution
Bench in Barium Chemicals’ case principally on the ground that the power
conferred on the Central Government is not an arbitrary power and the same has
to be exercised in accordance with the restraints imposed by law. For the
reasons stated earlier we agree with the conclusion reached by Hidayatullah and
Shelat, JJ. in Barium Chemicals’ case that the existence of circumstances
suggesting that the company’s business was being conducted as laid down in
sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud
or misfeasance or other misconduct towards the company or towards any of its
members is a condition precedent for the Government to form the required
opinion and if the existence of those conditions is challenged, the Courts are
entitled to examine whether those circumstances were existing when the order
was made. In other words, the existence of the circumstances in question are
open to judicial review though the opinion formed by the Government is not
amenable to review by the Courts. As held earlier the required circumstances
did not exist in this case.”
14. Apart from
the aforesaid two judgments of the Apex Court the learned counsel has in
support of his contention has also relied upon the judgment of the Delhi High
Court in the case of Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp.
Cas. 634 and the judgment of the Calcutta High Court in the case of New Central
Jute Mills Co. Ltd. v. Dy. Secretary, Ministry of Finance, Department of
Revenue & Company Law [1970] 40 Comp. Cas. 102 (Cal.). By relying upon the
aforesaid two judgments the learned counsel has reiterated the submissions which
are already set out in extentio hereinabove.
15. In the
alternative to the above submissions the learned counsel has raised the issue
of interpretation of section 237(b)(i) and it is contended that assuming that
the judgment of the Apex Court did not hold that the running of a business in
praesentis in the manner set out therein is a condition precedent still
according to him on a plain and simple reading of the section an inescapable
conclusion is that for the purpose of exercising the power under the said section
the business must be a running business and not defunct or closed down
business. On the other hand learned counsel Mr. Desai the learned Additional
Solicitor General appearing for the respondent has contended that the
provisions of section 237(b)(i) cannot be so restrictly interpreted. According
to him it takes in its sweep even a part conduct of the business partially
conducted even if the company has become defunct or it has suspended its
business operation for any reasons whatsoever. It has been further contended by
the learned counsel that the provisions of section 237(b)(i) in its opening
portion provides that the power of the Central Government to appoint one or
more persons as inspector to investigate the affairs of the company and to
report thereon to the Central Government is a power conferred on the respondent
in the public interest and such power of the Central Government ought to be
given full effect for effecting investigation and cannot be so interpreted so
as to defeat the provisions of the Act. It has been further contended that the
word ‘is being conducted’ is in a simple present tense but by using the words
conducted in past tense it has included within its scope even the business
which was carried out for fraudulent purposes in the past. Thus according to
the learned Additional Solicitor General the Central Government would have
jurisdiction to investigate irrespective of the fact that whether the company
is running the business or not. The learned Additional Socilitor General has further
contended that the Court must give purposeful interpretation to the provisions
of section 237(b)(i) and should not interpret the section which results in
absurd consequences. According to the learned counsel the section cannot be
interpreted in a manner which can provide a scope to do the things which are in
fact meant to be prevented by the provisions thereof. Insofar as the aforesaid
authorities are concerned, the learned counsel for the respondent has contended
that the judgment of the Apex Court in the case of Barium Chemicals Ltd.
(supra) does not in any way or manner set out any such proposition of law as
contended by the learned counsel for the respondent i.e. the company must be
running the business in praesentis so as to attract the provisions of section
237(b)(i). The learned counsel has contended that the paras referred to by the
learned counsel for the appellant did not carve out any such proposition of law
as canvassed by the learned counsel for the appellant before this Court and
therefore the said argument ought not to be accepted. The learned counsel has
further contended that if the interpretation is given as suggested by the
learned counsel for the appellant in most of the cases, then the company would
commit fraud and carry on business for fraudulent or unlawful purpose and/or to
defraud the creditors and before the same can be detected or investigated they
would close down the company and evade investigation or cases where due to
criminal investigation if the business of the companies has come to a halt then
in that event it would escape the investigation under section 237(b)(i) of the
Companies Act. Further more it would restrict the power of Government to take
immediate remedial action of preventing further fraud being carried on by the
company by carrying on business.
16. Alternatively
the learned counsel solicitor general has contended that in the facts of the
present case in fact the company is carrying on business in praesentis. It has
been contended that the company is neither a defunct company nor has the
company been wound up but it is merely affected by virtue of the various orders
passed by the various authorities affecting the business of the company but is
still in operation. It has been contended that it is admitted by the appellant
themselves in the various documents which are set out on record which indicate
that according to appellant themselves the business is a running business and
not closed down as claimed by the appellant himself and it has been contended
by the learned counsel for the appellant that even if the section is
interpreted as claimed by the learned counsel for the appellant still the order
impugned herein is legal and valid and it satisfies all the requirements of section
237(b)(i) and this Court in exercise of power under section 10(f) ought not to
inteferere with the said order passed by the Company Law Board and the appeal
should be dismissed.
17. While
considering the rival contentions of the parties insofar as the first question
of law framed by the petitioner is concerned i.e. the power under section
237(b)(i) can only be exercised if the company is carrying on business and does
not apply if the company has closed down its business or by virtue of the
orders passed by various authorities due to it has been forced to close down
its business. I do not agree that the aforesaid issue is no longer a res
integra in view of the judgment of the Apex Court in the case of Barium
Chemicals (supra). On going through the above judgment of the Apex Court, in
which the Apex Court has considered the constitutional validity of section
237(b)(i), I do not find any such proposition of law laid down by the Apex
Court that the power under section 237(b)(i) can only be exercised when the
company was carrying on business in praesentis. The paras on which strong
reliance has been placed by the learned counsel for the appellant in my opinion
does not raise any such issue of law. In the said paras the Apex Court was
dealing with the issue of formation of opinion of the Central Government and
requirement of the material in support thereof while ordering investigation
under section 237(b)(i) of the Act. The para clearly indicates that the court
was considering the words in the opinion of the Central Government and was
considering that whether such words suggest in any manner that there should be
material in support. While considering the aforesaid issue the court has
analysed the said sections and has broken in into four parts a, b, c and d therein.
Such division of the section in four parts namely a, b, c and d is nothing else
but division of the plain language of the section as it is. The learned counsel
for the appellant has contended that the Apex Court while considering the
section in parts (a) and (b) as used the words ‘business is being conducted’
indicates that the court was of the opinion that the investigation cannot be
ordered once the business has been closed down. I do not read any such
proposition of law in the said para which has been set out in the said judgment
nor do I find from the reading of the said judgment that any such issue was
ever considered by the Apex Court. I therefore do not accept the contention of
the learned counsel that the issue whether the investigation can be ordered
only when the business is being conducted must be read in present tense and
that the ratio of the aforesaid judgment in the case of Barrium Chemicals Ltd.
(supra) covers the issue. I therefore reject the contention of the appellants
that this issue is squarely covered and no more res integra by virtue of the
judgment of the Apex Court in the case of Barium Chemicals Ltd. (supra). I am
of the opinion that it is now well settled law that the judgment is an
authority only on such proposition of law which squarely arises in the cases
which are squarely dealt with by the court and that is the only ratio of the
judgment which is binding on me. I do not find any such ratio or proposition of
law as agitated by the learned counsel for the appellant being decided by the
Apex Court in the aforesaid judgment of Barium Chemicals Ltd.’s case (supra). I
therefore do not accept the contention of the learned counsel for the
appellants and reject the same.
18. Once I so
hold that the issue is not covered by the judgment cited by the learned
counsel, then I am required to consider the alternative argument of the learned
counsel for the appellant i.e., on a plain and simple interpretation of section
237(b)(i) of the Companies Act, it is a condition precedent that business must
be a running business ordering investigation under section 237(b)(i). The
learned counsel for the appellant has contended that even on interpretation the
section is clear and unambiguous. It uses the word ‘is being conducted’ which
is simple present tense. Thus according to the learned counsel for the
appellant on plain and simple interpretation of the section itself it is clear
that the power under section 237(b)(i) can be exercised by the authorities only
if the business is conducted in praesentis. Insofar as the arguments on the
interpretation of section 237(b)(i) is concerned it is by now well-settled that
the interpretation of the section as a first principle must be on the basis of
simple and plain language used in the section itself. However, there is a case
at which has been well recognised by the various courts that if interpretation
is likely to result in absurd consequences or it defeats the intention of the
Legislature then in that event purposive interpretation ought to be resorted to
and interpretation should be such to advance the intention of the Legislature
rather than defeating the same. In my opinion the provisions of investigation
under section 237(b)(i) are being introduced by the Parliament with the
intention to prevent persons who enter the business in the guise of corporate
entities to carry on fraudulent business with a view to harm the public
interest. Butterworth in his 5th edition on the company law while tracing out
the background of the similar legislation i.e. English Company Law has inter
alia considered the reason for introduction of such a legislation and while
doing so it has stated as under :
“It is important to know the background of the
legislation. It sometimes happens that public companies are conducted in a way
which is beyond the control of the ordinary shareholders. The majority of the
shares are in the hands of two or three individuals. These have control of the
company’s affairs. The other shareholders know little and/or told little. They
receive the glossy annual reports. Most of them throw them into the wastepaper
basket. There is an annual general meeting but few of the shareholders attend.
The whole management and control is in the hands of the directors. They are
self-perpetuating oligarchy; and are virtually unaccountable. Seeing that the
directors are the guardians of the company, the question is asked : Quis
custodiet ipsos custodies - Who will guard the guards themselves.”
19. Similar are
the provisions under section 237(b)(i) of the Companies Act in India.
Essentially the provisions are meant to see that the defrauding of the public
at large is not being carried on under the guise of the corporate affairs. In
my opinion even on plain and simple reading of the said section would indicate
that the words used ‘is being conducted’ are used in the context of the
fraudulent or unlawful business conducted by the company in course of running
of their business. It does not mean that once the business is conducted in
unlawful and fraudulent manner and if it is closed down the power of the
Central Government of ordering investigation under section 237(b)(i) stood
revoked or ceased to have effect as contended by the learned counsel for the
appellant. The word ‘is being conducted’ has to be read alongwith the words
‘fraudulent or unlawful purpose’ even if it is so read it is clear that the
word ‘is being conducted’ is used with the intention to indicate that when the
business of the company was conducted it was conducted for unlawful purpose.
Even otherwise I am of the opinion that to accept the contention of the
appellant would be to make the said section nugatory and without any effect and
toothless. It is because any person can conduct the business for fraudulent or
unlawful purpose and before it is detected would close down the business of the
company and in fact escape the consequences as contemplated under section
237(b)(i) of the company. It is not uncommon that there are companies who are
fly by night operators in a booming economy of India today. If such an interpretation
is given to section 237(b)(i) then all these companies would commit fraud and
would close down the business and consequently make the provisions a dead
letter on the statue. Apart therefrom it is also difficult to interpret the
section in a manner the learned counsel for the appellant has called upon me to
do because while so interpreted it is necessary that the Central Government
must detect and investigate all such cases of the company which are conducted
in a fraudulent or unlawful purpose in a course when such conduct is being
carried on by the company. I do not think this could be a legislative intention
while enacting the said section 237(b)(i).
20. The
principles of interpretation of statue are well settled. It is repeatedly held
by the Apex Court that the interpretation must be to avoid absurdity and
unrealistic result or consequences of such an interpretation. The Maxwell has
in his book Interpretation of Statutes in the 10th edition as opined as under :
“....if the choice is between two interpretation,
the narrow of which would fails to achieve the manifest purpose of the
legislation, we should avoid a construction which would reduce the legislation
to futility and should rather accept the bolder construction based on the view
that Parliament would legislate only for the purpose of bringing about an
effective result.”
21. The
aforesaid rule of a meaningful and purposeful interpretation of the section to
avoid the absurd consequence is by now well settled in the case of Mangin v.
IRC [1971] All Eng. LR 179 Lord Donvan has stated as under :
“Thirdly, the object of the construction of a
statute being to ascertain the will of the Legislature, it may be presumed that
neither injustice nor absurdity was intended. If therefore a literal
interpretation would produce such a result, and the language admits of an
interpretation which would avoid it, then such an interpretation may be
adopted.”
22. The said
view is also recognised in large number of authorities in India, some of which
can be briefly enumerated as under : In the case of Budhan Singh v. Babi Bux
AIR 1970 SC 1880 in para 9 it is stated as under :
“9. Before considering the meaning of the word
‘held’ in section 9, it is necessary to mention that it is proper to assume
that the law-makers who are the representatives of the people enact laws which
the society considers as honest, fair and equitable. The object of every
legislation is to advance public welfare. In other words, as observed by
Crawford in his book on Statutory Constructions that the entire legislative
process is influenced by considerations of justice and reason. Justice and
reason constitute the great general legislative intent in every piece of
legislation. Consequently, where the suggested construction operates hoarsely,
ridiculously or in any other manner contrary to prevailing conceptions of
justice and reason, in most instances, it would seem that the apparent or
suggested meaning of the statute was not the one intended by the law makers. In
the absence of some other indication that the harsh or ridiculous effect was
actually intended by the Legislature, there is little reason to believe that it
represents the legislative intent.” (p. 1883)
23. In the case
of Nasiruddin v. State Transport Appellate Tribunal AIR 1976 SC 331 where in the
Apex Court has in para 26 as held as under :
“26. The conclusion as well as the reasoning
of the High Court that the permanent seat of the High Court is at Allahabad is
not quite sound. The order states that the High Court shall sit as the new High
Court and the Judges and Division Bench thereof shall sit at Allahabad or at
such other places in the United Provinces as the Chief Justice may, with the
approval of the Governor of the United Provinces appoint. The word ‘or’ cannot
be reads as ‘and’. If the precise words used are plain and unambiguous, they
are bound to be construed in their ordinary sense. The mere fact that the
results of a statute may be unjust does not entitle a court to refuse to give
it effect. If there are two different interpretations of the words in an Act,
the Court will adopt that which is just, reasonable and sensible rather than
that which is none of those things. If the inconvenience is an absurd
inconvenience, by reading an enactment in its ordinary sense, whereas if it is
read in a manner in which it is capable, though not in an ordinary sense, there
would not be any inconvenience at all; there would be reason why one should not
read it according to its ordinary grammatical meaning. Where the words are
plain the court would not make any alteration.” (p. 338)
24. In the case
of Molar Mal v. Kay Iron Works (P.) Ltd. [2000] 4 SCC 285 while reconsidering
the aforesaid principle the Apex Court has held as under:
“The Courts will have to follow the rule of
literal construction which rule enjoins the Court to take the words as used by
the Legislature and to give it the meaning which naturally implies. But, there
is an exception to this rule. That exception comes into play when application
of literal construction of the words in the statute leads to absurdity,
inconsistency, or when it is shown that the legal context in which the words
are used or by reading the statute as a whole, it requires a different meaning.
If the expression ‘entitled to apply again’ as given its literal meaning, it
would defeat the very object for which the Legislature has incorporated that
proviso in the Act inasmuch as the object of that proviso can be defeated by a
landlord who has more than one tenanted premises by filing multiple
applications simultaneously for eviction and thereafter obtain possession of
all those premises without the bar of the proviso being applicable to him. This
could not have been the purpose for which the proviso is included in the Act.
If such an interpretation is given then the various provisos found in
sub-section (3) of section 13 would become otiose and the very object of the
enactment would be defeated. Therefore, the restriction contemplated under the
proviso extends even up to the stage when the Court or the Tribunal is
considering the case of the landlord for actual eviction and is not confined to
the stage of filing of eviction petition only.” (p. 288)
25. Thus in my
opinion the true and correct interpretation of section 237(b)(i) would only
mean that if the company while conducting the business has acted in a
fraudulent or unlawful purpose then such companies will fall within the net of
section 237(b)(i) irrespective of the fact that whether it is a running concern
or close down subsequently for any reason whatsoever I am of the aforesaid
opinion also because under the provisions of section 250(A) it is specifically
provided that investigation may be initiated under section 237(b)(i)
notwithstanding that the application is made under sections 397 and 398 of the
Companies Act or it has passed a special resolution for voluntary winding up of
such a company. In my opinion if section 250(A) is read along with section
237(b)(i) it is without any doubt that the contention of the learned counsel
for the appellant that no investigation can be carried out once the company has
ceased to operate its business. In any event on a true and proper construction
of the section I do not accept the contention of the learned counsel for the
appellant that the business of the company should be conducted in praesentis
for the purpose of ordering investigation by the Central Government under
section 237(b)(i).
26. Even
otherwise on facts the learned counsel for the respondent has been able to
establish that the business of the company is not totally stopped though
undoubtedly it has been seriously affected by virtue of the orders passed by
the SEBI and stock exchange of suspension of the brokerage licence, suspension
or freezer of bank account and collapse of Madhavpura Co-operative Bank and
Global Trust Bank. The learned counsel has drawn my attention to the affidavit
filed by the company before the Company Law Board in which it has been stated
as under :
“3(b) It is incumbent that in order to achieve
this objective, the functioning of the Applicant/Respondent group of companies
ought not to be crippled which situation would inevitably result if the order
dated 27-9-2004 passed by this Hon’ble Board is not amended for the purpose of
determining the real question, as would be evident from the averments made hereinafter
in this application.”
“6. It is stated in this connection that the
following the details of payment made by the Applicant group of companies and
value of Share/Property lying with the Bank :-
Particulars
|
Amt. (Rs. in crores) |
|
|
By Cash/Deposits/Dividend |
27.34 |
|
|
By sale of stocks |
15.18 |
|
|
Paid to Bank of India |
28.92 |
|
|
Total |
|
71.44 |
It may be mentioned that out of the figures
indicated above, even as recently as during the period ranging between
11-9-2004 and 4-11-2004, securities worth Rs. 15,18,02,166.05 (Rupees Fifteen
Crores Eighteen Lacs Two Thousand One Hundred and Sixty Six and paise Five),
held by the Ketan Parekh group with Madhavpura Mercantile Co-operative Bank
Limited were liquidated towards discharging dues towards the said bank by the
Ketan Parekh group.
7. It is also submitted that Shri Ketan V.
Parekh has always co-operated with the Banks even admist his crisis. In spite
of all the accounts frozen by various agencies and a bank on Shri Ketan V.
Parekh and on his various group of companies from carrying out activities in
the capital markets, the aforesaid amounts paid reflects clear intention on the
part of Shri Ketan V. Parekh and his group of companies towards liquidating
dues of bankers, financial institutions, and creditors. Admist such a situation
it would be contrary to public interest if efforts of the Ketan Parekh group of
companies to liquidate bank’s dues are jeopardised in any manner.
10. Admist these fact finding investigations, to
impose another investigation would have the effect of crippling the functioning
of Ketan Parekh Group of Companies and would adversely affect their capacities
to liquidate dues of creditors which would be contrary to public interest.”
27. Learned
counsel for the respondent has also relied upon the balance sheet of the
various companies which inter alia undoubtedly indicates conduct of some
business though by way of liquidation of the various assets of the company.
However the learned counsel for the appellant has contended that liquidating
the assets and/or conducting the business of the company by calling meetings of
the company cannot be deemed to be conducting the business of the company. He
has relied upon the judgment of the Apex Court in the case of Bengal &
Assam Investors Ltd. v. CIT AIR 1966 SC 1514 particularly para 13 of the said
judgment. The said para 13 of the said judgment reads as under :
“13. Mr. Desai laid a great deal of stress on
the argument that the very fact that a company is incorporated to carry on
investment shows that the company is carrying on business. We are unable to
agree with this contention. Bhagwati, J. observed in Lakshminarayan Ram Gopal
Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 that ‘when a com-pany is
incorporated it may not necessarily come into existence for the purpose of
carrying on a business’. He further observed that ‘the objects of an
incorporated company as laid down in the memorandum of association are
certainly not conclusive of the question whether the activities of the company
amount to carrying on of business.’” (p. 1518)
28. While
considering the aforesaid contention the Apex Court has held that there is
difference between the incorporation of a company and conduct of the business
of the company. In this case the company was only incorporated on the paper but
no business of any nature was conducted by the company. The said judgment has
no application in the facts of the present case where the business of the
company insofar as statutory requirements are concerned of calling meetings,
filing returns, preparing the balance sheet is running. It may be that actual
trading in the stock markets or stock exchanges has come to a halt by
suspension of the trading licence by the SEBI or the business has been
substantially crippled by virtue of freezer of various bank accounts. I am of
the opinion that this cannot be treated as business of the company ‘is not
carried on’ and/or the same ‘is closed down’ for reasons beyond the control of
the appellant, i.e., by virtue of the passing of the orders of the various
authorities such as SEBI, CBI and other Central Government authorities. The
business of the company is conducted even today even though at a very low
level, it cannot be said that the business of the company has ceased to be in
operation. The word ‘is being conducted’ under section 237(b)(i) even if it is
so interpreted as contended by the learned counsel for the appellant it should
be and must mean that the business of the company has to come to a total stop
and no activities of the company are carried on. In my opinion such situation
arises only when the company is wound up either by voluntary winding up or
compulsory winding up as provided under the Companies Act. In the aforesaid
circumstances even on the facts of the present case I am of the opinion that
the business of the company is being carried on and therefore the provisions of
section 237(b)(i) squarely apply to the case which would mean that the order
passed by the Company Law Board is legal and valid and on this ground does not
require any interference by this Court.
29. This takes
me to the second question of law framed by the learned counsel for the
appellant that whether in the present case the Central Government has able to
produce necessary material on evidence to establish that the ground exist for
ordering such an investigation under section 237(b)(i). On the facts of the
present case it is not in dispute that there has been a stock market collapse
in the year 2001 and the appellants herein have indulged in large number of
share dealings and trading. It is also not in dispute before me that the
Madhavpura Co-operative Bank and Global Trust Bank has collapsed in view of the
stock market scam. However appellants have denied their involvement in the
scam. They have on the contrary contended that they are the victims of the
collapse of the share market and not the beneficiaries. The respondents therein
have produced before the Company Law Board in support of the application for
investigation under section 237(b)(i) a report of the Joint Parliamentary
Committee investigating said scam. The respondents have also produced the
report and/or order passed by the SEBI against the appellants and Ketan Parekh
alleged moving spirit behind the 14 companies. The Central Government has also
in support of the application relied upon the reports which are filed by the
inspectors in the course of carrying out investigation under section 209(A).
The Central Government has also relied upon large number of breaches of the
provisions of the Companies Act by the various companies in support of
investigation. In my view not only there is a material in the form of aforesaid
reports, documents and orders but a more than prima facie case has been made
out for investigation of the appellant company. The Joint Parliamentary
Committee has in fact directed the investigation against these entities by the
SEBI or the Central Government. However the learned counsel for the appellant
canvassed that there is no material which can be used by the respondent in
respect of the investigation because each of the authorities are entitled to
conduct its own investigation on the basis of aforesaid report and, therefore,
the same cannot be utilised for the purpose of ordering investigation by the
Central Government under section 237(b)(i). I am not inclined to accept the
contention of the learned counsel for the appellant for the simple reason that
it is possible that the material can be common or identical in the course of
various investigations embarked upon by the various authorities. It does not
mean that the respondents are not entitled to use the material which have been
unearthed or found in the course of the investigation by any other authority.
The material in the present case is glaring. There was a serious collapse of
the stock exchange in 2001. The SEBI on investigation has found that all the
entities have entered into typical type of transactions in concert with each
other so as to ultimately result in collapse of the stock market. Consequently
large amount of public fund has been eroded. Consequent upon the collapse of
the Global Trust even UTI has been subjected to serious financial difficulties
and was ultimately required to be bailed out by the Government. These are very
serious circumstances and there is a plethora of material to indicate that 14
of the entities who are subject to investigation under the provisions of
section 237(b)(i) have played some role the consequence of which has resulted
as mentioned herein above. The learned counsel for the appellant further
contends that there is no need for investigation when there is substantial
material and therefore the power ought not to be exercised merely for the
purpose of exercising under section 237(b)(i). The aforesaid contention is
merely stated to be rejected as devoid of any merits. In my opinion the Central
Government has not only sufficient material but also has a strong prima facie
case for ordering investigation. It has been well settled by the various
decisions of the Apex Court that the Court ought not to interfere at this stage
of investigation by the authorities. The investigation is not a trial of an
offence. It is merely a fact-finding venture. It is no doubt true that in the
context of the companies it is a serious issue because it interferes with their
rights to carry out free trading but it has been held that every right is
coupled with reasonable restrictions and if the company has prima facie carried
out fraudulent activities then obviously it cannot complain about
investigations carried out by the Central Government in exercise of statutory
powers conferred under section 237(b)(i).
30. This leads me to the third question of law
which has been raised by the learned counsel for the appellant.
31. It has been
inter alia contended that the power conferred under the provisions of section
237(b)(i) of the Act must be sparingly exercised and cannot be utilised in
casual manner. It has been contended by the learned counsel for the appellant
that in respect of the so called security scam of 2001 there are already
investigations undertaken by the SEBI, CBI and even the Department of Company
Affairs by ordering investigation under section 209(A). It has therefore been
contended that on the same material and on the same allegations one more
investigation ought not to be ordered by the Central Government nor the Company
Law Board ought to grant a sanction to such an investigation. It is not
contended that the said exercise is in futility and the same is carried on
simultaneously by the various authorities with a view to only affect the
business of the company and thus the same should not be permitted.
32. Learned
counsel for the appellant has taken me through the provisions of the SEBI Act
and has contended that the purpose and scope of inquiry thereunder has been
more extensive and the provisions are more harsh and effective and in view
thereof the inquiry under section 237(b)(i) is meaningless and would achieve no
purpose. It has been therefore contended that once there is an extensive
inquiry undertaken by SEBI in exercise of powers conferred under the SEBI Act
and that the SEBI is supposed to be an expert authority in stock exchange
transactions. It is neither necessary nor permissible to conduct inquiry by the
Department of Company Affairs by invoking powers under section 237(b)(i) of the
Companies Act. It has been urged by the learned counsel for the appellant that
the inquiry ordered and sanctioned by the CBI, is merely to harass the
appellant company and is not meant for achieving any objective and therefore
the court should strike down the Company Law Board order sanctioning the said
inquiry. It has been further contended that the parallel CBI investigation is
also already in progress. The Department of Company Affairs is also conducting
an inspection under section 209(A) and that various prosecutions are already
launched. In view thereof it has been contended that no such investigation
should be permitted by the Central Government in exercise of power under
section 237(b)(i). On the other hand the learned counsel for the respondent has
urged that the investigation is a must looking at the magnitude and the
proposition of fraud which has been alleged to have been committed by all the
sixteen entities and according to the Central Government the moving spirit
behind these companies is Mr. Ketan Parekh. The learned counsel for the
respondent company has drawn my attention to a resolution passed by the
Government of India, Department of Company Affairs being resolution dated 2-7-2003
and it has been contended that by the said resolution the Government of India
has set up a Serious Fraud Investigation Office (SFIO) and it is required that
the corporate frauds should be investigated by the said SFIO. It is also
brought to my attention that under the said resolution the SFIO will be
conferred with the power to investigate in the company because the
investigation under section 237(b)(i) of the Companies Act is entrusted to the
SFIO. The learned counsel for the respondent has further contended that there
are authorities and authorities which require to investigate the various
aspects of fraud committed by the companies like the appellant herein. It has
been contended that the SEBI under the SEBI Act has a restrictive power to
investigate i.e., in respect of security transactions but when it comes to
transaction in respect of banks and other institutions which are not within the
purview and/or jurisdiction of the SEBI and the same are required to be
investigated by the Central Government through the appropriate authority and/or
body. It has been contended that the inquiry under the different acts by the
different authorities are in respect of their respective jurisdiction and
spheres assigned to them under the various legislations and it cannot be stated
in law that merely because the inquiry is in progress by one authority under
one act it should automatically prevent the other authorities from conducting
investigation under a separate statue.
33. I have
considered these rival submissions of the parties and I am of the opinion that
the jurisdiction and the power of the various investigating authorities derived
from the jurisdiction vested in them by the various legislations or statutes,
the authority which is doing the inquiry and/or conducting the investigation is
required to carry out investigation keeping in mind the legal provisions and
legal limitations which are stipulated under the respective statute.
Undoubtedly it can be that there may be an overlapping investigation but in my
opinion such an eventuality cannot prevent any investigating authority from
carrying out investigation in respect of their jurisdiction conferred on them
under the statute. I am also of the further opinion that the investigation in
respect of the corporate fraud can be initiated and considered by the Central
Government under section 237(b)(i) of the Companies Act. I have not been able
to come across any provisions under the SEBI Act in which any corporate fraud
can be investigated by the SEBI. Undoubtedly it can be investigated under
normal criminal law by the CBI. I am further of the opinion that merely because
the material on the basis of which investigation is being undertaken is
identical to the material which is subject-matter of investigation by the other
authority it cannot be stated that both the authorities cannot simultaneously
investigate pursuant to power conferred on them under their respective
statutes. I am of the opinion that every authority is entitled to investigate
even may be in respect of the same material as well as from the angle and facet
in which they have been asked to carry out investigation. It is possible that
the SEBI may be investigating the same material on the ground of breach of the
various provisions of the SEBI Act and other security related legislations
whereas the Central Government, Department of Company Affairs can consider
and/or investigate the fraud and/or breach of various provisions of law in the
light and context of the provisions of the Companies Act may be in respect of the
same material. However, I am of the opinion that the contentions advanced by
the learned counsel for the appellant cannot be accepted particularly in view
of the fact that every authority has been conferred various powers in their
respective legislation. A similar issue aroused before the English Court under
the identical provisions of investigation under the Companies Law and the Court
of Appeal in the case of London United Investments Plc, In re 1992 BCLC 285
equivalent to 1971 All Eng. LR 849 it is held as under :
“The power of the Secretary of State to
appoint inspectors to investigate the affairs of a company and to report is an
important regulatory mechanism for ensuring probity in the management of
companies affairs. That of course is in the public interest. Since the
Secretary of State’s powers under section 432(2) are exercisable where there
are circumstances suggesting fraud, it is likely that in many cases where
inspectors are appointed an investigation by the police or the Serious Fraud
Office could also be appropriate. But the code under the 1985 Act is a separate
code even though it may overlap the field of criminal investigation.”
34. Apart from
the aforesaid position in law : I am also of the further opinion that the
Central Government having constituted the Serious Fraud Investigation Office
and if it desires to carry out investigation in respect of the affairs of the
aforesaid 14 appellant companies without any mala fide intention then it is not
possible to stall the investigation merely on the basis of contentions and
arguments advanced by the learned counsel for the appellant that all the
authorities cannot be permitted to carry the investigation simultaneously in
respect of the very same material. I therefore, reject the contention on behalf
of the appellant in respect of question No. 3 which have been formulated. I am
of the opinion that the answer to this question is that every authority is
entitled to carry out investigation may be in respect of the same material
insofar as they do not exceed the jurisdiction conferred on them in their
respective statute. I therefore answer this question of law accordingly.
35. The learned
counsel for the respondent has drawn my attention to the judgment of the Apex
Court in the case of DDA v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622
and has brought to my attention that the Supreme Court has taken note of the
fact that various frauds are committed by the companies defrauding the public
at large by taking shelter of corporate entities. It has been contended by the
learned counsel for the respondent by relying upon the aforesaid judgment that
it is necessary to lift or pierce the corporate veils and to see who are the
real men behind the veil who are involved in defrauding others under the guise
of corporate entity. It has been contended by the learned counsel for the
respondent that such an exercise can be undertaken by the SFIO while carrying
out investigation under section 237(b)(i) of the Companies Act and the court
must not stole such an investigation. It has been contended by the learned
counsel for the appellant that there are serious allegations in the present
case and thus this Court must refrain from exercising jurisdiction and
interfering with the investigation at this stage. I find considerable substance
in the contention advanced by the learned counsel for the respondent. It is
well settled that the court must be reluctant in interfering in the matter
where the same is still at investigating stage. The Court cannot and should not
usurp the jurisdiction vested in the Central Government to form an opinion and
come to a conclusion as to whether the investigation is necessary or not
limited jurisdiction or power is conferred on the court is to ascertain whether
there is a material in support of the opinion arrived at by the Central
Government and/or the said exercise is not a mala fide exercise of power. In
the facts of the present case I do not consider that the exercise of the
Central Government is mala fide. There is a plethora of material and in view
therein I do not desire to interfere with the investigation ordered by the
Central Government in exercise of power conferred under section 237(b)(i) of
the Act.
36. In view
thereof I find that there is no substance in the present appeals. I accordingly
dismiss all the 14 appeals with cost quantified at Rs. 10,000 each per appeal.
At the request of the learned counsel for the
appellant the statement of the learned counsel for the respondent to maintain
status quo is to continue till 29-4-2005.
In view of the dismissal of the appeals itself
nothing remains in the Company Applications (L) No. 1030 of 2004 to 1043 of
2004 for ad interim orders and the same is dismissed accordingly with no order
as to costs.
companies
act
[2005]
61 SCL 33 (bom.)
High
Court of
Panther Fincap & Management
Services Ltd.
v.
Central
Government, Union of
S.U.
Kamdar, J.
Appeal
Nos. 1 to 14 of 2005
In
Company Petition Nos. 34, 36, 38, 39, 40, 44, 49, 52, 56, 60, 64, 65, 67 and 68
of 2003
March 31,
2005
Section 237 of the Companies Act, 1956 -
Investigation of company’s affairs in other cases - Whether if a company while
conducting business has acted in a fraudulent or unlawful manner, then such
company will fall within net of section 237(b)(i) irrespective of fact whether
it is a running concern or close down subsequently for any reason whatsoever -
Held, yes - Whether merely because material, on basis of which investigation is
being undertaken, is identical to material which is subject-matter of
investigation by other authority, it cannot be stated that both authorities
cannot simultaneously investigate pursuant to power conferred on them under
their respective statutes - Held, yes - On sudden collapse of stock market,
Joint Parliamentary Committee directed SEBI to make investigation against
appellant-companies - SEBI found that due to concerted transactions between
appellants and ‘K’, who was moving spirit behind companies, there was a
ultimate collapse of stock market - Consequent to said collapse, Global Trust
Bank (GTB) and UTI had been subjected to serious financial difficulties and
were ultimately bailed out by Government - Central Government, relying on
report of SEBI and report of inspectors carrying out inspections under section
209A, sought permission of CLB for investigation into affairs of
appellant-companies under section 237 - Whether in facts and circumstances of
case, Central Government had not only sufficient material but also had a strong
prima facie case for ordering investigation under section 237(b)(i) - Held, yes
Facts
There was a sudden crash in stock-exchange
which was attributed and alleged to one ‘K’. Allegedly, the appellant-companies
were controlled and owned directly or indirectly by the said ‘K’. With the
crash of the stock market, there had simultaneously been a crash of Madhavpura
Co-operative Bank (MCB), Global Trust Bank (GTB) and UTI and thousands crore of
rupees had been siphoned off from the system. With a hue and cry from the
public, a Joint Parliamentary Committee (JPC) was constituted to investigate
the said stock exchange crash. Apart from that, SEBI was also directed to carry
out investigations and to take appropriate action within provision of the
Securities & Exchange Board of India Act, 1992. In the meantime, the
respondent, in exercise of power under section 209A, carried out inspection of
books of account of the appellants. In these circumstances and based on the
material gathered from three basic sources, namely, the report of the JPC, the
interim report of the SEBI investigation and, thirdly the reports pursuant to
the investigation under section 209A, the respondent in a company petition
sought permission of the CLB to investigate affairs of the company in exercise
of power under section 237(b)(i). The appellants objected the application on
ground that the purpose and object of investigation having already been
achieved by carrying out investigation by authorities such as CBI, SEBI and
Department of Company Affairs under section 209A, further investigation under
section 237 was not necessary and it would affect the appellants prejudicially.
Rejecting the objection of the appellants, the CLB allowed the company petition
and permitted the Department of Company Affairs to carry out investigation
under section 237(b)(i) in the affairs of each of the appellant-companies.
On appeal, it was also contended by the
appellants that once the business of the company had ceased to be in operation
for any reason whatsoever voluntarily or otherwise, then the respondents had no
jurisdiction to initiate and/or exercise jurisdiction vested in them by virtue
of the proceedings under section 237(b)(i); and that the respondents had not
made out prima facie case for investigation under section 237(b)(i).
Held
The provisions of investigation under section
237(b)(i) are being introduced by the Parliament with the intention to prevent
persons who enter the business in the guise of corporate entities to carry on
fraudulent business with a view to harm the public interest. [
Essentially, the provisions of section 237 are
meant to see that the defrauding of the public at large is not being carried on
under the guise of the corporate affairs. Plain and simple reading of the said
section would indicate that the words used ‘is being conducted’ are used in the
context of the fraudulent or unlawful business conducted by the company in
course of running of their business. It does not mean that once the business is
conducted in unlawful and fraudulent manner and if it is closed down, the power
of the Central Government of ordering investigation under section 237(b)(i)
stood revoked or ceased to have effect. The word ‘is being conducted’ has to be
read along with the words ‘fraudulent or unlawful purpose’ and if it is so
read, it is clear that the word ‘is being conducted’ is used with the intention
to indicate that when the business of the company was conducted, it was
conducted for unlawful purpose. Any person can conduct the business for
fraudulent or unlawful purpose and before it is detected would close down the
business of the company and in fact escape the consequences as contemplated
under section 237(b)(i). It is not uncommon that there are companies who are
fly by night operators in a booming economy of
The true and correct interpretation of section
237(b)(i) would only mean that if the company while conducting the business has
acted in a fraudulent or unlawful purpose, then such companies will fall within
the net of section 237(b)(i) irrespective of the fact that whether it is a
running concern or close down subsequently for any reason whatsoever because
under the provisions of section 250A it is specifically provided that
investigation may be initiated under section 237(b)(i) notwithstanding that the
application is made under sections 397 and 398 or it has passed a special
resolution for voluntary winding up of such a company.
In any event on a true and proper construction
of the section, it cannot be held that the business of company should be
conducted in praesentis for the purpose of ordering investigation by the
Central Government under section 237(b)(i). [
Even otherwise on facts, the respondent had
been able to establish that the business of the company was not totally stopped
though undoubtedly it had been seriously affected by virtue of the orders
passed by the SEBI and stock exchange of suspension of the brokerage license,
suspension or freezer of bank account and collapse of MCB and GTB. [
That could not be treated as business of the
company was not carried on and/or the same was closed down for reasons beyond
the control of the appellant, i.e., by virtue of the passing of the orders of
various authorities such as SEBI, CBI and other Central Government authorities.
The business of the company was conducted even today even though at a very low
level. It could not be said that the business of the company had ceased to be
in operation. The word ‘is being conducted’ under section 237(b)(i) even if it
is so interpreted, as contended by the appellant, it should be and must mean
that the business of the company has come to a total stop and no activities of
the company are carried on. Such situation arises only when the company is
wound up either by voluntary winding up or compulsory winding up as provided
under the Act. In the aforesaid circumstances even on the facts of the instant
case, the business of the company was being carried on and, therefore, the
provisions of section 237(b)(i) squarely applied to the case which would mean
that the order passed by the CLB was legal and valid and on this ground did not
require any interference by the Court. [
On the facts of the instant case, it was not
in dispute that there had been a stock market collapse in the year 2001 and the
appellants had indulged in large number of share dealings and trading. It was
also not in dispute that the MCB and GTB had collapsed in view of the stock
market scam. The respondents had produced before the CLB in support of the
application for investigation under section 237(b)(i) a report of the JPC
investigating said scam. The respondents had also produced the report and/or
order passed by the SEBI against the appellants and ‘K’ who was moving spirit
behind the appellant-companies. The Central Government had also, in support of
the application, relied upon the reports which were filed by the inspectors in
the course of carrying out investigation under section 209A. The Central
Government had also relied upon large number of breaches of the provisions of
the Act by the various companies in support of investigation. Therefore, not
only there was a material in the form of aforesaid reports, documents and
orders but a more than prima facie case had been made out for investigation of
the appellant companies. The JPC had in fact directed the investigation against
these entities by the SEBI or the Central Government. However, the appellant
canvassed that there was no material which could be used by the respondent in
respect of the investigation because each of the authorities was entitled to
conduct its own investigation on the basis of aforesaid report and, therefore,
the same material could not be utilized for the purpose of ordering
investigation by the Central Government under section 237(b)(i). The contention
of the appellant could not be accepted for the simple reason that it is
possible that the material can be common or identical in course of various
investigations embarked upon by the various authorities. It did not mean that
the respondents were not entitled to use the material which had been unearthed
or found in the course of the investigation by any other authorities. The
material in the instant case was glaring. There was a serious collapse of the
stock exchange in 2001. The SEBI, on investigation, had found that all the
entitles had entered into typical type of transactions in concert with each
other so as to ultimately result in collapse of the stock market. Consequently,
large amount of public fund had been eroded. Consequent upon the collapse of
the GTB, even UTI had been subjected to serious financial difficulties and was
ultimately required to be bailed out by the Government. These were very serious
circumstances and there was a plethora of material to indicate that the
companies, which were subject to investigation under the provision of section
237(b)(i), had played some role, the consequence of which had resulted as
mentioned above. Therefore, the Central Government had not only sufficient
material but also had a strong prima facie case for ordering investigation. It
has been well settled by the various decisions of the Apex Court that the Court
ought not to interfere at this stage of investigation by the authorities. The
investigation is not a trial of an offence. It is merely a fact finding
venture. It is no doubt true that in the context of the companies it is a
serious issue becuase it interferes with their rights to carry out free trading
but it has been held that every right is coupled with reasonable restrictions
and if the company has prima facie carried out fradulent activities then
obviously it cannot complain about investigations carried out by the Central
Government in exercise of statutory powers conferred under section 237(b)(i).
[Para 29]
The jurisdiction and the power of the various
investigating authorities derived from the jurisdiction vested in them by the
various legislations or statutes; the authority which is doing the inquiry
and/or conducting the investigation is required to carry out investigation
keeping in mind the legal provisions and legal limitations which are stipulated
under the respective statute. Undoubtedly, it can be that there may be an
overlapping investigation but such an eventuality cannot prevent any
investigating authority from carrying out investigation in respect of their
jurisdiction conferred on them under the statute. The investigation in respect
of the corporate fraud can be initiated and considered by the Central
Government under section 237(b)(i). There is no provision under the SEBI Act in
which any corporate fraud can be investigated by the SEBI. Undoubtedly, it can
be investigated under normal criminal law by the CBI. Merely because the
material, on the basis of which investigation is being undertaken, is identical
to the material which is subject-matter of investigation by the other authority,
it cannot be stated that both the authorities cannot simultaneously investigate
pursuant to power conferred on them under their respective statutes. Every
authority is entitled to investigate even may be in respect of the same
material as well as from the angle and facet in which they have been asked to
carry out investigation. It was possible that the SEBI might be investigating
the same material on the ground of breach of the various provisions of the SEBI
Act and other security related legislations whereas the Central Government,
Department of Company Affairs could consider and/or investigate the fraud
and/or breach of various provisions of law in the light and context of the
provisions of the Act, might be in respect of the same material. [Para 33]
The Central Government having constituted the
Serious Fraud Investigation Office and if it desired to carry out investigation
in respect of the affairs of the appellant-companies without any mala fide
intention, then it was not possible to stall the investigation merely on the
basis of contentions and arguments advanced by the appellant that all the
authorities could not be permitted to carry out the investigation
simultaneously in respect of the very same material. Therefore, every authority
is entitled to carry out investigation, may be, in respect of the same material
insofar as they do not exceed the jurisdiction conferred on them in their
respective statute. [Para 34]
The Court cannot and should not usurp the
jurisdiction vested in the Central Government to form an opinion and come to a
conclusion as to whether the investigation is necessary or not. Limited
jurisdiction or power conferred on the Court is to ascertain whether there is a
material in support of the opinion arrived at by the Central Government and/or
the said exercise is not a mala fide exercise of power. In the facts of the
instant case, it could not be said that the exercise of power under section 237
by the Central Government was mala fide. There was a plethora of material and
in view of that, the investigation ordered by the Central Government in
exercise of power conferred under section 237(b)(i) could not be interfered.
[Para 35]
In view of the above, there was no substance
in these appeals and same were, accordingly, dismissed.
Cases referred to
Barium Chemicals Ltd. v. CLB [1966] 36 Comp.
Cas. 639 (SC) (para 11), Rohtas Industries Ltd. v. S.D. Agarwal [1969] 1 SCC
325 (para 13), Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634
(Delhi) (para 14), New Central Jute Mills Co. Ltd. v. Dy. Secretary, Ministry
of Finance, Department of Revenue & Company Law [1970] 40 Comp. Cas. 102
(Cal.) (para 14), Mangin v. IRC [1971] All Eng. LR 179 (para 21), Budhan Singh
v. Babi Bux AIR 1970 SC 1880 (para 22), Nasiruddin v. State Transport Appellate
Tribunal AIR 1976 SC 331 (para 23), Molar Mal v. Kay Iron Works (P.) Ltd.
[2000] 4 SCC 285 (para 24), Bengal & Assam Investors Ltd. v. CIT AIR 1966
SC 1514 (para 27), London United Investments Plc., In re 1992 BCLC 285 (CA)
(para 33) and DDA v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622 (para
35).
N.H. Seerval and Vinod Parekh for the Appellant. B.H. Desai and Sethna
for the Respondent.
Judgment
1. Economic
progress usher with it economic perversity such as the land scam, Petrol Pump
Scam, import export scam, Hawala scam, security scam, shares and stocks scam,
bank scam etc. With the passage of time the method of committing these scams
has been more involved and more complex and are woven into various webs. Thus
as a collary thereto investigations into such scams are also required to be
more scientific, more intrinsic and more detailed with the help of the experts.
Corporate frauds and corporate misconduct are also another facet of such scams.
Companies are being floated and are disappearing into thin air making the
common man poorer and poorer by thousands of crores of rupees. These 16 appeals
are challenging an order passed by the company law board under which it has
ordered an investigation into one of such alleged scams under section 237(b)(i)
of the Companies Act which is being known as Ketan Parekh - Stock scam of 2001.
2. Few facts
dealing with the complex question of law which have been raised by the
appellant in the present proceedings are briefly narrated as under :
3. In 2001 there
was a sudden crash in the stock market i.e., the sudden increase in the prices
over the board securities in the period 1999-2000 and then sudden crash of the
stock market is attributed and alleged to one Mr. Ketan Parekh. It is alleged
that he by his conduct through his various entities and companies has committed
fraud which led to the said crash in the stock market. It is also alleged that
the 14 companies in the present appeals are entities which are controlled and
owned directly or indirectly by the said Ketan Parekh, who is the alleged
King-player in the stock exchange scam of 2001. There are also allegations that
with the crash of the stock market, there has simultaneously been a crash of
the Madhavpura Co-operative Bank, Global Trust Bank and UTI and thousands of
crores of rupees have been siphoned off from the system. With a hue and cry
from the public the Lok Sabha on 26-4-2001 constituted the Parliamentary
Committee as fact-finding committee to investigate the said 2001 Stock Exchange
crash. The terms of reference of the said Joint Parliamentary Committee have
been enlarged on 3-8-2001 and inquiries pertaining to the crash of UTI were
also made part of the said Joint Parliamentary Committee. The Joint
Parliamentary Committee has given their report and has inter alia recommended
in paras 11 to 35 of the report that the investigations must be carried out in
respect of 6 corporate groups belonging to Ketan Parekh and that the Department
of Company Affairs has been informed that 6 out of 10 corporate groups have
transferred huge amount to entities and associates of Ketan Parekh and this
aspect requires investigation. Joint Parliamentary Committee has also
simultaneously directed SEBI to carry out investigations to take appropriate
action within the provisions of Security Exchange Board India Act, 1992 as
amended from time-to-time (hereinafter referred to as ‘the SEBI Act’).
4. On
25-6-2001 the respondents issued a letter to the appellants seeking inspection of
the books of account of the appellant in exercise of power conferred under
section 209A of the Companies Act. After carrying out certain initial
investigations on the reference of the company on 25-11-2001 a preliminary
finding report was filed by the respondent with the Central Government. On
19-11-2004 the respondents set out various details and inquiries with the
appellant company seeking various information. This inspection under section
209A of the Companies Act has been partly carried out and is still in progress.
5. On
2-5-2003 the Company Petition No. 39 of 2003 was filed by the respondent with
the Company Law Board seeking permission to investigate the affairs of the
company in exercise of power conferred under section 237(b)(i) of the Companies
Act. The application is inter alia based on the interim report of the various
irregularities of the SEBI as well as certain irregularities which came to the
light by virtue of inspection under section 209A of the Companies Act. The said
petition is also based on a report of the Joint Parliamentary Committee. Thus
in nutshell the application which has been initiated under section 237(b)(i) is
based on the material gathered from three basic sources namely, the report of
the Joint Parliamentary Committee, the interim report of the SEBI investigation
and thirdly the reports pursuant to the investigation under section 209A of the
Companies Act. The petition which is filed on 2-5-2003 by the respondent in
detail sets out the various findings on the aforesaid three reports and the
material gathered by the said authorities as required for the purpose of
carrying out investigation under section 237(b)(i). This petition dated
2-5-2003 was served on the company on 16-5-2003. It is the case of the
petitioner that on 20-7-2003 they applied to the Company Law Board for a
certified true copy of the SEBI report and other documents which are relied
upon by the respondent in the said company petition before the Company Law
Board. On 12-7-2003 the appellant herein sought a transfer of the proceedings
from the Principal Bench of the Company Law Board, New Delhi to the Western
Region Bench of the Company Law Board at Mumbai. Simultaneously they have also
applied for inspection of the various documents which are referred to and/or relied
upon by the respondent in the said company petition. On 24-11-2003 the
appellant company filed a reply inter alia opposing the petition which was
filed under section 37(b)(i) of the Companies Act. It was inter alia alleged
that the powers sought to be exercised by the Company Law Board are likely to
seriously affect the interest of the company. The various allegations made in
the company petition were denied. It was contended that the stock market crash
which took place some time in or about 2001 was not due to acts on the part of
Ketan Parekh but in fact he along with his entitles have suffered losses in the
range of about Rs. 3,000 crores to Rs. 4,000 crores. It was further contended
that if there was any evidence regarding misuse of funds of banks and financial
institutions then the appellant cannot be penalised for the same but it is in
fact the duty of the Reserve Bank of India to regulate and over see the
functions of the banks and financial institutions affecting the financial
matters and that the consequence of the failure on the part of the RBI cannot
be attributed to the appellant herein. Insofar as the allegation that there is
intention of the company to conduct its business with an intention to defraud
its creditors, members and other members or for a fraudulent or unlawful
purpose is concerned, the appellant has contended that the word ‘intention’
would mean that the someone was deceived by the respondents deliberately and in
preplanned events to their advantage and it assumes a guilty mind and there has
to be an unlawful gain by such an evil design on the part of the appellant
herein. It was contended that the crash of the stock market in 2001 was merely
a drastic melt down of the share prices due to a declining trend in global
share market which has also inflicted heavy financial losses to the appellant
companies. It is further contended that the drastic fall in the share prices
cannot be foreseen by the appellant and they themselves are the victims of melt
down and not the beneficiaries of the same. Thus the allegation of carrying on
business for defrauding the creditors and/or for fraudulent or unlawful purpose
were denied. It has been further contended that the purpose and object of
investigation has already been achieved by carrying out investigations by the
authorities such as SEBI, CBI and Department of Company Affairs under section
209A of the Companies Act and therefore a further investigation in the matter
by the said investigating authorities appointed by the Central Government under
section 237(b)(i) is neither necessary nor efficacious and it would only affect
the interest of the appellant company prejudicially. The respondents on the
other hand in their rejoinder have placed extensive reliance upon the
inspection report of the CBI and Joint Parliamentary Committee and also the
inspection carried out by the Department of Company Affairs under section
209(A). Even a certain extract of the JPC report has been annexed to the said
rejoinder.
6. After
hearing the parties the Company Law Board has passed an impugned order on
27-9-2004. By the impugned order the Company Law Board has inter alia held that
there is a ground made out for carrying out investigation under section
237(b)(i). It has been further held that there are serious allegations of fraud
and scams by these corporate entities and there is substantive material in
support of the said allegations to conduct support the investigation under
section 237(b)(i) of the Companies Act. Thus the Company Law Board allowed the
company petition and permitted the Department of Company Affairs to carry out
investigation under section 237(b)(i) in the affairs of each of the appellant
companies. This order dated 22-9-2004 which is a common order passed in respect
of all of the sixteen appeals before me is the subject-matter of challenge
before me. These are the appeals filed under section 10F on the ground that
certain substantive questions of law arise in the present case and require
determination of this Court.
7. Learned
counsel for the appellant has framed three substantial questions of law in
support of his argument which are briefly enumerated as under :
(i) Whether it is a condition precedent for exercise of power
under section 237(b)(i) of the Companies Act that the business of the company
should be in operation as on the date when the power is sought to be exercised
by the respondent or that once the business of the company has ceased to be in
operation for any reason whatsoever voluntarily or otherwise, then the
respondents have no jurisdiction to initiate and/or exercise jurisdiction
vested in them by virtue of the proceedings under section 237(b)(i) ?
(ii) Whether on the facts of the present case the respondents have
made out prima facie case for investigation or alternatively there is a material
available for exercising jurisdiction by the respondent under section 237(b)(i)
?
(iii) Whether in view of simultaneous investigations carried out by
SEBI, CBI and Department of Company Affairs under section 209A the respondent
ought not be permitted to launch a fresh investigation in exercise of power
under section 237(b)(i) of the Companies Act on same material and on same facts
?
8. Before I
deal with the aforesaid substantial questions of law as framed by the learned
counsel for the appellant I feel that it is necessary that the relevant
provisions of the Act which are germane to the aforesaid questions of law must
be set out. Some of the relevant provisions are reproduced as under :
“209A. Inspection of books of account, etc.,
of companies.—(1) The books of account and other books and papers of every
company shall be open to inspection during business hours—
(i) by the Registrar, or
(ii) by such officer of the Government as may
be authorised by the Central Government in this behalf;
(iii) by such officers of the Securities and
Exchange Board of India as may be authorised by it :
Provided that such inspection may be made
without giving any previous notice to the company or any officer thereof:
Provided further that the inspection by the
Securities and Exchange Board of India shall be made in respect of matters
covered under sections referred to in section 55A.
(2) It shall be the duty of every director, other officer or
employee of the company to produce to the person making inspection under sub-section
(1), all such books of account and other books and papers of the company in his
custody or control and to furnish him with any statement, information or
explanation relating to the affairs of the company as the said person may
require of him within such time and at such place as he may specify.
(3) It shall also be the duty of every director, other officer or
employee of the company to give to the person making inspection under this
section all assistance in connection with the inspection which the company may
be reasonably expected to give.
(4) The person making the inspection under this section may,
during the course of inspection,-
(i) make or cause to be made copies of books
of account and other books and papers, or
(ii) place or cause to be placed any marks of identification thereon
in token of the inspection having been made,
(5) Notwithstanding anything contained in any other law for the
time being in force or any contract to the contrary, any person making an
inspection under this section shall have the same powers as are vested in a
civil court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a
suit, in respect of the following matters, namely:—(i) the discovery and
production of books of account and other documents, at such place and such time
as may be specified by such person; (ii) summoning and enforcing the attendance
of persons and examining them on oath; (iii) inspection of any books, registers
and other documents of the company at any place.
(6) Where an inspection of the books of account and other books
and papers of the company has been made under this section, the person making
the inspection shall make a report to the Central Government or the Securities
and Exchange Board of India in respect of inspection made by its officers.
(7) Any officer authorised to make an inspection under this
section shall have all the powers that a Registrar has under this Act in
relation to the making of inquiries.
(8) If default is made in complying with the provisions of this
section, every officer of the company who is in default shall be punishable
with fine which shall not be less than fifty thousand rupees, and also with
imprisonment for a term not exceeding one year.
(9) Where a director or any other officer of a company has been
convicted of an offence under this section he shall, on and from the date on
which he is so convicted, be deemed to have vacated his office as such and on
such vacation of office, shall be disqualified for holding such office in any company,
for a period of five years from such date.”
“234. Power of Registrar to call for
information or explanation.— (1) Where, on perusing any document which a
company is required to submit to him under this Act, the Registrar is of
opinion that any information or explanation is necessary with respect to any
matter to which such document purports to relate, he may, by a written order,
call on the company submitting the document to furnish in writing such
information or explanation, within such time as he may specify in the order.
(2) On receipt by the company of an order under sub-section (1),
it shall be the duty of the company, and of all persons who are the officer of
the company, to furnish such information or explanation to the best of their
power.
(3) On receipt of a copy of an order under sub-section (1), it
shall also be the duty of every person who has been an officer of the company
to furnish such information or explanation to the best of his power.
(3A) If no information or explanation is furnished within the time
specified or if the information or explanation furnished is, in the opinion of
the Registrar, inadequate, the Registrar may by another written order call on
the company to produce before him for his inspection such books and papers as he
considers necessary within such time as he may specify in the order; and it
shall be the duty of the company, and of all persons who are officers of the
company, to produce such books and papers.
(4) If the company, or any such person as is referred to in
sub-section (2) or (3), refuses or neglects to furnish any such information or
explanation or if the company or any such person as is referred to in
sub-section (3A) refuses or neglects to produce any such books and papers,-
(a) the company and each such person shall be punishable with
fine which may extend to five thousand rupees and in the case of a continuing
offence, with an additional fine which may extend to five hundred rupees for
every day after the first during which the offence continues; and
(b) the Court trying the offence may, on the application of the
Registrar and after notice to the company, make an order on the company for
production before the Registrar of such books and papers as in the opinion of
the Court, may reasonably be required by the Registrar for the purpose referred
to in sub-section (1).
(5) On receipt of any writing containing the information or
explanation referred to in sub-section (1), or of any book or paper produced
whether in pursuance of an order of the Registrar under sub-section (3A) or of
an order of the Court under sub-section (4), the Registrar may annex that
writing book or paper, or where that book or paper is required by the company,
any copy or extract thereof, to the document referred to in sub-section (1); and
any writing or any book or paper or copy or extract thereof so annexed shall be
subject to the like provisions as to inspection, the taking of extracts and the
furnishing of copies, as that document is subject.
(6) If such information or explanation is not furnished within
the specified time or if after perusal of such information or explanation or of
the books and papers produced whether in pursuance of an order of the Registrar
under sub-section (3A) or of an order of the Court under sub-section (4), the Registrar
is of opinion that the document referred to in sub-section (1), together with
such information or explanation or such books and papers discloses an
unsatisfactory state of affair or does not disclose a full and fair statement
of any matter to which the document purports to relate, the Registrar shall
report in writing the circumstances of the case to the Central Government.
(7) If it is represented to the Registrar of materials placed
before him by any contributory or creditor or any other person interest that
the business of a company is being carried on in fraud of its creditors or of
persons dealing with the company or otherwise for a fraudulent or unlawful
purpose, he may, after giving the company an opportunity of being heard, by a
written order, call on the company to furnish in writing any information or
explanation on matters specified in the order, within such time as he may
specify therein; and the provisions of sub-sections (2), (3), 3(A), (4) and (6)
of this section shall apply to such order.
|
** |
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(8) The provisions of the section shall apply mutatis mutandis to
documents which a liquidator, or a foreign company within the meaning of
section 591, is required to file under this Act.”
“235. Investigation of the affairs of a company.—(1)
The Central Government may, where a report has been made by the Registrar under
sub-section (6) of section 234, or under sub-section (7) of that section, read
with sub-section (6) thereof, appoint one or more competent persons as
inspectors to investigate the affairs of a company and to report thereon in
such manner as the Central Government may direct.
(2) Where—
(a) in the case of a company having a share capital, an application
has been received from not less than two hundred members or from members
holding not less than one-tenth of the total voting power therein, and
(b) in the case of a company having no share capital, an
application has been received from not less than one-fifth of the persons on
the company’s register of members, the Tribunal may, after giving the parties
an opportunity of being heard, by order, declare that the affairs of the
company ought to be investigated by an inspector or inspectors, and on such a
declaration being made, the Central Government shall appoint one or more
competent persons as inspectors to investigate the affairs of the company and
to report thereon in such manner as the Central Government may direct.”
“237. Investigation of company’s affairs in
other cases.—Without prejudice to its powers under section 235, the Central
Government-
(a) shall appoint one or more competent persons as inspectors to
investigate the affairs of a company and to report thereon in such manner as
the Central Government may direct, if-
(i) the company, by special resolution;
or
(ii) the Court, by order, declares that the affairs of the
company ought to be investigated by an inspector appointed by the Central
Government; and
(b) may do if in its opinion or in the opinion
of the Tribunal, there are circumstances suggesting—
(i) that the business of the company is being conducted with
intent to defraud its creditors, members or any other persons, or otherwise for
a fraudulent or unlawful purpose, or in a manner oppressive of any of its
members, or that the company was formed for any fraudulent of unlawful purpose;
(ii) that persons concerned in the formation of the company or
the management of its affairs have in connection therewith been guilty of
fraud, misfeasance or other misconduct towards the company or towards any of
its members; or
(iii) that the members of the company have not been given all the
information with respect to its affairs which they might reasonably expect,
including information relating to the calculation of the commission payable to
a managing or other director, or the manager, of the company.”
“250A. Voluntary winding up of company, etc.,
not to stop investigation proceedings.—An investigation may be initiated under
section 235, 237, 239 or 247 notwithstanding that—
(a) an application has been made for an order
under section 397 or section 398; or
(b) the company has passed a special resolution for voluntary
winding up, and no investigation so initiated shall be stopped or suspended by
reason only of the fact that an application referred to in clause (a) has been
made or a special resolution referred to in clause (b) has been passed.”
9. Learned
counsel appearing for appellant has vehemently contended before me that the
proceedings which are initiated by the respondent before the Company Law Board for
investigation under section 237(b)(i) of the Companies Act is totally without
jurisdiction and non est. It has been further contended that the condition
precedent prescribed under the said section having not been complied with by
the Company Law Board was not entitled in law to exercise jurisdiction under
the provisions of section 237(b)(i) of the Companies Act. The learned counsel
has further contended that on true and correct interpretation the Company Law
Board gets jurisdiction to pass an order of investigation only if the company
is carrying on business with the intention to defraud its creditors, members
and/or carrying on business for fraudulent or unlawful purpose or in a manner
oppressive to any of its members in a praesentis. It is therefore contended
that if the company is not carrying on business at present then irrespective of
the fact that during the period when the company was carrying on business
whether the company has conducted business defrauding the creditors or for a
fraudulent or unlawful purpose or in a manner oppressive to any members the
Company Law Board does not acquire jurisdiction to launch investigation under
section 237(b)(i). It has been vehemently contended that the provisions under
section 237(b)(i) must be strictly construed because it is an inroad in the
freedom guaranteed by the Constitution under Article 19(1)(g). It is contended
that it is an interference with the right of the shareholders to carry on
business as guaranteed by the Constitution. It has been contended that section
237(b)(i) must be so strictly read that unless there is a compliance with the
condition precedent prescribed thereon the Tribunal cannot exercise power to
launch investigation in the affairs of the company, it has been further
contended that only in the last category prescribed under section 237(b)(i)
i.e., if the company is formed for any fraudulent and/or unlawful purpose that
it is not necessary that the business of the company should be carried on at
present moment when the investigations are ordered. It has been contended by
the learned counsel for the appellant in alternative to the aforesaid
submission that even if the provisions of section 237(b)(i) are not so strictly
construed as urged by him then also it must be so construed that save and
except the case where the business of the company is voluntarily closed or the
company is voluntarily wound up then only on those cases section 237(b)(i)
would be applicable but in all other cases the provisions of section 237(b)(i)
would not apply if the business of the company is not carried in praesentis. It
has been further contended that it is immaterial that whether at the relevant
time when the business it was carried on by the company was in fact carried on
for the purpose of defrauding the creditors or members and/or carried on for
fraudulent or unlawful purpose or it is carried on in a manner oppressive to
any of its members and still the Company Law Board will not permit the
investigation by the Central Government under the provisions of section
237(b)(i) of the Companies Act. It has been strenuously urged by the learned
counsel for the appellant that the power conferred on the Central Government
under section 237(b)(i) is a draconian power interfering with the business of
the company and such power must not be permitted to be utilised save and except
directly in accordance with law and therefore the said application for
investigation when the business is not running in praesentis cannot be granted.
10. On the facts
of the present case the learned counsel has contended that it is an admitted
position that in respect of some of the appellants who are inter alia carrying
on business of share brokerage their share brokers card has been suspended and
in some of the cases the said card is revoked and/or terminated by the
concerned stock exchange and SEBI and some of the trading firms who were
carrying on business as a share broker have come to a halt and therefore those
companies are not carrying on any business in praesentis and thus the
jurisdiction vested under the Central Government and/or the Company Law Board
to investigate under section 237(b)(i) cannot be exercised in respect of these
companies. It has been further contended that business of the various companies
has also been closed because of the freezing of the bank accounts in parallel
investigations which have been carried out by the SEBI, CBI and Department of
Company Affairs. It has been therefore contended by the learned counsel for the
appellant that even in respect of companies who are not share broking companies
still their business has also come to a total halt and/or for all practical
purposes all these companies are defunct companies and exist only on paper.
Thus according to the learned counsel for the appellant the Company Law Board
ought not to have passed the impugned order since it does not satisfy the
jurisdictional requirements of section 237(b)(i) of the Companies Act. Thus the
learned counsel for the appellant has contended that the argument that these
appellants at the relevant time when they were carrying on business have
committed a scam even if it is taken as true still the said scam cannot be the
subject-matter of investigation under section 237(b)(i) because of closure of
their business for reasons beyond their control. The business of the appellants
have been brought to a halt by an order of SEBI suspending and/or revoking the
licence to carry on business of the company. Thus it is submitted that when
power is exercised under section 237(b)(i) by the Central Government the
company being already defunct companies and not running the business they
cannot be subjected to investigation under the said section.
11. The learned
counsel for the appellants has vehemently contended that the issue urged by him
is directly or squarely covered by the Constitution Bench decision of the Apex
Court in the case of Barium Chemicals Ltd. v. CLB [1966] 36 Comp. Cas. 639. He
has drawn my attention to the following para and has contended that the Apex
Court has clearly held that under section 237(b)(i) as a jurisdictional
requirement for exercising of power of ordering investigation against a company
it is necessary that the company must be carrying on business in praesentis and
it is absolutely immaterial that the company has in past carried on the
business for a fraudulent or unlawful purpose or for defrauding the creditors
or any of the members. The said para reads as under :
“In dealing with this problem the first point
to notice is that the power is discretionary and its exercise depends upon the
honest formation of an opinion that an investigation is necessary. The words
‘in the opinion of the Central Government’ indicate that the opinion must be
formed by the Central Government and it is of course implicit that the opinion
must be an honest opinion. The next requirement is that ‘there are
circumstances suggesting, etc.’ These words indicate that before the Central
Government forms, its opinion it must have before it circumstances suggesting
certain inferences. These inferences are of many kinds and it will be useful to
make a mention of them here in a tabular form :
(a) that the business is being conducted with
intent to defraud-
(i) creditors of the company
(ii) members, or
(iii) any other person;
(b) that the business is being conducted
(i) for a fraudulent purpose,
(ii) for a unlawful purpose;
(c) that persons who formed the company or
manage its affairs have been guilty of-
(i) fraud, or
(ii) misfeasance or other
misconduct-towards the company or towards any of its members;
(d) that information has been withheld from the members about its
affairs which might reasonably be expected, including calculation of commission
payable to-
(i) managing or other director,
(ii) managing agent,
(iii) the secretaries and treasurers,
(iv) the managers.
These grounds limit the jurisdiction of the
Central Government. No jurisdiction outside the section which empowers the
initiation of investigation, can be exercised. An action, not based on
circumstances suggesting an inference of the enumerated kind, will not be
valid. In other words, the enumeration of the inferences, which may be drawn
from the circumstances, postulates the absence of a general discretion to go on
a fishing expedition to find evidence. . . .” (p. 661)
12. The learned counsel
has vehemently contended that the judgment of the Apex Court as per majority
decision laid down by Hidayatullah, J. is the lead judgment and holds that the
provisions of section 237(b)(i) can only be exercised when the business is
running in praesentis and does not apply when the business of the company has
been closed down for any reasons whatsoever including the reasons which are
beyond the control of the appellant themselves. The learned counsel has been at
pain to convey that the issue which has been raised by him is no more res
integra in view of the judgment of the Constitution Bench and has contended
that the said judgment of the Apex Court is binding on me. According to the
learned counsel for the appellant the aforesaid para in the judgment holds that
the business of the company must be carried on in praesentis for the purpose
which is mentioned in the said section for exercising power by the Central
Government under section 237(b)(i).
13. He has
further contended that the issue was further discussed in subsequent judgment
of the Apex Court in the case of Rohtas Industries Ltd. v. S.D. Agarwal [1969]
1 SCC 325. It has been contended that Apex Court in the aforesaid judgment has
accepted the view taken by Hidayatullah, J. as the correct view. He has relied
upon para 6 of the said judgment. He has also relied upon para 11 where the
Apex Court has approved the view of Hidayatullah, J. in the case of Barium
Chemicals Ltd. (supra). The said paras 6 and 11 reads as under :
“6. The decision of this Court in Barium
Chemical’s case (supra) which considered the scope of section 237(b)
illustrates that difficulty. In that case Hidayatullah, J. (our present Chief
Justice) and Shelat, J. came to the conclusion that though the power under
section 237(b) is a discretionary power the first requirement for its exercise
is the honest formation of an opinion that the investigation is necessary and
the further requirement is that ‘there are circumstances suggesting’ the
inference set out in the section; an action not based on circumstances
suggesting an inference of the enumerated kind will not be valid; the formation
of the opinion is subjective but the existence of the circumstances relevant to
the inference of the enumerated kind will not be valid; the formation of the
opinion is sine qua non or action must demonstratable; if their existence is
questioned, it has to be proved at least prima facie; it is not sufficient to
assert that those circumstances exist and give no clue to what they are,
because the circumstances must be such as to lead to conclusions of certain
definiteness; the conclusions must relate to an intent to defraud, a fraudulent
or unlawful purpose, fraud or misconduct. In other words they held that
although the formation of opinion is subjective but the existence of
circumstances relevant to the inference as the sine qua non for action must be
demonstratable; if their existence is questioned, it has to be proved at least
prima facie; it is not sufficient to assert that those circumstances exist and give
no clue to what they are, because the circumstances must be such as to lead to
conclusions of certain definiteness; that conclusions must relate to an intent
to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In other
words they held that although the formation of opinion by the Central
Government is a purely subjective process and such an opinion cannot be
challenged in a Court on the ground of propriety, reasonableness or
sufficiency, the authority concerned is nevertheless required to arrive at such
an opinion from circumstances suggesting the conclusion set out in sub-clauses
(i), (ii) and (iii) of section 237(b) and the expression ‘circumstances
suggesting’ cannot support the construction that even the existence of
circumstances is a matter of subjective opinion. Shelat, J. further observed
that it is hard to contemplate that the Legislature could have left to the
subjective process both the formation of opinion and also the existence of
circumstances on which it is to be founded; it is also not reasonable to say
that the clause permitted the authority to say that it has formed the opinion
on circumstances which in its opinion exist and which in its opinion suggest an
intent to defraud or a fraudulent or unlawful purpose.
11. Coming back to section 237(b) in finding
out its true scope we have to bear in mind that that section is a part of the
scheme referred to earlier and therefore the said provision takes its colour
from sections 235 and 236. In finding out the legislative intent we cannot
ignore the requirement of those sections. In interpreting section 237(b) we
cannot ignore the adverse effect of the investigation on the company. Finally
we must also remember that the section in question is an inroad on the powers
of the company to carry on its trade or business and thereby an infraction of
the fundamental right guaranteed to its shareholders under Article 19(1)(g) and
its validity cannot be upheld unless it is considered that the power in
question is a reasonable restriction in the interest of general public. In fact
the vires of that provision was upheld by majority of the judges Constitution
Bench in Barium Chemicals’ case principally on the ground that the power
conferred on the Central Government is not an arbitrary power and the same has
to be exercised in accordance with the restraints imposed by law. For the
reasons stated earlier we agree with the conclusion reached by Hidayatullah and
Shelat, JJ. in Barium Chemicals’ case that the existence of circumstances
suggesting that the company’s business was being conducted as laid down in
sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud
or misfeasance or other misconduct towards the company or towards any of its
members is a condition precedent for the Government to form the required
opinion and if the existence of those conditions is challenged, the Courts are
entitled to examine whether those circumstances were existing when the order
was made. In other words, the existence of the circumstances in question are
open to judicial review though the opinion formed by the Government is not
amenable to review by the Courts. As held earlier the required circumstances
did not exist in this case.”
14. Apart from
the aforesaid two judgments of the Apex Court the learned counsel has in
support of his contention has also relied upon the judgment of the Delhi High
Court in the case of Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp.
Cas. 634 and the judgment of the Calcutta High Court in the case of New Central
Jute Mills Co. Ltd. v. Dy. Secretary, Ministry of Finance, Department of
Revenue & Company Law [1970] 40 Comp. Cas. 102 (Cal.). By relying upon the
aforesaid two judgments the learned counsel has reiterated the submissions
which are already set out in extentio hereinabove.
15. In the
alternative to the above submissions the learned counsel has raised the issue
of interpretation of section 237(b)(i) and it is contended that assuming that
the judgment of the Apex Court did not hold that the running of a business in
praesentis in the manner set out therein is a condition precedent still
according to him on a plain and simple reading of the section an inescapable
conclusion is that for the purpose of exercising the power under the said
section the business must be a running business and not defunct or closed down
business. On the other hand learned counsel Mr. Desai the learned Additional
Solicitor General appearing for the respondent has contended that the
provisions of section 237(b)(i) cannot be so restrictly interpreted. According
to him it takes in its sweep even a part conduct of the business partially
conducted even if the company has become defunct or it has suspended its
business operation for any reasons whatsoever. It has been further contended by
the learned counsel that the provisions of section 237(b)(i) in its opening
portion provides that the power of the Central Government to appoint one or
more persons as inspector to investigate the affairs of the company and to
report thereon to the Central Government is a power conferred on the respondent
in the public interest and such power of the Central Government ought to be
given full effect for effecting investigation and cannot be so interpreted so
as to defeat the provisions of the Act. It has been further contended that the
word ‘is being conducted’ is in a simple present tense but by using the words
conducted in past tense it has included within its scope even the business
which was carried out for fraudulent purposes in the past. Thus according to the
learned Additional Solicitor General the Central Government would have
jurisdiction to investigate irrespective of the fact that whether the company
is running the business or not. The learned Additional Socilitor General has
further contended that the Court must give purposeful interpretation to the
provisions of section 237(b)(i) and should not interpret the section which
results in absurd consequences. According to the learned counsel the section
cannot be interpreted in a manner which can provide a scope to do the things
which are in fact meant to be prevented by the provisions thereof. Insofar as
the aforesaid authorities are concerned, the learned counsel for the respondent
has contended that the judgment of the Apex Court in the case of Barium Chemicals
Ltd. (supra) does not in any way or manner set out any such proposition of law
as contended by the learned counsel for the respondent i.e. the company must be
running the business in praesentis so as to attract the provisions of section
237(b)(i). The learned counsel has contended that the paras referred to by the
learned counsel for the appellant did not carve out any such proposition of law
as canvassed by the learned counsel for the appellant before this Court and
therefore the said argument ought not to be accepted. The learned counsel has
further contended that if the interpretation is given as suggested by the
learned counsel for the appellant in most of the cases, then the company would
commit fraud and carry on business for fraudulent or unlawful purpose and/or to
defraud the creditors and before the same can be detected or investigated they
would close down the company and evade investigation or cases where due to
criminal investigation if the business of the companies has come to a halt then
in that event it would escape the investigation under section 237(b)(i) of the
Companies Act. Further more it would restrict the power of Government to take
immediate remedial action of preventing further fraud being carried on by the
company by carrying on business.
16. Alternatively
the learned counsel solicitor general has contended that in the facts of the
present case in fact the company is carrying on business in praesentis. It has
been contended that the company is neither a defunct company nor has the company
been wound up but it is merely affected by virtue of the various orders passed
by the various authorities affecting the business of the company but is still
in operation. It has been contended that it is admitted by the appellant
themselves in the various documents which are set out on record which indicate
that according to appellant themselves the business is a running business and
not closed down as claimed by the appellant himself and it has been contended
by the learned counsel for the appellant that even if the section is
interpreted as claimed by the learned counsel for the appellant still the order
impugned herein is legal and valid and it satisfies all the requirements of
section 237(b)(i) and this Court in exercise of power under section 10(f) ought
not to inteferere with the said order passed by the Company Law Board and the
appeal should be dismissed.
17. While
considering the rival contentions of the parties insofar as the first question
of law framed by the petitioner is concerned i.e. the power under section
237(b)(i) can only be exercised if the company is carrying on business and does
not apply if the company has closed down its business or by virtue of the
orders passed by various authorities due to it has been forced to close down its
business. I do not agree that the aforesaid issue is no longer a res integra in
view of the judgment of the Apex Court in the case of Barium Chemicals (supra).
On going through the above judgment of the Apex Court, in which the Apex Court
has considered the constitutional validity of section 237(b)(i), I do not find
any such proposition of law laid down by the Apex Court that the power under
section 237(b)(i) can only be exercised when the company was carrying on
business in praesentis. The paras on which strong reliance has been placed by
the learned counsel for the appellant in my opinion does not raise any such
issue of law. In the said paras the Apex Court was dealing with the issue of
formation of opinion of the Central Government and requirement of the material
in support thereof while ordering investigation under section 237(b)(i) of the
Act. The para clearly indicates that the court was considering the words in the
opinion of the Central Government and was considering that whether such words
suggest in any manner that there should be material in support. While
considering the aforesaid issue the court has analysed the said sections and
has broken in into four parts a, b, c and d therein. Such division of the
section in four parts namely a, b, c and d is nothing else but division of the
plain language of the section as it is. The learned counsel for the appellant
has contended that the Apex Court while considering the section in parts (a)
and (b) as used the words ‘business is being conducted’ indicates that the
court was of the opinion that the investigation cannot be ordered once the
business has been closed down. I do not read any such proposition of law in the
said para which has been set out in the said judgment nor do I find from the
reading of the said judgment that any such issue was ever considered by the
Apex Court. I therefore do not accept the contention of the learned counsel
that the issue whether the investigation can be ordered only when the business
is being conducted must be read in present tense and that the ratio of the
aforesaid judgment in the case of Barrium Chemicals Ltd. (supra) covers the
issue. I therefore reject the contention of the appellants that this issue is
squarely covered and no more res integra by virtue of the judgment of the Apex
Court in the case of Barium Chemicals Ltd. (supra). I am of the opinion that it
is now well settled law that the judgment is an authority only on such
proposition of law which squarely arises in the cases which are squarely dealt
with by the court and that is the only ratio of the judgment which is binding
on me. I do not find any such ratio or proposition of law as agitated by the
learned counsel for the appellant being decided by the Apex Court in the
aforesaid judgment of Barium Chemicals Ltd.’s case (supra). I therefore do not
accept the contention of the learned counsel for the appellants and reject the
same.
18. Once I so
hold that the issue is not covered by the judgment cited by the learned
counsel, then I am required to consider the alternative argument of the learned
counsel for the appellant i.e., on a plain and simple interpretation of section
237(b)(i) of the Companies Act, it is a condition precedent that business must
be a running business ordering investigation under section 237(b)(i). The
learned counsel for the appellant has contended that even on interpretation the
section is clear and unambiguous. It uses the word ‘is being conducted’ which
is simple present tense. Thus according to the learned counsel for the
appellant on plain and simple interpretation of the section itself it is clear
that the power under section 237(b)(i) can be exercised by the authorities only
if the business is conducted in praesentis. Insofar as the arguments on the
interpretation of section 237(b)(i) is concerned it is by now well-settled that
the interpretation of the section as a first principle must be on the basis of
simple and plain language used in the section itself. However, there is a case
at which has been well recognised by the various courts that if interpretation
is likely to result in absurd consequences or it defeats the intention of the
Legislature then in that event purposive interpretation ought to be resorted to
and interpretation should be such to advance the intention of the Legislature
rather than defeating the same. In my opinion the provisions of investigation
under section 237(b)(i) are being introduced by the Parliament with the
intention to prevent persons who enter the business in the guise of corporate
entities to carry on fraudulent business with a view to harm the public
interest. Butterworth in his 5th edition on the company law while tracing out
the background of the similar legislation i.e. English Company Law has inter
alia considered the reason for introduction of such a legislation and while
doing so it has stated as under :
“It is important to know the background of the
legislation. It sometimes happens that public companies are conducted in a way
which is beyond the control of the ordinary shareholders. The majority of the
shares are in the hands of two or three individuals. These have control of the
company’s affairs. The other shareholders know little and/or told little. They
receive the glossy annual reports. Most of them throw them into the wastepaper
basket. There is an annual general meeting but few of the shareholders attend.
The whole management and control is in the hands of the directors. They are
self-perpetuating oligarchy; and are virtually unaccountable. Seeing that the
directors are the guardians of the company, the question is asked : Quis
custodiet ipsos custodies - Who will guard the guards themselves.”
19. Similar are
the provisions under section 237(b)(i) of the Companies Act in India.
Essentially the provisions are meant to see that the defrauding of the public
at large is not being carried on under the guise of the corporate affairs. In
my opinion even on plain and simple reading of the said section would indicate
that the words used ‘is being conducted’ are used in the context of the
fraudulent or unlawful business conducted by the company in course of running
of their business. It does not mean that once the business is conducted in
unlawful and fraudulent manner and if it is closed down the power of the
Central Government of ordering investigation under section 237(b)(i) stood
revoked or ceased to have effect as contended by the learned counsel for the
appellant. The word ‘is being conducted’ has to be read alongwith the words
‘fraudulent or unlawful purpose’ even if it is so read it is clear that the
word ‘is being conducted’ is used with the intention to indicate that when the
business of the company was conducted it was conducted for unlawful purpose.
Even otherwise I am of the opinion that to accept the contention of the
appellant would be to make the said section nugatory and without any effect and
toothless. It is because any person can conduct the business for fraudulent or
unlawful purpose and before it is detected would close down the business of the
company and in fact escape the consequences as contemplated under section
237(b)(i) of the company. It is not uncommon that there are companies who are
fly by night operators in a booming economy of India today. If such an
interpretation is given to section 237(b)(i) then all these companies would commit
fraud and would close down the business and consequently make the provisions a
dead letter on the statue. Apart therefrom it is also difficult to interpret
the section in a manner the learned counsel for the appellant has called upon
me to do because while so interpreted it is necessary that the Central
Government must detect and investigate all such cases of the company which are
conducted in a fraudulent or unlawful purpose in a course when such conduct is
being carried on by the company. I do not think this could be a legislative
intention while enacting the said section 237(b)(i).
20. The
principles of interpretation of statue are well settled. It is repeatedly held
by the Apex Court that the interpretation must be to avoid absurdity and
unrealistic result or consequences of such an interpretation. The Maxwell has
in his book Interpretation of Statutes in the 10th edition as opined as under :
“....if the choice is between two
interpretation, the narrow of which would fails to achieve the manifest purpose
of the legislation, we should avoid a construction which would reduce the
legislation to futility and should rather accept the bolder construction based
on the view that Parliament would legislate only for the purpose of bringing
about an effective result.”
21. The
aforesaid rule of a meaningful and purposeful interpretation of the section to
avoid the absurd consequence is by now well settled in the case of Mangin v.
IRC [1971] All Eng. LR 179 Lord Donvan has stated as under :
“Thirdly, the object of the construction of a
statute being to ascertain the will of the Legislature, it may be presumed that
neither injustice nor absurdity was intended. If therefore a literal
interpretation would produce such a result, and the language admits of an
interpretation which would avoid it, then such an interpretation may be
adopted.”
22. The said
view is also recognised in large number of authorities in India, some of which
can be briefly enumerated as under : In the case of Budhan Singh v. Babi Bux
AIR 1970 SC 1880 in para 9 it is stated as under :
“9. Before considering the meaning of the word
‘held’ in section 9, it is necessary to mention that it is proper to assume
that the law-makers who are the representatives of the people enact laws which
the society considers as honest, fair and equitable. The object of every
legislation is to advance public welfare. In other words, as observed by
Crawford in his book on Statutory Constructions that the entire legislative
process is influenced by considerations of justice and reason. Justice and
reason constitute the great general legislative intent in every piece of
legislation. Consequently, where the suggested construction operates hoarsely,
ridiculously or in any other manner contrary to prevailing conceptions of justice
and reason, in most instances, it would seem that the apparent or suggested
meaning of the statute was not the one intended by the law makers. In the
absence of some other indication that the harsh or ridiculous effect was
actually intended by the Legislature, there is little reason to believe that it
represents the legislative intent.” (p. 1883)
23. In the case
of Nasiruddin v. State Transport Appellate Tribunal AIR 1976 SC 331 where in
the Apex Court has in para 26 as held as under :
“26. The conclusion as well as the reasoning
of the High Court that the permanent seat of the High Court is at Allahabad is
not quite sound. The order states that the High Court shall sit as the new High
Court and the Judges and Division Bench thereof shall sit at Allahabad or at
such other places in the United Provinces as the Chief Justice may, with the
approval of the Governor of the United Provinces appoint. The word ‘or’ cannot
be reads as ‘and’. If the precise words used are plain and unambiguous, they
are bound to be construed in their ordinary sense. The mere fact that the
results of a statute may be unjust does not entitle a court to refuse to give
it effect. If there are two different interpretations of the words in an Act,
the Court will adopt that which is just, reasonable and sensible rather than
that which is none of those things. If the inconvenience is an absurd
inconvenience, by reading an enactment in its ordinary sense, whereas if it is
read in a manner in which it is capable, though not in an ordinary sense, there
would not be any inconvenience at all; there would be reason why one should not
read it according to its ordinary grammatical meaning. Where the words are
plain the court would not make any alteration.” (p. 338)
24. In the case
of Molar Mal v. Kay Iron Works (P.) Ltd. [2000] 4 SCC 285 while reconsidering
the aforesaid principle the Apex Court has held as under:
“The Courts will have to follow the rule of
literal construction which rule enjoins the Court to take the words as used by
the Legislature and to give it the meaning which naturally implies. But, there
is an exception to this rule. That exception comes into play when application
of literal construction of the words in the statute leads to absurdity,
inconsistency, or when it is shown that the legal context in which the words
are used or by reading the statute as a whole, it requires a different meaning.
If the expression ‘entitled to apply again’ as given its literal meaning, it
would defeat the very object for which the Legislature has incorporated that
proviso in the Act inasmuch as the object of that proviso can be defeated by a
landlord who has more than one tenanted premises by filing multiple
applications simultaneously for eviction and thereafter obtain possession of
all those premises without the bar of the proviso being applicable to him. This
could not have been the purpose for which the proviso is included in the Act.
If such an interpretation is given then the various provisos found in
sub-section (3) of section 13 would become otiose and the very object of the
enactment would be defeated. Therefore, the restriction contemplated under the
proviso extends even up to the stage when the Court or the Tribunal is
considering the case of the landlord for actual eviction and is not confined to
the stage of filing of eviction petition only.” (p. 288)
25. Thus in my
opinion the true and correct interpretation of section 237(b)(i) would only
mean that if the company while conducting the business has acted in a
fraudulent or unlawful purpose then such companies will fall within the net of
section 237(b)(i) irrespective of the fact that whether it is a running concern
or close down subsequently for any reason whatsoever I am of the aforesaid
opinion also because under the provisions of section 250(A) it is specifically
provided that investigation may be initiated under section 237(b)(i)
notwithstanding that the application is made under sections 397 and 398 of the
Companies Act or it has passed a special resolution for voluntary winding up of
such a company. In my opinion if section 250(A) is read along with section
237(b)(i) it is without any doubt that the contention of the learned counsel
for the appellant that no investigation can be carried out once the company has
ceased to operate its business. In any event on a true and proper construction
of the section I do not accept the contention of the learned counsel for the
appellant that the business of the company should be conducted in praesentis
for the purpose of ordering investigation by the Central Government under
section 237(b)(i).
26. Even
otherwise on facts the learned counsel for the respondent has been able to
establish that the business of the company is not totally stopped though
undoubtedly it has been seriously affected by virtue of the orders passed by
the SEBI and stock exchange of suspension of the brokerage licence, suspension
or freezer of bank account and collapse of Madhavpura Co-operative Bank and
Global Trust Bank. The learned counsel has drawn my attention to the affidavit
filed by the company before the Company Law Board in which it has been stated
as under :
“3(b) It is incumbent that in order to achieve
this objective, the functioning of the Applicant/Respondent group of companies
ought not to be crippled which situation would inevitably result if the order
dated 27-9-2004 passed by this Hon’ble Board is not amended for the purpose of
determining the real question, as would be evident from the averments made
hereinafter in this application.”
“6. It is stated in this connection that the
following the details of payment made by the Applicant group of companies and
value of Share/Property lying with the Bank :-
Particulars
|
Amt. (Rs. in crores) |
|
|
By Cash/Deposits/Dividend |
27.34 |
|
|
By sale of stocks |
15.18 |
|
|
Paid to Bank of India |
28.92 |
|
|
Total |
|
71.44 |
It may be mentioned that out of the figures
indicated above, even as recently as during the period ranging between 11-9-2004
and 4-11-2004, securities worth Rs. 15,18,02,166.05 (Rupees Fifteen Crores
Eighteen Lacs Two Thousand One Hundred and Sixty Six and paise Five), held by
the Ketan Parekh group with Madhavpura Mercantile Co-operative Bank Limited
were liquidated towards discharging dues towards the said bank by the Ketan
Parekh group.
7. It is also submitted that Shri Ketan V.
Parekh has always co-operated with the Banks even admist his crisis. In spite of
all the accounts frozen by various agencies and a bank on Shri Ketan V. Parekh
and on his various group of companies from carrying out activities in the
capital markets, the aforesaid amounts paid reflects clear intention on the
part of Shri Ketan V. Parekh and his group of companies towards liquidating
dues of bankers, financial institutions, and creditors. Admist such a situation
it would be contrary to public interest if efforts of the Ketan Parekh group of
companies to liquidate bank’s dues are jeopardised in any manner.
10. Admist these fact finding investigations,
to impose another investigation would have the effect of crippling the
functioning of Ketan Parekh Group of Companies and would adversely affect their
capacities to liquidate dues of creditors which would be contrary to public
interest.”
27. Learned
counsel for the respondent has also relied upon the balance sheet of the
various companies which inter alia undoubtedly indicates conduct of some
business though by way of liquidation of the various assets of the company.
However the learned counsel for the appellant has contended that liquidating
the assets and/or conducting the business of the company by calling meetings of
the company cannot be deemed to be conducting the business of the company. He
has relied upon the judgment of the Apex Court in the case of Bengal &
Assam Investors Ltd. v. CIT AIR 1966 SC 1514 particularly para 13 of the said
judgment. The said para 13 of the said judgment reads as under :
“13. Mr. Desai laid a great deal of stress on
the argument that the very fact that a company is incorporated to carry on
investment shows that the company is carrying on business. We are unable to
agree with this contention. Bhagwati, J. observed in Lakshminarayan Ram Gopal
Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 that ‘when a com-pany is
incorporated it may not necessarily come into existence for the purpose of
carrying on a business’. He further observed that ‘the objects of an
incorporated company as laid down in the memorandum of association are
certainly not conclusive of the question whether the activities of the company
amount to carrying on of business.’” (p. 1518)
28. While
considering the aforesaid contention the Apex Court has held that there is difference
between the incorporation of a company and conduct of the business of the
company. In this case the company was only incorporated on the paper but no
business of any nature was conducted by the company. The said judgment has no
application in the facts of the present case where the business of the company
insofar as statutory requirements are concerned of calling meetings, filing
returns, preparing the balance sheet is running. It may be that actual trading
in the stock markets or stock exchanges has come to a halt by suspension of the
trading licence by the SEBI or the business has been substantially crippled by
virtue of freezer of various bank accounts. I am of the opinion that this
cannot be treated as business of the company ‘is not carried on’ and/or the
same ‘is closed down’ for reasons beyond the control of the appellant, i.e., by
virtue of the passing of the orders of the various authorities such as SEBI,
CBI and other Central Government authorities. The business of the company is
conducted even today even though at a very low level, it cannot be said that
the business of the company has ceased to be in operation. The word ‘is being
conducted’ under section 237(b)(i) even if it is so interpreted as contended by
the learned counsel for the appellant it should be and must mean that the
business of the company has to come to a total stop and no activities of the
company are carried on. In my opinion such situation arises only when the
company is wound up either by voluntary winding up or compulsory winding up as
provided under the Companies Act. In the aforesaid circumstances even on the
facts of the present case I am of the opinion that the business of the company
is being carried on and therefore the provisions of section 237(b)(i) squarely apply
to the case which would mean that the order passed by the Company Law Board is
legal and valid and on this ground does not require any interference by this
Court.
29. This takes
me to the second question of law framed by the learned counsel for the appellant
that whether in the present case the Central Government has able to produce
necessary material on evidence to establish that the ground exist for ordering
such an investigation under section 237(b)(i). On the facts of the present case
it is not in dispute that there has been a stock market collapse in the year
2001 and the appellants herein have indulged in large number of share dealings
and trading. It is also not in dispute before me that the Madhavpura
Co-operative Bank and Global Trust Bank has collapsed in view of the stock
market scam. However appellants have denied their involvement in the scam. They
have on the contrary contended that they are the victims of the collapse of the
share market and not the beneficiaries. The respondents therein have produced
before the Company Law Board in support of the application for investigation
under section 237(b)(i) a report of the Joint Parliamentary Committee
investigating said scam. The respondents have also produced the report and/or
order passed by the SEBI against the appellants and Ketan Parekh alleged moving
spirit behind the 14 companies. The Central Government has also in support of
the application relied upon the reports which are filed by the inspectors in
the course of carrying out investigation under section 209(A). The Central
Government has also relied upon large number of breaches of the provisions of
the Companies Act by the various companies in support of investigation. In my
view not only there is a material in the form of aforesaid reports, documents
and orders but a more than prima facie case has been made out for investigation
of the appellant company. The Joint Parliamentary Committee has in fact
directed the investigation against these entities by the SEBI or the Central
Government. However the learned counsel for the appellant canvassed that there
is no material which can be used by the respondent in respect of the
investigation because each of the authorities are entitled to conduct its own
investigation on the basis of aforesaid report and, therefore, the same cannot
be utilised for the purpose of ordering investigation by the Central Government
under section 237(b)(i). I am not inclined to accept the contention of the
learned counsel for the appellant for the simple reason that it is possible
that the material can be common or identical in the course of various
investigations embarked upon by the various authorities. It does not mean that
the respondents are not entitled to use the material which have been unearthed
or found in the course of the investigation by any other authority. The
material in the present case is glaring. There was a serious collapse of the
stock exchange in 2001. The SEBI on investigation has found that all the
entities have entered into typical type of transactions in concert with each
other so as to ultimately result in collapse of the stock market. Consequently
large amount of public fund has been eroded. Consequent upon the collapse of
the Global Trust even UTI has been subjected to serious financial difficulties
and was ultimately required to be bailed out by the Government. These are very
serious circumstances and there is a plethora of material to indicate that 14
of the entities who are subject to investigation under the provisions of
section 237(b)(i) have played some role the consequence of which has resulted
as mentioned herein above. The learned counsel for the appellant further
contends that there is no need for investigation when there is substantial
material and therefore the power ought not to be exercised merely for the
purpose of exercising under section 237(b)(i). The aforesaid contention is
merely stated to be rejected as devoid of any merits. In my opinion the Central
Government has not only sufficient material but also has a strong prima facie case
for ordering investigation. It has been well settled by the various decisions
of the Apex Court that the Court ought not to interfere at this stage of
investigation by the authorities. The investigation is not a trial of an
offence. It is merely a fact-finding venture. It is no doubt true that in the
context of the companies it is a serious issue because it interferes with their
rights to carry out free trading but it has been held that every right is
coupled with reasonable restrictions and if the company has prima facie carried
out fraudulent activities then obviously it cannot complain about
investigations carried out by the Central Government in exercise of statutory
powers conferred under section 237(b)(i).
30. This leads me to the third question of law
which has been raised by the learned counsel for the appellant.
31. It has been
inter alia contended that the power conferred under the provisions of section
237(b)(i) of the Act must be sparingly exercised and cannot be utilised in
casual manner. It has been contended by the learned counsel for the appellant
that in respect of the so called security scam of 2001 there are already
investigations undertaken by the SEBI, CBI and even the Department of Company
Affairs by ordering investigation under section 209(A). It has therefore been
contended that on the same material and on the same allegations one more
investigation ought not to be ordered by the Central Government nor the Company
Law Board ought to grant a sanction to such an investigation. It is not
contended that the said exercise is in futility and the same is carried on
simultaneously by the various authorities with a view to only affect the
business of the company and thus the same should not be permitted.
32. Learned
counsel for the appellant has taken me through the provisions of the SEBI Act
and has contended that the purpose and scope of inquiry thereunder has been
more extensive and the provisions are more harsh and effective and in view
thereof the inquiry under section 237(b)(i) is meaningless and would achieve no
purpose. It has been therefore contended that once there is an extensive
inquiry undertaken by SEBI in exercise of powers conferred under the SEBI Act
and that the SEBI is supposed to be an expert authority in stock exchange transactions.
It is neither necessary nor permissible to conduct inquiry by the Department of
Company Affairs by invoking powers under section 237(b)(i) of the Companies
Act. It has been urged by the learned counsel for the appellant that the
inquiry ordered and sanctioned by the CBI, is merely to harass the appellant
company and is not meant for achieving any objective and therefore the court
should strike down the Company Law Board order sanctioning the said inquiry. It
has been further contended that the parallel CBI investigation is also already
in progress. The Department of Company Affairs is also conducting an inspection
under section 209(A) and that various prosecutions are already launched. In
view thereof it has been contended that no such investigation should be
permitted by the Central Government in exercise of power under section
237(b)(i). On the other hand the learned counsel for the respondent has urged
that the investigation is a must looking at the magnitude and the proposition
of fraud which has been alleged to have been committed by all the sixteen
entities and according to the Central Government the moving spirit behind these
companies is Mr. Ketan Parekh. The learned counsel for the respondent company
has drawn my attention to a resolution passed by the Government of India,
Department of Company Affairs being resolution dated 2-7-2003 and it has been
contended that by the said resolution the Government of India has set up a
Serious Fraud Investigation Office (SFIO) and it is required that the corporate
frauds should be investigated by the said SFIO. It is also brought to my
attention that under the said resolution the SFIO will be conferred with the
power to investigate in the company because the investigation under section
237(b)(i) of the Companies Act is entrusted to the SFIO. The learned counsel
for the respondent has further contended that there are authorities and
authorities which require to investigate the various aspects of fraud committed
by the companies like the appellant herein. It has been contended that the SEBI
under the SEBI Act has a restrictive power to investigate i.e., in respect of
security transactions but when it comes to transaction in respect of banks and
other institutions which are not within the purview and/or jurisdiction of the
SEBI and the same are required to be investigated by the Central Government
through the appropriate authority and/or body. It has been contended that the
inquiry under the different acts by the different authorities are in respect of
their respective jurisdiction and spheres assigned to them under the various
legislations and it cannot be stated in law that merely because the inquiry is
in progress by one authority under one act it should automatically prevent the
other authorities from conducting investigation under a separate statue.
33. I have
considered these rival submissions of the parties and I am of the opinion that
the jurisdiction and the power of the various investigating authorities derived
from the jurisdiction vested in them by the various legislations or statutes,
the authority which is doing the inquiry and/or conducting the investigation is
required to carry out investigation keeping in mind the legal provisions and
legal limitations which are stipulated under the respective statute.
Undoubtedly it can be that there may be an overlapping investigation but in my
opinion such an eventuality cannot prevent any investigating authority from
carrying out investigation in respect of their jurisdiction conferred on them
under the statute. I am also of the further opinion that the investigation in
respect of the corporate fraud can be initiated and considered by the Central
Government under section 237(b)(i) of the Companies Act. I have not been able
to come across any provisions under the SEBI Act in which any corporate fraud
can be investigated by the SEBI. Undoubtedly it can be investigated under
normal criminal law by the CBI. I am further of the opinion that merely because
the material on the basis of which investigation is being undertaken is
identical to the material which is subject-matter of investigation by the other
authority it cannot be stated that both the authorities cannot simultaneously
investigate pursuant to power conferred on them under their respective
statutes. I am of the opinion that every authority is entitled to investigate
even may be in respect of the same material as well as from the angle and facet
in which they have been asked to carry out investigation. It is possible that
the SEBI may be investigating the same material on the ground of breach of the
various provisions of the SEBI Act and other security related legislations
whereas the Central Government, Department of Company Affairs can consider
and/or investigate the fraud and/or breach of various provisions of law in the
light and context of the provisions of the Companies Act may be in respect of
the same material. However, I am of the opinion that the contentions advanced
by the learned counsel for the appellant cannot be accepted particularly in
view of the fact that every authority has been conferred various powers in
their respective legislation. A similar issue aroused before the English Court
under the identical provisions of investigation under the Companies Law and the
Court of Appeal in the case of London United Investments Plc, In re 1992 BCLC
285 equivalent to 1971 All Eng. LR 849 it is held as under :
“The power of the Secretary of State to
appoint inspectors to investigate the affairs of a company and to report is an
important regulatory mechanism for ensuring probity in the management of
companies affairs. That of course is in the public interest. Since the
Secretary of State’s powers under section 432(2) are exercisable where there
are circumstances suggesting fraud, it is likely that in many cases where
inspectors are appointed an investigation by the police or the Serious Fraud
Office could also be appropriate. But the code under the 1985 Act is a separate
code even though it may overlap the field of criminal investigation.”
34. Apart from
the aforesaid position in law : I am also of the further opinion that the
Central Government having constituted the Serious Fraud Investigation Office
and if it desires to carry out investigation in respect of the affairs of the
aforesaid 14 appellant companies without any mala fide intention then it is not
possible to stall the investigation merely on the basis of contentions and
arguments advanced by the learned counsel for the appellant that all the
authorities cannot be permitted to carry the investigation simultaneously in
respect of the very same material. I therefore, reject the contention on behalf
of the appellant in respect of question No. 3 which have been formulated. I am
of the opinion that the answer to this question is that every authority is
entitled to carry out investigation may be in respect of the same material
insofar as they do not exceed the jurisdiction conferred on them in their
respective statute. I therefore answer this question of law accordingly.
35. The learned
counsel for the respondent has drawn my attention to the judgment of the Apex
Court in the case of DDA v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622
and has brought to my attention that the Supreme Court has taken note of the
fact that various frauds are committed by the companies defrauding the public
at large by taking shelter of corporate entities. It has been contended by the
learned counsel for the respondent by relying upon the aforesaid judgment that
it is necessary to lift or pierce the corporate veils and to see who are the
real men behind the veil who are involved in defrauding others under the guise
of corporate entity. It has been contended by the learned counsel for the
respondent that such an exercise can be undertaken by the SFIO while carrying
out investigation under section 237(b)(i) of the Companies Act and the court
must not stole such an investigation. It has been contended by the learned
counsel for the appellant that there are serious allegations in the present
case and thus this Court must refrain from exercising jurisdiction and
interfering with the investigation at this stage. I find considerable substance
in the contention advanced by the learned counsel for the respondent. It is
well settled that the court must be reluctant in interfering in the matter
where the same is still at investigating stage. The Court cannot and should not
usurp the jurisdiction vested in the Central Government to form an opinion and
come to a conclusion as to whether the investigation is necessary or not
limited jurisdiction or power is conferred on the court is to ascertain whether
there is a material in support of the opinion arrived at by the Central
Government and/or the said exercise is not a mala fide exercise of power. In
the facts of the present case I do not consider that the exercise of the
Central Government is mala fide. There is a plethora of material and in view
therein I do not desire to interfere with the investigation ordered by the
Central Government in exercise of power conferred under section 237(b)(i) of the
Act.
36. In view
thereof I find that there is no substance in the present appeals. I accordingly
dismiss all the 14 appeals with cost quantified at Rs. 10,000 each per appeal.
At the request of the learned counsel for the
appellant the statement of the learned counsel for the respondent to maintain
status quo is to continue till 29-4-2005.
In view of the dismissal of the appeals itself
nothing remains in the Company Applications (L) No. 1030 of 2004 to 1043 of
2004 for ad interim orders and the same is dismissed accordingly with no order
as to costs.
[1972] 42 COMP. CAS. 338 (
HIGH COURT OF
v.
Union of
H.R. KHANNA, C.J.
AND P.N. KHANNA, J.
CIVIL WRIT NO. 1082 OF 1969
MAY 14, 1971
V.M. Tarkunde, H.L. Anand and
T.M. Chandwani, for the Petitioner.
Jagadish Swarup, Dipak Chaudhry, (A.K. Marwah, and R.L. Mehta, for the
Respondents:
Khanna, C.J.—This is a petition under articles
226 and 227 of the Constitution of India by B.M. Bajoria of
The facts giving rise to the petition are as below:
The petitioner has been associated with a number of
firms and joint stock companies including Ouchterlony Valley Estates (1958)
Ltd. (hereinafter referred to as “the company”). The company was incorporated
in the year 1938 with an authorised capital of Rs. 40 lakhs. The issued and
paid-up capital of the company in 1967 was over Rs. 19 lakhs. The company was
incorporated with the object of carrying on business of tea and coffee
plantations, and owns a number of tea and coffee estates in District Nilgiris.
Its shares are quoted on the Madras Stock Exchange. According to the
petitioner, he was the managing director 6f the said company between 1966 and
1969. Since June, 1969, the petitioner claims to have severed his connections with the company and to have sold
his entire holdings in it. 0a November 10, 1968, Shri G. Srinivasan, Assistant
Inspecting Officer, Company Law Board, visited the office of the company and
carried out an inspection of the books of accounts and other records of the
company by virtue of authority conferred by section 209 of the Companies Act,
1956. Shri Srinivasan made a report of the outcome of the inspection to the
Company Law Board. The Company Law Board considered the report. On January 25,
1969, Shri S.S. Singh, respondent No. 3, addressed the following letter to the Director,
Special Police Establishment, CBI,
“M/s.
Ouchterlony Valley Estates (1938) is a public limited company situated at
During the
course of a routine inspection under section 209(4) under the Companies Act by
Shri G. Srinivasan, Assistant Inspecting Officer of this department, it has
come to light that the properties of the company have been dishonestly disposed
of and the proceeds thereof were not credited in the accounts of the company.
Timber from the reserved area land of the company, viz., Lauriston Estate, New
Hope Estate, Kelly Division, Glermans Estate, Suppolk Division, Tullous
Division, etc., have been dishonestly cut and removed and its proceeds
amounting to over Rs. 6 lakhs were not credited to the accounts of the company
but have been dishonestly misappropriated. This has been done between January,
1967, and February, 1968, as presently seen. It has further come to light that
certain properties of the company were sold at high price but in the books of
the company lesser amounts were credited and the difference was dishonestly
misappropriated. Another mode of dishonest misappropriation of the funds of the
company has been found, inasmuch as the actual expenses incurred by or on
behalf of the company were inflated and the inflated amount was claimed from
the company between the period February, 1966, to January, 1967. The difference
between the inflated amount charged and the actual amount spent was dishonestly
misappropriated. It is further learnt reliably that the above dishonest
misappropriations from, the funds of the company were committed by the
management in connivance with certain employees and; that the company was
dishonestly deprived of its lawful property and moneys.
As there is
reasonable ground for believing that the management along with other employees
have committed the above acts of dishonest misappropriation of the company’s
money and have further dishonestly or fraudulently falsified the records, it is
requested that a case under sections 120B (read with 409), Indian Penal
Code, 409, 467, 471 and 477-A, Indian Penal Cods, may kindly be registered and
investigated.
The details of the various alleged misappropriations
are given in the annexure.
This may please be registered for investigation and
the offenders brought to book.”
Respondent No. 4 then took cognizance and had a case
registered on the basis of the above letter. Copy of the first information
report was forwarded by the police to the Magistrate having jurisdiction.
On November 6, 1969, the petitioner filed the present writ petition for the issuance of a writ to quash :
“(a) the report of the Assistant Inspecting Officer
of the Company Law Board;
(b) the reports and proceedings of the Company Law Board subsequent to the report of the Assistant Inspecting Officer aforesaid;
(c) the decision of the Company Law Board to prosecute the manager meat of the company; and
(d) the reference of the matter by the Board to the Central Bureau of Investigation and the communication of the Under Secretary of the Company Law Board dated January 25, 1969, and the proceedings now being taken by the Central Bureau of Investigation in pursuance thereof.”
The petitioner has also prayed for a direction
restraining the respondents from in any manner taking steps in relation to the
said allegations in pursuance of the report or in relation to the conduct and
affairs of the company.
The petition has been resisted by the respondents and
the affidavit of Shri Sadho Saran Singh, Under-Secretary of the Company Law
Board, has been filed in opposition to the petition.
The first contention, which has been advanced on
behalf of the petitioner, is that the officers of the Delhi Special Police
Establishment have no power to investigate into the offences alleged to have
been committed in the State of
“A doubt raised in the High Court and before us that
the Government of Maharashtra had not considered the matter or that the consent
was not properly given, is sufficiently answered by the affidavit of the
Undersecretary to the Government of Maharashtra dated July 18, 1968, in which
it is clearly stated that the Chief Minister had considered the matter and
given his consent and that under the Rules of Business he was quite competent
to do so. No argument has been advanced before us which entitled the appellant
to go behind the memorandum and the affidavit. There is a presumption of
regularity of official acts and even apart from it, the memorandum and the
affidavit clearly establish that the consent was given.”
Before dealing with the other contention advanced on
behalf of the petitioner, it may be useful to refer to some of the provisions
of the Companies Act. Section 209 of the Act relates to books of account to be
kept by a company. Sub-section (4) of that section provides for the inspection
of books of account and reads:
“(4)
(a) The
books of accounts and other books and papers shall be open to inspection by any
director during business hours.
(b) The
hooks of account and other books and papers shall be open to inspection during
business hours—
(i) by the Registrar,
(ii) by any officer of Government authorised by the Central Government in this behalf:
Provided that such inspection may be made without giving any previous
notice to the company or any officer thereof.
(c) The Registrar or such officer may during the course of inspection—
(i) make
or cause to be made copies of the books of account and other books and papers,
(ii) place
or cause to be placed any marks of identification thereon in token of the
inspection haying been made.
(d) In
order to enable the Registrar or such officer to make an inspection of the
books of account and other books and papers of the company it shall be the duty
of the company—
(i) to
produce to the Registrar or such officer such books of account and other books
and papers of the company as the Registrar or such officer may require,
(ii) otherwise
to give to the Registrar or such officer all assistance in connection with the
inspection which the company is reasonably able to give.”
Sections 235 to 251 pertain to investigation of the
affairs of a company. Section 235 provides for investigation of affairs of a
company on application by members or report by Registrar. Section 237 deals
with investigation of the affairs of a company in other cases and reads as
under:
“237. Without prejudice to its powers under section
235, the Central Government—
(a) shall
appoint one or more competent persons as inspectors to investigate the affairs
of a company and to report thereon in such manner as the Central Government may
direct, if—
(i) the company, by special resolution; or
(ii) the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and
(b) may do so if, in the opinion of the Central
Government, there are circumstances, suggesting—
(i) that
the business of the company is being conducted with intent to defraud its
creditors, members or any other persons, or otherwise for a fraudulent or
unlawful purpose, or in a manner oppressive of any of its members, or that the
company was formed for any fraudulent or unlawful purpose;
(ii) that
persons concerned in the formation of the company or the management of its
affairs have in connection therewith been guilty of fraud, misfeasance or other
misconduct towards the company or towards any of its members; or
(iii) that
the members of the company have not been given all the information with respect
to its affairs which they might reasonably expect; including information
relating to the calculation of the commission payable to a managing or other
director, the managing agent, the secretaries and treasurers, or the manager,
of the company,”
Section 239 gives power to inspectors to carry on
investigation into affairs of related companies or of managing agents. Section
240 provides that it shall be the duty of all officers, employees and agents of
a company to preserve and to produce to an inspector or a person authorised all
books and papers relating to the company and otherwise to give assistance in
connection with the investigation. Section 240A empowers the inspector, where
he has reasonable ground- to believe that the books and papers of, o? relating
to, a, company may be destroyed, mutilated or altered, to apply to a Magistrate
for seizure of such books and papers. Section 241 makes provision for the
submission of the inspector’s report to the Government. The Central Government
is required to forward a copy of the final report made by the inspectors to the
company at its registered office and other persons specified in the section.
Section 242 empowers the Central Government to launch prosecution if from any
report made under the preceding section, it appears to the Central Government
that any person has; in relation to the company, been guilty of an offence.
Sub-section (1) of that section- reads as under:
“242. (1) If,
from any report made under section 241, it appears to the Central Government
that any person has, in relation to the company or in relation to any other
body corporate, managing agent, secretaries «ad treasurers, or associate of a
managing agent or secretaries and treasurers, whose affairs have been
investigated by victual of section 23 been guilty, of any offence for which he
is criminally liable, the Central Government may, after taking such legal
advice as it thinks fit, prosecute such person for the offence; and it shall be
the duty of all officers and other employees and agents of the company, body
corporate, managing agent, secretaries and treasurers, or associate, as the
case may be, (other than the accused in the proceedings), to give the Central
Government all assistance in connection with the prosecution which they are
reasonably able to give.”
Section 243
makes provision for an application: for winding up of a company or for an order
under sections 397 or 398, if it appears to the Central Government from the
inspectors report that it is expedient to do so. Section 244 authorises the
Central (Government to initiate proceedings in the name of a company for the
recovery of damages of property if, from a perusal of the report, it appears to
the Central Government that such proceedings ought in the public interest to be
brought by the company. It is not necessary for the purpose of this case to
refer to the other provisions relating to investigation into the affairs of the
company.
It is argued
by Mr. Tarkunde on behalf of the petitioner that if it is intended to prosecute
a director of the company in. respect of some act of embezzlement or
malfeasance concerning the affairs of the company the only way to do so is by
directing investigation into the affairs of the company under section 237 of
the Companies. Act. After a report under section 241 of the Act is received as
a result of that investigation, a copy of that report should be supplied to the
company The Government may in that event, after taking legal advice, launch
prosecution in accordance with section 242. To lodge a report with the police ;
on the basis of a report submitted by an official of the Company Law Board
after inspection of account books under section 209(4) of the Act without
supplying a copy of the report of that official to the company would result,
according to the learned counsel, in such procedural discrimination as would-be
violative of article 14 of the Constitution. The above argument, though
ostensibly attractive, on closer examination, incur opinion, would be found to
be not tenable. An investigation into the affairs of a company is ordered in a
variety of circumstances which have been mentioned in sections 235 and 237 (a)
the Companies Act. In cases covered by section 237(a) the Government is bound
to appoint one or more competent persons as inspectors to investigate the
affairs of a company. As against that, if a-case is governed by clause (b) of
section 237 or in case it is governed by section 235, the Government has, a
discretion in the matter. An investigation into the affairs of a company under
the above provisions of law from the point of view of; general reputation of a
company is a very serious matter. It can result in a number of consequences,
viz., prosecution, vide section 242 ; winding up of the company or an order
under sections 397 or 398 of the Act, vide section 243 or initiation of
proceedings by the Central Government in the name of the company for recovery
of damages or property, vide section 244 of the Act. It is also manifest that
investigation is ordered into the affairs of a company when there is some
aspect of those affairs regarding which the Government is not in possession of
full facts and the circumstances exist as are referred to in section 235 or 237
of the Act. In such an event, the Government orders probe into these aspects to
apprise itself of the correct facts. It is only after that probe, when further
facts come to the notice of the Government, that the Government has to decide
about the next step, i.e., whether it should drop the matter Or proceed in any
of the ways mentioned in sections 242 to 244 of the Act. There is, however,
nothing in section 237 which makes it imperative for the Government to order
investigation into the affairs of the company when the Government does not
consider the necessity of further probe and is already in possession of facts
which, in its opinion, show the commission of an offence by an officer of the
company or other person in respect of the assets of the company. There is, in
such an event, no legal bar to the officer of the Company Law Board or other
Government officer concerned making a report to the police. A report to the
police in the very nature of things is directed against one or more than one
individual. Although the records of the company may have to be examined and
produced during the course of police investigation or in evidence during the
course of prosecution following that investigation so far as the existence and
continued functioning of the company are concerned they would not be affected
by such investigation or prosecution of the individuals.
The question
of supply of copy of inspectors’ report under section 241 of the Companies Act
arises when the investigation into the affairs of a company is made as
contemplated by sections 235 and 237 of the Act. The “affairs of a company”
have been held to mean its business affairs—its goodwill, profits or losses,
contracts and assets, including its control over subsidiaries and it makes no
difference who is conducting those affairs. (See page 606 of the Principles of
Modern Company Law by Gower, third edition). Section 241 of the Companies Act
contemplates supply of a copy of the report when investigation is made. When,
however, there is no such investigation, no occasion can arise for the supply
of such a copy. An inspection of the account books of a company under
section 209(4) is something quite distinct from an investigation into the
affairs of a company as envisaged in sections 235 and 237 of the Act. The fact
that in the case of such an investigation a provision is made for the supply of
a copy of the report of the persons making the investigation while there is no
provision for the supply of a copy of the report of the person making the
inspection, would not, in our opinion, show discrimination violative of article
14 of the Constitution.
We are not impressed by the argument advanced on
behalf of the petitioner that section 242 alone prescribes the mode of
launching prosecution against officers of the company and other individuals who
appeal to have been guilty of embezzlement and other acts of malfeasance in
respect of the assets of a company. There is neither an express provision nor
any other provision which by necessary implication warrants this conclusion.
There are some provisions of the Companies Act like section 621(1A), 624, 624A
and 624B wherein the words used are “Notwithstanding anything contained in the
Code of Criminal Procedure”, thus indicating that those provisions would have
an overriding effect. There is, however, nothing in section 242 or the other
provisions of the Companies Act to point to the conclusion that no prosecution
can be launched or no report can be made to the police in respect of an alleged
act of embezzlement or malfeasance by an individual connected with the company
without recourse to an investigation under sections 235 or 237 of the Act. In
the case of M. Vaidyanathan v. Sub-divisional Magistrate, Erode, the
question arose whether the provisions of section 630 of the:Companies Act
constituted a bar to the exercise of the jurisdiction vested in a police
officer under sections 154 and 157 of the Code of Criminal Procedure. The
question was answered in the negative by Rajagopalan J. The above decision was
affirmed on appeal by a Division Bench of the Madras High Court (Rajamannar
C.J. and Panchapakesa Ayyar J.) in In re M. Vaidyanathan.
It has been argued on behalf of the petitioner that a
company or the individual concerned may have a complete answer to offer
regarding the allegation of embezzlement or malfeasance based upon the result
of an inspection under section 209(4) of the Act. To initiate proceedings for
prosecution without affording the company or the individual the opportunity of
giving a reply to such allegations would be oppressive and be tantamount to
persecution. In this respect we are of the view that mere registration of a
case does not necessarily mean that it would result in prosecution. If during investigation
by police following such registration of the case facts come to light either in
course of examination of the individual concerned or otherwise that no case for
embezzlement or malfeasance has been
made; the police in such a case can proceed in accordance with section 169 of
the Code of Criminal Procedure. It cannot; therefore, be said that the
individual concerned has no opportunity what so ever of showing cause before
the challan is put in court that the allegations against him of embezzlement or
malfeasance are not well-founded. It is no doubt true that the police after
registration of a case does not normally drop the matter as contemplated by
“section 169 of the Code of Criminal Procedure, but this is so in all cases
registered by the police. The above circumstance cannot, in our opinion, lend
material assistance to the case of the petitioner
It may also
be mentioned that no ground has been taken by the petitioner in the petition
about any violation of article 14 o£ the Constitution. Apart from that, we are
of the opinion that there has been no such violation of that article. Reference
has been made on behalf of the petitioner to the case of Northern India
Caterers Private Ltd. v. State of Punjab. Their
Lordships in that case dealt with section 5 of the Punjab Public Premises and
Land (Eviction and Rent Recovery) Act. It was held by the majority that the
section provided two alternative remedies to the Government and left it to the
unguided discretion of the Collector to resort to one or the other and to pick
and choose some of those in occupation of public properties and premises for
the application of the more drastic procedure under section 5. The impugned
section was consequently held to be violative of article 14 of the
Constitution. The dictum land down in the above case, in our opinion, cannot be
of much assistance to the petitioner because we are not dealing here with two
available procedures one more drastic or prejudicial to the party concerned
than the other to be applied at the arbitrary will of the authority. An
investigation under sections 235 and 237 of the Companies Act as mentioned
earlier is not the same as inspection of account book under section 209(4). No
inference of contravention of article 14 can be drawn from the procedural
difference between the aforesaid investigation and inspection of records. The
fact that information derived as a result of the above-mentioned investigation
or inspection can give rise prosecution would not attract article 14 of the
Constitution. The said article does not postulate that information, which may
be the basis for making report to the police, must be derived in one particular
way and no other way.
Reference has
also been made on behalf of the petitioner to the case of Nazir Ahmad v. King
Emperor
wherein, while dealing with a confession recorded by a Magistrate, their
Lordships held that where a power is given to do a certain thing in a certain
way the thing must be done in that way or not at all. The above dictum could
have been attracted to the present ease if the Government had resorted
to investigation into the affairs of the company without complying with the
provisions of section 235 and the subsequent sections of the Companies Act. T;
he present is not a case where a power is: given to do a certain thing in a
certain way and the thing has been done in some other way.
Another case to which reference has been made is
Rohtas Industries Ltd. v. S.D. Agarwal. It
has been held in that case that action under section 235 of the Companies Act
can be taken provided certain preconditions including those mentioned in
section 236 are fulfilled. It has been further held that such investigation is
a serious matter and should not be ordered except on good grounds. This case
too cannot be of much avail to the petitioner because no order for investigation
into the affairs of the company has been made in the instant case.
The matter can also be looked at from another angle.
Any one who has information of the commission of a cognizable Offence can make
a report about the commission of such offence to the police. The police after
registration of the case on the basis of that report, in accordance with
section 154 of the Code of Criminal procedure, can investigate the matter. If
the investigation reveals that such an offence has been committed, the police
has to put in challan in court, where after the trial of Me Code would commence
in the criminal court. There’ are certain offences wherein the police cannot
put in challan without observing some formality such as obtaining consent in
cases covered by section 196A(2) of the Code of Criminal Procedure or Requisite
sanction in cases covered by section 197 of the code or; section 6 of the
Prevention of Corruption Act. Their is however .no provision of law, at least
none has been cited at the bar which makes it imperative to obtain such consent
or sanction or to go through other formality before the police can put in
challan for a cognizable offence relating to the assets of a company. The plain
effect of the acceptance of the submission made on behalf of the petitioner
would be to place a procedural restriction on the prosecution of officers of a
company or other individuals in respect of offences relating; to the assets of
a company. It is our opinion not permissible to read such a restriction in the
statue when none exists.
Reference has been made by Mr. Tarkunde, to. the
report, of a committee which preceded the enactment of the Companies Act. The
petitioner in our opinion cannot derive much assistance from the report of that
committee in the matter of the construction of the .provisions of the Companies
Act. Even in .respect of the statement of objects ;and reasons for
introducing a particular piece of legislation the court can refer to the statement
only for the purpose of ascertaining the circumstances which led to the
legislation in order to find out what was the mischief which the legislature
aimed at. The statement of objects and reasons for introducing a particular
piece of legislation cannot be used for interpreting the legislation if the
words used therein are clear enough. (See in this connection S.C. Prashar v.
Vasantsen Dwarkadas). A
report of a committee can obviously not stand on a higher footing than the
statement of objects and reasons.
As a result of the above, the petition fails and is
dismissed, but in the circumstances without costs.
[2000]
23 SCL 249 (Ker.)
High
Court of Kerala
v.
Trichur Heart Hospital Ltd.
K.A.
Abdul Gafoor, J.
Company
Petition No. 40 of 1999
Section 237 of the Companies Act, 1956 - Investigation of company’s affairs - Whether in view of power vested with Company Law Board to order investigation in appropriate circumstances under section 237(b), petitioner could approach CLB and Company Court has no reason for exercising its discretionary power to direct such investigation - Held, yes
Facts
The petitioner, a contributory of the
respondent company, in a petition filed under section 237(a)(ii) sought a
declaration that the company’s affairs were such that they required
investigation by an Inspector appointed by the Central Government in that
regard, as the Company was not maintaining proper accounts and was doing
several business activities without obtaining statutory sanction from the
Central Government as enjoined by law.
Held
Of course, the company court has got power
which it can exercise in terms of section 237(a)(ii) but section 237 (b)
empowers the CLB, if there are circumstances necessitating investigation, to
order accordingly. This power has been granted to the CLB, in terms of
amendment effected in the Act in 1988. When the power is conferred on the CLB,
it was incumbent for the petitioner to approach that statutory Board which
should examine and do justice, as the circumstances demanded. In such
circumstances, there was no reason for exercising the discretionary power
vested in this
Case referred to
Kumarannuni v. Mathrubhumi Printing &
Publishing Co. Ltd. [1981] KLT (S.N.) 88.
Judgment
1. This is a
petition under section 237(a)(ii) of the Companies Act, 1956 (‘the Act’). The
petitioner, a contributory of the 1st respondent company seeks a declaration
that the company affairs are in such a position that it requires investigation
by an Inspector appointed by the Central Government in that regard. It is
submitted that the company is not keeping proper accounts and it had done
several business activities without obtaining the statutory sanction from the
Central Government as enjoined by the law. The Directors of the company
including respondents 2 and 3 are now mismanaging the affairs of the company.
Therefore, the entire affairs of the company require an investigation and this
Court has power under section 237(a)(ii) to order so. If such an order is
issued, necessarily, the Central Government will be bound by that order to
investigate it. It is submitted, relying on the decision reported in
Kumarannuni v. Mathrubhumi Printing & Publishing Co. Ltd. [1981] KLT (S.N.)
88 - Case No. 159 that when it is prima facie satisfied, such a declaration can
be issued.
2. Of course,
the company court has got power to exercise in terms of Section 237(a)(ii). But
section 237(b) empowers the CLB, if there are circumstances necessitating
investigation to order accordingly. This power has been granted to the CLB, in
terms of the amendment effected in the Companies Act in 1988. Before the
amendment sanction had to be given in terms of sub-clause (b) by the Central
Government. When the power vested in the Executive Government is invoked, one
incumbent may perhaps feel that justice may not be meted out. But now, after
the amendment in 1988 the power vested with the Central Government had been
taken away and vested with the CLB. When the power is conferred on the CLB, it
is incumbent on the petitioner to approach that statutory Board which shall
examine and do justice, as the circumstances demand. In such circumstances,
there arise no reason for exercising the discretionary power vested in this
company court to direct such investigation or declare that it need
investigation by the Central Government. Accordingly, the company petition
fails and is dismissed without prejudice to the right of the petitioner to move
the CLB in terms of section 237(b).
[1967]
37 COMP. CAS. 341 (
V.
B
MATTER
NO. 271 OF 1964
AUGUST
6,1965
JUDGMENT
The petitioner-company
claims to carry on business as exporter, investor and financier and further
claims to have been acting as selling agent for the State Trading Corporation
in respect of cement and also as sole selling agent or selling agent of several
other companies. According to the petitioner-company, it has built up a very
efficient and effective marketing organisation covering the whole of
On 11th April,
1963, the Central Government made the following order against the
petitioner-company:
"Whereas
the Central Government is of the opinion that there are circumstances
suggesting that the business of Ashoka Marketing Company Limited, a company
having its registered office at No. 18-A, Brabourne Road, Calcutta (hereinafter
referred to as the said company), is being conducted with intent to defraud its
creditors, members or other persons and the persons concerned in the management
of its affairs have in connection there with been guilty of fraud, misfeasance
or other misconduct towards the said company or its members;
And whereas it
has come to the notice of the Central Government that the said company is
acting as the selling agent of M/s. Rohtas, Industries Limited, Dalmianagar,
Bihar and New Central Jute Mills Co. Ltd., Calcutta,(hereinafter referred to as
the said managed companies);
And whereas
Sahu Jain Ltd., a company having its registered office at No. II, Clive Row,
And whereas a
question (hereinafter referred to as the said question) has arisen as to
whether Ashoka Marketing Limited is an `associate' as defined in clause (c) and
(d) of sub-section (3) of section 2 of the Companies Act, 1956 (I of 1956), of
the managing agent;
And whereas it
appears to the Central Government that there is good reason to investigate the
said question;
And whereas
the Central Government consider it desirable that an inspector should be
appointed to investigate the affairs of the said company as well as to
investigate the said question and to report thereon;
Now therefore
in exercise of the several powers conferred by sub-clauses (i) and (ii) of
clause (b) of section 237 of Companies Act, 1956 (I of 1956), and clause (a) of
sub-section (I) of section 249 of the said Act, the Central Government hereby
appoint Shri S. Prakash Chopra of M/s. S.P. Chopra & Co., Chartered
Accountants,.31-F, Connaught place, New Delhi, as inspector to investigate the
affairs of the said company, namely, Ashoka Marketing Company Ltd., for the
period from 1st April, 1958, to date and also prior to I st April, 1958, should
the inspector consider necessary and to investigate the said question, namely,
whether M/s. Ashoka Marketing Co. Ltd. is the associate of Sahu Jain Ltd.,
which is the managing agent of the said managed companies and report thereon to
the Central Government pointing out, inter alia, all irregularities and
contraventions in respect of the provisions of the Companies Act, 1913, or of
any other law for the time being in force and the person or persons who are
responsible for such irregularities and contraventions.
The inspector
shall complete the investigation and submit six copies of his report to the
Central Government not later than four months from the date of issue of this
order unless time in that behalf is extended by the Central Government.
A separate
order will be issued with regard to the remuneration and other incidental
expenses of the inspector."
The aforesaid order,
in so far as it is one under clause (b) of section 237 of the Companies Act, is
characterised by the petitioner-company to be bad, illegal, without
jurisdiction and mala fide in law on the same grounds as were urged against
similar orders made against New Central Jute Mills Co. Ltd. [1966]36 Comp. Cas.
512 dealt with by me in my judgment (Matter No. 272 of 1964) . In so far as the
order is one under section 249 (I) (a) of the Companies Act , the petitioner
company denies that it is an associate of Sahu Jain Ltd., and asserts that
there is no reason even to suspect such association.
However,
without prejudice to its contentions that the impugned investigation could not
and should not have been ordered, it is said the petitioner-company decided to
comply with the requisitions made by S.P. Chopra, the inspector. The
petitioner-company alleges to have supplied to S.P. Chopra such statements and
information as he wanted and ultimately on 17th May, 1963, the managing
director of the petitioner wrote to him in the following language:
"This
completes all information that you wanted by your letter...... dated 16th
April, 1963. Except that certain information regarding the year 1958 and some
very trivial information for the years 1959 and 1960 remain to be supplied. The
same is being complied with and will be made available to you shortly."
The
information supplied apparently did not satisfy S.P. Chopra who, according to
the petitioner-company, was carrying on a roving enquiry and was fishing for
information. He, therefore, asked for more and went on meeting the senior
officers of the petitioner and gathering more information Further, he obtained
from the petitioner-company volumes of minutes books, and in spite of promise
to return them quickly, sat over them until May, 1964. Also, he verbally
examined the managing director, secretary, controller of accounts, another
director of the name of N.R.Khaitan and also several other officers of the
petitioner-company, without giving the least indication about the purpose of
the enquiry.
The prolonged
investigation notwithstanding,S.P Chopra could not produce the report within
the time fixed by the order, dated 11th April, 1963. On 9th August, 1963,
therefore, the Central Government made an order of extension of time as hereinbelow
quoted:
"In
continuation of the Central Government orders of even number dated the 11th
April, 1963, the Central Government hereby extends the time for the completion
of the investigation and for submission of the report by the inspector appointed
to investigate into the affairs of Ashoka Marking Company Limited, a company
having its registered office at No.18-A, Barbourne Road, Calcutta, under
section 237 (b) of the Companies Act, 1956 (I of 1956), up to the 31st October,
1963."
According to the
petitioner, there being no extension of time made in so far as the
investigation was one under section 249(1) (a) of the Companies Act, that
investigation lapsed. I shall consider this point later on. This extended time,
however, was not sufficient for S.P. Chopra to produce his report. On 31st
October, 1963, the Central Government had to extent the time over again,
purporting at the same time to revive the allegedly lapsed investigation under
section 249(I) (a). That order is set out below:
In continuation
of the Central Government orders of even number dated the 11th April, 1963, and
the 9th August, 1963, respectively, the Central Government hereby extends the
time for the completion of the investigation and for submission of the reports
by the inspector appointed to investigate into the affairs of Ashoka Marketing
Limited, a company having its registered office at No. 18-A, Brabourne Road,
Calcutta, and also its associateship with Sahu Jain Limited under section
237(b) and 249 (I)(a) of the Companies Act, 1956 (I of 1956), respectively, up
to the 31st January, 1964."
The petitioner
condemns this order as illegal and contends that a lapsed investigation under
section 249(I)(a) cannot be revived by a mere order of extension.
The second
extension of time to complete the investigation was also uselessly consumed,
except to the extent hereinafter indicated, and on 29th January, 1964, the
Central Government granted further extension of time in the following language:
"In
continuation of the Central Government orders of even number dated 11th April,
1963, 9th August, 1963, and 31st October, 1963, respectively, the Central
Government hereby extends the time for the completion of the investigation and
for submission of the reports by the inspector appointed to investigate into
the affairs of Ashoka Marketing Ltd., a company having its registered office at
number 18-A, Brabourne Road, Calcutta, and also its associateship with Sahu
Jain Ltd. under sections 237(b) and 249 (I)(a) of the Companies Act, 1956(I of
1956) ,respectively, up to June, 1964."
During the
continuance of the second extension of time , S.P Chopra wrote to the
petitioner-company the following letter, dated 26th November, 1963:
"This is
to inform you that I am deputing my assistant, Shri S.B. Gupta, who is also a
Technical Assistant in Company Law Administration, Government of India, to
check the statements supplied by you along with the books and records of the
company. Kindly afford all assistance and facilities to him with a view to
enabling him to perform his duties quickly.
In regard to
may power to depute staff to do ministerial work, I have to draw your attention
to the decision of Case No. 38 of 1963 by the High Court, Bombay, regarding
interpretation of section 240 of the Companies Act. It is expected that Mr.
Gupta will be reaching
By another
letter, dated 4th December, 1963, S.P.Chopra further informed the
petitioner-company that one I.M. Puri will be working with S.B.Gupta in the
matter of checking. The said letter is quoted below:
"In
continuation of my letter No. GG/4322 dated the 26th November, 1963 , I have to
inform you that I have instructed my assistant, Shri S.B.Gupta, who is also a
Technical Assistant, Company Law Administration, Government of India, to check
the statement supplied by you with the books and records of the company
maintained at Calcutta and Sahupuri Varanasi, along with Shri I.M.Puri about
whom intimation has been sent earlier. I am sending a copy of this letter to
Shri Gupta who is at present in
The
petitioner-company took exception to the manner in which S.B.Gupta and I.M.Puri
wanted to carry on their work and described the same as investigation by
themselves, on their own, and no as deputies of Inspector Chopra. The company
says that S.P Chopra ignored the exception taken by the petitioner. The company
further says the purpose less investigation dragged on to the great harassment
of the company and causing complete dislocation of the company's business.
Fourteen months
after the investigation had started, the Central Government separated the
investigation under section 237 (b) (i) and (ii) from the investigation under
section 249 (I) (a) and extended the period of investigation by an order ,
dated 12th June , 1964, reading as hereinbelow set out:
"Whereas
vide Central Government's order of even number dated the 11th April, 1963,an
investigation was ordered into the affairs of Ashoka Marketing Limited,
Calcutta and Shri S. Prakash Chopra of M/s. S.P Chopra & Co., Chartered
Accountants, 31-F, Connaught, Place New Delhi, appointed as inspector for the
purpose;
And whereas
the date for completion for the said investigation and for submission of the
report by the said inspector was last extended up to the 30 th June, 1964, by
order of even number dated the 29th January, 1964;
And whereas it
is felt that for the efficient conduct of the investigation , it is necessary
to appoint an additional inspector:
Now,
therefore, in exercise of the powers conferred by sub-clauses (i) and (ii) of
clause (b) of section 237 of the Companies Act, 1956(I of 1956), the Central
Government hereby appoint Shri I.M.Puri, an Accounts Officer in the Company Law
Board, as co-inspector, with co-extensive powers which may be exercised by him
severally or jointly with the other inspector. The two co-inspectors shall
complete the investigation and submit six copies of their report to the Central
Government by 30th June, 1964, or by such date as may be extended from time to
time, if and when found necessary."
Three days
thereafter, on 15th June, 1964, the Central Government made a similar order in
respect of the investigation under section 249 (I) (a):
"Whereas
vide Central Government's order of even number dated the 11th April,1963, Shri
S.P. Prakash Chopra of M/s. S.P. Chopra & Co., Chartered Accountants, 31-F,
Connaught Place, New Delhi, was appointed as inspector to investigate the
question as to whether Ashoka Marketing Limited is an associate of its managing
agents, viz., M/s. Sahu Jain Limited as defined in clauses (c) and (d) of
sub-section (3) of section 2 of the Companies Act, 1956(I of 1956);
And whereas
the date for completion of the said investigation and for submission of the
report by the said inspector was last extended up to the 30th June, 1964, by
order of even number dated the 29th January, 1964;
And whereas it
is felt that for the efficient conduct of the investigation, it is necessary to
appoint additional inspectors:
Now,
therefore, in exercise of the powers conferred by clause (a) of sub-section (I)
of section 249 of the Companies Act, 1956 (I of 1956), the Central Government
hereby appoint Sarvashri I.M.Puri, Accounts Officer and S.B. Gupta, Technical
Assistant in the Company Law Board, as co-inspectors with co-extensive powers
which may be exercised by them severally or jointly with the other inspector.
The three inspectors shall complete the investigation and submit six copies of
the report to the Central Government by 30th June, 1964, or by such date as may
be extended from time to time, if and when found necessary."
The
petitioner-company challenged the separation of functions and appointment of
additional inspector and co-inspectors as illegal, without jurisdiction and
characterised the same as wholly incongruous with the original order, dated
11th April, 1963, in so far as they called for two reports from two sets of
inspectors in the place of one report from one inspector.
Shortly after
their appointment, I.M. Puri and S.B. Gupta, it is alleged, began to chase the
petitioner-company for inspection of books, refused prayers even for short
adjournment and threatened action on the theory that the petitioner company had
refused production of books of account. The representations made by the
petitioner-company to the Central Government against the attitude taken I.M.
Puri and S.B.Gupra elicited no reply. On the other hand, the Company Law
Administration Department of the Central Government sent the following
telegram, on 28th June, 1964, to the petitioner company:
"Inspectors
report your refusal to produce books and papers stop violation section 240 stop
request production forthwith stop failing shall be obliged to proceed against
you for persistent default in carrying out your obligations and functions under
the law in such manner as advised stop confirm compliance stop shall consider
your representation when recd. stop please bring contents this telegram all
senior officers employees, agents, of your company.'
Since the
period of submission of report was about to expire, the Central Government made
the following order, on 30th June,1964, in respect of the investigation under
section 237(b):
"Whereas
vide Central Government's order of even number dated the 11th April, 1963, and
12th June, 1964, respectively, Sarvashri S. Prakash Chopra and I.M. Puri were
appointed as inspectors under section 237(b) of the Companies Act, 1956(I of
1956), to investigate into the affairs of Ashoka Marketing Limited, Calcutta;
And whereas
the date for completion of the said investigation and for submission of the
report by the said inspectors was last fixed as 30th June, 1964;
And whereas it
has been represented to the Central Government that due to the refusal of the
company and its officers to produce all books and other papers or to appear
before the inspectors for the purpose of examination and other non-co-operative
and dilatory tactics, it would not be possible for them to complete the
investigation and submit their report by the aforesaid date;
And whereas
Shri S. Prakash Chopra, inspector, has regretted his inability to continue any
longer with this appointment due to his other professional engagements;
And whereas it
has also become necessary to relieve Shri I.M. Puri from this assignment on account
of increase in his investigation work in other companies due to Shri Chopra's
relinquishment of the office of inspector;
And whereas
after consideration of the aforesaid circumstances and also the magnitude of
the work involved , the Central Government are of the opinion that certain
modifications/additions in the orders already issued are necessary:
Now,
therefore, in exercise of the powers conferred by sub-clauses (i) and (ii) of
clause (b) of section 237 of the Companies Act, 1956 (I of 1956), the Central
Government hereby appoint in place of Sarvashri S.Prakash Chopra and I.M.Puri,
Sarvashri S. Rajagoplan, a Senior Accounts Officer and S.B. Gupta, a Technical
Assistant in the Company Law Board, as co-inspectors. The two inspectors shall
have co-extensive powers which may be exercised by them severally or jointly.
The inspectors shall complete the investigation and submit six copies of their
report to the Central Government by 31st December, 1964."
On the same
day, the Central Government made another order in respect of the investigation
under section 249 (I) to the following effect:
"Whereas
vide Central Government's orders of even number dated 11th April, 1963, and
15th June, 1964, respectively , Sarvashri S.Prakash Chopra I.M. Puri and S.B.
Gupta were appointed as inspectors to investigate the question as to whether
Ashoka Marketing Limited is an associate of its managing agents, viz. M/s. Sahu
Jain Limited, as defined in clauses (c) and (d) of sub-section (3) of section 2
of the Companies Act, 1956(I of 1956);
And whereas
the date for completion of the said investigation and for submission of the
report by the said inspectors was last fixed as 30th June, 1964;
And whereas it
has been represented to the Central Government that due to the refusal of the
company and its officers to produce all books and other papers or to appear
before the inspectors for the purpose of examination and other non-co-operative
and dilatory tactics, it would not be possible for them to complete the
investigation by the aforesaid date;
And whereas
Shri S. Prakash Chopra, Inspector, has regretted his inability to continue any
longer with this appointment due to his other professional engagements;
And whereas it
has also become necessary to relieve Shri I.M. Puri from this assignment on
account of increase in his investigation work in other companies due to Shri
Chopra's relinguishment of the office of inspector;
And whereas
after consideration of the aforesaid circumstances and also the magnitude of
the work involved, the Central Government are of the opinion that certain
modifications/additions in the orders already issued are necessary:
Now therefore
in exercise of the powers conferred by clause (a) of sub- section (I) of
section 249 of the Companies Act, 1956 (I of 1956), the Central Government
hereby appoint in place of Sarvashri S. Prakash Chopra and I.M. Puri, Shri P.B.
Menon, a Registrar of Companies in the Company Law Board, to be a co-inspector
with Shri S.B.Gupra. The two inspectors shall have co-extensive powers which
may be exercised by them severally or jointly. The inspectors shall complete
the investigation and submit six copies of their report of the Central
Government by 31 st December, 1964."
The
petitioner-company characterises these orders also as illegally made in abuse
of power and meant to harass the petitioner-company without just cause.
In paragraph
56 of the petition, it is alleged that action under section 240-A of the
Companies Act, for seizure of documents was illegally taken against the petitioner-company
on 20th July, 1964, but with that I am not concerned in the present rule.
In this rule,
the petitioner-company prays for the quashing of the order or orders for the
two investigations, as extended from time to time and for a mandate upon the
respondents restraining them from giving effect to the same.
Mr. R.C. Deb,
learned advocate for the petitioner, urged in condemnation of the order for
investigation under section 237(b) (i) and (ii) the same grounds as he did in
New Central Jute Mills Co. Ltd. v. Deputy Secretary, Ministry of Finace
[1966]36 Comp.Cas.512 and I overrule the grounds for the same reasons as I did
in that case, excepting in so far as hereinafter indicated. I do not repeat my
reasonings over again for the sake of brevity.
The
affidavit-in-opposition, in the instant case, affirmed by respondent No. 3 is
mostly uninformative, full of general denials, devoid of particulars and is
unhelpful and unassisting in nature. I have already observed in New Central
Jute Mills Co, Ltd. v. Deputy Secretary, Ministry of Finance [1966]36 Comp.
Cas.512.
" An
order of the Central Government under section 237 (b) is certainly not
justiciable , if the order has been made by the appropriate authority bonafide
and reasonably, even though the reasons may not fully appeal to a court of law.
It may not also be necessary for the Central Government to recite its
reasonings when making an order under section 237(b). But when the exercise of
the power is challenged as actuated by malice in law, before a court of law,
justification for the exercise of the power must not be blanketed from the
court."
If the
affidavit-in-opposition had been wholly uninformative, I do not think I could
overrule the contention of Mr. Deb that the order for investigation under section
237(b) was made without legal excuse. But the affidavit-in-opposition is not as
bad as that in so far as the investigation under section 237 (b) is concerned.
It appears from paragraph 5 of the affidavit-in-opposition as quoted below.
"I say that
the working results profits and/or amounts distributable amongst the
shareholders as dividend would have been much higher had the circumstances as
mentioned in the order dated 11th April, 1963, did not exist."
It appears
from paragraph 6 of the petition that the petitioner-company was purporting to
keep large sums in reserve and as a result thereof reduced the dividend from
Rs. 37.50 np. per share in 1958-59 to Rs. 28 per share in 1959-60 and
thereafter to Rs. 10 per share during the years 1960-61 to 1962-93.
Unreasonable declaration of dividends was upheld as prima facie ground for
ordering investigation in the case entitled In re Miles Aircraft Ltd. [1948]
W.N. 178; [1948] I All E.R.225.which I have discussed at length in my judgment
in New Central Jute Mills Co. Ltd. [1966]36 Comp. Cas.512. If the Central
Government came to hold the opinion that the working results and the rates of
dividends declared were incompatible and if that suggested to the Central
Government that there were circumstances suggesting the necessity of an
investigation under section 237(b), I cannot hold that the investigation was
ordered without any legal excuse. I am, therefore, not inclined to strike down
the investigation under section 237(b). Although of this opinion, I record the
same criticism that I did in New Central Jute Mills Co. Ltd., [1966]36 Comp.
Cas.512 in regard to the carriage of the investigation and administer the same
caution to the present body of inspectors.
I now turn to
the investigation ordered under section 249 (I) (a). An investigation under
section 249 (I) (a) may be ordered; (a) Where any question arises as to whether
any body corporate, firm or individual is or is not, or was or was not, an
associate of the managing agent or secretaries and treasurers of a company and
(b) it appears to the Central Government that there is good reason to
investigate such question.
Regarding
being had to the language of the section, the Central Government may proceed on
a prima facie theory to be proved or disproved with reference to facts later on
ascertained. This means that the Central Government may direct investigation
when it appears that there are good reasons but which reasons may disappear
when real facts became known. I have already dealt with this aspect in my judgment
in New Central Jute Mills Co. Ltd., [1966]36 Comp.Cas.512, when dealing with an
investigation ordered under section 237 (b) and need not repeat the same here.
On the same reasons, I hold that in directing an investigation under section
249 (I)(a) the Central Government cannot proceed on mere subjective
satisfaction but may proceed on grounds which appear to the Central Government
to be prima facie reasonable. The ground relied upon must to that extent be
justified, if challenged before a court of law to be unreasonable or irrelevant
or actuated by malice. Now, in the order, dated 11th April , 1963, it was
recited that the petitioner-company was found to be the selling agent of Rohtas
Industries Ltd. and New Central Jute Mills Co.Ltd, both managed by their
managing agents, Sahu Jain Ltd,.and on that basis, it was said, there arose the
question whether the petitioner-company was an associate of the managing agency
company, within the meaning of section 2(3) (c), and (d) of the Companies Act.
In paragraph 18 of the petition, the petitioner-company categorically stated
that it was not an associate of Sahu Jain Ltd. and that there did not exist any
ground even to suspect that the petitioner was an associate. Paragraph 18 of
the petition has been colourlessly dealt with in paragraph 14 of the
affidavit-in-opposition in the following language;
"I
dispute the allegation contained therein that the petitioner is not an
associate of Sahu Jain Ltd. In this respect I submit that the Central
Government did have materials before it on the basis of which it formed an
opinion that there was necessity to investigate the question of the petitioner
being an associate of Sahu Jain Ltd. It is submitted in this regard that it was
not necessary for the Central Government to set out any particulars of the good
reason which led the Central Government to order the investigation. I further
say that it is only after the investigation now, in progress is completed the
true status of the petitioner would be known."
Now, merely by
acting as selling agent of certain managed companies, a company does not,
without more, become an associate of the managing agents of such companies,
within the meaning of section 2(3) (c) and (d) of the Companies Act. Thus the
ground or the reason recited in the order, dated 11th April,1963, is of
irrelevant consideration. The lacuna in the order might have been cured by
pleading some reason in the affidavit-in-opposition but the respondent have not
elected to do so. I might have compelled, following the principle enunciated by
this court in Daulatram Rawatmull v. Income -tax Officer(Appeal from Original
Order No. 309 of 1959), the respondents to place before this court and before
the petitioner the materials which prompted the Central Government to proceed under
section 249 (I)(a) of the Companies Act and to determine whether the condition
precedent to such an action did in fact exist. Mr. S. Chaudhuri learned
advocate for the respondents, it should be noticed, was ready with the records
and was prepared to disclose such materials to this court but not to the
petitioner. But because of further lacuna in the order noticed by myself, I am
of the opinion, an order of compulsory disclosure of the grounds or reasons for
the action taken should not be made to salvage the situation, after the
investigation had gone on for over two years and after the extreme steps of
search and seizure had taken place. The further lacuna noticed by me is
hereinafter stated.
The order for
investigation under section249 (I)(a) started on the plea as hereinbefore
stated. Time for submission of the report was extended from time to time
without any different plea until 15th June, 1963, when there was a separation
of the combined investigations under sections 237(b) and 249 (I)(a) ordered and
the time for investigation was extended. The order dated 15th June, 1963,
however recited a different plea, namely:
"Whereas
vide Central Government's order of even number dated the 11th April,
1963, Shri S. Prakash Chopra of M/s S.P. Chopra & Co., Chartered
Accountants, 31-F, Connaught Place, New Delhi, was appointed as inspector to
investigate the question as to whether Ashoka Marketing Ltd. is an associate of
its managing agents, viz., M/s Sahu Jain Ltd., as defined in clauses (c) and
(d) of sub-section (3) of section 2 of the Companies Act, 1956 (I of
1956)."
The same plea
was pleaded in the order dated 30th June, 1963, when the resignation of S.P.
Chopra was accepted and the investigation under section 249 (I) (a) was
entrusted to Puri-Menon-Gupta-combination of co-inspectors.
Now,
admittedly, Sahu Jain Ltd. is not the managing agent of the petitioner company.
As a matter of fact the petitioner-company is not at all a company managed by a
managing agent. How the different plea crept into the order is difficult to
visualise. This may be due to mistake, oversight, inadvertence and the like,
while summarising the original pleas as in the order dated 11th April, 1963,
but may also be due to confusion while making the order. I have already
indicated that the plea recited in the order dated 11th April, 1963, is
irrelevant without more. I am not sure whether the orders, dated 15th June and
30th June, 1963, intended to say what was lacking in the original order,
although what was said was also incorrect and unmeaning. Since an order under
section 249(1) (a) can be made only if it appears to the Central Government
that good reasons exist for an investigation, an order made ex facie on
irrelevant ground in the first instance and thereafter confounded by incorrect
and imaginary ground should not be upheld.
I have already
expressed the opinion in New Central Jute Mills Co. Ltd. [1966] 36 Comp. Cas.
512 that a Central Government order for investigation is not justiciable, if
the order has been made by the appropriate authority bonafide and reasonable,
even though the reasons may not fully appeal to a court of law. I have also
held that it may not be necessary for the Central Government to recite its
reasonings when making the order; but if the exercise of power be challenged on
the ground that it is actuated by malice in law, before a court of law,
justification for the exercise of the power must not be withheld any more. In
the instant case, the plea recited in the original order, dated 11th April,
1963, has no nexus to section 2 (3) (c) and (d) of the Companies Act. The plea
recited in the subsequent orders, dated 15th June and 30th June, 1963, is
imaginary. Nothing was said in the affidavit in opposition in justification of
the order, excepting by way of making reference to unknown contents in the
office records. I am unable, therefore, to find any legal justification for the
order.
Mr. Deb,
learned advocate for the petitioner, found another defect in the order under
section 249(1) (a), which I need notice at this stage. He invited my attention
to the order, dated 9th August, 1963, and submitted that by that order the
investigation under section 237(b) only was extended but not the investigation
under section 249(I) (a). The effect of this, according to Mr. Deb, was that
the investigation under section 249(I) (a) lapsed. He further submitted that
the order dated 31st October, 1963, in so far as it attempted to revive and
extend a lapsed order was infructuous to that extent.
In support of
his contention Mr. Deb relied on certain observations by the Supreme Court in
Straw Board Manufacturing Co. Ltd. v. Gutta Mills Worker's Union [1953] S.C.R.
439. In that case the Supreme Court had to interpret the provisions of section
6(I) of the U.P. Industrial Disputes Act, 1947, which peremptorily requires an
adjudicator to submit his award to the State Government " within such time
as may be specified" and not within such time as may be from time to time
specified. In that context, the Supreme Court observed (at page 445):
"It is
significant that the only occasion when the state Government can, under the
U.P. Act, specify a fresh period of time is when it remits the award for
reconsideration under sub-section (2) of section 6, for under sub section (3)
the adjudicator is enjoined to submit his award, after reconsideration, within
such period as may be specified by the State Government. Even in this case
under section 6(2) and (3) the State Government may in the order remitting the
award specify a time within which the award, after reconsideration, must be
filed. This gives the power to the State Government to fix a fresh period of
time to do a fresh Act, namely, to reconsidered and file the reconsidered
award. It does not give the state government any power to enlarge the time fixed
originally for the initial making of the award.....
Learned
advocate for the intervener, the State of Uttar Pradesh, draws our attention to
section 21 of the U.P. General Clauses Act, 1904, and contends that the order
of 26th April, 1950, should be taken as an amendment or modification, within
the meaning of that section, of the first order of February 18, 1950. It is
true that the order of 26th April, 1950, does ex facie purport to modify the
order of 18th February, 1950, but, in view of the absence of any distinct
provision in section 21 that the power of amendment and modification conferred
on the State Government may be so exercised as to have retrospective operation,
the order of 26th April, 1950, viewed merely as an order of amendment or
modification, cannot, by virtue of section 21, have that effect. If, therefore,
the amending order operates prospectively,......If cannot validate the award
which had been made after the expiry of the time specified in the original
order and before the date of the amending order, during which period the
adjudicator was functus officio and had no jurisdiction to act at all."
This decision
is distinguishable. There is no statutory time-limit for making a report under
section 249. The limit of time fixed, under an investigation order, to submit a
report has no effect on the pendency of the investigation. The failure on the
part of an inspector to make a report within the fixed time may amount to a
breach of duty on the part of the inspector but does not automatically bring
the investigation to an end. In this view, I find inspiration from a judgment
of the Supreme Court in Andheri Marol Kurla Bus Services v. State of Bombay,
[1959] Suppl. 2 S.C.R. 739, in which delay in submission of report by a
conciliation officer under section 12(6) of the Industrial Disputes Act, 1947,
was held not to have the effect of terminating the conciliation, which
continued until a settlement was effected or a report of non- settlement
received. Therefore, even though there had not been any extension of time
formally made for submission of the report, the inspector or inspectors might
carry on the investigation to its close, however balmeworthy he or they might
have made himself or themselves for his or their failure to conform to the time
schedule.
Mr. Chaudhuri,
learned advocate for the respondents, advanced two arguments to save the
orders, dated 9th August and 31st October, 1963, form the onslaught of Mr. Deb.
He submitted, in the first place, that the order dated 9th October, 1963, as
made by the respondent-Deputy Secretary in fact extended the time for
submission of report in respect of the investigation both under section 237 (b)
as also under section 249(I) (a) but in making out copies thereof, for service
upon the parties, the line concerning extension of time for submission of
report under section 249(I) (a) dropped out through the typist's inadvertence
and nobody detected the omission. In support of this submission he produced the
original order and had his submission supported by an affidavit affirmed by the
respondent-Deputy Secretary. I find no reason to disbeliever the affidavit,
although I am constrained to observe that the department of Company Law
Administration will never deserve an efficiency certificate, if the department
conducts and continued to conduct its affairs in such a slipshod manner. Mr.
Chaudhuri submitted, in the next place, that the petitioner company acquiesced
in the jurisdiction for investigation under section 249(I) (a) in spite of the
defect, if any at all, and it was not open to the company to find fault with
the order so long thereafter. He relied on the observations of the Supreme
Court in Pannalal Binjraj v. Union of India [1957] 31 I.T.R. 565; [1957] S.C.R.
233 in support of this contention. I am not much impressed by this argument. If
the petitioner-company submitted to the investigation under protest, as it says
it did, there may not arise any question of acquiescence. I need not, however,
go into this aspect at length, because I have already negatived this branch of
the argument of Mr. Deb on another ground.
Mr. Deb
further contended that the question envisaged under section 249(I) (a) must
arise and it must appear to the Central Government that there were goods
reasons to order investigation. There would not be good reasons, according to
Mr. Deb, until the petitioner was heard. He, therefore contended, that to order
an investigation without hearing the company was a violation of the principles
of natural justice. In support of this contention Mr. Deb relied firstly on
Capel v. Child (1832) 2 Cr. & J. 558, and particularly on the following
observations by Lyndhurst C.B.:
"Here is
a new jurisdiction given-a new authority given: a power is given to the bishop
to pronounce a judgment; and according to every principle of law and equity,
such judgment could not be pronounced or, if pronounced, could not for a moment
be sustained, unless the party in the first instance had the opportunity of
being heard in his defence which in this case he had not."
He also relied
on Fisher v. Jackson [1891] 2 Ch. D. 84 and Ridge v. Baldwin [1963] 2 All E.R.
66, both referring to the observations of Lyndhurst C.B. with approval. In my
opinion the decisions do not support the contention. The investigation in
question has not a quasi-judicial character. Nobody is an accused before the
inspector. The inspector does not pronounce a judgment nor does he penalise
anybody. The function of the inspector is equivalent to the function of a
fact-finding mission: vide Raja Narayan Bansilal v. Maneck Phiroz Mistry [1960]
30 Comp. Cas. 644 (S.C.). Considerations of natural justice are irrelevant in
the conduct of such an investigation.
Mr. Deb also
contended that section 249(I) (a) contemplated the appointment of
"an" inspector, meaning thereby a single inspector; as such, the
appointment of co-inspectors was bad. In support of this contention be
contrasted the language used in section 249(I)(a) with the language used in
sections 235, 237(a) and 247, which speak of appointment of one or more persons
as inspector. I am not impressed by this argument. "An" inspector, in
my opinion, should be read as any inspector and the singular would include the
plural. The comparison of language of different sections will not necessarily
establish the proposition contended for by Mr. Deb, because it does not always
follow that the Legislature intends something different only because the
language used in different sections is not exactly the same: vide observations
of Lord Goddard in Lines v. Herson [1951] 2 K.B. 682.
Mr. Deb lastly
contended that the investigations under section 237(b) and 249(I) (a) could not
be combined under one order and, if at all, two separate orders of
investigation should have been made. He submitted that this was all the more so
because powers exercisable under the two investigations were not the same, for
example, an investigation under section 249 (1)(a) did not attract of sizure of
documents under section 240-A. He invited my attention to section 249(2) and
247(5) in support of this argument. He further submitted that a combined order
would create difficulties in apportioning costs of two different investigations
lumped together. I am not convinced by the argument. Power to order
investigation being there, it mattered little whether investigation under
section 237(b) and 249(I) (a) were made under one order or by different orders
and this is so even though all the powers exercisable under the different
investigations are not identical. Difficulties in apportioning costs must be
faced by the authority making such an order and benefits of doubt in such
apportionment must go to the company investigated.
Although I
overrule the other arguments of Mr. Deb in condemnation of the investigation
under section 249 (I) (a), still I quash the order for reasons herein before
stated.
In the result
the investigation ordered under section 237(b) is upheld and this rule is
discharged to that extent. The order of investigation under section 249(I) (a)
is, however, quashed and I restrain the respondents from further proceeding
with the same. This rule succeeds and is made absolute to that extent. There
will be no order as to costs.
I make it
clear that nothing in this judgment shall stand in the way of the Central
Government in making a fresh order of investigation under section 249(I) (a)
according to law, if good reasons for such an investigation exists.
Interim order
shall continue for a period of a fortnight from to day and shall thereafter
stand vacated.
[1981] 51
COMP. CAS. 634 (DELHI)
HIGH COURT OF
v.
Union of
T.V.R. TATACHARI, C.J.
AND S. RANGANATHAN, J.
Civil Writ Petition No. 918 of 1974
APRIL 26, 1978
A.K.
Sen , Mrs. Leila Seth and B. Mohan for the Petitioner.
K.M. Kataria for the Respondent.
JUDGMENT
S. Ranganathan, J. —This is a writ petition filed by Ashoka Marketing Ltd.
(hereinafter referred to as "the company" or AML) for the issue of a
writ of certiorari to quash the orders passed on December 31, 1973, June 26,
1974, and July 2, 1974, by the Company Law Board (hereinafter referred to as
"the Board") and an order dated July 2, 1974, passed by the
Government. The Union of India and the Secretary, Ministry of Law, Justice and
Company affairs, have also been made respondents.
The order dated December31,
1973, passed by the Board is an order under s. 237(b) of the Companies Act,
1956, appointing a firm of chartered accountants as inspector to carry out an
investigation into the affairs of the company during the period from March 1,
1966, to December 31, 1973, and "to report thereon to the Company Law
Board pointing out, inter alia, all irregularities and contraventions of the
provisions of the Companies Act, 1956, and of any other law and the person or
persons responsible for such irregularities or contraventions" on or
before June 30, 1974. The reason why the Board considered this action necessary
appears from the first paragraph of the order which contains the preamble:
"Whereas in the
opinion of the Company Law Board there are circumstances suggesting that the
persons concerned in the management of the affairs
of the company have in connection therewith been guilty of fraud, misfeasance
and other misconduct towards the company and its members".
Which is nothing more than
a repetition of the language of s. 237(b)(ii) as to the circumstance warranting
the appointment of an inspector under that provision. The grievance of the
company is that there were no such circumstances in existence on the basis of
which the Board could have formed such an opinion or ordered such an
appointment. In the writ petition, the company has sought to substantiate its
plea on the basis of the following allegations.
The company had been
incorporated in 1948 and was carrying on business as traders, exporters,
selling agents, dealers in stocks, shares and investments and for some time in
the manufacture and sale of plywood. It had also recently commenced a business
in the manufacture and sale of electronic goods. It had built up a very
efficient and effective organisation and had been carrying on its business and
activities scrupulously in accordance with law. It has a respectable board of
directors. It maintained regular books of account and records; its turnover was
increasing from year to year; its profits were reasonable and it was also
declaring reasonable dividends. While so, on April 11, 1963, the Govt. of India
ordered an investigation into its affairs under ss. 237(b) and 249(1) of the
Companies Act, 1956, but this order was quashed by the High Court of Calcutta
by its judgment dated March 7, 1969. In the meantime, the Registrar of
Companies had been making several enquiries and, to the understanding of the
company, he was satisfied with the information and explanation given to him. In
September, 1972, the Board, acting under s. 209(4)(b)(ii) of the Companies Act
had appointed one Sri Sooraj Kapoor, to inspect the company's books. He had
also called for explanation, information and books from the company. The
company's affidavit specifically avers in para. 7:
"So far as your
petitioner is aware there has been no complaint by the inspector of any fraud
and/or misfeasance and/or misconduct and/or irregularity and contravention in
the business or affairs of the company, Nor had, to the knowledge of the
company, any shareholder or creditor of the company made any such allegation.
In these circumstances, the
order dated 31-12-1973 was without any basis or justification".
It is pointed out that the
order does not set out any circumstance or material leading to the formation of
the opinion expressed therein. Therefore, soon after the order was received on
7-1-1974, the company applied to the board for a review of the order setting
out all the above facts, pointing out that the provisions of s. 237 were
drastic and should not be commenced "unless
there are satisfactory grounds supported by relevant and cogent materials and
evidence" and without such materials an inspector should not be given
"arbitrary and untramelled powers to make a fishing inquiry and to
investigate into any affair of your petitioner which is not authorised under
the law" during the period from March 1, 1966, till the date of the order.
The company offered to furnish any information that may be needed in respect of
any particular transactions and prayed that the order for a general
investigation be cancelled. This petition was rejected by the Government and
the Company Law Board and hence this writ petition by which the petitioner
requests this court to quash the order u/s. 237(b) dated December 31, 1973, the
letter dated June 26, 1974, by which the Company Law Board extended the period
for the inspector's report till December 31, 1974, and the orders dated
February 2, 1974, by which the Board and the Company Affairs Dept. of the Govt.
of India declined to review the order dated December 31, 1973.
Perhaps all that a company
could do at this stage was to deny that there were any circumstances justifying
action u/s. 237 in its case, for the Board does not take the company into
confidence or indicate to it the basis for the action taken by it. It is,
therefore, of the greatest importance that when a company approaches the court
with a writ petition, making out a prima face case that the action u/s. 237 was
not justified, the Board should place before the court all the circumstances
available to it on the record on which the opinion has been formed that the
persons in management were guilty of fraud, misfeasance or misconduct towards
the company and its members. Unfortunately, in this case, the stand of the
Board has been put forward piecemeal in its original counter-affidavit and two
supplemental counter-affidavits filed by it, one before the hearing of the case
started and the other at a considerably advanced stage of the hearing. The
company has also filed more than one rejoinder. In order to understand the full
facts, we have to consider the following seven affidavits, which we shall, for
convenient reference, designate as A-1 to A-7:
|
A-1. |
Reply
affidavit of respondent |
dt. |
31-7-75 |
|
A-2. |
Rejoinder
of petitioner |
" |
25-8-75 |
|
A-3. |
Further
rejoinder |
" |
28-10-76 |
|
A-4. |
Supplemental
reply of respondent |
" |
7-12-76 |
|
A-5. |
Further
rejoinder of petitioner |
" |
22-12-76 |
|
A-6. |
Further
reply of respondent |
" |
13-1-78 |
|
A-7. |
Final
reply of petitioner |
" |
24-1-78 |
The case against the
company was first spelt out in A-1. In para. 10, it was stated that the order
in the instant case had been passed on the basis of seven transactions of the
company which had come to the notice of the Board:
1. Surrender of the sole
selling agency of Jaipur Udyog Ltd.
2. Purchase and sale of
the undertaking of Albion Plywood Ltd.
3.
4. Investment in low
yielding debentures.
5.
6. Unsecured loan of
large amounts to closely connected persons and
7. Write off of three
loans.
As a general preface to
these charges it was stated that the company was one of twelve companies that
belong to a group known as the Sahu Jain group and it was a common tendency of
common block shareholders of such group concerns to benefit each other even if
at the cost of the other shareholders, We have to examine by taking up each of
these "charges" seriatim and analysing the averments of the parties,
whether circumstances have been made out to sustain the action taken by the
Board.
General charge
According to A-1, the
petitioner belongs to a group of companies known as "Sahu Jain
group". It is stated that, according to the report of the Monopolies
Enquiry Commission, 1965, a group of 26 companies has been said to belong to
this business house and that, according to the report of the Industrial
Licensing Policy Enquiry Committee, 1969, there were 29 such concerns. The
respondent has referred to 12 concerns which are mentioned in both the reports
and alleged that they belong to the Sahu Jain group. These concerns are,
besides the petitioner (AML), Albion Plywood Ltd. (APL), Bharat Oversees Pvt.
Ltd. (BOL), Hindustan Vehicles Ltd. (HVL), Jaipur Udyog Ltd. (JUL) Mahespur
Holdings Ltd. (MHL), Parshya Properties Ltd. (PPL), Rohtas Industries Ltd.
(RIL), Shree Kesaria Investments Ltd. (KIL), Shree Rishab Investments Ltd.
(SRIL), New Central Jute Mills Co. Ltd. (NCJ) and Bharat Nidhi Ltd. (BNL).
After setting out the names of these concerns, A-1 alleges "a common
tendency of such shareholders/directors in these concerns to benefit each other
even if at the cost of the other shareholders of the concern".
In reply to the above, the
petitioner-company has stoutly repudiated the existence of any such group as
alleged. It is stated that though a notice was given by the Dept. of Compay
Affairs in 1974, calling upon the petitioner to show cause why action under s.
48(2) of the Monopolies and Restrictive Trade Practices Act, 1969, should not
be taken for default in compliance with the provisions of s. 26 of the said
Act, the proceedings were dropped by a decision communicated on 26th April,
1976. In other words, the same Dept. of Company Affairs had accepted the
position that no case had been made out for treating these concerns as
inter-connected.
Apart from the fact that
the respondent has not answered the point made in the reply or given details to
show that AML is one of the concerns belonging to a closely knit group along
with the 11 others we are of opinion that this general allegation made in A-1
is not helpful in determining the issues in the present case. Merely because
certain companies are said to form a group and there are transactions between
these companies, it cannot be presumed that the transactions are mala fide or
that they were entered into with a view to defraud or otherwise act in a manner
detrimental to some or all of the concerns. No doubt, in considering the nature
of a particular transactions, or the purpose and motive behind it, the
relationship between the parties may be a relevant consideration and while
examining the seven specific charges made against the company, we shall keep
this aspect also in mind to see whether there has been any attempt to act to
the detriment of AML with a view to benefit any of the other concerns
mentioned. But, all that we would like to observe here is, that the approach
indicated in A-l, of starting with a presumption that there must be necessarily
something wrong because the transactions are between companies of the same
group, is not correct. The general charge formulated in A-l, therefore, cannot,
by itself, be a ground justifying the action under s. 237, in the present case,
unless it is substantiated with reference to one or more of the other seven
charges.
Charge
No. 3:
It will be convenient to
take up the first two charges last. Taking up the third charge first, the
complaint against the company is that between September, 1968, and February,
1970, it sold at a huge loss some of the shares held by it in NCJ, APL, HVL,
MHL and KIL. The sale was at an unnecessarily low price (lower than the market
price) and, in the case of two concerns, was of the controlling interest
therein. So, it is alleged this transaction was "prima facie" against
the interest of the company.
The factual position that
emerges from the various affidavits in regard to these sales is as follows:
(a) In the case of NCJ, the shares were sold at rates varying
from Rs. 4.40 to Rs. 4.50 per share as against the face value of Rs. 10. Though
according to the respondents, NCJ had large reserves and had also earned good
profits, it is admitted that the shares are quoted on the stock exchange and
that the market quotations for the shares at the relevant time ranged between
Rs. 4.56 to Rs. 4.62 per share. The claim of the petitioner-company is that the
shares were sold at the rates quoted at the Calcutta Stock Exchange and this statement
has not been denied by the respondent. Further, it is pointed out that even on
the basis that they had been sold at rates
slightly less than the market value, the transaction was still beneficial to
the company inasmuch as the value of the shares fell from Rs. 4.50 this year to
Rs. 3.75 in the subsequent year and, if the company had not sold the shares
when it did, the loss would have been even greater.
(b) In the case of APL and HVL, it is common ground that these
concerns had been incurring huge losses and that their shares were worth less.
Forced to admit this position in A-4, the respondent would still find fault
with the petitioner for having sold thirty-five thousand shares of HVL
"for a nominal amount of Rs. 3,500" 'alleging vaguely that this
"conveys no sense except of getting the set-off against profits for the
purpose of taxation".
(c) In regard to the MHL and KIL, the shares are not quoted on
the stock exchange. The allegations of the respondent that these were transfers
of controlling interest is not correct. The number of shares sold were 23,000
out of 50,000, in the case of KIL, and 16,000 out of 35,000, in the case of
MHL. There is no allegation that the petitioner had earlier transferred shares
in these companies to the same person or associated person so as to give them
controlling interest. Regarding the price, the complaint is that the shares
were sold at Rs. 2.55 and Rs. 2.80, respectively, although the break-up value
of the shares would have worked out to Rs. 15.71 and Rs. 11.58, respectively.
A study of the above facts
would show that the charge that the petitioner had sold the shares at less than
the market price is not borne out by the material on record. This is very clear
in the case of the first three companies. In the case of the last two, no
doubt, the sale price is less than the alleged break-up value. But in the case
of a private limited company, the break-up value does not always or necessarily
furnish a correct clue as to its market value at any particular point of time:
[CWT v. Mahadeo Jalan [1972] 86 ITR 621 (SC)]. There is no other material to
indicate that the actual sale price did not represent the value which those
shares could realise in the open market on the respective dates of sale though
the companies whose shares were sold are said to belong to the Sahu Jain Group,
that fact is of no significance as the sale does not benefit those concerns.
Nor is there any allegation that these shares have been transferred to other
companies of the same group at a favourable price to benefit them at the cost
of the petitioner-company. In regard to this charge, therefore, no
circumstances have been shown to exist which could lead to the formation of an
opinion that there has been some fraud, misfeasance or misconduct on the part
of the management of the petitioner-company.
Charge
No. 4: Investment in low yielding debentures.
The purport of the charge
against the company under this head is not clear. The allegation in A-1 is in
the following terms:
"In June, 1970, the
company purchased from Sri P. Jain, Smt. Indu Jain, Smt. Shushila
Jain, the Bhartiya Gyanpit and the Universal Trust certain debentures worth Rs.
10 lakhs yielding 8% per annum, whereas the loans of the company yielded 11% per annum".
The above allegation can
mean one of two things. The first is that, whereas certain other investments
made by the company by way of loans yielded an interest rate of 11% per annum,
the debentures in question yielded only 8%. But if this were the charge against
the company, that would not be sufficient to attract action under s.237. All
the funds held by the company cannot be invested so as to yield the same
return. Merely because on some investments by way of loans, the petitioner has
been able to get 11% interest, the inference does not follow that an investment
in debentuces yielding 8% must be the result of some fraud, misfeasance or
misconduct on the part of the directors. There is no material to suggest that
all the investments of the company were yielding 11% interest and despite similar
investments being available readily, the petitioner-company purchased these
"low rate" debentures to oblige the vendors. It is also not alleged
that funds yielding higher return were withdrawn for making these purchases to
the detriment of the company.
The other possible
interpretation of the allegation is that, whereas the company had received
advances and deposits and paid interest thereon at 11%, it has invested the
funds drawn from those advances and deposits in debentures which yielded a
smaller return. This contention is met by A-2 which points out the fallacy in
the above line of reasoning. There is no material to correlate the funds
invested by the company in the above debentures with the loans taken by it on
payment of interest at 11%. The resources of the company were not limited only
to such loans. The company had received advances from its customers on which it
paid no interest whatever. It has security deposits on which it was paying
interest at only 6 to 6 1/2%. The surplus funds of the company had to be
invested and there is no material to suggest that the investment in these
debentures was in any way motivated. In fact, the charge does not even allege
that the purchases were made to benefit the vendors who, it would appear, may
be connected with the directors of the petitioner-company. In these
circumstances, therefore, no circumstances have been brought to light for
drawing an inference of fraud, misfeasance or misconduct.
For the first time, in the
reply affidavit, A-4, the respondent, took a fresh point that the debentures
purchased by the company were those of PPL
which, in the year ended January 31, 1970, had incurred a net loss of Rs. 596
lakhs as against its paid up capital of Rs. 5 lakhs. It will be seen that this
is a totally new charge. The original allegation against the company was only
for having made an investment yielding a smaller return and did not even
mention the name of the company whose debentures were purchased. However, A-4
attaches importance to the name and seems to doubt the solvency of the company
the debentures of which have been acquired, perhaps also because it is one of
the concerns of the group according to the respondent. But this criticism has
not been made out by reference to the balance-sheet position of the said
company. As its name indicates it appears to be a property holding company.
There is no information regarding its assets and liabilities. In the case of a
property company it is not unusual that there are only losses in working in the
initial stages of its development before the income from the properties
constructed or held by it starts flowing in. Moreover, debentures are secured
loans and there is not an iota of evidence placed to show that these debentures
were worthless. The fact that PPL is a company of the group will not, per se,
render the debentures worthless or the purchase motivated. A-4 has only
attempted to voice a suspicion of bona fides but backed it by no material on
record. Here also the respondent has failed to make out the existence of
circumstances to show that in purchasing these debentures, the directors of the
company have been guilty of any fraud, misfeasance or misconduct towards the
company or its members. Charge No.5: Purchase and sale of jeeps.
The allegation is that in November,
1966 and January, 1967, the company purchased twelve jeeps. Seven of these were
sold in March, 1967, and two more in October, 1967. The company incurred a loss
of Rs. 47,000 on the purchase and sale. The jeeps had been insured only from
January to August, 1967. The accounts of the petitioner did not show any
expenses in respect of petrol during the year 1967. From these facts, the
inference is sought to be drawn that the purchase of the jeep was not for the
purposes of the business of the company and that the transactions were not in
the interests of the petitioner-company.
The company's plea is that
the jeeps were purchased and sold under the authority of resolutions passed by
the board of directors. The transaction was in the ordinary course of business
of the company and in order to ensure its smooth running. Though the exact
manner of utilisation of these jeeps had not been indicated in the affidavits,
Sri Sen submitted that the transaction should be judged in the light of the
fact that it was put through at the time of the general elections, that the
jeeps were purchased in business interests, "in order to ensure the smooth
running of the business of the company"
and that no mala fides were involved in the transaction.
We are unable to see how this
transaction can attract the impugned action by the respondent. As suggested by
Sri Sen, there is an explanation for the purchase of the jeeps and their
disposal within a short time. But, even disbelieving this explanation and
assuming the worst, it is a mere instance of purchase and sale by the company
of a certain asset which resulted in a loss to the company. It has not been
explained in what manner this transaction reveals fraud, misfeasance or
misconduct on the part of the persons concerned in the management of the
company. There is no allegation that these jeeps were intended for or utilized
by those persons or that they were sold to them or to other concerns of this
group in which they were interested at concessional rates or the like, Except
that the company had entered into an imprudent transaction, there are no
circumstances of the nature outlined in s. 237(b)(ii).
Charge
No. 6: Loans to certain individuals
The respondent has taken
objection to the advances of loans by the petitioner-company to a number of
persons "who belonged to the Sahu Jain group" to the extent of Rs.
1.26 crores. In particular, it is stated that loans to the extent of Rs. 68.75
lakhs were advanced to one R.G. between August, 1968, and March, 1972, and that
similar loans were also advanced to A.P.J. From these persons Rs. 20 lakhs and
Rs. 95 lakhs, respectively, remained due to the petitioner.. The answer of the
company is that the petitioner had vast resources by way of deposits from
stockists and advances from customers. The investment of these funds among
others by way of loans was part of the business of the company. These were
loans carrying a high rate of interest (as admitted in para. 10(4) of A-1), and
were repayable on demand. It has been denied that any loan in excess of Rs. 20
lakhs was given to R.G. In the case of A.P.J. only Rs. 4.45 lakhs was due and,
in the case of R.G., the entire amount of the loan was repaid by 6th November,
1974.
The petitioner's reply that
these are loans earning a high rate of interest has not been denied. In fact,
one of the earlier charges against the company was that when these loans were
earning a higher rate of interest of 11%, the debentures of P.P.L. carrying 8%
interest should not have been acquired. It is, therefore, inconsistent on the
part of the Board to find fault with the company also for having advanced these
loans. It is not the respondent's suggestion that these persons were not
capable of returning the loans or that the persons concerned in the management
of the company stood to gain in some way as a result of these transactions. The
loans have also been substantially repaid. In these circumstances, we fail to
see how this transaction can attract action under s. 237(b)(ii).
Charge
No. 7: Write off of three loans
According to A-1, the
petitioner-company had advanced in 1963-64, three loans, one, a sum of Rs.
50,000 to Sri K.L.M., two, Rs. 30,000 to Sri T.H.K. and three, Rs. 15,000 to
Shri H.K.M. Neither these loans nor any interest thereon was recovered from
these persons though the interest itself was quite substantial and amounted to
as much as Rs. 46,553. No efforts were made to recover them and a major part
has been written off.
The explanation given by the
company is that these were very respectable and prominent persons in public
life. One of them was a counsel for the company and one of them held a high
office in the State of Orissa. When they were in some financial difficulty, the
company advanced certain loans to them. But the circumstances were such that
the loans could not be repaid. It was embarrassing for the company to take
legal proceedings against them. However, some efforts for recovery were made.
In the case of Sri T.H.K., Rs. 25,000 were recovered and only Rs. 5,000 had to
be written off. The other two, however, became bad debts and were written off
in 1973.
All that the materials
placed on record discloses is that the petitioner-company advanced certain
loans which became irrecoverable and had to be written off. The persons to whom
the monies were lent were not relatives or associates of the persons concerned
in the management of the company. They were outsiders and influential people to
whom the company, bona fide, though perhaps imprudently, as events turned out
later, advanced certain monies which had to be written off. We are unable to
conceive how this transaction of the company can be made the basis of a charge
of fraud, misfeasance or misconduct on the part of the directors, etc., towards
the company or its members.
We shall now take up the
first two charges which are the most important. Shri Kataria, in particular,
has placed considerable reliance on the first charge as sufficient by itself to
warrant the action taken. As will be seen later, there is an inter-connection
between the two transactions which may have to be considered together. We
shall, however, set out the facts discussed in respect of each of these charges
separately and then discuss the resultant position that emerges.
Charge
No.1: Surrender of sole selling agency of JUL
The allegation, as set out
in A-l, was that the petitioner had been appointed the sole selling agents of
JUL for the sale of cement for a period of five years from April 1, 1966. From
this agency, the petitioner was deriving an annual return of about Rs. 8 to 10
lakhs. Notwithstanding this, the company surrendered the agency in favour of
BOL, without receiving any compensation for the unexpired period of the agency.
The transaction, therefore, was said to be,
prima facie, against the interests of the company.
On behalf of the
petitioner, it was pointed out by A-2 that this allegation was based on two
misconceptions. The first was that the agency was extremely profitable to the
petitioner-company. This was not so factually. Though the gross commission from
this agency in the accounting years which ended on August 31, 1966, August 31,
1967, and August 31, 1968, amounted to Rs. 92 lakhs, Rs. 108 lakhs and Rs. 8.10
lakhs, respectively, the net income of the company from this source, after
deducting the expenditure incurred for earning the said income, came to only
Rs. 1.95 lakhs for the first year and there were actually losses of Rs. 65,000
and Rs. 2.24 lakhs, respectively, for the succeeding two years. Full details of
the computations on the basis of which these figures were arrived at were given
in A-3. It was pointed out that the New Delhi office of the petitioner looked
after this business and also the work of three regional offices at Chandigarh,
Jaipur and Sawaimadhopur. The work for the cement agency at these places was
considerable and involved the setting up of a number of establishments with
sufficient personnel to handle the work efficiently. Though the company also
dealt in certain other commodities such as sale of steel pipes, plywood, paper
and rubber goods, the turnover of cement was the maximum. The turnover in the
other commodities varied between 1 and 2 1/2 per cent, of the cement turnover.
The company, therefore, apportioned the total expenditure on the basis of
turnover and deducted the same to arrive at the net figures referred to
earlier. The second misconception of the respondent, according to the
petitioner, was that the petitioner was entitled to some compensation for the
unexpired period of the agency but had voluntarily forgone the same. This was
also not correct. Under s. 294A(c) of the Companies Act, the agents were not
entitled to compensation on resignation.
The respondent tried to
meet the above case of the petitioner in its affidavits A-4 and A-6. The
correctness of the computation of the expenditure deductible against the
commission income was contested on the following grounds:
(a) The New Delhi office of the petitioner looked after the
cement agency not merely of JUL but also of other brands of cement such as
Rohtas, Portland and Ashoka. The commission earned by the petitioner from JUL
was 40% of the total commission earned by it in 1966-67, and 33% in 1967-68.
The expenditure deductible against the commission received from JUL would,
therefore, be much less than what has been claimed by the company.
(b) The allocation of expenditure on the basis of turnover was
not correct because cement was a commodity in short supply which did not
require any special efforts for sale.
(c) The expenditure taken into account by
the petitioner included the interest paid by the head office which should be
excluded and if this is done the net commission figures would work out to Rs.
4.12 lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 0.22 lakhs in 1968.
(d) As a result of the surrender of the sole
selling agency the petitioner-company's asset position was considerably
affected. It has to call back a loan of Rs. 60 lakhs from NCI and also dispose
of other investments of about Rs. 45 lakhs. Moreover, it had to meet
liabilities to the extent of Rs. 268 lakhs relating to the business of the sole
selling agency and in order to raise this amount it had to sell its plywood
factory for Rs. 57 lakhs, sell debentures for the amount of Rs. 63 lakhs, make
over loans due to it from 9 parties amounting to Rs. 43 lakhs and pay cash of
Rs. 105 lakhs.
These
points have been effectively met by the petitioner-company. Regarding (a) it
has been pointed out that the agencies of Rohtas, Portland and Ashoka cements
were not accounted for in the New Delhi books of the company but were accounted
for in the Calcutta books of the company. The expenditure pertaining to those
agencies was, therefore, not included in the New Delhi books. The Delhi office
was having only the sale of paper, asbestos and certain other commodities in
addition to the sole selling agency of JUL. It is, therefore, not correct to
say that only a part of the commission accounted for in the Delhi books was
attributable to the JUL agency. This contention is also borne out by the copy
of account of the New Delhi office placed on record by the petitioner. The
first point made by the respondent is, therefore, without force. Regarding (b)
there is merely an assertion on behalf of the respondent that the sale of
cement was very easy and did not call for any expenditure on the part of the
company. In A-3, the petitioner-company has set out at very great length the
nature of the activities and functions it had to undertake in relation to the
business of the sole selling agency. A detailed analysis of the expenditure
under various heads was also furnished. In the face of all these details, the
mere assertion that the cement sold itself and that all the expenditure was
unnecessary cannot be accepted. Point (a) made on behalf of the respondent
again has not been substantiated. The interest paid by the company was interest
paid by it on the advances it had received from stockists and purchasers of
cement. The interest is, therefore, expenditure properly debitable against the
commission income and there is no justification for excluding the same from the
P. & L. account. Regarding the other plea that interest received by the
head office has not been taken into account, the respondent has not placed
before us the details of interest earned by the petitioner in relation to the
sole selling agency, which, according to it, should have been included but has
been left out of the account by the petitioner. Apart
from the above lack of material we may also point out that even if, as
contended by the respondent, the expenditure by way of interest is left out of
account, the net profit earned from the sole selling agency would be Rs. 4.12
lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 22,000 in 1968. In other words,
it was a dwindling income and the mere fact of surrender of such a source of
income cannot lead to the adverse inference sought to be drawn by the
respondent.
Coming now to the points
made out in A-6, we find again that the company has given a satisfactory reply.
So far as the recall of a sum of Rs. 60 lakhs from the NCJ is concerned, it is
pointed out that the petitioner-company had advanced Rs. 1,40,00,000 to the
NCJ. The Company Law Board had directed the company to recall the loan in terms
of s. 370 of the Companies Act. Actually, the company applied for extension of
time for the recalling of the above amounts and it was only in pursuance of the
directions of the Company Law Board, dated September 25, 1968, that the sum of
R. 60 lakhs was repaid by the NCJ. This point, therefore, is of no
significance. As to the last point made regarding the sale of the company's
assets, we may point out that the respondent is confusing between the result of
the surrender of the sole selling agency and the cause therefor. Naturally,
when the petitioner-company surrendered the sole selling agency, it had to
repay the security amounts and advances received by it in its capacity as sole
selling agents. This had necessarily to be done by disposing of some assets and
by paying a certain amount of cash. It could also be that some of these assets
may have been acquired out of the moneys received in the course of the sole
selling agency. From the mere fact that, as a result of the transfer of the
sole selling agency, the petitioner had to discharge its liabilities incurred
in relation thereto by the disposal of certain assets and transfer of certain
loans and payment of cash, it cannot follow that the very act of the surender
of the managing agency was inspired by improper motives.
The essence of the case of
the department was that the sole selling agency was a very valuable asset which
no prudent businessman would give up. A point has also been sought to be made
in para. 9 of A-6 that whereas 5,000 out of 15,000 shares of the
petitioner-company are in the hands of nationalised banks, BOL is a private
Ltd. Co., the profits earned by which go to certain individuals who are at the
helm of affairs of the petitioner-company. In considering it to be a valuable
asset, the respondent has gone by the figures of gross commission without
allowing the deduction of any expenditure thereagainst. Even if the expenditure
cannot be allowed to the extent claimed by the petitioner, some expenditure
must be allowed and, even according to the respondent's figures, the income
from this source was dwindling over the years. The respondent's allegation that
BOL is an associated concern has been denied in A-2 and A-6 and no material to
show any close connection or control has been placed on record. In A-3 and A-7,
the petitioner has alleged that, early in 1968, JUL had indicated to it that
they wished to terminate its agency and appoint BOL as its agents and it was in
this context that they had to surrender the agency. Sri Kataria objects to this
allegation made at a late stage being taken into account. There is also nothing
to show that the initiative for terminating the agency came from JUL. So, we
shall leave it out of account. But even ignoring all these submissions of the
petitioner and taking the respondent's case at its best, all that has been made
out is that the petitioner-company gave up a sole selling agency which was
remunerative. But will this alone be a ground for drawing an inference that the
persons in management have been guilty of fraud, misfeasance or misconduct
towards the company? We think not, and this will become clearer if we bear in
mind that this transaction of surrender of the sole selling agency in favour of
BOL was simultaneous with another transaction of surrender of the sole
undertaking of APL, which we are discussing below and consider these two
transactions together. We shall, therefore, proceed to discuss the second
charge against.
Charge
No.2: Purchase and sale of plywood factory
The APL was a losing
concern. It had sustained losses to the tune of Rs. 52.72 lakhs between October
1, 1962, to March 31, 1966. The petitioner-company had advanced loans to APL to
the extent of Rs. 40 lakhs, and on October 31, 1965,a sum of Rs. 41,91,561.64
was due to the petitioner on account of principal and interest from APL. According
to the petitioner, there was no way of recovering this loan and so the
petitioner ultimately decided to purchase the undertaking of APL and carry on
the business in plywood on its own. This proposal was placed before a meeting
of the shareholders of the company held on 21st March, 1966. The explanatory
note attached to the notice of this general meeting contained the resolution of
the company approving the commencement by it of a business in plywood which was
necessary in terms of s. 149 of the Companies Act as amended by Act 31 of 1965.
The block assets were taken over at a value fixed by a reputed firm of valuers
and the other assets were taken over at book value. The petitioner-company
worked the concern for a period of three years but it was not a very successful
experiment. In the period of April 1,1966, to August 31, 1968, during which the
petitioner-company ran the business it had to incur a further loss of Rs. 38.94
lakhs. Eventually, therefore, the company decided that it was not profitable to
continue carrying on the business and it was decided to dispose of the same. It was about this time that the surrender of the
selling agency of JUL by the petitioner-company in favour of BOL was also
contemplated and it was decided that the undertaking of APL would also be
transferred to BOL. This transaction was also placed before a meeting of the
shareholders of the company held on the 28th September, 1968, and the
undertaking was transferred to BOL w.e.f. 1st October, 1968.
According to the
petitioner, the above undertaking was purchased at a cost of Rs. 77.17 lakhs
and the sale price was Rs. 88.18 lakhs representing the book value of the
various assets as on the date of the sale. If this is correct, there is nothing
even prima facie wrong with the transaction. The respondent's allegation,
however, is that the undertaking was purchased not for Rs. 77.17 lakhs but for
Rs. 88.65 lakhs and sold not for Rs. 88.18 lakhs but only for Rs. 57 lakhs. The
discrepancy in the purchase price is due to the fact that, according to the
respondent, an interest amount of Rs. 3.49 lakhs recoverable from the APL had
not been realised. This has been categorically denied by the petitioner and it
has been asserted in A-7 that interest was duly recovered from APL. It is then
alleged by the respondent that the valuation report on the basis of which the
purchase was effected does not give any basis for the valuation and that an
inspection report showed that it had made a profit of Rs. 11.40 lakhs in the
bargain. The inspection report relied upon has not been placed before us. That
apart, the valuation was got done by a reputed firm of valuers. If the
valuation report did not give the details, it was open to the respondent to
have found out the details from the said firm. It cannot be merely assumed that
this valuation report was a made-up one and that it did not represent the
proper value of the purchased undertaking and that the consideration paid by
the petitioner-company must have been an exaggerated consideration.
While, on the one hand, the respondent criticises the purchase as having been made at an exaggerated price, allegations of a contrary nature are made in regard to the sale transaction of the undertaking in 1968. Here, it is alleged that the sale price was only Rs. 57 lakhs and not Rs. 78.18 lakhs as stated by the petitioner. This allegation has also been denied by the petitioner. The respondent has drawn the inference that the sale price was only Rs. 65 lakhs from the fact that certain liabilities of the petitioner-company to the extent of Rs. 268 lakhs which was transferred to BOL were adjusted in the following manner:
|
|
Rs. |
|
Transfer
of debentures |
63
lakhs |
|
Cash
paid |
105
lakhs |
|
Loan
transferred |
43
lakhs |
|
Price
of plywood factory |
57
lakhs |
|
Total |
268
lakhs |
The petitioner has pointed
out in A-7 that this proceeds on a misapprehension. The total sale price was
Rs. 78.18 lakhs as explained in detail in the annexure filed along with A-2 but
only a part of the sale price was adjusted against the sum of Rs. 268 lakhs.
Again, the respondent alleges that the transfer of the undertaking at book
values was not justified and that the unit must have been worth much more in
October, 1968, than in April, 1966. This allegation again is totally
unacceptable. When the petitioner-company wanted to take over the undertaking
of APL, which had suffered serious losses, it was prepared to take over the
same only after having the block assets valued by a reputed firm of valuers.
Having taken over the undertaking, the petitioner conducted the business for a
period of about two years during which it suffered a heavy loss. It was,
therefore, decided to transfer the undertaking to BOL at book value. There is
nothing suspicious about this and the respondent admits in A-4 that it is
unable to attribute any motive for the petitioner not undertaking a revaluation
of the block assets. Thus, the respondent has not been able to make out any
satisfactory reason why the purchase and sale price as claimed by the
petitioner should be disbelieved.
Realising this, perhaps,
the respondent in A-4 poses a question: Why did the company purchase a losing
concern? and concludes that this must have been effected in order to claim a loss
for income-tax purposes, by claiming a set-off of the losses in the business
against its other profits. It will be seen that this allegation overlooks the
fact that that the concern was taken over in lieu of a debt is not denied; it
does not also help the respondent's case. Even assuming that the
petitioner-company took over this losing concern merely in order to reduce its
income-tax burden, the transaction would not be one detrimental to the
interests of the company because admittedly the transaction helped to reduce
the tax liability of the company to the extent of about Rs. 20 lakhs. That
apart, this is merely a vague and wild allegation made by the respondent in an
effort to make out some charge against the company when the charge, as
originally laid, cannot be established.
According to the
petitioner-company, the purchase was for Rs. 77.17 lakhs and the sale for Rs.
88.18 lakhs. If this is so, there is no case at all for the respondent. But even assuming that the undertaking
had been purchased for Rs. 80.65 lakhs and had been sold only for Rs. 57 lakhs,
this would not lead to an inference of any misfeasance, misconduct or fraud on
the part of the management, if looked at against the correct factual
background. It should not be forgotten that this was an undertaking which had
been sustaining losses right from the commencement. The total loss incurred by
it was to the tune of about Rs. 92 lakhs. So, the mere fact that it was sold to
BOL for a price smaller than the purchase price is not sufficient to draw an
inference against the directors or the management of the company. Having regard
to the continuous record of losses, the suggestion made in A-4 that the value
of the undertaking in October, 1968, must have been considerably more than the
value of the undertaking in April, 1966, is obviously absurd and without basis.
We are, therefore, unable to spell out from the circumstances of the
transaction the conclusion sought to be drawn by the respondent.
Moreover, as we have
mentioned earlier, an important circumstance that is relevant in assessing the
real effect of the transactions which form the subject-matter of the first two
charges against the company is that they are really connected transactions.
Both of them took place simultaneously. In or about July, 1978, the company
decided to surrender the sole selling agency of JUL and also decided to
transfer the undertaking of APL to BOL. In fact, the transaction involved a
number of other mutual arrangements and adjustments which have not been
properly examined by the respondent. The petitioner has denied that BOL is a
part of the group, but granting that it was, still one would appreciate that
the two transactions put together do not leave any room for any adverse
inference. Let us assume, as contended by the respondent, that the sole selling
agency of JUL was a profitable one. Let us also assume that the undertaking of
APL was a losing one and had been transferred to BOL at a price lower than the
price for which the petitioner purchased it. All these facts put together could
only amount to this that, as a result of certain understandings in July, 1968,
the petitioner-company transferred to BOL a remunerative undertaking and also
an admittedly losing concern. It cannot, therefore, be postulated that the
management of the petitioner-company had indulged in these transactions with a
view to benefit BOL and its limited shareholders at the cost of the
petitioner-company. It should not also be overlooked that the transaction
relating to APL had, at both stages, been placed before and unanimously
approved by the shareholders of the company. It has been pointed out in A-6
that a substantial proportion of the shares of the petitioner-company was held
by nationalised banks and it cannot be assumed that they voted the proposals
which were patently detrimental to the company's interests.
We have discussed at length
all the materials placed before us by the parties and reached the conclusion
that the action initiated by the respondent against the petitioner-company was
not justified. Sri Kataria, for the respondent, submitted that, at least in
regard to the first two charges, the respondent has shown the existence of some
circumstances which called for further investigation. He submitted that if,
after investigation, the charges were made out, the board would take other
action but that, if the charges could not be substantiated, further proceedings
would be dropped. So, according to him, it was not possible on the material for
this court to say that even the appointment of an inspector to delve into these
matters was not necessary or justified.
We think that the
contention of Sri Kataria proceeds on a misconception of the true scope of s.
237 (b). In Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp Cas 639;
AIR 1967 SC 295, the affidavit of the Board disclosed that (p. 296—AIR
headnote):
"In the conduct of the
company there was delay, bungling and faulty planning of project entailing
double expenditure, continuous losses resulting in sharp fall in prices of the
company's shares and resignation of some of the directors on account of
differences of opinion with the managing director".
On the question whether
these facts could support an order under s. 237(b), Mudholkar J. (speaking for himself
and Sarkar C.J.), observed (AIR headnote p. 296—see also 36 Comp Cas at p.
692):
"It cannot be said
that from a huge loss incurred by a company and the working of the company in a
disorganised and unbusinesslike way, the only conclusion possible was that it
was due to lack of capability. It was reasonably conceivable that the result
had been produced by fraud and other varieties of dishonesty or misfeasance.
The order did not amount to a finding of fraud. It was to find out what kind of
wrong action has led to the company's illfate that the powers under the section
were given. The enquiry might have revealed that there was no fraud or other
similar kind of malfeasance. It would be destroying the beneficial and
effective use of the powers given by the section to say that the Board must
first have showed that a fraud could clearly be said to have been committed. It
was enough that the facts showed that it could be reasonably thought that the
company's unfortunate position might have been caused by fraud and other
species of dishonest action".
Two other judges, however,
did not agree with this view. Hidayatullah J. (as he then was), expressed
himself as follows. (AIR head note—see also pp. 661, 662 of 36 Comp Cas):
"The words 'in the
opinion of the Central Government' in section 237(b) indicate that the opinion
must be formed by the Central Government and it
is of course implicit that the opinion must be an honest opinion. The next
requirement is that ' there are circumstances suggesting, etc' These words indicate
that before the Central Government forms its opinion it must have before it
circumstances suggesting certain inferences........
Again, an action, not based
on circumstances suggesting an inference of the enumerated kind will not be
valid. In other words, the enumeration of the inferences which may be drawn
from the circumstances, postulates the absence of a general discretion to go on
a fishing expedition to find evidence. No doubt the formation of opinion is
subjective but the existence of circumstances relevant to the inference as the
sine qua non for action must be demonstrable. If the action is questioned on
the ground that no circumstances leading to an inference of the kind
contemplated by the section exists, the action might be exposed to interference
unless the existence of the circumstances is made out... Since the existence of
' circumstances ' is a condition fundamental to the making of an opinion, the
existence of the circumstances, if questioned, has to be proved at least prima
facie. It is not sufficient to assert that the circumstances exist and give no
clue to what they are because the circumstances must be such as to lead to
conclusions of certain definiteness".
Shelat J. had this to say
(See pp. 689, 690 of 36 Comp Cas):
"There must therefore
exist circumstances which in the opinion of the Authority suggest what has been
set out in sub-clauses (i), (ii) or (iii). If it is shown that the
circumstances do not exist or that they are such that it is impossible for any
one to form an opinion therefrom suggestive of the aforesaid things, the
opinion is challengeable on the ground of non-application of mind or perversity
or on the ground that it was formed on collateral grounds and was beyond the
scope of the statute.
Even assuming that the entire
cl. (b) is subjective and that the clause does not necessitate disclosure of
circumstances, the circumstances have in the present case been disclosed in the
affidavits of the Chairman and the other officials. Once they are disclosed,
the court can consider whether they are relevant circumstances from which the
Board could have formed the opinion that they were suggestive of the things set
out in cl. (b)".
Bachawat J. expressed no
views on this aspect of the case.
The scope of the section
was, therefore, again considered by the Supreme Court in Rohtas Industries Ltd.
v. Agarwal [1969] 39 Comp Cas 781; AIR 1969 SC 707 "to sort out the
requirements" of the section. After a review of the several decisions
cited before the court, Hegde J. (speaking for himself and Sikri J., as he then
was), concluded thus (p. 800 of 39 Comp Cas):
"Coming back to
section 237(b), in finding out its true scope, we have to bear in mind that
that section is a part of the scheme referred to earlier and, therefore, the said provision takes its colour from
sections 235 and 236. In finding out the legislative intent we cannot ignore
the requirements of those sections. In interpreting section 237(b) we cannot
ignore the adverse effect of the investigation on the company. Finally, we must
also remember that the section in question is an inroad on the powers of the
company to carry on its trade or business and thereby an infraction of the
fundamental right guaranteed to its shareholders under article 19(1)(g) and its
validity cannot be upheld unless it is considered that the power in question is
a reasonable restriction in the interest of the general public. In fact the
vires of that provision was upheld by a majority of the judges constituting the
Bench in Barium Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311;
AIR 1967 SC 295, principally on the ground that the power conferred on the
Central Government is not an arbitrary power and the same has to be exercised
in accordance with the restraints imposed by law. For the reasons stated
earlier, we agree with the conclusion reached by Hidayatullah and Shelat JJ. in
Barium Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311; AIR 1967 SC
295, that the existence of circumstances suggesting that the company's business
was being conducted as laid down in sub-clause (1) or the persons mentioned in
sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards
the company or towards any of its members is a condition precedent for the
Government to form the required opinion and if the existence of those
conditions is challenged, the courts are entitled to examine whether those
circumstances were existing when the order was made. In other words, the
existence of the circumstances in question are open to judicial review though
the opinion formed by the Government is not amenable to review by the courts.
As held earlier, the required circumstances did not exist in this case".
Bachawat J. was of a
different view. He observed (p. 803 of 39 Comp Cas):
"If it is established
that there were no materials upon which the authority could form the requisite
opinion the court may infer that the authority did not apply its mind to the
relevant facts. The requisite opinion is then lacking and the condition
precedent to the exercise of the power under section 237(b) is not fulfilled.
On this ground I interfered with the order under section 237(b) in Barium
Chemicals v. Company Law Board [1966] Supp SCR 311 at p. 343; 36 Comp Cas 639:
AIR 1967 SC 295 at p.313...... The condition precedent to the exercise of power
under section 237(b) is the opinion of the Government and not the existence of
the circumstances suggesting one or more of the specified matters. To hold that
the factual existence of such matters is a condition precedent to the exercise
of the power is to re-write the section. Section 23 7(b) must be interpreted in the light of its own language and
subject-matter. We miss its real import if we begin by referring to the
construction put by other judges on other statutes perhaps similar but not the
same. The decisions are useful when they lay down principles of interpretation
or give the meaning of words which have become terms of art "
but he agreed with the
conclusion of the majority that, on facts, the order under s. 237(b) was not
maintainable. In that case, the only allegation against the company on the
basis of which the action under s. 237(b) was sought to be supported was that
it had sold certain preference shares at their face value when they could have
been converted into ordinary shares of Rs. 10 each which were then quoted at
Rs. 15 in the stock market. Hegde J. observed (pp. 800, 801 of 39 Comp Cas):
"The next question is
whether any reasonable authority, much less an expert body like the Central
Government, could have reasonably made the impugned order on the basis of the
material before it. Admittedly, the only relevant material on the basis of
which the impugned order can be said to have been made is the, transaction of
sale of preference shares of Albion Plywoods Ltd. At the time when the
Government made the impugned order, it did not know the market quotation for
the ordinary share of that company as on the date of the sale of those shares
or immediately before that date. They did not care to find out that
information. Hence there was no material before them showing that they were
sold for inadequate consideration. If as is now proved that the market price of
those shares on or about May 6, 1960, was only Rs. 11 per share then the
transaction in question could not have afforded any basis for forming the
opinion required by section 237(b). If the market price of an ordinary share of
that company on or about May 6, 1960, was only Rs. 11 it was quite reasonable
for the directors to conclude that the price of the ordinary shares is likely
to go down' in view of the company's proposal to put on the market another
50,000 shares as a result of the conversion of the preference shares into
ordinary shares. We do not think that any reasonable person, much less any
expert body like the Government, on the material before it, could have jumped
to the conclusion that there was any fraud involved in the sale of the shares
in question. If the Government had any suspicion about that transaction it
should have probed into the matter further before directing any investigation.
We are convinced that the precipitate action taken by the Government was not
called for nor could be justified on the basis of the material before it. The
opinion formed by the Government was a wholly irrational opinion. The fact that
one of the leading directors of the appellant-company was a suspect in the eye
of the Government because of his antecedents, assuming without deciding,
that the allegations against him are true, was not a
relevant circumstance. That circumstance should not have been allowed to cloud
the opinion of the Government. The Government is charged with the
responsibility to form a bona fide opinion on the basis of relevant material.
The opinion formed in this case cannot be held to have been formed in accordance
with law".
From the foregoing it will
be seen that the question whether circumstances have been shown to exist from
which, reasonably, an inference of the nature contemplated by the provision can
be drawn is a matter for judicial consideration. It is not sufficient for the
Board to merely allege some facts which raise some suspicion in order to enable
it to enter into a fishing expedition or to undertake an investigation as a
result of which possibly some case could be made out against the company. In
the present case, if at all, there is some content only in the first two
charges. But even there the Board is not clear about the facts and looking at
both the transactions together there are no circumstances brought to light from
which any fraud, misfeasance or misconduct on the part of the management can be
made out. As Shelat J. has pointed out in Barium Chemicals Ltd. v. Company Law
Board [1966] Supp SCR 311; 36 Comp Cas 639; AIR 1967 SC 295/ these expressions
envisage the following types of conduct (AIR headnote):
"The term 'fraud'
connotes actual dishonesty and, however much the court may disapprove of a
personal conduct it must consider whether he has been guilty of dishonesty.
Misfeasance results from an act or conduct in the nature of a breach of trust
or an act resulting in loss to the company. Misconduct of promoters or
directors as understood in the Companies Act means not misconduct of every kind
but such as has produced pecuniary loss to the company by misapplication of its
assets or other act".
In the present case, there
is no basis for any allegation of fraud or misconduct. It cannot even be
alleged that the management has entered into any of the transactions in the
nature of a breach of trust or with a view to cause pecuniary loss to the
company. We have, therefore, no hesitation in concluding that no case for
action under s. 237(b)(ii) has been made out.
Before parting with the
case, we should like to point out one further feature in the present case. As
pointed out by the Supreme Court, the circumstances justifying action under s.
237 should exist at the date of the order. In A-1, the respondent only set out
a few broad allegations which were controverted by A-2 and A-3. The respondent
then filed A-4 giving further details and figures and it is not clear why these
were not furnished at the original stage itself. In the original petition, the
company had specifically alleged that the
earlier investigations by the Board, in particular by Sri Suraj Kapur, had
yielded nothing adverse to the company. In the original reply filed by the
respondent (paras. 6 and 7 of A-1) this was not controverted, rather there was
an indefinite statement that the functions of the Registrar of Companies and
Sri Suraj Kapur were limited and they were not required or entitled to make any
complaints regarding fraud or misfeasance, admitting impliedly that the reports
had contained no adverse comments, etc. The additional facts mentioned in A-4
were more in the nature of pointing out of loopholes in the defence put forward
in A-2 and A-3 than a positive case based on definite data. Sri Kataria,
however, stated in court that full details regarding the allegations were
available from the inspection report and that he would place the same before
us. But eventually neither the inspection report nor the facts and details
gathered by the inspector were placed before us. Instead, A-6 was filed. This
no doubt refers to the report of Sri Kapur dated January 12, 1973, and to the
discussions he had with the officers of the company. But A-6 which puts forward
certain additional facts avoids stating specifically that these facts were
based on the results of the inspection report and had been arrived at after due
investigation and enquiries with the company. Even in A-6 the attempt made is
only to raise a cloud of suspicion by referring to a number of facts and
figures without any attempt at analysing them and making out clear factual
charges against the company. The charges are vague and general and do not
attempt to bring home to the directors or persons in management in general or
any of them in particular any conduct of the nature contemplated by s.
237(b)(ii). As pointed out in the case of Barium Chemicals [1966] Supp SCR 311;
36 Comp Cas 639; AIR 1967 SC 295, an allegation that the company had entered
into an unremu-nerative or imprudent transaction cannot suffice to attract s.
237. If the basis of the order under s. 237(b) was only the data furnished in
A-l, the material was woefully inadequate to support the order. But even the additional
facts furnished in A-4 and A-6 do not add much substance to the charges. We,
therefore, hold that the respondent has failed to make out the existence or
circumstances justifying the formation of an opinion that there was fraud,
misfeasance or misconduct on the part of the persons in management of the
company towards the company or its members.
We, therefore, make the
rule absolute and quash the impugned orders marked annexs. C, G, H and I to the
writ petition. The respondents are restrained from giving effect in any manner
to the aforesaid orders against the petitioner-company.
The writ petition is
allowed with costs.
[1983] 54 COMP CAS 370 (KER.)
HIGH COURT OF KERALA
v.
Mathrubhumi Printing and
Publishing Co. Ltd.
M.P. MENON J.
COMPANY PETITION NO. 11 OF 1979
SEPTEMBER 9, 1981
M.
Ramanatha Pillai for the Petitioner.
P.K. Kurien and K.A. Nayar for the Respondent.
M.P. Menon J.—This is a petition under s. 237(a)(ii) of the Companies Act.
The petitioner is a member of a company, and he wants an order declaring that
its affairs require investigation by an inspector appointed by the Central
Govt. Before going into the facts of the case, it is necessary to examine under
what circumstances such a declaration could be made.
Section 237 of the Act
reads :
"Investigation of
company's affairs in other cases.—Without prejudice to its powers under section
235, the Central Government—
(a) shall appoint one or more competent persons as inspectors to
investigate the affairs of a company and to report thereon in such manner as
the Central Government may direct, if—
(i) the company,
by special resolution ; or
(ii) the court, by order, declares that the affairs of the company
ought to be investigated by an inspector appointed by the Central Government;
and
(b) may do so if, in the opinion of the Central Government, there are
circumstances suggesting—
(i) that the business of the company is being conducted with
intent to defraud its creditors, members or any other persons, or otherwise for
a fraudulent or unlawful purpose, or in a manner oppressive of any of its
members, or that the company was formed for any fraudulent or unlawful purpose;
(ii) that persons concerned in the formation of the company or the
management of its affairs have in connection therewith been guilty of fraud,
misfeasance or other misconduct towards the company or towards any of its
members ; or
(iii) that the members of the company have not
been given all the information with respect to its affairs which they might
reasonably expect, including information relating to the calculation of the
commission payable to a managing or other director, the managing agent, the
secretaries and treasurers, or the manager, of the company."
Counsel suggests that the
discretion conferred on the court under cl. (a)(ii) is wide and uncontrolled
and that the court can pass an order whenever it is satisfied, on a scrutiny of
the materials placed before it, that an investigation is called for. The
petitioner can prove his allegations before the inspector, when one is
appointed, it is said : the court is only to see whether prima facie they have
substance. But the question still remains on what kind of material the court
can act. Going by the section, the inspector is to investigate into the affairs
of the company, and not into the specific allegations made by a petitioner,
suggesting thereby that the allegations or the materials should be such as to
satisfy the court about the need for such an investigation. Section 237(b)
enumerates the circumstances under which the Central Govt. can suo motu order a
similar investigation ; and the discretion there is not uncontrolled. The
Central Govt., before exercising its power thereunder, should form an opinion
that circumstances suggesting the existence of one or other of the matters
specified in sub-cls. (i) to (iii) are there. It should form an opinion that
there are circumstances to suggest—
(i) that the business of the company is being carried on with
intent to defraud its members, or otherwise for a fraudulent or unlawful
purpose ; or
(ii) that it is carried on in a manner
oppressive of its members ; or
(iii) that the company itself was formed for a
fraudulent or unlawful purpose; or
(iv) that the persons concerned with its formation or management
are guilty of fraud, misfeasance or other misconduct in connection with the
formation or management; or
(v) that due
information is withheld from the members.
It is not as if a member can make any
allegation and the Central Govt. can order an investigation on being satisfied
that it calls for a further probe. The nature of the allegations must have
relevance to the matters enumerated in cl. (b). The question then is, is the
situation different when the court has to decide under cl. (a) about the
desirability of an investigation ?
The answer to my mind lies
partly in the history of company law, and partly in some of the other
provisions of the Act. A company is an association of men or women for trading,
more or less like a partnership. In a partnership, the members are few, and
each has confidence in the other. When the members participating in the
association are few, their relationship can be worked out within the . confines
of contract and agency. But when their number is large, a different form of
organisation will be necessary. In the initial stages, these unincorporated
bodies were developing in
In Foss v. Harbottle [1843]
2 Hare 461, it was held that the courts could not normally interfere with the
internal management of the company at the instance of a minority of members
dissatisfied with the conduct of its affairs by the majority. This approach was
sought to be justified on various grounds. The first was that the members who
had contracted to abide by the decision of the majority could not complain
against something to which they had agreed. The second was that the majority
alone knew what was good for the association or company, and that the court's
views could not be imposed on them. And the third was that as the company was a
separate juristic person, it alone, or at least only a majority of its members,
could complain of any injury to it, and not a minority. In Salomon v. Salomon
& Co. [1897] AC 22, the House of Lords went to the extreme of refusing to
discover dummies and nominees behind the veil of incorporation, by placing
emphasis on the separate legal personality of the company. In spite of the fact
that free trans-ferability of shares is one of the important features of any
company, it was held
in In re Gresham Life Assurance Society : Ex fiarte Penney [1872] 8 Ch App 446, that where the articles of association vested
an absolute discretion in the directors of a company to refuse to recognise a
transfer of shares, the court would presume that the directors had exercised
the power bona fide. They could not be compelled to disclose reasons for their
refusal, unless want of good faith was affirmatively established by a
petitioner. Dishonesty, fraud, bad faith, breach of trust and the like were the
minimum to be established by individual shareholders before they could get any
equitable relief from the Chancery courts ; in all other cases, the contract
was supreme.
The various provisions of the
Companies Act relating to minority protection have to be examined in the above
background if their true content is to be discovered. Chapter VI deals with
"oppression and mismanagement". Section 397 enables the minority
shareholders to approach the court with a grievance that the company's affairs
are being carried on in a manner oppressive to them, and s. 398 provides for a
like complaint that the affairs of the company are carried on in a manner
prejudicial to public interest or to the interests of the company. Oppression
or mismanagement, in the context, have been understood as conduct involving
lack of probity or bona fides. When the directors of a company with their
majority support conduct themselves in a manner inequitable, i.e., when their
conduct is tainted with lack of probity or selfish interest (as distinct from
the interests of the company and the public), the court can step in and rectify
matters. What lies behind the statutory provisions is a breach of the fiduciary
duties the majority is supposed to honour and the basis of the complaint itself
is that there is a breach of such duties. Section 408 confers a similar power
on the Central Govt. to rectify matters, if the minority is able to satisfy
that authority that similar circumstances verging on breach of trust are there.
Winding up is another remedy available to minority shareholders when they find
that those in management of the company have failed in their duties, some of
which are statutory and some, fiduciary. Section 433(f), in particular, makes a
provision for winding up on "just and equitable" grounds. Section 542
is an instance where even a single contributory can approach the court, in the
course of the winding up of a company, for a declaration that the persons in
management be held liable for fraudulent conduct of business. Misfeasance
proceedings contemplated by s. 543 are also intended to assess and recover
damages from persons responsible for a misapplication of the company's funds
and properties, and for breach of trust. The thread running through all these
provisions is the existence of a duty on the part of those in control of the
affairs to conduct themselves more or less like trustees, and a liability to
account when they are in breach thereof. When the majority of shareholders find
that the directors are acting improperly or that the company's affairs are
mismanaged, they could remove the directors in a general meeting; they need not
go to court. But when the minority has a similar grievance, all that they can
do is to approach the court. The provisions are thus intended to protect
minority interests on the footing, and on the only footing, that their rights
are being trampled upon in an inequitable or unconscionable manner. They are
thus exceptions to the rule in Foss v. Harbottle [1843] 2 Hare 461, that a
minority cannot ordinarily invite the court to look into the internal affairs
of a company. And each of the exceptions rests on the principle that
dishonesty, fraud, want of good faith, misfeasance, breach of trust and the
like are remediable in equity, irrespective of contractual obligations.
The provisions of ss. 235
to 251 dealing with "investigation" recognise only another form of
the remedy available to the minority shareholders. While ss. 235 to 237 deal
with the circumstances under which investigation could be ordered, ss. 238 to
241 deal with inspectors, their powers and the report they have to make. Once
the report is made, follow-up measures are contemplated by ss. 242 to 244.
Section 242 provides for the prosecution of those found criminally liable.
Section 243 empowers the Central Govt., through a person authorised by it, to
apply for a winding-up on "just and equitable" grounds or to apply
for the removal of the oppression and mismanagement. And s. 244 conceives of
proceedings in misfeasance. The purpose of the investigation is thus to find
out whether those in charge of the affairs of a company are guilty of illegal
conduct or of conduct trenching upon breach of fiduciary obligations. That is
way s. 237(b) speaks of unlawful purpose, fraud, oppression, misfeasance and
misconduct. Whether it be under s. 235 when the Central Govt. acts on the
application of a group of members, or under s. 237 when it acts suo motu or
under orders of court, the machinery for investigation is to be set in motion
only in the context of a complaint regarding breach of duties which equity has
imposed on the majority.
If the above be the true
position, it follows that in proceedings under s. 237(a)(ii), the court will
look into only those allegations which have a bearing on the fiduciary duties
of the majority, or their duty to abide by the law. of course, the court need
not satisfy itself that the allegations are true, it is enough if a prima facie
case is made out. No investigation can be ordered merely because the
petitioning shareholder feels aggrieved about the manner in which, the
company's affairs are being carried on, or because the court thinks that they
could be better managed. The remedy being equitable, the court has also to satisfy
itself that the petitioner has come to court bona fide for obtaining
redres-sal, and not for any other purpose. An isolated instance of
mismanagement, already remedied, could not also justify the passing of an order
under s. 237(a)(ii).
As to the facts of the
case, the petitioner is a shareholder of the Mathrubhumi Printing and
Publishing Company Ltd., Calicut, a company engaged - in the printing and
publishing of, mainly, the Malayalam daily newspaper "Mathniobhnmi"
from Calicut, Cochin and Trivandrum. The late Mr. V. M. Nair was the managing
director of the company till his death in May, 1977. He was occupying that
position at least from 1958 and on his death, there was a change in management.
One M. J. Krishna Mohan succeeded him and continued in office till November,
1979, when he too passed away. The present managing director is a cousin of
Krishna Mohan, The company petition was filed in June, 1979, i.e., after the
death of Sri V. M. Nair and while Krishna Mohan was alive. The petitioner was
the advertising representative and special correspondent (or part-time news
reporter) for the newspaper at Bangalore. The arrangement regarding news
reporting was terminated in February, 1978. The advertising agency was also
terminated by April 1, 1979. He had filed a suit against the company ; that was
dismissed, but the matter is pending in appeal. He had raised certain claims
before the Labour Court and there he succeeded ; but the company has challenged
the decision in writ proceedings. An industrial dispute, and a criminal
complaint filed by the company against him, are also said to be pending. What
is relevant to notice is that the relationship between the petitioner and the
present management of the company is somewhat strained, and that the company
petition itself was filed soon after his advertising agency was terminated.
And, if the proceeding of the 56th annual meeting of the company is any
guidance, there are at least two groups among the members, one supporting the
present management and another loyal to the old.
Though a number of
allegations are raised in the petition, Mr. Ramanatha Pillai for the petitioner
pressed only some of them at the hearing ; and I am dealing with only those
allegations.
The first relates to the
alleged theft or loss of newsprint. At the 54th annual meeting held on January
29, 1977, a member complained that a large quantity of newsprint belonging to
the company was stolen and sold in black market by some people. Since the
management took no action, the question was again raised at the 55th meeting
held on March 27, 1978. A committee was thereupon appointed to go into the
matter and at the 56th annual meeting, the convenor of the committee informed
members that there was a prima facie case. These are the bare averments in
para. 3 of the petition. There is no allegation that the directors or their
friends or relatives were involved, or that the management attempted to cover
up the matter. At the most, the allegation is that there was some theft or loss
some time during 1975-76 and that the management has failed to take any action.
Exhibit A-2 is the report
of the committee. It is dated July 21, 1979, and was made available to the
company in August, 1979. The petitioner was examined as P.W. 1 in January,
1981, and by this time he could refer to its contents also. Still, all that he
has said in evidence is that 7 to 8 tons of newsprint were stolen or otherwise
lost in 1974, and that in spite of Ex. A-2 report, the management has not taken
any action.
Exhibit A-2 shows that
according to the then manager, Sri Krishnan Nair, he was authorised to dispose
of waste newsprint (discoloured, sticky, broken, with no tensile strength), and
that he had allowed the watchman, Beeran Haji, to keep a lorry load in a
separate godown, pending disposal, as the company's godowns were full. The
value of the waste was fixed by the press superintendent and, after sale, the
proceeds were made over to the company. Beeran Haji, however, was not sure
whether the reels were waste. The committee came to the conclusion that the
transaction was not above suspicion, though there was no evidence of theft as
such ; it was not at any rate impressed by Sri Krishnan Nair's version. It is
even possible to think that in the opinion of the committee, Krishnan Nair was
in some way responsible for the loss. The committee also noted that after the
alleged incident, the machinery for dealing with waste newsprint had been
improved. There is also evidence to show that waste can legitimately go up to
12%, that the percentage for the company during the relevant period was around
9%, and that all the rest of the paper was used and accounted for as good
quality, according to the Audit Bureau of Circulation. Even assuming that the
allegation of theft or loss is true, and that Ex. A-2 contains any specific
finding, it is difficult to see what useful purpose would be served by ordering
an investigation at this distance of time into an alleged theft of 1974. The
petitioner was aware when he came to this court that the committee was looking
into the matter ; it was not as if the management had hushed it up or had
failed to take any action. Exhibit A-2 discloses that even if there was some
scope for malpractice in 1974, the machinery for dealing with waste newsprint
has since been strengthened and streamlined. The committee itself does not
place the blame on the directors then in management; and the matter was allowed
to be raised and discussed at three general body meetings, suggesting thereby
that there was no attempt to stifle minority criticism or to suppress anything.
In any event, the material available is insufficient to disclose a prima facie
case regarding breach of fiduciary duties. I may add that the petitioner
himself had suggested at the 56th meeting that a "memorial" be created
to honour ex-manager, Krishnan Nair, for the valuable services rendered by him
while in service.
The next complaint is about
irregularities and corruption in the purchase of a flat at Bombay. All that is
stated in para. 4 of the petition is that there was such an allegation and that
the committee had enquired into it. The petitioner's evidence as P.W. 1 does
not also take us any further. Exhibit A-2 shows that the flat was purchased
during the tenure of Sri V. M. Nair, and that the administrative officer of the
company was responsible for negotiating the deal. According to this officer, he
had acted under the instructions of Sri V. M. Nair. The majority of the
committee recorded that though this could not be verified, as Sri Nair was no
more alive, there was reason to think that sufficient care was not taken. One
of the members of the committee dissented, and indicated that the attempt was
only to malign the old management. The company's lawyers, who examined Ex. A-2
report, expressed the opinion that there was nothing but suspicion and no
action could be taken on its basis. After a careful reading of Ex. A-2, I am
inclined to agree with this view. Of course, the majority had made an
observation in Ex. A-2 report that the title obtained was not perfect and that
the full consideration was paid before getting the title deed. When Mr.
Ramanatha Pillai high lighted this aspect at the hearing, I directed the
management to produce the title deed. But when it was produced along with
certain other documents, it was contended that production of documents at that
stage could not be allowed. I am not inclined to take such a technical view of
the matter because if that be the case, most of the allegations in the petition
could only be considered as vague and unspecific. Some of them could not even
be considered as allegations. The petitioner's attempt may be to settle some
scores with the present management, but so far as the court is concerned, the
attempt should be to find out whether the mino rity shareholders have anything
real to complain of. I am, therefore, marking the documents as Exs. C-1 to
C-10. The title deed, Ex. C-1, dis closes that transfer of flats in Bombay was
being made by transferring shares in the building company and that the company
herein acquired the concerned shares on the day the consideration was paid. Sri
V. M. Nair himself has signed Ex. C-1. The flat is admittedly in the exclusive
and undisturbed possession of the company. On the materials available,
therefore, I am unable to hold that misfeasance, misconduct, breach of trust or
fraud have been established, prima facie, in regard to this trans action.
Another case is about the
writing off of large sums as bad debts, and the allegation in the petition is
only this :
"It is also seen from
Ex. P-1 proceedings that large sums are written off in the financial year to
which Ex. P-1 relates."
There is no complaint, at
least in the pleadings, that the amounts were recoverable, or that they were
written off in order to benefit the directors or their favourites, or that the
action was in any other way irregular or improper. Exhibits C-2 to G-10 show
that the Board had decided to write off the amounts concerned at three
different sittings. The amounts were outstanding from advertisers, agents and
other people numbering about 160, Exhibit P-1 referred to in the petition is
Ex. A-1 minutes of the 56th annual meeting; and the only question at the
meeting relating to writing off was whether charges for printing the Janata
Party posters for the Chickmaga-loor election were also included in the amounts
written off. The suggestion was denied and it was pointed out that the election
itself was held during the previous financial year and that printing charges
for posters had been fully realised. An Interesting interlude was a suggestion
by someone that only printing charges due from the Congress party were being
written off in the past. The amount written off during the year in question was
Rs. 1,02,623. For the year ended July 31, 1977, the amount written off was
higher. A large amount is seen written off during 1979-80 also. Taking into
account the business turnover and the accounting practice of the company, it
cannot be said that anything unusual had taken place during Ex. A-1 year. The
auditors had raised no objection and the general body had approved the
accounts. In my opinion, this allegation of the petitioner is devoid of any
merit.
The next grievance relates
to the purchase of some land at Trivan-drum. There was no reference to such a
complaint either in the petition or in the reply affidavit filed in September,
1979. The point was raised in para. 4 of the reply affidavit dated October 23,
1980, in the following manner :
"It may also be kindly
noted that Sri Damodaran who is found to be one of the employees responsible
for the deal in respect of the purchase of the flat in Bombay has again been
allowed to participate effectively in the transaction regarding the purchase of
property by the company in Trivandrum which again is a reckless venture whereby
the company is put to loss."
The evidence of P.W. 1 is
to the effect that the land was purchased for starting the Trivandrum edition
of the newspaper and that it is kept vacant, while the Trivandrum edition is
being published from some other premises. There is also a statement that more
than one lakh of rupees was spent for acquiring land in a marshy area. But when
it came to argument, the point stressed was that it was an unwise policy to
have acquired land and then depended on other premises for the Trivandrum
edition. The company has produced documents to show that land in the
neighbourhood is being sold at three times the rate it had paid. It is also
explained that the equipment and machinery for the Trivandrum press had
arrived, and that their erection and the publication of the Trivandrum edition
could not have been postponed. The evidence discloses that about one crore of
rupees was set apart for the Trivandrum edition, and that there was a prolonged
strike and lock-out in the meanwhile. There is thus no material to hold that
the investment of about a lakh of rupees in land, to be eventually used for
housing the Trivandrum project, was a reckless venture or a foolish adventure.
Paragraphs 5 and 5A of the
petition deal with another charge, and that relates to the appointment of one
Sri Manakalath as public relations manager of the company in June, 1978. It is
alleged that he was appointed without a board resolution and without inviting
applications for the post, and that lie was allowed to draw large sums as T.A.
advance without vouchers. It was, however, conceded at the hearing that the
managing director was competent to appoint such officers without the Board's
sanction and that there was no practice of inviting applications for such
posts. The person concerned was working at Madras as the company's
advertisement representative, and there is evidence to show that his
appointment as P.R.M. was followed by an increase in advertisement revenues.
The main attack was directed against payment of advances. R.W. 1 has given
evidence that all payments were effected only against vouchers and that bills
and accounts were being subsequently presented, verified and adjusted. The
auditors have raised no objection. The reports of the directors and auditors,
as also the balance-sheet and profit and loss accounts, were duly passed during
every year. Counsel referred to some discrepancy in one of the answers given at
the 56th annual general meeting, but the control and supervision of finances
and accounts should normally be left to those in charge and the auditors,
subject to acceptance by the general body. There is no evidence regarding any
particular disbursement or voucher, even if such a matter could be gone into in
proceedings like the present.
Another matter raised in
paras. 5 and 5A concerns the appointment of one C.G.K. Reddi as adviser. The
allegation is that he entered into an agreement with a foreign concern for the
monopoly supply and distribution of the company's publications and that this
was done without the sanction of the Reserve Bank and to the detriment of the
company. My attention has not been drawn to any passage in the evidence of PAY.
1 dealing with want of Reserve Bank sanction or detriment to the company. All
that was said by P.W. 1 was that the agreement had not benefited the company
and that there was some litigation. It was also added that there was no board
resolution authorising Sri Reddy to enter into the contract. The company's
answer is that Reddy was appointed as adviser for one year for modernising the
company and planning the Trivandrum project. He had acquired experience as
general manager of the "Deccan Herald" and as business manager of the
"Hindu". The evidence of R.W. 1, along with the documents produced,
show that Reserve Bank permission had been obtained, that the agreement was
entered into with the full concurrence of the managing director after effecting
modifications suggested by him, and that the arrangement had come to an end
within a matter of days because of some ban ordered by the U.A.E. government. There
is no evidence of litigation loss, detriment, illegality or even unauthorised
dealing. This complaint should also, therefore, fail.
Another allegation which,
if proved, would have been a matter of some substance, is about the appointment
of one Sri P. V. Chandran as the director of the company. What is argued is
that he was a partner in a firm of advertisers with which the company had
dealings, and that he was appointed in violation of s. 299 of the Companies Act
inasmuch as his interest in that business was not disclosed. But the
allegations in paras. 9 and 9A of the petition make no reference to s. 299, but
only to the extending of credit facilities to the firm as a
"non-accredited" advertising agent. From the evidence, however, it is
clear that such agents are also given credit facilities, though for a shorter
term. The decision to appoint Sri Chandran as director was taken at the board
meeting held on May 14, 1978 ; he was not present at the meeting. Exhibit B17
dated July 14, 1978, is a letter from Chandran, in reply to the company's
letter dated June 2, 1978, disclosing his interest in the firm. R. W. 1 says
that though the firm was a valuable customer, no fresh contract was given to it
after Sri Chandran was appointed as director. He resigned from the firm by the
end of March, 1979. Violation of s. 299 is thus not made out.
Paragraph 7 of the petition
complains of the company's attempt to borrow one crore of rupees, when it has a
paid up capital of less than nine lakhs only. The interest liability would be
too much for the company, it is averred. It is added that "in the peculiar
circumstances now obtaining in the company, there is every reason to suspect
the bona fides of the management in the matter". The company's answer is
that newspaper business had become highly competitive with other papers like
Malyala Manorama starting editions from different centres and that it was,
therefore, decided to expand the company's business by starting a Trivandrum
edition of the Malhrubhumi and that the borrowing was intended to raise funds
for the purpose. The decision to borrow was actually taken at an extraordinary
general meeting held on June 23, 1969. It was unanimous and the petitioner was
also a party to it. If this be the true position, I fail to see how he could
challenge the bona fides of the decision, and how it could be said that that
anyone is guilty of breach of fiduciary duties.
The last complaint is that
"information regarding the affairs of the company and its working are
purposely withheld from the members"; and the company's answer is that
members of the company have access to all the records of the company as laid
down in the Companies Act. P. W. I has no case that any particular information
he wanted has been withheld. What is suggested by counsel is that some of the
questions asked by members at the 56th meeting (Ex. A-1) remained unanswered.
Disclosure is no doubt one of the fundamental principles underlying the
formation and working of a company. Members have a right to know how the
company's affairs arc conducted. Creditors would also like to learn about its
financial position. Even members of the public are interested, at least from
the point of view of future investment. The Companies Act, therefore, provides
for maintenance of registers, books, records and for publication and compulsory
disclosure of accounts duly audited. Every company should have a registered
office and that office must maintain the memorandum and articles of
association, register of directors, of members, and other books and files
regarding share capital and other matters. The accounts should be audited every
year and annual returns are to be submitted. Charges should be registered. All
these are available for inspection by members of the company and even by the
public. The audited accounts have to be placed before the annual general body
for the information of the members. The directors have to report every year to
the shareholders in general meeting. Extraordinary general body meetings are
also held. These are some of the provisions of the Act which insist on supply
of information to members and others. But that does not mean that every
question asked at every general meeting should be forthwith answered, without
even considering whether they relate to the affairs of the company as
understood in law, and whether it would be possible to answer such questions
without due notice. A business organisation like a company cannot function like
a legislative assembly, if only for the reason that the powers of the directors
and the members in general body are denned. Section 237(b)(iii) speaks of
"information with respect to its affairs which they might reasonably
expect", i.e., the information sought for must be about the affairs of the
company and something which could reasonably be expected to be supplied. No
attempt has been made before me, either in the course of evidence or at the
hearing, to point out that any particular information of such a character has
been withheld.
On an anxious consideration
of the materials on record and the arguments advanced, and even overlooking the
unsatisfactory nature of the pleadings, I am unable to hold that circumstances
suggesting the existence of fraud, illegality, misfeasance, misconduct, etc.,
have been made out even prima facie, so as to relax the rule in Foss v.
Harbottle [1843] 2 Hare 461 and direct an investigation into the internal
affairs of the company. The company petition is, therefore, dismissed, but
without costs.
[1981] 51
COMP. CAS. 634 (DELHI)
HIGH COURT OF
v.
Union of
T.V.R. TATACHARI, C.J.
AND S. RANGANATHAN, J.
Civil Writ Petition No. 918 of 1974
APRIL 26, 1978
A.K.
Sen , Mrs. Leila Seth and B. Mohan for the Petitioner.
K.M. Kataria for the Respondent.
JUDGMENT
S. Ranganathan, J. —This is a writ petition filed by Ashoka Marketing Ltd.
(hereinafter referred to as "the company" or AML) for the issue of a
writ of certiorari to quash the orders passed on December 31, 1973, June 26,
1974, and July 2, 1974, by the Company Law Board (hereinafter referred to as
"the Board") and an order dated July 2, 1974, passed by the
Government. The Union of India and the Secretary, Ministry of Law, Justice and
Company affairs, have also been made respondents.
The order dated December31,
1973, passed by the Board is an order under s. 237(b) of the Companies Act,
1956, appointing a firm of chartered accountants as inspector to carry out an
investigation into the affairs of the company during the period from March 1,
1966, to December 31, 1973, and "to report thereon to the Company Law
Board pointing out, inter alia, all irregularities and contraventions of the
provisions of the Companies Act, 1956, and of any other law and the person or
persons responsible for such irregularities or contraventions" on or before
June 30, 1974. The reason why the Board considered this action necessary
appears from the first paragraph of the order which contains the preamble:
"Whereas in the
opinion of the Company Law Board there are circumstances suggesting that the
persons concerned in the management of the affairs
of the company have in connection therewith been guilty of fraud, misfeasance
and other misconduct towards the company and its members".
Which is nothing more than
a repetition of the language of s. 237(b)(ii) as to the circumstance warranting
the appointment of an inspector under that provision. The grievance of the
company is that there were no such circumstances in existence on the basis of
which the Board could have formed such an opinion or ordered such an appointment.
In the writ petition, the company has sought to substantiate its plea on the
basis of the following allegations.
The company had been
incorporated in 1948 and was carrying on business as traders, exporters,
selling agents, dealers in stocks, shares and investments and for some time in
the manufacture and sale of plywood. It had also recently commenced a business
in the manufacture and sale of electronic goods. It had built up a very
efficient and effective organisation and had been carrying on its business and
activities scrupulously in accordance with law. It has a respectable board of
directors. It maintained regular books of account and records; its turnover was
increasing from year to year; its profits were reasonable and it was also
declaring reasonable dividends. While so, on April 11, 1963, the Govt. of India
ordered an investigation into its affairs under ss. 237(b) and 249(1) of the
Companies Act, 1956, but this order was quashed by the High Court of Calcutta
by its judgment dated March 7, 1969. In the meantime, the Registrar of
Companies had been making several enquiries and, to the understanding of the
company, he was satisfied with the information and explanation given to him. In
September, 1972, the Board, acting under s. 209(4)(b)(ii) of the Companies Act
had appointed one Sri Sooraj Kapoor, to inspect the company's books. He had
also called for explanation, information and books from the company. The
company's affidavit specifically avers in para. 7:
"So far as your
petitioner is aware there has been no complaint by the inspector of any fraud
and/or misfeasance and/or misconduct and/or irregularity and contravention in
the business or affairs of the company, Nor had, to the knowledge of the
company, any shareholder or creditor of the company made any such allegation.
In these circumstances, the
order dated 31-12-1973 was without any basis or justification".
It is pointed out that the
order does not set out any circumstance or material leading to the formation of
the opinion expressed therein. Therefore, soon after the order was received on
7-1-1974, the company applied to the board for a review of the order setting
out all the above facts, pointing out that the provisions of s. 237 were
drastic and should not be commenced "unless
there are satisfactory grounds supported by relevant and cogent materials and
evidence" and without such materials an inspector should not be given
"arbitrary and untramelled powers to make a fishing inquiry and to
investigate into any affair of your petitioner which is not authorised under
the law" during the period from March 1, 1966, till the date of the order.
The company offered to furnish any information that may be needed in respect of
any particular transactions and prayed that the order for a general
investigation be cancelled. This petition was rejected by the Government and
the Company Law Board and hence this writ petition by which the petitioner
requests this court to quash the order u/s. 237(b) dated December 31, 1973, the
letter dated June 26, 1974, by which the Company Law Board extended the period
for the inspector's report till December 31, 1974, and the orders dated
February 2, 1974, by which the Board and the Company Affairs Dept. of the Govt.
of India declined to review the order dated December 31, 1973.
Perhaps all that a company
could do at this stage was to deny that there were any circumstances justifying
action u/s. 237 in its case, for the Board does not take the company into
confidence or indicate to it the basis for the action taken by it. It is,
therefore, of the greatest importance that when a company approaches the court
with a writ petition, making out a prima face case that the action u/s. 237 was
not justified, the Board should place before the court all the circumstances
available to it on the record on which the opinion has been formed that the
persons in management were guilty of fraud, misfeasance or misconduct towards
the company and its members. Unfortunately, in this case, the stand of the
Board has been put forward piecemeal in its original counter-affidavit and two
supplemental counter-affidavits filed by it, one before the hearing of the case
started and the other at a considerably advanced stage of the hearing. The
company has also filed more than one rejoinder. In order to understand the full
facts, we have to consider the following seven affidavits, which we shall, for
convenient reference, designate as A-1 to A-7:
|
A-1. |
Reply
affidavit of respondent |
dt. |
31-7-75 |
|
A-2. |
Rejoinder
of petitioner |
" |
25-8-75 |
|
A-3. |
Further
rejoinder |
" |
28-10-76 |
|
A-4. |
Supplemental
reply of respondent |
" |
7-12-76 |
|
A-5. |
Further
rejoinder of petitioner |
" |
22-12-76 |
|
A-6. |
Further
reply of respondent |
" |
13-1-78 |
|
A-7. |
Final
reply of petitioner |
" |
24-1-78 |
The case against the
company was first spelt out in A-1. In para. 10, it was stated that the order
in the instant case had been passed on the basis of seven transactions of the
company which had come to the notice of the Board:
1. Surrender of the sole
selling agency of Jaipur Udyog Ltd.
2. Purchase and sale of
the undertaking of Albion Plywood Ltd.
3.
4. Investment in low
yielding debentures.
5. Sale of jeeps at a
loss.
6. Unsecured loan of
large amounts to closely connected persons and
7. Write off of three
loans.
As a general preface to
these charges it was stated that the company was one of twelve companies that
belong to a group known as the Sahu Jain group and it was a common tendency of
common block shareholders of such group concerns to benefit each other even if
at the cost of the other shareholders, We have to examine by taking up each of
these "charges" seriatim and analysing the averments of the parties,
whether circumstances have been made out to sustain the action taken by the
Board.
General charge
According to A-1, the
petitioner belongs to a group of companies known as "Sahu Jain
group". It is stated that, according to the report of the Monopolies
Enquiry Commission, 1965, a group of 26 companies has been said to belong to
this business house and that, according to the report of the Industrial
Licensing Policy Enquiry Committee, 1969, there were 29 such concerns. The
respondent has referred to 12 concerns which are mentioned in both the reports
and alleged that they belong to the Sahu Jain group. These concerns are,
besides the petitioner (AML), Albion Plywood Ltd. (APL), Bharat Oversees Pvt.
Ltd. (BOL), Hindustan Vehicles Ltd. (HVL), Jaipur Udyog Ltd. (JUL) Mahespur
Holdings Ltd. (MHL), Parshya Properties Ltd. (PPL), Rohtas Industries Ltd.
(RIL), Shree Kesaria Investments Ltd. (KIL), Shree Rishab Investments Ltd.
(SRIL), New Central Jute Mills Co. Ltd. (NCJ) and Bharat Nidhi Ltd. (BNL).
After setting out the names of these concerns, A-1 alleges "a common
tendency of such shareholders/directors in these concerns to benefit each other
even if at the cost of the other shareholders of the concern".
In reply to the above, the
petitioner-company has stoutly repudiated the existence of any such group as
alleged. It is stated that though a notice was given by the Dept. of Compay
Affairs in 1974, calling upon the petitioner to show cause why action under s.
48(2) of the Monopolies and Restrictive Trade Practices Act, 1969, should not
be taken for default in compliance with the provisions of s. 26 of the said
Act, the proceedings were dropped by a decision communicated on 26th April,
1976. In other words, the same Dept. of Company Affairs had accepted the
position that no case had been made out for treating these concerns as
inter-connected.
Apart from the fact that
the respondent has not answered the point made in the reply or given details to
show that AML is one of the concerns belonging to a closely knit group along
with the 11 others we are of opinion that this general allegation made in A-1
is not helpful in determining the issues in the present case. Merely because
certain companies are said to form a group and there are transactions between
these companies, it cannot be presumed that the transactions are mala fide or
that they were entered into with a view to defraud or otherwise act in a manner
detrimental to some or all of the concerns. No doubt, in considering the nature
of a particular transactions, or the purpose and motive behind it, the
relationship between the parties may be a relevant consideration and while
examining the seven specific charges made against the company, we shall keep
this aspect also in mind to see whether there has been any attempt to act to the
detriment of AML with a view to benefit any of the other concerns mentioned.
But, all that we would like to observe here is, that the approach indicated in
A-l, of starting with a presumption that there must be necessarily something
wrong because the transactions are between companies of the same group, is not
correct. The general charge formulated in A-l, therefore, cannot, by itself, be
a ground justifying the action under s. 237, in the present case, unless it is
substantiated with reference to one or more of the other seven charges.
Charge
No. 3: Sale of shares at a loss.
It will be convenient to
take up the first two charges last. Taking up the third charge first, the
complaint against the company is that between September, 1968, and February,
1970, it sold at a huge loss some of the shares held by it in NCJ, APL, HVL,
MHL and KIL. The sale was at an unnecessarily low price (lower than the market
price) and, in the case of two concerns, was of the controlling interest
therein. So, it is alleged this transaction was "prima facie" against
the interest of the company.
The factual position that
emerges from the various affidavits in regard to these sales is as follows:
(a) In the case of NCJ, the shares were sold at rates varying
from Rs. 4.40 to Rs. 4.50 per share as against the face value of Rs. 10. Though
according to the respondents, NCJ had large reserves and had also earned good
profits, it is admitted that the shares are quoted on the stock exchange and
that the market quotations for the shares at the relevant time ranged between
Rs. 4.56 to Rs. 4.62 per share. The claim of the petitioner-company is that the
shares were sold at the rates quoted at the Calcutta Stock Exchange and this
statement has not been denied by the respondent. Further, it is pointed out
that even on the basis that they had been sold
at rates slightly less than the market value, the transaction was still
beneficial to the company inasmuch as the value of the shares fell from Rs.
4.50 this year to Rs. 3.75 in the subsequent year and, if the company had not
sold the shares when it did, the loss would have been even greater.
(b) In the case of APL and HVL, it is common ground that these
concerns had been incurring huge losses and that their shares were worth less.
Forced to admit this position in A-4, the respondent would still find fault
with the petitioner for having sold thirty-five thousand shares of HVL
"for a nominal amount of Rs. 3,500" 'alleging vaguely that this
"conveys no sense except of getting the set-off against profits for the
purpose of taxation".
(c) In regard to the MHL and KIL, the shares are not quoted on
the stock exchange. The allegations of the respondent that these were transfers
of controlling interest is not correct. The number of shares sold were 23,000
out of 50,000, in the case of KIL, and 16,000 out of 35,000, in the case of
MHL. There is no allegation that the petitioner had earlier transferred shares
in these companies to the same person or associated person so as to give them
controlling interest. Regarding the price, the complaint is that the shares
were sold at Rs. 2.55 and Rs. 2.80, respectively, although the break-up value
of the shares would have worked out to Rs. 15.71 and Rs. 11.58, respectively.
A study of the above facts
would show that the charge that the petitioner had sold the shares at less than
the market price is not borne out by the material on record. This is very clear
in the case of the first three companies. In the case of the last two, no
doubt, the sale price is less than the alleged break-up value. But in the case
of a private limited company, the break-up value does not always or necessarily
furnish a correct clue as to its market value at any particular point of time:
[CWT v. Mahadeo Jalan [1972] 86 ITR 621 (SC)]. There is no other material to
indicate that the actual sale price did not represent the value which those
shares could realise in the open market on the respective dates of sale though
the companies whose shares were sold are said to belong to the Sahu Jain Group,
that fact is of no significance as the sale does not benefit those concerns.
Nor is there any allegation that these shares have been transferred to other
companies of the same group at a favourable price to benefit them at the cost
of the petitioner-company. In regard to this charge, therefore, no
circumstances have been shown to exist which could lead to the formation of an
opinion that there has been some fraud, misfeasance or misconduct on the part
of the management of the petitioner-company.
Charge
No. 4: Investment in low yielding debentures.
The purport of the charge
against the company under this head is not clear. The allegation in A-1 is in
the following terms:
"In June, 1970, the
company purchased from Sri P. Jain, Smt. Indu Jain, Smt. Shushila
Jain, the Bhartiya Gyanpit and the Universal Trust certain debentures worth Rs.
10 lakhs yielding 8% per annum, whereas the loans of the company yielded 11% per annum".
The above allegation can mean
one of two things. The first is that, whereas certain other investments made by
the company by way of loans yielded an interest rate of 11% per annum, the
debentures in question yielded only 8%. But if this were the charge against the
company, that would not be sufficient to attract action under s.237. All the
funds held by the company cannot be invested so as to yield the same return.
Merely because on some investments by way of loans, the petitioner has been
able to get 11% interest, the inference does not follow that an investment in
debentuces yielding 8% must be the result of some fraud, misfeasance or
misconduct on the part of the directors. There is no material to suggest that
all the investments of the company were yielding 11% interest and despite
similar investments being available readily, the petitioner-company purchased
these "low rate" debentures to oblige the vendors. It is also not
alleged that funds yielding higher return were withdrawn for making these
purchases to the detriment of the company.
The other possible
interpretation of the allegation is that, whereas the company had received
advances and deposits and paid interest thereon at 11%, it has invested the
funds drawn from those advances and deposits in debentures which yielded a smaller
return. This contention is met by A-2 which points out the fallacy in the above
line of reasoning. There is no material to correlate the funds invested by the
company in the above debentures with the loans taken by it on payment of
interest at 11%. The resources of the company were not limited only to such
loans. The company had received advances from its customers on which it paid no
interest whatever. It has security deposits on which it was paying interest at
only 6 to 6 1/2%. The surplus funds of the company had to be invested and there
is no material to suggest that the investment in these debentures was in any
way motivated. In fact, the charge does not even allege that the purchases were
made to benefit the vendors who, it would appear, may be connected with the
directors of the petitioner-company. In these circumstances, therefore, no
circumstances have been brought to light for drawing an inference of fraud,
misfeasance or misconduct.
For the first time, in the
reply affidavit, A-4, the respondent, took a fresh point that the debentures
purchased by the company were those of PPL
which, in the year ended January 31, 1970, had incurred a net loss of Rs. 596
lakhs as against its paid up capital of Rs. 5 lakhs. It will be seen that this
is a totally new charge. The original allegation against the company was only
for having made an investment yielding a smaller return and did not even
mention the name of the company whose debentures were purchased. However, A-4
attaches importance to the name and seems to doubt the solvency of the company
the debentures of which have been acquired, perhaps also because it is one of
the concerns of the group according to the respondent. But this criticism has
not been made out by reference to the balance-sheet position of the said
company. As its name indicates it appears to be a property holding company.
There is no information regarding its assets and liabilities. In the case of a
property company it is not unusual that there are only losses in working in the
initial stages of its development before the income from the properties
constructed or held by it starts flowing in. Moreover, debentures are secured
loans and there is not an iota of evidence placed to show that these debentures
were worthless. The fact that PPL is a company of the group will not, per se,
render the debentures worthless or the purchase motivated. A-4 has only
attempted to voice a suspicion of bona fides but backed it by no material on
record. Here also the respondent has failed to make out the existence of
circumstances to show that in purchasing these debentures, the directors of the
company have been guilty of any fraud, misfeasance or misconduct towards the
company or its members. Charge No.5: Purchase and sale of jeeps.
The allegation is that in
November, 1966 and January, 1967, the company purchased twelve jeeps. Seven of
these were sold in March, 1967, and two more in October, 1967. The company
incurred a loss of Rs. 47,000 on the purchase and sale. The jeeps had been
insured only from January to August, 1967. The accounts of the petitioner did
not show any expenses in respect of petrol during the year 1967. From these
facts, the inference is sought to be drawn that the purchase of the jeep was
not for the purposes of the business of the company and that the transactions
were not in the interests of the petitioner-company.
The company's plea is that
the jeeps were purchased and sold under the authority of resolutions passed by
the board of directors. The transaction was in the ordinary course of business
of the company and in order to ensure its smooth running. Though the exact
manner of utilisation of these jeeps had not been indicated in the affidavits,
Sri Sen submitted that the transaction should be judged in the light of the
fact that it was put through at the time of the general elections, that the
jeeps were purchased in business interests, "in order to ensure the smooth
running of the business of the company"
and that no mala fides were involved in the transaction.
We are unable to see how
this transaction can attract the impugned action by the respondent. As
suggested by Sri Sen, there is an explanation for the purchase of the jeeps and
their disposal within a short time. But, even disbelieving this explanation and
assuming the worst, it is a mere instance of purchase and sale by the company
of a certain asset which resulted in a loss to the company. It has not been
explained in what manner this transaction reveals fraud, misfeasance or
misconduct on the part of the persons concerned in the management of the
company. There is no allegation that these jeeps were intended for or utilized
by those persons or that they were sold to them or to other concerns of this
group in which they were interested at concessional rates or the like, Except that
the company had entered into an imprudent transaction, there are no
circumstances of the nature outlined in s. 237(b)(ii).
Charge
No. 6: Loans to certain individuals
The respondent has taken
objection to the advances of loans by the petitioner-company to a number of
persons "who belonged to the Sahu Jain group" to the extent of Rs.
1.26 crores. In particular, it is stated that loans to the extent of Rs. 68.75
lakhs were advanced to one R.G. between August, 1968, and March, 1972, and that
similar loans were also advanced to A.P.J. From these persons Rs. 20 lakhs and
Rs. 95 lakhs, respectively, remained due to the petitioner.. The answer of the
company is that the petitioner had vast resources by way of deposits from
stockists and advances from customers. The investment of these funds among
others by way of loans was part of the business of the company. These were
loans carrying a high rate of interest (as admitted in para. 10(4) of A-1), and
were repayable on demand. It has been denied that any loan in excess of Rs. 20
lakhs was given to R.G. In the case of A.P.J. only Rs. 4.45 lakhs was due and,
in the case of R.G., the entire amount of the loan was repaid by 6th November,
1974.
The petitioner's reply that
these are loans earning a high rate of interest has not been denied. In fact,
one of the earlier charges against the company was that when these loans were
earning a higher rate of interest of 11%, the debentures of P.P.L. carrying 8%
interest should not have been acquired. It is, therefore, inconsistent on the
part of the Board to find fault with the company also for having advanced these
loans. It is not the respondent's suggestion that these persons were not
capable of returning the loans or that the persons concerned in the management
of the company stood to gain in some way as a result of these transactions. The
loans have also been substantially repaid. In these circumstances, we fail to
see how this transaction can attract action under s. 237(b)(ii).
Charge
No. 7: Write off of three loans
According to A-1, the
petitioner-company had advanced in 1963-64, three loans, one, a sum of Rs.
50,000 to Sri K.L.M., two, Rs. 30,000 to Sri T.H.K. and three, Rs. 15,000 to
Shri H.K.M. Neither these loans nor any interest thereon was recovered from
these persons though the interest itself was quite substantial and amounted to
as much as Rs. 46,553. No efforts were made to recover them and a major part
has been written off.
The explanation given by
the company is that these were very respectable and prominent persons in public
life. One of them was a counsel for the company and one of them held a high
office in the State of
All that the materials
placed on record discloses is that the petitioner-company advanced certain
loans which became irrecoverable and had to be written off. The persons to whom
the monies were lent were not relatives or associates of the persons concerned
in the management of the company. They were outsiders and influential people to
whom the company, bona fide, though perhaps imprudently, as events turned out
later, advanced certain monies which had to be written off. We are unable to
conceive how this transaction of the company can be made the basis of a charge
of fraud, misfeasance or misconduct on the part of the directors, etc., towards
the company or its members.
We shall now take up the
first two charges which are the most important. Shri Kataria, in particular,
has placed considerable reliance on the first charge as sufficient by itself to
warrant the action taken. As will be seen later, there is an inter-connection
between the two transactions which may have to be considered together. We
shall, however, set out the facts discussed in respect of each of these charges
separately and then discuss the resultant position that emerges.
Charge
No.1: Surrender of sole selling agency of JUL
The allegation, as set out
in A-l, was that the petitioner had been appointed the sole selling agents of
JUL for the sale of cement for a period of five years from April 1, 1966. From
this agency, the petitioner was deriving an annual return of about Rs. 8 to 10
lakhs. Notwithstanding this, the company surrendered the agency in favour of
BOL, without receiving any compensation for the unexpired period of the agency.
The transaction, therefore, was said to be,
prima facie, against the interests of the company.
On behalf of the petitioner,
it was pointed out by A-2 that this allegation was based on two misconceptions.
The first was that the agency was extremely profitable to the
petitioner-company. This was not so factually. Though the gross commission from
this agency in the accounting years which ended on August 31, 1966, August 31,
1967, and August 31, 1968, amounted to Rs. 92 lakhs, Rs. 108 lakhs and Rs. 8.10
lakhs, respectively, the net income of the company from this source, after
deducting the expenditure incurred for earning the said income, came to only
Rs. 1.95 lakhs for the first year and there were actually losses of Rs. 65,000
and Rs. 2.24 lakhs, respectively, for the succeeding two years. Full details of
the computations on the basis of which these figures were arrived at were given
in A-3. It was pointed out that the New Delhi office of the petitioner looked
after this business and also the work of three regional offices at Chandigarh,
Jaipur and Sawaimadhopur. The work for the cement agency at these places was
considerable and involved the setting up of a number of establishments with
sufficient personnel to handle the work efficiently. Though the company also
dealt in certain other commodities such as sale of steel pipes, plywood, paper
and rubber goods, the turnover of cement was the maximum. The turnover in the
other commodities varied between 1 and 2 1/2 per cent, of the cement turnover.
The company, therefore, apportioned the total expenditure on the basis of
turnover and deducted the same to arrive at the net figures referred to
earlier. The second misconception of the respondent, according to the
petitioner, was that the petitioner was entitled to some compensation for the
unexpired period of the agency but had voluntarily forgone the same. This was
also not correct. Under s. 294A(c) of the Companies Act, the agents were not
entitled to compensation on resignation.
The respondent tried to
meet the above case of the petitioner in its affidavits A-4 and A-6. The
correctness of the computation of the expenditure deductible against the
commission income was contested on the following grounds:
(a) The New Delhi office of the petitioner looked after the
cement agency not merely of JUL but also of other brands of cement such as
Rohtas, Portland and Ashoka. The commission earned by the petitioner from JUL
was 40% of the total commission earned by it in 1966-67, and 33% in 1967-68.
The expenditure deductible against the commission received from JUL would,
therefore, be much less than what has been claimed by the company.
(b) The allocation of expenditure on the basis of turnover was
not correct because cement was a commodity in short supply which did not
require any special efforts for sale.
(c) The expenditure taken into account by
the petitioner included the interest paid by the head office which should be
excluded and if this is done the net commission figures would work out to Rs.
4.12 lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 0.22 lakhs in 1968.
(d) As a result of the surrender of the sole
selling agency the petitioner-company's asset position was considerably
affected. It has to call back a loan of Rs. 60 lakhs from NCI and also dispose
of other investments of about Rs. 45 lakhs. Moreover, it had to meet
liabilities to the extent of Rs. 268 lakhs relating to the business of the sole
selling agency and in order to raise this amount it had to sell its plywood
factory for Rs. 57 lakhs, sell debentures for the amount of Rs. 63 lakhs, make
over loans due to it from 9 parties amounting to Rs. 43 lakhs and pay cash of
Rs. 105 lakhs.
These
points have been effectively met by the petitioner-company. Regarding (a) it
has been pointed out that the agencies of Rohtas,
Coming now to the points
made out in A-6, we find again that the company has given a satisfactory reply.
So far as the recall of a sum of Rs. 60 lakhs from the NCJ is concerned, it is pointed
out that the petitioner-company had advanced Rs. 1,40,00,000 to the NCJ. The
Company Law Board had directed the company to recall the loan in terms of s.
370 of the Companies Act. Actually, the company applied for extension of time
for the recalling of the above amounts and it was only in pursuance of the
directions of the Company Law Board, dated September 25, 1968, that the sum of
R. 60 lakhs was repaid by the NCJ. This point, therefore, is of no
significance. As to the last point made regarding the sale of the company's
assets, we may point out that the respondent is confusing between the result of
the surrender of the sole selling agency and the cause therefor. Naturally,
when the petitioner-company surrendered the sole selling agency, it had to repay
the security amounts and advances received by it in its capacity as sole
selling agents. This had necessarily to be done by disposing of some assets and
by paying a certain amount of cash. It could also be that some of these assets
may have been acquired out of the moneys received in the course of the sole
selling agency. From the mere fact that, as a result of the transfer of the
sole selling agency, the petitioner had to discharge its liabilities incurred
in relation thereto by the disposal of certain assets and transfer of certain
loans and payment of cash, it cannot follow that the very act of the surender
of the managing agency was inspired by improper motives.
The essence of the case of
the department was that the sole selling agency was a very valuable asset which
no prudent businessman would give up. A point has also been sought to be made
in para. 9 of A-6 that whereas 5,000 out of 15,000 shares of the
petitioner-company are in the hands of nationalised banks, BOL is a private
Ltd. Co., the profits earned by which go to certain individuals who are at the
helm of affairs of the petitioner-company. In considering it to be a valuable
asset, the respondent has gone by the figures of gross commission without
allowing the deduction of any expenditure thereagainst. Even if the expenditure
cannot be allowed to the extent claimed by the petitioner, some expenditure
must be allowed and, even according to the respondent's figures, the income
from this source was dwindling over the years. The respondent's allegation that
BOL is an associated concern has been denied in A-2 and A-6 and no material to
show any close connection or control has been placed on record. In A-3 and A-7,
the petitioner has alleged that, early in 1968, JUL had indicated to it that
they wished to terminate its agency and appoint BOL as its agents and it was in
this context that they had to surrender the agency. Sri Kataria objects to this
allegation made at a late stage being taken into account. There is also nothing
to show that the initiative for terminating the agency came from JUL. So, we
shall leave it out of account. But even ignoring all these submissions of the
petitioner and taking the respondent's case at its best, all that has been made
out is that the petitioner-company gave up a sole selling agency which was
remunerative. But will this alone be a ground for drawing an inference that the
persons in management have been guilty of fraud, misfeasance or misconduct
towards the company? We think not, and this will become clearer if we bear in
mind that this transaction of surrender of the sole selling agency in favour of
BOL was simultaneous with another transaction of surrender of the sole
undertaking of APL, which we are discussing below and consider these two
transactions together. We shall, therefore, proceed to discuss the second
charge against.
Charge
No.2: Purchase and sale of plywood factory
The APL was a losing
concern. It had sustained losses to the tune of Rs. 52.72 lakhs between October
1, 1962, to March 31, 1966. The petitioner-company had advanced loans to APL to
the extent of Rs. 40 lakhs, and on October 31, 1965,a sum of Rs. 41,91,561.64
was due to the petitioner on account of principal and interest from APL.
According to the petitioner, there was no way of recovering this loan and so
the petitioner ultimately decided to purchase the undertaking of APL and carry
on the business in plywood on its own. This proposal was placed before a
meeting of the shareholders of the company held on 21st March, 1966. The
explanatory note attached to the notice of this general meeting contained the
resolution of the company approving the commencement by it of a business in
plywood which was necessary in terms of s. 149 of the Companies Act as amended
by Act 31 of 1965. The block assets were taken over at a value fixed by a
reputed firm of valuers and the other assets were taken over at book value. The
petitioner-company worked the concern for a period of three years but it was
not a very successful experiment. In the period of April 1,1966, to August 31,
1968, during which the petitioner-company ran the business it had to incur a
further loss of Rs. 38.94 lakhs. Eventually, therefore, the company decided
that it was not profitable to continue carrying on the business and it was
decided to dispose of the same. It was about
this time that the surrender of the selling agency of JUL by the
petitioner-company in favour of BOL was also contemplated and it was decided
that the undertaking of APL would also be transferred to BOL. This transaction
was also placed before a meeting of the shareholders of the company held on the
28th September, 1968, and the undertaking was transferred to BOL w.e.f. 1st
October, 1968.
According to the
petitioner, the above undertaking was purchased at a cost of Rs. 77.17 lakhs
and the sale price was Rs. 88.18 lakhs representing the book value of the
various assets as on the date of the sale. If this is correct, there is nothing
even prima facie wrong with the transaction. The respondent's allegation,
however, is that the undertaking was purchased not for Rs. 77.17 lakhs but for
Rs. 88.65 lakhs and sold not for Rs. 88.18 lakhs but only for Rs. 57 lakhs. The
discrepancy in the purchase price is due to the fact that, according to the
respondent, an interest amount of Rs. 3.49 lakhs recoverable from the APL had
not been realised. This has been categorically denied by the petitioner and it
has been asserted in A-7 that interest was duly recovered from APL. It is then
alleged by the respondent that the valuation report on the basis of which the
purchase was effected does not give any basis for the valuation and that an
inspection report showed that it had made a profit of Rs. 11.40 lakhs in the
bargain. The inspection report relied upon has not been placed before us. That
apart, the valuation was got done by a reputed firm of valuers. If the
valuation report did not give the details, it was open to the respondent to
have found out the details from the said firm. It cannot be merely assumed that
this valuation report was a made-up one and that it did not represent the
proper value of the purchased undertaking and that the consideration paid by
the petitioner-company must have been an exaggerated consideration.
While, on the one hand, the respondent criticises the purchase as having been made at an exaggerated price, allegations of a contrary nature are made in regard to the sale transaction of the undertaking in 1968. Here, it is alleged that the sale price was only Rs. 57 lakhs and not Rs. 78.18 lakhs as stated by the petitioner. This allegation has also been denied by the petitioner. The respondent has drawn the inference that the sale price was only Rs. 65 lakhs from the fact that certain liabilities of the petitioner-company to the extent of Rs. 268 lakhs which was transferred to BOL were adjusted in the following manner:
|
|
Rs. |
|
Transfer of debentures |
63
lakhs |
|
Cash paid |
105
lakhs |
|
Loan transferred |
43
lakhs |
|
Price of plywood factory |
57
lakhs |
|
Total |
268
lakhs |
The petitioner has pointed out
in A-7 that this proceeds on a misapprehension. The total sale price was Rs.
78.18 lakhs as explained in detail in the annexure filed along with A-2 but
only a part of the sale price was adjusted against the sum of Rs. 268 lakhs.
Again, the respondent alleges that the transfer of the undertaking at book
values was not justified and that the unit must have been worth much more in
October, 1968, than in April, 1966. This allegation again is totally
unacceptable. When the petitioner-company wanted to take over the undertaking
of APL, which had suffered serious losses, it was prepared to take over the
same only after having the block assets valued by a reputed firm of valuers.
Having taken over the undertaking, the petitioner conducted the business for a
period of about two years during which it suffered a heavy loss. It was,
therefore, decided to transfer the undertaking to BOL at book value. There is
nothing suspicious about this and the respondent admits in A-4 that it is
unable to attribute any motive for the petitioner not undertaking a revaluation
of the block assets. Thus, the respondent has not been able to make out any
satisfactory reason why the purchase and sale price as claimed by the
petitioner should be disbelieved.
Realising this, perhaps,
the respondent in A-4 poses a question: Why did the company purchase a losing
concern? and concludes that this must have been effected in order to claim a
loss for income-tax purposes, by claiming a set-off of the losses in the
business against its other profits. It will be seen that this allegation
overlooks the fact that that the concern was taken over in lieu of a debt is
not denied; it does not also help the respondent's case. Even assuming that the
petitioner-company took over this losing concern merely in order to reduce its
income-tax burden, the transaction would not be one detrimental to the
interests of the company because admittedly the transaction helped to reduce
the tax liability of the company to the extent of about Rs. 20 lakhs. That
apart, this is merely a vague and wild allegation made by the respondent in an
effort to make out some charge against the company when the charge, as
originally laid, cannot be established.
According to the
petitioner-company, the purchase was for Rs. 77.17 lakhs and the sale for Rs.
88.18 lakhs. If this is so, there is no case at all for the respondent. But even assuming that the undertaking
had been purchased for Rs. 80.65 lakhs and had been sold only for Rs. 57 lakhs,
this would not lead to an inference of any misfeasance, misconduct or fraud on
the part of the management, if looked at against the correct factual
background. It should not be forgotten that this was an undertaking which had
been sustaining losses right from the commencement. The total loss incurred by it
was to the tune of about Rs. 92 lakhs. So, the mere fact that it was sold to
BOL for a price smaller than the purchase price is not sufficient to draw an
inference against the directors or the management of the company. Having regard
to the continuous record of losses, the suggestion made in A-4 that the value
of the undertaking in October, 1968, must have been considerably more than the
value of the undertaking in April, 1966, is obviously absurd and without basis.
We are, therefore, unable to spell out from the circumstances of the
transaction the conclusion sought to be drawn by the respondent.
Moreover, as we have
mentioned earlier, an important circumstance that is relevant in assessing the
real effect of the transactions which form the subject-matter of the first two
charges against the company is that they are really connected transactions.
Both of them took place simultaneously. In or about July, 1978, the company
decided to surrender the sole selling agency of JUL and also decided to
transfer the undertaking of APL to BOL. In fact, the transaction involved a
number of other mutual arrangements and adjustments which have not been
properly examined by the respondent. The petitioner has denied that BOL is a
part of the group, but granting that it was, still one would appreciate that
the two transactions put together do not leave any room for any adverse
inference. Let us assume, as contended by the respondent, that the sole selling
agency of JUL was a profitable one. Let us also assume that the undertaking of
APL was a losing one and had been transferred to BOL at a price lower than the
price for which the petitioner purchased it. All these facts put together could
only amount to this that, as a result of certain understandings in July, 1968,
the petitioner-company transferred to BOL a remunerative undertaking and also
an admittedly losing concern. It cannot, therefore, be postulated that the
management of the petitioner-company had indulged in these transactions with a
view to benefit BOL and its limited shareholders at the cost of the
petitioner-company. It should not also be overlooked that the transaction
relating to APL had, at both stages, been placed before and unanimously
approved by the shareholders of the company. It has been pointed out in A-6 that
a substantial proportion of the shares of the petitioner-company was held by
nationalised banks and it cannot be assumed that they voted the proposals which
were patently detrimental to the company's interests.
We have discussed at length
all the materials placed before us by the parties and reached the conclusion
that the action initiated by the respondent against the petitioner-company was
not justified. Sri Kataria, for the respondent, submitted that, at least in
regard to the first two charges, the respondent has shown the existence of some
circumstances which called for further investigation. He submitted that if,
after investigation, the charges were made out, the board would take other
action but that, if the charges could not be substantiated, further proceedings
would be dropped. So, according to him, it was not possible on the material for
this court to say that even the appointment of an inspector to delve into these
matters was not necessary or justified.
We think that the
contention of Sri Kataria proceeds on a misconception of the true scope of s.
237 (b). In Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp Cas 639;
AIR 1967 SC 295, the affidavit of the Board disclosed that (p. 296—AIR
headnote):
"In the conduct of the
company there was delay, bungling and faulty planning of project entailing
double expenditure, continuous losses resulting in sharp fall in prices of the
company's shares and resignation of some of the directors on account of
differences of opinion with the managing director".
On the question whether
these facts could support an order under s. 237(b), Mudholkar J. (speaking for
himself and Sarkar C.J.), observed (AIR headnote p. 296—see also 36 Comp Cas at
p. 692):
"It cannot be said
that from a huge loss incurred by a company and the working of the company in a
disorganised and unbusinesslike way, the only conclusion possible was that it
was due to lack of capability. It was reasonably conceivable that the result
had been produced by fraud and other varieties of dishonesty or misfeasance.
The order did not amount to a finding of fraud. It was to find out what kind of
wrong action has led to the company's illfate that the powers under the section
were given. The enquiry might have revealed that there was no fraud or other
similar kind of malfeasance. It would be destroying the beneficial and
effective use of the powers given by the section to say that the Board must
first have showed that a fraud could clearly be said to have been committed. It
was enough that the facts showed that it could be reasonably thought that the
company's unfortunate position might have been caused by fraud and other
species of dishonest action".
Two other judges, however,
did not agree with this view. Hidayatullah J. (as he then was), expressed himself
as follows. (AIR head note—see also pp. 661, 662 of 36 Comp Cas):
"The words 'in the
opinion of the Central Government' in section 237(b) indicate that the opinion
must be formed by the Central Government and it
is of course implicit that the opinion must be an honest opinion. The next
requirement is that ' there are circumstances suggesting, etc' These words
indicate that before the Central Government forms its opinion it must have
before it circumstances suggesting certain inferences........
Again, an action, not based
on circumstances suggesting an inference of the enumerated kind will not be
valid. In other words, the enumeration of the inferences which may be drawn
from the circumstances, postulates the absence of a general discretion to go on
a fishing expedition to find evidence. No doubt the formation of opinion is
subjective but the existence of circumstances relevant to the inference as the
sine qua non for action must be demonstrable. If the action is questioned on
the ground that no circumstances leading to an inference of the kind
contemplated by the section exists, the action might be exposed to interference
unless the existence of the circumstances is made out... Since the existence of
' circumstances ' is a condition fundamental to the making of an opinion, the
existence of the circumstances, if questioned, has to be proved at least prima
facie. It is not sufficient to assert that the circumstances exist and give no
clue to what they are because the circumstances must be such as to lead to
conclusions of certain definiteness".
Shelat J. had this to say
(See pp. 689, 690 of 36 Comp Cas):
"There must therefore
exist circumstances which in the opinion of the Authority suggest what has been
set out in sub-clauses (i), (ii) or (iii). If it is shown that the
circumstances do not exist or that they are such that it is impossible for any
one to form an opinion therefrom suggestive of the aforesaid things, the
opinion is challengeable on the ground of non-application of mind or perversity
or on the ground that it was formed on collateral grounds and was beyond the
scope of the statute.
Even assuming that the
entire cl. (b) is subjective and that the clause does not necessitate
disclosure of circumstances, the circumstances have in the present case been
disclosed in the affidavits of the Chairman and the other officials. Once they
are disclosed, the court can consider whether they are relevant circumstances
from which the Board could have formed the opinion that they were suggestive of
the things set out in cl. (b)".
Bachawat J. expressed no
views on this aspect of the case.
The scope of the section
was, therefore, again considered by the Supreme Court in Rohtas Industries Ltd.
v. Agarwal [1969] 39 Comp Cas 781; AIR 1969 SC 707 "to sort out the requirements"
of the section. After a review of the several decisions cited before the court,
Hegde J. (speaking for himself and Sikri J., as he then was), concluded thus
(p. 800 of 39 Comp Cas):
"Coming back to
section 237(b), in finding out its true scope, we have to bear in mind that
that section is a part of the scheme referred to earlier and, therefore, the said provision takes its colour from
sections 235 and 236. In finding out the legislative intent we cannot ignore
the requirements of those sections. In interpreting section 237(b) we cannot
ignore the adverse effect of the investigation on the company. Finally, we must
also remember that the section in question is an inroad on the powers of the
company to carry on its trade or business and thereby an infraction of the
fundamental right guaranteed to its shareholders under article 19(1)(g) and its
validity cannot be upheld unless it is considered that the power in question is
a reasonable restriction in the interest of the general public. In fact the vires
of that provision was upheld by a majority of the judges constituting the Bench
in Barium Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311; AIR 1967
SC 295, principally on the ground that the power conferred on the Central
Government is not an arbitrary power and the same has to be exercised in
accordance with the restraints imposed by law. For the reasons stated earlier,
we agree with the conclusion reached by Hidayatullah and Shelat JJ. in Barium
Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311; AIR 1967 SC 295,
that the existence of circumstances suggesting that the company's business was
being conducted as laid down in sub-clause (1) or the persons mentioned in
sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards
the company or towards any of its members is a condition precedent for the
Government to form the required opinion and if the existence of those
conditions is challenged, the courts are entitled to examine whether those
circumstances were existing when the order was made. In other words, the
existence of the circumstances in question are open to judicial review though
the opinion formed by the Government is not amenable to review by the courts.
As held earlier, the required circumstances did not exist in this case".
Bachawat J. was of a
different view. He observed (p. 803 of 39 Comp Cas):
"If it is established
that there were no materials upon which the authority could form the requisite
opinion the court may infer that the authority did not apply its mind to the
relevant facts. The requisite opinion is then lacking and the condition
precedent to the exercise of the power under section 237(b) is not fulfilled.
On this ground I interfered with the order under section 237(b) in Barium
Chemicals v. Company Law Board [1966] Supp SCR 311 at p. 343; 36 Comp Cas 639:
AIR 1967 SC 295 at p.313...... The condition precedent to the exercise of power
under section 237(b) is the opinion of the Government and not the existence of
the circumstances suggesting one or more of the specified matters. To hold that
the factual existence of such matters is a condition precedent to the exercise
of the power is to re-write the section. Section 23 7(b) must be interpreted in the light of its own language and
subject-matter. We miss its real import if we begin by referring to the
construction put by other judges on other statutes perhaps similar but not the
same. The decisions are useful when they lay down principles of interpretation
or give the meaning of words which have become terms of art "
but he agreed with the
conclusion of the majority that, on facts, the order under s. 237(b) was not
maintainable. In that case, the only allegation against the company on the
basis of which the action under s. 237(b) was sought to be supported was that
it had sold certain preference shares at their face value when they could have
been converted into ordinary shares of Rs. 10 each which were then quoted at
Rs. 15 in the stock market. Hegde J. observed (pp. 800, 801 of 39 Comp Cas):
"The next question is
whether any reasonable authority, much less an expert body like the Central
Government, could have reasonably made the impugned order on the basis of the
material before it. Admittedly, the only relevant material on the basis of
which the impugned order can be said to have been made is the, transaction of
sale of preference shares of Albion Plywoods Ltd. At the time when the
Government made the impugned order, it did not know the market quotation for
the ordinary share of that company as on the date of the sale of those shares
or immediately before that date. They did not care to find out that
information. Hence there was no material before them showing that they were
sold for inadequate consideration. If as is now proved that the market price of
those shares on or about May 6, 1960, was only Rs. 11 per share then the
transaction in question could not have afforded any basis for forming the
opinion required by section 237(b). If the market price of an ordinary share of
that company on or about May 6, 1960, was only Rs. 11 it was quite reasonable
for the directors to conclude that the price of the ordinary shares is likely
to go down' in view of the company's proposal to put on the market another
50,000 shares as a result of the conversion of the preference shares into
ordinary shares. We do not think that any reasonable person, much less any
expert body like the Government, on the material before it, could have jumped
to the conclusion that there was any fraud involved in the sale of the shares
in question. If the Government had any suspicion about that transaction it
should have probed into the matter further before directing any investigation.
We are convinced that the precipitate action taken by the Government was not
called for nor could be justified on the basis of the material before it. The
opinion formed by the Government was a wholly irrational opinion. The fact that
one of the leading directors of the appellant-company was a suspect in the eye
of the Government because of his antecedents, assuming without deciding,
that the allegations against him are true, was not a
relevant circumstance. That circumstance should not have been allowed to cloud
the opinion of the Government. The Government is charged with the
responsibility to form a bona fide opinion on the basis of relevant material.
The opinion formed in this case cannot be held to have been formed in
accordance with law".
From the foregoing it will
be seen that the question whether circumstances have been shown to exist from
which, reasonably, an inference of the nature contemplated by the provision can
be drawn is a matter for judicial consideration. It is not sufficient for the
Board to merely allege some facts which raise some suspicion in order to enable
it to enter into a fishing expedition or to undertake an investigation as a
result of which possibly some case could be made out against the company. In
the present case, if at all, there is some content only in the first two
charges. But even there the Board is not clear about the facts and looking at
both the transactions together there are no circumstances brought to light from
which any fraud, misfeasance or misconduct on the part of the management can be
made out. As Shelat J. has pointed out in Barium Chemicals Ltd. v. Company Law
Board [1966] Supp SCR 311; 36 Comp Cas 639; AIR 1967 SC 295/ these expressions
envisage the following types of conduct (AIR headnote):
"The term 'fraud'
connotes actual dishonesty and, however much the court may disapprove of a
personal conduct it must consider whether he has been guilty of dishonesty.
Misfeasance results from an act or conduct in the nature of a breach of trust
or an act resulting in loss to the company. Misconduct of promoters or
directors as understood in the Companies Act means not misconduct of every kind
but such as has produced pecuniary loss to the company by misapplication of its
assets or other act".
In the present case, there
is no basis for any allegation of fraud or misconduct. It cannot even be
alleged that the management has entered into any of the transactions in the
nature of a breach of trust or with a view to cause pecuniary loss to the
company. We have, therefore, no hesitation in concluding that no case for
action under s. 237(b)(ii) has been made out.
Before parting with the
case, we should like to point out one further feature in the present case. As
pointed out by the Supreme Court, the circumstances justifying action under s.
237 should exist at the date of the order. In A-1, the respondent only set out
a few broad allegations which were controverted by A-2 and A-3. The respondent
then filed A-4 giving further details and figures and it is not clear why these
were not furnished at the original stage itself. In the original petition, the
company had specifically alleged that the
earlier investigations by the Board, in particular by Sri Suraj Kapur, had
yielded nothing adverse to the company. In the original reply filed by the
respondent (paras. 6 and 7 of A-1) this was not controverted, rather there was
an indefinite statement that the functions of the Registrar of Companies and
Sri Suraj Kapur were limited and they were not required or entitled to make any
complaints regarding fraud or misfeasance, admitting impliedly that the reports
had contained no adverse comments, etc. The additional facts mentioned in A-4
were more in the nature of pointing out of loopholes in the defence put forward
in A-2 and A-3 than a positive case based on definite data. Sri Kataria,
however, stated in court that full details regarding the allegations were
available from the inspection report and that he would place the same before
us. But eventually neither the inspection report nor the facts and details
gathered by the inspector were placed before us. Instead, A-6 was filed. This
no doubt refers to the report of Sri Kapur dated January 12, 1973, and to the
discussions he had with the officers of the company. But A-6 which puts forward
certain additional facts avoids stating specifically that these facts were
based on the results of the inspection report and had been arrived at after due
investigation and enquiries with the company. Even in A-6 the attempt made is
only to raise a cloud of suspicion by referring to a number of facts and
figures without any attempt at analysing them and making out clear factual
charges against the company. The charges are vague and general and do not
attempt to bring home to the directors or persons in management in general or
any of them in particular any conduct of the nature contemplated by s.
237(b)(ii). As pointed out in the case of Barium Chemicals [1966] Supp SCR 311;
36 Comp Cas 639; AIR 1967 SC 295, an allegation that the company had entered
into an unremu-nerative or imprudent transaction cannot suffice to attract s.
237. If the basis of the order under s. 237(b) was only the data furnished in
A-l, the material was woefully inadequate to support the order. But even the
additional facts furnished in A-4 and A-6 do not add much substance to the
charges. We, therefore, hold that the respondent has failed to make out the
existence or circumstances justifying the formation of an opinion that there
was fraud, misfeasance or misconduct on the part of the persons in management
of the company towards the company or its members.
We, therefore, make the
rule absolute and quash the impugned orders marked annexs. C, G, H and I to the
writ petition. The respondents are restrained from giving effect in any manner
to the aforesaid orders against the petitioner-company.
The writ petition is
allowed with costs.
[1983] 53 Comp. Cas. 485 (Ker)
High Court OF Kerala
v.
Yoosuf Sagar Abdulla & Sons
(P.) Ltd.
M. P. Menon j.
COMPANY
PETITION NO. 22 OF 1978.
January 29, 1980
M.
Ramanatha Pillai for the Petitioner.
M.
M.P. Menon J.—The petitioner, a director and also a manager of Yoosuf
Sagar Abdulla & Sons (P.) Ltd., seeks a declaration under s. 237 of the
Companies Act, 1956, that the affairs of the company ought to be investigated
by the inspector appointed by the Central Govt. Necessary directions to the
Central Govt. are also sought for.
The facts stated and the
allegations made in the petition briefly are these. A foreign national, Yoosuf
Sagar Abdulla, was doing import and export business at
K.V.
Kunhammed has filed a detailed counter-affidavit on behalf of the company
denying all the petitioner's allegations and suggesting that he (the
petitioner), who was actively participating in the management till 1978, has
chosen to make them only because his remuneration was reduced and some of his
powers were curbed during 1977 and 1978. The petitioner has got himself
examined as P.W. 1 and Exs. A-1 to A-3 are marked on his side. The respondent
has produced only some documents and they are Exs. B-1 to B-6.
Counsel
for the petitioner raised the following points at the time of hearing
"(i) the appointment of Ahammed Yoosuf as
managing director in February, 1973, without the sanction of the Reserve Bank
was opposed to the provisions of the Foreign Exchange Regulation Act;
(ii) non-resident equity participation exceeding
40 per cent, is illegal, in view of section 29 of the Foreign Exchange Regulation
Act, 1973 ;
(iii) the raid of 1976 and the consequent
disclosures reveal a state of affairs which requires investigation ; and
(iv) because of Kunhammed's interest in the rival
firm, the company's business has been going down."
The
above, according to counsel, are circumstances calling for an order under s.
237(a)(ii) of the Companies Act, 1956. Section 237 reads :
"Investigation
of. company's affairs in other cases.—Without prejudice to its powers under
section 235, the Central Government—
(a) shall appoint one or more competent persons
as inspectors to in vestigate the affairs of a company and to report thereon in
such manner as the Central Government may direct, if—
(i) the
company, by special resolution ; or
(ii) the Court, by order, declares that the
affairs of the company ought to be investigated by an inspector appointed by
the Central Government ; and
(b) may do so if, in the opinion of the Central
Government, there are circumstances suggesting—
(i) that the business of the company is
being conducted with intent to defraud its creditors, members or any other
persons, or otherwise for a fraudulent or unlawful purpose, or in a manner
oppressive of any of its members, or that the company was formed for any
fraudulent or unlawful purpose;
(ii) that persons concerned in the formation
of the company or the management of its affairs have in connection therewith
been guilty of fraud, misfeasance or other misconduct towards the company or
towards any of its members ; or
(iii) that the members of the company have not
been given all the information with respect to its affairs which they might
reasonably expect, including information relating to the calculation of the
commission payable to a managing or other director, the managing agent, the
secretaries and treasurers, or the manager, of the company."
The
section conceives of three situations where the Central Govt. can appoint
inspectors for investigation. The first is when the company itself declares
that such an investigation is necessary. The second is when the court makes an
order. And the third is when the Central Govt. forms an opinion that the
circumstances enumerated in cl. (b) exist. The first is easy to understand:
When the company itself wants an investigation, the Central Govt. need not stop
to enquire why. The third can also be understood because when suo motu action
is proposed to be taken by the Government, it shall not act arbitrarily, but
only consistent with guidelines laid down. But what about the second situation,
where the court has to make an order ? Mr. Ramanatha Pillai for the petitioner
suggests that the power and the discretion of the court are uncontrolled ; it
can direct an investigation whenever it suspects that all is not well with the
company. Whether the apprehensions of the court are true or not is a matter to
be found by the investigating inspectors, and the court is not to insist on
evidence. It appears to me that this is too broad a statement. Investigation of
the company's affairs by the Department of Trade in England has always been
understood as a statutory exception to the rule in Foss v. Harbottle ([1843] 2
Hare 461) that the internal affairs of a company
is a matter for the majority, and a dissatisfied minority cannot seek outside
interference. The Companies Act provides for the protection of minorities in
three ways (i) by giving them a right to complain against oppression, (ii) by
permitting them to act on behalf of the company when it is wound up, as in the
case of misfeasance proceedings, and (iii) by enabling them to obtain remedies
indirectly through investigation. The court's discretion under s. 237 is,
therefore, to be exercised only when it is satisfied that the minority has made
out at least a prima facie case that the rule in Foss v. Harbottle [1843] 2
Hare 461, requires relaxation in the interests of the company. The Calcutta
High Court has held in In re Patrakola Tea Co. Ltd., AIR 1967 Cal 406, that
before the company court orders an investigation under s. 237(a)(ii), the
petitioner should make out a strong case in relation to one or other of the
matters referred to in cl.(b). In other words, the circumstances enumerated in
cl. (b) are material for the exercise of the court's discretion also. The
discretion is certainly a judicial one and is to be exercised only when a
minority acts in the interests of the company as a whole.
Turning to the first point
raised by the petitioner, the answer furnished by the respondent is that in
February, 1973, when Ahammed Yoosuf was appointed managing director, there was
no prohibition against a foreign national being so appointed. The Foreign
Exchange Regulation Act, 1973, was not then in force; and the predecessor
enactment of 1947 contained no such restrictions. Mr. Ramanatha Pillai is
unable to dispute this position ; and it is also seen from Ex. A-1 that the
proposal to appoint Ahammed Yoosuf as managing director was made by the
petitioner himself at the 71st meeting of the Board held on February 14, 1973.
He cannot certainly complain in 1978 about a lawful decision taken by the Board
in 1973 at his own instance, and then seek an investigation on that ground.
As regards non-resident
equity participation, what s. 29 of the FER Act, 1973, lays down is that a
company with more than 40 per cent. "nonresident interest" shall not
carry on in India, or establish in India a branch, office or other place of
business for trading, except with the permission of the Reserve Bank.
Sub-section (2) provides that companies of this nature which were there at the
commencement of the Act should apply to the Reserve Bank for permission to
continue, within six months of such commencement. When an application is made,
the Reserve Bank will hold an enquiry and pass orders allowing it or rejecting
it. If the application is rejected, the company shall discontinue business from
the expiry of 90 clays after receipt of the order. When no application is made
within the time allowed, a like order can then also be issued by the Reserve
Bunk. In the case of a company like the present, therefore, a violation of section
29(1) can be established only if it is shown that no application at all has
been made to the Reserve Bank, or that the application made has been rejected.
But the petitioner admits in evidence (as P. W. 1) that in May, 1974, he
himself had discussed with a firm of lawyers in Madras the question of
approaching the Reserve Bank for permission under the FER Act (46/73). He adds
:
"It is true that
we had taken some steps to get appropriate permission from the Reserve Bank
under the Foreign Exchange Regulation Act. I do not know whether the Reserve
Bank has denied or given permission."
Thus, an application for
permission has admittedly been made and there is nothing to show that it has
been rejected, and that the company is continuing its activities in spite of
such rejection. It is difficult to accept the petitioner's contention that the
burden of showing that permission has already been obtained is on the
respondent ; the respondent has no such case. Even the petitioner does not
state that the application has been rejected. The respondent's case in the
counter-affidavit is that the matter is still pending with the Reserve Bank ;
and they cannot be called upon to produce an order which has not been passed at
all. The FER Act, 1973, also provides the machinery for its enforcement and it
is idle to think that it will be set in motion only under orders of this court
under s. 237. of the Companies Act. In this view, it is also unnecessary to
consider the respondent's contention that the 51 shares of the deceased founder
could not be taken note of for arriving at the 40% limit.
The third circumstance
relates to the 1976 raid and its consequences. According to the petitioner, the
officers of the Enforcement Directorate raided the business premises of
Kunhammed Koya's firm as also the office of the respondent-company in July,
1976. A typed sheet of paper evidencing transactions to the extent of Rs.
6,75,000 was seized from Koya's office and this indicated that Koya had
concealed, as unaccounted, the company's income to that extent. The amount was
later included in Ex. A-3, balance-sheet for the year ending September 15, 1976
; but the company had never received this amount. It was forced to pay
income-tax for the said amount and to borrow funds for the purpose. Koya also
took his commission for the profit. The petitioner signed Ex. A-3 as a director
only because he was persuaded to do so by Koya and the auditors. But in
cross-examination (as P.W. 1), the petitioner admits that his residence was
also raided and some papers seized, including a file of the year 1972. The
petitioner himself had brought down this paper from Kuwait. Copies of letters
he had sent to Yakkob Yoosuf Sagar were also taken away. An exact copy of the
typed sheet seized from Koya's office was found at the petitioner's residence
also. The sheet disclosed disbursements to the tune of Rs. 6.75 lakhs,
including Rs. 52,000 to Koya, Fathima, her daughter and the petitioner himself.
He had not actually received any portion of the aforesaid amount, though he had
given a statement to the Enforcement Officers that he had received Rs. 2,000.
It was the petitioner himself who had typed out the sheet, though under
instructions from Koya. Both Koya and himself are parties to the adjudication
proceedings initiated in pursuance of the raid and the proceedings are still
pending.
If anything, the above
discloses that the raid was conducted at a time when the petitioner and Koya
were on good terms, and was directed against something which was not the making
of Koya alone. One of the files seized admittedly belonged to a period before
Koya was made a director. It was the petitioner who had brought it down from
Kuwait. The contents of the typed sheet were equally against Koya and the
petitioner. Even on his own admission, the petitioner was actively
participating in the management of the company's affairs from 1973 to 1978. He
was operating the bank account from 1975 to 1978. He was attending office every
day and was getting a decent salary and bonus. He was carrying on correspondence
on behalf of the company. Exhibit A-3, balance-sheet, which accounted for the
income said to have been concealed, was signed by him long after the raid. I
refrain from saying anything more because the adjudication proceedings are
still pending, but it will certainly be unwise to bring about a parallel
investigation by the inspectors of the company department into a matter which
has already been enquired into by officers of the Enforcement Directorate, and
is now at the stage of adjudication. The investigation under s. 237 is into the
affairs of a company, and not into a specific illegal act which a company or
even an individual could commit.
Detriment to the company by
reason of Koya's interest in the rival firm also remains a bare allegation ; if
anything, the evidence is opposed to it. The company's business is to import
dates, and to export wood scantlings, coir products, spices and the like. P.W.
1 does not refer to the diversion by Koya of even a single item of import or
export. Before 1973, the company had very little export business ; the business
was practically confined to importing dates of the annual value of Rs. 5 lakhs.
This business continued in the same fashion till 1977, when the system of
"open general licence" was introduced, and it became less attractive.
Obviously, therefore, the import business had not suffered because of Koya's
induction. As for exports, this line of business had picked up only from 1973,
and the maximum amount of business was done in 1974. In 1975 and 1976, the
company got some expert orders, and these were executed by using the licence of
Koya's firm ; the company itself had no export licence. On the export side
also, therefore, the company had not suffered any difficulty because of Koya.
The petitioner knew, when Koya was brought in as director with his active
participation in February, 1973, that the "rival firm" was doing the
same business on a large scale, at least from 1958.
The respondent's case that
the petitioner's present approach to this court is the result of his annoyance
at the board resolutions reducing his remuneration and cancelling his power to
operate bank accounts, need not be minutely examined in view of what has been
stated above. It must, however, be noticed that the petitioner was a party to
Exs.A-1 and A-2, resolutions of 1973, whereunder Ahammed Yoosuff was made
managing director and Koya, the director-in-charge. On his own admission, the
officers of the Enforcement Directorate had reason to suspect his complicity in
the circumstances that led to the 1976 raid. The business of the company had
also not gone down because of Koya's rival interests ; and at any rate, the
petitioner was a full-time salaried director during the period in question.
Under these circumstances, it is difficult to assume that the accusations now
made in regard to these matters are all based on a bona fide apprehension about
the affairs of the company, and not influenced by an anxiety to grind one's own
axe. No circumstance have been brought to light to suggest that the business of
the company is being carried on for fraudulent or unlawful purposes or in a
manner oppressive of the minority, or that those in management (and the.
petitioner is admittedly one among them) have misconducted themselves towards
the company or its members.
I, therefore, dismiss the company petition, leaving the parties to bear their own costs.
[1983] 53 COMP. CAS. 493 (KER)
HIGH COURT OF KERALA
v.
Dig Vijay Chit Fund (P.) Ltd.
M. P. Menon J.
COMPANY PETITION NO. 23 OF 1978
July 1, 1980
M. Ramanatha Pillai for the Petitioners.
Mani J. Meenattoor for the Respondent.
M.P. Menon J.—This is a petition filed by the two members of the Dig
Vijay Chit Fund (P.) Ltd. under s. 237 of the Companies Act, 1956, for a
declaration that the affairs of the company require investigation by an
inspector appointed by the Central Govt.
The main business of the
company is in kuries and in money-lending. The first petitioner, along with six
other shareholders, had earlier filed a petition for winding up it, but that
was dismissed on the ground that they had other remedies, and that the prayer
for winding-up was unreasonable in the circumstances disclosed. The present is
a resort to one of the other remedies available.
The allegations in the
petition are broadly the following : The chief agent and the directors of the
company are utilising their position to oppress the other shareholders. The
chief agent and his relatives hold 72 shares and the directors control another
122. In April, 1972, the company fraudulently sold 64 shares, belonging to
seven members, who were not supporting the directors; and these shares were
purchased by the relatives of the directors and the chief agent. The group in
management has been misappropriating the company's funds, destroying valuable
records to cover up their misdeeds, causing loss to the company by declining to
proceed against debtors, and writing off bad debts after privately collecting
amounts from the concerned debtors. Some particulars relating to the alleged
misappropriation, destruction of records, etc., are furnished, and there is
also a general allegation that the company has been incurring losses as a
result of all the above.
The company has denied all
these allegations in its counter-affidavit. The 2nd petitioner has been
examined as P.W. 1 and Exs. A-1 to A-6 have been marked on the side of the
petitioners. The company has examined its present managing director as R.W. 1,
and marked Exs. B-1 to B-7.
Sections 235 to 246 of the
Companies Act, 1956, deal with the investigation of the affairs of a company.
Under s. 235, the Central Govt. is given power to appoint inspectors for the
purpose; and the power is to be exercised either on the application by members
or on the basis of a report by the Registrar under s. 234. Section 236 provides
that members applying under s. 235 should furnish evidence to show that they
have "good reason for requiring the investigation ". Clause (a) of s.
237 obliges the Central Govt. to arrange for an investigation when the company,
by special resolution, or the court, by order, declares that an investigation
is called for, while cl. (b) confers a discretion on the Government to do so
when the circumstances enumerated thereunder are found to exist. Sections 238
to 241 deal with inspectors, their powers and the report they have to make.
Sections 242 to 244 specify the follow-up measures the government could take on
the basis of the reports. Prosecution of persons found criminally liable,
moving the court for winding-up or for relief from oppression, and initiation
of misfeasance and other proceedings are some of the measures contemplated.
Section 245 provides for the expenses of investigation, and s. 246 declares
that the inspectors' reports shall be admissible as evidence in legal
proceedings. An analysis of the above provisions indicates that appointment of
inspectors is a matter in the discretion of the Govt. under s. 236, and also
cl. (b) of s. 237; but in cases governed by s. 237(a), the Government has a
duty to act. The machinery for inspection could be set in motion on the request
of members under s. 236, only when a certain percentage of the total number of
members apply; the Central Govt. cannot aet when the strength of those who
apply is below the minimum prescribed. But what about an application to the
court under s. 237(a)(ii)? Can the court order an investigation irrespective of
the number of members who seek to invoke its power ?
Section 237 does not in
terms speak of an application to be filed in court; but r. 11(a)(9) of the
Companies (Court) Rules, 1959, conceives of such an application. In Raghunath
Swarup Mathur v. Har Swamp Mathur [1970] 40 Comp Cas 282, the Allahabad High
Court observed thus (at p. 296):
"As the declaration
sought amounts to a direction to the Central Government, it should only be
granted either where a party, having applied to the Central Government for an
investigation, has failed despite sufficient grounds shown for it, or, when the
court finds that a proceeding before it, under either section 397 or section
398 of the Act, cannot satisfactorily terminate without such an
investigation".
But it appears from the
decision of the Delhi High Court in Delhi Flour Mills Co. Ltd., In re [1975] 45
Comp Cas 33, that a prior application to the Central Govt. under s. 236, or the
pendency of proceedings under ss. 397 and 398, are not conditions precedent for
exercising the court's power under s. 237(a)(ii). The Delhi case had arisen
from an application filed by a single shareholder; and it is also not Contended
before me that the numerical strength of the members, who move the court under
s. 237, should satisfy the minimum prescribed by s. 235.
The present proceedings are
only for the purpose of deciding whether the affairs of the company should be
looked into by the inspectors. And, according to counsel for the petitioners,
it is not necessary for his clients to prove their allegations before this
court; they could prove them before the inspectors. NO doubt, cl. (a)(ii) of s.
237 does not lay down what circumstances are to be proved before the court and
on what materials the court could act. But that does not mean that mere
allegations are sufficient. A court can act only on the materials placed before
it; and those materials should at least be such as to satisfy the court that a
deeper probe into the company's affairs is desirable in the interests of the
company itself. According to the Delhi High Court in Delhi Flour Mills Co.
Ltd.'s case [1975] 45 Comp Cas 33 (Delhi), noticed above, the materials should
be such as would result in proceedings being taken under ss. 242 to 244; no
investigation could be ordered merely because a shareholder feels aggrieved
about the manner in which the company's business is being carried on. The scope
of s. 237 was considered by me in C. P. No. 22 of 1978 decided on 29-1-1980. [P.
Sreenivasan v. Yoosuf Sugar Abdulla & Sons
(P.) Ltd. [1983] 53 Comp Cas 485 (Ker)], in the following terms (at p. 489):
"The section conceives
of three situations where the Central Government can appoint inspectors for
investigation. The first is when the company itself declares that such an
investigation is necessary. The second is when the court makes an order. And
the third is when, the Central Govt. forms an opinion that the circumstances
enumerated in cl. (b) exist. The first is easy to understand; when the company
itself wants an investigation, the Central Govt. need not stop to enquire why.
The third can also be understood because when suo motu action is proposed to be
taken by the Government, it shall not act arbitrarily, but only consistent with
the guidelines laid down. But what about the second situation, where the court
has to make an order? Mr. Ramanatha Pillai for the petitioner suggests that the
power and the discretion of the court are uncontrolled; it can direct an
investigation whenever it suspects that all is not well with the company.
Whether the apprehensions of the court are true or not is a matter to be found
by the investigating inspectors, and the court is not to insist on evidence. It
appears to me that this is too broad a statement. Investigation of the
company's affairs by the Department of Trade in England has always been
understood as a statutory exception to the rule in Foss v. Harbottle [1843] 2
Hare 461, that the internal affairs of a company is a matter for the majority,
and a dissatisfied minority cannot seek outside interference. The Companies Act
provides for the protection of minorities in three ways: (i) by giving them a
right to complain against oppression, (ii) by permitting them to act on behalf
of the company when it is wound up, as in the case of misfeasance proceedings,
and (iii) by enabling them to obtain remedies indirectly through investigation.
The court's discretion under section 237 is, therefore, to be exercised only
when it is satisfied that the minority has made out at least a prima facie case
that the rule in Foss v. Harbottle [1843] 2 Hare 461, requires relaxation in
the interests of the company. The Calcutta High Court has held in In re
Patrakola Tea Co. Ltd., AIR 1967 Cal 406, that before the company court orders
an investigation under section 237(a)(ii), the petitioner should make out a
strong case in relation to one or other of the matters referred to in clause
(b). In other words, the circumstances enumerated in clause (b) are material
for the exercise of the court's discretion also. The discretion is certainly a
judicial one and is to be exercised only when a minority acts in the interests
of the company as a whole".
It is in the above
background ,that I propose to examine the allegations made and the evidence
adduced herein.
As regards
misappropriation, two specific instances are referred to in para. 5 of the
petition. The first is that in 1971, the then managing dire-tor, Sri
Chandrasekharan, had drawn an amount of Rs. 3,000 from the "Anamath
account" when there was no deposit with the company in his name. The
company's answer in para. 8 of its counter-affidavit is that Mr.
Chandrasekharan had drawn an amount of Rs. 3,000 on September 23, 1971, when he
had a credit balance of only Rs. 602.99, but that he had subsequently made
deposits of Rs. 1,534 and Rs. 2,300 in November and December, 1971. The
correctness of this statement is not disputed in the petitioners' reply
affidavit. And a mere entry in the suspense account is not sufficient to
establish misappropriation. The concerned account books have not been called
for; and neither Mr. Chandrasekharan nor the person who made the entry has been
cited to explain it. No attempt has also been made to bring out what the powers
of the managing director were in matters of this kind. P. W. 1, who was himself
a managing director of the company for some time, made only a bare reference to
the entry in the course of his evidence; he did not even say that the amount was
misappropriated or lost to the company.
The second instance relates
to the compromise effected in O.S. 137/70, filed by the company against one
Francis for the recovery of Rs. 680; and the allegation is that the party had
produced a receipt showing that the amount had been paid personally to the
managing director, Mr. Namboodiri-pad, and that the suit was compromised
without crediting the amount in the company's accounts. But the documents
produced tell a different tale. Exhibit B-1 dated November 16, 1970, discloses
that P.W. 1, who was then the managing director of the company, had authorised
R.W. 1, who was then its secretary, to compromise the suit, though the party
had produced a "false receipt". Exhibit B-3 shows that an amount of
Rs. 498 was credited in P.W. 1's suspense account with the company on the next
day. According to R.W. 1, the party had produced in court a false receipt and
when he was threatened with criminal action, he offered to settle the matter by
paying Rs. 500. The matter was settled with the concurrence of P.W. 1 and the
amount (less Rs. 2 for expenses) was credited in his suspense account as per
Ex. B-3, pending filing of a compromise petition before the court. Exhibit A-2
is a certified copy of the compromise petition filed on November 6, 1971, and
Ex. A-1 is a compromise decree. The petitioners' case that Sri Namboodiripad
had received payment and issued a receipt and that the suit was compromised
when this was brought to light, does not stand scrutiny in the light of the
admitted circumstance that P.W. 1 himself was aware that the receipt was a
false one and that the compromise was effected on the footing that it was not
genuine. Misappropriation is a serious matter, and the evidence available is
insufficient to establish even a prima facie case.
The allegations relating to
destruction of records and the fraudulent transfer of the 64 shares were not
pursued at the time of hearing. P.W. 1 did not in his evidence even make
mention about the destruction of any records; and a suggestion thrown at R.W. 1
during his cross-examination about "removal" of records was promptly
denied. The same is the position regarding the 64 shares said to have been
fraudulently transferred.
The next allegation relates
to the writing off of Rs. 22,074 and Rs. 14,476, respectively, as bad debts, in
the profit and loss account marked as Exs. A-4 and A-5; and the case attempted
to be made out is that the directors and the chief agent had actually received
payment of the amounts and had thereafter attempted to cover up the
misappropriation by making it appear that they were bad debts. Exhibits A-4 and
A-5 do show that the amounts were written off; but there is nothing but the
assertion of P.W. 1 to suggest that any officer of the company had actually
received payments as alleged. P.W. 1 stated in cross-examination that the
amounts written off included Rs. 800 due from one Sachidanandan, Rs. 750 from
Ummer, Rs. 600 from Ayyappan and Rs. 700 from Madhavan; but Sachidanandan alone
had told him that he had paid the amount to the company. P.W. 1 had no other
knowledge or information about the alleged payments. The company's case, on the
other hand, is that the amount written off in Ex. A-4 represents arrears of
kuri collections and amounts due under promissory notes from over 400 persons,
considered as irrecoverable. The company had conducted more than 100 chitties
and made a large number of other advances; and some amounts were being written
off from time to time. Exhibit B-4, the minutes book, indicates that the amount
was written off as per Board's resolution dated November 9, 1973. Exhibit A-4,
the audited accounts, must have been approved by the general body also. That
apart, the list of bad debts referred to in the Board's resolution is Ex. B-5
and it contains particulars of 446 debts due from chit subscribers, the amounts
varying from Rs. 2.50 to Rs: 118. Sachidanandan's name is not there, and no
debt exceeding Rs. 118 is seen written off. The debts in Ex. A-5 were also written
off by a Board's resolution, and, according to R.W. 1, those were amounts due
from employees (bill collectors), who were going about making collections. They
had left the services of the company and they had no assets. It is usual for
men in a business of this type to periodically write off irrecoverable debts.
In the present case, it was done by resolutions duly passed by the Board, and
obviously approved by the general body of members. The accounts were duly
audited and filed with the Registrar. The evidence is totally insufficient to
raise even a serious suspicion that anything else had been done.
The only other point raised
is that the company has been incurring loss year after year; but no
investigation could be ordered unless that result is linked with fraud,
misfeasance, mismanagement, oppression and the like. The loss might be an
ordinary business risk: It may be noticed that the company's paid up capital
and membership have risen by at least one hundred per cent between 1976 and
1978. The petitioners are only two out of 1,312 members. The company has also a
case that the first petitioner is the wife of a dismissed employee and that the
2nd is annoyed by a notice demanding payment of some amounts due from him. It
is unnecessary to go into this aspect because, even otherwise, the attempt of
the petitioners has only been to show that something suspicious had taken place
between 1971 and 1975.
In, my view, therefore, no case for the issue of a direction under s. 237(a)(ii) is made out, and the petition has to fail. It is accordingly dismissed, but without any order as to costs.