Section 233B
Cost
Audit
[2002] 38 scl 741 (
v.
Union of
DR.
MUKUNDAKAM SHARMA, J.
CIVIL WRIT PETITION NOS. 3393 AND 4789 OF 2000
Section 233B of the Companies Act, 1956 - Cost Audit - Whether when statute provides that a power is to be exercised by Central Government, said power must be exercised by statutory authority who is empowered to exercise said power in a manner which is not arbitrary or unreasonable, after taking into consideration all relevant factors, and while doing so if it is found by said authority that no approval could be granted as sought for, it would have also power to disapprove proposal which is inherent in empowerment itself - Held, yes - Proposal for appointment of petitioner as cost auditor in terms of section 233B was disapproved by Central Government on ground that a complaint had been filed by Government against petitioner before Institute of Cost and Works Accountants of India under section 21 of the Cost and Works Accountants Act, 1959 as petitioner had failed to submit audit report of said company in spite of specific instructions of Government to do so - Complaint was still pending - Whether action of Central Government in refusing to approve said proposal could be said to be arbitrary or unreasonable and, hence, had to be upheld - Held, no
The petitioner was a fellow member of the
A conjoint reading of the provisions of
sections 224 and 233B would make it crystal clear that unlike the audit of
financial accounts of the company which is required to be conducted annually by
appointing an auditor in terms of section 224, audit of cost accounts is not a
regular annual feature. When the Central Government in its discretion directs
cost audit of a company by a cost accountant, then the provisions of section
233B become applicable. It is explicit from the wording of the provisions of
section 233B that the audit of cost accounts is to be in addition to the audit
of financial accounts by a statutory auditor appointed under section 224 or
224(a), as the case may be. The said provision of section 233B provides that
pursuant to the directions of the Central Government when issued in this
behalf, a cost auditor is to be appointed by the board of directors of the
company with the prior approval of the Central Government. Such a cost auditor
appointed under section 233B shall have the same powers and duties in relation
to the audit of cost accounts as are provided to the statutory auditors under
section 227. It is specifically laid down that such cost auditor is to be
appointed with the prior approval of the Central Government. Such a power
definitely envisages not only a power of approval but in an appropriate case
even the power to disapprove. When the statute provides that a power is to be
exercised by the Central Government, the said power must be exercised by the
statutory authority who is empowered to exercise the said power in a manner
which is not arbitrary or unreasonable, after taking into consideration all the
relevant factors. While doing so if it is found by the said authority that no
approval could be granted as sought for, it would have also the power to
disapprove the proposal which is inherent in the empowerment itself.
In the instant case, when a proposal was sent
by respondent No. 3 for appointment of the petitioner as its cost accountant in
terms of section 233B, neither the provisions of section 224 were attracted nor
was the Central Government statutorily bound to accord its approval to the said
proposal.
A discretion definitely vested on the Central
Government to examine the records and to satisfy itself whether the said
proposal satisfied all the requirements and met the norms and in case there was
any impediment in appointing such a person as a cost accountant, the Central
Government had the discretion and also the power to reject or to disapprove the
proposal of respondent No. 3. The said power of disapproval is inherent on the
Central Government, if in the facts and circumstances of a particular case, it
is of the opinion that no such approval could be granted because of the given
circumstances. In the instant case, the proposal was not approved on the ground
which was specifically stated in the counter-affidavit by respondent Nos. 1 and
2. The complaint against the petitioner was still pending for disposal and,
therefore, the action of the respondents in refusing to approve the proposal of
respondent No. 3 could not be said to be arbitrary or unreasonable.
Accordingly, the petition was to be dismissed.
Dr. A.K. Mishra and H.B. Mishra for the Petitioner. Jayant
Bhushan for the Respondent.
Sharma, J. - As the facts and the issues involved are similar in nature, I proceed to
dispose of both the writ petitions by this common judgment/order.
2. The
petitioner herein is a fellow member of the
3. Respondent Nos. 1 and 2 have filed their counter-affidavit contending,
inter alia, that a complaint has been filed by the Government of India
(Department of Company Affairs) against the petitioner before the Institute of
Cost and Works Accountants of India, Calcutta, in December, 1998, under section
21 of the Cost and Works Accountants Act, 1959, in connection with his
professional misconduct during his appointment as cost auditor of Continental
Paper Ltd. The allegation is that the petitioner had failed to submit the audit
report of the said company in spite of specific instructions from the
Government to do so. The said complaint is pending disposal and in that view of
the matter, particularly in view of the professional misconduct committed by
the petitioner, no approval was granted to the proposal of respondent No. 3.
4. The Counsel appearing for the petitioner, during the course of his
submissions submitted that the said impugned order is arbitrary and devoid of
any reason and, therefore, it is required to be set aside. He drew my attention
also to the provisions of section 224 and section 233B of the Act and on the
basis thereof submitted that no discretion is vested in the Central Government
to refuse to give approval to the proposal of the company, namely, respondent
No. 3 in respect of appointment of the cost accountant. According to him, the
provisions of section 224 are applicable to the facts and circumstances of the
case and in terms of the aforesaid provision there is a mandate on the Central
Government to act positively on the proposal sent by the company to the Central
Government and, therefore, in the instant case the decision of respondent Nos.
1 and 2 of not giving approval to the proposal of the company is bad in law and
is liable to be set aside.
5. The counsel appearing for the respondent, however, refuted the aforesaid
allegations and submitted that the relevant provision which is applicable to
the facts and circumstances of the case is section 233B and, therefore, while
judging the validity of the impugned order, the only relevant provision which
is required to be looked into is the provision of section 233B. He also
submitted that when a power of approval is vested in the Central Government, it
also encompasses within its ambit a power to disapprove and a discretion is
vested on the Central Government to refuse to give the approval on reasonable
and valid grounds. He submitted that the ground on which the said approval was
not given is spelt out from the counter-affidavit filed by respondent Nos. 1
and 2 and, according to him, the said grounds are valid grounds for not
according approval to the proposal of respondent No. 3.
6. In the light of the aforesaid submissions, I have perused the records
placed before me. Counsel appearing for the petitioner drew my attention to the
proposal submitted by the respondent No. 3 for appointment of the petitioner as
cost auditor for the periods ending on 31-3-1999 and 31-3-2000. He
particularly, referred to clause 7 of Form No. 23C which was sent on behalf of
respondent No. 3 recommending the name of the petitioner and seeking approval
of his name as the cost accountant of respondent No. 3. In the aforesaid clause
7 as against the query as to whether the cost auditor is subjected to any
disqualification under section 233B, the company, namely, respondent No. 3 has
specifically indicated that no disqualification has been earned by the
petitioner as a cost auditor. Relying on the same he submitted that under the
provisions of section 224, the petitioner should have been appointed as the
cost auditor of the company. He also submitted that the word used in the said
provisions of section 224 is ‘shall’ and, therefore, it is mandatory for the
Central Government to accord approval to the proposal of respondent No. 3 as it
is.
7. I have considered the said provision of section 224 which relates to the
procedure for appointment of auditors. Such auditors are appointed by
respondent No. 3 either in its annual general meeting or by its board of
directors, as the case may be. The provisions of section 233B, on the other
hand, deal with the power of the Central Government to direct external audit of
a particular company by cost accountants. A conjoint reading of the aforesaid
two provisions would make it crystal clear that unlike the audit of financial
accounts of the company which is required to be conducted annually by
appointing an auditor in terms of section 224, audit of cost accounts is not a
regular annual feature. When the Central Government, in its discretion directs
cost audit of a company by a cost accountant, then the provisions of section
233 become applicable. It is explicit from the wording of the provisions of
section 233B that the audit of cost accounts is to be in addition to the audit
of financial accounts by a statutory auditor appointed under section 224 or
224(a) as the case may be. The said provision of section 233B provides that
pursuant to the directions of the Central Government when issued in this
behalf, a cost auditor is to be appointed by the board of directors of the
company with the prior approval of the Central Government. Such a cost auditor
appointed under section 233B shall have the same powers and duties in relation
to the audit of cost accounts as are provided to the statutory auditors under
section 227 of the Act. It is specifically laid down that such cost auditor is
to be appointed with the prior approval of the Central Government. Such a power
definitely envisages not only a power of approval but in an appropriate case
even the power to disapprove. When the statute provides that the power is to be
exercised by the Central Government, the said power must be exercised by the
statutory authority who is empowered to exercise the said power in a manner
which is not arbitrary or unreasonable, after taking into consideration all the
relevant factors. While doing so if it is found by the said authority that no
approval could be granted as sought for, it would have also the power to
disapprove the proposal which is inherent in the empowerment itself. In the
present case, when a proposal was sent by respondent No. 3 for appointment of
the petitioner as its cost accountant in terms of section 233B, neither the
provisions of section 224 of the Companies Act were attracted nor was the
Central Government statutorily bound to accord its approval to the said
proposal.
8. In my considered opinion a discretion
definitely vested on the Central Government to examine the records and to
satisfy itself whether the said proposal satisfies all the requirements and
meets the norms and in case there is any impediment in appointing such a person
as a cost accountant, the Central Government had the discretion and also the
power to reject or to disapprove the proposal of respondent No. 3. The said
power of disapproval is inherent on the Central Government, if on the facts and
circumstances of a particular case, it is of the opinion that no such approval
could be granted because of the given circumstances. In the present case, the
proposal was not approved on the ground which is specifically stated in the counter-affidavit
by respondent Nos. 1 and 2. The ground indicated is that a complaint has been
filed by the Government (Department of Company Affairs) against the petitioner
before the Institute of Cost and Works Accountants of India under section 21 of
the Cost and Works Accountants Act, 1959, as the petitioner had failed to
submit the audit report of the said company in spite of specific instructions
of the Government to do so. As of today, the aforesaid complaint is pending for
disposal and, therefore, the action of the respondents in refusing to approve
the proposal of respondent No. 3 could not be said to be arbitrary or
unreasonable. Besides, the said proposal was for the period ending on 31-3-1999
and 31-3-2000. The proposal was not approved and, therefore, in the meantime,
fresh proposal must have been sent and cost accountant in terms of section 233B
must have been appointed by respondent No. 3. Accordingly, I find no merit in
these petitions and the same stand dismissed.
[1983]
53 COMP. CAS. 454 (
HIGH COURT OF
v.
Union of
S.B. WAD J.
CIVIL WRIT PETITION NO. 2397 OF 1981 CONNECTED WITH CWPS. NOS. 2398 AND 1085 OF 1982 AND CCPS. NOS. 110 AND 111 OF 1981.
AUGUST 23, 1982
M.C. Bhandare,
Shardul S. Shroff and Mrs. Pallavi Shroff for the Petitioner.
D.P. Wadhwa and Madan Lokur for
the Respondents.
S.B.
Wad J.—The petitioner is a
reputed firm of cost auditors with a standing of about 40 years. The Company Law
Board by its decision dated November 18, 1980, took the following decision
imposing restrictions on the number of cost audits that can be entrusted to a
cost auditor/ a firm of cost auditors :
"The
number of cost audits to be allowed per cost auditor per annum should be
restricted to 30 instead of 20 as suggested by the Council. Since cost audit is
ordered for a product manufactured by a company, the number of audits should be
reckoned with reference to each product for which a report is submitted. Further,
if the product is manufactured in more than one unit of a company, the report
in respect of each unit will be treated as one cost audit for the purpose of
reckoning the above limit.
The above
limit will be made applicable from the calendar year 1-1-1981 and will apply to
those units whose year ending falls within the period".
The said
decision of the CLB was published in the publication of the Council of the
The impugned
decision is challenged by the petitioner on the following grounds:
(a) that
the said decision is ultra vires the provisions of s. 233(b) and s. 637 A of
the Companies Act;
(b) that
the impugned decision is arbitrary and capricious; and
(c) that the said decision violates the
fundamental rights of the petitioner as guaranteed by art. 19(1)(g) of the
Constitution.
The
respondents justify the decision as a step for promoting efficiency and
dispersal of the cost audit work with a view to prevent monopoly. The
respondents submit that the restrictions were because of the complaints of
concentration of work received by the Council. It is then submitted that the
statutory body of the cost auditors, namely, the
In 1959,
Parliament passed the Cost and Works Accountants Act (Act 23 of 1959). The
object of the enactment was "to make provision for the regulation of the
profession of Cost and Works Accountants". A person who possesses the
requisite academic qualifications and training as prescribed by the Institute
can register himself as a cost accountant with the Institute. Under s. 6 of the
Act no member of the Institute shall be entitled to practice, whether in
We may now
note the relevant provisions of the Companies Act in this regard;
"209.
(1)(d) In the case of a company pertaining to any class of companies engaged in
production, processing, manufacturing or mining activities, such particulars relating
to utilisation of material or labour or to other items of cost as may be
prescribed, if such class of companies is required by the Central Government to
include such particulars in the books of account".
"224.
(1) Every company shall, at
each annual general meeting, appoint an auditor or auditors to hold office from
the conclusion of that meeting until the conclusion of the next annual general
meeting and shall, within seven days of the appointment, give intimation
thereof to every auditor so appointed.
(1A) Every auditor appointed under sub-section
(1) shall, within thirty days of the receipt from the company of the intimation
of his appointment, inform the Registrar in writing that he has accepted, or
refused to accept, the appointment.
(1B) On and from the financial year next
following the commencement of the Companies (Amendment) Act, 1974, no company
or its Board of Directors shall appoint or reappoint any person or firm as its
auditor if such person or firm is, at the date of such appointment or
re-appointment, holding appointment as auditor of the specified number of
companies or more than the specified number of companies.
(1C) For the purposes of enabling a company to
comply with the provisions of sub-section (1B), a person or firm holding, immediately
before the commencement of the Companies (Amendment) Act, 1974, appointment as
the auditor of a number of companies exceeding the specified number, shall,
within sixty days from such commencement, intimate his or its unwillingness to
be re-appointed as the auditor from the financial year next following such
commencement, to the company or companies of which he or it is not willing to
be re-appointed as the auditor; and shall simultaneously intimate to the
Registrar the names of the companies of which he or it is willing to be
re-appointed as the auditor and forward a copy of the intimation to each of the
companies referred to therein".
"233B.
(1) Where in the opinion of
the Central Government it is necessary so to do in relation to any company required
under clause (d) of sub-section (1) of section 209 to include in its books of
account the particulars referred to therein, the Central Government may, by
order, direct that an audit of cost accounts of the company shall be conducted
in such manner as may be specified in the order by an auditor (who shall be a
cost accountant within the meaning of the Cost and Works Accountants Act, 1959
(23 of 1959)
Provided that
if the Central Government is of opinion that sufficient number of cost
accountants within the meaning of the Cost and Works Accountants Act, 1959, are
not available for conducting the audit of the cost accounts of companies
generally, that Government may, by notification in the Official Gazette, direct
that, for such period as may be specified in the said notification, such
Chartered Accountants within the meaning of the Chartered Accountants Act, 1949
(38 of 1949), as possesses the prescribed qualifications, may also conduct the
audit of the cost accounts of companies, and thereupon a Chartered Accountant
possessing the prescribed qualifications may be appointed to audit the cost
accounts of the company.
(2) The auditor under this
section shall be appointed by the Board of directors of the company with the
previous approval of the Central Government.
(3) An audit conducted by
an auditor under this section shall be in addition to an audit conducted by an
auditor appointed under section 224.
(4) An auditor shall have
the same powers and duties in relation to an audit conducted by him under this
section as an auditor of a company has under sub-section (1) of section 227 and
such auditor shall make his report to the Central Government in such form and
within such time as may be prescribed and shall also at the same time forward a
copy of the report to the company.
(5)
(a) A person referred to in
sub-section (3) or sub-section (4) of section 226 shall not be appointed or
re-appointed for conducting the audit of the cost accounts of a company.
(b) A person appointed,
under section 224, as an auditor of a company, shall not be appointed or
re-appointed for conducting the audit of the cost accounts of that company.
(c) If a person, appointed
for conducting the audit of cost accounts of a company, becomes subject, after his
appointment, to any of the disqualifications specified in clause (a) or clause
(b) of this sub-section, he shall, on and from the date on which he becomes so
subject, cease to conduct the audit of the cost accounts of the company.
(6) Upon receipt of an
order under sub-section (1), it shall be the duty of the company to give all
facilities and assistance to that person appointed for conducting the audit of
the cost accounts of the company.
(7) The company shall,
within thirty days from the date of receipt of a copy of the report referred to
in sub-section (4), furnish the Central Government with full information and
explanations on every reservation or qualification contained in such report.
(8) If, after considering
the report referred to in sub-section (4) and the information and explanations
furnished by the company under sub-section (7), the Central Govervment
is of opinion that any further information or explanation is necessary, that
Government may call for such further information and explanation and thereupon
the company shall furnish the same within such time as may be specified by that
Government.
(9) On receipt of the report referred to in sub-section (4) and
the informations and explanations furnished by the company under sub section
(7) and sub-section (8), the Central Government may take such action on the
report, in accordance with the provisions of this Act or any other law for the
time being in force, as it may consider necessary.
(10) The Central Government may direct the company whose cost accounts have been audited under this section to circulate to its members, along with the notice of the annual general meeting to be held for the first time after the submission of such report, the whole or such portion of the said report as it may specify in this behalf.
(11) If default is made in complying with the provisions of this section, the company shall be liable to be punished with fine which may extend to five thousand rupees, and every officer of the company who is in default, shall be liable to be punished with imprisonment for a term which may extend to three years, or with fine which may extend to five thousand rupees, or with both".
"637A.
(1) Where the (Central Government or Company Law Board) is
required or authorised by any provision of this Act,—
(a) to accord approval, sanction, consent, confirmation or recogni tion to or in relation to, any matter;
(b) to give any direction in relation to any matter; or
(c) to
grant any exemption in relation to any matter, then, in the absence of anything
to the contrary contained in such or any other provision of this Act, the
(Central Government or Company Law Board) may accord, give or grant such
approval, sanction, consent, confirmation, recognition, direction or exemption
subject to such conditions, limitations or restrictions as it may think fit to
impose and may, in the case of contravention of any such condition, limitation
or restriction, rescind or withdraw such approval, sanction, consent,
confirmation, recognition, direction of exemption".
"637AA. Notwithstanding anything contained in
section 198, section 309 or section 637A, the Central Government may, while
according its approval under section 269, to any appointment or to any
remuneration under section 309, section 310, section 311 or section 187, fix
the remuneration of the person so appointed or the remuneration, as the case
may be, within the limits specified in this Act, at such amount or percentage
of profits of the company, as it may
deem fit and while fixing the remuneration, the Central Government shall have
regard to—
(a) the
financial position of the company;
(b) the remuneration or commission drawn by the
individual concerned in any other capacity, including his capacity as a sole
selling agent;
(c) the
remuneration or commission drawn by him from any other company;
(d) professional
qualifications and experience of the individual concerned;
(e) public
policy relating to the removal of disparities in income".
By the
Companies (Amendment) Act, 1965, s. 209(1)(d) and s. 233B were added to the
Companies Act. The Central Govt. can now direct a class of companies engaged in
production, manufacturing, etc., to keep accounts relating to the utilisation
of material or labour or to other items of costs as may be prescribed. The
Central Govt. can direct cost audit of the companies for which the accounts are
required to be maintained as stated above. By the Companies (Amendment) Act,
1974, a new proviso was added to s. 224(1). Sub-sections (2)(d) and (1C) were
also added. The object of the amendments was to limit the number of audits for
each auditor or firm of auditors. It is an admitted fact that the prescribed
limits of audits is twenty. Simultaneously a proviso was added to s. 233B
regarding the cost audit permitting the chartered accountants to carry out cost
audits also. The Central Govt. could permit the chartered accountants to
undertake the cost audit if it forms the opinion that a sufficient number of
cost accountants were not available.
Relying on
these provisions, the petitioner argues that there is no provision in s. 233B
similar to s. 224(1B) to impose any restriction on the number of cost audits
which can be undertaken by a cost auditor. Since there is no provision in the
enactment, the impugned decision is ultra vires of s. 233B. The Central Govt.,
on the other hand, claims that they can impose such restrictions by virtue of a
general power vested in the Central Govt. or the CLB under s. 637A of the Act.
The reply of the petitioner is that the general power of s. 637A cannot be
invoked by the Central Govt. unless the principal and substantive provision of
the Act allegedly requiring an action under s. 637A expressly permits any such
limitation. On a closer scrutiny of the relevant section, the petitioner's
submission has to be upheld.
Power to
impose restrictions, limitations or conditions under s. 637A was available for
the Central Govt. in respect of chartered accountants all the time. A question
can legitimately be posed as to why in 1974 Parliament found it necessary to
expressly amend s. 224 so as to permit the Central Govt. to impose
restrictions on the number of audits. Section 233B relating to the cost audits
was also amended in 1974. Why was it that Parliament did not find it necessary
to amend the said provision permitting the Central Govt. to impose restrictions
on the number of cost audits ? It is clear that Parliament thought that unless
an express power is conferred by statute, the Central Govt. has no such power.
In its own wisdom Parliament also thought that no such restriction was
necessary for cost accounting and for that reason no power need be conferred on
the Central Govt. to impose restrictions on the number of cost audits. Further,
there is intrinsic evidence of the intention of Parliament not to impose any
such restriction on the number of cost audits. The proviso to s. 233B,
simultaneously introduced in 1974, makes this position clear. What Parliament
found was that the problem of the profession of cost accountants was not of
surplus but was one of shortage, unlike the profession of chartered
accountants. Because of this special problem concerning the profession of cost
auditors, the Central Govt. was empowered to permit the chartered accountant to
conduct the cost audits (provided they hold required qualifications). The power
conferred on the Central Govt. in regard to chartered accountants and the cost
accountants, by the said provisions of Companies Act, are of diametrically
opposite connotation. It is further clear that for imposing any restriction on
the quantum of the professional activity there must be a legislative sanction.
The Executive cannot operate of its own and tread on the field of the
Legislature. Respondents have tried to justify the impugned order relying on
sub-ss. (1B) and (1C) of s. 224. But the argument ignores the express language
of the two sections, the legislative intent and the social realities of the two
professions.
Does s. 637A improve the position of the respondents
? I think not. Section 637 cannot be pressed into service unless the provisions
of the Companies Act require or authorise the Central Govt. or the Company Law
Board to accord the approval, sanction, etc. In other words, such approval,
sanction, etc., is a pre-condition to the exercise of power under s. 637A.
Power to impose a condition, limitation or restriction cannot be understood
without analysing the provisions of the Act requiring the approval, sanction,
etc., the scheme of the said provision in the Act, and the object of such
provision. A reference to the principal and substantive provisions of the Act
requiring approval and sanction is also necessary because there might be
something "contrary" to the idea of condition, limitation and
restriction in the language of tbe section or other provisions of the Act. In
this sense the provisions of s. 637A are neither autonomous nor omnipotent. As
stated above, the key to understand s. 233B is in its proviso. The proviso
distinctly states an intention contrary
to that of limitations and restrictions on the quantum of audit. If the
profession of cost auditors was overcrowded there would not have been any
necessity for permitting chartered accountants also to conduct cost audits. The
Legislature was aware that a sufficient number of cost accountants was not,
available, In other words, all the available cost auditors had enough work. In
fact the assumption is that the work is more than what the available number of
cost accountants would be able to do. The proviso to s. 233B, introduced in
1974 by the same amendment by which the restriction on number of audits was
introduced in s. 224, unambiguously expresses the intention of the Legislature
contrary to the idea of any restriction or limitation. Section 637A will have,
therefore, no application and cannot be utilised by the Central Govt. or by the
CLB to take the power which is not conferred upon them by the Companies Act.
The impugned decision is wholly ultra vires the provisions of the Companies
Act. Since the restriction of audits to 30 audits is not lawful, the basis and
mode of calculation of 30 audits, namely, "each product" of the
company and each unit of the company, where the product is manufactured in more
than one unit, is also illegal.
The
respondents, however, submit that the decision of the Supreme Court in CLB v.
Upper. Doab Sugar Mills Ltd. [1977] 47 Comp Cas 173; AIR 1977 SC 831, supports
the restrictions of thirty audits imposed by the impugned order. In that case,
the respondent-company had sought approval of the CLB under s. 269(1) of the
Act for the appointment of two managing directors after the coming into force
of the Companies Act, 1956. The CLB gave the approval subject to a condition
that the total remuneration of each managing director by way of commission and
salary shall not exceed Rs. 1,20,000 per annum. This restriction on the quantum
of commission a ad salary was challenged by the company. It was argued before
the Supreme Court that s. 198 and sub-s. (3) of s. 309 are special provisions
regarding the remuneration of the directors and, therefore, s. 269 and s, 637A
cannot be invoked to justify the said restriction. On an analysis of s. 198 and
sub-s. (3) of s. 309, the Supreme Court came to the conclusion that the said
sections deal with an entirely different situation of the managing directors
having been appointed earlier to the Act and continuing after the coming into
force of the Companies Act, 1956. The said two directors were appointed for the
first time after the said Act came into force. The Supreme Court set aside the
decision of this court which was in favour of the respondent-company and
dismissed the appeal of the respondent. It may be seen that there is no
analysis of the contents and amplitude of the powers under s. 637A. This may be
because no such argument was advanced before the Supreme Court. The challenge,
it appears, was a limited
challenge. Section 269, according to the respondent, in that case, does not
speak of the remuneration of the managing directors. Therefore, while giving
approval under s. 269, the CLB could not restrict the remuneration since it was
beyond the intendment of s. 269. The two other sections were referred to by the
company in order to demonstrate, by contrast, the said intendment. I do not
think that the said decision of the Supreme Court helps the Central Govt. or
the CLB. If we closely examine the approach of the Supreme court it is apparent
that the Supreme Court had looked to the nature of the restriction, the
situation in which it is detailed in the section and the object of the
provisions in question. There are numerous sections in the Companies Act where
approval, sanction or directions can be given by the Central Govt. or the CLB.
Right from the birth of a company and its name to its dissolution, and the
innumerable aspects of constitution, functions and working of the company are
regulated through the powers of approval, sanction, directions, etc. Each case,
therefore, calls for a separate consideration. The decision of the Supreme
Court, to my mind, would not salvage the respondent in the imposition of
restriction on the number of cost audits.
The
petitioner has also challenged the impugned order as being violative of the
right to carry on a profession, guaranteed by art. 19(1)(g) of the
Constitution. It is admitted by the counsel of the
The Cost and Works Accountants Act was passed in
1959, with an object to make provision for the "regulation of the
profession of costs and works accountants". Broadly speaking, the Act lays
down the qualifications required for a cost accountant to practise his
profession and to enforce the discipline of professional ethics. Where a profession
is so regulated by parliamentary legislation a moot question arises. Is the
right to practise created by the statute or is it merely regulated by the
statute ? If the right is entirely a creation of the statute, it can be argued
that it is not a fundamental right. If it is created by a statute then the
challenge is a limited challenge. It must be demonstrated that the provisions
of the statute are unconstitutional. But if the unconstitutionally cannot be
established, the only challenge open to the petitioner is to show that an
administrative restriction is ultra vires the statute. If, however, the statute
merely regulates a profession but does not create the right to practise the
profession, the petitioner can challenge the given restriction both on the
grounds of vires of the statute and as an unreasonable restriction on the
fundamental right. This question is of great significance to all the
professions, such as that of advocate, medical practitioner, architect, etc.
Most of these professions are now regulated by statutory regulations. Article
19(1)(g) of the Constitution guarantees to every citizen a right to practise
any profession or to carry on any occupation, trade or business. Article 19(6)
empowers the State to make a law prescribing professional or technical
qualifications necessary for practising any profession or to carry on any
occupation, trade or business. In other words, if a law passed by Parliament
imposes restrictions relating to professional and technical qualifications for
practising a profession that will be a reasonable restriction permitted by the
Constitution. Most of the enactments regulating professions passed after the
adoption of the Constitution, prescribed the professional and technical
qualification for practising these professions, Parliament has kept in mind the
ambit of the power of the State mentioned in art. 19(6) to impose restrictions
in the nature of professional and technical qualifications. The restriction
imposed on a profession can be reasonable and hence constitutional if two
conditions are satisfied—(1)the restriction must be imposed by law, and (2) the
restriction should be only in the nature of professional or technical
qualifications. If the restrictions imposed are not imposed by law or if they
are of the nature different from the professional or technical qualifications,
the restrictions would be unreasonable and unconstitutional.
The preamble and the statement of objects and reasons
expressly state that this enactment is made for "regulating" the
profession. In fact, the petitioner had started his profession in 1948, eleven
years before the Act was passed.
The restriction of 30 audits imposed by the impugned decision is net imposed by
the Costs and Works Accountants Act, 1959, or the regulations framed under the
said Act. They are. purported to be imposed by virtue of the powers under s.
233B of the Companies Act. The restriction imposed is for the purposes of the
Companies Act. Can it be said that the impugned restriction does not directly
violate any fundamental right but only incidentally and remotely impinges upon
it? No, the effect is direct and proximate in view of the admission of the
Council itself. In its affidavit dated December 26, 1981, the Council has
stated :
"The main business of these practising cost
accountants today is to carry out cost audit under section 233B of the
Companies Act, as there is very little scope of practice outside this
field".
It is, therefore, vulnerable to challenge of
violation of fundamental right. The fact that sufficient number of chartered
accountants are not available in the profession, noted by the legislature in s.
233B, has a direct relevance. The freedom to practise a profession can be
curtailed by law and not by an executive decision of the CLB. In recognition of
this principle sub-s. (1B) was added to s. 224 in regard to chartered
accountants by the amending Act of 1974. Since the restriction is imposed in
the present case by a mere executive order, the restriction is
unconstitutional. The limitation on the quantum of work, namely, 30 audits,
cannot by any stretch of imagination be described as a professional or
technical qualification envisaged by art. 19(6)(i). The technical and
professional qualifications for registration as a cost auditor are laid down by
regln. 29 of the Costs and Works Accountants Regulations, 1959, framed by
virtue of the powers given to the Council under the Act. Details of syllabi for
the examinations and practical training are also laid down by the said
Regulations. The Regulations do not put any restriction on the quantum of work
that can be undertaken by a cost auditor. The impugned decision is
unconstitutional on this ground also. The said decision violates the
fundamental right of the petitioner guaranteed by art. 19(1)(g).
The impugned decision is further faulted by the petitioner on the ground of arbitrariness and breach of art. 14 of the Constitution. The justification of the respondents in taking the present decision is that the work of cost accountants is monopolised in the hands of a few persons and the dispersal of the work is in the interest of the profession. The approval by the statutory council is also relied upon to show that there is no arbitrariness in the decision. The respondents claim that the said restriction is necessary in order to get the cost audits done within the time prescribed by the Act and for securing effciency of performance. It is submitted by the respondent that there are about 500 auditors and the Government orders about 1,200 to 1,600 audits every year. By a simple arithmetical calculation a cost auditor does not get more than three audits every year. Annexure R-5 filed by the respondents (with the counter-affidavit) gives a summary of the audits conducted in 1981. It is as tinder :
|
A Unit Range |
No. of Cost Auditors
|
||
|
Below 5 |
123 |
||
|
6 — 10 |
12 |
||
|
11—20 |
6 |
||
|
20 and above |
2 |
||
|
|
|
Total: 143 |
|
|
B Remuneration Range |
No. of Cost Auditors
|
||
|
Below 25,000 |
120 |
||
|
25,001—50,000 |
13 |
||
|
50,000—1 lakh |
7 |
||
|
Above 1 lakh |
3 |
||
|
|
|
Total : 143 |
|
The summary demonstrates, according to the
respondents, the uneven dispersal of work of cost audits. Two cost auditors have
done more than twenty audits in the year and the income of three cost auditors
is over a lakh of rupees each but 123 auditors have done less than five audits
in a year and their income is below Rs. 25,000.
The petitioners have repelled this justification
through a number of . submissions. It is argued that the considerations of the
so-called monopoly and dispersal of work are alien to the basic concept of a
profession. Unlike business, the profession is characterised by personal
competence and relationship of confidence between the client and the
professional practitioner It is also emphasised that under the Act it is a
company which appoints a cost auditor. Cost accountant's work is not limited
merely to the components of costs, namely, labour, raw material, etc. The
process of manufacture and special techniques of manufacture must be understood
by the cost auditor before he presents the cost picture to a company. Process
of manufacture and special techniques applied by the manufacturer are highly
secret information. Different industries have different fields of
specialisation and a cost auditor is preferred for his specialised knowledge by
a company. Monopolies in trade and business, on the other hand, are established
by control of capital and money power. It is not so in a profession. A cost
accountant is preferred for his professional competence, for his specialisation
and above all for his integrity and the trust that a company can put in the
auditor in matters of processes and techniques of manufacture. The petitioner
then submits that a paucity of work is felt by the same auditors because of the
fact that the Government does not order sufficient number of audits. There is
ample scope for all the auditors and a huge number of units can be audited. The
Government does not take necessary steps to do anything in this regard. There
are presently 1,600 factories (unit) liable to cost audit but the Government
ordered cost audits in about 470 units only in 1981. It is the failure on the
part of the Government that has resulted in the alleged scramble for work. The
figures provided by the Government would show that out of about 500 auditors
only about 143 auditors are to some extent actively practising. Even out of
143, majority of auditors are in service drawing salaries and some of them are
retired employees who do auditing merely as an additional income. It is the
Government which is responsible for restricting the growth of the profession of
cost accountants. Annexure D is a letter written by the Chemical, Industrial
and Pharmaceutical Laboratories Ltd. to the CLB. This was a company to which
the Board had informed that they should engage another cost auditor as the
petitioner had done more than 30 audits. In reply the company had informed that
the work was entrusted to the petitioner as the profession involves an element
of confidentiality, trade secrecy, integrity and professional ethics and
familiarity with the intricacies of bulk drug manufacturing. They had also
informed that the petitioner had performed his duties within the statutory time
and with efficiency. Similar is a letter (annex. E) from the Anil Starch
Products Ltd. The said company had also emphasised that a change of auditor
from year to year would seriously jeopardise the industry. The petitioner then
submits that he and Mr. Nalin Mehta, a petitioner in the connected petition,
together have only 7% of the total cost audit work of the entire country and
the petitioners share is only 4%.' They do not enjoy a position of dominance.
It is then submitted that there are statutory provisions for completing audit
within a specific period with penal sanctions and, therefore, the alleged
ground of securing timely audits in support of the Government's claim is
without any basis. It is then submitted that the Government has not produced
any material or date to show that the petitioners in the two petitions or any
other auditor, having large work, has delayed the submission of the report or
done the audit work inefficiently.
There is a good deal of substance in the submissions
of the petitioner. There is absolutely no data produced by the Government to
show that the large work undertaken by the petitioner and some others like him
has in fact resulted in delayed reports beyond the statutory period or that any
penal action was taken against any one of them, under the statutory provisions.
So also no material is produced by the respondents to show that the large work
handled by these auditors has resulted in inefficiency. The justification for
the impugned decision is thus conjectural and imaginary. In fact, annexs. D and
E referred to above show that the petitioner had performed the audit work not
only within the statutory period but with high efficiency and acumen. Having 4%
of the total work by the petitioner and 3% of the total work in the connected
petition cannot be reasonably defined as establishing a monopoly. From the
figures produced by the Government itself there are only 143 cost auditors who
can be said to be somewhat actively practising the profession. So also instead
of 1,600 audits that can be ordered, the Government has ordered only about 470
audits. This is just over 25% of the audits that can be ordered even according
to the Government information. On the other hand, the Government has claimed that
there are 500 auditors and 1,600 audits can be conducted resulting in only two
to three audits per auditor. The basis for the Government's decision is thus
highly imaginary and is not supported by any factual or rational data. It was
admitted by the Government that in the developed industrial countries cost
audit has acquired a regular status and as a routine necessity. Our public
sector undertakings and the private industries have yet not appreciated the
importance of cost audits, which is in their own interest. This is similar to
the total neglect of research by our industries. In this state of affairs there
is a limited scope for large scale increase of the cost audit work and that too
within the cost audits ordered by the Government under s. 233B. In the present
state of this profession the endeavour of the Government should be to foster
further the growth and awareness of its utility in optimum industrial
development of this country. The uncontroverted figures for the year 1981 would
show that the activity of the Government in this area is in the reverse
direction. The economists would call this harmful to the industrial growth of
this nation. Even by the Government calculations an auditor will get about two
or three audits in a year. This would not even be sufficient for making his
living. The restriction of audits to 30 audits would in no way contribute to a
dispersal of the cost audit work. Even if 1,600 audits are ordered on the basis
of 30 audits per auditor the work would be concentrated in the hands of 55
auditors as against the alleged number of 500. But if 1981 figures of 470
audits is taken into account on the basis of 30 audits per auditor, only 16
auditors would be able to monopolise the entire work. The impugned decision
will thus defeat the very object of the said decision, as claimed by the
Government. The decision thus suffers from lack of application of mind to the
real problem faced by the profession of cost auditors. In Mahindra and Mahindra
Ltd. v. Union of India [1983] 53 Comp Cas 337, ILR [1980] 2 Delhi 1232; the
Division Bench of this court (consisting of Prakash Narain, Actg. C.J. & Sultan Singh J.), was called upon to decide
the legality of restriction imposed by the Central Govt. on the salaries and
commission of three whole time executive directors of the petitioner-company in
that case. The scope of the powers under s. 637A and s. 637AA came up for the
consideration of the Government (court ?). So also the validity of the
Government policy was called in question by the petitioner. The Division Bench
through several examples came to the conclusion that the Government policy can
be distinct from the public policy. What is good from the point of view of the
Government may not be good from the point of view of the general public. The Division
Bench observed (p. 355):
"Therefore,
we are of the view that when the respondent has categorically said that it was
the Government policy which resulted in the issuance of the impugned
guidelines, that cannot be taken to mean that it was public policy. Indeed,
public policy in a democratic set up is generally expressed through the will of
Parliament or other Legislatures. That is how it should be, keeping in view the
provisions of art. 37 of the Constitution".
The Division
Bench further held that howsoever laudable the object may be, it has to be
effectuated by the State by making laws and not by executive action. With
respect I agree to rely on the said observation of the Division Bench in the
decision of this case because while framing the policy, the Government has not
considered the necessity of the growth of the profession of cost auditors for
the accelerated industrial growth of this country. These are the public
interests at stake Moreover, the Government policy is tried to be imposed by
Executive action and not through parliamentary legislation. It may be pertinent
to note that after the decision of this court in Upper Doab Sugar Mills Ltd. v.
CLB [1971] 41 Comp Cas 643, wherein this court held that s. 637A does not
permit the imposition of a ceiling on remuneration and commission of a managing
director so as to ensure minimisation of economic inequalities, a new section,
namely, s. 637AA, was introduced in the Companies Act by the Amending Act of
1974. The said section provides for the guidelines to the Government in giving
approvals under s. 269 of the Companies Act. Guideline "e" reads:
"the Central Government shall have regard to public policy relating to the
removal of disparities in income". This is a clear indication of the
intention of Parliament that such policy considerations should be supported by
its legislation and should not be left to Government policy to be expressed in
the form of an executive order or decision. For the reasons stated above the
impugned decision is arbitrary and violative of art. 14 of the Constitution. In
Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487, the Constitution Bench
of the Supreme Court after reviewing some of the earlier decisions has held (p.
499):
"It must, therefore, now be taken to be well settled
that what art 14 strikes at is arbitrariness because an action that is
arbitrary, must neces sarily involve negation of equality....... Wherever,
therefore, there is arbitrariness in State action.... art. 14 immediately
springs into action and strikes down such State action. In fact, the concept of
reasonableness and non-arbitrariness pervades the entire constitutional scheme
and is a golden thread which runs through the whole of the fabric of the
Constitution".
The other restrictions enjoined by the impugned order
are also arbitrary and contrary to law. The impugned order restricts cost
audits to thirty per cost auditor. The petitioner is a firm, although a sole
proprietary firm. As stated earlier, the Board informed two of the petitioner's
clients, namely, M/s. Chemical, Industrial and Pharmaceuticals Laboratories,
Bombay, and Anil Starch Products Ltd. that the petitioner-firm had completed
thirty audits and, therefore, the companies should choose another auditor.
Thus, although the impugned order restricts audits on the basis of an
individual cost auditor, the Board has imposed the said limitation on the firm.
The petitioner submits that s. 2(2) permits the profession to be practised as a
partnership firm. So also reglns. 112 and 113 recognise the right of a firm to
practice as a cost auditor. The petitioner then submits that on the one hand
the Board is imposing a limitation of thirty audits per auditor and, on the
other hand, it has not accorded its approval to the petitioner's application
for taking an additional partner in the firm and its reconstitution, for the
last more than seven months. Constitution or reconstitution of a firm requires
the approval of the Central Govt. under regln. 113 but the approval cannot be
refused unless the Government forms the opinion that it will amount to
professional misconduct or the partnership terms are not fair and reasonable or
that it would not be in the interests of general public. It is claimed that the
entire approach of the Government is arbitrary. The respondents, however,
contend that each of the partners in a partnership firm is permitted to do
thirty audits but the work shall be assigned to any auditor as an individual
and no work would be assigned to the firm as such. Considering the provisions
of s. 2(2) and reglns. 112 and 113 there is no doubt that a firm of auditors,
as an entity, has a right to practise. This is a statutory right. Apart from
the fact that the right cannot be taken away by an executive decision no
rational justification is shown by the respondents to justify the limitation of
a firm. A partnership firm is a compendious name of the partners working
together. Other professions such as solicitors architects, etc., have such
firms. The Act expressly prohibits an incorporated company from practising as a
chartered accountant. That is to some extent understandable because the
profession depends on the personal efficiency, competence and integrity, which
may not be possible in the case of a company. So also the question of
professional misconduct or violation of staiutoiy requirements cannot be
appropriately dealt with against a large number of persons involved in a
company. But that is not so in the case of a partnership firm. The respondents
have explained as to why the petitioner's application for reconstitution of the
firm has been delayed for such an inordinate time. Rejecting an approval on the
grounds stated in regln. 113 is understandable but merely to sit on a file for
seven months is wholly capricious.
The measure for calculation of thirty audits, adopted
by the impugned order, is each product that is manufactured by a company and
where the product is manufactured in more than one unit, each such unit would
decide the requisite number. Fixing thirty audits on the basis of products or on
the basis of units has no rational connection to the object of s. 209(1)(d) or
of s. 233B. It is also far removed from the realities of cost audit practice.
The only object of the Government decision appears to be to reduce the number
of audits per auditor as much as possible. Section 209(1)(d) and s. 233B enjoin
cost audit of a company. The units of the company may not have a different
corporate identity. The cost audit cannot, therefore, be ordered of such a
unit. In the case of a product the audit can be only of a company which
manufactures the product. Let us take an illustration of a product like cement
manufactured by A.C.C. The A.C.C. as a company has a number of factories all
over India. The position of raw material, labour, managerial expenses, cost of
transport, taxation, would be different in different parts of India in which
the factories are located. The A.C.C as a company would be employing its own
special techniques and process in different units. There would be some
centralised functions, such as marketing, accounting, administration, by way of
centralised functions. Although, therefore, as a physical fact cost audit has
to be undertaken in relation to a product or a unit to start with, it is very
difficult to separate the same from the overall centralised costing of a
company. An auditor who is familiar with the costing system of a company like
the A.C.C. would be able to undertake costing of all its units more quickly,
more efficiently and a full confidence regarding integrity. If different auditors
are to undertake audits of different units of one company it would be very
difficult to achieve the said results. But whatever may be the justification of
the Government for ordering separate audits for different units or separate
products, no rational justification has been shown as to why the number of
audits should be restricted on the basis of units or products. I, therefore,
hold that the above restrictions in the impugned order have no rational nexus
and are arbitrary.
For the reasons stated above, the impugned order is
arbitrary and violates art. 14 of the Constitution.
The impugned decision of the CLB dated November
18, 1980, and the letters of the CLB directing M/s. Chemical, Industrial and
Pharmaceutical Laboratories, Bombay, and Anil Starch Products Ltd. dated
September 19, 1981, are quashed and set aside. The respondents are further
directed to dispose of the petitioner's application for the re-constitution of
the firm within one month from today. The writ petition succeeds with costs. The
rule is made absolute.
[2003]
42 SCL 758 (Mad.)
HIGH COURT OF
v.
Registrar of Companies
P.
SATHASIVAM, J.
COMPANY
PETITION NO. 112 OF 1996
AND
COMPANY APPLICATION NO. 524 OF 1996
AUGUST
21, 2002
Section 233B of the Companies Act, 1956, read
with the Cost Audit (Report) Rules, 1968 - Cost Audit - A company was required
to furnish cost records to auditor, and auditor was required to submit his
report to CLB within stipulated date - Company as well as auditor applied for
extension of time to comply with said obligation due to labour problem in
company - No reply was received from Government - Company received a show-cause
notice containing allegation for delay of 24 days in filing report - Company defended
said notice on ground that it had submitted report to CLB in accordance with
law - Whether since company and auditor had applied for extension of time to
submit report but no reply was received and fact of labour problem was proved
by documentary evidence, it could be said that petitioner acted honestly and
diligently and delay in submitting cost records/audit report was beyond his
control - Held, yes - Whether, therefore, petitioner could not be punished for
offence under section 233B(11) - Held, yes
Under section 233B(1), the Central Government issued a notification,
asking the petitioner-company to appoint a cost auditor and to submit a cost
audit report within stipulated period. Accordingly, the company appointed a
cost auditor and reported to the Central Government. On account of labour
problem in the company resulting in stoppage of work, the company as well as
the auditor sought for extension of time up to 31-8-1995, that is, for 2 months
to submit cost audit report. Cost audit report was submitted to the CLB on
21-10-1995. However, the company received a notice containing allegation that
there was a delay of 24 days in filing the report and, hence, the petitioner
was liable to be punished according to the Act. The company defended that since
it had applied for extension of time to file the cost audit report for which no
reply was received and it had filed its cost audit report to the CLB in
accordance with law, there was no default in complying with section 233B nor
with the Cost Audit (Report) Rules. But ROC disputed various averments made by
the petitioner. It was stated that request for extension of time to file cost
audit report had been declined by the Government, consequently, no extension of
time had been allowed. As the reply was not satisfactory and convincing, the
respondent officer preferred a complaint under section 233B(11) before the
Judicial Magistrate.
On petition under section 633(2) :
Section 233B provides that where in the opinion of the Central
Government, it is necessary so to do in relation to any company required under
section 209(1)(d) to include in its books of account the particulars referred
therein, the Central Government may by order direct that an audit of cost
accounts of company shall be conducted. The company has to furnish records
within 90 days from the end of financial year to the auditor and the auditor
will have further 90 days to submit its report to the CLB and the company.
Failure to comply with above provisions entails penalties.
In the instant case, there was a delay of 24 days in filing the cost
audit report to the CLB. The explanation given by the petitioner was that the
delay was due to labour problem in the company. It was also stated that they
had applied for extension of time but the same had not been considered and no
reply had been received. Though in the counter affidavit it was stated that the
Central Government declined the request of the petitioner-company as well as
the auditor, the fact remained that no order had been passed by the Central
Government. The documentary evidence, including communication from the Labour
Commissioner regarding labour problem for a particular period, showed that the
petitioner acted honestly and diligently and the delay in submitting the cost
records was beyond his control. Almost in similar circumstances and while
considering section 633(2), the Courts have granted the relief as claimed.
After going through the factual details in those cases and the statutory
provisions referred to therein, it was to be held that the conclusions arrived
at therein were applicable to the instant case. Therefore, the Registrar of
Companies was to be directed to forbear from prosecuting the petitioner for the
offence mentioned in the show-cause notice.
Accordingly, the company petition was to be allowed.
In the Matter of Muktsar Electric Supply Co. Ltd., In re (In Liquidation)
[1966] 36 Comp. Cas. 144 (Punj.), East India Hotels Ltd., In re [1980] 50 Comp.
Cas. 381 (
T.K. Bhaskaran for the Petitioner. S.R. Sundaram for the
Respondent.
P. Sathasivam, J. - This petition is filed under section 633(2) of
the Companies Act, 1956, read with rule 11A of the Companies (Court) Rules,
1959, seeking an order to relieve the petitioner of his liability in relation
to the offence under section 233B read with the Cost Audit (Report) Rules,
1968.
The case of the petitioner is briefly stated hereunder :
According to the petitioner, he is the managing director of M/s. Kwality
Spinning Mills Limited (hereinafter referred to as “company”). The company was
incorporated as a private limited company on June 26, 1958, and has become a
public limited company by virtue of the provisions of section 43A(2) of the
Companies Act, 1956, with effect from December 30, 1989. Under section 233B of
the Companies Act, it is provided for an audit of cost accounts in certain
cases. The Central Government in exercise of their powers given under section
233B(4) read with section 27(1) and 642(1)(b) of the Companies Act, framed the
Cost Audit (Report) Rules, 1968. As per the provisions from the Companies Act
and the Rules, the company has to furnish the records within 90 days from the
end of the financial year to the auditor and the auditor will have further 90
days to submit his report to the Company Law Board and to the company. The
Rules provide for penalties to the company and the cost auditor. If default is
made by the company in furnishing the records to the auditor and render
assistance to him to enable him to file report, the company and every officer
who is in default shall be punishable with fine which may extend to Rs. 500. If
the cost auditor commits defaults in furnishing his report to the Company Law
Board and to the company, the auditor will be punishable with fine which may
extend to Rs. 500. The Central Government by notification dated March 25, 1993,
made under section 233B(1) of the Act required the company to appoint a cost
auditor and submit the cost audit report. The said letter was received by the
company on May 3, 1993. The company by letter dated August 31, 1994, informed
the Central Government that a cost auditor was appointed and complied with the
requirements of the law. The company by letter dated January 3, 1995, informed
the Central Government that the financial year of the company ending with
December 31, 1994, has been extended to March 31, 1995, in accordance with the
provisions of the Companies Act and the Registrar of Companies was also
informed of the change of the financial year. The financial year of the company
is ending with March 31, 1995. Thus the company is required to submit the cost
audit report under section 233B of the Act read with Cost Audit (Report) Rules,
1968, within 120 days by the cost auditor appointed by the company with the
prior approval of the Central Government.
It is further stated that there was some difficulty on the part of the
company to give all the records to the cost auditor due to labour problem in
the company resulting in stoppage of the work and fall in production. The
company received a letter dated May 30, 1995, from the cost auditor requesting
the company to seek for extension of time by two months for submission of cost
audit report. Pursuant to the said letter, the company sought for extension of
time up to August 31, 1995. The cost auditor also by his letter dated July 10,
1995, sought for extension of time up to August 31, 1995. Though the letter is
written as an abundant caution, the company has submitted its records to the
cost auditor and the cost auditor has also finalised his report on October 9,
1995, and he has submitted his report to the Company Law Board on October 21,
1995. It is alleged that there was a delay of 24 days in filing the report by
the cost auditor before the Company Law Board. In such a circumstance, the
petitioner received a show-cause notice dated May 17, 1996, whereunder the
company required to submit its explanation as to the cost audit report for the
year ending December 31, 1993, and December 31, 1994, the same was replied by
the company in its letter dated May 24, 1996. The cost audit report has already
been filed before the Company Law Board in accordance with law. The delay is
inexplicable and the extension of time sought for by the company with the
Central Government is not considered and no reply has been received with regard
to the extension of time sought for by the company. The petitioner, as a
managing director of the company has acted honestly and diligently in complying
with the provisions of the Act and Rules. In spite of it, if the prosecution is
initiated, it will cause irreparable injury and hardship, hence the present
petition before this court.
Pursuant to the notice, the respondent Registrar of Companies has filed a
counter-affidavit disputing various averments made by the petitioner. It is
stated that the time-limit for rendition of report prescribed under rule 4 is
only 120 days. The petitioner company’s request dated June 30, 1995, and the
cost auditor’s request dated July 10, 1995, for extension of time for
submitting the cost audit report have been declined by the Central Government,
consequently no extension of time has been allowed to the company. As the reply
is not satisfactory and convincing, the respondent officer has preferred a
complaint under section 233B(11) before the Judicial Magistrate Court I,
Pollachi on June 5, 1996. After filing of the complaint, this petition is not
maintainable and the remedy is that the petitioner should prefer a petition
under section 633(1) before the Judicial Magistrate, Pollachi, where the
complaint is filed and pending.
In the light of the above pleadings, I have heard learned counsel for the
petitioner as well as learned senior Central Government standing counsel.
The only point for consideration is, whether the petitioner has made out
a case for interference by this court under section 633(2) of the Companies Act
and relieve the petitioner from his liability in relation to the offence under
section 233B of the Act read with the Cost Audit (Report) Rules.
There is no dispute that under section 233B of the Act it is provided for
an audit of cost accounts in certain cases. It is also not disputed that the
Central Government by virtue of their powers given under the Companies Act
framed the Cost Audit (Report) Rules, 1968. The provisions, namely section 233B
of the Act and the Rules make it clear that if in the opinion of the Central
Government it is necessary so to do in relation to any company to include in
its books of account the particulars referred to in section 209(1)(d) of the
Act, the Central Government may by order direct that an audit of cost accounts
of the company shall be conducted in such a manner, as specified in the order
by an auditor, who shall be a cost accountant within the meaning of the Cost
and Works Accountants Act, 1959. The auditor shall be appointed by the board
with the prior approval of the Central Government. All these statutory
provisions are not disputed.
It is further seen that as per the above-referred provisions, the company
has to furnish records within 90 days from the end of the financial year to the
auditor and the auditor will have further 90 days time to submit his report to
the Company Law Board and to the company. The Rules provide for penalties to
the company and the cost auditor. It is stated that there was a delay of 24 days
in filing the report by the cost auditor before the Company Law Board. Pursuant
to the show-cause notice calling upon the petitioner to submit his explanation
as to why the cost audit report for the years ending December 31, 1993, and
December 31, 1994, has not been submitted in time, the petitioner submitted his
explanation that the cost audit report has already been filed before the
Company Law Board and in respect of delay of 24 days in filing the cost audit
report by the cost auditor, it is stated that the delay is due to labour
problem in their company. It is also stated that they filed an appropriate
representation for extension of time with the Central Government and the same
has not been considered and no reply has been received. Though in the counter
affidavit it is stated that the Central Government declined the request of the
petitioner-company as well as the auditor, the fact remains that no order has
been passed by the Central Government.
Now, I shall consider whether the petitioner, as a managing director of
the company has acted honestly and diligently in complying with the Companies
Act and Rules. In the petition the petitioner has specifically averred that he
has acted honestly and diligently (vide para. 15). Learned counsel for the
petitioner has brought to my notice the main reason for not submitting the
report within the prescribed time is due to labour unrest. It is seen that by
letter dated October 24, 1994, the company has informed the Assistant
Commissioner of Labour (Conciliation-I), Coimbatore, stating that the workers
of their mill have gone on illegal strike from 11.25 a.m. on October 21, 1994,
without giving any statutory notice. Again on January 25, 1995, the company has
written in their letter to the very same Officer informing that the workers of
their mill were on illegal strike from October 21, 1994, resumed duty with
effect from 3.25 p.m. on January 25, 1995, unconditionally. The said
communication to the Labour Officer proves that there was a labour problem for
a particular period.
It is also brought to my notice the letter of the cost accountant dated
May 30, 1995, addressed to the company wherein he has requested the company to
apply to the Company Law Board for an extension of two months time for
submission of cost records for the year ended March 31, 1995, to the cost
auditor. The letter dated June 3, 1995, addressed to the Director (Cost),
Ministry of Law, Justice and Company Affairs, New Delhi, shows that after
highlighting the last date for submission of the records and report, they
informed that during the relevant years there had been intermittent labour
problem in the unit and the complete work stoppage due to labour problem and
strike for nearly a period of four months, which upset their programmes and
there was a fall in production and dislocation of working. They also informed
that audit of their accounts is just being taken and would be completed by
August 15, 1995. As such they would be able to place before the cost auditor
the cost records only by end of August, 1995. By saying so, they requested the
Director (Cost) to grant two months period, i.e., up to August 31, 1995, for
placing their cost records before the cost auditor for auditing. I have already
referred to the request made by the cost accountant. For second time, i.e., on
July 10, 1995, the cost accountant wrote another letter to the Director (Cost),
Department of Company Affairs, informing that as soon as he receives the cost
records he will arrange to complete the cost audit work and submit his cost
audit report without delay. All these documents find place at page Nos. 9, 12,
14, 15 and 17 of the typed set filed along with the company petition. These
documents clearly show that the petitioner acted honestly and diligently and
the delay in submitting the cost records is beyond his control.
In this regard, it is relevant to refer to sub-section (2) of section 633
of the Act, which reads as under :
“(2) Where any such officer has reason to
apprehend that any proceedings will or might be brought against him in respect
of any negligence, default, breach of duty, misfeasance or breach of trust, he
may apply to the High Court for relief and the High Court on such application
shall have the same power to relieve him as it would have had if it had been a
Court before which a proceeding against that officer for negligence, default,
breach of duty, misfeasance or breach of trust had been brought under
sub-section (1).”
Though it is contended by the learned senior Central Government standing
counsel that this court is not the appropriate authority, in the light of the
said provision, I am unable to accept the said contention. As a matter of fact,
if any notice is received for negligence, breach of duty, miscompliance or
breach of trust and any application is made before this court, this court has
the same power and decide as if it had been a court before which a proceeding
against the Officer for negligence, default, breach of duty and breach of
compliance has been brought under sub-section (1). No doubt, the same has to be
considered only after notice to the Registrar of Companies and after affording
an opportunity to him. In the light of the said provision, I am satisfied that
the petitioner had acted honestly and diligently and properly explained the
delay of 24 days in submitting the cost report to the Company Law Board.
Learned counsel for the petitioner has relied on the following decisions
in support of his claim that by virtue of the above-referred provisions this
court in a appropriate case relieve the person concerned from the prosecution :
(1) In
the case of In the Matter of Muktsar Electric Supply Co. Ltd., In re (In
Liquidation) [1966] 36 Comp. Cas. 144 (Punj.);
(2)
East India Hotels Ltd., In re
[1980] 50 Comp. Cas. 381 (Cal.);
(3)
G. M. Mohan v. Registrar of
Companies [1984] 56 Comp. Cas. 265 (Kar.); and
(4)
P. Vaman Rao v. Secretary to
Government [1998] 93 Comp. Cas. 486 (AP).
Almost in similar circumstances and while considering section 633(2) of
the Act, the courts have granted the relief as claimed. After going through the
factual details in those cases and the statutory provisions referred to
therein, I am in respectful agreement with the conclusion arrived at therein
and I am of the view that these decisions are applicable to our case.
Therefore, in the circumstances made out in this case, this court under
section 633(2) of the Act directs the Registrar of Companies to forbear from
prosecuting the petitioner for the offence mentioned in the show-cause notice.
Accordingly, the company petition is allowed. No costs. Consequently, connected
company application is closed.
Section 234
Power
of Registrar to call for information or explanations
[1980]
50 COMP. CAS. 75 (
HIGH COURT OF
SALIL K. ROY CHOWDHURY, J.
COMPANY PETITION NO. 87 OF 1978
JULY 20, 1978
A.C. Law for the Petitioner.
S.B. Mukherjee for
the Company.
JUDGMENT
Salil
K. Roy Chowdhury J.—This is a winding-up application filed by the Additional Registrar
of Companies, West Bengal, after obtaining sanction of the Regional Director,
Company Law Board, Calcutta, under s. 439(5) of the Companies Act, 1956. The
grounds alleged are that the company has suspended its business for a whole
year within the meaning of cl. (c) of s. 433 of the Companies Act, 1956, and it
is just and equitable that the company should be wound up under cl. (f) of s.
433 of the Companies Act, 1956.
It
appears that the company was incorporated on the 18th January, 1941, as a public
limited company and its registered office is situate at No. 22,
It
is alleged in para. 8 of the petition that the company did not file its
balance-sheets and annual returns for the years ending 31st December, 1963,
onwards and the company did not carry on any business from 1951 to 1960. It is
further alleged that, as the company has not carried on business since 1962,
there is no use in allowing the company to continue and be a drain on public
fund and, therefore, it must be held that the company
has suspended its business for a whole year within the meaning of cl. (c) of s.
433 of the Companies Act and it is just and equitable that the company should
be wound up as provided in cl. (f) of s. 433 of the Companies Act, 1956.
It appears that in view of
the state of affairs, the Registrar of Companies applied before the Regional
Director, Company Law Board,
The present winding-up
petition was presented on the 27th February, 1978, and was made returnable on
the 6th March, 1978. On the returnable date notice was directed to be served on
the company along with a copy of the petition and it was made returnable on the
13th March, 1978. On the 13th March, 1978, the company appeared and took leave
to file the affidavit and the petitioner also took leave to file
affidavit-in-reply. Thereafter from time to time the date for filing the
affidavit-in-opposition and affidavit-in-reply by the Registrar was extended
and also leave was given to the parties to file supplementary affidavits.
The company, through one
Arun Kumar Jhajharia, one of the directors, took several objections firstly
that the company has not suspended its business and in fact it has carried on
its business and earned substantial amounts by way of profits and the company
is a solvent company. It is further alleged that the company is a subsidiary
company of Messrs. James Wright Ltd. which also has its registered office at
the same place at No. 22,
It
appears that the said Arun Kumar Jhajharia filed another affidavit affirmed on
20th March, 1978, inter alia, alleging that the company has sundry creditors to
the extent of Rs. 5,18,000 and they are opposing the winding-up application,
i.e., Jhajharia Trading Co. P. Ltd., a sister concern of the company and one,
R.P. Agarwalla & Bros. P. Ltd. It was further alleged that the accounts for
the period 1970 to 1974 had been duly prepared and were approved at the annual
general meeting of the company alleged to have been held in June, 1977, and the
said accounts were tendered for filing in July, 1977, with the Registrar of
Companies but the same was refused on the ground of delay although the company
was willing to pay any additional fees, as required or imposed for the purpose
of filing. As in the said supplementary affidavit allegations were made against
the Registrar for not accepting the balance-sheets and annual returns for those
years in spite of tendering the same along with the additional fees, if any, on
the 5th April, 1978, I granted leave to the petitioner to file a supplementary
affidavit-in-reply thereto. Pursuant to such leave an affidavit affirmed on
25th May, 1978, by one, Kanchan Kumar Dhar, Additional Registrar of Companies,
the petitioner, was filed, inter alia, denying that the company tendered for
filing the balance-sheets and annual returns for the years 1970 to 1974, as
alleged. It was further submitted in the said affidavit that the present
application is not an application by a creditor or a contributory for
compulsory winding-up, but has been initiated by the Registrar of Companies
pursuant to a sanction accorded by the Company Law Board and the same has been
done in public interest. It was further pointed out in the said supplementary
affidavit of the petitioner that the said
Jhajharia Trading Co. P. Ltd. and James Wright Ltd. are companies controlled by
the said Jhajharia and, therefore, they would naturally come forward to oppose
the winding-up petition. It was specifically made clear in the said
supplementary affidavit that the application has been made on two specific
grounds, i.e., suspension of business for one year and it is just and equitable
and, therefore, the creditors' view on the proposed winding-up petition is not
material.
Mr. A.C. Law, appearing for
the petitioner, submitted that from the records of the Registrar, that is, the
balance-sheets and other documents filed by the company, it appears that the
company is not carrying on any business for more than one year and the company
is a habitual defaulter in filing its balance-sheet and profit and loss account
and annual returns and its directors have been prosecuted year after year and
even then the company had not filed any such balance-sheet and profit and loss account
regularly. Therefore, it must be held that the company had suspended its
business for more than one year within the meaning of cl. (c), s. 433 and it is
just and equitable to wind up the company under s. 433(f) of the Companies Act,
1956. Mr. Law cited a decision of the English Court in Re Lubin, Rosen and Associates
Ltd. [1975] 1 All ER 577 (Ch. D.), where the Secretary
of State presented a petition for a compulsory winding-up order pursuant to s.
35(1) of the English Companies Act, 1967. In the facts of that case, it was
held that the petition presented by the Secretary of State is in somewhat
different category from a petition presented by a creditor or contributory
since the latter petition in their own interest is a class, whereas the
Secretary of State petitions under a special statutory provision which comes
into operation only when it is expedient to him in public interest that the
company should be wound up and it was further held that in such cases, the
court, without abdicating any of its judicial and discretionary powers ought to
give weight to the Secretary of State's views. Relying on the said decision,
Mr. Law submitted that in the present case, the court should give weight to the
Registrar's views for presenting the winding-up petition after obtaining
sanction of the Company Law Board under sub-s. (5), s. 439 of the Companies
Act, 1956. He further submitted that in the facts and circumstances of the case
it must be held that the company has suspended its business for more than one
year and it is only after the present application has been made that the
affidavits have been filed alleging that the company is carrying on business
and earning profits. He referred to the various decisions of this court on the
question whether the company can be said to have suspended its business or the
substratum has gone : Muralidhar Roy v. Bengal Steamship Co. [1920] ILR 47 Cal 654; AIR 1920 Cal 722,
Oriental Navigation Co. v. Bhanaram Agarwalla [1922] ILR 49 Cal. 399; AIR 1922
Cal. 365, In re Dhootpapeshwar Sales Corporation Ltd. [1972] 42 Comp. Cas. 139
(Bom.) and, lastly, the Supreme Court decision in Seth Mohan Lal v. Grain
Chambers Ltd. [1968] 38 Comp. Cas. 543; AIR 1968 SC 772.
Mr.
Law submitted that in the present case although there is some delay in filing
the winding-up petition after obtaining the sanction under sub-sec. (5) of s.
439 of the Companies Act, 1956, for the public interest it is just and
equitable that the company should be wound up and particularly having regard to
the fact that all sorts of statements have been made in the affidavit filed on
behalf of the petitioner regarding the carrying on of the business although no
balance-sheet, profit and loss account, or returns have been filed by the
company since 1963. Therefore, at this stage, it cannot be said that the
presentation of the winding-up petition could be an abuse of the process of the
court, and, therefore, it must be admitted.
Mr.
S.B. Mukherjee appearing for the company submitted, firstly, that there is no
ground whatsoever as to the factual basis of obtaining sanction. Secondly, the
present application is barred by limitation under art. 137 of the Limitation
Act, 1963, as the present application has been admittedly filed more than five
years after the sanction under sub-s. (5) of s. 439 was obtained. Thirdly,
there are alternative remedies available to the petitioner against the company
for defaults alleged to have been committed by the company under the Companies
Act as the winding-up petition is filed on just and equitable ground. And
lastly, the inordinate delay in presenting the petition has made the winding-up
petition liable to be dismissed. Mr. Mukherjee cited the recent decision of the
Division Bench of this court in Kumarapuram Gopal Krishnan Ananthakrishnan v.
Burdwan-Cutwa Railway Co. Ltd. [1978] 48 Comp. Cas. 611; 82 CWN 774; [1978] TLR
1937 (Cal.), where it has been held that art. 137 of the Limitation Act applies
to an application for winding-up of a company and the limitation starts from
the date of accrual of right to apply. The right of the Registrar to apply for
winding-up of the company accrues on the date when the sanction is obtained
under sub-s. (5) of s. 439 of the Companies Act, 1956, and, therefore, Mr.
Mukherjee rightly submitted that the present application is admittedly filed
long beyond three years from the date of sanction accorded under sub-s. (5) of
s. 439 of the Companies Act for presenting the winding-up petition. Therefore,
the application on the face of it is barred by limitation and it must be taken
off the file.
Mr.
Mukherjee also relied on a decision of A.N. Ray J. (as he then was) In re
Bengal Flying Club [1967] 71 CWN 38 (Cal.), where it has been held that as the
petition was filed about three years after the alleged claim of the petitioning
creditor arose, such a delay would suggest that the winding-up petition was not
bona fide and the discretion of the court could not be exercised in the facts
and circumstances of that case. Mr. Mukheriee relied on the said principle and
submitted that in the present case the delay of more than 5 years in presenting
this petition must be held not bona fide and the court's discretionary power
should not be used in favour of admitting the said petition.
Lastly,
Mr. Mukherjee cited a decision in Lokenath Gupta v. Credits P. Ltd. [1968] 38
Comp. Cas. 599; 72 CWN 624 (Cal.), where it has been held that when the company
carried on the business it could not be said that the substratum of the company
had completely gone and the court should refuse to make an order of the winding
up. Relying on the said decision, Mr. Mukherjee submitted that the present
application is not maintainable as it is mainly on the ground which does not
exist on the date of presenting the winding-up petition and on stale grounds,
and secondly, the petitioning-creditor has ample and adequate alternative
remedy to proceed against the company and its directors for non-compliance with
the statutory provisions and the winding-up petition is not the proper remedy
in the facts and circumstances of this case. He relied on the provisions of s.
233(2) of the Companies Act which gave ample power to the petitioner to proceed
under various other sections of the Companies Act against the company if there
is any ground for the same. Mr. Mukherjee rightly submitted that in any event
the present application is barred by limitation, as has been specifically held
by the appeal court decision in Kumarapuram Gopal Krishnan Ananlhakrishnan v. Burdwan-Cutwa Railway Co. [1978] 48
Comp. Cas. 611, 633; 82 CWN 774, 776; [1978] TLR 1937 (Cal.). Therefore, Mr.
Mukherjee submitted that the present application should be dismissed.
Mr. Mukherjee also drew my
attention to Gore-Browne on Companies, 43rd edn., arts. 30-20.
In Gore-Browne on
Companies, 43rd edn., arts. 31-20, where the said' decision of the English
court in Lubin, Rosen & Associates Ltd. [1975] 1 All ER 577 (Ch D) has been
noted and it appears that the Secretary of State for Trade presenting a petition
on the basis of an inspector's report under s. 168 for public interest, the
question of court's consideration of the said petition is on a different basis
than those of the creditors and contributories. The provisions of the English
Act are quite different from the provisions under which the present petition is
presented.
Mr. Mukherjee drew my
attention to s. 237 and s. 243 of the Companies Act where provisions have been
made for investigation and report can be filed and the winding-up petition can
be presented on the basis of such report by the Central Government. This is not
an application of that nature and, therefore, the question of the petitioner
being in a different category than the creditors and contributories cannot
arise. Mr. Mukherjee, therefore, submitted that the present application should
be dismissed.
Considering
the matter very carefully and giving my anxious thought over the matter as it
relates and involves the vital question of administration of the companies
under the Companies Act and the function of the Registrar of Companies, I
cannot but dismiss the present application on the ground that the application
is barred by limitation under art. 137 of the Limitation Act of 1963, on the
face of it. Admittedly, the sanction obtained by the petitioner under sub-s.
(5) of s. 439 of the Companies Act is dated the 8th January, 1973, and the
winding-up petition was presented on the 27th February, 1978, i.e., more than
five years from the date of obtaining the sanction. Therefore, according to the
decision of the appeal court in the case of Burdwan-Culwa Railway Co. reported
in [1978] 48 Comp. Cas. 611 (Cal.), the right to apply accrued on the 8th
January, 1973, and it has become barred three years thereafter under art. 137
of the Limitation Act, 1963. The said decision is binding on me and the
application must be held to be barred by limitation.
Apart
from this fact it appears to me that prima facie the nature of the company's
business and the way it has been conducted by its directors, gives rise to
grave suspicion as to the nature of its business and the mode in which it is
carried on. Further it appears that the company is consistently violating the
provisions of the Companies Act by not filing its annual return, profit and
loss account and the balance-sheets and the Registrar as a routine matter
prosecuted the company and its directors year after year and obtained
convictions. In spite of such convictions it appears that the company has not
regularised the matter and has not complied with the provisions of the
Companies Act yet. Further it also appears to me that the Registrar, on the one
hand, on the basis of a sanction obtained under sub-s. (5) of s. 433 of the
Companies Act on the ground that the company has suspended its business for
more than one year and it is just and equitable to wind up the company, and on
the other hand went on mechanically prosecuting the company and its directors
for non-filing of the balance-sheets and profit and loss accounts year after
year under the provisions of the Companies Act. I am finding it difficult to
understand how such an inconsistent stand can be taken by the Registrar as, in
one breath, he is alleging that the company has suspended its business and it
is just and equitable to wind up the company and, in the next breath, he is
proceeding against the company for non-filing of the balance-sheets and profit
and loss accounts as if the company is alive and has committed default in
filing its statutory returns and documents under the Companies Act. Further, from
the affidavit of Arun Kumar Jhajharia, a director of the company, which has
been filed in this application, it is alleged that the company is carrying on
substantial business and as a subsidiary of James Wright & Company Ltd. is
earning substantial profit for the last few years, Further, the company has a large number of creditors who appear to be its sister
concerns, and therefore, the company seems to be interlocked with several
companies and having mutual transactions.
Prima facie, it appears to
me that the nature of the company is somewhat dubious and mysterious and the
Registrar seems to have been mechanically proceeding under the Companies Act,
on the one hand obtaining sanction to present a winding-up petition under
sub-s. (5) of s. 433 of the Companies Act and, on the other hand, prosecuting
the company and its directors for non-filing of the balance-sheets and profit
and loss accounts for the subsequent years. It further appears that for the
period between 1970 and 1972, the Registrar has not proceeded against the
company and its directors. The company is alleged to have violated the
provisions of s. 210 of the Companies Act for so many years, year after year,
and in the affidavit filed on behalf of the Registrar, sufficient doubt has
been expressed as to the bona fide nature of the company's business which are
alleged in the affidavit-in-opposition in this application. From the way the
Registrar has proceeded in presenting this petition, it reveals utter lack of
responsibility and sense of duty on the part of the Registrar. He has not
realised his functions under the Companies Act which is primarily to act as a
watchdog to keep control and supervision over the functioning of a company by
due compliance of the provisions of the Companies Act. By merely mechanically
obtaining a sanction and keeping the same in cold storage for five years and
then trying to use the same by presenting a winding-up petition shows utter
lack of sense of duty and responsibility on the part of the petitioner in this
case being the Assistant Registrar of Companies, West Bengal.
The application, as I have
already held, is barred by limitation on the face of it but the facts revealed
in this proceeding, clearly show that there are sufficient grounds for the
Registrar to proceed under s. 234 of the Companies Act and take appropriate
steps for investigation into the affairs of the company under the provisions of
the Companies Act. I am also prima facie satisfied from the materials which
have been brought to the notice of this court in the affidavits filed on behalf
of the company and the Registrar that there are very good grounds for suspicion
as to the nature of the business of the company and the manner in which it is
conducted which requires to be probed into and investigated according to the
provisions of the Companies Act or any other provision of law. Further, it
appears that the books, papers and documents of the company up to the year
1963, were seized by the C.B.I. and that itself gives an indication that the
company's affairs are not conducted in a proper manner.
In these circumstances, the
Registrar is directed forthwith to take appropriate steps to discharge his
duties and functions for proper investigation of the affairs of the company
under the provisions of the Companies Act.
In the result, I cannot but
hold, that the present application is barred by limitation on the face of it
and, therefore, the winding-up petition is to be taken off the file. There will
be no order as to costs.
[1959]
29 COMP. CAS. 97 (MAD.)
HIGH COURT OF
V.
BALAKRISHNA
AYYAR, J.
WRIT
PETITION NO. 428 OF 1957
JULY
24, 1958
BALAKRISHNA
AYYAR, J. - This is a petition for the issue of a writ prohibiting the first
respondent Mr. M. S. Srinivasan from holding an enquiry and conducting an
investigation into the affairs of the Coimbatore Spinning and Weaving Co. Ltd.,
in pursuance of an order dated April 4, 1957, made by the Government of India.
The relevant
facts are these. In May, 1956, one Parameswara Iyer, a shareholder in the
Coimbatore Spinning and Weaving Company Ltd. wrote to the Registrar of
Companies in which he made various allegations against the management. He said
that the managing agents "have since their assumption of office been
acting most selfishly jeopardising the interests of the company and have by
frauds, misfeasance, misconduct, misappropriation and falsification of accounts
and various other acts in contravention of law unduly enriched themselves at
the expense and loss of the company causing loss not only to members but also
to the Government by suppressing the true income and defrauding the taxes
legitimately due."
He then
proceeded to enumerate what he called a few of the major items of fraud and
misconduct of the managing agents.
(1) The managing agents of
the company are firm consisting of two partners, viz., V. Gopal Naidu and A. V.
Srinivasalu Naidu. Between the years 1944 and 1952 three bungalows were
constructed in
(2) A sum of Rs. 70,000,
was paid out of the company's funds to the G.E.C. (
(3) In 1951 Amirthammal, a
granddaughter of Gopal Naidu, was married and in connection with that event a
sum of over a lakh of rupees was expended. About Rs. 91,800 of the money thus
spent came out of the funds of the mills, the amount being debited to various
items such as purchases of mill stores, cotton waste, etc.
(4) In spite of the fact
that the mills turned out large quantities of the cotton waste which were
available for sale, a sum of Rs. 70,000 was shown to have been expended on the
purchase of cotton waste from one Arumugham Chettiar of Kinathukadavu. This
transaction is a bogus one.
(5) Various expenses
incurred by the managing agents and their friends for their personal and
private needs were debited to the accounts of the mills.
"A debit
note of Rs. 36,840 in N. Ramaswami Naidu's account, credit given to him in the
succeeding year will show the fictitiousness of the transactions and
accounts."
On 7th June,
1956, the Registrar of Companies,
On 6th July,
1956, the Registrar of Companies again wrote to the company asking it to send
its detailed remarks on each of the specific allegations within 15 days. The
company's attention was also drawn to section 234 of the Companies Act, 1956,
and it was told that in the absence of a detailed answer it would be presumed
that it had no explanation to give. To this the company replied by a letter
dated 19th July,1956, asking for a month's time in order that it might examine
the several allegations and give its explanation.
On 6th August,
1956, the manager of the company and Mr. Srinivasa Aiyar, an advocate of the
company, filed before the Registrar a written explanation dated 5th August,
1956. On 23rd August, 1956, the company wrote that Messrs. V. Rajagopalachari
and V. Srinivasa Aiyar, advocates, had been authorised to represent the company
and requested that they be heard on behalf of the company with reference to the
statement that had been filed on 6th August, 1956. On 24th August, 1956, Messrs
V. Rajagopalachari and V. Srinivasa Aiyar explained the various allegations
that had been made and they stated that the ledgers and vouchers would be
produced on 6th September, 1956, for inspection. On 19th October, 1956, Mr.
Rajagopalachari again appeared and furnished to the Registrar typed copies of
certain accounts and vouchers. He also appears to have addressed certain legal
arguments and contended that it was not a fit case either on the facts or in
law for the Registrar to find that the affairs of the company were in an
unsatisfactory state, that there was no bona fides in the complaint and that it
was a fit and proper case wherein the Registrar should find that the complaint
was frivolous and vexatious and that he should disclose the indentity of the
informant to the company.
On 27th
November, 1956, the Registrar submitted his report to the Government of India.
On 10th April,
1957, the Government of India appointed Mr. M. S. Srinivasan, a Chartered
Accountant of Coimbatore, as an inspector, :
"to
investigate into the affairs of the company and to point out all irregularities
and contraventions in respect of the provisions of the Companies Act or of any
other law for the time being in force."
On 12th April,
1956, Mr. Srinivasan called at the office of the company and tendered a letter
he had himself written pointing out that he had been appointed by the Central
Government as an inspector to investigate the affairs of the company and asking
that various books be delivered to him. The company telegraphed and also wrote
to the Government of India requesting that some person other than Mr.
Srinivasan be appointed as inspector. On 20th/22nd April, 1957, the Government
of India wrote to the company to say that they saw no grounds for changing the
inspector and adding,
"In
case, however, you experience any difficulties during the investigation, you
can always represent them to the Regional Director of this Department, who has
been instructed to look into them."
In these
circumstances the present writ petition has been filed by the company.
It was stated
that holders of some 31,000 shares assembled in meeting and passed a resolution
appointing Mr. T. T. R. Pillai to intervene on their behalf and represent their
view to the Central Government. On behalf of these shareholders Mr. Thyagarajan
sought leave to intervene in the present proceedings and he was permitted to do
so.
Mr. T. M. Krishnaswami
Aiyar, the learned advocate for the company, as also Mr. Thyagarajan raised
certain objections based on sub-section (7) of section 234 of the Companies
Act, 1956, which runs as follows :
"If it
is represented to the Registrar on materials placed before him by any
contributory or creditor or any other person interested 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), (4) and (6) of this section shall apply to
such order.
If upon
inquiry the Registrar is satisfied that any representation on which he took
action under this sub-section was frivolous or vexatious, he shall disclose the
identity of his informant to the company."
The first
objection was this. This sub-section requires the Registrar to conform to a
certain procedure. When it is represented to him that the business of company
is being carried on in the manner specified in the sub-section it is open to
him to ignore the representation and take no action on it. But, if he decides
to act on it, he must first of all give the company "an opportunity of
being heard". Thereafter he must issue a written order calling upon the
company to furnish in writing any information or explanation on matters which
the Registrar may specify in the order. In the present case no written order
has been made conforming to the requirements of the sub-section. This deviation
from the procedure prescribed by the sub-section is fatal to the entire
proceedings. The result is that the report which ultimately followed must be
treated as one having no existence in law; for all legal purposes it is non
est. The order of the Central Government based on such a report must also fall.
I am unable to
accept this objection. On 7th June 1956, the Registrar of Companies did write a
letter to the Coimbatore Spinning and Weaving Company Ltd., enclosing extracts
from the complaint which he had received from Parameswara Iyer and calling for
very urgent and detailed remarks from the company. I cannot therefore accept
the objection that there was no written order calling on the company to furnish
its explanation. The omission of the Registrar was not in respect of this but
in respect of another matter. What he failed to do was to give the company
"an opportunity of being heard" before he made his written order. The
company was undoubtedly heard through advocates on at least two days, viz.,
24th August, 1956, and 19th October, 1956, though it was subsequent to the
written order. As a matter of substance, therefore, the company cannot complain
either that it was not heard or that it was not given an opportunity to present
its case in writing. The mistake made by the Registrar was in omitting to give
the company an opportunity of being heard before he made his written order.
This irregularity does not appear to me to be of any importance in the
circumstances of the present case. What is the object of prescribing that the
company should be given an opportunity of being heard ? Obviously in order that
the company may satisfy the Registrar that the allegations are so frivolous or
vexatious or that for some other reason there is no justification at all for
taking further action on the representations that were made. The object of the
written order is to enable the company to know the substance of the allegations
made against it and which it is required to meet. The entire purpose of this
portion of the sub-section is to enable the company to gives its explanation
and present its case to the Registrar; and, that opportunity it had in ample
measure. It was given full facilities for submitting its written explanation
and its advocates were heard, and, as I said before, on two occasions.
Be it
remembered that here we are concerned with a procedural matter and its is not
every deviation from the prescribed procedure that would vitiate the result. It
will be wrong to assimilate the procedure prescribed in a matter of this kind
to the procedure which attaches to religious rituals. There has been, in my
opinion, substantial compliance with the requirements of the statute, and, in
any case, the company has not suffered any prejudice. I greatly doubt whether
if an irregularity of this nature is shown to have occurred in the course of a
criminal trail an appellate court would have set aside a conviction which
followed. Even supposing that the Registrar did commit an irregularity, I do
not see how it affects the jurisdiction of the Central Government to pass what
order they thought proper. The learned Advocate-General also pointed out that
this objection has not been taken in the writ petition itself; and that
objection appears to me to be correct.
Another
objection based on sub-section (7) of section 234 was this. That sub-section
requires that it should be represented to the Registrar 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 of unlawful purpose. The
representation itself must allege that the business of the company is being
carried on in the manner specified. It is not sufficient that the
representation should contain allegations that there had been fraud or
misfeasance or malfeasance or unlawful or fraudulent activities in the past.
The allegations must be that such is the present state of affairs. The
complaint which Parameswara Iyer sent to the Registrar contains only
allegations of what according to him took place between 1944 and 1952. Those
allegations are not equivalent to an allegation "that the business of the
company is being carried on in frand of its creditors," etc.
Besides, mere
representation to that effect will not do. The sub-section requires that the
Registrar, after giving the company an opportunity of being heard, should make
a written order calling upon it to furnish its explanation in writing. When the
stage is reached the provisions of sub-sections (2), (3), (4), (5), and (6) of
section 234 would apply.
Now,
sub-section (6) runs as follows :
"If such
information or explanation is not furnished within the specified time, or if
after perusal of such information or explanation the Registrar is of opinion
that the document in question discloses an unsatisfactory state of affairs, or
that it does not disclose a full and fair statement of the matter to which it
purports to relate, the Registrar shall report in writing the circumstances of
the case to the Central Government."
It will be
noticed that according to this sub-section the duty of the Registrar to report
to the Central Government would arise only when he "is of opinion that the
document in question discloses an unsatisfactory state of affairs, or that it
does not disclose a full and fair statement of the matter to which it purports
to relate."
There was some
argument as to the effect of this sub-section in relation to sub-section (7)
and the facts of this case. At one stage it was suggested that to enable the
Registrar to report to the Government it would be sufficient if he was
satisfied after examining the explanation of the company that it disclosed
"an unsatisfactory state of affairs." At another stage it was
suggested that since proceedings under sub-section (7) are initiated by a
representation that the business of the company "is being carried on in
fraud of the creditors" etc., the Registrar must be of opinion that the
representation is true and that the business of the company "is being
carried on" in the manner alleged.
Now, the
allegations of Parameswara Iyer related to what he said happened between 1944
and 1952 and, even if it supposed that his allegations are true, they will not
show that the business of the company is being carried on in fraud of its
creditors etc. What happened between 1944 and 1952 can in no circumstances justify
the view that "an unsatisfactory state of affairs" is disclosed at
present. The allegations of Parameswara Iyer are not sufficient and cannot be
regarded by any reasonable person as sufficient to show either that the present
state of affairs of the company is unsatisfactory or that the affairs of the
company are being carried on in the manner specified in sub-section (7).
To support the
argument that the expression "is being carried on" refers to a
present state of affairs and not to what happened in the past reference was
made to the case reported in Southern Railway v. Railway Rates Tribunal.
I agree with
both Mr. Krishnaswami Aiyar and with Mr. Thyagarajan that the expression
"is being carried on" occurring in sub-section (7) relates to the
state of affairs at the time the representation to the Registrar is made and
not to something which is a matter of past history. But it does not appear to
me to be correct to say that in his letter to the Registrar, Parameswara Iyer
did not make any allegation about "the present state" of affair of
the company. In one paragraph of his letter - I have quoted it above and I
quote it again now - Parameswara Iyer expressly said :
"The
said managing agents have since their assumption of office been acting most
selfishly jeopardising the interests of the company and have by frauds,
misfeasance, misconduct, misappropriation and falsification of accounts and
various other acts in contravention of law unduly enriched themselves at the
expenses and loss of the company causing loss not only to members but also to
the Government by suppressing the true income and defrauding the taxes
legitimately due."
This passage
can be fairly read as meaning that ever since the time the managing agents
entered on their duties they have been committing acts of fraud, misfeasance
and misappropriation and that state of affairs continues. It will not,
therefore, be right to say that there was no representation at all before the
Registrar of Companies as required by sub-section (7).
It was very strongly
argued that even if it be that between 1944 and 1952 there had been acts of
fraud or misfeasance or malversation that is not sufficient to show that the
same state of things continues.
To this
argument the learned Advocate-General replied by referring to certain
provisions of the Criminal Procedure Code. He remarked that before a person can
be required to furnish security for his good behaviour under section 110 of the
Criminal Procedure Code it must be shown that he is by habit a thief, a robber,
a receiver of stolen properties etc. Ordinarily this is done by giving evidence
of his conduct in the past. What he is now and what he is likely to do now can
be proved by a reference to what he had been doing in the recent past. No doubt
the requirements of section 110 of the Criminal Procedure Code are usually
satisfied in the manner indicated by the learned Advocate-General. But, I do
not want to press the analogy too far. Certain facts, however, must be
remembered. If the persons who manage the affairs of a company commit acts of
fraud or misappropriation or malversation the only persons who are likely to
know about it at the time the wrongful acts are being committed are the
wrong-doers themselves, and, unless they fall out amongst themselves immediately,
information as to what has taken place will not ordinarily be forthcoming at
once. Before a shareholder or a creditor or any one else dealing with the
company gets an inkling about what has been taking place there must be an
interval of time. This is inevitable. Now if the arguments of Mr. Krishnaswami
Aiyar and of Mr. Thyagarajan were right what result will follow ? Since of
necessity the representation made to the Registrar must relate to something
that had taken place in the past - even though it is the proximate past - it
cannot relate to a state of things at present. In such a case there can be no
representation under sub-section (7) that would justify action by the
Registrar; the sub-section would be reduced to a set of idle words. It seems to
me, as the learned Advocate-General contended, that the proper way to look at
the matter is this : You study the allegation and put yourself various
questions. Do the allegation suggest a scheme or continuous set of operations ?
Are the persons who initiated or who operated the scheme still in a position to
carry on as they had been doing in the past ? If that is so, it will be
reasonable to infer that they continue their past mode of conduct and are
enriching themselves in the same manner that they had been doing in the past.
I want to make
on thing clear; I am expressing no opinion whatever on the truth or otherwise
of the allegations made by Parameswara Iyer in his letter to the Registrar of
Companies. Nor am I offering any comment on the explanation which the company
offered. It will suffice for present purposes to say that on the allegation of
Parameswara Iyer, the Registrar was entitled to take action under section 234
of the Act and make a report to the Central Government.
Parameswara
Iyer did not merely allege that there had been one act of misappropriation.
According to him, the managing agents of the company had been continuously
siphoning off the resources of the company for their private benefit. The
specific charges he made indicate not merely the magnitude of the defalcation
which he attributed to the managing agents; if believed they would cogent
evidence of a systematic course of dishonest or fraudulent dealing. As I said
before, if the Registrar was persuaded that the allegations of Parameswara Iyer
were prima facie true, he would have been within his rights in taking the view
that the old modus operandi continued.
The next
remark I would make here is that neither sub-section (6) nor sub-section (7)
requires that the Registrar of Companies should record any finding. Nor do
either of the sub-sections say that the Registrar has to be satisfied that the
representations are true; it is enough if he is of opinion that the affairs of
the company are being carried on in the manner specified in sub-section (7).
"Opinion", it will be realised, does not denote the same state of
mind as is indicated by the word "finding" or
"satisfaction". The three words indicate varying stages of the
intellectual process.
It must not be
overlooked that the present writ petition is directed not against the report of
the Registrar, but against the order of the Central Government. The Central
Government are by no means bound to accept the views or opinions of the
Registrar. He makes his report and the decision is the decision not of the
Registrar but of the Government.
Yet another
argument was advanced. It was said that the provisions of sub-section (7) of
section 234 do not apply to the present case because even if the allegations of
Parameswara Iyer are assumed to be true it cannot be said that the business of
the company is being carried on in fraud of its creditors because no creditors
has been defrauded or even complains that he has not been paid. Nor can it be
said that it is being carried on in fraud of persons dealing with the company
because there is no such allegation. And so, all that remains in that
sub-section is the requirements that there must be representation that the
business of the company is being carried on for a fraudulent or unlawful
purpose. Assuming for a moment that there was misappropriation of the funds of
the company by the managing agents, that does not show that the business of the
company was being carried on "for a fraudulent or unlawful purpose".
The argument was that, before we can say such a thing, it must be shown that
the primary purpose of the operations of the company is fraudulent or unlawful.
In assessing
the validity of this argument one must bear in mind the purpose of this and
other similar provisions in the Act. They are intended, if I may use the
analogy, to enable medicinal or surgical treatment to be administered to the
company before it becomes necessary to do a post-mortem examination. There are
various provisions in the Act - not all of them very effective, however
formidable they may appear to be on page - which enable delinquent directors or
office bearers of the company to be proceeded against. There are also various
other provisions which enable further investigation and further pursuit to be
made after the company has gone into the hands of the official liquidator. The
provisions relating to information and investigation are intended to enable the
Government to remedy things even at the outset. Therefore, if it appears that
the managing agents of the company have been misappropriating its funds then it
will not be an answer to say that no creditor or person dealing with the
company has yet been defrauded. That will be the inevitable consequence if the
matter is allowed to develop along the lines the managing agents are alleged to
be following. In any case, it seems to me, that the allegations that the
managing agents of the company are misappropriating its funds can be brought
within the ambit of the expression "or otherwise for a fraudulent or
unlawful purpose". It is unnecessary that the sole object of the
operations which the managing agents carry on should be fraudulent or unlawful.
It is not even necessary that it should be the dominant object. It would be
sufficient if it is one of their objects. I am not prepared to accept the
argument that the managing agents of the company can stave off an enquiry by
alleging that the income of the company amounts to say - Rs. 10,00,000, and
that they have been misappropriating only one lakh of rupees.
All the
arguments based on sub-sections (6) and (7) of section 234 must, it seems to
me, fail.
I would here
refer to a case reported in In re Grosvenor and West-End Railway Terminus Hotel
Co. That was a case in which the Board of Trade appointed an inspector to
investigate and report on the affairs of the Grosvenor and West-End Railway
Terminus Hotel Co. The company took out summons for the issue of a writ of
prohibition to the board and to the inspector, to prohibit them from further
proceeding with the enquiry. The writ was refused by LAWRENCE J. The company
appealed. That appeal was also dismissed.
Sections 56
and 59 of the Companies Act, 1862, of England provided as follows :
"56. The
Board of Trade may appoint one or more competent inspectors to examine into the
affairs of any company under this Act, and to report thereon, in such manner as
the Board may direct, upon the applications following, that is to say
..................
59. Upon the
conclusion of the examination the inspectors shall report their opinion to the
Board of Trade."
In the course
of his judgment LORD ESHER M.R. observed :
"The
inquiry held by the inspector is not a judicial inquiry, and has nothing in the
nature of a judicial determination. Now, there are certain preliminaries to be
observed before the Board of Trade has power to appoint an inspector under
section 56. Even in a case in which the Board had assumed to appoint an
inspector without those preliminaries being observed, it seems to me that no
writ of prohibition could be issued against them."
In the present
case one point sought to be made is that there has been an irregularity in the
procedure of the Registrar. If the court was justified in refusing to issue a
writ where the preliminaries were not observed at all as in the English case just
referred to, I do not see how an irregularity in observing the preliminaries
will justify the issue of a writ.
Another
argument was based on the terms of section 235 of the Act. That section opens
as follows :
"The
Central Government may 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."
The duties of
an inspector appointed under this section, said Mr. Krishnaswami Aiyar, are of
a quasi-judicial nature. In order therefore to be competent within the meaning
of the section it is not sufficient that he has got the requisite skill to do
the work assigned to him. He must also be free from any bias which would
disqualify. In the present case Mr. Srinivasan, whom the Central Government
have appointed as inspector, is, by reason of his bias, wholly disqualified for
holding the enquiry. Mr. Srinivasan was auditor of the Kadri Mills Ltd. in
Coimbatore. In his audit report he pointed out various irregularities
suggesting misconduct on the part of Gopal Naidu and his sons. On the strength
of his report criminal proceedings were instituted against Gopal Naidu and his
three sons in C.C. No. 531 of 1953, on the file of the Additional First Class
Magistrate of Coimbatore. Mr. Srinivasan's report was the principal document
for the prosecution and he was also their principal witness. When he was
cross-examined he was compelled to admit that his report was incorrect and the
charges were groundless. In one portion of his evidence he stated :
"that he
took full responsibility for his report for finalising which he alone took
about a month, but in the later portion of his evidence after a admitting that
his report was incorrect in material particulars, blamed his assistants for the
errors of omission and commission. The trying magistrate acquitted the accused,
but in his judgment made certain strong observations against the conduct of the
first respondent."
(Vide
paragraph II of the affidavit in support of the petition). Mr. Krishnaswami
Aiyar very strongly argued that in these circumstances Mr. Srinivasan is
disqualified for the office of inspector to which he has been appointed by the
Central Government because that office is a quasi-judicial office. The inspector,
said Mr. Krishnaswami Aiyar, has very large powers. In order to investigate the
affairs of one company he may, if he thinks it necessary to do so, investigate
the affairs of any other company or individual as set out in section 239 of the
Act. He can compel the production of all the documents he wants. He can examine
on oath any of the persons referred to in sub-section (1) of section 240, and,
if any person refuses to obey his direction to produce any document or to
answer questions put to him the inspector may certify the refusal to the court
and the court may after hearing the matter punish the offender as if he had
been guilty of contempt of court. The inspector is also entitled to invoke the
assistance of the court under sub-section (4) of section 240 on various
matters. He is required to take down in writing notes of examination of
witnesses and these have to be signed by the deponent thereafter. Such notes
may be used in evidence against the deponent. On the report which the inspector
makes the Government of India may institute a prosecution under section 242.
Section 246 of the Act provides that the report of the inspector "shall be
admissible in any legal proceeding as evidence of the opinion of the inspector
...... in relation to any matter contained in the report."
In spite of
all this, I am unable to take the view that the duties of an inspector
appointed by the Central Government under section 235 or under section 237 of
the Act are quasi-judicial in their nature. The words of the section themselves
make it plain that his duty is to investigate the affairs of a company and to
report thereon. His position is analogous to that of a sub-inspector of police
who goes out to investigate a crime which has been reported at his station.
That the inspector appointed under the Companies Act has got powers to take
evidence on oath while a sub-inspector of police has no such powers does not
make any real difference. To carry out his duties the inspector appointed under
the Act is given certain facilities and powers in the same manner as a
sub-inspector of police is given facilities and powers under the Criminal
Procedure Code.
Continuing his
argument on this part of the case Mr. Krishnaswami Aiyar said that an inspector
appointed under the Act has to make certain decisions and that this makes his
duties quasi-judicial in nature. But then, that is also the position of an
inspector or sub-inspector of police. He too has to take decisions on various
matters. Will he search a particular house ? Will he seize particular papers ?
Will he arrest a particular person ? That decisions have to be taken on various
matters during the course of an investigation does not make the investigation a
quasi-judicial proceeding. Revenue officers are from time to time called upon
by the Board of Revenue or the Government to investigate and report on various
administrative matters, during the course of which they may take evidence on
oath; as for example the condition of affairs in a municipality or a panchayat
or other body working in a district. But so far as I am aware such duties have
never been held to be quasi-judicial in character. The position of an inspector
under section 235 of the Act appears to me to be very similar to that of a
revenue officer enquiring into matters of the kind mentioned above and on which
he has been called upon to report by the Board of Revenue or the Government. In
this particular case I find it hard to see how we can properly describe the
duties of the inspector as quasi-judicial. He has no parties before him. The
Central Government is not in the position of a plaintiff or complainant before
him. Nor even Parameswara Iyer, the original petitioner to the Registrar.
Parameswara Iyer cannot go before the inspector and insist that he has a right
to be present during the enquiry. Nor can Parameswara Iyer claim that the
inspector should examine witnesses in his presence and give him an opportunity
to cross-examine them. Likewise, the managing agents of the company cannot
insist that the inspector should examine all the witnesses in their presence
and that they should be given an opportunity to cross-examine them. Nor can
they insist that he should take all or even any part or the evidence that they
may tender. No doubt the inspector would in proper cases give the person who
has made his representation to the Registrar and the managing agents
opportunity to be present and facilities to put questions to the witnesses.
But, the important thing is that they have no right to do so. What evidence he
will take, whom all he will examine, in what order he will examine them, what
line of enquiry he will pursue, are all matters in the obsolete discretion of
the inspector. And finally, he is not required to give any decision on the
matter, no report that he may make is binding on the Government or the company
or the managing agents or the person at whose instance the Registrar took
action.
Mr.
Krishnaswami Aiyar referred to Venkatasubba Reddi v. Registrar of Co-operative
Societies where it was held that the functions of the Registrar of Co-operative
Societies in considering the question of registration under-section 12(2) of
the Co-operative Societies Act, are undoubtedly quasi-judicial. I do not think
that this case helps Mr. Krishnaswami Aiyar because a Registrar has to make an
order and before doing so he has to be satisfied that there has been no
contravention of the Act or the Rules. Besides, the direction that he gives
conclusively determines certain rights and is tantamount to an adjudication.
Mr.
Krishnaswami Aiyar also referred to Southern Railway v. Railway Rates Tribunal.
But that case deals with Railways Rates Tribunals whose duties are very
different indeed from those of an inspector.
The decision
in Thangal Kunju Musaliar v. Venkatachalam Potti, on which Mr. Krishnaswami
Aiyar placed some reliance dealt with the powers of an officer appointed by the
Indian Income-tax Investigation Commission to investigate into certain
allegations of tax evasion by a Thangal of Travancore. But I am unable to see
anything in the report that helps Mr. Krishnaswami Aiyar.
The case in
Bharat Bank v. Employees of Bharat Bank, which Mr. Krishnaswami Aiyar cited
relates to an industrial tribunal whose position, again, is entirely different
from that of an inspector appointed under the Companies Act.
Much nearer in
point are the cases referred to by the learned Advocate-General. Of these one
is In re Grosvenor and West End Railway Terminus Hotel Co. which has been
already referred to. The views of LORD ESHER M.R. have already been quoted.
CHITTY L.J. was of the same opinion :
"The
beginning and the end of the duty of an inspector appointed under section 56 is
to examine and report. He does not occupy a quasi-judicial position. The
proceedings before him are not judicial in any proper sense of the term. There
is no court, and no judge, nor anyone assuming to constitute a court, or
exercising a jurisdiction which he does not possess, or exceeding any
jurisdiction which he has. As has been pointed out, the whole business begins
and ends with the enquiry and report. The report cannot be made the foundation
of any subsequent action, it is merely evidence of the opinion of the
inspector. He is nothing more than an inspector as he is described in the
Act."
The case of
Hearts of Oak Assurance Co. v. Attorney-General, dealt with an inspector
appointed by the Industrial Assurance Commissioner under section 17,
sub-section (1), of the Industrial Assurance Act, 1923, for the purpose of
examining into the reporting on the affairs of an industrial assurance company.
The court observed :
"It
appears to me to be clear that the object of the examination is merely to
recover information as to the company's affairs and that it is in no sense a
judicial proceeding for the purpose of trial of an offence; it is enough to
point out that there are no parties before the inspector, that he alone
conducts the inquiry, and that the power to examine on oath is confined to the
officers, members, agents and servants of the company."
It is well
settled that where the duties of an officer are not judicial or quasi-judicial
the question of bias becomes irrelevant and does not disqualify. See Franklin
v. Minister of Town and Country Planning. LORD THANKERTON observed :
"..... I
could wish that the use of the word 'bias' should be confined to its proper
sphere. Its proper significance, in my opinion, is to denote a departure from
the standard of even-handed justice which the law requires from those who
occupy judicial office, or those who are commonly regarded as holding a quasi-judicial
office, such as an arbitrator. The reason for this clearly is that, having to
adjudicate as between two or more parties, he must come to his adjudication
with an independent mind, without any inclination or bias towards one side or
other in the dispute ....... But, in the present case, the respondent having no
judicial duty, the only question is what the respondent actually did, that it,
whether in fact he did genuinely consider the report and the objections."
I may also
usefully quote here the head-note to the case :
"In
considering the report of the person who has held a public local inquiry under
sch. I, para. 3 of the New Towns Act, 1946, after objections have been made to an
order under s. 1, sub-s. (1) of the Act, the Minister of Town and Country
Planning has no judicial or quasi-judicial duty imposed on him, so that
considerations of bias in the execution of such a duty are irrelevant, the sole
question being whether or not he genuinely considered the report and the
objections."
All the
objections taken before me fail. This writ petition is therefore dismissed with
costs of the second respondent. Advocate's fee Rs. 250.
Petition
dismissed.
MADHYA PRADESH HIGH COURT
[2005] 62 SCL 557 (MP)
High Court of Madhya Pradesh,
v.
Union of
S.K. SETH, J.
W.P. NO. 28 OF 2004
FEBRUARY 21, 2005
Section 235, read with section 234, of the
Companies Act, 1956 - Investigation of affairs of a company - Whether it is not
always necessary for Registrar of Companies (RoC) to seek information or
explanation from company for formation of opinion as per section 234, as
neither principles of natural justice are in built in section 234 nor is it a
sine qua non to call information from company - Held, yes - Whether such an
administrative decision and function of RoC does not affect any of fundamental
rights of company and, therefore, it is not open to primary or strict judicial
review - Held, yes
FACTS
Pursuant to orders passed on behalf of the Central Government under section 235(1) ordering investigation by respondent No. 3 into the affairs of the petitioner-company, the respondent No.3 issued summons to the principal officer of the petitioner-company to produce books of account and other documents as well as to give evidence.
The petitioner company filed writ petition contending that in the absence of any report of the RoC, the impugned order had been issued, which was per se illegal, without jurisdiction and as such unsustainable in law. Alternatively, it was urged that if there was a report of RoC, then it had been obtained behind the petitioner’s back without seeking any information or explanation and as such, it was arbitrary.
HELD
Various sections including section 234 falling under
part VI enjoin upon a company governed by the Act to furnish documents and
information to RoC. Requirement of section 234 is, thus, satisfied for
formation of opinion and it is not always necessary for the RoC to seek information
or explanation from the company for formation of opinion as per section 234.
Neither the principles of natural justice are inbuilt in section 234 nor is it
a sine qua non to call information from the company. Thus, from the documents
which a company is required to submit under the provisions of the Act, RoC may
form an opinion that such documents disclose an unsatisfactory state of affairs
or do not disclose full and fair statement of any matter to which the document
purports to relate. It is not necessary for the RoC to seek information or
explanation to form an opinion with regard to affairs of the company and for
preparation of report under section 234(1) read with section 234(6). Parliament
has entrusted the discretion to RoC to prepare and submit report. Such an
administrative decision and function did not affect any of the fundamental
rights of the petitioner company and, therefore, it was not open to primary or
strict judicial review. Thus, on the secondary review, there was no
arbitrariness in not seeking explanation or information from the company. [
An investigation ordered under section 235(1) is
purely a fact-finding enquiry and nothing more and that did not affect any of
the rights of the petitioner-company. Protection of investors was one of the
primary themes of the Act. If the relevant provisions of the Act dealing with
enquiries and investigations of the affairs of the companies are considered
from that point of view, there would be no difficulty in holding that
investigation ordered was not arbitrary. [
The last submission was that during investigation
petitioner or its principal officer under section 240 could be compelled to
give evidence which could be used against company. By implication, the
petitioner tried to invoke the fundamental right guaranteed under article 20(3)
of the Constitution. This question was no longer res integra. A constitutional
bench of five judges of the Supreme Court had settled the controversy in Raja
Narayanlal Bansi Lal v. Maneck Phiroze Mistry AIR 1961 SC 29. According to said
decision when a person is called upon under the provisions of Act to give
evidence and produce documents, he cannot be said to be a person accused of any
offence as is required under article 20(3). [
In the result, the writ petition stood dismissed.
CASES REFERRED TO
Rohtas Industries Ltd. v. S.D. Agarwal AIR 1969 SC 707 (para 2), Sri Ramdas Motor Transport Ltd. v. Tadi Adhinayana Reddy AIR 1997 SC 2189 (para 2), Badri Prasad Chikwa v. State of M.P. AIR 1999 MP 38 (para 2), Union of India v. W.N. Chadha AIR 1993 SC 1082 (para 3), Narayanlal Bansilal v. Maneck Phirose Mistry AIR 1959 Bom. 320 (para 3), Coimbatore Spg. & Wvg. Ltd. v. M.S. Shrinivasan AIR 1959 Mad. 229 (para 3), Damoh Panna Sagar Rural Regional Bank v. Munna Lal Jain 2005 AIR SCW 95 (para 5) and Raja Narayanlal Bansi Lal v. Maneck Phiroze Mistry AIR 1961 SC 29 (para 7).
Vijay Asudani for the Petitioner. T.N. Singh for the Respondent.
ORDER
1. This writ petition is directed against the Order dated 16-12-2003
(Ann. P-2) and the Summons dated 2-1-2004 (Ann. P-3). Order dated 16-12-2003 on
behalf of the Central Government has been passed by respondent
No. 2 under section 235(1) of the Companies Act, 1956 (hereinafter referred to
as ‘Act’) ordering investigation by respondent No.3 into the affairs of the
petitioner company. In order to carry out investigation, respondent No. 3 has
issued summons to the Principal Officer of the petitioner company to produce
Books of Account and other documents and papers and as well as to give evidence
from 7-1-2004 to 9-1-2004.
2. Facts lie in a narrow compass. Petitioner is a company
registered under the provisions of the Act. It is alleged that without there
being any report of the Registrar of Companies (hereinafter referred to as
‘RoC’) the order dated 16-10-2003 P-2 has been issued which is per se illegal,
without jurisdiction, and as such unsustainable in law. Alternatively, it is
urged that if there is any report of RoC as contemplated under section 234(6)
of the Act, then it has been obtained behind the petitioner’s back without
seeking any information or explanation and as such, it is arbitrary and
deserves to be quashed by appropriate writ. It was also urged that respondent
No.3 is making roving enquiry on the strength of vague summons, which is
impermissible. However, this contention was given up at the time of argument in
view of annexure P-4 issued by the Investigator-respondent No.3. It is
contended that without seeking explanation or information, RoC cannot prepare
report contemplated under section 234(6) of the Act consequently; the
investigation ordered against the petitioner is bad in law. Second submission
was that petitioner is entitled to have the copy of report as well as an
opportunity of prior hearing and without that petitioner is handicapped and
cannot effectively defend itself in the investigation. It was also contended
that during investigation petitioner or its principal officer under section 240
of the Act can be compelled to give evidence against it which is contrary to
law. These are the contentions that have been advanced by Shri Vijay Asudani,
learned counsel for the petitioner at the time of hearing. He also placed
reliance on the following decisions in Rohtas Industries Ltd. v. S.D. Agarwal AIR
1969 SC 707, Sri Ramdas Motor Transport Ltd. v. Tadi Adhinayana Reddy AIR 1997
SC 2189 and Badri Prasad Chikwa v. State of
3. Per contra, Shri T.N. Singh learned counsel appearing
for respondents submitted that Order dated 16-12-2003 has been passed under
section 235(1) of the Act on the report of RoC, and RoC is not required to seek
explanation or information for preparing report. According to him, under
section 234(1) of the Act report can also be prepared on the subjective satisfaction
based upon document filed under the provisions of the Act. He further contended
that subjective satisfaction is not open to review. Shri Singh also submitted
that before passing an order under section 235(1) of the Act, the respondents
are not under any legal obligation to furnish the report. Investigation is
purely a fact-finding enquiry and there is no lis between the respondents and
the petitioner company. It is only after the Investigator submits the report
the Central Government is required to forward the report under section 241(2)
of the Act. Shri Singh in support of his contentions placed reliance on the
decision of Supreme Court in Union of India v. W.N. Chadha AIR 1993 SC 1082 and
two decisions of
4. After having heard learned counsel for parties at length and going through the material available on record, in the considered opinion of this Court, there is no merit and substance in the submissions of learned counsel for petitioner and the writ petition being devoid of substance deserves to be dismissed.
5. While dealing with the rival submissions, one has to bear in mind that both, sections 234 and 235 of the Act fall under Part VI of the Act. Part VI of the Act deals with the Management and Administration of companies registered under the Act. Various sections falling under part VI of the Act enjoin upon a company governed by the Act to furnish documents and information to the RoC. For example, section 146 of the Act casts a statutory duty to furnish to RoC the situation of the registered office of the company within thirty days of incorporation; section 149 of the Act puts restriction on commencement of business of company where a company having share capital has issued prospectus inviting public to subscribe to shares or exercise any power of borrowing unless a duly verified declaration by a Director or the Secretary is filed with RoC under section 149(1)(d) or section 149(2)(c) and section 149(2A) of the Act; section 150 of the Act requires intimation to RoC where a company has converted any of its share into stock; section 157 of the Act makes it compulsory for a company to inform the RoC situation of foreign register and where it is kept; section 159 of the Act requires furnishing of annual returns to the RoC containing the particulars specified in part I of Schedule V; Annual returns along with certificate under section 161 of the Act; Registration of resolution under section 192 of the Act ; Annual Balance Sheet and profit and loss under section 220 of the Act; Appointment of Auditors under section 224 of the Act. These are only some of the provisions that require a company to submit documents under the provisions of the Act. Requirement of section 234 of the Act is thus satisfied for formation of opinion and it not always necessary for the RoC to seek information or explanation from the company for formation of opinion as per section 234. In the considered opinion of this Court. Neither the principles of natural justice are inbuilt in section 234 of the Act nor is it a sine qua non to call information from the petitioner company. Reliance placed on Badri Prasad Chikwa’s case (supra) is misconceived. In that case, the court was dealing with removal of Elected Counsellor of a Municipality under section 41 of the M.P. Municipalities Act, 1961. Section 41, itself provides for affording an opportunity of hearing before removing the Counsellor because such removal entails disqualification. Thus removal from elected office has civil consequences which are missing in the present case. Thus, in the considered opinion of this court, from the documents which a company is required to submit under the provisions of the Act, RoC may form an opinion that such documents disclose an unsatisfactory state of affairs or do not disclose full and fair statement of any matter to which the document purports to relate. It is not necessary for the RoC to seek information or explanation to form an opinion with regard to affairs of the company and for preparation of report. Under section 234(1) read with section 234(6). Parliament has entrusted the discretion to RoC to prepare and submit report. Such an administrative decision and function does not affect none of the fundamental right of the petitioner company, therefore, it is not open to primary or strict judicial review as explained in the latest decision of Their Lordships of the Supreme Court in Damoh Panna Sagar Rural Regional Bank v. Munna Lal Jain 2005 AIR SCW 95. Applying the Wednesbury’s principle, it is clear that the scope of judicial review in the present case is secondary in nature to see whether RoC can form an opinion on basis of documents submitted by a company under the provisions of the Act. In the foregoing discussion, it has already been held that from the documents which a company is required to submit under the provision of the Act, RoC may form an opinion if such documents disclose an unsatisfactory state of affairs or do not disclose full and fair statement of any matter to which the document purports to relate. Thus, on the secondary review, there is no arbitrariness in not seeking explanation or information from the company. Thus, there is no force in the submissions of Shri Vijay Asudani that principles of natural justice are inbuilt under section 234 of the Act.
6. Now coming to other submissions of learned counsel for petitioner, in the considered opinion of this Court they are devoid of merit. The Central Government is not bound by the report of RoC. Under section 235(1), it may order an investigation. An investigation is purely a fact-finding enquiry and nothing more that does not affect any of the rights of the petitioner-company. In the considered opinion of this Court the law relating to investigation as laid down in W.N. Chadha’s case (supra) is more close to the facts of the case in hand. Their Lordships after analyzing various authorities have held at the stage of investigation rule of audi alterem partem is inapplicable because the investigator is not deciding any matter except to collect material and prior notice and opportunity of hearing would frustrate very object of investigation and enquiry. Under the provisions of the Act, petitioner is entitled for a copy of report only under section 241. During the course of final arguments, it was submitted by Shri Singh that investigator appointed by the Central Government has submitted the report and action thereon shall be taken as per law. One cannot forget that a company is a creature of the statute. There can be no doubt that one of the objects of the Companies Act is to throw open to all citizens the privilege of carrying on business with limited liability. Inevitably the business of the company has to be carried on through human agency, and that sometimes gives rise to irregularities and malapractices in the management of the affairs of the company. Protection of investors is one of the primary themes of the Act. If the relevant provisions of the Act dealing with enquiries and investigations of the affairs of the companies are considered from this point of view there would be no difficulty in holding that investigation ordered is not arbitrary.
7. The last submission was that during investigation petitioner or its principal officer under section 240 of the Act can be compelled to give evidence that can be used against Company. By implication, learned counsel for petitioner tried to invoke the fundamental right guaranteed under Article 20(3) of the Constitution. This question was no longer res integra. A constitutional bench of five judges of the Supreme Court had settled the controversy in Raja Narayanlal Bansi Lal v. Maneck Phirose Mistry AIR 1961 SC 29. According to said decision when a person is called upon under the provisions of Act, to give evidence and produce documents he cannot be said to be a person accused of any offence as is required under Article 20(3) of the Constitution.
8. In view of the foregoing discussion, this Court finds no
merit in the submissions made by learned counsel for petitioner, it is not
necessary to discuss various decisions cited at the time of arguments because
in none of them controversy involved in the present case was dealt with. In the
result, the writ petition fails and is accordingly stands dismissed. No order
as to costs.
[1959]
29 COMP. CAS. 97 (MAD.)
HIGH COURT OF
V.
BALAKRISHNA
AYYAR, J.
WRIT
PETITION NO. 428 OF 1957
JULY
24, 1958
BALAKRISHNA
AYYAR, J. - This is a petition for the issue of a writ prohibiting the
first respondent Mr. M. S. Srinivasan from holding an enquiry and conducting an
investigation into the affairs of the Coimbatore Spinning and Weaving Co. Ltd.,
in pursuance of an order dated April 4, 1957, made by the Government of India.
The relevant
facts are these. In May, 1956, one Parameswara Iyer, a shareholder in the
Coimbatore Spinning and Weaving Company Ltd. wrote to the Registrar of
Companies in which he made various allegations against the management. He said
that the managing agents "have since their assumption of office been
acting most selfishly jeopardising the interests of the company and have by
frauds, misfeasance, misconduct, misappropriation and falsification of accounts
and various other acts in contravention of law unduly enriched themselves at
the expense and loss of the company causing loss not only to members but also
to the Government by suppressing the true income and defrauding the taxes
legitimately due."
He then
proceeded to enumerate what he called a few of the major items of fraud and
misconduct of the managing agents.
(1) The managing agents of
the company are firm consisting of two partners, viz., V. Gopal Naidu and A. V.
Srinivasalu Naidu. Between the years 1944 and 1952 three bungalows were
constructed in
(2) A sum of Rs. 70,000,
was paid out of the company's funds to the G.E.C. (
(3) In 1951 Amirthammal, a
granddaughter of Gopal Naidu, was married and in connection with that event a
sum of over a lakh of rupees was expended. About Rs. 91,800 of the money thus
spent came out of the funds of the mills, the amount being debited to various
items such as purchases of mill stores, cotton waste, etc.
(4) In spite of the fact
that the mills turned out large quantities of the cotton waste which were
available for sale, a sum of Rs. 70,000 was shown to have been expended on the
purchase of cotton waste from one Arumugham Chettiar of Kinathukadavu. This
transaction is a bogus one.
(5) Various expenses
incurred by the managing agents and their friends for their personal and
private needs were debited to the accounts of the mills.
"A debit
note of Rs. 36,840 in N. Ramaswami Naidu's account, credit given to him in the
succeeding year will show the fictitiousness of the transactions and
accounts."
On 7th June,
1956, the Registrar of Companies,
On 6th July,
1956, the Registrar of Companies again wrote to the company asking it to send
its detailed remarks on each of the specific allegations within 15 days. The
company's attention was also drawn to section 234 of the Companies Act, 1956,
and it was told that in the absence of a detailed answer it would be presumed
that it had no explanation to give. To this the company replied by a letter
dated 19th July,1956, asking for a month's time in order that it might examine
the several allegations and give its explanation.
On 6th August,
1956, the manager of the company and Mr. Srinivasa Aiyar, an advocate of the
company, filed before the Registrar a written explanation dated 5th August,
1956. On 23rd August, 1956, the company wrote that Messrs. V. Rajagopalachari
and V. Srinivasa Aiyar, advocates, had been authorised to represent the company
and requested that they be heard on behalf of the company with reference to the
statement that had been filed on 6th August, 1956. On 24th August, 1956, Messrs
V. Rajagopalachari and V. Srinivasa Aiyar explained the various allegations
that had been made and they stated that the ledgers and vouchers would be
produced on 6th September, 1956, for inspection. On 19th October, 1956, Mr.
Rajagopalachari again appeared and furnished to the Registrar typed copies of
certain accounts and vouchers. He also appears to have addressed certain legal
arguments and contended that it was not a fit case either on the facts or in
law for the Registrar to find that the affairs of the company were in an
unsatisfactory state, that there was no bona fides in the complaint and that it
was a fit and proper case wherein the Registrar should find that the complaint
was frivolous and vexatious and that he should disclose the indentity of the
informant to the company.
On 27th
November, 1956, the Registrar submitted his report to the Government of India.
On 10th April,
1957, the Government of India appointed Mr. M. S. Srinivasan, a Chartered
Accountant of Coimbatore, as an inspector, :
"to
investigate into the affairs of the company and to point out all irregularities
and contraventions in respect of the provisions of the Companies Act or of any
other law for the time being in force."
On 12th April,
1956, Mr. Srinivasan called at the office of the company and tendered a letter
he had himself written pointing out that he had been appointed by the Central
Government as an inspector to investigate the affairs of the company and asking
that various books be delivered to him. The company telegraphed and also wrote
to the Government of India requesting that some person other than Mr.
Srinivasan be appointed as inspector. On 20th/22nd April, 1957, the Government
of India wrote to the company to say that they saw no grounds for changing the
inspector and adding,
"In
case, however, you experience any difficulties during the investigation, you
can always represent them to the Regional Director of this Department, who has
been instructed to look into them."
In these
circumstances the present writ petition has been filed by the company.
It was stated
that holders of some 31,000 shares assembled in meeting and passed a resolution
appointing Mr. T. T. R. Pillai to intervene on their behalf and represent their
view to the Central Government. On behalf of these shareholders Mr. Thyagarajan
sought leave to intervene in the present proceedings and he was permitted to do
so.
Mr. T. M.
Krishnaswami Aiyar, the learned advocate for the company, as also Mr.
Thyagarajan raised certain objections based on sub-section (7) of section 234
of the Companies Act, 1956, which runs as follows :
"If it
is represented to the Registrar on materials placed before him by any
contributory or creditor or any other person interested 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), (4) and (6) of this section shall
apply to such order.
If upon
inquiry the Registrar is satisfied that any representation on which he took action
under this sub-section was frivolous or vexatious, he shall disclose the
identity of his informant to the company."
The first
objection was this. This sub-section requires the Registrar to conform to a
certain procedure. When it is represented to him that the business of company
is being carried on in the manner specified in the sub-section it is open to
him to ignore the representation and take no action on it. But, if he decides
to act on it, he must first of all give the company "an opportunity of
being heard". Thereafter he must issue a written order calling upon the
company to furnish in writing any information or explanation on matters which
the Registrar may specify in the order. In the present case no written order
has been made conforming to the requirements of the sub-section. This deviation
from the procedure prescribed by the sub-section is fatal to the entire
proceedings. The result is that the report which ultimately followed must be
treated as one having no existence in law; for all legal purposes it is non
est. The order of the Central Government based on such a report must also fall.
I am unable to
accept this objection. On 7th June 1956, the Registrar of Companies did write a
letter to the Coimbatore Spinning and Weaving Company Ltd., enclosing extracts
from the complaint which he had received from Parameswara Iyer and calling for
very urgent and detailed remarks from the company. I cannot therefore accept
the objection that there was no written order calling on the company to furnish
its explanation. The omission of the Registrar was not in respect of this but
in respect of another matter. What he failed to do was to give the company
"an opportunity of being heard" before he made his written order. The
company was undoubtedly heard through advocates on at least two days, viz.,
24th August, 1956, and 19th October, 1956, though it was subsequent to the
written order. As a matter of substance, therefore, the company cannot complain
either that it was not heard or that it was not given an opportunity to present
its case in writing. The mistake made by the Registrar was in omitting to give
the company an opportunity of being heard before he made his written order.
This irregularity does not appear to me to be of any importance in the circumstances
of the present case. What is the object of prescribing that the company should
be given an opportunity of being heard ? Obviously in order that the company
may satisfy the Registrar that the allegations are so frivolous or vexatious or
that for some other reason there is no justification at all for taking further
action on the representations that were made. The object of the written order
is to enable the company to know the substance of the allegations made against
it and which it is required to meet. The entire purpose of this portion of the
sub-section is to enable the company to gives its explanation and present its
case to the Registrar; and, that opportunity it had in ample measure. It was
given full facilities for submitting its written explanation and its advocates
were heard, and, as I said before, on two occasions.
Be it
remembered that here we are concerned with a procedural matter and its is not
every deviation from the prescribed procedure that would vitiate the result. It
will be wrong to assimilate the procedure prescribed in a matter of this kind
to the procedure which attaches to religious rituals. There has been, in my
opinion, substantial compliance with the requirements of the statute, and, in
any case, the company has not suffered any prejudice. I greatly doubt whether
if an irregularity of this nature is shown to have occurred in the course of a
criminal trail an appellate court would have set aside a conviction which
followed. Even supposing that the Registrar did commit an irregularity, I do
not see how it affects the jurisdiction of the Central Government to pass what
order they thought proper. The learned Advocate-General also pointed out that
this objection has not been taken in the writ petition itself; and that
objection appears to me to be correct.
Another
objection based on sub-section (7) of section 234 was this. That sub-section
requires that it should be represented to the Registrar 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 of unlawful purpose. The
representation itself must allege that the business of the company is being
carried on in the manner specified. It is not sufficient that the
representation should contain allegations that there had been fraud or
misfeasance or malfeasance or unlawful or fraudulent activities in the past.
The allegations must be that such is the present state of affairs. The
complaint which Parameswara Iyer sent to the Registrar contains only
allegations of what according to him took place between 1944 and 1952. Those
allegations are not equivalent to an allegation "that the business of the
company is being carried on in frand of its creditors," etc.
Besides, mere
representation to that effect will not do. The sub-section requires that the
Registrar, after giving the company an opportunity of being heard, should make
a written order calling upon it to furnish its explanation in writing. When the
stage is reached the provisions of sub-sections (2), (3), (4), (5), and (6) of
section 234 would apply.
Now,
sub-section (6) runs as follows :
"If such
information or explanation is not furnished within the specified time, or if
after perusal of such information or explanation the Registrar is of opinion
that the document in question discloses an unsatisfactory state of affairs, or
that it does not disclose a full and fair statement of the matter to which it
purports to relate, the Registrar shall report in writing the circumstances of
the case to the Central Government."
It will be
noticed that according to this sub-section the duty of the Registrar to report
to the Central Government would arise only when he "is of opinion that the
document in question discloses an unsatisfactory state of affairs, or that it
does not disclose a full and fair statement of the matter to which it purports
to relate."
There was some
argument as to the effect of this sub-section in relation to sub-section (7)
and the facts of this case. At one stage it was suggested that to enable the
Registrar to report to the Government it would be sufficient if he was
satisfied after examining the explanation of the company that it disclosed
"an unsatisfactory state of affairs." At another stage it was
suggested that since proceedings under sub-section (7) are initiated by a
representation that the business of the company "is being carried on in
fraud of the creditors" etc., the Registrar must be of opinion that the
representation is true and that the business of the company "is being
carried on" in the manner alleged.
Now, the
allegations of Parameswara Iyer related to what he said happened between 1944
and 1952 and, even if it supposed that his allegations are true, they will not
show that the business of the company is being carried on in fraud of its
creditors etc. What happened between 1944 and 1952 can in no circumstances
justify the view that "an unsatisfactory state of affairs" is
disclosed at present. The allegations of Parameswara Iyer are not sufficient
and cannot be regarded by any reasonable person as sufficient to show either
that the present state of affairs of the company is unsatisfactory or that the
affairs of the company are being carried on in the manner specified in
sub-section (7).
To support the
argument that the expression "is being carried on" refers to a
present state of affairs and not to what happened in the past reference was
made to the case reported in Southern Railway v. Railway Rates Tribunal.
I agree with
both Mr. Krishnaswami Aiyar and with Mr. Thyagarajan that the expression
"is being carried on" occurring in sub-section (7) relates to the
state of affairs at the time the representation to the Registrar is made and
not to something which is a matter of past history. But it does not appear to
me to be correct to say that in his letter to the Registrar, Parameswara Iyer
did not make any allegation about "the present state" of affair of
the company. In one paragraph of his letter - I have quoted it above and I
quote it again now - Parameswara Iyer expressly said :
"The
said managing agents have since their assumption of office been acting most
selfishly jeopardising the interests of the company and have by frauds,
misfeasance, misconduct, misappropriation and falsification of accounts and
various other acts in contravention of law unduly enriched themselves at the
expenses and loss of the company causing loss not only to members but also to
the Government by suppressing the true income and defrauding the taxes
legitimately due."
This passage
can be fairly read as meaning that ever since the time the managing agents
entered on their duties they have been committing acts of fraud, misfeasance
and misappropriation and that state of affairs continues. It will not,
therefore, be right to say that there was no representation at all before the
Registrar of Companies as required by sub-section (7).
It was very
strongly argued that even if it be that between 1944 and 1952 there had been
acts of fraud or misfeasance or malversation that is not sufficient to show that
the same state of things continues.
To this
argument the learned Advocate-General replied by referring to certain
provisions of the Criminal Procedure Code. He remarked that before a person can
be required to furnish security for his good behaviour under section 110 of the
Criminal Procedure Code it must be shown that he is by habit a thief, a robber,
a receiver of stolen properties etc. Ordinarily this is done by giving evidence
of his conduct in the past. What he is now and what he is likely to do now can
be proved by a reference to what he had been doing in the recent past. No doubt
the requirements of section 110 of the Criminal Procedure Code are usually
satisfied in the manner indicated by the learned Advocate-General. But, I do
not want to press the analogy too far. Certain facts, however, must be
remembered. If the persons who manage the affairs of a company commit acts of
fraud or misappropriation or malversation the only persons who are likely to
know about it at the time the wrongful acts are being committed are the
wrong-doers themselves, and, unless they fall out amongst themselves
immediately, information as to what has taken place will not ordinarily be
forthcoming at once. Before a shareholder or a creditor or any one else dealing
with the company gets an inkling about what has been taking place there must be
an interval of time. This is inevitable. Now if the arguments of Mr.
Krishnaswami Aiyar and of Mr. Thyagarajan were right what result will follow ?
Since of necessity the representation made to the Registrar must relate to
something that had taken place in the past - even though it is the proximate
past - it cannot relate to a state of things at present. In such a case there
can be no representation under sub-section (7) that would justify action by the
Registrar; the sub-section would be reduced to a set of idle words. It seems to
me, as the learned Advocate-General contended, that the proper way to look at
the matter is this : You study the allegation and put yourself various questions.
Do the allegation suggest a scheme or continuous set of operations ? Are the
persons who initiated or who operated the scheme still in a position to carry
on as they had been doing in the past ? If that is so, it will be reasonable to
infer that they continue their past mode of conduct and are enriching
themselves in the same manner that they had been doing in the past.
I want to make
on thing clear; I am expressing no opinion whatever on the truth or otherwise
of the allegations made by Parameswara Iyer in his letter to the Registrar of
Companies. Nor am I offering any comment on the explanation which the company
offered. It will suffice for present purposes to say that on the allegation of
Parameswara Iyer, the Registrar was entitled to take action under section 234
of the Act and make a report to the Central Government.
Parameswara
Iyer did not merely allege that there had been one act of misappropriation.
According to him, the managing agents of the company had been continuously
siphoning off the resources of the company for their private benefit. The
specific charges he made indicate not merely the magnitude of the defalcation
which he attributed to the managing agents; if believed they would cogent
evidence of a systematic course of dishonest or fraudulent dealing. As I said
before, if the Registrar was persuaded that the allegations of Parameswara Iyer
were prima facie true, he would have been within his rights in taking the view
that the old modus operandi continued.
The next
remark I would make here is that neither sub-section (6) nor sub-section (7)
requires that the Registrar of Companies should record any finding. Nor do
either of the sub-sections say that the Registrar has to be satisfied that the
representations are true; it is enough if he is of opinion that the affairs of
the company are being carried on in the manner specified in sub-section (7).
"Opinion", it will be realised, does not denote the same state of
mind as is indicated by the word "finding" or "satisfaction".
The three words indicate varying stages of the intellectual process.
It must not be
overlooked that the present writ petition is directed not against the report of
the Registrar, but against the order of the Central Government. The Central
Government are by no means bound to accept the views or opinions of the
Registrar. He makes his report and the decision is the decision not of the
Registrar but of the Government.
Yet another
argument was advanced. It was said that the provisions of sub-section (7) of
section 234 do not apply to the present case because even if the allegations of
Parameswara Iyer are assumed to be true it cannot be said that the business of
the company is being carried on in fraud of its creditors because no creditors
has been defrauded or even complains that he has not been paid. Nor can it be
said that it is being carried on in fraud of persons dealing with the company
because there is no such allegation. And so, all that remains in that
sub-section is the requirements that there must be representation that the
business of the company is being carried on for a fraudulent or unlawful
purpose. Assuming for a moment that there was misappropriation of the funds of
the company by the managing agents, that does not show that the business of the
company was being carried on "for a fraudulent or unlawful purpose".
The argument was that, before we can say such a thing, it must be shown that
the primary purpose of the operations of the company is fraudulent or unlawful.
In assessing
the validity of this argument one must bear in mind the purpose of this and
other similar provisions in the Act. They are intended, if I may use the
analogy, to enable medicinal or surgical treatment to be administered to the
company before it becomes necessary to do a post-mortem examination. There are
various provisions in the Act - not all of them very effective, however
formidable they may appear to be on page - which enable delinquent directors or
office bearers of the company to be proceeded against. There are also various
other provisions which enable further investigation and further pursuit to be
made after the company has gone into the hands of the official liquidator. The
provisions relating to information and investigation are intended to enable the
Government to remedy things even at the outset. Therefore, if it appears that
the managing agents of the company have been misappropriating its funds then it
will not be an answer to say that no creditor or person dealing with the
company has yet been defrauded. That will be the inevitable consequence if the
matter is allowed to develop along the lines the managing agents are alleged to
be following. In any case, it seems to me, that the allegations that the
managing agents of the company are misappropriating its funds can be brought within
the ambit of the expression "or otherwise for a fraudulent or unlawful
purpose". It is unnecessary that the sole object of the operations which
the managing agents carry on should be fraudulent or unlawful. It is not even
necessary that it should be the dominant object. It would be sufficient if it
is one of their objects. I am not prepared to accept the argument that the
managing agents of the company can stave off an enquiry by alleging that the
income of the company amounts to say - Rs. 10,00,000, and that they have been
misappropriating only one lakh of rupees.
All the
arguments based on sub-sections (6) and (7) of section 234 must, it seems to
me, fail.
I would here
refer to a case reported in In re Grosvenor and West-End Railway Terminus Hotel
Co. That was a case in which the Board of Trade appointed an inspector to
investigate and report on the affairs of the Grosvenor and West-End Railway
Terminus Hotel Co. The company took out summons for the issue of a writ of
prohibition to the board and to the inspector, to prohibit them from further
proceeding with the enquiry. The writ was refused by LAWRENCE J. The company
appealed. That appeal was also dismissed.
Sections 56
and 59 of the Companies Act, 1862, of England provided as follows :
"56. The
Board of Trade may appoint one or more competent inspectors to examine into the
affairs of any company under this Act, and to report thereon, in such manner as
the Board may direct, upon the applications following, that is to say
..................
59. Upon the
conclusion of the examination the inspectors shall report their opinion to the
Board of Trade."
In the course
of his judgment LORD ESHER M.R. observed :
"The
inquiry held by the inspector is not a judicial inquiry, and has nothing in the
nature of a judicial determination. Now, there are certain preliminaries to be
observed before the Board of Trade has power to appoint an inspector under
section 56. Even in a case in which the Board had assumed to appoint an
inspector without those preliminaries being observed, it seems to me that no
writ of prohibition could be issued against them."
In the present
case one point sought to be made is that there has been an irregularity in the
procedure of the Registrar. If the court was justified in refusing to issue a
writ where the preliminaries were not observed at all as in the English case
just referred to, I do not see how an irregularity in observing the
preliminaries will justify the issue of a writ.
Another
argument was based on the terms of section 235 of the Act. That section opens
as follows :
"The
Central Government may 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."
The duties of
an inspector appointed under this section, said Mr. Krishnaswami Aiyar, are of
a quasi-judicial nature. In order therefore to be competent within the meaning
of the section it is not sufficient that he has got the requisite skill to do
the work assigned to him. He must also be free from any bias which would
disqualify. In the present case Mr. Srinivasan, whom the Central Government
have appointed as inspector, is, by reason of his bias, wholly disqualified for
holding the enquiry. Mr. Srinivasan was auditor of the Kadri Mills Ltd. in
Coimbatore. In his audit report he pointed out various irregularities
suggesting misconduct on the part of Gopal Naidu and his sons. On the strength
of his report criminal proceedings were instituted against Gopal Naidu and his
three sons in C.C. No. 531 of 1953, on the file of the Additional First Class
Magistrate of Coimbatore. Mr. Srinivasan's report was the principal document
for the prosecution and he was also their principal witness. When he was
cross-examined he was compelled to admit that his report was incorrect and the
charges were groundless. In one portion of his evidence he stated :
"that he
took full responsibility for his report for finalising which he alone took
about a month, but in the later portion of his evidence after a admitting that
his report was incorrect in material particulars, blamed his assistants for the
errors of omission and commission. The trying magistrate acquitted the accused,
but in his judgment made certain strong observations against the conduct of the
first respondent."
(Vide
paragraph II of the affidavit in support of the petition). Mr. Krishnaswami
Aiyar very strongly argued that in these circumstances Mr. Srinivasan is
disqualified for the office of inspector to which he has been appointed by the
Central Government because that office is a quasi-judicial office. The
inspector, said Mr. Krishnaswami Aiyar, has very large powers. In order to
investigate the affairs of one company he may, if he thinks it necessary to do
so, investigate the affairs of any other company or individual as set out in
section 239 of the Act. He can compel the production of all the documents he
wants. He can examine on oath any of the persons referred to in sub-section (1)
of section 240, and, if any person refuses to obey his direction to produce any
document or to answer questions put to him the inspector may certify the
refusal to the court and the court may after hearing the matter punish the
offender as if he had been guilty of contempt of court. The inspector is also
entitled to invoke the assistance of the court under sub-section (4) of section
240 on various matters. He is required to take down in writing notes of
examination of witnesses and these have to be signed by the deponent
thereafter. Such notes may be used in evidence against the deponent. On the
report which the inspector makes the Government of India may institute a
prosecution under section 242. Section 246 of the Act provides that the report
of the inspector "shall be admissible in any legal proceeding as evidence
of the opinion of the inspector ...... in relation to any matter contained in
the report."
In spite of
all this, I am unable to take the view that the duties of an inspector
appointed by the Central Government under section 235 or under section 237 of
the Act are quasi-judicial in their nature. The words of the section themselves
make it plain that his duty is to investigate the affairs of a company and to
report thereon. His position is analogous to that of a sub-inspector of police
who goes out to investigate a crime which has been reported at his station.
That the inspector appointed under the Companies Act has got powers to take
evidence on oath while a sub-inspector of police has no such powers does not
make any real difference. To carry out his duties the inspector appointed under
the Act is given certain facilities and powers in the same manner as a
sub-inspector of police is given facilities and powers under the Criminal
Procedure Code.
Continuing his
argument on this part of the case Mr. Krishnaswami Aiyar said that an inspector
appointed under the Act has to make certain decisions and that this makes his
duties quasi-judicial in nature. But then, that is also the position of an
inspector or sub-inspector of police. He too has to take decisions on various
matters. Will he search a particular house ? Will he seize particular papers ?
Will he arrest a particular person ? That decisions have to be taken on various
matters during the course of an investigation does not make the investigation a
quasi-judicial proceeding. Revenue officers are from time to time called upon
by the Board of Revenue or the Government to investigate and report on various
administrative matters, during the course of which they may take evidence on
oath; as for example the condition of affairs in a municipality or a panchayat
or other body working in a district. But so far as I am aware such duties have
never been held to be quasi-judicial in character. The position of an inspector
under section 235 of the Act appears to me to be very similar to that of a
revenue officer enquiring into matters of the kind mentioned above and on which
he has been called upon to report by the Board of Revenue or the Government. In
this particular case I find it hard to see how we can properly describe the
duties of the inspector as quasi-judicial. He has no parties before him. The
Central Government is not in the position of a plaintiff or complainant before
him. Nor even Parameswara Iyer, the original petitioner to the Registrar. Parameswara
Iyer cannot go before the inspector and insist that he has a right to be
present during the enquiry. Nor can Parameswara Iyer claim that the inspector
should examine witnesses in his presence and give him an opportunity to
cross-examine them. Likewise, the managing agents of the company cannot insist
that the inspector should examine all the witnesses in their presence and that
they should be given an opportunity to cross-examine them. Nor can they insist
that he should take all or even any part or the evidence that they may tender.
No doubt the inspector would in proper cases give the person who has made his
representation to the Registrar and the managing agents opportunity to be
present and facilities to put questions to the witnesses. But, the important
thing is that they have no right to do so. What evidence he will take, whom all
he will examine, in what order he will examine them, what line of enquiry he
will pursue, are all matters in the obsolete discretion of the inspector. And
finally, he is not required to give any decision on the matter, no report that
he may make is binding on the Government or the company or the managing agents
or the person at whose instance the Registrar took action.
Mr.
Krishnaswami Aiyar referred to Venkatasubba Reddi v. Registrar of Co-operative
Societies where it was held that the functions of the Registrar of Co-operative
Societies in considering the question of registration under-section 12(2) of
the Co-operative Societies Act, are undoubtedly quasi-judicial. I do not think
that this case helps Mr. Krishnaswami Aiyar because a Registrar has to make an
order and before doing so he has to be satisfied that there has been no
contravention of the Act or the Rules. Besides, the direction that he gives
conclusively determines certain rights and is tantamount to an adjudication.
Mr.
Krishnaswami Aiyar also referred to Southern Railway v. Railway Rates Tribunal.
But that case deals with Railways Rates Tribunals whose duties are very
different indeed from those of an inspector.
The decision
in Thangal Kunju Musaliar v. Venkatachalam Potti, on which Mr. Krishnaswami
Aiyar placed some reliance dealt with the powers of an officer appointed by the
Indian Income-tax Investigation Commission to investigate into certain allegations
of tax evasion by a Thangal of Travancore. But I am unable to see anything in
the report that helps Mr. Krishnaswami Aiyar.
The case in
Bharat Bank v. Employees of Bharat Bank, which Mr. Krishnaswami Aiyar cited
relates to an industrial tribunal whose position, again, is entirely different
from that of an inspector appointed under the Companies Act.
Much nearer in
point are the cases referred to by the learned Advocate-General. Of these one
is In re Grosvenor and West End Railway Terminus Hotel Co. which has been
already referred to. The views of LORD ESHER M.R. have already been quoted.
CHITTY L.J. was of the same opinion :
"The
beginning and the end of the duty of an inspector appointed under section 56 is
to examine and report. He does not occupy a quasi-judicial position. The
proceedings before him are not judicial in any proper sense of the term. There
is no court, and no judge, nor anyone assuming to constitute a court, or
exercising a jurisdiction which he does not possess, or exceeding any jurisdiction
which he has. As has been pointed out, the whole business begins and ends with
the enquiry and report. The report cannot be made the foundation of any
subsequent action, it is merely evidence of the opinion of the inspector. He is
nothing more than an inspector as he is described in the Act."
The case of
Hearts of Oak Assurance Co. v. Attorney-General, dealt with an inspector
appointed by the Industrial Assurance Commissioner under section 17,
sub-section (1), of the Industrial Assurance Act, 1923, for the purpose of
examining into the reporting on the affairs of an industrial assurance company.
The court observed :
"It
appears to me to be clear that the object of the examination is merely to
recover information as to the company's affairs and that it is in no sense a
judicial proceeding for the purpose of trial of an offence; it is enough to
point out that there are no parties before the inspector, that he alone
conducts the inquiry, and that the power to examine on oath is confined to the
officers, members, agents and servants of the company."
It is well
settled that where the duties of an officer are not judicial or quasi-judicial
the question of bias becomes irrelevant and does not disqualify. See Franklin
v. Minister of Town and Country Planning. LORD THANKERTON observed :
"..... I
could wish that the use of the word 'bias' should be confined to its proper
sphere. Its proper significance, in my opinion, is to denote a departure from
the standard of even-handed justice which the law requires from those who
occupy judicial office, or those who are commonly regarded as holding a
quasi-judicial office, such as an arbitrator. The reason for this clearly is
that, having to adjudicate as between two or more parties, he must come to his
adjudication with an independent mind, without any inclination or bias towards
one side or other in the dispute ....... But, in the present case, the
respondent having no judicial duty, the only question is what the respondent
actually did, that it, whether in fact he did genuinely consider the report and
the objections."
I may also
usefully quote here the head-note to the case :
"In
considering the report of the person who has held a public local inquiry under
sch. I, para. 3 of the New Towns Act, 1946, after objections have been made to
an order under s. 1, sub-s. (1) of the Act, the Minister of Town and Country
Planning has no judicial or quasi-judicial duty imposed on him, so that
considerations of bias in the execution of such a duty are irrelevant, the sole
question being whether or not he genuinely considered the report and the
objections."
All the
objections taken before me fail. This writ petition is therefore dismissed with
costs of the second respondent. Advocate's fee Rs. 250.
Petition
dismissed.
[1957]
27 COMP. CAS. 97 (MAD.)
HIGH COURT OF
v.
RAJAGOPALAN,
J.
Writ
Petition No. 394 of 1956
AUGUST
3,1956
RAJAGOPALAN,
J. - The Agricultural and Industrial Corporation Ltd. was incorporated in
1947 under the provisions of the Indian Companies Act, 1913. At the meeting of
the general body of the shareholders held on 5th March, 1949, the petitioner
was elected the managing director of the company in the place of one Narayana
Rao who had been the managing director up to then. The petitioner claimed that
on 17th July, 1949, at another meeting of the general body of the shareholders,
one A.S. Venkata Rao was elected the managing director, and the petitioner
handed over charge of the affairs of the company to Venkata Rao. The claim in
the counter affidavit of the second respondent was that the petitioner
functioned along with A.S.Venkata Rao till 4th may, 1950, though Venkata Rao
had been elected as director in charge on 17th July, 1949. The petitioner
further claimed that after 4th May, 1950, he ceased to have anything to do with
the management of the company. He was employed thereafter at Kozhikode and
later at
From the
averments in the counter affidavit of the second respondent it appears that in
the balance sheet of the company, filed with the Assistant Registrar of
Companies at Erode on 7th March, 1949, tangible assets of the company to the
extent of nearly Rs. 49,000 were disclosed. It was alleged that no balance
sheet was filed with the Registrar of Companies subsequent to that. There were
charges and counter charges as between the directors and ex-directors of the
company. On 8th June, 1955, the Registrar of Companies addressed a letter to
the Inspector-General of Police,
The letter of
the Registrar dated 8th June, 1955, was treated as a complaint to the police,
and it was eventually registered at Kanjanur police station in South Arcot
District as Cr. No. 48 of 1955, under sections 406, 409 and 477A of the Indian
Penal Code. In November, 1955, the further investigation was transferred to the
police officers in charge of the Erode police station. It was registered as Cr.
No. 892 of 1955, and a copy of the complaint was lodged as the first
information report with the Sub-Divisional Magistrate, Erode. Further
investigation into the complaint was eventually taken over by the Criminal
Investigation Department,
The petitioner
averred in the affidavit he filed in support of the petition that he was arrested
at Bombay on 29th October, 1955, without a warrant and he was subsequently
released on bail by the Additional Presidency Magistrate, Esplanade, Bombay.
The petitioner appeared before the Sub-Divisional Magistrate, Erode, on 24th
November, 1955, but what happened further in that court he did not say.
In March,
1956, the petitioner applied under article 226 of the Constitution impleading
the sub-Divisional Magistrate, Erode, and the Registrar of Joint Stock
Exchange,
Though he had
not been impleaded as a party to these proceedings at that stage, the Inspector
of Police, Criminal Investigation Department, who was in charge of the
investigation, swore to an affidavit on 9th July, 1956, to explain what further
proceedings were taken after the investigation was taken over by the Criminal Investigation
Department. Subsequent to that the petitioner was permitted in C.M.P. No. 5646
of 1956 to implied the Inspector of Police as the third respondent in these
proceedings, and also to amend the prayer in W.P. No. 394 of 1956. The relief
that the petitioner asked for after that amendment was the issue of a writ of
prohibition "prohibiting all further investigation by the third respondent
in so far as the petitioner is concerned in respect of the affairs of the
Agricultural and Industrial Credit Corporation Ltd."
The
petitioner's claim was that he was arrested at
I shall
proceed on the basis, that the letter of the Registrar dated 8th June, 1955,
was a complaint to the police within the scope of the provisions of the
Criminal Procedure Code. The offences the petitioner, among others, was alleged
to have committed were specified as those punishable under section 406, 409 and
477A of the Indian Penal Code. Of these, offences punishable under sections 406
and 409 of the Indian Penal Code are cognizable offences. These are cases in
which the person accused of having committed those offences could be arrested
by the police without a warrant by a Magistrate. Section 154 of the Criminal
Procedure Code runs :
"Every information
relating to the commission of a cognizable offence if given orally to an
officer in charge of a police station shall be reduced to writing by him or
under his direction and be read over to the informant ; and every such
information, whether given in whether or reduced to writing as aforesaid, shall
be signed by the person giving it, and the substance thereof shall be entered
in a book to be kept by such officer in such form as the State Government may
prescribe in this behalf."
The letter
dated 8th June, 1955, though addressed to the Inspector- General of Police,
satisfied the requirements of section 154 of the Criminal Procedure Code. It
was eventually registered apparently under the provisions of section 154 by the
officer in charge of the police station at Kanjanur. Section 156(1) authorises
any officer in charge of a police station to investigate any cognizable case
without the order of a Magistrate. Under section 157(1) even without a
complaint in writing, if "from the information received or otherwise"
an officer in charge of a police station has reason to suspect the commission
of a cognizable offence, he could send a report of the same to a Magistrate
empowered to take cognizance of such an offence upon a police report and
thereafter arrange for the investigation of the case.
I have
referred to the provisions of the Criminal Procedure Code to explain what the
statutory duties of a police officer are, when he is informed by a complaint in
writing or even otherwise that a cognizable offence has been committed. At that
stage even the disclosure of the name of the person suspected to have committed
the offence may not be necessary to authorise an investigation by the police
officer.
The relief
that the petitioner eventually asked for in these proceedings before me under
articles 226 of the Constitution was, that a writ of prohibition should issue
to restrain the third respondent from investigating into the charges against
the petitioner, the charges the he was suspected of having committed offences
punishable under sections 406, 409 and 407A of the Indian Penal Code. If the
third respondent, who is now in charge of the conduct of the investigation, has
jurisdiction to investigate the charges against the accused, then obviously no
writ of prohibition can issue. The complaint of the learned counsel for the
petitioner was that the addressed the letter dated 8th June, 1955, to the
Inspector-General of Police asking for an investigation. I shall deal with that
contention a little later. Even if the Registrar acted in contravention of any
statutory provisions in preferring a complaint to the police, that in my
opinion, may not affect the jurisdiction of the police officer to investigate
into a complaint of the commission of cognizable offences like those punishable
under sections 406 and 409 of the Indian Penal Code. Even if any irregularity
tainted the complaint dated 8th June, 1955, section 157(1) of the Criminal
Procedure Code is sufficient to clothe the police officer with jurisdiction to
investigate. Even on information received, from whatever source that
information was received, or even otherwise, if the police officer in charge of
a police station has reason to suspect that a cognizable offence has been
committed, he has jurisdiction to investigate, under section 157(1) of the
Criminal Procedure Code. In fact it would be his statutory duty to investigate.
The Criminal
Procedure Code itself does not provide for any statutory bar to such an
investigation. Whether there is any other statutory bar to the investigation
entrusted to the third respondent is the next question.
The learned
counsel for the petitioner relied on section 620 of the Companies Act (1 of
1956) and urged that barred an investigation by the police even into charges of
the commission of cognizable offences if the acts on which these charges were
founded were in relation to the affairs of a company incorporated under the
Companies Act. The Companies Act (1 of 1956) replaced the earlier enactment,
the Indian Companies Act, 1913. It should be more convenient to refer to the
statutory provisions as they stand numbered in the Companies Act of 1956
without any need to quote the corresponding provisions of the earlier Act, the
Indian Companies Act, 1913. In the rest of this judgment I shall refer to the
Companies Act (1 of 1956) as the Act.
Section 620 of
the Act runs :
"Penalty
for wrongful withholding of property :-
(1) If any officer or employee of a company
-
(a) wrongfully obtains possession of any
property of a company ; or
(b) having any such
property in his possession, wrongfully withholds it or knowingly applied it to
purposes other than those expressed or directed in the articles and authorised
by this Act ; he shall, on the complaint of the company or any creditor or
contributory thereof, be punishable with fine which may extend to one thousand
rupees.
(2) The court trying the
offence may also order such officer or employee to deliver up or refund, within
a time to be fixed by the court, any such property wrongfully obtained or
wrongfully withheld or knowingly misapplied, or in default, to suffer
imprisonment for a term which may extend to two years."
The learned
Advocate-General pointed out that there was no statutory provision in the
English Companies Act to correspond to section 630 of the Act. Section 630 of
the Act is really based on and is analogous to section 16 of the Friendly
Societies Act, 1875 of England. The scope of the summary procedure provided for
by section 16 of the Friendly Friendly Societies Act and that of the reliefs that could be claimed
or granted under that section were explained by the Court of Appeal in Vernon
v. Watson 1. LORD HALSBURY L.C. observed :
"If the
operation of the statute had been confined to criminal proceedings I should
have entertained no doubt that imprisonment for the criminal offence afforded
no answer to a civil claim for the debt."
After pointing
out that in section 16 two different proceedings were mixed up together, the
Lord Chancellor observed :
"We must
apply the ordinary principles of law to each part of the procedure. In fact the
legislation itself points in that direction, because one part of the section
provides that the criminal proceedings taken under it shall not interfere with
the right to indict....That was based on the statutory provision that `nothing
herein contained prevents any such person from being proceeded against by way
of indictment, if not previously convicted of the same offence under the
provisions of this Act'."
It is true
that there is no such saving clause in section 630 of the Act. But that, in my
opinion, makes no real difference to the application of the principles laid
down with reference to section 16 of the Friendly Societies Act, 1875.
Section 630 of
the Act by itself imposes no bar of the initiation of proceedings in a criminal
court even with reference to acts committed in relation to that affairs of a
company, if those acts amount to offences like those punishable under sections
406 and 409 of the Indian Penal Code. Section 630 of the Act provides for a
summary procedure. It authorises an officer or an employee of the company, and
only these two, to apply under section 630. The acts specified in clauses (a)
and (b) of section 630(1) of the Act may not by themselves and with nothing
more amount to criminal misappropriation as defined by the Indian Penal Code
and made punishable under section 406 or 409 of the Indian Penal Code. For
example, knowingly applying any property of the company to purposes other than
those expressed or directed in the articles and authorised by the Act fails
within section 630(1)(b). There might be nothing criminal punishable under
section 406 of the Indian Penal Code in such an application. Yet it would fall
under section 630 of the Act. I have referred to these at some length only to
explain the scope of section 630 of the Act. It provides a summary remedy and
the persons who are entitled to ask for that remedy are specified. It is
confined to an officer or an employee of the company. Whether, when in
proceedings initiated under section 630(1) of the Act a punishment follows,
that would bar a conviction under section 406 or 409 of the Indian Penal Code,
I am not called upon to decide in these proceedings and I express no opinion.
We are still at the stage of initiation of proceedings. The Registrar of
Companies could not himself invoke section 630 of the Act. He complained to the
police that offences punishable under sections 406 and 409 of the Indian Penal
Code appeared to have been committed. Those are offences against the State. In
the prosecution of a person suspected of having committed such offences, it is
that State representing society as a whole that is interested. The benefits
conferred by section 630 of the Act are confined to the company, to its
representatives specified by section 630 itself. It is a little difficult to
see any real basis for the contention of the learned counsel for the
petitioner, that section 630 of the Act bars an investigation or prosecution
for offences punishable under sections 406 and 409 of the Indian Penal Code.
Section 630 of the Act provides no statutory bar to the exercise of the
jurisdiction vested in a police officer by section 154, 156(1) and 157(1) of
the Criminal Procedure Code.
The learned
counsel for the petitioner next referred to the provisions of the Act dealing
with the powers of the Registrar and the Central Government, and in particular
to sections 234 and 242 of the Act. Section 242(1) 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 of the Criminal Procedure Code. No more than section
630 of the Act does section 242 bar the exercise of the jurisdiction of the
third respondent to investigate into a complaint of the commission of
cognisable offences punishable under sections 406 and 409 of the Indian Penal
Code.
I pointed out
earlier than even if there was any irregularity or even illegality attendant on
the letter dated 8th June, 1955, which was treated as a complaint by the police
for purposes of investigation, neither the jurisdiction to investigate nor the
exercise thereof by the police officer could be effected. The learned
Advocate-General pointed out that it was not in the discharge of any statutory
duties imposed upon him that the Registrar sent the letter dated 8th June,
1955, asking for an investigation by the police. Even as a citizen he had the
right to bring to the notice of the police that one or more cognisable offences
had been committed. He set the machinery of law in motion, and that he was
entitled to do. It may not be necessary to discuss this aspect further for the
disposal of this application. I am unable to accept the contention of the
learned counsel for the petitioner, that the Registrar did something illegal,
something prohibiting by the act, when he addressed the letter on 8th June,
1955, without availing himself of the powers vested in him by section 234 and
other relevant provisions of the Act. True, nothing in the Act specifically
authorised him to prefer a complaint to the police. But the, there was no
prohibition in the Act against asking the police to investigate into a case,
where congnizable offences punishable under section 406 and 409 of the Indian
Penal Code were suspected to have been committed. There was nothing illegal
about the letter dated 8th June, 1955, which was eventually treated as a
complaint in writing to a police officer within the meaning of section 154(1)
of the Criminal Procedure Code.
The learned
counsel for the petitioner referred to Rishbud v. State of Delhi 1, where the learned
Judges laid down that where the cognisance of the case has in fact been taken
and the case has proceeded to termination, the invalidity of the precedent
investigation does not vitiate the results, unless miscarriage of justice has
been caused thereby. Their Lordships laid down further :
"When
such a breach is brought to the notice of the court at an early stage of the
trial the court will have to consider the nature and extent of the violation
and pass appropriate orders for such investigation as may be called for, wholly
or partly, and by such officer as it considers appropriate........."
Apparently the
learned counsel relied upon this principle to support his contention that he
was entitled to a writ to prohibition. But, as I have held, he failed to
establish that the third respondent was doing anything illegal, anything
prohibited by the statute in conducting the investigation with which he has
been entrusted. The writ asked for is one of prohibition. If the third
respondent had jurisdiction to undertake and continue the investigation, the
writ asked for cannot issue the third respondent has that jurisdiction. This
application fails.
The rule is
discharged and this petition is dismissed. There will be no order as to costs.
Petition
dismissed.
[1992]
73 COMP. CAS. 74 (MAD)
HIGH COURT of
v.
Sakthi Automobiles (P.) Ltd.
SRINIVASAN,
J.
C.R.P. No. 4711 of 1984
DECEMBER
12, 1990
George Alexander for the petitioner.
A.S.
Venkatachalamoorthy for the respondent
Srinivasan,
J.—This revision petition is
directed against the order of the executing court
dismissing the execution petition filed by the petitioner herein on the ground
that the bailiff had resubmitted the warrant with an endorsement that there is
no such concern as Sakthi Automobiles P. Ltd. in the address given. The
petitioner obtained a decree on April 23, 1981, in O.S. No. 8 of 1980,
Sub-Court, Kavarathi,
Pending
the revision, the petitioner filed C.M.P. Nos. 5242 of 1987 and 5243 of 1987. The latter is for impleading the
Registrar of Companies as a party to the revision petition. The former is for directions to the Registrar of Companies to take necessary
steps under section 234 of the Companies Act, so as to enable the petitioner to
realise the amount due under the decree. Though C.M.P. No. 5243 of 1987 was
ordered by this court on June 29, 1987, the Registrar did not enter appearance
when the application was taken up for final orders despite his being served.
This court passed an order impleading the Registrar and directed issue of fresh
notice in the other application for directions. After service of notice, the
Registrar has entered appearance and has filed a counter-affidavit wherein it
is stated that the application for directions travels beyond the scope of the
revision petition and the directions cannot be granted. It is also stated that,
from the records of the first respondent company, it is seen that the company
has filed balance-sheets and annual returns required to be filed, after long delay for which additional fee
to the tune of Rs. 8,600 on various counts was levied and collected under the
provisions of section 611(2) of the Companies Act. It is further stated that the Registrar is not aware of any fraud or cheating on
the part of the company. The Registrar has given the registered address of the
company as No. 20/1,
Learned
counsel for the petitioner argued that the first respondent-company has
violated the provisions of sections 146 and 147 of the Act and is, therefore,
liable to be prosecuted. Under
sub-section (1) of section 146, a company shall, as
and from the 30th day after the date of its incorporation or from the date on
which it begins to carry on the business, whichever is earlier, have a
registered office to which all communications and notices may be addressed.
Under subsection (2), notice of the situation of the registered office and of
every change therein shall be given within thirty days after the date of the
incorporation of the company or after the date of the change, and the Registrar
shall record the same. It is only under the said section that the change of
address has been notified to the Registrar by the company, though belatedly. It
is for the Registrar to take appropriate proceedings against the company if the
provisions of section 146 or section 147 are violated. The provisions for
imposing a fine on the defaulting company or sentence of imprisonment will not
enable the petitioner to collect the decree amount from out of the fine amount.
The remedy of the petitioner is only to execute the decree or to apply for winding
up of the company under sections 433 to section 439 of the Companies Act.
Section
234 of the Companies Act will also not help the petitioner to recover the
decree amount from the Registrar. Under that section, if any document required
to be submitted to the Registrar by the company under the Act is filed before
him and, on perusing the same, if the Registrar is of the opinion that any
information or explanation is necessary with respect to any matter to which
such document purports to relate, he may call on the company by a written order
to furnish such information or explanation within such time as he may specify
in the order. The section will not come into play, unless a document which is
required to be submitted had been filed before the Registrar and the Registrar
after perusing the same is of the opinion that further explanation or information is necessary. Hence, the
petitioner cannot invoke section 234 and pray for a direction from this court
to the Registrar to collect the decree amount on his behalf ; nor can he make
any claim to the amount levied as fine by the Registrar on the company, in view
of the default committed by the company.
In
the circumstances, the only remedy available to the petitioner is to execute
the decree by giving the correct address of the company as is now disclosed by
the Registrar or to initiate proceedings for the winding up of the company
under the provisions of the Companies Act. With the above observations, the
civil revision petition is dismissed but, in the circumstances, there will be
no order as to costs.
Section 235
Investigation of the affairs of the company
[1974]
44 COMP. CAS. 106 (
high court of
Indian Express (
v.
Chief Presidency Magistrate
VeerasWami, C.J.
and 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.
[1966]
36 COMP.CAS. 201 (
V.
D.
FALSHAW, C.J.
AND
MEHAR SINGH, J.
FIRST
APPEAL AGAINST ORDER NO. 4D OF 1965
FEBRUARY
22, 1965
JUDGMENT
MEHAR
SINGH, J. - In this appeal under
section 10D of the Companies Act, 1956 (1 of 1956), hereinafter to be referred
as "the Act", by Sushil Kumar Sanghi, appellant from the order dated
November 26, 1964, of the Companies tribunal, made under section 240, read with
section 10A(1)(b), of the Act, accepting the application made by the
respondent, Mr. R.R. Kini, who has been appointed as inspector by the Central
Government to investigate the affairs of Asia Udyog (Private) Limited,
hereinafter to be referred as "the Udyog Company", under section
235(c) of the Act, and ordering the appellant "to answer such questions as
may be put to him by the petitioner (respondent) with regard to the affairs of
the Udyog Limited from and after 13th February, 1953", the main question
for consideration is whether the appellant is or is not entitled, in the facts
and circumstances of the case, to protection of article 20(3) of the
Constitution, which says that "no person accused of any offence shall be
compelled to be a witness against himself."
On report by the
Registrar of Companies, Delhi, under sub-section (6) of section 234 of the Act
concerning the affairs of the Udyog Company, the Central Government being of
the view that it was desirable that inspectors be appointed to investigate into
the affairs of that company and to report thereon, it, by notification
No.2(9)-CL.1/62, of April 19, 1963, appointed Mr. R.R. Kini (respondent), Legal
Adviser, and Mr. S.M. Dugar, Senior Accounts Officer, in the department of
Company Law Administration, as inspectors to investigate into the affairs of
that company for the period from January 1, 1953, to date and even for the
period prior thereto, should the inspector consider necessary to do so, and to
report thereon pointing out, inter alia, all irregularities and contraventions
in respect of the provisions of the Act or of the Indian 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 inspectors were
to complete their investigation and make the report within three months from
the date of the notification, but as that was not possible, that time was
extended from time to time.
It was Mr.
R.R. Kini alone who took up the investigation of the Udyog Company. The appellant
was asked to appear before him on July 16, 1964, which he did, and on that day
a part of his statement was recorded. On the next day, that is to say, on July
17, 1964, when the appellant appeared again to continue his statement, he moved
two applications objecting to being questioned by the inspector, which
applications were dismissed on July 31, 1964. The appellant was to appear
before the inspector on August 15, 1964, to continue his statement, but on
August 13 he wrote informing the Inspector that he was not going to appear any
further before him. This he seems to have also conveyed to him orally.
On that the
inspector moved an application before the Tribunal under sub-section (3) of
section 240, read with section 10A(1)(b), of the Act, certifying the refusal of
the appellant to appear before him and to answer the questions in the
investigation of the affairs of the Udyog Company. The appellant raised a large
number of objections before the Tribunal to that application of the inspector.
The Tribunal repelled all the objections and made an order as already stated
above. In this appeal by the appellant it is that order of the Tribunal which
is being questioned.
A charge-sheet
is pending in a criminal case against the appellant along with a number of others
in the court of the District Magistrate of Delhi in connection with conspiracy
to commit criminal breach of trust in regard to the funds of Dalmia Jain
Aviation Limited of which the appellant was one of the directors and for
commission of various offences in pursuance of the conspiracy. A copy of the
charge-sheet is annexure "R-2" in which there are a number of charges
for offences under section 120B, read with section 409, and sections 409, 465,
467 and 477A of the Penal Code. Items 3 and 36 in the charge-sheet concern the
appellant. Those items are :
"3.
Ivestigations made by me have revealed that a criminal conspiracy having for
its objects the commission of the criminal breach of trust of the funds and
assets of Dalmia Jain Airways Limited, Delhi, and the offences for forgery and
falsification of accounts came into being in or about 1946 at Delhi and
continued to exist till 1953, during which period its ramifications spread over
other places in India. All the accused mentioned above were parties to the
criminal conspiracy....
36. On March
25, 1953, the Board of Directors of Dalmia Jain Aviation Limited consisting of
R. Sharma (since dead), S.K. Sanghi, accused No.18, and G. Ramachandran,
accused No.19, authorised S.N. Dudani, accused No.15, to dispose of the records
of Dalmia Jain Airways Limited and all the important and incriminating records
were done with."
It is said
that previously the name of the Udyog Company was Dalmia Jain Aviation Limited.
One of the allegations against the accused persons, including the appellant, in
that case is said to be that the funds of Dalmia Jain Airways Limited were
siphoned away through Dalmia Jain Aviation Limited, now the Udyog Company, and
then the offence of breach of trust of the funds and assets of Dalmia Jain
Airways Limited was committed by the accused persons. The learned counsel for
the appellant has urged that the object of the questions in the investigation
by the inspector has been to show inter-connection between Dalmia Jain Airways
Limited and Dalmia Jain Aviation Limited so as to bring into picture the
offence of misappropriation of funds and assets of Dalmia Jain Airways Limited
by among others the appellant. He then points out that answers so obtained from
the appellant can be used as evidence against him under sub-section (5) of
section 240 of the Act, which is in these terms - "Notes of any
examination under sub-section (2) or (4) shall be taken down in writing and
shall be read over to or by, and signed by, the person examined, and may thereafter
be used in evidence against him." The learned counsel has stressed that
the nature of the questions that were being asked of the appellant by the
inspector revealed intimate and direct connection between the subject-matter of
the prosecution that is pending against the appellant in the court of the
District Magistrate and the nature of the investigation that is being conducted
by the inspector. In this way the appellant was placed in a situation in which
he was being compelled to answer questions, the answers to which would
incriminate him for offences in the pending criminal case against him and would
be available as evidence against him under sub-section (5) of section 240 of
the Act. What the learned counsel has urged is that there has been contravention
of sub-article (3) of article 20. This in substance is the main contention on
the side of the appellant in this appeal. No question was placed before the
Tribunal, and none has been placed before this court, that the inspector asked
the appellant to show the bearing of any such question on the charges against
the appellant in the criminal case pending against him before the District
Magistrate. Obviously in the absence of the form and the nature of the question
objected to, it is next to impossible to reach a conclusion whether or not it
may have any connection with that prosecution and tends to be an incriminating
question for offences forming the subject-matter of that prosecution or, for
that matter, of any other offence. The appellant gave answers to all questions
before the inspector until before his refusal to continue with his statement.
Up to that stage he took no objection to the nature and character of the
questions. The learned counsel for the appellant has pointed out that the
appellant was unrepresented by a legal adviser before the inspector and he was
not in a position to take such a technical objection to the nature and
character of the questions that were being put to him. It is said that there
has been a refusal on the part of the inspector to allow the appellant legal
aid of a counsel. But the learned Additional Solicitor-General has stated at
the bar that there would be no objection by the inspector to the presence of a
counsel for the purpose of aiding and advising the appellant to raise objections
to the incriminating nature and character of any question put to him. But of
course such assistance will only be confined to such advice. The learned
counsel for the appellant has further referred to the final order made by the
Tribunal that the appellant will answer such questions as may be put to him by
the inspector with regard to the affairs of the Udyog Company and he says that
in this there is no reservation that the questions are to be subject to the
limitation as in sub-article (3) of article 20. This, however, is an approach
without substance because every tribunal which has the power to examine a
person in any connection must keep in view the provisions of that article.
Merely because the Tribunal has not made reference to that article in the
closing sentences of its order does not mean that the inspector is not to have
regard to the provisions of that article. As has been pointed out, there was no
specific question before the Tribunal with regard to which it could consider
the applicability or otherwise of sub-article (3) of article 20. A vague
allegation was made before it that the questions that were likely to be put to
the appellant would have the tendency to contravene that article, but
apparently the Tribunal could not possibly have taken note of any such vague
allegation and passed an effective order. What was contended before it, and has
been reiterated here, is that in view of the pending prosecution of the
appellant in the criminal case before the District Magistrate, the investigation
by the inspector be stopped altogether because its ramifications are likely to
almost cover the same field as that prosecution. This again is vague and it has
not been shown how that is so. It has been said that copies of a large number
of documents have been given to the accused persons in that criminal case and a
very large number of witnesses are cited and it is not practical for the
appellant to state in definite detail what aspect of the prosecution in that
criminal case is parallel to what part of the investigation before the
inspector. This surely in itself gives a reply to the argument of the learned
counsel for the appellant that the Tribunal could not possibly have made a
blanket order stopping the enquiry on such a vague approach which it is impossible
to bring to bear on sub-article (3) of article 20. There is no manner of
applying that article except to something specific and definite from which it
can be made out that what is being sought from the party will provide evidence
of an incriminating nature against him. Particularly is this so with regard to
an oral statement that a party, as the appellant in this appeal, is required to
make under the law. The learned counsel for the appellant has then suggested
that the inspector should prepare a list of questions beforehand and give the
list to the appellant to enable him to know which questions are likely to
incriminate him so that he may object to the same and may not give answers.
This is an extraordinary suggestion, for no investigation can possibly be
conducted in this manner. It is not possible for the inspector to prepare a
list of questions for an obvious reason that the run of the questions will
depend to a very great extent upon the manner in which the answers are given
and the information sought in question is supplied. The learned counsel has
also made reference to certain parts of the Report of the Commission of
Inquiry, commonly known as Bose Commission Report, and in it there was
reference to Dalmia Jain Aviation Limited, the previous name of the Udyog
Company, at pages 366, 417 and 419. The object of this has been that there has
already been some kind of investigation with regard to the Udyog Company when
its name was Dalmia Jain Aviation Limited. It has not been quite clear how any
reference to that company in the report of the Bose Commission affects the
power of the Central Government under section 235 of the Act to appoint
inspectors to investigate the affairs of the Udyog Company or the jurisdiction
of the inspector to do so under the succeeding provisions of the Act. It is
thus clear that there is nothing in the present case upon which sub-article (3)
of article 20 can operate and it cannot possibly be applied to a vague
allegation that the investigation that is being conducted by the inspectors may
have some bearing or is likely to have a bearing on certain aspects of the
prosecution in the criminal case pending before the District Magistrate against
the appellant, without saying definitely what aspect or what material of that case
is being made the subject-matter of the questioning in the present
investigation. The Tribunal because of section 10A(1)(b) exercises the powers
of the court under section 240 of the Act and the relevant sub-section is
sub-section (3). For the present purpose this much of it is material. "If
any such persons fails without reasonable cause or refuses - ... (b) to appear
before the inspector personally when required to do so under sub-section (2) or
to answer any question which is put to him by the inspector in pursuance of
that sub-section, the inspector may certify the failure or refusal under his
hand to the court and make an application to the court to hold an enquiry into
the case; and the court may, thereupon, after taking such evidence, if any, as
may be produced against or on behalf of the alleged offender and hearing his
explanation, if any, make an order for the production by him before the
inspector of all such books or papers within a date to be specified in order or
requiring such person to answer any question which may be put to him by the
inspector." It is evident that, on the facts of the present case, the
inspector could only certify the refusal of the appellant "to appear
before him personally" and "to answer any question which is put to
him", and the Tribunal could only order the appearance of the appellent
and require him "to answer any questions which may be put to him by the
inspector." This is the limitation of the jurisdiction of the Tribunal. It
could either direct the appellant to answer any questions put to him by the
inspector or dismiss the application of the inspector with regard to any
particular question or questions. But under this provision it has no
jurisdiction to stop an investigation ordered by the Central Government under section
235 of the Act. This court has no power to do so either, hearing an appeal from
an order of the Tribunal.
It has then
been further contended by the learned counsel for the appellant that the
Tribunal, in spite of the application of the appellant in this behalf, did not
take any evidence in support of the position taken by the appellant in reply to
the application of the inspector. When asked what possible type of evidence had
the appellant in mind when making such an application, the learned counsel has,
in the face of the vague allegations detailed above, had to fall back into
saying that the appellant would have led evidence connected with the criminal
case pending against him in the court of the District magistrate, but the
Tribunal could not be turned into something like a parallel could trying the
same thing as the District magistrate has to try in that case. This approach,
on the facts, is entirely misconceived. In the face of the vagueness of the
allegation on the side of the appellant that the questions which the inspector
will put to him, without knowing what questions the inspector will put to him
or what will be the trend of those questions, would be likely to incriminate
him, it was quite impossible for the appellant to lead any evidence with regard
to the same or for the Tribunal to permit the appellant to do so. The only
manner in which evidence could have been attracted and, even for that matter
sub-article (3) of article 20 could come into consideration, was to deal with
specific and definite questions when put by the inspector to the appellant. As
a question is put and if sub-article (3) of article 20 is attracted, an
objection can be taken to a question and then the objection can be followed up.
It has already been pointed out that the learned Additional Solicitor- General
has said that the inspector will allow the facility of the presence of a legal
adviser to the appellant to help him to know whether such an objection ought or
ought not to be raised with regard to a particular question.
Another
argument urged by the learned counsel on behalf of the appellant is that the
inspector, Mr. R.R. Kini, is a legal adviser in the Company Law Administration,
and it is against the principles of natural justice that an employee in the
Company Law Administration and a legal adviser to the Registrar of Companies
should be conducting the investigation. This is a rather astounding argument
because all investigations are on the side of the Government, by and large
conducted by Government officials or Government agencies and it is not clear
how any principle of natural justice intervenes to stop such investigations.
The argument is, to say the least, without any basis.
The last
argument urged by the learned counsel is that while the notification appointed
two Inspectors to carry on the investigation jointly or severally, but only one
Inspector has done so, and that one Inspector could not conduct either the
investigation or approach the Tribunal as he has done. The learned counsel of
the opinion that both the Inspectors must have acted in unison and as a body.
This is obviously incorrect, for there would be no point in empowering them to
carry out the investigation jointly and severally if every time they are
compelled to sit jointly. The object of thus appointing two inspectors with
power to conduct the investigation jointly and severally is apparent that each
one of the inspectors may be able to carry on a part of the investigation by
himself on a particular aspect of the affairs of the company. So that nothing
turns upon this argument.
There
were, as stated, a number of other arguments before the Tribunal, none of which
has been urged at the hearing here, and all the arguments that have been urged
have been found to be unsound and unsupportable. This appeal fails and is
dismissed with costs.
FALSHAW
C. J. - I agree.
[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.
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' Union
[1983] 53 Comp Cas 184. In Harinagar Sugar Mills' case [1966] 36 Comp Cas 426,
an application by a receiver under the provisions of sections 433 and 439 was
permitted by the Supreme Court on the ground that it is one mode of realisation
of a debt due to the joint family whom the receiver represented. In that case,
the Supreme Court relying on Palmer's Company Precedents, Part II (1960 Edn.,)
observed as follows (p. 430 of 36 Comp Cas):
"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.
[2005] 61 SCL 121 (
High
Court of
v.
State (NCT of
O.P.
Dwivedi, J.
WP
(Crl.) No. 1163 of 2003
and
Crl. M. No. 995 of 2003
March 24,
2005
Section 235 of the Companies Act, 1956 -
Investigation of affairs of a company - Whether provisions of sections 235 to
242 do not create any bar against an investigation by police officer if
cognizable offences punishable under Indian Penal Code, 1860 are suspected to
have been committed in connection with affairs of company - Held, yes
The complainant-company, holding 25 per cent equity
shares of ‘S’ Ltd., lodged a complaint with the Deputy Commissioner of Police
against the petitioners, who were chairman-cum-managing director, chartered
accountants and finance controller of ‘S’ Ltd., alleging that they had
fraudulently and illegally got allotted and issued equity shares in the names
of themselves, relatives and family members without having contributed any cash
and had manipulated accounts of ‘S’ Ltd. by making false documents, fabricating
valuable securities with a view to illegally siphon off the funds of the ‘S’
Ltd. The Metropolitan Magistrate directed investigation in the matter under
section 156 of the Code of Criminal Procedure, 1973. On the basis of the said
order, an FIR was registered under sections 409/411/424/467/477A, read with
section 120B, of the IPC.
On writ, the petitioners contended that the
Act under sections 235 to 242 provides efficacious redress regarding
investigation into the affairs of the company and, therefore, the FIR was
liable to be quashed.
The nature and scope of investigation to be
conducted under sections 235 to 242 is vastly different from the nature and
scope of the investigation to be conducted by the police. An investigation
under sections 235 to 242 is not an investigation of a criminal case. The
purpose of investigation under the provisions of the Act is only to streamline
the working of the company. Such investigations may reveal violation of rules
and regulations by the office bearers or even commission of technical offences,
which are punishable under the Act for which investigation under the Cr.PC may
be uncalled for. But if such investigations reveal the commission of offences
under the IPC, section 242 enacts an enabling provision under which the
Government can also launch prosecution. On the other hand, an investigation by
the police officer is launched on receipt of an information of the commission
of a cognizable offence. Under section 157 of the Cr.PC, it is obligatory on
the part of the police officer to launch investigation if he suspects
commission of cognizable offence or if the commission of such an offence is
brought to his notice. Even if there is no specific report and police officer
has only a suspicion, may be on the basis of an anonymous complaint, he is duty
bound to investigate the same. Every citizen has constitutional rights to
approach police and the Court when commission of cognizable offence is
suspected. Various High Courts and the
Thus, a settled proposition of law is that if
there is a specific information about the suspected commission of a cognizable
offence under the IPC, may be in connection with the affairs of the company,
anybody can approach the police which then is obliged to carry out the
investigation. Every citizen has constitutional right to approach police
officer or the Court for the investigation into the commission of the
cognizable offence. In the instant case, FIR was lodged under the Court orders,
which had not been challenged in any proceedings. While considering the
question of quashing of the FIR in a writ petition or in a petition filed under
section 482, Cr.PC, the Court is not supposed to minutely examine the
veracity/truthfulness of the evidence or the probative value thereof. It could
not be said at the instant stage that the allegations in the complaint even if
taken on their face value did not make out an offence. [
In the instant case, FIR had been registered
under order of the Court which order had not been challenged so far. The
investigation was still in progress and at the instant stage, it was not
possible to say that the allegations were totally groundless or on the face of
it, they did not make out any offence under the IPC. The provisions of sections
235 to 242 do not create any bar against an investigation by police officer if
cognizable offences punishable under the IPC are suspected to have been
committed in connection with the affairs of the company. [
In the result, the writ petition failed and
was to be dismissed. [
Observations of the Supreme Court in the case
of Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy [1997] 13 SCL 118
cannot be read to mean that police investigation into suspected commission of
cognizable offence in relation to the affairs of the company is ruled out in
view of sections 235 to 242. The Supreme Court has repeatedly observed in the
said judgment (paras 6 and 10) that main grievance of the respondent in the
writ petition related to the mismanagement of the affairs of the
appellant-company and then taking into consideration sections 235 to 242, the
Supreme Court proceeded to hold that these sections adequately take care of
such type of situations. In that case, there was no compliance of provisions of
section 235. Under the circumstances, the Supreme Court felt that ordering an
investigation at the instance of single shareholder was uncalled for. [
State of
N.K. Kaul and Anil Sharma for the Petitioner. D.C. Mathur, Mohit Mathur and
V.S. Panwar for the Respondent.
Judgment
1. The moot
point for consideration in this writ petition is whether recourse to
investigation in the affairs of company under sections 235 to 242 of the
Companies Act, 1956 (‘the Act’) is the only way to launch prosecution in
respect of alleged/suspected commission of cognizable offences under the Indian
Penal Code (‘IPC’) by the office bearers of the company or the police can
investigate such allegations of its own or under orders of Court, if approached
by the aggrieved person/shareholder.
2. Through
this petition under section 482 of the Code of Criminal Procedure, 1973
(‘Cr.PC’) read with article 226/227 of the Constitution of India, the
petitioners seek quashing of FIR bearing No. 99/2002, PS Connaught Place, New
Delhi under sections 406/409/420/424/467/477A read with section 120B of the
IPC. The said FIR was registered in pursuance of order dated 19th February,
2002 passed by learned Metropolitan Magistrate, New Delhi on a criminal
complaint filed by the respondent against the petitioners who are chairman-cum-managing
director, director, chartered accountants and finance controller respectively
of Sunair Hotels Ltd. It was alleged in the complaint that in or around
December 1994, petitioner Nos. 1 to 3 approached respondent company and
requested it to subscribe to the equity share capital of Sunair Hotels Ltd., to
the tune of 25 per cent equity share capital amounting to 70 lakh equity shares
@ Rs. 10 per share aggregating to Rs. 7 crores. Induced by the assurances of
the accused, the complainant-company made payment of Rs. 7 crores for the
allotment of shares of Sunair Hotels Ltd., which in turn allotted and issued 70
lakh shares to the respondent-company. Apart from that 25,94,824 fully paid up
equity shares of Rs. 10 each aggregating to 2,59,84,240 were also issued to the
respondent-company. Thus, at the time of filing of complaint,
respondent-company was holding 95,94,824 fully paid-up equity shares of Sunair
Hotels Ltd. Besides, on the request of petitioner Nos. 1 to 3, the
respondent-company also provided interest bearing security deposit of Rs. 8
crores, on the premise that its deposit was safe and the same would help in the
early completion of the hotel project. After taking huge money from the
respondent-company, Sunair Hotels Ltd. also approached the financial
institutions and banks for loan for the construction of hotel. Sunair Hotels
Ltd., thus, raised a sum of Rs. 42 crores as term loans from the financial
institutions and banks, viz., Industrial Development Bank of India (Rs. 10.5
crores), Tourism Financial Corporation of India (Rs. 21 crores) and Oriental
Bank of Commerce (Rs. 10.5 crores). It was alleged in the complaint that
petitioners had fraudulently and illegally got allotted and issued equity
shares worth Rs. 21 crores of Sunair Hotels Ltd. in the name of themselves,
relatives and family members without having contributed any cash, for which the
complainant has lodged a complaint with the Deputy Commissioner of Police
(Crimes and Railway) and a case was registered vide FIR No. 90/2000 with the
police station, Connaught Place, New Delhi under sections
406/409/420/424/467/477A read with section 120B of the IPC. On further inquiry
the complainant-company came to know that the petitioners have manipulated the
accounts of Sunair Hotels Ltd. by making false documents, fabricating valuable
securities and have used the said forged and fabricated documents and the books
of account of Sunair Hotels Ltd. with a view to illegally siphon off the funds
of Sunair Hotels Ltd., borrowed by it from various agencies for the
construction of the hotel. The funds illegally siphoned off from Sunair Hotels
Ltd. were later on dishonestly used/utilized by the accused for subscribing to
the additional share capital worth Rs. 10.75 crores in Sunair Hotels Ltd.
through bogus benami companies. The money received by these benami companies
from Sunair Hotels Ltd. were allegedly shown to have been paid further on to
various sub-contractors. When inquiries were made from the sub-contractors it
was revealed that they had never carried out any construction work for Sunair
Hotels Ltd. In fact many of the so-called/alleged sub-contractors were
employees of the petitioners or Sunair Hotels Ltd. and were earning meagre
salaries. In para 15 of the complaint, the respondent gave details of certain
companies, namely, Bansal Estate (P.) Ltd., Isha Metal (P.) Ltd., Atul
Constructions & Finvest (P.) Ltd. It was alleged that huge amounts were
shown to have been paid to these companies, which were controlled by either of
the petitioners. Various instances of bogus expenditure shown in the books of
account of Sunair Hotels Ltd. were also given in para 16 of the complaint. It
was alleged that modus operandi adopted
by the accused was that during the construction of the hotel project, the
accused persons misappropriated the funds of Sunair Hotels Ltd. by creating
false documents, fabricating valuable securities and falsifying the books of
account of Sunair Hotels Ltd. Other instances of alleged misdeeds of the
petitioner were also given in paras 18, 19 and 20 of the complaint.
3. On receipt
of this complaint, learned Metropolitan Magistrate passed the following order
dated 19th February, 2002 -
“...Heard. File perused. The material on
record contains allegation of breach of trust, forgery falsification of
account, etc., against the respondents. SHO Police Station, Connaught Place, is
directed to investigate the matter under section 156, Cr.PC in accordance with
the law and submit his report by 27th March, 2002. Copy of the order, complaint
and the annexed documents be sent to the SHO, complainant counsel to file the
same today itself....”
4. On the
basis of said order, FIR No. 99/2002 was registered under sections
409/411/424/467/477A read with section 120B of the IPC. During investigation,
the police has submitted status reports from time-to-time. A perusal of status
reports indicates that police has found some substance in the allegations
regarding bogus entries showing payments to some companies and sub-contractors.
It may be that after investigation is over, the police may file challan or
final report for closure of the case depending upon the nature of the evidence
they gather during investigation but at this stage, it appears that allegations
made in the complaint regarding these alleged bogus payments and falsification
of accounts are not entirely groundless.
5. Mr. N.K.
Kaul, learned senior counsel appearing for the petitioner, vehemently contended
that the respondent has already approached the Company Law Board (‘CLB’) and,
vide order dated 13th June, 2001, the CLB rejected the application filed under
section 397/398 of the Companies Act filed by the respondent, therefore, a
parallel investigation by police into the same allegation is not permissible. A
perusal of the said order dated 13th June, 2001 passed by the CLB shows that it
deals mainly with the allegation of fraudulent allotment of shares amongst
petitioners without actual payment of money. The CLB was of the view that no
fraud appears to have been committed in the said allotment. The criminal
complaint filed in the Court of the learned Metropolitan Magistrate was not
confined to alleged fraudulent allotment of shares by the petitioners. The
alleged fraudulent allotment of shares by the petitioners among themselves was
subject-matter of earlier FIR being No. 90/2002 registered at P.S. Connaught
Place, New Delhi. The present FIR No. 99/2002 was registered at P.S. Connaught
Place, New Delhi, mainly on the allegations regarding siphoning off the
company’s funds by the petitioners by making bogus entries in the account books
in the name of benami companies who in turn made payment to fictitious
sub-contractors. Thus, subject-matter of the criminal complaint on the basis of
which present FIR has been registered is different from that of application
under section 397/398 filed by the respondent before the CLB, although to some
extent it may be overlapping.
6. Learned
counsel for the petitioner next contended that sections 235 to 242 of the Act
provide a complete machinery for investigation into the affairs of the company
and resultant prosecution under section 242 of the Act. Therefore, resort to
police investigation under the provisions of the Cr.PC is impliedly barred and
as such the FIR is liable to be quashed. Reference was made to the decision of
the Supreme Court in the case of State of Haryana v. Ch. Bhajan Lal [1990] 4 SC
650, wherein it was held that FIR is liable to be quashed if the Act provides
efficacious redress for the grievance of the parties. In para 107, Apex Court
has observed as under :
“107. In the backdrop of the interpretation of
the various relevant provisions of the Code under Chapter XIV and of the
principles of law enunciated by this court in a series of decisions relating to
the exercise of the extraordinary power under article 226 or the inherent
powers under section 482 of the Code which we have extracted and reproduced
above, we give the following categories of cases by way of illustration wherein
such power could be exercised either to prevent abuse of the process of any
court or otherwise to secure the ends of justice, though it may not be possible
to lay down any precise, clearly defined and sufficiently channelised and
inflexible guidelines or rigid formulate and to give an exhaustive list of
myriad kinds of cases wherein such power should be exercised :
1. Where
the allegations made in the first information report (‘FIR’) or the complaint,
even if they are taken at their face value and accepted in their entirety do
not prima facie constitute any offence or make out a case against the accused.
2. Where
the allegations in the FIR and other materials, if any accompanying the FIR do
not disclose a cognizable offence, justifying an investigation by police
officers under section 156(1) of the Code except under an order of a magistrate
within the purview of section 155(2) of the Code.
3. Where
the uncontroverted allegations made in the FIR or complaint and the evidence
collected in support of the same do not disclose the commission of any offence
and make out a case against the accused.
4. Where
the allegations in the FIR do not constitute a cognizable offence but
constitute only a non-cognizable offence, no investigation is permitted by a
police officer without an order of a magistrate as contemplated under section
155(2) of the Code.
5. Where
the allegations made in the FIR or complaint are so absurd and inherently
improbable on the basis of which no prudent person can ever reach a just
conclusion that there is sufficient ground for proceeding against the accused.
6. Where
there is an express legal bar engrafted in any of the provisions of the Code or
the concerned Act (under which a criminal proceeding is instituted) to the
institution and continuance of the proceedings and/or where there is a specific
provision in the Code or the concerned Act providing efficacious redress for
the grievance of the aggrieved party.
7. Where
a criminal proceeding is manifestly attended with mala fide and/or where the
proceeding is maliciously instituted with an ulterior motive for wreaking
vengeance on the accused and with a view to spite him due to private and
personal grudge.”
7. According
to the learned counsel for the petitioner, the case in hand falls in the
category (6) above. The Companies Act under sections 235 to 242 thereof
provides efficacious redress regarding investigation into the affairs of the
company and the present FIR is, therefore, liable to be quashed. In the very
next paragraph. Supreme Court cautioned the High Courts, while dealing with the
question of quashing of FIR, in the following words :
“108. We also give a note of caution to the
effect that the power of quashing a criminal proceeding should be exercised
very sparingly and with circumspection and that too in the rarest of rare
cases; that the court will not be justified in embarking upon an inquiry as to
the reliability or genuineness or otherwise of the allegations made in the FIR
or the complaint and that the extraordinary or inherent powers do not confer an
arbitrary jurisdiction on the court to act according to its whim or caprice.”
8. Reliance
was also placed on the decision of the Apex Court in the case of Rohtas
Industries Ltd. v. S.D. Aggarwal AIR 1969 SC 707, wherein it was held that
investigations under sections 235 to 242 of the Act is a serious matter. Such investigation
should not be ordered routinely. Reliance was also placed on a later decision
of the Supreme Court in the case of Sri Ramdas Motor Transport Ltd. v. Tadi
Adhinarayana Reddy [1997] 13 SCL 118. In that case, facts were that there was
some dispute between managing director of the appellant-company and his
son-in-law who was a former director of the company and also a M.P. At the
instance of son-in-law eight shareholders of the company filed a company
petition under sections 397 and 398 of the Act before the CLB on the ground of
oppression of minority shareholders and mismanagement of the affairs of the
company. The CLB declined to grant interim order therein. Thereafter,
son-in-law filed another company petition under section 397/398 of the Act on the
similar ground. Again third company petition was filed for the appointment of
the Administrator. During the pendency of the proceedings, one of the
shareholders filed a writ petition under article 226 of the Constitution of
India alleging financial mismanagement of the company and misappropriation of
funds before Andhra Pradesh High Court praying for mandamus directing Union of
India to forthwith prosecute the appellant in accordance with law. It was
alleged that there was misappropriation of the funds of the appellant and CBI
inquiry was also prayed for. Writ petition was dismissed by the learned Single
Judge of the Andhra Pradesh High Court but in appeal, the Division Bench of the
Andhra Pradesh reversed the order of the Single Judge and issued a direction to the Central Government to make its own
verification of the allegations in the writ petition thus indirectly ordering
an inquiry into the affairs of the company bypassing the detailed provisions
with in-built safeguards under the Act. In these circumstances, the Apex Court
followed the observations made in the case of Rohtas Industries Ltd. (supra)
and observed that the allegations basically deal with mismanagement of the
affairs of the company and oppression of the minority shareholders. Its shareholding
was very closely held. The fact that the company had borrowed moneys from
public institutions, is no ground for not availing of the statutory remedies
provided under the Act before the appropriate statutory Forums which are
designed for this very purpose. In para 9 of the judgment, the Apex Court has observed as under :
“9. The power, therefore, to appoint an
inspector to investigate the affairs of a company has to be exercised by the
Central Government after a proper preliminary scrutiny by the Registrar, or by
the CLB as the case may be. It cannot be instituted simply on the basis of
allegations made by one shareholder. Under section 237, there is a further
power given to the Central Government to appoint inspectors to investigate the
affairs of a company if the company, by a special resolution, or the court, by
order declares that such investigation is necessary. Similarly, this may be
done if in the opinion of the CLB there are circumstances suggesting that the
business of the company is being conducted with the intent to defraud its
creditors, members or any other person or otherwise for a fraudulent or
unlawful purpose or in the manner oppressive of any of its members or that the
company was formed for any fraudulent or unlawful purpose. The CLB may also come to a
conclusion that there are circumstances suggesting that the persons concerned
in the formation of the company or management of its affairs have been guilty
of fraud, misfeasance or other misconduct towards the company or towards any of
its members; or that the members of the company have not been given all the
information with respect to its affairs which they might reasonably expect. In
these circumstances, on the basis of the opinion so framed by the CLB, the
Central Government nor the CLB has been moved by the first respondent in
accordance with law for this purpose. In the case of Rohtas Industries v. S.D.
Agarwal, this court examined the nature of the power conferred on the Central
Government under section 235 as well as section 237(b) and held that the scheme of these sections
makes it clear that unless proper grounds exist for investigation of the
affairs of a company, such investigation will not be lightly undertaken. An
investigation may seriously damage a company and should not be ordered without
proper material gathered in the manner provided in the Companies Act. The power
of investigation has been conferred on the Central Government on the faith that
it will be 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.”
9. Having
given my thoughtful consideration to submissions made by learned counsel for
the parties, in the light of material on record and the case law cited at the
bar, I am of the view that the observation of the Apex Court in the case of Sri
Ramdas Motor Transport Ltd. (supra) cannot be read to mean that police
investigation into suspected commission of cognizable offence in relation to
the affairs of the company is ruled out in view of sections 235 to 242 of the
Act. It is important to note that the Supreme Court has repeatedly observed in
the said judgment (paras 6 and 10) that main grievance of the respondent in the
writ petition relates to the mismanagement of the affairs of the
appellant-company and then taking into consideration sections 235 to 242 of the
Act, Supreme Court proceeded to hold that these sections adequately take care
of such type of situations. Under section 235 of the Act, investigation can be
ordered if report has been made by the Registrar under section 234(6) and
234(7). Further under sub-section (2) of section 235, the CLB will also order
investigation if (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. In that case, there was no compliance of provisions of section 235.
Under the circumstances, Supreme Court felt that ordering an investigation at
the instance of single shareholder is uncalled for. If there are general
allegations regarding mismanagement of the affairs of the company or oppression
of the minority shareholders, the aggrieved party shall approach
Registrar/CLB/Government to take proper steps under section 235 onwards of the
Act. In such cases, Government is not supposed to order investigation as a
matter of routine - Rohtas Industries Ltd.’s case (supra).
10. In the present
case, the scenario is different. The FIR has already been registered and the
investigation/prosecution has already been launched. The nature and scope of
investigation to be conducted under sections 235 to 242 is vastly different
from the nature and scope of the investigation to be conducted by the police.
An investigation under sections 235 to 242 is not an investigation of a
criminal case. The purpose of investigation under the provisions of the
Companies Act is only to streamline the working of the company. Such
investigations may reveal violation of rules and regulations by the office
bearers or even commission of technical offences, which are punishable under
the Act for which investigation under the Cr.PC may be uncalled for. But if
such investigations reveal the commission of offences under IPC. Section 242
enacts an enabling provision under which the Government can also launch
prosecution - M. Vaidyanathan v. Sub Divisional Magistrate AIR 1957 Mad. 65 and
Indian Express (Madura) (P.) Ltd. v. Chief Presidency Magistrate [1974] 44 Comp. Cas. 108 (Mad.). On the other
hand, an investigation by the police officer is launched on receipt of an
information of the commission of a cognizable offence. Under section 157 of
Cr.PC, it is obligatory on the part of police officer to launch investigation
if he suspects commission of cognizable offence or if the commission of such an
offence is brought to his notice. Even if there is no specific report and
police officer has only a suspicion, may be on the basis of an anonymous
complaint, he is duty bound to investigate the same. Every citizen has
constitutional rights to approach police and the Court when commission of
cognizable offence is suspected. Various High Courts and the Apex Court have
taken consistent view that the provisions of sections 235 to 242 do not have
the effect of abrogating or repealing the provisions of the Cr.PC which deal
with the powers of the police officer to investigate report about the
commission of the cognizable offence. In support of his contention Mr. Dinesh
Mathur, learned senior counsel for respondent and Ms. Mukta Gupta, learned
counsel for State referred to B.N. Bajoria v. Union of India ILR 1971 Delhi
715; M. Vaidynathan’s case (supra); Indian Express (Madura) (P.) Ltd.’s case (supra) and Radhey Shyam Khemka v. State of Bihar 1993 Crl. LJ 2888 (SC). A
Division Bench of this Court in the case of B. N. Bajoria (supra), had
expressly repelled the argument that the only way to prosecute an office bearer
of the company in respect of some act of embezzlement or misappropriation of
funds concerning the affairs of the company is to direct investigation into the
affairs of the company under section 235. While dealing with this argument, the
Division Bench has observed as under :
“An investigation into the affairs of a
company is ordered in a variety of circumstances which have been mentioned in
sections 235 and 237 of 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 section 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 those 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 CLB 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 individuals. 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.” (p. 723)
11. Again the Division Bench has observed as under
:
“We are not impressed by the argument advanced
on behalf of the petitioner that section 242 alone prescribes mode of launching
prosecution against officers of the company and other individuals who appear 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 sections 621(1A), 624, 624A and 624B
wherein the words used are ‘Notwithstanding any 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 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 section 235 or 237 of the Act. In
the case of M. Vaidyanathan v. Sub-Divisional Magistrate Erode AIR 1957 Mad.
65, 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, 156 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 Madras High Court (Rajamannar, CJ.
and Panchapakesa, J.) in M. Vaidyanathan, In re AIR 1957 Mad. 432.” (p. 724)
12. The Division Bench further observed as under :
“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 the case 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. There 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 though 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 offence relating to
the assets of a company. It is in our opinion not permission to read such a
restriction in the statute 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 AIR 1963 SC 1956). A report of a Committee can obviously not stand on
a higher footing than the Statement of Objects and Reasons.” (p. 726)
13. In view of
my discussion above, a settled proposition of law emerges is that if there is a
specific information about the suspected commission of a cognizable offence
under IPC, may be in connection with the affairs of the company anybody can
approach the police which then is obliged to carry but the investigation. Every
citizen has constitutional right to approach police officer or the Court for
the investigation into the commission of the cognizable offence. In the present
case, FIR was lodged under the Court orders, which has not been challenged in
any proceedings. While considering the question of quashing of the FIR in a
writ petition or in a petition filed under section 482, Cr.PC, the Court is not
supposed to minutely examine the veracity/truthfulness of the evidence or the
probative value thereof - M. Narayandas v. State of Karnataka 2003 (Suppl. 1)
JT 412. It cannot be said at this stage that the allegation in the complaint
even if taken on their face value do not make out an offence. In the case of
Radhey Shyam Khemka (supra), the Supreme Court repelled the contention that the
police investigation in the alleged/suspected cognizable offence is barred in
view of the provision of Companies Act. In that case, the appellants who were
directors of the company had issued prospectus inviting public subscriptions of
42,000 equity shares and 3,000 preference shares. It was given out by the
appellants to the investors that application was being made to the Calcutta
Stock Exchange for enlisting the shares of the company for official quotation.
Such application, which was made on behalf of the company, was rejected by the
stock exchange. In spite of the rejection the share money collected from
different investors was held by the appellants and none of the shareholders
were either informed or were repaid. On that basis, CBI registered a case and
filed challan under section 409 of the IPC. The appellant sought quashing of
the FIR on the ground that there are adequate provisions in the Act which can
take care of the alleged offences and, therefore, a launching of the
prosecution without taking recourse to the provisions of the Act amounted to
abuse of the process of Court. The Apex Court observed that in a situation like
this where FIR has been registered and charge sheet has been filed, quashing of
the prosecution pending against the appellant only on the ground that it was
open to the applicants to take recourse to the provisions of the Act cannot be
accepted. It would be open to the trial court to examine whether on the basis
of material produced on behalf of the prosecution it is established that the
appellant had issued the prospectus inviting applications in respect of shares
of the company aforesaid with a dishonest intention or having received the
money from the applicants they had dishonestly retained or misappropriated the
same. That exercise cannot be performed either by the High Court or by the Apex
Court.
14. In the case
of State of West Bengal v. Narayan K. Patodia AIR 2000 SC 1405, the Supreme
Court observed that availability of an alternative investigation, per se,
cannot be a ground to quash FIR. In the case of Surendra Nath Sarkar v. Kali Pada Das AIR 1940 Cal. 232, it was
held that private complaint in respect of offence committed in the affairs of
the company is not barred either under the Act or under the Cr.PC. There is no
warrant for the preposition that a single shareholder cannot lodge a criminal
complaint or police report in respect of commission of the cognizable offence
in connection with the affairs of the company.
15. As observed
earlier, in the present case, FIR has been registered under order of the Court
which order has not been challenged so far. The investigation is still in
progress and at this stage, it is not possible to say that the allegations are
totally groundless or on the face of it they do not make out any offence under
the IPC. The provisions of sections 235 to 242 of the Act do not create any bar
against an investigation by police officer if cognisable offence punishable
under the IPC are suspected to have been committed in connection with the
affairs of the company.
16. In the result, this writ petition fails and is
hereby dismissed.
Sri Ramdas Motor Transport Ltd.
v.
Tadi Adhinarayana Reddy
K.S. PARIPOORNAN AND SMT. SUJATA V. MANOHAR, JJ.
CIVIL APPEAL NO. 3155 OF 1997
MAY 1, 1997
Section 235 of the Companies Act, 1956, read
with article 226 of the Constitution - Investigation of affairs of company -
Whether petition for direction to investigate into affairs of company can be
maintained under article 226 - Held, no - Whether disputes relating to
mismanagement of affairs of company and oppression of minority shareholders of
a deemed public limited company involves public interest and can be a ground
for not availing of statutory remedies provided under Companies Act - Held, no
FACTS
Some of the shareholders of the appellant-company
filed before the CLB, a company petition under sections 397 and 398 on the
ground of oppression of minority shareholders and mismanagement of the affairs
of the company. During the pendency of the proceedings before the CLB, the
respondent filed a writ petition under article 226 of the Constitution before
the High Court praying for an investigation into the affairs of the company. A
single Judge of the High Court dismissed the writ petition holding that the
Companies Act provides a forum to consider the grievance made out in the
petition. On appeal, however, the Division Bench of the High Court entertained
the appeal on the ground that the petition raised many serious issues as to
falsification of accounts of a public limited company and directed for an investigation
into the affairs of the company.
On appeal before the Supreme Court:
HELD
Under section 235(2) a power is given to the CLB in
case where, Inter alia, an application is received from not less than 200
members, or members holding not less than one-tenth of the total voting power
in a company, to declare, after giving the parties an opportunity of being
heard, that the affairs of the company ought to be investigated by an Inspector
or Inspectors. 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.
The power, therefore, to appoint Inspector to
investigate the affairs of a company has to be exercised by the Central
Government after a proper preliminary scrutiny by the Registrar or by the CLB
as the case may be. It cannot be instituted simply on the basis of allegations
made by one shareholder. Under section 237, there is a further power given to
the Central Government to appoint Inspectors to investigate the affairs of a
company if the company, by a special resolution, or the Court, by order
declares that such investigation is necessary. Similarly, this may be done if
in the opinion of the CLB there are circumstances suggesting that the business
of the company is being conducted with intent to defraud its creditors, members
or any other person 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. The CLB may also come to a conclusion that
there are circumstances suggesting that the
persons concerned in the formation of the company or management of its affairs
have been guilty of fraud, misfeasance or other misconduct towards the company
or towards any of its members; or that the members of the company have not been
given all the information with respect to its affairs which they might
reasonably expect. In these circumstances, on the basis of the opinion so
framed by the CLB, the Central Government may order an investigation.
In the
instant case no attempt had been made by the respondent to get the affairs of
the company investigated in the manner provided under the Act. Neither the Central
Government nor the CLB had been moved by the respondent in accordance with law
for this purpose. Instead of moving the authorities prescribed under the Act
the first respondent had chosen to resort to the writ jurisdiction of the High
Court for a direction to have the affairs of the company investigated by the
CBI.
The Single Judge before whom the present writ
petition came up for hearing very rightly held that the Companies Act provides
a forum to consider the grievances made out by the first respondent in the writ
petition. When such a forum, statutorily constituted, exists, it is but
appropriate that resort to article 226 should be discouraged There is an
efficacious alternative remedy available under the statute. In fact under the
Companies Act, a more satisfactory solution is available. The Single Judge was
right in pointing out that some of the shareholders had initiated proceedings
before the CLB. The only grievance of the petitioner in the writ petition was
that no orders had been passed thereon. The Single Judge had rightly held that
such a grievance could not constitute a ground for invoking the jurisdiction of
the High Court under article 226.
Further no
public interest was involved in disputes of the kind referred to in the writ
petition. They basically dealt with mismanagement of the affairs of the company
and oppression of the minority shareholders. The company was only a deemed
public limited company. Its shareholding was very closely held The only other
factor referred to in the writ petition to invoke the doctrine of so-called
public interest, was the fact that the company had borrowed moneys from public
institutions. This was no ground for not availing of the statutory remedies
provided under the Act before the appropriate statutory forums which are
designed for this very purpose.
Therefore, the order of the Single Judge could
not be interfered with. The judgment of the Division Bench was set aside.
CASE REFERRED TO
Rohtas
Industries Ltd v. S.D. Agarwal [1969] 3 SCR 108.
K.
Parasaran, A.K. Mylsamy and V.
Balachandran for the Appellant. A.K. Ganguli, Nikhil Nayyar and Ms.
B. Sunita Rao for the Respondent.
JUDGMENT
Mrs.
Manohar, J. - Leave granted.
2. The first appellant-company was established
in 1944 as a private limited company under the Companies Act, 1913. It
continued as a private limited company under the Companies Act, 1956 ('the
Act'). However, with effect from 1-2-1975, by virtue of section 43A of the Act,
it became a public limited company in view of the fact that the annual turn-over
of the company was above the prescribed limit. The first appellant-company,
however, continues to be a closely-held company consisting of only 61
shareholders including 11 employees and ex-employees. The second appellant is
the chairman and managing director of the first appellant- company. The third
appellant is the joint managing director of the first appellant-company. The
main object of the company is to carry on the business of parcel lorry service,
manufacture of automobile components and dealership of Telco.
3. It is the case of the appellants that there
were disputes between the managing director, i.e., second appellant, and his
son-in-law, Srihari Rao, who was a former director of the first
appellant-company and a former Member of Parliament. The disputes started some
time in 1993. In 1994 (according to the appellants, at the instigation of
Srihari Rao) eight shareholders of the company filed before the CLB, Principal
Bench, New Delhi, a company petition bearing CP No. 7 of 1994 under sections 397
and 398 of the Act, on the ground of oppression of minority shareholders and
mismanagement of the affairs of the company by the second and third appellants.
In the said petition, an injunction was sought to restrain the first
appellant-company from proceeding with the rights issue of its shares. After
hearing both the parties, however, the CLB declined to grant any interim order
to this effect. The CLB directed the company to file an affidavit with regard
to the rights issue and to follow the procedure which it had followed earlier
for the rights issue.
4. Thereafter, Srihari Rao and some others filed
before the CLB another Company Petition No. 15of 1994undersections397and398 on
the ground of oppression of minority shareholders and mismanagement of the affairs
of the company by the second and third appellants. This petition was filed on
7-4-1994. An interim relief was sought from the CLB for supersession of the
board of directors of the first appellant-company and for re- constitution of
the board of directors. An interim injunction was also sought against
appellants 2 and 3 to restrain them from functioning as managing director and
joint managing director of the first appellant- company. The company petition
was listed for hearing on 20-3-1995. It was adjourned at the request of the
petitioners therein and thereafter from time to time. The petitioners
before the CLB filed an application to receive evidence by affidavit. This
application was rejected by the CLB on 17-6-1995. The main petition was
thereafter heard from 16-10-1995 onwards.
5. On 12-1-1996, Shrihari Rao filed another company application for appointment of an administrator. During the hearing of this application, the petitioners in the said petition took further time for filing a better affidavit in support of their application and the application was adjourned to 4-12-1996. The hearing of the main company petition was adjourned to May 1997 at the instance of the petitioners therein. We have set out these facts as the grievance of the 1st respondent in his writ petition is: CLB has failed to pass an order.
6. During the pendency of all these proceedings before the
CLB, on 5-10-1996, the 1st respondent filed a writ petition under article 226 of
the Constitution before the High Court of Andhra Pradesh for a writ of mandamus
directing Union of India and the Secretary (Finance), Union of India
(respondents 1 and 2 in the writ petition) to forthwith prosecute the present
appellants 2 and 3 in accordance with law. The first respondent has challenged
in the writ petition various transactions entered into by the first
appellant-company relating to purchases and sales. The first respondent has
also challenged the correctness of the figures shown in the balance-sheet and
profit and loss accounts of the first appellant-company. According to the first
respondent there was misappropriation of the funds of the company by appellants
2 and 3. It was claimed by the first respondent that this amounts to misappropriation
of public funds and that, for the alleged acts of appellants 2 and 3, the Union
of India should be directed to prosecute appellants 2 and 3. There is a further
prayer in the writ petition that the Court should direct an inquiry by the
Central Bureau of Investigation into the alleged financial mismanagement of the
company and misappropriation of funds by appellants 2 and 3; that a report
should be submitted to the Court within four weeks pending the disposal of the
writ petition; and on the basis of such report the Court should give further
directions. There is also a prayer for the appointment of an interim
administrator to take charge of the affairs of the first appellant-company. All
these prayers relate the alleged mismanagement of the affairs of the first
appellant-company by appellants 2 and 3. In essence, the writ petition under
article 226 prays for an investigation into the affairs of the first
appellant-company, and for action against appellants 2 and 3. The interim
prayer for an administrator of the company also clearly shows that the main
grievance of the first respondent in the writ petition relates to the
management of the affairs of the first appellant-company.
7. The Act provides for dealing with such grievances
against a company and its board of directors. Under section 235 of the Act, the
Central Government may, where a report has been made by the Registrar under
section 234(6) or (7) of the Act, 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. Section 234(6) requires the
Registrar, in cases where he is of the view, on the basis of information or
explanation furnished by the company, or on the basis of the books and papers
produced, that the documents together with information and explanation disclose
an unsatisfactory state of affairs, or do not disclose a full and fair
statement of any matter to which the documents purport to relate, to report in
writing the circumstances of the case to the Central Government. Sub-section
(7) deals with the Registrar acting on the basis of material placed before him
by any contributory or creditor or any other person interested in the business
of the company. The Registrar, if he is satisfied that the business of the
company is being carried on in fraud of its creditors or persons dealing with
the company, or otherwise for a fraudulent or unlawful purpose, may, after
giving an opportunity of hearing to the company, by written order call upon the
company to furnish in writing any information or explanation in connection with
it. If he is satisfied that investigation is required, he may refer the case to
the Central Government. Whereupon, the Central Government could order an
investigation under section 235. The Central Government, therefore, will not
readily order an investigation into the affairs of the company unless the
Registrar makes a report as set out in section 235(1), read with section 234(6)
and (7).
8. Under section 235(2), a power is given to the CLB in case where, inter alia, an application is received from not less than 200 members, or members holding not less than one-tenth of the total voting power in a company, to declare, after giving the parties an opportunity of being heard, that the affairs of the company ought to be investigated by an Inspector or Inspectors. 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.
9. The power, therefore, to appoint Inspector to
investigate the affairs of a company has to be exercised by the Central
Government after a proper preliminary scrutiny by the Registrar or by the CLB
as the case may be. It cannot be instituted simply on the basis of allegations
made by one shareholder. Under section 237 of the Act, there is a further power
given to the Central Government to appoint Inspectors to investigate the
affairs of a company if the company, by a special resolution, or the Court, by
order declares that such investigation is necessary. Similarly, this may be
done if in the opinion of the CLB there are circumstances suggesting that the
business of the company is being conducted with intent to defraud its
creditors, members or any other person 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. The CLB may also
come to a conclusion that there are circumstances suggesting that the persons
concerned in the formation of the company or management of its affairs have
been guilty of fraud, misfeasance or other misconduct towards the company or
towards any of its members; or that the members of the company have not been
given all the information with respect to its affairs which they might
reasonably expect. In these circumstances, on the basis of the opinion so
framed by the CLB, the Central Government may order an investigation. Neither
the Central Government nor the CLB has been moved by the first respondent in
accordance with law for this purpose. In the case of Rohtas Industries Ltd. v.
S.D. Agarwal [1969] 3 SCR 108, this Court examined the nature of the power
conferred on the Central Government under section 235 as well as 237(b) and
held that the scheme of these sections makes it clear that unless proper
grounds exist for investigation of the affairs of a company, such investigation
will not be lightly undertaken. An investigation may seriously damage a company
and should not be ordered without proper material gathered in the manner
provided in the Act. The power of investigation has been conferred on the
Central Government on the faith that it will be 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.
10. In the present case no attempt has been made by the first
respondent to get the affairs of the company investigation in the manner
provided under the Act. Neither the Central Government nor the CLB has been
moved by the 1st respondent in accordance with law for this purpose. Instead of
moving the authorities prescribed under the Act the first respondent has chosen
to resort to the writ jurisdiction of the High Court for a direction to have
the affairs of the company investigated by the CBI.
11. Under section 397 of the Act any member of a company who
complains that the affairs of the company are being conducted in a manner
prejudicial to public interest or in a manner oppressive to any member or
members may apply to the CLB for an order under that section. The CLB has wide powers
to make such orders as it may think fit to bring an end to the matters
complained of. Some of the shareholders of the first appellant-company have, in
fact, filed petition under sections 397 and 398 before the CLB in which they
have asked for similar reliefs including the appointment of an interim
administrator. The acts of mismanagement and oppression complained of are
similar to those set out in the writ petition before the High Court. The only
ground alleged in the writ petition for moving the High Court under article 226
is that the CLB is not moving in the matter. Under an excuse that the CLB has
not yet made an order, a shareholder cannot be allowed to by pass the express
provisions of the Act and move the High Court under article 226. A shareholder
has very effective remedies under the Act for prevention of oppression and
mismanagement. When such remedies are available, the High Court should not
readily entertain a petition under article 226.
12. The learned single judge before whom the present writ petition came up for hearing very rightly held that the Act provides a forum to consider the grievances made out by the first respondent in the writ petition. When such a forum, statutorily constituted, exists, it is but appropriate that resort to article 226 should be discouraged. There is an efficacious alternative remedy available under the statute. In fact under the Act, a more satisfactory solution is available. The Single Judge was right in pointing out that some of the shareholders have initiated proceedings before the CLB. The only grievance of the petitioner in the writ petition is that no orders have been passed thereon. The Single Judge has rightly held that such a grievance cannot constitute a ground for invoking the jurisdiction of the High Court under article 226. He, therefore, dismissed the writ petition.
13. In appeal, however, the Division Bench of the Andhra
Pradesh High Court presided over by the Chief Justice, entertained the appeal
on the ground that the petition raised many serious issues as to falsification
of the accounts of a public limited company. It said that the acts of the
company would jeopardise public interest. Therefore, the petition involved
wider 'public interest' and should be entertained. In the result the Division Bench
issued a direction to the Central Government to make its own verification of
the allegations in the writ petition. In other words, the Division Bench of the
High Court directed an investigation into the affairs of the company, by
passing the detailed provisions with inbuilt safeguards under the Act, designed
specially for this purpose. The only ground for intervention appears to be
'public interest'. We fail to see what public interest is involved in disputes
of the kind referred to in the writ petition. They basically deal with
mismanagement of the affairs of the company and oppression of the minority
shareholders. The company is only a deemed public limited company. Its
shareholding is very closely held. The only other factor referred to in the
writ petition to invoke the doctrine of so-called public interest, is the fact
that the company had borrowed moneys from public institutions. This is no
ground for not availing of the statutory remedies provided under the Act before
the appropriate statutory forums which are designed for this very purpose. We are distressed to find that the
well-reasoned judgment of the Single Judge was interfered with in a casual
manner. The impugned judgment rests on fragile foundations and reads more like
in ipse dixit.
14. The appeal is allowed and the impugned
judgment of the Division Bench of the Andhra Pradesh High Court is set aside.
The first respondent shall pay to the appellant costs of the appeal quantified
at Rs. 15,000.