SECTIONS 236 AND 237

Investigation of company’s affairs in other cases

[1972] 42 Comp. Cas. 63 (Guj.)

HIGH COURT OF GUJARAT

Alembic Glass Industries Ltd., In re

D.A. Desai, J.

COMPANY PETITION NO. 11 OF 1971

August 2, 1971

 S.N. Shelat for the Petitioner.

J.M. Thakore and with G.N. Shah for the Respondent.

JUDGMENT

D.A. Desai, J.—The petitioner is a shareholder of Alembic Glass Industries Ltd., Baroda, a company incorporated on 19th December, 1944, under the provisions of the Companies Act, 1913, as prevalent in the former Baroda State. The petition is filed under section 237(a)(ii) of the Companies Act, 1956, praying for two reliefs:

"(i)    to pass appropriate order or direction regarding the investigation to be made by appointing investigator and/or auditors to inquire into and report regarding the affairs and the conduct of the company including the transaction of purchases since 1966 ; and

        (ii)    to direct the Central Government to order investigation under section 237 of the Companies Act."

Number of allegations have been made in the petition alleging that the business of the company is being conducted with intent to defraud its creditors, members or any other persons and is otherwise fraudulent and in a manner oppressive to its members. The allegations can be broadly summarised under three heads:

(i)         that the managing agents have without the permission or sanction of the board of directors purchased capital assets in excess of the prescribed limit and also sold the capital assets in excess of the prescribed limits, such as purchase of aeroplane, setting up of the plant at Bangalore and purchase and sale of one Ambassador car:

(ii)        flagrant violation of the provisions contained in section 372 by purchasing the shares of Alembic Chemical Works Company Ltd. and M/s. Dharak Ltd.; and

(iii)       purchases at inflated price from certain specified firms in which Mr. Ramanbhai B. Amin, a partner of the firm of managing agents, namely, Nishechi Services, has vital interest. The petitioner has further stated that he has brought all these malpractices to the notice of the Central Government and requested the Central Government to take action under section 237 of the Companies Act to appoint an inspector to investigate into the affairs of the company, but the Central Government has neither taken any action nor cared to inform him what action it proposed to take in respect of the allegations made by the petitioner in his applications and letters sent by him to the Central Government. The petitioner has stated that therefore he has been constrained to file this petition under section 237(a)(ii) for the aforementioned reliefs.

On the petition being presented a notice prior to its admission was ordered to be issued to the company in response to which the respondent appeared and filed a short affidavit, inter alia, contending that this court has no jurisdiction to entertain the petition under section 237(a)(ii) of the Companies Act.

Section 237 of the Companies Act reads as under :

"237. Investigation of company's affairs in other cases.—Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)         the company, by special resolution ; or

(ii)        the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

        (b)    may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose; or

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members ; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company."

Group of sections commencing from section 235 and ending with section 251 are grouped together under the heading "Investigation". Section 235 confers power upon the Central Government to appoint an inspector to investigate the affairs of any company and to report thereon in such manner as the Central Government may direct in the circumstances mentioned in the section, namely:

(a)        in the case of a company having a share capital, on the application either of not less than 200 members or of members holding not less than one-tenth of the total voting power therein ;

(b)        in the case of a company not having a share capital, on the application of not less than one-fifth in number of the persons on the company's register of members ;

(c)        in the case of any company, on a report by the Registrar under sub-section (6) or sub-section (7) read with sub-section (6) of section 234.

Section 236 prescribes the manner of making the application as provided for by section 235. Under section 237, obligation is cast on the Central Government to appoint an inspector to investigate the affairs of the company if—

            (i)         the company adopts a special resolution to that effect and conveys it to the Central Government; or

(ii)        the court by its order directs the Central Government to appoint an inspector to investigate into the affairs of a company.

Clause (b) of section 237 enables the Central Government to suo motu appoint an inspector to investigate the affairs of a company if the conditions set out in one or other of the sub-clauses of clause (b) are satisfied. By the present petition, the petitioner has invoked the jurisdiction of this court under section 237(a)(ii).

The learned Advocate-General appearing for the company contended that this court has no jurisdiction to appoint an inspector to investigate the affairs of the company and, therefore, prayer (a) in the petition is beyond the jurisdiction of this court. It must straightaway be conceded that under section 237 this court has no jurisdiction to appoint an inspector to investigate the affairs of any company. Looking to the scheme of the section: commencing from section 235, it is crystal clear that the power to appoint an inspector to investigate the affairs of any company vests in the Central Government. The Central Government can be moved to exercise that power in the manner provided for in section 235 by a requisite number of members or by the Registrar. Even in that case, the Central Government is not bound to appoint an inspector. Clause (b) of section 237 enables the Central Government to appoint an inspector to investigate the affairs of the company suo motu. However, that power can be exercised on the subjective satisfaction of the Central Government with regard to all or any of the matters set out in the three sub-clauses of clause (b). The Central Government is under an obligation to appoint an inspector if one or the other conditions specified in clause (a) of section 237 is satisfied. Two conditions are :

            (i)         that the company adopts a special resolution to that effect; or

            (ii)        that the court by its order directs the Central Government to appoint an inspector.

Section 237 leaves no room for doubt that this court exercising jurisdiction under the Companies Act has no power to appoint an inspector. Therefore, prayer (a) by which the petitioner wants this court to appoint an inspector cannot be granted.

It was next urged that prayer (b) is premature. By prayer (b) the petitioner wants this court to direct the Central Government to appoint an inspector to investigate the affairs of the company. As the first limb of the argument it was urged that even according to the allegations made by the petitioner he has already approached the Central Government to appoint an inspector and as that application has not been finally decided, this court should not proceed to make any order under section 237(a)(ii) even if it has jurisdiction to pass such order. It is undoubtedly true that the petitioner has approached the Central Government and has sent various applications, letters and affidavits requesting the Central Government to take action against the company in exercise of the powers conferred upon the Central Government under section 237(b). But at this stage, on the demur, the question is : whether this court has or has no jurisdiction to entertain an application under section 237(a)(ii) and in an appropriate case to make an order directing the Central Government to appoint an inspector. That the court, in its wisdom, in a given case, may not pass an order under section 237(a)(ii) is entirely a different matter. The larger question argued was that this court cannot entertain a petition simpliciter under section 237 (a)(ii) unless the party has first approached the Central Government drawing its attention to various malpractices committed in the administration of the affairs of the company and after the Central Government declines to take action under section 237(b). This will immediately raise a question : whether the powers conferred upon the court under section 237(a)(ii) can only be exercised after the Central Government has declined to exercise powers under section 237(b). In other words, is it obligatory or incumbent upon a party before approaching this court under section 237(a)(ii) to first approach the Central Government and only after the Central Government declines to take any action, this court's jurisdiction can be invoked and the court can exercise jurisdiction under section 237(a)(ii). The construction of clause (a) of section 237 suggested by the learned Advocate-General would make the approach to the Central Government under section 237(b) a condition precedent to the court exercising jurisdiction under section 237(a)(ii). There is no warrant for this construction. There is nothing in the language of section 237 which indicates that a person invoking the court's jurisdiction under section 237(a)(ii) must, first, as a necessary condition before coming to the court, approach the Central Government, invite the attention of the Central Government to the various malpractices committed in the administration of the affairs of the company, and only after the Central Government declines to take any action in the matter, that he can invoke this court's jurisdiction under section 237(a)(ii). That would be, in fact, putting a fetter upon the power of this court, which the section does not provide, nor should the court by necessary implication read into section 237 any such fetter on the power of this court. Let it be distinctly understood that the court may in a given case decline to exercise jurisdiction under section 237(a)(ii) till the Central Government disposes of the matter pending before it under section 237(b); but that is entirely different from saying that no one can come to this court unless he first approaches the Central Government under section 237(b). That would be unduly limiting the jurisdiction of the court which the legislature has not thought fit to put, to delimit or circumscribe.

The language of section 237(a) is clear and unambiguous and admits of no construction by which any fetter or limit can be put on the jurisdiction of this court to entertain a petition for giving a direction to the Central Government to appoint an inspector to investigate the affairs of the company. Once the court makes an order, it is obligatory upon the Central Government to appoint an inspector. There are three distinct methods by which a party desirous of getting the affairs of a company investigated may get an inspector appointed by the Central Government. If the requisite number of members are available, application can be made under section 235. Any one who is unable to collect the requisite number of members may bring to the notice of the Central Government various malpractices committed in the administration of the affairs of a company and the Central Government may act suo motu under section 237(b). In the aforementioned two cases the question of appointment of an inspector is within the discretion of the Central Government. But there is a third mode legislatively recognised and mandatory in character by which an inspector can be got appointed by the Central Government and that is where the special resolution to that effect is adopted by the company, or where the court makes an order to that effect.

The legislature has conferred wide jurisdiction on this court to entertain a petition under section 237(a)(ii). In fact, the power of the Central Government to appoint an inspector suo motu under section 237(b) is limited to its subjective satisfaction in respect of one or other matters contained in three sub-clauses of clause (b). The legislature in its wisdom has not put any such condition before the court can make an order, though the court may in its wisdom expect prima facie proof of some of these conditions on the subjective satisfaction of which the Central Government would appoint an inspector before directing the Central Government to appoint an inspector. While conferring jurisdiction on the court to direct the Central Government to appoint an inspector, the legislature has not thought fit to circumscribe the discretion or jurisdiction in any manner. It would, therefore, be utterly inappropriate to curtail or circumscribe or fetter the jurisdiction of this court by reading into the section something which is not there.

The learned Advocate-General, however, in support of the construction canvassed for by him, urged that section 237 must be read subject to section 235 or section 237(b). It was urged that only if a requisite number of members gathered together as required by section 235 and approached the Central Government or anyone can draw the attention of the Centra] Government to the affairs of the company under section 237(b), on the Central Government being satisfied about one or the other thing set out in the three clauses of section 237(b), the Central Government may appoint an inspector. It is, therefore, not possible to conceive that the legislature would confer such wide jurisdiction upon the court under section 237(a)(ii), as to enable anyone to bypass these two sections. It was also urged that wherever the legislature wanted a single person to come to the court to take action against the company, it has in terms so provided. But, in all other cases, action against the company being representative action, one or the other individual should not be permitted to invoke the jurisdiction of the court which would have the tendency to open the flood-gates of litigation. As a corollary, it was urged that a petition under sections 397 and 398 for reliefs against oppression of minority shareholders can only be filed if and only if certain number of members gather together and come to the court as required by section 399. Approaching the matter from this angle and proceeding further, it was urged that it would not be appropriate to read section 237 in isolation but it must be read subject to section 235. The scheme of sections 235, 236 and 237 is quite clear and unambiguous. The requisite number of members can request the Central Government to appoint an inspector. The legislature also conferred power upon the Central Government to appoint an inspector suo motu. But the legislature also thought fit to confer jurisdiction on the court to examine the allegations against a company even at the instance of a single shareholder, and, if satisfied, to direct the Central Government to appoint an inspector. By putting this construction, which appears to be grammatically correct and in consonance with the spirit of section 237, there should be no apprehension of opening the flood-gates of litigation. Whenever the court directs a thing to be done, there is judicious investigation of allegations by a judicially trained mind and reason is the hallmark of judicial approach, fairplay and moderation. A party who comes to this court requesting the court to direct the Central Government to appoint an inspector will have to satisfy the judicial conscience that there has been such mal-administration in the affairs of the company, and that some one should at least look into the malpractices. In my opinion, the apprehension appears to be unfounded. Therefore, it appears that neither section 235 nor section 237 controls section 237(a)(ii) and this court has jurisdiction to entertain a petition under section 237(a)(ii) notwithstanding the fact that the party invoking the jurisdiction of this court has not approached the Central Government and notwithstanding the fact that the Central Government has taken no action on such an application already made to it. The petition, therefore, cannot be said to be premature or liable to be thrown out on this ground.

The learned Advocate-General invited my attention to the practice in England in respect of an application made under section 165 which is a corresponding section in the English Companies Act, 1948. It was urged that the practice as grown up in England does indicate that an application under section 165(a)(ii) which is in pari materia with section 237(a)(ii) will not be entertained until the party coming to the court has first approached the board of trade and the board of trade has refused to appoint an inspector. My attention was drawn to Palmer's Company Law, 21st edition, page 683, where the author has observed as under :

"If the board of trade refuse to appoint an inspector, a member may apply to the court for an order under section 165(a)(ii)"

From this observation, an attempt was made to urge that approaching the board of trade is a condition precedent to the court exercising jurisdiction under section 165(a)(ii). The observation cannot be construed to that effect because of an earlier observation in the same Chapter at page 681. There the author has observed as under:

"An application for an order is made by originating motion (R.S.C. 1965, Ord. 102, r. 4). Such an order may further be made by the court of its own motion in any proceeding before it."

Pennington on Company law, at page 557, has observed:

"The board of trade must appoint an inspector to investigate the affairs of a company if a meeting of its members by special resolution, or the court, by order, declares that its affairs ought to be so investigated."

It is further observed that, thus, if an individual member fails to persuade the board to appoint an inspector, of its own motion, or if the requisite fraction of members fails to persuade the board to do so, an application may be made to the court to reverse the board's decision. Gower, in his Principles of Modern Company Law, third edition, at page 606, has observed as under:

"It is very uncommon for an application to be made to the court for an order since it is cheaper, quicker and normally easier to apply direct to the board to exercise their power under section 165(b)."

It thus appears that even though ordinarily a single shareholder would be too unwilling to take proceedings in a court of law invoking the court's jurisdiction under section 237(a)(ii) and, therefore, would prefer to go to the Central Government, yet there is nothing in the language of the section or in the practice indicated hereinabove to lead to the conclusion that no one can come to the court without first going to the Central Government. Entertaining of an application directly by the court without insisting upon the applicant going to the Central Government would not indicate that thereby the individual is allowed to bypass some of the statutory provisions of law.

It was next urged that the court can make an order as envisaged by section 237(a)(ii) not by entertaining an independent petition from any petitioner but the court, while examining the affairs of the company in respect of some other proceedings against the same company, may in order to give full relief and to effectively adjudicate upon the issues raised before it direct the Central Government to appoint an inspector. It was urged that one cannot conceive of an application simpliciter under section 237(a)(ii) for directing appointment of an inspector by the Central Government but power under section 237(a)(ii) can only be exercised where the court has seizin upon the affairs of a company on account of some other proceeding pending in the court against that company. I fail to see anything in the language of section 237(a)(ii) indicating that a petition simpliciter for an action under section 237(a)(ii) cannot be entertained but that power conferred by section 237(a)(ii) can only be exercised by the court against the company in respect of whom some other proceeding is pending in the court and the court considers it proper to direct appointment of an inspector. My attention was drawn to the commentary by A. Ramaiya in A Guide to the Companies Act, sixth edition, page 408, where the author has observed that the order of the court referred to in clause (a)(ii) may be passed in any proceeding in which the court has seizin of the company's affairs. This commentary cannot be read to mean that existence or pendency of some proceeding other than the one for taking action under section 237(a)(ii) is sine qua non so that the court would have seizin over the affairs of the company and then alone in such a proceeding, in order to effectively dispose of that proceeding, the powers under section 237(a)(ii) can be exercised. On the contrary, it only indicates that even in the absence of a petition simpliciter for an action under section 237(a)(ii) for directing the Central Government to appoint an inspector, the court while hearing some other proceeding against a company in the course of which the court is satisfied that an inspector to investigate the affairs of the company should be appointed, the court may without any application to that effect proceed to pass such an order. If the court has such wide power to exercise jurisdiction under section 237(a)(ii) in another proceeding against the same company, there is no justification for holding that a petition simpliciter under section 237(a)(ii) cannot be entertained by the court. Viewed from this angle, the observations of the Allahabad High Court in Raghunath Swarup Mathur v. Har Swarup Mathur would not be of any assistance. In that case, while dismissing a petition under sections 397 and 398, it was observed that no case is made out for making an order under section 237(a)(ii).

Lastly, I would also like to point out that rule 11(9) of the Companies (Court) Rules, 1959, provides that the court can be moved under section 237 by a petition. That, of course, is not decisive. But if the construction that I put upon section 237 is correct, the fact that a petition is prescribed for moving the court may also point in the same direction.

Thus, upon a proper construction of section 237, a petition can be filed under section 237(a)(ii) of the Companies Act for a prayer that the Central Government be directed to appoint an inspector to investigate the affairs of the company. Prayer (b) is to that effect and, therefore, the petition is one which can be entertained.

As no further facts have been set out in the affidavit, the petition is accepted and admitted and notice of the petition should be issued to the company. Costs of this hearing would be costs in the cause.

[1976] 45 Comp. Cas. 33 (DELHI)

DELHI FLOUR MILLS CO.LTD., In re

D.K.KAPUR. J.

COMPANY PETITION NO. 71 OF 1972

JUNE 7, 1974

Satish Chandra for the Petitioner.

Ved Vyas and A.N. Khanna for Respondent Nos. 1 to 5.

H.S. Bhatia for the Central Government.

JUDGMENT

D.K. Kapur, J.—This is a petition under section 237 of the Companies Act, 1956 (hereinafter called "the Act"), instituted by a shareholder of M/s. Delhi Flour Mills Company Ltd., which prays for an order by the court directing that the affairs of the said company, M/s. Delhi Flour Mills Company Ltd., be investigated by an inspector appointed by the Central Government. Five other persons have been joined as respondents to the petition. They are the managing director of the company, two other directors of the company, Shri R.P. Jain (chief executive of the company) and the secretary of the Company Law Board. Notice of this petition was given to the first five respondents as well as the Registrar of Companies. Later, notice was also given to the Central Government on whose behalf Shri H.S. Bhatia, Assistant Registrar of Companies, appeared. He also appeared on behalf of the Registrar of Companies. Shri H.S. Bhatia stated that the Central Government was not making any representation in respect of this petition. The Registrar of Companies filed a reply in the form of an affidavit. A reply was also filed by the company in the form of an affidavit and a further affidavit was filed by the petitioner.

Subsequently, an application, C.A. No. 5 of 1974, was moved by the first respondent (Delhi Flour Mills Co. Ltd.), in which it was urged that the petition was entirely misconceived and was not maintainable, inter alia for the reason that the Central Government alone could direct investigation and section 237(a)(ii) of the Companies Act, 1956, was not available to a private party for the purpose of getting the affairs of a company investigated by an inspector appointed by the Central Government, except if there were other proceedings pending before the court such as proceedings under sections 397 and 398 of the Act. It was urged that the court had no jurisdiction to make an order directing the investigation of the affairs of the company as this jurisdiction was exclusively reserved to the Central Government. In this petition, it was submitted that the preliminary point should be decided in the first instance. Notice of this application was given to the petitioner and I directed that this question should be determined as a preliminary matter. On hearing this question, I came to the conclusion that the question of maintainability should not be restricted only to the point whether the petitioner could move the court and obtain an order, but it should also be considered as to whether the court could act on the application of the petitioner as framed in the present case. With a view to determining the question of maintainability, I have gone through the pleadings of the petition as appearing in the petition and have tried to determine whether on the material placed before the court in the petition itself, the court was entitled to order an investigation into the affairs of the first respondent. I may mention straightaway that Mr. Satish Chandra, learned counsel for the petitioner, did state that he had further material which would support an investigation in the affairs of the first respondent. But I did not permit this to be placed on record in the form of a further affidavit or a replication. I was of the view that the court had to consider, on the material in the petition, whether the petition was maintainable as such. I shall first deal with the question raised specifically in C.A. No. 5 of 1974, as to whether the petition praying for the investigation of the affairs of a company can be moved as an original petition in the court. In this respect, learned counsel for the petitioner cited Deodatt Purshottam Patel v. Alembic Glass Industries Ltd., wherein it was held that there was nothing in the language of section 237 to show that the jurisdiction conferred by that section could only be exercised in respect of a company when some other proceedings were pending in the court. I fully agree with this decision and I see no reason why the petition praying for an investigation should not be filed even though no other proceedings are pending. It is another matter that the court may be very cautious in ordering investigation, if such a petition is moved, but the jurisdiction of the court seems to be preserved by section 237(a)(ii) of the Act. Moreover, the Companies (Court) Rules, 1959, also indicate that such a petition is maintainable. In rule 11, the proceedings, which may be moved by applications to the company court, have been divided into two categories, some of which are to be instituted on petition, and some of which have to be commenced by judge's summons. There is a list of 23 applications which are to be instituted on petitions. These petitions are to be tried in a different manner from judge's summons. In the list of 23 applications, the 9th entry is: "Applications under section 237 for an order that the affairs of a company are to be investigated." Thus, it appears that applications for the investigation of the affairs of a company can be instituted by themselves as original petitions in the court and it is so contemplated by the Companies (Court) Rules. Mr. Satish Chandra, learned counsel for the petitioner, has contended that such petitions must be tried fully before an order is given as to whether investigation should be ordered or not. I do not want to express any opinion on this question at this stage. It appears to me that the very object of moving a petition under section 237 of the Act to the court is to order an investigation by an inspector to be appointed by the Central Government. This decision requires no previous investigation by the court. However, I am prepared to say that there might be a case before the court when an investigation of a preliminary character may be necessary by the court before the petition is adjudicated upon.

I am, at the present moment, concerned with the other question which arises in this case concerning the applicability of section 237 of the Act. I have to determine whether the present case is one which could be ordered to be investigated by the Central Government through an inspector. For this purpose, I will shortly state what is set out in the petition. Before I do so, I may also state that the nature of an investigation to be ordered depends very much on the power of the Central Government which would be exercised if the court so orders. For instance, the consequences of an order directing investigation have to be seen from the various provisions which govern such questions. Sections 235, 236 and 237 of the Act only state the manner in which the investigation is to be commenced. But, once the investigation is ordered, then the subsequent provisions of the Act come into operation. Section 237 of the Act sets out the powers of the inspector to make an investigation and sections 240 and 240A of the Act deal with various matters which have to be dealt with by the inspector and provide for examination of the books and seizure of the documents, etc. Section 241 of the Act deals with the report of the inspector and sections 242, 243 and 244 of the Act deal with what is to be done once a report has been made. Under section 242 of the Act, a prosecution can be ordered. Under section 243 of the Act, an application for winding up of the company on a petition under sections 397 and 398 of the Act can be instituted. Under section 244 of the Act, proceedings for recovery of damages or property can be instituted. Now, the result of an investigation, to my mind, can result in other prosecutions or an application for winding up or an application under sections 397 and 398 of the Act or a suit for recovery of damages or any property, which has been misapplied on account of misfeasance or mismanagement. Therefore, before an investigation can be ordered by the court, there seems to be some sort of material required, which would result in proceedings being taken of the manner prescribed by section 242, 243 or 243 of the Act. It is unnecessary to order an investigation merely because a shareholder feels aggrieved at the manner in which the company's business is going on. It is in this light that I propose to analyse the allegations contained in the petition.

The substance of the petition can be divided into three portions. The first portion, commencing from para 8.1, deals with the profits made by the company in four separate financial years ending 31st October, 1966, 31st October, 1967, 31st October, 1968, and 31st October, 1969. The figures for purchase and sales disclosed by the company are set out as well as net profits. According to the petition, the net profits had fallen from Rs. 13 lakhs in 1966 to only Rs. 1.74 lakhs in 1969, which showed mis-management and misconduct on behalf of the respondents. The petitioner stated that it should be discovered as to where the profits had been eaten up and the responsibility should be fixed for the same. I need hardly say that the profitability of a company varies from year to year and depends on such things as price, cost of labour, cost of electricity and other factors which vary from year to year. I do not think that the purpose of section 237 of the Act is to order an investigation into the economic working of a company. On the other hand, the purpose of such an investigation is to see whether allegations concerning mismanagement, misappropriation or other illegal acts are justified. I do not think that this allegation (in this petition) can be considered as one which can be directed to be investigated by an inspector appointed by the Central Government. If, on the other hand, there is some material to show that the fall of profits is due to illegal acts, then an investigation may be ordered in a suitable case. I, therefore, reject this ground as being insufficient to order an investigation.

The next ground or portion set out in paragraph 8 3 is that certain persons have been appointed senior executives and have been paid huge salaries. The persons are named in the paragraphs. The persons mentioned are stated to be near relations of respondents Nos. 2 and 5, i.e., the managing director and the chief executive of the company. In fact, one of the persons named is the chief executive himself. I think no investigation is necessary for the purpose of determining the salaries of the persons employed by the company. There are sufficient number of provisions of the Act guarding the shareholders from unauthorised appointments of employees, who are relatives of directors. If there has been any breach of those provisions of the Act, the petitioner should seek his remedy elsewhere. This is also not a matter which, in my opinion, requires investigation by an inspector.

I now come to the third portion of the petition, which is concerned with the fact that the respondent-company is a holding company of Indian Hardware Industries Ltd. It is stated in the petition that Indian Hardware Industries Ltd. is a company registered in the Union Territory of Delhi in which Delhi Flour Mills Company Ltd. holds shares worth Rs. 4,15,879 25 and has also advanced a loan of Rs. 23,66,883 19 to that company. It is stated that for the year ending 31st October, 1966, the directors have forgone interest on the loan whereas in the loans and advances entered in the balance-sheet it is stated that the matter of interest has been deferred till an amalgamation has taken place between the first respondent and Indian Hardware Industries Ltd., and in the subsequent balance-sheets, it is stated that there was no provision for the interest on the loan advanced to the subsidiary company. It is claimed that the total amount recoverable from the subsidiary company (Indian Hardware Industries Ltd.) totalled to about Rs. 47 lakhs as on 31st August, 1972. In the next paragraph of the petition, paragraph 8.7, it is claimed that the investment by Delhi Flour Mills Co. Ltd. (hereinafter called the "holding company"), in the shares of the subsidiary company and the advance of the loan to the same company suggests serious misconduct and certain grounds are given as to why this is so. I may now deal with these grounds.

It is firstly stated that large borrowings had been made by the holding company in the form of deposits and debentures from the open market for the purpose of making investments in the subsidiary company and high interest had been paid on those loans. The figures for 1966, 1967, 1968 and 1969 are given and show that the debentures and deposits varied between Rs. 22 lakhs and Rs. 29 lakhs approximately in these four years. The next ground was that the directors of the first respondent were behaving as despotic owners by investing about seven times the paid up capital of the holding company in the subsidiary company without earning interest, much less dividend and this was detrimental to the shareholders of the holding company, the first respondent. The third point made is that the shareholders of the subsidiary company are mainly relations and employees of the directors of the holding company and, thus, the advances were made to that company for benefiting their own family members at the expense of the minority shareholders of the first respondent, the holding company.

Although the allegations made in the petition show that a considerable investment has been made by the holding company in the subsidiary company, which has not so far matured in any profits and is in fact causing a loss to the holding company, I do not think that this is a matter which can be treated as an illegality under the Act. It is open, under the provisions of the Act, for one company to own a considerable portion of the shareholding of a subsidiary company. This is just as any private individual may make an investment in a company. It is an unfortunate matter that the subsidiary company has not shown the requisite profitability that would justify such a large investment. However, in order to justify an investigation in this matter, it would have to be shown that the amount had been misappropriated in some way or there had been some misfeasance or some other illegality. To put it in another way, here may be a case where a company makes a large investment, which results in a loss, but the loss is bona fide. There may be another case in which a large investment is made with the object of transferring assets dishonestly to some other person. There is not even an allegation in the petition that the investment in the subsidiary company has been made for the purpose of passing on the assets of the holding company in some dishonest or illegal manner to the subsidiary company or to some other persons connected with the subsidiary company. The only facts disclosed in the petition raise a question that the holding company, i.e., the first respondent, has made a large investment in a subsidiary company, which does not appear to have fructified so far into a profitable venture. It is quite possible that, in the years to come, the subsidiary company may start doing well. It is not possible on the material in the petition to say that any facts are disclosed which would justify an investigation. After all, what has the inspector to investigate ? Is he to merely ascertain that large sums of money are invested ? This is a known fact. It is patent from the balance-sheets of the holding company which has also included the balance-sheets of the subsidiary company. Along with the petition, the petitioner has filed the accounts of the Delhi Flour Mills Company Ltd. for the years 1966, 1967, 1968 and 1969. These are annexures "C-1" to "C-4". Each one of these printed books also set out the balance-sheets of Indian Hardware Industries Ltd. for the corresponding periods. For instance, in the balance-sheet of Delhi Flour Mills Company Ltd. for the year ending 31st October, 1966, the balance-sheet of M/s. Indian Hardware Industries Ltd. as on 30th June, 1966, is enclosed. From the balance-sheet of Indian Hardware Industries Ltd. ending on 30th June, 1969, I find that there was a carry-forward loss of Rs. 1,89,833-87 which was reduced to Rs. 89,44672. The balance-sheet for the period ending 30th June, 1966, showed a carry-forward loss of Rs. 3,38,508.54. This shows that Indian Hardware Industries Ltd. had a loss of about Rs. 3 50 lakhs prior to 1966, which was reduced to about Rs. 89,000 in 1969. Naturally, a new industry does not make profits immediately. There is, therefore, some justification for the petitioner to say that the directors of the first respondent have not made a profitable venture and have not been wise in making an investment in the subsidiary company. But lack of wisdom is not something that can be investigated under section 237 of the Act. What is required to be investigated is some malpractice. It is the absence of the allegation regarding such malpractices that is fatal to the petitioner's case. I see no object in the court ordering an investigation into some thing which is really apparent from reading the balance-sheets annexed to the present petition. I, therefore, say that on the present material this is not a sufficient ground for ordering investigation of the affairs of the first respondent.

There is a subsidiary question raised in the petition in paragraph 8.9. This states that a sum of Rs. 6,57,275.48 has been advanced to Delhi Flour Mills Syndicate, the sole selling agents, who are not doing any work for the first respondent and, therefore, this is not justified. I need hardly say that this is an insufficient matter for investigation, because this is a known fact. Even if this allegation is true, it is something concerning which the petitioner can get relief by moving the appropriate court. I see no reason why this matter requires investigation by an inspector appointed by the Central Government.

To my mind, the object of investigation is quite different from the one which has impelled the petitioner to move this petition. The purpose of investigation is to discover something which is not apparently visible to the naked eye. If, for instance, the petitioner had brought out some malpractice in the working of the first respondent, which would raise an inference of dishonesty or malfeasance or misfeasance or misappropriation or some such similar ground which would lead to an inference of mismanagement or oppression, etc., then the court might consider making an order for investigation. Even in such a case, it might be that the petitioner had a sufficient remedy by applying for a winding-up order or by applying under sections 397 and 398 of the Act. The whole question would depend on the circumstances disclosed in the petition.

One serious misgiving has been in my mind concerning the present petition which I may now set out. It is open to any petitioner to move the court for an order of investigation against the company. He need not be a shareholder, he need not have any personal interest; he may be a complete stranger and yet he can move the court seeking an order for investigation of the affairs of a company. If the court has to deal with all such petitions, the court may be literally flooded with them. It is, therefore, necessary for the court to act most cautiously on the question of considering whether the affairs of a company need investigation. It is for this purpose and this reason that I have considered this point from the point of view of maintainability rather than on the material that might be found if an investigation was actually ordered. It is quite possible that if a particular company is investigated some other facts may arise or be discovered. Such facts might justify an investigation. On such an argument, the affairs of all companies could be investigated throughout the country. In order to prevent such an unusual situation arising, I think that the court has to act with the greatest caution when acting under section 237 of the Act. It is to be noticed that the Central Government has the power under section 235, read with section 237 of the Act, to order investigation into the affairs of a company. This power has been the subject-matter of a large number of judicial decisions. In Barium Chemicals Ltd. v. Company Law Board, the Supreme Court had opportunity to deal with what were the circumstances that would justify an opinion by the Central Government that the affairs of a company needed investigation. It was observed that at least prima facie evidence should exist concerning the circumstances which would lead to the conclusion that an investigation was necessary. Therefore, I am of the view that although the aforementioned interpretation of sections 235 and 237 of the Act is restricted to the Central Government, a similar test must also be applied by the court when dealing with this type of case. There also must be circumstances before the court, which lead to an inference that there has been the type of malpractice by the first respondent or its directors, which would justify an investigation of its affairs. For the purpose of determining whether the petition is maintainable it is sufficient to state the circumstances stated in the petition, and I feel that these circumstances are not sufficient in the present case to lead to an inference, even on reading the petition, that the affairs of the first respondent need an investigation.

By a subsequent application, learned counsel for the petitioner brought to my notice a decision of this court in B.M. Bajoria v. Union of India. This authority does not seem to advance the case of the petitioner at all. It was concerned with an inspection of a company made under section 209(4) of the Act. That section authorises an officer of the Central Government to inspect the books of account of a company. In the course of the judgment some reference was made to section 237 of the Act on account of the fact that it was urged that a police report should not be filed as a result of the inspection of the accounts under section 209 of the Act, but the same could only be utilised for the purpose of filing a complaint if an investigation had first been carried out and a complaint filed under section 242. This argument was rejected by the court. I can see nothing in this judgment which leads to an inference that the court has to order investigation into the affairs of the company irrespective of whether there is any material to justify such an investigation.

In the circumstances, I come to the view that the allegations made in the petition are insufficient to maintain this petition. I make it clear that this conclusion is based only on the allegations contained in the petition. It by no means debars the petitioner from relying on other material for the same purpose. The petition is accordingly rejected on the ground that it does not disclose a cause of action. There will be no costs.

[1983] 54 COMP CAS 370 (KER.)

HIGH COURT OF KERALA

Kumaranunni

v.

Mathrubhumi Printing and Publishing Co. Ltd.

M.P. MENON J.

COMPANY PETITION NO. 11 OF 1979

SEPTEMBER 9, 1981

M. Ramanatha Pillai for the Petitioner.

P.K. Kurien and K.A. Nayar for the Respondent.

JUDGMENT

M.P. Menon J.—This is a petition under s. 237(a)(ii) of the Companies Act. The petitioner is a member of a company, and he wants an order declaring that its affairs require investigation by an inspector appointed by the Central Govt. Before going into the facts of the case, it is necessary to examine under what circumstances such a declaration could be made.

Section 237 of the Act reads :

"Investigation of company's affairs in other cases.—Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)         the company, by special resolution ; or

(ii)        the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

        (b)    may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members ; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company."

Counsel suggests that the discretion conferred on the court under cl. (a)(ii) is wide and uncontrolled and that the court can pass an order whenever it is satisfied, on a scrutiny of the materials placed before it, that an investigation is called for. The petitioner can prove his allegations before the inspector, when one is appointed, it is said : the court is only to see whether prima facie they have substance. But the question still remains on what kind of material the court can act. Going by the section, the inspector is to investigate into the affairs of the company, and not into the specific allegations made by a petitioner, suggesting thereby that the allegations or the materials should be such as to satisfy the court about the need for such an investigation. Section 237(b) enumerates the circumstances under which the Central Govt. can suo motu order a similar investigation ; and the discretion there is not uncontrolled. The Central Govt., before exercising its power thereunder, should form an opinion that circumstances suggesting the existence of one or other of the matters specified in sub-cls. (i) to (iii) are there. It should form an opinion that there are circumstances to suggest—

(i)         that the business of the company is being carried on with intent to defraud its members, or otherwise for a fraudulent or unlawful purpose ; or

    (ii)        that it is carried on in a manner oppressive of its members ; or

    (iii)       that the company itself was formed for a fraudulent or unlawful purpose; or

(iv)       that the persons concerned with its formation or management are guilty of fraud, misfeasance or other misconduct in connection with the formation or management; or

    (v)        that due information is withheld from the members.

It is not as if a member can make any allegation and the Central Govt. can order an investigation on being satisfied that it calls for a further probe. The nature of the allegations must have relevance to the matters enumerated in cl. (b). The question then is, is the situation different when the court has to decide under cl. (a) about the desirability of an investigation ?

The answer to my mind lies partly in the history of company law, and partly in some of the other provisions of the Act. A company is an association of men or women for trading, more or less like a partnership. In a partnership, the members are few, and each has confidence in the other. When the members participating in the association are few, their relationship can be worked out within the . confines of contract and agency. But when their number is large, a different form of organisation will be necessary. In the initial stages, these unincorporated bodies were developing in England on the lines of quasi-partnership with fluctuating membership. But as the law of contract arid agency could not be fully applied to a situation where the actual management of the business was in the hands of a few, with the bulk of the members forming the association waiting outside, the Chancery courts of England started to apply the equitable doctrine of trust to those larger bodies. Those in management of the business of the association were held to be occupying a fiduciary position, with certain fiduciary duties, in relation to the association and its members. Basically, the business association, or the company as it came to be called, rested on contract between the members ; but in certain respects, the members in management (i.e., directors) were held to have fiduciary duties, as distinct from contractual. The sanctity of contract which was the philosophy of the 18th and 19th centuries, as modified by the rules of equity developed by the equity courts, thus contributed to the development of company law even before Parliament thought of legislating on the subject. It was the Joint Stock Companies Act of 1844 which first drew the distinction between a partnership and a company. The enactment provided for registrations of associations with more than 25 members. Limited liability was recognised only in 1855, and it was only under the Joint Stock Companies Act of 1856 that registration became a matter of course. Even after the Companies Act of 1862 was placed on the statute book, the position was that the members of a company, particularly those in a minority, had little control over the directors in actual management. If the minority could approach the equity courts with complaints of breach of trust, they obtained some redress, and not otherwise.

In Foss v. Harbottle [1843] 2 Hare 461, it was held that the courts could not normally interfere with the internal management of the company at the instance of a minority of members dissatisfied with the conduct of its affairs by the majority. This approach was sought to be justified on various grounds. The first was that the members who had contracted to abide by the decision of the majority could not complain against something to which they had agreed. The second was that the majority alone knew what was good for the association or company, and that the court's views could not be imposed on them. And the third was that as the company was a separate juristic person, it alone, or at least only a majority of its members, could complain of any injury to it, and not a minority. In Salomon v. Salomon & Co. [1897] AC 22, the House of Lords went to the extreme of refusing to discover dummies and nominees behind the veil of incorporation, by placing emphasis on the separate legal personality of the company. In spite of the fact that free trans-ferability of shares is one of the important features of any company, it was held in In re Gresham Life Assurance Society : Ex fiarte Penney [1872] 8 Ch App 446, that where the articles of association vested an absolute discretion in the directors of a company to refuse to recognise a transfer of shares, the court would presume that the directors had exercised the power bona fide. They could not be compelled to disclose reasons for their refusal, unless want of good faith was affirmatively established by a petitioner. Dishonesty, fraud, bad faith, breach of trust and the like were the minimum to be established by individual shareholders before they could get any equitable relief from the Chancery courts ; in all other cases, the contract was supreme.

The various provisions of the Companies Act relating to minority protection have to be examined in the above background if their true content is to be discovered. Chapter VI deals with "oppression and mismanagement". Section 397 enables the minority shareholders to approach the court with a grievance that the company's affairs are being carried on in a manner oppressive to them, and s. 398 provides for a like complaint that the affairs of the company are carried on in a manner prejudicial to public interest or to the interests of the company. Oppression or mismanagement, in the context, have been understood as conduct involving lack of probity or bona fides. When the directors of a company with their majority support conduct themselves in a manner inequitable, i.e., when their conduct is tainted with lack of probity or selfish interest (as distinct from the interests of the company and the public), the court can step in and rectify matters. What lies behind the statutory provisions is a breach of the fiduciary duties the majority is supposed to honour and the basis of the complaint itself is that there is a breach of such duties. Section 408 confers a similar power on the Central Govt. to rectify matters, if the minority is able to satisfy that authority that similar circumstances verging on breach of trust are there. Winding up is another remedy available to minority shareholders when they find that those in management of the company have failed in their duties, some of which are statutory and some, fiduciary. Section 433(f), in particular, makes a provision for winding up on "just and equitable" grounds. Section 542 is an instance where even a single contributory can approach the court, in the course of the winding up of a company, for a declaration that the persons in management be held liable for fraudulent conduct of business. Misfeasance proceedings contemplated by s. 543 are also intended to assess and recover damages from persons responsible for a misapplication of the company's funds and properties, and for breach of trust. The thread running through all these provisions is the existence of a duty on the part of those in control of the affairs to conduct themselves more or less like trustees, and a liability to account when they are in breach thereof. When the majority of shareholders find that the directors are acting improperly or that the company's affairs are mismanaged, they could remove the directors in a general meeting; they need not go to court. But when the minority has a similar grievance, all that they can do is to approach the court. The provisions are thus intended to protect minority interests on the footing, and on the only footing, that their rights are being trampled upon in an inequitable or unconscionable manner. They are thus exceptions to the rule in Foss v. Harbottle [1843] 2 Hare 461, that a minority cannot ordinarily invite the court to look into the internal affairs of a company. And each of the exceptions rests on the principle that dishonesty, fraud, want of good faith, misfeasance, breach of trust and the like are remediable in equity, irrespective of contractual obligations.

The provisions of ss. 235 to 251 dealing with "investigation" recognise only another form of the remedy available to the minority shareholders. While ss. 235 to 237 deal with the circumstances under which investigation could be ordered, ss. 238 to 241 deal with inspectors, their powers and the report they have to make. Once the report is made, follow-up measures are contemplated by ss. 242 to 244. Section 242 provides for the prosecution of those found criminally liable. Section 243 empowers the Central Govt., through a person authorised by it, to apply for a winding-up on "just and equitable" grounds or to apply for the removal of the oppression and mismanagement. And s. 244 conceives of proceedings in misfeasance. The purpose of the investigation is thus to find out whether those in charge of the affairs of a company are guilty of illegal conduct or of conduct trenching upon breach of fiduciary obligations. That is way s. 237(b) speaks of unlawful purpose, fraud, oppression, misfeasance and misconduct. Whether it be under s. 235 when the Central Govt. acts on the application of a group of members, or under s. 237 when it acts suo motu or under orders of court, the machinery for investigation is to be set in motion only in the context of a complaint regarding breach of duties which equity has imposed on the majority.

If the above be the true position, it follows that in proceedings under s. 237(a)(ii), the court will look into only those allegations which have a bearing on the fiduciary duties of the majority, or their duty to abide by the law. of course, the court need not satisfy itself that the allegations are true, it is enough if a prima facie case is made out. No investigation can be ordered merely because the petitioning shareholder feels aggrieved about the manner in which, the company's affairs are being carried on, or because the court thinks that they could be better managed. The remedy being equitable, the court has also to satisfy itself that the petitioner has come to court bona fide for obtaining redres-sal, and not for any other purpose. An isolated instance of mismanagement, already remedied, could not also justify the passing of an order under s. 237(a)(ii).

As to the facts of the case, the petitioner is a shareholder of the Mathrubhumi Printing and Publishing Company Ltd., Calicut, a company engaged - in the printing and publishing of, mainly, the Malayalam daily newspaper "Mathniobhnmi" from Calicut, Cochin and Trivandrum. The late Mr. V. M. Nair was the managing director of the company till his death in May, 1977. He was occupying that position at least from 1958 and on his death, there was a change in management. One M. J. Krishna Mohan succeeded him and continued in office till November, 1979, when he too passed away. The present managing director is a cousin of Krishna Mohan, The company petition was filed in June, 1979, i.e., after the death of Sri V. M. Nair and while Krishna Mohan was alive. The petitioner was the advertising representative and special correspondent (or part-time news reporter) for the newspaper at Bangalore. The arrangement regarding news reporting was terminated in February, 1978. The advertising agency was also terminated by April 1, 1979. He had filed a suit against the company ; that was dismissed, but the matter is pending in appeal. He had raised certain claims before the Labour Court and there he succeeded ; but the company has challenged the decision in writ proceedings. An industrial dispute, and a criminal complaint filed by the company against him, are also said to be pending. What is relevant to notice is that the relationship between the petitioner and the present management of the company is somewhat strained, and that the company petition itself was filed soon after his advertising agency was terminated. And, if the proceeding of the 56th annual meeting of the company is any guidance, there are at least two groups among the members, one supporting the present management and another loyal to the old.

Though a number of allegations are raised in the petition, Mr. Ramanatha Pillai for the petitioner pressed only some of them at the hearing ; and I am dealing with only those allegations.

The first relates to the alleged theft or loss of newsprint. At the 54th annual meeting held on January 29, 1977, a member complained that a large quantity of newsprint belonging to the company was stolen and sold in black market by some people. Since the management took no action, the question was again raised at the 55th meeting held on March 27, 1978. A committee was thereupon appointed to go into the matter and at the 56th annual meeting, the convenor of the committee informed members that there was a prima facie case. These are the bare averments in para. 3 of the petition. There is no allegation that the directors or their friends or relatives were involved, or that the management attempted to cover up the matter. At the most, the allegation is that there was some theft or loss some time during 1975-76 and that the management has failed to take any action.

Exhibit A-2 is the report of the committee. It is dated July 21, 1979, and was made available to the company in August, 1979. The petitioner was examined as P.W. 1 in January, 1981, and by this time he could refer to its contents also. Still, all that he has said in evidence is that 7 to 8 tons of newsprint were stolen or otherwise lost in 1974, and that in spite of Ex. A-2 report, the management has not taken any action.

Exhibit A-2 shows that according to the then manager, Sri Krishnan Nair, he was authorised to dispose of waste newsprint (discoloured, sticky, broken, with no tensile strength), and that he had allowed the watchman, Beeran Haji, to keep a lorry load in a separate godown, pending disposal, as the company's godowns were full. The value of the waste was fixed by the press superintendent and, after sale, the proceeds were made over to the company. Beeran Haji, however, was not sure whether the reels were waste. The committee came to the conclusion that the transaction was not above suspicion, though there was no evidence of theft as such ; it was not at any rate impressed by Sri Krishnan Nair's version. It is even possible to think that in the opinion of the committee, Krishnan Nair was in some way responsible for the loss. The committee also noted that after the alleged incident, the machinery for dealing with waste newsprint had been improved. There is also evidence to show that waste can legitimately go up to 12%, that the percentage for the company during the relevant period was around 9%, and that all the rest of the paper was used and accounted for as good quality, according to the Audit Bureau of Circulation. Even assuming that the allegation of theft or loss is true, and that Ex. A-2 contains any specific finding, it is difficult to see what useful purpose would be served by ordering an investigation at this distance of time into an alleged theft of 1974. The petitioner was aware when he came to this court that the committee was looking into the matter ; it was not as if the management had hushed it up or had failed to take any action. Exhibit A-2 discloses that even if there was some scope for malpractice in 1974, the machinery for dealing with waste newsprint has since been strengthened and streamlined. The committee itself does not place the blame on the directors then in management; and the matter was allowed to be raised and discussed at three general body meetings, suggesting thereby that there was no attempt to stifle minority criticism or to suppress anything. In any event, the material available is insufficient to disclose a prima facie case regarding breach of fiduciary duties. I may add that the petitioner himself had suggested at the 56th meeting that a "memorial" be created to honour ex-manager, Krishnan Nair, for the valuable services rendered by him while in service.

The next complaint is about irregularities and corruption in the purchase of a flat at Bombay. All that is stated in para. 4 of the petition is that there was such an allegation and that the committee had enquired into it. The petitioner's evidence as P.W. 1 does not also take us any further. Exhibit A-2 shows that the flat was purchased during the tenure of Sri V. M. Nair, and that the administrative officer of the company was responsible for negotiating the deal. According to this officer, he had acted under the instructions of Sri V. M. Nair. The majority of the committee recorded that though this could not be verified, as Sri Nair was no more alive, there was reason to think that sufficient care was not taken. One of the members of the committee dissented, and indicated that the attempt was only to malign the old management. The company's lawyers, who examined Ex. A-2 report, expressed the opinion that there was nothing but suspicion and no action could be taken on its basis. After a careful reading of Ex. A-2, I am inclined to agree with this view. Of course, the majority had made an observation in Ex. A-2 report that the title obtained was not perfect and that the full consideration was paid before getting the title deed. When Mr. Ramanatha Pillai high lighted this aspect at the hearing, I directed the management to produce the title deed. But when it was produced along with certain other documents, it was contended that production of documents at that stage could not be allowed. I am not inclined to take such a technical view of the matter because if that be the case, most of the allegations in the petition could only be considered as vague and unspecific. Some of them could not even be considered as allegations. The petitioner's attempt may be to settle some scores with the present management, but so far as the court is concerned, the attempt should be to find out whether the mino rity shareholders have anything real to complain of. I am, therefore, marking the documents as Exs. C-1 to C-10. The title deed, Ex. C-1, dis closes that transfer of flats in Bombay was being made by transferring shares in the building company and that the company herein acquired the concerned shares on the day the consideration was paid. Sri V. M. Nair himself has signed Ex. C-1. The flat is admittedly in the exclusive and undisturbed possession of the company. On the materials available, therefore, I am unable to hold that misfeasance, misconduct, breach of trust or fraud have been established, prima facie, in regard to this trans action.

Another case is about the writing off of large sums as bad debts, and the allegation in the petition is only this :

"It is also seen from Ex. P-1 proceedings that large sums are written off in the financial year to which Ex. P-1 relates."

There is no complaint, at least in the pleadings, that the amounts were recoverable, or that they were written off in order to benefit the directors or their favourites, or that the action was in any other way irregular or improper. Exhibits C-2 to G-10 show that the Board had decided to write off the amounts concerned at three different sittings. The amounts were outstanding from advertisers, agents and other people numbering about 160, Exhibit P-1 referred to in the petition is Ex. A-1 minutes of the 56th annual meeting; and the only question at the meeting relating to writing off was whether charges for printing the Janata Party posters for the Chickmaga-loor election were also included in the amounts written off. The suggestion was denied and it was pointed out that the election itself was held during the previous financial year and that printing charges for posters had been fully realised. An Interesting interlude was a suggestion by someone that only printing charges due from the Congress party were being written off in the past. The amount written off during the year in question was Rs. 1,02,623. For the year ended July 31, 1977, the amount written off was higher. A large amount is seen written off during 1979-80 also. Taking into account the business turnover and the accounting practice of the company, it cannot be said that anything unusual had taken place during Ex. A-1 year. The auditors had raised no objection and the general body had approved the accounts. In my opinion, this allegation of the petitioner is devoid of any merit.

The next grievance relates to the purchase of some land at Trivan-drum. There was no reference to such a complaint either in the petition or in the reply affidavit filed in September, 1979. The point was raised in para. 4 of the reply affidavit dated October 23, 1980, in the following manner :

"It may also be kindly noted that Sri Damodaran who is found to be one of the employees responsible for the deal in respect of the purchase of the flat in Bombay has again been allowed to participate effectively in the transaction regarding the purchase of property by the company in Trivandrum which again is a reckless venture whereby the company is put to loss."

The evidence of P.W. 1 is to the effect that the land was purchased for starting the Trivandrum edition of the newspaper and that it is kept vacant, while the Trivandrum edition is being published from some other premises. There is also a statement that more than one lakh of rupees was spent for acquiring land in a marshy area. But when it came to argument, the point stressed was that it was an unwise policy to have acquired land and then depended on other premises for the Trivandrum edition. The company has produced documents to show that land in the neighbourhood is being sold at three times the rate it had paid. It is also explained that the equipment and machinery for the Trivandrum press had arrived, and that their erection and the publication of the Trivandrum edition could not have been postponed. The evidence discloses that about one crore of rupees was set apart for the Trivandrum edition, and that there was a prolonged strike and lock-out in the meanwhile. There is thus no material to hold that the investment of about a lakh of rupees in land, to be eventually used for housing the Trivandrum project, was a reckless venture or a foolish adventure.

Paragraphs 5 and 5A of the petition deal with another charge, and that relates to the appointment of one Sri Manakalath as public relations manager of the company in June, 1978. It is alleged that he was appointed without a board resolution and without inviting applications for the post, and that lie was allowed to draw large sums as T.A. advance without vouchers. It was, however, conceded at the hearing that the managing director was competent to appoint such officers without the Board's sanction and that there was no practice of inviting applications for such posts. The person concerned was working at Madras as the company's advertisement representative, and there is evidence to show that his appointment as P.R.M. was followed by an increase in advertisement revenues. The main attack was directed against payment of advances. R.W. 1 has given evidence that all payments were effected only against vouchers and that bills and accounts were being subsequently presented, verified and adjusted. The auditors have raised no objection. The reports of the directors and auditors, as also the balance-sheet and profit and loss accounts, were duly passed during every year. Counsel referred to some discrepancy in one of the answers given at the 56th annual general meeting, but the control and supervision of finances and accounts should normally be left to those in charge and the auditors, subject to acceptance by the general body. There is no evidence regarding any particular disbursement or voucher, even if such a matter could be gone into in proceedings like the present.

Another matter raised in paras. 5 and 5A concerns the appointment of one C.G.K. Reddi as adviser. The allegation is that he entered into an agreement with a foreign concern for the monopoly supply and distribution of the company's publications and that this was done without the sanction of the Reserve Bank and to the detriment of the company. My attention has not been drawn to any passage in the evidence of PAY. 1 dealing with want of Reserve Bank sanction or detriment to the company. All that was said by P.W. 1 was that the agreement had not benefited the company and that there was some litigation. It was also added that there was no board resolution authorising Sri Reddy to enter into the contract. The company's answer is that Reddy was appointed as adviser for one year for modernising the company and planning the Trivandrum project. He had acquired experience as general manager of the "Deccan Herald" and as business manager of the "Hindu". The evidence of R.W. 1, along with the documents produced, show that Reserve Bank permission had been obtained, that the agreement was entered into with the full concurrence of the managing director after effecting modifications suggested by him, and that the arrangement had come to an end within a matter of days because of some ban ordered by the U.A.E. government. There is no evidence of litigation loss, detriment, illegality or even unauthorised dealing. This complaint should also, therefore, fail.

Another allegation which, if proved, would have been a matter of some substance, is about the appointment of one Sri P. V. Chandran as the director of the company. What is argued is that he was a partner in a firm of advertisers with which the company had dealings, and that he was appointed in violation of s. 299 of the Companies Act inasmuch as his interest in that business was not disclosed. But the allegations in paras. 9 and 9A of the petition make no reference to s. 299, but only to the extending of credit facilities to the firm as a "non-accredited" advertising agent. From the evidence, however, it is clear that such agents are also given credit facilities, though for a shorter term. The decision to appoint Sri Chandran as director was taken at the board meeting held on May 14, 1978 ; he was not present at the meeting. Exhibit B17 dated July 14, 1978, is a letter from Chandran, in reply to the company's letter dated June 2, 1978, disclosing his interest in the firm. R. W. 1 says that though the firm was a valuable customer, no fresh contract was given to it after Sri Chandran was appointed as director. He resigned from the firm by the end of March, 1979. Violation of s. 299 is thus not made out.

Paragraph 7 of the petition complains of the company's attempt to borrow one crore of rupees, when it has a paid up capital of less than nine lakhs only. The interest liability would be too much for the company, it is averred. It is added that "in the peculiar circumstances now obtaining in the company, there is every reason to suspect the bona fides of the management in the matter". The company's answer is that newspaper business had become highly competitive with other papers like Malyala Manorama starting editions from different centres and that it was, therefore, decided to expand the company's business by starting a Trivandrum edition of the Malhrubhumi and that the borrowing was intended to raise funds for the purpose. The decision to borrow was actually taken at an extraordinary general meeting held on June 23, 1969. It was unanimous and the petitioner was also a party to it. If this be the true position, I fail to see how he could challenge the bona fides of the decision, and how it could be said that that anyone is guilty of breach of fiduciary duties.

The last complaint is that "information regarding the affairs of the company and its working are purposely withheld from the members"; and the company's answer is that members of the company have access to all the records of the company as laid down in the Companies Act. P. W. I has no case that any particular information he wanted has been withheld. What is suggested by counsel is that some of the questions asked by members at the 56th meeting (Ex. A-1) remained unanswered. Disclosure is no doubt one of the fundamental principles underlying the formation and working of a company. Members have a right to know how the company's affairs arc conducted. Creditors would also like to learn about its financial position. Even members of the public are interested, at least from the point of view of future investment. The Companies Act, therefore, provides for maintenance of registers, books, records and for publication and compulsory disclosure of accounts duly audited. Every company should have a registered office and that office must maintain the memorandum and articles of association, register of directors, of members, and other books and files regarding share capital and other matters. The accounts should be audited every year and annual returns are to be submitted. Charges should be registered. All these are available for inspection by members of the company and even by the public. The audited accounts have to be placed before the annual general body for the information of the members. The directors have to report every year to the shareholders in general meeting. Extraordinary general body meetings are also held. These are some of the provisions of the Act which insist on supply of information to members and others. But that does not mean that every question asked at every general meeting should be forthwith answered, without even considering whether they relate to the affairs of the company as understood in law, and whether it would be possible to answer such questions without due notice. A business organisation like a company cannot function like a legislative assembly, if only for the reason that the powers of the directors and the members in general body are denned. Section 237(b)(iii) speaks of "information with respect to its affairs which they might reasonably expect", i.e., the information sought for must be about the affairs of the company and something which could reasonably be expected to be supplied. No attempt has been made before me, either in the course of evidence or at the hearing, to point out that any particular information of such a character has been withheld.

On an anxious consideration of the materials on record and the arguments advanced, and even overlooking the unsatisfactory nature of the pleadings, I am unable to hold that circumstances suggesting the existence of fraud, illegality, misfeasance, misconduct, etc., have been made out even prima facie, so as to relax the rule in Foss v. Harbottle [1843] 2 Hare 461 and direct an investigation into the internal affairs of the company. The company petition is, therefore, dismissed, but without costs.

[1988] 64 COMP. CAS. 603 (BOM.)

HIGH COURT OF BOMBAY - NAGPUR BENCH

Hariganga Cement Ltd.

v.

Company Law Board

S. W. PURANIK AND G. G. LONEY, JJ.

WRIT PETITION NO. 1629 OF 1986

DECEMBER 17, 1986

  V. R. Manohar for the petitioner.

Ramesh Darda for the Respondents.

JUDGMENT

The judgment of the court was delivered by

S. W. Puranik J.—The petitioner—M/s. Hariganga Cement Limited— is a public limited company duly incorporated and registered under the Companies Act, 1956, and this petition by the said company is directed against the common order bearing reference No. 20/1/86-CL-I, dated July 31, 1986, passed by respondent No. 1, the Company Law Board, in a petition filed before it under section 250 read with sections 237 and 247 of the Companies Act, 1956, as well as a petition filed under sections 408 and 409 of the Companies Act, 1956. By the said impugned order, the Company Law Board has directed investigation into the affairs of the petitioner company (hereinafter referred to as "the company") under section 237 of the Companies Act, while dismissing the application under sections 408 and 409 of the Companies Act, and partially allowing the application under sections 237, 247 and 250 of the Companies Act.

Brief facts leading to the present petition may be stated as follows:

The petitioner-company was promoted for setting up a mini cement plant in Chandrapur District of Maharashtra State and was incorporated in March, 1979. The plant has been set up and has gone into production from the end of June, 1986. The said company is financed by various financial institutions including nationalised banks, Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India Ltd. (ICICI), Industrial Finance Corporation India (IFCI) and Investment Corporation of Maharashtra Ltd. (ICM).

One Shri T. L. Arora, a non-resident Indian, was the director of the said company from June, 1981, to March, 1986, and is also a shareholder holding 20,000 equity shares in his own name and 20,000 equity shares held by him jointly with his wife. The said Shri Arora, it is alleged by the company, started creating difficulties in the management of the company with the sole object of taking over the control and management of the company. It is further alleged that he retired from the office of the director by rotation on March 31, 1986, and failed to get himself re-elected to the board of directors. It is then alleged by the company that the said Arora and his associates went to the extent of proposing a resolution at the annual general meeting held on March 31, 1986, for the removal of Shri G. R. Agarwal, chairman and Shri O. P. Agarwal, director, of the company who were the main promoters of the petitioner company, and sought to get two of his associates as directors in the resulting vacancies. The said resolution failed as it could not be proposed and seconded.

As already stated above, the annual general meeting of the company was scheduled on March 31, 1986, when one Shri K. R. Batra, another shareholder, filed an application under sections 237, 247 and 250 of the Companies Act before the Company Law Board. Shri T. L. Arora also filed an application under sections 408 and 409 of the Companies Act. The allegations made in these applications were substantially the same. Some of the allegations made in the above applications may be stated as follows;

(1)        That the chairman and his brother had diverted funds of the company and siphoned off the same through a series of transactions to other sister concerns;

            (2)        That the annual general meeting of March 31, 1986, was mis conducted; and

(3)        That Shri G. R. Agarwal had invested over Rs. 25 lakhs in the names of poor and illiterate villagers of Jeetpura, Haryana, in the sums of Rs. 10,000 to Rs. 25,000 each, even though those persons had no resources. It is, therefore, Shri G. R. Agarwal, who is actively control ling the affairs of the company on the basis of such bogus shares.

To substantiate these allegations, the said Arora had collected signatures and thumb impressions and statements from the said villagers who have stated that they had never applied for such shares.

Respondent No. 1, the Company Law Board, on hearing both the parties, passed the following order:

"25.      In regard to the maintainability of an application under section 409 of the Act, the condition precedent is that the application should be made either by a director, managing director or other persons holding certain positions as mentioned in section 409. Since Shri Arora did not hold any of these positions at the relevant time and it has also not been shown that any of his co-applicants held the same when the application was made, it is clear that the said application is not maintainable.

26.       With regard to the application under section 408, it may be mentioned that applicant No. 2 has not been able to prove most of the allegations and in particular the one relating to advances of Rs. l.64 crores said to have been given to companies connected with Shri G. R. Agarwal. The remaining transactions have been reasonably explained by the respondents. It is also significant that the financial institutions are actively associating themselves with conducting the affairs of the company and have suggested professionalisation of the board of directors, described in para. 11, supra, and appointment of concurrent auditors. These should adequately take care of proclivity, if any, towards mismanagement and we do not think if any further preventive action under section 408 of the Companies Act is warranted.....".

It may not be out of place to mention here that before the above order was passed by respondent No. 1, the Company Law Board, the petitioner-company who was respondent therein had been duly served notice and they had filed their detailed statement and explanations before the Company Law Board. All the allegations in the applications of Mr. Arora and Batra, were denied. The Company Law Board, while rejecting both the applications of Mr. Arora and Batra, made only one adverse observation to the effect that satisfactory answers to the allegations that a large number of villagers had been put up as a front by Sri G.R. Agarwal have not been furnished. Thus, it appears to be the only reason given by the Company Law Board that it was not satisfied with the replies given on behalf of the petitioner-company.

We have detailed the findings arrived at by respondent No. 1, the Company Law Board, from paragraphs 25 and 26 of its order, wherein it may be noticed that the application under section 409 of the Companies Act was not maintainable and in regard to the other applications under section 408, it was stated that the applicants have not been able to prove most of their allegations, while the remaining transactions have been reasonably explained by the respondent therein. The Company Law Board has also taken into account all the facts that financial institutions were actively associating themselves with the affairs of the company and that these should adequately take care of proclivity, if any, towards mismanagement and that no further preventive action under section 408 of the Companies Act is warranted.

In spite of the above categorical finding, the Company Law Board, in para 27 of the impugned order states as follows:

"27.      However, in regard to the request for investigations under sections 237, 247 and 250, satisfactory answers to the allegations that a large number of villagers had been put up as a front by Shri G. R. Agarwal have not been furnished. It is also seen that the IDBI ordered some investigations into the affairs of the company. Therefore, a probe, inter alia, into the related issue of purchase of shares by the villagers seems necessary. Since this is an important point on which we are not satisfied with the replies from the company, we feel necessary that the affairs of the company should be investigated with a view to ascertain the correctness or otherwise of the various allegations made in the petitions including the aforesaid".

An operative order annexed to the impugned order, however, states that "there are circumstances suggesting that the persons concerned in the management of its affairs have been guilty of misconduct towards the company, and some of its members, more specifically, certain villagers of Jeetpura in Haryana; and whereas the Company Law Board considered it necessary to appoint an inspector to investigate into the affairs of the company and report thereon...hereby appoints Shri V. Govindan, Joint Director (Inspection), Department of Company Affairs, Shastri Bhavan, New Delhi, as inspector to investigate into the affairs of the company and to report to the Company Law Board...".

It is to be noted that even in the final conclusions in paragraph 27, the Board has held that no satisfactory answer was given in respect of benami shareholders, and that a probe, inter alia, into the related issue of purchase of shares by the said villagers seems necessary. The Board further directed that the affairs of the company should be investigate with a view to ascertain the correctness or otherwise of the various allegations made in the petitions including the aforesaid.

Shri V. R. Manohar, learned counsel for the petitioner-company, attacked the impugned order as arbitrary, whimsical, irrational and perverse. He criticised the same as an order which is a result of total non-application of mind on the part of respondent No. 1. He also contended that on the basis of the available facts and circumstances which were placed before respondent No. 1-Board, it was impossible for any reasonable person, much less the Company Law Board, to opine therefrom suggestive of the things mentioned in clauses (i), (ii) and (iii) of section 237(b) of the Companies Act. According to the petitioner, the impugned order certainly is contrary to the findings recorded by respondent No. 1, Company Law Board, itself. The impugned order has also no nexus with the finding recorded in the body of the impugned order. Further, no reasonable body of persons, properly versed in law, could have passed the impugned order and, hence, the impugned order can be branded as arbitrary and capricious.

Shri Ramesh Darda, learned counsel for the respondents, Company Law Board, and the Union of India, supported the impugned order. According to him, there were sufficient circumstances and facts brought on record, which were sufficient for the Board to act and direct investigation into the affairs of the company. In so far as the contention of the petitioner-company that while in the body of the order the Board had decided to order inquiry only in respect of the bogus shares held benami in the names of villagers in Haryana, yet the final order directs investigation into the entire affairs of the company, is concerned, Shri Darda stated that apart from the said allegations and documents of the villagers, two applications of Shri Arora and Batra were also before the Board contending several allegations in the matter of management of the affairs of the company. He further submitted that the subjective satisfaction arrived at by the Board on the basis of these facts cannot be challenged before this court. At the time of hearing of this petition, we had secured the records and papers which were before respondent No. 1, when it had passed the impugned order. With the assistance of both the counsel, we have perused all the documents in detail.

Some of the principles governing the orders passed by the Company Law Board under section 237(b) of the Companies Act may be borne in mind. The earlier view of the Supreme Court in State of Madras v. C. P. Sarathy, AIR 1953 SC 53, was not approved subsequently. In the said decision in 1953, the Supreme Court had held that "whenever a provision of law confers certain power on an authority on its forming a certain opinion on the basis of certain facts, the courts are precluded from examining whether the relevant facts on the basis of which the opinion is said to have been formed in fact existed". This decision in 1953 has been overruled by the subsequent decision of the Supreme Court in the matter of Rohtas Industries Ltd. v. S. D. Agarwal [1969] 39 Comp Cas 781; AIR 1969 SC 707, in which the Supreme Court have observed that the 1953 decision cannot be considered as authority for this preposition. It was further held by the Supreme Court, approving the decision in Barium Chemicals' case [1966] 36 Comp Cas 639; AIR 1967 SC 295 that (at page 800 of 39 Comp Cas):"...the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (i) or the persons mentioned in sub-clause (ii) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and, if the existence of those conditions is challenged, the courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question is open to judicial review though the opinion formed by the Government is not amenable to review by the courts". Thus, even though the subjective opinion formed by the Company Law Board is not amenable to challenge, the judicial courts can certainly look at the circumstances as to whether they were existing, or if they were existing, whether they had any nexus with the opinion formed by the Company Law Board.

It is well settled that the discretionary powers under section 237(b) of the Companies Act must be exercised honestly and not for corrupt or ulterior purposes. The authority must form the requisite opinion honestly and after applying its mind to the relevant materials before it. In exercising the discretion, the authority must have regard only to circumstances suggesting one or more of the matters specified in sub-clauses (i), (ii) and (iii) of section 237(b) of the Companies Act. It must act reasonably and not capriciously or arbitrarily. It will be an absurd exercise of discretion, if, for example, the authority forms the requisite opinion on the ground that the director in charge of the company is a member of a particular community. Within these narrow limits, the opinion is not conclusive and can be challenged in a court of law. (refer paragraph 45 of Rohtas Industries Ltd.'s case [1969] 39 Comp Cas 781; AIR 1969 SC 707, at pages 802, 803). The Supreme Court has also observed in the above case at paragraph 46 (at page 803) that: "If it is established that there were no materials upon which the authority could form the requisite opinion, the court may infer that the authority did not apply its mind to the relevant facts. The requisite opinion is then lacking and the condition precedent to the exercise of the power under section 237(b) is not fulfilled".

On perusal of the records and papers, we find that the applications of Shri Batra and Arora have been rejected and could not be considered as they were not supported by affidavits. However, the Company Law Board seems to have relied upon the so called documents or statements of some villagers from Haryana, inter alia, contending that they had never applied for the shares of the petitioner-company nor had they contributed any amount. The true copies of the said documents are at annexures E, F, G and C to this petition. Scrutiny of the said documents shows that the affidavits are not by the shareholders themselves, but by some of the relatives of the recorded shareholders'. Some of the affidavits are not even sworn and are mere chits bearing thumb impressions or signatures of the villagers. Such documents, in our opinion, cannot form the basis of even the purported existence of any material before the Company Law Board.

In the return filed on behalf of respondent No. 1, the Company Law Board, it has been sought to be contended that apart from the documents purporting to be the statements of the benami village shareholders, two applications of S/Shri Batra and Arora were also before the Board, which contained serious allegations regarding mismanagement of the affairs of the petitioner-company. Shri Darda, learned counsel for the respondents, has also taken the same stand during his arguments. We do not find that such a contention can be accepted at all, for the simple reason that the speaking order passed by the Board at annexure A clearly brushes aside the applications filed by Batra and Arora, and they have categorically concluded that most of the allegations in the applications were not substantiated, whereas the remaining allegations have been duly explained by the company. The only material, on the basis of which the impugned order is passed, is the statement of the villagers from Haryana and if that is the only circumstance which was in existence at the time of the passing of the opinion by the Board, then no additional circumstance can be placed now during the arguments. or in the return. The opinion formed by the Board is squarely based only on the statement of the alleged villagers from Haryana, and we have already found that the said statements have no nexus with the mismanagement of the affairs of the petitioner-company. In fact, even if the allegations in the villagers' statement may be true, it may amount only to an offence by the individual person concerned, who has secured the benami shares in the name of the said villagers. It does not reflect on the management of the 'affairs of the company. For such an act of holding unauthorised benami shares, there are independent provisions under the Companies Act for taking action against such shareholder who has secured benami shares.

The discretionary powers vested in the Company Law Board under section 237(b) of the Companies Act are of a very wide nature and the said powers have to be exercised with great cirumspection and retrospection and in a judicious manner: The powers under section 237 have been conferred on the Central Government in the faith that it will lie exercised in a reasonable manner. The Department of the Central Government which deals with companies is presumed to be. an expert body in company law matters. Therefore, the standard that is prescribed under section 237(b) is not the standard required of an ordinary citizen but that of an expert. Hence, if the court comes to the conclusion that no reasonable authority would have passed the impugned order on the material before it, then the same is liable to be struck down.

The formation of the opinion under section 237 of the Companies Act by the Central Government is subjective, but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. It is not reasonable to say that the clause permits the Government to say that it has formed the opinion on circumstances which, it thinks, exist. Since the existence of "circumstances" is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned in court, has to be proved at least prima facie. It is not sufficient to say that circumstances exist but give no clue as to what they are, because the circumstances must be such as to lead to a conclusion of certain definiteness. When it is challenged that the opinion has been formed mala fide or upon extraneous or irrelevant matters, the respondent must disclose before the court, the circumstances which will indicate that his action was within the four corners of his own powers.

We have already observed that none of the circumstances which could have led to the conclusion arrived at by respondent No. 1-Board were in existence. On the other hand, we have seen from the return and from the oral submissions of learned counsel for respondents that certain reasons have been added now to substantiate the opinion formed by respondent No. 1-Board. Such reasons, stated afterwards, cannot justify the order in retrospect, if they were not available to the authority at the time of exercising its powers in arriving at the opinion. In fact, other circumstances which were before the court were already considered and rejected.

As stated earlier by us, even though wide powers have been conferred on respondent No. 1, the Company Law Board, yet they must be exercised in a reasonable manner. It is pertinent to note that such an order has an adverse effect on the reputation and credibility of the petitioner-company and may cause grave prejudice to its affairs and may also give rise to consequences which could not be allowed to take place at the cost of the petitioner-company's interest. The Company Law Board, in its speaking order (annexure A) has also observed that several financial institutions, such as, IDBI, ICICI, IFCI, etc., have actively associated themselves with the management of the company, and are duly respresented on the board of directors and that should take adequate care of any proclivity, if any, towards mismanagement of the company.

In view of the above discussion, we have no hesitation to strike down the impugned order at annexure A and its operative part appointing an Inspector for investigation into the affairs of the petitioner-company.

In the result, the writ petition is allowed. Rule made absolute as above. In the circumstances of the case, there shall be no order as to costs.

[1970] 40 COMP. CAS. 282 (ALL)

HIGH COURT OF ALLAHABAD

Raghunath Swarup Mathur

v.

Har Swarup Mathur

M. H. BEG, J.

COMPANY PETITION NO. 15 OF 1967

NOVEMBER 18, 1969

 S. S. Bhatnagar for the petitioner.

Gopal Behari, L. N. Pandey and CM. Srivastava for the respondent.

JUDGMENT

M. H. Beg, J.—Raghunath Swarup Mathur and his four sons are the petitioners before this court under sections 397 and 398 of the Companies Act, 195(3 (hereinafter referred to as the Act). The petitioners fulfil the requirements of section 399 of the Act for filing a petition under sections 397/398 of the Act as they hold more than one-tenth of the paid up capital of the Co-operative Co. Ltd., Nawabganj, Saharanpur, which is the company involved here. The petitioners allege that the first three opposite parties, Har Swarup Mathur and Kishan Swarup Mathur and Jagroop Swarup Mathur, the real brothers of petitioner No. 1, control the affairs of the co-operative company and that the three opposite parties Nos. 4 to 6— Hari Mohan Mathur and R. P. Mathur and K. K. Bhartari—are mere puppets in their hands. M/s. Shyam K. Gupta Company, Auditors, opposite party No. 7, have been impleaded by the petitioners on the allegation that they have been colluding in concealing irregularities and frauds of opposite parties Nos. 1 to 3. The Central Government, opposite party No. 9, is probably impleaded only because section 400 of the Act requires a notice of such a petition to be sent to the Central Government.  The real targets of the attack of the petitioners are the three opposite parties, who according to the petitioners, have functioned in various capacities contrary to the provisions of the Act and realised salaries illegally from the company. The petitioners also allege that the three opposite parties are defrauding the company, misappropriating funds, and embezzling money.

So far as H. S. Mathur, opposite party No. 1, the former managing director, is concerned, it is in evidence that a suit was filed by the company for the recovery of Rs. 15,621 from him on the ground that he had illegally drawn Rs. 825 as salary as a managing director from April 1, 1961, to October 27, 1962, without obtaining either the sanction of the Central Government as required by section 269(2) of the Act, or the sanction of the company under section 317 of the Act. Another ground on which the amount was alleged to have been illegally paid to him is that the company made no profits from March, 1961, to March, 1962, so that the opposite party was said to be bound to refund the amount under section 309(5) of the Act because his appointment did not have the approval of the Central Government under section 198(4) of the Act. This claim, however, having formed the subject-matter of a suit by the company which was dismissed by the Civil Judge, Saharanpur, the case of the contesting opposite parties is that the suit was rightly dismissed as the salary was paid to the opposite party No. 1 after obtaining the required sanction under the law and that no appeal was filed as the decision of the civil judge was correct. The petitioners alleged that the suit was dismissed owing to collusion between the contesting opposite parties. In other words, the petitioners want to reopen the case by means of this petition on vague allegations of fraud and collusion of which particulars are wanting to sustain the plea.

Another ground of attack against the opposite party No. 1 is that the accounts were not kept properly during his term of office as managing director and that the audit reports from 1959 to 1962 and a letter written by the Registrar of Companies, U.P., dated March 16, 1963 (annexure "D") show that "there were embezzlements and corruption on a large scale." No audit report supports a charge of this character. Indeed, the petitioners have themselves alleged that the auditors are colluding with the contesting opposite parties to whitewash and conceal the contesting opposite parties' illegal acts. A perusal of a copy of the above-mentioned letter, filed by the petitioners themselves, shows that the Registrar had asked for information and accounts on the ground that accounts had not been properly maintained, as required by section 209 of the Act. This information was required to be furnished within ten days of the receipt of the letter. There is no mention there of any embezzlement, corruption or fraud. The letter also indicates that the appointments of K. S. Mathur, opposite party No. 2, either as general manager or as secretary, being irregular for contravening the provisions of sections 310 and 314, the company was required to give information about the steps taken to obtain refund of excess payments. Information was also required to be given, within ten days, whether steps had been taken to regularise increase of the sitting fees of directors from Rs. 25 to Rs. 100 per meeting by obtaining the approval of the Central Government under section 310 of the Act or to show that the excess amount paid had been refunded.

The only specific item mentioned by the petitioners of alleged embezzlement is that an annual expenditure of fuel was shown as ranging from Rs. 7,000 to about Rs. 14,000 in different years whereas it was said to be always less than Rs. 100 every year. It was, however, stated in the petition that, in the balance sheet, the expenditure for fuel had been shown as amalgamated in subsequent years with expenditure for "steam coal". The counter-affidavit of the contesting opposite parties shows that they furnished details of all expenditure to the Registrar, but, as the Registrar was not satisfied, the company was prosecuted under sections 216 and 218 of the Act for failure to furnish information from 1958 to 1961 and that the managing director was convicted. As regards the alleged expenditure on the specific item of fuel, the contesting opposite parties ascertained that it was always correctly shown and that large variations in the amount shown were due to substitution of coal in place of other fuel in subsequent years. Apparently, only the other fuel was shown separately as "fuel" in some years and the petitioners have picked upon this item due to the resulting confusion. Another ground taken is that petitioner No. 1 filed a complaint against opposite, parties Nos. 1 and 2 under sections 465/477A, Indian Penal Code, for falsification of the attendance register, but the petitioners themselves state that this case was compromised on 15th March, 1963.

Similar allegations are made against K. S. Mathur and J. S. Mathur, opposite parties Nos. 2 and 3. The allegations are either unsupported by particulars or relate to some irregularity which had already been the subject-matter of attention of the Registrar of Companies or the Company Law Board so that the irregularity was either cured or condoned. And, once, the managing director was actually convicted, as already mentioned, for infringement of sections 216/218 of the Act. The allegation against K. S. Mathur, opposite party No. 2, in particular, was that expenses on office and administration by him and on repairs and maintenance were excessive. This allegation is also controverted by the contesting opposite parties. The correctness of the allegation that the balance-sheet ending March, 1964, did not show the purchase of any machinery or plant, whereas the addition of Rs. 8,055.37 is shown in purchases, is also denied by the contesting opposite parties. The allegations relating to particular heads of expenditure as unjustified or incorrect are vague and general. No specific instances or details of falsification of accounts with regard to particular transactions could be furnished. Every allegation, whether in relation to any particular head of expenditure or of a more general and sweeping character, is met by a counter assertion so that it is not possible to determine which version is true without an elaborate and detailed examination of the accounts and taking of evidence including oral evidence.

The allegation that the auditors have been colluding or conspiring with the contesting opposite parties has not been substantiated. It is significant that, among the charges levelled by the petitioners against the contesting opposite partie.3, is that writ petitions were filed in this court by them as well as in the Supreme Court against the reinstatement of petitioner No. 1 as ordered by the Labour Court, Meerut, and these were ultimately dismissed. The contesting opposite parties alleged that petitioner No. 1, who had also been employed by the company, was dismissed for insubordination and want of efficiency as an engineer employed by the company. The contesting opposite parties also alleged that the petitioners were disappointed at the results of the election of directors at a general meeting of the company held on 30th of September, 1965. Among the grounds of the petition, taken in paragraph 18, is that elections of opposite party No. 1 as director and opposite; party No. 2 as managing director were illegal and that the minutes of the meeting had been fabricated.

On the above-mentioned allegations, the petitioners have prayed for the removal of opposite party No. 2 from the office of the managing director and of the other contesting opposite parties from directorship of the company. They pray that petitioner No. 1 may be appointed the managing director and that the other directors may be chosen by this court from amongst the petitioners or other shareholders "as this hon'ble court may deem fit and proper". They ask for orders directing opposite party No. 1 to refund a sum Rs. 15,021 paid to him from April 1, 1961, to February 27, 1962, and the alleged excess of managerial remuneration paid to opposite parties Nos. 2 and 3 from April 1, 1961, up to the date of the petition on the ground that these payments violated sections 198 and 309 of the Companies Act. They also pray that opposite parties Nos. 1 to 3 "be forbidden to hold any office of profit in the company along with respondents Nos. 4, 5 and 6". Furthermore, petitioner No. 1 has claimed compensation for loss of pay due to illegal termination of his service and the award of gratuity to him "when due for his 25 years or more of service " and also that he be reinstated in his post. The petitioners have also applied, presumably as one of the alternative modes of relief, for the appointment of an investigating officer to examine the affairs of the company with regard to the alleged mismanagement and " bungling" of accounts and embezzlement and to assess the loss to the company from the activities of the opposite parties Nos. 1 to 6, and, it is prayed, that such of the opposite parties as are "found responsible" be ordered to be prosecuted in a court of law.

It is evident from the allegations of the two sides, and, particularly from the reliefs claimed, that the petitioners' whole object is that this court should interfere with the internal management of the company and set right the alleged mismanagement by appointing petitioners and others of their liking to manage the company in place of the contesting opposite parties, who should, according to the petitioners, be punished for their alleged misdeeds. The case of the contesting opposite parties, on the other hand, is that the petition is a mala fide attempt by disgruntled and outvoted individuals to injure the company for fanciful wrongs alleged to have been done to them. They allege that the petitioners' sole object is that the management of the company should be handed over to an outvoted minority of shareholders led by the first petitioner, a former employee of the company and the father of the other petitioners. The circumstances in which the petition is made, some of the allegations made in it, and the reliefs claimed in it certainly indicate that the motives of the petitioners may be questionable. It may be that the dominant object of the petitioners is to secure control of the company and to punish the contesting opposite parties for actions which are not liked by the petitioners whose personal interests are injured. Nevertheless, if a case for any order under either section 397 or section 398 of the Act is made out, the petitioners' motives or objects will not matter.

Section 397 of the Act undoubtedly empowers this court to make such orders "as it thinks fit" but only "with a view to bringing to an end the matters complained of". The matters complained of must be proved to establish : "(a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members ; and (b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up." It is, therefore, an essential prerequisite for a petitioner under section 397 of the Act to prove that, apart from any prejudice to the interests of members, a winding up order would be justified in equity. Although, grounds of justice and equity elude categorisation and must necessarily be left to be decided on the particular facts of each case, yet, well recognised tests have to be applied in deciding what they are, and the language used in section 397 indicates that just and equitable grounds for a winding up must not only exist, but they must be sufficiently compelling so as to "justify" a winding up order.

Section 443(2) of the Act makes it clear that the court may refuse to exercise its discretionary power to order a winding up on the ground that it is just and equitable to do so if more suitable alternative remedy for obtaining relief is there. It enacts :

"Where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up, if it is of opinion that some other remedy is available to the petitioners and that they arc acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy."

Indeed, the principle that the existence of a more efficacious alternative mode of relief, which could be adopted, justifies refusal to exercise the discretionary power invoked is of more general application. It applies to other kinds of discretionary powers. It will be observed that powers contained in both sections 397 and 398 of the Act are discretionary.

Section 398 of the Act does not contain the express restriction, found in section 397 of the Act, that facts proved must justify a winding up order. It is, therefore, difficult to see the object of putting cases of existing injury to public interest in section 397 as well as in section 393. It was enough to put such cases in section 398, the range of which is not confined to cases in which winding up orders would be justified. In cases falling under section 398(1)(b), action can be taken to prevent even likelihood of injury in future either to the interests of a company or to public interest. But, in so far as powers under section 397 as well as section 398 are discretionary, the principle is equally applicable to both that the exercise of such power should be refused where a more suitable or efficacious means of redress is open to a complainant. Another rule, flowing from the very nature of powers under sections 397 and 398 of the Act, is that interference with internal management of companies should take place only on good and compelling grounds.

Learned counsel for the contesting opposite parties relied on Smt. Soma Vati Devi Chand v. Krishna Sugar Mills Ltd., to contend that the jurisdiction of the court, under sections 397 and 398 of the Act, described as "summary" by the learned counsel, does not extend to determination of contested questions of fact requiring "investigation". The case cited deals with the jurisdiction of the court under section 155 of the Act relating to rectification of register of members. The principle contained there is not applicable to the wide equitable jurisdiction conferred by sections 397 and 398 of the Act. If courts have refused to enter into contested questions of fact in proceedings under sections 397 and 398, it is not because there is a limitation upon the jurisdiction of the court confining it to uncontested questions of fact. Indeed, such a restriction upon the powers of the court would defeat the very object of a remedial power which can rarely be exercised without contest on facts. But, inasmuch as the jurisdiction of the court under the Act is, as a matter of practice and generally applied rules, exercised on the basis of evidence tendered through affidavits, it is possible to refuse the exercise of discretionary power on the ground that more detailed and necessary oral and documentary evidence can be conveniently produced in another type of proceeding which may be available on the facts of a particular case. Exceptional cases can, however, arise in which detailed adduction of oral and documentary evidence, in proceedings under sections 397 and 398 of the Act, may be the only way of administering justice efficaciously.

In In re Bengal Luxmi Cotton Mills Ltd., the Calcutta High Court refused to exercise its jurisdiction on the ground that suits already filed, in which detailed evidence could be led on contested questions of fact, were more suitable, in the circumstances of the particular case, than "summary" proceedings under sections 397 and 398 of the Act, in which evidence by affidavits is given, for trial of questions raised. It, however, indicated that if suits had not been already filed, the position may have been different. It did not deny itself the jurisdiction to try contested questions of fact by adduction of detailed evidence if the suits had not been filed. In other words, it applied a rule applicable to exercise of discretionary power, but, as the jurisdiction to embark on an elaborate inquiry, if justified by the circumstances of the case, was there, I doubt, with great respect, whether the jurisdiction can be correctly described as a "summary" jurisdiction.

In K. R. S. Narayana Iyengar v. T. A. Mani , Ramaswami J. pointed out, by a reference to legislative history, that the object of sections 397 and 398 of the Act, was to arm courts with power to prevent winding up orders by imposing solutions upon the company in cases where, in the absence of such provisions, there could be no alternative to winding up. In Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd., Bhagwati J. interpreted sections 397 and 398 of the Act as meant primarily for preventive action against continuing wrongs under which past or concluded transactions could be set aside only in exceptional cases where past transactions formed the basis of or were inseparably linked up with a continuing wrong. In Bengal Luxmi Cotton Mills case  B. C. Mitra J. went so far as to hold that:

"......to make an order under section 397 or section 398 on the ground that a criminal complaint has been made against the directors or even on the ground that the directors had been convicted of a criminal offence, would be introducing into the law relating to companies, matters which are entirely foreign to company law and administration, and beyond the ambit of the jurisdiction which this court exercises."

What the learned judge really meant seemed to be that powers of the court under sections 397 and 398 of the Act were neither intended to operate as substitutes for punitive criminal proceedings nor could be invoked solely because the directors of a company had made themselves criminally liable to be prosecuted.

In Shanti Prasad Jain v. Kalinga Tubes Ltd., the Supreme Court had occasion to consider the scope of sections 397 and 398 of the Act before the amendments of both these sections in 1963. As regards section 397 of the Act, it quoted with approval the views expressed by English courts, on the corresponding section 210 of the English Companies Act of 1948, which were held to be applicable here. The cases cited were : Elder v. Elder and Watson, George Meyer v. Scottish Co-operative Wholesale Society Ltd., Scottish Co-operative Wholesale Society Ltd. v. Meyer  (Meyer's case in appeal in the House of Lords) and In re H. R. Harmer Ltd.   Their Lordships of our Supreme Court pointed out, inter alia (page 364) :

"The oppression of which a petitioner complains must relate to the manner in which the affairs of the company concerned are being conducted ; and the conduct complained of must be such as to oppress a minority of the members (including the petitioners) qua shareholders."

They also said (page 366):

"The circumstances must be such as to warrant the inference that 'there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy'."

Mere lack of confidence and differences between two groups were insufficient for action under section 397. After considering the scope of section 398, their Lordships held (page 375) :

"On such application being made, if the court is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the matter of management or control of a company, it is likely that the affairs of the company will be conducted as aforesaid, the court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit. This section only comes into play, as the marginal note shows, when there is actual mismanagement or apprehension of mismanagement of the affairs of the company. It may be contrasted with section 397 which deals with oppression to the minority shareholders, whether there is prejudice to the company or not."

As already observed by me, after the amendments of sections 397 and 398 in 1963, prejudice to public interest can form a ground of action either under section 397 or under section 398 of the Act. The scope of remedial action under either of the two sections could be said to have become more extended as a result. Nevertheless, the powers vested in the court continue to be discretionary and are designed for removal of an existing and not past oppressive or prejudicial course of conduct of the affairs of the company. They are, in my opinion, primarily intended for preventive purposes. The object of the exercise of these powers is either to prevent a winding up or to remove the continuation of harm or reasonable probability of injury to the interests of the company or to the wider public interests. Past acts and transactions may either afford evidence of what may be reasonably apprehended in future or may have to be undone only to prevent or remove what had wrongfully originated in the past but continues to exist and provides a sustainable cause of action at the time when the petition is filed. Purely punitive action, as distinct from preventive remedial action, does not fall directly within the purview of these provisions although certain forms of punitive action, such as those mentioned in Schedule XI, which is applied by section 406 of the Act to proceedings under sections 397 and 398 of the Act, may indirectly result from them. Although the amplitude of the remedial powers of the court, under sections 397 and 398, should not be curtailed in such way as to hamper the jurisdiction to suppress the mischiefs aimed at, yet, the court has to be careful and astute enough to prevent a misuse of the provisions of sections 397 and 398 by a party, lest a remedy proposed and adopted to overcome an alleged mischief becomes a source of greater oppression and harm than the one sought to be removed or prevented.

The petition before me may now be examined in the light of the foregoing discussion of the law applicable to such petitions. It would not be unfair to describe the petition, in substance, as little more than a catalogue of charges for past alleged misdeeds of the first three opposite parties. The charges against opposite party No. 1, the former managing director, relate to the period in which he served the company in that capacity and begin with : "That Shri H.S. Mathur, respondent No. 1, is unfit to act as a director on the following grounds." The subject-matter of these charges has already been mentiond above. Similarly, charges against opposite parties Nos. 2 and 3 set out their past acts as grounds of their unfitness to act as the managing director and director respectively. Sections 397 and 398 of the Act are not meant for such purely punitive action.

As regards the claims of petitioner No. 1, as a former employee of the company, the petitioners only disclosed, in the petition, that the company had filed writ petitions against the orders of a labour court reinstating the petitioner, which were dismissed. But, other facts, that petitioner No. 1 had to subsequently retire, having attained the age of superannuation, that there was an arbitration award on the dispute arising between the parties on this question and on the claim for gratuity, and that a writ petition directed against that award was dismissed by this court, were revealed by the opposite parties. The claims of petitioner No. 1, made in his capacity as a former employee only, who had worked as an engineer of the company, for an order of reinstatement and payment of gratuity to him, are not only shown to be concluded by previous orders in other proceedings but are utterly misplaced in proceedings under sections 397 and 398 of the Act which are only open to a member as a shareholder of the company. Such claims have nothing to do with claims for relief against any unfair or unjustifiable agreements which may have to be set aside or modified, under section 402(d) and (e) of the Act, as necessary consequences of orders under sections 397 and 398 of the Act.

A glance at the representations filed on behalf of the Central Government, under section 400 of the Act, shows that the claims for refund of salaries paid to opposite parties alleged to have been irregularly appointed without sanction of the Central Government, are also not well founded as the company either obtained the required approval or the excess payments were refunded. No question of setting aside a decree of a civil court, dismissing any such claim, could arise on the allegations of any fraud or collusion in such a case. The Central Government also seemed satisfied with the auditors' reports on the company's balance-sheets which, according to its representations dated November 28, 1967, were not adverse or qualified reports for the two preceding years.

Several issues, including those on the alleged unfitness of each of the three opposite parties to act as directors, were framed in this case. The petitioners were given full opportunity, under the orders of this court, to examine the records of the company, under the supervision of a commissioner, so as to provide particulars of alleged "embezzlements and corruption" and mismanagement. They could do nothing more than to cite four audit reports, for the years 1960-61, 1961-62, 1962-63 and 1963-64, of which copies were filed, revealing certain irregularities and defects, which were certainly brought out, in accounts kept and expenses shown as incurred, during the term of office of the opposite party No. 1, as managing director, which lasted until 1965. Therefore, after hearing arguments of both sides at some length, the first and preliminary issue in the case was reframed as follows :

"On allegations made by both sides and the material on record is this a fit case for any order either under section 397 or section 398 of the Companies Act ?"

The preliminary issue was reframed so as to embrace matters covered by other issues also. It did not seem necessary to decide any other issue before deciding this issue.  Mr. P. C. Srivastava, learned counsel for the petitioners, who obtained time for further preparation of arguments of this issue, put in considerable industry and argued the case for his clients with commendable fairness and ability. He was, however, unable to convince me that any order, either under section 397 or section 398 of the Act, could be passed by this court in this case.

Those complaints of the petitioners against the conduct of the affairs of the company by the contesting opposite parties which could be supported by some particulars relate to a period before September 30, 1965, when a new managing director was elected. The petition in this court was filed on August 23, 1967. Delay, if considerable and unexplained, is enough to defeat equities and to justify a refusal to exercise discretionary powers. In this case, delay is both considerable and unexplained so far as any question of giving relief against the alleged mismanagement before September 30, 1965, is concerned. Moreover, alleged mismanagement up to 1965 could not, as already indicated, be said to be even relevant unless reasonably correlated to a prospect of mismanagement in and after 1967.

The only past transaction or event which could be said to affect the present and future management of the company was the election at the general meeting of the company held on September 30, 1965. The petitioners allege that only fourteen members were present at it. A copy of the minutes (annexure "M" to the counter-affidavit) shows that fifteen out of twenty-five members were present. The petitioners allege that proxies were not allowed to be utilised at the meeting. The minutes disclose that ten members voted through proxies. The election of opposite party No. 1 as director was challenged on the ground that his proposer, Hari Mohan Mathur, opposite party No. 4, who is admitted to be a shareholder, had no right to propose a name for the office of a director. This objection appears to be utterly baseless. At least nothing was shown to substantiate the objection. It was also alleged that opposite party No. 2 received only two votes in his favour when he stood for directorship and that two votes were cast against him. This is clearly contradicted by the minutes of the meeting. It is also inconsistent with the petitioners 'allegation about the contesting opposite parties' control over a number of members which certainly exceeds two. The copy of the minutes of the meeting also discloses that petitioner No. 1 was present and stood for election to the office of a director but failed and left the meeting without signing the minutes. The petitioners allege that entries in the minutes book are false. But, they have not filed affidavits of any other members present at the meeting. And, they waited for nearly two years, during which another general meeting and fresh elections of directors had taken place, before applying to this court. They could not, therefore, be held to have made out a case for believing that the contesting opposite parties are not legally authorised to conduct the affairs of the company.

The minutes of the general meeting of September 30, 1965, show that a dividend of 20% was declared for the year ending March 31, 1965. The counter-affidavit filed on behalf of the petitioners, together with the replies in the rejoinder-affidavit, show that, whatever may have been the position in the past, the company is carrying on a profitable business now. Even if some "bungling", as the petitioners call it, had taken place in the keeping of accounts in the past, this would not justify a winding up order. As the Supreme Court pointed out in Rajahmundry Electric Supply Corporation Ltd. v. Nageswara Rao , proof of some mismanagement, even if it extends to misappropriation of funds by directors, may not justify a winding up order where the company is a sound profit earning concern. The reason for this is clear. The proper remedy in such cases lies in suitable proceedings against delinquent directors and not by a winding up order which is directed against the company. In the instant case, neither an "oppression" of a minority nor circumstances justifying a winding up could be established. Therefore, section 397 of the Act would not apply. And, as the contested charges of some mismanagement in the past, even if proved, are not enough to establish an existing injury to the interests of the company or to public interest, or, the likelihood of such injury in future, no action under section 398 of the Act can be taken.

Before concluding, 1 may indicate a procedure which could, in appropriate cases, be held to be a necessary prelude to proceedings under sections 397 and 398. Sections 235 to 237 of the Act empower the Central Government to appoint one or more inspectors to investigate the affairs of a company and to submit a report, which is made legally admissible evidence, by section 246 of the Act, in proceedings before a court of law. Such a report could provide the basis of action by the Central Government against a company under either section 397 or section 398 of the Act, as laid down by section 243 of the Act, or, for recovery of damages in respect of any fraud, misfeasance, or other misconduct in the management of the company's affairs, where this is necessary in public interest, as provided by section 244 of the Act. It could, therefore, be urged, in cases where a detailed inquiry into the conduct of the affairs of a company is called for, that a petition under either section 397 or section 398 of the Act, without applying for such an inquiry, under section 236 of the Act, is premature.

Learned counsel for the petitioners contended that this is a fit case in which at least a declaration by order of this court, under section 237(a)(ii) of the Act, that an investigation by an inspector is needed, is called for.  After having considered this submission seriously, I have reached the conclusion

[1983] 53 COMP. CAS. 493 (KER)

HIGH COURT OF KERALA

Mrs. U. A. Sumathy

v.

Dig Vijay Chit Fund (P.) Ltd.

M. P. Menon J.

COMPANY PETITION NO. 23 OF 1978

July 1, 1980

M. Ramanatha Pillai for the Petitioners.

Mani J. Meenattoor for the Respondent.

JUDGMENT

M.P. Menon J.—This is a petition filed by the two members of the Dig Vijay Chit Fund (P.) Ltd. under s. 237 of the Companies Act, 1956, for a declaration that the affairs of the company require investigation by an inspector appointed by the Central Govt.

The main business of the company is in kuries and in money-lending. The first petitioner, along with six other shareholders, had earlier filed a petition for winding up it, but that was dismissed on the ground that they had other remedies, and that the prayer for winding-up was unreasonable in the circumstances disclosed. The present is a resort to one of the other remedies available.

The allegations in the petition are broadly the following : The chief agent and the directors of the company are utilising their position to oppress the other shareholders. The chief agent and his relatives hold 72 shares and the directors control another 122. In April, 1972, the company fraudulently sold 64 shares, belonging to seven members, who were not supporting the directors; and these shares were purchased by the relatives of the directors and the chief agent. The group in management has been misappropriating the company's funds, destroying valuable records to cover up their misdeeds, causing loss to the company by declining to proceed against debtors, and writing off bad debts after privately collecting amounts from the concerned debtors. Some particulars relating to the alleged misappropriation, destruction of records, etc., are furnished, and there is also a general allegation that the company has been incurring losses as a result of all the above.

The company has denied all these allegations in its counter-affidavit. The 2nd petitioner has been examined as P.W. 1 and Exs. A-1 to A-6 have been marked on the side of the petitioners. The company has examined its present managing director as R.W. 1, and marked Exs. B-1 to B-7.

Sections 235 to 246 of the Companies Act, 1956, deal with the investigation of the affairs of a company. Under s. 235, the Central Govt. is given power to appoint inspectors for the purpose; and the power is to be exercised either on the application by members or on the basis of a report by the Registrar under s. 234. Section 236 provides that members applying under s. 235 should furnish evidence to show that they have "good reason for requiring the investigation ". Clause (a) of s. 237 obliges the Central Govt. to arrange for an investigation when the company, by special resolution, or the court, by order, declares that an investigation is called for, while cl. (b) confers a discretion on the Government to do so when the circumstances enumerated thereunder are found to exist. Sections 238 to 241 deal with inspectors, their powers and the report they have to make. Sections 242 to 244 specify the follow-up measures the government could take on the basis of the reports. Prosecution of persons found criminally liable, moving the court for winding-up or for relief from oppression, and initiation of misfeasance and other proceedings are some of the measures contemplated. Section 245 provides for the expenses of investigation, and s. 246 declares that the inspectors' reports shall be admissible as evidence in legal proceedings. An analysis of the above provisions indicates that appointment of inspectors is a matter in the discretion of the Govt. under s. 236, and also cl. (b) of s. 237; but in cases governed by s. 237(a), the Government has a duty to act. The machinery for inspection could be set in motion on the request of members under s. 236, only when a certain percentage of the total number of members apply; the Central Govt. cannot aet when the strength of those who apply is below the minimum prescribed. But what about an application to the court under s. 237(a)(ii)? Can the court order an investigation irrespective of the number of members who seek to invoke its power ?

Section 237 does not in terms speak of an application to be filed in court; but r. 11(a)(9) of the Companies (Court) Rules, 1959, conceives of such an application. In Raghunath Swarup Mathur v. Har Swamp Mathur [1970] 40 Comp Cas 282, the Allahabad High Court observed thus (at p. 296):

"As the declaration sought amounts to a direction to the Central Government, it should only be granted either where a party, having applied to the Central Government for an investigation, has failed despite sufficient grounds shown for it, or, when the court finds that a proceeding before it, under either section 397 or section 398 of the Act, cannot satisfactorily terminate without such an investigation".

But it appears from the decision of the Delhi High Court in Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp Cas 33, that a prior application to the Central Govt. under s. 236, or the pendency of proceedings under ss. 397 and 398, are not conditions precedent for exercising the court's power under s. 237(a)(ii). The Delhi case had arisen from an application filed by a single shareholder; and it is also not Contended before me that the numerical strength of the members, who move the court under s. 237, should satisfy the minimum prescribed by s. 235.

The present proceedings are only for the purpose of deciding whether the affairs of the company should be looked into by the inspectors. And, according to counsel for the petitioners, it is not necessary for his clients to prove their allegations before this court; they could prove them before the inspectors. NO doubt, cl. (a)(ii) of s. 237 does not lay down what circumstances are to be proved before the court and on what materials the court could act. But that does not mean that mere allegations are sufficient. A court can act only on the materials placed before it; and those materials should at least be such as to satisfy the court that a deeper probe into the company's affairs is desirable in the interests of the company itself. According to the Delhi High Court in Delhi Flour Mills Co. Ltd.'s case [1975] 45 Comp Cas 33 (Delhi), noticed above, the materials should be such as would result in proceedings being taken under ss. 242 to 244; no investigation could be ordered merely because a shareholder feels aggrieved about the manner in which the company's business is being carried on. The scope of s. 237 was considered by me in C. P. No. 22 of 1978 decided on 29-1-1980. [P. Sreenivasan v. Yoosuf Sugar Abdulla & Sons (P.) Ltd. [1983] 53 Comp Cas 485 (Ker)], in the following terms (at p. 489):

"The section conceives of three situations where the Central Government can appoint inspectors for investigation. The first is when the company itself declares that such an investigation is necessary. The second is when the court makes an order. And the third is when, the Central Govt. forms an opinion that the circumstances enumerated in cl. (b) exist. The first is easy to understand; when the company itself wants an investigation, the Central Govt. need not stop to enquire why. The third can also be understood because when suo motu action is proposed to be taken by the Government, it shall not act arbitrarily, but only consistent with the guidelines laid down. But what about the second situation, where the court has to make an order? Mr. Ramanatha Pillai for the petitioner suggests that the power and the discretion of the court are uncontrolled; it can direct an investigation whenever it suspects that all is not well with the company. Whether the apprehensions of the court are true or not is a matter to be found by the investigating inspectors, and the court is not to insist on evidence. It appears to me that this is too broad a statement. Investigation of the company's affairs by the Department of Trade in England has always been understood as a statutory exception to the rule in Foss v. Harbottle [1843] 2 Hare 461, that the internal affairs of a company is a matter for the majority, and a dissatisfied minority cannot seek outside interference. The Companies Act provides for the protection of minorities in three ways: (i) by giving them a right to complain against oppression, (ii) by permitting them to act on behalf of the company when it is wound up, as in the case of misfeasance proceedings, and (iii) by enabling them to obtain remedies indirectly through investigation. The court's discretion under section 237 is, therefore, to be exercised only when it is satisfied that the minority has made out at least a prima facie case that the rule in Foss v. Harbottle [1843] 2 Hare 461, requires relaxation in the interests of the company. The Calcutta High Court has held in In re Patrakola Tea Co. Ltd., AIR 1967 Cal 406, that before the company court orders an investigation under section 237(a)(ii), the petitioner should make out a strong case in relation to one or other of the matters referred to in clause (b). In other words, the circumstances enumerated in clause (b) are material for the exercise of the court's discretion also. The discretion is certainly a judicial one and is to be exercised only when a minority acts in the interests of the company as a whole".

It is in the above background ,that I propose to examine the allegations made and the evidence adduced herein.

As regards misappropriation, two specific instances are referred to in para. 5 of the petition. The first is that in 1971, the then managing dire-tor, Sri Chandrasekharan, had drawn an amount of Rs. 3,000 from the "Anamath account" when there was no deposit with the company in his name. The company's answer in para. 8 of its counter-affidavit is that Mr. Chandrasekharan had drawn an amount of Rs. 3,000 on September 23, 1971, when he had a credit balance of only Rs. 602.99, but that he had subsequently made deposits of Rs. 1,534 and Rs. 2,300 in November and December, 1971. The correctness of this statement is not disputed in the petitioners' reply affidavit. And a mere entry in the suspense account is not sufficient to establish misappropriation. The concerned account books have not been called for; and neither Mr. Chandrasekharan nor the person who made the entry has been cited to explain it. No attempt has also been made to bring out what the powers of the managing director were in matters of this kind. P. W. 1, who was himself a managing director of the company for some time, made only a bare reference to the entry in the course of his evidence; he did not even say that the amount was misappropriated or lost to the company.

The second instance relates to the compromise effected in O.S. 137/70, filed by the company against one Francis for the recovery of Rs. 680; and the allegation is that the party had produced a receipt showing that the amount had been paid personally to the managing director, Mr. Namboodiri-pad, and that the suit was compromised without crediting the amount in the company's accounts. But the documents produced tell a different tale. Exhibit B-1 dated November 16, 1970, discloses that P.W. 1, who was then the managing director of the company, had authorised R.W. 1, who was then its secretary, to compromise the suit, though the party had produced a "false receipt". Exhibit B-3 shows that an amount of Rs. 498 was credited in P.W. 1's suspense account with the company on the next day. According to R.W. 1, the party had produced in court a false receipt and when he was threatened with criminal action, he offered to settle the matter by paying Rs. 500. The matter was settled with the concurrence of P.W. 1 and the amount (less Rs. 2 for expenses) was credited in his suspense account as per Ex. B-3, pending filing of a compromise petition before the court. Exhibit A-2 is a certified copy of the compromise petition filed on November 6, 1971, and Ex. A-1 is a compromise decree. The petitioners' case that Sri Namboodiripad had received payment and issued a receipt and that the suit was compromised when this was brought to light, does not stand scrutiny in the light of the admitted circumstance that P.W. 1 himself was aware that the receipt was a false one and that the compromise was effected on the footing that it was not genuine. Misappropriation is a serious matter, and the evidence available is insufficient to establish even a prima facie case.

The allegations relating to destruction of records and the fraudulent transfer of the 64 shares were not pursued at the time of hearing. P.W. 1 did not in his evidence even make mention about the destruction of any records; and a suggestion thrown at R.W. 1 during his cross-examination about "removal" of records was promptly denied. The same is the position regarding the 64 shares said to have been fraudulently transferred.

The next allegation relates to the writing off of Rs. 22,074 and Rs. 14,476, respectively, as bad debts, in the profit and loss account marked as Exs. A-4 and A-5; and the case attempted to be made out is that the directors and the chief agent had actually received payment of the amounts and had thereafter attempted to cover up the misappropriation by making it appear that they were bad debts. Exhibits A-4 and A-5 do show that the amounts were written off; but there is nothing but the assertion of P.W. 1 to suggest that any officer of the company had actually received payments as alleged. P.W. 1 stated in cross-examination that the amounts written off included Rs. 800 due from one Sachidanandan, Rs. 750 from Ummer, Rs. 600 from Ayyappan and Rs. 700 from Madhavan; but Sachidanandan alone had told him that he had paid the amount to the company. P.W. 1 had no other knowledge or information about the alleged payments. The company's case, on the other hand, is that the amount written off in Ex. A-4 represents arrears of kuri collections and amounts due under promissory notes from over 400 persons, considered as irrecoverable. The company had conducted more than 100 chitties and made a large number of other advances; and some amounts were being written off from time to time. Exhibit B-4, the minutes book, indicates that the amount was written off as per Board's resolution dated November 9, 1973. Exhibit A-4, the audited accounts, must have been approved by the general body also. That apart, the list of bad debts referred to in the Board's resolution is Ex. B-5 and it contains particulars of 446 debts due from chit subscribers, the amounts varying from Rs. 2.50 to Rs: 118. Sachidanandan's name is not there, and no debt exceeding Rs. 118 is seen written off. The debts in Ex. A-5 were also written off by a Board's resolution, and, according to R.W. 1, those were amounts due from employees (bill collectors), who were going about making collections. They had left the services of the company and they had no assets. It is usual for men in a business of this type to periodically write off irrecoverable debts. In the present case, it was done by resolutions duly passed by the Board, and obviously approved by the general body of members. The accounts were duly audited and filed with the Registrar. The evidence is totally insufficient to raise even a serious suspicion that anything else had been done.

The only other point raised is that the company has been incurring loss year after year; but no investigation could be ordered unless that result is linked with fraud, misfeasance, mismanagement, oppression and the like. The loss might be an ordinary business risk: It may be noticed that the company's paid up capital and membership have risen by at least one hundred per cent between 1976 and 1978. The petitioners are only two out of 1,312 members. The company has also a case that the first petitioner is the wife of a dismissed employee and that the 2nd is annoyed by a notice demanding payment of some amounts due from him. It is unnecessary to go into this aspect because, even otherwise, the attempt of the petitioners has only been to show that something suspicious had taken place between 1971 and 1975.

In, my view, therefore, no case for the issue of a direction under s. 237(a)(ii) is made out, and the petition has to fail. It is accordingly dismissed, but without any order as to costs.

[1990] 68 Comp. Cas. 641 (Kar.)

High Court OF Karnataka

Bangalore Timber Industries

v.

Madras Sapper Ex-Servicemen's Rehabilitation Association

P.P. BOPANNA J.

COMPANY PETITION NO. 3 OF 1986

September 10, 1987

 Udaya Holla for the Petitioners.

G.B. Chandregowda and K. Lakshminarayana Rao for the Respondent.

G.S. Rao for Opposing creditor.

JUDGMENT

P.P. Bopanna J.—This company petition is filed by the creditors of an unregistered company which is carrying on business under the name and style of Madras Sapper Ex-Servicemen's Rehabilitation Association. There are six petitioners and all are creditors of this unregistered company (hereafter referred to as "the company").

Petitioner No. 1 is the creditor of the company in a sum of Rs. 16,11,908.51, petitioner No. 2 is the creditor of the company in a sum of Rs. 1,72,949.03, petitioner No. 3 is the creditor in a sum of Rs. 7,90,284.94, petitioner No. 4 is the creditor in a sum of Rs. 1,98,752.79 and petitioner No. 6 is the creditor in a sum of Rs. 1,46,042.78. Thus, in all, an aggregate amount of Rs. 33,49,262.58 is admittedly due from the company to these petitioners since 1984.

The case of the petitioners is that these amounts have been outstanding in spite of repeated demands and, therefore, they are entitled to 12% interest on the amounts due to them from the respective dates for the supply of timber made by them to this company. It should be noted at this stage that this company was registered under the Societies Registration Act with no share capital. The object of this company is to rehabilitate the ex-servicemen by engaging them in the manufacture of a variety of goods and products made out of wood. Therefore, they required a constant supply of raw material in the shape of timber and cut pieces of timber and towards this requirement, the petitioners have admittedly supplied the necessary raw material from time to time. Though the company had commenced its business in the year 1966, it does not appear to have made much progress as could be seen from the notice of the special general meeting held on December 26, 1985, at its headquarters in Bangalore. In that meeting, certain resolutions were passed. The first resolution was to the effect that subject to the provisions of the Industrial Disputes Act, the entire business undertaking carried on by respondent No. 1 should be closed down from April 1, 1986, after the receipt of the necessary sanction from the State Government and arrangements be made to pay the statutory dues to the workmen as per the provisions of the aforesaid Act, on the availability of funds for that purpose.

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.

[1998] 93 COMP. CAS. 41 (AP)

HIGH COURT OF ANDHRA PRADESH

Uunet India Limited

v.

I.C. Rao

B. SUBHASHAN REDDY J.

Company Petition No. 24 of 1994

DECEMBER 14, 1994

 

 T. Ramakrishna Rao and Ms. T. Balajayashree for the Petitioners.

A. Krishna Murthy and Y. Jaganmohan for the Respondent.

JUDGMENT

B. Subhashan Reddy, J.—This company petition is filed under section 237(a)(ii) of the Companies Act, 1956, invoking this court's jurisdiction to declare that the affairs of the first petitioner-company, namely, Uunet India Ltd., are fit to be investigated by an inspector appointed by the Central Government. In support of the said relief, several allegations are made that the respondents, particularly, respondents Nos. 1 and 2 have committed acts contrary to the company law as also the memorandum and articles of association of the first petitioner-company.

The first petitioner-company is hereinafter referred to as "the company". The company was firstly incorporated as a private limited company on May 25, 1990, and later on a resolution was passed on May 3, 1993, to convert the same into a public limited company and it was incorporated as a public limited company with effect from November 25, 1993. The authorised capital which was hitherto Rs. 10 lakhs was raised to Rs. 1 crore. Petitioner No. 2 and respondent No. 1, who were hitherto managing director and joint managing director respectively, were both appointed as managing directors in the annual general meeting held on February 6, 1993, for a period of five years. Even before that, Mr. N. Ch. Subba Raju, who was the director, had resigned and in his place, Dr. B. Achanti was appointed as NRI director on November 22, 1992. The same was approved by the annual general body meeting held on July 6, 1993.

Respondents Nos. 2 and 3 are the father and the maternal grandfather, respectively, of the first respondent. Respondent No. 2 was projected as the alternate director to Dr. Mrs. Vijayalakshmi Achanti who is the wife of Dr. B. Achanti, NRI director on the board of directors of the company. The second respondent had participated in the board meetings and also had performed some functions. The petitioners dispute the position of the second respondent as alternate directors to Dr. Vijayalakshmi Achanti and questioned his consequential acts of participation in the affairs of the company as illegal and unauthorised. The meeting of the board of directors said to have been held on September 20, 1993, October 4, 1993, March 31, 1994, April 7, 1994, and April 24, 1994, are disputed by petitioners Nos. 2 to 6. With regard to the meeting held on July 4, 1993, the petitioners admit the same only to the extent of passing of resolution to raise funds for purchase of the cars of Maruti Van and Ambassador. The petitioners claim that they had convened a board meeting on April 6, 1994, proceded by notice dated March 25, 1994, and that the said meeting was held at Hotel Krishna Oberoi to transact the business of the company. It is stated that in the said meeting dated April 6, 1994, resolutions were passed (a) appointing petitioners Nos. 4 to 6 as directors of the company ; (b) to change the registered office of the company from the residential premises of the first respondent to the business office in Software Technology Park, HUDA Complex, Maithrivanam, Ameerpet, Hyderabad ; (c) for allotment of 24,500 equity shares to the applicants whose share applications were pending with the company ; (d) to change the authorised signatory to operate the bank account in the name of the second petitioner jointly with the sixth petitioner instead of the previous signatories, i.e., the second petitioner and the first respondent. This meeting and the validity of the same is disputed by the respondents. In fact, impugning the same a suit was filed in O.S. No. 458 of 1994, on the file of the court of the Additional Judge, City Civil Court, Hyderabad, on April 21, 1994, seeking a declaration that defendants Nos. 3 and 4 (petitioners Nos. 4 and 5) are not the directors of the company and D-5 (petitioner No. 6) is not the additional/alternate director of the company and to cancel or forfeit the shares allotted to the petitioners and to declare that the board meeting was not held on April 6, 1994, and not to take cognizance of any resolution passed in the said alleged meeting dated April 6, 1994. Two interlocutory applications Nos. 593 and 594 were filed seeking restraint orders against petitioners Nos. 2 to 6. In I.A. No. 593 of 1994, the court of the 1st Additional Judge, City Civil Court, Hyderabad, granted injunction on April 22, 1994, restraining petitioners Nos. 2 to 6 from holding any board meetings, passing any resolutions, casting any votes, issuing any share capital or increasing the authorised share capital, operating the bank account of the petitioner-company or interfering in the day-to-day affairs of the company and from entering into the company from time to time including the general body meeting, In I.A. No. 594 of 1994, the said court issued injunction orders restraining petitioners Nos. 2 to 6 from paying any amounts in respect of cheques, instruments, whatsoever of any nature presented by or through or signed by any one of the above petitioners whether jointly or severally in respect of account No. 387. The said order was also passed on April 22, 1994. Against the order passed in I.A. No. 593 of 1994, petitioners Nos. 2 to 8 had preferred CMA No. 580 of 1994, before this court and this court by order dated April 28, 1994, allowed the same by converting it to a revision under article 227 of the Constitution of India when an objection was raised by the respondents that on the ground of pecuniary jurisdiction the said appeal was not maintainable in this court and is only maintainable in the court of the Chief Judge, City Civil Court, Hyderabad. Against the said order in the CMA, the respondents have preferred LPA No. 96 of 1994, and a Division Bench of this court by order dated May 3, 1994, allowed the same setting aside the order passed by the learned single judge with directions to file a CMA before the lower appellate court. Pursuant to the same, CMA No. 92 of 1994 was filed before the Vacation Judge, City Civil Court and I.A. No. 86 of 1994, was filed to suspend the interim injunction orders issued by the trial court. Against the orders in I.A. No. 594 of 1994, petitioners Nos. 2 to 6 had filed CMA No. 93 of 1994, before the said vacation judge. I.A. No. 86 of 1994 in CMA No. 92 of 1994, to suspend the interim orders passed by the trial court was dismissed by the Vacation Judge of the City Civil Court by order dated May 25, 1994. Assailing the same, CRP No. 2034 of 1994 was filed by petitioners Nos. 2 to 6 before this court and this court allowed the same by order dated September 2, 1994. Now, Mr. A. Krishnamurthy, learned counsel for respondents Nos. 1 and 2 submitted a photostat copy of letter dated December 12, 1994, addressed by Mr. P.S. Narasimha, Advocate, Supreme Court, to him stating that the Supreme Court in SLP No. 19935 of 1994, has set aside the said order dated September 2, 1994, passed in the above CRP.

Respondents Nos. 3 and 4 have filed O.S. No. 1111 of 1994, on the file of the court of the IV Additional Judge, City Civil Court, Hyderabad, against the petitioners and others including respondents Nos. 1 and 2 herein seeking the reliefs of :

(a)        perpetual injunction restraining them from holding any board meetings of the first defendant-company (first petitioner herein) excepting holding a board meeting for the purpose of calling the annual general body meeting, passing any resolutions, taking any policy decisions, issuing or allotting any shares or increasing the authorised share capital or operating any of the bank accounts in the name of the company at Hyderabad or branches elsewhere and from doing any acts prejudicial to the interests of the company ;

(b)        to appoint a receiver for taking inventory of the property of the company ;

(c)        to declare all the board resolutions passed by the defendants subsequent to June 14, 1994, excepting the board meeting for the purpose of calling the annual general body meeting of the company as null, void and inoperative ; and

(d)        to declare that the appointment or co-option of any director other than those elected in the annual general body meeting as null, void and inoperative.

The cause for filing the said suit is stated from paragraphs 8 onwards in the plaint of the said suit. The said suit is still pending.

Serious dispute is raised by the petitioners with regard to the status of the second respondent as an alternate director to Mrs. Vijayalakshmi Achanti. His participation and actions by virtue of the said status is assailed as being illegal and void. In fact, it is averred that Mrs. Vijayalakshmi Achanti was never appointed as NRI director and that there is no resolution to that effect and that there was no occasion to appoint the second respondent as alternate director to her. It is alleged by the petitioners that the first respondent with an evil design of capturing the financial control of the company, hatched a conspiracy along with his father, i.e., the second respondent herein and his group by illegally appointing the second respondent as alternate director in violation of the provisions of company law and the articles of association and that in that process, he concocted the holding of meetings of the board of directors with the alleged quorum of two directors on September 20, 1993, October 4, 1993, March 31, 1994, April 7, 1994, and April 24, 1994, and that in the said meetings, the minutes were concocted by the second respondent in the status of chairman of the said meetings and that there was no service of notice or agenda on the directors of the company before the meetings said to have been conducted on the aforementioned dates.

Detailing the above, the petitioners plead that all the aforesaid actions of respondents Nos. 1 and 2 are nothing short of mismanagement of the company and that the same warrants investigation by an Inspector appointed by the Central Government under section 237(a)(ii) of the Companies Act, 1956. Pending consideration of the said plea for investigation under the above legal provision, the petitioners have sought for several other prayers as a part of the main relief and also interim prayers. It is apt to extract the main prayer sought for by the petitioners, as also the other prayers along with the said main prayer and also interim reliefs while filing the company petition and also reliefs which are sought to be added by way of amendment under Order 6, rule 17 of the Civil Procedure Code, 1908, in the company applications.

Prayers originally sought for in Company Petition No. 24 of 1994 :

(1)        That the affairs of the company conducted by respondents Nos. 1 and 2 in the administration of the company and in the financial operations of the company, be investigated by an inspector to be appointed by the Central Government and consequently direct the Central Government to appoint an Inspector to investigate into the affairs of the company conducted by respondents Nos. 1 and 2 ;

(2)        To declare the alleged board meetings dated September 20, 1993, October 4, 1993, March 31, 1994, April 7, 1994, April 21, 1994, April 24, 1994, or any other alleged board meetings said to have been held by respondents Nos. 1 and 2 and the alleged resolutions passed therein as illegal, and inoperative in law ;

(3)        To declare the notice dated May 19, 1994, issued to the members of the petitioner-company convening the annual general body meeting on June 14, 1994, as illegal and inoperative in law ;

(4)        To declare that respondent No. 2 is not a validly appointed alternate director of the petitioner-company and consequently all the actions purported to have been done by him in respect of the affairs of the petitioner-company as null and void ; and

(5)        To declare that the meeting held on April 6, 1994, at the instance of petitioners Nos. 2 to 6 and the resolutions passed therein as valid and operative.

Interim reliefs sought for :

(1)        Restraining respondents Nos. 1 and 2 by an order of temporary injunction from conducting the proposed annual general body meeting on June 14, 1994, and from conducting ordinary business and special business and passing resolutions mentioned in the said notice in pursuance of the notice dated May 19, 1994, to the members of the petitioner-company.

(2)        Restraining respondents Nos. 1 and 2 by an order of temporary injunction from holding any board meetings, passing any resolutions, casting any votes, issuing any share capital or increasing the authorised share capital, or to operate any bank accounts in the name of the company or its branches and to do any acts prejudicial to the interests of the petitioner-company.

(3)        Restraining respondent No. 2 by an order of temporary injunction from interfering in the day to day administration of the company or from entering into the petitioner-company's premises or its branches.

(4)        Directing respondents Nos. 1 and 2 to keep all the records of the company, account books of the company, bank account books and office seals of the company in the registered office premises of the petitioner-company at HUDA complex, Mythrivanam, Ameerpet, Hyderabad, and pass such other order or orders deemed fit in the interests of justice.

Additional prayers sought for in C.A. No. 228 of 1994 by way of amendment :

            (1)        To declare that respondents Nos. 3 and 4 are not the shareholders of the company ;

            (2)        To declare that O.S. No. 1111 of 1994 is illegal and inoperative in law.

(3)        To declare all the actions already taken by respondents Nos. 1 to 4 and other alleged shareholders belonging to the group of respondents Nos. 1 and 2 pursuant to the alleged board meetings mentioned above and the resolutions passed therein as invalid and inoperative in law.

(4)        To direct respondents Nos. 1 to 4 and other alleged shareholders belonging to the group of respondents Nos. 1 and 2 not to take any further action pursuant to the above alleged board meetings pending investigation by the Inspector to be appointed by the Central Government into the affairs of the company conducted by respondents Nos. 1 and 2.

(5)        That respondent No. 1 be directed not to convene board meetings or general body meetings, pass any resolutions, cast any vote, issue any share capital or increase the authorised share capital or growing (sic) any third party rights or alienate the properties of the company and not to operate any of the bank accounts of the company or its branches and not to do any acts prejudicial to the interests of the company pending investigation by the Inspector to be appointed by the Central Government ; and

(6)        Respondent No. 1 be directed to hand over all the cheques and other negotiable instruments drawn in favour of the company by the customers and others and bank pass-books and cheque books of the company which are in his custody to petitioner No. 2 and also hand over all the business and administrative records, account books along with vouchers of payments and receipts which are in the custody to petitioner No. 2 pending investigation by the inspector to be appointed by the Central Government.

Further additional prayers sought for by amendment in C.A. No. 268 of 1994 :

            (1)        To declare respondent No. 1 as disqualified to act as the managing director of the petitioner-company.

(2)        To direct respondents Nos. 1 and 2 to keep all the business records, account books, bank accounts, cheque books and pass-books of the company in the head office of the company at 505-B, HUDA complex, Mythrivanam, Ameerpet, Hyderabad.

(3)        To direct respondents Nos. 1 and 2 to produce all the accounts of income and expenditure of the Calcutta branch office of the company from July, 1993, to-date.

(4)        To declare that the alleged allotment of 1,32,800 shares on September 20, 1993, and 90,700 shares on March 31, 1994, and also the issue of alleged share certificates in favour of the alleged shareholders by respondents Nos. 1 and 2 are invalid and inoperative in law.

(5)        To declare the notice dated September 1, 1994, issued to the board of directors of the company and the notice dated September 24, 1994, issued to the members of the company by respondents Nos. 2, 3, 4 and the proposed respondent No. 5 calling for the extraordinary general body meeting and also the holding of the extraordinary general body meeting on October 20, 1994, and the resolutions if any passed in the said extraordinary general body meeting are invalid and inoperative in law ; and

(6)        To declare that the civil suit O.S. No. 458 of 1994, filed by respondent No. 1, before the 1st Additional Judge, City Civil Court, as illegal and unsustainable in law.

The petitioners had also filed several company applications. In C.A. No. 101 of 1994, filed by the petitioners, this court by order dated June 13, 1994, passed injunction orders restraining respondents Nos. 1 and 2 from conducting the annual general body meeting scheduled on June 14, 1994, from conducting ordinary business and special business and passing resolutions mentioned in the said notice dated May 19, 1994, and restraining respondents Nos. 1 and 2 from holding any board meetings, passing any resolutions, casting any votes, issuing any share capital or increasing the authorised share capital or operating any bank accounts in the name of the company and doing any acts prejudicial to the interests of the company or from entering into the company's premises or its branches pending the disposal of the company petition.

Respondents Nos. 1 and 2 had filed C.A. No. 106 of 1994, to vacate the said order. This court passed a limited order on June 29, 1994, permitting respondents Nos. 1 and 2 to deposit the cheques given in the list and to disburse the amounts given in the list annexed thereto by operating the current account of the company with the Bank of India, Khairatabad branch and the respondents were directed to file a copy of the bank statement after completion of the transactions. The petitioners had filed C.A. No. 127 of 1994 to review the said order and by order dated July 13, 1994, this court disposed of the same to the effect that the expenditure by respondents Nos. 1 and 2 shall not exceed Rs. 10,73,247.80. Against said orders, the petitioners had preferred OSA No. 24 of 1994, before the Division Bench and by order dated October 6, 1994, the Division Bench had dismissed the same by making the following observations :

"In view of the fact that expenditure to the extent of Rs. 10 lakhs and odd has already been incurred by the second respondent in pursuance of the impugned order passed by the learned company judge, it is not for us to enter into the merits of the order, particularly, as the proceedings are still pending before the company judge. Whether or not the expenditure to the extent of Rs. 7,73,000 was authorised by the board of directors and whether it was an urgent expenditure are questions which may have to be considered by the company judge before whom the proceedings are pending. Any observations made by us on the merits of the matter may affect the proceedings before the learned company judge and at this stage, we think it appropriate to order, in the particular circumstances of the case, that the objections raised before us by learned counsel for the petitioners may be raised before the learned company judge at the appropriate time in accordance with law so that the same be considered by him. It was further urged by learned counsel for the appellants that the application for a direction to the second respondent to deposit the cheques in the account of the company in terms of the order passed by the learned company judge may be disposed of and a direction be issued to the respondents to comply with the order passed by the learned company judge in that regard. Since we are disposing of the main appeal itself, we are not obliged to decide the interlocutory application as it is still open to the applicant to raise grievance before the learned company judge in that regard too."

The petitioners have filed the following other applications :

(a)        C.A No. 115 of 1994—to appoint a commissioner to make local investigations at the registered office premises at 505-B Mythrivanam, Ameerpet, Hyderabad, and the residential premises of respondents Nos. 1 and 2 at 27 on Road No. 10, Jubilee Hills, Hyderabad, and office premises at Anu Capital and Investments Limited, Hyderabad, 203, Concord Apartments, Somajiguda, Hyderabad, and to make an investigation of all the records, computer equipment, furniture, communicating equipment, etc., of the company.

(b)        C.A. No. 116 of 1994—directions to respondents Nos. 1 and 2 to produce upon oath all the documents including account books of the company in their possession and power as stated in the notice dated June 25, 1994, issued by the petitioners and to keep the said records and accounts in the safe custody of the Registrar of the High Court or in the alternative to direct respondents Nos. 1 and 2 to give inspection of the same and to permit the petitioners to take out xerox copies of the same.

(c)        C.A. No. 121 of 1994—directions against respondents Nos. 1 and 2 to make discovery on oath of the documents which are or have been in their possession and power relating to the company and the matters in dispute in the company petition.

(d)        C.A. No. 191 of 1994—to strike off the defence of the respondents on the ground of non-compliance with the order dated July 6, 1994, passed by this court directing counsel for the respondents to file an affidavit of documents.

(e)        C.A. No. 224 of 1994—to stay all further proceedings in O.S. No. 1111 of 1994, on the file of the court of the IVth Additional Judge, City Civil Court, Hyderabad, and to declare that the said suit is illegal and invalid in law. Interim stay was granted by this court on September 12, 1994, against which respondents Nos. 3 and 4 filed OSA No. 32 of 1994, but the Division Bench by order dated October 20, 1994, dismissed the same by directing the respondents to move the company judge for vacating the said order.

(f)         C.A. No. 218 of 1994—to authorise and allow the petitioners to operate the bank account of the company by depositing the cheques/DDs and other negotiable instruments received from the customers in favour of the company and also to operate the said account to incur expenditure of the company from time to time and to direct respondents Nos. 1 and 2 to make over and deliver all the cheques, drafts, bills and other negotiable instruments received from the customers of the company, bank pass books and other documents relating to the bank accounts of the company in the custody and possession of respondents Nos. 1 and 2 to petitioner No. 2, to direct respondents Nos. 1 and 2 to make over and deliver all the business records of the company, account books and any other documents of the company which are in the custody and possession of respondents Nos. 1 and 2 to petitioner Nos. 2.

(g)        C.A. No. 246 of 1994—to stay the holding of the meeting convened by respondents Nos. 2 to 5 pursuant to the impugned notice dated September 1, 1994. The said meeting was scheduled on October 10, 1994, and by order dated October 19, 1994, this court had allowed the meeting to go on, but directed that if any resolution is passed, the same shall not be given effect to until further orders. The said order is subsisting as on today.

(h)        C.A. No. 247 of 1994—directions against respondents Nos. 1 and 2 to deposit all the cheques, drafts and other negotiable instruments drawn in favour of the company and also to file the statement of said cheques, drafts and negotiable instruments and to direct respondents Nos. 1 and 2 to make over and deliver to petitioner No. 2 all the bank pass-books, cheque books and documents relating to the bank accounts of the company and all the business records of the company, account books of the company and any other documents of the company in the custody and possession of respondents Nos. 1 and 2.

(i)         C.A. No. 251 of 1994—directions against respondents Nos. 1 and 2 to make over and deliver all the cheques, drafts and bills and other negotiable instruments, etc., as pleaded in the other related petitions.

(j)         C.A. No. 256 of 1994—to implead the Registrar of Companies and the Secretary, Department of Company Affairs, Union of India, as respondents Nos. 6 and 7 in the company petition.

(k)        C.A. No. 257 of 1994—directions to the Registrar of Companies to dispose of the application seeking extension of time for holding the annual general meeting of the company within a week or alternatively to direct the Registrar of Companies to extend the time for a period of three months from October 6, 1994, for holding the annual general meeting of the company.

(l)         C.A. No. 267 of 1994—directions against the Registrar of Companies to give inspection of all the documents of the company with the said Registrar detailed in the annexure and to direct the said Registrar to produce the said documents at the time of the hearing of the company petition.

The respondents filed a counter controverting the allegations made by the petitioners. They contend that several reliefs sought for are beyond the scope of section 237 of the Companies Act. They state that the civil suits filed by them are not barred and that the orders passed by the civil court are valid and operative. They assert that the second respondent was validly appointed as alternate director and that his participation in the meetings and the actions and resolutions are all true and valid and are binding and that the board meetings which are specified above and disputed by the petitioners are held properly preceded by notice and agenda and to the knowledge of petitioners Nos. 2 and 3. Further, the respondents dispute the truth and validity of the board meeting said to have been held by the petitioners on April 6, 1994, which is, of course, subject matter of O.S. No. 458 of 1994, on the file of the court of the 1st Additional Judge, City Civil Court, Hyderabad, referred to supra. The respondents raised a jurisdictional issue with regard to the maintainability of the company petition itself and filed C.A. No. 144 of 1994, to decide the same as a preliminary issue. The first respondent has also filed C.A. No. 217 of 1994, seeking a direction to permit him to incur an expenditure of Rs. 18,08,462.47 to run the day to day affairs of the company and to operate the said bank account of the company.

Mr. T. Ramakrishna Rao, learned counsel for the petitioners, vehemently contends that on the dates specified, no meetings were held by the respondents and that all the said meetings and resolutions said to have been passed are fabricated and cooked-up and that there was no quorum to hold the said meetings and that the second respondent was not at all the alternate director and was further disqualified in view of the order of this court dated September 2, 1994, in CRP No. 2034 of 1994. He further submits that for holding a board meeting seven clear days notice is necessary and the same was not at all issued for holding any of the above meetings projected by the respondents. He contends that the two suits, i.e., O.S. No. 458 of 1994, filed by respondents Nos. 1 and 2 and O.S. No. 1111 of 1994, filed by respondents Nos. 3 and 4 in the civil court are not at all maintainable. He further contends that respondents Nos. 3, 4 and 5 are not at all the shareholders and respondent No. 2, holds only 10 shares worth Rs. 100 and that it is incomprehensible that respondent No. 2 who holds such a minimum of 10 shares worth Rs. 100 can act as alternate director taking important decisions relating to company affairs. He has taken me to the various sections of the Companies Act like sections 72, 73, 75, 193 and articles 68, 69, 173, 96, 98, 99, 101, 114, 115, 119, 120, 128, 130, 150 of the articles of association and related provisions and submits that the respondents have flagrantly violated the said provisions. He further submits that this court, as a company court, has got ample jurisdiction to grant the prayers sought for and that the words "affairs of the company" should not be understood in a limited sense, but it has to be construed in a comprehensive and a liberal sense embracing all the affairs of the company. He questions the allotment of shares of 1,32,800 on the ground that even though the date is shown as September 30, 1993, it is not communicated within the specified time as contemplated under section 75 of the Companies Act and that the same was communicated only on April 7, 1994. He further submits that there cannot be any allotment of shares without application and that such applications are absent, apart from the fact that the shareholders were not communicated about the allotment of shares. He further submits that the first respondent was disqualified to be a managing director of the company as he was already a managing director of another company and that simultaneous managing directorship is impermissible under clause (d) of Part I of Schedule 13 to the Companies Act. He pleads that to undo the wrongs committed by respondents Nos. 1 and 2, this court can invoke its inherent powers to issue appropriate directions in the interests of justice and also to grant the prayers in the interlocutory applications, apart from granting the other prayers. Mr. T. Ramakrishna Rao, learned counsel for the petitioners, has cited the judicial precedents in British India Corporation v. Robert Menzies [1936] 6 Comp Cas 250 ; AIR 1936 All 568, Jiyajeerao Cotton Mills Ltd. v. Company Law Board [1969] 39 Comp Cas 856 (MP), Selvaraj (V.) v. Mylapore Hindu Permanent Fund Ltd. [1968] 38 Comp Cas 153 ; AIR 1968 Mad 378, Manabendra Shah (H.H.) v. Official Liquidator, Indian Electrim Tools Corporation Ltd. [1977] 47 Comp Cas 356 (Delhi), Chandigarh Tourist Syndicate P. Ltd., In re [1978] 48 Comp Cas 267 (Punj), Century Flour Mills Ltd. v. S. Suppiah [1975] 45 Comp Cas 444 (Mad) [FB], Pravin Kantilal Vakil v. Rohini Ramesh Save [1985] 57 Comp Cas 31 (Bom) and Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 (SC) in support of his contentions.

Mr. A. Krishna Murthy, learned counsel for respondents Nos. 1 and 2, counters the argument of counsel for the petitioners and contends that even though initially an objection was raised with regard to the maintainability of the company petition, in view of the several allegations made against the respondents, the respondents now concede for a direction to the Central Government for investigation by an inspector into the affairs of the company as prayed in prayer (a) of the company petition and that all other reliefs are unsustainable and are beyond the scope of the petition under section 237 of the Companies Act. He takes me to sections 235, 237, 397, 398, 399, 10F, 391, 394, 395, 400 to 407 and particularly, pointing out to the amendments brought to the above legal provisions. He also cites articles 115(c), 132 and 78. He states sections 290 and also 175 coupled with article 78 and section 260 and argues that in the absence of the chairman, the members can elect a chairman. He submits that all interlocutory applications have got no nexus with the main application under section 237. He also submits that the allegations made in the company petition are very vague. He submits that the first respondent is not a managing director of two companies as argued by learned counsel for the petitioners, but the other concern which deals in process control and instrumentation is a proprietary concern and not a company. He submits that the order in the CRP cannot be construed as res judicata determining the rights of the parties finally and the same also does not bind the second respondent as he was not a party to the same and that in any event, the same is now set at naught by the Supreme Court. He cites the decisions rendered in Amirtharaj v. Ramiah Nadar [1968] 38 Comp Cas 337 (Mad), R. Prakasam v. Sree Narayana Dharma Paripalana Yogam [1980] 50 Comp Cas 611 (Ker), Rajendra Menon (R.R.) (No. 2) v. Cochin Stock Exchange Ltd. [1990] 69 Comp Cas 256 (Ker).

Mr. Y. Jaganmohan, learned counsel for respondents Nos. 3 to 5, adopts the arguments of Mr. A. Krishna Murthy.

In British India Corporation v. Robert Menzies [1936] 6 Comp Cas 250 ; AIR 1936 All 568, a Division Bench of the Allahabad High Court was dealing with the power of the company court for directing the furnishing of a copy of the register of members of the company to a shareholder thereof. A rule framed by the Allahabad High Court in exercise of the rule making power under the Companies Act, was also a question for consideration. Basing on that, Mr. T. Ramakrishna Rao, learned counsel for the petitioners submits that even though there is no specific provision in the Companies Act, a company court is having the jurisdiction to enforce compliance with the provisions of the Act in all matters concerning the company. I am afraid, I cannot countenance this argument for the reason that my jurisdiction is invoked only for the purpose of directing investigation under section 237(a)(ii) of the Companies Act, and I have to deal only with the said power which is expressly conferred on the company court to order investigation which is one of the modes, the other modes being by a company voluntarily inviting such an investigation or the Central Government under clause (b) of section 237 of the Act directing such an investigation on formation of opinion that such an investigation is warranted. In Jiyajeerao Cotton Mills Ltd. v. Company Law Board [1969] 39 Comp Cas 856 (MP), a Division Bench of the Madhya Pradesh High Court was dealing with the power of the company court to interfere with the order of the Government ordering investigation under section 237(b)(ii). The same is inapplicable to the case on hand. In V. Selvaraj v. Mylapore Hindu Permanent Fund Ltd. [1968] 38 Comp Cas 153 ; AIR 1968 Mad 378, the court was dealing with the matters contemplated by sections 166, 186 and 256 of the Companies Act regarding the powers of the company court to give directions for appointment of an independent chairman for the annual general body meeting as the said meeting could not be convened because of the disputes. This decision has got no bearing on this case. In H.H. Manabendra Shah v. Official Liquidator, Indian Electrim Tools Corporation Ltd. [1977] 47 Comp Cas 356, the Delhi High Court held that a written application for allotment of shares is necessary before a person can be entered as a member in the register of shareholders. This proposition cannot be doubted. But, there is a statutory presumption under section 164 of the Companies Act, and it is for the petitioners to rebut the same in the investigation to be conducted. It is for the authorities, either the investigating officials or the Central Government, to consider as to whether there is compliance with regard to the provisions of the Act and also the articles of association pointed out by the petitioners. In Chandigarh Tourist Syndicate P. Ltd., In re [1978] 48 Comp Cas 267, the Punjab High Court entertained an application under section 151 of the Civil Procedure Code, 1908, read with rule 9 of the Companies (Court) Rules, 1959, seeking a direction against the outgoing managing director to hand over the records, keys of the almirahs and the cash on hand relating to the company to the newly elected managing director. The said case has got no application to the instant case, as still the claim and rival claims of removal of the directors and induction of new directors including that of managing director has got to be investigated and such a stage did not come. Handing over the records or other properties of the company will only be a consequent step after the above process is done. In Century Flour Mills Ltd. v. S. Suppiah [1975] 45 Comp Cas 444, the Full Bench of the Madras High Court dealt with the difference between a stay order and an injunction and undid an illegal act done in convening the extraordinary general body meeting of the shareholders in spite of the stay order. This has also got no application in the instant case. In Pravin Kantilal Vakil v. Rohini Ramesh Save [1985] 57 Comp Cas 31 (Bom) the interpretation of sections 391 and 392 of the Companies Act, fell for consideration which in no way is concerned with this case. In Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548, the Supreme Court dealt with the nature of a share as to whether it is a movable property and allied aspects like shareholders' rights, transferability etc., as also the foreign exchange regulations which have got no bearing on this case.

In Amirtharaj v. Ramiah Nadar [1968] 38 Comp Cas 337 (Mad), Justice T. Ramaprasada Rao of the Madras High Court was dealing with the power relating to investigation contemplated under section 235 of the Companies Act, 1956, with the corresponding old provisions of the Companies Act, 1913, and concisely speaking, the statement of law made is that the company court dealing under section 237(a)(ii) is empowered to direct the Central Government to order investigation and after passing such an order, the company court ceases to have jurisdiction to adjudicate on other aspects. A similar view was taken in R. Prakasam v. Sree Narayana Dharma Paripalana Yogam [1980] 50 Comp Cas 611 (Ker). The said proposition of law was reiterated further in Rajendra Menon (R.R.) (No. 2) v. Cochin Stock Exchange Ltd. [1990] 69 Comp Cas 256 (Ker).

A company is an artificial being existing only in the contemplation of law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. The Companies Act contemplates several provisions. But, I am now concerned only with one provision, i.e., section 237(a)(ii), under which the power of this court is invoked for directing the Central Government to order investigation by the concerned inspectors. The company court itself is not invested with any powers of investigation under the above provision and all that it can do is to consider the plea of the petitioners as to whether it is a fit case to direct the Central Government to do so. Section 237 conceives of three situations, where the Central Government can appoint inspectors for investigation. The first is when the company itself declares that such an investigation is necessary, the second is when the court makes an order and the third is when the Central Government forms an opinion that circumstances enumerated in clause (b) exist. This court is concerned only with the second aspect, i.e., whether circumstances exist to issue directions to the Central Government which power is traceable to section 237(a)(ii) and it is invoked by the petitioners. Passing such an order for investigation is neither judicial nor quasi judicial. Such an order will not determine the rights of the parties. It only paves the way for action to be initiated either by the parties or by the Central Government or authorities specified. In fact, it was held that an order of the company court directing investigation under section 237(a)(ii) is not a judgment within clause 15 of the Letters Patent and is not appealable. A Division Bench of the Madras High Court in Ramiah Nadar v. Amirtharaj, [1962] 32 Comp Cas 52 ; AIR 1962 Mad 163, laid down the said proposition. The same is based on the authoritative pronouncement of the Constitution Bench of the Supreme Court in Narayanlal v. M.P. Mistry, AIR 1961 SC 29. When an order by the company court directing investigation in exercise of the powers under section 237(a)(ii) of the Companies Act, is not a judgment determining the rights of the parties, it is ununderstandable as to how the plea with regard to other prayers can be considered at all, as they are not specifically conferred on this court under section 237 of the Companies Act. Even interlocutory prayers cannot be considered as it cannot be said that they are ancillary to the grant of the main prayer. It is needless to mention that all interlocutory applications seeking interim orders are only steps-in-aid for final adjudication. But, when the final adjudication itself is not a judgment, seeking interim prayers or prayers unrelated to section 237(a)(ii) are wholly misconceived. Further, the investigation with regard to fact-finding includes within its scope contravention of legal provisions and that is yet to be done. Before the investigation is done and a fact-finding is recorded, it is premature for this court to express opinion one way or the other. Even after the investigation is conducted and the report is submitted to the Central Government, it is for the Central Government to move in the matter and take appropriate action, for, this court becomes functus officio once an order is made directing the Central Government to appoint officers for investigation into the affairs of the company. The purpose of investigation is not to investigate into the economic working of a company. The purpose is to see whether the allegations concerning mismanagement, misappropriation or other illegal acts are justified. The High Court exercising jurisdiction under section 237(a)(ii) has no power to appoint an inspector to investigate the affairs of a company. When the court directs the Central Government to appoint inspectors to investigate a company's affairs and when the inspector submits a report to the Government, it is only the Government that can move matters as it thinks fit and the party who prompted the court to issue the order under section 237(a)(ii) cannot seek relief on the basis of and on a consideration of the report. In the instant case, a dispute is raised telling upon the interests of the company and its shareholders and status of directors/additional directors or alternate directors, as also the managing director and holding of the meetings, passing of the resolutions and validity thereof and a fact-finding regarding the truth or otherwise of the allegations made by the petitioners may be necessary and further the respondents themselves do not resist such an investigation and in fact, Mr. A. Krishna Murthy, learned counsel for respondents Nos. 1 and 2, submits that in view of the allegations made, respondents Nos. 1 and 2 are prepared to face the same investigation in order to have a clear cut fact finding in that regard and Mr. Y. Jaganmohan; learned counsel appearing for the other respondents also concurs with the submission of Mr. A. Krishna Murthy.

In the circumstances, I am inclined to direct the Central Government to appoint inspector/s to investigate into the affairs of the company and the inspector/s so appointment shall report thereon to the Central Government making things clear so as to enable the parties, what course of action they opt to take and also enabling the authorities to take such steps as are necessary. It is needless to mention that for the matters not enumerated under the Companies Act, to be dealt with by the authority/the company court/the Company Law Board, the civil courts' jurisdiction under section 9 of the Civil Procedure Code, 1908, is not barred. But this aspect as to whether the civil suits in O.S. Nos. 458 of 1994 and 1111 of 1994 are maintainable or not is not for adjudication of this court for the reasons stated supra, as this proceeding is only a truncated one specifically dealing with the aspect to order investigation under section 237(a)(ii) and it is for the petitioners to raise the pleas with regard to maintainability of the above civil proceedings and if such contentions are taken, they will be dealt with as triable issues.

For the reasons aforestated, except relief No. 1 for directing the Central Government to make an investigation in exercise of the powers under section 237(a)(ii) of the Companies Act, the other prayers, be they in the kind of main prayers or interlocutory, are unsustainable. It is for the investigating agency to take such steps as contemplated in the relevant provisions of the Companies Act, for effective investigation and reporting. The civil suits and interlocutory applications therein and the CMAs arising out of the interlocutory applications shall be disposed of by the civil courts on their own basis and in accordance with law. The order dated October 19, 1994, directing not to give effect to the resolutions, if passed, on October 20, 1994, are vacated and if any resolutions are passed on October 20, 1994, they will take effect in accordance with law. In the circumstances, the Secretary, Company Affairs, Government of India, who has been impleaded as respondent No. 6 is directed to appoint competent persons as inspector/s to investigate into the affairs of the first petitioner-company touching upon the aspects mentioned above, within three months from the date of the receipt of this order. It is for the Central Government to take such consequent action as deemed fit depending upon the result of the said investigation.

Ms. Balajayashree, learned counsel representing the petitioners, at the time of delivery of the judgment, has apprised me that W.P. No. 20440 of 1994, has been filed by the petitioners in this court impugning the proceedings of the Registrar of Companies dated November 2, 1994, and that the operation of the said order has been suspended by this court. She also states that another WPMP No. 25890 of 1994, has been filed seeking permission to the petitioners to hold the annual general meeting and that the same is pending. I refrain from making any comments with regard to the institution of the said writ petition or the interim order passed, as also the pendency of the WPMP and it is for the concerned learned judge to deal with the same. So far as this company petition is concerned, the same is finally disposed of with the directions mentioned above. No costs.

[1980] 50 COMP. CAS. 127 (DELhi)

HIGH COURT OF DELHI

V.V. Purie

v.

E. M. C. Steel Ltd.

S. RANGANATHAN, J.

C.P. NO. 96 OF 1977

DECEMBER 22, 1978

Satish Chandra, for the Petitioner.

Ved Vyas and A.P. Jain, for the Respondent.

 JUDGMENT

Ranganathan J.—This is a petition under s. 237 of the Companies Act seeking an order for an investigation into the affairs of E.M.C. Steel Ltd. (hereinafter referred to as "the company"). Sri Ved Vyas appearing for the respondents raised two preliminary objections to the maintainability of the 'petition:—(1) that the petitioner has no locus standi to file a petition under s. 237; and (2) that the allegations in the petition and the circumstances in which the petition has been filed show that the petition is mala fide and intended only to harass the respondent by setting in motion a fishing enquiry into the affairs of the company. I am disposing of by this order only these two preliminary objections which, if upheld, would result in the petition being dismissed in limine.

The first respondent, the company, was incorporated on August 21, 1971, as a private limited company but became a public company on December 28, 1973. The paid-up capital of the company is rupees five lakhs being the amount fully paid up on its 50,000 equity shares of the face value of Rs. 10 each. Of these 49,996 shares are held by M/s. Electrical Manufacturing Company Ltd. (hereinafter referred to as "the holding company") and the remaining four shares are held by three individuals. Respondents Nos. 2 to 6 are directors of the company.

The petitioner is the attorney of Smt. Savitri Devi Maini and her five daughters who owned premises No. 11, Panchsheel Park, Diplomatic Enclave, New Delhi. In response to an advertisement by the petitioner, the second respondent approached the petitioner with an offer that the company would take on lease the first floor of the above house (hereafter' referred to as "the premises") on rent for a period of three years from August 15, 1975. The rent payable was agreed to be Rs. 2,750 per month from August 15, 1975, to July 31, 1977, and Rs. 3,000 from August 1, 1977: to July 31, 1978. The terms of the tenancy were set out in a letter addressed to the petitioner by the first respondent. The allegation of the petitioner is that, though the tenancy was in the name of the company, it was really intended for the use of respondents Nos. 2 and 5 and that, in addition to the sum of Rs. 2,750 per month, the second respondent had agreed to pay a sum of Rs. 5,000 per month as retainer fee to one P. P. Singh, husband of one of the co-owners of the premises who had been an employee in the holding company till December 31, 1974. It is further alleged that respondents Nos. 2 and 5 had assured the petitioner that they would vacate the premises in the event of the premises finding a buyer for the premises and desiring to sell the same. In October, 1976, it is stated, the owners entered into an agreement to sell the premises to the Govt. of Egypt and so called upon the respondents to vacate the same. But the respondents had a great influence in political circles and refused to vacate the premises till March, 1977. At that time they agreed to vacate the premises provided the full rent paid by them for the period from August 15, 1975, to December 31, 1976, was refunded to them. It is stated that since the petitioners had agreed to sell the property to the Egyptian Govt. they had no alternative but to agree to this demand. Accordingly, it is stated, that the petitioners paid a sum of Rs. 53,625 (Rs. 45,375 being rent at Rs. 2,750 per month and Rs. 8,250 being the sum received by P.P. Singh) to the 5th respondent in cash on March 23, 1977, in the presence of witnesses. It is the allegation of the petitioner that the 5th respondent did not pass on this amount to the company but misappropriated it. The petitioner has filed Suit No. 554 of 1977 in this court for a declaration that the sum of Rs. 53,625 has been given to the first respondent-company through the 5th respondent and this suit is pending adjudication.

In the meantime, the petitioner has moved this petition under s. 237 of the Companies Act seeking investigation into the affairs of the first respondent-company. The allegations on the basis of which the investigation is sought for may be summarised as follows :

(i)         The company has availed itself of huge financial credit from, the Allahabad Bank, Calcutta, and diverted the funds either to its own directors or to the holding company. The overdraft facilities given by the above bank to the company were far out of proportion to its capital and other resources.

(ii)        The fifth respondent had developed political contacts and by virtue of association with persons in power abused his influence in business matters.

(iii)       The balance-sheet and the profit and loss account and auditors' report of the company disclosed a state of affairs which called for investigation.

    (iv)       The sum of Rs. 53,625 had been misappropriated by the 5th respondent.

For these reasons it prayed that this court should direct the Central Govt. to appoint an inspector to carry out an investigation into the affairs of the company.

I may at once state that of the two preliminary objections raised by Sri Ved Vyas there is no substance in the second objection that the petition is mala fide and intended only to harass the respondents. It is no doubt true that some broad allegations have been made in paras. 18 and 19 of the petition making certain allegations against the respondents which may not be quite material for the disposal of the petition. But I do not think that the mere fact that such allegations have been made can result in the dismissal of the petition on the grounds suggested by Sri Ved Vyas. If otherwise the petitioner has made out a case for an investigation into the affairs of the company I do not think that the petition can be dismissed because the petitioner is motivated in filing the petition either in view of the pending litigation between the two parties or in view of the grievance of the petitioner that the respondents had taken advantage of certain political situations in their dealings with him.

It is common ground that, apart from the one transaction above referred to in respect of which the petitioner has already filed a suit, the petitioner has no manner of interest in, or concern with, the affairs of the company as a shareholder, creditor or otherwise. This being so, the question raised is whether the petitioner has any locus standi to present this petition under s. 237 of the Act, to ask for an investigation into the affairs of the company.

Section 237 appears in Chap. I of Part VI of the Companies Act which contains general provisions for the management and administration of the company. This Chapter deals with several topics under this head such as the maintenance of registers, the filing of annual returns, the conduct of meetings and proceedings, the qualifications and restraints on management personnel and their remuneration, the manner of maintenance of accounts and audit of the company and includes also provisions regarding the investigation into the affairs of the company. Under the sub-heading "Investigation", the Act makes two important provisions for enabling an investigation into the affairs of a company which are contained in ss. 235 and 237 of the Act. Section 235 enables the Central Govt. to appoint inspectors to investigate the affairs of the company on an application being made by a specified minimum number of the members of the company or on a report by the Registrar under s. 234 of the Act. Where the members of the company seek an order from the Central Govt., the Central Govt. can require evidence to show that the applicants have good reasons for requiring the investigation. Where the Central Govt. moves on the basis of a report of the Registrar that will be because in the opinion of the Registrar certain account books and documents of the company disclose an unsatisfactory state of affairs or do not disclose a full and fair statement of the matters to which the documents relate, or because he is of opinion, on materials placed before him by any contributory or a creditor or any other person interested, that the business of the company is being carried on in fraud of its creditors or of persons dealing with the company or otherwise for a fraudulent or unlawful purpose.

Section 237 is the provision with which we are concerned in the present case. The section reads:

"Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)         the company, by special resolution; or

(ii)        the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

        (b)    may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members, or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company."

This section enables the Central Govt. to appoint inspectors to investigate the affairs of a company in two sets of circumstances. In the first eventuality, namely, where the company has by a special resolution requested the Central Govt. to do so or the court by order has declared that the affairs of the company ought to be so investigated, the Central Govt. has no option but to appoint an inspector. The second part of the seption gives a discretion to the Central Govt. to consider whether such an investigation is called for and it may do so after consideration of circumstances suggesting the conduct of the business in the manner set out in sub-cls. (i), (ii) and (iii) of cl. (b) of the above section. It is under sub-cl. (ii) of cl. (a) of this section that the present application has been filed.

The clause is couched in very wide language. It does not specifically impose any conditions or spell out any requirements to be satisfied before a petitioner comes to court or the court directs the appointment of an inspector. Nevertheless, can it be said that there are certain implicit or inherent limitations on the exercise by the court of its power under this clause ? An attempt was made earlier unsuccessfully to read into the section one such limitation. It was argued that the court cannot exercise such a power unless it is already in seisin of some other matter relating to the company and the request for investigation is made to the court incidentally in the course of such proceedings. But this argument was rejected by the Gujarat High Court in the case of Alembic Glass Industries Ltd., In re [1972] 42 Comp. Cas. 63. It is sufficient to read the third para of the head-note in that decision appearing at page 63 :

"There is nothing in the language of section 237(a)(ii) indicating that a petition simpliciter for action under section 237(a)(ii) cannot be entertained, and that the power conferred by section 237(a)(ii) can only be exercised by the court against a company in respect of which some other proceeding is pending in the court and the court considers it proper to direct appointment of an inspector."

The same view was taken by Kapur J. in the case of Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp. Cas. 33 (Delhi).

In view of the above decisions, Shri Ved Vyas stated that he would not press that argument here but he contended that, however wide the language of s. 237 may be, it should not be so construed as to vest an absolute and unlimited right in a complete and total stranger who has no manner of interest in or connection with a company to seek an investigation into its affairs. Before considering this contention, it is necessary to refer to the observations of Kapur J. in the case of Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp. Cas. 33 (Delhi), which according to Shri Lekhi, have already decided the point. No doubt, Kapur J. observed in that case (p. 41) :

"One serious misgiving has been in my mind concerning the present petition which I may now set out. It is open to any petitioner to move the court for an order of investigation against the company. He need not be a shareholder, he need not have any personal interest; he may be a complete stranger and yet he can move the court seeking an order for investigation of the affairs of a company. If the court has to deal with all such petitions, the court may be literally flooded with them. It is, therefore, necessary for the court to act most cautiously on the question of considering whether the affairs of a company need investigation." (Emphasis added).

But that was a case of a petition filed by a shareholder of the company and the learned judge had no occasion to deal with the issue of locus standi now raised. The observations were made in a different context and, in fact, they show that the learned judge was also emphasising the necessity of exercising great caution and restraint in invoking the aid of the section,

After deep consideration, I have come to the conclusion that the argument of Shri Ved Vyas has to be accepted. The courts are intended to provide redress to litigants who complain of the infringement of their legal rights and, in the absence of very clear words in a statute, it may not be construed as conferring on any person a right to move a court when no legal injury has been caused to him. The legal maxim ubi jus ibi remedium has two facets. It signifies, in the first place, that whenever the law gives a right or prohibits an injury, the person who is injured or whose right is infringed will have a remedy of action in the courts. The converse of this proposition is equally true, viz., that there is no remedy by way of legal action unless there is the infringement of a legal right to demand that an act shall not be clone. The common law as well as the several statutes create rights and duties and they also provide for certain remedies against the violation of the rights or non-performance of the duties. The provisions for remedies have to be construed as intended for seeking remedies against the infringement of the legal rights. Where a person has no legal interest, he has no grievance in the eye of law and he cannot seek intervention of the court.

It is the above principle that has been applied by the courts even while interpreting the scope of prerogative writs and they have always insisted that the person who approaches the court must be one whose legal rights are affected and who has a legal grievance. This position has been reiterated in a series of decisions of the Supreme Court. In Chiranjilal Chaudhari v. Union of India [1950] SCR 869 ; [1951] 21 Comp. Cas. 33, 54 (SC) Mukherjea J. observed :

"To make out a case under this article, it is incumbent upon the petitioner to establish not merely that the law complained of is beyond the competence of the particular legislature as not being covered by any of the items in the legislative lists, but that it affects or invades his fundamental rights guaranteed by the Constitution, of which he could seek enforcement by an appropriate writ or order. The rights that could be enforced under article 32 must ordinarily be the rights of the petitioner himself who complains of infraction of such rights and approaches the court for relief. This being the position, the proper subject of our investigation would be what rights, if any, of the petitioner as a shareholder of the company have been violated by the impugned legislation."

In State of Orissa v. Madan Gopal Rungta [1952] SCR 28 the High Court had not decided the respective merits of the rival contentions between the parties as it was of opinion that the matter could be satisfactorily gone into in the course of a suit. However, the court passed an order on the writ petitions giving certain directions. The Supreme Court held that the language of art. 226 did not permit the High Court to pass an order of the nature above mentioned. Kania C.J. observed (p. 33):

"The language of the article shows that the issuing of writs or directions by the court is not founded only on its decision that a right of the aggrieved party under Part III of the Constitution (Fundamental Rights) has been infringed. It can also issue writs or give similar directions for any other purpose. The concluding words of article 226 have to be read in the context of what precedes the same. Therefore the existence of the right is the foundation of the exercise of jurisdiction of the court under this article."

In Calcutta Gas Company (Proprietary) Ltd. v. State of West Bengal, AIR 1962 SC 1044, the applicant-company had been appointed under an agreement as the manager of another company (Oriental Gas Company Ltd.) which owned an industrial undertaking for the manufacture and sale of fuel gas in Calcutta. The West Bengal Legislature enacted the Oriental Gas Company Act, 1960, providing that the said undertaking should stand transferred to the State Govt. for five years for management and control and notifications were passed in pursuance thereof. The applicant by a petition under art. 226 sought to impugn the constitutional validity of the said Act. The first question that fell to be considered was whether the appellant had the locus standi to file the petition under art. 226 of the Constitution. Subba Rao J. (as he then was) stated the principle thus (p. 1047):

"The argument of learned counsel for the respondents is that the appellant was only managing the industry and it had no proprietary right therein and, therefore, it could not maintain the application. Article 226 confers a very wide power on the High Court to issue directions and writs of the nature mentioned therein for the enforcement of any of the rights conferred by Part III or for any other purpose. It is, therefore, clear that persons other than those claiming fundamental rights can also approach the court seeking a relief thereunder. The article in terms does not describe the classes of persons entitled to apply thereunder ; but it is implicit in the exercise of the extraordinary jurisdiction that the relief asked for must be one to enforce a legal right. In State of Orissa v. Madan Gopcd Rungta [1952] SCR 28 this court has ruled that the existence of the right is the foundation of the exercise of jurisdiction of the court under art. 226 of the Constitution. In Chiranjilal Chaudhari v. Union of India [1950] SCR 869; [1951] 21 Comp. Cas. 33 (SC), it has been held by this court that the legal right that can be enforced under art. 32 must ordinarily be the right of the petitioner himself who complains of infraction of such right and approaches the court for relief. We do not see any reason why a different principle should apply in the case of a petitioner under art. 226 of the Constitution. The right that can be enforced under art. 226 also shall ordinarily be the personal or individual right of the petitioner himself, though in the case of some of the writs like habeas corpus or quo war ran to this rule may have to be relaxed or modified. The question, therefore, is whether in the present case the petitioner has a legal right, and whether it has been infringed by the contesting respondents."

The above decisions show that in spite of the wide language of art. 226 and in spite of the fact that art. 32 is also intended to ensure the protection of fundamental rights, the courts have held that only a person who has a legal right and who is prejudicially affected by a particular legislation or act can approach the court for obtaining the relief under the said provisions. This is a general principle which should apply in respect of any petitioner approaching a court for redress.

Shri Lekhi argued that s. 237 appears in the context of a number of statutory provisions which are intended to regulate the management and administration of companies in public interest. He took me broadly through the various allegations made against the company. He pointed out that, according to the petition, the annual accounts and balance-sheet of the company contained various aspects which required explanation and clarifications. The annual reports showed that the company had been obtaining funds from the bank and diverting it to the holding company and that the company had opened a foreign bank account and presumably violating the provisions of the Foreign Exchange Regulation Act. These are matters affecting public interest. He also points out that s. 237(a) does not contain any restrictive provisions such as the provision regarding a minimum number of persons who can approach the Central Govt. under s. 235. He submits that no limitations should be inferred or presumed to exist and that it should be held that it is open to any member of the public to come forward and file a petition that the affairs of a public company are not being properly managed and that an investigation into its affairs should be directed by the court. He submits that the mere consideration that a wide interpretation of s. 237 would open the flood gates of litigation cannot be taken to be a relevant consideration for interpreting the wide and unrestricted language of s. 237.

To take the last point first, I agree that if the section can be read as envisaging beyond all doubt that it will be open to any person to come to the court and seek an investigation into the affairs of any company, the courts should not be deterred from giving that interpretation merely because it might open the flood gates of litigation, for where the statute is clear, the court should give effect to the right created and should not restrict that right merely in order to minimise litigation. But where the language of the section is not so clear and where there is nothing in the scheme of the Act to warrant the giving of an altogether too liberal and wide an interpretation I think it is legitimate to take into consideration the fact that such a wide interpretation might result in a spurt of litigation by persons having no direct interest or concern in the subject-matter thereof.

I have already pointed out that, on general principles, it would not be correct to read the section as authorising any man in the street to seek orders for investigation into the affairs of a company, merely because it is a public company and its affairs are, in his opinion, being conducted to the detriment of public interest. The interest which the person may have as a member of the public in the purity of the administration of public companies is too remote and intangible for the infraction of which he may move a court. That apart, I do not think that s. 237 is capable of such a wide interpretation even when read in the context of the scheme and the various other provisions of the Companies Act. There are several provisions of the Companies Act which contemplate restrictions and provisions to safeguard the interests of the public. A contravention of the provisions of the Act would also be an offence which can lead to a criminal prosecution. Nevertheless, whenever there is a violation of the statute, a right to seek redress from the courts is conferred only upon the statutory authorities who are entrusted with the supervision of the companies or on members, creditors or other persons interested in the company. Under ss. 397 and 398, where the affairs of a company, inter alia, are being conducted in a manner prejudicial to the public interest, the intervention of the court may be sought but only by a specified number of members of the company though even a smaller number may apply subject to certain conditions and restrictions. A petition for the winding up of a company even where such winding up is occasioned by the conduct of its affairs in disregard of the statute and to the detriment of public interest, can be presented only by the company, its creditors or contributories or by the designated officers of the Govt. Where a company is being wound up and it appears that the business of the company has been carried on in a fraudulent manner, only the liquidator, creditor or contributory can seek appropriate orders from the court against the persons who are alleged to have been parties to the carrying on of the business in the manner aforesaid. Thus, the scheme of the Act does not seem to envisage that, merely because a company is a public company, it would be open to any member of the public to move the court for directions.

The recent decision of the House of Lords in Gouriet v. Attorney-General [1977] 3 WLR 300 is of some relevance in this context. The Post Office Act and the Telegraph Act in England made it an offence for persons engaged in the business of the post office wilfully to delay or omit to deliver postal packets and messages in the course of transmission and for any person to solicit or endeavour to procure another person to commit such an offence. The executive council of the union of post office workers resolved to call on its members not to handle mails to South Africa during a particular week and similar action was also proposed by other trade unions. The plaintiff, Gouriet, sought the Attorney-General's consent to act as plaintiff in relator proceedings for an injunction to restrain the postal union from the above course but the Attorney-General withheld his consent. Thereafter, the plaintiff issued a writ of summons in his own name and applied to the judge in chambers for an injunction in the same terms. The injunction in the terms sought for was granted by the Court of Appeal by invoking a very wide language of O. 15, r. 16 of the Rules of the Supreme Court which read as follows (p. 327):

"No action or other proceeding shall be open to objection on the ground that a merely declaratory judgment or order is sought thereby, and the court may make binding declarations of right whether or not any consequential relief is or could be claimed."

The above decision was reversed by the House of Lords for several reasons but we are concerned here only with the application of the principle that a person whose rights as a private individual are not affected cannot seek an injunction even if it be to present what he considers to be a threatened breach of law or even the commission of an offence.

At the outset, Lord Wilberforce explained the scope of a relator action (p. 310) :

"A relator action—a type of action which has existed from the earliest times—is one in which the Attorney-General, on the relation of individuals (who may include local authorities or companies) brings an action to assert a public right. It can properly be said to be a fundamental principle of English Law that private rights can be asserted by individuals, but that public rights can only be asserted by the Attorney-General as representing the public. In terms of constitutional law, the rights of the public are vested in the Crown, and the Attorney-General enforces them as an officer of the Crown. And just as the Attorney-General has in general no power to interfere with the assertion of private rights, so in general no private person has the right of representing the public in the assertion of public rights. If he tries to do so his action can be struck out.

An appeal was made to the Year Books to controvert this universally accepted proposition. Examples can be found of cases, in early times, where subjects were allowed to assert in the courts rights of the Crown (see Year Books Series, Vol. XVII, Ed. II, 1314-15, Selden Society ed. W. C. Bol-land). But all these cases were cases asserting, through writs of quo warranto or analogous writs, claims of a nature which in modern times came to be made by prerogative writs, or cases concerned with some proprietary right of the Crown : They were not cases of individuals asserting rights belonging to the public. No instance of this could be brought forward, whether in ancient or modern times."

and expressed his conclusion thus (p. 316):

"I shall content myself with saying that, in my opinion, there is no support in authority for the proposition that declaratory relief can be granted unless the plaintiff, in proper proceedings, in which there is a dispute between the plaintiff and the defendant concerning their legal respective rights or liabilities either asserts a legal right which is denied or threatened, or claims immunity from some claim of the defendant against him or claims that the defendant is infringing or threatens to infringe some public right so as to inflict special damage on the plaintiff."

Viscount Dilhorne, referring to O. 15, r. 16 above mentioned, pointed out (p. 327):

"It does not provide that an action will lie whenever a declaration is sought. It does not enlarge the jurisdiction of the court. It merely provides that no objection can be made on the ground only that a declaration is sought. In my opinion it provides no ground for saying that since 1883 the courts have had jurisdiction to entertain an action instituted by a person other than the Attorney-General who does not claim that any personal right or interest will be affected and who is seeking just to protect public rights."

At page 332, Lord Diplock observed :

"The only kinds of rights with which courts of justice are concerned are legal rights; and a court of civil jurisdiction is concerned with legal rights only when the aid of the court is invoked by one party claiming a right against another party, to protect or enforce the right or to provide a remedy against that other party for infringement of it, or is invoked by either party to settle a dispute between them as to the existence or nature of the right claimed. So for the court to have jurisdiction to declare any legal right it must be one which is claimed by one of the parties as enforceable against an adverse party to the litigation, either as a subsisting right or as one which may come into existence in the future conditionally on the happening of an event."

Lord Fraser had this to say (p. 352):

"....the plaintiff has expressly disclaimed any special interest and has sued simply as a member of the public. In the field of public rights I find confirmation in several of the cases that were cited to us for my view that there was no difference in the extent of the court's jurisdiction in actions by private persons according to whether the action claims an injunction or a declaration..........

The case of London Association of Shipowners and Brokers v. London and India Docks Joint Committee [1892] 3 Ch 242 (CA), might at first sight appear to support a wider power to make declarations but that is not really so. All the learned judges who took part in the decision thought the plaintiffs would only be entitled to a declaration if their private rights were being injured or threatened..........all the cases cited to us where declarations concerned with public rights were made at the instance of private parties suing alone were cases in which either their private rights were affected or they had suffered special damage by the infringement of the public rights."

The above extracts contain an enunciation of the general principle that the courts will not entertain action on behalf of private persons to enforce the observance of public rights and duties unless they have a personal interest in the matter and unless their rights and interests are in some way affected. I think that even in the interpretation of s. 237 this basic limitation should be treated as implicit and the section should not be given an interpretation which would make it possible for persons to start litigation in respect of what does not concern them. The section should be so interpreted as to enable relief to be obtained only by some person whose rights have been affected by the manner in which the affairs of the company have been conducted or accounts maintained and has, therefore, a grievance in the eye of law for which he seeks relief from the court. There is ample scope for the invocation of s. 237 by persons whose rights are infringed or affected and whose interests need to be projected or safeguarded by an investigation—a creditor who is unable to move the Central Govt. under s. 235; member or members who, though aggrieved, are unwilling to move the Central Govt. or unable to fulfil the requirements of s. 236 and hence unable to move the Central Govt.; members who approach the Central Govt. under ss. 235 and 237(b) and are aggrieved by the rejection of their applications ; a company which wants an investigation but is unable to have a special resolution passed. These are some illustrations of persons who would be able to move the court u/s. 237(a). It is, therefore, not as if the scope of the remedy enacted by this provision would be unreasonably curtailed or would become illusory by reading into the section an implied limitation to exclude persons having no manner of interest or concern with the company, from availing of it.

For the above reasons I uphold the preliminary objection raised by the respondent to the maintainability of the petition and dismiss the petition in limine. There will, however, be no order as to costs.

[2002] 37 scl 804 (ker.)

High Court of Kerala

Premier Plantations Ltd.

v.

M. Ebrahimkutty

J. B. Koshy and K. Padmanabhan Nair, JJ.

M. F.A. No. 1273 of 1998 (B)

March 25, 2002

Section 237, read with section 10, of the Companies Act, 1956 - Investigation of company’s affairs in other cases - Whether ‘Court’ referred to in section 237 is court having jurisdiction under section 10 and no other court - Held, yes - Whether under section 237(a)(ii), court can appoint directly inspector(s) to investigate into affairs of company - Held, no - Whether court can only make a declaration that affairs of company ought to be investigated by an inspector appointed by Central Government - Held, yes - Whether power of Company Law Board under section 237(b) is a bar to exercise of discretionary jurisdiction of court under section 237(a)(ii) - Held, no - Whether mere allegations are insufficient to support an application to court to act under section 237(1)(ii) and material placed before court should be such as to satisfy court that a deeper probe into affairs of company is desirable in interests of company itself - Held, yes - Whether court can pass a declaration under section 237(a) for a fishing expedition - Held, no - Whether an isolated instance of mismanagement is enough for court to declare that an investigation is required - Held, no - Whether existence of circumstances described under section 237(b) may sway court to pass an order under section 237(a)(ii) also but it is not always mandatory that court can pass a declaration only if conditions under section 237(b) exist - Held, yes - Whether power of court under section 237(a)(ii) is equal to power of CLB under section 237(b) - Held, no - Whether unlike CLB, there are no restrictions placed on Court even though Court will exercise its judicial discretion only on sufficient materials and only after it is convinced that situation warrants an investigation in interest of company as a whole - Held, yes - Whether when a discretionary order under section 237(a)(ii) is passed by proper court with jurisdiction, unless there are compelling grounds appellate court will not interfere - Held, yes

Facts

The respondent was an equity shareholder and the promoter of the appellant-company. He was also appointed as the Chairman of the company. Subsequently, the company came out with public issue which was subscribed in excess of 14 times the offer. Thereafter, the respondent filed petition under section 237(a)(ii) before the Company Judge seeking to direct the Central Government to appoint inspectors to investigate into the affairs of the company. It was alleged that no first annual general meeting of the company was held as convened in time.

The managing director, ‘M’ had been fraudulently mismanaging the company in utter disregard of the interest of the shareholders and was acting in an autocratic and oppressive manner. He created false and fabricated documents with nefarious motive to oust the respondent and other members of the board of directors who opposed the misutilisation and misappropriation of public funds. He created documents and minutes purporting to remove the petitioner and others who opposed the mismanagement and oppression. Though on the public issue, shares were over subscribed to the tune of 14 times and huge amounts were collected from the public, shares were neither allotted properly nor amounts refunded to the applicants whose application for shares were not accepted.

It was further alleged that 1200 complaints had been filed against ‘M’ by the subscribers to whom the amounts were not refunded and that ‘M’ had misappropriated, misutilised and mismanaged the funds collected through public issue and diverted the funds for his private purposes. The company opposed the petition. The Company Judge found that the submission of the Central Government supported the respondent’s allegations and concluded that a deeper probe was necessary and passed an order declaring that affairs of the company ought to be investigated by an inspector appointed by the Court itself.

On appeal :

Held

By virtue of the power under section 237(a)(ii), the Court cannot appoint directly inspector or inspectors to investigate the affairs of the company but only make a declaration that the affairs of the company ought to be investigated by an inspector appointed by the Central Government. Once such an order is passed it is mandatory for the Central Government to conduct such investigation by appointing competent persons as inspectors.

The court referred to in section 237 in the court having jurisdiction under section 10 and no other Court or a Court hearing writ petitions. Petition was filed before the competent company court in the instant case. It is true that mere allegations are not sufficient to support an application to the Court to act under section 237(a)(ii), and the material placed before the Court should be such as to satisfy the Court that a deeper probe into the affairs of the company is desirable in the interests of the company itself. In other words, Court will not pass a declaration under section 237(a) for a fishing expedition. But Court is entitled to see whether on the basis of the material brought before the Court, a declaration is to be made or not. An isolated instance of mismanagement is not enough for the Court to declare that an investigation is required. The material placed before the Court should be such as to satisfy the Court that a deeper probe into the company affairs is desirable in the interests of the company itself. The judicial conscience must be satisfied that there has been maladministration in the affairs of the company warranting an investigation.

Existence of alternative remedy also can be taken as a condition for refusing to exercise the discretionary jurisdiction in appropriate cases, but it cannot operate as an absolute bar. No where in section 237 it is stated that Court cannot be approached under section 237(a)(ii) before approaching CLB under section 237(b). It is true that after amendment of section 237(b) (Companies Amendment Act, 1988 with effect from 31-5-1991), the CLB has power to direct the Central Government to appoint inspectors to investigate into the affairs of the company if circumstances mentioned in sub-clause (i), (ii) or (iii) of section 237(b) exist. But, the CLB must be satisfied that such circumstances exist. Power of the CLB under section 237(b) is not a bar in exercising the discretionary jurisdiction of the Court under section 237(a)(ii). No such condition was made out by the Legislature for exercising the jurisdiction by the company court under section 237(a)(ii) even though Court will take such a course only if circumstances warrant.

Before passing an order under section 237(a)(ii), Court should be satisfied that there are sufficient materials to show that affairs of the company is in such a way that an investigation is necessary. The existence of circumstances described under section 237(b) may sway the Court to pass an order under section 237(a)(ii) also. But it is not always mandatory that Court can pass a declaration only if the conditions under section 237(b) exist. No such restrictions are placed by the Legislature even though Court will exercise its judicial discretion only on sufficient materials and only after the Court is convinced that situation warrants an investigation in the interest of the company as a whole. For a minority shareholder or a person legally interested in the affairs of the company it may not always be possible to place all materials alleged by him. But investigation is necessary to disclose something which is not apparently visible. If all materials are already available, there is no scope for further investigation. At the same time, existence of circumstances must warrant reasonably so as to invoke jurisdiction of the Court. Power of the Court under section 237(a)(ii) is not equal to the power of the CLB under section 237(b). Unless any one of the circumstances as mentioned in section 237(b) exist, the CLB cannot order an investigation, but no such restriction is placed on the Court.

It was argued that once the company court passes a discretionary declaration under section 237(a)(ii) for appointment of an inspector for investigation, it cannot set aside as it is not a judicial or a quasi-judicial order and is not appealable. The Court is not appointing inspectors by itself. Order does not deter the rights of the parties. The order is also appealable under section 483. But when a discretionary order under section 237(a)(ii) is passed by the proper court with jurisdiction, unless there is compelling grounds appellate court will not interfere. In other words, if there is no prima facie material at all before the Court and Court ordered investigation under section 237(a)(ii) as a fishing expedition, appellate court will interfere. But it is settled law that if order is passed after considering the materials available, normally appellate court will not interfere with the discretionary order passed by a competent court with jurisdiction.

In the instant case, there were sufficient material for the Company Judge to pass the impugned order. In any event, when the company court passed the impugned order on materials available in the case, on the facts of the case it could not be stated that an interference by appellate court was warranted. This was an appropriate case where discretionary order had been passed by the court by exercising powers under section 237(a)(ii). No interference was called for.

Cases referred to

Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp. Cas. 33 (Delhi), Alembic Glass Industries Ltd., In re [1972] 42 Comp. Cas. 63 (Guj.), P. Sreenivasan v. Yoosuf Sagar Abdullah & Sons (P.) Ltd. [1983] 53 Comp. Cas. 485 (Ker.), Modi Industries Ltd. v. Union of India [1982] 52 Comp. Cas. 589 (Delhi), Safia Usman v. Union of India [2000] CLC 110 (Ker.), Barium Chemicals Ltd. v. CLB AIR 1967 SC 295, Rohtas Industries Ltd. v. S.D. Agarwal AIR 1969 SC 707, R.V. Mohammed v. Trichur Heart Hospital Ltd. [2000] CLC 258 (Ker.), Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy [1997] 90 Comp. Cas. 383/13 SCL 118 (SC), Mrs. U.A. Sumathy v. Dig Vijay Chit Fund (P.) Ltd. [1983] 53 Comp. Cas. 493 (Ker.), V.V. Purie v. E.M.C. Steel Ltd. [1980] 50 Comp. Cas. 127 (Delhi) and Uunet India Ltd. v. I.C. Rao [1998] 93 Comp. Cas. 41 (AP).

K.P. Dandapani for the Appellant. P.S. Sreedharan Pillai, M.P. Mohammed Aslam, S. Abdul Salam and Tom K. Thomas for the Respondent.

Judgment

J.B. Koshy, J.—First respondent in this appeal (referred in this judgment as the petitioner for convenience) filed a petition under section 237 of the Companies Act, 1956 (‘the Act’) to direct the Central Government to appoint one or more competent persons as inspectors by declaring that the affairs of the Premier Plantations Ltd., first appellant (‘as company’) ought to be investigated and to report thereon within a specified time limit. Before going into the facts of the case we may first discuss the power of this Court under section 237(a)(ii). Section 237 reads as follows :

“Investigation of company’s affairs in other cases. - Without prejudice to its powers under section 235, the Central Government—

(a)      shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

          (i)         the company, by special resolution; or

(ii)        the Court, by order, declares that the affairs of the company ought to the investigated by an inspector appointed by the Central Government; and

        (b)      may do so if, in the opinion of the Company Law Board, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent on unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director or the manager, of the company.”

A reading of the above section will show that power given under section 237 to the Central Government is independent and operates without prejudice to its powers under section 235 of the Act. But under section 237(a) the Central Government can appoint an inspector for investigating the affairs of the company only if the company passes a special resolution for it or if an order is passed by the Court. Under section 237(b) the CLB is also empowered to do so in certain special circumstances required the Central Government to conduct investigation. By virtue of the power under section 237(a)(ii), the Court cannot appoint directly inspector or inspectors to investigate the affairs of the company but only make a declaration that the affairs of the company ought to be investigated by an inspector appointed by the Central Government. Once such an order is passed it is mandatory for the Central Government to conduct such investigation by appointing competent persons as inspectors—Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp. Cas. 33 (Delhi), and in Alembic Glass Industries Ltd., In re [1972] 42 Comp. Cas. 63 (Guj.).

2.         The Court referred to in section 237 is the Court having jurisdiction under section 10 of the Act and no other Court or a Court hearing writ petitions. Petition was filed before the competent company court in this case. It is true that mere allegations are not sufficient to support an application to the court to act under section 237(a)(ii). The material placed before the Court should be such as to satisfy the Court that a deeper probe into the affairs of the company is desirable in the interests of the company itself as held by this Court in P. Sreenivasan v. Yoosuf Sagar Abdullah & Sons (P.) Ltd. [1983] 53 Comp. Cas. 485. In other words, the Court will not pass a declaration under section 237(a) for a fishing expedition. But the Court is entitled to see whether on the basis of the material brought before the Court, declaration is to be made or not Modi Industries Ltd. v. Union of India [1982] 52 Comp. Cas. 589 (Delhi). An isolated instance of mismanagement is not enough for the Court to declare that an investigation is required. The material placed before the Court should be such as to satisfy the Court that a deeper probe into the company affairs is desirable in the interests of the company itself. The judicial conscience must be satisfied that there has been misadministration in the affairs of the company warranting an investigation.

3.         It was argued by the counsel for the appellants that in Safia Usman v. Union of India [2000] CLC 110 a single Judge of this Court held that without exhausting the remedy under section 237(b), the Court cannot exercise power under section 237(a)(ii). A reading of this decision shows that proper relief was not asked in the petition as required under section 237(a)(ii) and company itself was not impleaded as a party. Existence of alternate remedy also can be taken as a condition for refusing to exercise the discretionary jurisdiction in appropriate cases, but it cannot operate as an absolute bar. Nowhere in section 237 it is stated that court cannot be approached under section 237(a)(ii) before approaching the CLB under section 237(b). It is true that after amendment of section 237(b). (Companies Amendment Act, 1988 with effect from 31-5-1991), the CLB has power to direct the Central Government to appoint inspectors to investigate into the affairs of the company if circumstances mentioned in sub-clause (i), (ii) or (iii) of section 237(b) exit. But, the CLB must be satisfied that such circumstances exit as held by the Apex Court in Barium Chemicals Ltd. v. CLB AIR 1967 SC 295. Before amendment, this power was with the Central Government itself. See also Rohtas Industries Ltd. v. S.D. Agarwal AIR 1969 SC 707. Power of the CLB under section 237(b) is not a bar in exercising the discretionary jurisdiction of the Court under section 237(a)(ii). No such condition was made out by the Legislature for exercising the jurisdiction by the company court under section 237(a)(ii) even though Court will take such a course only if circumstances warrant. Another decision pointed out is the decision of the learned single Judge of this Court R.V. Mohammed v. Trichur Heart Hospital Ltd. [2000] CLC 258. What was held in that decision is the Court cannot order an investigation by appointing an inspector, but under section 237(a)(ii) the Court can, if circumstances warrant, by an order makes a declaration that the affairs of the company ought to be investigated by an inspector appointed by the Central Government and on making such declaration the Central Government has no option but has to appoint an inspector to investigate the affairs of the company. No other hypertechnical view is possible in view of the clear wording of section 237(a). As held by the Gujarat High Court in Alembic Glass Industries Ltd.’s case (supra) :

“The Legislature has conferred wide jurisdiction on this court to entertain a petition under section 237(a)(ii). In fact, the power of the Central Government to appoint an inspector suo motu under section 237(b) is limited to its subjective satisfaction in respect of one or other matters contained in three sub-clauses of clause (b). The Legislature in its wisdom has not put any such condition before the court can make an order, though the court may in its wisdom expect prima facie proof of some of these conditions on the subjective satisfaction of which the Central Government would appoint an inspector. While conferring jurisdiction on the court to direct the Central Government to appoint an inspector, the Legislature has not thought fit to circumscribe the discretion or jurisdiction in any manner. It would, therefore, be utterly inappropriate to curtail or circumscribe or fetter the jurisdiction of this court by reading into the section something which is not there.” (p. 68)

4.         Another decision pointed out by the learned counsel for the appellants in the Apex Court decision in Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy [1997] 90 Comp. Cas. 383. There a writ petition was filed seeking direction for investigation by the Central Bureau of Investigation. The Apex Court held that in view of the specific remedies under sections 43A, 234, 235, 237, 397 and 398 of the Act, a writ petition will not lie. It is not a matter of public interest and remedy available under the Act shall be availed of. Here the petitioner has approached under section 237 and it cannot be held that petition is not maintainable. Scope and power of company court under section 237(a)(ii) was not discussed in that decision. Ofcourse under section 237(a)(ii), Court’s would insist upon solid factual base and mere allegations are insufficient. It was held by this court in Mrs. U.A. Sumathy v. Dig Vijay Chit Fund (P.) Ltd. [1983] 53 Comp. Cas. 493, that :

“... No doubt, clause (a)(ii) of section 237 does not lay down what circumstances are to be proved before the court and on that materials the court could act. But that does not mean that mere allegations are sufficient. A court can act only on the materials placed before it; and those materials should at least be such as to satisfy the court that a deeper probe into the company’s affairs is desirable in the interests of the company itself...”(p. 496)

The powers under section 237(a)(ii) were considered by Justice M.P. Menon in the decisions in P. Sreenivasan’s case (supra). In that decision it was held as follows :

“The section conceives of three situations where the Central Government can appoint inspectors for investigations. The first is when the company itself declares that such an investigation is necessary. The second is when the court makes an order. And the third is when the Central Government forms an opinion that the circumstances enumerated in clause (b) exist. The first is easy to understand : when the company itself wants an investigation, the Central Government need not stop to enquire why. The third can also be understood because when suo motu action is proposed to be taken by the Government, it shall not act arbitrarily, but only consistent with guidelines laid down. But what about the second situation, where the court has to make an order ? Mr. Ramanatha Pillai for the petitioner suggests that the power and the discretion of the court are uncontrolled; it can direct an investigation whenever it suspects that all is not well with the company. Whether the apprehensions of the court are true or not is a matter to be found by the investigating inspectors, and the court is not to insist on evidence. It appears to me that this is too broad a statement. Investigation of the company’s affairs by the Department of Trade in England has always been understood as a statutory exception to the rule in Foss v. Harbottle [1843] 2 Hare 461 that the internal affairs of a company is a matter for the majority, and a dissatisfied minority cannot seek outside interference. The Companies Act provides for the protection of minorities in three ways (i) by giving them a right to complain against oppression, (ii) by permitting them to act on behalf of the company when it is wound up, as in the case of misfeasance proceedings, and (iii) by enabling them to obtain remedies indirectly through investigation. The Court’s discretion under section 237 is, therefore, to be exercised only when it is satisfied that the minority has made out at least a prina facie case that the rule in Foss v. Harbottle [1843] 2 Hare 461, requires relaxation in the interest of the company...” (p. 489)

We agree with the above observation that before passing an order under section 237(a)(ii) the Court should be satisfied that there are sufficient materials to show that affairs of the company is in such a way that an investigation is necessary. We also note that existence of circumstances described under section 237(b) may sway the Court to pass an order under section 237(a)(ii) also. But we are of the opinion that it is not always mandatory that the Court can pass a declaration only if the conditions under section 237(b) exist. No such restrictions are placed by the Legislature even though the Court will exercise its judicial discretion only on sufficient materials and only after the court is convinced that situation warrants an investigation in the interest of the company as a whole. We also note that for a minority shareholder or a person legally interested in the affairs of the company, may not always be possible to place all materials alleged by him. But investigation is necessary to disclose something which is not apparently visible. If all materials are already available, there is no scope for further investigation. At the same time, existence of circumstances must warrant reasonably so as to invoke jurisdiction of the Court. Power of the Court under section 237(a)(ii) is not equal to the power of the CLB under section 237(b). Unless any one of the circumstances as mentioned in section 237(b) exist, the CLB cannot order an investigation, but no such restriction is placed on the Court.

5.         As facts are concerned, according to the petitioner, he is an equity shareholder of 5,16,000 equity shares of the company. The company was incorporated on 12-12-1990 as a private limited company and the petitioner was one of the promoters of the company. By resolution dated 5-1-1991 the company resolved to take over the assets and liabilities of T.P. Muralidharan & Associates and the amount outstanding in the credit of partners account, both capital and current account as on 31-12-1990 should be taken as the amount contributed by them towards share capital and necessary share certificates should be issued to them. The company was engaged in the plantation of tea, coffee, cardamom and pepper. It was converted into a public limited company on 28-1-1991. Thereafter it came out with public issue of 36 lakhs equity shares of Rs. 10 each for cash at par. Subscriptions of shares were received about 14 times of the declared public issue. As per clause 11(A) of the articles of association, the subscribers to the memorandum of association were appointed as directors. The petitioner and the second appellant herein were subscribers of the memorandum of association. The second appellant was appointed as the managing director. (We are referring the second appellant as ‘managing director’ in this judgment.) Though, as per clause 16 of the memorandum of association, all directors except the managing director for the time being were to retire from office at the first annual general meeting of the company, no annual general meeting of the company has been held or convened in time. Though a document styled as first annual report and accounts of 1991 was published on 31-2-1992, no such meeting of the company was held at 3 p.m. on 25-4-1992 at the registered office of the company as mentioned in the notice attached to the report and accounts of 1991. The managing director had been fraudulently mismanaging the company in utter disregard of the interest of the shareholders and was acting in an autocratic and oppressive manner. He began to create false and fabricated documents with nefarious motive to oust the petitioner and other members of the board of directors who opposed the misutilisation and misappropriation of public funds. He created documents and minutes purporting to remove the petitioner and others who opposed the mismanagement and oppression. Though on the public, issue shares were oversubscribed to the tune of 14 times and huge amounts were collected from the public, shares were neither allotted properly nor amounts refunded to the applicants whose application for shares were not accepted. It is understood that 1200 complaints are filed before the jurisdictional court in Bombay against the managing director by the subscribers to whom amounts were not refunded. It was also stated that for non-convening of the meeting and not filing balance sheet for the period 1992 to 1996 many proceedings are pending. Share value of the company was depleted to nil from Rs. 70 and company has been de-listed in the Stock Exchange. The managing director had misappropriated, musutilised and mismanaged the funds collected through public issue and diverted the funds for his private purposes ignoring the purpose for which the company was incorporated. The authorities who are entrusted to supervise and control the management of the company and to prevent misuse of public funds are not discharging their duties properly.

6.         The appellants opposed the above petition and submitted that there is no locus standi to file the above petition as he was no more a shareholder at the time of filing the petition. It was stated that he was the Chairman of the company till 28-5-1993 only. General body meetings were held properly and the excess amount collected for share capital was returned without delay. All allegations against the second respondent as managing director of the company was denied and it was also submitted that no case is made out by the petitioner for an order of investigation by the court under section 237.

7.         Before going into the merits of the case we may also consider the argument regarding locus standi of the petitioner. It is not disputed that he was the first chairman of the company. He owns 5,16,000 equity shares. According to the company, the above shares were transferred. It is the contention of the petitioner that documents were created by the appellant to oust the petitioner and other members who opposed the misutilisation and misappropriation of funds, especially received from public placement of shares. This, according to him, is one of the matter to be investigated. Admittedly, he was a promoter of the company. Counter statement filed by the third respondent reveals further facts, which we will consider later, would show that the petitioner is substantially interested in the affairs of the company. In such circumstances, he cannot be turned as person having no manner of interest or concern in the company as held by the Delhi High Court in V.V. Purie v. E.M.C. Steel Ltd. [1980] 50 Comp. Cas. 127. As we have already held the question is whether sufficient materials are there for the Court to hold prima facie that a deeper investigation is required on the facts of the case and being a discretionary remedy to be exercised with much caution, sufficiency of materials has to be proved.

8.         Based on the decision in Uunet India Ltd. v. I.C. Rao [1998] 93 Comp. Cas. 41 (AP). It was argued that once the company court passes a discretionary declaration under section 237(a)(ii) for appointment of an inspector for investigation, it cannot set aside as it is not a judicial or a quasi-judicial order and is not appealable. The court is not appointing inspectors by itself. Order does not deter the rights of the parties. We are of the view that the order is also appealable under section 483 of the Act. But when a discretionary order under section 237(a)(ii) is passed by the proper Court with jurisdiction, unless there is compelling ground appellate court will not interfere. In other words, if there is no prima facie material at all before the Court and the Court ordered investigation under section 237(a)(ii) as a fishing expedition, appellate court will interfere. But it is settled law that if order passed after considering the materials available, normally appellate court will not interfere with the discretionary order passed by a competent court with jurisdiction. Therefore, we may come to the facts of the case.

9.         On behalf of the fourth respondent the Central Government (third respondent) a counter affidavit was filed. Averments in the same really support the petitioner’s allegations. With regard to shareholders register of the petitioner, it is submitted in paragraph 2 of the counter affidavit that :

“... it is respectfully submitted that Premier Plantation Ltd. was incorporated on 12-12-1990 as a private limited company. The said company had became a public company under section 44 of the Companies Act with effect from 28-1-1991.... The memorandum and articles of association of the said company show that the petitioner herein was one of the promoters of the company. Since the said company was a listed company and since the company was not regular in filing the returns in compliance of the provisions of the Companies Act, 1956 at the third respondent’s office, the respondents 3 and 4 are not posted with the facts regarding the shareholding position of the petitioner. The petitioner has alleged that the shares held by him had been fraudulently transferred by the second respondent...

It was stated in the prospectus that the first respondent-company was incorporated by taking over the assets and liabilities of a partnership firm, viz., T.P. Muralidharan & Associates which was engaged in the plantation of Tea, Coffee, Cardamom and Pepper. It was stated further that the firm was in operation for about 11 months before taken over by the first-respondent-company and the operations of the firm during the said period was profitable. As found from the prospectus, the total income of the firm was Rs. 121 lakhs on which its net profit was Rs. 82 lakhs. It was further stated in the prospectus that on taken over of the firm by the company, the extent of the amounts standing at the credit of the partners capital account was amounted to Rs. 240 lakhs and equity shares of Rs. 240 lakhs had been allotted by the first-respondent-company to the partners of T.P. Muralidharan & Associates as on 15-1-1991 is as under :

 

Name

No. of Shares allotted

 

 

for other than cash

1.

M. Ibrahimkutty

516000

2.

T.P.Muralidharan

 

  516000

3.

K.P. Basheer

240000

4.

C.M. Subair

240000

5.

Mrs. Sukumari

210000

6.

T.P. Ratnakumari

210000

7.

Mrs. Zahida

210000

8.

Smt. T.P. Kunhamina

210000

9.

Mr. Joseph Pudussery

  48000

 

 

 2400000

 

 

 

 

[Emphasis supplied]”

10.       With regard to the allegation that due to public issue of shares, Rs. 24.74 crores was over subscribed and it was not refunded, it is stated as follows :

“. . . In terms of the public issue every application for shares was to be for a minimum of 100 shares of its multiples and a sum of Rs. 5 per share was to be paid towards application money. The issue was oversubscribed and the total shares application money received by the first-respondent-company was Rs. 27.90 crores as against the share allotments made for Rs. 3.16 crores. Hence a sum of Rs. 24.74 crores had to be refunded to the unsuccessful applicants. It is revealed from the Director’s Report formed part of the balance sheet as at 31-3-1996 of the first-respondent-company that only Rs. 1 crore had been paid for the estate to Bank of Tokyo out of the capital of Rs. 3.60 crores raised through the public issue and as a result, the possession of the Estate was restored to the Receiver because of the non-payment of the balance money.” [Emphasis supplied]

11.       With regard to non-conducting of annual general body meeting in time and non-filing of the balance sheet, it is clear from the counter affidavit that first annual general body meeting was held on 25-4-1992 and the second annual general body meeting was held only on 19-3-1997 for adopting the accounts for 31-3-1993 to 31-3-1996, it is stated as follows :

“. . . As regards the averments made in this paragraph that no annual general meeting of the first-respondent-company had been convened till filing of this petition, it is submitted that the audited financial statements filed at the third respondent’s office show that the annual general meetings for adopting the said accounts were held as follows :-

1.

For B/S. as at

31-12-1991

First AGM on 25-4-1992 at 3.00 PM

2.

-do-

31-3-1993

Second AGM on 19-3-1997 at 10.30 AM

3.

-do-

31-3-1994

Third AGM on 19-3-1997 at 11.30 AM

4.

-do-

31-3-1995

Fourth AGM on 19-3-1997 at 2.00 PM

5.

-do-

31-3-1996

Fifth AGM on 19-3-1997 at 3.00 PM

Since the first-respondent-company has a large number of shareholders as it had gone for public issue, the AG meetings held on 19-3-1997 for adopting the accounts for 31-3-1993 to 31-3-1996 cannot be believed to be properly held in compliance of the provisions of section 166 of the Companies Act...” [Emphasis supplied]

Again it was stated as follows :

“The first-respondent was not regular in filing the statutory returns with the third respondent as required under the Companies Act. Prosecution cases were filed against the first and second respondents for not filing the balance sheets of the first respondent at the third respondent’s office. Cases were filed for not filing the balance sheet as at 31-3-1993, 31-3-1994, 31-3-1995 in time. The second respondent had filed the said balance sheets with the third respondent only on 23-5-1997. The total number of cases filed by the third respondent against first respondent and second respondent under various provisions of the Companies Act are as follows :

No. of Prosecution

Section
Results

3

220(3)

Pleaded guilty

3

162

-do-

7

113(2)

-do-

74

73(2B)

Pending.

 

[Emphasis supplied]”

12.       With regard to diversion of funds collected through public issues, it was stated as follows :

“. . . But some of the mistakes committed by the first and second respondents at the time of public issue appear to be wilful and doubted to be for undue benefits. It was stated in the prospectus that the refund will be made to the unsuccessful applicants by cheque or demand draft drawn on any of bankers to the issue. The first respondent had opened the refund account with ANZ Grindlays Bank, Mumbai - 1, which was not include as bankers to the issue as per the prospectus. ANZ Grindlays Bank has filed a suit, O.S. No. 431 of 1993 against the first-respondent before the Sub-Court, Ernakulam; for recovery of a sum of Rs. 1,05,29,947.70. It was found from the statement of the refund that the first-respondent had transferred a sum of Rs. 2,02,93,904 from the refund account on 8-5-1992 for making payments to the following parties :-

        (i)       Issued D.D. for Rs. 1 crore in favour of Bank of Tokyo.

        (ii)      Transferred Rs. 75,00,000 to the account of Fairgrowth Financial Services Ltd., Bangalore.

(iii)     Rs. 27,92,294 was issued to the first-respondent by way of pay order and was encashed by it.” [Emphasis supplied]

Further it was stated as follows :

“...the prospectus issued by the first respondent on 18-12-1991 shows that the object of the issue was to provide a part of the funds required for acquiring the tea estate along with the processing plant which was being operated by the first-respondent on lease. The total area proposed to be acquired was about 1900 acres. Cost of the project was worked out as under :

Cost of acquisition of tea estate             :           Rs. 265 lakhs

Development expenditure          :           Rs. 15 lakhs

Plant and machinery      :           Rs. 45 lakhs

But it is not clear from the accounts of the company that the funds collected in the public issue had been utilised as proposed in the prospectus. Further it was stated in the prospectus that the first-respondent-company was incorporated by taking over the assets and liabilities of the partnership firm, which was engaged in the plantation of Tea, Coffee, Cardamom, Pepper etc. It was further mentioned that on the date of taken over of the firm by the company, the amount available at the credit of the partners in the capital account was Rs. 240 lakhs and equity shares of Rs. 240 lakhs had been allotted to the partners of the said firm. The firm had leasehold rights in the properties possessed by it at the time of taken over by the first-respondent-company. It is not clear from the records available with the third respondent as to whether the lease had been transferred in favour of the first-respondent. Annexure A-5 to the petition revealed that lease was not transferred in the name of the company. In this connection it is to be noted that the Central Bank of India had filed a suit O.S.No. 11 of 1994 for recovery of the secured loans given to the partnership firm amounting to Rs. 327 lakhs. It is stated in the auditors report of the first-respondent-company that the Central Bank of India had not approved the taken over of the partnership firm Muralidharan & Associates by the first respondent....” [Emphasis supplied]

13.       In fact, paragraph 10 of the counter affidavit shows that third respondent has also suggested an inspection under section 209A of the Act in 1997 itself as it needs detailed inspection. But it was not done because of the pre-occupation of the Inspecting Officer and filing of this case and investigation under section 237 will be more detail. A statement of about 70 criminal cases pending against the company under section 73(2B) of the Act was also filed by the third respondent. Statements in the counter filed by the third and fourth respondents show that it is a case where deeper investigation is warranted. We are not reiterating the averments of the third respondent. The Tribunal will be revealed the investigation. But there are prima facie materials to order a declaration for investigation.

14.       On these prima facie facts, the learned Company Judge held as follows :

“All these facts and materials on record clearly establish that there are sufficient materials available on record in support of the various allegations made by the petitioner in the petition regarding the mismanagement of the first respondent, diversion of funds, failure to comply with the statutory obligations etc. warranting a deeper probe into the affairs of company . . .”

On the basis of my finding that there are sufficient materials on record warranting an order under section 237(a)(ii) of the Companies Act to direct the fourth respondent to investigate into the affairs of the company as provided under section 237(a) of the Companies Act. Hence this petition is allowed. The fourth respondent is directed to appoint one or more competent inspectors to investigate the affairs of the first-respondent-company under section 237(a) of the Companies Act and to report within a specified time limit. . .”

Thus, the company court on consideration of the materials found that a deeper probe is necessary and passed an order declaring that affairs of the company ought to be investigated by an inspector appointed by the Court itself.

15.       We are of the opinion that there are sufficient materials for the company judge to pass the above order. In any event, when the company court passed the above order on materials available in the case, on the facts of this case it cannot be stated that an interference by the appellate court is warranted. This is an appropriate case where discretionary order has been passed by the Court by exercising powers under section 237(a)(ii). No interference is called for.

The appeal is dismissed.

[2002] 37 scl 804 (ker.)

High Court of Kerala

Premier Plantations Ltd.

v.

M. Ebrahimkutty

J. B. Koshy and K. Padmanabhan Nair, JJ.

M. F.A. No. 1273 of 1998 (B)

March 25, 2002

Section 237, read with section 10, of the Companies Act, 1956 - Investigation of company’s affairs in other cases - Whether ‘Court’ referred to in section 237 is court having jurisdiction under section 10 and no other court - Held, yes - Whether under section 237(a)(ii), court can appoint directly inspector(s) to investigate into affairs of company - Held, no - Whether court can only make a declaration that affairs of company ought to be investigated by an inspector appointed by Central Government - Held, yes - Whether power of Company Law Board under section 237(b) is a bar to exercise of discretionary jurisdiction of court under section 237(a)(ii) - Held, no - Whether mere allegations are insufficient to support an application to court to act under section 237(1)(ii) and material placed before court should be such as to satisfy court that a deeper probe into affairs of company is desirable in interests of company itself - Held, yes - Whether court can pass a declaration under section 237(a) for a fishing expedition - Held, no - Whether an isolated instance of mismanagement is enough for court to declare that an investigation is required - Held, no - Whether existence of circumstances described under section 237(b) may sway court to pass an order under section 237(a)(ii) also but it is not always mandatory that court can pass a declaration only if conditions under section 237(b) exist - Held, yes - Whether power of court under section 237(a)(ii) is equal to power of CLB under section 237(b) - Held, no - Whether unlike CLB, there are no restrictions placed on Court even though Court will exercise its judicial discretion only on sufficient materials and only after it is convinced that situation warrants an investigation in interest of company as a whole - Held, yes - Whether when a discretionary order under section 237(a)(ii) is passed by proper court with jurisdiction, unless there are compelling grounds appellate court will not interfere - Held, yes

Facts

The respondent was an equity shareholder and the promoter of the appellant-company. He was also appointed as the Chairman of the company. Subsequently, the company came out with public issue which was subscribed in excess of 14 times the offer. Thereafter, the respondent filed petition under section 237(a)(ii) before the Company Judge seeking to direct the Central Government to appoint inspectors to investigate into the affairs of the company. It was alleged that no first annual general meeting of the company was held as convened in time.

The managing director, ‘M’ had been fraudulently mismanaging the company in utter disregard of the interest of the shareholders and was acting in an autocratic and oppressive manner. He created false and fabricated documents with nefarious motive to oust the respondent and other members of the board of directors who opposed the misutilisation and misappropriation of public funds. He created documents and minutes purporting to remove the petitioner and others who opposed the mismanagement and oppression. Though on the public issue, shares were over subscribed to the tune of 14 times and huge amounts were collected from the public, shares were neither allotted properly nor amounts refunded to the applicants whose application for shares were not accepted.

It was further alleged that 1200 complaints had been filed against ‘M’ by the subscribers to whom the amounts were not refunded and that ‘M’ had misappropriated, misutilised and mismanaged the funds collected through public issue and diverted the funds for his private purposes. The company opposed the petition. The Company Judge found that the submission of the Central Government supported the respondent’s allegations and concluded that a deeper probe was necessary and passed an order declaring that affairs of the company ought to be investigated by an inspector appointed by the Court itself.

On appeal :

Held

By virtue of the power under section 237(a)(ii), the Court cannot appoint directly inspector or inspectors to investigate the affairs of the company but only make a declaration that the affairs of the company ought to be investigated by an inspector appointed by the Central Government. Once such an order is passed it is mandatory for the Central Government to conduct such investigation by appointing competent persons as inspectors.

The court referred to in section 237 in the court having jurisdiction under section 10 and no other Court or a Court hearing writ petitions. Petition was filed before the competent company court in the instant case. It is true that mere allegations are not sufficient to support an application to the Court to act under section 237(a)(ii), and the material placed before the Court should be such as to satisfy the Court that a deeper probe into the affairs of the company is desirable in the interests of the company itself. In other words, Court will not pass a declaration under section 237(a) for a fishing expedition. But Court is entitled to see whether on the basis of the material brought before the Court, a declaration is to be made or not. An isolated instance of mismanagement is not enough for the Court to declare that an investigation is required. The material placed before the Court should be such as to satisfy the Court that a deeper probe into the company affairs is desirable in the interests of the company itself. The judicial conscience must be satisfied that there has been maladministration in the affairs of the company warranting an investigation.

Existence of alternative remedy also can be taken as a condition for refusing to exercise the discretionary jurisdiction in appropriate cases, but it cannot operate as an absolute bar. No where in section 237 it is stated that Court cannot be approached under section 237(a)(ii) before approaching CLB under section 237(b). It is true that after amendment of section 237(b) (Companies Amendment Act, 1988 with effect from 31-5-1991), the CLB has power to direct the Central Government to appoint inspectors to investigate into the affairs of the company if circumstances mentioned in sub-clause (i), (ii) or (iii) of section 237(b) exist. But, the CLB must be satisfied that such circumstances exist. Power of the CLB under section 237(b) is not a bar in exercising the discretionary jurisdiction of the Court under section 237(a)(ii). No such condition was made out by the Legislature for exercising the jurisdiction by the company court under section 237(a)(ii) even though Court will take such a course only if circumstances warrant.

Before passing an order under section 237(a)(ii), Court should be satisfied that there are sufficient materials to show that affairs of the company is in such a way that an investigation is necessary. The existence of circumstances described under section 237(b) may sway the Court to pass an order under section 237(a)(ii) also. But it is not always mandatory that Court can pass a declaration only if the conditions under section 237(b) exist. No such restrictions are placed by the Legislature even though Court will exercise its judicial discretion only on sufficient materials and only after the Court is convinced that situation warrants an investigation in the interest of the company as a whole. For a minority shareholder or a person legally interested in the affairs of the company it may not always be possible to place all materials alleged by him. But investigation is necessary to disclose something which is not apparently visible. If all materials are already available, there is no scope for further investigation. At the same time, existence of circumstances must warrant reasonably so as to invoke jurisdiction of the Court. Power of the Court under section 237(a)(ii) is not equal to the power of the CLB under section 237(b). Unless any one of the circumstances as mentioned in section 237(b) exist, the CLB cannot order an investigation, but no such restriction is placed on the Court.

It was argued that once the company court passes a discretionary declaration under section 237(a)(ii) for appointment of an inspector for investigation, it cannot set aside as it is not a judicial or a quasi-judicial order and is not appealable. The Court is not appointing inspectors by itself. Order does not deter the rights of the parties. The order is also appealable under section 483. But when a discretionary order under section 237(a)(ii) is passed by the proper court with jurisdiction, unless there is compelling grounds appellate court will not interfere. In other words, if there is no prima facie material at all before the Court and Court ordered investigation under section 237(a)(ii) as a fishing expedition, appellate court will interfere. But it is settled law that if order is passed after considering the materials available, normally appellate court will not interfere with the discretionary order passed by a competent court with jurisdiction.

In the instant case, there were sufficient material for the Company Judge to pass the impugned order. In any event, when the company court passed the impugned order on materials available in the case, on the facts of the case it could not be stated that an interference by appellate court was warranted. This was an appropriate case where discretionary order had been passed by the court by exercising powers under section 237(a)(ii). No interference was called for.

Cases referred to

Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp. Cas. 33 (Delhi), Alembic Glass Industries Ltd., In re [1972] 42 Comp. Cas. 63 (Guj.), P. Sreenivasan v. Yoosuf Sagar Abdullah & Sons (P.) Ltd. [1983] 53 Comp. Cas. 485 (Ker.), Modi Industries Ltd. v. Union of India [1982] 52 Comp. Cas. 589 (Delhi), Safia Usman v. Union of India [2000] CLC 110 (Ker.), Barium Chemicals Ltd. v. CLB AIR 1967 SC 295, Rohtas Industries Ltd. v. S.D. Agarwal AIR 1969 SC 707, R.V. Mohammed v. Trichur Heart Hospital Ltd. [2000] CLC 258 (Ker.), Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy [1997] 90 Comp. Cas. 383/13 SCL 118 (SC), Mrs. U.A. Sumathy v. Dig Vijay Chit Fund (P.) Ltd. [1983] 53 Comp. Cas. 493 (Ker.), V.V. Purie v. E.M.C. Steel Ltd. [1980] 50 Comp. Cas. 127 (Delhi) and Uunet India Ltd. v. I.C. Rao [1998] 93 Comp. Cas. 41 (AP).

K.P. Dandapani for the Appellant. P.S. Sreedharan Pillai, M.P. Mohammed Aslam, S. Abdul Salam and Tom K. Thomas for the Respondent.

Judgment

J.B. Koshy, J.—First respondent in this appeal (referred in this judgment as the petitioner for convenience) filed a petition under section 237 of the Companies Act, 1956 (‘the Act’) to direct the Central Government to appoint one or more competent persons as inspectors by declaring that the affairs of the Premier Plantations Ltd., first appellant (‘as company’) ought to be investigated and to report thereon within a specified time limit. Before going into the facts of the case we may first discuss the power of this Court under section 237(a)(ii). Section 237 reads as follows :

“Investigation of company’s affairs in other cases. - Without prejudice to its powers under section 235, the Central Government—

(a)      shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

          (i)         the company, by special resolution; or

(ii)        the Court, by order, declares that the affairs of the company ought to the investigated by an inspector appointed by the Central Government; and

        (b)      may do so if, in the opinion of the Company Law Board, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors,  oppressive of any of its members, or that the company was formed for any fraudulent on unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director or the manager, of the company.”

A reading of the above section will show that power given under section 237 to the Central Government is independent and operates without prejudice to its powers under section 235 of the Act. But under section 237(a) the Central Government can appoint an inspector for investigating the affairs of the company only if the company passes a special resolution for it or if an order is passed by the Court. Under section 237(b) the CLB is also empowered to do so in certain special circumstances required the Central Government to conduct investigation. By virtue of the power under section 237(a)(ii), the Court cannot appoint directly inspector or inspectors to investigate the affairs of the company but only make a declaration that the affairs of the company ought to be investigated by an inspector appointed by the Central Government. Once such an order is passed it is mandatory for the Central Government to conduct such investigation by appointing competent persons as inspectors—Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp. Cas. 33 (Delhi), and in Alembic Glass Industries Ltd., In re [1972] 42 Comp. Cas. 63 (Guj.).

2.         The Court referred to in section 237 is the Court having jurisdiction under section 10 of the Act and no other Court or a Court hearing writ petitions. Petition was filed before the competent company court in this case. It is true that mere allegations are not sufficient to support an application to the court to act under section 237(a)(ii). The material placed before the Court should be such as to satisfy the Court that a deeper probe into the affairs of the company is desirable in the interests of the company itself as held by this Court in P. Sreenivasan v. Yoosuf Sagar Abdullah & Sons (P.) Ltd. [1983] 53 Comp. Cas. 485. In other words, the Court will not pass a declaration under section 237(a) for a fishing expedition. But the Court is entitled to see whether on the basis of the material brought before the Court, declaration is to be made or not Modi Industries Ltd. v. Union of India [1982] 52 Comp. Cas. 589 (Delhi). An isolated instance of mismanagement is not enough for the Court to declare that an investigation is required. The material placed before the Court should be such as to satisfy the Court that a deeper probe into the company affairs is desirable in the interests of the company itself. The judicial conscience must be satisfied that there has been misadministration in the affairs of the company warranting an investigation.

3.         It was argued by the counsel for the appellants that in Safia Usman v. Union of India [2000] CLC 110 a single Judge of this Court held that without exhausting the remedy under section 237(b), the Court cannot exercise power under section 237(a)(ii). A reading of this decision shows that proper relief was not asked in the petition as required under section 237(a)(ii) and company itself was not impleaded as a party. Existence of alternate remedy also can be taken as a condition for refusing to exercise the discretionary jurisdiction in appropriate cases, but it cannot operate as an absolute bar. Nowhere in section 237 it is stated that court cannot be approached under section 237(a)(ii) before approaching the CLB under section 237(b). It is true that after amendment of section 237(b). (Companies Amendment Act, 1988 with effect from 31-5-1991), the CLB has power to direct the Central Government to appoint inspectors to investigate into the affairs of the company if circumstances mentioned in sub-clause (i), (ii) or (iii) of section 237(b) exit. But, the CLB must be satisfied that such circumstances exit as held by the Apex Court in Barium Chemicals Ltd. v. CLB AIR 1967 SC 295. Before amendment, this power was with the Central Government itself. See also Rohtas Industries Ltd. v. S.D. Agarwal AIR 1969 SC 707. Power of the CLB under section 237(b) is not a bar in exercising the discretionary jurisdiction of the Court under section 237(a)(ii). No such condition was made out by the Legislature for exercising the jurisdiction by the company court under section 237(a)(ii) even though Court will take such a course only if circumstances warrant. Another decision pointed out is the decision of the learned single Judge of this Court R.V. Mohammed v. Trichur Heart Hospital Ltd. [2000] CLC 258. What was held in that decision is the Court cannot order an investigation by appointing an inspector, but under section 237(a)(ii) the Court can, if circumstances warrant, by an order makes a declaration that the affairs of the company ought to be investigated by an inspector appointed by the Central Government and on making such declaration the Central Government has no option but has to appoint an inspector to investigate the affairs of the company. No other hypertechnical view is possible in view of the clear wording of section 237(a). As held by the Gujarat High Court in Alembic Glass Industries Ltd.’s case (supra) :

“The Legislature has conferred wide jurisdiction on this court to entertain a petition under section 237(a)(ii). In fact, the power of the Central Government to appoint an inspector suo motu under section 237(b) is limited to its subjective satisfaction in respect of one or other matters contained in three sub-clauses of clause (b). The Legislature in its wisdom has not put any such condition before the court can make an order, though the court may in its wisdom expect prima facie proof of some of these conditions on the subjective satisfaction of which the Central Government would appoint an inspector. While conferring jurisdiction on the court to direct the Central Government to appoint an inspector, the Legislature has not thought fit to circumscribe the discretion or jurisdiction in any manner. It would, therefore, be utterly inappropriate to curtail or circumscribe or fetter the jurisdiction of this court by reading into the section something which is not there.” (p. 68)

4.         Another decision pointed out by the learned counsel for the appellants in the Apex Court decision in Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy [1997] 90 Comp. Cas. 383. There a writ petition was filed seeking direction for investigation by the Central Bureau of Investigation. The Apex Court held that in view of the specific remedies under sections 43A, 234, 235, 237, 397 and 398 of the Act, a writ petition will not lie. It is not a matter of public interest and remedy available under the Act shall be availed of. Here the petitioner has approached under section 237 and it cannot be held that petition is not maintainable. Scope and power of company court under section 237(a)(ii) was not discussed in that decision. Ofcourse under section 237(a)(ii), Court’s would insist upon solid factual base and mere allegations are insufficient. It was held by this court in Mrs. U.A. Sumathy v. Dig Vijay Chit Fund (P.) Ltd. [1983] 53 Comp. Cas. 493, that :

“... No doubt, clause (a)(ii) of section 237 does not lay down what circumstances are to be proved before the court and on that materials the court could act. But that does not mean that mere allegations are sufficient. A court can act only on the materials placed before it; and those materials should at least be such as to satisfy the court that a deeper probe into the company’s affairs is desirable in the interests of the company itself...”(p. 496)

The powers under section 237(a)(ii) were considered by Justice M.P. Menon in the decisions in P. Sreenivasan’s case (supra). In that decision it was held as follows :

“The section conceives of three situations where the Central Government can appoint inspectors for investigations. The first is when the company itself declares that such an investigation is necessary. The second is when the court makes an order. And the third is when the Central Government forms an opinion that the circumstances enumerated in clause (b) exist. The first is easy to understand : when the company itself wants an investigation, the Central Government need not stop to enquire why. The third can also be understood because when suo motu action is proposed to be taken by the Government, it shall not act arbitrarily, but only consistent with guidelines laid down. But what about the second situation, where the court has to make an order ? Mr. Ramanatha Pillai for the petitioner suggests that the power and the discretion of the court are uncontrolled; it can direct an investigation whenever it suspects that all is not well with the company. Whether the apprehensions of the court are true or not is a matter to be found by the investigating inspectors, and the court is not to insist on evidence. It appears to me that this is too broad a statement. Investigation of the company’s affairs by the Department of Trade in England has always been understood as a statutory exception to the rule in Foss v. Harbottle [1843] 2 Hare 461 that the internal affairs of a company is a matter for the majority, and a dissatisfied minority cannot seek outside interference. The Companies Act provides for the protection of minorities in three ways (i) by giving them a right to complain against oppression, (ii) by permitting them to act on behalf of the company when it is wound up, as in the case of misfeasance proceedings, and (iii) by enabling them to obtain remedies indirectly through investigation. The Court’s discretion under section 237 is, therefore, to be exercised only when it is satisfied that the minority has made out at least a prina facie case that the rule in Foss v. Harbottle [1843] 2 Hare 461, requires relaxation in the interest of the company...” (p. 489)

We agree with the above observation that before passing an order under section 237(a)(ii) the Court should be satisfied that there are sufficient materials to show that affairs of the company is in such a way that an investigation is necessary. We also note that existence of circumstances described under section 237(b) may sway the Court to pass an order under section 237(a)(ii) also. But we are of the opinion that it is not always mandatory that the Court can pass a declaration only if the conditions under section 237(b) exist. No such restrictions are placed by the Legislature even though the Court will exercise its judicial discretion only on sufficient materials and only after the court is convinced that situation warrants an investigation in the interest of the company as a whole. We also note that for a minority shareholder or a person legally interested in the affairs of the company, may not always be possible to place all materials alleged by him. But investigation is necessary to disclose something which is not apparently visible. If all materials are already available, there is no scope for further investigation. At the same time, existence of circumstances must warrant reasonably so as to invoke jurisdiction of the Court. Power of the Court under section 237(a)(ii) is not equal to the power of the CLB under section 237(b). Unless any one of the circumstances as mentioned in section 237(b) exist, the CLB cannot order an investigation, but no such restriction is placed on the Court.

5.         As facts are concerned, according to the petitioner, he is an equity shareholder of 5,16,000 equity shares of the company. The company was incorporated on 12-12-1990 as a private limited company and the petitioner was one of the promoters of the company. By resolution dated 5-1-1991 the company resolved to take over the assets and liabilities of T.P. Muralidharan & Associates and the amount outstanding in the credit of partners account, both capital and current account as on 31-12-1990 should be taken as the amount contributed by them towards share capital and necessary share certificates should be issued to them. The company was engaged in the plantation of tea, coffee, cardamom and pepper. It was converted into a public limited company on 28-1-1991. Thereafter it came out with public issue of 36 lakhs equity shares of Rs. 10 each for cash at par. Subscriptions of shares were received about 14 times of the declared public issue. As per clause 11(A) of the articles of association, the subscribers to the memorandum of association were appointed as directors. The petitioner and the second appellant herein were subscribers of the memorandum of association. The second appellant was appointed as the managing director. (We are referring the second appellant as ‘managing director’ in this judgment.) Though, as per clause 16 of the memorandum of association, all directors except the managing director for the time being were to retire from office at the first annual general meeting of the company, no annual general meeting of the company has been held or convened in time. Though a document styled as first annual report and accounts of 1991 was published on 31-2-1992, no such meeting of the company was held at 3 p.m. on 25-4-1992 at the registered office of the company as mentioned in the notice attached to the report and accounts of 1991. The managing director had been fraudulently mismanaging the company in utter disregard of the interest of the shareholders and was acting in an autocratic and oppressive manner. He began to create false and fabricated documents with nefarious motive to oust the petitioner and other members of the board of directors who opposed the misutilisation and misappropriation of public funds. He created documents and minutes purporting to remove the petitioner and others who opposed the mismanagement and oppression. Though on the public, issue shares were oversubscribed to the tune of 14 times and huge amounts were collected from the public, shares were neither allotted properly nor amounts refunded to the applicants whose application for shares were not accepted. It is understood that 1200 complaints are filed before the jurisdictional court in Bombay against the managing director by the subscribers to whom amounts were not refunded. It was also stated that for non-convening of the meeting and not filing balance sheet for the period 1992 to 1996 many proceedings are pending. Share value of the company was depleted to nil from Rs. 70 and company has been de-listed in the Stock Exchange. The managing director had misappropriated, musutilised and mismanaged the funds collected through public issue and diverted the funds for his private purposes ignoring the purpose for which the company was incorporated. The authorities who are entrusted to supervise and control the management of the company and to prevent misuse of public funds are not discharging their duties properly.

6.         The appellants opposed the above petition and submitted that there is no locus standi to file the above petition as he was no more a shareholder at the time of filing the petition. It was stated that he was the Chairman of the company till 28-5-1993 only. General body meetings were held properly and the excess amount collected for share capital was returned without delay. All allegations against the second respondent as managing director of the company was denied and it was also submitted that no case is made out by the petitioner for an order of investigation by the court under section 237.

7.         Before going into the merits of the case we may also consider the argument regarding locus standi of the petitioner. It is not disputed that he was the first chairman of the company. He owns 5,16,000 equity shares. According to the company, the above shares were transferred. It is the contention of the petitioner that documents were created by the appellant to oust the petitioner and other members who opposed the misutilisation and misappropriation of funds, especially received from public placement of shares. This, according to him, is one of the matter to be investigated. Admittedly, he was a promoter of the company. Counter statement filed by the third respondent reveals further facts, which we will consider later, would show that the petitioner is substantially interested in the affairs of the company. In such circumstances, he cannot be turned as person having no manner of interest or concern in the company as held by the Delhi High Court in V.V. Purie v. E.M.C. Steel Ltd. [1980] 50 Comp. Cas. 127. As we have already held the question is whether sufficient materials are there for the Court to hold prima facie that a deeper investigation is required on the facts of the case and being a discretionary remedy to be exercised with much caution, sufficiency of materials has to be proved.

8.         Based on the decision in Uunet India Ltd. v. I.C. Rao [1998] 93 Comp. Cas. 41 (AP). It was argued that once the company court passes a discretionary declaration under section 237(a)(ii) for appointment of an inspector for investigation, it cannot set aside as it is not a judicial or a quasi-judicial order and is not appealable. The court is not appointing inspectors by itself. Order does not deter the rights of the parties. We are of the view that the order is also appealable under section 483 of the Act. But when a discretionary order under section 237(a)(ii) is passed by the proper Court with jurisdiction, unless there is compelling ground appellate court will not interfere. In other words, if there is no prima facie material at all before the Court and the Court ordered investigation under section 237(a)(ii) as a fishing expedition, appellate court will interfere. But it is settled law that if order passed after considering the materials available, normally appellate court will not interfere with the discretionary order passed by a competent court with jurisdiction. Therefore, we may come to the facts of the case.

9.         On behalf of the fourth respondent the Central Government (third respondent) a counter affidavit was filed. Averments in the same really support the petitioner’s allegations. With regard to shareholders register of the petitioner, it is submitted in paragraph 2 of the counter affidavit that :

“... it is respectfully submitted that Premier Plantation Ltd. was incorporated on 12-12-1990 as a private limited company. The said company had became a public company under section 44 of the Companies Act with effect from 28-1-1991.... The memorandum and articles of association of the said company show that the petitioner herein was one of the promoters of the company. Since the said company was a listed company and since the company was not regular in filing the returns in compliance of the provisions of the Companies Act, 1956 at the third respondent’s office, the respondents 3 and 4 are not posted with the facts regarding the shareholding position of the petitioner. The petitioner has alleged that the shares held by him had been fraudulently transferred by the second respondent...

It was stated in the prospectus that the first respondent-company was incorporated by taking over the assets and liabilities of a partnership firm, viz., T.P. Muralidharan & Associates which was engaged in the plantation of Tea, Coffee, Cardamom and Pepper. It was stated further that the firm was in operation for about 11 months before taken over by the first-respondent-company and the operations of the firm during the said period was profitable. As found from the prospectus, the total income of the firm was Rs. 121 lakhs on which its net profit was Rs. 82 lakhs. It was further stated in the prospectus that on taken over of the firm by the company, the extent of the amounts standing at the credit of the partners capital account was amounted to Rs. 240 lakhs and equity shares of Rs. 240 lakhs had been allotted by the first-respondent-company to the partners of T.P. Muralidharan & Associates as on 15-1-1991 is as under :

 

Name

No. of Shares allotted

 

 

for other than cash

1.

M. Ibrahimkutty

516000

2.

T.P.Muralidharan

 

  516000

3.

K.P. Basheer

240000

4.

C.M. Subair

240000

5.

Mrs. Sukumari

210000

6.

T.P. Ratnakumari

210000

7.

Mrs. Zahida

210000

8.

Smt. T.P. Kunhamina

210000

9.

Mr. Joseph Pudussery

  48000

 

 

 2400000

 

 

 

 

[Emphasis supplied]”

10.       With regard to the allegation that due to public issue of shares, Rs. 24.74 crores was over subscribed and it was not refunded, it is stated as follows :

“. . . In terms of the public issue every application for shares was to be for a minimum of 100 shares of its multiples and a sum of Rs. 5 per share was to be paid towards application money. The issue was oversubscribed and the total shares application money received by the first-respondent-company was Rs. 27.90 crores as against the share allotments made for Rs. 3.16 crores. Hence a sum of Rs. 24.74 crores had to be refunded to the unsuccessful applicants. It is revealed from the Director’s Report formed part of the balance sheet as at 31-3-1996 of the first-respondent-company that only Rs. 1 crore had been paid for the estate to Bank of Tokyo out of the capital of Rs. 3.60 crores raised through the public issue and as a result, the possession of the Estate was restored to the Receiver because of the non-payment of the balance money.” [Emphasis supplied]

11.       With regard to non-conducting of annual general body meeting in time and non-filing of the balance sheet, it is clear from the counter affidavit that first annual general body meeting was held on 25-4-1992 and the second annual general body meeting was held only on 19-3-1997 for adopting the accounts for 31-3-1993 to 31-3-1996, it is stated as follows :

“. . . As regards the averments made in this paragraph that no annual general meeting of the first-respondent-company had been convened till filing of this petition, it is submitted that the audited financial statements filed at the third respondent’s office show that the annual general meetings for adopting the said accounts were held as follows :-

1.

For B/S. as at

31-12-1991

First AGM on 25-4-1992 at 3.00 PM

2.

-do-

31-3-1993

Second AGM on 19-3-1997 at 10.30 AM

3.

-do-

31-3-1994

Third AGM on 19-3-1997 at 11.30 AM

4.

-do-

31-3-1995

Fourth AGM on 19-3-1997 at 2.00 PM

5.

-do-

31-3-1996

Fifth AGM on 19-3-1997 at 3.00 PM

Since the first-respondent-company has a large number of shareholders as it had gone for public issue, the AG meetings held on 19-3-1997 for adopting the accounts for 31-3-1993 to 31-3-1996 cannot be believed to be properly held in compliance of the provisions of section 166 of the Companies Act...” [Emphasis supplied]

Again it was stated as follows :

“The first-respondent was not regular in filing the statutory returns with the third respondent as required under the Companies Act. Prosecution cases were filed against the first and second respondents for not filing the balance sheets of the first respondent at the third respondent’s office. Cases were filed for not filing the balance sheet as at 31-3-1993, 31-3-1994, 31-3-1995 in time. The second respondent had filed the said balance sheets with the third respondent only on 23-5-1997. The total number of cases filed by the third respondent against first respondent and second respondent under various provisions of the Companies Act are as follows :

No. of Prosecution

Section
Results

3

220(3)

Pleaded guilty

3

162

-do-

7

113(2)

-do-

74

73(2B)

Pending.

 

[Emphasis supplied]”

12.       With regard to diversion of funds collected through public issues, it was stated as follows :

“. . . But some of the mistakes committed by the first and second respondents at the time of public issue appear to be wilful and doubted to be for undue benefits. It was stated in the prospectus that the refund will be made to the unsuccessful applicants by cheque or demand draft drawn on any of bankers to the issue. The first respondent had opened the refund account with ANZ Grindlays Bank, Mumbai - 1, which was not include as bankers to the issue as per the prospectus. ANZ Grindlays Bank has filed a suit, O.S. No. 431 of 1993 against the first-respondent before the Sub-Court, Ernakulam; for recovery of a sum of Rs. 1,05,29,947.70. It was found from the statement of the refund that the first-respondent had transferred a sum of Rs. 2,02,93,904 from the refund account on 8-5-1992 for making payments to the following parties :-

        (i)       Issued D.D. for Rs. 1 crore in favour of Bank of Tokyo.

        (ii)      Transferred Rs. 75,00,000 to the account of Fairgrowth Financial Services Ltd., Bangalore.

(iii)     Rs. 27,92,294 was issued to the first-respondent by way of pay order and was encashed by it.” [Emphasis supplied]

Further it was stated as follows :

“...the prospectus issued by the first respondent on 18-12-1991 shows that the object of the issue was to provide a part of the funds required for acquiring the tea estate along with the processing plant which was being operated by the first-respondent on lease. The total area proposed to be acquired was about 1900 acres. Cost of the project was worked out as under :

Cost of acquisition of tea estate             :           Rs. 265 lakhs

Development expenditure          :           Rs. 15 lakhs

Plant and machinery      :           Rs. 45 lakhs

But it is not clear from the accounts of the company that the funds collected in the public issue had been utilised as proposed in the prospectus. Further it was stated in the prospectus that the first-respondent-company was incorporated by taking over the assets and liabilities of the partnership firm, which was engaged in the plantation of Tea, Coffee, Cardamom, Pepper etc. It was further mentioned that on the date of taken over of the firm by the company, the amount available at the credit of the partners in the capital account was Rs. 240 lakhs and equity shares of Rs. 240 lakhs had been allotted to the partners of the said firm. The firm had leasehold rights in the properties possessed by it at the time of taken over by the first-respondent-company. It is not clear from the records available with the third respondent as to whether the lease had been transferred in favour of the first-respondent. Annexure A-5 to the petition revealed that lease was not transferred in the name of the company. In this connection it is to be noted that the Central Bank of India had filed a suit O.S.No. 11 of 1994 for recovery of the secured loans given to the partnership firm amounting to Rs. 327 lakhs. It is stated in the auditors report of the first-respondent-company that the Central Bank of India had not approved the taken over of the partnership firm Muralidharan & Associates by the first respondent....” [Emphasis supplied]

13.       In fact, paragraph 10 of the counter affidavit shows that third respondent has also suggested an inspection under section 209A of the Act in 1997 itself as it needs detailed inspection. But it was not done because of the pre-occupation of the Inspecting Officer and filing of this case and investigation under section 237 will be more detail. A statement of about 70 criminal cases pending against the company under section 73(2B) of the Act was also filed by the third respondent. Statements in the counter filed by the third and fourth respondents show that it is a case where deeper investigation is warranted. We are not reiterating the averments of the third respondent. The Tribunal will be revealed the investigation. But there are prima facie materials to order a declaration for investigation.

14.       On these prima facie facts, the learned Company Judge held as follows :

“All these facts and materials on record clearly establish that there are sufficient materials available on record in support of the various allegations made by the petitioner in the petition regarding the mismanagement of the first respondent, diversion of funds, failure to comply with the statutory obligations etc. warranting a deeper probe into the affairs of company . . .”

On the basis of my finding that there are sufficient materials on record warranting an order under section 237(a)(ii) of the Companies Act to direct the fourth respondent to investigate into the affairs of the company as provided under section 237(a) of the Companies Act. Hence this petition is allowed. The fourth respondent is directed to appoint one or more competent inspectors to investigate the affairs of the first-respondent-company under section 237(a) of the Companies Act and to report within a specified time limit. . .”

Thus, the company court on consideration of the materials found that a deeper probe is necessary and passed an order declaring that affairs of the company ought to be investigated by an inspector appointed by the Court itself.

15.       We are of the opinion that there are sufficient materials for the company judge to pass the above order. In any event, when the company court passed the above order on materials available in the case, on the facts of this case it cannot be stated that an interference by the appellate court is warranted. This is an appropriate case where discretionary order has been passed by the Court by exercising powers under section 237(a)(ii). No interference is called for.

The appeal is dismissed.

[1972] 42 Comp. Cas. 63 (Guj.)

HIGH COURT OF GUJARAT

Alembic Glass Industries Ltd., In re

D.A. Desai, J.

COMPANY PETITION NO. 11 OF 1971

August 2, 1971

S.N. Shelat for the Petitioner.

J.M. Thakore and with G.N. Shah for the Respondent.

JUDGMENT

D.A. Desai, J.—The petitioner is a shareholder of Alembic Glass Industries Ltd., Baroda, a company incorporated on 19th December, 1944, under the provisions of the Companies Act, 1913, as prevalent in the former Baroda State. The petition is filed under section 237(a)(ii) of the Companies Act, 1956, praying for two reliefs:

"(i)    to pass appropriate order or direction regarding the investigation to be made by appointing investigator and/or auditors to inquire into and report regarding the affairs and the conduct of the company including the transaction of purchases since 1966 ; and

    (ii)    to direct the Central Government to order investigation under section 237 of the Companies Act."

Number of allegations have been made in the petition alleging that the business of the company is being conducted with intent to defraud its creditors, members or any other persons and is otherwise fraudulent and in a manner oppressive to its members. The allegations can be broadly summarised under three heads:

(i)         that the managing agents have without the permission or sanction of the board of directors purchased capital assets in excess of the prescribed limit and also sold the capital assets in excess of the prescribed limits, such as purchase of aeroplane, setting up of the plant at Bangalore and purchase and sale of one Ambassador car:

(ii)        flagrant violation of the provisions contained in section 372 by purchasing the shares of Alembic Chemical Works Company Ltd. and M/s. Dharak Ltd.; and

(iii)       purchases at inflated price from certain specified firms in which Mr. Ramanbhai B. Amin, a partner of the firm of managing agents, namely, Nishechi Services, has vital interest. The petitioner has further stated that he has brought all these malpractices to the notice of the Central Government and requested the Central Government to take action under section 237 of the Companies Act to appoint an inspector to investigate into the affairs of the company, but the Central Government has neither taken any action nor cared to inform him what action it proposed to take in respect of the allegations made by the petitioner in his applications and letters sent by him to the Central Government. The petitioner has stated that therefore he has been constrained to file this petition under section 237(a)(ii) for the aforementioned reliefs.

On the petition being presented a notice prior to its admission was ordered to be issued to the company in response to which the respondent appeared and filed a short affidavit, inter alia, contending that this court has no jurisdiction to entertain the petition under section 237(a)(ii) of the Companies Act.

Section 237 of the Companies Act reads as under :

"237. Investigation of company's affairs in other cases.—Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)         the company, by special resolution ; or

(ii)        the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

        (b)    may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose; or

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members ; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company."

Group of sections commencing from section 235 and ending with section 251 are grouped together under the heading "Investigation". Section 235 confers power upon the Central Government to appoint an inspector to investigate the affairs of any company and to report thereon in such manner as the Central Government may direct in the circumstances mentioned in the section, namely:

(a)        in the case of a company having a share capital, on the application either of not less than 200 members or of members holding not less than one-tenth of the total voting power therein ;

(b)        in the case of a company not having a share capital, on the application of not less than one-fifth in number of the persons on the company's register of members ;

(c)        in the case of any company, on a report by the Registrar under sub-section (6) or sub-section (7) read with sub-section (6) of section 234.

Section 236 prescribes the manner of making the application as provided for by section 235. Under section 237, obligation is cast on the Central Government to appoint an inspector to investigate the affairs of the company if—

            (i)         the company adopts a special resolution to that effect and conveys it to the Central Government; or

(ii)        the court by its order directs the Central Government to appoint an inspector to investigate into the affairs of a company.

Clause (b) of section 237 enables the Central Government to suo motu appoint an inspector to investigate the affairs of a company if the conditions set out in one or other of the sub-clauses of clause (b) are satisfied. By the present petition, the petitioner has invoked the jurisdiction of this court under section 237(a)(ii).

The learned Advocate-General appearing for the company contended that this court has no jurisdiction to appoint an inspector to investigate the affairs of the company and, therefore, prayer (a) in the petition is beyond the jurisdiction of this court. It must straightaway be conceded that under section 237 this court has no jurisdiction to appoint an inspector to investigate the affairs of any company. Looking to the scheme of the section: commencing from section 235, it is crystal clear that the power to appoint an inspector to investigate the affairs of any company vests in the Central Government. The Central Government can be moved to exercise that power in the manner provided for in section 235 by a requisite number of members or by the Registrar. Even in that case, the Central Government is not bound to appoint an inspector. Clause (b) of section 237 enables the Central Government to appoint an inspector to investigate the affairs of the company suo motu. However, that power can be exercised on the subjective satisfaction of the Central Government with regard to all or any of the matters set out in the three sub-clauses of clause (b). The Central Government is under an obligation to appoint an inspector if one or the other conditions specified in clause (a) of section 237 is satisfied. Two conditions are :

            (i)         that the company adopts a special resolution to that effect; or

            (ii)        that the court by its order directs the Central Government to appoint an inspector.

Section 237 leaves no room for doubt that this court exercising jurisdiction under the Companies Act has no power to appoint an inspector. Therefore, prayer (a) by which the petitioner wants this court to appoint an inspector cannot be granted.

It was next urged that prayer (b) is premature. By prayer (b) the petitioner wants this court to direct the Central Government to appoint an inspector to investigate the affairs of the company. As the first limb of the argument it was urged that even according to the allegations made by the petitioner he has already approached the Central Government to appoint an inspector and as that application has not been finally decided, this court should not proceed to make any order under section 237(a)(ii) even if it has jurisdiction to pass such order. It is undoubtedly true that the petitioner has approached the Central Government and has sent various applications, letters and affidavits requesting the Central Government to take action against the company in exercise of the powers conferred upon the Central Government under section 237(b). But at this stage, on the demur, the question is : whether this court has or has no jurisdiction to entertain an application under section 237(a)(ii) and in an appropriate case to make an order directing the Central Government to appoint an inspector. That the court, in its wisdom, in a given case, may not pass an order under section 237(a)(ii) is entirely a different matter. The larger question argued was that this court cannot entertain a petition simpliciter under section 237 (a)(ii) unless the party has first approached the Central Government drawing its attention to various malpractices committed in the administration of the affairs of the company and after the Central Government declines to take action under section 237(b). This will immediately raise a question : whether the powers conferred upon the court under section 237(a)(ii) can only be exercised after the Central Government has declined to exercise powers under section 237(b). In other words, is it obligatory or incumbent upon a party before approaching this court under section 237(a)(ii) to first approach the Central Government and only after the Central Government declines to take any action, this court's jurisdiction can be invoked and the court can exercise jurisdiction under section 237(a)(ii). The construction of clause (a) of section 237 suggested by the learned Advocate-General would make the approach to the Central Government under section 237(b) a condition precedent to the court exercising jurisdiction under section 237(a)(ii). There is no warrant for this construction. There is nothing in the language of section 237 which indicates that a person invoking the court's jurisdiction under section 237(a)(ii) must, first, as a necessary condition before coming to the court, approach the Central Government, invite the attention of the Central Government to the various malpractices committed in the administration of the affairs of the company, and only after the Central Government declines to take any action in the matter, that he can invoke this court's jurisdiction under section 237(a)(ii). That would be, in fact, putting a fetter upon the power of this court, which the section does not provide, nor should the court by necessary implication read into section 237 any such fetter on the power of this court. Let it be distinctly understood that the court may in a given case decline to exercise jurisdiction under section 237(a)(ii) till the Central Government disposes of the matter pending before it under section 237(b); but that is entirely different from saying that no one can come to this court unless he first approaches the Central Government under section 237(b). That would be unduly limiting the jurisdiction of the court which the legislature has not thought fit to put, to delimit or circumscribe.

The language of section 237(a) is clear and unambiguous and admits of no construction by which any fetter or limit can be put on the jurisdiction of this court to entertain a petition for giving a direction to the Central Government to appoint an inspector to investigate the affairs of the company. Once the court makes an order, it is obligatory upon the Central Government to appoint an inspector. There are three distinct methods by which a party desirous of getting the affairs of a company investigated may get an inspector appointed by the Central Government. If the requisite number of members are available, application can be made under section 235. Any one who is unable to collect the requisite number of members may bring to the notice of the Central Government various malpractices committed in the administration of the affairs of a company and the Central Government may act suo motu under section 237(b). In the aforementioned two cases the question of appointment of an inspector is within the discretion of the Central Government. But there is a third mode legislatively recognised and mandatory in character by which an inspector can be got appointed by the Central Government and that is where the special resolution to that effect is adopted by the company, or where the court makes an order to that effect.

The legislature has conferred wide jurisdiction on this court to entertain a petition under section 237(a)(ii). In fact, the power of the Central Government to appoint an inspector suo motu under section 237(b) is limited to its subjective satisfaction in respect of one or other matters contained in three sub-clauses of clause (b). The legislature in its wisdom has not put any such condition before the court can make an order, though the court may in its wisdom expect prima facie proof of some of these conditions on the subjective satisfaction of which the Central Government would appoint an inspector before directing the Central Government to appoint an inspector. While conferring jurisdiction on the court to direct the Central Government to appoint an inspector, the legislature has not thought fit to circumscribe the discretion or jurisdiction in any manner. It would, therefore, be utterly inappropriate to curtail or circumscribe or fetter the jurisdiction of this court by reading into the section something which is not there.

The learned Advocate-General, however, in support of the construction canvassed for by him, urged that section 237 must be read subject to section 235 or section 237(b). It was urged that only if a requisite number of members gathered together as required by section 235 and approached the Central Government or anyone can draw the attention of the Centra] Government to the affairs of the company under section 237(b), on the Central Government being satisfied about one or the other thing set out in the three clauses of section 237(b), the Central Government may appoint an inspector. It is, therefore, not possible to conceive that the legislature would confer such wide jurisdiction upon the court under section 237(a)(ii), as to enable anyone to bypass these two sections. It was also urged that wherever the legislature wanted a single person to come to the court to take action against the company, it has in terms so provided. But, in all other cases, action against the company being representative action, one or the other individual should not be permitted to invoke the jurisdiction of the court which would have the tendency to open the flood-gates of litigation. As a corollary, it was urged that a petition under sections 397 and 398 for reliefs against oppression of minority shareholders can only be filed if and only if certain number of members gather together and come to the court as required by section 399. Approaching the matter from this angle and proceeding further, it was urged that it would not be appropriate to read section 237 in isolation but it must be read subject to section 235. The scheme of sections 235, 236 and 237 is quite clear and unambiguous. The requisite number of members can request the Central Government to appoint an inspector. The legislature also conferred power upon the Central Government to appoint an inspector suo motu. But the legislature also thought fit to confer jurisdiction on the court to examine the allegations against a company even at the instance of a single shareholder, and, if satisfied, to direct the Central Government to appoint an inspector. By putting this construction, which appears to be grammatically correct and in consonance with the spirit of section 237, there should be no apprehension of opening the flood-gates of litigation. Whenever the court directs a thing to be done, there is judicious investigation of allegations by a judicially trained mind and reason is the hallmark of judicial approach, fairplay and moderation. A party who comes to this court requesting the court to direct the Central Government to appoint an inspector will have to satisfy the judicial conscience that there has been such mal-administration in the affairs of the company, and that some one should at least look into the malpractices. In my opinion, the apprehension appears to be unfounded. Therefore, it appears that neither section 235 nor section 237 controls section 237(a)(ii) and this court has jurisdiction to entertain a petition under section 237(a)(ii) notwithstanding the fact that the party invoking the jurisdiction of this court has not approached the Central Government and notwithstanding the fact that the Central Government has taken no action on such an application already made to it. The petition, therefore, cannot be said to be premature or liable to be thrown out on this ground.

The learned Advocate-General invited my attention to the practice in England in respect of an application made under section 165 which is a corresponding section in the English Companies Act, 1948. It was urged that the practice as grown up in England does indicate that an application under section 165(a)(ii) which is in pari materia with section 237(a)(ii) will not be entertained until the party coming to the court has first approached the board of trade and the board of trade has refused to appoint an inspector. My attention was drawn to Palmer's Company Law, 21st edition, page 683, where the author has observed as under :

"If the board of trade refuse to appoint an inspector, a member may apply to the court for an order under section 165(a)(ii)"

From this observation, an attempt was made to urge that approaching the board of trade is a condition precedent to the court exercising jurisdiction under section 165(a)(ii). The observation cannot be construed to that effect because of an earlier observation in the same Chapter at page 681. There the author has observed as under:

"An application for an order is made by originating motion (R.S.C. 1965, Ord. 102, r. 4). Such an order may further be made by the court of its own motion in any proceeding before it."

Pennington on Company law, at page 557, has observed:

"The board of trade must appoint an inspector to investigate the affairs of a company if a meeting of its members by special resolution, or the court, by order, declares that its affairs ought to be so investigated."

It is further observed that, thus, if an individual member fails to persuade the board to appoint an inspector, of its own motion, or if the requisite fraction of members fails to persuade the board to do so, an application may be made to the court to reverse the board's decision. Gower, in his Principles of Modern Company Law, third edition, at page 606, has observed as under:

"It is very uncommon for an application to be made to the court for an order since it is cheaper, quicker and normally easier to apply direct to the board to exercise their power under section 165(b)."

It thus appears that even though ordinarily a single shareholder would be too unwilling to take proceedings in a court of law invoking the court's jurisdiction under section 237(a)(ii) and, therefore, would prefer to go to the Central Government, yet there is nothing in the language of the section or in the practice indicated hereinabove to lead to the conclusion that no one can come to the court without first going to the Central Government. Entertaining of an application directly by the court without insisting upon the applicant going to the Central Government would not indicate that thereby the individual is allowed to bypass some of the statutory provisions of law.

It was next urged that the court can make an order as envisaged by section 237(a)(ii) not by entertaining an independent petition from any petitioner but the court, while examining the affairs of the company in respect of some other proceedings against the same company, may in order to give full relief and to effectively adjudicate upon the issues raised before it direct the Central Government to appoint an inspector. It was urged that one cannot conceive of an application simpliciter under section 237(a)(ii) for directing appointment of an inspector by the Central Government but power under section 237(a)(ii) can only be exercised where the court has seizin upon the affairs of a company on account of some other proceeding pending in the court against that company. I fail to see anything in the language of section 237(a)(ii) indicating that a petition simpliciter for an action under section 237(a)(ii) cannot be entertained but that power conferred by section 237(a)(ii) can only be exercised by the court against the company in respect of whom some other proceeding is pending in the court and the court considers it proper to direct appointment of an inspector. My attention was drawn to the commentary by A. Ramaiya in A Guide to the Companies Act, sixth edition, page 408, where the author has observed that the order of the court referred to in clause (a)(ii) may be passed in any proceeding in which the court has seizin of the company's affairs. This commentary cannot be read to mean that existence or pendency of some proceeding other than the one for taking action under section 237(a)(ii) is sine qua non so that the court would have seizin over the affairs of the company and then alone in such a proceeding, in order to effectively dispose of that proceeding, the powers under section 237(a)(ii) can be exercised. On the contrary, it only indicates that even in the absence of a petition simpliciter for an action under section 237(a)(ii) for directing the Central Government to appoint an inspector, the court while hearing some other proceeding against a company in the course of which the court is satisfied that an inspector to investigate the affairs of the company should be appointed, the court may without any application to that effect proceed to pass such an order. If the court has such wide power to exercise jurisdiction under section 237(a)(ii) in another proceeding against the same company, there is no justification for holding that a petition simpliciter under section 237(a)(ii) cannot be entertained by the court. Viewed from this angle, the observations of the Allahabad High Court in Raghunath Swarup Mathur v. Har Swarup Mathur would not be of any assistance. In that case, while dismissing a petition under sections 397 and 398, it was observed that no case is made out for making an order under section 237(a)(ii).

Lastly, I would also like to point out that rule 11(9) of the Companies (Court) Rules, 1959, provides that the court can be moved under section 237 by a petition. That, of course, is not decisive. But if the construction that I put upon section 237 is correct, the fact that a petition is prescribed for moving the court may also point in the same direction.

Thus, upon a proper construction of section 237, a petition can be filed under section 237(a)(ii) of the Companies Act for a prayer that the Central Government be directed to appoint an inspector to investigate the affairs of the company. Prayer (b) is to that effect and, therefore, the petition is one which can be entertained.

As no further facts have been set out in the affidavit, the petition is accepted and admitted and notice of the petition should be issued to the company. Costs of this hearing would be costs in the cause.

[1962] 32 COMP. CAS. 52 (MAD.)

N.P.S.N. Ramiah Badar

v.

N.K. R.K. Amirtharaj

RAMACHANDRA IYER, OFFG. CJ. AND RAMAKRISHNAN J.

JULY 10, 1961

 

 RAMACHANDRA IYER, OFFG. C.J.-This is an appeal form the order of Ramaswami J. in O.P.No. 272 of 1952 direction the Government of India to appoint one or ore competent persons as inspectors to investigate into the affairs of the Nadar Press Ltd., Sivakasi, and to report thereon for further action to be taken under section 242 of the Companies Act of 1956, if it appears to the central Government that such action should be taken thereunder. the substantive application, namely, O.P.No 272 of 1952, was filed under section 153C of the Indian Companies Act,1913, for obtaining an order appointing an administrator or receiver to take charge of the business, properties and assets of the company, for terminating the service of the managing director and other director, who were in charge of the affairs of the company, and for certain other reliefs on the footing that there was mismanagement of the4 company be the board of directors and that the affairs of the company were conducted in a manner detrimental to the interest of the company and its shareholders.

During the course of hearing of the petition the learned judge tentatively came to the conclusion that the materials on record made out an overwhelming prima facie case for ordering investigation into the affairs of the company by the machinery; provided under the Indian Companies Act. The learned judge, therefore, called for a report form the officers appointed by the central Government under the provisions of section 237 of the Indian Companies Act. Some of the directors of the company feeling aggrieved by the order directing an investigation, have filed this appeal.

A preliminary objection to the maintainability of the appeal s taken of behalf of the respondent of the ground that the order of the learned judge does not amount to a judgment within the meaning of the term in clause 15 of the Letters Patent.

In order to appreciate the contention, it is necessary firs5 to ascertain the scope of section 237 of the Act, That section provides for investigation of the company’s affairs in certain cases and provides that the Central Government shall appoint one or more competent person as inspector to investigate the affairs of the company and to report thereon in such ;manner ;as ;the Central Government may; direct, if the court by order declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government. the nature of the jurisdiction of the Government in as analogous case has been considered in the judgment of the Supreme out in Raja Narayan Bansilal v. Maneck Phiroz Mistry. that case was concerned with an enquiry under section 234 of the Indian companies Act. Their Lordships if the supreme Court observed :

“Thus the scope of the enquiry contemplated by section 234 is clear ; wherever the Registrar has reason to believe that the affairs of the company are not properly carried on he is empowered to make an enquiry into the said affairs. Similarly under section 235 inspectors are appointed to investigate the affairs of any company and report thereon. the investigation carried on by the inspectors is no more than the work so a cat-finding commission.”

What the leaned judge in the instant case should be held to have directed is the issue of a fact-finding commission in terms of section 237 of the At for the purpose on investigation. If on the basis of the report of the inspectors the Government come to the conclusion that any action shod be taken in regard to the management of the company, the court would consider the same. If the Government do not consider that any further action is necessary, the appellant could have no grievance whatsoever.

Mr. Thyagarajan appearing of the appellant contends that as section 237 speaks of a declaration by court, it should necessarily involve an adjudication, which would greatly or adversely affect the company’s reputation and the direction contained in the order of the learned judge would have a wider significance than that of a mere fact-finding commission. We are unable to agree with the contention. For he purpose of direction an investigation under section 237 the court has to find certain preliminary facts. but the finding of the court is not a final one : it cannot affect either the company or its directors. A mere direction to investigate cannot cannot give rise to a legal grievance. In our opinion, the order of the learned judge directing the issue of investigation is something analogous to the issue of a commission for the purpose of looking into the accounts of the parties.

In Tuljaram Row v. Alagappa Chettiar, it was observed that an order direction evidence to be taken on commission would not be a judgment so as to be appeable. The characteristic of a judgment has been considered in detail by Govinda Menon J., as he then was, in Central Brokers v. Ramnarayana Poddar and Co. The learned judge laid down two tests to find out whether the adjudication in a particular case is a judgment within the meaning of clause 15 or not. The test were :

 (I) whether the order terminates suit or proceedings , and (2) whether it affects the merits of the controversy between the parties in the suit itself. that view was followed in Union of India v. Shanmugha Nadar, a judgment to which one of us wa a party. It s sufficient for the purpose of this case to consider whether the second of the two tests has been satisfied.

Mr. Thyagarajan for the appellant contends the in so far as the learned judge has declared that there is a case for investigation, it must be held that ;the merits of the controversy have in a way bee adjudicated upon. We have earlier pointed out that the learned judge has merely sated that there is a prima facie case for further investigation, by the Government under the provisions of section 237. it cannot obviously be said that the merits of the case have been finally disposed of . There is a possibility of the management being vindicated at the investigation ; even other8se the results of the investigation would laid only to the initiation of appropriate proceeding. WE are therefore not satisfied that the order of the learned judge in this case fulfill the test laid down in the various cases as to what a judgment is. In our opinion an order by court directing the investigation under the provisions of section 237 of the Indian Companies Act will not amount to a judgment ;within the ;meaning of the term “judgment” in clause 15 of the Letters patent so as ;to entitle an aggrieved partly to appeal therefrom.

The appeal fails and is dismissed with costs

Appeal dismissed.

[1984] 56 COMP. CAS. 284 (KER.)

HIGH COURT OF KERALA

V.J. Thomas Vettom

v.

Kuttanad Rubber Co. Ltd.

V. KHALID AND G. BALAGANGADHARAN NAIR, JJ.

M.F.A. Nos. 96 and 104 of 1981

OCTOBER 18, 1982

 C.M. Devan, N.S. Sundararaman, K.V.R. Shenoi, P.K. Kurien, K.A. Nayar and E.R. Venkiteswaran for the Appellants.

Mani J. Meenattoor, M.M. Abdul Aziz and Chacko J. Kallivayalil for the Respondents.

JUDGMENT

The judgment of the court was delivered by

Khalid J.—These two appeals are against the judgment of the learned company judge in C.P. No. 19 of 1974 and C.P. No. 8 of 1976 which were heard together, filed under ss. 397 and 398 of the Companies Act, 1956. In the first petition, the prayers were for removal of the present director and secretary from the management of the company, to restrain the company by an order of injunction from effecting sale of the 53 acres of land and to appoint at least two directors from the petitioner's group, while the prayers in the other petition, inter alia, were to remove the second and third respondents from the management of the company, to direct the second respondent to make good the loss illegally pocketed by him out of the sale proceeds of the 53 acres of estate and to appoint an administrator to look after the affairs of the company. The main allegations against the respondents were: (i) that 53 acres of rubber estate were sold without valid necessity, (2) dividends were not declared to create a situation of inducing the minority shareholders to part with their shares, (3) slaughter tapping and double tapping were resorted to unnecessarily and the amounts derived from them were not accounted in the books of the company, (4) timber trees were cut and sale proceeds were not accounted, (5) the son of the secretary was appointed as superintendent removing the then incumbent adopting an improper procedure, and (6) the workers of the company and its smoke house were used for the purpose of the son's estate. Though the petitions raised various other grounds also, the learned judge considered only such of the allegations as were pressed before him at the time of hearing. Six witnesses were examined on behalf of the petitioners and two on behalf of the respondents. A commissioner was appointed and he also gave evidence. After considering the evidence in the case, the learned judge felt that the evidence adduced was not sufficient to grant reliefs to the petitioners and dismissed the petitions observing that the petitions might have been filed because two of the petitioners wanted to settle some old scores with the secretary. Even so, the learned judge felt in view of the grave allegations made against the director and in view of the suspicious nature of the transactions which formed the subject-matter of the petitions, an investigation into the affairs of the company was necessary and, consequently, issued a direction to the Central Government, under s. 237(a)(ii) of the Act to appoint an inspector to investigate the affairs of the company. The appeals are directed against the judgment dismissing the petitions. A memorandum of cross-objection is filed against the direction made under s. 237(a)(ii) of the Act.

The sole petitioner in C.P. No. 19 of 1974 is P.W. 4. C.P. No. 8 of 1976 was originally filed by the first petitioner. The second petitioner is impleaded on June 1, 1976. The first petitioner was examined as P.W. 1 and the second petitioner as P.W. 2. P.W. 3 is a dismissed employee of the estate. P.W. 5 is the son of a former director. P.W. 6 was examined to prove certain documents. R.W. 1 was the superintendent of the estate till 1974 and R.W. 2 is the secretary. P.W. 4, the petitioner in C.P. No. 19 of 1974, was a director of the company from December 31, 1954, to January 18, 1972. P.W. 2 the second petitioner in C.P. No. 8 of 1976, was a director from 1971 to 1976. At the relevant time he was also the manager of the estate. Both P.Ws. 2 and 4 ceased to be directors of the company on account of their absence from three consecutive meetings of the board of directors. P.W. 4 filed O.S. No. 779 of 1971 before the Allppey Munsiff's Court against his removal from the board of directors. The suit was subsequently dismissed. Thereafter, he filed O.S. No. 420 of 1972 for a declaration that he continued as a director. This suit also was dismissed. It was, thereafter, that he filed C.P. No. 19 of 1974. P.W. 2 filed O.S. No. 642 of 1976 in the Alleppey Munsiff's Court for a declaration that he continued as a director of the company. That suit also was dismissed. It is submitted that an appeal is pending.

One Joseph Chacko was the founder of the company. The main asset of the company is the rubber estate known as Pazhuthadam Rubber Estate with a planted area of over 450 acres. P.W. 4 is a grandson of the founder. In C.P. No. 19 of 1974, the allegations were mostly directed against the secretary and also P.W. 2. P.W. 2 is the son of the secretary's maternal grandfather. The old superintendent R.W. 1 was also related to the founder. The parties are in one or the other way related to one another.

The petitioners put forward their case on the basis that they belonged to the minority group of shareholders and that by various acts the majority group was oppressing them. According to them, they were denied access to the books of the company, the books were manipulated to suit the convenience of the directors and the affairs of the company were conducted in a manner harmful to the interests of the company. The case of the petitioners is denied by the company. According to the company, there was never any attempt to acquire weak shares at low value, reserves were built up for being used in replantation, that during the relevant time when the impugned transactions took place the petitioners were active in the affairs of the company, that all transactions were placed before the general body, that the sale of 53 acres was necessitated since the company was badly in need of funds and that the petition was filed without any bona fides.

The learned judge has discussed the facts and evidence of the case in great detail. We will briefly advert to the allegations and the evidence bearing on them and examine whether the findings entered on each of the allegations pressed at the hearing need interference at our hands. Before examining the evidence in the case to consider whether the petitioner is entitled to any relief, and whether the judgment rendered by the learned judge needs interference, we will have to examine the correctness of a proposition of law put formed by the appellant's counsel in M.F.A. No. 96 of 1981. The contention raised is as follows:

There is a fiduciary relationship between a director and the company. A director, therefore, has always to act in good faith vis-a-vis the company. When the action of such a director is impeached on the ground that it lacked good faith, the person who makes the accusation need only adduce prima facie evidence in support of the accusation and once such evidence is adduced, the burden shifts to the director or directors to satisfactorily rebut the accusation by acceptable evidence. In other words, in such cases, there is a reversal of the normal rule of burden of proof. This contention was largely rested on s. 111 of the Indian Evidence Act.

It is necessary first, to understand the scope of the fiduciary nature of the relationship on which this argument is built. Directors have been held to be sometimes agents of the company. They are also understood to be trustees so far as the company's property and its funds in their hands are concerned. Courts of law have considered and treated them as trustees of money which comes into their hands and once it is proved that they have misapplied or misused such money, they were held liable to make good those monies. In Regal (Hastings) Ltd. v. Gulliver [1942] 1 All ER 378, the House of Lords had occasion to consider this aspect of the case. The House of Lords observed thus:

"Directors of a limited company are the creatures of statute and occupy a position peculiar to themselves. In some respects they resemble trustees, in others they do not. In some respects they resemble agents, in others they do not. In some respects they resemble managing partners, in others they do not."

The House of Lords considered various authorities dealing with this question, and it was decided that the powers of the directors were in some sense fiduciary in relation to the company. On the facts of that case, directors who had made some profits by virtue of their position involving a cinema house and a subsidiary company, it was held that the rule of equity which insists on those who by user of a fiduciary position make a profit should account for it, is not dependent on fraud or absence of bona fides but by virtue of their position as trustee. In Selangor United Rubber Estates Ltd. v. Cradock [1968] 2 All ER 1073 (Ch D) the first question of law discussed was how far the directors are trustees of the company's funds and while answering this question, the discussion proceeded on the assumption that there existed a fiduciary relationship between the director and the company which is clear from the following observation (p. 1091):

"It is clear and not disputed that they owe a fiduciary duty to the company to apply its assets only for the purpose of the company and are, therefore, liable for breach of that duty; but the question how far they are trustees bears on the question how other defendants can be made liable as constructive trustees as claimed.

On occassion directors have been said to be trustees and on occasion not to be trustees."

The following observation In re Forest of Dean Coal Mining Co. [1878] 10 Ch D 450 was noted with approval (p. 453):

"Again, directors are called trustees. They are no doubt trustees of assets which have come into their hands, or which are under their control, but they are not trustees of a debt due to the company. . . . . .A director is the managing partner of the concern, and although a debt is due to the concern I do not think it is right to call him a trustee of that debt which remains unpaid, though his liability in respect of it may in certain cases and in some respects be analogous to the liability of a trustee. So much for the question of unpaid debts."

And the discussion on this question was wound up as follows:

"So, in my view, in general as in this case a credit in a company's bank account which the directors are authorised to operate are moneys of the company under the control of those directors and are held by them on trust for the company in accordance with its purposes."

Gower's Principles of Modern Company Law, fourth edition, contains the following passage (p. 572):

"The fiduciary duties of directors are, basically, identical with those applying to any other fiduciary and discussed in works on Trusts and Agency. Such duties have, indeed, already been dealt with briefly in connection with another type of fiduciary peculiar to company law, the promoter. But the relevant rules have received particular elaboration in relation to directors and the practical importance of the subject makes it desirable to discuss it here in greater detail."

"Directors, once their appointments take effect, are fiduciaries and must, therefore, display the utmost good faith towards the company in their dealings with it or on its behalf." (p. 575)

From the above discussion, it has to be held that there exists a sort of fidudiary relationship between the directors and the company and that law requires the directors to deal with the monies and properties of the company as trustees. The contention that the appellants put forward on this basis is that once the fiduciary relationship mentioned above is accepted, the burden to satisfy the court of the good faith in transactions, the bona fides of which are questioned by a shareholder, shifts to the director and that the shareholder need only adduce some prima facie evidence. For this purpose, strong reliance was placed on s. 111 of the Indian Evidence Act. It is useful to read the section itself before considering the scope of its operation:

"111. Proof of good faith in transactions where one parly is in relation of active confidence.—Where there is a question as to the good faith of a transaction between parties, one of whom stands to the other in a position of active confidence, the burden of proving the good faith of the transaction is on the party who is in a position of active confidence."

Normally, the law presumes prima facie in favour of deeds duly executed. Therefore, when the validity of a transaction on the ground of fraud, undue influence, etc., falls to be decided imputing bad faith, the burden is on the person who challenges it. The exception to this rule comes where fiduciary relationship subsists between the contracting parties. The scope of s. 111 has to be understood before applying it. It has no application except as between parties to the transaction in question. The section contemplates a transaction between two persons, one of whom has an advantage over the other, who puts trust in him. In order to bind persons with the rigour of proof contained in the section, the party who seeks its benefit must prove that the other party is in a position of active confidence. The two illustrations given to the section give some guide to appreciate cases where the section could be pressed into service. The section has been used in cases of "medical practitioner and patient, spiritual director and penitent, trustee and cestui que trust, husband and wife, guardian and ward, agent and principal and the like". The court always looks to the possibility of exercise of dominion and influence by the one who receives benefit over the other who is denied of it. The concept of active confidence must inform the court before extending the benefit of the section to a transaction in question. The words "active confidence" normally indicate that the parties to the transaction are such that one is bound to protect the interest of the other. A volume of case-law is available where this section had been used in cases where pardanashin and quasi-pardanashin ladies are involved to the transactions impugned. We have tried in vain to get at any case where the rigour of the burden of proof in-built in the section had been extended to transactions entered into by the directors of the company, the bona fides and validity of which were questioned by a shareholder. In our view, this filed has remained virgin for the very good reason that such a plea is not available in cases like this. This is a contention not raised before the learned judge, nor in the memorandum of appeal before us. The transactions before us are those entered into between directors and third parties, not between the appellants and the directors between whom there does not exist any fiduciary relationship. The section has application only between contracting parties. A company incorporated under the Companies Act functions within the confines of the provisions of that Act and a company differs from a proprietary concern only to the extent that its activities are governed by the provisions of the Act. A proprietary concern is not answerable to any one for what it does, but a company is answerable to the Government as well as to its shareholders when the directors act against the provisions of the Act and to the proved detriment of the company or its shareholders. If the appellants' contention is to be accepted, any shareholder can throw some mud at a director by filing an application like the one filed in this case, adduce some evidence and then insist upon the company to satisfy the court that the allegation is not correct and thus stifle the activities of the company. The learned judge was not prepared to accept the evidence adduced as sufficient to substantiate the allegations made against the directors, indirectly holding that the burden of proving the allegations satisfactorily is on the petitioners. On a careful consideration of this contention, which we have permitted the appellants' counsel to argue before us, though not raised before, we hold that the burden to satisfactorily establish the accusations against the directors is upon those who question their validity and there is no reversal of burden as contemplated in s. 111 of the Indian Evidence Act.

One other question of law also has to be disposed of before entering into the evidence in' the case. The learned judge, as already stated, directed the Central Government to appoint an inspector to investigate the affairs of the company under s. 237(a)(ii) of the Act since he felt that the company was not functioning in a proper manner. The Inspector appointed by the Central Government has submitted his report to the court as enjoined by the section. The memorandum of cross-objection filed relates to this direction by the learned judge and the counsel for the company submits before us that this cross-objection is not pressed because the report has already been filed. The attempt of the appellants' counsel in both the appeals is to invite us to go into the report to treat it as additional evidence, to be considered along with the evidence already on record, to displace the findings entered by the learned company judge and to persuade us to allow the appeals. The appellant in M.F.A. No. 96 of 1981 has also filed an application, C.M.P. No. 19643 of 1982 under 0. 41, r. 27 and s. 151, CPC, to admit the inspection report as additional evidence in the case. The respondent has filed a counter-affidavit and has strongly opposed reception of the report as additional evidence and reading passages from the report to supplement the evidence already on record. In view of this objection, we allowed the counsel on both sides to make their submissions regarding this aspect of the case. The appellants' case is based on s. 246 of the Companies Act, which reads as follows:

"246. A copy of any report of any inspector or inspectors appointed under section 235 or 237 authenticated in such manner, if any, as may be prescribed, shall be admissible in any legal proceeding as evidence of the opinion of the inspector or inspectors in relation to any matter contained in the report."

It is submitted that this section is very wide in its scope and permits the admissibility of the report in any legal proceeding as evidence of the opinion of the inspector in relation to any matter contained in the report. An appeal from the judgment of the company judge is a legal proceeding. Such a proceeding is not excluded from the operation of s. 246. This court, sitting in appeal, will be perfectly justified, according to him, in looking into the report for the purpose of satisfying itself of the validity or the bona fide nature of the grounds set forth in the petition in supplementation to the evidence already on record. The respondents' counsel submits that this is totally impermissible and that s. 246 cannot be pressed into service for admitting the report obtained as per a direction under s. 237 in an appeal from the judgment in which such a direction was given. He took us through the various sections of the Act in reinforcement of this submission and to satisfy us of the use to which such a report can be put under the Act. According to him, the learned company judge becomes functus officio once a direction under s. 237 is given. He cannot be invited to look into a report submitted pursuant to such a direction after the main petition is disposed of. If his jurisdiction is so restricted, the jurisdiction of the appellate court would be also similarly restricted. In other words, if examination of the contents of the report by the judge who gave the direction is not permissible in law, a court sitting in appeal over the judgment will also be not permitted to look into that report. According to him, the provisions of the Act lay down how the report can be used. If the request of the appellant is to be accepted, that would amount to inviting this court to displace the judgment of the learned judge by some material secured after the judgment when the learned judge found that the materials available before him were not sufficient to give relief to the petitioner; If this court is to interfere with the judgment of the learned judge relying upon the report, that would result in the deletion of the direction made under s. 237 without an attack by the appellant against that direction. We find force in this submission.

We will examine the scope of the report under s. 237 presently. Section 237 enables the Central Government or the court to appoint one or more competent persons as inspectors to investigate into the affairs of a company. The court exercises its powers under s. 237 when it finds that the afffairs of the company ought to be investigated by an inspector appointed by the Central Government, on being satisfied that such investigation is necessary though the evidence on record is not sufficient to give relief to the aggrieved party. Under s. 241, the inspectors have to submit a final report to the Central Government on the conclusion of the investigation. Where the inspectors are appointed under s. 237 in pursuance of an order of the court, a copy of the report has to be furnished to the court. While under s. 235 appointment of inspectors by the Central Government when circumstances mentioned in the said section exist is discretionary, the appointment under s. 237 is mandatory. Section 242 provides for initiating prosecution against persons for any offence disclosed from the report submitted by the inspector. Section 243 enables the Central Government to file a petition for the wnding up of the company, or to file an application for an order under s. 397 or s. 398 or both, a petition for the winding up and an application under s. 397 or s. 398. It has to be noted that the use of the report obtained under s. 237 is restricted; it can only be by the Central Government and not by any other person, for example, a shareholder. But the Central Government can cause an application to be made either for winding up in a case falling under s. 243, under s. 439(1)(f), or an application under s. 397 or s. 398, under s. 401, by any person authorised by it in this behalf. The attempt of the appellants before us is to make use of the report in a manner not contemplated by the Act. The report could be made use of only by the Central Government in the manner provided in s. 243. Section 244 provides for proceedings being taken for the recovery of damages if from any such report as aforesaid, it appears to the Central Government that proceedings ought, in the public interest, to be brought by the company or any body corporate whose affairs had been investigated. The scheme contained in the above provisions makes it clear that a machinery is provided to use the report that an inspector submits after investigation into the affairs of the company either at the instance of the Central Government or at the instance of the court. A direction by a court to appoint an inspector for investigation into the affairs of the company is necessitated only when the court finds it difficult to pass an effective order in an application under s. 397 or s. 398. To use such a report at the appellate stage to displace the order of the original court would be to set at naught the effect of the various provisions enabling the Central Government to act on the report. To do so would be to violate the various sections quoted above.

The nature of the report that an inspector makes has also to be considered in this context. He has power to summon persons whom he thinks could give useful information. He takes their statements behind the back of persons to be affected. The persons whom he questions are not cross-examined by persons who will be affected. What he submits is his opinion on the materials so collected. To say that this court can at the appellate stage look into the statements so taken and the opinion so expressed, and then on the strength of those materials should interfere with the judgment of the learned judge, would be to exalt the opinion submitted by the inspector over the decision of the learned judge, which, according to us, is totally impermissible and not contemplated under the Act. When proceedings are initiated on the strength of this opinion, the affected party will get a right to challenge the various particulars of the report and even a right to get the persons from whom statements were taken to be cross-examined. If we allow the report to be looked into, that would be in denial of an opportunity to the affected party to challenge the report. If the challenge against the various items of the report is to be permitted, this court will have to convert itself into a company court of original jurisdiction. The Central Government has to consider various aspects including public interest before starting any proceeding on the strength of this report. We, therefore, feel no difficulty in disallowing the use of the report at the appellate stage. In Nadar Press Ltd. In re: N.K.R.K. Amirtharaj v. N.P.S.N. Ramiah Nadar [1968] 38 Comp Cas 337 (Mad), the scope and applicability of s. 237 came up for consideration and the following extract in page 343, with which we agree, can be usefully quoted:

"The above conclusion of mine can also be reached by applying the provisions of the new Act. When the court by order declared that the affairs of the company ought to be investigated by an inspector and directed the Central Government to appoint an inspector to go into such details, then there is an exhaustion of the jurisdiction of this court in so far as this application is concerned, and it is for the Central Government to take up the matter in their hands after receipt of the report of the inspector and do such things as are necessary and expedient in public interest..........It should be, however, remembered that once an inspector is appointed and the inspector, after enquiry, submits a report, it is for the Central Government to act, and it is no longer open to a person, who prompted the court to issue an order under section 237(a)(ii), to call upon such court after the investigation report of the inspector, to consider the said report once again and give him such reliefs which, according to him, he is entitled to. This is not provided under the Act........."

What remains in this connection is the application filed by the appellant in M.F.A. No. 96 of 1981 as C.M.P. No. 19643 of 1982 under O. 41 r. 27 for reception of the report as additional evidence. What is produced is a copy of a copy. There was some controversy before the learned vacation jude when the matter came before him about the admissibility of the copy. We do not think it necessary to consider the question, nor to examine whether the application to admit additional evidence is based on satisfactory grounds, for the reason that we have already held that the document attempted to be produced cannot be admitted in evidence in this proceeding. Hence CM.P. No. 19643 is dismissed.

We will consider the gounds of attack one by one. Before doing so, it would be relevant to bear in mind the fact that the petitioner in C.P. No. 19 of 1974 was a director of the company from December 31, 1954, to January 18, 1972 (examined as PW-4), and the second petitioner in C.P. No. 8 of 1976 (examined as PW-2) was a director from 1971 to 1976 and was also during that period the manager of the estate. The acts of oppression and acts resulting in financial loss and misappropriation took place at the time PW-2 was with the company and to a small extent while PW-4 was with the company. It has also to be noted that PW-2 did not figure as a petitioner originally when C.P. No. 8 of 1976 was filed and got himself impleaded subsequently in June, 1976. The fact that both PWs. 2 and 4 had moved the civil court for their reliefs against the loss of their directorship by filing suits and had got worsted in them, can also be kept in mind (though one of the cases is pending in appeal now) while considering the acceptability of the evidence adduced by them.

The most important allegation against the respondents relates to the sale of 53 acres of rubber estate. The case about the sale was not clearly set out in the first petition. The petition was subsequently amended incorporating the prayer to set aside the same or to order recovery of Rs. 5,30,000 from the directors. In fact, the sale took place months before the filing of that petition. In the second petition, the allegation against the sale contains better details. It is said that this sale was by private negotiations and that by this sale, the secretary got unduly enriched to the extent of Rs. 4,00,000 with corresponding loss to the company. The sale was unnecessary and no sanction from the general body was obtained. The amount realised on paper did not represent the real consideration. The company met this allegation with the plea that sale was necessary and an advertisement was not taken out informing the sale to the public to avoid unnecessary labour agitations. The property sold was not fully planted and was in part rocky. PW-2 at all relevant times was actively participating in the negotiations for the sale and it was he who executed the sale deeds.

The minutes of the board meeting recorded in Ext. B1 during the relevant period when the sale took place will have to be looked into to appreciate the rival contentions regarding the sale. PW-2 was appointed manager of the estate on April 12, 1972. This decision was taken at the meeting of the board held on April 12, 1972. At the meeting of the board on November 7, 1973, RW-2 and PW-2 furnished an estimate of the immediate financial requirements for the estate, which included funds for clearing off an overdraft liability and for day-to-day working, payment of provident fund arrears, installing a motor and putting up of workers' quarters. The board felt that there was no possibility of getting loan on reasonable terms. This led to the decision to sell a part of the estate described as immature, non-yielding poor area. A block of 53 acres was pointed out by PW-2 as poor and hilly. The board thereupon authorised PW-2 and RW-2 to contact prospective buyers and report. At the next meeting held on January 12, 1974, PW-2 and RW-2 submitted a detailed report about prospective buyers. Some offers were also produced. The board discussed the matter and authorised PW-2 to execute sale deeds at the rate of Rs. 5,000 per acre and hand over possession to specified persons. All the sale deeds were executed by PW-2 at Kottayam at his residence. The execution of the document is seen to be between 6 p.m. and midnight on May 17, 1974, the District Registrar having been brought to his residence for the purpose. Exts. B5 to B15 are the sale deeds, the sale being at the rate of Rs. 5,000 per acre. According to the allegation in C. P. No. 19 of 1974, the normal price for an acre of planted area would be Rs. 15,000. By this fraudulent and surreptitious sale, the company had lost Rs. 5,30,000. In C. P. No. 8 of 1976, the allegation is that the sale was in fact for Rs. 12,500 per acre and that the secretary had pocketed as illegal gain a sum of Rs. 3,97,500. PW-4 deposed that the sale was effected without advertisement and without authorisation from the general body, that the area was well planted and yielding, and that two of the purchasers had told him that they had paid at the rate of Rs. 12,500 per acre. PW-1 has no direct knowledge of this. His evidence is based on hearsay. PW-2 admits having executed the sale deeds in the presence of the Registrar at his residence. He was unwell at the time. Some of the purchasers told him that the real consideration was Rs. 12,500 per acre. He signed the documents as directed by the secretary and his son and was not permitted to read them. Consideration was received by the secretary and his son. The other material witness regarding the sale is PW-6. He had sold away 82.50 acres of planted area belonging to him for Rs. 9,50,000 in 1975. The documents are Exts. A-31, A-32 and A-33. He had never seen the company's estate which is eight miles away from his own. He deposed that the market for rubber was not attractive during 1973-74 and there was a sudden jump in 1975. RW-1 deposed that parcels of another estate adjoining the estate in question were sold away at Rs. 5,000 per acre in 1973. The 50 acres sold by the company in 1974 were not being tapped at that time but they were about to be. Sales in 1974 varied between Rs. 5,000 and Rs. 6,000. He himself had eight acres of rubber which he sold after he left the services of the company at Rs. 6,000 per acre. RW-2, the secretary, deposed that PW-2 took a leading part in both the transactions, that the price of Rs. 5,000 was fixed after negotiations by PW-2, that it was PW-2 who arranged for the execution of the documents and that he was giving false evidence deliberately. The learned judge felt that the above evidence gave room for suspicion that all was not well with the transaction. According to him, the consideration of Rs. 12,000 shown in Exts. A-1 to A-33 for the rubber estate, eight miles away, in 1975 and Rs. 5,000 shown in 1975 for the estate in question gave room to suspect whether the documents in question showed the correct consideration. Even so, the learned judge felt that he was unable to find sufficient evidence to hold that the area was actually sold at Rs. 12,500 per acre and that the secretary had pocketed the difference. The learned judge was not prepared to accept the version given by PW-2. He held that PWs. 1 and 4 had only hearsay knowledge, thereby holding that the allegation under this head was not proved beyond doubt.

The respondents' counsel found fault with the observations made by the learned judge about the disparity between the consideration in the document in question and Exts. A-31 to A-33 to be abnormal, and stated that the evidence clearly indicated the transaction to be bona fide and beyond reproach. In particular he stated that the said observation by the learned judge was without properly considering Exts. B-28 and B-29, two documents of sale in the year 1973 of an estate adjoining the estate in question. In these two documents, the consideration shown was Rs. 5,000 in the year 1973. According to respondents' counsel, if these documents were looked into, the learned judge would have been satisfied that the consideration shown in the documents impugned was fair and reasonable.

It is not correct to say that the learned judge had not adverted to this sale evidenced by Exts. B-28 and B-29. He refers to the evidence of R.W. 1 who had deposed about the sale of parcels of Kollankulam estate for Rs. 5,000 per acre in 1973 and did not rely upon it as that was hearsay information. It is true that direct reference is not made about these two documents. It may be that the respondents' counsel is justified in stating that these two documents which came into existence in 1973 represent a bona fide transaction and the consideration therein showed reasonable price. But no one connected with these documents was examined and, therefore, the details given in the said two documents cannot be made use of to contend that the amount shown in the impugned documents as consideration is fair. If these two documents had been proved, the respondent would have been in a better position to press them in support of his case of sufficiency of consideration for the sale deeds in question. Under these circumstances, the observation of the learned judge that the evidence of R.W. 1 is only hearsay, is correct. We have considered the evidence in the case regarding the impugned sale deeds. The evidence of P.W. 1 is of no consequence. The evidence of P.W. 2 cannot impress any court of law because he stands self-condemned on account of his active participation in all the affairs of the company during the relevant period. Exhibit B1, the minutes of the board meeting at the time he was the manager, which is a book maintained statu-torily, contains the various decisions taken at various meetings. He had the temerity of denying the signature of the chairman in the minutes. This is the only method available to him to get rid of the effect of the minutes. This minutes book was produced in O.S. No. 642 of 1976 filed by him. We do not think it necessary to go deep into the case of P.W. 2 of the alleged forged signature of the chairman because, according to us, that is only a desperate attempt at this stage to explain the adverse circumstances against him. We have looked into the minutes book ourselves. We find the signature of the chairman, who is no more, in the minutes of the meetings at which he presided. We find the signature of the successor-chairman in the meetings at which he presided'. The minutes book, as already stated, is a book the maintenance of which the Companies Act insists. If Ext. B1 is accepted, it has to be found that P.W. 2 knew at all relevant times about the proposal to sell 53 acres of land and that he had taken active part in the negotiations and the ultimate execution of the sale deed. His evidence that the actual consideration was Rs. 12,500 and that this amount was paid in the presence of the Registrar cannot, for a moment, be accepted. There was no reason why he should have been a mute spectator when Rs. 12,500 per acre changed hands while actually the document showed only Rs. 5,000 per acre as consideration. Nobody has been examined to prove the actual payment of consideration of Rs. 12,500 though P.Ws. 2 and 4 would depose that some persons had mentioned as to them. The evidence of P.W. 4 also is not trustworthy. P.W. 6 is a witness examined on the petitioner's side. He proxed Exts. A-31 to A-33. He deposed that the price of rubber till 1974 was not appreciable and that there was a speedy rise in the price of rubber in 1975. By saying so, he justified the difference between the prices in the sale deeds in question and his sale deeds. He was not treated hostile. This evidence was made use of by the respondents to explain the difference in consideration between the two sets of documents. R.W. 1 has to be treated as a disinterested witness. His cause is seen espoused by the petitioners. The case of the petitioners was that an experienced superintendent like R.W. 1 was unceremoniously eased out to give way for the appointment of R.W. 2's son. This case would show that the petitioners did not have any complaint against R.W. 1. However, R.W. 1 does not support the petitioner's case. According to him, the consideration shown in the documents is fair having regard to the rubber price at that time. He himself had sold 8 acres of rubber estate. He deposed about the sale of the adjoining rubber estate in 1973; possibly, the reference was to Exts. B-28 and B-29. It is true, that the learned judge has not made pointed reference to these two documents. These documents came into existence in 1973. R.W. 2 has deposed about the circumstances under which the sale took place and about the actual consideration received. The evidence adduced by the petitioners, in our view, is not sufficient to establish either that sale was unnecessary or that the consideration shown in the documents does not represent the actual consideration received. We, therefore, hold, in agreement with the learned judge, that the allegation that the sale was effected with ulterior motives, to enrich the respondent, not showing the actual consideration has not been satisfactorily proved.

Before considering the other allegations, we may in passing refer to the allegation that R.W. 1, the former supperintendent of the estate, was driven out of office in order to accommodate the secretary's son, the third respondent, and to get at the shares held by R.W. 1 and his relatives. R.W. 1 gave evidence to the contrary. According to him, he went out voluntarily. He wanted better terms. The board did not accede and hence he resigned. All these are evident from the minutes of the board meeting held on January 12, 1974. His shares were purchased by P.W. 2 and his wife. Therefore, the case of exerting pressure on R.W. 1 and the alleged removal cannot persude us to hold that it was done to accommodate P.W. 2's son and cannot pass muster in view of the evidence of R.W. 1 himself.

One other allegation was that the secretary and his group were keeping share certificates with them in order to prevent transmission of shares in favour of the legal representatives of deceased shareholders. This alle gation is not supported by any evidence. Not even a single case had been mentioned though an attempt was made to say that the signature of the former chairman in some share transfer forms was different from the admitted signature. The learned judge felt unimpressed by this case because some of those transfer forms were used to transfer shares in favour of P.W. 2 himself. Another important allegation made by the petitioners is that dividends were not declared for a long time with the avowed intention of compelling the minority shareholders to transfer their shares and facilitating cornering of shares by the secretary and his dependants. It is true that dividends were not admittedly declared from 1962-63 to 1971-72. But the allegation made is disproved by the fact that the petitioners did not succeed in citing one single instance of a transfer of share below par. P.W. 1 purchased some shares in 1971 at Rs. 100 per share. According to P.W. 4, the shares were worth Rs. 400 each in 1968. The evidence in the case indicates that after 1971-72, dividends ranging from 2.4 to 40% were declared.

The learned judge then examined the case that the secretary and his relatives tried to corner the shares by the device of non-declaration of dividends. As rightly pointed out by the learned judge, there is nothing wrong if a person tries to purchase shares which are being sold. In paragraph 20, the learned judge discussed in detail the relationship between the parties and the number of shares held by them in the estate. It is seen that the majority shares in the company were always held by members of the Kanjooparambil and Kalappurakkal families. The petitioner in C.P. No. 19 of 1974 held only 10 shares in 1950. But he acquired 60 shares in March, 1958, and 8 shares in July, 1968. The first petitioner in C.P. No. 8 of 1976 acquired 173 shares in 1971 and the second petitioner started purchasing shares from 1971. The secretary, his wife, sons and daughters acquired 320 shares during the period when dividends were not declared. But the evidence shows that most of the transferors were related to the transferees. After discussing this evidence, the learned judge observed, according to us, with respect, rightly, that the transfer of shares was never below par, was not a one-way traffic and that there was nothing unusual or abnormal, susceptible of being characterised as oppression or mismanagement in relation to the transfer of these shares. The conclusion is that the non-declaration of dividend did not affect the value of the shares and in fact the value at all times had remained above par.

In C.P. No. 19 of 1974 there was one other allegation that the transfers to the contingency reserve, working capital reserve and gratuity reserve were either illegal or fraudulent. We were taken through the balance-sheet, etc., by the appellants' counsel in his attempt to satisfy us that these allegations were bogus, and was only to deplete the funds of the company and for undue enrichment of the secretary. The learned judge was not impressed with these allegations. No acceptable evidence was adduced to substantiate the case of bogus reservations. Building up reserves cannot be characterised as mismanagement. Companies sometimes require it. In the absence of acceptable materials, we are in agreement with the learned judge holding that this allegation has not been made out and cannot be pressed into service in support of an application under s. 397 or s. 398. The two other remaining allegations related to double tapping and slaughter-tapping.

The allegation about double tapping is that though double tapping was carried on, the yield therefrom was not accounted, and that payments to the workers under this head were not entered in the company's accounts, the suggestion being that the respondents were appropriating the extra yield to themselves. According to the respondents, double tapping was never resorted to. Sometimes, extra tapping was arranged and that too when the season was favourable and the yield good. Without giving any importance to the nomenclature, we see from the materials on record that some sort of tapping other than normal was being carried on on some occasions. This being the admitted case, what this court is concerned with is the enquiry whether the income from this extra tapping was being entered in the accounts or not. We have already indicated that the evidence of P.W. 1 is unserviceable because he deposed what he heard from others. P.W. 2 would say that the income was being siphoned away without being brought into the accounts. P.W. 3 is a dismissed employee. He spoke about double tapping; but did not say that yield was not being accounted for in the company's books. P.W. 4 has no complaint in this regard. As against this evidence, there is the evidence of R.Ws. 1 and 2 who would say that the yield was being duly accounted for in the company's books. Some suspicion was sought to be created with reference to Exts. B-30 and B-31 and Exts. A-4 to A-8 in reinforcement of the appellants' case. Exts. A-4 to A-8 are demands made by the workers for higher rates of wages for extra tapping. These show that extra-tapping, if any done, was not a secret affair. Ext. B-30, "extra-tapping file", discloses that wages were being paid for extra-tapping. Ext. B-31 shows that during certain periods in 1974-75, the yield was about 50% more than the average. According to the respondents, during this period, extra-tapping was done. P.Ws. 2 and 4, who were intimately connected with the company for a long time as directors, could have adduced better evidence in support of this allegation. Their evidence cannot inspire confidence in a court for the reason that they chose to make this allegation after losing their directorship. In any case,' the evidence is not sufficient to make out this allegation. From some of the books that we looked into, we find that the excess yield had been accounted for. We agree with the learned judge that the petitioners did not succeed to make out a case on this ground either.

Slaughter-tapping, according to the respondents, is a process of recent origin, in the sense of an act of mismanagement. The petitioners' case is that slaughter-tapping was resorted to without the matter being brought to the notice of the board of directors and tenders being invited. We do not propose to discuss the evidence in this regard in detail, for the evidence is not sufficiently persuasive to hold that the petitioners have made out a case on this ground. The company came into existence in 1910. Rubber plantation began in 1912. There is evidence to show that the rubber board recommended replanting the estate in 1960 with better plants. Slaughter-tapping started somewhere in 1952 and was completed in 1970. During 1952-1971, the process of replanting went on. From 1962 onwards slaughter-tapping was being arranged directly by the company itself and sometimes through reliable contractors. According to the respondents, it is not necessary to invite tenders always. It is for the board of directors to decide as to how the slaughter tapping is to be done. The complaint that the entire income from slaughter tapping was being suppressed has not been satisfactorily made out. The learned judge observed that the audited balance-sheet produced showed that at least part of it was being accounted for. He was not prepared to accept the evidence in this regard. He felt that the petitioners should have adduced better evidence especially because P.Ws. 2 and 4 who were directors during a long period would have been in the know of things at that time. We have examined the evidence ourselves. We find it difficult to accept the evidence of P.Ws. 2 and 4 in support of this ground. Their evidence throughout is suspect. They have not succeeded in making out a clear case of underhand dealings by the respondents by way of slaughter-tapping. We do not find any material persuasive enough to disagree with the findings of the learned judge on this ground also.

The next allegation relates to cutting and removing valuable teak and rosewood trees without bringing the sale proceeds in the company's account. This complaint has not been properly pleaded in the petitions. Despite this, the learned judge was inclined to consider the complaint, if evidence was made available. According to him, the evidence was far from satisfactory. Sufficient details regarding the number of trees cut, the time at which they were cut, the approximate loss occasioned to the company, etc., were not proved. If it was done between 1957 and 1976, P.Ws. 2 and 4 were equally guilty as the respondents for this. The evidence of P.W. 1 as usual is worthless. The evidence of P.Ws. 2 and 4 cannot be relied upon for this purpose in the absence of other acceptable corroborative evidence. R.W. 1 admitted that some trees standing on the boundaries were cut and sold during replantation, while R.W. 2 stated that the timber was used for estate purposes. Nothing turns out on this inconsistency when the petitioners have failed to make any specific allegation either in the pleadings or in the evidence. Exts.C-1 and C-2, the commission reports, only show that some trees were cut years ago and some others more recently. No attempt was made by the petitioners to establish the manner in which the misappropriation on this account was caused. The evidence of R.W. 2 that some of the trees were used for putting up sheds, etc., might be suspicious. Some trees were seen stacked in a portion of the estate also. ' But such suspicion alone is not sufficient to pass an order of the kind that the petitioners request for. We agree with the learned judge that evidence is far from satisfactory to prove this allegation.

The third respondent is the son of the secretary. The allegation against him is two-fold. According to the petitioners, R.W. 1 was eased out unceremoniously to find a place for him. The petitioners were also participants in this move. It is not necessary to examine this in detail because R.W. 1 himself has deposed that the resigned the job voluntarily since the company did not favourably respond to the terms that he put forward. Regarding the method of appointment of the third respondent also, a detailed discussion is not necessary since at the time when he was appointed, P.W. 2 was very much in the picture and his appointment was after due publicity. The second allegation against him is that workers of the company and its smoke-house were used for the purpose of his estate in the adjoining area. This case cannot be true because the estate of the third respondent has its own smoke-house. That the services of the workers were availed of for the estate of the third respondent has not been satisfactorily proved. The only attempt made is to construct a case on certain note books and diaries, Exts. A-1 and A-14 and A-15 to A-17 seized by the tax authorities, where there is some noting about a 45th Block. No one connected with these note books and diaries was examined. Whether this 45th Block is third respondent's estate or not, is itself a matter not free from doubt. The allegation has not been satisfactorily made out nor is the evidence sufficient to hold that the resources of the company were being diverted for the benefit of this estate.

It is true that dividends were not declared from 1962-63 to 1971-72. This allegation was made to support the further allegation that it was deliberately done to corner the shares. We have already shown that the shares did not suffer from devaluation and that no evidence was made available to show that any transfer of shares took place below par. That there was deliberate attempt on the part of the company to oppress the minority shareholders by non-declaration of dividends has not been made out, though, in our opinion, no satisfactory explanation was given why dividends were not declared even during the period when the company was making profit.

We have considered the entire evidence in detail. We agree with respect with the conclusions of the learned judge that the evidence is not sufficient to give any of the reliefs that the petitioners have prayed for. The dissatisfaction of a minority of shareholders with the conduct of the affairs of the company by the majority will not normally persuade a court to interfere with the management. It is only when the court has before it reliable evidence where the majority acts against the provisions of the articles of association of the company or of the statute governing it or unconscionable use of the majority's power resulting or likely to result in financial loss or where action which could be characterised as unfair and improper is made, that the court will exercise its powers under s. 397 or s. 398 of the Companies Act. Every kind of oppression cannot be remedied by the court. The oppression must be such as to justify the winding-up of the company on just and equitable grounds, since the words used are "are being conducted". The action complained of must be a continuous one and not either an isolated or a stale one. Once the court is satisfied that the complaint is made without bona fides and to settle old scores or with the sole intention of mud-slinging, no orders under s. 397 or s. 398 will be passed. The court must have strong grounds before it to order a winding up. An order under s. 397 or s. 398 can be supported only if such grounds are present. The fact that the complaining parties were themselves participants in the alleged activities will be one of the factors to dissuade the court from exercising its powers under the section. Delay and acquiescence in the acts complained of will also be circumstances against the grant of reliefs. The powers of the court under s. 402 are wide. But the courts have always exercised restraint in interfering with the affairs of the company, for the affairs of the company are normally its own concern and the concern of its shareholders. It is only when the facts and evidence before the court are such as to persuade it to hold that interference with the affairs of the company is necessary that it would exercise its powers. The interest of public good will always be kept by the court in mind. But the concept of public interest will preponderate over the autonomy of a company and the management under the articles of association and within the confines of the provisions of the Companies Act, only if such evidence is available before the court. Stray cases of mismanagement or even a few cases of mismanagement without sufficient proof will not lead a court to entrust the powers of the management of a company in the interest of public good, to strangers appointed by the court. Disgruntled shareholders there will always be. Courts will not listen to them unless they make out a persuasive case of oppression and mismanagement. The provisions of the Companies Act, especially Chapter VI, are not meant to convert the company court into a super structure supervising all its activities and affairs. Since the powers are wide, they have to be exercised with utmost restraint. In this case, we have the spectacle of two disgruntled directors who had themselves been participants in the various acts of mismanagement alleged figuring with injured innocence as complainants before the court. This circumstance itself to a large extent demolishes the bona fides of the allegations put forward. This fact would not have influenced us if there was reliable evidence to show that the respondents acted to the peril of the company and indulged in acts amounting to oppression of the minority shareholders and if the petitioners had made out sufficient grounds justifying the winding up of the company. We hold that the learned judge was justified in dismissing the petitions. As already indicated, the direction to appoint an Inspector, though challenged in the memorandum of cross-objection, has to stand since the memorandum is not pressed.

In the result, the appeals and the memorandum of cross-objections are dismissed without costs.

Counsel for the appellants in both the appeals make an oral application for grant of certificate for leave to the Supreme Court. We are not satisfied that these two appeals involve any substantial question of law of general importance, which, in our opinion, needs to be decided by the Supreme Court. Certificate refused.

[1974] 44 COMP. CAS. 106 (MADRAS)

high court of madras

Indian Express (Madurai) Private Ltd.

v.

Chief Presidency Magistrate

VeerasWami, C.J.

a0nd Paul, J.

WRIT APPEAL NOS. 554 AND 555 OF 1971

AND 69 TO 72 OF 1972 AND C.M.P. NOS. 4262, 4263, 4029

AND 4030 OF 1972

March 20, 1973

 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.

JUDGMENT

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 (Madurai) Private Ltd., the Express Newspapers Private Ltd. and the Andhra Prabha Private Ltd., are the subsidiaries of the Indian Express Newspapers (Bombay) Private Ltd. The aforesaid group of companies owns, prints and publishes newspapers and periodicals from different centres in India, such as Madras, Madurai, Vijayawada, etc. The second appellant in these writ appeals is R. N. Goenka, who at all material times was and is still connected with the aforesaid companies as managing director, director or shareholder.

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., Madras, and the Indian Express (Madurai) Private Ltd., under section 209(4) of the Companies Act. He is said to have examined all the ledgers, excepting one volume which was not available and perused the minutes book kept by the company and also the accounts of brokers who had commercial dealings with the company and had visited the registered office of the Indian Express (Madurai) Private Ltd., inspected the investments and the ledger accounts pertaining thereto and took relevant copies of accounts and extracts therefrom. Subsequently about a year later, between August 14, 1970, and August 21, 1970, one Mr. Puri, an officer authorised to act under section 209 of the Companies Act of 1956, inspected the records of the Andhra Prabha Ltd. at Vijayawada, including the minutes book, bank files, accounts, etc. On September 19, 1970, Mr. Puri submitted an elaborate inspection report under section 209(4) of the Companies Act in respect of M/s. Andhra Prabha Ltd., Vijayawada. In his report Mr. Puri had stated that during the course of his inspection he noticed certain transactions carried out by the company which were very shady in character and questionable. He felt that there was a fictitious transaction of purchase of Indian printing paper booked in 1967-68 and consequent inflation of stock of newsprint of the company with intent to defraud the Punjab National Bank on the one hand and with a view to camouflage the heavy debit in the account of and due from M/s. Gopikishan Ramkishan in the books of M/s. Express Newspapers Private Ltd., at the time of their annual closing of accounts as at March 31, 1968, on the other hand, and a fictitious loan to M/s. Radhakrishna Dalmia & Co., the firm of share-brokers, and false statements had been made to the Indian Bank Ltd. for procuring overdraft facility against pledge of shares and misappropriation of shares in the Indian Iron and Steel Company and there were also instances of suppression of facts and of otherwise incorrect statements in the audited balance-sheet and profit and loss account of the company with intent to defraud the public. In those circumstances, Mr. Puri concluded his report by saying that in view of the several transactions involving intent to defraud which had come to his notice during the course of his inspection, it was felt that a thorough investigation into the affairs of that company and its sister companies would be much more revealing and that the transactions quoted in the report satisfied the requirements of section 237(b) of the Companies Act for ordering an investigation. After considering that report, the Company Law Board, instead of ordering an investigation under section 237(b) of the Companies Act, preferred on April 2, 1971, a complaint to the Director of the Central Bureau of Investigation and that complaint was registered on April 19, 1971, by the Central Bureau of Investigation for offences under sections 120-B, 420 and 477-A of the Indian Penal Code. On June 7, 1971, on the application of Sri Charanjiv Lall, Deputy-Superiadent of Police, CBI/SPE/STU, North Block, New Delhi, camping at Madras, praying for the issue of search warrants under section 96, Criminal Procedure Code, for searching various places including the office of Andhra Prabha Private Ltd., Express Estates, Mount Road, Madras, the office of M/s. Express Newspapers Private Ltd., Express Estates, Mount Road, Madras, the office of M/s. Express Newspapers (Bombay) Private Ltd., at Express Estates, Mount Road, Madras, and the office of the Indian Express (Madurai) Private Ltd., at the Express Estates, Mount Road, Madras, the Chief Presidency Magistrate of Madras, who is the first respondent in Writ Appeals Nos. 554/71, 69/72 and 70/72, after perusing the application for the issue of the warrants which contained also the list of documents to be seized from the various premises, and after examining on oath, Sri Charanjiv Lall, issued search warrants as required; and under those search warrants the Central Bureau of Investigation simultaneously conducted searches of various premises on June 8, 1971, and June 9, 1971, and seized certain records handed over by the appellants. Thereupon, the Indian Express (Madurai) Private Ltd., the Express Newspapers Private Ltd. and the Andhra Prabha Ltd., along with Mr. R. N. Goenka who was connected with those companies in the capacity of managing director, director or shareholder, filed on June 18, 1971, Writ Petitions Nos. 1916 to 1918 of 1971 for the issue of writs of certiorari to quash the aforesaid search warrants and subsequently on July 26, 1971, they filed Writ Petitions Nos. 2394 to 2396 of 1971 for the issue of writs of mandamus directing the Company Law Board to withdraw the complaint which they had laid before the Central Bureau of Investigation on April 2, 1971.

It was contended in these first batch of writ petitions that owing to mala fide, perverse and unreasonable political motives and on extraneous and irrelevant considerations, this group of newspapers has been discriminated against and singled out for hostile and unequal treatment as compared to other newspapers and the petitioners were being prosecuted by the Government because of the attitude of the ruling party against the group of the newspapers owned by the group companies and in this process the Company Law Board, the Central Bureau of Investigation and its officers were being used as instruments of oppression against the petitioners and there were no grounds at all for searching the premises of the petitioners or for seizing the documents. The main contention raised in the second batch of writ petitions was that the Companies Act of 1956 is a code the intrinsic nature of which is that it is exhaustive in regard to matters specifically provided for therein and as such the specific procedure prescribed therein on receipt of the report under section 209(4) of the Companies Act has to be followed and the Company Law Board cannot invoke the provisions of the Criminal Procedure Code and resort to the agency of the police for making an investigation under the provisions of the Criminal Procedure Code, and prosecuting the offenders for offences committed by the officers of the company in relation to the affairs of the company, even though those offences would also be offences under the Indian Penal Code, and in laying the information before the police for them to investigate and prosecute, the Company Law Board had acted illegally or without jurisdiction in the sense that it had done an act which was impliedly prohibited and consequently the information laid before the Central Bureau of Investigation should be considered as non est and as a result thereof the registering of that information as a First Information Report by the Special Police Establishment and the subsequent action taken by the police during the course of their investigation such as the applying for and obtaining search warrants and searching the premises of the appellants, should be held to be without jurisdiction. These contentions did not find acceptance at the hands of the learned judge, Ramaprasada Rao J.

Mr. M. K. Nambiar, on behalf of the appellants, has contended before us that the Companies Act being a self-contained Code and a consolidating and amending Act, prescribing in detail the mode of investigation into and prosecution by the Company Law Board, in respect of any offences committed in relation to the companies' affairs, recourse to any investigation or prosecution by the police under the Code of Criminal Procedure is by necessary intendment prohibited and the Company Law Board being a creature of the statute, it can, as a statutory authority, exercise only such powers as are vested in it by the Companies Act and when the Companies Act has conferred no powers on the Company Law Board to prefer a complaint to the police for investigation and prosecution under the Code of Criminal Procedure, any complaint laid by the Company Law Board with the police for such investigation and prosecution in respect of any offences which appear to have been committed in relation to the companies' affairs, would be ultra vires its powers and would be wholly void and consequently the investigation and prosecution by the Central Bureau of Investigation in pursuance of such a complaint would be illegal, void and wholly without jurisdiction and even if the finding of Ramaprasada Rao J. that the Company Law Board had the power to make a complaint to the police like any other citizen under the Criminal Procedure Code is correct, it would follow that the Company Law Board would have the choice of two procedures in respect of persons similarly situate, one procedure being more advantageous to the persons involved than the other, the act of the Company Law Board in choosing the procedure which is less advantageous to the persons involved would be violative of article 14 of the Constitution and further the Central Bureau of Investigation has no jurisdiction to investigate into the complaint, since section 3 of the Delhi Special Police Establishment Act is void by reason of excessive delegation and there is no proof of consent accorded by the Madras Government for the investigation by the Central Bureau of Investigation as required by entry 8, List I, of the Constitution. It must be stated at this juncture that the last mentioned proposition was not pressed before Ramaprasada Rao J., as the learned judge himself has observed in his judgment. Hence the appellants in Writ Appeals Nos. 554 and 555/71 have filed C.M.Ps. Nos. 4262 and 4263/72 for permission to raise that ground as an additional ground, in these appeals. But in view of the fact that this ground was not pressed before the learned judge, we are not permitting the appellants to raise that ground before us and C.M.Ps. Nos, 4262 and 4263/72 are, therefore, dismissed. The contention that the act of the Company Law Board in laying a complaint to the police is violative of article 14 of the Constitution was also not raised before the learned judge; but C.M.Ps. Nos. 4029 and 4030 of 1972 have been filed before us, seeking permission to raise that ground as an additional ground of appeal. Mr. Nambiar, the learned counsel for the appellants, has contended that this ground being a pure question of law can be raised at a late stage, even in appeal and where such a question of law is raised as an additional ground, it is in the discretion of the High Court either to allow it or not. In support of that contention of his, he has cited the decision of the Supreme Court in Chittoori Subbanna v. Kudappa Sublanna . There it was held by the Supreme Court:

"A pure question of law not dependent on the determination of any question of fact should be allowed to be raised for the first time in the grounds of appeal by the first appellate court. Such pure questions of law are allowed for the first time at later stages also. Where a new point not taken in the grounds of appeal is sought to be raised as an additional ground by a substantive application for that purpose, the High Court has discretion to allow the application or refuse it. But the discretion exercised by the High Court will not be interfered with except for good reasons, for example, where the court acts capriciously or in disregard of any legal principle".

The Supreme Court has, in that decision, referred to the following observations of Lord Watson in Connecticut Fire Insurance Co. v. Kavanagh :

"'When a question of law is raised for the first time in a court of last resort upon the construction of a document, or upon facts either admitted or proved beyond controversy, it is not only competent but expedient in the interests of justice to entertain the plea. The expediency of adopting that course may be doubted, when the plea cannot be disposed of without deciding nice questions of fact, in considering which the court of ultimate review is placed in a much less advantageous position than the courts below'".

It has been pointed out by Mr. Nambiar that this additional ground has arisen because of the finding of the learned judge that there are two procedures allowed by law for the Company Law Board to adopt in the matter of investigation into and prosecution of the offenders in regard to offences committed by the officers of the company in relation to the affairs of the company and as such in the interests of justice the appellants should be allowed to raise that additional ground as a pure question of law. In the circumstances, we are inclined to allow this additional ground of appeal to be urged before us. C.M.Ps. Nos. 4029 and 4030 of 1972 are ordered accordingly.

The learned Additional Solicitor-General appearing on behalf of the Company Law Board has, however, urged before us that section 5(1) of the Code of Criminal Procedure is not subject to or controlled by any other law and all offences under the Indian Penal Code have to be investigated into and tried only under the provisions of the Code of Criminal Procedure and there is also no explicit provision in the Companies Act that offences under the Indian Penal Code in relation to companies shall be investigated only under the provisions of the Companies Act and there is also no provision in the Companies Act relating to laying of information to the police and as such the laying of the complaint to the Central Bureau of Investigation by the Company Law Board was within the competence of the Company Law Board and was in accordance with law. He has pointed out that there is a vital difference between laying of the information before the police by the Company Law Board, followed by an investigation under the Criminal Procedure Code and an investigation into the affairs of a company by the Company Law Board under the provisions of the Companies Act followed by a prosecution under section 242 of the Companies Act and has argued that the scope of the aforesaid two procedures are different and, in the circumstances of this case, if thought fit, the Company Law Board was well within its right in laying the information before the police and the police who have not only a statutory right, but are also statutorily bound, to investigate into the information so received, have rightly carried on the investigation under the provisions of the Code of Criminal Procedure and the issue of the search warrants by the learned Chief Presidency Magistrate, on the facts placed before him by means of the application filed by Mr. Charanjiv Lall and by his statement on oath before the learned Chief Presidency Magistrate, and after applying his mind to those facts and on being satisfied, is in accordance with law. He has futher argued that there is nothing in the Companies Act to indicate that section 5(1) of the Code of Criminal Procedure would be applicable to all offences committed in relation to the affairs of a company, nor is there anything in the Companies Act to indicate that the Central Government is prevented from laying a First Information Report, if an offence is disclosed on the report of an inspection made under section 209(4) of the Companies Act or otherwise and there is no obligation cast on the Company Law Board to follow the procedure starting with an inspection under section 209(4) of the Act and ending with the inspector's report under section 241 of the Act and that in fact there is no obligation cast on the Company Law Board to order an investigation under section 235 of the Act, after an inspection under section 209(4) of the Act and actually there is no link between an inspection under section 209(4) and an investigation under section 235 and that section 242 of the Companies Act is merely an enabling provision and it does not restrict or control either complaints filed by third persons or the power of the police to investigate under the provisions of the Code of Criminal Procedure. He has further argued that assuming that section 242 of the Companies Act is exhaustive of the subject with which it deals, the subject so dealt with is prosecution for criminal offences disclosed in an inspection report of an investigating officer under section 235 or 237 of the Companies Act and it does not control or affect or provide for the laying of information before the police in respect of cognizable offences under the Indian Penal Code disclosed as a result of an inspection under section 209(b) of the Companies Act or otherwise. He has lastly urged that executive action taken under valid provisions cannot be violative of article 14 of the Constitution of India, especially when neither section 242 of the Companies Act nor the provisions of the Code of Criminal Procedure are contended to be violative of article 14 of the Constitution of India.

Undoubtedly, the inherent nature of a Code is that it is exhaustive in regard to the matters specifically provided for in it. The Indian Companies Act is an Act to consolidate and amend the law relating to companies and certain other associations.

"The purpose of a consolidating statute is to present the whole body of the statutory law on a subject in complete form, repealing the former statutes". (Halsbury's Laws of England, third edition, volume 36, page 366).

The essence of a code is to be exhaustive on the matters in respect of which it declares the law and it is not the province of a judge to disregard or go outside the letter of the enactment according to its true construction. The whole scheme of the Companies Act is to ensure proper conduct of the affairs of companies in public interest, and the preservation of the image of the company in the eyes of the public, and in the interests of the members of the company and also the creditors to ensure that the affairs of the company are conducted in a proper manner and its transactions are above suspicion. It is to ensure this that the various provisions under the Companies Act have been devised and returns have been prescribed for the purpose of enabling a close watch to be kept in regard to the transactions of the company and in regard to the manner in which its affairs are conducted. Section 209(4) of the Companies Act enjoins the books of account and other books and papers to be kept open to inspection by any director during business hours and also to be kept open for inspection during business hours,—

            (i)         by the Registrar, and

            (ii)        by any officer of Government authorised by the Central Government in this behalf.

Under section 233A, powers have been given to the Central Government to direct special audit of the accounts in certain cases and powers have been granted under other provisions for the Registrar of Companies to call for information and explanation when he thinks that any such information or explanation is necessary on perusing any document which a company is required to submit under the provisions of the Act and a duty is cast on all persons who are officers of the company to furnish such information or explanation to the best of their power to the Registrar and if no information or explanation is furnished within the time specified or if the information or explanation furnished is, in the opinion of the Registrar, inadequate, the Registrar may by order in writing call on the company to produce before him for his inspection such books and papers as he considers necessary within such time as he may specify in the order and a duty is cast on the company and all persons who are officers of the company to produce such books and papers; and the refusal or neglect to furnish any such information or explanation or to produce any such books and papers is made an offence punishable with a fine and power is given to the court trying that offence to make an order on the company for production before the Registrar of such books and papers as in the opinion of the court may reasonably be required by the Registrar for the purpose as referred to above on the application of the Registrar and on receiving any writing containing the information or explanation or any book or paper, the Registrar may annex that writing, book or paper and if such information or explanation is not furnished within the specified time or if on perusing such information or explanation or the books and papers produced, the Registrar is of opinion that the document referred to above together with such information or explanation or such books and papers discloses an unsatisfactory state of affairs or does not disclose a full and fair statement of any matter to which the document purports to relate, the Registrar shall report in writing the circumstances of the case to the Central Government. Sub-section (7) of section 234 further confers power on the Registrar to call on the company to furnish in writing any information or explanation on matters specified in the order, within such time as he may specify therein, if it is represented to the Registrar on materials placed before him by any contributory or creditor or any other persons interested, that the business of the company is being carried on in fraud of its creditors or of persons dealing with the company or otherwise for a fraudulent or unlawful purpose.

Then under section 235 of the Companies Act the Central Government is given the power and discretion to appoint one or more persons as inspectors to investigate the affairs of any company and to report thereon in such manner as the Central Government may direct,—

(a)        in the case of a company having a share capital, on the application either of not less than two hundred members or of members holding not less than one-tenth of the total voting power therein;

(b)        in the case of a company not having a share capital, on the application of not less than one-fifth in number of the persons on the company's register of members;

(c)        in the case of any company, on a report by the Registrar under sub-section (6), or sub-section (7) read with sub-section (6), of section 234.

Then section 237 of the Act says that, without prejudice to its powers under section 235, the Central Government—

"(a)       shall appoint one or more competent persons as Inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)     the company, by special resolution; or

        (ii)    the court, by order,

declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

(b)        may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)     that the business of the company is being conducted with intent to defraud its creditors, members, or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose; or

(ii)    that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii)   that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company".

Section 239 says :

"(1)      If an inspector appointed under section 235 or 237 to investigate the affairs of a company thinks it necessary for the purposes of his investigation to investigate also the affairs of —

(a)    any other body corporate which is, or has at any relevant time been, the company's subsidiary or holding company, or a subsidiary of its holding company, or a holding company of its subsidiary;

        (b)    any other body corporate which is, or has at any relevant time been, managed—

(i)         by any person as managing agent or as secretaries and treasurers or as managing director or as manager, who is, or was at the relevant time, either the managing agent or the secretaries and treasurers or the managing director or the manager of the company; or

(ii)        by any person who is, or was at the relevant time, an associate of the managing agent or secretaries and treasurers of the company; or

(iii)       by any person of whom the managing agent or secretaries and treasurers of the company is, or was at the relevant time, an associate;

(c)    any other body corporate which is, or has at any relevant time been, managed by the company or whose board of directors comprises of nominees of the company or is accustomed to act in accordance with the directions or instructions of—

        (i)         the company; or

        (ii)        any of the directors of the company; or

(iii)       any company any of whose directorships is held by the employees or nominees of those having the control and management of the first mentioned company; or

(d)    any person who is or has at any relevant time been the company's managing agent or secretaries and treasurers or managing director or manager or an associate of such managing agent or secretaries and treasurers, the inspector shall, subject to the provisions of sub-section (2), have power so to do and shall report on the affairs of the other body corporate or of the managing agent, secretaries and treasurers, managing director, manager or associate of the managing agent or secretaries and treasurers, so far as he thinks that the result of his investigation thereof are relevant to the investigation of the affairs of the first mentioned company.

(2)        In the case of any body corporate or person referred to in clause (b)(ii), b(iii), (c) or (d) of sub-section (1), the inspector shall not exercise his power of investigating into, and reporting on, its or his affairs without first having obtained the prior approval of the Central Government thereto:

Provided that before according approval under this sub-section, the Central Government shall give the body corporate or person a reasonable opportunity to show cause why such approval should not be accorded".

Section 240 makes provision for the production of documents and evidence before the inspector so appointed and casts a duty on all officers and other employees and agents of the company, and where the company is or was managed by a managing agent or secretaries and treasurers, on all officers and other employees and agents of the managing agent or secretaries and treasurers, and where the affairs of any other body corporate or of a managing agent or secretaries and treasurers, or of an associate of a managing agent or secretaries and treasurers, are investigated by virtue of section 239, on all officers and other employees and agents of such body corporate, managing agent, secretaries and treasurers, or associate, and where such managing agent, secretaries and treasurers or associate is or was a firm, on all the partners in the firm, to preserve and to produce to an inspector or any person authorised by him in this behalf with the previous approval of the Central Government, all books and papers of, or relating to, the company or, as the case may be, of or relating to the other body corporate, managing agent, secretaries and treasurers or associate, which are in their custody or power and otherwise to give to the inspector all assistance in connection with the investigation which they are reasonably able to give. That section gives power to the inspector to examine on oath any of the persons referred to above and any other person with the previous approval of the Central Government in relation to the affairs of the company, etc. Power is conferred also by means of section 240A for the seizure of documents by the inspector. Then, under section 241, provision is made for making a report by the inspector on the conclusion of the investigation made under section 239. These provisions have been devised to enable the Central Government to keep a close watch over the affairs of the companies in the interests of the members of the company, the creditors, etc. Section 242 provides for the prosecution of any person who has, in relation to the company or in relation to any other body corporate, managing agent, secretaries and treasurers, or associate of a managing agent or secretaries and treasurers whose affairs have been investigated by virtue of section 239, been guilty of any offence for which he is criminally liable. The section says that on a consideration of the report made under section 241, the Central Government may, after taking such legal advice as it thinks fit, prosecute such person for the offence; and it shall be the duty of all officers and other employees and agents of the company, body corporate, etc., to give the Central Government all assistance in connection with the prosecution which they are reasonably able to give.

It is contended by Mr. Narabiar on behalf of the appellants that by reason of the incorporation of the above provisions, recourse to the laying of information before the police for their investigating under the provisions of the Code of Criminal Procedure into offences under the Indian Penal Code appearing to have been committed in relation to the affairs of the company is impliedly barred and the Company Law Board is bound to carry on investigation under the aforesaid provisions of the Companies Act and, eventually, under section 242, prosecute the person against whom offences have been disclosed as a result of such inspection or investigation by an inspector made under the provisions referred to above. But, then, it should be noted that even assuming that section 242 of the Companies Act is exhaustive of the subject with which it deals, that is, prosecution for criminal offences disclosed on a report of an investigation made under section 235 or 237, there is no provision in regard to the laying of information before the police for the police to investigate under the provisions of the Code of Criminal Procedure where cognizable offences under the Indian Penal Code are disclosed on an inspection under section 209(4) of the Companies Act and as such in our view section 242 of the Act does not control or affect the laying of information before the police in respect of cognizable offences under the Indian Penal Code disclosed as a result of an inspection under section 209(4) of the Act or otherwise. Section 242 is the culmination of an investigation started under section 235 or 237 of the Act. Where no such investigation has been started under section 235 or 237, there is no question of section 242 coming into operation. Now, in the case before us, no investigation under section 237 had been started. It was only as a result of a report of an inspection made under section 209(4) by Mr. Puri that the Central Government laid the information before the police for investigation under the provisions of the Code of Criminal Procedure in regard to the cognizable offences under the Indian Penal Code which there were grounds to believe had been committed in relation to the affairs of the company. It may be noted that there is no provision for a report to be sent on an inspection of the books of account, etc., of the company made under section 209(4). The report made by Mr. Puri after his inspection of the accounts, etc., under section 209(4) is, therefore, only an administrative report to apprise the Central Government of the state of affairs of the company. Mr. Puri, no doubt, recommended investigation under section 237; but the Central Government thought it fit and expedient to lay information before the police so that the police may investigate under the provisions of the Code of Criminal Procedure inasmuch as cognizable offences under the Indian Penal Code were disclosed, presumably because such an investigation by the police under the provisions of the Code of Criminal Procedure would be more effective. We can see nothing in the provisions of the Companies Act which would even by implication bar a recourse to the laying of the information before the police for the purpose of investigation and action under the Code of Criminal Procedure when there are reasonable grounds for believing that cognizable offences under the Indian Penal Code had been committed in relation to the affairs of the company. It cannot be said that the Companies Act is exhaustive even in the matter of investigation into cognizable offences under the Indian Penal Code committed in relation to the affairs of a company. In fact, the Act does not touch that aspect at all.

Nevertheless, Mr. Nambiar contends that what the statute does not expressly or impliedly authorise is to be taken to be prohibited. No doubt, " statutory corporations have such rights and can do such acts only as are authorised directly or indirectly by the statutes creating them", while " non-statutory corporations, speaking generally, can do everything that an ordinary individual can do unless restricted directly or indirectly by statute".

"The powers of a corporation created by statute are limited and circumscribed by the statutes which regulate it, and extend no further than is expressly stated therein, or is necessarily and properly required for carrying into effect the purposes of its incorporation, or may be fairly regarded as incidental to, or consequential upon, those things which the legislature has authorised. What the statute does not expressly or impliedly authorise is to be taken to be prohibited". (Vide Halsbury's Laws of England, third edition, volume 9, pages 59, 62 and 63).

But, then, we are of the opinion that the laying of information before the police by the Company Law Board on a perusal of the inspection report under section 209(4) of the Companies Act is necessarily and properly required for carrying into effect the purpose of the information of the Board and may be fairly regarded as incidental to or consequential upon those things which the legislature has authorised. We do not think that the laying of information before the police in this case contravenes the principles in Taylor v. Taylor  that where power is given to do a thing in a certain way the thing must be done in that way or not at all and that the other methods of performance are necessarily forbidden. It has been recognised in Rohtas Industries Ltd. v. S. D. Agarwal  that the power conferred on the Central Government under section 235 as well as under section 237(b) is a discretionary power. Consequently, it is left to the Central Government to refrain from ordering an investigation into the affairs of a company under section 237(b). Only if it chooses to order an investigation under section 237(b) then that investigation would culminate in action being taken under section 242. There is nothing in the Companies Act which would either expressly or impliedly prohibit the Central Government from laying information to the police in lieu of ordering an investigation under section 237(b). Mr. Nambiar admitted that there is no express prohibition regarding investigation by police; but he contended that according to the principles of interpretation of statues there is an implied prohibition. We are unable to see any such implied prohibition on an interpretation of the relevant provisions of the Companies Act.

In M. Vaidyanathan v. Sub-Divisional Magistrate, Erode , a similar argument appears to have been advanced while challenging the act of the Registrar of Companies in making a complaint to the police against the officers of the company without availing himself of the powers vested in him by section 234 and other relevant provisions of the Act. It was observed in that decision that:

"Section 242(1) of the Companies Act is only an enabling provision as the use of the word 'may' in the passage 'the Central Government may, after taking such legal advice as it thinks fit, prosecute such a person for the offence' indicates. By itself section 242(1) does not divest a police officer of the jurisdiction conferred upon him either under section 154, 156 or 157, Criminal Procedure Code. No more than section 630 of the Act, does section 242 bar the exercise of the jurisdiction of the police to investigate into a complaint of the commission of cognizable offences punishable under sections 406 and 409, Indian Penal Code".

Another argument advanced by the learned counsel for the appellants is that the source of the power of the police to investigate is the statute itself, namely, the Criminal Procedure Code, but the statute itself may limit that power, as for example section 195, and equally so another statute may limit that power. We are, however, unable to accept this argument, for, in our view, there is nothing in the Companies Act which limits the power of the police to investigate under the Criminal Procedure Code.

In B. M. Bajoria v. Union of India  it was held that :

"There is nothing in section 237 of the Companies Act, 1956, which makes it imperative for the Government to order investigation into the affairs of the company when the Government does not consider the necessity of further probe and is already in possession of facts which in its opinion show the commission of an offence by an officer of the company or other person in respect of the assets of the company. There is, in such an event, no legal bar to the officer of the Company Law Board or other Government officer concerned making a report to the police.......

There is nothing in section 242 or the other provisions of the Companies Act, 1956, to point to the conclusion that no prosecution can be launched or no report can be made to the police in respect of an alleged act of embezzlement or malfeasance by an individual connected with a company without recourse to an investigation under section 235 or section 237".

We are in respectful agreement with these observations.

It must also be noted that under section 237(b) of the Companies Act it is not mandatory on the part of the Central Government to order an investigation into the affairs of a company and to call for a report thereon even if, in the opinion of the Central Government, the circumstances mentioned under sub-section (b) of section 237 exist. The section says that the Central Government may appoint one or more competent persons to investigate the affairs of a company and to report thereon if, in the opinion of the Central Government, there are circumstances suggesting fraud, misconduct, etc., in the affairs of the company. No obligation is, therefore, cast on the Central Government to follow the procedure starting with an investigation under section 237 and culminating in a prosecution under the provisions of section 242 and there is no provision which would prevent the Central Government from laying the information before the police if a cognizable offence under the Indian Penal Code is disclosed on an inspection made under section 209(4) or otherwise.

The provisions of the Companies Act do not exclude any of the provisions of the Criminal Procedure Code in respect of laying of information before the police in regard to any investigation by the police into cognizable offences under the Indian Penal Code where such cognizable offences were committed in relation to the affairs of a company. In the absence of clear and unambiguous language, intention to alter the existing law should not be imputed to the legislature (vide Craies on Statute Law, fifth edition, at pages 114 and 115). The law does not favour repeal of statute by implication and, therefore, a later statute should not be construed as repealing an earlier one without express words or by necessary implication. (Vide Maxwell on the Interpretation of Statutes, tenth edition, page 170 and Craies on Statute Law, fifth edition, page 337).

"Unless two statutes are so plainly repugnant to each other, that effect cannot be given to both at the same time, a repeal will not be implied,..". (Vide Kutner v. Phillips ).

There are no provisions in the Companies Act and in the Criminal Procedure Code which can be said to be so plainly repugnant to each other that effect cannot be given to both at the same time. In our view, there is no provision in the Companies Act which would by necessary implication exclude the provisions of the Criminal Procedure Code relating to laying of information to the police in regard to an investigation by the police into cognizable offences under the Indian Penal Code committed in relation to the affairs of a company.

In Daltnia Jain Airways Ltd. v. Union of India  it was held :

"Investigation under section 137 of the Indian Companies Act, 1913, is very different in scope from the investigation under the Code of Criminal Procedure and it is difficult to hold that by enactment of sections 137 to 141 A, the legislature intended to abrogate the provisions contained in Chapter XIV of the Criminal Procedure Code when offences have been committed in relation to the companies. It is not possible to say that the provisions of the Criminal Procedure Code cannot stand together with the provisions relating to investigation in the Companies Act and the proceedings under the Companies Act do not necessarily conflict with those under the Criminal Procedure Code. The proceedings started under section 137 onwards are not exclusively or primarily criminal. The investigation under these provisions is only into the affairs of the company which may disclose several liabilities of the officers of the company or may disclose commission of criminal offences".

In Northern India Caterers (Private) Ltd. v. State of Punjab  it has been observed by the Supreme Court that :

"The rule of construction is that where a statute provides in express terms that its enactment will repeal an earlier Act by reason of its inconsistency with such earlier Act, the latter may be treated as repealed. Even where the later Act does not contain such express words, if the co-existence of the two sets of provisions is destructive of the object with which the later Act was passed, the court would treat the earlier provision as impliedly repealed.........But repeal by implication is not generally favoured by courts".

Under section 5(1) of the Code of Criminal Procedure, all offences under the Indian Penal Code shall be investigated, inquired into, tried and otherwise dealt with according to the provisions of the Criminal Procedure Code. Section 5(2) states that all offences under any other law shall be investigated, inquired into, tried and otherwise dealt with according to the same provisions, but subject to any enactment for the time being in force regulating the manner or place of investigating, inquiring into, trying or otherwise dealing with such offences. Therefore, if, in relation to the affairs of a company, offences under the Indian Penal Code are disclosed, they shall be investigated, inquired into, tried and otherwise dealt with according to the provisions of the Criminal Procedure Code while offences under the Companies Act disclosed in relation to the affairs of a company could be investigated, inquired into, tried and otherwise dealt with according to the Criminal Procedure Code, but subject to the provisions in the Companies Act regulating the laying or place of investigating, inquiring into, trying or otherwise dealing with such offences.

In Emperor v. Khwaja Nazir Ahmed  the Privy Council has observed:

"Just as it is essential that every one accused of a crime should have free access to a court of justice so that he may be duly acquitted if found not guilty of the offence with which he is charged, so it is of the utmost importance that the judiciary should not interfere with the police in matters which are within their province and into which the law imposes upon them the duty of enquiry. In India.... there is a statutory right on the part of the police, under sections 154 and 156, to investigate the circumstances of an alleged cognizable crime without requiring any authority from the judicial authorities, and it would............be an unfortunate result if it should be held possible to interfere with those statutory rights by an exercise of the inherent jurisdiction of the court........"

Even assuming that the Company Law Board acted outside its powers when it laid information before the police to investigate and if necessary prosecute the persons involved in the commission of cognizable offences under the Indian Penal Code in relation to the affairs of the company, that would not in any way detract from the power of the police to act on that information and commence investigation and carry it through to its logical conclusion. The Criminal Procedure Code is not concerned with the personality of the person who lays the first information report; and it is only concerned with the quality of the information. In M. Vaidyanathan v. Sub-Divisional Magistrate, Erode , it was held that even if there was any irregularity or any illegality attendant on the letter of the Registrar of Companies which laid the information before the police and which was treated as a complaint by the police for the purpose of investigation, neither the jurisdiction to investigate nor the exercise thereof by the police officer could be affected.

Any person can lay information before the police and if such information could be believed to be authentic and discloses cognizable offences, the police are bound to investigate into the same. Any individual can set the law in motion by laying information before the police or by preferring a complaint to the court. In the present case before us, the information laid before the police was signed by the Under-Secretary to the Government of India and on receipt of the information the police have registered the case and took up investigation into the case as they are empowered to do. When any individual can lay information before the police in respect of the commission of cognizable offences for the police to investigate, we are not able to see how any disability could attach to the information laid in this case, merely because under the provisions of the Companies Act no power is conferred on the Company Law Board or the Central Government to lay such information before the police.

Mr. Nambiar has argued that, assuming that two courses were open to the Central Government or the Company Law Board,

            (1)        to order an investigation into the affairs of the company under the provisions of section 237, or

            (2)        lay information before the police,

the action of the Central Government or the Company Law Board in choosing the latter course is violative of article 14 of the Constitution of India. This ground was not urged before Ramaprasada Rao J., but we have permitted this additional ground to be raised before us, even though in our opinion this ground is untenable as we shall later show. Mr. Nambiar, while enlarging on the aforesaid argument of his, has pointed out that the procedure of ordering an investigation into the affairs of a company under section 237 of the Companies Act and then proceeding under section 242 of the Act is a procedure more advantageous to the persons involved than the procedure of laying information before the police and thereby entrusting the investigation and further action thereon to the police and as such the choosing of the latter procedure is discriminatory. Mr. Nambiar has pointed out that as between the aforesaid two procedures there are six vital differences :

(1)        Under the provisions of the Companies Act, only competent persons would be ordered to investigate into the matter whereas under the Criminal Procedure Code any police officer could investigate into the same;

(2)        Under the provisions of the Companies Act even the order of the Government directing investigation under section 237 is subject to judicial review as has been held in Rohtas Industries Ltd. v. S. D. Agarwal  whereas the laying of information before the police is not an act that is subject to judicial review;

(3)        When an investigation is conducted under the provisions of the Companies Act, under the orders of the Government, a report of the investigation has to be given to the party, but there is no provision under the Criminal Procedure Code for the accused to be given a copy of any report of the investigation;

(4)        The Company Law Board, which consists of experts, reviews such a report made after an investigation into the affairs of a company and that itself is a guarantee that the matter would be properly considered before a prosecution is launched against the persons involved;

            (5)        The Company Law Board is bound to take legal advice after the report is submitted; and

(6)        The Company Law Board being a wing of the Central Government is the highest authority in the land and, as such, if it prosecutes under the provisions of section 242, such a prosecution would be on adequate grounds and for proper reasons.

 

But then, in our opinion, the provisions of the Criminal Procedure Code provide ample safeguards for a fair investigation to be carried on. Though the Company Law Board may consist of experts in regard to company matters, so far as investigations into offences under the Indian Penal Code are concerned, we are unable to see how police officers could not be equated to the position, though not of experts, at least of persons well experienced in the matter of investigation into offences. Further, the provision under section 242 of the Companies Act enabling the Central Government to take legal advice is only an enabling provision and it gives a discretion to the Central Government to take legal advice or not before prosecuting offenders. There is no duty cast on the Central Government to take legal advice after reviewing the report of investigation before prosecuting the offenders. In the case of an investigation by the police after the police sends the final report and the court takes cognizance of the offences disclosed in the final report, copies of all the statements recorded during the investigation as also documents on which the prosecution proposed to rely have to be furnished to the accused persons before the commencement of the enquiry or trial. We do not agree that the procedure laid down under the Companies Act is more advantageous to the persons involved than the procedure laid down by the Criminal Procedure Code. In our view, the scope of the two procedures is entirely different and would apply to different sets of circumstances and cannot even be construed as parallel to each other. Therefore, we are of the view that the act of the Central Government or the Company Law Board in laying the information to the police is not violative of article 14 of the Constitution.

The net result is that we find that there are no grounds at all to issue a writ in the nature of mandamus or any suitable direction directing the department of company affairs to withdraw the complaint lodged by it with the Central Bureau of Investigation or to refrain from prosecuting such investigation or taking further action in respect of the information so laid. Consequently, Writ Appeals Nos. 555/71, 71/72 and 72/72 are dismissed with costs.

In the other batch of writ appeals, we have to straightaway state that there is no lack of bona fides on the part of the Central Government or the police in setting the process of investigation into motion. The argument that the warrants issued by the first respondent, the learned Chief Presidency Magistrate, were not in accordance with law cannot be accepted. The first respondent had examined Mr. Charanjiv Lall on oath and only after being satisfied that the documents called for were necessary for the purpose of investigation and would not, as asserted by Mr. Charanjiv Lall, be produced by the company if called upon so to do, the learned Chief Presidency Magistrate issued the search warrant after applying his judicial mind to the question. The learned Magistrate was not bound to record his reasons in writing. All that section 96 of the Criminal Procedure Code requires is that the Magistrate must have reason to believe that such is the state of affairs or, in other words, the Magistrate must be satisfied that there is necessity for the search warrant to be issued, as otherwise the thing would not be produced. The Criminal Procedure Code gives power to a police officer to request for the issue of a search warrant if he has reasonable grounds for believing that such search was required for the purposes of investigation into the offence which he is authorised to investigate; and Mr. Charanjiv Lall who applied for the search warrant appraised the learned Chief Presidency Magistrate of the necessary materials on the basis of which a search warrant was required and the Magistrate was satisfied as to the necessity for such a warrant and then issued it. That being so, the act of the Magistrate in so issuing the search warrant would not be open to judicial review under article 226 of the Constitution. Further, as pointed out by the learned judge Ramaprasada Rao J., the search warrants have already been executed. It would be futile now to issue a writ quashing the issuance of the warrant. Therefore, we see no grounds at all to issue a writ of certiorari to quash the search warrants dated June 7, 1971. Consequently, Writ Appeals Nos. 554/71, 69/72 and 70/72 are dismissed with costs. Counsel's fee Rs. 500 in the first of the appeals. No fee in the others.

[1983] 54 COMP CAS 370 (KER.)

HIGH COURT OF KERALA

Kumaranunni

v.

Mathrubhumi Printing and Publishing Co. Ltd.

M.P. MENON J.

COMPANY PETITION NO. 11 OF 1979

SEPTEMBER 9, 1981

  M. Ramanatha Pillai for the Petitioner.

P.K. Kurien and K.A. Nayar for the Respondent.

JUDGMENT

M.P. Menon J.—This is a petition under s. 237(a)(ii) of the Companies Act. The petitioner is a member of a company, and he wants an order declaring that its affairs require investigation by an inspector appointed by the Central Govt. Before going into the facts of the case, it is necessary to examine under what circumstances such a declaration could be made.

Section 237 of the Act reads :

"Investigation of company's affairs in other cases.—Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)         the company, by special resolution ; or

(ii)        the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

        (b)    may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members ; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company."

Counsel suggests that the discretion conferred on the court under cl. (a)(ii) is wide and uncontrolled and that the court can pass an order whenever it is satisfied, on a scrutiny of the materials placed before it, that an investigation is called for. The petitioner can prove his allegations before the inspector, when one is appointed, it is said : the court is only to see whether prima facie they have substance. But the question still remains on what kind of material the court can act. Going by the section, the inspector is to investigate into the affairs of the company, and not into the specific allegations made by a petitioner, suggesting thereby that the allegations or the materials should be such as to satisfy the court about the need for such an investigation. Section 237(b) enumerates the circumstances under which the Central Govt. can suo motu order a similar investigation ; and the discretion there is not uncontrolled. The Central Govt., before exercising its power thereunder, should form an opinion that circumstances suggesting the existence of one or other of the matters specified in sub-cls. (i) to (iii) are there. It should form an opinion that there are circumstances to suggest—

(i)         that the business of the company is being carried on with intent to defraud its members, or otherwise for a fraudulent or unlawful purpose ; or

    (ii)        that it is carried on in a manner oppressive of its members ; or

    (iii)       that the company itself was formed for a fraudulent or unlawful purpose; or

(iv)       that the persons concerned with its formation or management are guilty of fraud, misfeasance or other misconduct in connection with the formation or management; or

    (v)        that due information is withheld from the members.

It is not as if a member can make any allegation and the Central Govt. can order an investigation on being satisfied that it calls for a further probe. The nature of the allegations must have relevance to the matters enumerated in cl. (b). The question then is, is the situation different when the court has to decide under cl. (a) about the desirability of an investigation ?

The answer to my mind lies partly in the history of company law, and partly in some of the other provisions of the Act. A company is an association of men or women for trading, more or less like a partnership. In a partnership, the members are few, and each has confidence in the other. When the members participating in the association are few, their relationship can be worked out within the . confines of contract and agency. But when their number is large, a different form of organisation will be necessary. In the initial stages, these unincorporated bodies were developing in England on the lines of quasi-partnership with fluctuating membership. But as the law of contract arid agency could not be fully applied to a situation where the actual management of the business was in the hands of a few, with the bulk of the members forming the association waiting outside, the Chancery courts of England started to apply the equitable doctrine of trust to those larger bodies. Those in management of the business of the association were held to be occupying a fiduciary position, with certain fiduciary duties, in relation to the association and its members. Basically, the business association, or the company as it came to be called, rested on contract between the members ; but in certain respects, the members in management (i.e., directors) were held to have fiduciary duties, as distinct from contractual. The sanctity of contract which was the philosophy of the 18th and 19th centuries, as modified by the rules of equity developed by the equity courts, thus contributed to the development of company law even before Parliament thought of legislating on the subject. It was the Joint Stock Companies Act of 1844 which first drew the distinction between a partnership and a company. The enactment provided for registrations of associations with more than 25 members. Limited liability was recognised only in 1855, and it was only under the Joint Stock Companies Act of 1856 that registration became a matter of course. Even after the Companies Act of 1862 was placed on the statute book, the position was that the members of a company, particularly those in a minority, had little control over the directors in actual management. If the minority could approach the equity courts with complaints of breach of trust, they obtained some redress, and not otherwise.

In Foss v. Harbottle [1843] 2 Hare 461, it was held that the courts could not normally interfere with the internal management of the company at the instance of a minority of members dissatisfied with the conduct of its affairs by the majority. This approach was sought to be justified on various grounds. The first was that the members who had contracted to abide by the decision of the majority could not complain against something to which they had agreed. The second was that the majority alone knew what was good for the association or company, and that the court's views could not be imposed on them. And the third was that as the company was a separate juristic person, it alone, or at least only a majority of its members, could complain of any injury to it, and not a minority. In Salomon v. Salomon & Co. [1897] AC 22, the House of Lords went to the extreme of refusing to discover dummies and nominees behind the veil of incorporation, by placing emphasis on the separate legal personality of the company. In spite of the fact that free trans-ferability of shares is one of the important features of any company, it was held in In re Gresham Life Assurance Society : Ex fiarte Penney [1872] 8 Ch App 446, that where the articles of association vested an absolute discretion in the directors of a company to refuse to recognise a transfer of shares, the court would presume that the directors had exercised the power bona fide. They could not be compelled to disclose reasons for their refusal, unless want of good faith was affirmatively established by a petitioner. Dishonesty, fraud, bad faith, breach of trust and the like were the minimum to be established by individual shareholders before they could get any equitable relief from the Chancery courts ; in all other cases, the contract was supreme.

The various provisions of the Companies Act relating to minority protection have to be examined in the above background if their true content is to be discovered. Chapter VI deals with "oppression and mismanagement". Section 397 enables the minority shareholders to approach the court with a grievance that the company's affairs are being carried on in a manner oppressive to them, and s. 398 provides for a like complaint that the affairs of the company are carried on in a manner prejudicial to public interest or to the interests of the company. Oppression or mismanagement, in the context, have been understood as conduct involving lack of probity or bona fides. When the directors of a company with their majority support conduct themselves in a manner inequitable, i.e., when their conduct is tainted with lack of probity or selfish interest (as distinct from the interests of the company and the public), the court can step in and rectify matters. What lies behind the statutory provisions is a breach of the fiduciary duties the majority is supposed to honour and the basis of the complaint itself is that there is a breach of such duties. Section 408 confers a similar power on the Central Govt. to rectify matters, if the minority is able to satisfy that authority that similar circumstances verging on breach of trust are there. Winding up is another remedy available to minority shareholders when they find that those in management of the company have failed in their duties, some of which are statutory and some, fiduciary. Section 433(f), in particular, makes a provision for winding up on "just and equitable" grounds. Section 542 is an instance where even a single contributory can approach the court, in the course of the winding up of a company, for a declaration that the persons in management be held liable for fraudulent conduct of business. Misfeasance proceedings contemplated by s. 543 are also intended to assess and recover damages from persons responsible for a misapplication of the company's funds and properties, and for breach of trust. The thread running through all these provisions is the existence of a duty on the part of those in control of the affairs to conduct themselves more or less like trustees, and a liability to account when they are in breach thereof. When the majority of shareholders find that the directors are acting improperly or that the company's affairs are mismanaged, they could remove the directors in a general meeting; they need not go to court. But when the minority has a similar grievance, all that they can do is to approach the court. The provisions are thus intended to protect minority interests on the footing, and on the only footing, that their rights are being trampled upon in an inequitable or unconscionable manner. They are thus exceptions to the rule in Foss v. Harbottle [1843] 2 Hare 461, that a minority cannot ordinarily invite the court to look into the internal affairs of a company. And each of the exceptions rests on the principle that dishonesty, fraud, want of good faith, misfeasance, breach of trust and the like are remediable in equity, irrespective of contractual obligations.

The provisions of ss. 235 to 251 dealing with "investigation" recognise only another form of the remedy available to the minority shareholders. While ss. 235 to 237 deal with the circumstances under which investigation could be ordered, ss. 238 to 241 deal with inspectors, their powers and the report they have to make. Once the report is made, follow-up measures are contemplated by ss. 242 to 244. Section 242 provides for the prosecution of those found criminally liable. Section 243 empowers the Central Govt., through a person authorised by it, to apply for a winding-up on "just and equitable" grounds or to apply for the removal of the oppression and mismanagement. And s. 244 conceives of proceedings in misfeasance. The purpose of the investigation is thus to find out whether those in charge of the affairs of a company are guilty of illegal conduct or of conduct trenching upon breach of fiduciary obligations. That is way s. 237(b) speaks of unlawful purpose, fraud, oppression, misfeasance and misconduct. Whether it be under s. 235 when the Central Govt. acts on the application of a group of members, or under s. 237 when it acts suo motu or under orders of court, the machinery for investigation is to be set in motion only in the context of a complaint regarding breach of duties which equity has imposed on the majority.

If the above be the true position, it follows that in proceedings under s. 237(a)(ii), the court will look into only those allegations which have a bearing on the fiduciary duties of the majority, or their duty to abide by the law. of course, the court need not satisfy itself that the allegations are true, it is enough if a prima facie case is made out. No investigation can be ordered merely because the petitioning shareholder feels aggrieved about the manner in which, the company's affairs are being carried on, or because the court thinks that they could be better managed. The remedy being equitable, the court has also to satisfy itself that the petitioner has come to court bona fide for obtaining redres-sal, and not for any other purpose. An isolated instance of mismanagement, already remedied, could not also justify the passing of an order under s. 237(a)(ii).

As to the facts of the case, the petitioner is a shareholder of the Mathrubhumi Printing and Publishing Company Ltd., Calicut, a company engaged - in the printing and publishing of, mainly, the Malayalam daily newspaper "Mathniobhnmi" from Calicut, Cochin and Trivandrum. The late Mr. V. M. Nair was the managing director of the company till his death in May, 1977. He was occupying that position at least from 1958 and on his death, there was a change in management. One M. J. Krishna Mohan succeeded him and continued in office till November, 1979, when he too passed away. The present managing director is a cousin of Krishna Mohan, The company petition was filed in June, 1979, i.e., after the death of Sri V. M. Nair and while Krishna Mohan was alive. The petitioner was the advertising representative and special correspondent (or part-time news reporter) for the newspaper at Bangalore. The arrangement regarding news reporting was terminated in February, 1978. The advertising agency was also terminated by April 1, 1979. He had filed a suit against the company ; that was dismissed, but the matter is pending in appeal. He had raised certain claims before the Labour Court and there he succeeded ; but the company has challenged the decision in writ proceedings. An industrial dispute, and a criminal complaint filed by the company against him, are also said to be pending. What is relevant to notice is that the relationship between the petitioner and the present management of the company is somewhat strained, and that the company petition itself was filed soon after his advertising agency was terminated. And, if the proceeding of the 56th annual meeting of the company is any guidance, there are at least two groups among the members, one supporting the present management and another loyal to the old.

Though a number of allegations are raised in the petition, Mr. Ramanatha Pillai for the petitioner pressed only some of them at the hearing ; and I am dealing with only those allegations.

The first relates to the alleged theft or loss of newsprint. At the 54th annual meeting held on January 29, 1977, a member complained that a large quantity of newsprint belonging to the company was stolen and sold in black market by some people. Since the management took no action, the question was again raised at the 55th meeting held on March 27, 1978. A committee was thereupon appointed to go into the matter and at the 56th annual meeting, the convenor of the committee informed members that there was a prima facie case. These are the bare averments in para. 3 of the petition. There is no allegation that the directors or their friends or relatives were involved, or that the management attempted to cover up the matter. At the most, the allegation is that there was some theft or loss some time during 1975-76 and that the management has failed to take any action.

Exhibit A-2 is the report of the committee. It is dated July 21, 1979, and was made available to the company in August, 1979. The petitioner was examined as P.W. 1 in January, 1981, and by this time he could refer to its contents also. Still, all that he has said in evidence is that 7 to 8 tons of newsprint were stolen or otherwise lost in 1974, and that in spite of Ex. A-2 report, the management has not taken any action.

Exhibit A-2 shows that according to the then manager, Sri Krishnan Nair, he was authorised to dispose of waste newsprint (discoloured, sticky, broken, with no tensile strength), and that he had allowed the watchman, Beeran Haji, to keep a lorry load in a separate godown, pending disposal, as the company's godowns were full. The value of the waste was fixed by the press superintendent and, after sale, the proceeds were made over to the company. Beeran Haji, however, was not sure whether the reels were waste. The committee came to the conclusion that the transaction was not above suspicion, though there was no evidence of theft as such ; it was not at any rate impressed by Sri Krishnan Nair's version. It is even possible to think that in the opinion of the committee, Krishnan Nair was in some way responsible for the loss. The committee also noted that after the alleged incident, the machinery for dealing with waste newsprint had been improved. There is also evidence to show that waste can legitimately go up to 12%, that the percentage for the company during the relevant period was around 9%, and that all the rest of the paper was used and accounted for as good quality, according to the Audit Bureau of Circulation. Even assuming that the allegation of theft or loss is true, and that Ex. A-2 contains any specific finding, it is difficult to see what useful purpose would be served by ordering an investigation at this distance of time into an alleged theft of 1974. The petitioner was aware when he came to this court that the committee was looking into the matter ; it was not as if the management had hushed it up or had failed to take any action. Exhibit A-2 discloses that even if there was some scope for malpractice in 1974, the machinery for dealing with waste newsprint has since been strengthened and streamlined. The committee itself does not place the blame on the directors then in management; and the matter was allowed to be raised and discussed at three general body meetings, suggesting thereby that there was no attempt to stifle minority criticism or to suppress anything. In any event, the material available is insufficient to disclose a prima facie case regarding breach of fiduciary duties. I may add that the petitioner himself had suggested at the 56th meeting that a "memorial" be created to honour ex-manager, Krishnan Nair, for the valuable services rendered by him while in service.

The next complaint is about irregularities and corruption in the purchase of a flat at Bombay. All that is stated in para. 4 of the petition is that there was such an allegation and that the committee had enquired into it. The petitioner's evidence as P.W. 1 does not also take us any further. Exhibit A-2 shows that the flat was purchased during the tenure of Sri V. M. Nair, and that the administrative officer of the company was responsible for negotiating the deal. According to this officer, he had acted under the instructions of Sri V. M. Nair. The majority of the committee recorded that though this could not be verified, as Sri Nair was no more alive, there was reason to think that sufficient care was not taken. One of the members of the committee dissented, and indicated that the attempt was only to malign the old management. The company's lawyers, who examined Ex. A-2 report, expressed the opinion that there was nothing but suspicion and no action could be taken on its basis. After a careful reading of Ex. A-2, I am inclined to agree with this view. Of course, the majority had made an observation in Ex. A-2 report that the title obtained was not perfect and that the full consideration was paid before getting the title deed. When Mr. Ramanatha Pillai high lighted this aspect at the hearing, I directed the management to produce the title deed. But when it was produced along with certain other documents, it was contended that production of documents at that stage could not be allowed. I am not inclined to take such a technical view of the matter because if that be the case, most of the allegations in the petition could only be considered as vague and unspecific. Some of them could not even be considered as allegations. The petitioner's attempt may be to settle some scores with the present management, but so far as the court is concerned, the attempt should be to find out whether the mino rity shareholders have anything real to complain of. I am, therefore, marking the documents as Exs. C-1 to C-10. The title deed, Ex. C-1, dis closes that transfer of flats in Bombay was being made by transferring shares in the building company and that the company herein acquired the concerned shares on the day the consideration was paid. Sri V. M. Nair himself has signed Ex. C-1. The flat is admittedly in the exclusive and undisturbed possession of the company. On the materials available, therefore, I am unable to hold that misfeasance, misconduct, breach of trust or fraud have been established, prima facie, in regard to this trans action.

Another case is about the writing off of large sums as bad debts, and the allegation in the petition is only this :

"It is also seen from Ex. P-1 proceedings that large sums are written off in the financial year to which Ex. P-1 relates."

There is no complaint, at least in the pleadings, that the amounts were recoverable, or that they were written off in order to benefit the directors or their favourites, or that the action was in any other way irregular or improper. Exhibits C-2 to G-10 show that the Board had decided to write off the amounts concerned at three different sittings. The amounts were outstanding from advertisers, agents and other people numbering about 160, Exhibit P-1 referred to in the petition is Ex. A-1 minutes of the 56th annual meeting; and the only question at the meeting relating to writing off was whether charges for printing the Janata Party posters for the Chickmaga-loor election were also included in the amounts written off. The suggestion was denied and it was pointed out that the election itself was held during the previous financial year and that printing charges for posters had been fully realised. An Interesting interlude was a suggestion by someone that only printing charges due from the Congress party were being written off in the past. The amount written off during the year in question was Rs. 1,02,623. For the year ended July 31, 1977, the amount written off was higher. A large amount is seen written off during 1979-80 also. Taking into account the business turnover and the accounting practice of the company, it cannot be said that anything unusual had taken place during Ex. A-1 year. The auditors had raised no objection and the general body had approved the accounts. In my opinion, this allegation of the petitioner is devoid of any merit.

The next grievance relates to the purchase of some land at Trivan-drum. There was no reference to such a complaint either in the petition or in the reply affidavit filed in September, 1979. The point was raised in para. 4 of the reply affidavit dated October 23, 1980, in the following manner :

"It may also be kindly noted that Sri Damodaran who is found to be one of the employees responsible for the deal in respect of the purchase of the flat in Bombay has again been allowed to participate effectively in the transaction regarding the purchase of property by the company in Trivandrum which again is a reckless venture whereby the company is put to loss."

The evidence of P.W. 1 is to the effect that the land was purchased for starting the Trivandrum edition of the newspaper and that it is kept vacant, while the Trivandrum edition is being published from some other premises. There is also a statement that more than one lakh of rupees was spent for acquiring land in a marshy area. But when it came to argument, the point stressed was that it was an unwise policy to have acquired land and then depended on other premises for the Trivandrum edition. The company has produced documents to show that land in the neighbourhood is being sold at three times the rate it had paid. It is also explained that the equipment and machinery for the Trivandrum press had arrived, and that their erection and the publication of the Trivandrum edition could not have been postponed. The evidence discloses that about one crore of rupees was set apart for the Trivandrum edition, and that there was a prolonged strike and lock-out in the meanwhile. There is thus no material to hold that the investment of about a lakh of rupees in land, to be eventually used for housing the Trivandrum project, was a reckless venture or a foolish adventure.

Paragraphs 5 and 5A of the petition deal with another charge, and that relates to the appointment of one Sri Manakalath as public relations manager of the company in June, 1978. It is alleged that he was appointed without a board resolution and without inviting applications for the post, and that lie was allowed to draw large sums as T.A. advance without vouchers. It was, however, conceded at the hearing that the managing director was competent to appoint such officers without the Board's sanction and that there was no practice of inviting applications for such posts. The person concerned was working at Madras as the company's advertisement representative, and there is evidence to show that his appointment as P.R.M. was followed by an increase in advertisement revenues. The main attack was directed against payment of advances. R.W. 1 has given evidence that all payments were effected only against vouchers and that bills and accounts were being subsequently presented, verified and adjusted. The auditors have raised no objection. The reports of the directors and auditors, as also the balance-sheet and profit and loss accounts, were duly passed during every year. Counsel referred to some discrepancy in one of the answers given at the 56th annual general meeting, but the control and supervision of finances and accounts should normally be left to those in charge and the auditors, subject to acceptance by the general body. There is no evidence regarding any particular disbursement or voucher, even if such a matter could be gone into in proceedings like the present.

Another matter raised in paras. 5 and 5A concerns the appointment of one C.G.K. Reddi as adviser. The allegation is that he entered into an agreement with a foreign concern for the monopoly supply and distribution of the company's publications and that this was done without the sanction of the Reserve Bank and to the detriment of the company. My attention has not been drawn to any passage in the evidence of PAY. 1 dealing with want of Reserve Bank sanction or detriment to the company. All that was said by P.W. 1 was that the agreement had not benefited the company and that there was some litigation. It was also added that there was no board resolution authorising Sri Reddy to enter into the contract. The company's answer is that Reddy was appointed as adviser for one year for modernising the company and planning the Trivandrum project. He had acquired experience as general manager of the "Deccan Herald" and as business manager of the "Hindu". The evidence of R.W. 1, along with the documents produced, show that Reserve Bank permission had been obtained, that the agreement was entered into with the full concurrence of the managing director after effecting modifications suggested by him, and that the arrangement had come to an end within a matter of days because of some ban ordered by the U.A.E. government. There is no evidence of litigation loss, detriment, illegality or even unauthorised dealing. This complaint should also, therefore, fail.

Another allegation which, if proved, would have been a matter of some substance, is about the appointment of one Sri P. V. Chandran as the director of the company. What is argued is that he was a partner in a firm of advertisers with which the company had dealings, and that he was appointed in violation of s. 299 of the Companies Act inasmuch as his interest in that business was not disclosed. But the allegations in paras. 9 and 9A of the petition make no reference to s. 299, but only to the extending of credit facilities to the firm as a "non-accredited" advertising agent. From the evidence, however, it is clear that such agents are also given credit facilities, though for a shorter term. The decision to appoint Sri Chandran as director was taken at the board meeting held on May 14, 1978 ; he was not present at the meeting. Exhibit B17 dated July 14, 1978, is a letter from Chandran, in reply to the company's letter dated June 2, 1978, disclosing his interest in the firm. R. W. 1 says that though the firm was a valuable customer, no fresh contract was given to it after Sri Chandran was appointed as director. He resigned from the firm by the end of March, 1979. Violation of s. 299 is thus not made out.

Paragraph 7 of the petition complains of the company's attempt to borrow one crore of rupees, when it has a paid up capital of less than nine lakhs only. The interest liability would be too much for the company, it is averred. It is added that "in the peculiar circumstances now obtaining in the company, there is every reason to suspect the bona fides of the management in the matter". The company's answer is that newspaper business had become highly competitive with other papers like Malyala Manorama starting editions from different centres and that it was, therefore, decided to expand the company's business by starting a Trivandrum edition of the Malhrubhumi and that the borrowing was intended to raise funds for the purpose. The decision to borrow was actually taken at an extraordinary general meeting held on June 23, 1969. It was unanimous and the petitioner was also a party to it. If this be the true position, I fail to see how he could challenge the bona fides of the decision, and how it could be said that that anyone is guilty of breach of fiduciary duties.

The last complaint is that "information regarding the affairs of the company and its working are purposely withheld from the members"; and the company's answer is that members of the company have access to all the records of the company as laid down in the Companies Act. P. W. I has no case that any particular information he wanted has been withheld. What is suggested by counsel is that some of the questions asked by members at the 56th meeting (Ex. A-1) remained unanswered. Disclosure is no doubt one of the fundamental principles underlying the formation and working of a company. Members have a right to know how the company's affairs arc conducted. Creditors would also like to learn about its financial position. Even members of the public are interested, at least from the point of view of future investment. The Companies Act, therefore, provides for maintenance of registers, books, records and for publication and compulsory disclosure of accounts duly audited. Every company should have a registered office and that office must maintain the memorandum and articles of association, register of directors, of members, and other books and files regarding share capital and other matters. The accounts should be audited every year and annual returns are to be submitted. Charges should be registered. All these are available for inspection by members of the company and even by the public. The audited accounts have to be placed before the annual general body for the information of the members. The directors have to report every year to the shareholders in general meeting. Extraordinary general body meetings are also held. These are some of the provisions of the Act which insist on supply of information to members and others. But that does not mean that every question asked at every general meeting should be forthwith answered, without even considering whether they relate to the affairs of the company as understood in law, and whether it would be possible to answer such questions without due notice. A business organisation like a company cannot function like a legislative assembly, if only for the reason that the powers of the directors and the members in general body are denned. Section 237(b)(iii) speaks of "information with respect to its affairs which they might reasonably expect", i.e., the information sought for must be about the affairs of the company and something which could reasonably be expected to be supplied. No attempt has been made before me, either in the course of evidence or at the hearing, to point out that any particular information of such a character has been withheld.

On an anxious consideration of the materials on record and the arguments advanced, and even overlooking the unsatisfactory nature of the pleadings, I am unable to hold that circumstances suggesting the existence of fraud, illegality, misfeasance, misconduct, etc., have been made out even prima facie, so as to relax the rule in Foss v. Harbottle [1843] 2 Hare 461 and direct an investigation into the internal affairs of the company. The company petition is, therefore, dismissed, but without costs.

[1982] 52 Comp. Cas. 589 (Del)

High Court of Delhi

Modi Industries Ltd.

v.

Union of India

D. K. KAPUR AND YOGESWAR DAYAL, JJ.

CIVIL WRIT PETITION NO. 378 OF 1977.

APRIL 9, 1980

G.L. Sanghi , A.T. Patra and B. Mohan for the petitioner.

K.N. Kataria for the Respondents.

JUDGMENT

D.K. Kapur, j—The petitioner-company is a public limited company which was originally known as Modi Sugar Mills Ltd., but at present it carries on business of various types, i.e., sugar, vanaspathi, steel, electrodes, lantern, gases, distillery and soap. The balance-sheets for the years 1971-72 to 1975-76 which are on record show that the share capital is more than Rs. 2.5 crores and there are reserves in the neighbourhood of Rs. 3 crores. The petitioner has challenged an order issued on 12th May, 1977, by the Company Law Board which reads as follows:

" No. 2/4/77-CL. I

Government of India,

Ministry of Law, Justice & Company Affairs,

Department of Company Affairs,

(Company Law Board)

Shastri Bhavan, 'A' Wing, 5th Floor,

Dr. R. P. Road, New Delhi-110001, 12-5-77.

ORDER

WHEREAS in the opinion of the Company Law Board there are circumstances suggesting that the persons concerned with the management of the company named as Modi Industries Limited having its registered office at Modinagar District, Meerut, Uttar Pradesh (hereinafter referred to as the company) have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company/or its members :

And whereas the Company Law Board is further of the opinion that inspectors should be appointed to investigate into the affairs of the company.

NOW, therefore, in exercise of the powers conferred by clause (b) of section 237 of the Companies Act, 1956 (Act 1 of 1956), read with section 10E(1) of the said Act, and the notification of the Government of India in the Department of Company Affairs, No. G.S.R. 443(e) dated the 18th October, 1972, the Company Law Board hereby appoints S/Shri Jagdish G. Wadhwan, Amolak Lal Bajaj and Harish Kumar, Chartered Accountants, C/o. M. Pal & Company, 4850/24, Ansari Road, New Delhi-2, as inspectors to investigate into the affairs of the company and to report thereon pointing out all the irregularities and contraventions of the Companies Act, 1956, and/or any other law and the person or persons responsible for such irregularities and contraventions.

2. The Inspectors shall investigate into the affairs of the company in respect of the years 1971-72 to 1975-76 and complete the investigation and submit six typed copies of their report to the Company Law Board on or before 31st December, 1977. The Company Law Board hereby reserves the right to extend the above-mentioned date from time to time and when considered necessary.

3. The Inspectors shall be entitled to a consolidated remuneration of 70,000 (rupees seventy thousand only) and other incidental out of pocket expenses actually incurred.

By order of the Company Law Boord

Sd. N. L. Pillay

Under Secretary to the Company Law Board.

No. 2/4/77/CL. I.

Copy forwarded to :—

1.       Shri Jagdish C. Wadhwan

C/o M/s. M. Pal & Co

 

4850/24, Ansari Road,.

2.       Shri Amolak Lal Bajaj J

            New Delhi-2.

3.         Shri Harish Kumar

 

4.         M/s. Modi Industries Limited, Modinagar,             District Meerut, Uttar Pradesh.

 

5.         Regional Director, Company Law Board,             Kanpur

 

6.         The Registrar of Companies, Delhi.

 

7.         File No. 3/15/76-CL-I Branch.

 

8.         CL. II Branch

 

9.         Guard File.

 

Sd. N. L. Pillay

Under-Secretary to the Company Law Board. "

 

The said order was issued under s. 237 of the Companies Act, 1956, which gives the Central Govt. considerable powers to order the investigation into the affairs of a company for particular purposes. The said section also gives to the court power to order the investigation into the affairs of the company. There are three ways in which the power under s. 237 can be invoked. The company may pass a special resolution to that effect or the court may order the same. In such cases there is no restriction to the power being exercised, but in the case of the Central Govt., the power is circumscribed by s. 237(b) which shows that the Central Govt. can order the investigation only if there are circumstances suggesting either that the business of the company was being conducted with intent to defraud its creditors, members or any other persons, or otherwise for unlawful purposes, etc., or that the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct or that members of the company have not been given information which they might reasonably expect and so on. In the present case, the opening words of the order show that the opinion of the Company Law Board was that there are circumstances suggesting that persons connected with the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company or its members. The order moreover provides that the persons appointed to carry out the investigation have to look into the affairs of the company and make a report pointing out all irregularities and contraventions of the provisions of the Companies Act or any other law, and also, the person or persons responsible for such irregularities and contraventions. It is contended before us that the order merely sets out the words of the section and does not point out the circumstances that might have come to the notice of the Company Law Board. Also, the report required from the chartered accountants appointed to carry out the investigation is concerned with the irregularities and contraventions of the Companies Act, 1956, and other law, which means the investigation is not limited to fraud, misfeasance or misconduct.

A large number of cases have been brought to our notice concerning the manner in which the courts have examined orders passed by the Central Govt. and the Company Law Board under s. 237 of the Act. The leading judgments on this point have been referred to us. They are, Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp Cas 639; AIR 1967 SC 295 and Rohtas Industries Ltd. v. 5. D. Agarwal [1969] 39 Comp Cas 781; AIR 1969 SC 707. In each case, the Supreme Court had occasion to examine the manner in which s. 237 of the Act is to be applied to a given set of facts. In addition, there is a comparatively recent unreported judgment of this court where a Division Bench has examined a petition similar to the one before us which is Ashoka Marketing Ltd. v. Union oj India, Civil Writ Petition No. 918 of 1974, decided on 26th April, 1978, since reported in [1981] 51 Comp Cas 634 (Delhi).

In has been pointed out by learned counsel for the petitioner that in all these three cases the order passed under s. 237 by the Central Govt. was quashed on the ground that circumstances did not exist which would suggest that any person connected with the management had been guilty of fraud, misfeasance or misconduct.

The procedure of law laid down in these three judgments have been pointed out to us and it has been stressed that the circumstances which may give rise to the opinion are not only to be subjectively determined by the person or persons expressing the opinion, but must also be objectively shown to exist. It has been stressed before us that we should examine the existence of the circumstances as claimed in the affidavit filed on behalf of the respondents and also the explanation given in the affidavit filed on behalf of the petitioner in reply to the said affidavit.

As it happens, the counter-affidavit of Shri N. L. Pillay, Undersecretary of Law, Justice and Company Affairs, has been filed in reply to the petition, but later another affidavit, being the affidavit of Shri S. Balaraman, Under-Secretary, Government of India, Ministry of Law, Justice and Company Affairs, has been filed which is dated 4th December, 1979. The first affidavit was filed on 29th October, 1977; it did not give any particular material in regard to the question whether circumstances existed. Probably, that is why the second affidavit had to be filed. The affidavit of Shri S. Balaraman is, therefore, the one to be considered regarding the circumstances which warranted the passing of an order under s. 237 of the Act. This affidavit refers to the circumstances under several headings : (1) working of the steel unit, (2) working of gas and chemical units, (3) working of distillery unit, (4) working of sugar unit, (5) working of vanaspati unit, and (6) working of soap unit. The purpose of this affidavit is to bring to the notice of the court that there are certain circumstances specifying malpractices.

In reply to this, a rejoinder affidavit dated 14th January, 1980, has been filed, which is the affidavit of Shri A. K. Jain, Company Secretary of the petitioner-company. This is a detailed document referring to a number of facts, the object of which is to show that the circumstances alleged to exist do not in fact exist, or at least the circumstances are quite different from what are alleged to exist. As we are to follow the procedure followed in the three judgments referred to, it may be now useful first to state the legal position which emerges from the judgments.

In Rohtas Industries' case [1969] 39 Comp Cas 781 ; AIR 1969 SC 707, the order is reproduced at p. 785 (p. 709 of AIR) of the report. It seems to be exactly in the same terms as in the present case. An affidavit being the affidavit of Shri Rabindra Chandra Dutt, Secretary to the Govt. of India, Ministry of Finance, Department of Company Affairs and Insurance, and Chairman, Company Law Board, was filed in opposition in the Patna High Court. In this affidavit, reference was made to the report of the Commission of Enquiry headed by Justice Vivian Bose dated 15th June, 1962, and certain complaints received by the department concerning the misconduct of the management. It is noteworthy that the Patna High Court had dismissed the writ petition on the ground that it was not open to judicial review and the opinion of the Central Govt. was conclusive. However, in view of the judgment in the Barium Chemicals' case [1966] 36 Comp Cas 639 (SC) and on an interpretation of the law, the Supreme Court went into the allegations, particularly the circumstances relating to certain transactions. It was concluded that the investigation in question would not have been ordered except for the fact that Shri S. P. Jain was associated with the company. On the legal question, it was held as follows (p. 800 of 39 Comp Cas):

"Coming back to section 237(b), in finding out its true scope we have to bear in mind that that section is a part of the scheme referred to earlier and, therefore, the said provision takes its colour from sections 235 and 236. In finding out the legislative intent we cannot ignore the requirements of those sections. In interpreting section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally, we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interests of the general public. In fact the vires of that provision was upheld by a majority of the judges constituting the Bench in Barium Chemicals' case [1966] 36 Comp Cas 639, [1966] Supp SCR 311; AIR 1967 SC 295, principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated earlier, we agree with the conclusion reached by Hidayatullah and Shelat JJ. in Barium Chemicals' case that the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (i) or the persons mentioned in sub-clause (ii) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the courts are entitled to examine whether those circumstances were existing when the order was made. In other words the existence of the circumstances in question are open to judicial review though the opinion formed by the Government is not amenable to review by the courts. As held earlier, the required circumstances did not exist in this case."

The court then considered whether any reasonable authority, much less an expert body like the Central Govt., could have made the impugned order on the basis of the material before it and came to the following conclusion (p. 801 of 39 Comp Cas):

"We do not think that any reasonable person, much less any expert body like the Government, on the material before it, could have jumped to the conclusion that there was any fraud involved in the sale of the shares in question. If the Government had any suspicion about that transaction it should have probed into the matter further before directing any investigation. We are convinced that the precipitate action taken by the Government was not called for nor could be justified on the basis of the material before it. The opinion formed by the Government was a wholly irrational opinion."

The judgment in the other Supreme Court case, Barium Chemicals Ltd. [1966] 36 Comp Cas 639 ; AIR 1967 SC 295, which is earlier, proceeds on an even more detailed examination of the law and come to the conclusion that the opinion to be formed must be based on circumstances and moreover the law required that the existence of the circumstances must be demonstrated, as held by Hidayatullah J. at p. 661 (p. 309 of AIR) of the report:

"An action, not based on circumstances suggesting an inference of the enumerated kind will not be valid. In other words, the enumeration of the inferences which may be drawn from the circumstances, postulates the absence of a general discretion to go on a fishing expedition to find evidence. No doubt the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. If the action is questioned on the ground that no circumstances leading to an inference of the kind contemplated by the section exists, the action might be exposed to interference unless the existence of the circumstances is made out. As my brother Shelat has put it trenchantly:

'It is not reasonable to say that the clause permitted the Government to say that it has formed the opinion on circumstances which it thinks exist....'

Since the existence of 'circumstances' is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned, has to be proved at least prima facie. It is not sufficient to assert that the circumstances exist and give no clue as to what they are because the circumstances must be such as to lead to conclusions of certain definiteness. The conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct or the withholding of information of a particular kind. We have to see whether the chairman in his affidavit has shown the existence of circumstances leading to such tentative conclusions. If he has, his action cannot be questioned because the inference is to be drawn subjectively and even if this court would not have drawn a similar inference that fact would be irrelevant. But if the circumstances pointed out are such that no inference of the kind stated in s. 237(b) can at all be drawn that action would be ultra vires the Act and void."

This quotation would show that there has to be an objective demonstration of the circumstances, but if the circumstances are shown to exist then the question whether the opinion is rightly or wrongly formed is not the subject of judicial review.

The same view has materially been adopted by the Division Bench of this court in deciding Ashoka Marketing Ltd.'s case [1981] 51 Comp Cas 634.

There is another case decided by myself, S. L. Verma v. Delhi Flour Mills Co. Ltd. [1975] 45 Comp Cas 33 (Delhi), wherein it has been pointed out that even the court has to be careful when applying its power under s. 237 although there is no apparent limit in the section.

Having now stated the manner in which the court is to act, it is necessary to examine the facts of the case with a view to determining whether circumstances do in fact exist which could lead to the formation of the opinion. In order to examine the affidavits filed in this case setting out the circumstances that are said to exist, it is also necessary to be quite clear as to for what purpose these affidavits are being examined. No doubt, we are to examine the existence of certain circumstances. But, what are those circumstances ? It is interesting to note that from the very beginning legislation regarding companies has been directed towards the prevention of certain evils, which came into existence, almost simultaneously with the great rise of private financial enterprises or business corporations. The great success of the East India Company had been followed by the South Sea Company in the latter part of the 17th Century. The South Sea Company had proved to be a fraudulent venture described as a company for scheming rather than trading. The Bubble Act, 1720, was the first positive legislation to suppress the formation of companies formed as mere ingenious legal devices for deceiving the public. On the other hand, too much control over the formation of companies would also affect capital formation and floatations for innocent purposes, so a great deal of legislation has resulted. As the Companies Act in India is largely based on the English Companies Act, it would not be out of place here to mention that s. 237, as it now exists in the Companies Act, 1956, is practically the same as s. 165 of the English Companies Act, 1948. The subsequent sections dealing with the powers during investigation, the production of documents and the proceedings and report of the inspectors are also more or less the same. In England, the power to direct an investigation is given to the Board of Trade. The same principle has been applied in India by giving the power to the Company Law Board, though in the Act it is stated to be a power of the Central Govt.

It may be pointed out that before 1948, the Companies Act did not make any provision in England for ordering an investigation into the affairs of a company. In fact, the history of company law legislation shows that the original doctrine of economic liberalism and laissez faire has gradually vanished so as to permit the public being protected from fraud and exploitation. There was a time when the court would not interfere in the internal management of a company ; it would not interfere in disputes between shareholders and would leave the determination of the rights of shareholders entirely to the brute majority as represented by majority shareholders. This has all been altered in various ways. Sections 397 and 398, as they now exist in the Act, enable the court to protect minority rights. Ample powers to prevent oppression of the minority or to prevent the misuse of the company's funds against the public interest or to prevent mismanagement and other evils now exist.

Nevertheless, it cannot be denied that corporations are run in such a way that it is difficult for a small shareholder or for other persons belonging to the public getting inside information as to the actual manner in which the funds collected from the public are being employed by the persons who are in-charge of the management of the company. As at present, there are several powers available to various authorities under the Act in addition to those granted to the company court to protect the interests of the shareholders and the general public.

Under s. 209 of the Act, accounts have to be kept by a company in a particular manner. Those accounts are open to inspection by a director during business hours. The account books have to be preserved along with the vouchers relevant to each entry in good condition for a period of not less than eight years. Under s. 209A the books of account and other papers of the company are open to inspection during business hours by the Registrar of Companies or by an officer who is specially authorised by the Central Govt. in this behalf. Such an inspection can be made without giving any notice to the company concerned. Great powers are given to the person making an inspection under this section. He can take copies of books of account and other books and papers; he can use the power of a civil court for discovery and production and can examine on oath. There are penalties provided if the company makes default in complying with the directions given in the inspection. If a director or officer of a company is convicted of an offence under the section, he vacates his office and is disqualified for a period of five years. This section came into effect from 1st February, 1975.

In addition, a company is to disclose its annual accounts and balance-sheet at a general meeting as provided by s. 210, et seq. Auditors have to be appointed who examine the books of account of a company for the purpose of audit and the nature of the report is specifically provided for in the Act.

In addition to this protection of the shareholders by and through audit of the accounts by a chartered accountant, the Central Govt. has the power under s. 233A to order a special audit in certain cases. This section shows that the Central Govt. can order a special audit when the affairs of the company are not being managed in accordance with sound business principles, etc., or a company is being managed in a manner likely to cause injury or damage, etc., to the business, or the financial position of the company is in danger. Under s. 233B, a cost accountant can be appointed. These provisions were introduced in the Act in 1960 and 1965, respectively. In addition to this, there is the power to order investigation under s. 237 with which we are concerned.

This introduction is not out of place in the circumstances of the present case because the facts show that in the present case in January, 1971, an order was passed by the Company Law Board under s. 209(4) appointing Shri Suresh Behari to inspect the books of account and other papers of the petitioner-company. According to the petitioner, nothing was revealed by this special inspection.

On 24th January, 1973, the Company Law Board issued a notice under s. 233A, which appears as annex. B to the petition. It states that an inspection of the books and records of the company had been made under s. 209A(4) and according to that inspection certain transactions had taken place which showed that the company was not being managed in accordance with sound business principles and prudent commercial practices. A large number of allegations regarding alleged malpractices was set out in this document but the same need not mentioned in extenso.

In reply to the show-cause notice a detailed reply was given which is annex. C. This reply was considered by the Company Law Board and the petitioner-company was represented by an advocate, Shri G. S. Shah. Eventually, in May, 1974, the Central Govt. decided that no special audit was necessary.

It is then stated in the petition that a further inspection of the books of account and other books of the company was made for the period January, 1975, to May, 1975, and all information required by the inspector was supplied. Nothing more was done as a result of this inspection till the notice was issued on 12th May, 1977, which relates to the period covered by the years 1971-72 to 1975-76, which would also appear to be the period covered by the inspection made by the inspectors under s. 209. Learned counsel for the petitioner has stressed the fact that there could hardly be any need for an investigation when even a special audit had been dropped as stated above.

Although the facts would suggest that the Company Law Board is reopening the matter which it appears to have closed earlier, nevertheless we have to examine the affidavit in detail to see what is actually stated. It would make very little difference if the inspection or audit or other steps taken earlier did not reveal anything or were dropped. I now proceed to examine the contents of the affidavit of Shri S. Balaraman under the various headings mentioned in that affidavit.

Working of the steel unit.

Under this heading, it is stated in the affidavit that this is the major investment by the company. It is claimed that the working results were not satisfactory during the years in question. In 1970-71, there was a profit of Rs. 129.10 lakhs, in 1971-72 a profit of Rs. 60.26 lakhs, in 1972-73 a profit of Rs. 0.066 lakhs, and in 1973-74 a loss of Rs. 67.53 lakhs. It is claimed that the lesser profit for 1971-72 was also due to the adjustment of scrap of the book value of Rs. 12.60 lakhs in the books of the company. It is claimed that this is not correct. The explanation given to the various authorities is contradictory. It is stated that the working results of the steel unit show that the melting losses are increasing, and also, consumption of electricity, graphite electrodes and other materials is increasing per metric tonne without any satisfactory explanation. It is claimed that this indicates the possibility of selling the material outside the books or the processing of scrap of other parties at the cost of the company. Therefore, it is necessary to investigate the truth particularly, as there was no satisfactory explanation for adjustment of the scrap.

There was some difficulty in understanding the case made out in the affidavit under this heading. The fact that Rs. 12.60 lakhs had been adjusted is not in doubt, but the circumstances set out do not reveal what are the circumstances which would show fraud, misconduct or misfeasance. These terms have been analysed in the judgment of Sbelat J. in Barium Chemicals Ltd.'s case [1966] 36 Comp Cas 639 (SC). They are also set out in s. 543 of the Companies Act, 1956. The words used in s. 237 are as follows :

"237. Investigation of company's affairs in other cases.—Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)         the company, by special resolution ; or

        (ii)        the court, by order,

declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government ; and

        (b)    may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose ;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members ; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company."

We are concerned with sub-cl. (b)(ii). The circumstances must show that some persons connected with the management have been guilty of fraud, misfeasance or other misconduct towards the company. The words "been guilty" are strong words. So, there must be some circumstances which would lead to the inference that there has been some fraud, misfeasance, breach of trust or other misconduct which requires investigation. The fact that a certain adjustment has been made in the books of account is not a concealed occurrence.

In order to understand the point involved, we have examined the affidavit filed in reply to these allegations. This reveals that the fall in profits was occasioned by rise in the cost of raw materials and increased conversion cost. There was also a drastic power cut in the State of Uttar Pradesh which decreased the production of steel from 73,297 tons in 1971-72 to 27,208 tons in 1973-74. It was claimed that the increase in melting loss was due to the nature of the scrap purchased and technical matters regarding various types of scrap, such as heavy scrap, light or turning scrap has been given. It is claimed that the petitioner-company was forced to purchase low quality scrap due to circumstances. As far as the claim regarding Rs. 12.60 lakhs adjustment is concerned, it is pointed out that the Collector of Central Excise had also claimed that Rs. 12.60 lakhs worth of scrap had been removed from the factory without payment of excise duty, but the matter had been dropped as there was no surreptitious production and removal by the petitioner-company. The Income-tax Officer had added Rs. 70 lakhs to the income of the petitioner on the same or similar allegations, but the Appellate Assistant Commissioner by an order dated 5th August, 1977, had held that the allegation of unaccounted production or sale could not be sustained. The reasons given for this were : (a) the accounting and quantitative records of the assessee maintained from purchase to the stage of finished products, (b) the employment of a large number of workers and staff without whose connivance the products could not obviously be removed or sold, (c) the fact that bonus was payable based on production. Furthermore, the operations were handled by outside contractors and quantitative records of finished goods fully reconciled with outside contractor's wage bills. No discrepancy in the record had been pointed out, and there was no evidence of any unaccounted sale of finished goods.

From this affidavit and the circumstances of the case we have to determine whether there is any objective fact rather than subjective fact to show that any steel had been surreptitiously removed after producing the same. The explanation offered by counsel for the petitioner was that it is customary to check the stock at the end of the accounting period and it is only on the basis of verification that the stock of scrap was reduced by Rs. 12.60 lakhs. It is pointed out that the scrap is bought in bulk and consumed periodically. It is only when the stock is to be accounted for at the end of the year that a stock-taking is made. The exact position, therefore, is that the adjustment of Rs. 12.60 lakhs is merely a verification of the actual existing state of affairs rather than any change in the actual stock-in-hand (of scrap).

It is, therefore, plain that there are two possibilities which are stated to be the circumstances under this heading. There is the adjustment of Rs. 12.60 lakhs worth of scrap and there is a fall in the rate of profit, etc. By themselves, these facts cannot show the existence of any fraud, misfeasance or other misconduct. These are not circumstances, but mere guesses. It cannot be objectively stated that any reasononable person could say that this shows that there has been fraud or misconduct. In fact, the point becomes much easier to understand when one examines the profit and loss account for the year ending 31st October, 1972. The raw materials consumed in that year were Rs. 19,83,96,747.93. In the year 1975-76, the raw materials were Rs. 22,22,54,888.84. When raw materials worth crores of rupees are consumed in a year, it would obviously be very difficult to maintain an exact check on the actual stock of any raw material and, therefore, it is not surprising that a discrepancy is likely to occur if ascertained at the end of the financial year. It cannot be said that an open and clear statement in the books of account regarding the adjustment and the existence of the same can lead to an inference that there has been fraud, misconduct or misfeasance. It must also be understood that when the goods leave the factory they have to pass the excise authorities. Without some contravention being discovered or ascertained it cannot be said that any circumstances exist. Certainly, if some steel was found to have escaped excise or some other facts tended to show that the scrap had been otherwise removed, circumstances might have been different. So, this particular circumstance is not sufficient to sustain the order.

Working of gas and chemical units

Under this heading, it is claimed in the affidavit that the company produces oxygen, nitrogen and acetylene gas. The company had purchased 23,125 cylinders, but 631 cylinders had been lost and there is a dispute about 443 other cylinders. It was claimed that 375 of these cylinders had been lost by the Delhi agent, M/s. Modi Industries Agency and Industrial Gas Distributors, of which 353 had been lost in the year 1970-71. It is claimed that these cylinders are being used the Delhi agent for their own business who are taking advantage of the goodwill of the company and selling Modi gas. In connection with acetylene gas, it is claimed that the company started 30 MT. of calcium carbide which was later on treated as having been received for the purpose of processing. These allegartions are refuted in the affidavit in reply. It is stated that the lost cylinders had been paid for. A copy of the agreement with the agent has also been filed. It is stated that the replacement cost of these cylinders had been received. It cannot be said that these allegations can show circumstances of the type mentioned in s. 237.

With regard to the other allegation concerning the diversion of 30 MT. of calcium carbide, it is stated that there is nothing in the record of the company to show this and no reasonable man could come to such a conclusion. It appears that the explanation of the company is correct. No material has been placed before us to show how and where these 30 MT. of calcium carbide are mentioned except in the affidavit. It may be recalled that in the Barium Chemical's case [1966] 36 Comp Cas 639 (SC), and in the Rohtas Industries case [1969] 39 Comp Cas 781 (SC) specific allegations regarding the transactions were placed before the court. But, the mere allegation that 30 MT. is reported to have been treated as being received from another is not enough. Who is the person who made this report ? Where were these 30 MT. of calcium carbide removed and for whom ? It appears that the allegation is completely vague.

Working of distillery unit

Under this heading, it is claimed that 600 cylinders other than those used for other gases have been lost. It is claimed that the cylinders were still in use and there was a diversion of the profits of this business to some one else. Again, no specific material has been brought to show the existence of objective circumstances. In the affidavit-in-reply, it is stated that there has been a fall in the production of calcium carbide because customers' cylinders used to be utilised for this purpose. However, it appears to be admitted that some cylinders were lost because they were not returned by the agent, as they were not returned to the agent by customers. In the affidavit, it is stated that carbon-dioxide was a bye-product from fermentation of molasses and was not of such good quality as to be used by big customers like Coca-Cola and Gold Spot. Actual figures showing that the number of cylinders supplied by customers for filling carbon-dioxide gas had fallen from 4,495 to 968 in the period 1969-70 to 1972-73, are also set out. It is then stated that due to a letter written by the Chief Inspector of Explosives of India, Nagpur, the filling of customers' cylinders was discontinued as customers could not produce certificates of fitness. Furthermore, the allegation that any carbon-dioxide was sold outside the books of the company is stated to be totally false and baseless because Central Excise is payable on the production and selling of carbon-dioxide and the excise department has not found anything wrong in the books of the company.

It does seem that the allegations are vague and indefinite. What do the allegations mean ? Some cylinders are missing, but the explanation is similar to the one given regarding the other cylinders. As far as the fall of production is concerned, an explanation has been offered. The Company Law Board is not concerned with the quantum of production, but with the question whether an inference can be raised from circumstances showing the existence of fraud, misconduct, etc. It cannot possibly be said that the carbon-dioxide is being manufactured and sold outside the books of the company without some other circumstances being shown to exist concerning this fact. So, the circumstances set out in the affidavit would not justify the order under this heading.

It is alleged in the affidavit that as the cylinders are reported to be lost but the employment of cylinders shows that they are in use, hence this business was being done outside the books of the company. As explained by the company, this would mean that the carbon-dioxide is being smuggled out of the premises of the company in spite of the excise department. As no facts appear in the affidavit showing that any cylinders have been found to have been smuggled out, this appears to be merely a conjecture rather than a circumstance.

Working of sugar unit :

Under this heading, the irregularities alleged to exist are : (a) in the manner in which items have been classified, (b) it is alleged that certain repairs are of a capital nature which should have been capitalised and this has resulted in fall in production, (c) the stores account did not tally with the stores ledger maintained in the head office, so the company was not maintaining proper control over the stores, (d) the consumption record of firewood and coal showed some discrepancies, (e) the costing record was not maintained in accordance with the Cost Accounting Rules. As is obvious, all these circumstances are concerned with the manner in which account books are maintained. These allegations are characterised entirely as baseless in the affidavit-in-reply. It is pointed out that the Registrar of Companies had by a letter dated 20th July, 1977, raised similar points with specific instances and the whole matter was clarified to the Registrar. It was there stated that the accounts of the company were correctly maintained. A quotation from that letter is set out in the affidavit filed by the company. It is sufficient for the purposes of this petition to say that there may be a difference between the department and the company as to how the accounts should be maintained, but this cannot possibly lead to an inference that there has been a breach of trust or fraud, etc. So, this ground does not appear to disclose any circumstances which would be relevant for an order under s. 237.

Working of vanaspati unit:

Under this heading, the irregularities pointed out in the affidavit are : (a) details of commission amounting to Rs. 20,575.78 on the purchase of tin plates could not be obtained at the time of inspection, (b) the report has shown wide fluctuations in the refining loss. In the absence of satisfactory explanation there was a possibility of underhand dealings. So, a further probe was necessary, (c) vanaspati was sold on some favourable terms to a firm, M/s. Banarsidas Ramniwas of New Delhi, which is owned by relatives of one of the managing directors of the company. Some favours had also been given to this firm, (d) irregularities had been noticed in the sale and distribution of vanaspati which is not in conformity with the orders issued by the State Govt. under the Defence of India Rules. In reply to this the affidavit of the company raises the following points :

(a)        With regard to the allegation concerning commission, it is stated that this is only a book adjustment as simultaneous credit is given under the advice of the Calcutta Sales Depot. The commission is neither an expenditure nor a receipt by the company.

(b)        As regards the refining loss, technical reasons are given ; some loss takes place because the oil used in the production of vanaspati is purchased from Delhi, Hyderabad and Rajasthan. In some cases excessive impurities are contained. Refining losses depend on a number of factors, namely, the quality of oil, suspended impurities, muscilage, power failure and efficiency of workers. It is claimed that the refining losses increase due to more free fatty acid content. It is stated that the Appellate Assistant Commissioner, Central Range, Meerut, by an order dated 30th March, 1978, had held that the refining losses were not excessive.

(c)        As regards the sale to M/s. Banarsidas Ramniwas of New Delhi, it is claimed that there is no relationship of the directors of the company within the meaning of the Companies Act. It is claimed that the price of vanaspati fluctuates from day to day and hour to hour and in no case was a lesser rate charged. As far as credit facilities are concerned, it is stated that similar facilities are given to other firms, namely, Salig Ram Nagar Mal, Hapur, and Mangal Sen Faquir Chand, Baraut.

As regards (d) it is claimed that no breach has taken place.

Again, all these allegations are vague and of an indefinite type. Although the allegations have been denied, it does appear that the same are wholly irrelevant for the purposes of s. 237(b) as alleged in the affidavit-in-reply. The main purpose, object and necessity for applying s. 237 is to ascertain irregularities which show breach of trust, misconduct or misfeasance and allegations of a different type cannot be made a substitute for the necessary circumstances.

Working of soap unit

The last heading under which the allegations are made refer to soap. It is alleged that the soap transferred from the vanaspati unit does not reconcile with that received by the soap unit. It is further claimed that import of stainless steel rods from a company in Derbyshire, U.K., and Monel Wire from a firm in Paris were made in the year 1972-73, as actual user, but when this material was found to be defective or unsuitable it was sold to parties in Bombay, resulting in a profit to the company. It is alleged that the sale was made without the permission of the Chief Controller of Imports and Exports. In reply, the affidavit states that there is no difference between the soap sent by the vanaspati unit and that received by the soap unit. This matter has also been considered by the income-tax authorities and the decision of the Inspecting Assistant Commissioner is quoted. It is pointed out that the Income-tax Officer had considered that 3.92 MT. was the difference and had claimed that this was due to suppressed production, but the Inspecting Assistant Commissioner had held that the Income-tax Officer had failed to notice the opening stock and the closing balance and there was a mistake by the Income-tax Officer. Thus, this very objection was rejected by the income-tax department.

As regards the sale of imported goods, it is pointed out that by selling the defective material at a profit, the company has acted as a prudent businessman and this could not be a point for an order under s. 237(b).

Again, it appears that no circumstances justifying an investigation can be said to exist and no reasonable man could have ordered an enquiry into the alleged breach of trust, misfeasance or misconduct.

These are in all the allegations which have been minutely examined for the purpose of ascertaining whether any of them would justify an investigation. In reaching the conclusion that there are no circumstances to justify an investigation it has to be kept in view that an investigation is made when an offence is claimed to exist. If one compares the case of a criminal offence, first, there must be a report about the commission of an offence which may be by complaint or by police report. Once, it is found that there is an offence or an apparent offence then a prima facie case exists for making an investigation. Similarly, there must be some kind of facts objectively existing which show that an offence of the type mentioned ia s. 237(b) has taken place. It must be kept in view that the offences mentioned in s. 237(b) are of a serious nature. Fraud in the running of a company or misconduct or misfeasance by the management of the same are serious matters. The directors of a company are in the position of trustees. They are responsible like trustees. The allegations we have referred to deal with the manner in which the business is being conducted. Whether one considers the steel unit and the allegation concerning the possibility of production existing outside the books of the company or one considers the gas and chemical unit and the possibility of the cylinders being used for making clandestine sales of gases, or the possibility in the distillery unit of carbon-dioxide being manufactured secretly or if one considers the vanaspati unit or the soap unit, it is not possibilities that have to be ascertained but realities. The section is not intended to deal with a roving and fishing enquiry with a view to establishing that there has been a fraud or misconduct or misfeasance. The offence must be there and then the investigation can take place. An investigation for finding out whether there has been an offence means that the investigation is made in the circumstances which do not justify it. Allegations of the type made in the present case can be made in the case of practically every single company which would mean that the Central Govt. would have unrestricted powers of ordering investigation.

It is noteworthy that most of the points, and probably all the points, have been separately looked into by the income-tax department while determining the income and running of the company. Similarly, the excise department which is-concerned with the realisation of excise duty is also deeply concerned with the manner in which the goods produced by the petitioner-company are taken out of the factory. If neither of these departments have been able to ascertain that any of the products of the company have been taken out secretly or there is a manufacture outside the books of the company, it is still possible that those departments have been hood-winked or have not noticed some additional circumstances which have come to light during the investigation carried out under s. 209A or the other provisions of the Companies Act, which have been noticed above. However, the most noteworthy feature of this case is that a special audit under s. 233A which was proposed was dropped after considering the books of the company. As all the facts under consideration relate to the years 1971-72 to 1975-76, it does appear that no new material had come to light which did not exist earlier.

The result of all this analysis would show that the requirements of the section as pointed out by the Supreme Court in the aforementioned judgments have not been fulfilled. The circumstances which must exist objectively have not been shown to exist. It would thus follow that we have to accept the present petition and quash the order passed by the Company Law Board exercising the powers of the Central Govt. under s. 237(b) of the Act. We accordingly issue a writ to quash the order dated 12th May, 1977, whereby inspectors were appointed to make an investigation into the affairs of the company. The petitioner will get costs of this petition. Counsel's fee Rs. 500.

[2002] 37 scl 804 (ker.)

High Court of Kerala

Premier Plantations Ltd.

v.

M. Ebrahimkutty

J. B. Koshy and K. Padmanabhan Nair, JJ.

M. F.A. No. 1273 of 1998 (B)

March 25, 2002

Section 237, read with section 10, of the Companies Act, 1956 - Investigation of company’s affairs in other cases - Whether ‘Court’ referred to in section 237 is court having jurisdiction under section 10 and no other court - Held, yes - Whether under section 237(a)(ii), court can appoint directly inspector(s) to investigate into affairs of company - Held, no - Whether court can only make a declaration that affairs of company ought to be investigated by an inspector appointed by Central Government - Held, yes - Whether power of Company Law Board under section 237(b) is a bar to exercise of discretionary jurisdiction of court under section 237(a)(ii) - Held, no - Whether mere allegations are insufficient to support an application to court to act under section 237(1)(ii) and material placed before court should be such as to satisfy court that a deeper probe into affairs of company is desirable in interests of company itself - Held, yes - Whether court can pass a declaration under section 237(a) for a fishing expedition - Held, no - Whether an isolated instance of mismanagement is enough for court to declare that an investigation is required - Held, no - Whether existence of circumstances described under section 237(b) may sway court to pass an order under section 237(a)(ii) also but it is not always mandatory that court can pass a declaration only if conditions under section 237(b) exist - Held, yes - Whether power of court under section 237(a)(ii) is equal to power of CLB under section 237(b) - Held, no - Whether unlike CLB, there are no restrictions placed on Court even though Court will exercise its judicial discretion only on sufficient materials and only after it is convinced that situation warrants an investigation in interest of company as a whole - Held, yes - Whether when a discretionary order under section 237(a)(ii) is passed by proper court with jurisdiction, unless there are compelling grounds appellate court will not interfere - Held, yes

Facts

The respondent was an equity shareholder and the promoter of the appellant-company. He was also appointed as the Chairman of the company. Subsequently, the company came out with public issue which was subscribed in excess of 14 times the offer. Thereafter, the respondent filed petition under section 237(a)(ii) before the Company Judge seeking to direct the Central Government to appoint inspectors to investigate into the affairs of the company. It was alleged that no first annual general meeting of the company was held as convened in time.

The managing director, ‘M’ had been fraudulently mismanaging the company in utter disregard of the interest of the shareholders and was acting in an autocratic and oppressive manner. He created false and fabricated documents with nefarious motive to oust the respondent and other members of the board of directors who opposed the misutilisation and misappropriation of public funds. He created documents and minutes purporting to remove the petitioner and others who opposed the mismanagement and oppression. Though on the public issue, shares were over subscribed to the tune of 14 times and huge amounts were collected from the public, shares were neither allotted properly nor amounts refunded to the applicants whose application for shares were not accepted.

It was further alleged that 1200 complaints had been filed against ‘M’ by the subscribers to whom the amounts were not refunded and that ‘M’ had misappropriated, misutilised and mismanaged the funds collected through public issue and diverted the funds for his private purposes. The company opposed the petition. The Company Judge found that the submission of the Central Government supported the respondent’s allegations and concluded that a deeper probe was necessary and passed an order declaring that affairs of the company ought to be investigated by an inspector appointed by the Court itself.

On appeal :

Held

By virtue of the power under section 237(a)(ii), the Court cannot appoint directly inspector or inspectors to investigate the affairs of the company but only make a declaration that the affairs of the company ought to be investigated by an inspector appointed by the Central Government. Once such an order is passed it is mandatory for the Central Government to conduct such investigation by appointing competent persons as inspectors.

The court referred to in section 237 in the court having jurisdiction under section 10 and no other Court or a Court hearing writ petitions. Petition was filed before the competent company court in the instant case. It is true that mere allegations are not sufficient to support an application to the Court to act under section 237(a)(ii), and the material placed before the Court should be such as to satisfy the Court that a deeper probe into the affairs of the company is desirable in the interests of the company itself. In other words, Court will not pass a declaration under section 237(a) for a fishing expedition. But Court is entitled to see whether on the basis of the material brought before the Court, a declaration is to be made or not. An isolated instance of mismanagement is not enough for the Court to declare that an investigation is required. The material placed before the Court should be such as to satisfy the Court that a deeper probe into the company affairs is desirable in the interests of the company itself. The judicial conscience must be satisfied that there has been maladministration in the affairs of the company warranting an investigation.

Existence of alternative remedy also can be taken as a condition for refusing to exercise the discretionary jurisdiction in appropriate cases, but it cannot operate as an absolute bar. No where in section 237 it is stated that Court cannot be approached under section 237(a)(ii) before approaching CLB under section 237(b). It is true that after amendment of section 237(b) (Companies Amendment Act, 1988 with effect from 31-5-1991), the CLB has power to direct the Central Government to appoint inspectors to investigate into the affairs of the company if circumstances mentioned in sub-clause (i), (ii) or (iii) of section 237(b) exist. But, the CLB must be satisfied that such circumstances exist. Power of the CLB under section 237(b) is not a bar in exercising the discretionary jurisdiction of the Court under section 237(a)(ii). No such condition was made out by the Legislature for exercising the jurisdiction by the company court under section 237(a)(ii) even though Court will take such a course only if circumstances warrant.

Before passing an order under section 237(a)(ii), Court should be satisfied that there are sufficient materials to show that affairs of the company is in such a way that an investigation is necessary. The existence of circumstances described under section 237(b) may sway the Court to pass an order under section 237(a)(ii) also. But it is not always mandatory that Court can pass a declaration only if the conditions under section 237(b) exist. No such restrictions are placed by the Legislature even though Court will exercise its judicial discretion only on sufficient materials and only after the Court is convinced that situation warrants an investigation in the interest of the company as a whole. For a minority shareholder or a person legally interested in the affairs of the company it may not always be possible to place all materials alleged by him. But investigation is necessary to disclose something which is not apparently visible. If all materials are already available, there is no scope for further investigation. At the same time, existence of circumstances must warrant reasonably so as to invoke jurisdiction of the Court. Power of the Court under section 237(a)(ii) is not equal to the power of the CLB under section 237(b). Unless any one of the circumstances as mentioned in section 237(b) exist, the CLB cannot order an investigation, but no such restriction is placed on the Court.

It was argued that once the company court passes a discretionary declaration under section 237(a)(ii) for appointment of an inspector for investigation, it cannot set aside as it is not a judicial or a quasi-judicial order and is not appealable. The Court is not appointing inspectors by itself. Order does not deter the rights of the parties. The order is also appealable under section 483. But when a discretionary order under section 237(a)(ii) is passed by the proper court with jurisdiction, unless there is compelling grounds appellate court will not interfere. In other words, if there is no prima facie material at all before the Court and Court ordered investigation under section 237(a)(ii) as a fishing expedition, appellate court will interfere. But it is settled law that if order is passed after considering the materials available, normally appellate court will not interfere with the discretionary order passed by a competent court with jurisdiction.

In the instant case, there were sufficient material for the Company Judge to pass the impugned order. In any event, when the company court passed the impugned order on materials available in the case, on the facts of the case it could not be stated that an interference by appellate court was warranted. This was an appropriate case where discretionary order had been passed by the court by exercising powers under section 237(a)(ii). No interference was called for.

Cases referred to

Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp. Cas. 33 (Delhi), Alembic Glass Industries Ltd., In re [1972] 42 Comp. Cas. 63 (Guj.), P. Sreenivasan v. Yoosuf Sagar Abdullah & Sons (P.) Ltd. [1983] 53 Comp. Cas. 485 (Ker.), Modi Industries Ltd. v. Union of India [1982] 52 Comp. Cas. 589 (Delhi), Safia Usman v. Union of India [2000] CLC 110 (Ker.), Barium Chemicals Ltd. v. CLB AIR 1967 SC 295, Rohtas Industries Ltd. v. S.D. Agarwal AIR 1969 SC 707, R.V. Mohammed v. Trichur Heart Hospital Ltd. [2000] CLC 258 (Ker.), Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy [1997] 90 Comp. Cas. 383/13 SCL 118 (SC), Mrs. U.A. Sumathy v. Dig Vijay Chit Fund (P.) Ltd. [1983] 53 Comp. Cas. 493 (Ker.), V.V. Purie v. E.M.C. Steel Ltd. [1980] 50 Comp. Cas. 127 (Delhi) and Uunet India Ltd. v. I.C. Rao [1998] 93 Comp. Cas. 41 (AP).

K.P. Dandapani for the Appellant. P.S. Sreedharan Pillai, M.P. Mohammed Aslam, S. Abdul Salam and Tom K. Thomas for the Respondent.

Judgment

J.B. Koshy, J.—First respondent in this appeal (referred in this judgment as the petitioner for convenience) filed a petition under section 237 of the Companies Act, 1956 (‘the Act’) to direct the Central Government to appoint one or more competent persons as inspectors by declaring that the affairs of the Premier Plantations Ltd., first appellant (‘as company’) ought to be investigated and to report thereon within a specified time limit. Before going into the facts of the case we may first discuss the power of this Court under section 237(a)(ii). Section 237 reads as follows :

“Investigation of company’s affairs in other cases. - Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

          (i)         the company, by special resolution; or

(ii)        the Court, by order, declares that the affairs of the company ought to the investigated by an inspector appointed by the Central Government; and

        (b)      may do so if, in the opinion of the Company Law Board, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent on unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director or the manager, of the company.”

A reading of the above section will show that power given under section 237 to the Central Government is independent and operates without prejudice to its powers under section 235 of the Act. But under section 237(a) the Central Government can appoint an inspector for investigating the affairs of the company only if the company passes a special resolution for it or if an order is passed by the Court. Under section 237(b) the CLB is also empowered to do so in certain special circumstances required the Central Government to conduct investigation. By virtue of the power under section 237(a)(ii), the Court cannot appoint directly inspector or inspectors to investigate the affairs of the company but only make a declaration that the affairs of the company ought to be investigated by an inspector appointed by the Central Government. Once such an order is passed it is mandatory for the Central Government to conduct such investigation by appointing competent persons as inspectors—Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp. Cas. 33 (Delhi), and in Alembic Glass Industries Ltd., In re [1972] 42 Comp. Cas. 63 (Guj.).

2.         The Court referred to in section 237 is the Court having jurisdiction under section 10 of the Act and no other Court or a Court hearing writ petitions. Petition was filed before the competent company court in this case. It is true that mere allegations are not sufficient to support an application to the court to act under section 237(a)(ii). The material placed before the Court should be such as to satisfy the Court that a deeper probe into the affairs of the company is desirable in the interests of the company itself as held by this Court in P. Sreenivasan v. Yoosuf Sagar Abdullah & Sons (P.) Ltd. [1983] 53 Comp. Cas. 485. In other words, the Court will not pass a declaration under section 237(a) for a fishing expedition. But the Court is entitled to see whether on the basis of the material brought before the Court, declaration is to be made or not Modi Industries Ltd. v. Union of India [1982] 52 Comp. Cas. 589 (Delhi). An isolated instance of mismanagement is not enough for the Court to declare that an investigation is required. The material placed before the Court should be such as to satisfy the Court that a deeper probe into the company affairs is desirable in the interests of the company itself. The judicial conscience must be satisfied that there has been misadministration in the affairs of the company warranting an investigation.

3.         It was argued by the counsel for the appellants that in Safia Usman v. Union of India [2000] CLC 110 a single Judge of this Court held that without exhausting the remedy under section 237(b), the Court cannot exercise power under section 237(a)(ii). A reading of this decision shows that proper relief was not asked in the petition as required under section 237(a)(ii) and company itself was not impleaded as a party. Existence of alternate remedy also can be taken as a condition for refusing to exercise the discretionary jurisdiction in appropriate cases, but it cannot operate as an absolute bar. Nowhere in section 237 it is stated that court cannot be approached under section 237(a)(ii) before approaching the CLB under section 237(b). It is true that after amendment of section 237(b). (Companies Amendment Act, 1988 with effect from 31-5-1991), the CLB has power to direct the Central Government to appoint inspectors to investigate into the affairs of the company if circumstances mentioned in sub-clause (i), (ii) or (iii) of section 237(b) exit. But, the CLB must be satisfied that such circumstances exit as held by the Apex Court in Barium Chemicals Ltd. v. CLB AIR 1967 SC 295. Before amendment, this power was with the Central Government itself. See also Rohtas Industries Ltd. v. S.D. Agarwal AIR 1969 SC 707. Power of the CLB under section 237(b) is not a bar in exercising the discretionary jurisdiction of the Court under section 237(a)(ii). No such condition was made out by the Legislature for exercising the jurisdiction by the company court under section 237(a)(ii) even though Court will take such a course only if circumstances warrant. Another decision pointed out is the decision of the learned single Judge of this Court R.V. Mohammed v. Trichur Heart Hospital Ltd. [2000] CLC 258. What was held in that decision is the Court cannot order an investigation by appointing an inspector, but under section 237(a)(ii) the Court can, if circumstances warrant, by an order makes a declaration that the affairs of the company ought to be investigated by an inspector appointed by the Central Government and on making such declaration the Central Government has no option but has to appoint an inspector to investigate the affairs of the company. No other hypertechnical view is possible in view of the clear wording of section 237(a). As held by the Gujarat High Court in Alembic Glass Industries Ltd.’s case (supra) :

“The Legislature has conferred wide jurisdiction on this court to entertain a petition under section 237(a)(ii). In fact, the power of the Central Government to appoint an inspector suo motu under section 237(b) is limited to its subjective satisfaction in respect of one or other matters contained in three sub-clauses of clause (b). The Legislature in its wisdom has not put any such condition before the court can make an order, though the court may in its wisdom expect prima facie proof of some of these conditions on the subjective satisfaction of which the Central Government would appoint an inspector. While conferring jurisdiction on the court to direct the Central Government to appoint an inspector, the Legislature has not thought fit to circumscribe the discretion or jurisdiction in any manner. It would, therefore, be utterly inappropriate to curtail or circumscribe or fetter the jurisdiction of this court by reading into the section something which is not there.” (p. 68)

4.         Another decision pointed out by the learned counsel for the appellants in the Apex Court decision in Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy [1997] 90 Comp. Cas. 383. There a writ petition was filed seeking direction for investigation by the Central Bureau of Investigation. The Apex Court held that in view of the specific remedies under sections 43A, 234, 235, 237, 397 and 398 of the Act, a writ petition will not lie. It is not a matter of public interest and remedy available under the Act shall be availed of. Here the petitioner has approached under section 237 and it cannot be held that petition is not maintainable. Scope and power of company court under section 237(a)(ii) was not discussed in that decision. Ofcourse under section 237(a)(ii), Court’s would insist upon solid factual base and mere allegations are insufficient. It was held by this court in Mrs. U.A. Sumathy v. Dig Vijay Chit Fund (P.) Ltd. [1983] 53 Comp. Cas. 493, that :

“... No doubt, clause (a)(ii) of section 237 does not lay down what circumstances are to be proved before the court and on that materials the court could act. But that does not mean that mere allegations are sufficient. A court can act only on the materials placed before it; and those materials should at least be such as to satisfy the court that a deeper probe into the company’s affairs is desirable in the interests of the company itself...”(p. 496)

The powers under section 237(a)(ii) were considered by Justice M.P. Menon in the decisions in P. Sreenivasan’s case (supra). In that decision it was held as follows :

“The section conceives of three situations where the Central Government can appoint inspectors for investigations. The first is when the company itself declares that such an investigation is necessary. The second is when the court makes an order. And the third is when the Central Government forms an opinion that the circumstances enumerated in clause (b) exist. The first is easy to understand : when the company itself wants an investigation, the Central Government need not stop to enquire why. The third can also be understood because when suo motu action is proposed to be taken by the Government, it shall not act arbitrarily, but only consistent with guidelines laid down. But what about the second situation, where the court has to make an order ? Mr. Ramanatha Pillai for the petitioner suggests that the power and the discretion of the court are uncontrolled; it can direct an investigation whenever it suspects that all is not well with the company. Whether the apprehensions of the court are true or not is a matter to be found by the investigating inspectors, and the court is not to insist on evidence. It appears to me that this is too broad a statement. Investigation of the company’s affairs by the Department of Trade in England has always been understood as a statutory exception to the rule in Foss v. Harbottle [1843] 2 Hare 461 that the internal affairs of a company is a matter for the majority, and a dissatisfied minority cannot seek outside interference. The Companies Act provides for the protection of minorities in three ways (i) by giving them a right to complain against oppression, (ii) by permitting them to act on behalf of the company when it is wound up, as in the case of misfeasance proceedings, and (iii) by enabling them to obtain remedies indirectly through investigation. The Court’s discretion under section 237 is, therefore, to be exercised only when it is satisfied that the minority has made out at least a prina facie case that the rule in Foss v. Harbottle [1843] 2 Hare 461, requires relaxation in the interest of the company...” (p. 489)

We agree with the above observation that before passing an order under section 237(a)(ii) the Court should be satisfied that there are sufficient materials to show that affairs of the company is in such a way that an investigation is necessary. We also note that existence of circumstances described under section 237(b) may sway the Court to pass an order under section 237(a)(ii) also. But we are of the opinion that it is not always mandatory that the Court can pass a declaration only if the conditions under section 237(b) exist. No such restrictions are placed by the Legislature even though the Court will exercise its judicial discretion only on sufficient materials and only after the court is convinced that situation warrants an investigation in the interest of the company as a whole. We also note that for a minority shareholder or a person legally interested in the affairs of the company, may not always be possible to place all materials alleged by him. But investigation is necessary to disclose something which is not apparently visible. If all materials are already available, there is no scope for further investigation. At the same time, existence of circumstances must warrant reasonably so as to invoke jurisdiction of the Court. Power of the Court under section 237(a)(ii) is not equal to the power of the CLB under section 237(b). Unless any one of the circumstances as mentioned in section 237(b) exist, the CLB cannot order an investigation, but no such restriction is placed on the Court.

5.         As facts are concerned, according to the petitioner, he is an equity shareholder of 5,16,000 equity shares of the company. The company was incorporated on 12-12-1990 as a private limited company and the petitioner was one of the promoters of the company. By resolution dated 5-1-1991 the company resolved to take over the assets and liabilities of T.P. Muralidharan & Associates and the amount outstanding in the credit of partners account, both capital and current account as on 31-12-1990 should be taken as the amount contributed by them towards share capital and necessary share certificates should be issued to them. The company was engaged in the plantation of tea, coffee, cardamom and pepper. It was converted into a public limited company on 28-1-1991. Thereafter it came out with public issue of 36 lakhs equity shares of Rs. 10 each for cash at par. Subscriptions of shares were received about 14 times of the declared public issue. As per clause 11(A) of the articles of association, the subscribers to the memorandum of association were appointed as directors. The petitioner and the second appellant herein were subscribers of the memorandum of association. The second appellant was appointed as the managing director. (We are referring the second appellant as ‘managing director’ in this judgment.) Though, as per clause 16 of the memorandum of association, all directors except the managing director for the time being were to retire from office at the first annual general meeting of the company, no annual general meeting of the company has been held or convened in time. Though a document styled as first annual report and accounts of 1991 was published on 31-2-1992, no such meeting of the company was held at 3 p.m. on 25-4-1992 at the registered office of the company as mentioned in the notice attached to the report and accounts of 1991. The managing director had been fraudulently mismanaging the company in utter disregard of the interest of the shareholders and was acting in an autocratic and oppressive manner. He began to create false and fabricated documents with nefarious motive to oust the petitioner and other members of the board of directors who opposed the misutilisation and misappropriation of public funds. He created documents and minutes purporting to remove the petitioner and others who opposed the mismanagement and oppression. Though on the public, issue shares were oversubscribed to the tune of 14 times and huge amounts were collected from the public, shares were neither allotted properly nor amounts refunded to the applicants whose application for shares were not accepted. It is understood that 1200 complaints are filed before the jurisdictional court in Bombay against the managing director by the subscribers to whom amounts were not refunded. It was also stated that for non-convening of the meeting and not filing balance sheet for the period 1992 to 1996 many proceedings are pending. Share value of the company was depleted to nil from Rs. 70 and company has been de-listed in the Stock Exchange. The managing director had misappropriated, musutilised and mismanaged the funds collected through public issue and diverted the funds for his private purposes ignoring the purpose for which the company was incorporated. The authorities who are entrusted to supervise and control the management of the company and to prevent misuse of public funds are not discharging their duties properly.

6.         The appellants opposed the above petition and submitted that there is no locus standi to file the above petition as he was no more a shareholder at the time of filing the petition. It was stated that he was the Chairman of the company till 28-5-1993 only. General body meetings were held properly and the excess amount collected for share capital was returned without delay. All allegations against the second respondent as managing director of the company was denied and it was also submitted that no case is made out by the petitioner for an order of investigation by the court under section 237.

7.         Before going into the merits of the case we may also consider the argument regarding locus standi of the petitioner. It is not disputed that he was the first chairman of the company. He owns 5,16,000 equity shares. According to the company, the above shares were transferred. It is the contention of the petitioner that documents were created by the appellant to oust the petitioner and other members who opposed the misutilisation and misappropriation of funds, especially received from public placement of shares. This, according to him, is one of the matter to be investigated. Admittedly, he was a promoter of the company. Counter statement filed by the third respondent reveals further facts, which we will consider later, would show that the petitioner is substantially interested in the affairs of the company. In such circumstances, he cannot be turned as person having no manner of interest or concern in the company as held by the Delhi High Court in V.V. Purie v. E.M.C. Steel Ltd. [1980] 50 Comp. Cas. 127. As we have already held the question is whether sufficient materials are there for the Court to hold prima facie that a deeper investigation is required on the facts of the case and being a discretionary remedy to be exercised with much caution, sufficiency of materials has to be proved.

8.         Based on the decision in Uunet India Ltd. v. I.C. Rao [1998] 93 Comp. Cas. 41 (AP). It was argued that once the company court passes a discretionary declaration under section 237(a)(ii) for appointment of an inspector for investigation, it cannot set aside as it is not a judicial or a quasi-judicial order and is not appealable. The court is not appointing inspectors by itself. Order does not deter the rights of the parties. We are of the view that the order is also appealable under section 483 of the Act. But when a discretionary order under section 237(a)(ii) is passed by the proper Court with jurisdiction, unless there is compelling ground appellate court will not interfere. In other words, if there is no prima facie material at all before the Court and the Court ordered investigation under section 237(a)(ii) as a fishing expedition, appellate court will interfere. But it is settled law that if order passed after considering the materials available, normally appellate court will not interfere with the discretionary order passed by a competent court with jurisdiction. Therefore, we may come to the facts of the case.

9.         On behalf of the fourth respondent the Central Government (third respondent) a counter affidavit was filed. Averments in the same really support the petitioner’s allegations. With regard to shareholders register of the petitioner, it is submitted in paragraph 2 of the counter affidavit that :

“... it is respectfully submitted that Premier Plantation Ltd. was incorporated on 12-12-1990 as a private limited company. The said company had became a public company under section 44 of the Companies Act with effect from 28-1-1991.... The memorandum and articles of association of the said company show that the petitioner herein was one of the promoters of the company. Since the said company was a listed company and since the company was not regular in filing the returns in compliance of the provisions of the Companies Act, 1956 at the third respondent’s office, the respondents 3 and 4 are not posted with the facts regarding the shareholding position of the petitioner. The petitioner has alleged that the shares held by him had been fraudulently transferred by the second respondent...

It was stated in the prospectus that the first respondent-company was incorporated by taking over the assets and liabilities of a partnership firm, viz., T.P. Muralidharan & Associates which was engaged in the plantation of Tea, Coffee, Cardamom and Pepper. It was stated further that the firm was in operation for about 11 months before taken over by the first-respondent-company and the operations of the firm during the said period was profitable. As found from the prospectus, the total income of the firm was Rs. 121 lakhs on which its net profit was Rs. 82 lakhs. It was further stated in the prospectus that on taken over of the firm by the company, the extent of the amounts standing at the credit of the partners capital account was amounted to Rs. 240 lakhs and equity shares of Rs. 240 lakhs had been allotted by the first-respondent-company to the partners of T.P. Muralidharan & Associates as on 15-1-1991 is as under :

 

Name

No. of Shares allotted

 

 

for other than cash

1.

M. Ibrahimkutty

516000

2.

T.P.Muralidharan

 

516000

3.

K.P. Basheer

240000

4.

C.M. Subair

240000

5.

Mrs. Sukumari

210000

6.

T.P. Ratnakumari

210000

7.

Mrs. Zahida

210000

8.

Smt. T.P. Kunhamina

210000

9.

Mr. Joseph Pudussery

48000

 

 

2400000

 

 

 

 

[Emphasis supplied]”

10.       With regard to the allegation that due to public issue of shares, Rs. 24.74 crores was over subscribed and it was not refunded, it is stated as follows :

“. . . In terms of the public issue every application for shares was to be for a minimum of 100 shares of its multiples and a sum of Rs. 5 per share was to be paid towards application money. The issue was oversubscribed and the total shares application money received by the first-respondent-company was Rs. 27.90 crores as against the share allotments made for Rs. 3.16 crores. Hence a sum of Rs. 24.74 crores had to be refunded to the unsuccessful applicants. It is revealed from the Director’s Report formed part of the balance sheet as at 31-3-1996 of the first-respondent-company that only Rs. 1 crore had been paid for the estate to Bank of Tokyo out of the capital of Rs. 3.60 crores raised through the public issue and as a result, the possession of the Estate was restored to the Receiver because of the non-payment of the balance money.” [Emphasis supplied]

11.       With regard to non-conducting of annual general body meeting in time and non-filing of the balance sheet, it is clear from the counter affidavit that first annual general body meeting was held on 25-4-1992 and the second annual general body meeting was held only on 19-3-1997 for adopting the accounts for 31-3-1993 to 31-3-1996, it is stated as follows :

“. . . As regards the averments made in this paragraph that no annual general meeting of the first-respondent-company had been convened till filing of this petition, it is submitted that the audited financial statements filed at the third respondent’s office show that the annual general meetings for adopting the said accounts were held as follows :-

1.

For B/S. as at

31-12-1991

First AGM on 25-4-1992 at 3.00 PM

2.

-do-

31-3-1993

Second AGM on 19-3-1997 at 10.30 AM

3.

-do-

31-3-1994

Third AGM on 19-3-1997 at 11.30 AM

4.

-do-

31-3-1995

Fourth AGM on 19-3-1997 at 2.00 PM

5.

-do-

31-3-1996

Fifth AGM on 19-3-1997 at 3.00 PM

Since the first-respondent-company has a large number of shareholders as it had gone for public issue, the AG meetings held on 19-3-1997 for adopting the accounts for 31-3-1993 to 31-3-1996 cannot be believed to be properly held in compliance of the provisions of section 166 of the Companies Act...” [Emphasis supplied]

Again it was stated as follows :

“The first-respondent was not regular in filing the statutory returns with the third respondent as required under the Companies Act. Prosecution cases were filed against the first and second respondents for not filing the balance sheets of the first respondent at the third respondent’s office. Cases were filed for not filing the balance sheet as at 31-3-1993, 31-3-1994, 31-3-1995 in time. The second respondent had filed the said balance sheets with the third respondent only on 23-5-1997. The total number of cases filed by the third respondent against first respondent and second respondent under various provisions of the Companies Act are as follows :

No. of Prosecution

Section
Results

3

220(3)

Pleaded guilty

3

162

-do-

7

113(2)

-do-

74

73(2B)

Pending.

 

[Emphasis supplied]”

12.       With regard to diversion of funds collected through public issues, it was stated as follows :

“. . . But some of the mistakes committed by the first and second respondents at the time of public issue appear to be wilful and doubted to be for undue benefits. It was stated in the prospectus that the refund will be made to the unsuccessful applicants by cheque or demand draft drawn on any of bankers to the issue. The first respondent had opened the refund account with ANZ Grindlays Bank, Mumbai - 1, which was not include as bankers to the issue as per the prospectus. ANZ Grindlays Bank has filed a suit, O.S. No. 431 of 1993 against the first-respondent before the Sub-Court, Ernakulam; for recovery of a sum of Rs. 1,05,29,947.70. It was found from the statement of the refund that the first-respondent had transferred a sum of Rs. 2,02,93,904 from the refund account on 8-5-1992 for making payments to the following parties :-

        (i)       Issued D.D. for Rs. 1 crore in favour of Bank of Tokyo.

        (ii)      Transferred Rs. 75,00,000 to the account of Fairgrowth Financial Services Ltd., Bangalore.

(iii)     Rs. 27,92,294 was issued to the first-respondent by way of pay order and was encashed by it.” [Emphasis supplied]

Further it was stated as follows :

“...the prospectus issued by the first respondent on 18-12-1991 shows that the object of the issue was to provide a part of the funds required for acquiring the tea estate along with the processing plant which was being operated by the first-respondent on lease. The total area proposed to be acquired was about 1900 acres. Cost of the project was worked out as under :

Cost of acquisition of tea estate       :           Rs. 265 lakhs

Development expenditure    :           Rs. 15 lakhs

Plant and machinery            :           Rs. 45 lakhs

But it is not clear from the accounts of the company that the funds collected in the public issue had been utilised as proposed in the prospectus. Further it was stated in the prospectus that the first-respondent-company was incorporated by taking over the assets and liabilities of the partnership firm, which was engaged in the plantation of Tea, Coffee, Cardamom, Pepper etc. It was further mentioned that on the date of taken over of the firm by the company, the amount available at the credit of the partners in the capital account was Rs. 240 lakhs and equity shares of Rs. 240 lakhs had been allotted to the partners of the said firm. The firm had leasehold rights in the properties possessed by it at the time of taken over by the first-respondent-company. It is not clear from the records available with the third respondent as to whether the lease had been transferred in favour of the first-respondent. Annexure A-5 to the petition revealed that lease was not transferred in the name of the company. In this connection it is to be noted that the Central Bank of India had filed a suit O.S.No. 11 of 1994 for recovery of the secured loans given to the partnership firm amounting to Rs. 327 lakhs. It is stated in the auditors report of the first-respondent-company that the Central Bank of India had not approved the taken over of the partnership firm Muralidharan & Associates by the first respondent....” [Emphasis supplied]

13.       In fact, paragraph 10 of the counter affidavit shows that third respondent has also suggested an inspection under section 209A of the Act in 1997 itself as it needs detailed inspection. But it was not done because of the pre-occupation of the Inspecting Officer and filing of this case and investigation under section 237 will be more detail. A statement of about 70 criminal cases pending against the company under section 73(2B) of the Act was also filed by the third respondent. Statements in the counter filed by the third and fourth respondents show that it is a case where deeper investigation is warranted. We are not reiterating the averments of the third respondent. The Tribunal will be revealed the investigation. But there are prima facie materials to order a declaration for investigation.

14.       On these prima facie facts, the learned Company Judge held as follows :

“All these facts and materials on record clearly establish that there are sufficient materials available on record in support of the various allegations made by the petitioner in the petition regarding the mismanagement of the first respondent, diversion of funds, failure to comply with the statutory obligations etc. warranting a deeper probe into the affairs of company . . .”

On the basis of my finding that there are sufficient materials on record warranting an order under section 237(a)(ii) of the Companies Act to direct the fourth respondent to investigate into the affairs of the company as provided under section 237(a) of the Companies Act. Hence this petition is allowed. The fourth respondent is directed to appoint one or more competent inspectors to investigate the affairs of the first-respondent-company under section 237(a) of the Companies Act and to report within a specified time limit. . .”

Thus, the company court on consideration of the materials found that a deeper probe is necessary and passed an order declaring that affairs of the company ought to be investigated by an inspector appointed by the Court itself.

15.       We are of the opinion that there are sufficient materials for the company judge to pass the above order. In any event, when the company court passed the above order on materials available in the case, on the facts of this case it cannot be stated that an interference by the appellate court is warranted. This is an appropriate case where discretionary order has been passed by the Court by exercising powers under section 237(a)(ii). No interference is called for.

The appeal is dismissed.

bombay high court

companies act

[2005] 61 SCL 33 (bom.)

High Court of Bombay

Panther Fincap & Management Services Ltd.

v.

Central Government, Union of India

S.U. Kamdar, J.

Appeal Nos. 1 to 14 of 2005

In Company Petition Nos. 34, 36, 38, 39, 40, 44, 49, 52, 56, 60, 64, 65, 67 and 68 of 2003

March 31, 2005

Section 237 of the Companies Act, 1956 - Investigation of company’s affairs in other cases - Whether if a company while conducting business has acted in a fraudulent or unlawful manner, then such company will fall within net of section 237(b)(i) irrespective of fact whether it is a running concern or close down subsequently for any reason whatsoever - Held, yes - Whether merely because material, on basis of which investigation is being undertaken, is identical to material which is subject-matter of investigation by other authority, it cannot be stated that both authorities cannot simultaneously investigate pursuant to power conferred on them under their respective statutes - Held, yes - On sudden collapse of stock market, Joint Parliamentary Committee directed SEBI to make investigation against appellant-companies - SEBI found that due to concerted transactions between appellants and ‘K’, who was moving spirit behind companies, there was a ultimate collapse of stock market - Consequent to said collapse, Global Trust Bank (GTB) and UTI had been subjected to serious financial difficulties and were ultimately bailed out by Government - Central Government, relying on report of SEBI and report of inspectors carrying out inspections under section 209A, sought permission of CLB for investigation into affairs of appellant-companies under section 237 - Whether in facts and circumstances of case, Central Government had not only sufficient material but also had a strong prima facie case for ordering investigation under section 237(b)(i) - Held, yes

Facts

There was a sudden crash in stock-exchange which was attributed and alleged to one ‘K’. Allegedly, the appellant-companies were controlled and owned directly or indirectly by the said ‘K’. With the crash of the stock market, there had simultaneously been a crash of Madhavpura Co-operative Bank (MCB), Global Trust Bank (GTB) and UTI and thousands crore of rupees had been siphoned off from the system. With a hue and cry from the public, a Joint Parliamentary Committee (JPC) was constituted to investigate the said stock exchange crash. Apart from that, SEBI was also directed to carry out investigations and to take appropriate action within provision of the Securities & Exchange Board of India Act, 1992. In the meantime, the respondent, in exercise of power under section 209A, carried out inspection of books of account of the appellants. In these circumstances and based on the material gathered from three basic sources, namely, the report of the JPC, the interim report of the SEBI investigation and, thirdly the reports pursuant to the investigation under section 209A, the respondent in a company petition sought permission of the CLB to investigate affairs of the company in exercise of power under section 237(b)(i). The appellants objected the application on ground that the purpose and object of investigation having already been achieved by carrying out investigation by authorities such as CBI, SEBI and Department of Company Affairs under section 209A, further investigation under section 237 was not necessary and it would affect the appellants prejudicially. Rejecting the objection of the appellants, the CLB allowed the company petition and permitted the Department of Company Affairs to carry out investigation under section 237(b)(i) in the affairs of each of the appellant-companies.

On appeal, it was also contended by the appellants that once the business of the company had ceased to be in operation for any reason whatsoever voluntarily or otherwise, then the respondents had no jurisdiction to initiate and/or exercise jurisdiction vested in them by virtue of the proceedings under section 237(b)(i); and that the respondents had not made out prima facie case for investigation under section 237(b)(i).

Held

The provisions of investigation under section 237(b)(i) are being introduced by the Parliament with the intention to prevent persons who enter the business in the guise of corporate entities to carry on fraudulent business with a view to harm the public interest. [Para 18]

Essentially, the provisions of section 237 are meant to see that the defrauding of the public at large is not being carried on under the guise of the corporate affairs. Plain and simple reading of the said section would indicate that the words used ‘is being conducted’ are used in the context of the fraudulent or unlawful business conducted by the company in course of running of their business. It does not mean that once the business is conducted in unlawful and fraudulent manner and if it is closed down, the power of the Central Government of ordering investigation under section 237(b)(i) stood revoked or ceased to have effect. The word ‘is being conducted’ has to be read along with the words ‘fraudulent or unlawful purpose’ and if it is so read, it is clear that the word ‘is being conducted’ is used with the intention to indicate that when the business of the company was conducted, it was conducted for unlawful purpose. Any person can conduct the business for fraudulent or unlawful purpose and before it is detected would close down the business of the company and in fact escape the consequences as contemplated under section 237(b)(i). It is not uncommon that there are companies who are fly by night operators in a booming economy of India today. If such an interpretation as sought for by the appellants is given to section 237(b)(i), then all these companies would commit fraud and would close down the business and, consequently, make the provision a dead letter on the statue. [Para 19]

The true and correct interpretation of section 237(b)(i) would only mean that if the company while conducting the business has acted in a fraudulent or unlawful purpose, then such companies will fall within the net of section 237(b)(i) irrespective of the fact that whether it is a running concern or close down subsequently for any reason whatsoever because under the provisions of section 250A it is specifically provided that investigation may be initiated under section 237(b)(i) notwithstanding that the application is made under sections 397 and 398 or it has passed a special resolution for voluntary winding up of such a company.

In any event on a true and proper construction of the section, it cannot be held that the business of company should be conducted in praesentis for the purpose of ordering investigation by the Central Government under section 237(b)(i). [Para 25]

Even otherwise on facts, the respondent had been able to establish that the business of the company was not totally stopped though undoubtedly it had been seriously affected by virtue of the orders passed by the SEBI and stock exchange of suspension of the brokerage license, suspension or freezer of bank account and collapse of MCB and GTB. [Para 26]

That could not be treated as business of the company was not carried on and/or the same was closed down for reasons beyond the control of the appellant, i.e., by virtue of the passing of the orders of various authorities such as SEBI, CBI and other Central Government authorities. The business of the company was conducted even today even though at a very low level. It could not be said that the business of the company had ceased to be in operation. The word ‘is being conducted’ under section 237(b)(i) even if it is so interpreted, as contended by the appellant, it should be and must mean that the business of the company has come to a total stop and no activities of the company are carried on. Such situation arises only when the company is wound up either by voluntary winding up or compulsory winding up as provided under the Act. In the aforesaid circumstances even on the facts of the instant case, the business of the company was being carried on and, therefore, the provisions of section 237(b)(i) squarely applied to the case which would mean that the order passed by the CLB was legal and valid and on this ground did not require any interference by the Court. [Para 28]

On the facts of the instant case, it was not in dispute that there had been a stock market collapse in the year 2001 and the appellants had indulged in large number of share dealings and trading. It was also not in dispute that the MCB and GTB had collapsed in view of the stock market scam. The respondents had produced before the CLB in support of the application for investigation under section 237(b)(i) a report of the JPC investigating said scam. The respondents had also produced the report and/or order passed by the SEBI against the appellants and ‘K’ who was moving spirit behind the appellant-companies. The Central Government had also, in support of the application, relied upon the reports which were filed by the inspectors in the course of carrying out investigation under section 209A. The Central Government had also relied upon large number of breaches of the provisions of the Act by the various companies in support of investigation. Therefore, not only there was a material in the form of aforesaid reports, documents and orders but a more than prima facie case had been made out for investigation of the appellant companies. The JPC had in fact directed the investigation against these entities by the SEBI or the Central Government. However, the appellant canvassed that there was no material which could be used by the respondent in respect of the investigation because each of the authorities was entitled to conduct its own investigation on the basis of aforesaid report and, therefore, the same material could not be utilized for the purpose of ordering investigation by the Central Government under section 237(b)(i). The contention of the appellant could not be accepted for the simple reason that it is possible that the material can be common or identical in course of various investigations embarked upon by the various authorities. It did not mean that the respondents were not entitled to use the material which had been unearthed or found in the course of the investigation by any other authorities. The material in the instant case was glaring. There was a serious collapse of the stock exchange in 2001. The SEBI, on investigation, had found that all the entitles had entered into typical type of transactions in concert with each other so as to ultimately result in collapse of the stock market. Consequently, large amount of public fund had been eroded. Consequent upon the collapse of the GTB, even UTI had been subjected to serious financial difficulties and was ultimately required to be bailed out by the Government. These were very serious circumstances and there was a plethora of material to indicate that the companies, which were subject to investigation under the provision of section 237(b)(i), had played some role, the consequence of which had resulted as mentioned above. Therefore, the Central Government had not only sufficient material but also had a strong prima facie case for ordering investigation. It has been well settled by the various decisions of the Apex Court that the Court ought not to interfere at this stage of investigation by the authorities. The investigation is not a trial of an offence. It is merely a fact finding venture. It is no doubt true that in the context of the companies it is a serious issue becuase it interferes with their rights to carry out free trading but it has been held that every right is coupled with reasonable restrictions and if the company has prima facie carried out fradulent activities then obviously it cannot complain about investigations carried out by the Central Government in exercise of statutory powers conferred under section 237(b)(i). [Para 29]

The jurisdiction and the power of the various investigating authorities derived from the jurisdiction vested in them by the various legislations or statutes; the authority which is doing the inquiry and/or conducting the investigation is required to carry out investigation keeping in mind the legal provisions and legal limitations which are stipulated under the respective statute. Undoubtedly, it can be that there may be an overlapping investigation but such an eventuality cannot prevent any investigating authority from carrying out investigation in respect of their jurisdiction conferred on them under the statute. The investigation in respect of the corporate fraud can be initiated and considered by the Central Government under section 237(b)(i). There is no provision under the SEBI Act in which any corporate fraud can be investigated by the SEBI. Undoubtedly, it can be investigated under normal criminal law by the CBI. Merely because the material, on the basis of which investigation is being undertaken, is identical to the material which is subject-matter of investigation by the other authority, it cannot be stated that both the authorities cannot simultaneously investigate pursuant to power conferred on them under their respective statutes. Every authority is entitled to investigate even may be in respect of the same material as well as from the angle and facet in which they have been asked to carry out investigation. It was possible that the SEBI might be investigating the same material on the ground of breach of the various provisions of the SEBI Act and other security related legislations whereas the Central Government, Department of Company Affairs could consider and/or investigate the fraud and/or breach of various provisions of law in the light and context of the provisions of the Act, might be in respect of the same material. [Para 33]

The Central Government having constituted the Serious Fraud Investigation Office and if it desired to carry out investigation in respect of the affairs of the appellant-companies without any mala fide intention, then it was not possible to stall the investigation merely on the basis of contentions and arguments advanced by the appellant that all the authorities could not be permitted to carry out the investigation simultaneously in respect of the very same material. Therefore, every authority is entitled to carry out investigation, may be, in respect of the same material insofar as they do not exceed the jurisdiction conferred on them in their respective statute. [Para 34]

The Court cannot and should not usurp the jurisdiction vested in the Central Government to form an opinion and come to a conclusion as to whether the investigation is necessary or not. Limited jurisdiction or power conferred on the Court is to ascertain whether there is a material in support of the opinion arrived at by the Central Government and/or the said exercise is not a mala fide exercise of power. In the facts of the instant case, it could not be said that the exercise of power under section 237 by the Central Government was mala fide. There was a plethora of material and in view of that, the investigation ordered by the Central Government in exercise of power conferred under section 237(b)(i) could not be interfered. [Para 35]

In view of the above, there was no substance in these appeals and same were, accordingly, dismissed.

Cases referred to

Barium Chemicals Ltd. v. CLB [1966] 36 Comp. Cas. 639 (SC) (para 11), Rohtas Industries Ltd. v. S.D. Agarwal [1969] 1 SCC 325 (para 13), Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634 (Delhi) (para 14), New Central Jute Mills Co. Ltd. v. Dy. Secretary, Ministry of Finance, Department of Revenue & Company Law [1970] 40 Comp. Cas. 102 (Cal.) (para 14), Mangin v. IRC [1971] All Eng. LR 179 (para 21), Budhan Singh v. Babi Bux AIR 1970 SC 1880 (para 22), Nasiruddin v. State Transport Appellate Tribunal AIR 1976 SC 331 (para 23), Molar Mal v. Kay Iron Works (P.) Ltd. [2000] 4 SCC 285 (para 24), Bengal & Assam Investors Ltd. v. CIT AIR 1966 SC 1514 (para 27), London United Investments Plc., In re 1992 BCLC 285 (CA) (para 33) and DDA v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622 (para 35).

N.H. Seerval and Vinod Parekh for the Appellant. B.H. Desai and Sethna for the Respondent.

Judgment

1.         Economic progress usher with it economic perversity such as the land scam, Petrol Pump Scam, import export scam, Hawala scam, security scam, shares and stocks scam, bank scam etc. With the passage of time the method of committing these scams has been more involved and more complex and are woven into various webs. Thus as a collary thereto investigations into such scams are also required to be more scientific, more intrinsic and more detailed with the help of the experts. Corporate frauds and corporate misconduct are also another facet of such scams. Companies are being floated and are disappearing into thin air making the common man poorer and poorer by thousands of crores of rupees. These 16 appeals are challenging an order passed by the company law board under which it has ordered an investigation into one of such alleged scams under section 237(b)(i) of the Companies Act which is being known as Ketan Parekh - Stock scam of 2001.

2.         Few facts dealing with the complex question of law which have been raised by the appellant in the present proceedings are briefly narrated as under :

3.         In 2001 there was a sudden crash in the stock market i.e., the sudden increase in the prices over the board securities in the period 1999-2000 and then sudden crash of the stock market is attributed and alleged to one Mr. Ketan Parekh. It is alleged that he by his conduct through his various entities and companies has committed fraud which led to the said crash in the stock market. It is also alleged that the 14 companies in the present appeals are entities which are controlled and owned directly or indirectly by the said Ketan Parekh, who is the alleged King-player in the stock exchange scam of 2001. There are also allegations that with the crash of the stock market, there has simultaneously been a crash of the Madhavpura Co-operative Bank, Global Trust Bank and UTI and thousands of crores of rupees have been siphoned off from the system. With a hue and cry from the public the Lok Sabha on 26-4-2001 constituted the Parliamentary Committee as fact-finding committee to investigate the said 2001 Stock Exchange crash. The terms of reference of the said Joint Parliamentary Committee have been enlarged on 3-8-2001 and inquiries pertaining to the crash of UTI were also made part of the said Joint Parliamentary Committee. The Joint Parliamentary Committee has given their report and has inter alia recommended in paras 11 to 35 of the report that the investigations must be carried out in respect of 6 corporate groups belonging to Ketan Parekh and that the Department of Company Affairs has been informed that 6 out of 10 corporate groups have transferred huge amount to entities and associates of Ketan Parekh and this aspect requires investigation. Joint Parliamentary Committee has also simultaneously directed SEBI to carry out investigations to take appropriate action within the provisions of Security Exchange Board India Act, 1992 as amended from time-to-time (hereinafter referred to as ‘the SEBI Act’).

4.         On 25-6-2001 the respondents issued a letter to the appellants seeking inspection of the books of account of the appellant in exercise of power conferred under section 209A of the Companies Act. After carrying out certain initial investigations on the reference of the company on 25-11-2001 a preliminary finding report was filed by the respondent with the Central Government. On 19-11-2004 the respondents set out various details and inquiries with the appellant company seeking various information. This inspection under section 209A of the Companies Act has been partly carried out and is still in progress.

5.         On 2-5-2003 the Company Petition No. 39 of 2003 was filed by the respondent with the Company Law Board seeking permission to investigate the affairs of the company in exercise of power conferred under section 237(b)(i) of the Companies Act. The application is inter alia based on the interim report of the various irregularities of the SEBI as well as certain irregularities which came to the light by virtue of inspection under section 209A of the Companies Act. The said petition is also based on a report of the Joint Parliamentary Committee. Thus in nutshell the application which has been initiated under section 237(b)(i) is based on the material gathered from three basic sources namely, the report of the Joint Parliamentary Committee, the interim report of the SEBI investigation and thirdly the reports pursuant to the investigation under section 209A of the Companies Act. The petition which is filed on 2-5-2003 by the respondent in detail sets out the various findings on the aforesaid three reports and the material gathered by the said authorities as required for the purpose of carrying out investigation under section 237(b)(i). This petition dated 2-5-2003 was served on the company on 16-5-2003. It is the case of the petitioner that on 20-7-2003 they applied to the Company Law Board for a certified true copy of the SEBI report and other documents which are relied upon by the respondent in the said company petition before the Company Law Board. On 12-7-2003 the appellant herein sought a transfer of the proceedings from the Principal Bench of the Company Law Board, New Delhi to the Western Region Bench of the Company Law Board at Mumbai. Simultaneously they have also applied for inspection of the various documents which are referred to and/or relied upon by the respondent in the said company petition. On 24-11-2003 the appellant company filed a reply inter alia opposing the petition which was filed under section 37(b)(i) of the Companies Act. It was inter alia alleged that the powers sought to be exercised by the Company Law Board are likely to seriously affect the interest of the company. The various allegations made in the company petition were denied. It was contended that the stock market crash which took place some time in or about 2001 was not due to acts on the part of Ketan Parekh but in fact he along with his entitles have suffered losses in the range of about Rs. 3,000 crores to Rs. 4,000 crores. It was further contended that if there was any evidence regarding misuse of funds of banks and financial institutions then the appellant cannot be penalised for the same but it is in fact the duty of the Reserve Bank of India to regulate and over see the functions of the banks and financial institutions affecting the financial matters and that the consequence of the failure on the part of the RBI cannot be attributed to the appellant herein. Insofar as the allegation that there is intention of the company to conduct its business with an intention to defraud its creditors, members and other members or for a fraudulent or unlawful purpose is concerned, the appellant has contended that the word ‘intention’ would mean that the someone was deceived by the respondents deliberately and in preplanned events to their advantage and it assumes a guilty mind and there has to be an unlawful gain by such an evil design on the part of the appellant herein. It was contended that the crash of the stock market in 2001 was merely a drastic melt down of the share prices due to a declining trend in global share market which has also inflicted heavy financial losses to the appellant companies. It is further contended that the drastic fall in the share prices cannot be foreseen by the appellant and they themselves are the victims of melt down and not the beneficiaries of the same. Thus the allegation of carrying on business for defrauding the creditors and/or for fraudulent or unlawful purpose were denied. It has been further contended that the purpose and object of investigation has already been achieved by carrying out investigations by the authorities such as SEBI, CBI and Department of Company Affairs under section 209A of the Companies Act and therefore a further investigation in the matter by the said investigating authorities appointed by the Central Government under section 237(b)(i) is neither necessary nor efficacious and it would only affect the interest of the appellant company prejudicially. The respondents on the other hand in their rejoinder have placed extensive reliance upon the inspection report of the CBI and Joint Parliamentary Committee and also the inspection carried out by the Department of Company Affairs under section 209(A). Even a certain extract of the JPC report has been annexed to the said rejoinder.

6.         After hearing the parties the Company Law Board has passed an impugned order on 27-9-2004. By the impugned order the Company Law Board has inter alia held that there is a ground made out for carrying out investigation under section 237(b)(i). It has been further held that there are serious allegations of fraud and scams by these corporate entities and there is substantive material in support of the said allegations to conduct support the investigation under section 237(b)(i) of the Companies Act. Thus the Company Law Board allowed the company petition and permitted the Department of Company Affairs to carry out investigation under section 237(b)(i) in the affairs of each of the appellant companies. This order dated 22-9-2004 which is a common order passed in respect of all of the sixteen appeals before me is the subject-matter of challenge before me. These are the appeals filed under section 10F on the ground that certain substantive questions of law arise in the present case and require determination of this Court.

7.         Learned counsel for the appellant has framed three substantial questions of law in support of his argument which are briefly enumerated as under :

(i)         Whether it is a condition precedent for exercise of power under section 237(b)(i) of the Companies Act that the business of the company should be in operation as on the date when the power is sought to be exercised by the respondent or that once the business of the company has ceased to be in operation for any reason whatsoever voluntarily or otherwise, then the respondents have no jurisdiction to initiate and/or exercise jurisdiction vested in them by virtue of the proceedings under section 237(b)(i) ?

(ii)        Whether on the facts of the present case the respondents have made out prima facie case for investigation or alternatively there is a material available for exercising jurisdiction by the respondent under section 237(b)(i) ?

(iii)       Whether in view of simultaneous investigations carried out by SEBI, CBI and Department of Company Affairs under section 209A the respondent ought not be permitted to launch a fresh investigation in exercise of power under section 237(b)(i) of the Companies Act on same material and on same facts ?

8.         Before I deal with the aforesaid substantial questions of law as framed by the learned counsel for the appellant I feel that it is necessary that the relevant provisions of the Act which are germane to the aforesaid questions of law must be set out. Some of the relevant provisions are reproduced as under :

“209A. Inspection of books of account, etc., of companies.—(1) The books of account and other books and papers of every company shall be open to inspection during business hours—

        (i)       by the Registrar, or

        (ii)      by such officer of the Government as may be authorised by the Central Government in this behalf;

        (iii)     by such officers of the Securities and Exchange Board of India as may be authorised by it :

Provided that such inspection may be made without giving any previous notice to the company or any officer thereof:

Provided further that the inspection by the Securities and Exchange Board of India shall be made in respect of matters covered under sections referred to in section 55A.

(2)  It shall be the duty of every director, other officer or employee of the company to produce to the person making inspection under sub-section (1), all such books of account and other books and papers of the company in his custody or control and to furnish him with any statement, information or explanation relating to the affairs of the company as the said person may require of him within such time and at such place as he may specify.

(3)  It shall also be the duty of every director, other officer or employee of the company to give to the person making inspection under this section all assistance in connection with the inspection which the company may be reasonably expected to give.

(4) The person making the inspection under this section may, during the course of inspection,-

        (i)       make or cause to be made copies of books of account and other books and papers, or

(ii)      place or cause to be placed any marks of identification thereon in token of the inspection having been made,

(5)  Notwithstanding anything contained in any other law for the time being in force or any contract to the contrary, any person making an inspection under this section shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit, in respect of the following matters, namely:—(i) the discovery and production of books of account and other documents, at such place and such time as may be specified by such person; (ii) summoning and enforcing the attendance of persons and examining them on oath; (iii) inspection of any books, registers and other documents of the company at any place.

(6)  Where an inspection of the books of account and other books and papers of the company has been made under this section, the person making the inspection shall make a report to the Central Government or the Securities and Exchange Board of India in respect of inspection made by its officers.

(7)  Any officer authorised to make an inspection under this section shall have all the powers that a Registrar has under this Act in relation to the making of inquiries.

(8)  If default is made in complying with the provisions of this section, every officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees, and also with imprisonment for a term not exceeding one year.

(9)  Where a director or any other officer of a company has been convicted of an offence under this section he shall, on and from the date on which he is so convicted, be deemed to have vacated his office as such and on such vacation of office, shall be disqualified for holding such office in any company, for a period of five years from such date.”

“234. Power of Registrar to call for information or explanation.— (1) Where, on perusing any document which a company is required to submit to him under this Act, the Registrar is of opinion that any information or explanation is necessary with respect to any matter to which such document purports to relate, he may, by a written order, call on the company submitting the document to furnish in writing such information or explanation, within such time as he may specify in the order.

(2)  On receipt by the company of an order under sub-section (1), it shall be the duty of the company, and of all persons who are the officer of the company, to furnish such information or explanation to the best of their power.

(3)  On receipt of a copy of an order under sub-section (1), it shall also be the duty of every person who has been an officer of the company to furnish such information or explanation to the best of his power.

(3A)If no information or explanation is furnished within the time specified or if the information or explanation furnished is, in the opinion of the Registrar, inadequate, the Registrar may by another written order call on the company to produce before him for his inspection such books and papers as he considers necessary within such time as he may specify in the order; and it shall be the duty of the company, and of all persons who are officers of the company, to produce such books and papers.

(4)  If the company, or any such person as is referred to in sub-section (2) or (3), refuses or neglects to furnish any such information or explanation or if the company or any such person as is referred to in sub-section (3A) refuses or neglects to produce any such books and papers,-

(a)      the company and each such person shall be punishable with fine which may extend to five thousand rupees and in the case of a continuing offence, with an additional fine which may extend to five hundred rupees for every day after the first during which the offence continues; and

(b)      the Court trying the offence may, on the application of the Registrar and after notice to the company, make an order on the company for production before the Registrar of such books and papers as in the opinion of the Court, may reasonably be required by the Registrar for the purpose referred to in sub-section (1).

(5)  On receipt of any writing containing the information or explanation referred to in sub-section (1), or of any book or paper produced whether in pursuance of an order of the Registrar under sub-section (3A) or of an order of the Court under sub-section (4), the Registrar may annex that writing book or paper, or where that book or paper is required by the company, any copy or extract thereof, to the document referred to in sub-section (1); and any writing or any book or paper or copy or extract thereof so annexed shall be subject to the like provisions as to inspection, the taking of extracts and the furnishing of copies, as that document is subject.

(6)  If such information or explanation is not furnished within the specified time or if after perusal of such information or explanation or of the books and papers produced whether in pursuance of an order of the Registrar under sub-section (3A) or of an order of the Court under sub-section (4), the Registrar is of opinion that the document referred to in sub-section (1), together with such information or explanation or such books and papers discloses an unsatisfactory state of affair or does not disclose a full and fair statement of any matter to which the document purports to relate, the Registrar shall report in writing the circumstances of the case to the Central Government.

(7)  If it is represented to the Registrar of materials placed before him by any contributory or creditor or any other person interest that the business of a company is being carried on in fraud of its creditors or of persons dealing with the company or otherwise for a fraudulent or unlawful purpose, he may, after giving the company an opportunity of being heard, by a written order, call on the company to furnish in writing any information or explanation on matters specified in the order, within such time as he may specify therein; and the provisions of sub-sections (2), (3), 3(A), (4) and (6) of this section shall apply to such order.

**

**

**

(8)  The provisions of the section shall apply mutatis mutandis to documents which a liquidator, or a foreign company within the meaning of section 591, is required to file under this Act.”

“235. Investigation of the affairs of a company.—(1) The Central Government may, where a report has been made by the Registrar under sub-section (6) of section 234, or under sub-section (7) of that section, read with sub-section (6) thereof, appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct.

(2)        Where—

(a)      in the case of a company having a share capital, an application has been received from not less than two hundred members or from members holding not less than one-tenth of the total voting power therein, and

(b)      in the case of a company having no share capital, an application has been received from not less than one-fifth of the persons on the company’s register of members,

the Tribunal may, after giving the parties an opportunity of being heard, by order, declare that the affairs of the company ought to be investigated by an inspector or inspectors, and on such a declaration being made, the Central Government shall appoint one or more competent persons as inspectors to investigate the affairs of the company and to report thereon in such manner as the Central Government may direct.”

“237. Investigation of company’s affairs in other cases.—Without prejudice to its powers under section 235, the Central Government-

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if-

        (i)           the company, by special resolution; or

(ii)          the Court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

        (b)      may do if in its opinion or in the opinion of the Tribunal, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent of unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company.”

“250A. Voluntary winding up of company, etc., not to stop investigation proceedings.—An investigation may be initiated under section 235, 237, 239 or 247 notwithstanding that—

        (a)      an application has been made for an order under section 397 or section 398; or

(b)      the company has passed a special resolution for voluntary winding up, and no investigation so initiated shall be stopped or suspended by reason only of the fact that an application referred to in clause (a) has been made or a special resolution referred to in clause (b) has been passed.”

9.         Learned counsel appearing for appellant has vehemently contended before me that the proceedings which are initiated by the respondent before the Company Law Board for investigation under section 237(b)(i) of the Companies Act is totally without jurisdiction and non est. It has been further contended that the condition precedent prescribed under the said section having not been complied with by the Company Law Board was not entitled in law to exercise jurisdiction under the provisions of section 237(b)(i) of the Companies Act. The learned counsel has further contended that on true and correct interpretation the Company Law Board gets jurisdiction to pass an order of investigation only if the company is carrying on business with the intention to defraud its creditors, members and/or carrying on business for fraudulent or unlawful purpose or in a manner oppressive to any of its members in a praesentis. It is therefore contended that if the company is not carrying on business at present then irrespective of the fact that during the period when the company was carrying on business whether the company has conducted business defrauding the creditors or for a fraudulent or unlawful purpose or in a manner oppressive to any members the Company Law Board does not acquire jurisdiction to launch investigation under section 237(b)(i). It has been vehemently contended that the provisions under section 237(b)(i) must be strictly construed because it is an inroad in the freedom guaranteed by the Constitution under Article 19(1)(g). It is contended that it is an interference with the right of the shareholders to carry on business as guaranteed by the Constitution. It has been contended that section 237(b)(i) must be so strictly read that unless there is a compliance with the condition precedent prescribed thereon the Tribunal cannot exercise power to launch investigation in the affairs of the company, it has been further contended that only in the last category prescribed under section 237(b)(i) i.e., if the company is formed for any fraudulent and/or unlawful purpose that it is not necessary that the business of the company should be carried on at present moment when the investigations are ordered. It has been contended by the learned counsel for the appellant in alternative to the aforesaid submission that even if the provisions of section 237(b)(i) are not so strictly construed as urged by him then also it must be so construed that save and except the case where the business of the company is voluntarily closed or the company is voluntarily wound up then only on those cases section 237(b)(i) would be applicable but in all other cases the provisions of section 237(b)(i) would not apply if the business of the company is not carried in praesentis. It has been further contended that it is immaterial that whether at the relevant time when the business it was carried on by the company was in fact carried on for the purpose of defrauding the creditors or members and/or carried on for fraudulent or unlawful purpose or it is carried on in a manner oppressive to any of its members and still the Company Law Board will not permit the investigation by the Central Government under the provisions of section 237(b)(i) of the Companies Act. It has been strenuously urged by the learned counsel for the appellant that the power conferred on the Central Government under section 237(b)(i) is a draconian power interfering with the business of the company and such power must not be permitted to be utilised save and except directly in accordance with law and therefore the said application for investigation when the business is not running in praesentis cannot be granted.

10.       On the facts of the present case the learned counsel has contended that it is an admitted position that in respect of some of the appellants who are inter alia carrying on business of share brokerage their share brokers card has been suspended and in some of the cases the said card is revoked and/or terminated by the concerned stock exchange and SEBI and some of the trading firms who were carrying on business as a share broker have come to a halt and therefore those companies are not carrying on any business in praesentis and thus the jurisdiction vested under the Central Government and/or the Company Law Board to investigate under section 237(b)(i) cannot be exercised in respect of these companies. It has been further contended that business of the various companies has also been closed because of the freezing of the bank accounts in parallel investigations which have been carried out by the SEBI, CBI and Department of Company Affairs. It has been therefore contended by the learned counsel for the appellant that even in respect of companies who are not share broking companies still their business has also come to a total halt and/or for all practical purposes all these companies are defunct companies and exist only on paper. Thus according to the learned counsel for the appellant the Company Law Board ought not to have passed the impugned order since it does not satisfy the jurisdictional requirements of section 237(b)(i) of the Companies Act. Thus the learned counsel for the appellant has contended that the argument that these appellants at the relevant time when they were carrying on business have committed a scam even if it is taken as true still the said scam cannot be the subject-matter of investigation under section 237(b)(i) because of closure of their business for reasons beyond their control. The business of the appellants have been brought to a halt by an order of SEBI suspending and/or revoking the licence to carry on business of the company. Thus it is submitted that when power is exercised under section 237(b)(i) by the Central Government the company being already defunct companies and not running the business they cannot be subjected to investigation under the said section.

11.       The learned counsel for the appellants has vehemently contended that the issue urged by him is directly or squarely covered by the Constitution Bench decision of the Apex Court in the case of Barium Chemicals Ltd. v. CLB [1966] 36 Comp. Cas. 639. He has drawn my attention to the following para and has contended that the Apex Court has clearly held that under section 237(b)(i) as a jurisdictional requirement for exercising of power of ordering investigation against a company it is necessary that the company must be carrying on business in praesentis and it is absolutely immaterial that the company has in past carried on the business for a fraudulent or unlawful purpose or for defrauding the creditors or any of the members. The said para reads as under :

“In dealing with this problem the first point to notice is that the power is discretionary and its exercise depends upon the honest formation of an opinion that an investigation is necessary. The words ‘in the opinion of the Central Government’ indicate that the opinion must be formed by the Central Government and it is of course implicit that the opinion must be an honest opinion. The next requirement is that ‘there are circumstances suggesting, etc.’ These words indicate that before the Central Government forms, its opinion it must have before it circumstances suggesting certain inferences. These inferences are of many kinds and it will be useful to make a mention of them here in a tabular form :

        (a)      that the business is being conducted with intent to defraud-

        (i)           creditors of the company

        (ii)          members, or

        (iii)         any other person;

        (b)      that the business is being conducted

        (i)           for a fraudulent purpose,

        (ii)          for a unlawful purpose;

(c)     that persons who formed the company or manage its affairs have been guilty of-

        (i)           fraud, or

        (ii)          misfeasance or other misconduct-towards the company or towards any of its members;

(d)      that information has been withheld from the members about its affairs which might reasonably be expected, including calculation of commission payable to-

        (i)           managing or other director,

        (ii)          managing agent,

        (iii)         the secretaries and treasurers,

        (iv)         the managers.

These grounds limit the jurisdiction of the Central Government. No jurisdiction outside the section which empowers the initiation of investigation, can be exercised. An action, not based on circumstances suggesting an inference of the enumerated kind, will not be valid. In other words, the enumeration of the inferences, which may be drawn from the circumstances, postulates the absence of a general discretion to go on a fishing expedition to find evidence. . . .” (p. 661)

12.       The learned counsel has vehemently contended that the judgment of the Apex Court as per majority decision laid down by Hidayatullah, J. is the lead judgment and holds that the provisions of section 237(b)(i) can only be exercised when the business is running in praesentis and does not apply when the business of the company has been closed down for any reasons whatsoever including the reasons which are beyond the control of the appellant themselves. The learned counsel has been at pain to convey that the issue which has been raised by him is no more res integra in view of the judgment of the Constitution Bench and has contended that the said judgment of the Apex Court is binding on me. According to the learned counsel for the appellant the aforesaid para in the judgment holds that the business of the company must be carried on in praesentis for the purpose which is mentioned in the said section for exercising power by the Central Government under section 237(b)(i).

13.       He has further contended that the issue was further discussed in subsequent judgment of the Apex Court in the case of Rohtas Industries Ltd. v. S.D. Agarwal [1969] 1 SCC 325. It has been contended that Apex Court in the aforesaid judgment has accepted the view taken by Hidayatullah, J. as the correct view. He has relied upon para 6 of the said judgment. He has also relied upon para 11 where the Apex Court has approved the view of Hidayatullah, J. in the case of Barium Chemicals Ltd. (supra). The said paras 6 and 11 reads as under :

“6. The decision of this Court in Barium Chemical’s case (supra) which considered the scope of section 237(b) illustrates that difficulty. In that case Hidayatullah, J. (our present Chief Justice) and Shelat, J. came to the conclusion that though the power under section 237(b) is a discretionary power the first requirement for its exercise is the honest formation of an opinion that the investigation is necessary and the further requirement is that ‘there are circumstances suggesting’ the inference set out in the section; an action not based on circumstances suggesting an inference of the enumerated kind will not be valid; the formation of the opinion is subjective but the existence of the circumstances relevant to the inference of the enumerated kind will not be valid; the formation of the opinion is sine qua non or action must demonstratable; if their existence is questioned, it has to be proved at least prima facie; it is not sufficient to assert that those circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness; the conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In other words they held that although the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstratable; if their existence is questioned, it has to be proved at least prima facie; it is not sufficient to assert that those circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness; that conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In other words they held that although the formation of opinion by the Central Government is a purely subjective process and such an opinion cannot be challenged in a Court on the ground of propriety, reasonableness or sufficiency, the authority concerned is nevertheless required to arrive at such an opinion from circumstances suggesting the conclusion set out in sub-clauses (i), (ii) and (iii) of section 237(b) and the expression ‘circumstances suggesting’ cannot support the construction that even the existence of circumstances is a matter of subjective opinion. Shelat, J. further observed that it is hard to contemplate that the Legislature could have left to the subjective process both the formation of opinion and also the existence of circumstances on which it is to be founded; it is also not reasonable to say that the clause permitted the authority to say that it has formed the opinion on circumstances which in its opinion exist and which in its opinion suggest an intent to defraud or a fraudulent or unlawful purpose.

11. Coming back to section 237(b) in finding out its true scope we have to bear in mind that that section is a part of the scheme referred to earlier and therefore the said provision takes its colour from sections 235 and 236. In finding out the legislative intent we cannot ignore the requirement of those sections. In interpreting section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under Article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of general public. In fact the vires of that provision was upheld by majority of the judges Constitution Bench in Barium Chemicals’ case principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated earlier we agree with the conclusion reached by Hidayatullah and Shelat, JJ. in Barium Chemicals’ case that the existence of circumstances suggesting that the company’s business was being conducted as laid down in sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the Courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question are open to judicial review though the opinion formed by the Government is not amenable to review by the Courts. As held earlier the required circumstances did not exist in this case.”

14.       Apart from the aforesaid two judgments of the Apex Court the learned counsel has in support of his contention has also relied upon the judgment of the Delhi High Court in the case of Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634 and the judgment of the Calcutta High Court in the case of New Central Jute Mills Co. Ltd. v. Dy. Secretary, Ministry of Finance, Department of Revenue & Company Law [1970] 40 Comp. Cas. 102 (Cal.). By relying upon the aforesaid two judgments the learned counsel has reiterated the submissions which are already set out in extentio hereinabove.

15.       In the alternative to the above submissions the learned counsel has raised the issue of interpretation of section 237(b)(i) and it is contended that assuming that the judgment of the Apex Court did not hold that the running of a business in praesentis in the manner set out therein is a condition precedent still according to him on a plain and simple reading of the section an inescapable conclusion is that for the purpose of exercising the power under the said section the business must be a running business and not defunct or closed down business. On the other hand learned counsel Mr. Desai the learned Additional Solicitor General appearing for the respondent has contended that the provisions of section 237(b)(i) cannot be so restrictly interpreted. According to him it takes in its sweep even a part conduct of the business partially conducted even if the company has become defunct or it has suspended its business operation for any reasons whatsoever. It has been further contended by the learned counsel that the provisions of section 237(b)(i) in its opening portion provides that the power of the Central Government to appoint one or more persons as inspector to investigate the affairs of the company and to report thereon to the Central Government is a power conferred on the respondent in the public interest and such power of the Central Government ought to be given full effect for effecting investigation and cannot be so interpreted so as to defeat the provisions of the Act. It has been further contended that the word ‘is being conducted’ is in a simple present tense but by using the words conducted in past tense it has included within its scope even the business which was carried out for fraudulent purposes in the past. Thus according to the learned Additional Solicitor General the Central Government would have jurisdiction to investigate irrespective of the fact that whether the company is running the business or not. The learned Additional Socilitor General has further contended that the Court must give purposeful interpretation to the provisions of section 237(b)(i) and should not interpret the section which results in absurd consequences. According to the learned counsel the section cannot be interpreted in a manner which can provide a scope to do the things which are in fact meant to be prevented by the provisions thereof. Insofar as the aforesaid authorities are concerned, the learned counsel for the respondent has contended that the judgment of the Apex Court in the case of Barium Chemicals Ltd. (supra) does not in any way or manner set out any such proposition of law as contended by the learned counsel for the respondent i.e. the company must be running the business in praesentis so as to attract the provisions of section 237(b)(i). The learned counsel has contended that the paras referred to by the learned counsel for the appellant did not carve out any such proposition of law as canvassed by the learned counsel for the appellant before this Court and therefore the said argument ought not to be accepted. The learned counsel has further contended that if the interpretation is given as suggested by the learned counsel for the appellant in most of the cases, then the company would commit fraud and carry on business for fraudulent or unlawful purpose and/or to defraud the creditors and before the same can be detected or investigated they would close down the company and evade investigation or cases where due to criminal investigation if the business of the companies has come to a halt then in that event it would escape the investigation under section 237(b)(i) of the Companies Act. Further more it would restrict the power of Government to take immediate remedial action of preventing further fraud being carried on by the company by carrying on business.

16.       Alternatively the learned counsel solicitor general has contended that in the facts of the present case in fact the company is carrying on business in praesentis. It has been contended that the company is neither a defunct company nor has the company been wound up but it is merely affected by virtue of the various orders passed by the various authorities affecting the business of the company but is still in operation. It has been contended that it is admitted by the appellant themselves in the various documents which are set out on record which indicate that according to appellant themselves the business is a running business and not closed down as claimed by the appellant himself and it has been contended by the learned counsel for the appellant that even if the section is interpreted as claimed by the learned counsel for the appellant still the order impugned herein is legal and valid and it satisfies all the requirements of section 237(b)(i) and this Court in exercise of power under section 10(f) ought not to inteferere with the said order passed by the Company Law Board and the appeal should be dismissed.

17.       While considering the rival contentions of the parties insofar as the first question of law framed by the petitioner is concerned i.e. the power under section 237(b)(i) can only be exercised if the company is carrying on business and does not apply if the company has closed down its business or by virtue of the orders passed by various authorities due to it has been forced to close down its business. I do not agree that the aforesaid issue is no longer a res integra in view of the judgment of the Apex Court in the case of Barium Chemicals (supra). On going through the above judgment of the Apex Court, in which the Apex Court has considered the constitutional validity of section 237(b)(i), I do not find any such proposition of law laid down by the Apex Court that the power under section 237(b)(i) can only be exercised when the company was carrying on business in praesentis. The paras on which strong reliance has been placed by the learned counsel for the appellant in my opinion does not raise any such issue of law. In the said paras the Apex Court was dealing with the issue of formation of opinion of the Central Government and requirement of the material in support thereof while ordering investigation under section 237(b)(i) of the Act. The para clearly indicates that the court was considering the words in the opinion of the Central Government and was considering that whether such words suggest in any manner that there should be material in support. While considering the aforesaid issue the court has analysed the said sections and has broken in into four parts a, b, c and d therein. Such division of the section in four parts namely a, b, c and d is nothing else but division of the plain language of the section as it is. The learned counsel for the appellant has contended that the Apex Court while considering the section in parts (a) and (b) as used the words ‘business is being conducted’ indicates that the court was of the opinion that the investigation cannot be ordered once the business has been closed down. I do not read any such proposition of law in the said para which has been set out in the said judgment nor do I find from the reading of the said judgment that any such issue was ever considered by the Apex Court. I therefore do not accept the contention of the learned counsel that the issue whether the investigation can be ordered only when the business is being conducted must be read in present tense and that the ratio of the aforesaid judgment in the case of Barrium Chemicals Ltd. (supra) covers the issue. I therefore reject the contention of the appellants that this issue is squarely covered and no more res integra by virtue of the judgment of the Apex Court in the case of Barium Chemicals Ltd. (supra). I am of the opinion that it is now well settled law that the judgment is an authority only on such proposition of law which squarely arises in the cases which are squarely dealt with by the court and that is the only ratio of the judgment which is binding on me. I do not find any such ratio or proposition of law as agitated by the learned counsel for the appellant being decided by the Apex Court in the aforesaid judgment of Barium Chemicals Ltd.’s case (supra). I therefore do not accept the contention of the learned counsel for the appellants and reject the same.

18.       Once I so hold that the issue is not covered by the judgment cited by the learned counsel, then I am required to consider the alternative argument of the learned counsel for the appellant i.e., on a plain and simple interpretation of section 237(b)(i) of the Companies Act, it is a condition precedent that business must be a running business ordering investigation under section 237(b)(i). The learned counsel for the appellant has contended that even on interpretation the section is clear and unambiguous. It uses the word ‘is being conducted’ which is simple present tense. Thus according to the learned counsel for the appellant on plain and simple interpretation of the section itself it is clear that the power under section 237(b)(i) can be exercised by the authorities only if the business is conducted in praesentis. Insofar as the arguments on the interpretation of section 237(b)(i) is concerned it is by now well-settled that the interpretation of the section as a first principle must be on the basis of simple and plain language used in the section itself. However, there is a case at which has been well recognised by the various courts that if interpretation is likely to result in absurd consequences or it defeats the intention of the Legislature then in that event purposive interpretation ought to be resorted to and interpretation should be such to advance the intention of the Legislature rather than defeating the same. In my opinion the provisions of investigation under section 237(b)(i) are being introduced by the Parliament with the intention to prevent persons who enter the business in the guise of corporate entities to carry on fraudulent business with a view to harm the public interest. Butterworth in his 5th edition on the company law while tracing out the background of the similar legislation i.e. English Company Law has inter alia considered the reason for introduction of such a legislation and while doing so it has stated as under :

“It is important to know the background of the legislation. It sometimes happens that public companies are conducted in a way which is beyond the control of the ordinary shareholders. The majority of the shares are in the hands of two or three individuals. These have control of the company’s affairs. The other shareholders know little and/or told little. They receive the glossy annual reports. Most of them throw them into the wastepaper basket. There is an annual general meeting but few of the shareholders attend. The whole management and control is in the hands of the directors. They are self-perpetuating oligarchy; and are virtually unaccountable. Seeing that the directors are the guardians of the company, the question is asked : Quis custodiet ipsos custodies - Who will guard the guards themselves.”

19.       Similar are the provisions under section 237(b)(i) of the Companies Act in India. Essentially the provisions are meant to see that the defrauding of the public at large is not being carried on under the guise of the corporate affairs. In my opinion even on plain and simple reading of the said section would indicate that the words used ‘is being conducted’ are used in the context of the fraudulent or unlawful business conducted by the company in course of running of their business. It does not mean that once the business is conducted in unlawful and fraudulent manner and if it is closed down the power of the Central Government of ordering investigation under section 237(b)(i) stood revoked or ceased to have effect as contended by the learned counsel for the appellant. The word ‘is being conducted’ has to be read alongwith the words ‘fraudulent or unlawful purpose’ even if it is so read it is clear that the word ‘is being conducted’ is used with the intention to indicate that when the business of the company was conducted it was conducted for unlawful purpose. Even otherwise I am of the opinion that to accept the contention of the appellant would be to make the said section nugatory and without any effect and toothless. It is because any person can conduct the business for fraudulent or unlawful purpose and before it is detected would close down the business of the company and in fact escape the consequences as contemplated under section 237(b)(i) of the company. It is not uncommon that there are companies who are fly by night operators in a booming economy of India today. If such an interpretation is given to section 237(b)(i) then all these companies would commit fraud and would close down the business and consequently make the provisions a dead letter on the statue. Apart therefrom it is also difficult to interpret the section in a manner the learned counsel for the appellant has called upon me to do because while so interpreted it is necessary that the Central Government must detect and investigate all such cases of the company which are conducted in a fraudulent or unlawful purpose in a course when such conduct is being carried on by the company. I do not think this could be a legislative intention while enacting the said section 237(b)(i).

20.       The principles of interpretation of statue are well settled. It is repeatedly held by the Apex Court that the interpretation must be to avoid absurdity and unrealistic result or consequences of such an interpretation. The Maxwell has in his book Interpretation of Statutes in the 10th edition as opined as under :

“....if the choice is between two interpretation, the narrow of which would fails to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result.”

21.       The aforesaid rule of a meaningful and purposeful interpretation of the section to avoid the absurd consequence is by now well settled in the case of Mangin v. IRC [1971] All Eng. LR 179 Lord Donvan has stated as under :

“Thirdly, the object of the construction of a statute being to ascertain the will of the Legislature, it may be presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted.”

22.       The said view is also recognised in large number of authorities in India, some of which can be briefly enumerated as under : In the case of Budhan Singh v. Babi Bux AIR 1970 SC 1880 in para 9 it is stated as under :

“9. Before considering the meaning of the word ‘held’ in section 9, it is necessary to mention that it is proper to assume that the law-makers who are the representatives of the people enact laws which the society considers as honest, fair and equitable. The object of every legislation is to advance public welfare. In other words, as observed by Crawford in his book on Statutory Constructions that the entire legislative process is influenced by considerations of justice and reason. Justice and reason constitute the great general legislative intent in every piece of legislation. Consequently, where the suggested construction operates hoarsely, ridiculously or in any other manner contrary to prevailing conceptions of justice and reason, in most instances, it would seem that the apparent or suggested meaning of the statute was not the one intended by the law makers. In the absence of some other indication that the harsh or ridiculous effect was actually intended by the Legislature, there is little reason to believe that it represents the legislative intent.” (p. 1883)

23.       In the case of Nasiruddin v. State Transport Appellate Tribunal AIR 1976 SC 331 where in the Apex Court has in para 26 as held as under :

“26. The conclusion as well as the reasoning of the High Court that the permanent seat of the High Court is at Allahabad is not quite sound. The order states that the High Court shall sit as the new High Court and the Judges and Division Bench thereof shall sit at Allahabad or at such other places in the United Provinces as the Chief Justice may, with the approval of the Governor of the United Provinces appoint. The word ‘or’ cannot be reads as ‘and’. If the precise words used are plain and unambiguous, they are bound to be construed in their ordinary sense. The mere fact that the results of a statute may be unjust does not entitle a court to refuse to give it effect. If there are two different interpretations of the words in an Act, the Court will adopt that which is just, reasonable and sensible rather than that which is none of those things. If the inconvenience is an absurd inconvenience, by reading an enactment in its ordinary sense, whereas if it is read in a manner in which it is capable, though not in an ordinary sense, there would not be any inconvenience at all; there would be reason why one should not read it according to its ordinary grammatical meaning. Where the words are plain the court would not make any alteration.” (p. 338)

24.       In the case of Molar Mal v. Kay Iron Works (P.) Ltd. [2000] 4 SCC 285 while reconsidering the aforesaid principle the Apex Court has held as under:

“The Courts will have to follow the rule of literal construction which rule enjoins the Court to take the words as used by the Legislature and to give it the meaning which naturally implies. But, there is an exception to this rule. That exception comes into play when application of literal construction of the words in the statute leads to absurdity, inconsistency, or when it is shown that the legal context in which the words are used or by reading the statute as a whole, it requires a different meaning. If the expression ‘entitled to apply again’ as given its literal meaning, it would defeat the very object for which the Legislature has incorporated that proviso in the Act inasmuch as the object of that proviso can be defeated by a landlord who has more than one tenanted premises by filing multiple applications simultaneously for eviction and thereafter obtain possession of all those premises without the bar of the proviso being applicable to him. This could not have been the purpose for which the proviso is included in the Act. If such an interpretation is given then the various provisos found in sub-section (3) of section 13 would become otiose and the very object of the enactment would be defeated. Therefore, the restriction contemplated under the proviso extends even up to the stage when the Court or the Tribunal is considering the case of the landlord for actual eviction and is not confined to the stage of filing of eviction petition only.” (p. 288)

25.       Thus in my opinion the true and correct interpretation of section 237(b)(i) would only mean that if the company while conducting the business has acted in a fraudulent or unlawful purpose then such companies will fall within the net of section 237(b)(i) irrespective of the fact that whether it is a running concern or close down subsequently for any reason whatsoever I am of the aforesaid opinion also because under the provisions of section 250(A) it is specifically provided that investigation may be initiated under section 237(b)(i) notwithstanding that the application is made under sections 397 and 398 of the Companies Act or it has passed a special resolution for voluntary winding up of such a company. In my opinion if section 250(A) is read along with section 237(b)(i) it is without any doubt that the contention of the learned counsel for the appellant that no investigation can be carried out once the company has ceased to operate its business. In any event on a true and proper construction of the section I do not accept the contention of the learned counsel for the appellant that the business of the company should be conducted in praesentis for the purpose of ordering investigation by the Central Government under section 237(b)(i).

26.       Even otherwise on facts the learned counsel for the respondent has been able to establish that the business of the company is not totally stopped though undoubtedly it has been seriously affected by virtue of the orders passed by the SEBI and stock exchange of suspension of the brokerage licence, suspension or freezer of bank account and collapse of Madhavpura Co-operative Bank and Global Trust Bank. The learned counsel has drawn my attention to the affidavit filed by the company before the Company Law Board in which it has been stated as under :

“3(b) It is incumbent that in order to achieve this objective, the functioning of the Applicant/Respondent group of companies ought not to be crippled which situation would inevitably result if the order dated 27-9-2004 passed by this Hon’ble Board is not amended for the purpose of determining the real question, as would be evident from the averments made hereinafter in this application.”

“6. It is stated in this connection that the following the details of payment made by the Applicant group of companies and value of Share/Property lying with the Bank :-

Particulars

Amt. (Rs. in crores)

By Cash/Deposits/Dividend

27.34

By sale of stocks

15.18

Paid to Bank of India

28.92

Total

 

71.44

It may be mentioned that out of the figures indicated above, even as recently as during the period ranging between 11-9-2004 and 4-11-2004, securities worth Rs. 15,18,02,166.05 (Rupees Fifteen Crores Eighteen Lacs Two Thousand One Hundred and Sixty Six and paise Five), held by the Ketan Parekh group with Madhavpura Mercantile Co-operative Bank Limited were liquidated towards discharging dues towards the said bank by the Ketan Parekh group.

7. It is also submitted that Shri Ketan V. Parekh has always co-operated with the Banks even admist his crisis. In spite of all the accounts frozen by various agencies and a bank on Shri Ketan V. Parekh and on his various group of companies from carrying out activities in the capital markets, the aforesaid amounts paid reflects clear intention on the part of Shri Ketan V. Parekh and his group of companies towards liquidating dues of bankers, financial institutions, and creditors. Admist such a situation it would be contrary to public interest if efforts of the Ketan Parekh group of companies to liquidate bank’s dues are jeopardised in any manner.

10. Admist these fact finding investigations, to impose another investigation would have the effect of crippling the functioning of Ketan Parekh Group of Companies and would adversely affect their capacities to liquidate dues of creditors which would be contrary to public interest.”

27.       Learned counsel for the respondent has also relied upon the balance sheet of the various companies which inter alia undoubtedly indicates conduct of some business though by way of liquidation of the various assets of the company. However the learned counsel for the appellant has contended that liquidating the assets and/or conducting the business of the company by calling meetings of the company cannot be deemed to be conducting the business of the company. He has relied upon the judgment of the Apex Court in the case of Bengal & Assam Investors Ltd. v. CIT AIR 1966 SC 1514 particularly para 13 of the said judgment. The said para 13 of the said judgment reads as under :

“13. Mr. Desai laid a great deal of stress on the argument that the very fact that a company is incorporated to carry on investment shows that the company is carrying on business. We are unable to agree with this contention. Bhagwati, J. observed in Lakshminarayan Ram Gopal Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 that ‘when a com-pany is incorporated it may not necessarily come into existence for the purpose of carrying on a business’. He further observed that ‘the objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business.’” (p. 1518)

28.       While considering the aforesaid contention the Apex Court has held that there is difference between the incorporation of a company and conduct of the business of the company. In this case the company was only incorporated on the paper but no business of any nature was conducted by the company. The said judgment has no application in the facts of the present case where the business of the company insofar as statutory requirements are concerned of calling meetings, filing returns, preparing the balance sheet is running. It may be that actual trading in the stock markets or stock exchanges has come to a halt by suspension of the trading licence by the SEBI or the business has been substantially crippled by virtue of freezer of various bank accounts. I am of the opinion that this cannot be treated as business of the company ‘is not carried on’ and/or the same ‘is closed down’ for reasons beyond the control of the appellant, i.e., by virtue of the passing of the orders of the various authorities such as SEBI, CBI and other Central Government authorities. The business of the company is conducted even today even though at a very low level, it cannot be said that the business of the company has ceased to be in operation. The word ‘is being conducted’ under section 237(b)(i) even if it is so interpreted as contended by the learned counsel for the appellant it should be and must mean that the business of the company has to come to a total stop and no activities of the company are carried on. In my opinion such situation arises only when the company is wound up either by voluntary winding up or compulsory winding up as provided under the Companies Act. In the aforesaid circumstances even on the facts of the present case I am of the opinion that the business of the company is being carried on and therefore the provisions of section 237(b)(i) squarely apply to the case which would mean that the order passed by the Company Law Board is legal and valid and on this ground does not require any interference by this Court.

29.       This takes me to the second question of law framed by the learned counsel for the appellant that whether in the present case the Central Government has able to produce necessary material on evidence to establish that the ground exist for ordering such an investigation under section 237(b)(i). On the facts of the present case it is not in dispute that there has been a stock market collapse in the year 2001 and the appellants herein have indulged in large number of share dealings and trading. It is also not in dispute before me that the Madhavpura Co-operative Bank and Global Trust Bank has collapsed in view of the stock market scam. However appellants have denied their involvement in the scam. They have on the contrary contended that they are the victims of the collapse of the share market and not the beneficiaries. The respondents therein have produced before the Company Law Board in support of the application for investigation under section 237(b)(i) a report of the Joint Parliamentary Committee investigating said scam. The respondents have also produced the report and/or order passed by the SEBI against the appellants and Ketan Parekh alleged moving spirit behind the 14 companies. The Central Government has also in support of the application relied upon the reports which are filed by the inspectors in the course of carrying out investigation under section 209(A). The Central Government has also relied upon large number of breaches of the provisions of the Companies Act by the various companies in support of investigation. In my view not only there is a material in the form of aforesaid reports, documents and orders but a more than prima facie case has been made out for investigation of the appellant company. The Joint Parliamentary Committee has in fact directed the investigation against these entities by the SEBI or the Central Government. However the learned counsel for the appellant canvassed that there is no material which can be used by the respondent in respect of the investigation because each of the authorities are entitled to conduct its own investigation on the basis of aforesaid report and, therefore, the same cannot be utilised for the purpose of ordering investigation by the Central Government under section 237(b)(i). I am not inclined to accept the contention of the learned counsel for the appellant for the simple reason that it is possible that the material can be common or identical in the course of various investigations embarked upon by the various authorities. It does not mean that the respondents are not entitled to use the material which have been unearthed or found in the course of the investigation by any other authority. The material in the present case is glaring. There was a serious collapse of the stock exchange in 2001. The SEBI on investigation has found that all the entities have entered into typical type of transactions in concert with each other so as to ultimately result in collapse of the stock market. Consequently large amount of public fund has been eroded. Consequent upon the collapse of the Global Trust even UTI has been subjected to serious financial difficulties and was ultimately required to be bailed out by the Government. These are very serious circumstances and there is a plethora of material to indicate that 14 of the entities who are subject to investigation under the provisions of section 237(b)(i) have played some role the consequence of which has resulted as mentioned herein above. The learned counsel for the appellant further contends that there is no need for investigation when there is substantial material and therefore the power ought not to be exercised merely for the purpose of exercising under section 237(b)(i). The aforesaid contention is merely stated to be rejected as devoid of any merits. In my opinion the Central Government has not only sufficient material but also has a strong prima facie case for ordering investigation. It has been well settled by the various decisions of the Apex Court that the Court ought not to interfere at this stage of investigation by the authorities. The investigation is not a trial of an offence. It is merely a fact-finding venture. It is no doubt true that in the context of the companies it is a serious issue because it interferes with their rights to carry out free trading but it has been held that every right is coupled with reasonable restrictions and if the company has prima facie carried out fraudulent activities then obviously it cannot complain about investigations carried out by the Central Government in exercise of statutory powers conferred under section 237(b)(i).

30.       This leads me to the third question of law which has been raised by the learned counsel for the appellant.

31.       It has been inter alia contended that the power conferred under the provisions of section 237(b)(i) of the Act must be sparingly exercised and cannot be utilised in casual manner. It has been contended by the learned counsel for the appellant that in respect of the so called security scam of 2001 there are already investigations undertaken by the SEBI, CBI and even the Department of Company Affairs by ordering investigation under section 209(A). It has therefore been contended that on the same material and on the same allegations one more investigation ought not to be ordered by the Central Government nor the Company Law Board ought to grant a sanction to such an investigation. It is not contended that the said exercise is in futility and the same is carried on simultaneously by the various authorities with a view to only affect the business of the company and thus the same should not be permitted.

32.       Learned counsel for the appellant has taken me through the provisions of the SEBI Act and has contended that the purpose and scope of inquiry thereunder has been more extensive and the provisions are more harsh and effective and in view thereof the inquiry under section 237(b)(i) is meaningless and would achieve no purpose. It has been therefore contended that once there is an extensive inquiry undertaken by SEBI in exercise of powers conferred under the SEBI Act and that the SEBI is supposed to be an expert authority in stock exchange transactions. It is neither necessary nor permissible to conduct inquiry by the Department of Company Affairs by invoking powers under section 237(b)(i) of the Companies Act. It has been urged by the learned counsel for the appellant that the inquiry ordered and sanctioned by the CBI, is merely to harass the appellant company and is not meant for achieving any objective and therefore the court should strike down the Company Law Board order sanctioning the said inquiry. It has been further contended that the parallel CBI investigation is also already in progress. The Department of Company Affairs is also conducting an inspection under section 209(A) and that various prosecutions are already launched. In view thereof it has been contended that no such investigation should be permitted by the Central Government in exercise of power under section 237(b)(i). On the other hand the learned counsel for the respondent has urged that the investigation is a must looking at the magnitude and the proposition of fraud which has been alleged to have been committed by all the sixteen entities and according to the Central Government the moving spirit behind these companies is Mr. Ketan Parekh. The learned counsel for the respondent company has drawn my attention to a resolution passed by the Government of India, Department of Company Affairs being resolution dated 2-7-2003 and it has been contended that by the said resolution the Government of India has set up a Serious Fraud Investigation Office (SFIO) and it is required that the corporate frauds should be investigated by the said SFIO. It is also brought to my attention that under the said resolution the SFIO will be conferred with the power to investigate in the company because the investigation under section 237(b)(i) of the Companies Act is entrusted to the SFIO. The learned counsel for the respondent has further contended that there are authorities and authorities which require to investigate the various aspects of fraud committed by the companies like the appellant herein. It has been contended that the SEBI under the SEBI Act has a restrictive power to investigate i.e., in respect of security transactions but when it comes to transaction in respect of banks and other institutions which are not within the purview and/or jurisdiction of the SEBI and the same are required to be investigated by the Central Government through the appropriate authority and/or body. It has been contended that the inquiry under the different acts by the different authorities are in respect of their respective jurisdiction and spheres assigned to them under the various legislations and it cannot be stated in law that merely because the inquiry is in progress by one authority under one act it should automatically prevent the other authorities from conducting investigation under a separate statue.

33.       I have considered these rival submissions of the parties and I am of the opinion that the jurisdiction and the power of the various investigating authorities derived from the jurisdiction vested in them by the various legislations or statutes, the authority which is doing the inquiry and/or conducting the investigation is required to carry out investigation keeping in mind the legal provisions and legal limitations which are stipulated under the respective statute. Undoubtedly it can be that there may be an overlapping investigation but in my opinion such an eventuality cannot prevent any investigating authority from carrying out investigation in respect of their jurisdiction conferred on them under the statute. I am also of the further opinion that the investigation in respect of the corporate fraud can be initiated and considered by the Central Government under section 237(b)(i) of the Companies Act. I have not been able to come across any provisions under the SEBI Act in which any corporate fraud can be investigated by the SEBI. Undoubtedly it can be investigated under normal criminal law by the CBI. I am further of the opinion that merely because the material on the basis of which investigation is being undertaken is identical to the material which is subject-matter of investigation by the other authority it cannot be stated that both the authorities cannot simultaneously investigate pursuant to power conferred on them under their respective statutes. I am of the opinion that every authority is entitled to investigate even may be in respect of the same material as well as from the angle and facet in which they have been asked to carry out investigation. It is possible that the SEBI may be investigating the same material on the ground of breach of the various provisions of the SEBI Act and other security related legislations whereas the Central Government, Department of Company Affairs can consider and/or investigate the fraud and/or breach of various provisions of law in the light and context of the provisions of the Companies Act may be in respect of the same material. However, I am of the opinion that the contentions advanced by the learned counsel for the appellant cannot be accepted particularly in view of the fact that every authority has been conferred various powers in their respective legislation. A similar issue aroused before the English Court under the identical provisions of investigation under the Companies Law and the Court of Appeal in the case of London United Investments Plc, In re 1992 BCLC 285 equivalent to 1971 All Eng. LR 849 it is held as under :

“The power of the Secretary of State to appoint inspectors to investigate the affairs of a company and to report is an important regulatory mechanism for ensuring probity in the management of companies affairs. That of course is in the public interest. Since the Secretary of State’s powers under section 432(2) are exercisable where there are circumstances suggesting fraud, it is likely that in many cases where inspectors are appointed an investigation by the police or the Serious Fraud Office could also be appropriate. But the code under the 1985 Act is a separate code even though it may overlap the field of criminal investigation.”

34.       Apart from the aforesaid position in law : I am also of the further opinion that the Central Government having constituted the Serious Fraud Investigation Office and if it desires to carry out investigation in respect of the affairs of the aforesaid 14 appellant companies without any mala fide intention then it is not possible to stall the investigation merely on the basis of contentions and arguments advanced by the learned counsel for the appellant that all the authorities cannot be permitted to carry the investigation simultaneously in respect of the very same material. I therefore, reject the contention on behalf of the appellant in respect of question No. 3 which have been formulated. I am of the opinion that the answer to this question is that every authority is entitled to carry out investigation may be in respect of the same material insofar as they do not exceed the jurisdiction conferred on them in their respective statute. I therefore answer this question of law accordingly.

35.       The learned counsel for the respondent has drawn my attention to the judgment of the Apex Court in the case of DDA v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622 and has brought to my attention that the Supreme Court has taken note of the fact that various frauds are committed by the companies defrauding the public at large by taking shelter of corporate entities. It has been contended by the learned counsel for the respondent by relying upon the aforesaid judgment that it is necessary to lift or pierce the corporate veils and to see who are the real men behind the veil who are involved in defrauding others under the guise of corporate entity. It has been contended by the learned counsel for the respondent that such an exercise can be undertaken by the SFIO while carrying out investigation under section 237(b)(i) of the Companies Act and the court must not stole such an investigation. It has been contended by the learned counsel for the appellant that there are serious allegations in the present case and thus this Court must refrain from exercising jurisdiction and interfering with the investigation at this stage. I find considerable substance in the contention advanced by the learned counsel for the respondent. It is well settled that the court must be reluctant in interfering in the matter where the same is still at investigating stage. The Court cannot and should not usurp the jurisdiction vested in the Central Government to form an opinion and come to a conclusion as to whether the investigation is necessary or not limited jurisdiction or power is conferred on the court is to ascertain whether there is a material in support of the opinion arrived at by the Central Government and/or the said exercise is not a mala fide exercise of power. In the facts of the present case I do not consider that the exercise of the Central Government is mala fide. There is a plethora of material and in view therein I do not desire to interfere with the investigation ordered by the Central Government in exercise of power conferred under section 237(b)(i) of the Act.

36.       In view thereof I find that there is no substance in the present appeals. I accordingly dismiss all the 14 appeals with cost quantified at Rs. 10,000 each per appeal.

At the request of the learned counsel for the appellant the statement of the learned counsel for the respondent to maintain status quo is to continue till 29-4-2005.

In view of the dismissal of the appeals itself nothing remains in the Company Applications (L) No. 1030 of 2004 to 1043 of 2004 for ad interim orders and the same is dismissed accordingly with no order as to costs.

 

[1983] 53 Comp. Cas. 485 (Ker)

High Court OF Kerala

P. Sreenivasan

v.

Yoosuf Sagar Abdulla & Sons (P.) Ltd.

M. P. Menon j.

COMPANY PETITION NO. 22 OF 1978.

January 29, 1980

M. Ramanatha Pillai for the Petitioner.

M. Ramachandran, U.K. Ramakrishnan and P. Vijayamma for the Respondent.

JUDGMENT

M.P. Menon J.—The petitioner, a director and also a manager of Yoosuf Sagar Abdulla & Sons (P.) Ltd., seeks a declaration under s. 237 of the Companies Act, 1956, that the affairs of the company ought to be investigated by the inspector appointed by the Central Govt. Necessary directions to the Central Govt. are also sought for.

The facts stated and the allegations made in the petition briefly are these. A foreign national, Yoosuf Sagar Abdulla, was doing import and export business at Calicut. On the eve of his return to Kuwait in 1954, he formed the company for taking over that business. Yoosuf Sagar Abdullah is no more, but 51 shares still continue to be in his name, apparently for want of sanction from the competent authority for transferring them to others. Only 161 shares have been issued, and the other shares are now being held by Yakkob Yoosuf Sagar (son of the founder through his Indian wife), Ahammed Yoosuf Sagar (son through a Kuwait wife), K.V. Kunhammed, Mrs. Fathima, Damodaran Nambiar and the petitioner (2 shares). Ahammed Yoosuf is a Kuwaiti citizen and a non-resident. He was appointed as managing director in February, 1973. During the same month, K.V. Kunhammed (2 shares) was appointed as assistant director and he was also authorised to manage the affairs of the company and to carry out the duties and exercise the powers of the managing director. No permission was obtained from the Reserve Bank to appoint the foreign national (Ahammed Yoosuf) as managing director. K.V. Kunhammed, who is now in virtual management, is managing partner of M/s. Haji P.I, Ahammed Koya 8c Sons, a firm carrying on the same business ; and it is this firm that is now actually doing the business of the company. The premises of the firm was raided by officers of the Enforcement Directorate, in July, 1976, and they found out "that Kunhammed had got some unaccounted money in the import, of date fruits made on the basis of the licence issued to the company”. The non-residential interest in the company is more than 40 per cent, and no sanction from the Reserve Bank has been obtained to continue this position. Kunhammed has "lately" been keeping back the minutes book and other documents without permitting the petitioner to have access to them. Consideration of the profit and loss account and the balance-sheet for the year ending September 15, 1976, was unusually postponed to July, 1977, to cover up what was detected in the 1975 raid. The business is being carried on in a manner oppressive to members including the petitioner, and he is also not being furnished with the information he is entitled to get, as director.

K.V. Kunhammed has filed a detailed counter-affidavit on behalf of the company denying all the petitioner's allegations and suggesting that he (the petitioner), who was actively participating in the management till 1978, has chosen to make them only because his remuneration was reduced and some of his powers were curbed during 1977 and 1978. The petitioner has got himself examined as P.W. 1 and Exs. A-1 to A-3 are marked on his side. The respondent has produced only some documents and they are Exs. B-1 to B-6.

Counsel for the petitioner raised the following points at the time of hearing

"(i)    the appointment of Ahammed Yoosuf as managing director in February, 1973, without the sanction of the Reserve Bank was opposed to the provisions of the Foreign Exchange Regulation Act;

(ii)    non-resident equity participation exceeding 40 per cent, is illegal, in view of section 29 of the Foreign Exchange Regulation Act, 1973 ;

(iii)   the raid of 1976 and the consequent disclosures reveal a state of affairs which requires investigation ; and

        (iv)   because of Kunhammed's interest in the rival firm, the company's business has been going down."

The above, according to counsel, are circumstances calling for an order under s. 237(a)(ii) of the Companies Act, 1956. Section 237 reads :

"Investigation of. company's affairs in other cases.—Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to in vestigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)         the company, by special resolution ; or

(ii)        the Court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government ; and

        (b)    may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members ; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company."

The section conceives of three situations where the Central Govt. can appoint inspectors for investigation. The first is when the company itself declares that such an investigation is necessary. The second is when the court makes an order. And the third is when the Central Govt. forms an opinion that the circumstances enumerated in cl. (b) exist. The first is easy to understand: When the company itself wants an investigation, the Central Govt. need not stop to enquire why. The third can also be understood because when suo motu action is proposed to be taken by the Government, it shall not act arbitrarily, but only consistent with guidelines laid down. But what about the second situation, where the court has to make an order ? Mr. Ramanatha Pillai for the petitioner suggests that the power and the discretion of the court are uncontrolled ; it can direct an investigation whenever it suspects that all is not well with the company. Whether the apprehensions of the court are true or not is a matter to be found by the investigating inspectors, and the court is not to insist on evidence. It appears to me that this is too broad a statement. Investigation of the company's affairs by the Department of Trade in England has always been understood as a statutory exception to the rule in Foss v. Harbottle ([1843] 2 Hare 461) that the internal affairs of a company is a matter for the majority, and a dissatisfied minority cannot seek outside interference. The Companies Act provides for the protection of minorities in three ways (i) by giving them a right to complain against oppression, (ii) by permitting them to act on behalf of the company when it is wound up, as in the case of misfeasance proceedings, and (iii) by enabling them to obtain remedies indirectly through investigation. The court's discretion under s. 237 is, therefore, to be exercised only when it is satisfied that the minority has made out at least a prima facie case that the rule in Foss v. Harbottle [1843] 2 Hare 461, requires relaxation in the interests of the company. The Calcutta High Court has held in In re Patrakola Tea Co. Ltd., AIR 1967 Cal 406, that before the company court orders an investigation under s. 237(a)(ii), the petitioner should make out a strong case in relation to one or other of the matters referred to in cl.(b). In other words, the circumstances enumerated in cl. (b) are material for the exercise of the court's discretion also. The discretion is certainly a judicial one and is to be exercised only when a minority acts in the interests of the company as a whole.

Turning to the first point raised by the petitioner, the answer furnished by the respondent is that in February, 1973, when Ahammed Yoosuf was appointed managing director, there was no prohibition against a foreign national being so appointed. The Foreign Exchange Regulation Act, 1973, was not then in force; and the predecessor enactment of 1947 contained no such restrictions. Mr. Ramanatha Pillai is unable to dispute this position ; and it is also seen from Ex. A-1 that the proposal to appoint Ahammed Yoosuf as managing director was made by the petitioner himself at the 71st meeting of the Board held on February 14, 1973. He cannot certainly complain in 1978 about a lawful decision taken by the Board in 1973 at his own instance, and then seek an investigation on that ground.

As regards non-resident equity participation, what s. 29 of the FER Act, 1973, lays down is that a company with more than 40 per cent. "nonresident interest" shall not carry on in India, or establish in India a branch, office or other place of business for trading, except with the permission of the Reserve Bank. Sub-section (2) provides that companies of this nature which were there at the commencement of the Act should apply to the Reserve Bank for permission to continue, within six months of such commencement. When an application is made, the Reserve Bank will hold an enquiry and pass orders allowing it or rejecting it. If the application is rejected, the company shall discontinue business from the expiry of 90 clays after receipt of the order. When no application is made within the time allowed, a like order can then also be issued by the Reserve Bunk. In the case of a company like the present, therefore, a violation of section 29(1) can be established only if it is shown that no application at all has been made to the Reserve Bank, or that the application made has been rejected. But the petitioner admits in evidence (as P. W. 1) that in May, 1974, he himself had discussed with a firm of lawyers in Madras the question of approaching the Reserve Bank for permission under the FER Act (46/73). He adds :

"It is true that we had taken some steps to get appropriate permission from the Reserve Bank under the Foreign Exchange Regulation Act. I do not know whether the Reserve Bank has denied or given permission."

Thus, an application for permission has admittedly been made and there is nothing to show that it has been rejected, and that the company is continuing its activities in spite of such rejection. It is difficult to accept the petitioner's contention that the burden of showing that permission has already been obtained is on the respondent ; the respondent has no such case. Even the petitioner does not state that the application has been rejected. The respondent's case in the counter-affidavit is that the matter is still pending with the Reserve Bank ; and they cannot be called upon to produce an order which has not been passed at all. The FER Act, 1973, also provides the machinery for its enforcement and it is idle to think that it will be set in motion only under orders of this court under s. 237. of the Companies Act. In this view, it is also unnecessary to consider the respondent's contention that the 51 shares of the deceased founder could not be taken note of for arriving at the 40% limit.

The third circumstance relates to the 1976 raid and its consequences. According to the petitioner, the officers of the Enforcement Directorate raided the business premises of Kunhammed Koya's firm as also the office of the respondent-company in July, 1976. A typed sheet of paper evidencing transactions to the extent of Rs. 6,75,000 was seized from Koya's office and this indicated that Koya had concealed, as unaccounted, the company's income to that extent. The amount was later included in Ex. A-3, balance-sheet for the year ending September 15, 1976 ; but the company had never received this amount. It was forced to pay income-tax for the said amount and to borrow funds for the purpose. Koya also took his commission for the profit. The petitioner signed Ex. A-3 as a director only because he was persuaded to do so by Koya and the auditors. But in cross-examination (as P.W. 1), the petitioner admits that his residence was also raided and some papers seized, including a file of the year 1972. The petitioner himself had brought down this paper from Kuwait. Copies of letters he had sent to Yakkob Yoosuf Sagar were also taken away. An exact copy of the typed sheet seized from Koya's office was found at the petitioner's residence also. The sheet disclosed disbursements to the tune of Rs. 6.75 lakhs, including Rs. 52,000 to Koya, Fathima, her daughter and the petitioner himself. He had not actually received any portion of the aforesaid amount, though he had given a statement to the Enforcement Officers that he had received Rs. 2,000. It was the petitioner himself who had typed out the sheet, though under instructions from Koya. Both Koya and himself are parties to the adjudication proceedings initiated in pursuance of the raid and the proceedings are still pending.

If anything, the above discloses that the raid was conducted at a time when the petitioner and Koya were on good terms, and was directed against something which was not the making of Koya alone. One of the files seized admittedly belonged to a period before Koya was made a director. It was the petitioner who had brought it down from Kuwait. The contents of the typed sheet were equally against Koya and the petitioner. Even on his own admission, the petitioner was actively participating in the management of the company's affairs from 1973 to 1978. He was operating the bank account from 1975 to 1978. He was attending office every day and was getting a decent salary and bonus. He was carrying on correspondence on behalf of the company. Exhibit A-3, balance-sheet, which accounted for the income said to have been concealed, was signed by him long after the raid. I refrain from saying anything more because the adjudication proceedings are still pending, but it will certainly be unwise to bring about a parallel investigation by the inspectors of the company department into a matter which has already been enquired into by officers of the Enforcement Directorate, and is now at the stage of adjudication. The investigation under s. 237 is into the affairs of a company, and not into a specific illegal act which a company or even an individual could commit.

Detriment to the company by reason of Koya's interest in the rival firm also remains a bare allegation ; if anything, the evidence is opposed to it. The company's business is to import dates, and to export wood scantlings, coir products, spices and the like. P.W. 1 does not refer to the diversion by Koya of even a single item of import or export. Before 1973, the company had very little export business ; the business was practically confined to importing dates of the annual value of Rs. 5 lakhs. This business continued in the same fashion till 1977, when the system of "open general licence" was introduced, and it became less attractive. Obviously, therefore, the import business had not suffered because of Koya's induction. As for exports, this line of business had picked up only from 1973, and the maximum amount of business was done in 1974. In 1975 and 1976, the company got some expert orders, and these were executed by using the licence of Koya's firm ; the company itself had no export licence. On the export side also, therefore, the company had not suffered any difficulty because of Koya. The petitioner knew, when Koya was brought in as director with his active participation in February, 1973, that the "rival firm" was doing the same business on a large scale, at least from 1958.

The respondent's case that the petitioner's present approach to this court is the result of his annoyance at the board resolutions reducing his remuneration and cancelling his power to operate bank accounts, need not be minutely examined in view of what has been stated above. It must, however, be noticed that the petitioner was a party to Exs.A-1 and A-2, resolutions of 1973, whereunder Ahammed Yoosuff was made managing director and Koya, the director-in-charge. On his own admission, the officers of the Enforcement Directorate had reason to suspect his complicity in the circumstances that led to the 1976 raid. The business of the company had also not gone down because of Koya's rival interests ; and at any rate, the petitioner was a full-time salaried director during the period in question. Under these circumstances, it is difficult to assume that the accusations now made in regard to these matters are all based on a bona fide apprehension about the affairs of the company, and not influenced by an anxiety to grind one's own axe. No circumstance have been brought to light to suggest that the business of the company is being carried on for fraudulent or unlawful purposes or in a manner oppressive of the minority, or that those in management (and the. petitioner is admittedly one among them) have misconducted themselves towards the company or its members.

I, therefore, dismiss the company petition, leaving the parties to bear their own costs.

[1981] 51 COMP. CAS. 634 (DELHI)

HIGH COURT OF DELHI

Ashoka Marketing Ltd.

v.

Union of India

T.V.R. TATACHARI, C.J.

AND S. RANGANATHAN, J.

Civil Writ Petition No. 918 of 1974

APRIL 26, 1978

A.K. Sen , Mrs. Leila Seth and B. Mohan for the Petitioner.

K.M. Kataria for the Respondent.

JUDGMENT

S. Ranganathan, J. —This is a writ petition filed by Ashoka Marketing Ltd. (hereinafter referred to as "the company" or AML) for the issue of a writ of certiorari to quash the orders passed on December 31, 1973, June 26, 1974, and July 2, 1974, by the Company Law Board (hereinafter referred to as "the Board") and an order dated July 2, 1974, passed by the Government. The Union of India and the Secretary, Ministry of Law, Justice and Company affairs, have also been made respondents.

The order dated December31, 1973, passed by the Board is an order under s. 237(b) of the Companies Act, 1956, appointing a firm of chartered accountants as inspector to carry out an investigation into the affairs of the company during the period from March 1, 1966, to December 31, 1973, and "to report thereon to the Company Law Board pointing out, inter alia, all irregularities and contraventions of the provisions of the Companies Act, 1956, and of any other law and the person or persons responsible for such irregularities or contraventions" on or before June 30, 1974. The reason why the Board considered this action necessary appears from the first paragraph of the order which contains the preamble:

"Whereas in the opinion of the Company Law Board there are circumstances suggesting that the persons concerned in the management of the affairs of the company have in connection therewith been guilty of fraud, misfeasance and other misconduct towards the company and its members".

Which is nothing more than a repetition of the language of s. 237(b)(ii) as to the circumstance warranting the appointment of an inspector under that provision. The grievance of the company is that there were no such circumstances in existence on the basis of which the Board could have formed such an opinion or ordered such an appointment. In the writ petition, the company has sought to substantiate its plea on the basis of the following allegations.

The company had been incorporated in 1948 and was carrying on business as traders, exporters, selling agents, dealers in stocks, shares and investments and for some time in the manufacture and sale of plywood. It had also recently commenced a business in the manufacture and sale of electronic goods. It had built up a very efficient and effective organisation and had been carrying on its business and activities scrupulously in accordance with law. It has a respectable board of directors. It maintained regular books of account and records; its turnover was increasing from year to year; its profits were reasonable and it was also declaring reasonable dividends. While so, on April 11, 1963, the Govt. of India ordered an investigation into its affairs under ss. 237(b) and 249(1) of the Companies Act, 1956, but this order was quashed by the High Court of Calcutta by its judgment dated March 7, 1969. In the meantime, the Registrar of Companies had been making several enquiries and, to the understanding of the company, he was satisfied with the information and explanation given to him. In September, 1972, the Board, acting under s. 209(4)(b)(ii) of the Companies Act had appointed one Sri Sooraj Kapoor, to inspect the company's books. He had also called for explanation, information and books from the company. The company's affidavit specifically avers in para. 7:

"So far as your petitioner is aware there has been no complaint by the inspector of any fraud and/or misfeasance and/or misconduct and/or irregularity and contravention in the business or affairs of the company, Nor had, to the knowledge of the company, any shareholder or creditor of the company made any such allegation.

In these circumstances, the order dated 31-12-1973 was without any basis or justification".

It is pointed out that the order does not set out any circumstance or material leading to the formation of the opinion expressed therein. Therefore, soon after the order was received on 7-1-1974, the company applied to the board for a review of the order setting out all the above facts, pointing out that the provisions of s. 237 were drastic and should not be commenced "unless there are satisfactory grounds supported by relevant and cogent materials and evidence" and without such materials an inspector should not be given "arbitrary and untramelled powers to make a fishing inquiry and to investigate into any affair of your petitioner which is not authorised under the law" during the period from March 1, 1966, till the date of the order. The company offered to furnish any information that may be needed in respect of any particular transactions and prayed that the order for a general investigation be cancelled. This petition was rejected by the Government and the Company Law Board and hence this writ petition by which the petitioner requests this court to quash the order u/s. 237(b) dated December 31, 1973, the letter dated June 26, 1974, by which the Company Law Board extended the period for the inspector's report till December 31, 1974, and the orders dated February 2, 1974, by which the Board and the Company Affairs Dept. of the Govt. of India declined to review the order dated December 31, 1973.

Perhaps all that a company could do at this stage was to deny that there were any circumstances justifying action u/s. 237 in its case, for the Board does not take the company into confidence or indicate to it the basis for the action taken by it. It is, therefore, of the greatest importance that when a company approaches the court with a writ petition, making out a prima face case that the action u/s. 237 was not justified, the Board should place before the court all the circumstances available to it on the record on which the opinion has been formed that the persons in management were guilty of fraud, misfeasance or misconduct towards the company and its members. Unfortunately, in this case, the stand of the Board has been put forward piecemeal in its original counter-affidavit and two supplemental counter-affidavits filed by it, one before the hearing of the case started and the other at a considerably advanced stage of the hearing. The company has also filed more than one rejoinder. In order to understand the full facts, we have to consider the following seven affidavits, which we shall, for convenient reference, designate as A-1 to A-7:

A-1.

Reply affidavit of respondent

dt.

31-7-75

A-2.

Rejoinder of petitioner

"

25-8-75

A-3.

Further rejoinder

"

28-10-76

A-4.

Supplemental reply of respondent

"

7-12-76

A-5.

Further rejoinder of petitioner

"

22-12-76

A-6.

Further reply of respondent

"

13-1-78

A-7.

Final reply of petitioner

"

24-1-78

The case against the company was first spelt out in A-1. In para. 10, it was stated that the order in the instant case had been passed on the basis of seven transactions of the company which had come to the notice of the Board:

        1. Surrender of the sole selling agency of Jaipur Udyog Ltd.

        2. Purchase and sale of the undertaking of Albion Plywood Ltd.

        3. Sale of certain shares at a loss.

        4. Investment in low yielding debentures.

        5. Sale of jeeps at a loss.

        6. Unsecured loan of large amounts to closely connected persons and

        7. Write off of three loans.

As a general preface to these charges it was stated that the company was one of twelve companies that belong to a group known as the Sahu Jain group and it was a common tendency of common block shareholders of such group concerns to benefit each other even if at the cost of the other shareholders, We have to examine by taking up each of these "charges" seriatim and analysing the averments of the parties, whether circumstances have been made out to sustain the action taken by the Board.

General charge

According to A-1, the petitioner belongs to a group of companies known as "Sahu Jain group". It is stated that, according to the report of the Monopolies Enquiry Commission, 1965, a group of 26 companies has been said to belong to this business house and that, according to the report of the Industrial Licensing Policy Enquiry Committee, 1969, there were 29 such concerns. The respondent has referred to 12 concerns which are mentioned in both the reports and alleged that they belong to the Sahu Jain group. These concerns are, besides the petitioner (AML), Albion Plywood Ltd. (APL), Bharat Oversees Pvt. Ltd. (BOL), Hindustan Vehicles Ltd. (HVL), Jaipur Udyog Ltd. (JUL) Mahespur Holdings Ltd. (MHL), Parshya Properties Ltd. (PPL), Rohtas Industries Ltd. (RIL), Shree Kesaria Investments Ltd. (KIL), Shree Rishab Investments Ltd. (SRIL), New Central Jute Mills Co. Ltd. (NCJ) and Bharat Nidhi Ltd. (BNL). After setting out the names of these concerns, A-1 alleges "a common tendency of such shareholders/directors in these concerns to benefit each other even if at the cost of the other shareholders of the concern".

In reply to the above, the petitioner-company has stoutly repudiated the existence of any such group as alleged. It is stated that though a notice was given by the Dept. of Compay Affairs in 1974, calling upon the petitioner to show cause why action under s. 48(2) of the Monopolies and Restrictive Trade Practices Act, 1969, should not be taken for default in compliance with the provisions of s. 26 of the said Act, the proceedings were dropped by a decision communicated on 26th April, 1976. In other words, the same Dept. of Company Affairs had accepted the position that no case had been made out for treating these concerns as inter-connected.

Apart from the fact that the respondent has not answered the point made in the reply or given details to show that AML is one of the concerns belonging to a closely knit group along with the 11 others we are of opinion that this general allegation made in A-1 is not helpful in determining the issues in the present case. Merely because certain companies are said to form a group and there are transactions between these companies, it cannot be presumed that the transactions are mala fide or that they were entered into with a view to defraud or otherwise act in a manner detrimental to some or all of the concerns. No doubt, in considering the nature of a particular transactions, or the purpose and motive behind it, the relationship between the parties may be a relevant consideration and while examining the seven specific charges made against the company, we shall keep this aspect also in mind to see whether there has been any attempt to act to the detriment of AML with a view to benefit any of the other concerns mentioned. But, all that we would like to observe here is, that the approach indicated in A-l, of starting with a presumption that there must be necessarily something wrong because the transactions are between companies of the same group, is not correct. The general charge formulated in A-l, therefore, cannot, by itself, be a ground justifying the action under s. 237, in the present case, unless it is substantiated with reference to one or more of the other seven charges.

Charge No. 3: Sale of shares at a loss.

It will be convenient to take up the first two charges last. Taking up the third charge first, the complaint against the company is that between September, 1968, and February, 1970, it sold at a huge loss some of the shares held by it in NCJ, APL, HVL, MHL and KIL. The sale was at an unnecessarily low price (lower than the market price) and, in the case of two concerns, was of the controlling interest therein. So, it is alleged this transaction was "prima facie" against the interest of the company.

The factual position that emerges from the various affidavits in regard to these sales is as follows:

(a)        In the case of NCJ, the shares were sold at rates varying from Rs. 4.40 to Rs. 4.50 per share as against the face value of Rs. 10. Though according to the respondents, NCJ had large reserves and had also earned good profits, it is admitted that the shares are quoted on the stock exchange and that the market quotations for the shares at the relevant time ranged between Rs. 4.56 to Rs. 4.62 per share. The claim of the petitioner-company is that the shares were sold at the rates quoted at the Calcutta Stock Exchange and this statement has not been denied by the respondent. Further, it is pointed out that even on the basis that they had been sold at rates slightly less than the market value, the transaction was still beneficial to the company inasmuch as the value of the shares fell from Rs. 4.50 this year to Rs. 3.75 in the subsequent year and, if the company had not sold the shares when it did, the loss would have been even greater.

(b)        In the case of APL and HVL, it is common ground that these concerns had been incurring huge losses and that their shares were worth less. Forced to admit this position in A-4, the respondent would still find fault with the petitioner for having sold thirty-five thousand shares of HVL "for a nominal amount of Rs. 3,500" 'alleging vaguely that this "conveys no sense except of getting the set-off against profits for the purpose of taxation".

(c)        In regard to the MHL and KIL, the shares are not quoted on the stock exchange. The allegations of the respondent that these were transfers of controlling interest is not correct. The number of shares sold were 23,000 out of 50,000, in the case of KIL, and 16,000 out of 35,000, in the case of MHL. There is no allegation that the petitioner had earlier transferred shares in these companies to the same person or associated person so as to give them controlling interest. Regarding the price, the complaint is that the shares were sold at Rs. 2.55 and Rs. 2.80, respectively, although the break-up value of the shares would have worked out to Rs. 15.71 and Rs. 11.58, respectively.

A study of the above facts would show that the charge that the petitioner had sold the shares at less than the market price is not borne out by the material on record. This is very clear in the case of the first three companies. In the case of the last two, no doubt, the sale price is less than the alleged break-up value. But in the case of a private limited company, the break-up value does not always or necessarily furnish a correct clue as to its market value at any particular point of time: [CWT v. Mahadeo Jalan [1972] 86 ITR 621 (SC)]. There is no other material to indicate that the actual sale price did not represent the value which those shares could realise in the open market on the respective dates of sale though the companies whose shares were sold are said to belong to the Sahu Jain Group, that fact is of no significance as the sale does not benefit those concerns. Nor is there any allegation that these shares have been transferred to other companies of the same group at a favourable price to benefit them at the cost of the petitioner-company. In regard to this charge, therefore, no circumstances have been shown to exist which could lead to the formation of an opinion that there has been some fraud, misfeasance or misconduct on the part of the management of the petitioner-company.

Charge No. 4: Investment in low yielding debentures.

The purport of the charge against the company under this head is not clear. The allegation in A-1 is in the following terms:

"In June, 1970, the company purchased from Sri P. Jain, Smt. Indu Jain, Smt. Shushila Jain, the Bhartiya Gyanpit and the Universal Trust certain debentures worth Rs. 10 lakhs yielding 8% per annum, whereas the loans of the company yielded 11% per annum".

The above allegation can mean one of two things. The first is that, whereas certain other investments made by the company by way of loans yielded an interest rate of 11% per annum, the debentures in question yielded only 8%. But if this were the charge against the company, that would not be sufficient to attract action under s.237. All the funds held by the company cannot be invested so as to yield the same return. Merely because on some investments by way of loans, the petitioner has been able to get 11% interest, the inference does not follow that an investment in debentuces yielding 8% must be the result of some fraud, misfeasance or misconduct on the part of the directors. There is no material to suggest that all the investments of the company were yielding 11% interest and despite similar investments being available readily, the petitioner-company purchased these "low rate" debentures to oblige the vendors. It is also not alleged that funds yielding higher return were withdrawn for making these purchases to the detriment of the company.

The other possible interpretation of the allegation is that, whereas the company had received advances and deposits and paid interest thereon at 11%, it has invested the funds drawn from those advances and deposits in debentures which yielded a smaller return. This contention is met by A-2 which points out the fallacy in the above line of reasoning. There is no material to correlate the funds invested by the company in the above debentures with the loans taken by it on payment of interest at 11%. The resources of the company were not limited only to such loans. The company had received advances from its customers on which it paid no interest whatever. It has security deposits on which it was paying interest at only 6 to 6 1/2%. The surplus funds of the company had to be invested and there is no material to suggest that the investment in these debentures was in any way motivated. In fact, the charge does not even allege that the purchases were made to benefit the vendors who, it would appear, may be connected with the directors of the petitioner-company. In these circumstances, therefore, no circumstances have been brought to light for drawing an inference of fraud, misfeasance or misconduct.

For the first time, in the reply affidavit, A-4, the respondent, took a fresh point that the debentures purchased by the company were those of PPL which, in the year ended January 31, 1970, had incurred a net loss of Rs. 596 lakhs as against its paid up capital of Rs. 5 lakhs. It will be seen that this is a totally new charge. The original allegation against the company was only for having made an investment yielding a smaller return and did not even mention the name of the company whose debentures were purchased. However, A-4 attaches importance to the name and seems to doubt the solvency of the company the debentures of which have been acquired, perhaps also because it is one of the concerns of the group according to the respondent. But this criticism has not been made out by reference to the balance-sheet position of the said company. As its name indicates it appears to be a property holding company. There is no information regarding its assets and liabilities. In the case of a property company it is not unusual that there are only losses in working in the initial stages of its development before the income from the properties constructed or held by it starts flowing in. Moreover, debentures are secured loans and there is not an iota of evidence placed to show that these debentures were worthless. The fact that PPL is a company of the group will not, per se, render the debentures worthless or the purchase motivated. A-4 has only attempted to voice a suspicion of bona fides but backed it by no material on record. Here also the respondent has failed to make out the existence of circumstances to show that in purchasing these debentures, the directors of the company have been guilty of any fraud, misfeasance or misconduct towards the company or its members. Charge No.5: Purchase and sale of jeeps.

The allegation is that in November, 1966 and January, 1967, the company purchased twelve jeeps. Seven of these were sold in March, 1967, and two more in October, 1967. The company incurred a loss of Rs. 47,000 on the purchase and sale. The jeeps had been insured only from January to August, 1967. The accounts of the petitioner did not show any expenses in respect of petrol during the year 1967. From these facts, the inference is sought to be drawn that the purchase of the jeep was not for the purposes of the business of the company and that the transactions were not in the interests of the petitioner-company.

The company's plea is that the jeeps were purchased and sold under the authority of resolutions passed by the board of directors. The transaction was in the ordinary course of business of the company and in order to ensure its smooth running. Though the exact manner of utilisation of these jeeps had not been indicated in the affidavits, Sri Sen submitted that the transaction should be judged in the light of the fact that it was put through at the time of the general elections, that the jeeps were purchased in business interests, "in order to ensure the smooth running of the business of the company" and that no mala fides were involved in the transaction.

We are unable to see how this transaction can attract the impugned action by the respondent. As suggested by Sri Sen, there is an explanation for the purchase of the jeeps and their disposal within a short time. But, even disbelieving this explanation and assuming the worst, it is a mere instance of purchase and sale by the company of a certain asset which resulted in a loss to the company. It has not been explained in what manner this transaction reveals fraud, misfeasance or misconduct on the part of the persons concerned in the management of the company. There is no allegation that these jeeps were intended for or utilized by those persons or that they were sold to them or to other concerns of this group in which they were interested at concessional rates or the like, Except that the company had entered into an imprudent transaction, there are no circumstances of the nature outlined in s. 237(b)(ii).

Charge No. 6: Loans to certain individuals

The respondent has taken objection to the advances of loans by the petitioner-company to a number of persons "who belonged to the Sahu Jain group" to the extent of Rs. 1.26 crores. In particular, it is stated that loans to the extent of Rs. 68.75 lakhs were advanced to one R.G. between August, 1968, and March, 1972, and that similar loans were also advanced to A.P.J. From these persons Rs. 20 lakhs and Rs. 95 lakhs, respectively, remained due to the petitioner.. The answer of the company is that the petitioner had vast resources by way of deposits from stockists and advances from customers. The investment of these funds among others by way of loans was part of the business of the company. These were loans carrying a high rate of interest (as admitted in para. 10(4) of A-1), and were repayable on demand. It has been denied that any loan in excess of Rs. 20 lakhs was given to R.G. In the case of A.P.J. only Rs. 4.45 lakhs was due and, in the case of R.G., the entire amount of the loan was repaid by 6th November, 1974.

The petitioner's reply that these are loans earning a high rate of interest has not been denied. In fact, one of the earlier charges against the company was that when these loans were earning a higher rate of interest of 11%, the debentures of P.P.L. carrying 8% interest should not have been acquired. It is, therefore, inconsistent on the part of the Board to find fault with the company also for having advanced these loans. It is not the respondent's suggestion that these persons were not capable of returning the loans or that the persons concerned in the management of the company stood to gain in some way as a result of these transactions. The loans have also been substantially repaid. In these circumstances, we fail to see how this transaction can attract action under s. 237(b)(ii).

Charge No. 7: Write off of three loans

According to A-1, the petitioner-company had advanced in 1963-64, three loans, one, a sum of Rs. 50,000 to Sri K.L.M., two, Rs. 30,000 to Sri T.H.K. and three, Rs. 15,000 to Shri H.K.M. Neither these loans nor any interest thereon was recovered from these persons though the interest itself was quite substantial and amounted to as much as Rs. 46,553. No efforts were made to recover them and a major part has been written off.

The explanation given by the company is that these were very respectable and prominent persons in public life. One of them was a counsel for the company and one of them held a high office in the State of Orissa. When they were in some financial difficulty, the company advanced certain loans to them. But the circumstances were such that the loans could not be repaid. It was embarrassing for the company to take legal proceedings against them. However, some efforts for recovery were made. In the case of Sri T.H.K., Rs. 25,000 were recovered and only Rs. 5,000 had to be written off. The other two, however, became bad debts and were written off in 1973.

All that the materials placed on record discloses is that the petitioner-company advanced certain loans which became irrecoverable and had to be written off. The persons to whom the monies were lent were not relatives or associates of the persons concerned in the management of the company. They were outsiders and influential people to whom the company, bona fide, though perhaps imprudently, as events turned out later, advanced certain monies which had to be written off. We are unable to conceive how this transaction of the company can be made the basis of a charge of fraud, misfeasance or misconduct on the part of the directors, etc., towards the company or its members.

We shall now take up the first two charges which are the most important. Shri Kataria, in particular, has placed considerable reliance on the first charge as sufficient by itself to warrant the action taken. As will be seen later, there is an inter-connection between the two transactions which may have to be considered together. We shall, however, set out the facts discussed in respect of each of these charges separately and then discuss the resultant position that emerges.

Charge No.1: Surrender of sole selling agency of JUL

The allegation, as set out in A-l, was that the petitioner had been appointed the sole selling agents of JUL for the sale of cement for a period of five years from April 1, 1966. From this agency, the petitioner was deriving an annual return of about Rs. 8 to 10 lakhs. Notwithstanding this, the company surrendered the agency in favour of BOL, without receiving any compensation for the unexpired period of the agency. The transaction, therefore, was said to be, prima facie, against the interests of the company.

On behalf of the petitioner, it was pointed out by A-2 that this allegation was based on two misconceptions. The first was that the agency was extremely profitable to the petitioner-company. This was not so factually. Though the gross commission from this agency in the accounting years which ended on August 31, 1966, August 31, 1967, and August 31, 1968, amounted to Rs. 92 lakhs, Rs. 108 lakhs and Rs. 8.10 lakhs, respectively, the net income of the company from this source, after deducting the expenditure incurred for earning the said income, came to only Rs. 1.95 lakhs for the first year and there were actually losses of Rs. 65,000 and Rs. 2.24 lakhs, respectively, for the succeeding two years. Full details of the computations on the basis of which these figures were arrived at were given in A-3. It was pointed out that the New Delhi office of the petitioner looked after this business and also the work of three regional offices at Chandigarh, Jaipur and Sawaimadhopur. The work for the cement agency at these places was considerable and involved the setting up of a number of establishments with sufficient personnel to handle the work efficiently. Though the company also dealt in certain other commodities such as sale of steel pipes, plywood, paper and rubber goods, the turnover of cement was the maximum. The turnover in the other commodities varied between 1 and 2 1/2 per cent, of the cement turnover. The company, therefore, apportioned the total expenditure on the basis of turnover and deducted the same to arrive at the net figures referred to earlier. The second misconception of the respondent, according to the petitioner, was that the petitioner was entitled to some compensation for the unexpired period of the agency but had voluntarily forgone the same. This was also not correct. Under s. 294A(c) of the Companies Act, the agents were not entitled to compensation on resignation.

The respondent tried to meet the above case of the petitioner in its affidavits A-4 and A-6. The correctness of the computation of the expenditure deductible against the commission income was contested on the following grounds:

(a)        The New Delhi office of the petitioner looked after the cement agency not merely of JUL but also of other brands of cement such as Rohtas, Portland and Ashoka. The commission earned by the petitioner from JUL was 40% of the total commission earned by it in 1966-67, and 33% in 1967-68. The expenditure deductible against the commission received from JUL would, therefore, be much less than what has been claimed by the company.

(b)        The allocation of expenditure on the basis of turnover was not correct because cement was a commodity in short supply which did not require any special efforts for sale.

(c)        The expenditure taken into account by the petitioner included the interest paid by the head office which should be excluded and if this is done the net commission figures would work out to Rs. 4.12 lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 0.22 lakhs in 1968.

(d)        As a result of the surrender of the sole selling agency the petitioner-company's asset position was considerably affected. It has to call back a loan of Rs. 60 lakhs from NCI and also dispose of other investments of about Rs. 45 lakhs. Moreover, it had to meet liabilities to the extent of Rs. 268 lakhs relating to the business of the sole selling agency and in order to raise this amount it had to sell its plywood factory for Rs. 57 lakhs, sell debentures for the amount of Rs. 63 lakhs, make over loans due to it from 9 parties amounting to Rs. 43 lakhs and pay cash of Rs. 105 lakhs.

These points have been effectively met by the petitioner-company. Regarding (a) it has been pointed out that the agencies of Rohtas, Portland and Ashoka cements were not accounted for in the New Delhi books of the company but were accounted for in the Calcutta books of the company. The expenditure pertaining to those agencies was, therefore, not included in the New Delhi books. The Delhi office was having only the sale of paper, asbestos and certain other commodities in addition to the sole selling agency of JUL. It is, therefore, not correct to say that only a part of the commission accounted for in the Delhi books was attributable to the JUL agency. This contention is also borne out by the copy of account of the New Delhi office placed on record by the petitioner. The first point made by the respondent is, therefore, without force. Regarding (b) there is merely an assertion on behalf of the respondent that the sale of cement was very easy and did not call for any expenditure on the part of the company. In A-3, the petitioner-company has set out at very great length the nature of the activities and functions it had to undertake in relation to the business of the sole selling agency. A detailed analysis of the expenditure under various heads was also furnished. In the face of all these details, the mere assertion that the cement sold itself and that all the expenditure was unnecessary cannot be accepted. Point (a) made on behalf of the respondent again has not been substantiated. The interest paid by the company was interest paid by it on the advances it had received from stockists and purchasers of cement. The interest is, therefore, expenditure properly debitable against the commission income and there is no justification for excluding the same from the P. & L. account. Regarding the other plea that interest received by the head office has not been taken into account, the respondent has not placed before us the details of interest earned by the petitioner in relation to the sole selling agency, which, according to it, should have been included but has been left out of the account by the petitioner. Apart from the above lack of material we may also point out that even if, as contended by the respondent, the expenditure by way of interest is left out of account, the net profit earned from the sole selling agency would be Rs. 4.12 lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 22,000 in 1968. In other words, it was a dwindling income and the mere fact of surrender of such a source of income cannot lead to the adverse inference sought to be drawn by the respondent.

Coming now to the points made out in A-6, we find again that the company has given a satisfactory reply. So far as the recall of a sum of Rs. 60 lakhs from the NCJ is concerned, it is pointed out that the petitioner-company had advanced Rs. 1,40,00,000 to the NCJ. The Company Law Board had directed the company to recall the loan in terms of s. 370 of the Companies Act. Actually, the company applied for extension of time for the recalling of the above amounts and it was only in pursuance of the directions of the Company Law Board, dated September 25, 1968, that the sum of R. 60 lakhs was repaid by the NCJ. This point, therefore, is of no significance. As to the last point made regarding the sale of the company's assets, we may point out that the respondent is confusing between the result of the surrender of the sole selling agency and the cause therefor. Naturally, when the petitioner-company surrendered the sole selling agency, it had to repay the security amounts and advances received by it in its capacity as sole selling agents. This had necessarily to be done by disposing of some assets and by paying a certain amount of cash. It could also be that some of these assets may have been acquired out of the moneys received in the course of the sole selling agency. From the mere fact that, as a result of the transfer of the sole selling agency, the petitioner had to discharge its liabilities incurred in relation thereto by the disposal of certain assets and transfer of certain loans and payment of cash, it cannot follow that the very act of the surender of the managing agency was inspired by improper motives.

The essence of the case of the department was that the sole selling agency was a very valuable asset which no prudent businessman would give up. A point has also been sought to be made in para. 9 of A-6 that whereas 5,000 out of 15,000 shares of the petitioner-company are in the hands of nationalised banks, BOL is a private Ltd. Co., the profits earned by which go to certain individuals who are at the helm of affairs of the petitioner-company. In considering it to be a valuable asset, the respondent has gone by the figures of gross commission without allowing the deduction of any expenditure thereagainst. Even if the expenditure cannot be allowed to the extent claimed by the petitioner, some expenditure must be allowed and, even according to the respondent's figures, the income from this source was dwindling over the years. The respondent's allegation that BOL is an associated concern has been denied in A-2 and A-6 and no material to show any close connection or control has been placed on record. In A-3 and A-7, the petitioner has alleged that, early in 1968, JUL had indicated to it that they wished to terminate its agency and appoint BOL as its agents and it was in this context that they had to surrender the agency. Sri Kataria objects to this allegation made at a late stage being taken into account. There is also nothing to show that the initiative for terminating the agency came from JUL. So, we shall leave it out of account. But even ignoring all these submissions of the petitioner and taking the respondent's case at its best, all that has been made out is that the petitioner-company gave up a sole selling agency which was remunerative. But will this alone be a ground for drawing an inference that the persons in management have been guilty of fraud, misfeasance or misconduct towards the company? We think not, and this will become clearer if we bear in mind that this transaction of surrender of the sole selling agency in favour of BOL was simultaneous with another transaction of surrender of the sole undertaking of APL, which we are discussing below and consider these two transactions together. We shall, therefore, proceed to discuss the second charge against.

Charge No.2: Purchase and sale of plywood factory

The APL was a losing concern. It had sustained losses to the tune of Rs. 52.72 lakhs between October 1, 1962, to March 31, 1966. The petitioner-company had advanced loans to APL to the extent of Rs. 40 lakhs, and on October 31, 1965,a sum of Rs. 41,91,561.64 was due to the petitioner on account of principal and interest from APL. According to the petitioner, there was no way of recovering this loan and so the petitioner ultimately decided to purchase the undertaking of APL and carry on the business in plywood on its own. This proposal was placed before a meeting of the shareholders of the company held on 21st March, 1966. The explanatory note attached to the notice of this general meeting contained the resolution of the company approving the commencement by it of a business in plywood which was necessary in terms of s. 149 of the Companies Act as amended by Act 31 of 1965. The block assets were taken over at a value fixed by a reputed firm of valuers and the other assets were taken over at book value. The petitioner-company worked the concern for a period of three years but it was not a very successful experiment. In the period of April 1,1966, to August 31, 1968, during which the petitioner-company ran the business it had to incur a further loss of Rs. 38.94 lakhs. Eventually, therefore, the company decided that it was not profitable to continue carrying on the business and it was decided to dispose of the same. It was about this time that the surrender of the selling agency of JUL by the petitioner-company in favour of BOL was also contemplated and it was decided that the undertaking of APL would also be transferred to BOL. This transaction was also placed before a meeting of the shareholders of the company held on the 28th September, 1968, and the undertaking was transferred to BOL w.e.f. 1st October, 1968.

According to the petitioner, the above undertaking was purchased at a cost of Rs. 77.17 lakhs and the sale price was Rs. 88.18 lakhs representing the book value of the various assets as on the date of the sale. If this is correct, there is nothing even prima facie wrong with the transaction. The respondent's allegation, however, is that the undertaking was purchased not for Rs. 77.17 lakhs but for Rs. 88.65 lakhs and sold not for Rs. 88.18 lakhs but only for Rs. 57 lakhs. The discrepancy in the purchase price is due to the fact that, according to the respondent, an interest amount of Rs. 3.49 lakhs recoverable from the APL had not been realised. This has been categorically denied by the petitioner and it has been asserted in A-7 that interest was duly recovered from APL. It is then alleged by the respondent that the valuation report on the basis of which the purchase was effected does not give any basis for the valuation and that an inspection report showed that it had made a profit of Rs. 11.40 lakhs in the bargain. The inspection report relied upon has not been placed before us. That apart, the valuation was got done by a reputed firm of valuers. If the valuation report did not give the details, it was open to the respondent to have found out the details from the said firm. It cannot be merely assumed that this valuation report was a made-up one and that it did not represent the proper value of the purchased undertaking and that the consideration paid by the petitioner-company must have been an exaggerated consideration.

While, on the one hand, the respondent criticises the purchase as having been made at an exaggerated price, allegations of a contrary nature are made in regard to the sale transaction of the undertaking in 1968. Here, it is alleged that the sale price was only Rs. 57 lakhs and not Rs. 78.18 lakhs as stated by the petitioner. This allegation has also been denied by the petitioner. The respondent has drawn the inference that the sale price was only Rs. 65 lakhs from the fact that certain liabilities of the petitioner-company to the extent of Rs. 268 lakhs which was transferred to BOL were adjusted in the following manner:

 

Rs.

Transfer of debentures

63 lakhs

Cash paid

105 lakhs

Loan transferred

43 lakhs

Price of plywood factory

57 lakhs

Total

268 lakhs

The petitioner has pointed out in A-7 that this proceeds on a misapprehension. The total sale price was Rs. 78.18 lakhs as explained in detail in the annexure filed along with A-2 but only a part of the sale price was adjusted against the sum of Rs. 268 lakhs. Again, the respondent alleges that the transfer of the undertaking at book values was not justified and that the unit must have been worth much more in October, 1968, than in April, 1966. This allegation again is totally unacceptable. When the petitioner-company wanted to take over the undertaking of APL, which had suffered serious losses, it was prepared to take over the same only after having the block assets valued by a reputed firm of valuers. Having taken over the undertaking, the petitioner conducted the business for a period of about two years during which it suffered a heavy loss. It was, therefore, decided to transfer the undertaking to BOL at book value. There is nothing suspicious about this and the respondent admits in A-4 that it is unable to attribute any motive for the petitioner not undertaking a revaluation of the block assets. Thus, the respondent has not been able to make out any satisfactory reason why the purchase and sale price as claimed by the petitioner should be disbelieved.

Realising this, perhaps, the respondent in A-4 poses a question: Why did the company purchase a losing concern? and concludes that this must have been effected in order to claim a loss for income-tax purposes, by claiming a set-off of the losses in the business against its other profits. It will be seen that this allegation overlooks the fact that that the concern was taken over in lieu of a debt is not denied; it does not also help the respondent's case. Even assuming that the petitioner-company took over this losing concern merely in order to reduce its income-tax burden, the transaction would not be one detrimental to the interests of the company because admittedly the transaction helped to reduce the tax liability of the company to the extent of about Rs. 20 lakhs. That apart, this is merely a vague and wild allegation made by the respondent in an effort to make out some charge against the company when the charge, as originally laid, cannot be established.

According to the petitioner-company, the purchase was for Rs. 77.17 lakhs and the sale for Rs. 88.18 lakhs. If this is so, there is no case at all for the respondent. But even assuming that the undertaking had been purchased for Rs. 80.65 lakhs and had been sold only for Rs. 57 lakhs, this would not lead to an inference of any misfeasance, misconduct or fraud on the part of the management, if looked at against the correct factual background. It should not be forgotten that this was an undertaking which had been sustaining losses right from the commencement. The total loss incurred by it was to the tune of about Rs. 92 lakhs. So, the mere fact that it was sold to BOL for a price smaller than the purchase price is not sufficient to draw an inference against the directors or the management of the company. Having regard to the continuous record of losses, the suggestion made in A-4 that the value of the undertaking in October, 1968, must have been considerably more than the value of the undertaking in April, 1966, is obviously absurd and without basis. We are, therefore, unable to spell out from the circumstances of the transaction the conclusion sought to be drawn by the respondent.

Moreover, as we have mentioned earlier, an important circumstance that is relevant in assessing the real effect of the transactions which form the subject-matter of the first two charges against the company is that they are really connected transactions. Both of them took place simultaneously. In or about July, 1978, the company decided to surrender the sole selling agency of JUL and also decided to transfer the undertaking of APL to BOL. In fact, the transaction involved a number of other mutual arrangements and adjustments which have not been properly examined by the respondent. The petitioner has denied that BOL is a part of the group, but granting that it was, still one would appreciate that the two transactions put together do not leave any room for any adverse inference. Let us assume, as contended by the respondent, that the sole selling agency of JUL was a profitable one. Let us also assume that the undertaking of APL was a losing one and had been transferred to BOL at a price lower than the price for which the petitioner purchased it. All these facts put together could only amount to this that, as a result of certain understandings in July, 1968, the petitioner-company transferred to BOL a remunerative undertaking and also an admittedly losing concern. It cannot, therefore, be postulated that the management of the petitioner-company had indulged in these transactions with a view to benefit BOL and its limited shareholders at the cost of the petitioner-company. It should not also be overlooked that the transaction relating to APL had, at both stages, been placed before and unanimously approved by the shareholders of the company. It has been pointed out in A-6 that a substantial proportion of the shares of the petitioner-company was held by nationalised banks and it cannot be assumed that they voted the proposals which were patently detrimental to the company's interests.

We have discussed at length all the materials placed before us by the parties and reached the conclusion that the action initiated by the respondent against the petitioner-company was not justified. Sri Kataria, for the respondent, submitted that, at least in regard to the first two charges, the respondent has shown the existence of some circumstances which called for further investigation. He submitted that if, after investigation, the charges were made out, the board would take other action but that, if the charges could not be substantiated, further proceedings would be dropped. So, according to him, it was not possible on the material for this court to say that even the appointment of an inspector to delve into these matters was not necessary or justified.

We think that the contention of Sri Kataria proceeds on a misconception of the true scope of s. 237 (b). In Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp Cas 639; AIR 1967 SC 295, the affidavit of the Board disclosed that (p. 296—AIR headnote):

"In the conduct of the company there was delay, bungling and faulty planning of project entailing double expenditure, continuous losses resulting in sharp fall in prices of the company's shares and resignation of some of the directors on account of differences of opinion with the managing director".

On the question whether these facts could support an order under s. 237(b), Mudholkar J. (speaking for himself and Sarkar C.J.), observed (AIR headnote p. 296—see also 36 Comp Cas at p. 692):

"It cannot be said that from a huge loss incurred by a company and the working of the company in a disorganised and unbusinesslike way, the only conclusion possible was that it was due to lack of capability. It was reasonably conceivable that the result had been produced by fraud and other varieties of dishonesty or misfeasance. The order did not amount to a finding of fraud. It was to find out what kind of wrong action has led to the company's illfate that the powers under the section were given. The enquiry might have revealed that there was no fraud or other similar kind of malfeasance. It would be destroying the beneficial and effective use of the powers given by the section to say that the Board must first have showed that a fraud could clearly be said to have been committed. It was enough that the facts showed that it could be reasonably thought that the company's unfortunate position might have been caused by fraud and other species of dishonest action".

Two other judges, however, did not agree with this view. Hidayatullah J. (as he then was), expressed himself as follows. (AIR head note—see also pp. 661, 662 of 36 Comp Cas):

"The words 'in the opinion of the Central Government' in section 237(b) indicate that the opinion must be formed by the Central Government and it is of course implicit that the opinion must be an honest opinion. The next requirement is that ' there are circumstances suggesting, etc' These words indicate that before the Central Government forms its opinion it must have before it circumstances suggesting certain inferences........

Again, an action, not based on circumstances suggesting an inference of the enumerated kind will not be valid. In other words, the enumeration of the inferences which may be drawn from the circumstances, postulates the absence of a general discretion to go on a fishing expedition to find evidence. No doubt the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. If the action is questioned on the ground that no circumstances leading to an inference of the kind contemplated by the section exists, the action might be exposed to interference unless the existence of the circumstances is made out... Since the existence of ' circumstances ' is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned, has to be proved at least prima facie. It is not sufficient to assert that the circumstances exist and give no clue to what they are because the circumstances must be such as to lead to conclusions of certain definiteness".

Shelat J. had this to say (See pp. 689, 690 of 36 Comp Cas):

"There must therefore exist circumstances which in the opinion of the Authority suggest what has been set out in sub-clauses (i), (ii) or (iii). If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute.

Even assuming that the entire cl. (b) is subjective and that the clause does not necessitate disclosure of circumstances, the circumstances have in the present case been disclosed in the affidavits of the Chairman and the other officials. Once they are disclosed, the court can consider whether they are relevant circumstances from which the Board could have formed the opinion that they were suggestive of the things set out in cl. (b)".

Bachawat J. expressed no views on this aspect of the case.

The scope of the section was, therefore, again considered by the Supreme Court in Rohtas Industries Ltd. v. Agarwal [1969] 39 Comp Cas 781; AIR 1969 SC 707 "to sort out the requirements" of the section. After a review of the several decisions cited before the court, Hegde J. (speaking for himself and Sikri J., as he then was), concluded thus (p. 800 of 39 Comp Cas):

"Coming back to section 237(b), in finding out its true scope, we have to bear in mind that that section is a part of the scheme referred to earlier and, therefore, the said provision takes its colour from sections 235 and 236. In finding out the legislative intent we cannot ignore the requirements of those sections. In interpreting section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally, we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of the general public. In fact the vires of that provision was upheld by a majority of the judges constituting the Bench in Barium Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311; AIR 1967 SC 295, principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated earlier, we agree with the conclusion reached by Hidayatullah and Shelat JJ. in Barium Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311; AIR 1967 SC 295, that the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question are open to judicial review though the opinion formed by the Government is not amenable to review by the courts. As held earlier, the required circumstances did not exist in this case".

Bachawat J. was of a different view. He observed (p. 803 of 39 Comp Cas):

"If it is established that there were no materials upon which the authority could form the requisite opinion the court may infer that the authority did not apply its mind to the relevant facts. The requisite opinion is then lacking and the condition precedent to the exercise of the power under section 237(b) is not fulfilled. On this ground I interfered with the order under section 237(b) in Barium Chemicals v. Company Law Board [1966] Supp SCR 311 at p. 343; 36 Comp Cas 639: AIR 1967 SC 295 at p.313...... The condition precedent to the exercise of power under section 237(b) is the opinion of the Government and not the existence of the circumstances suggesting one or more of the specified matters. To hold that the factual existence of such matters is a condition precedent to the exercise of the power is to re-write the section. Section 23 7(b) must be interpreted in the light of its own language and subject-matter. We miss its real import if we begin by referring to the construction put by other judges on other statutes perhaps similar but not the same. The decisions are useful when they lay down principles of interpretation or give the meaning of words which have become terms of art "

but he agreed with the conclusion of the majority that, on facts, the order under s. 237(b) was not maintainable. In that case, the only allegation against the company on the basis of which the action under s. 237(b) was sought to be supported was that it had sold certain preference shares at their face value when they could have been converted into ordinary shares of Rs. 10 each which were then quoted at Rs. 15 in the stock market. Hegde J. observed (pp. 800, 801 of 39 Comp Cas):

"The next question is whether any reasonable authority, much less an expert body like the Central Government, could have reasonably made the impugned order on the basis of the material before it. Admittedly, the only relevant material on the basis of which the impugned order can be said to have been made is the, transaction of sale of preference shares of Albion Plywoods Ltd. At the time when the Government made the impugned order, it did not know the market quotation for the ordinary share of that company as on the date of the sale of those shares or immediately before that date. They did not care to find out that information. Hence there was no material before them showing that they were sold for inadequate consideration. If as is now proved that the market price of those shares on or about May 6, 1960, was only Rs. 11 per share then the transaction in question could not have afforded any basis for forming the opinion required by section 237(b). If the market price of an ordinary share of that company on or about May 6, 1960, was only Rs. 11 it was quite reasonable for the directors to conclude that the price of the ordinary shares is likely to go down' in view of the company's proposal to put on the market another 50,000 shares as a result of the conversion of the preference shares into ordinary shares. We do not think that any reasonable person, much less any expert body like the Government, on the material before it, could have jumped to the conclusion that there was any fraud involved in the sale of the shares in question. If the Government had any suspicion about that transaction it should have probed into the matter further before directing any investigation. We are convinced that the precipitate action taken by the Government was not called for nor could be justified on the basis of the material before it. The opinion formed by the Government was a wholly irrational opinion. The fact that one of the leading directors of the appellant-company was a suspect in the eye of the Government because of his antecedents, assuming without deciding, that the allegations against him are true, was not a relevant circumstance. That circumstance should not have been allowed to cloud the opinion of the Government. The Government is charged with the responsibility to form a bona fide opinion on the basis of relevant material. The opinion formed in this case cannot be held to have been formed in accordance with law".

From the foregoing it will be seen that the question whether circumstances have been shown to exist from which, reasonably, an inference of the nature contemplated by the provision can be drawn is a matter for judicial consideration. It is not sufficient for the Board to merely allege some facts which raise some suspicion in order to enable it to enter into a fishing expedition or to undertake an investigation as a result of which possibly some case could be made out against the company. In the present case, if at all, there is some content only in the first two charges. But even there the Board is not clear about the facts and looking at both the transactions together there are no circumstances brought to light from which any fraud, misfeasance or misconduct on the part of the management can be made out. As Shelat J. has pointed out in Barium Chemicals Ltd. v. Company Law Board [1966] Supp SCR 311; 36 Comp Cas 639; AIR 1967 SC 295/ these expressions envisage the following types of conduct (AIR headnote):

"The term 'fraud' connotes actual dishonesty and, however much the court may disapprove of a personal conduct it must consider whether he has been guilty of dishonesty. Misfeasance results from an act or conduct in the nature of a breach of trust or an act resulting in loss to the company. Misconduct of promoters or directors as understood in the Companies Act means not misconduct of every kind but such as has produced pecuniary loss to the company by misapplication of its assets or other act".

In the present case, there is no basis for any allegation of fraud or misconduct. It cannot even be alleged that the management has entered into any of the transactions in the nature of a breach of trust or with a view to cause pecuniary loss to the company. We have, therefore, no hesitation in concluding that no case for action under s. 237(b)(ii) has been made out.

Before parting with the case, we should like to point out one further feature in the present case. As pointed out by the Supreme Court, the circumstances justifying action under s. 237 should exist at the date of the order. In A-1, the respondent only set out a few broad allegations which were controverted by A-2 and A-3. The respondent then filed A-4 giving further details and figures and it is not clear why these were not furnished at the original stage itself. In the original petition, the company had specifically alleged that the earlier investigations by the Board, in particular by Sri Suraj Kapur, had yielded nothing adverse to the company. In the original reply filed by the respondent (paras. 6 and 7 of A-1) this was not controverted, rather there was an indefinite statement that the functions of the Registrar of Companies and Sri Suraj Kapur were limited and they were not required or entitled to make any complaints regarding fraud or misfeasance, admitting impliedly that the reports had contained no adverse comments, etc. The additional facts mentioned in A-4 were more in the nature of pointing out of loopholes in the defence put forward in A-2 and A-3 than a positive case based on definite data. Sri Kataria, however, stated in court that full details regarding the allegations were available from the inspection report and that he would place the same before us. But eventually neither the inspection report nor the facts and details gathered by the inspector were placed before us. Instead, A-6 was filed. This no doubt refers to the report of Sri Kapur dated January 12, 1973, and to the discussions he had with the officers of the company. But A-6 which puts forward certain additional facts avoids stating specifically that these facts were based on the results of the inspection report and had been arrived at after due investigation and enquiries with the company. Even in A-6 the attempt made is only to raise a cloud of suspicion by referring to a number of facts and figures without any attempt at analysing them and making out clear factual charges against the company. The charges are vague and general and do not attempt to bring home to the directors or persons in management in general or any of them in particular any conduct of the nature contemplated by s. 237(b)(ii). As pointed out in the case of Barium Chemicals [1966] Supp SCR 311; 36 Comp Cas 639; AIR 1967 SC 295, an allegation that the company had entered into an unremu-nerative or imprudent transaction cannot suffice to attract s. 237. If the basis of the order under s. 237(b) was only the data furnished in A-l, the material was woefully inadequate to support the order. But even the additional facts furnished in A-4 and A-6 do not add much substance to the charges. We, therefore, hold that the respondent has failed to make out the existence or circumstances justifying the formation of an opinion that there was fraud, misfeasance or misconduct on the part of the persons in management of the company towards the company or its members.

We, therefore, make the rule absolute and quash the impugned orders marked annexs. C, G, H and I to the writ petition. The respondents are restrained from giving effect in any manner to the aforesaid orders against the petitioner-company.

The writ petition is allowed with costs.

[1970] 40 COMP. CAS. 83 (CAL)

HIGH COURT OF CALCUTTA

Deputy Secretary, Ministry of Finance, Dept. of Revenue & Company Law

v.

Sahu Jain Ltd.

D.N. SINHA, C.J.

AND B.C. MITRA, J.

APPEAL ORDER NO. 203 OF 1965

FEBRUARY 18, 1969

B. Das, B. N. Sen and B. Basak for the appellant.

R. C. Deb, Subrata Roy Chowdury and P. L. Khaitan for the respondent.

JUDGMENT

B.C. Mitra, J.—The respondent is the managing agent of several companies incorporated under the Indian Companies Act and mentioned in paragraph 1 of the petition. On April 11, 1963, an order was made by the Central Government in exercise of the powers conferred by sub-clauses (i) and (ii) of clause (b) of section 237 of the Companies Act, 1956 (hereinafter referred to as "the Act"). In this order it was recited that whereas the Central Government was of the opinion that there were circumstances suggesting that the business of the respondent was being conducted with intent to defraud its creditors, members and other persons and the persons connected in the management of the respondent's affairs had in connection therewith been guilty of fraud, misfeasance or other misconduct towards the respondent or its members or other persons and whereas the Central Government considered it desirable that an inspector should be appointed to investigate the affairs of the respondent and to report thereon, the Central Government in exercise of the powers under the said provisions of the Act appointed one S. Prakash Chopra, as inspector to investigate the affairs of the respondent for a certain period mentioned in the order. The inspector so appointed was to complete the investigation and submit his report within four months from the date of the order unless the time was extended. On the very next day the respondent protested in writing against the order and denied that there were any circumstance justifying the formation of the alleged opinion by the Central Government. The respondent also requested that information may be supplied to it regarding materials in the possession of the Government on the basis of which the alleged opinion was formed by the Central Government. By a letter dated June 17, 1963, the appellant No. 1 refused to disclose any materials to the respondent.

The investigation was not completed within the time fixed by the order and by an order dated August 9, 1963, the time to submit the report was extended up to October 31, 1963. A second extension was also granted on October 31, 1963, and the time of submitting a report was extended up to January 31, 1964. The investigation, however, was not completed within the extended time and a third extension was granted by an order dated January 29, 1964, and the time to make the report was extended till June 30, 1964. On June 30, 1964, however, the inspector was relieved of his duties and two new persons, namely, S. D. Agarwal and S. Rajagopalan, were appointed co-inspectors and the time to make the report was again extended up to December 31, 1964. Aggrieved by the order appointing inspectors for the investigation and also by subsequent orders granting extension of time to make the report the petitioner moved this court under article 226 of the Constitution and obtained a rule nisi. By a judgment and order dated August 6, 1965, this rule was made absolute and the order dated April 11, 1963, and the subsequent order mentioned above whereby time to submit the report was extended was quashed and appropriate writs were directed to be issued. It was, however, provided that nothing contained in the order would stand in the way of the Central Government in making a fresh investigation order according to law. This appeal is directed against the judgment and order dated August 6, 1965.

The question involved in this appeal is whether the appellants were justified in refusing to disclose to the respondent the materials which led the Central Government to form the opinion as to matters set out in sub-clauses (i) and (ii) of clause (b) of section 237 of the Act. I set out below the relevant portion of the statute :

"237 (b) may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)     that the business of the company is being conducted with intent to defraud its creditors, members, or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose ;

(ii)    that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members."

On behalf of the appellants, Mr. Basak contended that the question whether the circumstances set out in sub-clauses (i) and (ii) of clause (b) set out above existed was a matter entirely for the subjective satisfaction of the Central Government. It was argued that the opinion of the Central Government contemplated by the statute was not justiciable and that the respondent was not entitled to know if there were any materials in the possession of the Central Government which justified the formation of the opinion. It was further argued that if the materials, on which the opinion of the Central Government was formed, were disclosed at this stage the very purpose and object of the investigation would be defeated. Evidence of fraud, misfeasance and other misconduct, it was argued, would be tampered with and destroyed if the respondent was at this stage informed about the materials on which the opinion was formed.

It was next contended by the learned counsel for the appellants that out of the various matters set out in sub-clauses (i), (ii) and (iii) of clause (b) of section 237 of the Act, the Central Government had selected two matters, one from sub-clause (i), namely, intent to defraud creditors, members or other persons and the matters set out in clause (ii), namely, that persons concerned in the management of the affairs of the respondent have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the respondent or its members. The selection of two matters only out of the various matters set out in sub-clauses (i), (ii) and (iii), it was submitted, clearly proved that the Central Government applied its mind to the matter, and having so applied its mind formed its opinion and thereafter directed the investigation. It was not a case, therefore, it. was submitted, where the mind was not applied at all and a sweeping order of investigation made for the purpose of a roving inquiry to discover materials upon which a case could be founded. But, it was argued, although the Central Government applied its mind to the matter before directing investigation, it was not bound, at this stage, to disclose the materials which it took into consideration in forming the opinion. The investigation, it was argued, was in the nature of a fact-finding commission and the Central Government could not be expected to form a conclusive opinion about the intent to defraud creditors, misfeasance and malpractices of those in charge of the management of the respondent, without taking into consideration the report of the investigation, which was likely to bring out relevant materials for the formation of a fully objective opinion.

Before dealing with the contentions mentioned above I should refer to the case made out by the respondent in the petition and the appellant's answer to the charges in the petition as laid down in the affidavit-in-opposition. The respondent's first charge is that the impugned order is mala fide, illegal, arbitrary, capricious, without jurisdiction and ultra vires the Companies Act, 1956. The second charge is that the Central Government did not and could not form any opinion as alleged and that the impugned order is perverse and was made in abuse of statutory powers. The respondent alleges that its business was never conducted with intent to defraud creditors, members or other persons. It is next alleged that all the loans and advances obtained by the respondent from its bankers are fully secured by pledge of securities, and that the unsecured loans are from directors and shareholders and family members of the directors of the respondent who are satisfied with the conduct of business of the respondent. It is next alleged that the respondent did not receive any complaint from any of its members that they have been defrauded. It is further alleged that the respondent has only eight members who are the directors and their family members and an officer of the respondent. With regard to the charge in the impugned notice that other persons had been defrauded it is alleged that this charge is mala fide, and devoid of particulars, and has been deliberately made to harass the respondent. In the next place there is a denial of the existence of circumstances which could justify the formation of any opinion on the part of the Central Government that the persons concerned in the management of the respondent's affairs had been guilty of fraud, misfeasance or other misconduct.

It is next alleged that the investigation was continued for a period of nearly 15 months, and that it was unreasonably and unnecessarily prolonged, and for several months nothing was done to carry on the investigation. It is alleged that this delay and procrastination in the investigation has caused tremendous dislocation and loss in the respondent's business and has affected its reputation. It is next alleged that the impugned order had fixed a period of 4 months within which the inspector was directed to complete the investigation and submit his report. But the investigation was not completed and the report was not submitted even after the expiry of 15 months and thereafter, without completing the investigation, S.P. Chopra, the inspector appointed resigned, and the appellants Nos. 2 and 3 were appointed inspectors by an order dated June 13, 1964, and by this order the period of investigation was extended till December 31, 1964. It is next alleged that the object of the investigation was to make a roving and fishing enquiry into the respondent's books and records in the hope that materials would be found on such inquiry for taking action against the respondent.

In support of its contention that the order is mala tide the respondent has set out in the petition particulars in support thereof which are as follows:

(i)         One of the managed companies of the respondent, namely, New Central Jute Mills Company Ltd., submitted an application for licence to import jute mills machinery for the production of carpet-backing cloth. The application for import of machinery valued at Rs. 41 lakhs was recommended by the Jute Commissioner for issue of licence for Rs. 28,37,625. After scrutiny of the recommendations of the Jute Commissioner, the Joint Chief Controller of Imports and Exports, Calcutta, decided to grant 8 licences for the aggregate amount of Rs. 26,69,355 and this decision was communicated to New Central Jute Mills Company Ltd. In spite of repeated requests the import licences were not issued, and suddenly without any reason, by a communication dated May 14, 1964, the Joint Chief Controller of Imports & Exports informed the said managed company that no licence could be issued in its favour. No reason was assigned for the refusal nor was the managed company given any opportunity to show cause against the refusal; but import licences were issued to various other jute mills who along with the managed company applied for import licences.

(ii)        The said managed company entered into an agreement with Jute Industries [1961] Company Ltd. of Thailand by which the managed company agreed to supply technical know-how for setting up a jute mill in Thailand. This agreement was approved by the Reserve Bank of India. The managed company also arranged with the Thailand company for sale and export from India of jute mills machinery of the value of £1,82,628 for installation of the jute mill in Thailand, upon the managed company agreeing to invest nearly Rs. 20 lakhs in the share capital of the foreign company out of the sale proceeds of the machinery. This arrangement was made by the managed company in the face of strong international competition. The Reserve Bank of India issued necessary sanction to the managed company for the said investment and the shareholders of the company at a general meeting also approved of the venture. Thereafter, on or about February 1, 1964, an application was made under section 372 of the Companies Act, 1956, to the Central Government for necessary sanction for investment in the shares of a foreign company. By a letter dated April 4, 1964, the Central Government refused to give sanction and this refusal was followed by a letter dated May 5, 1964, from the Reserve Bank of India to the managed company in which it was stated that the bank was advised that the Central Government had reconsidered the question of investment in the foreign company and that the proposal for investment in jute mill in Thailand was rejected and, therefore, the sanction was withdrawn. The managed company protested to the Central Government against the cancellation of the sanction but no reply was given by the Central Government.

(iii)       Rohtas Industries Ltd., another company managed by the respondent, is a manufacturer of sugar, cement, asbestos cement, paper, banaspati, chemicals, etc. The development council for paper pulp and allied industries took certain decisions for raising the production of paper during the Third Plan period. Two sub-committees were set up by the council to examine applications from various paper mills for improving production by effecting modification and balancing of equipments. The committee accepted several schemes submitted by seven different manufacturers including Rohtas Industries Ltd. Accordingly, this company applied to the Ministry of Industries for grant of industrial licences under the Industries (Development and Regulation) Act, 1951, for expansion of its pulp and paper factories and the requisite import licences under the approved schemes along with six other paper mills. The licencing committee and the capital goods committee of the Central Government approved the scheme of increasing production of the seven paper mills. In March, 1961, six of the paper mills received the necessary permission for importing the balancing equipments from foreign countries and they also received industrial licences for increasing their output but the Rohtas Industries Ltd. was refused both the import licence as well as the industrial licence. Such refusal was made without giving to the company an opportunity to state its case.

(iv)       In February, 1961, Rohtas Industries Ltd. was granted an industrial licence for 36,000 tons of printing paper and writing paper and 36,000 tons of pulp annually. Further licences were given to produce 15,000 tons of best quality paper annually. Thereupon the company applied to the Chief Controller of Imports for necessary import licences but suddenly, by a letter dated October 7, 1961, the company was asked to show cause as to why the industrial licence should not be revoked. It was pointed out on behalf of the company that it had contacted the Export Import Bank for arranging finance and had sent its experts to Washington for negotiations. Yet, on April 17, 1964, the Central Government wrote to the company that the application for grant of import licence had been rejected and that the company should surrender its industrial licence for cancellation.

(v)        Simultaneous orders of investigation and appointment of inspectors were also made with regard to Rohtas Industries Ltd. and the time to complete the investigation and make the report was also extended from time to time.

(vi)       By a letter dated June 20, 1962, the Central Government agreed to grant to Jaipur Uddyog Ltd. (another managed company) a licence for the manufacture of portland cement by setting up a new industrial undertaking in Rajasthan. Pursuant to this communication the company took all possible steps for erecting a cement factory at Rajasthan. Thereafter, on April 4, 1963, the Central Government wrote to the company that the time schedule for completing the various stages of the work should be furnished to the Government and if effective steps to the satisfaction of the Government were not taken within three months the question of cancellation of the approval letter would be considered. But even before the expiry of the said period of three months the managed company was suddenly served with a show cause notice on May 10, 1963, as to why the approval granted to the company for erecting a cement factory at Rajasthan should not be cancelled. The company showed cause as called upon, yet, on June 14, 1963, the approval already granted was suddenly cancelled.

The instances mentioned above have been cited by the respondent to show that the impugned order has been made by the Central Government mala fide and the managed companies of the respondent had been singled out on various occasions in the past for penal measures arbitrarily and unreasonably taken without any justification.

I shall now turn to the affidavit-in-opposition affirmed by appellant No. 1, on August 29, 1964. It is to be seen how far the allegations made by the respondent in support of the charges of mala fide, arbitrary and unreasonable conduct have been met by facts pleaded in the affidavit-in-opposition. It is also to be seen if any material have been disclosed to show that there were circumstances suggesting either one or the other of the matters required by sub-clauses (i), (ii) and (iii) of section 237 (b) of the Act.

The main contention of the appellants as made out in the affidavit-in-opposition is that the impugned order was made bona fide and that the opinion of the Central Government is not justiciable. In answer to the respondent's allegations that there were no material for formation of an opinion on the part of the Central Government that the business was conducted with intent to defraud creditors, there is only a submission that it was only after the investigation was completed that the true manner in which the business of the respondent was conducted whether with intent to defraud its members, creditors or others would be revealed. As to the charge of mala fides there is only a bare denial and as to the allegation that no complaints had been received by the respondent regarding fraud and mismanagement from any one, it is alleged that these facts, if proved, are irrelevant and do not establish that the respondent's business is parried on correctly and properly. It is, however, admitted in the affidavit that the investigation has been going on for a period of nearly 15 months.

With regard to the allegations in the petition to which I have already referred regarding refusal to grant import licences, industrial licences, revocation of sanction by the Reserve Bank of India and export of jute mills machinery for the joint venture in Thailand, it is alleged that the allegations are irrevelant and such allegations did not concern the Department of Revenue and Company Law of the Ministry of Finance. There is, however, one assertion to which I must in particular refer, namely, a submission that the Central Government is not bound to disclose the reasons for forming its opinion. That is how a challenge by the respondent that there were no materials for forming an opinion and that an opinion as required by the statute was never formed was attempted to be met by the appellants. The deponent it seems was primarily concerned with one department only of the Central Government, namely, the Department of Revenue and Company Law of the Ministry of Finance. On behalf of the Union of India (appellant No. 4) no affidavit was filed to deny or controvert the allegations made in the petition.

It is plain to us that on the question whether there were any materials suggesting either of the matters set out in sub-clauses (i), (ii) and (iii) of section 237(b), the appellants closed and bolted the door. They drew a veil tightly around them, and they thought, and indeed they still think, that the veil can neither be pierced nor lifted, to see if materials exist which the statute required as a pre-condition to the making of an order under section 237(b) of the Act. Quite apart from the fact that the charges of mala fide, unreasonable and arbitrary conduct remained unanswered and unrefuted by the appellants, even by the Central Government who was a party to the writ petition, it is to be seen if the contention of the appellants can be upheld, bearing in mind the requirement of section 237(b) of the Act.

This very question was raised in Barium Chemicals Ltd. v. Company Law Board. In that case also an order was made under section 237(b) of the Act appointing inspectors for investigating the affairs of the company. Thereupon the company moved a writ petition under article 226 of the Constitution and one of the charges in the petition was that the order was made mala fide. The minority view of the Supreme Court expressed by Mudholkar J. held that the discretion conferred by the section was administrative and not judicial since its exercise one way or the other did not affect the rights of a company nor did it lead to any serious consequences. It was further held, relying upon Emperor v. Sibnath Banerjee, that if it could be shown that the board had in fact not formed an opinion its order could be successfully challenged and that there was a difference between not forming an opinion at all and forming an opinion upon grounds which could be regarded as inapt or insufficient or irrelevant. Referring to the loss suffered by the company the minority view was that this loss arising out of disorganised and unbusinesslike methods of carrying on business was due to lack of capability only but that the loss might conceivably have been produced by fraud and other varieties of dishonesty or misfeasance. The minority held that the discretion conferred by section 237(b) of the Act was administrative and that the opinion to be formed under that section was a matter of subjective satisfaction, but if grounds were disclosed the court could examine them for considering whether they were relevant. It was also held, however, that the order could be challenged if it was made mala fide but that in that case it was not shown to have been so made. On this ground it was held that the attack on the order failed. The majority, however, consisting of Hidayatullah J. (as he then was), Bachawat and Shelat JJ., came to a different conclusion.

Hidayatullah J. (as he then was), after referring to the grounds set out under section 237(b) of the Act, held at page 309 of the report as follows:

"These grounds limit the jurisdiction of the Central Government. No jurisdiction, outside the section which empowers the initiation of investigation, can be exercised. An action, not based on circumstances suggesting an inference of the enumerated kind, will not be valid. In other words, the enumeration of the inferences, which may be drawn from the circumstances, postulates the absence of a general discretion to go on a fishing expedition to find evidence. No doubt the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. If the action is questioned on the ground that no circumstances leading to an inference of the kind contemplated by the section exists, the action might be exposed to interference unless the existence of the circumstances is made out. As my brother, Shelat j., has put it trenchantly:

'It is not reasonable to say that the clause permitted the Government to say that it has formed the opinion on circumstances which it thinks exist.......'

Since the existence of 'circumstances' is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned, has to be proved at least prima facie. It is not sufficient to assert that the circumstances exist and give no clue to what they are because the circumstances must be such as to lead to conclusions of certain definiteness. The conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct or the withholding of information of a particular kind. We have to see whether the chairman in his affidavit has shown the existence of circumstances leading to such tentative conclusions. If he has, his action cannot be questioned because the inference is to be drawn subjectively and even if this court would not have drawn a similar inference that fact would be irrelevant. But if the circumstances pointed out are such that no inference of the kind stated in section 237 (b) can at all be drawn, the action would be ultra vires the Act and void."

Shelat J. was of the view that the formation of the opinion by the Central Government was a subjective process and that this opinion of the Central Government was not subject to a challenge on the ground of propriety, reasonableness or sufficiency. But his Lordship also held that the authority was required to arrive at such an opinion from circumstances suggesting what was set out in sub clauses (i), (ii) or (iii) and if those circumstances did not exist the Government could not say that they do exist. His Lordship was further of the opinion that the expression "circumstances suggesting" could not support the construction that even the existence of circumstances was a matter of subjective opinion and that the expression pointed out that there must exist circumstances from which the authority formed an opinion that they were suggestive of the crucial matters set out in the three sub-clauses. His Lordship further went on to hold at page 325 of the report:

"It is hard to contemplate that the legislature could have left to the subjective process both the formation of opinion and also the existence of circumstances on which it is to be founded. It is also not reasonable to say that the clause permitted the authority to say that it has formed the opinion on circumstances which in its opinion exist and which in its opinion suggest an intent to defraud or a fraudulent or unlawful purpose. It is equally unreasonable to think that the legislature could have abandoned even the small safeguard of requiring the opinion to be founded on existent circumstances which suggest the things for which an investigation can be ordered and left the opinion and even the existence of circumstances from which it is to be formed to a subjective process... There must therefore exist circumstances which in the opinion of the authority suggest what has been set out in sub-clause (i), (ii) or (iii). If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute."

It is thus clear that the majority view of the Supreme Court was that while the formation of the opinion was a matter of subjective satisfaction of the Central Government, materials leading to the formation of such opinion must exist and, if challenged in court, must be proved to exist and that if such materials do not exist the action of the Central Government in directing investigation would be ultra vires the statute.

In this case there is no evidence at all that any such materials existed. The respondent has challenged the appellants on the existence of such materials and has also charged the appellants with mala fides. There was no response to this challenge and charge. The appellants declined to disclose any materials, which could prima facie at any rate have justified the formation of opinion as required by the statute. That being the position, the order directing the investigation and the subsequent orders extending the time to submit the report by the inspectors cannot but be held to be ultra vires section 237(b) of the Act. In answer to the categorical allegations in ground (e) of the grounds set out under paragraph 18 of the petition, all that has been stated in paragraph 15 of the affidavit-in-opposition affirmed on August 29, 1964, is that the Central Government is not bound to express its reasons for forming its opinion. Far from disclosing any materials, it has not even been alleged that such materials did exist and were the basis of formation of the opinion. If there are materials, there may be several reasons arising out of those materials for formation of the opinion. But even if it is held that the Central Government is not bound to disclose the reasons for forming its opinion it must be held that there must exist materials to provide the reasons on which the opinion is formed.

Formation of an opinion is undoubtedly a subjective process and on the same materials different persons may come to different conclusions. It is now well settled that, in matters such as these, this court will not substitute its opinion for that of the authority which by statute is required to form the opinion. Sufficiency or adequacy of materials is also a matter beyond the scope of inquiry by this court in a writ petition. But, while sufficiency or adequacy of materials or evidence is a matter into which this court cannot go in a writ petition, existence of some prima facie materials, at any rate, must be proved to the satisfaction of the court, if there is a challenge on this question by a petitioner. The statute requires as a pre-condition to the order of investigation, firstly, that the Central Government must form an opinion and, secondly, that in the opinion of the Central Government there should be circumstances suggesting one or the other of the matters enumerated in clauses (i), (ii) and (iii) of section 237(b). If the statute merely required that inspectors may be appointed by the Central Government if in its opinion such inspectors ought to be appointed and stopped there, the position might have been different. It might not have been open to a petitioner in that case to argue that there were no materials for forming an opinion that inspectors ought to be appointed. But the legislature did not stop at merely requiring the Central Government to form an opinion, it went very much further and laid down conditions which must be fulfilled. These conditions are that the opinion of the Central Government must be based on various existing circumstances. These circumstances have been specified and enumerated with the full particulars in clauses (i), (ii) and (iii) of section 237(b). Existence of these circumstances cannot be a matter of subjective satisfaction of the Central Government where, as in this case, there is a challenge by the petitioner that not one of the circumstances suggesting either of the matters set out in the said clauses exist. This challenge can be met only by satisfying the court that some materials at least do exist to justify the formation of an opinion by the Central Government as to the necessity of an investigation.

I shall now turn to some of the other decisions relied upon by the learned counsel for the appellants. Reliance was placed upon a decision of the Supreme Court in Ram Krishna Dalmia v. Justice S. R. Tendolkar. In that case a notification issued by the Central Government under section 3 of the Commissions of Inquiry Act was challenged by a writ petition. Sub-section (1) of section 3 of the Act provides :

"The appropriate Government may, if it is of opinion that it is necessary so to do,.... appoint a commission of inquiry for the purpose of making an inquiry into any definite matter of public importance..."

It was argued that Parliament or the Government had usurped the functions of the judiciary inasmuch as they were undertaking to hold an inquiry. This contention was rejected on the ground that the commission of inquiry could only make recommendations which were (not) enforceable proprio vigore and therefore there could be no question of usurpation of the judiciary functions and that, as the only power of the Commission was to inquire and make a report and embody therein its recommendation and had no power of adjudication in the sense of passing an order, the notification could not be challenged on the ground that the inquiry was made in exercise of judicial functions and for that reason there was usurpation by Parliament or the Government of the judicial organs of the Union of India. This decision to our mind is of no assistance to the appellants as the question in this appeal is whether there were any materials enumerated in clauses (i), (ii) and (iii) of section 237(b) of the Companies Act, 1956, for formation of an opinion by the Central Government to direct an investigation into the affairs of the company. The next case relied upon is a decision of the Supreme Court in Raja Narayanlal Bansilal v. Maneck Phiroz Misery . In that case the Registrar of Companies, in exercise of his power under section 137 of the Indian Companies Act, 1913, wrote to a company, of which the appellant was the managing agent, that the business of the company was carried on in fraud, and so he called upon the company to furnish the information which he required. The Registrar made a report to the Central Government under section 137(5) of the 1913 Act and this report showed that the affairs of the company were carried on in fraud of contributories and that the managing agent who was also the promoter acting under a fictitious name was advancing money to the several farms owned by the managing agent which were purchased from the company's funds. It was also stated in the report that between 1942 and 1951 various farm lands were purchased by advancing money from a fictitious account in the company's books. There was also a statement that the managing agent was utilising the company for his personal gain and therefore a case had been made out for an investigation under section 138. In accordance with the recommendations of the Registrar, the Central Government appointed an inspector to investigate the affairs of the company. In the meantime, the Indian Companies Act, 1913, was repealed by the Companies Act, 1956. The managing agent (appellant) challenged the appointment of the inspector, firstly, on the ground that he had been appointed under the old Act and had no jurisdiction to exercise the powers referable to the relevant provisions of the new Act. Secondly, there was a challenge to the vires of sections 239 and 240 of the new Act inasmuch as section 240 offended against the guarantee provided by article 20(3) of the Constitution and certain portions of both the sections offending against article 14. Reliance was placed on the observations in that judgment that the inquiry was no more than the work of a fact-finding commission and that the persons who were called upon to submit to the inquiry were not accused of any offence. These observations, however, were made in repelling the appellant's contentions that the appointment of the inspector was violative of article 20(3) of the Constitution. Besides, in that case materials were disclosed in justification of an order of investigation by appointment of inspectors. None of the issues now before us were raised in this case. The next case relied upon was also a decision of the Supreme Court, Stale Trading Corporation of India Ltd. v. Commercial Tax Officer. In that case the question decided was that a corporation was not a citizen under article 1 9 of the Constitution and could not ask for enforcement of fundamental rights granted to citizens under that article. This decision to our mind is of no assistance to the appellants because the question of enforcement of fundamental rights does not arise in this case.

The next case relied upon by the appellants is also a decision of the Supreme Court, Associated Cement Companies Ltd. v. P. N. Sharma. Reliance was placed on that decision for the proposition that the impugned order was an administrative order and was not amenable to judicial review. In that case an order was made under the Punjab Welfare Officers (Recruitment and Conditions of Service) Rules, 1952, directing the appellant to reinstate its welfare officers and the question raised before the Supreme Court was whether the State of Punjab exercising its appellate jurisdiction under rule 6(6) of the said Rules was a tribunal within the meaning of article 136(1) of the Constitution. The facts in that case and the questions of law raised before the Supreme Court have nothing to do with the questions now before us in this appeal and for this reason this decision is of no assistance to the appellants. Reliance was next placed on another decision of the Supreme Court, Sadhu Singh v. Delhi Administration. In that case an order was made under rule 30(1) of the Defence of India Rules, 1962, by the District Magistrate, Delhi, whereby the petitioner was detained in prison. Thereupon the prisoner moved the Supreme Court for setting aside his detention and for an order of release. The validity of the detention order was challenged only on the ground that there, was no confirmation of the order by the Administrator, Union Territory of Delhi, in the manner provided by rule 3A(6)(b) of the Rules. The appellant's contention that the proceedings for review were quasi-judicial in character and therefore the prisoner should have been given an opportunity to make his representations was repelled by the Supreme Court on the ground that the rule was an emergency measure which authorised the Government to detain a person without trial with a view to prevent him from acting to the detriment of public order and safety. It was further held that the satisfaction of the authority and the confirmation of the order of detention were not subject to judicial review as the order of detention without trial was an executive act and that the subjective satisfaction of the detaining authority was a condition of the making of the order and, if that condition was shown to exist, the court had no power to inquire into the sufficiency of the materials on which the order was made or the propriety or expediency of making the order. I do not sec how this decision is of any assistance to the applicants in this case as all that was held was that the making of the order of detention was based on the subjective satisfaction of the prescribed authority. But in this case the question is not whether the formation of the opinion by the Central Government is a matter of subjective satisfaction, as no doubt it is, but whether, having regard to the provisions of the statute, the Central Government is bound to disclose the reasons if there is a challenge to the existence of the same. That being the question before us this decision of the Supreme Court is of no assistance to the appellants.

The decisions discussed above do not in our view support the contentions of the appellants in this appeal. Besides it is not necessary for us for the purpose of this appeal to examine other decisions for upholding the contentions of the appellants having regard to the decision of the Supreme Court in Barium Chemicals Ltd. v. Company Law Board, discussed at length earlier in this judgment. In that case the majority view of the Supreme Court have been clearly and unambiguously staged by Hidayatullah J. (as he then was) and Shelat J. and indeed Mr. Basak conceded that if in our view the majority of the Supreme Court had laid down the law and the interpretation of section 237(b) of the Companies Act, it was not open to him to raise the contentions he has raised. We see no reason to do otherwise than to hold that the majority view of the Supreme Court in Barium Chemicals Ltd. v. Company Law Board  has clearly expressed its view on the interpretation of section 237(b) of the Companies Act, 1956 and that being so, the views expressed by the Supreme Court with regard to other statutes which are not in pari materia with the statute with which we are concerned would hardly be of any assistance in dealing with the contentions of the appellants in this appeal.

The learned Advocate-General for the respondent submitted that it was not open to the appellant to raise the contentions mentioned above having regard to the observations of the majority of the Supreme Court in Barium Chemicals Ltd. v. Company Law Board . He, however, proceeded further and wanted to support the judgment on certain grounds, which the court below had held against him. This contention on behalf of the respondent was dealt with by the court below in the judgment delivered in Matter No. 272 of 1964, New Central Jute Mills Ltd. v. Deputy Secretary, Ministry of Finance, Deparment of Revenue and Company Law . Shortly put, this contention on behalf of the respondent in the court below was as follows:

By the Companies (Amendment) Act, 1963, which came into force from January 1, 1964, section 10E was introduced in the Companies Act, 1956. This amendment provided for the constitution of the Company Law Board and other incidental matters. By this amendment sub-sections (1) and (2) of section 637 of the Companies Act, 1956, were also amended and a new sub-section (2A) was introduced. Sub-section (2A) runs as follows :

"The provisions of this Act shall apply in relation to the Company Law Board as they apply in relation to the Central Government in respect of any matter in relation to which the powers and functions of the Central Government have been delegated to the Company Law Board."

The respondent's contention in the court below was that after April, 1964, the Central Government divested itself of its powers and duties under sections 235 to 250 of the Companies Act and therefore the appointment of I. M. Puri as co-inspector with S.P. Chopra and the appointment of S.C. Bafna in place of S.P. Chopra to act as co-inspector with I.M. Puri were all beyond the authority of the Central Government. The court below, however, repelled this contention of the respondent and held that in its opinion investigations validly started by the lawful authority at a time when that authority had not parted with its powers and duties, did not become invalid proceedings merely because of subsequent parting of powers. In other words, the investigation started by the Central Government did not become invalid by reason of the subsequent delegation of the power by the Central Government to the Company Law Board.

In support of this contention the learned Advocate-General, firstly, relied upon a decision of the Judicial Committee, King Emperor v. Sibnath Banerji, in support of the contention that after the delegation of the powers of the Central Government under section 237 of the Companies Act, the Central Government had no power left in its hands to appoint inspectors to continue the investigation as there was a complete divestiture of the powers created by section 237. Reliance was next placed on a decision of the Court of Appeal in England, Blackpool Corporation v. Locker. In that case the Minister of Health, acting under the provisions of the Defence (General) Regulations, 1939, delegated his powers to take possession of dwelling-houses to local authorities by means of circulars which contained various conditions relating to taking possession. In exercise of this delegated power the town clerk of a local authority took possession of a house. The owner of the house notified the local authority that he intended to use the house for his own residence. The Minister of Health purported to confirm in writing the action of the town clerk of the local authority in requisitioning the house and on this question it was held that the Minister when delegating his powers had for the time being divested himself of those powers and, therefore, had no power to ratify the requisition made by the town clerk of the local authority and that neither the corporation nor the town clerk acted as the agents of the Minister. Reliance was next placed on a Bench decision of this court, K. B. Mathur v. N. C. Chatterjee.

The learned Advocate-General also relied upon several other decisions in support of the contention that after delegation of the powers under section 237(b) of the Companies Act, 1956, to the Company Law Board, the Central Government was not competent either to appoint new inspectors or to extend the time of the inspectors so appointed, to make the report. The decisions on which reliance was placed were State of Punjab v. Hari Kishan Sharma. In that case the State Government required all applications for cinema licences to be forwarded to it for disposal although section 5(1) and (2) of the Punjab Cinemas (Regulations) Act conferred the jurisdiction to consider and deal with such applications on the licensing authority. It was held that the State Government could not convert itself into the original authority to deal with the licences because section 5(3) of the Act allowed an appeal to the State Government to be preferred by a person who was aggrieved by the rejection of his application by the licensing authority. The next case relied upon by the learned Advocate-General was also a decision of the Supreme Court, Roop Chaned v. State of Punjab, in which the majority of the Supreme Court held that when the Government delegated its power to entertain and decide an appeal under section 21(4) of the East Punjab Holdings (Consolidation and Prevention of Fragmentation) Act, 19-18, to an officer who pursuant to such delegation heard the appeal and made an order, such an order was an order of the Government, as it was made under the statutory power which could only be exercised in terms of the statute. The next case relied upon is a decision of the English Court of Appeal Lewisham Borough Council v. Roberts. The passage relied on is at page 824 of the report where it has been held that when the Government department delegated its functions to a town clerk under Regulation 51(5) of the Defence (General) Regulations, 1939, it was putting some one in its place to do the acts which it was authorised to do and the town clerk was an agent of the department and a sub-agent of the Crown and that the delegation to the town clerk was an administrative act so as to enable the administrative functions of requisitioning to operate smoothly and efficiently. Denning L.J. differed from the observations of Scott L.J. to the contrary in Blackpool Corporation v. Locker, to which I shall presently refer, and observed that the observations of Scott L.J. were unnecessary for the decision. In Blackpool Corporation v. Locker, Scott L.J., while dealing with the question of delegation of powers of requisitioning by a Minister to local authorities, held that the Minister, when delegating his power had for the time being divested himself of those powers and therefore he had no power to ratify a purported requisition and neither the local authority to whom the power is delegated nor its town clerk acted as the Minister's agent.

The next contention of the learned Advocate-General was that the impugned order was made by the Central Government without applying its mind to the matter and in support of this contention reliance was placed on a decision of the Supreme Court, Jagannath Misra v. State of Orissa. In that case a detention order was made under rule 30(1)(b) of the Defence of India Rules dealing with the question whether the State Government who made the order applied its mind to the matter. Before making the order the Supreme Court held that where a number of grounds were the basis of a detention order the various grounds should be joined by the conjunctive "and" and use of disjunctive "or" in such a case made no sense and as the word "or" was used in the impugned order it showed that the order was more or less a copy of the rule under which it was made without any application of the mind of the authority concerned to the grounds which applied. On the same question reliance was also placed on another decision of the Supreme Court, Ram Manohar Lohia v. Slate of Bihar.

The learned counsel for the appellants sought to repel the above contention on behalf of the respondent by contending that there was an implied resumption of power by the Central Government in appointing the new inspector and extending the time to make the report. In other words, it was argued that when an authority, which had delegated its power under a statute made an order which by reason of the delegation the delegate alone could make, there was an implied resumption of the power delegated. In support of this contention the learned counsel for the appellants, firstly, relied upon Huth v. Clarke , Lewisham Borough Council v. Roberts and Gordon, Dadds and Company v. Morris  Learned counsel for the appellants also relied upon a decision of the Supreme Court, Godawari S. Parulekar v. State of Maharashtra , for the proposition that the decision of the Judicial Committee in King Emperor v. Sibnath Banerji  was not an authority for the proposition that the Governor entirely divested himself of his powers of passing an order and that the Judicial Committee was dealing with the responsibility of the Governor for the orders issued by the delegate and that all that the Judicial Committee held was that the Governor was not responsible for an order of a delegate and that the Governor could himself act under rule 26 of the Defence of India Rules.

We have been told by the learned Advocate-General that the question raised by him in the appeal in support of the judgment, namely, that once having delegated its power under section 237(b) of the Act, the Central Government could not appoint new inspectors, are the main points involved in the next appeal (New Central Jute Mills Co. Ltd. v. Deputy Secretary, Ministry of Finance ) in which the respondent in this appeal is the appellant. That being so, and. as we are of the opinion that so far as this appeal is concerned the impugned order must be struck down on the ground that the Central Government declined to state if there were any reasons for the formation of the opinion and on the ground that existence of circumstances which enabled the Central Government to form an opinion with regard to the matters set out in clauses (i), (ii) and (iii) of section 237(b) of the Companies Act must be made out as the impugned order has been challenged on the ground that no such circumstances existed, it is not necessary for us to go into the other question raised by the parties in this appeal. We accordingly refrain from expressing any views on the question of the validity of the Central Government's orders appointing the new inspectors and extending the time to make the report by the inspectors so appointed, by reason of the delegation of the powers of the Central Government to the Company Law Board. In our view the refusal of the Central Government to disclose the reasons for the formation of the opinion and the failure on its part to prove the existence of any circumstances that enabled it to form the opinion with regard to the matters set out in clauses (i), (ii) and (iii) are sufficient for striking down the impugned order.

In the result, this appeal fails and is dismissed with costs.

Certified for two counsel. All interim orders are vacated.

Operation of this order will remain stayed for six weeks from today, as prayed for.

Sinha C.J.—I agree.

[1966] 36 COMP.CAS. 543 (CAL.)

HIGH COURT OF CALCUTTA

Sahu Jain Ltd.

v.

Deputy Secretary, Ministry of Finance

BANERJEE, J.

MATTER NO. 2810 OF 1964

AUGUST 6, 1965

 JUDGMENT

The petitioner-company claims to carry on business as managing agent of certain public limited companies, namely, Rohtas Industries Ltd., New Central Jute Mills Co. Ltd., Jaipur Udyog Ltd., Bharat Collieries Ltd., S. K. G. Sugar Ltd., Dehri-Rohtas Light Railway Co. Ltd., Plywood Industries Ltd., and Albion Plywood Ltd. The petitioner-company has a paid up capital of Rs. 5,00,000 and claims to have built up a general reserve of Rs. 25 lakhs. The petitioner-company future claims to be running its business on sound principles and in strict compliance of the provisions of law. These facts are pleaded in order to emphasise upon the contention that the petitioner-company should have been treated as beyond reproach. The measure put by the petitioner-company upon itself is not, however, an agreed measurement and is disputed in the affidavit- in-opposition.

On April 11, 1963, the Central Government made the following order against the petitioner-company:

"Whereas the Central Government is of the opinion that there are circumstances suggesting that the business of Sahu Jain Limited, a company having its registered office at 11, Clive Row, Calcutta (hereinafter referred to as the said company), is being conducted with intent to defraud its creditors, members or other persons and the persons concerned in the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the said company or its members;

And whereas the Central Government consider it desirable that an inspector should be appointed to investigate the affairs of the said company and to report thereon ;

Now, therefore, in exercise of the several powers conferred by sub- clauses (i) and (ii) of clause (b) of section 237 of the Companies Act, 1956 ( 1 of 1956), the Central Government hereby appoints Shri S. Prakash Chopra of Messrs. S. P. Chopra & Co., Chartered Accountants, 31F Connaught Place, New Delhi, as inspector to investigate the affairs of the said company for the period from September 1, 1958, to date and should the inspector so consider it necessary, also for the period prior to September 1, 1958, and to report thereon to the Central Government pointing out, inter alia, all irregularities and contraventions in respect of the provisions of the Companies Act, 1956, or of the Indian Companies Act, 1913, or of any other law for the time being in force and person or persons who are responsible for such irregularities and contraventions;

The inspector shall complete the investigation and submit six copies of his report to the Central Government not later than four months from the date of issue of this order unless time in that behalf is extended by the Central Government;

A separate order will issue with regard to the remuneration and other incidental expenses of the inspector."

The petitioner-company objected to the order in writing on June 12, 1963, in the following language :

"It is alleged in the preamble of the said order that the Central Government is of the opinion that there are circumstances suggesting that our business is being conducted with intent to defraud our creditors, members or other persons and the persons concerned in the management of the company's affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or its members. These allegations are entirely unfounded and false. We deny that there are any circumstances suggesting as indicated in the preamble. We feel that the above order has been made because of extraneous circumstances. If, however, there are any materials in the possession of the Central Government on the basis of which the Central Government has formed the above opinion, we would request you to kindly furnish the same to us at the earliest."

The objection notwithstanding, the petitioner-company alleges that it did not stand in the way of investigation. But this was done, it is alleged, without prejudice.

Between April 16, 1963, and June 12, 1963, S.P. Chopra, the inspector, sought for various information from the petitioner-company which the petitioner alleges were all supplied in writing firstly by eight letters written between April 18, 1963, to May 6, 1963, thereafter by two letters written between May 6, 1963, to May 27, 1963, further thereafter by a letter dated May 27, 1963, and lastly thereafter by two letters dated June 26, 1963, and July 16, 1963. Copies of these letters are all annexed to the petition. The petitioner-company further alleges that it gave to S. P. Chopra all co-operation, including preparation of statements and production of books as and when required. The measure of co-operation alleged to have been extended is not admitted in the affidavit-in-opposition and paragraph 12 of the affidavit contains vague and indefinite charges of obstruction and intimidation by the petitioner-company.

Be that as it may, the investigation was not completed within the time fixed by the order dated April 11, 1963, and had to be extended up to October 31, 1963, by an order dated August 9, 1963, which I set out below :

"In continuation of the Central Government order of even number dated the 11th April, 1963, the Central Government hereby extends the time for the completion of the investigation and for submission of the report by the inspector appointed to investigate into the affairs of Sahu Jain Ltd., a company having its registered office at 11, Clive Row, Calcutta, under section 237(b) of the Companies Act, 1956 (Act 1 of 1956), up to the 31st October, 1963."

How this extension of time was usefully consumed does not appear but on October 31, 1963, there was a second extension of time granted to complete the investigation in the following language :

"In continuation of the Central Government orders of even number dated the 11th April, 1963, and 9th August, 1963, respectively, the Central Government hereby extends the time for the completion of the investigation and for submission of the report by the inspector appointed to investigate into the affairs of Sahu Jain Ltd., a company having its registered office at 11, Clive Row, Calcutta, under section 237(b) of the Companies Act, 1956 (Act 1 of 1956), up to the 31st January, 1964."

This extension of time also produced no better result and the Central Government extended the period for a third time by an order dated January 29, 1964, couched in the following language :

"In continuation of the Central Government orders of even number dated the 11th April, 1963, 9th August, 1963, and 31st October, 1963, respectively, the Central Government hereby extends the time for the completion of the investigation and for submission of the report by the inspector appointed to investigate into the affairs of Sahu Jain Ltd., a company having its registered office at 11, Clive Row, Calcutta, under section 237(b) of the Companies Act, 1956 (Act 1 of 1956), up to the 30th June, 1964."

At this stage, on February 22, 1964, S.P. Chopra wrote the following letter to the petitioner-company :

"I am deputing Shri S. D. Agarwal to check the statements, etc., filed by you with the account books of the company. He will be visiting Calcutta as from 2nd March, 1964. I shall be grateful if you would kindly afford all facilities to him."

Although characterising such delegation of authority to investigate as illegal, the petitioner alleges to have given full facilities to S. D. Agarwal to carry out his work. This is, however, denied in paragraph 12 of the affidavit-in-opposition. Nothing further appears to have happened during this extended period.

On June 30, 1964, the Central Government relieved S.P. Chopra from his appointment, at his own request, appointed S. D. Agarwal and S. Rajagopalan as co-inspectors in succession to S.P. Chopra and extended the time to make the report up to December 31, 1964. The order dated June 30, 1964, is set out hereinafter :

"Whereas vide Central Government's order of even number dated 11th April, 1963, an investigation was ordered into the affairs of Sahu Jain Ltd., 11, Clive Row, Calcutta, under section 237(b) of the Companies Act, 1956 (1 of 1956), and Shri S. Prakash Chopra of Messrs. S. P. Chopra & Co., Chartered Accounts, 31 F, Connaught Place, New Delhi, was appointed as inspector for the purpose ;

And whereas the date for completion of the said investigation and for submission of the report by the said inspector was first fixed as 30th June, 1964 ;

And whereas it has been represented to the Central Government that due to refusal of the company and its officers to produce all books and other papers or to appear before the inspector for the purpose of examination and other non-co-operative and dilatory tactics it would not be possible to complete the investigation by the aforesaid date ;

And whereas Shri S. Prakash Chopra, inspector, has regretted his inability to continue any longer with this appointment due to his other professional engagements;

And whereas after consideration of the aforesaid circumstances and also the magnitude of the work involved, the Central Government are of the opinion that certain modifications and additions in the orders already issued are necessary ;

Now, therefore, in exercise of the powers conferred by sub-clauses (i) and (ii) of clause (b) of section 237 of the Companies Act, 1956 (1 of 1956), the Central Government hereby appoints in place of Shri S. Prakash Chopra, Sarvashri S. Rajagopalan and S. D. Agarwal, Senior Accounts Officers in the Company Law Board, as co-inspectors. The two inspectors shall have co-extensive powers which may be exercised by them severally or jointly. The inspectors shall complete the investigation and submit six copies of their report to the Central Government by 31st December, 1964."

The petitioner-company condemns the appointment of co-inspectors as illegal and not sanctioned by law.

It is alleged by the petitioner-company that the newly appointed co-inspectors made no demand upon the petitioner-company for production of books and accounts but straightaway applied for seizure of books of the petitioner-company under section 240A of the Companies Act and re-inforced by necessary magisterial orders effected search and seizure of various books and documents. This action is condemned by the petitioner company and it is alleged that orders for search and seizure were obtained by false representation and suppression of materials. I am, however, not concerned with the propriety of this action in this rule, which is the subject-matter of another rule issued by this court.

Aggrieved by the different actions taken, the petitioner-company moved this court under article 226 of the Constitution, praying for a writ of certiorari for the quashing of the orders dated April 11, June 30, August 9, October 31, 1963, and January 29, 1964, for a writ of mandamus restraining the respondents from giving effect thereto or to any of them, and for a writ of prohibition restraining the respondents from proceeding under the said orders or any of them and obtained this rule on July 30, 1964.

During the pendency of the rule, I am told, there has been a further extension of the investigation order on December 12, 1964.

Mr. R. C. Deb, learned advocate for the petitioner, argued the same points in condemnation of the impugned orders as he did in Matter No. 272 of 1964 (New Central Jute Mills Co. Ltd. v. Deputy Secretary, Ministry of Finance [1966] 36 Comp. Cas. 512. and I overrule the arguments for the same reasons as I did in that matter. I do not repeat the reasonings at this place for the sake of brevity.

Mr. Deb, however, raised certain other points in this rule, which I need separately consider. In paragraphs 9 to 12 of the petition, it is alleged :

(a)        that all loans and advances obtained by the petitioner-company from banks are fully secured to the satisfaction of the bankers ;

(b)        that the unsecured loans are from directors, shareholders and family members of the directors of the petitioner-company who are fully conversant and satisfied with the conduct of the business of the petitioner-company;

(c)        that the petitioner-company has only eight members, namely, three directors, their family members and an officer of the petitioner-company who are all satisfied with the working of the company ;

(d)        that the allegation of intention to defraud "other persons" is devoid of particulars;

(e)        that there were no complaints ever made against the petitioner- company by anybody.

On the above basis Mr. Deb contended that there were no circumstances suggesting necessity of an investigation under section 237(b) of the Companies Act and that the order for investigation must have been made without legal excuse.

Paragraphs 9 to 12 of the petition are dealt with in paragraphs 8 to 10 of the affidavit-in-opposition as hereinbelow quoted :

"8. With reference to paragraph 9 of the petition I do not admit that the business of the petitioner was not or is not conducted with intent to defraud its creditors, members or any other persons as alleged or at all. It is submitted that it is only after the investigation now in progress is completed that the true manner in which the business of the petitioner is being conducted whether with intent to defraud its members, creditors or other persons or not will be revealed. I deny that there were or is no instance which would justify the formation of any opinion by the Central Government that the petitioner was or is conducting its business with intent to defraud any of its creditors. I have no knowledge of and do not admit that the petitioner had no complaint from any of its creditors regarding the way its business was or is being conducted. Save as is herein expressly admitted, I deny the correctness of the submissions, contentions or allegations of the petitioner in the said paragraph 9 of the petition.

9. With reference to paragraph 10 of the petition, I have no knowledge of and do not admit that the members of the petitioner do not include any outsider. Save as aforesaid, I do not admit the allegations and submissions made in the said paragraph 10 of the petition.

10. With reference to paragraphs 11, 12 and 13 of the petition, the charges of mala fides are denied and the correctness of the submissions and contentions therein made are disputed. Assuming but not admitting that no complaints or enquiries were received or made as alleged, it is contended that such fact even if proved are irrelevant and/or in any event do not establish that the affairs of the petitioner's business are properly or correctly run."

Now, "not admitted" is not denial. If any authority is needed, reference may be made to the judgment, dated February 2, 1949, by A.K. Sarkar J. in Suit No. 366 of 1937 (Jogandra Nath Mullik v. Kanto Mohan Mullik Unreported). "No knowledge" is worse than "not admitted". That may only indicate how uninformed the respondents are. Bare denial does not serve any purpose, where an allegation of fact need be specifically denied. A somewhat affirmative statement, however, appears in paragraph 6 of the affidavit-in-opposition, in which it is stated:

"I say that the Central Government on proper and sufficient grounds formed its opinion and bona fide made the order dated the 11th April,1963. I submit that the opinion of the Central Government is not justiciable. I further submit that it is neither necessary or proper that the order of the 11th April, 1963, should on the face of it disclose the nature and contents of the materials on the basis of which the Central Government formed its opinion.

The above statement has only an assertive value but is not revealing in any measure. I have held in Matter No. 272 of 1964 (New Central Jute Mills Co. Ltd. v. Dy. Secy. Unreported) :

The Government may proceed under section 237(b) only if there are 'circumstances suggesting' the existence of malpractices envisaged in sub-clauses (i), (ii) and (iii) of clause (b) in other words, the Central Government must proceed reasonably and must not be actuated by bad faith or dishonesty, must exclude from consideration matters which are irrelevant and must act according to law and not humour."

I have further held in the decision referred to above:

"An order of the Central Government under section 237(b) is certainly not justiciable, if the order has been made by the appropriate authority bona fide and reasonably, even though the reasons may not fully appeal to a court of law. It may not also be necessary for the Central Government to recite its reasonings when making an order under section 237(b). But when the exercise of the power is challenged as actuated by malice in law, before a court of law justification for the exercise of the power must not be blanketed from the court."

I have already quoted the relevant extracts from the affidavit-in-opposition. That affidavit in my opinion is unhelpful, evasive and uninformative and is an example of what an affidavit-in-opposition should not be in a writ matter. The exercise of the power under section 237(b) has been challenged by the petitioner as done without legal excuse and specific grounds have been pleaded to show that such is the case. The affidavit-in-opposition does not reveal any legal excuse. The respondent merely plead want of knowledge, non-admission of factual statements and bare denials. I cannot, on such an affidavit, hold that the grievance made by petitioner must be unfounded.

I have expressed the view in Matter No. 272 of 1964 (New Central Jute Mills Co. Ltd.(1966) 36 Comp Cas. 512.) that if the Central Government is to proceed on "circumstances suggesting" it can merely proceed on hypothesis, that is to say, on a prima facie theory to be proved or disproved with reference to facts, later on ascertained. Now, if the character of the investigation is merely that of a fact-finding commission, as pointed out by the Supreme Court in Raja Narayan Bansilal v. Maneck Phiroz Mistry (1961) 30 Comp. Cas. 644: (1961) 1 S.C.R. 417, the Central Government cannot be expected to form a fully objective opinion about the malpractices mentioned in sub-clauses (i),(ii) and (iii) of section 237(b) before the investigation brings out relevant materials for the formation of such opinion. It may merely form the opinion that there are circumstances, which may be capable of innocent interpretation, but until so done, suggestively sinister. this is a form of opinion which is lesser in degree than the self-confident opinion based on reasonable materials, commonly known as objective opinion but greater in degree than the speculative view, which goes by the name of subjective satisfaction. Reading the affidavit, I do not find any material from which I can infer that the Central Government proceeded even on prima facie materials. I cannot, therefore, ignore the criticism that there is nothing to indicate that the Central Government had any legal excuse in making the order and may have proceeded on mere subjective satisfaction.

I need notice that the respondents do not claim privilege in respect of the materials on which they made the order of investigation under section 237(b). They merely say that it is not necessary to disclose the materials in the order itself. That may be so, but when called upon to vindicate the making of the order before a court of law the respondents are not to hold back from the court the circumstances which suggested to them the necessity for making the order. The respondents failed to indicate those circumstances before this court, either in the affidavit-in-opposition or in course of argument. The mere assertion that they followed the law in making the order and did not act without any legal excuse is not enough to satisfy the judicial conscience of the court. I am therefore unable to uphold the order for investigation as made.

Before I leave this point, I desire to make one position clear. What the petitioner states in paragraphs 9 to 12 of the petition notwithstanding, it may be possible for the Central Government to make an order for investigation under section 237(b) if in its opinion there are circumstances suggesting the necessity for such an investigation. The allegations contained in paragraphs 9 to 12 of the petition are not necessarily to be taken at their face value. The Central Government may have been materials in its possession which may indicate the falsity of the allegation or the Central Government may have in its possession other materials which may call for an investigation of the affairs of the company under section 237(b). In the instant case, the respondents fail to justify the order because they do not elect to say anything useful.

Following the dictum in Appeal from Original Order No. 209 of 1959 (Daulatram Rawatmull v. Income-tax Officer-unreported), I might have compelled the respondents to place before this court the materials which prompted the Central Government to take action under section 237(b) and determine for myself whether the materials justified the action taken. I do not, however, propose to do so for two reasons. In the first place, the investigation was ordered as far back as April 11, 1963, and has made some progress. In the course of the investigation, the extreme step for search and seizure of documents has been taken. I do not think that this is an appropriate case where I should try to salvage the investigation, at this stage, by compelling the respondents to disclose the materials, if any exist at all. Then again, the Central Government can always make a fresh order for investigation on circumstances suggesting the propriety of such an action and justify the same, if called upon to do so.

Before I close this judgment, I need observe that Mr. Deb strongly argued that after the establishment of the Company Law Board, the Central Government lost the jurisdiction to extend the time for investigation or to appoint an inspector or co-inspector in the vacancy in the inspectorate. I have dealt with this argument in Matter No. 272 of 1964 (New Central Jute Mills Co. Ltd. (1966) 36 Comp. Cas. 512) and negatived the contention. I need not repeat my reasonings over again in this rule for so doing.

In the result, this rule succeeds and impugned order of investigation is quashed and the respondents are restrained from giving further effect to the same. Let a mandate issue accordingly.

Nothing contained in this judgment shall stand in the way of the Central Government in making a fresh investigation order according to law.

There will be no order as to costs.

The operation of this judgment shall remain stayed for a fortnight.

[1970] 40 COMP. CAS. 102 (CAL)

HIGH COURT OF CALCUTTA

New Central Jute Mills Co. Ltd.

v.

Deputy Secretary, Ministry of Finance

Department of Revenue & Company Law

D.N. SINHA, C.J.

AND B.C. MITRA, J.

APPEAL FROM ORIGINAL ORDER NO. 236 OF 1966

MARCH 7, 1969

R.C. Deb, Subrata Roy Chowdhury and P.L. Khaitan for the appellant.

Niren De, B. Das and B. Basak for the respondent.

JUDGMENT

Sinha, C. J.—The appellant in this case is Messrs. New Central Jute Mills Co. Ltd., which is a public limited company incorporated under the Indian Companies Act, 1913 (hereinafter referred to as "the appellant"), and is an existing company under the Companies Act, 1956 (hereinafter referred to as the "said Act"), having its registered office at 11, ('live Row, Calcutta. It carries on business, inter alia, as manufacturers of jute goods, chemicals and fertilizers. It owns two jute mills called Albion Jute Mills and Lothian Jute Mills situate at Budge Budge, West Bengal. It owns a factory at Varanasi known as Sahu Chemicals & Fertilizers in which soda ash and ammonium chloride are produced.

Messrs. Sahu Jain Ltd., of 11, Clive Row, Calcutta, was at all material times and still is the managing agents of the appellant. The authorised capital of the appellant is rupees five crores divided into 30,00,000 ordinary shares of Rs. 10 each and 20,00,000 preference shares of Rs. 100 each. The paid-up capital of the appellant is Rs. 2,89,00,000 divided into 33,000 preference shares of Rs. 100 each fully called-up and 25,60,000 ordinary shares of Rs. 10 each fully called-up. The capital of the appellant was increased by Rs. 42,75,000 in 1958 and further by Rs. 42,75,000 in 1959 and again by Rs. 85,00,000 in 1961. These figures are mentioned to show that the appellant is a substantial company. In the petition it is stated that at all material times the business of the appellant was run on sound principles resulting in substantial profits, declaration of good dividends and provision for sufficient reserve. For example, it is stated that the appellant made a net profit of Rs. 1,32,55,724 for the year ended 31st March, 1963, after meeting all expenses and interest charges and after providing Rs. 53,55,584 for depreciation. The appellant declared as dividend a sum of Rs. 28,60,000 in addition to payment of interim dividend of Rs. 12,80,000 for the year ended 31st March, 1963. In other words, during the said year the appellant declared 15 per cent, dividend on ordinary shares and 91 per cent, on preference shares. On or about 11th April, 1963, the Central Government purported to pass an order under sub-clauses (i) and (ii) of clause (b) of section 237 of the said Act. The relevant part of section 237 of the said Act runs as follows :

"237 Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)         the company, by special resolution ; or

(ii)        the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

        (b)    may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members, or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members;....................."

It would be interesting to relate here shortly how provisions as to inspection and investigation of the affairs of companies came to be incorporated in the said Act. The Indian Companies Act, 1913, was extensively amended in 1936 and thereafter further amended from time to time. After the World War II, there was a demand for its drastic revision. In the report of the Company Law Committee, 1952, it was stated :

"No Jaw, however well-conceived or well drafted, can be altogether fool-and-knave proof and it is impossible for any law to protect the fool from the consequences of his acts or omissions. Nevertheless, we consider that it is the function of law to prevent dishonest and unscrupulous people from creating conditions and circumstances, which will enable them to make fools of others. The powers of inspection and investigation into the affairs of a company, which the Companies Acts of most countries confer on Government or a quasi-independent authority, are intend' d primarily as a check on the activities of such people. We recognise that, in some cases, the use of the powers of inspection and investigation may, initially, tend to shake the credit of a company and thereby adversely affect its competitive position, although the allegations against the company may in the end be found to have been largely unfounded. It is, therefore, necessary that the investigation provisions of the Act should be so conceived as to reduce this threat to the credit of companies to a minimum. This risk should not, however, deter us from considering the desirability of conferring adequate powers on an appropriate authority to investigate the affairs of a company, where such investigation is prima facie called for. On the contrary, we consider it to be in the long term interest of the trade and industry of this country that such powers should be vested in a competent authority and exercised energetically, albeit with due caution and fairness in all cases which require investigation." (Report of the Company Law Committee, 1952, page 133).

The demand for drastic action was sought to be made by enacting the Companies Act, 1956, which came into operation from April 1, 1956. The said Act has been amended several times. Section 209(4) of the said Act contains provisions for inspection and sections 235 to 251 contain provisions for investigation. I have already mentioned that on or about the 11th April, 1963, an order was passed under sub-clauses (i) and (ii) of clause (b) of section 237 of the said Act upon the appellant. The relevant part of the said order runs as follows :

"Whereas the Central Government is of the opinion that there are circumstances suggesting that the business of the New Central jute Mills Ltd., a company having its registered office at 11, Clive Row, Calcutta (hereinafter referred to as the "said company"), is being conducted with intent to defraud its creditors, members or other persons and the persons concerned in the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the said company or its members ;

And whereas the Central Government consider it desirable that an inspector should be appointed to investigate the affairs of the said company and to report thereon ;

Now therefore in exercise of the several powers conferred by sub-clauses (i) and (ii) of clause (b) of section 237 of the Companies Act, 1956 (Act 1 of 1956), the Central Government hereby appoint Shri S. Prakash Chopra of M/s. S. P. Chopra and Company, Chartered Accountants, 31F Connaught Place, New Delhi, as inspector to investigate the affairs of the said company for the period from April 1, 1958, to date and should the inspector so consider it necessary also for the period prior to April 1, 1958, and to report thereon to the Central Government pointing out inter alia irregularities and contraventions in respect of the provisions of the Companies Act, 1956, or of the Indian Companies Act, 1913, or any other law for the time being in force and person or persons who are responsible for such irregularities and contraventions.

The inspector shall complete the investigation and submit six copies of his final report to the Central Government not later than four months from the date of issue of this order unless time in that behalf is extended by the Central Government.

A separate order will issue with regard to the remuneration and other incidental expenses of the inspector."

On receipt of the said order the appellant wrote to the respondent No. 1 objecting to the investigation, inter alia, on the ground that the order was unwarranted, without jurisdiction and made on consideration of extraneous circumstances, and requested the said respondent to furnish to the appellant the materials on the basis of which the order had been made. The said respondent by his letter dated 17th June, 1963, repudiated the allegation and refused to disclose any material as asked for. The said Mr. S.P. Chopra who was appointed inspector was, however, allowed to commence the investigation but could not complete it within the period originally fixed and by an order dated 9th August, 1963, the period originally fixed was extended to 31st October, 1963. On or about the 6th September, 1963, an order was made for inspection by Mr. I.N. Puri under sub-section (4) of section 209 of the Act. The appellant-company objected to this order also, but the objection was overruled. By an order dated 31st October, 1963, a further extension was given to Mr. S.P. Chopra to complete his investigation and report up to 31st January, 1964. By an order dated 29th January, 1964, a third extension was given up to 30th June, 1964. By an order dated 12th June, 1964, an additional inspector, Mr. U. N. Puri, was appointed and the two inspectors were directed to complete the investigation and report by 30th June, 1964, or such date as may be extended from time to time, if and when necessary. By an order dated 30th June, 1964, Mr. S.P. Chopra was relieved of his duties at his own request. In that order, it was stated that it had been represented to the Central Government that the investigation and report could not be completed within the extended time due to the refusal of the company and its officers to produce all books and papers or to appear before the inspector for the purpose of examination, and due to other non-co-operative dilatory tactics. In his place, Mr. S.C. Bafna was appointed co-inspector with Mr. I.N. Puri and they were directed to complete the investigation and report by the 31st December, 1964. On or about the 21st July, 1964, the appellant made an application to this court under article 226 of the Constitution, praying for a writ of certiorari for quashing of the order dated 11th April, 1963, and also the orders dated 6th September, 1963, 12th June, 1964, and 30th June, 1964, and for a writ of mandamus directing the respondent to recall or rescind the said orders and for a writ of prohibition restraining the respondents from taking further steps in the impugned proceedings. A rule was issued on 21st July, 1964. I might mention here that a similar rule was issued in C.R. No. 203 of 1965 (Deputy Secretary, Ministry of Finance v. Sahu Jain Ltd.). In both these applications the grounds are similar. The rule in Sahu Jain's case was heard by Banerjee J. and by his order dated 6th August, 1965, the rule was made absolute and the impugned orders in that case were quashed and appropriate writs were issued, making it clear, however, that nothing contained in the said order would stand in the way of the Central Government making a fresh investigation according to law. In both these rules, a common point of law was raised, namely, as to whether, the Central Government, in making an order, was bound to satisfy the court on the point as to whether, prima facie, grounds existed for taking action against the companies concerned, in terms of sub-clauses (i) and (ii) of clause (b) of section 237. In Sahu Jain's case, the stand taken by the respondent was that the "opinion" of the Central Government, based on circumstances mentioned in sub-clauses (i) and (ii) of clause (b), were subjective and it was not bound to disclose, either to the party concerned or the court, even the prima facie grounds upon which the opinion was based. In Sahu Jain's case3 a complete blanket was drawn and, although affidavits were filed, no grounds were disclosed to the court. By his judgment and order dated 6th August, 1965, the rule in that case was made absolute and the impugned orders were quashed, mainly on the ground that the respondents were bound to satisfy the court that there existed prima facie grounds for making an order under sub-clauses (i) and (ii) of clause (b) of section 237, and, as this was not done, the orders were defective and without jurisdiction. In the instant case, the very same attitude has been taken, namely, that the "opinion" of the Central Government was subjective and needed no disclosure either to the party or to the court. By an elaborate judgment the learned judge negatived this contention, but held that in the affidavit-in-opposition filed by Mr. D.S. Dang, Deputy Secretary to the Government of India, affirmed on 29th August, 1964, materials were disclosed, making out a prima facie case that circumstances existed in this case satisfying the provisions of sub-clauses (i) and (ii) of clause (b) of section 237. This information is stated to be contained in paragraph 4 of the said affidavit-in-opposition of Mr. Dang, which runs as follows :

"Further for the greater part of the period under investigation, Messrs. N.C. Jain & Co., a firm of chartered accountants, were the statutory auditors of the petitioner. In the same period, members of such firm were also acting as employees in some of the other concerns belonging to or controlled by Shanti Prasad Jain and/or members of his family who also control and manage the petitioner. In the premises, it is contended that the statutory auditors of the petitioner were not at material times independent and at no material time there has been a just audit of the petitioner's affairs'."

Banerjee J. was of the opinion that this statement was sufficient to make the impugned orders valid. The learned judge said as follows :

"It appears from the annual report of the petitioner-company for the years 1955 to 1962-63 (all annexed to the petition) that Sahu Jain Ltd. is and has been the managing agent of the petitioner-company. It is not disputed that Shanti Prasad Jain is the chairman of the board of directors of Sahu Jain Ltd. The Central Government appears to entertain the opinion that there are circumstances suggesting that members of the firm of N.C. Jain & Co., statutory auditors to the petitioner-company, are employed in other concerns belonging to or controlled by Shanti Prasad Jain. Now, the value of an audit report depends upon the independence and integrity of the auditors. If it appears that auditors are under some sort of obligation to the company, the accounts of which they audit, there may arise a doubt that the auditors might have discharged their functions much too indulgently. If such a doubt arises, it cannot be ignored as a doubt which no reasonable man should entertain. In the affidavit-in-reply the petitioner no doubt denies that any member or members of the firm of auditors were employed as alleged. I am not in a position to decide which version is correct. Be that as it may, paragraph 4 of the affidavit-in-opposition makes one definite allegation against the petitioner-company and the nature of the allegation is not such as does not make a reasonable man inquisitive. The petitioner-company controls very large capital contributed by the public. Its liabilities by way of loan and otherwise are also considerable. If it does not do its business honestly and properly, the repercussions on the economics of the country may be pretty severe. If in the opinion of the Central Government there are circumstances suggesting that the petitioner-company has been employing an obliging firm of auditors which may cover up its malpractices, it cannot be said that the Government did not act reasonably in taking action under section 237(b) or must have proceeded on a fundamental misconception of the law and the matter in regard to which the opinion was to be formed."

There were other grounds argued in support of the rule, but mainly on the ground stated above, the application failed and the rule was discharged on 4th August, 1965, although no order of to costs was made. It is against this order that this appeal is directed. In both the cases, a number of authorities were cited, but the learned judge did not have the opportunity of considering two Supreme Court decisions which have since come into existence and which are decisive on the points involved in the two cases, namely, Barium Chemicals Lid. v. Company Law Board and an unreported decision, Rohtas Industries Ltd. v. S. D. Agarwall (Civil Appeals Nos. 2274 to 2276 of 1966, judgment dated 16th December, 1968). In fact, in Sahu Jain's case , an appeal was preferred against the order of Banerjee]. dated 6th August, 1965, and, following the decision in Barium Chemicals Ltd. and the other authorities mentioned in the judgment of Mitra J. dated 18th February, 1969, the decision of Banerjee J. was upheld and the appeal has been dismissed with costs. In this appeal, we have received further assistance from the recent judgment of the Supreme Court in Rohlas Industries Ltd.  I will now proceed to summarise the findings in these two cases and apply them to the facts of the instant case, to see whether the order of Banerjee J. in the instant case dated 4th August, 1965, can be supported or should be set aside. In the case of Barium Chemicals Lid. v. Company Law Hoard, the facts were briefly as follows:

In 1959/60 the appellant No. 2, Balasubramaniam, obtained from the Central Government two licences for the manufacture of 2,500 and 1,900 tonnes of barium chemicals per year in the name of Transworld Traders of which he was the proprietor. He then started negotiations with Kali Chemic of Hanover, West Germany, to collaborate with him in setting up a plant. While he was so negotiating, M/s. T.T. Krishnamachari and Company, who were the sole selling agents of the said German company for some of their products, approached the second appellant for the sole selling agency of barium products of the plant proposed to be put up by the second appellant. The second appellant did not agree. On December 5, 1960, M/s. T.T. Krishnamachari and Co. applied to the Central Government for a licence for manufacture of barium chemicals. The second appellant objected to it but in spite of his objections the licence was granted. In the year 1961, the Barium Chemicals Ltd., the appellant No. 1, was incorporated with an authorised capital of rupees one crore and an issued capital of rupees fifty lakhs. Its primary object was to carry on the business of manufacturing all types of barium compounds. Balasubramaniam, the appellant No. 2, was appointed the managing director of the company from December 5, 1961. The erection of the plant was undertaken by M/s. L.A. Mitchell Ltd., Manchester, in pursuance of a collaboration agreement approved by the Central Government. In November, 1961, the Central Government granted a licence to the said company for import of machinery. On or about this time, Mr. T.T. Krishnamachari, the respondent No. 2, was appointed a Minister and rejoined the cabinet later on becoming the Minister of Finance and Economic Co-ordination and thereafter the Finance Minister of India. On August 30, 1962, the licence granted to M/s. T.T.K. Ltd. was revoked. It is stated that the appellant No. 2 was instrumental in having this done, by speaking to Prime Minister Nehru. On the other hand, it was stated that M/s. T.T.K. Ltd. had themselves decided to surrender it. Meanwhile, the appellant No. 1 was not faring well. It was not able to start work in full capacity and it was found on a survey report made by M/s. Humphreys and Glasgow (Overseas) Ltd., Bombay, that the planning and design of the plant erected by the collaborators was defective. The appellant No. 1 gave notice to M/s. Mitchell Ltd. on April 2, 1965, that if the plant was not completely installed by June 1, 1965, the company would terminate the arrangements and seek damages. As a result of it, the Chairman of L.A. Mitchell Ltd., Lord Poole, visited India and it was agreed that the necessary repairs would be carried out by the collaborators at an expenditure of £2,50,000 in addition to the amount already invested by it, and that production would commence from June, 1965. In the meantime, M/s. Kali Chemie of Hanover started negotiations for a collaboration agreement and the proposal was that the appellant No. 1 should be reorganised and its share capital distributed between Kali Chemie and M/s. T.T.K. Chemicals Ltd. It was also proposed that Kali Chemie should take over the responsibility of production; the appellant No. 1 would be responsible for the management and M/s. T.T.K. Chemicals Ltd. should take over the sales promotion. These negotiations, however, came to nothing owing to the agreement with the original collaborators. On May 19, 1965, the Secretary of the Company Law Board, under the direction of the Chairman thereof, issued an order on behalf of the Company Law Board under section 237(b) of the said Act. The relevant part of the order ran as follows:

" 'In the opinion of the Company Law Board there are circumstances suggesting that the business of M/s. Barium Chemicals Ltd..................is being conducted with the intent to defraud its creditors, members and other persons ; and further that the persons concerned in the management of the affairs of the company have in connection therewith been guilty of fraud, misfeasance and other misconduct towards the company and its members.

Therefore, in exercise of the powers vested by clause (b) of section 237 of the Companies Act, 1956 (1 of 1956), read with the Government of India, Department of Revenue, Notification No. GSR 178, dated the 1st February, 1964, the Company Law Board hereby appoint.............as inspectors to investigate the affairs of the company since its incorporation in 1961...............' "

Pursuant to the notice, search warrants were obtained and searches were carried out and documents were seized. The second appellant submitted a representation to the Board that the company was the first of its kind in India, that it could not go into production because of defective planning by the collaborators and that the impugned order had been made on account of trade rivalry between the company and M/s. T.T. K. and Company, in which the Minister, Mr. T.T. Krishnamachari, was interested. It was stated that the order was mala fide and it was made on grounds extraneous to the provisions of section 237(b) of the said Act and at the instance of the second respondent, Mr. Krishnamachari. As the Board was determined to proceed with the implementation of the order, an application was made before the Punjab High Court under article 226 for having the impugned order quashed and for certain other reliefs. This application failed and thereupon the appellants appealed to the Supreme Court. On behalf of the appellants four contentions were raised:

1. That the impugned order dated May 19, 1965, was mala fide and was the result of the personal hostility of the Minister.

2. The circumstances said to have been found were extraneous to section 237(b) and could not constitute a basis for the impugned order and the order was, therefore, ultra vires the section.

        3. That the impugned order was in any case bad as it was passed by the Chairman alone.

4. That the impugned order was bad because section 237 itself was bad as offending against articles 14 and 19(1)(g).

In the case, there was a majority judgment delivered by Shelat J. allowing the appeal and setting aside the impugned order, which was agreed with by Hidayatullah J. (as he then was) and Bachawat J. According to the minority judgment delivered by Mudholkar J. for himself and Sarkar C.J., it was held that the exercise of the power did not violate any fundamental rights, that the opinion to be formed under section 237(b) was subjective, but that, if the grounds were; disclosed by the Board, the court could examine them for considering whether they were relevant. That, on the facts of the case, they appeared to be relevant. It was not shown that it was made mala tide and the appeal should be dismissed. All the three learned judges constituting the majority gave their reasons and I shall now refer to the same. All the learned judges agreed that the impugned provisions were not ultra wires articles 14 and 19(1)(g) of the Constitution and also upon the fact that the charge of mala fides had not been established. In the present case we need not deal with these points.

In the present case we are concerned only with the question as to whether the provisions of section 237(b)(i) and (ii) are entirely subjective and cannot be gone into by the court or if the order was objected to on the ground of mala fides or relevance, the court has jurisdiction to go into the question and to what extent. If it has jurisdiction to go into the matter, can it be said in the instant case that the respondents have given a satisfactory answer as to the objections raised, so as to make out a prima facie case. The observation of Shelat J., so far as they are relevant on these points, may be summarised as follows:

(1)        The object of section 237 is to safeguard the interests of those dealing with a company by providing for an investigation where the management is so conducted as to jeopardize those interests or where a company is floated for a fraudulent or an unlawful object.

(2)        here is no doubt that the formation of the opinion by the Central Government is a purely subjective process. There can also be no doubt that, since the legislature has provided for the opinion of the Government and not of the court: such an opinion is not subject to a challenge on the ground of propriety, reasonableness or sufficiency.

(3)        But the authority is required to arrive at such an opinion from circumstances suggesting the existence of circumstances set out in sub- clauses (i) or (ii) or (iii). The expression "circumstances suggesting" means that the circumstances need not be such as would conclusively establish an intent to defraud or a fraudulent or an illegal purpose. The proof of such an intent or purpose is still to be adduced through an investigation. But the expression "circumstances suggesting" cannot support the construction that even the existence of circumstances is matter of subjective opinion. The law requires that there must exist circumstances from which the authority forms an opinion that they are suggestive of the crucial matters set out in the three sub-clauses. The legislature could not have left to the subjective process both the formation of opinion and also the existence of circumstances on which it is to be founded.

(4)        There must exist circumstances which in the opinion of the authority suggests what has been set out in sub-clause (i), (ii) or (iii). If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion therefrom suggestive of the aforesaid opinion, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute.

(5)        The words, "reason to believe" or "in the opinion of", do not always lead to the construction that these processes do not lend themselves even to a limited scrutiny by the court.

(6)        Of course, if there is any question of mala fides, dishonesty or corrupt purpose, it can be challenged in court and set aside, but even if it is based on good faith, the authority has to act in accordance with and within the limits of the legislative powers and its order can be challenged if it is beyond those limits or if it is based on grounds extraneous to the legislation or if there are no grounds at all for passing it or if the grounds are such that no one can reasonably arrive at the opinion or satisfaction requisite under the legislation. In any one of these circumstances, it can well be said that the authority did not honestly form its opinion or that, in forming it, it did not apply its mind.

In the judgment of Shelat J. it was pointed out that the chairman of the board had filed an affidavit-in-opposition in which it was stated that the circumstances upon which the board arrived at the opinion resulting in the impugned order were as follows:

"(i)    there had been delay, bungling and faulty planning of the project, resulting in double expenditure for which the collaborators had put the responsibility upon the managing director, petitioner No. 2:

(ii)    since its floatation the company had been continuously showing losses and nearly 1/3rd of its share capital had been wiped off;

(iii)   that the shares of the company, which to start with were at premium, were being quoted on the stock exchange at half their face value; and

(iv)   some eminent persons who had initially accepted seats on the board of directors of the company had subsequently severed their connections with it due to differences with petitioner No. 2 on account of the manner in which the affairs of the company were being conducted."

It was held that the grounds disclosed in the affidavit of the Chairman did not establish any intent to defraud or unlawful purpose either in the formation or conduct of the company or misfeasance or misconduct towards the company or its members. Delay, bungling or faulty planning could not constitute fraud, misfeasance or misconduct.

The relevant findings of Hidayatullah J. (as he then was) may be summarised as follows:

(1)        The power contained in section 237(b) of the said Act is discretionary and its exercise depends upon the honest formation of an opinion that an investigation is necessary. The words "in the opinion of the Central Government" indicate that the opinion must be formed by the Central Government and it is implicit that the opinion must be an honest opinion.

(2)        The next requirement is that "there are circumstances suggesting, etc." These words indicate that before the Central Government forms its opinion it must have before it circumstances suggesting certain inferences. These inferences are as follows :

        "(a)   that the business is being conducted with intent to defraud—

        (i)         creditors of the company, or

        (ii)        memberr, or

        (iii)       any other person ;

        (b)    that the business is being conducted—

        (i)         for a fraudulent purpose, or

        (ii)        for an unlawful purpose ;

        (c)    that persons who formed the company or manage its affairs have been guilty of—

        (i)         fraud, or

        (ii)        misfeasance or other misconduct towards the company or towards any of the members ;

(d)    that information has been withheld from the members about its affairs which might reasonably be expected, including information relating to the calculation of commission payable to—

        (i)         managing or other director,

        (ii)        managing agent,

        (iii)       secretaries and treasurers, and

        (iv)       the managers."

(3)        The above-mentioned grounds limit the jurisdiction of the Central Government, outside which the power cannot be exercised. An action not based on circumstances suggesting inferences of the enumerated kind will not be valid. In other words, the enumeration of the inferences, which may be drawn from the circumstances, postulates the absence of a general discretion to go on fishing expeditions to find evidence.

(4)        The formation of the opinion is subjective, but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. It is not reasonable to say that the clause permits the Government to say that it has formed the opinion on circumstances which it thinks exist.

(5)        Since the existence of "circumstances" is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned in court, has to be proved at least prima facie. It is not sufficient to say that the circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusion of certain definiteness.

(6)        When it is challenged that the opinion has been formed mala fide or upon extraneous or irrelevant matters, the respondent must disclose before the court the circumstances which will indicate that his action was within the four corners of his own powers.

On the facts, the majority view was that this onus has not been discharged and that the order was made on extraneous circumstances and the charge of mala fides was not substantiated. The affidavit of the chairman showed that he relied on circumstances which showed "delay, bungling and faulty planning" resulting in "double expenditure", for which the collaborators had put the responsibility on the second appellant. There was admitted loss in the running of the undertaking, for which the blame was put on faulty planning and design by the collaborators. None of these circumstances showed intent to defraud. That some directors had resigned did not also establish fraud or misconduct. There might be other reasons for their resignation. The affidavit of Mr. Dang merely repeated the allegations made by the chairman and stated that a "deeper probe" was necessary. It did not prove the existence of circumstances under which the power could be exercised.

On the relevant point, Bachawat J. agreed with the views stated above. He expressed different views on the question of delegation, but we are not concerned with it in this case.

The next case to be considered is the unreported decision of Rohlas Industries Lid. v. S.D. Agarwal. The facts in that case were briefly as follows : The appellant in the appeals was a company incorporated under the Indian Companies Act, 1913, some time in 1933 having its registered office at Dalmianagar in Bihar. The authorised capital was 15 crores and the paid-up capital about 6 crores. On or about the 11th April, 1963, a notice was issued at the instance of the Board upon the said company under sub-clauses (i) and (ii) of clause (b) of section 237 of the said Act. Inspectors were appointed and, like the previous case, time was repeatedly extended. The company applied before the Patna High Court challenging the said order and a rule was issued under article 226. In that case also the Chairman, Company Law Board, filed an affidavit-in-opposition. The circumstances disclosed therein in issuing the said order were as follows:

        "(a)   Shri S.P. Jain together with his friends, relations and associates is principally in charge of the management of the petitioner-company. Over a long period, several complaints had been received by the department, as to the misconduct of the said Shri S.P. Jain towards companies under his Control and management. Some of these were referred to and enquired into by a commission of inquiry headed by Mr. Justice Vivian Bose of the Supreme Court of India, which in its report dated 15th June, 1962, made adverse findings and observations against Shri S.P. Jain. Shri S.P. Jain is being prosecuted in the court of District Magistrate, Delhi, under sections 120B read with sections 409, 465, 467 and 477 of the Indian Penal Code in regard to his misconduct in the management of what are known as the Dalmia Jain group of companies, and most of the material upon the basis of which this prosecution was launched was available to the Central Government on 11th April, 1963. Shri Jain is also being prosecuted in Calcutta for misconduct in the management of Messrs. New Central Jute Mills Co. Ltd., a company under the same management as the petitioner, on the basis of an F.I.K., lodged by the department with the special judge, police establishment, just before the 11th April, 1963. Shri Jain is also being proceeded against before the Companies Tribunal under sections 388B and 398 for misconduct in managing the affairs of M/s. Bennett Coleman & Co. Ltd., and details as to Shri Jain's misconduct were with the Central Government as on 11th April, 1963.

        (b)    Complaints had also been received by the department before 11th April, 1963, specifically as to the misconduct on the part of the management of the petitioner-company in the conduct of its affairs."

The High Court dismissed the writ petition, holding that the opinion formed by the Central Government was not open to judicial review. From that order there was an appeal to the Supreme Court. In the Supreme Court, a further affidavit was filed and the only additional material that was placed before the court were three complaints received by the Government which were marked as annexures "A", "B" and "C". At the hearing it was conceded that the allegations made in annexuie "A" were too vague and could not have been the basis for making the impugned order. One concrete allegation made therein related to an event prior to the date from which an enquiry had been ordered. In fact, it had occurred in 1939, whereas the enquiry was ordered for a period subsequent to April 1, 1950. The allegations in annexure "B" were also found to be vague and not relied on. The following complaint in annexure "C" was relied on :

"The investments of the company in Albion Plywoods Ltd. and their variations by the company's managing agents appear to have been done to benefit the managing agents, their friends and brokers, at the expense of the shareholders. It appears that the preference shares in this company were sold at the market rate of Rs. 100 each when these could be converted into ordinary shares of Rs. 10 each which were then quoting at Rs. 15 in the stock market. This and various other acts of deliberate commissions and omissions require a thorough investigation so that shareholders in general may have a feeling of security in the company."

With regard to the above-mentioned allegations, it appeared that there was no material before the Board when it issued the order as to who were the partners of Bagla and Co. to whom the 3,000 preference shares were sold, and consequently whether the transaction could be said to have been made with a view to profit the directors of the appellant-company or their relations. Hegde J. held as follows:

"From the facts placed before us, it is clear that the Government had not bestowed sufficient attention to the material before it before passing the impugned order. It seems to have been oppressed by the opinion that it had formed about Shri S.P. Jain. From the arguments advanced by the Attorney-General it is clear that, but for the association of Mr. S.P. Jain with the appellant-company, the investigation in question, in all probability, would not have been ordered. Hence, it is clear that in making the impugned order irrelevant considerations have played an important part."

The learned judge then proceeded to uphold the vires of the section agreeing with the decision in Barium Chemicals case  and then proceeded to state as follows :

"The next question is whether any reasonable authority, much less an expert body like the Central Government, could have reasonably made the impugned order on the basis of the material before it. Admittedly, the only relevant material on the basis of which the impugned order can be said to have been made is the transaction of sale of preference shares of Albion Plywoods Ltd. At the time when the Government made the impugned order, it did not know the market quotation for the ordinary share of that company as on the date of the sale of those shares or immediately before that date. They did not care to mid out that information. Hence there was no material before them showing that they were sold for inadequate consideration. If, as is now proved, the market price of those shares on or about May 6, 1960, was only Rs. 11 per share then the transaction in question could not have afforded any basis for forming the opinion required by section 237(b). If the market price of an ordinary share of that company on or about May 6, 1960, was only Rs. 11, it was quite reasonable for the directors to conclude that the price of the ordinary shares is likely to go down in view of the company's proposal to put on the market another 50,000 shares as a result of the conversion of the preference shares into ordinary shares. We do not think that any reasonable person, much less any expert body like the Government, on the material before it, could have jumped to the conclusion that there was any fraud involved in the sale of the shares in question. If the Government had any suspicion about that transaction it should have probed into the matter further before directing any investigation. We are convinced that the precipitate action taken by the Government was not called for nor could be justified on the basis of the material before it. The opinion formed by the Government was a wholly irrational opinion. The fact that one of the leading directors of the appellant-company was a suspect in the eye of the Government because of his antecedents, assuming without deciding, that the allegations against him are true, was not a relevant circumstance. That circumstance should not have been allowed to cloud the opinion of the Government. The Government is charged with the responsibility to form a bona fide opinion on the basis of relevant material. The opinion formed in this case cannot be held to have been formed in accordance with law."

In the result the appeals were allowed and the orders were set aside. Bachawat J. described it as a "borderline case". He held that the court had no power to review the facts us an appellate body, nor could it substitute its opinion for that of the Government. He, however, came to the conclusion that there were no materials before the Government on which it could form the opinion that there were circumstances suggesting fraud, etc., as mentioned in the impugned order dated May 11, 1963. It can therefore be said that it had formed the opinion without applying its mind to the materials before it and, therefore, the opinion formed was in excess of its powers. The learned judge agreed with the proposed order of Hegde J.

It is clear, therefore, from the principles which have now been firmly established in the two Supreme Court decisions mentioned above, that upon being challenged the respondents must show to the court that prima facie reasons existed and were considered before the order was made in conformity with the provisions of sub-clauses (i) and (ii) of clause (b) of section 237 of the said Act. It is obvious that these reasons must exist when the order was made. It has been definitely laid down that an order could not be made to commence a fishing expedition in order to find the reasons for making an order. Reasons, if found afterwards cannot justify the order in retrospect, if they were not available to the authority exercising its powers, in arriving at an opinion in conformity with the provisions stated above.

I have already stated above that there were two cases which were decided by Banerjee J. In Sahn Jain's case the respondent-authorities refused to disclose any reason to this court for forming the opinion, although it was charged that the reasons were mala fide, extraneous and irrelevant. That order was manifestly against the principles laid down in the two cases mentioned above and has now been set aside. The only distinction in this case is that the learned judge in the court below had found that in paragraph 4 of the affidavit-in-opposition, certain statements were made which have been set out above. According to the learned judge, there were sufficient reasons to uphold the legality of the order made. We have some doubts as to whether the allegations made amount to fraud, misfeasance, or misconduct as is required under sub-clauses (i) and (ii) of clause (b) of section 237. Be that as it may, an objection has been taken by the Advocate-General, which appears to be fatal to the respondents. He argues with great force that if the law is that the respondent-authorities must show to the court that prima facie reasons existed for arriving at the opinion upon which the impugned order is based, it must be averred and shown that these circumstances existed at the time when the order was made and that the authority making the order was aware of them and based its opinion on these circumstances. Briefly put, the allegation in paragraph 4 is that there has not been adequate and proper audit of accounts of the appellant, as the auditor's reports were based on information furnished to them which were defective and the audit was not made by an independent auditor. It is nowhere stated that this fact came to be known to the authorities at or before the time when the impugned order was made, and that the impugned order was made upon the basis of these facts which came to be known prior to the making of the order. This, of course, would be fatal because the respondent authorities could not possibly justify the making of the impugned orders until such an averment was made and substantiated. The learned judge, in relying on the statements made in paragraph 4 of the affidavit of Mr. D.S. Dang, affirmed on 29th August, 1964, completely overlooked this aspect of the matter. The learned counsel on behalf of the respondents asked for an opportunity to file further affidavits and, in spite of opposition by the counsel for the appellants,

we, for the ends of justice, permitted additional affidavits to be filed upon this point and adjourned the hearing of the case. In fact, the matter was adjourned several times in order to enable such affidavit to be filed. Now, however, learned counsel for the respondent is constrained to admit before the court that his clients are not in a position to file any such affidavit in court. In our opinion, there can be now no doubt that the respondent-authorities have failed to discharge the onus of proving even a prima facie case to support the impugned order. The learned judge in the court below has relied on only one paragraph of the affidavit-in-opposition and this does not contain the necessary averments, and is useless for the purpose of the respondents.

The result is that, applying the tests set out in the two Supreme Court decisions mentioned above, this appeal should succeed and the judgment and order of the court below is set aside and the rule is made absolute and the impugned orders are set aside and/or quashed by appropriate writs and the respondents are restrained by a writ in the nature of mandamus from giving effect to the same. This will not, however, prevent them from issuing any further orders in accordance with law. The appellants are entitled to the costs of the appeal. Certified for two counsel.

The operation of this order will remain stayed for six weeks from this date.

B.C. Mitra J.—I agree.

bombay high court

companies act

[2005] 61 SCL 33 (bom.)

High Court of Bombay

Panther Fincap & Management Services Ltd.

v.

Central Government, Union of India

S.U. Kamdar, J.

Appeal Nos. 1 to 14 of 2005

In Company Petition Nos. 34, 36, 38, 39, 40, 44, 49, 52, 56, 60, 64, 65, 67 and 68 of 2003

March 31, 2005

Section 237 of the Companies Act, 1956 - Investigation of company’s affairs in other cases - Whether if a company while conducting business has acted in a fraudulent or unlawful manner, then such company will fall within net of section 237(b)(i) irrespective of fact whether it is a running concern or close down subsequently for any reason whatsoever - Held, yes - Whether merely because material, on basis of which investigation is being undertaken, is identical to material which is subject-matter of investigation by other authority, it cannot be stated that both authorities cannot simultaneously investigate pursuant to power conferred on them under their respective statutes - Held, yes - On sudden collapse of stock market, Joint Parliamentary Committee directed SEBI to make investigation against appellant-companies - SEBI found that due to concerted transactions between appellants and ‘K’, who was moving spirit behind companies, there was a ultimate collapse of stock market - Consequent to said collapse, Global Trust Bank (GTB) and UTI had been subjected to serious financial difficulties and were ultimately bailed out by Government - Central Government, relying on report of SEBI and report of inspectors carrying out inspections under section 209A, sought permission of CLB for investigation into affairs of appellant-companies under section 237 - Whether in facts and circumstances of case, Central Government had not only sufficient material but also had a strong prima facie case for ordering investigation under section 237(b)(i) - Held, yes

Facts

There was a sudden crash in stock-exchange which was attributed and alleged to one ‘K’. Allegedly, the appellant-companies were controlled and owned directly or indirectly by the said ‘K’. With the crash of the stock market, there had simultaneously been a crash of Madhavpura Co-operative Bank (MCB), Global Trust Bank (GTB) and UTI and thousands crore of rupees had been siphoned off from the system. With a hue and cry from the public, a Joint Parliamentary Committee (JPC) was constituted to investigate the said stock exchange crash. Apart from that, SEBI was also directed to carry out investigations and to take appropriate action within provision of the Securities & Exchange Board of India Act, 1992. In the meantime, the respondent, in exercise of power under section 209A, carried out inspection of books of account of the appellants. In these circumstances and based on the material gathered from three basic sources, namely, the report of the JPC, the interim report of the SEBI investigation and, thirdly the reports pursuant to the investigation under section 209A, the respondent in a company petition sought permission of the CLB to investigate affairs of the company in exercise of power under section 237(b)(i). The appellants objected the application on ground that the purpose and object of investigation having already been achieved by carrying out investigation by authorities such as CBI, SEBI and Department of Company Affairs under section 209A, further investigation under section 237 was not necessary and it would affect the appellants prejudicially. Rejecting the objection of the appellants, the CLB allowed the company petition and permitted the Department of Company Affairs to carry out investigation under section 237(b)(i) in the affairs of each of the appellant-companies.

On appeal, it was also contended by the appellants that once the business of the company had ceased to be in operation for any reason whatsoever voluntarily or otherwise, then the respondents had no jurisdiction to initiate and/or exercise jurisdiction vested in them by virtue of the proceedings under section 237(b)(i); and that the respondents had not made out prima facie case for investigation under section 237(b)(i).

Held

The provisions of investigation under section 237(b)(i) are being introduced by the Parliament with the intention to prevent persons who enter the business in the guise of corporate entities to carry on fraudulent business with a view to harm the public interest. [Para 18]

Essentially, the provisions of section 237 are meant to see that the defrauding of the public at large is not being carried on under the guise of the corporate affairs. Plain and simple reading of the said section would indicate that the words used ‘is being conducted’ are used in the context of the fraudulent or unlawful business conducted by the company in course of running of their business. It does not mean that once the business is conducted in unlawful and fraudulent manner and if it is closed down, the power of the Central Government of ordering investigation under section 237(b)(i) stood revoked or ceased to have effect. The word ‘is being conducted’ has to be read along with the words ‘fraudulent or unlawful purpose’ and if it is so read, it is clear that the word ‘is being conducted’ is used with the intention to indicate that when the business of the company was conducted, it was conducted for unlawful purpose. Any person can conduct the business for fraudulent or unlawful purpose and before it is detected would close down the business of the company and in fact escape the consequences as contemplated under section 237(b)(i). It is not uncommon that there are companies who are fly by night operators in a booming economy of India today. If such an interpretation as sought for by the appellants is given to section 237(b)(i), then all these companies would commit fraud and would close down the business and, consequently, make the provision a dead letter on the statue. [Para 19]

The true and correct interpretation of section 237(b)(i) would only mean that if the company while conducting the business has acted in a fraudulent or unlawful purpose, then such companies will fall within the net of section 237(b)(i) irrespective of the fact that whether it is a running concern or close down subsequently for any reason whatsoever because under the provisions of section 250A it is specifically provided that investigation may be initiated under section 237(b)(i) notwithstanding that the application is made under sections 397 and 398 or it has passed a special resolution for voluntary winding up of such a company.

In any event on a true and proper construction of the section, it cannot be held that the business of company should be conducted in praesentis for the purpose of ordering investigation by the Central Government under section 237(b)(i). [Para 25]

Even otherwise on facts, the respondent had been able to establish that the business of the company was not totally stopped though undoubtedly it had been seriously affected by virtue of the orders passed by the SEBI and stock exchange of suspension of the brokerage license, suspension or freezer of bank account and collapse of MCB and GTB. [Para 26]

That could not be treated as business of the company was not carried on and/or the same was closed down for reasons beyond the control of the appellant, i.e., by virtue of the passing of the orders of various authorities such as SEBI, CBI and other Central Government authorities. The business of the company was conducted even today even though at a very low level. It could not be said that the business of the company had ceased to be in operation. The word ‘is being conducted’ under section 237(b)(i) even if it is so interpreted, as contended by the appellant, it should be and must mean that the business of the company has come to a total stop and no activities of the company are carried on. Such situation arises only when the company is wound up either by voluntary winding up or compulsory winding up as provided under the Act. In the aforesaid circumstances even on the facts of the instant case, the business of the company was being carried on and, therefore, the provisions of section 237(b)(i) squarely applied to the case which would mean that the order passed by the CLB was legal and valid and on this ground did not require any interference by the Court. [Para 28]

On the facts of the instant case, it was not in dispute that there had been a stock market collapse in the year 2001 and the appellants had indulged in large number of share dealings and trading. It was also not in dispute that the MCB and GTB had collapsed in view of the stock market scam. The respondents had produced before the CLB in support of the application for investigation under section 237(b)(i) a report of the JPC investigating said scam. The respondents had also produced the report and/or order passed by the SEBI against the appellants and ‘K’ who was moving spirit behind the appellant-companies. The Central Government had also, in support of the application, relied upon the reports which were filed by the inspectors in the course of carrying out investigation under section 209A. The Central Government had also relied upon large number of breaches of the provisions of the Act by the various companies in support of investigation. Therefore, not only there was a material in the form of aforesaid reports, documents and orders but a more than prima facie case had been made out for investigation of the appellant companies. The JPC had in fact directed the investigation against these entities by the SEBI or the Central Government. However, the appellant canvassed that there was no material which could be used by the respondent in respect of the investigation because each of the authorities was entitled to conduct its own investigation on the basis of aforesaid report and, therefore, the same material could not be utilized for the purpose of ordering investigation by the Central Government under section 237(b)(i). The contention of the appellant could not be accepted for the simple reason that it is possible that the material can be common or identical in course of various investigations embarked upon by the various authorities. It did not mean that the respondents were not entitled to use the material which had been unearthed or found in the course of the investigation by any other authorities. The material in the instant case was glaring. There was a serious collapse of the stock exchange in 2001. The SEBI, on investigation, had found that all the entitles had entered into typical type of transactions in concert with each other so as to ultimately result in collapse of the stock market. Consequently, large amount of public fund had been eroded. Consequent upon the collapse of the GTB, even UTI had been subjected to serious financial difficulties and was ultimately required to be bailed out by the Government. These were very serious circumstances and there was a plethora of material to indicate that the companies, which were subject to investigation under the provision of section 237(b)(i), had played some role, the consequence of which had resulted as mentioned above. Therefore, the Central Government had not only sufficient material but also had a strong prima facie case for ordering investigation. It has been well settled by the various decisions of the Apex Court that the Court ought not to interfere at this stage of investigation by the authorities. The investigation is not a trial of an offence. It is merely a fact finding venture. It is no doubt true that in the context of the companies it is a serious issue becuase it interferes with their rights to carry out free trading but it has been held that every right is coupled with reasonable restrictions and if the company has prima facie carried out fradulent activities then obviously it cannot complain about investigations carried out by the Central Government in exercise of statutory powers conferred under section 237(b)(i). [Para 29]

The jurisdiction and the power of the various investigating authorities derived from the jurisdiction vested in them by the various legislations or statutes; the authority which is doing the inquiry and/or conducting the investigation is required to carry out investigation keeping in mind the legal provisions and legal limitations which are stipulated under the respective statute. Undoubtedly, it can be that there may be an overlapping investigation but such an eventuality cannot prevent any investigating authority from carrying out investigation in respect of their jurisdiction conferred on them under the statute. The investigation in respect of the corporate fraud can be initiated and considered by the Central Government under section 237(b)(i). There is no provision under the SEBI Act in which any corporate fraud can be investigated by the SEBI. Undoubtedly, it can be investigated under normal criminal law by the CBI. Merely because the material, on the basis of which investigation is being undertaken, is identical to the material which is subject-matter of investigation by the other authority, it cannot be stated that both the authorities cannot simultaneously investigate pursuant to power conferred on them under their respective statutes. Every authority is entitled to investigate even may be in respect of the same material as well as from the angle and facet in which they have been asked to carry out investigation. It was possible that the SEBI might be investigating the same material on the ground of breach of the various provisions of the SEBI Act and other security related legislations whereas the Central Government, Department of Company Affairs could consider and/or investigate the fraud and/or breach of various provisions of law in the light and context of the provisions of the Act, might be in respect of the same material. [Para 33]

The Central Government having constituted the Serious Fraud Investigation Office and if it desired to carry out investigation in respect of the affairs of the appellant-companies without any mala fide intention, then it was not possible to stall the investigation merely on the basis of contentions and arguments advanced by the appellant that all the authorities could not be permitted to carry out the investigation simultaneously in respect of the very same material. Therefore, every authority is entitled to carry out investigation, may be, in respect of the same material insofar as they do not exceed the jurisdiction conferred on them in their respective statute. [Para 34]

The Court cannot and should not usurp the jurisdiction vested in the Central Government to form an opinion and come to a conclusion as to whether the investigation is necessary or not. Limited jurisdiction or power conferred on the Court is to ascertain whether there is a material in support of the opinion arrived at by the Central Government and/or the said exercise is not a mala fide exercise of power. In the facts of the instant case, it could not be said that the exercise of power under section 237 by the Central Government was mala fide. There was a plethora of material and in view of that, the investigation ordered by the Central Government in exercise of power conferred under section 237(b)(i) could not be interfered. [Para 35]

In view of the above, there was no substance in these appeals and same were, accordingly, dismissed.

Cases referred to

Barium Chemicals Ltd. v. CLB [1966] 36 Comp. Cas. 639 (SC) (para 11), Rohtas Industries Ltd. v. S.D. Agarwal [1969] 1 SCC 325 (para 13), Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634 (Delhi) (para 14), New Central Jute Mills Co. Ltd. v. Dy. Secretary, Ministry of Finance, Department of Revenue & Company Law [1970] 40 Comp. Cas. 102 (Cal.) (para 14), Mangin v. IRC [1971] All Eng. LR 179 (para 21), Budhan Singh v. Babi Bux AIR 1970 SC 1880 (para 22), Nasiruddin v. State Transport Appellate Tribunal AIR 1976 SC 331 (para 23), Molar Mal v. Kay Iron Works (P.) Ltd. [2000] 4 SCC 285 (para 24), Bengal & Assam Investors Ltd. v. CIT AIR 1966 SC 1514 (para 27), London United Investments Plc., In re 1992 BCLC 285 (CA) (para 33) and DDA v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622 (para 35).

N.H. Seerval and Vinod Parekh for the Appellant. B.H. Desai and Sethna for the Respondent.

Judgment

1.         Economic progress usher with it economic perversity such as the land scam, Petrol Pump Scam, import export scam, Hawala scam, security scam, shares and stocks scam, bank scam etc. With the passage of time the method of committing these scams has been more involved and more complex and are woven into various webs. Thus as a collary thereto investigations into such scams are also required to be more scientific, more intrinsic and more detailed with the help of the experts. Corporate frauds and corporate misconduct are also another facet of such scams. Companies are being floated and are disappearing into thin air making the common man poorer and poorer by thousands of crores of rupees. These 16 appeals are challenging an order passed by the company law board under which it has ordered an investigation into one of such alleged scams under section 237(b)(i) of the Companies Act which is being known as Ketan Parekh - Stock scam of 2001.

2.         Few facts dealing with the complex question of law which have been raised by the appellant in the present proceedings are briefly narrated as under :

3.         In 2001 there was a sudden crash in the stock market i.e., the sudden increase in the prices over the board securities in the period 1999-2000 and then sudden crash of the stock market is attributed and alleged to one Mr. Ketan Parekh. It is alleged that he by his conduct through his various entities and companies has committed fraud which led to the said crash in the stock market. It is also alleged that the 14 companies in the present appeals are entities which are controlled and owned directly or indirectly by the said Ketan Parekh, who is the alleged King-player in the stock exchange scam of 2001. There are also allegations that with the crash of the stock market, there has simultaneously been a crash of the Madhavpura Co-operative Bank, Global Trust Bank and UTI and thousands of crores of rupees have been siphoned off from the system. With a hue and cry from the public the Lok Sabha on 26-4-2001 constituted the Parliamentary Committee as fact-finding committee to investigate the said 2001 Stock Exchange crash. The terms of reference of the said Joint Parliamentary Committee have been enlarged on 3-8-2001 and inquiries pertaining to the crash of UTI were also made part of the said Joint Parliamentary Committee. The Joint Parliamentary Committee has given their report and has inter alia recommended in paras 11 to 35 of the report that the investigations must be carried out in respect of 6 corporate groups belonging to Ketan Parekh and that the Department of Company Affairs has been informed that 6 out of 10 corporate groups have transferred huge amount to entities and associates of Ketan Parekh and this aspect requires investigation. Joint Parliamentary Committee has also simultaneously directed SEBI to carry out investigations to take appropriate action within the provisions of Security Exchange Board India Act, 1992 as amended from time-to-time (hereinafter referred to as ‘the SEBI Act’).

4.         On 25-6-2001 the respondents issued a letter to the appellants seeking inspection of the books of account of the appellant in exercise of power conferred under section 209A of the Companies Act. After carrying out certain initial investigations on the reference of the company on 25-11-2001 a preliminary finding report was filed by the respondent with the Central Government. On 19-11-2004 the respondents set out various details and inquiries with the appellant company seeking various information. This inspection under section 209A of the Companies Act has been partly carried out and is still in progress.

5.         On 2-5-2003 the Company Petition No. 39 of 2003 was filed by the respondent with the Company Law Board seeking permission to investigate the affairs of the company in exercise of power conferred under section 237(b)(i) of the Companies Act. The application is inter alia based on the interim report of the various irregularities of the SEBI as well as certain irregularities which came to the light by virtue of inspection under section 209A of the Companies Act. The said petition is also based on a report of the Joint Parliamentary Committee. Thus in nutshell the application which has been initiated under section 237(b)(i) is based on the material gathered from three basic sources namely, the report of the Joint Parliamentary Committee, the interim report of the SEBI investigation and thirdly the reports pursuant to the investigation under section 209A of the Companies Act. The petition which is filed on 2-5-2003 by the respondent in detail sets out the various findings on the aforesaid three reports and the material gathered by the said authorities as required for the purpose of carrying out investigation under section 237(b)(i). This petition dated 2-5-2003 was served on the company on 16-5-2003. It is the case of the petitioner that on 20-7-2003 they applied to the Company Law Board for a certified true copy of the SEBI report and other documents which are relied upon by the respondent in the said company petition before the Company Law Board. On 12-7-2003 the appellant herein sought a transfer of the proceedings from the Principal Bench of the Company Law Board, New Delhi to the Western Region Bench of the Company Law Board at Mumbai. Simultaneously they have also applied for inspection of the various documents which are referred to and/or relied upon by the respondent in the said company petition. On 24-11-2003 the appellant company filed a reply inter alia opposing the petition which was filed under section 37(b)(i) of the Companies Act. It was inter alia alleged that the powers sought to be exercised by the Company Law Board are likely to seriously affect the interest of the company. The various allegations made in the company petition were denied. It was contended that the stock market crash which took place some time in or about 2001 was not due to acts on the part of Ketan Parekh but in fact he along with his entitles have suffered losses in the range of about Rs. 3,000 crores to Rs. 4,000 crores. It was further contended that if there was any evidence regarding misuse of funds of banks and financial institutions then the appellant cannot be penalised for the same but it is in fact the duty of the Reserve Bank of India to regulate and over see the functions of the banks and financial institutions affecting the financial matters and that the consequence of the failure on the part of the RBI cannot be attributed to the appellant herein. Insofar as the allegation that there is intention of the company to conduct its business with an intention to defraud its creditors, members and other members or for a fraudulent or unlawful purpose is concerned, the appellant has contended that the word ‘intention’ would mean that the someone was deceived by the respondents deliberately and in preplanned events to their advantage and it assumes a guilty mind and there has to be an unlawful gain by such an evil design on the part of the appellant herein. It was contended that the crash of the stock market in 2001 was merely a drastic melt down of the share prices due to a declining trend in global share market which has also inflicted heavy financial losses to the appellant companies. It is further contended that the drastic fall in the share prices cannot be foreseen by the appellant and they themselves are the victims of melt down and not the beneficiaries of the same. Thus the allegation of carrying on business for defrauding the creditors and/or for fraudulent or unlawful purpose were denied. It has been further contended that the purpose and object of investigation has already been achieved by carrying out investigations by the authorities such as SEBI, CBI and Department of Company Affairs under section 209A of the Companies Act and therefore a further investigation in the matter by the said investigating authorities appointed by the Central Government under section 237(b)(i) is neither necessary nor efficacious and it would only affect the interest of the appellant company prejudicially. The respondents on the other hand in their rejoinder have placed extensive reliance upon the inspection report of the CBI and Joint Parliamentary Committee and also the inspection carried out by the Department of Company Affairs under section 209(A). Even a certain extract of the JPC report has been annexed to the said rejoinder.

6.         After hearing the parties the Company Law Board has passed an impugned order on 27-9-2004. By the impugned order the Company Law Board has inter alia held that there is a ground made out for carrying out investigation under section 237(b)(i). It has been further held that there are serious allegations of fraud and scams by these corporate entities and there is substantive material in support of the said allegations to conduct support the investigation under section 237(b)(i) of the Companies Act. Thus the Company Law Board allowed the company petition and permitted the Department of Company Affairs to carry out investigation under section 237(b)(i) in the affairs of each of the appellant companies. This order dated 22-9-2004 which is a common order passed in respect of all of the sixteen appeals before me is the subject-matter of challenge before me. These are the appeals filed under section 10F on the ground that certain substantive questions of law arise in the present case and require determination of this Court.

7.         Learned counsel for the appellant has framed three substantial questions of law in support of his argument which are briefly enumerated as under :

(i)         Whether it is a condition precedent for exercise of power under section 237(b)(i) of the Companies Act that the business of the company should be in operation as on the date when the power is sought to be exercised by the respondent or that once the business of the company has ceased to be in operation for any reason whatsoever voluntarily or otherwise, then the respondents have no jurisdiction to initiate and/or exercise jurisdiction vested in them by virtue of the proceedings under section 237(b)(i) ?

(ii)        Whether on the facts of the present case the respondents have made out prima facie case for investigation or alternatively there is a material available for exercising jurisdiction by the respondent under section 237(b)(i) ?

(iii)       Whether in view of simultaneous investigations carried out by SEBI, CBI and Department of Company Affairs under section 209A the respondent ought not be permitted to launch a fresh investigation in exercise of power under section 237(b)(i) of the Companies Act on same material and on same facts ?

8.         Before I deal with the aforesaid substantial questions of law as framed by the learned counsel for the appellant I feel that it is necessary that the relevant provisions of the Act which are germane to the aforesaid questions of law must be set out. Some of the relevant provisions are reproduced as under :

“209A. Inspection of books of account, etc., of companies.—(1) The books of account and other books and papers of every company shall be open to inspection during business hours—

        (i)       by the Registrar, or

        (ii)      by such officer of the Government as may be authorised by the Central Government in this behalf;

        (iii)     by such officers of the Securities and Exchange Board of India as may be authorised by it :

Provided that such inspection may be made without giving any previous notice to the company or any officer thereof:

Provided further that the inspection by the Securities and Exchange Board of India shall be made in respect of matters covered under sections referred to in section 55A.

(2)  It shall be the duty of every director, other officer or employee of the company to produce to the person making inspection under sub-section (1), all such books of account and other books and papers of the company in his custody or control and to furnish him with any statement, information or explanation relating to the affairs of the company as the said person may require of him within such time and at such place as he may specify.

(3)  It shall also be the duty of every director, other officer or employee of the company to give to the person making inspection under this section all assistance in connection with the inspection which the company may be reasonably expected to give.

(4)  The person making the inspection under this section may, during the course of inspection,-

        (i)       make or cause to be made copies of books of account and other books and papers, or

(ii)      place or cause to be placed any marks of identification thereon in token of the inspection having been made,

(5)  Notwithstanding anything contained in any other law for the time being in force or any contract to the contrary, any person making an inspection under this section shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit, in respect of the following matters, namely:—(i) the discovery and production of books of account and other documents, at such place and such time as may be specified by such person; (ii) summoning and enforcing the attendance of persons and examining them on oath; (iii) inspection of any books, registers and other documents of the company at any place.

(6)  Where an inspection of the books of account and other books and papers of the company has been made under this section, the person making the inspection shall make a report to the Central Government or the Securities and Exchange Board of India in respect of inspection made by its officers.

(7)  Any officer authorised to make an inspection under this section shall have all the powers that a Registrar has under this Act in relation to the making of inquiries.

(8)  If default is made in complying with the provisions of this section, every officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees, and also with imprisonment for a term not exceeding one year.

(9)  Where a director or any other officer of a company has been convicted of an offence under this section he shall, on and from the date on which he is so convicted, be deemed to have vacated his office as such and on such vacation of office, shall be disqualified for holding such office in any company, for a period of five years from such date.”

“234. Power of Registrar to call for information or explanation.— (1) Where, on perusing any document which a company is required to submit to him under this Act, the Registrar is of opinion that any information or explanation is necessary with respect to any matter to which such document purports to relate, he may, by a written order, call on the company submitting the document to furnish in writing such information or explanation, within such time as he may specify in the order.

(2)  On receipt by the company of an order under sub-section (1), it shall be the duty of the company, and of all persons who are the officer of the company, to furnish such information or explanation to the best of their power.

(3)  On receipt of a copy of an order under sub-section (1), it shall also be the duty of every person who has been an officer of the company to furnish such information or explanation to the best of his power.

(3A)If no information or explanation is furnished within the time specified or if the information or explanation furnished is, in the opinion of the Registrar, inadequate, the Registrar may by another written order call on the company to produce before him for his inspection such books and papers as he considers necessary within such time as he may specify in the order; and it shall be the duty of the company, and of all persons who are officers of the company, to produce such books and papers.

(4)  If the company, or any such person as is referred to in sub-section (2) or (3), refuses or neglects to furnish any such information or explanation or if the company or any such person as is referred to in sub-section (3A) refuses or neglects to produce any such books and papers,-

(a)      the company and each such person shall be punishable with fine which may extend to five thousand rupees and in the case of a continuing offence, with an additional fine which may extend to five hundred rupees for every day after the first during which the offence continues; and

(b)      the Court trying the offence may, on the application of the Registrar and after notice to the company, make an order on the company for production before the Registrar of such books and papers as in the opinion of the Court, may reasonably be required by the Registrar for the purpose referred to in sub-section (1).

(5)  On receipt of any writing containing the information or explanation referred to in sub-section (1), or of any book or paper produced whether in pursuance of an order of the Registrar under sub-section (3A) or of an order of the Court under sub-section (4), the Registrar may annex that writing book or paper, or where that book or paper is required by the company, any copy or extract thereof, to the document referred to in sub-section (1); and any writing or any book or paper or copy or extract thereof so annexed shall be subject to the like provisions as to inspection, the taking of extracts and the furnishing of copies, as that document is subject.

(6)  If such information or explanation is not furnished within the specified time or if after perusal of such information or explanation or of the books and papers produced whether in pursuance of an order of the Registrar under sub-section (3A) or of an order of the Court under sub-section (4), the Registrar is of opinion that the document referred to in sub-section (1), together with such information or explanation or such books and papers discloses an unsatisfactory state of affair or does not disclose a full and fair statement of any matter to which the document purports to relate, the Registrar shall report in writing the circumstances of the case to the Central Government.

(7)  If it is represented to the Registrar of materials placed before him by any contributory or creditor or any other person interest that the business of a company is being carried on in fraud of its creditors or of persons dealing with the company or otherwise for a fraudulent or unlawful purpose, he may, after giving the company an opportunity of being heard, by a written order, call on the company to furnish in writing any information or explanation on matters specified in the order, within such time as he may specify therein; and the provisions of sub-sections (2), (3), 3(A), (4) and (6) of this section shall apply to such order.

**

**

**

(8)  The provisions of the section shall apply mutatis mutandis to documents which a liquidator, or a foreign company within the meaning of section 591, is required to file under this Act.”

“235. Investigation of the affairs of a company.—(1) The Central Government may, where a report has been made by the Registrar under sub-section (6) of section 234, or under sub-section (7) of that section, read with sub-section (6) thereof, appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct.

(2)        Where—

(a)        in the case of a company having a share capital, an application has been received from not less than two hundred members or from members holding not less than one-tenth of the total voting power therein, and

(b)        in the case of a company having no share capital, an application has been received from not less than one-fifth of the persons on the company’s register of members, the Tribunal may, after giving the parties an opportunity of being heard, by order, declare that the affairs of the company ought to be investigated by an inspector or inspectors, and on such a declaration being made, the Central Government shall appoint one or more competent persons as inspectors to investigate the affairs of the company and to report thereon in such manner as the Central Government may direct.”

“237. Investigation of company’s affairs in other cases.—Without prejudice to its powers under section 235, the Central Government-

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if-

        (i)           the company, by special resolution; or

(ii)          the Court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

        (b)      may do if in its opinion or in the opinion of the Tribunal, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent of unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company.”

“250A. Voluntary winding up of company, etc., not to stop investigation proceedings.—An investigation may be initiated under section 235, 237, 239 or 247 notwithstanding that—

        (a)      an application has been made for an order under section 397 or section 398; or

(b)      the company has passed a special resolution for voluntary winding up, and no investigation so initiated shall be stopped or suspended by reason only of the fact that an application referred to in clause (a) has been made or a special resolution referred to in clause (b) has been passed.”

9.         Learned counsel appearing for appellant has vehemently contended before me that the proceedings which are initiated by the respondent before the Company Law Board for investigation under section 237(b)(i) of the Companies Act is totally without jurisdiction and non est. It has been further contended that the condition precedent prescribed under the said section having not been complied with by the Company Law Board was not entitled in law to exercise jurisdiction under the provisions of section 237(b)(i) of the Companies Act. The learned counsel has further contended that on true and correct interpretation the Company Law Board gets jurisdiction to pass an order of investigation only if the company is carrying on business with the intention to defraud its creditors, members and/or carrying on business for fraudulent or unlawful purpose or in a manner oppressive to any of its members in a praesentis. It is therefore contended that if the company is not carrying on business at present then irrespective of the fact that during the period when the company was carrying on business whether the company has conducted business defrauding the creditors or for a fraudulent or unlawful purpose or in a manner oppressive to any members the Company Law Board does not acquire jurisdiction to launch investigation under section 237(b)(i). It has been vehemently contended that the provisions under section 237(b)(i) must be strictly construed because it is an inroad in the freedom guaranteed by the Constitution under Article 19(1)(g). It is contended that it is an interference with the right of the shareholders to carry on business as guaranteed by the Constitution. It has been contended that section 237(b)(i) must be so strictly read that unless there is a compliance with the condition precedent prescribed thereon the Tribunal cannot exercise power to launch investigation in the affairs of the company, it has been further contended that only in the last category prescribed under section 237(b)(i) i.e., if the company is formed for any fraudulent and/or unlawful purpose that it is not necessary that the business of the company should be carried on at present moment when the investigations are ordered. It has been contended by the learned counsel for the appellant in alternative to the aforesaid submission that even if the provisions of section 237(b)(i) are not so strictly construed as urged by him then also it must be so construed that save and except the case where the business of the company is voluntarily closed or the company is voluntarily wound up then only on those cases section 237(b)(i) would be applicable but in all other cases the provisions of section 237(b)(i) would not apply if the business of the company is not carried in praesentis. It has been further contended that it is immaterial that whether at the relevant time when the business it was carried on by the company was in fact carried on for the purpose of defrauding the creditors or members and/or carried on for fraudulent or unlawful purpose or it is carried on in a manner oppressive to any of its members and still the Company Law Board will not permit the investigation by the Central Government under the provisions of section 237(b)(i) of the Companies Act. It has been strenuously urged by the learned counsel for the appellant that the power conferred on the Central Government under section 237(b)(i) is a draconian power interfering with the business of the company and such power must not be permitted to be utilised save and except directly in accordance with law and therefore the said application for investigation when the business is not running in praesentis cannot be granted.

10.       On the facts of the present case the learned counsel has contended that it is an admitted position that in respect of some of the appellants who are inter alia carrying on business of share brokerage their share brokers card has been suspended and in some of the cases the said card is revoked and/or terminated by the concerned stock exchange and SEBI and some of the trading firms who were carrying on business as a share broker have come to a halt and therefore those companies are not carrying on any business in praesentis and thus the jurisdiction vested under the Central Government and/or the Company Law Board to investigate under section 237(b)(i) cannot be exercised in respect of these companies. It has been further contended that business of the various companies has also been closed because of the freezing of the bank accounts in parallel investigations which have been carried out by the SEBI, CBI and Department of Company Affairs. It has been therefore contended by the learned counsel for the appellant that even in respect of companies who are not share broking companies still their business has also come to a total halt and/or for all practical purposes all these companies are defunct companies and exist only on paper. Thus according to the learned counsel for the appellant the Company Law Board ought not to have passed the impugned order since it does not satisfy the jurisdictional requirements of section 237(b)(i) of the Companies Act. Thus the learned counsel for the appellant has contended that the argument that these appellants at the relevant time when they were carrying on business have committed a scam even if it is taken as true still the said scam cannot be the subject-matter of investigation under section 237(b)(i) because of closure of their business for reasons beyond their control. The business of the appellants have been brought to a halt by an order of SEBI suspending and/or revoking the licence to carry on business of the company. Thus it is submitted that when power is exercised under section 237(b)(i) by the Central Government the company being already defunct companies and not running the business they cannot be subjected to investigation under the said section.

11.       The learned counsel for the appellants has vehemently contended that the issue urged by him is directly or squarely covered by the Constitution Bench decision of the Apex Court in the case of Barium Chemicals Ltd. v. CLB [1966] 36 Comp. Cas. 639. He has drawn my attention to the following para and has contended that the Apex Court has clearly held that under section 237(b)(i) as a jurisdictional requirement for exercising of power of ordering investigation against a company it is necessary that the company must be carrying on business in praesentis and it is absolutely immaterial that the company has in past carried on the business for a fraudulent or unlawful purpose or for defrauding the creditors or any of the members. The said para reads as under :

“In dealing with this problem the first point to notice is that the power is discretionary and its exercise depends upon the honest formation of an opinion that an investigation is necessary. The words ‘in the opinion of the Central Government’ indicate that the opinion must be formed by the Central Government and it is of course implicit that the opinion must be an honest opinion. The next requirement is that ‘there are circumstances suggesting, etc.’ These words indicate that before the Central Government forms, its opinion it must have before it circumstances suggesting certain inferences. These inferences are of many kinds and it will be useful to make a mention of them here in a tabular form :

        (a)      that the business is being conducted with intent to defraud-

        (i)           creditors of the company

        (ii)          members, or

        (iii)         any other person;

        (b)      that the business is being conducted

        (i)           for a fraudulent purpose,

        (ii)          for a unlawful purpose;

        (c)      that persons who formed the company or manage its affairs have been guilty of-

        (i)           fraud, or

        (ii)          misfeasance or other misconduct-towards the company or towards any of its members;

(d)    that information has been withheld from the members about its affairs which might reasonably be expected, including calculation of commission payable to-

        (i)           managing or other director,

        (ii)          managing agent,

        (iii)         the secretaries and treasurers,

        (iv)         the managers.

These grounds limit the jurisdiction of the Central Government. No jurisdiction outside the section which empowers the initiation of investigation, can be exercised. An action, not based on circumstances suggesting an inference of the enumerated kind, will not be valid. In other words, the enumeration of the inferences, which may be drawn from the circumstances, postulates the absence of a general discretion to go on a fishing expedition to find evidence. . . .” (p. 661)

12.       The learned counsel has vehemently contended that the judgment of the Apex Court as per majority decision laid down by Hidayatullah, J. is the lead judgment and holds that the provisions of section 237(b)(i) can only be exercised when the business is running in praesentis and does not apply when the business of the company has been closed down for any reasons whatsoever including the reasons which are beyond the control of the appellant themselves. The learned counsel has been at pain to convey that the issue which has been raised by him is no more res integra in view of the judgment of the Constitution Bench and has contended that the said judgment of the Apex Court is binding on me. According to the learned counsel for the appellant the aforesaid para in the judgment holds that the business of the company must be carried on in praesentis for the purpose which is mentioned in the said section for exercising power by the Central Government under section 237(b)(i).

13.       He has further contended that the issue was further discussed in subsequent judgment of the Apex Court in the case of Rohtas Industries Ltd. v. S.D. Agarwal [1969] 1 SCC 325. It has been contended that Apex Court in the aforesaid judgment has accepted the view taken by Hidayatullah, J. as the correct view. He has relied upon para 6 of the said judgment. He has also relied upon para 11 where the Apex Court has approved the view of Hidayatullah, J. in the case of Barium Chemicals Ltd. (supra). The said paras 6 and 11 reads as under :

“6. The decision of this Court in Barium Chemical’s case (supra) which considered the scope of section 237(b) illustrates that difficulty. In that case Hidayatullah, J. (our present Chief Justice) and Shelat, J. came to the conclusion that though the power under section 237(b) is a discretionary power the first requirement for its exercise is the honest formation of an opinion that the investigation is necessary and the further requirement is that ‘there are circumstances suggesting’ the inference set out in the section; an action not based on circumstances suggesting an inference of the enumerated kind will not be valid; the formation of the opinion is subjective but the existence of the circumstances relevant to the inference of the enumerated kind will not be valid; the formation of the opinion is sine qua non or action must demonstratable; if their existence is questioned, it has to be proved at least prima facie; it is not sufficient to assert that those circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness; the conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In other words they held that although the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstratable; if their existence is questioned, it has to be proved at least prima facie; it is not sufficient to assert that those circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness; that conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In other words they held that although the formation of opinion by the Central Government is a purely subjective process and such an opinion cannot be challenged in a Court on the ground of propriety, reasonableness or sufficiency, the authority concerned is nevertheless required to arrive at such an opinion from circumstances suggesting the conclusion set out in sub-clauses (i), (ii) and (iii) of section 237(b) and the expression ‘circumstances suggesting’ cannot support the construction that even the existence of circumstances is a matter of subjective opinion. Shelat, J. further observed that it is hard to contemplate that the Legislature could have left to the subjective process both the formation of opinion and also the existence of circumstances on which it is to be founded; it is also not reasonable to say that the clause permitted the authority to say that it has formed the opinion on circumstances which in its opinion exist and which in its opinion suggest an intent to defraud or a fraudulent or unlawful purpose.

11. Coming back to section 237(b) in finding out its true scope we have to bear in mind that that section is a part of the scheme referred to earlier and therefore the said provision takes its colour from sections 235 and 236. In finding out the legislative intent we cannot ignore the requirement of those sections. In interpreting section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under Article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of general public. In fact the vires of that provision was upheld by majority of the judges Constitution Bench in Barium Chemicals’ case principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated earlier we agree with the conclusion reached by Hidayatullah and Shelat, JJ. in Barium Chemicals’ case that the existence of circumstances suggesting that the company’s business was being conducted as laid down in sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the Courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question are open to judicial review though the opinion formed by the Government is not amenable to review by the Courts. As held earlier the required circumstances did not exist in this case.”

14.       Apart from the aforesaid two judgments of the Apex Court the learned counsel has in support of his contention has also relied upon the judgment of the Delhi High Court in the case of Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634 and the judgment of the Calcutta High Court in the case of New Central Jute Mills Co. Ltd. v. Dy. Secretary, Ministry of Finance, Department of Revenue & Company Law [1970] 40 Comp. Cas. 102 (Cal.). By relying upon the aforesaid two judgments the learned counsel has reiterated the submissions which are already set out in extentio hereinabove.

15.       In the alternative to the above submissions the learned counsel has raised the issue of interpretation of section 237(b)(i) and it is contended that assuming that the judgment of the Apex Court did not hold that the running of a business in praesentis in the manner set out therein is a condition precedent still according to him on a plain and simple reading of the section an inescapable conclusion is that for the purpose of exercising the power under the said section the business must be a running business and not defunct or closed down business. On the other hand learned counsel Mr. Desai the learned Additional Solicitor General appearing for the respondent has contended that the provisions of section 237(b)(i) cannot be so restrictly interpreted. According to him it takes in its sweep even a part conduct of the business partially conducted even if the company has become defunct or it has suspended its business operation for any reasons whatsoever. It has been further contended by the learned counsel that the provisions of section 237(b)(i) in its opening portion provides that the power of the Central Government to appoint one or more persons as inspector to investigate the affairs of the company and to report thereon to the Central Government is a power conferred on the respondent in the public interest and such power of the Central Government ought to be given full effect for effecting investigation and cannot be so interpreted so as to defeat the provisions of the Act. It has been further contended that the word ‘is being conducted’ is in a simple present tense but by using the words conducted in past tense it has included within its scope even the business which was carried out for fraudulent purposes in the past. Thus according to the learned Additional Solicitor General the Central Government would have jurisdiction to investigate irrespective of the fact that whether the company is running the business or not. The learned Additional Socilitor General has further contended that the Court must give purposeful interpretation to the provisions of section 237(b)(i) and should not interpret the section which results in absurd consequences. According to the learned counsel the section cannot be interpreted in a manner which can provide a scope to do the things which are in fact meant to be prevented by the provisions thereof. Insofar as the aforesaid authorities are concerned, the learned counsel for the respondent has contended that the judgment of the Apex Court in the case of Barium Chemicals Ltd. (supra) does not in any way or manner set out any such proposition of law as contended by the learned counsel for the respondent i.e. the company must be running the business in praesentis so as to attract the provisions of section 237(b)(i). The learned counsel has contended that the paras referred to by the learned counsel for the appellant did not carve out any such proposition of law as canvassed by the learned counsel for the appellant before this Court and therefore the said argument ought not to be accepted. The learned counsel has further contended that if the interpretation is given as suggested by the learned counsel for the appellant in most of the cases, then the company would commit fraud and carry on business for fraudulent or unlawful purpose and/or to defraud the creditors and before the same can be detected or investigated they would close down the company and evade investigation or cases where due to criminal investigation if the business of the companies has come to a halt then in that event it would escape the investigation under section 237(b)(i) of the Companies Act. Further more it would restrict the power of Government to take immediate remedial action of preventing further fraud being carried on by the company by carrying on business.

16.       Alternatively the learned counsel solicitor general has contended that in the facts of the present case in fact the company is carrying on business in praesentis. It has been contended that the company is neither a defunct company nor has the company been wound up but it is merely affected by virtue of the various orders passed by the various authorities affecting the business of the company but is still in operation. It has been contended that it is admitted by the appellant themselves in the various documents which are set out on record which indicate that according to appellant themselves the business is a running business and not closed down as claimed by the appellant himself and it has been contended by the learned counsel for the appellant that even if the section is interpreted as claimed by the learned counsel for the appellant still the order impugned herein is legal and valid and it satisfies all the requirements of section 237(b)(i) and this Court in exercise of power under section 10(f) ought not to inteferere with the said order passed by the Company Law Board and the appeal should be dismissed.

17.       While considering the rival contentions of the parties insofar as the first question of law framed by the petitioner is concerned i.e. the power under section 237(b)(i) can only be exercised if the company is carrying on business and does not apply if the company has closed down its business or by virtue of the orders passed by various authorities due to it has been forced to close down its business. I do not agree that the aforesaid issue is no longer a res integra in view of the judgment of the Apex Court in the case of Barium Chemicals (supra). On going through the above judgment of the Apex Court, in which the Apex Court has considered the constitutional validity of section 237(b)(i), I do not find any such proposition of law laid down by the Apex Court that the power under section 237(b)(i) can only be exercised when the company was carrying on business in praesentis. The paras on which strong reliance has been placed by the learned counsel for the appellant in my opinion does not raise any such issue of law. In the said paras the Apex Court was dealing with the issue of formation of opinion of the Central Government and requirement of the material in support thereof while ordering investigation under section 237(b)(i) of the Act. The para clearly indicates that the court was considering the words in the opinion of the Central Government and was considering that whether such words suggest in any manner that there should be material in support. While considering the aforesaid issue the court has analysed the said sections and has broken in into four parts a, b, c and d therein. Such division of the section in four parts namely a, b, c and d is nothing else but division of the plain language of the section as it is. The learned counsel for the appellant has contended that the Apex Court while considering the section in parts (a) and (b) as used the words ‘business is being conducted’ indicates that the court was of the opinion that the investigation cannot be ordered once the business has been closed down. I do not read any such proposition of law in the said para which has been set out in the said judgment nor do I find from the reading of the said judgment that any such issue was ever considered by the Apex Court. I therefore do not accept the contention of the learned counsel that the issue whether the investigation can be ordered only when the business is being conducted must be read in present tense and that the ratio of the aforesaid judgment in the case of Barrium Chemicals Ltd. (supra) covers the issue. I therefore reject the contention of the appellants that this issue is squarely covered and no more res integra by virtue of the judgment of the Apex Court in the case of Barium Chemicals Ltd. (supra). I am of the opinion that it is now well settled law that the judgment is an authority only on such proposition of law which squarely arises in the cases which are squarely dealt with by the court and that is the only ratio of the judgment which is binding on me. I do not find any such ratio or proposition of law as agitated by the learned counsel for the appellant being decided by the Apex Court in the aforesaid judgment of Barium Chemicals Ltd.’s case (supra). I therefore do not accept the contention of the learned counsel for the appellants and reject the same.

18.       Once I so hold that the issue is not covered by the judgment cited by the learned counsel, then I am required to consider the alternative argument of the learned counsel for the appellant i.e., on a plain and simple interpretation of section 237(b)(i) of the Companies Act, it is a condition precedent that business must be a running business ordering investigation under section 237(b)(i). The learned counsel for the appellant has contended that even on interpretation the section is clear and unambiguous. It uses the word ‘is being conducted’ which is simple present tense. Thus according to the learned counsel for the appellant on plain and simple interpretation of the section itself it is clear that the power under section 237(b)(i) can be exercised by the authorities only if the business is conducted in praesentis. Insofar as the arguments on the interpretation of section 237(b)(i) is concerned it is by now well-settled that the interpretation of the section as a first principle must be on the basis of simple and plain language used in the section itself. However, there is a case at which has been well recognised by the various courts that if interpretation is likely to result in absurd consequences or it defeats the intention of the Legislature then in that event purposive interpretation ought to be resorted to and interpretation should be such to advance the intention of the Legislature rather than defeating the same. In my opinion the provisions of investigation under section 237(b)(i) are being introduced by the Parliament with the intention to prevent persons who enter the business in the guise of corporate entities to carry on fraudulent business with a view to harm the public interest. Butterworth in his 5th edition on the company law while tracing out the background of the similar legislation i.e. English Company Law has inter alia considered the reason for introduction of such a legislation and while doing so it has stated as under :

“It is important to know the background of the legislation. It sometimes happens that public companies are conducted in a way which is beyond the control of the ordinary shareholders. The majority of the shares are in the hands of two or three individuals. These have control of the company’s affairs. The other shareholders know little and/or told little. They receive the glossy annual reports. Most of them throw them into the wastepaper basket. There is an annual general meeting but few of the shareholders attend. The whole management and control is in the hands of the directors. They are self-perpetuating oligarchy; and are virtually unaccountable. Seeing that the directors are the guardians of the company, the question is asked : Quis custodiet ipsos custodies - Who will guard the guards themselves.”

19.       Similar are the provisions under section 237(b)(i) of the Companies Act in India. Essentially the provisions are meant to see that the defrauding of the public at large is not being carried on under the guise of the corporate affairs. In my opinion even on plain and simple reading of the said section would indicate that the words used ‘is being conducted’ are used in the context of the fraudulent or unlawful business conducted by the company in course of running of their business. It does not mean that once the business is conducted in unlawful and fraudulent manner and if it is closed down the power of the Central Government of ordering investigation under section 237(b)(i) stood revoked or ceased to have effect as contended by the learned counsel for the appellant. The word ‘is being conducted’ has to be read alongwith the words ‘fraudulent or unlawful purpose’ even if it is so read it is clear that the word ‘is being conducted’ is used with the intention to indicate that when the business of the company was conducted it was conducted for unlawful purpose. Even otherwise I am of the opinion that to accept the contention of the appellant would be to make the said section nugatory and without any effect and toothless. It is because any person can conduct the business for fraudulent or unlawful purpose and before it is detected would close down the business of the company and in fact escape the consequences as contemplated under section 237(b)(i) of the company. It is not uncommon that there are companies who are fly by night operators in a booming economy of India today. If such an interpretation is given to section 237(b)(i) then all these companies would commit fraud and would close down the business and consequently make the provisions a dead letter on the statue. Apart therefrom it is also difficult to interpret the section in a manner the learned counsel for the appellant has called upon me to do because while so interpreted it is necessary that the Central Government must detect and investigate all such cases of the company which are conducted in a fraudulent or unlawful purpose in a course when such conduct is being carried on by the company. I do not think this could be a legislative intention while enacting the said section 237(b)(i).

20.       The principles of interpretation of statue are well settled. It is repeatedly held by the Apex Court that the interpretation must be to avoid absurdity and unrealistic result or consequences of such an interpretation. The Maxwell has in his book Interpretation of Statutes in the 10th edition as opined as under :

“....if the choice is between two interpretation, the narrow of which would fails to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result.”

21.       The aforesaid rule of a meaningful and purposeful interpretation of the section to avoid the absurd consequence is by now well settled in the case of Mangin v. IRC [1971] All Eng. LR 179 Lord Donvan has stated as under :

“Thirdly, the object of the construction of a statute being to ascertain the will of the Legislature, it may be presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted.”

22.       The said view is also recognised in large number of authorities in India, some of which can be briefly enumerated as under : In the case of Budhan Singh v. Babi Bux AIR 1970 SC 1880 in para 9 it is stated as under :

“9. Before considering the meaning of the word ‘held’ in section 9, it is necessary to mention that it is proper to assume that the law-makers who are the representatives of the people enact laws which the society considers as honest, fair and equitable. The object of every legislation is to advance public welfare. In other words, as observed by Crawford in his book on Statutory Constructions that the entire legislative process is influenced by considerations of justice and reason. Justice and reason constitute the great general legislative intent in every piece of legislation. Consequently, where the suggested construction operates hoarsely, ridiculously or in any other manner contrary to prevailing conceptions of justice and reason, in most instances, it would seem that the apparent or suggested meaning of the statute was not the one intended by the law makers. In the absence of some other indication that the harsh or ridiculous effect was actually intended by the Legislature, there is little reason to believe that it represents the legislative intent.” (p. 1883)

23.       In the case of Nasiruddin v. State Transport Appellate Tribunal AIR 1976 SC 331 where in the Apex Court has in para 26 as held as under :

“26. The conclusion as well as the reasoning of the High Court that the permanent seat of the High Court is at Allahabad is not quite sound. The order states that the High Court shall sit as the new High Court and the Judges and Division Bench thereof shall sit at Allahabad or at such other places in the United Provinces as the Chief Justice may, with the approval of the Governor of the United Provinces appoint. The word ‘or’ cannot be reads as ‘and’. If the precise words used are plain and unambiguous, they are bound to be construed in their ordinary sense. The mere fact that the results of a statute may be unjust does not entitle a court to refuse to give it effect. If there are two different interpretations of the words in an Act, the Court will adopt that which is just, reasonable and sensible rather than that which is none of those things. If the inconvenience is an absurd inconvenience, by reading an enactment in its ordinary sense, whereas if it is read in a manner in which it is capable, though not in an ordinary sense, there would not be any inconvenience at all; there would be reason why one should not read it according to its ordinary grammatical meaning. Where the words are plain the court would not make any alteration.” (p. 338)

24.       In the case of Molar Mal v. Kay Iron Works (P.) Ltd. [2000] 4 SCC 285 while reconsidering the aforesaid principle the Apex Court has held as under:

“The Courts will have to follow the rule of literal construction which rule enjoins the Court to take the words as used by the Legislature and to give it the meaning which naturally implies. But, there is an exception to this rule. That exception comes into play when application of literal construction of the words in the statute leads to absurdity, inconsistency, or when it is shown that the legal context in which the words are used or by reading the statute as a whole, it requires a different meaning. If the expression ‘entitled to apply again’ as given its literal meaning, it would defeat the very object for which the Legislature has incorporated that proviso in the Act inasmuch as the object of that proviso can be defeated by a landlord who has more than one tenanted premises by filing multiple applications simultaneously for eviction and thereafter obtain possession of all those premises without the bar of the proviso being applicable to him. This could not have been the purpose for which the proviso is included in the Act. If such an interpretation is given then the various provisos found in sub-section (3) of section 13 would become otiose and the very object of the enactment would be defeated. Therefore, the restriction contemplated under the proviso extends even up to the stage when the Court or the Tribunal is considering the case of the landlord for actual eviction and is not confined to the stage of filing of eviction petition only.” (p. 288)

25.       Thus in my opinion the true and correct interpretation of section 237(b)(i) would only mean that if the company while conducting the business has acted in a fraudulent or unlawful purpose then such companies will fall within the net of section 237(b)(i) irrespective of the fact that whether it is a running concern or close down subsequently for any reason whatsoever I am of the aforesaid opinion also because under the provisions of section 250(A) it is specifically provided that investigation may be initiated under section 237(b)(i) notwithstanding that the application is made under sections 397 and 398 of the Companies Act or it has passed a special resolution for voluntary winding up of such a company. In my opinion if section 250(A) is read along with section 237(b)(i) it is without any doubt that the contention of the learned counsel for the appellant that no investigation can be carried out once the company has ceased to operate its business. In any event on a true and proper construction of the section I do not accept the contention of the learned counsel for the appellant that the business of the company should be conducted in praesentis for the purpose of ordering investigation by the Central Government under section 237(b)(i).

26.       Even otherwise on facts the learned counsel for the respondent has been able to establish that the business of the company is not totally stopped though undoubtedly it has been seriously affected by virtue of the orders passed by the SEBI and stock exchange of suspension of the brokerage licence, suspension or freezer of bank account and collapse of Madhavpura Co-operative Bank and Global Trust Bank. The learned counsel has drawn my attention to the affidavit filed by the company before the Company Law Board in which it has been stated as under :

“3(b) It is incumbent that in order to achieve this objective, the functioning of the Applicant/Respondent group of companies ought not to be crippled which situation would inevitably result if the order dated 27-9-2004 passed by this Hon’ble Board is not amended for the purpose of determining the real question, as would be evident from the averments made hereinafter in this application.”

“6. It is stated in this connection that the following the details of payment made by the Applicant group of companies and value of Share/Property lying with the Bank :-

Particulars

Amt. (Rs. in crores)

By Cash/Deposits/Dividend

27.34

By sale of stocks

15.18

Paid to Bank of India

28.92

Total

 

71.44

It may be mentioned that out of the figures indicated above, even as recently as during the period ranging between 11-9-2004 and 4-11-2004, securities worth Rs. 15,18,02,166.05 (Rupees Fifteen Crores Eighteen Lacs Two Thousand One Hundred and Sixty Six and paise Five), held by the Ketan Parekh group with Madhavpura Mercantile Co-operative Bank Limited were liquidated towards discharging dues towards the said bank by the Ketan Parekh group.

7. It is also submitted that Shri Ketan V. Parekh has always co-operated with the Banks even admist his crisis. In spite of all the accounts frozen by various agencies and a bank on Shri Ketan V. Parekh and on his various group of companies from carrying out activities in the capital markets, the aforesaid amounts paid reflects clear intention on the part of Shri Ketan V. Parekh and his group of companies towards liquidating dues of bankers, financial institutions, and creditors. Admist such a situation it would be contrary to public interest if efforts of the Ketan Parekh group of companies to liquidate bank’s dues are jeopardised in any manner.

10. Admist these fact finding investigations, to impose another investigation would have the effect of crippling the functioning of Ketan Parekh Group of Companies and would adversely affect their capacities to liquidate dues of creditors which would be contrary to public interest.”

27.       Learned counsel for the respondent has also relied upon the balance sheet of the various companies which inter alia undoubtedly indicates conduct of some business though by way of liquidation of the various assets of the company. However the learned counsel for the appellant has contended that liquidating the assets and/or conducting the business of the company by calling meetings of the company cannot be deemed to be conducting the business of the company. He has relied upon the judgment of the Apex Court in the case of Bengal & Assam Investors Ltd. v. CIT AIR 1966 SC 1514 particularly para 13 of the said judgment. The said para 13 of the said judgment reads as under :

“13. Mr. Desai laid a great deal of stress on the argument that the very fact that a company is incorporated to carry on investment shows that the company is carrying on business. We are unable to agree with this contention. Bhagwati, J. observed in Lakshminarayan Ram Gopal Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 that ‘when a com-pany is incorporated it may not necessarily come into existence for the purpose of carrying on a business’. He further observed that ‘the objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business.’” (p. 1518)

28.       While considering the aforesaid contention the Apex Court has held that there is difference between the incorporation of a company and conduct of the business of the company. In this case the company was only incorporated on the paper but no business of any nature was conducted by the company. The said judgment has no application in the facts of the present case where the business of the company insofar as statutory requirements are concerned of calling meetings, filing returns, preparing the balance sheet is running. It may be that actual trading in the stock markets or stock exchanges has come to a halt by suspension of the trading licence by the SEBI or the business has been substantially crippled by virtue of freezer of various bank accounts. I am of the opinion that this cannot be treated as business of the company ‘is not carried on’ and/or the same ‘is closed down’ for reasons beyond the control of the appellant, i.e., by virtue of the passing of the orders of the various authorities such as SEBI, CBI and other Central Government authorities. The business of the company is conducted even today even though at a very low level, it cannot be said that the business of the company has ceased to be in operation. The word ‘is being conducted’ under section 237(b)(i) even if it is so interpreted as contended by the learned counsel for the appellant it should be and must mean that the business of the company has to come to a total stop and no activities of the company are carried on. In my opinion such situation arises only when the company is wound up either by voluntary winding up or compulsory winding up as provided under the Companies Act. In the aforesaid circumstances even on the facts of the present case I am of the opinion that the business of the company is being carried on and therefore the provisions of section 237(b)(i) squarely apply to the case which would mean that the order passed by the Company Law Board is legal and valid and on this ground does not require any interference by this Court.

29.       This takes me to the second question of law framed by the learned counsel for the appellant that whether in the present case the Central Government has able to produce necessary material on evidence to establish that the ground exist for ordering such an investigation under section 237(b)(i). On the facts of the present case it is not in dispute that there has been a stock market collapse in the year 2001 and the appellants herein have indulged in large number of share dealings and trading. It is also not in dispute before me that the Madhavpura Co-operative Bank and Global Trust Bank has collapsed in view of the stock market scam. However appellants have denied their involvement in the scam. They have on the contrary contended that they are the victims of the collapse of the share market and not the beneficiaries. The respondents therein have produced before the Company Law Board in support of the application for investigation under section 237(b)(i) a report of the Joint Parliamentary Committee investigating said scam. The respondents have also produced the report and/or order passed by the SEBI against the appellants and Ketan Parekh alleged moving spirit behind the 14 companies. The Central Government has also in support of the application relied upon the reports which are filed by the inspectors in the course of carrying out investigation under section 209(A). The Central Government has also relied upon large number of breaches of the provisions of the Companies Act by the various companies in support of investigation. In my view not only there is a material in the form of aforesaid reports, documents and orders but a more than prima facie case has been made out for investigation of the appellant company. The Joint Parliamentary Committee has in fact directed the investigation against these entities by the SEBI or the Central Government. However the learned counsel for the appellant canvassed that there is no material which can be used by the respondent in respect of the investigation because each of the authorities are entitled to conduct its own investigation on the basis of aforesaid report and, therefore, the same cannot be utilised for the purpose of ordering investigation by the Central Government under section 237(b)(i). I am not inclined to accept the contention of the learned counsel for the appellant for the simple reason that it is possible that the material can be common or identical in the course of various investigations embarked upon by the various authorities. It does not mean that the respondents are not entitled to use the material which have been unearthed or found in the course of the investigation by any other authority. The material in the present case is glaring. There was a serious collapse of the stock exchange in 2001. The SEBI on investigation has found that all the entities have entered into typical type of transactions in concert with each other so as to ultimately result in collapse of the stock market. Consequently large amount of public fund has been eroded. Consequent upon the collapse of the Global Trust even UTI has been subjected to serious financial difficulties and was ultimately required to be bailed out by the Government. These are very serious circumstances and there is a plethora of material to indicate that 14 of the entities who are subject to investigation under the provisions of section 237(b)(i) have played some role the consequence of which has resulted as mentioned herein above. The learned counsel for the appellant further contends that there is no need for investigation when there is substantial material and therefore the power ought not to be exercised merely for the purpose of exercising under section 237(b)(i). The aforesaid contention is merely stated to be rejected as devoid of any merits. In my opinion the Central Government has not only sufficient material but also has a strong prima facie case for ordering investigation. It has been well settled by the various decisions of the Apex Court that the Court ought not to interfere at this stage of investigation by the authorities. The investigation is not a trial of an offence. It is merely a fact-finding venture. It is no doubt true that in the context of the companies it is a serious issue because it interferes with their rights to carry out free trading but it has been held that every right is coupled with reasonable restrictions and if the company has prima facie carried out fraudulent activities then obviously it cannot complain about investigations carried out by the Central Government in exercise of statutory powers conferred under section 237(b)(i).

30.       This leads me to the third question of law which has been raised by the learned counsel for the appellant.

31.       It has been inter alia contended that the power conferred under the provisions of section 237(b)(i) of the Act must be sparingly exercised and cannot be utilised in casual manner. It has been contended by the learned counsel for the appellant that in respect of the so called security scam of 2001 there are already investigations undertaken by the SEBI, CBI and even the Department of Company Affairs by ordering investigation under section 209(A). It has therefore been contended that on the same material and on the same allegations one more investigation ought not to be ordered by the Central Government nor the Company Law Board ought to grant a sanction to such an investigation. It is not contended that the said exercise is in futility and the same is carried on simultaneously by the various authorities with a view to only affect the business of the company and thus the same should not be permitted.

32.       Learned counsel for the appellant has taken me through the provisions of the SEBI Act and has contended that the purpose and scope of inquiry thereunder has been more extensive and the provisions are more harsh and effective and in view thereof the inquiry under section 237(b)(i) is meaningless and would achieve no purpose. It has been therefore contended that once there is an extensive inquiry undertaken by SEBI in exercise of powers conferred under the SEBI Act and that the SEBI is supposed to be an expert authority in stock exchange transactions. It is neither necessary nor permissible to conduct inquiry by the Department of Company Affairs by invoking powers under section 237(b)(i) of the Companies Act. It has been urged by the learned counsel for the appellant that the inquiry ordered and sanctioned by the CBI, is merely to harass the appellant company and is not meant for achieving any objective and therefore the court should strike down the Company Law Board order sanctioning the said inquiry. It has been further contended that the parallel CBI investigation is also already in progress. The Department of Company Affairs is also conducting an inspection under section 209(A) and that various prosecutions are already launched. In view thereof it has been contended that no such investigation should be permitted by the Central Government in exercise of power under section 237(b)(i). On the other hand the learned counsel for the respondent has urged that the investigation is a must looking at the magnitude and the proposition of fraud which has been alleged to have been committed by all the sixteen entities and according to the Central Government the moving spirit behind these companies is Mr. Ketan Parekh. The learned counsel for the respondent company has drawn my attention to a resolution passed by the Government of India, Department of Company Affairs being resolution dated 2-7-2003 and it has been contended that by the said resolution the Government of India has set up a Serious Fraud Investigation Office (SFIO) and it is required that the corporate frauds should be investigated by the said SFIO. It is also brought to my attention that under the said resolution the SFIO will be conferred with the power to investigate in the company because the investigation under section 237(b)(i) of the Companies Act is entrusted to the SFIO. The learned counsel for the respondent has further contended that there are authorities and authorities which require to investigate the various aspects of fraud committed by the companies like the appellant herein. It has been contended that the SEBI under the SEBI Act has a restrictive power to investigate i.e., in respect of security transactions but when it comes to transaction in respect of banks and other institutions which are not within the purview and/or jurisdiction of the SEBI and the same are required to be investigated by the Central Government through the appropriate authority and/or body. It has been contended that the inquiry under the different acts by the different authorities are in respect of their respective jurisdiction and spheres assigned to them under the various legislations and it cannot be stated in law that merely because the inquiry is in progress by one authority under one act it should automatically prevent the other authorities from conducting investigation under a separate statue.

33.       I have considered these rival submissions of the parties and I am of the opinion that the jurisdiction and the power of the various investigating authorities derived from the jurisdiction vested in them by the various legislations or statutes, the authority which is doing the inquiry and/or conducting the investigation is required to carry out investigation keeping in mind the legal provisions and legal limitations which are stipulated under the respective statute. Undoubtedly it can be that there may be an overlapping investigation but in my opinion such an eventuality cannot prevent any investigating authority from carrying out investigation in respect of their jurisdiction conferred on them under the statute. I am also of the further opinion that the investigation in respect of the corporate fraud can be initiated and considered by the Central Government under section 237(b)(i) of the Companies Act. I have not been able to come across any provisions under the SEBI Act in which any corporate fraud can be investigated by the SEBI. Undoubtedly it can be investigated under normal criminal law by the CBI. I am further of the opinion that merely because the material on the basis of which investigation is being undertaken is identical to the material which is subject-matter of investigation by the other authority it cannot be stated that both the authorities cannot simultaneously investigate pursuant to power conferred on them under their respective statutes. I am of the opinion that every authority is entitled to investigate even may be in respect of the same material as well as from the angle and facet in which they have been asked to carry out investigation. It is possible that the SEBI may be investigating the same material on the ground of breach of the various provisions of the SEBI Act and other security related legislations whereas the Central Government, Department of Company Affairs can consider and/or investigate the fraud and/or breach of various provisions of law in the light and context of the provisions of the Companies Act may be in respect of the same material. However, I am of the opinion that the contentions advanced by the learned counsel for the appellant cannot be accepted particularly in view of the fact that every authority has been conferred various powers in their respective legislation. A similar issue aroused before the English Court under the identical provisions of investigation under the Companies Law and the Court of Appeal in the case of London United Investments Plc, In re 1992 BCLC 285 equivalent to 1971 All Eng. LR 849 it is held as under :

“The power of the Secretary of State to appoint inspectors to investigate the affairs of a company and to report is an important regulatory mechanism for ensuring probity in the management of companies affairs. That of course is in the public interest. Since the Secretary of State’s powers under section 432(2) are exercisable where there are circumstances suggesting fraud, it is likely that in many cases where inspectors are appointed an investigation by the police or the Serious Fraud Office could also be appropriate. But the code under the 1985 Act is a separate code even though it may overlap the field of criminal investigation.”

34.       Apart from the aforesaid position in law : I am also of the further opinion that the Central Government having constituted the Serious Fraud Investigation Office and if it desires to carry out investigation in respect of the affairs of the aforesaid 14 appellant companies without any mala fide intention then it is not possible to stall the investigation merely on the basis of contentions and arguments advanced by the learned counsel for the appellant that all the authorities cannot be permitted to carry the investigation simultaneously in respect of the very same material. I therefore, reject the contention on behalf of the appellant in respect of question No. 3 which have been formulated. I am of the opinion that the answer to this question is that every authority is entitled to carry out investigation may be in respect of the same material insofar as they do not exceed the jurisdiction conferred on them in their respective statute. I therefore answer this question of law accordingly.

35.       The learned counsel for the respondent has drawn my attention to the judgment of the Apex Court in the case of DDA v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622 and has brought to my attention that the Supreme Court has taken note of the fact that various frauds are committed by the companies defrauding the public at large by taking shelter of corporate entities. It has been contended by the learned counsel for the respondent by relying upon the aforesaid judgment that it is necessary to lift or pierce the corporate veils and to see who are the real men behind the veil who are involved in defrauding others under the guise of corporate entity. It has been contended by the learned counsel for the respondent that such an exercise can be undertaken by the SFIO while carrying out investigation under section 237(b)(i) of the Companies Act and the court must not stole such an investigation. It has been contended by the learned counsel for the appellant that there are serious allegations in the present case and thus this Court must refrain from exercising jurisdiction and interfering with the investigation at this stage. I find considerable substance in the contention advanced by the learned counsel for the respondent. It is well settled that the court must be reluctant in interfering in the matter where the same is still at investigating stage. The Court cannot and should not usurp the jurisdiction vested in the Central Government to form an opinion and come to a conclusion as to whether the investigation is necessary or not limited jurisdiction or power is conferred on the court is to ascertain whether there is a material in support of the opinion arrived at by the Central Government and/or the said exercise is not a mala fide exercise of power. In the facts of the present case I do not consider that the exercise of the Central Government is mala fide. There is a plethora of material and in view therein I do not desire to interfere with the investigation ordered by the Central Government in exercise of power conferred under section 237(b)(i) of the Act.

36.       In view thereof I find that there is no substance in the present appeals. I accordingly dismiss all the 14 appeals with cost quantified at Rs. 10,000 each per appeal.

At the request of the learned counsel for the appellant the statement of the learned counsel for the respondent to maintain status quo is to continue till 29-4-2005.

In view of the dismissal of the appeals itself nothing remains in the Company Applications (L) No. 1030 of 2004 to 1043 of 2004 for ad interim orders and the same is dismissed accordingly with no order as to costs.

 

bombay high court

companies act

[2005] 61 SCL 33 (bom.)

High Court of Bombay

Panther Fincap & Management Services Ltd.

v.

Central Government, Union of India

S.U. Kamdar, J.

Appeal Nos. 1 to 14 of 2005

In Company Petition Nos. 34, 36, 38, 39, 40, 44, 49, 52, 56, 60, 64, 65, 67 and 68 of 2003

March 31, 2005

Section 237 of the Companies Act, 1956 - Investigation of company’s affairs in other cases - Whether if a company while conducting business has acted in a fraudulent or unlawful manner, then such company will fall within net of section 237(b)(i) irrespective of fact whether it is a running concern or close down subsequently for any reason whatsoever - Held, yes - Whether merely because material, on basis of which investigation is being undertaken, is identical to material which is subject-matter of investigation by other authority, it cannot be stated that both authorities cannot simultaneously investigate pursuant to power conferred on them under their respective statutes - Held, yes - On sudden collapse of stock market, Joint Parliamentary Committee directed SEBI to make investigation against appellant-companies - SEBI found that due to concerted transactions between appellants and ‘K’, who was moving spirit behind companies, there was a ultimate collapse of stock market - Consequent to said collapse, Global Trust Bank (GTB) and UTI had been subjected to serious financial difficulties and were ultimately bailed out by Government - Central Government, relying on report of SEBI and report of inspectors carrying out inspections under section 209A, sought permission of CLB for investigation into affairs of appellant-companies under section 237 - Whether in facts and circumstances of case, Central Government had not only sufficient material but also had a strong prima facie case for ordering investigation under section 237(b)(i) - Held, yes

Facts

There was a sudden crash in stock-exchange which was attributed and alleged to one ‘K’. Allegedly, the appellant-companies were controlled and owned directly or indirectly by the said ‘K’. With the crash of the stock market, there had simultaneously been a crash of Madhavpura Co-operative Bank (MCB), Global Trust Bank (GTB) and UTI and thousands crore of rupees had been siphoned off from the system. With a hue and cry from the public, a Joint Parliamentary Committee (JPC) was constituted to investigate the said stock exchange crash. Apart from that, SEBI was also directed to carry out investigations and to take appropriate action within provision of the Securities & Exchange Board of India Act, 1992. In the meantime, the respondent, in exercise of power under section 209A, carried out inspection of books of account of the appellants. In these circumstances and based on the material gathered from three basic sources, namely, the report of the JPC, the interim report of the SEBI investigation and, thirdly the reports pursuant to the investigation under section 209A, the respondent in a company petition sought permission of the CLB to investigate affairs of the company in exercise of power under section 237(b)(i). The appellants objected the application on ground that the purpose and object of investigation having already been achieved by carrying out investigation by authorities such as CBI, SEBI and Department of Company Affairs under section 209A, further investigation under section 237 was not necessary and it would affect the appellants prejudicially. Rejecting the objection of the appellants, the CLB allowed the company petition and permitted the Department of Company Affairs to carry out investigation under section 237(b)(i) in the affairs of each of the appellant-companies.

On appeal, it was also contended by the appellants that once the business of the company had ceased to be in operation for any reason whatsoever voluntarily or otherwise, then the respondents had no jurisdiction to initiate and/or exercise jurisdiction vested in them by virtue of the proceedings under section 237(b)(i); and that the respondents had not made out prima facie case for investigation under section 237(b)(i).

Held

The provisions of investigation under section 237(b)(i) are being introduced by the Parliament with the intention to prevent persons who enter the business in the guise of corporate entities to carry on fraudulent business with a view to harm the public interest. [Para 18]

Essentially, the provisions of section 237 are meant to see that the defrauding of the public at large is not being carried on under the guise of the corporate affairs. Plain and simple reading of the said section would indicate that the words used ‘is being conducted’ are used in the context of the fraudulent or unlawful business conducted by the company in course of running of their business. It does not mean that once the business is conducted in unlawful and fraudulent manner and if it is closed down, the power of the Central Government of ordering investigation under section 237(b)(i) stood revoked or ceased to have effect. The word ‘is being conducted’ has to be read along with the words ‘fraudulent or unlawful purpose’ and if it is so read, it is clear that the word ‘is being conducted’ is used with the intention to indicate that when the business of the company was conducted, it was conducted for unlawful purpose. Any person can conduct the business for fraudulent or unlawful purpose and before it is detected would close down the business of the company and in fact escape the consequences as contemplated under section 237(b)(i). It is not uncommon that there are companies who are fly by night operators in a booming economy of India today. If such an interpretation as sought for by the appellants is given to section 237(b)(i), then all these companies would commit fraud and would close down the business and, consequently, make the provision a dead letter on the statue. [Para 19]

The true and correct interpretation of section 237(b)(i) would only mean that if the company while conducting the business has acted in a fraudulent or unlawful purpose, then such companies will fall within the net of section 237(b)(i) irrespective of the fact that whether it is a running concern or close down subsequently for any reason whatsoever because under the provisions of section 250A it is specifically provided that investigation may be initiated under section 237(b)(i) notwithstanding that the application is made under sections 397 and 398 or it has passed a special resolution for voluntary winding up of such a company.

In any event on a true and proper construction of the section, it cannot be held that the business of company should be conducted in praesentis for the purpose of ordering investigation by the Central Government under section 237(b)(i). [Para 25]

Even otherwise on facts, the respondent had been able to establish that the business of the company was not totally stopped though undoubtedly it had been seriously affected by virtue of the orders passed by the SEBI and stock exchange of suspension of the brokerage license, suspension or freezer of bank account and collapse of MCB and GTB. [Para 26]

That could not be treated as business of the company was not carried on and/or the same was closed down for reasons beyond the control of the appellant, i.e., by virtue of the passing of the orders of various authorities such as SEBI, CBI and other Central Government authorities. The business of the company was conducted even today even though at a very low level. It could not be said that the business of the company had ceased to be in operation. The word ‘is being conducted’ under section 237(b)(i) even if it is so interpreted, as contended by the appellant, it should be and must mean that the business of the company has come to a total stop and no activities of the company are carried on. Such situation arises only when the company is wound up either by voluntary winding up or compulsory winding up as provided under the Act. In the aforesaid circumstances even on the facts of the instant case, the business of the company was being carried on and, therefore, the provisions of section 237(b)(i) squarely applied to the case which would mean that the order passed by the CLB was legal and valid and on this ground did not require any interference by the Court. [Para 28]

On the facts of the instant case, it was not in dispute that there had been a stock market collapse in the year 2001 and the appellants had indulged in large number of share dealings and trading. It was also not in dispute that the MCB and GTB had collapsed in view of the stock market scam. The respondents had produced before the CLB in support of the application for investigation under section 237(b)(i) a report of the JPC investigating said scam. The respondents had also produced the report and/or order passed by the SEBI against the appellants and ‘K’ who was moving spirit behind the appellant-companies. The Central Government had also, in support of the application, relied upon the reports which were filed by the inspectors in the course of carrying out investigation under section 209A. The Central Government had also relied upon large number of breaches of the provisions of the Act by the various companies in support of investigation. Therefore, not only there was a material in the form of aforesaid reports, documents and orders but a more than prima facie case had been made out for investigation of the appellant companies. The JPC had in fact directed the investigation against these entities by the SEBI or the Central Government. However, the appellant canvassed that there was no material which could be used by the respondent in respect of the investigation because each of the authorities was entitled to conduct its own investigation on the basis of aforesaid report and, therefore, the same material could not be utilized for the purpose of ordering investigation by the Central Government under section 237(b)(i). The contention of the appellant could not be accepted for the simple reason that it is possible that the material can be common or identical in course of various investigations embarked upon by the various authorities. It did not mean that the respondents were not entitled to use the material which had been unearthed or found in the course of the investigation by any other authorities. The material in the instant case was glaring. There was a serious collapse of the stock exchange in 2001. The SEBI, on investigation, had found that all the entitles had entered into typical type of transactions in concert with each other so as to ultimately result in collapse of the stock market. Consequently, large amount of public fund had been eroded. Consequent upon the collapse of the GTB, even UTI had been subjected to serious financial difficulties and was ultimately required to be bailed out by the Government. These were very serious circumstances and there was a plethora of material to indicate that the companies, which were subject to investigation under the provision of section 237(b)(i), had played some role, the consequence of which had resulted as mentioned above. Therefore, the Central Government had not only sufficient material but also had a strong prima facie case for ordering investigation. It has been well settled by the various decisions of the Apex Court that the Court ought not to interfere at this stage of investigation by the authorities. The investigation is not a trial of an offence. It is merely a fact finding venture. It is no doubt true that in the context of the companies it is a serious issue becuase it interferes with their rights to carry out free trading but it has been held that every right is coupled with reasonable restrictions and if the company has prima facie carried out fradulent activities then obviously it cannot complain about investigations carried out by the Central Government in exercise of statutory powers conferred under section 237(b)(i). [Para 29]

The jurisdiction and the power of the various investigating authorities derived from the jurisdiction vested in them by the various legislations or statutes; the authority which is doing the inquiry and/or conducting the investigation is required to carry out investigation keeping in mind the legal provisions and legal limitations which are stipulated under the respective statute. Undoubtedly, it can be that there may be an overlapping investigation but such an eventuality cannot prevent any investigating authority from carrying out investigation in respect of their jurisdiction conferred on them under the statute. The investigation in respect of the corporate fraud can be initiated and considered by the Central Government under section 237(b)(i). There is no provision under the SEBI Act in which any corporate fraud can be investigated by the SEBI. Undoubtedly, it can be investigated under normal criminal law by the CBI. Merely because the material, on the basis of which investigation is being undertaken, is identical to the material which is subject-matter of investigation by the other authority, it cannot be stated that both the authorities cannot simultaneously investigate pursuant to power conferred on them under their respective statutes. Every authority is entitled to investigate even may be in respect of the same material as well as from the angle and facet in which they have been asked to carry out investigation. It was possible that the SEBI might be investigating the same material on the ground of breach of the various provisions of the SEBI Act and other security related legislations whereas the Central Government, Department of Company Affairs could consider and/or investigate the fraud and/or breach of various provisions of law in the light and context of the provisions of the Act, might be in respect of the same material. [Para 33]

The Central Government having constituted the Serious Fraud Investigation Office and if it desired to carry out investigation in respect of the affairs of the appellant-companies without any mala fide intention, then it was not possible to stall the investigation merely on the basis of contentions and arguments advanced by the appellant that all the authorities could not be permitted to carry out the investigation simultaneously in respect of the very same material. Therefore, every authority is entitled to carry out investigation, may be, in respect of the same material insofar as they do not exceed the jurisdiction conferred on them in their respective statute. [Para 34]

The Court cannot and should not usurp the jurisdiction vested in the Central Government to form an opinion and come to a conclusion as to whether the investigation is necessary or not. Limited jurisdiction or power conferred on the Court is to ascertain whether there is a material in support of the opinion arrived at by the Central Government and/or the said exercise is not a mala fide exercise of power. In the facts of the instant case, it could not be said that the exercise of power under section 237 by the Central Government was mala fide. There was a plethora of material and in view of that, the investigation ordered by the Central Government in exercise of power conferred under section 237(b)(i) could not be interfered. [Para 35]

In view of the above, there was no substance in these appeals and same were, accordingly, dismissed.

Cases referred to

Barium Chemicals Ltd. v. CLB [1966] 36 Comp. Cas. 639 (SC) (para 11), Rohtas Industries Ltd. v. S.D. Agarwal [1969] 1 SCC 325 (para 13), Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634 (Delhi) (para 14), New Central Jute Mills Co. Ltd. v. Dy. Secretary, Ministry of Finance, Department of Revenue & Company Law [1970] 40 Comp. Cas. 102 (Cal.) (para 14), Mangin v. IRC [1971] All Eng. LR 179 (para 21), Budhan Singh v. Babi Bux AIR 1970 SC 1880 (para 22), Nasiruddin v. State Transport Appellate Tribunal AIR 1976 SC 331 (para 23), Molar Mal v. Kay Iron Works (P.) Ltd. [2000] 4 SCC 285 (para 24), Bengal & Assam Investors Ltd. v. CIT AIR 1966 SC 1514 (para 27), London United Investments Plc., In re 1992 BCLC 285 (CA) (para 33) and DDA v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622 (para 35).

N.H. Seerval and Vinod Parekh for the Appellant. B.H. Desai and Sethna for the Respondent.

Judgment

1.         Economic progress usher with it economic perversity such as the land scam, Petrol Pump Scam, import export scam, Hawala scam, security scam, shares and stocks scam, bank scam etc. With the passage of time the method of committing these scams has been more involved and more complex and are woven into various webs. Thus as a collary thereto investigations into such scams are also required to be more scientific, more intrinsic and more detailed with the help of the experts. Corporate frauds and corporate misconduct are also another facet of such scams. Companies are being floated and are disappearing into thin air making the common man poorer and poorer by thousands of crores of rupees. These 16 appeals are challenging an order passed by the company law board under which it has ordered an investigation into one of such alleged scams under section 237(b)(i) of the Companies Act which is being known as Ketan Parekh - Stock scam of 2001.

2.         Few facts dealing with the complex question of law which have been raised by the appellant in the present proceedings are briefly narrated as under :

3.         In 2001 there was a sudden crash in the stock market i.e., the sudden increase in the prices over the board securities in the period 1999-2000 and then sudden crash of the stock market is attributed and alleged to one Mr. Ketan Parekh. It is alleged that he by his conduct through his various entities and companies has committed fraud which led to the said crash in the stock market. It is also alleged that the 14 companies in the present appeals are entities which are controlled and owned directly or indirectly by the said Ketan Parekh, who is the alleged King-player in the stock exchange scam of 2001. There are also allegations that with the crash of the stock market, there has simultaneously been a crash of the Madhavpura Co-operative Bank, Global Trust Bank and UTI and thousands of crores of rupees have been siphoned off from the system. With a hue and cry from the public the Lok Sabha on 26-4-2001 constituted the Parliamentary Committee as fact-finding committee to investigate the said 2001 Stock Exchange crash. The terms of reference of the said Joint Parliamentary Committee have been enlarged on 3-8-2001 and inquiries pertaining to the crash of UTI were also made part of the said Joint Parliamentary Committee. The Joint Parliamentary Committee has given their report and has inter alia recommended in paras 11 to 35 of the report that the investigations must be carried out in respect of 6 corporate groups belonging to Ketan Parekh and that the Department of Company Affairs has been informed that 6 out of 10 corporate groups have transferred huge amount to entities and associates of Ketan Parekh and this aspect requires investigation. Joint Parliamentary Committee has also simultaneously directed SEBI to carry out investigations to take appropriate action within the provisions of Security Exchange Board India Act, 1992 as amended from time-to-time (hereinafter referred to as ‘the SEBI Act’).

4.         On 25-6-2001 the respondents issued a letter to the appellants seeking inspection of the books of account of the appellant in exercise of power conferred under section 209A of the Companies Act. After carrying out certain initial investigations on the reference of the company on 25-11-2001 a preliminary finding report was filed by the respondent with the Central Government. On 19-11-2004 the respondents set out various details and inquiries with the appellant company seeking various information. This inspection under section 209A of the Companies Act has been partly carried out and is still in progress.

5.         On 2-5-2003 the Company Petition No. 39 of 2003 was filed by the respondent with the Company Law Board seeking permission to investigate the affairs of the company in exercise of power conferred under section 237(b)(i) of the Companies Act. The application is inter alia based on the interim report of the various irregularities of the SEBI as well as certain irregularities which came to the light by virtue of inspection under section 209A of the Companies Act. The said petition is also based on a report of the Joint Parliamentary Committee. Thus in nutshell the application which has been initiated under section 237(b)(i) is based on the material gathered from three basic sources namely, the report of the Joint Parliamentary Committee, the interim report of the SEBI investigation and thirdly the reports pursuant to the investigation under section 209A of the Companies Act. The petition which is filed on 2-5-2003 by the respondent in detail sets out the various findings on the aforesaid three reports and the material gathered by the said authorities as required for the purpose of carrying out investigation under section 237(b)(i). This petition dated 2-5-2003 was served on the company on 16-5-2003. It is the case of the petitioner that on 20-7-2003 they applied to the Company Law Board for a certified true copy of the SEBI report and other documents which are relied upon by the respondent in the said company petition before the Company Law Board. On 12-7-2003 the appellant herein sought a transfer of the proceedings from the Principal Bench of the Company Law Board, New Delhi to the Western Region Bench of the Company Law Board at Mumbai. Simultaneously they have also applied for inspection of the various documents which are referred to and/or relied upon by the respondent in the said company petition. On 24-11-2003 the appellant company filed a reply inter alia opposing the petition which was filed under section 37(b)(i) of the Companies Act. It was inter alia alleged that the powers sought to be exercised by the Company Law Board are likely to seriously affect the interest of the company. The various allegations made in the company petition were denied. It was contended that the stock market crash which took place some time in or about 2001 was not due to acts on the part of Ketan Parekh but in fact he along with his entitles have suffered losses in the range of about Rs. 3,000 crores to Rs. 4,000 crores. It was further contended that if there was any evidence regarding misuse of funds of banks and financial institutions then the appellant cannot be penalised for the same but it is in fact the duty of the Reserve Bank of India to regulate and over see the functions of the banks and financial institutions affecting the financial matters and that the consequence of the failure on the part of the RBI cannot be attributed to the appellant herein. Insofar as the allegation that there is intention of the company to conduct its business with an intention to defraud its creditors, members and other members or for a fraudulent or unlawful purpose is concerned, the appellant has contended that the word ‘intention’ would mean that the someone was deceived by the respondents deliberately and in preplanned events to their advantage and it assumes a guilty mind and there has to be an unlawful gain by such an evil design on the part of the appellant herein. It was contended that the crash of the stock market in 2001 was merely a drastic melt down of the share prices due to a declining trend in global share market which has also inflicted heavy financial losses to the appellant companies. It is further contended that the drastic fall in the share prices cannot be foreseen by the appellant and they themselves are the victims of melt down and not the beneficiaries of the same. Thus the allegation of carrying on business for defrauding the creditors and/or for fraudulent or unlawful purpose were denied. It has been further contended that the purpose and object of investigation has already been achieved by carrying out investigations by the authorities such as SEBI, CBI and Department of Company Affairs under section 209A of the Companies Act and therefore a further investigation in the matter by the said investigating authorities appointed by the Central Government under section 237(b)(i) is neither necessary nor efficacious and it would only affect the interest of the appellant company prejudicially. The respondents on the other hand in their rejoinder have placed extensive reliance upon the inspection report of the CBI and Joint Parliamentary Committee and also the inspection carried out by the Department of Company Affairs under section 209(A). Even a certain extract of the JPC report has been annexed to the said rejoinder.

6.         After hearing the parties the Company Law Board has passed an impugned order on 27-9-2004. By the impugned order the Company Law Board has inter alia held that there is a ground made out for carrying out investigation under section 237(b)(i). It has been further held that there are serious allegations of fraud and scams by these corporate entities and there is substantive material in support of the said allegations to conduct support the investigation under section 237(b)(i) of the Companies Act. Thus the Company Law Board allowed the company petition and permitted the Department of Company Affairs to carry out investigation under section 237(b)(i) in the affairs of each of the appellant companies. This order dated 22-9-2004 which is a common order passed in respect of all of the sixteen appeals before me is the subject-matter of challenge before me. These are the appeals filed under section 10F on the ground that certain substantive questions of law arise in the present case and require determination of this Court.

7.         Learned counsel for the appellant has framed three substantial questions of law in support of his argument which are briefly enumerated as under :

(i)         Whether it is a condition precedent for exercise of power under section 237(b)(i) of the Companies Act that the business of the company should be in operation as on the date when the power is sought to be exercised by the respondent or that once the business of the company has ceased to be in operation for any reason whatsoever voluntarily or otherwise, then the respondents have no jurisdiction to initiate and/or exercise jurisdiction vested in them by virtue of the proceedings under section 237(b)(i) ?

(ii)        Whether on the facts of the present case the respondents have made out prima facie case for investigation or alternatively there is a material available for exercising jurisdiction by the respondent under section 237(b)(i) ?

(iii)       Whether in view of simultaneous investigations carried out by SEBI, CBI and Department of Company Affairs under section 209A the respondent ought not be permitted to launch a fresh investigation in exercise of power under section 237(b)(i) of the Companies Act on same material and on same facts ?

8.         Before I deal with the aforesaid substantial questions of law as framed by the learned counsel for the appellant I feel that it is necessary that the relevant provisions of the Act which are germane to the aforesaid questions of law must be set out. Some of the relevant provisions are reproduced as under :

“209A. Inspection of books of account, etc., of companies.—(1) The books of account and other books and papers of every company shall be open to inspection during business hours—

        (i)       by the Registrar, or

        (ii)      by such officer of the Government as may be authorised by the Central Government in this behalf;

        (iii)     by such officers of the Securities and Exchange Board of India as may be authorised by it :

Provided that such inspection may be made without giving any previous notice to the company or any officer thereof:

Provided further that the inspection by the Securities and Exchange Board of India shall be made in respect of matters covered under sections referred to in section 55A.

(2)        It shall be the duty of every director, other officer or employee of the company to produce to the person making inspection under sub-section (1), all such books of account and other books and papers of the company in his custody or control and to furnish him with any statement, information or explanation relating to the affairs of the company as the said person may require of him within such time and at such place as he may specify.

(3)        It shall also be the duty of every director, other officer or employee of the company to give to the person making inspection under this section all assistance in connection with the inspection which the company may be reasonably expected to give.

(4)        The person making the inspection under this section may, during the course of inspection,-

        (i)       make or cause to be made copies of books of account and other books and papers, or

(ii)      place or cause to be placed any marks of identification thereon in token of the inspection having been made,

(5)        Notwithstanding anything contained in any other law for the time being in force or any contract to the contrary, any person making an inspection under this section shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit, in respect of the following matters, namely:—(i) the discovery and production of books of account and other documents, at such place and such time as may be specified by such person; (ii) summoning and enforcing the attendance of persons and examining them on oath; (iii) inspection of any books, registers and other documents of the company at any place.

(6)        Where an inspection of the books of account and other books and papers of the company has been made under this section, the person making the inspection shall make a report to the Central Government or the Securities and Exchange Board of India in respect of inspection made by its officers.

(7)        Any officer authorised to make an inspection under this section shall have all the powers that a Registrar has under this Act in relation to the making of inquiries.

(8)        If default is made in complying with the provisions of this section, every officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees, and also with imprisonment for a term not exceeding one year.

(9)        Where a director or any other officer of a company has been convicted of an offence under this section he shall, on and from the date on which he is so convicted, be deemed to have vacated his office as such and on such vacation of office, shall be disqualified for holding such office in any company, for a period of five years from such date.”

“234. Power of Registrar to call for information or explanation.— (1) Where, on perusing any document which a company is required to submit to him under this Act, the Registrar is of opinion that any information or explanation is necessary with respect to any matter to which such document purports to relate, he may, by a written order, call on the company submitting the document to furnish in writing such information or explanation, within such time as he may specify in the order.

(2)        On receipt by the company of an order under sub-section (1), it shall be the duty of the company, and of all persons who are the officer of the company, to furnish such information or explanation to the best of their power.

(3)        On receipt of a copy of an order under sub-section (1), it shall also be the duty of every person who has been an officer of the company to furnish such information or explanation to the best of his power.

(3A)     If no information or explanation is furnished within the time specified or if the information or explanation furnished is, in the opinion of the Registrar, inadequate, the Registrar may by another written order call on the company to produce before him for his inspection such books and papers as he considers necessary within such time as he may specify in the order; and it shall be the duty of the company, and of all persons who are officers of the company, to produce such books and papers.

(4)        If the company, or any such person as is referred to in sub-section (2) or (3), refuses or neglects to furnish any such information or explanation or if the company or any such person as is referred to in sub-section (3A) refuses or neglects to produce any such books and papers,-

(a)        the company and each such person shall be punishable with fine which may extend to five thousand rupees and in the case of a continuing offence, with an additional fine which may extend to five hundred rupees for every day after the first during which the offence continues; and

(b)        the Court trying the offence may, on the application of the Registrar and after notice to the company, make an order on the company for production before the Registrar of such books and papers as in the opinion of the Court, may reasonably be required by the Registrar for the purpose referred to in sub-section (1).

(5)        On receipt of any writing containing the information or explanation referred to in sub-section (1), or of any book or paper produced whether in pursuance of an order of the Registrar under sub-section (3A) or of an order of the Court under sub-section (4), the Registrar may annex that writing book or paper, or where that book or paper is required by the company, any copy or extract thereof, to the document referred to in sub-section (1); and any writing or any book or paper or copy or extract thereof so annexed shall be subject to the like provisions as to inspection, the taking of extracts and the furnishing of copies, as that document is subject.

(6)        If such information or explanation is not furnished within the specified time or if after perusal of such information or explanation or of the books and papers produced whether in pursuance of an order of the Registrar under sub-section (3A) or of an order of the Court under sub-section (4), the Registrar is of opinion that the document referred to in sub-section (1), together with such information or explanation or such books and papers discloses an unsatisfactory state of affair or does not disclose a full and fair statement of any matter to which the document purports to relate, the Registrar shall report in writing the circumstances of the case to the Central Government.

(7)        If it is represented to the Registrar of materials placed before him by any contributory or creditor or any other person interest that the business of a company is being carried on in fraud of its creditors or of persons dealing with the company or otherwise for a fraudulent or unlawful purpose, he may, after giving the company an opportunity of being heard, by a written order, call on the company to furnish in writing any information or explanation on matters specified in the order, within such time as he may specify therein; and the provisions of sub-sections (2), (3), 3(A), (4) and (6) of this section shall apply to such order.

**

**

**

(8)        The provisions of the section shall apply mutatis mutandis to documents which a liquidator, or a foreign company within the meaning of section 591, is required to file under this Act.”

“235. Investigation of the affairs of a company.—(1) The Central Government may, where a report has been made by the Registrar under sub-section (6) of section 234, or under sub-section (7) of that section, read with sub-section (6) thereof, appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct.

(2)        Where—

(a)      in the case of a company having a share capital, an application has been received from not less than two hundred members or from members holding not less than one-tenth of the total voting power therein, and

(b)      in the case of a company having no share capital, an application has been received from not less than one-fifth of the persons on the company’s register of members, the Tribunal may, after giving the parties an opportunity of being heard, by order, declare that the affairs of the company ought to be investigated by an inspector or inspectors, and on such a declaration being made, the Central Government shall appoint one or more competent persons as inspectors to investigate the affairs of the company and to report thereon in such manner as the Central Government may direct.”

“237. Investigation of company’s affairs in other cases.—Without prejudice to its powers under section 235, the Central Government-

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if-

        (i)           the company, by special resolution; or

(ii)          the Court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

        (b)      may do if in its opinion or in the opinion of the Tribunal, there are circumstances suggesting—

(i)           that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent of unlawful purpose;

(ii)          that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii)         that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company.”

“250A. Voluntary winding up of company, etc., not to stop investigation proceedings.—An investigation may be initiated under section 235, 237, 239 or 247 notwithstanding that—

        (a)      an application has been made for an order under section 397 or section 398; or

(b)      the company has passed a special resolution for voluntary winding up, and no investigation so initiated shall be stopped or suspended by reason only of the fact that an application referred to in clause (a) has been made or a special resolution referred to in clause (b) has been passed.”

9.         Learned counsel appearing for appellant has vehemently contended before me that the proceedings which are initiated by the respondent before the Company Law Board for investigation under section 237(b)(i) of the Companies Act is totally without jurisdiction and non est. It has been further contended that the condition precedent prescribed under the said section having not been complied with by the Company Law Board was not entitled in law to exercise jurisdiction under the provisions of section 237(b)(i) of the Companies Act. The learned counsel has further contended that on true and correct interpretation the Company Law Board gets jurisdiction to pass an order of investigation only if the company is carrying on business with the intention to defraud its creditors, members and/or carrying on business for fraudulent or unlawful purpose or in a manner oppressive to any of its members in a praesentis. It is therefore contended that if the company is not carrying on business at present then irrespective of the fact that during the period when the company was carrying on business whether the company has conducted business defrauding the creditors or for a fraudulent or unlawful purpose or in a manner oppressive to any members the Company Law Board does not acquire jurisdiction to launch investigation under section 237(b)(i). It has been vehemently contended that the provisions under section 237(b)(i) must be strictly construed because it is an inroad in the freedom guaranteed by the Constitution under Article 19(1)(g). It is contended that it is an interference with the right of the shareholders to carry on business as guaranteed by the Constitution. It has been contended that section 237(b)(i) must be so strictly read that unless there is a compliance with the condition precedent prescribed thereon the Tribunal cannot exercise power to launch investigation in the affairs of the company, it has been further contended that only in the last category prescribed under section 237(b)(i) i.e., if the company is formed for any fraudulent and/or unlawful purpose that it is not necessary that the business of the company should be carried on at present moment when the investigations are ordered. It has been contended by the learned counsel for the appellant in alternative to the aforesaid submission that even if the provisions of section 237(b)(i) are not so strictly construed as urged by him then also it must be so construed that save and except the case where the business of the company is voluntarily closed or the company is voluntarily wound up then only on those cases section 237(b)(i) would be applicable but in all other cases the provisions of section 237(b)(i) would not apply if the business of the company is not carried in praesentis. It has been further contended that it is immaterial that whether at the relevant time when the business it was carried on by the company was in fact carried on for the purpose of defrauding the creditors or members and/or carried on for fraudulent or unlawful purpose or it is carried on in a manner oppressive to any of its members and still the Company Law Board will not permit the investigation by the Central Government under the provisions of section 237(b)(i) of the Companies Act. It has been strenuously urged by the learned counsel for the appellant that the power conferred on the Central Government under section 237(b)(i) is a draconian power interfering with the business of the company and such power must not be permitted to be utilised save and except directly in accordance with law and therefore the said application for investigation when the business is not running in praesentis cannot be granted.

10.       On the facts of the present case the learned counsel has contended that it is an admitted position that in respect of some of the appellants who are inter alia carrying on business of share brokerage their share brokers card has been suspended and in some of the cases the said card is revoked and/or terminated by the concerned stock exchange and SEBI and some of the trading firms who were carrying on business as a share broker have come to a halt and therefore those companies are not carrying on any business in praesentis and thus the jurisdiction vested under the Central Government and/or the Company Law Board to investigate under section 237(b)(i) cannot be exercised in respect of these companies. It has been further contended that business of the various companies has also been closed because of the freezing of the bank accounts in parallel investigations which have been carried out by the SEBI, CBI and Department of Company Affairs. It has been therefore contended by the learned counsel for the appellant that even in respect of companies who are not share broking companies still their business has also come to a total halt and/or for all practical purposes all these companies are defunct companies and exist only on paper. Thus according to the learned counsel for the appellant the Company Law Board ought not to have passed the impugned order since it does not satisfy the jurisdictional requirements of section 237(b)(i) of the Companies Act. Thus the learned counsel for the appellant has contended that the argument that these appellants at the relevant time when they were carrying on business have committed a scam even if it is taken as true still the said scam cannot be the subject-matter of investigation under section 237(b)(i) because of closure of their business for reasons beyond their control. The business of the appellants have been brought to a halt by an order of SEBI suspending and/or revoking the licence to carry on business of the company. Thus it is submitted that when power is exercised under section 237(b)(i) by the Central Government the company being already defunct companies and not running the business they cannot be subjected to investigation under the said section.

11.       The learned counsel for the appellants has vehemently contended that the issue urged by him is directly or squarely covered by the Constitution Bench decision of the Apex Court in the case of Barium Chemicals Ltd. v. CLB [1966] 36 Comp. Cas. 639. He has drawn my attention to the following para and has contended that the Apex Court has clearly held that under section 237(b)(i) as a jurisdictional requirement for exercising of power of ordering investigation against a company it is necessary that the company must be carrying on business in praesentis and it is absolutely immaterial that the company has in past carried on the business for a fraudulent or unlawful purpose or for defrauding the creditors or any of the members. The said para reads as under :

“In dealing with this problem the first point to notice is that the power is discretionary and its exercise depends upon the honest formation of an opinion that an investigation is necessary. The words ‘in the opinion of the Central Government’ indicate that the opinion must be formed by the Central Government and it is of course implicit that the opinion must be an honest opinion. The next requirement is that ‘there are circumstances suggesting, etc.’ These words indicate that before the Central Government forms, its opinion it must have before it circumstances suggesting certain inferences. These inferences are of many kinds and it will be useful to make a mention of them here in a tabular form :

        (a)      that the business is being conducted with intent to defraud-

        (i)           creditors of the company

        (ii)          members, or

        (iii)         any other person;

        (b)      that the business is being conducted

        (i)           for a fraudulent purpose,

        (ii)          for a unlawful purpose;

        (c)      that persons who formed the company or manage its affairs have been guilty of-

        (i)           fraud, or

        (ii)          misfeasance or other misconduct-towards the company or towards any of its members;

(d)    that information has been withheld from the members about its affairs which might reasonably be expected, including calculation of commission payable to-

        (i)           managing or other director,

        (ii)          managing agent,

        (iii)         the secretaries and treasurers,

        (iv)         the managers.

These grounds limit the jurisdiction of the Central Government. No jurisdiction outside the section which empowers the initiation of investigation, can be exercised. An action, not based on circumstances suggesting an inference of the enumerated kind, will not be valid. In other words, the enumeration of the inferences, which may be drawn from the circumstances, postulates the absence of a general discretion to go on a fishing expedition to find evidence. . . .” (p. 661)

12.       The learned counsel has vehemently contended that the judgment of the Apex Court as per majority decision laid down by Hidayatullah, J. is the lead judgment and holds that the provisions of section 237(b)(i) can only be exercised when the business is running in praesentis and does not apply when the business of the company has been closed down for any reasons whatsoever including the reasons which are beyond the control of the appellant themselves. The learned counsel has been at pain to convey that the issue which has been raised by him is no more res integra in view of the judgment of the Constitution Bench and has contended that the said judgment of the Apex Court is binding on me. According to the learned counsel for the appellant the aforesaid para in the judgment holds that the business of the company must be carried on in praesentis for the purpose which is mentioned in the said section for exercising power by the Central Government under section 237(b)(i).

13.       He has further contended that the issue was further discussed in subsequent judgment of the Apex Court in the case of Rohtas Industries Ltd. v. S.D. Agarwal [1969] 1 SCC 325. It has been contended that Apex Court in the aforesaid judgment has accepted the view taken by Hidayatullah, J. as the correct view. He has relied upon para 6 of the said judgment. He has also relied upon para 11 where the Apex Court has approved the view of Hidayatullah, J. in the case of Barium Chemicals Ltd. (supra). The said paras 6 and 11 reads as under :

“6. The decision of this Court in Barium Chemical’s case (supra) which considered the scope of section 237(b) illustrates that difficulty. In that case Hidayatullah, J. (our present Chief Justice) and Shelat, J. came to the conclusion that though the power under section 237(b) is a discretionary power the first requirement for its exercise is the honest formation of an opinion that the investigation is necessary and the further requirement is that ‘there are circumstances suggesting’ the inference set out in the section; an action not based on circumstances suggesting an inference of the enumerated kind will not be valid; the formation of the opinion is subjective but the existence of the circumstances relevant to the inference of the enumerated kind will not be valid; the formation of the opinion is sine qua non or action must demonstratable; if their existence is questioned, it has to be proved at least prima facie; it is not sufficient to assert that those circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness; the conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In other words they held that although the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstratable; if their existence is questioned, it has to be proved at least prima facie; it is not sufficient to assert that those circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness; that conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In other words they held that although the formation of opinion by the Central Government is a purely subjective process and such an opinion cannot be challenged in a Court on the ground of propriety, reasonableness or sufficiency, the authority concerned is nevertheless required to arrive at such an opinion from circumstances suggesting the conclusion set out in sub-clauses (i), (ii) and (iii) of section 237(b) and the expression ‘circumstances suggesting’ cannot support the construction that even the existence of circumstances is a matter of subjective opinion. Shelat, J. further observed that it is hard to contemplate that the Legislature could have left to the subjective process both the formation of opinion and also the existence of circumstances on which it is to be founded; it is also not reasonable to say that the clause permitted the authority to say that it has formed the opinion on circumstances which in its opinion exist and which in its opinion suggest an intent to defraud or a fraudulent or unlawful purpose.

11. Coming back to section 237(b) in finding out its true scope we have to bear in mind that that section is a part of the scheme referred to earlier and therefore the said provision takes its colour from sections 235 and 236. In finding out the legislative intent we cannot ignore the requirement of those sections. In interpreting section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under Article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of general public. In fact the vires of that provision was upheld by majority of the judges Constitution Bench in Barium Chemicals’ case principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated earlier we agree with the conclusion reached by Hidayatullah and Shelat, JJ. in Barium Chemicals’ case that the existence of circumstances suggesting that the company’s business was being conducted as laid down in sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the Courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question are open to judicial review though the opinion formed by the Government is not amenable to review by the Courts. As held earlier the required circumstances did not exist in this case.”

14.       Apart from the aforesaid two judgments of the Apex Court the learned counsel has in support of his contention has also relied upon the judgment of the Delhi High Court in the case of Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634 and the judgment of the Calcutta High Court in the case of New Central Jute Mills Co. Ltd. v. Dy. Secretary, Ministry of Finance, Department of Revenue & Company Law [1970] 40 Comp. Cas. 102 (Cal.). By relying upon the aforesaid two judgments the learned counsel has reiterated the submissions which are already set out in extentio hereinabove.

15.       In the alternative to the above submissions the learned counsel has raised the issue of interpretation of section 237(b)(i) and it is contended that assuming that the judgment of the Apex Court did not hold that the running of a business in praesentis in the manner set out therein is a condition precedent still according to him on a plain and simple reading of the section an inescapable conclusion is that for the purpose of exercising the power under the said section the business must be a running business and not defunct or closed down business. On the other hand learned counsel Mr. Desai the learned Additional Solicitor General appearing for the respondent has contended that the provisions of section 237(b)(i) cannot be so restrictly interpreted. According to him it takes in its sweep even a part conduct of the business partially conducted even if the company has become defunct or it has suspended its business operation for any reasons whatsoever. It has been further contended by the learned counsel that the provisions of section 237(b)(i) in its opening portion provides that the power of the Central Government to appoint one or more persons as inspector to investigate the affairs of the company and to report thereon to the Central Government is a power conferred on the respondent in the public interest and such power of the Central Government ought to be given full effect for effecting investigation and cannot be so interpreted so as to defeat the provisions of the Act. It has been further contended that the word ‘is being conducted’ is in a simple present tense but by using the words conducted in past tense it has included within its scope even the business which was carried out for fraudulent purposes in the past. Thus according to the learned Additional Solicitor General the Central Government would have jurisdiction to investigate irrespective of the fact that whether the company is running the business or not. The learned Additional Socilitor General has further contended that the Court must give purposeful interpretation to the provisions of section 237(b)(i) and should not interpret the section which results in absurd consequences. According to the learned counsel the section cannot be interpreted in a manner which can provide a scope to do the things which are in fact meant to be prevented by the provisions thereof. Insofar as the aforesaid authorities are concerned, the learned counsel for the respondent has contended that the judgment of the Apex Court in the case of Barium Chemicals Ltd. (supra) does not in any way or manner set out any such proposition of law as contended by the learned counsel for the respondent i.e. the company must be running the business in praesentis so as to attract the provisions of section 237(b)(i). The learned counsel has contended that the paras referred to by the learned counsel for the appellant did not carve out any such proposition of law as canvassed by the learned counsel for the appellant before this Court and therefore the said argument ought not to be accepted. The learned counsel has further contended that if the interpretation is given as suggested by the learned counsel for the appellant in most of the cases, then the company would commit fraud and carry on business for fraudulent or unlawful purpose and/or to defraud the creditors and before the same can be detected or investigated they would close down the company and evade investigation or cases where due to criminal investigation if the business of the companies has come to a halt then in that event it would escape the investigation under section 237(b)(i) of the Companies Act. Further more it would restrict the power of Government to take immediate remedial action of preventing further fraud being carried on by the company by carrying on business.

16.       Alternatively the learned counsel solicitor general has contended that in the facts of the present case in fact the company is carrying on business in praesentis. It has been contended that the company is neither a defunct company nor has the company been wound up but it is merely affected by virtue of the various orders passed by the various authorities affecting the business of the company but is still in operation. It has been contended that it is admitted by the appellant themselves in the various documents which are set out on record which indicate that according to appellant themselves the business is a running business and not closed down as claimed by the appellant himself and it has been contended by the learned counsel for the appellant that even if the section is interpreted as claimed by the learned counsel for the appellant still the order impugned herein is legal and valid and it satisfies all the requirements of section 237(b)(i) and this Court in exercise of power under section 10(f) ought not to inteferere with the said order passed by the Company Law Board and the appeal should be dismissed.

17.       While considering the rival contentions of the parties insofar as the first question of law framed by the petitioner is concerned i.e. the power under section 237(b)(i) can only be exercised if the company is carrying on business and does not apply if the company has closed down its business or by virtue of the orders passed by various authorities due to it has been forced to close down its business. I do not agree that the aforesaid issue is no longer a res integra in view of the judgment of the Apex Court in the case of Barium Chemicals (supra). On going through the above judgment of the Apex Court, in which the Apex Court has considered the constitutional validity of section 237(b)(i), I do not find any such proposition of law laid down by the Apex Court that the power under section 237(b)(i) can only be exercised when the company was carrying on business in praesentis. The paras on which strong reliance has been placed by the learned counsel for the appellant in my opinion does not raise any such issue of law. In the said paras the Apex Court was dealing with the issue of formation of opinion of the Central Government and requirement of the material in support thereof while ordering investigation under section 237(b)(i) of the Act. The para clearly indicates that the court was considering the words in the opinion of the Central Government and was considering that whether such words suggest in any manner that there should be material in support. While considering the aforesaid issue the court has analysed the said sections and has broken in into four parts a, b, c and d therein. Such division of the section in four parts namely a, b, c and d is nothing else but division of the plain language of the section as it is. The learned counsel for the appellant has contended that the Apex Court while considering the section in parts (a) and (b) as used the words ‘business is being conducted’ indicates that the court was of the opinion that the investigation cannot be ordered once the business has been closed down. I do not read any such proposition of law in the said para which has been set out in the said judgment nor do I find from the reading of the said judgment that any such issue was ever considered by the Apex Court. I therefore do not accept the contention of the learned counsel that the issue whether the investigation can be ordered only when the business is being conducted must be read in present tense and that the ratio of the aforesaid judgment in the case of Barrium Chemicals Ltd. (supra) covers the issue. I therefore reject the contention of the appellants that this issue is squarely covered and no more res integra by virtue of the judgment of the Apex Court in the case of Barium Chemicals Ltd. (supra). I am of the opinion that it is now well settled law that the judgment is an authority only on such proposition of law which squarely arises in the cases which are squarely dealt with by the court and that is the only ratio of the judgment which is binding on me. I do not find any such ratio or proposition of law as agitated by the learned counsel for the appellant being decided by the Apex Court in the aforesaid judgment of Barium Chemicals Ltd.’s case (supra). I therefore do not accept the contention of the learned counsel for the appellants and reject the same.

18.       Once I so hold that the issue is not covered by the judgment cited by the learned counsel, then I am required to consider the alternative argument of the learned counsel for the appellant i.e., on a plain and simple interpretation of section 237(b)(i) of the Companies Act, it is a condition precedent that business must be a running business ordering investigation under section 237(b)(i). The learned counsel for the appellant has contended that even on interpretation the section is clear and unambiguous. It uses the word ‘is being conducted’ which is simple present tense. Thus according to the learned counsel for the appellant on plain and simple interpretation of the section itself it is clear that the power under section 237(b)(i) can be exercised by the authorities only if the business is conducted in praesentis. Insofar as the arguments on the interpretation of section 237(b)(i) is concerned it is by now well-settled that the interpretation of the section as a first principle must be on the basis of simple and plain language used in the section itself. However, there is a case at which has been well recognised by the various courts that if interpretation is likely to result in absurd consequences or it defeats the intention of the Legislature then in that event purposive interpretation ought to be resorted to and interpretation should be such to advance the intention of the Legislature rather than defeating the same. In my opinion the provisions of investigation under section 237(b)(i) are being introduced by the Parliament with the intention to prevent persons who enter the business in the guise of corporate entities to carry on fraudulent business with a view to harm the public interest. Butterworth in his 5th edition on the company law while tracing out the background of the similar legislation i.e. English Company Law has inter alia considered the reason for introduction of such a legislation and while doing so it has stated as under :

“It is important to know the background of the legislation. It sometimes happens that public companies are conducted in a way which is beyond the control of the ordinary shareholders. The majority of the shares are in the hands of two or three individuals. These have control of the company’s affairs. The other shareholders know little and/or told little. They receive the glossy annual reports. Most of them throw them into the wastepaper basket. There is an annual general meeting but few of the shareholders attend. The whole management and control is in the hands of the directors. They are self-perpetuating oligarchy; and are virtually unaccountable. Seeing that the directors are the guardians of the company, the question is asked : Quis custodiet ipsos custodies - Who will guard the guards themselves.”

19.       Similar are the provisions under section 237(b)(i) of the Companies Act in India. Essentially the provisions are meant to see that the defrauding of the public at large is not being carried on under the guise of the corporate affairs. In my opinion even on plain and simple reading of the said section would indicate that the words used ‘is being conducted’ are used in the context of the fraudulent or unlawful business conducted by the company in course of running of their business. It does not mean that once the business is conducted in unlawful and fraudulent manner and if it is closed down the power of the Central Government of ordering investigation under section 237(b)(i) stood revoked or ceased to have effect as contended by the learned counsel for the appellant. The word ‘is being conducted’ has to be read alongwith the words ‘fraudulent or unlawful purpose’ even if it is so read it is clear that the word ‘is being conducted’ is used with the intention to indicate that when the business of the company was conducted it was conducted for unlawful purpose. Even otherwise I am of the opinion that to accept the contention of the appellant would be to make the said section nugatory and without any effect and toothless. It is because any person can conduct the business for fraudulent or unlawful purpose and before it is detected would close down the business of the company and in fact escape the consequences as contemplated under section 237(b)(i) of the company. It is not uncommon that there are companies who are fly by night operators in a booming economy of India today. If such an interpretation is given to section 237(b)(i) then all these companies would commit fraud and would close down the business and consequently make the provisions a dead letter on the statue. Apart therefrom it is also difficult to interpret the section in a manner the learned counsel for the appellant has called upon me to do because while so interpreted it is necessary that the Central Government must detect and investigate all such cases of the company which are conducted in a fraudulent or unlawful purpose in a course when such conduct is being carried on by the company. I do not think this could be a legislative intention while enacting the said section 237(b)(i).

20.       The principles of interpretation of statue are well settled. It is repeatedly held by the Apex Court that the interpretation must be to avoid absurdity and unrealistic result or consequences of such an interpretation. The Maxwell has in his book Interpretation of Statutes in the 10th edition as opined as under :

“....if the choice is between two interpretation, the narrow of which would fails to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result.”

21.       The aforesaid rule of a meaningful and purposeful interpretation of the section to avoid the absurd consequence is by now well settled in the case of Mangin v. IRC [1971] All Eng. LR 179 Lord Donvan has stated as under :

“Thirdly, the object of the construction of a statute being to ascertain the will of the Legislature, it may be presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted.”

22.       The said view is also recognised in large number of authorities in India, some of which can be briefly enumerated as under : In the case of Budhan Singh v. Babi Bux AIR 1970 SC 1880 in para 9 it is stated as under :

“9. Before considering the meaning of the word ‘held’ in section 9, it is necessary to mention that it is proper to assume that the law-makers who are the representatives of the people enact laws which the society considers as honest, fair and equitable. The object of every legislation is to advance public welfare. In other words, as observed by Crawford in his book on Statutory Constructions that the entire legislative process is influenced by considerations of justice and reason. Justice and reason constitute the great general legislative intent in every piece of legislation. Consequently, where the suggested construction operates hoarsely, ridiculously or in any other manner contrary to prevailing conceptions of justice and reason, in most instances, it would seem that the apparent or suggested meaning of the statute was not the one intended by the law makers. In the absence of some other indication that the harsh or ridiculous effect was actually intended by the Legislature, there is little reason to believe that it represents the legislative intent.” (p. 1883)

23.       In the case of Nasiruddin v. State Transport Appellate Tribunal AIR 1976 SC 331 where in the Apex Court has in para 26 as held as under :

“26. The conclusion as well as the reasoning of the High Court that the permanent seat of the High Court is at Allahabad is not quite sound. The order states that the High Court shall sit as the new High Court and the Judges and Division Bench thereof shall sit at Allahabad or at such other places in the United Provinces as the Chief Justice may, with the approval of the Governor of the United Provinces appoint. The word ‘or’ cannot be reads as ‘and’. If the precise words used are plain and unambiguous, they are bound to be construed in their ordinary sense. The mere fact that the results of a statute may be unjust does not entitle a court to refuse to give it effect. If there are two different interpretations of the words in an Act, the Court will adopt that which is just, reasonable and sensible rather than that which is none of those things. If the inconvenience is an absurd inconvenience, by reading an enactment in its ordinary sense, whereas if it is read in a manner in which it is capable, though not in an ordinary sense, there would not be any inconvenience at all; there would be reason why one should not read it according to its ordinary grammatical meaning. Where the words are plain the court would not make any alteration.” (p. 338)

24.       In the case of Molar Mal v. Kay Iron Works (P.) Ltd. [2000] 4 SCC 285 while reconsidering the aforesaid principle the Apex Court has held as under:

“The Courts will have to follow the rule of literal construction which rule enjoins the Court to take the words as used by the Legislature and to give it the meaning which naturally implies. But, there is an exception to this rule. That exception comes into play when application of literal construction of the words in the statute leads to absurdity, inconsistency, or when it is shown that the legal context in which the words are used or by reading the statute as a whole, it requires a different meaning. If the expression ‘entitled to apply again’ as given its literal meaning, it would defeat the very object for which the Legislature has incorporated that proviso in the Act inasmuch as the object of that proviso can be defeated by a landlord who has more than one tenanted premises by filing multiple applications simultaneously for eviction and thereafter obtain possession of all those premises without the bar of the proviso being applicable to him. This could not have been the purpose for which the proviso is included in the Act. If such an interpretation is given then the various provisos found in sub-section (3) of section 13 would become otiose and the very object of the enactment would be defeated. Therefore, the restriction contemplated under the proviso extends even up to the stage when the Court or the Tribunal is considering the case of the landlord for actual eviction and is not confined to the stage of filing of eviction petition only.” (p. 288)

25.       Thus in my opinion the true and correct interpretation of section 237(b)(i) would only mean that if the company while conducting the business has acted in a fraudulent or unlawful purpose then such companies will fall within the net of section 237(b)(i) irrespective of the fact that whether it is a running concern or close down subsequently for any reason whatsoever I am of the aforesaid opinion also because under the provisions of section 250(A) it is specifically provided that investigation may be initiated under section 237(b)(i) notwithstanding that the application is made under sections 397 and 398 of the Companies Act or it has passed a special resolution for voluntary winding up of such a company. In my opinion if section 250(A) is read along with section 237(b)(i) it is without any doubt that the contention of the learned counsel for the appellant that no investigation can be carried out once the company has ceased to operate its business. In any event on a true and proper construction of the section I do not accept the contention of the learned counsel for the appellant that the business of the company should be conducted in praesentis for the purpose of ordering investigation by the Central Government under section 237(b)(i).

26.       Even otherwise on facts the learned counsel for the respondent has been able to establish that the business of the company is not totally stopped though undoubtedly it has been seriously affected by virtue of the orders passed by the SEBI and stock exchange of suspension of the brokerage licence, suspension or freezer of bank account and collapse of Madhavpura Co-operative Bank and Global Trust Bank. The learned counsel has drawn my attention to the affidavit filed by the company before the Company Law Board in which it has been stated as under :

“3(b) It is incumbent that in order to achieve this objective, the functioning of the Applicant/Respondent group of companies ought not to be crippled which situation would inevitably result if the order dated 27-9-2004 passed by this Hon’ble Board is not amended for the purpose of determining the real question, as would be evident from the averments made hereinafter in this application.”

“6. It is stated in this connection that the following the details of payment made by the Applicant group of companies and value of Share/Property lying with the Bank :-

Particulars

Amt. (Rs. in crores)

By Cash/Deposits/Dividend

27.34

By sale of stocks

15.18

Paid to Bank of India

28.92

Total

 

71.44

It may be mentioned that out of the figures indicated above, even as recently as during the period ranging between 11-9-2004 and 4-11-2004, securities worth Rs. 15,18,02,166.05 (Rupees Fifteen Crores Eighteen Lacs Two Thousand One Hundred and Sixty Six and paise Five), held by the Ketan Parekh group with Madhavpura Mercantile Co-operative Bank Limited were liquidated towards discharging dues towards the said bank by the Ketan Parekh group.

7. It is also submitted that Shri Ketan V. Parekh has always co-operated with the Banks even admist his crisis. In spite of all the accounts frozen by various agencies and a bank on Shri Ketan V. Parekh and on his various group of companies from carrying out activities in the capital markets, the aforesaid amounts paid reflects clear intention on the part of Shri Ketan V. Parekh and his group of companies towards liquidating dues of bankers, financial institutions, and creditors. Admist such a situation it would be contrary to public interest if efforts of the Ketan Parekh group of companies to liquidate bank’s dues are jeopardised in any manner.

10. Admist these fact finding investigations, to impose another investigation would have the effect of crippling the functioning of Ketan Parekh Group of Companies and would adversely affect their capacities to liquidate dues of creditors which would be contrary to public interest.”

27.       Learned counsel for the respondent has also relied upon the balance sheet of the various companies which inter alia undoubtedly indicates conduct of some business though by way of liquidation of the various assets of the company. However the learned counsel for the appellant has contended that liquidating the assets and/or conducting the business of the company by calling meetings of the company cannot be deemed to be conducting the business of the company. He has relied upon the judgment of the Apex Court in the case of Bengal & Assam Investors Ltd. v. CIT AIR 1966 SC 1514 particularly para 13 of the said judgment. The said para 13 of the said judgment reads as under :

“13. Mr. Desai laid a great deal of stress on the argument that the very fact that a company is incorporated to carry on investment shows that the company is carrying on business. We are unable to agree with this contention. Bhagwati, J. observed in Lakshminarayan Ram Gopal Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 that ‘when a com-pany is incorporated it may not necessarily come into existence for the purpose of carrying on a business’. He further observed that ‘the objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business.’” (p. 1518)

28.       While considering the aforesaid contention the Apex Court has held that there is difference between the incorporation of a company and conduct of the business of the company. In this case the company was only incorporated on the paper but no business of any nature was conducted by the company. The said judgment has no application in the facts of the present case where the business of the company insofar as statutory requirements are concerned of calling meetings, filing returns, preparing the balance sheet is running. It may be that actual trading in the stock markets or stock exchanges has come to a halt by suspension of the trading licence by the SEBI or the business has been substantially crippled by virtue of freezer of various bank accounts. I am of the opinion that this cannot be treated as business of the company ‘is not carried on’ and/or the same ‘is closed down’ for reasons beyond the control of the appellant, i.e., by virtue of the passing of the orders of the various authorities such as SEBI, CBI and other Central Government authorities. The business of the company is conducted even today even though at a very low level, it cannot be said that the business of the company has ceased to be in operation. The word ‘is being conducted’ under section 237(b)(i) even if it is so interpreted as contended by the learned counsel for the appellant it should be and must mean that the business of the company has to come to a total stop and no activities of the company are carried on. In my opinion such situation arises only when the company is wound up either by voluntary winding up or compulsory winding up as provided under the Companies Act. In the aforesaid circumstances even on the facts of the present case I am of the opinion that the business of the company is being carried on and therefore the provisions of section 237(b)(i) squarely apply to the case which would mean that the order passed by the Company Law Board is legal and valid and on this ground does not require any interference by this Court.

29.       This takes me to the second question of law framed by the learned counsel for the appellant that whether in the present case the Central Government has able to produce necessary material on evidence to establish that the ground exist for ordering such an investigation under section 237(b)(i). On the facts of the present case it is not in dispute that there has been a stock market collapse in the year 2001 and the appellants herein have indulged in large number of share dealings and trading. It is also not in dispute before me that the Madhavpura Co-operative Bank and Global Trust Bank has collapsed in view of the stock market scam. However appellants have denied their involvement in the scam. They have on the contrary contended that they are the victims of the collapse of the share market and not the beneficiaries. The respondents therein have produced before the Company Law Board in support of the application for investigation under section 237(b)(i) a report of the Joint Parliamentary Committee investigating said scam. The respondents have also produced the report and/or order passed by the SEBI against the appellants and Ketan Parekh alleged moving spirit behind the 14 companies. The Central Government has also in support of the application relied upon the reports which are filed by the inspectors in the course of carrying out investigation under section 209(A). The Central Government has also relied upon large number of breaches of the provisions of the Companies Act by the various companies in support of investigation. In my view not only there is a material in the form of aforesaid reports, documents and orders but a more than prima facie case has been made out for investigation of the appellant company. The Joint Parliamentary Committee has in fact directed the investigation against these entities by the SEBI or the Central Government. However the learned counsel for the appellant canvassed that there is no material which can be used by the respondent in respect of the investigation because each of the authorities are entitled to conduct its own investigation on the basis of aforesaid report and, therefore, the same cannot be utilised for the purpose of ordering investigation by the Central Government under section 237(b)(i). I am not inclined to accept the contention of the learned counsel for the appellant for the simple reason that it is possible that the material can be common or identical in the course of various investigations embarked upon by the various authorities. It does not mean that the respondents are not entitled to use the material which have been unearthed or found in the course of the investigation by any other authority. The material in the present case is glaring. There was a serious collapse of the stock exchange in 2001. The SEBI on investigation has found that all the entities have entered into typical type of transactions in concert with each other so as to ultimately result in collapse of the stock market. Consequently large amount of public fund has been eroded. Consequent upon the collapse of the Global Trust even UTI has been subjected to serious financial difficulties and was ultimately required to be bailed out by the Government. These are very serious circumstances and there is a plethora of material to indicate that 14 of the entities who are subject to investigation under the provisions of section 237(b)(i) have played some role the consequence of which has resulted as mentioned herein above. The learned counsel for the appellant further contends that there is no need for investigation when there is substantial material and therefore the power ought not to be exercised merely for the purpose of exercising under section 237(b)(i). The aforesaid contention is merely stated to be rejected as devoid of any merits. In my opinion the Central Government has not only sufficient material but also has a strong prima facie case for ordering investigation. It has been well settled by the various decisions of the Apex Court that the Court ought not to interfere at this stage of investigation by the authorities. The investigation is not a trial of an offence. It is merely a fact-finding venture. It is no doubt true that in the context of the companies it is a serious issue because it interferes with their rights to carry out free trading but it has been held that every right is coupled with reasonable restrictions and if the company has prima facie carried out fraudulent activities then obviously it cannot complain about investigations carried out by the Central Government in exercise of statutory powers conferred under section 237(b)(i).

30.       This leads me to the third question of law which has been raised by the learned counsel for the appellant.

31.       It has been inter alia contended that the power conferred under the provisions of section 237(b)(i) of the Act must be sparingly exercised and cannot be utilised in casual manner. It has been contended by the learned counsel for the appellant that in respect of the so called security scam of 2001 there are already investigations undertaken by the SEBI, CBI and even the Department of Company Affairs by ordering investigation under section 209(A). It has therefore been contended that on the same material and on the same allegations one more investigation ought not to be ordered by the Central Government nor the Company Law Board ought to grant a sanction to such an investigation. It is not contended that the said exercise is in futility and the same is carried on simultaneously by the various authorities with a view to only affect the business of the company and thus the same should not be permitted.

32.       Learned counsel for the appellant has taken me through the provisions of the SEBI Act and has contended that the purpose and scope of inquiry thereunder has been more extensive and the provisions are more harsh and effective and in view thereof the inquiry under section 237(b)(i) is meaningless and would achieve no purpose. It has been therefore contended that once there is an extensive inquiry undertaken by SEBI in exercise of powers conferred under the SEBI Act and that the SEBI is supposed to be an expert authority in stock exchange transactions. It is neither necessary nor permissible to conduct inquiry by the Department of Company Affairs by invoking powers under section 237(b)(i) of the Companies Act. It has been urged by the learned counsel for the appellant that the inquiry ordered and sanctioned by the CBI, is merely to harass the appellant company and is not meant for achieving any objective and therefore the court should strike down the Company Law Board order sanctioning the said inquiry. It has been further contended that the parallel CBI investigation is also already in progress. The Department of Company Affairs is also conducting an inspection under section 209(A) and that various prosecutions are already launched. In view thereof it has been contended that no such investigation should be permitted by the Central Government in exercise of power under section 237(b)(i). On the other hand the learned counsel for the respondent has urged that the investigation is a must looking at the magnitude and the proposition of fraud which has been alleged to have been committed by all the sixteen entities and according to the Central Government the moving spirit behind these companies is Mr. Ketan Parekh. The learned counsel for the respondent company has drawn my attention to a resolution passed by the Government of India, Department of Company Affairs being resolution dated 2-7-2003 and it has been contended that by the said resolution the Government of India has set up a Serious Fraud Investigation Office (SFIO) and it is required that the corporate frauds should be investigated by the said SFIO. It is also brought to my attention that under the said resolution the SFIO will be conferred with the power to investigate in the company because the investigation under section 237(b)(i) of the Companies Act is entrusted to the SFIO. The learned counsel for the respondent has further contended that there are authorities and authorities which require to investigate the various aspects of fraud committed by the companies like the appellant herein. It has been contended that the SEBI under the SEBI Act has a restrictive power to investigate i.e., in respect of security transactions but when it comes to transaction in respect of banks and other institutions which are not within the purview and/or jurisdiction of the SEBI and the same are required to be investigated by the Central Government through the appropriate authority and/or body. It has been contended that the inquiry under the different acts by the different authorities are in respect of their respective jurisdiction and spheres assigned to them under the various legislations and it cannot be stated in law that merely because the inquiry is in progress by one authority under one act it should automatically prevent the other authorities from conducting investigation under a separate statue.

33.       I have considered these rival submissions of the parties and I am of the opinion that the jurisdiction and the power of the various investigating authorities derived from the jurisdiction vested in them by the various legislations or statutes, the authority which is doing the inquiry and/or conducting the investigation is required to carry out investigation keeping in mind the legal provisions and legal limitations which are stipulated under the respective statute. Undoubtedly it can be that there may be an overlapping investigation but in my opinion such an eventuality cannot prevent any investigating authority from carrying out investigation in respect of their jurisdiction conferred on them under the statute. I am also of the further opinion that the investigation in respect of the corporate fraud can be initiated and considered by the Central Government under section 237(b)(i) of the Companies Act. I have not been able to come across any provisions under the SEBI Act in which any corporate fraud can be investigated by the SEBI. Undoubtedly it can be investigated under normal criminal law by the CBI. I am further of the opinion that merely because the material on the basis of which investigation is being undertaken is identical to the material which is subject-matter of investigation by the other authority it cannot be stated that both the authorities cannot simultaneously investigate pursuant to power conferred on them under their respective statutes. I am of the opinion that every authority is entitled to investigate even may be in respect of the same material as well as from the angle and facet in which they have been asked to carry out investigation. It is possible that the SEBI may be investigating the same material on the ground of breach of the various provisions of the SEBI Act and other security related legislations whereas the Central Government, Department of Company Affairs can consider and/or investigate the fraud and/or breach of various provisions of law in the light and context of the provisions of the Companies Act may be in respect of the same material. However, I am of the opinion that the contentions advanced by the learned counsel for the appellant cannot be accepted particularly in view of the fact that every authority has been conferred various powers in their respective legislation. A similar issue aroused before the English Court under the identical provisions of investigation under the Companies Law and the Court of Appeal in the case of London United Investments Plc, In re 1992 BCLC 285 equivalent to 1971 All Eng. LR 849 it is held as under :

“The power of the Secretary of State to appoint inspectors to investigate the affairs of a company and to report is an important regulatory mechanism for ensuring probity in the management of companies affairs. That of course is in the public interest. Since the Secretary of State’s powers under section 432(2) are exercisable where there are circumstances suggesting fraud, it is likely that in many cases where inspectors are appointed an investigation by the police or the Serious Fraud Office could also be appropriate. But the code under the 1985 Act is a separate code even though it may overlap the field of criminal investigation.”

34.       Apart from the aforesaid position in law : I am also of the further opinion that the Central Government having constituted the Serious Fraud Investigation Office and if it desires to carry out investigation in respect of the affairs of the aforesaid 14 appellant companies without any mala fide intention then it is not possible to stall the investigation merely on the basis of contentions and arguments advanced by the learned counsel for the appellant that all the authorities cannot be permitted to carry the investigation simultaneously in respect of the very same material. I therefore, reject the contention on behalf of the appellant in respect of question No. 3 which have been formulated. I am of the opinion that the answer to this question is that every authority is entitled to carry out investigation may be in respect of the same material insofar as they do not exceed the jurisdiction conferred on them in their respective statute. I therefore answer this question of law accordingly.

35.       The learned counsel for the respondent has drawn my attention to the judgment of the Apex Court in the case of DDA v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622 and has brought to my attention that the Supreme Court has taken note of the fact that various frauds are committed by the companies defrauding the public at large by taking shelter of corporate entities. It has been contended by the learned counsel for the respondent by relying upon the aforesaid judgment that it is necessary to lift or pierce the corporate veils and to see who are the real men behind the veil who are involved in defrauding others under the guise of corporate entity. It has been contended by the learned counsel for the respondent that such an exercise can be undertaken by the SFIO while carrying out investigation under section 237(b)(i) of the Companies Act and the court must not stole such an investigation. It has been contended by the learned counsel for the appellant that there are serious allegations in the present case and thus this Court must refrain from exercising jurisdiction and interfering with the investigation at this stage. I find considerable substance in the contention advanced by the learned counsel for the respondent. It is well settled that the court must be reluctant in interfering in the matter where the same is still at investigating stage. The Court cannot and should not usurp the jurisdiction vested in the Central Government to form an opinion and come to a conclusion as to whether the investigation is necessary or not limited jurisdiction or power is conferred on the court is to ascertain whether there is a material in support of the opinion arrived at by the Central Government and/or the said exercise is not a mala fide exercise of power. In the facts of the present case I do not consider that the exercise of the Central Government is mala fide. There is a plethora of material and in view therein I do not desire to interfere with the investigation ordered by the Central Government in exercise of power conferred under section 237(b)(i) of the Act.

36.       In view thereof I find that there is no substance in the present appeals. I accordingly dismiss all the 14 appeals with cost quantified at Rs. 10,000 each per appeal.

At the request of the learned counsel for the appellant the statement of the learned counsel for the respondent to maintain status quo is to continue till 29-4-2005.

In view of the dismissal of the appeals itself nothing remains in the Company Applications (L) No. 1030 of 2004 to 1043 of 2004 for ad interim orders and the same is dismissed accordingly with no order as to costs.

 

[1972] 42 COMP. CAS. 338 (DELHI)

HIGH COURT OF DELHI

B.M. Bajoria

v.

Union of India

H.R. KHANNA, C.J.

AND P.N. KHANNA, J.

CIVIL WRIT NO. 1082 OF 1969

MAY 14, 1971

V.M. Tarkunde, H.L. Anand and T.M. Chandwani, for the Petitioner.

Jagadish Swarup, Dipak Chaudhry, (A.K. Marwah, and R.L. Mehta, for the Respondents:

JUDGMENT

Khanna, C.J.—This is a petition under articles 226 and 227 of the Constitution of India by B.M. Bajoria of Calcutta against (1) the Union of India, (2) the Company Law Board, (3) S.S. Singh, Under Secretary, Company Law Board and (4) the Director, Special Police Establishment, CBI, New Delhi.

The facts giving rise to the petition are as below:

The petitioner has been associated with a number of firms and joint stock companies including Ouchterlony Valley Estates (1958) Ltd. (hereinafter referred to as “the company”). The company was incorporated in the year 1938 with an authorised capital of Rs. 40 lakhs. The issued and paid-up capital of the company in 1967 was over Rs. 19 lakhs. The company was incorporated with the object of carrying on business of tea and coffee plantations, and owns a number of tea and coffee estates in District Nilgiris. Its shares are quoted on the Madras Stock Exchange. According to the petitioner, he was the managing director 6f the said company between 1966 and 1969. Since June, 1969, the petitioner claims to have severed his connections with the company and to have sold his entire holdings in it. 0a November 10, 1968, Shri G. Srinivasan, Assistant Inspecting Officer, Company Law Board, visited the office of the company and carried out an inspection of the books of accounts and other records of the company by virtue of authority conferred by section 209 of the Companies Act, 1956. Shri Srinivasan made a report of the outcome of the inspection to the Company Law Board. The Company Law Board considered the report. On January 25, 1969, Shri S.S. Singh, respondent No. 3, addressed the following letter to the Director, Special Police Establishment, CBI, New Delhi, respondent No. 4:

“M/s. Ouchterlony Valley Estates (1938) is a public limited company situated at New Hope, New Hope (P.O.), Nilgiris District. The company is cultivating and selling tea and coffee. This company is managed by the board of directors with a managing director and the present directors are Shri B.M. Bajoria, managing director, Bakishore Bajoria, B.P. Pittle, K.N. Jalan, and G.K. Tuberewala.

During the course of a routine inspection under section 209(4) under the Companies Act by Shri G. Srinivasan, Assistant Inspecting Officer of this department, it has come to light that the properties of the company have been dishonestly disposed of and the proceeds thereof were not credited in the accounts of the company. Timber from the reserved area land of the company, viz., Lauriston Estate, New Hope Estate, Kelly Division, Glermans Estate, Suppolk Division, Tullous Division, etc., have been dishonestly cut and removed and its proceeds amounting to over Rs. 6 lakhs were not credited to the accounts of the company but have been dishonestly misappropriated. This has been done between January, 1967, and February, 1968, as presently seen. It has further come to light that certain properties of the company were sold at high price but in the books of the company lesser amounts were credited and the difference was dishonestly misappropriated. Another mode of dishonest misappropriation of the funds of the company has been found, inasmuch as the actual expenses incurred by or on behalf of the company were inflated and the inflated amount was claimed from the company between the period February, 1966, to January, 1967. The difference between the inflated amount charged and the actual amount spent was dishonestly misappropriated. It is further learnt reliably that the above dishonest misappropriations from, the funds of the company were committed by the management in connivance with certain employees and; that the company was dishonestly deprived of its lawful property and moneys.

As there is reasonable ground for believing that the management along with other employees have committed the above acts of dishonest misappropriation of the company’s money and have further dishonestly or fraudulently falsified the records, it is requested that a case under sections 120B (read with 409), Indian Penal Code, 409, 467, 471 and 477-A, Indian Penal Cods, may kindly be registered and investigated.

The details of the various alleged misappropriations are given in the annexure.

This may please be registered for investigation and the offenders brought to book.”

Respondent No. 4 then took cognizance and had a case registered on the basis of the above letter. Copy of the first information report was forwarded by the police to the Magistrate having jurisdiction.

On November 6, 1969, the petitioner filed the present writ petition for the issuance of a writ to quash :

        “(a)  the report of the Assistant Inspecting Officer of the Company Law Board;

        (b)    the reports and proceedings of the Company Law Board subsequent to the report of the Assistant Inspecting Officer aforesaid;

        (c)    the decision of the Company Law Board to prosecute the manager meat of the company; and

        (d)    the reference of the matter by the Board to the Central Bureau of Investigation and the communication of the Under Secretary of the Company Law Board dated January 25, 1969, and the proceedings now being taken by the Central Bureau of Investigation in pursuance thereof.”

The petitioner has also prayed for a direction restraining the respondents from in any manner taking steps in relation to the said allegations in pursuance of the report or in relation to the conduct and affairs of the company.

The petition has been resisted by the respondents and the affidavit of Shri Sadho Saran Singh, Under-Secretary of the Company Law Board, has been filed in opposition to the petition.

The first contention, which has been advanced on behalf of the petitioner, is that the officers of the Delhi Special Police Establishment have no power to investigate into the offences alleged to have been committed in the State of Tamil Nadu, because no consent to such investigation had been given by the Government of that State. This contention, in our opinion, is not well founded. The Delhi Special! Police Establishment has been constituted by the Central Government by virtue of the power conferred by section 2 of the Delhi Special Police Establishment Act, 1946 (XXV of 1946). Section 3 of that Act empowers the Central Government to specify by notification in the official gazette the offences or classes of offences, which are to be investigated-; by the Delhi Special Police Establishment. The Central Government issued, a notification under the above provision on November 6,1956. The offences; under sections 409, 467, 471, 477A as well as conspiracies in relation to or in; connection with those offences are mentioned besides other offences in that notification. Section 5 of the Act gives power? (to the Central Government to extend the powers and jurisdiction of Special Police Establishment to area other than a Union territory. According to section 6, nothing contained in section 5 shall be deemed to enable any member of the Delhi Special Police Establishment to exercise powers and jurisdiction in any area in a State not: being a Union territory or railway area, without the consent of the Government of that State. As the investigation in the present case has been-carried on by the Special Police Establishment in areas now forming part of Tamil Nadu, the question arises whether the Government of Tamil Nadu has given its: consent to the members of the Delhi Special Police Establishment to exercise powers and jurisdiction in Tamil Nadu. In this connection we find that Shri G.P. Kalra, Section Officer, Department of Personnel, Cabinet Secretariat, has filed his affidavit and along with that has produced a copy of the letter dated January 23, 1957, which was sent on behalf of the Home Department of the Madras (now Tamil Nadu) Government to the Ministry of Home Affairs, Government of India. According to that letter, the Madras Government agreed to the members of the Delhi Special Police Establishment exercising powers and jurisdiction within the Madras State with regard to the offences mentioned in the notification dated November 6, 1956. Affidavit has also been filed by Shri A.T. Sathianathan, Deputy Secretary to the Government: of Tamil Nadu. It is stated by Shri Sathianathan in that affidavit “that proper sanction was accorded by the State of Tamil Nadu in letter No. 188-Home, dated January 23, 1957, for the functioning of the Delhi Special Police Establishment exercising powers and jurisdiction within the State of Tamil Nadu with regard to offences mentioned in the notification of the Government of India”. According further to the affidavit, the file was dealt with at proper level in accordance with the Tamil Nadu Government Business Rules and Secreatriat Instructions then in force. Shri Sathianathan has added that the final orders for according sanction for the functioning of the Delhi Special Police Establishment in the State of Tamil Nadu were approved by the then Chief Minister, Shri Kamaraj. The material brought on record, in our opinion, clearly shows that the State of Tamil Nadu has given its consent to the members of the Delhi Special Police Establishment exercising powers and jurisdiction within the State of Tamil Nadu with regard to offences mentioned in the notification dated November 6, 1956. The argument that there is nothing to show that according to the Rules of Business the Chief Minister was authorised to give the approval, is not convincing, because there is a presumption of regularity of official acts. Apart from that, the affidavit of Shri Sathianathan shows that the file Was dealt with at proper level in accordance with the Tamil Nadu Government Business Rules and Secretariat Instructions then in force. A similar contention was raised, in tine case of Management of Advance Insurance Co, Ltd. v. Gurudasmal and, was repelled by the court in the fallowing words:

“A doubt raised in the High Court and before us that the Government of Maharashtra had not considered the matter or that the consent was not properly given, is sufficiently answered by the affidavit of the Undersecretary to the Government of Maharashtra dated July 18, 1968, in which it is clearly stated that the Chief Minister had considered the matter and given his consent and that under the Rules of Business he was quite competent to do so. No argument has been advanced before us which entitled the appellant to go behind the memorandum and the affidavit. There is a presumption of regularity of official acts and even apart from it, the memorandum and the affidavit clearly establish that the consent was given.”

Before dealing with the other contention advanced on behalf of the petitioner, it may be useful to refer to some of the provisions of the Companies Act. Section 209 of the Act relates to books of account to be kept by a company. Sub-section (4) of that section provides for the inspection of books of account and reads:

“(4)             

(a)        The books of accounts and other books and papers shall be open to inspection by any director during business hours.

(b)        The hooks of account and other books and papers shall be open to inspection during business hours—

                    (i)         by the Registrar,

                    (ii)        by any officer of Government authorised by the Central Government in this behalf:

Provided that such inspection may be made without giving any previous notice to the company or any officer thereof.

                (c)        The Registrar or such officer may during the course of inspection—

(i)         make or cause to be made copies of the books of account and other books and papers,

(ii)        place or cause to be placed any marks of identification thereon in token of the inspection haying been made.

(d)        In order to enable the Registrar or such officer to make an inspection of the books of account and other books and papers of the company it shall be the duty of the company—

(i)         to produce to the Registrar or such officer such books of account and other books and papers of the company as the Registrar or such officer may require,

(ii)        otherwise to give to the Registrar or such officer all assistance in connection with the inspection which the company is reasonably able to give.”

Sections 235 to 251 pertain to investigation of the affairs of a company. Section 235 provides for investigation of affairs of a company on application by members or report by Registrar. Section 237 deals with investigation of the affairs of a company in other cases and reads as under:

“237. Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)         the company, by special resolution; or

        (ii)        the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

        (b)    may do so if, in the opinion of the Central Government, there are circumstances, suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect; including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company,”

Section 239 gives power to inspectors to carry on investigation into affairs of related companies or of managing agents. Section 240 provides that it shall be the duty of all officers, employees and agents of a company to preserve and to produce to an inspector or a person authorised all books and papers relating to the company and otherwise to give assistance in connection with the investigation. Section 240A empowers the inspector, where he has reasonable ground- to believe that the books and papers of, o? relating to, a, company may be destroyed, mutilated or altered, to apply to a Magistrate for seizure of such books and papers. Section 241 makes provision for the submission of the inspector’s report to the Government. The Central Government is required to forward a copy of the final report made by the inspectors to the company at its registered office and other persons specified in the section. Section 242 empowers the Central Government to launch prosecution if from any report made under the preceding section, it appears to the Central Government that any person has; in relation to the company, been guilty of an offence. Sub-section (1) of that section- reads as under:

“242. (1) If, from any report made under section 241, it appears to the Central Government that any person has, in relation to the company or in relation to any other body corporate, managing agent, secretaries «ad treasurers, or associate of a managing agent or secretaries and treasurers, whose affairs have been investigated by victual of section 23 been guilty, of any offence for which he is criminally liable, the Central Government may, after taking such legal advice as it thinks fit, prosecute such person for the offence; and it shall be the duty of all officers and other employees and agents of the company, body corporate, managing agent, secretaries and treasurers, or associate, as the case may be, (other than the accused in the proceedings), to give the Central Government all assistance in connection with the prosecution which they are reasonably able to give.”

Section 243 makes provision for an application: for winding up of a company or for an order under sections 397 or 398, if it appears to the Central Government from the inspectors report that it is expedient to do so. Section 244 authorises the Central (Government to initiate proceedings in the name of a company for the recovery of damages of property if, from a perusal of the report, it appears to the Central Government that such proceedings ought in the public interest to be brought by the company. It is not necessary for the purpose of this case to refer to the other provisions relating to investigation into the affairs of the company.

It is argued by Mr. Tarkunde on behalf of the petitioner that if it is intended to prosecute a director of the company in. respect of some act of embezzlement or malfeasance concerning the affairs of the company the only way to do so is by directing investigation into the affairs of the company under section 237 of the Companies. Act. After a report under section 241 of the Act is received as a result of that investigation, a copy of that report should be supplied to the company The Government may in that event, after taking legal advice, launch prosecution in accordance with section 242. To lodge a report with the police ; on the basis of a report submitted by an official of the Company Law Board after inspection of account books under section 209(4) of the Act without supplying a copy of the report of that official to the company would result, according to the learned counsel, in such procedural discrimination as would-be violative of article 14 of the Constitution. The above argument, though ostensibly attractive, on closer examination, incur opinion, would be found to be not tenable. An investigation into the affairs of a company is ordered in a variety of circumstances which have been mentioned in sections 235 and 237 (a) the Companies Act. In cases covered by section 237(a) the Government is bound to appoint one or more competent persons as inspectors to investigate the affairs of a company. As against that, if a-case is governed by clause (b) of section 237 or in case it is governed by section 235, the Government has, a discretion in the matter. An investigation into the affairs of a company under the above provisions of law from the point of view of; general reputation of a company is a very serious matter. It can result in a number of consequences, viz., prosecution, vide section 242 ; winding up of the company or an order under sections 397 or 398 of the Act, vide section 243 or initiation of proceedings by the Central Government in the name of the company for recovery of damages or property, vide section 244 of the Act. It is also manifest that investigation is ordered into the affairs of a company when there is some aspect of those affairs regarding which the Government is not in possession of full facts and the circumstances exist as are referred to in section 235 or 237 of the Act. In such an event, the Government orders probe into these aspects to apprise itself of the correct facts. It is only after that probe, when further facts come to the notice of the Government, that the Government has to decide about the next step, i.e., whether it should drop the matter Or proceed in any of the ways mentioned in sections 242 to 244 of the Act. There is, however, nothing in section 237 which makes it imperative for the Government to order investigation into the affairs of the company when the Government does not consider the necessity of further probe and is already in possession of facts which, in its opinion, show the commission of an offence by an officer of the company or other person in respect of the assets of the company. There is, in such an event, no legal bar to the officer of the Company Law Board or other Government officer concerned making a report to the police. A report to the police in the very nature of things is directed against one or more than one individual. Although the records of the company may have to be examined and produced during the course of police investigation or in evidence during the course of prosecution following that investigation so far as the existence and continued functioning of the company are concerned they would not be affected by such investigation or prosecution of the individuals.

The question of supply of copy of inspectors’ report under section 241 of the Companies Act arises when the investigation into the affairs of a company is made as contemplated by sections 235 and 237 of the Act. The “affairs of a company” have been held to mean its business affairs—its goodwill, profits or losses, contracts and assets, including its control over subsidiaries and it makes no difference who is conducting those affairs. (See page 606 of the Principles of Modern Company Law by Gower, third edition). Section 241 of the Companies Act contemplates supply of a copy of the report when investigation is made. When, however, there is no such investigation, no occasion can arise for the supply of such a copy. An inspection of the account books of a company under section 209(4) is something quite distinct from an investigation into the affairs of a company as envisaged in sections 235 and 237 of the Act. The fact that in the case of such an investigation a provision is made for the supply of a copy of the report of the persons making the investigation while there is no provision for the supply of a copy of the report of the person making the inspection, would not, in our opinion, show discrimination violative of article 14 of the Constitution.

We are not impressed by the argument advanced on behalf of the petitioner that section 242 alone prescribes the mode of launching prosecution against officers of the company and other individuals who appeal to have been guilty of embezzlement and other acts of malfeasance in respect of the assets of a company. There is neither an express provision nor any other provision which by necessary implication warrants this conclusion. There are some provisions of the Companies Act like section 621(1A), 624, 624A and 624B wherein the words used are “Notwithstanding anything contained in the Code of Criminal Procedure”, thus indicating that those provisions would have an overriding effect. There is, however, nothing in section 242 or the other provisions of the Companies Act to point to the conclusion that no prosecution can be launched or no report can be made to the police in respect of an alleged act of embezzlement or malfeasance by an individual connected with the company without recourse to an investigation under sections 235 or 237 of the Act. In the case of M. Vaidyanathan v. Sub-divisional Magistrate, Erode, the question arose whether the provisions of section 630 of the:Companies Act constituted a bar to the exercise of the jurisdiction vested in a police officer under sections 154 and 157 of the Code of Criminal Procedure. The question was answered in the negative by Rajagopalan J. The above decision was affirmed on appeal by a Division Bench of the Madras High Court (Rajamannar C.J. and Panchapakesa Ayyar J.) in In re M. Vaidyanathan.

It has been argued on behalf of the petitioner that a company or the individual concerned may have a complete answer to offer regarding the allegation of embezzlement or malfeasance based upon the result of an inspection under section 209(4) of the Act. To initiate proceedings for prosecution without affording the company or the individual the opportunity of giving a reply to such allegations would be oppressive and be tantamount to persecution. In this respect we are of the view that mere registration of a case does not necessarily mean that it would result in prosecution. If during investigation by police following such registration of the case facts come to light either in course of examination of the individual concerned or otherwise that no case for embezzlement or malfeasance has been made; the police in such a case can proceed in accordance with section 169 of the Code of Criminal Procedure. It cannot; therefore, be said that the individual concerned has no opportunity what so ever of showing cause before the challan is put in court that the allegations against him of embezzlement or malfeasance are not well-founded. It is no doubt true that the police after registration of a case does not normally drop the matter as contemplated by “section 169 of the Code of Criminal Procedure, but this is so in all cases registered by the police. The above circumstance cannot, in our opinion, lend material assistance to the case of the petitioner

It may also be mentioned that no ground has been taken by the petitioner in the petition about any violation of article 14 o£ the Constitution. Apart from that, we are of the opinion that there has been no such violation of that article. Reference has been made on behalf of the petitioner to the case of Northern India Caterers Private Ltd. v. State of Punjab. Their Lordships in that case dealt with section 5 of the Punjab Public Premises and Land (Eviction and Rent Recovery) Act. It was held by the majority that the section provided two alternative remedies to the Government and left it to the unguided discretion of the Collector to resort to one or the other and to pick and choose some of those in occupation of public properties and premises for the application of the more drastic procedure under section 5. The impugned section was consequently held to be violative of article 14 of the Constitution. The dictum land down in the above case, in our opinion, cannot be of much assistance to the petitioner because we are not dealing here with two available procedures one more drastic or prejudicial to the party concerned than the other to be applied at the arbitrary will of the authority. An investigation under sections 235 and 237 of the Companies Act as mentioned earlier is not the same as inspection of account book under section 209(4). No inference of contravention of article 14 can be drawn from the procedural difference between the aforesaid investigation and inspection of records. The fact that information derived as a result of the above-mentioned investigation or inspection can give rise prosecution would not attract article 14 of the Constitution. The said article does not postulate that information, which may be the basis for making report to the police, must be derived in one particular way and no other way.

Reference has also been made on behalf of the petitioner to the case of Nazir Ahmad v. King Emperor wherein, while dealing with a confession recorded by a Magistrate, their Lordships held that where a power is given to do a certain thing in a certain way the thing must be done in that way or not at all. The above dictum could have been attracted to the present ease if the Government had resorted to investigation into the affairs of the company without complying with the provisions of section 235 and the subsequent sections of the Companies Act. T; he present is not a case where a power is: given to do a certain thing in a certain way and the thing has been done in some other way.

Another case to which reference has been made is Rohtas Industries Ltd. v. S.D. Agarwal. It has been held in that case that action under section 235 of the Companies Act can be taken provided certain preconditions including those mentioned in section 236 are fulfilled. It has been further held that such investigation is a serious matter and should not be ordered except on good grounds. This case too cannot be of much avail to the petitioner because no order for investigation into the affairs of the company has been made in the instant case.

The matter can also be looked at from another angle. Any one who has information of the commission of a cognizable Offence can make a report about the commission of such offence to the police. The police after registration of the case on the basis of that report, in accordance with section 154 of the Code of Criminal procedure, can investigate the matter. If the investigation reveals that such an offence has been committed, the police has to put in challan in court, where after the trial of Me Code would commence in the criminal court. There’ are certain offences wherein the police cannot put in challan without observing some formality such as obtaining consent in cases covered by section 196A(2) of the Code of Criminal Procedure or Requisite sanction in cases covered by section 197 of the code or; section 6 of the Prevention of Corruption Act. Their is however .no provision of law, at least none has been cited at the bar which makes it imperative to obtain such consent or sanction or to go through other formality before the police can put in challan for a cognizable offence relating to the assets of a company. The plain effect of the acceptance of the submission made on behalf of the petitioner would be to place a procedural restriction on the prosecution of officers of a company or other individuals in respect of offences relating; to the assets of a company. It is our opinion not permissible to read such a restriction in the statue when none exists.

Reference has been made by Mr. Tarkunde, to. the report, of a committee which preceded the enactment of the Companies Act. The petitioner in our opinion cannot derive much assistance from the report of that committee in the matter of the construction of the .provisions of the Companies Act. Even in .respect of the statement of objects ;and reasons for introducing a particular piece of legislation the court can refer to the statement only for the purpose of ascertaining the circumstances which led to the legislation in order to find out what was the mischief which the legislature aimed at. The statement of objects and reasons for introducing a particular piece of legislation cannot be used for interpreting the legislation if the words used therein are clear enough. (See in this connection S.C. Prashar v. Vasantsen Dwarkadas). A report of a committee can obviously not stand on a higher footing than the statement of objects and reasons.

As a result of the above, the petition fails and is dismissed, but in the circumstances without costs.

[2000] 23 SCL 249 (Ker.)

High Court of Kerala

R.V. Mohammed

v.

Trichur Heart Hospital Ltd.

K.A. Abdul Gafoor, J.

Company Petition No. 40 of 1999

October 4, 1999

Section 237 of the Companies Act, 1956 - Investigation of compa­ny’s affairs - Whether in view of power vested with Company Law Board to order investigation in appropriate circumstances under section 237(b), petitioner could approach CLB and Company Court has no reason for exercising its discretionary power to direct such investigation - Held, yes

Facts

The petitioner, a contributory of the respondent company, in a petition filed under section 237(a)(ii) sought a declaration that the company’s affairs were such that they required investigation by an Inspector appointed by the Central Government in that regard, as the Company was not maintaining proper accounts and was doing several business activities without obtaining statutory sanction from the Central Government as enjoined by law.

Held

Of course, the company court has got power which it can exercise in terms of section 237(a)(ii) but section 237 (b) empowers the CLB, if there are circumstances necessitating investigation, to order accordingly. This power has been granted to the CLB, in terms of amendment effected in the Act in 1988. When the power is con­ferred on the CLB, it was incumbent for the petitioner to approach that statutory Board which should examine and do justice, as the circumstances demanded. In such circumstances, there was no reason for exercising the discretionary power vested in this Company Court to direct such investigation or declare that it needed investigation by the Central Government. Accordingly, the company petition was dismissed without prejudice to the right of the petitioner to move the CLB in terms of section 237 (b).

Case referred to

Kumarannuni v. Mathrubhumi Printing & Publishing Co. Ltd. [1981] KLT (S.N.) 88.

Judgment

1.         This is a petition under section 237(a)(ii) of the Companies Act, 1956 (‘the Act’). The petitioner, a contributory of the 1st respondent company seeks a declaration that the company affairs are in such a position that it requires investigation by an Inspector appointed by the Central Government in that regard. It is submitted that the company is not keeping proper accounts and it had done several business activities without obtaining the statutory sanction from the Central Government as enjoined by the law. The Directors of the company including respondents 2 and 3 are now mismanaging the affairs of the company. Therefore, the entire affairs of the company require an investigation and this Court has power under section 237(a)(ii) to order so. If such an order is issued, necessarily, the Central Government will be bound by that order to investigate it. It is submitted, relying on the decision reported in Kumarannuni v. Mathrubhumi Printing & Publishing Co. Ltd. [1981] KLT (S.N.) 88 - Case No. 159 that when it is prima facie satisfied, such a declaration can be issued.

2.         Of course, the company court has got power to exercise in terms of Section 237(a)(ii). But section 237(b) empowers the CLB, if there are circumstances necessitating investigation to order accordingly. This power has been granted to the CLB, in terms of the amendment effected in the Companies Act in 1988. Before the amendment sanction had to be given in terms of sub-clause (b) by the Central Government. When the power vested in the Executive Government is invoked, one incumbent may perhaps feel that justice may not be meted out. But now, after the amendment in 1988 the power vested with the Central Government had been taken away and vested with the CLB. When the power is conferred on the CLB, it is incumbent on the peti­tioner to approach that statutory Board which shall examine and do justice, as the circumstances demand. In such circumstances, there arise no reason for exercising the discretionary power vested in this company court to direct such investigation or declare that it need investigation by the Central Government. Accordingly, the company petition fails and is dismissed without prejudice to the right of the petitioner to move the CLB in terms of section 237(b).

 

[1967] 37 COMP. CAS. 341 (CAL)

HIGH COURT OF CALCUTTA

Ashoka Marketing Ltd.

V.

Union Of India

B N BANERJEE, J.

MATTER NO. 271 OF 1964

AUGUST 6,1965

 JUDGMENT

The petitioner-company claims to carry on business as exporter, investor and financier and further claims to have been acting as selling agent for the State Trading Corporation in respect of cement and also as sole selling agent or selling agent of several other companies. According to the petitioner-company, it has built up a very efficient and effective marketing organisation covering the whole of India. In paragraph 5 of the petition , there is a recitation of the commodities in which the petitioner-company trades, which includes cement, paper, fertilisers, plywood bicycles, machinery, machine parts , motors and transformers, cables, tools, refractory materials and oil firing equipments. The petitioner-company has an issued and subscribed capital of Rs. 15,00,000 and claims to have build up a reserve of over Rs. 40,00,000. After having made provisions for taxation and reserves, the petitioner-company is said to have declared substantial dividends to its shareholders during the years 1958-59 to 1962-63. The directorate of the petitioner- company, it is said, includes businessmen of reputation and lawyers of respectability. The above facts are pleaded in order to emphasise upon the contention that the petitioner-company should have been regarded as beyond reproach. The measure put by the petitioner company upon itself is not, however, an agreed measurement and is disputed in the affidavit- in-opposition.

On 11th April, 1963, the Central Government made the following order against the petitioner-company:

"Whereas the Central Government is of the opinion that there are circumstances suggesting that the business of Ashoka Marketing Company Limited, a company having its registered office at No. 18-A, Brabourne Road, Calcutta (hereinafter referred to as the said company), is being conducted with intent to defraud its creditors, members or other persons and the persons concerned in the management of its affairs have in connection there with been guilty of fraud, misfeasance or other misconduct towards the said company or its members;

And whereas it has come to the notice of the Central Government that the said company is acting as the selling agent of M/s. Rohtas, Industries Limited, Dalmianagar, Bihar and New Central Jute Mills Co. Ltd., Calcutta,(hereinafter referred to as the said managed companies);

And whereas Sahu Jain Ltd., a company having its registered office at No. II, Clive Row, Calcutta, is the managing agent (hereinafter referred to as the managing agent) of the said managed companies;

And whereas a question (hereinafter referred to as the said question) has arisen as to whether Ashoka Marketing Limited is an `associate' as defined in clause (c) and (d) of sub-section (3) of section 2 of the Companies Act, 1956 (I of 1956), of the managing agent;

And whereas it appears to the Central Government that there is good reason to investigate the said question;

And whereas the Central Government consider it desirable that an inspector should be appointed to investigate the affairs of the said company as well as to investigate the said question and to report thereon;

Now therefore in exercise of the several powers conferred by sub-clauses (i) and (ii) of clause (b) of section 237 of Companies Act, 1956 (I of 1956), and clause (a) of sub-section (I) of section 249 of the said Act, the Central Government hereby appoint Shri S. Prakash Chopra of M/s. S.P. Chopra & Co., Chartered Accountants,.31-F, Connaught place, New Delhi, as inspector to investigate the affairs of the said company, namely, Ashoka Marketing Company Ltd., for the period from 1st April, 1958, to date and also prior to I st April, 1958, should the inspector consider necessary and to investigate the said question, namely, whether M/s. Ashoka Marketing Co. Ltd. is the associate of Sahu Jain Ltd., which is the managing agent of the said managed companies and report thereon to the Central Government pointing out, inter alia, all irregularities and contraventions in respect of the provisions of the Companies Act, 1913, or of any other law for the time being in force and the person or persons who are responsible for such irregularities and contraventions.

The inspector shall complete the investigation and submit six copies of his report to the Central Government not later than four months from the date of issue of this order unless time in that behalf is extended by the Central Government.

A separate order will be issued with regard to the remuneration and other incidental expenses of the inspector."

The aforesaid order, in so far as it is one under clause (b) of section 237 of the Companies Act, is characterised by the petitioner-company to be bad, illegal, without jurisdiction and mala fide in law on the same grounds as were urged against similar orders made against New Central Jute Mills Co. Ltd. [1966]36 Comp. Cas. 512 dealt with by me in my judgment (Matter No. 272 of 1964) . In so far as the order is one under section 249 (I) (a) of the Companies Act , the petitioner company denies that it is an associate of Sahu Jain Ltd., and asserts that there is no reason even to suspect such association.

However, without prejudice to its contentions that the impugned investigation could not and should not have been ordered, it is said the petitioner-company decided to comply with the requisitions made by S.P. Chopra, the inspector. The petitioner-company alleges to have supplied to S.P. Chopra such statements and information as he wanted and ultimately on 17th May, 1963, the managing director of the petitioner wrote to him in the following language:

"This completes all information that you wanted by your letter...... dated 16th April, 1963. Except that certain information regarding the year 1958 and some very trivial information for the years 1959 and 1960 remain to be supplied. The same is being complied with and will be made available to you shortly."

The information supplied apparently did not satisfy S.P. Chopra who, according to the petitioner-company, was carrying on a roving enquiry and was fishing for information. He, therefore, asked for more and went on meeting the senior officers of the petitioner and gathering more information Further, he obtained from the petitioner-company volumes of minutes books, and in spite of promise to return them quickly, sat over them until May, 1964. Also, he verbally examined the managing director, secretary, controller of accounts, another director of the name of N.R.Khaitan and also several other officers of the petitioner-company, without giving the least indication about the purpose of the enquiry.

The prolonged investigation notwithstanding,S.P Chopra could not produce the report within the time fixed by the order, dated 11th April, 1963. On 9th August, 1963, therefore, the Central Government made an order of extension of time as hereinbelow quoted:

"In continuation of the Central Government orders of even number dated the 11th April, 1963, the Central Government hereby extends the time for the completion of the investigation and for submission of the report by the inspector appointed to investigate into the affairs of Ashoka Marking Company Limited, a company having its registered office at No.18-A, Barbourne Road, Calcutta, under section 237 (b) of the Companies Act, 1956 (I of 1956), up to the 31st October, 1963."

According to the petitioner, there being no extension of time made in so far as the investigation was one under section 249(1) (a) of the Companies Act, that investigation lapsed. I shall consider this point later on. This extended time, however, was not sufficient for S.P. Chopra to produce his report. On 31st October, 1963, the Central Government had to extent the time over again, purporting at the same time to revive the allegedly lapsed investigation under section 249(I) (a). That order is set out below:

In continuation of the Central Government orders of even number dated the 11th April, 1963, and the 9th August, 1963, respectively, the Central Government hereby extends the time for the completion of the investigation and for submission of the reports by the inspector appointed to investigate into the affairs of Ashoka Marketing Limited, a company having its registered office at No. 18-A, Brabourne Road, Calcutta, and also its associateship with Sahu Jain Limited under section 237(b) and 249 (I)(a) of the Companies Act, 1956 (I of 1956), respectively, up to the 31st January, 1964."

The petitioner condemns this order as illegal and contends that a lapsed investigation under section 249(I)(a) cannot be revived by a mere order of extension.

The second extension of time to complete the investigation was also uselessly consumed, except to the extent hereinafter indicated, and on 29th January, 1964, the Central Government granted further extension of time in the following language:

"In continuation of the Central Government orders of even number dated 11th April, 1963, 9th August, 1963, and 31st October, 1963, respectively, the Central Government hereby extends the time for the completion of the investigation and for submission of the reports by the inspector appointed to investigate into the affairs of Ashoka Marketing Ltd., a company having its registered office at number 18-A, Brabourne Road, Calcutta, and also its associateship with Sahu Jain Ltd. under sections 237(b) and 249 (I)(a) of the Companies Act, 1956(I of 1956) ,respectively, up to June, 1964."

During the continuance of the second extension of time , S.P Chopra wrote to the petitioner-company the following letter, dated 26th November, 1963:

"This is to inform you that I am deputing my assistant, Shri S.B. Gupta, who is also a Technical Assistant in Company Law Administration, Government of India, to check the statements supplied by you along with the books and records of the company. Kindly afford all assistance and facilities to him with a view to enabling him to perform his duties quickly.

In regard to may power to depute staff to do ministerial work, I have to draw your attention to the decision of Case No. 38 of 1963 by the High Court, Bombay, regarding interpretation of section 240 of the Companies Act. It is expected that Mr. Gupta will be reaching Calcutta by 2nd December , 1963."

By another letter, dated 4th December, 1963, S.P.Chopra further informed the petitioner-company that one I.M. Puri will be working with S.B.Gupta in the matter of checking. The said letter is quoted below:

"In continuation of my letter No. GG/4322 dated the 26th November, 1963 , I have to inform you that I have instructed my assistant, Shri S.B.Gupta, who is also a Technical Assistant, Company Law Administration, Government of India, to check the statement supplied by you with the books and records of the company maintained at Calcutta and Sahupuri Varanasi, along with Shri I.M.Puri about whom intimation has been sent earlier. I am sending a copy of this letter to Shri Gupta who is at present in Calcutta."

The petitioner-company took exception to the manner in which S.B.Gupta and I.M.Puri wanted to carry on their work and described the same as investigation by themselves, on their own, and no as deputies of Inspector Chopra. The company says that S.P Chopra ignored the exception taken by the petitioner. The company further says the purpose less investigation dragged on to the great harassment of the company and causing complete dislocation of the company's business.

Fourteen months after the investigation had started, the Central Government separated the investigation under section 237 (b) (i) and (ii) from the investigation under section 249 (I) (a) and extended the period of investigation by an order , dated 12th June , 1964, reading as hereinbelow set out:

"Whereas vide Central Government's order of even number dated the 11th April, 1963,an investigation was ordered into the affairs of Ashoka Marketing Limited, Calcutta and Shri S. Prakash Chopra of M/s. S.P Chopra & Co., Chartered Accountants, 31-F, Connaught, Place New Delhi, appointed as inspector for the purpose;

And whereas the date for completion for the said investigation and for submission of the report by the said inspector was last extended up to the 30 th June, 1964, by order of even number dated the 29th January, 1964;

And whereas it is felt that for the efficient conduct of the investigation , it is necessary to appoint an additional inspector:

Now, therefore, in exercise of the powers conferred by sub-clauses (i) and (ii) of clause (b) of section 237 of the Companies Act, 1956(I of 1956), the Central Government hereby appoint Shri I.M.Puri, an Accounts Officer in the Company Law Board, as co-inspector, with co-extensive powers which may be exercised by him severally or jointly with the other inspector. The two co-inspectors shall complete the investigation and submit six copies of their report to the Central Government by 30th June, 1964, or by such date as may be extended from time to time, if and when found necessary."

Three days thereafter, on 15th June, 1964, the Central Government made a similar order in respect of the investigation under section 249 (I) (a):

"Whereas vide Central Government's order of even number dated the 11th April,1963, Shri S.P. Prakash Chopra of M/s. S.P. Chopra & Co., Chartered Accountants, 31-F, Connaught Place, New Delhi, was appointed as inspector to investigate the question as to whether Ashoka Marketing Limited is an associate of its managing agents, viz., M/s. Sahu Jain Limited as defined in clauses (c) and (d) of sub-section (3) of section 2 of the Companies Act, 1956(I of 1956);

And whereas the date for completion of the said investigation and for submission of the report by the said inspector was last extended up to the 30th June, 1964, by order of even number dated the 29th January, 1964;

And whereas it is felt that for the efficient conduct of the investigation, it is necessary to appoint additional inspectors:

Now, therefore, in exercise of the powers conferred by clause (a) of sub-section (I) of section 249 of the Companies Act, 1956 (I of 1956), the Central Government hereby appoint Sarvashri I.M.Puri, Accounts Officer and S.B. Gupta, Technical Assistant in the Company Law Board, as co-inspectors with co-extensive powers which may be exercised by them severally or jointly with the other inspector. The three inspectors shall complete the investigation and submit six copies of the report to the Central Government by 30th June, 1964, or by such date as may be extended from time to time, if and when found necessary."

The petitioner-company challenged the separation of functions and appointment of additional inspector and co-inspectors as illegal, without jurisdiction and characterised the same as wholly incongruous with the original order, dated 11th April, 1963, in so far as they called for two reports from two sets of inspectors in the place of one report from one inspector.

Shortly after their appointment, I.M. Puri and S.B. Gupta, it is alleged, began to chase the petitioner-company for inspection of books, refused prayers even for short adjournment and threatened action on the theory that the petitioner company had refused production of books of account. The representations made by the petitioner-company to the Central Government against the attitude taken I.M. Puri and S.B.Gupra elicited no reply. On the other hand, the Company Law Administration Department of the Central Government sent the following telegram, on 28th June, 1964, to the petitioner company:

"Inspectors report your refusal to produce books and papers stop violation section 240 stop request production forthwith stop failing shall be obliged to proceed against you for persistent default in carrying out your obligations and functions under the law in such manner as advised stop confirm compliance stop shall consider your representation when recd. stop please bring contents this telegram all senior officers employees, agents, of your company.'

Since the period of submission of report was about to expire, the Central Government made the following order, on 30th June,1964, in respect of the investigation under section 237(b):

"Whereas vide Central Government's order of even number dated the 11th April, 1963, and 12th June, 1964, respectively, Sarvashri S. Prakash Chopra and I.M. Puri were appointed as inspectors under section 237(b) of the Companies Act, 1956(I of 1956), to investigate into the affairs of Ashoka Marketing Limited, Calcutta;

And whereas the date for completion of the said investigation and for submission of the report by the said inspectors was last fixed as 30th June, 1964;

And whereas it has been represented to the Central Government that due to the refusal of the company and its officers to produce all books and other papers or to appear before the inspectors for the purpose of examination and other non-co-operative and dilatory tactics, it would not be possible for them to complete the investigation and submit their report by the aforesaid date;

And whereas Shri S. Prakash Chopra, inspector, has regretted his inability to continue any longer with this appointment due to his other professional engagements;

And whereas it has also become necessary to relieve Shri I.M. Puri from this assignment on account of increase in his investigation work in other companies due to Shri Chopra's relinquishment of the office of inspector;

And whereas after consideration of the aforesaid circumstances and also the magnitude of the work involved , the Central Government are of the opinion that certain modifications/additions in the orders already issued are necessary:

Now, therefore, in exercise of the powers conferred by sub-clauses (i) and (ii) of clause (b) of section 237 of the Companies Act, 1956 (I of 1956), the Central Government hereby appoint in place of Sarvashri S.Prakash Chopra and I.M.Puri, Sarvashri S. Rajagoplan, a Senior Accounts Officer and S.B. Gupta, a Technical Assistant in the Company Law Board, as co-inspectors. The two inspectors shall have co-extensive powers which may be exercised by them severally or jointly. The inspectors shall complete the investigation and submit six copies of their report to the Central Government by 31st December, 1964."

On the same day, the Central Government made another order in respect of the investigation under section 249 (I) to the following effect:

"Whereas vide Central Government's orders of even number dated 11th April, 1963, and 15th June, 1964, respectively , Sarvashri S.Prakash Chopra I.M. Puri and S.B. Gupta were appointed as inspectors to investigate the question as to whether Ashoka Marketing Limited is an associate of its managing agents, viz. M/s. Sahu Jain Limited, as defined in clauses (c) and (d) of sub-section (3) of section 2 of the Companies Act, 1956(I of 1956);

And whereas the date for completion of the said investigation and for submission of the report by the said inspectors was last fixed as 30th June, 1964;

And whereas it has been represented to the Central Government that due to the refusal of the company and its officers to produce all books and other papers or to appear before the inspectors for the purpose of examination and other non-co-operative and dilatory tactics, it would not be possible for them to complete the investigation by the aforesaid date;

And whereas Shri S. Prakash Chopra, Inspector, has regretted his inability to continue any longer with this appointment due to his other professional engagements;

And whereas it has also become necessary to relieve Shri I.M. Puri from this assignment on account of increase in his investigation work in other companies due to Shri Chopra's relinguishment of the office of inspector;

And whereas after consideration of the aforesaid circumstances and also the magnitude of the work involved, the Central Government are of the opinion that certain modifications/additions in the orders already issued are necessary:

Now therefore in exercise of the powers conferred by clause (a) of sub- section (I) of section 249 of the Companies Act, 1956 (I of 1956), the Central Government hereby appoint in place of Sarvashri S. Prakash Chopra and I.M. Puri, Shri P.B. Menon, a Registrar of Companies in the Company Law Board, to be a co-inspector with Shri S.B.Gupra. The two inspectors shall have co-extensive powers which may be exercised by them severally or jointly. The inspectors shall complete the investigation and submit six copies of their report of the Central Government by 31 st December, 1964."

The petitioner-company characterises these orders also as illegally made in abuse of power and meant to harass the petitioner-company without just cause.

In paragraph 56 of the petition, it is alleged that action under section 240-A of the Companies Act, for seizure of documents was illegally taken against the petitioner-company on 20th July, 1964, but with that I am not concerned in the present rule.

In this rule, the petitioner-company prays for the quashing of the order or orders for the two investigations, as extended from time to time and for a mandate upon the respondents restraining them from giving effect to the same.

Mr. R.C. Deb, learned advocate for the petitioner, urged in condemnation of the order for investigation under section 237(b) (i) and (ii) the same grounds as he did in New Central Jute Mills Co. Ltd. v. Deputy Secretary, Ministry of Finace [1966]36 Comp.Cas.512 and I overrule the grounds for the same reasons as I did in that case, excepting in so far as hereinafter indicated. I do not repeat my reasonings over again for the sake of brevity.

The affidavit-in-opposition, in the instant case, affirmed by respondent No. 3 is mostly uninformative, full of general denials, devoid of particulars and is unhelpful and unassisting in nature. I have already observed in New Central Jute Mills Co, Ltd. v. Deputy Secretary, Ministry of Finance [1966]36 Comp. Cas.512.

" An order of the Central Government under section 237 (b) is certainly not justiciable , if the order has been made by the appropriate authority bonafide and reasonably, even though the reasons may not fully appeal to a court of law. It may not also be necessary for the Central Government to recite its reasonings when making an order under section 237(b). But when the exercise of the power is challenged as actuated by malice in law, before a court of law, justification for the exercise of the power must not be blanketed from the court."

If the affidavit-in-opposition had been wholly uninformative, I do not think I could overrule the contention of Mr. Deb that the order for investigation under section 237(b) was made without legal excuse. But the affidavit-in-opposition is not as bad as that in so far as the investigation under section 237 (b) is concerned. It appears from paragraph 5 of the affidavit-in-opposition as quoted below.

"I say that the working results profits and/or amounts distributable amongst the shareholders as dividend would have been much higher had the circumstances as mentioned in the order dated 11th April, 1963, did not exist."

It appears from paragraph 6 of the petition that the petitioner-company was purporting to keep large sums in reserve and as a result thereof reduced the dividend from Rs. 37.50 np. per share in 1958-59 to Rs. 28 per share in 1959-60 and thereafter to Rs. 10 per share during the years 1960-61 to 1962-93. Unreasonable declaration of dividends was upheld as prima facie ground for ordering investigation in the case entitled In re Miles Aircraft Ltd. [1948] W.N. 178; [1948] I All E.R.225.which I have discussed at length in my judgment in New Central Jute Mills Co. Ltd. [1966]36 Comp. Cas.512. If the Central Government came to hold the opinion that the working results and the rates of dividends declared were incompatible and if that suggested to the Central Government that there were circumstances suggesting the necessity of an investigation under section 237(b), I cannot hold that the investigation was ordered without any legal excuse. I am, therefore, not inclined to strike down the investigation under section 237(b). Although of this opinion, I record the same criticism that I did in New Central Jute Mills Co. Ltd., [1966]36 Comp. Cas.512 in regard to the carriage of the investigation and administer the same caution to the present body of inspectors.

I now turn to the investigation ordered under section 249 (I) (a). An investigation under section 249 (I) (a) may be ordered; (a) Where any question arises as to whether any body corporate, firm or individual is or is not, or was or was not, an associate of the managing agent or secretaries and treasurers of a company and (b) it appears to the Central Government that there is good reason to investigate such question.

Regarding being had to the language of the section, the Central Government may proceed on a prima facie theory to be proved or disproved with reference to facts later on ascertained. This means that the Central Government may direct investigation when it appears that there are good reasons but which reasons may disappear when real facts became known. I have already dealt with this aspect in my judgment in New Central Jute Mills Co. Ltd., [1966]36 Comp.Cas.512, when dealing with an investigation ordered under section 237 (b) and need not repeat the same here. On the same reasons, I hold that in directing an investigation under section 249 (I)(a) the Central Government cannot proceed on mere subjective satisfaction but may proceed on grounds which appear to the Central Government to be prima facie reasonable. The ground relied upon must to that extent be justified, if challenged before a court of law to be unreasonable or irrelevant or actuated by malice. Now, in the order, dated 11th April , 1963, it was recited that the petitioner-company was found to be the selling agent of Rohtas Industries Ltd. and New Central Jute Mills Co.Ltd, both managed by their managing agents, Sahu Jain Ltd,.and on that basis, it was said, there arose the question whether the petitioner-company was an associate of the managing agency company, within the meaning of section 2(3) (c), and (d) of the Companies Act. In paragraph 18 of the petition, the petitioner-company categorically stated that it was not an associate of Sahu Jain Ltd. and that there did not exist any ground even to suspect that the petitioner was an associate. Paragraph 18 of the petition has been colourlessly dealt with in paragraph 14 of the affidavit-in-opposition in the following language;

"I dispute the allegation contained therein that the petitioner is not an associate of Sahu Jain Ltd. In this respect I submit that the Central Government did have materials before it on the basis of which it formed an opinion that there was necessity to investigate the question of the petitioner being an associate of Sahu Jain Ltd. It is submitted in this regard that it was not necessary for the Central Government to set out any particulars of the good reason which led the Central Government to order the investigation. I further say that it is only after the investigation now, in progress is completed the true status of the petitioner would be known."

Now, merely by acting as selling agent of certain managed companies, a company does not, without more, become an associate of the managing agents of such companies, within the meaning of section 2(3) (c) and (d) of the Companies Act. Thus the ground or the reason recited in the order, dated 11th April,1963, is of irrelevant consideration. The lacuna in the order might have been cured by pleading some reason in the affidavit-in-opposition but the respondent have not elected to do so. I might have compelled, following the principle enunciated by this court in Daulatram Rawatmull v. Income -tax Officer(Appeal from Original Order No. 309 of 1959), the respondents to place before this court and before the petitioner the materials which prompted the Central Government to proceed under section 249 (I)(a) of the Companies Act and to determine whether the condition precedent to such an action did in fact exist. Mr. S. Chaudhuri learned advocate for the respondents, it should be noticed, was ready with the records and was prepared to disclose such materials to this court but not to the petitioner. But because of further lacuna in the order noticed by myself, I am of the opinion, an order of compulsory disclosure of the grounds or reasons for the action taken should not be made to salvage the situation, after the investigation had gone on for over two years and after the extreme steps of search and seizure had taken place. The further lacuna noticed by me is hereinafter stated.

The order for investigation under section249 (I)(a) started on the plea as hereinbefore stated. Time for submission of the report was extended from time to time without any different plea until 15th June, 1963, when there was a separation of the combined investigations under sections 237(b) and 249 (I)(a) ordered and the time for investigation was extended. The order dated 15th June, 1963, however recited a different plea, namely:

"Whereas vide Central Government's order of even number dated the 11th April, 1963, Shri S. Prakash Chopra of M/s S.P. Chopra & Co., Chartered Accountants, 31-F, Connaught Place, New Delhi, was appointed as inspector to investigate the question as to whether Ashoka Marketing Ltd. is an associate of its managing agents, viz., M/s Sahu Jain Ltd., as defined in clauses (c) and (d) of sub-section (3) of section 2 of the Companies Act, 1956 (I of 1956)."

The same plea was pleaded in the order dated 30th June, 1963, when the resignation of S.P. Chopra was accepted and the investigation under section 249 (I) (a) was entrusted to Puri-Menon-Gupta-combination of co-inspectors.

Now, admittedly, Sahu Jain Ltd. is not the managing agent of the petitioner company. As a matter of fact the petitioner-company is not at all a company managed by a managing agent. How the different plea crept into the order is difficult to visualise. This may be due to mistake, oversight, inadvertence and the like, while summarising the original pleas as in the order dated 11th April, 1963, but may also be due to confusion while making the order. I have already indicated that the plea recited in the order dated 11th April, 1963, is irrelevant without more. I am not sure whether the orders, dated 15th June and 30th June, 1963, intended to say what was lacking in the original order, although what was said was also incorrect and unmeaning. Since an order under section 249(1) (a) can be made only if it appears to the Central Government that good reasons exist for an investigation, an order made ex facie on irrelevant ground in the first instance and thereafter confounded by incorrect and imaginary ground should not be upheld.

I have already expressed the opinion in New Central Jute Mills Co. Ltd. [1966] 36 Comp. Cas. 512 that a Central Government order for investigation is not justiciable, if the order has been made by the appropriate authority bonafide and reasonable, even though the reasons may not fully appeal to a court of law. I have also held that it may not be necessary for the Central Government to recite its reasonings when making the order; but if the exercise of power be challenged on the ground that it is actuated by malice in law, before a court of law, justification for the exercise of the power must not be withheld any more. In the instant case, the plea recited in the original order, dated 11th April, 1963, has no nexus to section 2 (3) (c) and (d) of the Companies Act. The plea recited in the subsequent orders, dated 15th June and 30th June, 1963, is imaginary. Nothing was said in the affidavit in opposition in justification of the order, excepting by way of making reference to unknown contents in the office records. I am unable, therefore, to find any legal justification for the order.

Mr. Deb, learned advocate for the petitioner, found another defect in the order under section 249(1) (a), which I need notice at this stage. He invited my attention to the order, dated 9th August, 1963, and submitted that by that order the investigation under section 237(b) only was extended but not the investigation under section 249(I) (a). The effect of this, according to Mr. Deb, was that the investigation under section 249(I) (a) lapsed. He further submitted that the order dated 31st October, 1963, in so far as it attempted to revive and extend a lapsed order was infructuous to that extent.

In support of his contention Mr. Deb relied on certain observations by the Supreme Court in Straw Board Manufacturing Co. Ltd. v. Gutta Mills Worker's Union [1953] S.C.R. 439. In that case the Supreme Court had to interpret the provisions of section 6(I) of the U.P. Industrial Disputes Act, 1947, which peremptorily requires an adjudicator to submit his award to the State Government " within such time as may be specified" and not within such time as may be from time to time specified. In that context, the Supreme Court observed (at page 445):

"It is significant that the only occasion when the state Government can, under the U.P. Act, specify a fresh period of time is when it remits the award for reconsideration under sub-section (2) of section 6, for under sub section (3) the adjudicator is enjoined to submit his award, after reconsideration, within such period as may be specified by the State Government. Even in this case under section 6(2) and (3) the State Government may in the order remitting the award specify a time within which the award, after reconsideration, must be filed. This gives the power to the State Government to fix a fresh period of time to do a fresh Act, namely, to reconsidered and file the reconsidered award. It does not give the state government any power to enlarge the time fixed originally for the initial making of the award.....

Learned advocate for the intervener, the State of Uttar Pradesh, draws our attention to section 21 of the U.P. General Clauses Act, 1904, and contends that the order of 26th April, 1950, should be taken as an amendment or modification, within the meaning of that section, of the first order of February 18, 1950. It is true that the order of 26th April, 1950, does ex facie purport to modify the order of 18th February, 1950, but, in view of the absence of any distinct provision in section 21 that the power of amendment and modification conferred on the State Government may be so exercised as to have retrospective operation, the order of 26th April, 1950, viewed merely as an order of amendment or modification, cannot, by virtue of section 21, have that effect. If, therefore, the amending order operates prospectively,......If cannot validate the award which had been made after the expiry of the time specified in the original order and before the date of the amending order, during which period the adjudicator was functus officio and had no jurisdiction to act at all."

This decision is distinguishable. There is no statutory time-limit for making a report under section 249. The limit of time fixed, under an investigation order, to submit a report has no effect on the pendency of the investigation. The failure on the part of an inspector to make a report within the fixed time may amount to a breach of duty on the part of the inspector but does not automatically bring the investigation to an end. In this view, I find inspiration from a judgment of the Supreme Court in Andheri Marol Kurla Bus Services v. State of Bombay, [1959] Suppl. 2 S.C.R. 739, in which delay in submission of report by a conciliation officer under section 12(6) of the Industrial Disputes Act, 1947, was held not to have the effect of terminating the conciliation, which continued until a settlement was effected or a report of non- settlement received. Therefore, even though there had not been any extension of time formally made for submission of the report, the inspector or inspectors might carry on the investigation to its close, however balmeworthy he or they might have made himself or themselves for his or their failure to conform to the time schedule.

Mr. Chaudhuri, learned advocate for the respondents, advanced two arguments to save the orders, dated 9th August and 31st October, 1963, form the onslaught of Mr. Deb. He submitted, in the first place, that the order dated 9th October, 1963, as made by the respondent-Deputy Secretary in fact extended the time for submission of report in respect of the investigation both under section 237 (b) as also under section 249(I) (a) but in making out copies thereof, for service upon the parties, the line concerning extension of time for submission of report under section 249(I) (a) dropped out through the typist's inadvertence and nobody detected the omission. In support of this submission he produced the original order and had his submission supported by an affidavit affirmed by the respondent-Deputy Secretary. I find no reason to disbeliever the affidavit, although I am constrained to observe that the department of Company Law Administration will never deserve an efficiency certificate, if the department conducts and continued to conduct its affairs in such a slipshod manner. Mr. Chaudhuri submitted, in the next place, that the petitioner company acquiesced in the jurisdiction for investigation under section 249(I) (a) in spite of the defect, if any at all, and it was not open to the company to find fault with the order so long thereafter. He relied on the observations of the Supreme Court in Pannalal Binjraj v. Union of India [1957] 31 I.T.R. 565; [1957] S.C.R. 233 in support of this contention. I am not much impressed by this argument. If the petitioner-company submitted to the investigation under protest, as it says it did, there may not arise any question of acquiescence. I need not, however, go into this aspect at length, because I have already negatived this branch of the argument of Mr. Deb on another ground.

Mr. Deb further contended that the question envisaged under section 249(I) (a) must arise and it must appear to the Central Government that there were goods reasons to order investigation. There would not be good reasons, according to Mr. Deb, until the petitioner was heard. He, therefore contended, that to order an investigation without hearing the company was a violation of the principles of natural justice. In support of this contention Mr. Deb relied firstly on Capel v. Child (1832) 2 Cr. & J. 558, and particularly on the following observations by Lyndhurst C.B.:

"Here is a new jurisdiction given-a new authority given: a power is given to the bishop to pronounce a judgment; and according to every principle of law and equity, such judgment could not be pronounced or, if pronounced, could not for a moment be sustained, unless the party in the first instance had the opportunity of being heard in his defence which in this case he had not."

He also relied on Fisher v. Jackson [1891] 2 Ch. D. 84 and Ridge v. Baldwin [1963] 2 All E.R. 66, both referring to the observations of Lyndhurst C.B. with approval. In my opinion the decisions do not support the contention. The investigation in question has not a quasi-judicial character. Nobody is an accused before the inspector. The inspector does not pronounce a judgment nor does he penalise anybody. The function of the inspector is equivalent to the function of a fact-finding mission: vide Raja Narayan Bansilal v. Maneck Phiroz Mistry [1960] 30 Comp. Cas. 644 (S.C.). Considerations of natural justice are irrelevant in the conduct of such an investigation.

Mr. Deb also contended that section 249(I) (a) contemplated the appointment of "an" inspector, meaning thereby a single inspector; as such, the appointment of co-inspectors was bad. In support of this contention be contrasted the language used in section 249(I)(a) with the language used in sections 235, 237(a) and 247, which speak of appointment of one or more persons as inspector. I am not impressed by this argument. "An" inspector, in my opinion, should be read as any inspector and the singular would include the plural. The comparison of language of different sections will not necessarily establish the proposition contended for by Mr. Deb, because it does not always follow that the Legislature intends something different only because the language used in different sections is not exactly the same: vide observations of Lord Goddard in Lines v. Herson [1951] 2 K.B. 682.

Mr. Deb lastly contended that the investigations under section 237(b) and 249(I) (a) could not be combined under one order and, if at all, two separate orders of investigation should have been made. He submitted that this was all the more so because powers exercisable under the two investigations were not the same, for example, an investigation under section 249 (1)(a) did not attract of sizure of documents under section 240-A. He invited my attention to section 249(2) and 247(5) in support of this argument. He further submitted that a combined order would create difficulties in apportioning costs of two different investigations lumped together. I am not convinced by the argument. Power to order investigation being there, it mattered little whether investigation under section 237(b) and 249(I) (a) were made under one order or by different orders and this is so even though all the powers exercisable under the different investigations are not identical. Difficulties in apportioning costs must be faced by the authority making such an order and benefits of doubt in such apportionment must go to the company investigated.

Although I overrule the other arguments of Mr. Deb in condemnation of the investigation under section 249 (I) (a), still I quash the order for reasons herein before stated.

In the result the investigation ordered under section 237(b) is upheld and this rule is discharged to that extent. The order of investigation under section 249(I) (a) is, however, quashed and I restrain the respondents from further proceeding with the same. This rule succeeds and is made absolute to that extent. There will be no order as to costs.

I make it clear that nothing in this judgment shall stand in the way of the Central Government in making a fresh order of investigation under section 249(I) (a) according to law, if good reasons for such an investigation exists.

Interim order shall continue for a period of a fortnight from to day and shall thereafter stand vacated.

[1981] 51 COMP. CAS. 634 (DELHI)

HIGH COURT OF DELHI

Ashoka Marketing Ltd.

v.

Union of India

T.V.R. TATACHARI, C.J.

AND S. RANGANATHAN, J.

Civil Writ Petition No. 918 of 1974

APRIL 26, 1978

A.K. Sen , Mrs. Leila Seth and B. Mohan for the Petitioner.

K.M. Kataria for the Respondent.

JUDGMENT

S. Ranganathan, J. —This is a writ petition filed by Ashoka Marketing Ltd. (hereinafter referred to as "the company" or AML) for the issue of a writ of certiorari to quash the orders passed on December 31, 1973, June 26, 1974, and July 2, 1974, by the Company Law Board (hereinafter referred to as "the Board") and an order dated July 2, 1974, passed by the Government. The Union of India and the Secretary, Ministry of Law, Justice and Company affairs, have also been made respondents.

The order dated December31, 1973, passed by the Board is an order under s. 237(b) of the Companies Act, 1956, appointing a firm of chartered accountants as inspector to carry out an investigation into the affairs of the company during the period from March 1, 1966, to December 31, 1973, and "to report thereon to the Company Law Board pointing out, inter alia, all irregularities and contraventions of the provisions of the Companies Act, 1956, and of any other law and the person or persons responsible for such irregularities or contraventions" on or before June 30, 1974. The reason why the Board considered this action necessary appears from the first paragraph of the order which contains the preamble:

"Whereas in the opinion of the Company Law Board there are circumstances suggesting that the persons concerned in the management of the affairs of the company have in connection therewith been guilty of fraud, misfeasance and other misconduct towards the company and its members".

Which is nothing more than a repetition of the language of s. 237(b)(ii) as to the circumstance warranting the appointment of an inspector under that provision. The grievance of the company is that there were no such circumstances in existence on the basis of which the Board could have formed such an opinion or ordered such an appointment. In the writ petition, the company has sought to substantiate its plea on the basis of the following allegations.

The company had been incorporated in 1948 and was carrying on business as traders, exporters, selling agents, dealers in stocks, shares and investments and for some time in the manufacture and sale of plywood. It had also recently commenced a business in the manufacture and sale of electronic goods. It had built up a very efficient and effective organisation and had been carrying on its business and activities scrupulously in accordance with law. It has a respectable board of directors. It maintained regular books of account and records; its turnover was increasing from year to year; its profits were reasonable and it was also declaring reasonable dividends. While so, on April 11, 1963, the Govt. of India ordered an investigation into its affairs under ss. 237(b) and 249(1) of the Companies Act, 1956, but this order was quashed by the High Court of Calcutta by its judgment dated March 7, 1969. In the meantime, the Registrar of Companies had been making several enquiries and, to the understanding of the company, he was satisfied with the information and explanation given to him. In September, 1972, the Board, acting under s. 209(4)(b)(ii) of the Companies Act had appointed one Sri Sooraj Kapoor, to inspect the company's books. He had also called for explanation, information and books from the company. The company's affidavit specifically avers in para. 7:

"So far as your petitioner is aware there has been no complaint by the inspector of any fraud and/or misfeasance and/or misconduct and/or irregularity and contravention in the business or affairs of the company, Nor had, to the knowledge of the company, any shareholder or creditor of the company made any such allegation.

In these circumstances, the order dated 31-12-1973 was without any basis or justification".

It is pointed out that the order does not set out any circumstance or material leading to the formation of the opinion expressed therein. Therefore, soon after the order was received on 7-1-1974, the company applied to the board for a review of the order setting out all the above facts, pointing out that the provisions of s. 237 were drastic and should not be commenced "unless there are satisfactory grounds supported by relevant and cogent materials and evidence" and without such materials an inspector should not be given "arbitrary and untramelled powers to make a fishing inquiry and to investigate into any affair of your petitioner which is not authorised under the law" during the period from March 1, 1966, till the date of the order. The company offered to furnish any information that may be needed in respect of any particular transactions and prayed that the order for a general investigation be cancelled. This petition was rejected by the Government and the Company Law Board and hence this writ petition by which the petitioner requests this court to quash the order u/s. 237(b) dated December 31, 1973, the letter dated June 26, 1974, by which the Company Law Board extended the period for the inspector's report till December 31, 1974, and the orders dated February 2, 1974, by which the Board and the Company Affairs Dept. of the Govt. of India declined to review the order dated December 31, 1973.

Perhaps all that a company could do at this stage was to deny that there were any circumstances justifying action u/s. 237 in its case, for the Board does not take the company into confidence or indicate to it the basis for the action taken by it. It is, therefore, of the greatest importance that when a company approaches the court with a writ petition, making out a prima face case that the action u/s. 237 was not justified, the Board should place before the court all the circumstances available to it on the record on which the opinion has been formed that the persons in management were guilty of fraud, misfeasance or misconduct towards the company and its members. Unfortunately, in this case, the stand of the Board has been put forward piecemeal in its original counter-affidavit and two supplemental counter-affidavits filed by it, one before the hearing of the case started and the other at a considerably advanced stage of the hearing. The company has also filed more than one rejoinder. In order to understand the full facts, we have to consider the following seven affidavits, which we shall, for convenient reference, designate as A-1 to A-7:

A-1.

Reply affidavit of respondent

dt.

31-7-75

A-2.

Rejoinder of petitioner

"

25-8-75

A-3.

Further rejoinder

"

28-10-76

A-4.

Supplemental reply of respondent

"

7-12-76

A-5.

Further rejoinder of petitioner

"

22-12-76

A-6.

Further reply of respondent

"

13-1-78

A-7.

Final reply of petitioner

"

24-1-78

The case against the company was first spelt out in A-1. In para. 10, it was stated that the order in the instant case had been passed on the basis of seven transactions of the company which had come to the notice of the Board:

        1. Surrender of the sole selling agency of Jaipur Udyog Ltd.

        2. Purchase and sale of the undertaking of Albion Plywood Ltd.

        3. Sale of certain shares at a loss.

        4. Investment in low yielding debentures.

        5. Sale of jeeps at a loss.

        6. Unsecured loan of large amounts to closely connected persons and

        7. Write off of three loans.

As a general preface to these charges it was stated that the company was one of twelve companies that belong to a group known as the Sahu Jain group and it was a common tendency of common block shareholders of such group concerns to benefit each other even if at the cost of the other shareholders, We have to examine by taking up each of these "charges" seriatim and analysing the averments of the parties, whether circumstances have been made out to sustain the action taken by the Board.

General charge

According to A-1, the petitioner belongs to a group of companies known as "Sahu Jain group". It is stated that, according to the report of the Monopolies Enquiry Commission, 1965, a group of 26 companies has been said to belong to this business house and that, according to the report of the Industrial Licensing Policy Enquiry Committee, 1969, there were 29 such concerns. The respondent has referred to 12 concerns which are mentioned in both the reports and alleged that they belong to the Sahu Jain group. These concerns are, besides the petitioner (AML), Albion Plywood Ltd. (APL), Bharat Oversees Pvt. Ltd. (BOL), Hindustan Vehicles Ltd. (HVL), Jaipur Udyog Ltd. (JUL) Mahespur Holdings Ltd. (MHL), Parshya Properties Ltd. (PPL), Rohtas Industries Ltd. (RIL), Shree Kesaria Investments Ltd. (KIL), Shree Rishab Investments Ltd. (SRIL), New Central Jute Mills Co. Ltd. (NCJ) and Bharat Nidhi Ltd. (BNL). After setting out the names of these concerns, A-1 alleges "a common tendency of such shareholders/directors in these concerns to benefit each other even if at the cost of the other shareholders of the concern".

In reply to the above, the petitioner-company has stoutly repudiated the existence of any such group as alleged. It is stated that though a notice was given by the Dept. of Compay Affairs in 1974, calling upon the petitioner to show cause why action under s. 48(2) of the Monopolies and Restrictive Trade Practices Act, 1969, should not be taken for default in compliance with the provisions of s. 26 of the said Act, the proceedings were dropped by a decision communicated on 26th April, 1976. In other words, the same Dept. of Company Affairs had accepted the position that no case had been made out for treating these concerns as inter-connected.

Apart from the fact that the respondent has not answered the point made in the reply or given details to show that AML is one of the concerns belonging to a closely knit group along with the 11 others we are of opinion that this general allegation made in A-1 is not helpful in determining the issues in the present case. Merely because certain companies are said to form a group and there are transactions between these companies, it cannot be presumed that the transactions are mala fide or that they were entered into with a view to defraud or otherwise act in a manner detrimental to some or all of the concerns. No doubt, in considering the nature of a particular transactions, or the purpose and motive behind it, the relationship between the parties may be a relevant consideration and while examining the seven specific charges made against the company, we shall keep this aspect also in mind to see whether there has been any attempt to act to the detriment of AML with a view to benefit any of the other concerns mentioned. But, all that we would like to observe here is, that the approach indicated in A-l, of starting with a presumption that there must be necessarily something wrong because the transactions are between companies of the same group, is not correct. The general charge formulated in A-l, therefore, cannot, by itself, be a ground justifying the action under s. 237, in the present case, unless it is substantiated with reference to one or more of the other seven charges.

Charge No. 3: Sale of shares at a loss.

It will be convenient to take up the first two charges last. Taking up the third charge first, the complaint against the company is that between September, 1968, and February, 1970, it sold at a huge loss some of the shares held by it in NCJ, APL, HVL, MHL and KIL. The sale was at an unnecessarily low price (lower than the market price) and, in the case of two concerns, was of the controlling interest therein. So, it is alleged this transaction was "prima facie" against the interest of the company.

The factual position that emerges from the various affidavits in regard to these sales is as follows:

(a)        In the case of NCJ, the shares were sold at rates varying from Rs. 4.40 to Rs. 4.50 per share as against the face value of Rs. 10. Though according to the respondents, NCJ had large reserves and had also earned good profits, it is admitted that the shares are quoted on the stock exchange and that the market quotations for the shares at the relevant time ranged between Rs. 4.56 to Rs. 4.62 per share. The claim of the petitioner-company is that the shares were sold at the rates quoted at the Calcutta Stock Exchange and this statement has not been denied by the respondent. Further, it is pointed out that even on the basis that they had been sold at rates slightly less than the market value, the transaction was still beneficial to the company inasmuch as the value of the shares fell from Rs. 4.50 this year to Rs. 3.75 in the subsequent year and, if the company had not sold the shares when it did, the loss would have been even greater.

(b)        In the case of APL and HVL, it is common ground that these concerns had been incurring huge losses and that their shares were worth less. Forced to admit this position in A-4, the respondent would still find fault with the petitioner for having sold thirty-five thousand shares of HVL "for a nominal amount of Rs. 3,500" 'alleging vaguely that this "conveys no sense except of getting the set-off against profits for the purpose of taxation".

(c)        In regard to the MHL and KIL, the shares are not quoted on the stock exchange. The allegations of the respondent that these were transfers of controlling interest is not correct. The number of shares sold were 23,000 out of 50,000, in the case of KIL, and 16,000 out of 35,000, in the case of MHL. There is no allegation that the petitioner had earlier transferred shares in these companies to the same person or associated person so as to give them controlling interest. Regarding the price, the complaint is that the shares were sold at Rs. 2.55 and Rs. 2.80, respectively, although the break-up value of the shares would have worked out to Rs. 15.71 and Rs. 11.58, respectively.

A study of the above facts would show that the charge that the petitioner had sold the shares at less than the market price is not borne out by the material on record. This is very clear in the case of the first three companies. In the case of the last two, no doubt, the sale price is less than the alleged break-up value. But in the case of a private limited company, the break-up value does not always or necessarily furnish a correct clue as to its market value at any particular point of time: [CWT v. Mahadeo Jalan [1972] 86 ITR 621 (SC)]. There is no other material to indicate that the actual sale price did not represent the value which those shares could realise in the open market on the respective dates of sale though the companies whose shares were sold are said to belong to the Sahu Jain Group, that fact is of no significance as the sale does not benefit those concerns. Nor is there any allegation that these shares have been transferred to other companies of the same group at a favourable price to benefit them at the cost of the petitioner-company. In regard to this charge, therefore, no circumstances have been shown to exist which could lead to the formation of an opinion that there has been some fraud, misfeasance or misconduct on the part of the management of the petitioner-company.

Charge No. 4: Investment in low yielding debentures.

The purport of the charge against the company under this head is not clear. The allegation in A-1 is in the following terms:

"In June, 1970, the company purchased from Sri P. Jain, Smt. Indu Jain, Smt. Shushila Jain, the Bhartiya Gyanpit and the Universal Trust certain debentures worth Rs. 10 lakhs yielding 8% per annum, whereas the loans of the company yielded 11% per annum".

The above allegation can mean one of two things. The first is that, whereas certain other investments made by the company by way of loans yielded an interest rate of 11% per annum, the debentures in question yielded only 8%. But if this were the charge against the company, that would not be sufficient to attract action under s.237. All the funds held by the company cannot be invested so as to yield the same return. Merely because on some investments by way of loans, the petitioner has been able to get 11% interest, the inference does not follow that an investment in debentuces yielding 8% must be the result of some fraud, misfeasance or misconduct on the part of the directors. There is no material to suggest that all the investments of the company were yielding 11% interest and despite similar investments being available readily, the petitioner-company purchased these "low rate" debentures to oblige the vendors. It is also not alleged that funds yielding higher return were withdrawn for making these purchases to the detriment of the company.

The other possible interpretation of the allegation is that, whereas the company had received advances and deposits and paid interest thereon at 11%, it has invested the funds drawn from those advances and deposits in debentures which yielded a smaller return. This contention is met by A-2 which points out the fallacy in the above line of reasoning. There is no material to correlate the funds invested by the company in the above debentures with the loans taken by it on payment of interest at 11%. The resources of the company were not limited only to such loans. The company had received advances from its customers on which it paid no interest whatever. It has security deposits on which it was paying interest at only 6 to 6 1/2%. The surplus funds of the company had to be invested and there is no material to suggest that the investment in these debentures was in any way motivated. In fact, the charge does not even allege that the purchases were made to benefit the vendors who, it would appear, may be connected with the directors of the petitioner-company. In these circumstances, therefore, no circumstances have been brought to light for drawing an inference of fraud, misfeasance or misconduct.

For the first time, in the reply affidavit, A-4, the respondent, took a fresh point that the debentures purchased by the company were those of PPL which, in the year ended January 31, 1970, had incurred a net loss of Rs. 596 lakhs as against its paid up capital of Rs. 5 lakhs. It will be seen that this is a totally new charge. The original allegation against the company was only for having made an investment yielding a smaller return and did not even mention the name of the company whose debentures were purchased. However, A-4 attaches importance to the name and seems to doubt the solvency of the company the debentures of which have been acquired, perhaps also because it is one of the concerns of the group according to the respondent. But this criticism has not been made out by reference to the balance-sheet position of the said company. As its name indicates it appears to be a property holding company. There is no information regarding its assets and liabilities. In the case of a property company it is not unusual that there are only losses in working in the initial stages of its development before the income from the properties constructed or held by it starts flowing in. Moreover, debentures are secured loans and there is not an iota of evidence placed to show that these debentures were worthless. The fact that PPL is a company of the group will not, per se, render the debentures worthless or the purchase motivated. A-4 has only attempted to voice a suspicion of bona fides but backed it by no material on record. Here also the respondent has failed to make out the existence of circumstances to show that in purchasing these debentures, the directors of the company have been guilty of any fraud, misfeasance or misconduct towards the company or its members. Charge No.5: Purchase and sale of jeeps.

The allegation is that in November, 1966 and January, 1967, the company purchased twelve jeeps. Seven of these were sold in March, 1967, and two more in October, 1967. The company incurred a loss of Rs. 47,000 on the purchase and sale. The jeeps had been insured only from January to August, 1967. The accounts of the petitioner did not show any expenses in respect of petrol during the year 1967. From these facts, the inference is sought to be drawn that the purchase of the jeep was not for the purposes of the business of the company and that the transactions were not in the interests of the petitioner-company.

The company's plea is that the jeeps were purchased and sold under the authority of resolutions passed by the board of directors. The transaction was in the ordinary course of business of the company and in order to ensure its smooth running. Though the exact manner of utilisation of these jeeps had not been indicated in the affidavits, Sri Sen submitted that the transaction should be judged in the light of the fact that it was put through at the time of the general elections, that the jeeps were purchased in business interests, "in order to ensure the smooth running of the business of the company" and that no mala fides were involved in the transaction.

We are unable to see how this transaction can attract the impugned action by the respondent. As suggested by Sri Sen, there is an explanation for the purchase of the jeeps and their disposal within a short time. But, even disbelieving this explanation and assuming the worst, it is a mere instance of purchase and sale by the company of a certain asset which resulted in a loss to the company. It has not been explained in what manner this transaction reveals fraud, misfeasance or misconduct on the part of the persons concerned in the management of the company. There is no allegation that these jeeps were intended for or utilized by those persons or that they were sold to them or to other concerns of this group in which they were interested at concessional rates or the like, Except that the company had entered into an imprudent transaction, there are no circumstances of the nature outlined in s. 237(b)(ii).

Charge No. 6: Loans to certain individuals

The respondent has taken objection to the advances of loans by the petitioner-company to a number of persons "who belonged to the Sahu Jain group" to the extent of Rs. 1.26 crores. In particular, it is stated that loans to the extent of Rs. 68.75 lakhs were advanced to one R.G. between August, 1968, and March, 1972, and that similar loans were also advanced to A.P.J. From these persons Rs. 20 lakhs and Rs. 95 lakhs, respectively, remained due to the petitioner.. The answer of the company is that the petitioner had vast resources by way of deposits from stockists and advances from customers. The investment of these funds among others by way of loans was part of the business of the company. These were loans carrying a high rate of interest (as admitted in para. 10(4) of A-1), and were repayable on demand. It has been denied that any loan in excess of Rs. 20 lakhs was given to R.G. In the case of A.P.J. only Rs. 4.45 lakhs was due and, in the case of R.G., the entire amount of the loan was repaid by 6th November, 1974.

The petitioner's reply that these are loans earning a high rate of interest has not been denied. In fact, one of the earlier charges against the company was that when these loans were earning a higher rate of interest of 11%, the debentures of P.P.L. carrying 8% interest should not have been acquired. It is, therefore, inconsistent on the part of the Board to find fault with the company also for having advanced these loans. It is not the respondent's suggestion that these persons were not capable of returning the loans or that the persons concerned in the management of the company stood to gain in some way as a result of these transactions. The loans have also been substantially repaid. In these circumstances, we fail to see how this transaction can attract action under s. 237(b)(ii).

Charge No. 7: Write off of three loans

According to A-1, the petitioner-company had advanced in 1963-64, three loans, one, a sum of Rs. 50,000 to Sri K.L.M., two, Rs. 30,000 to Sri T.H.K. and three, Rs. 15,000 to Shri H.K.M. Neither these loans nor any interest thereon was recovered from these persons though the interest itself was quite substantial and amounted to as much as Rs. 46,553. No efforts were made to recover them and a major part has been written off.

The explanation given by the company is that these were very respectable and prominent persons in public life. One of them was a counsel for the company and one of them held a high office in the State of Orissa. When they were in some financial difficulty, the company advanced certain loans to them. But the circumstances were such that the loans could not be repaid. It was embarrassing for the company to take legal proceedings against them. However, some efforts for recovery were made. In the case of Sri T.H.K., Rs. 25,000 were recovered and only Rs. 5,000 had to be written off. The other two, however, became bad debts and were written off in 1973.

All that the materials placed on record discloses is that the petitioner-company advanced certain loans which became irrecoverable and had to be written off. The persons to whom the monies were lent were not relatives or associates of the persons concerned in the management of the company. They were outsiders and influential people to whom the company, bona fide, though perhaps imprudently, as events turned out later, advanced certain monies which had to be written off. We are unable to conceive how this transaction of the company can be made the basis of a charge of fraud, misfeasance or misconduct on the part of the directors, etc., towards the company or its members.

We shall now take up the first two charges which are the most important. Shri Kataria, in particular, has placed considerable reliance on the first charge as sufficient by itself to warrant the action taken. As will be seen later, there is an inter-connection between the two transactions which may have to be considered together. We shall, however, set out the facts discussed in respect of each of these charges separately and then discuss the resultant position that emerges.

Charge No.1: Surrender of sole selling agency of JUL

The allegation, as set out in A-l, was that the petitioner had been appointed the sole selling agents of JUL for the sale of cement for a period of five years from April 1, 1966. From this agency, the petitioner was deriving an annual return of about Rs. 8 to 10 lakhs. Notwithstanding this, the company surrendered the agency in favour of BOL, without receiving any compensation for the unexpired period of the agency. The transaction, therefore, was said to be, prima facie, against the interests of the company.

On behalf of the petitioner, it was pointed out by A-2 that this allegation was based on two misconceptions. The first was that the agency was extremely profitable to the petitioner-company. This was not so factually. Though the gross commission from this agency in the accounting years which ended on August 31, 1966, August 31, 1967, and August 31, 1968, amounted to Rs. 92 lakhs, Rs. 108 lakhs and Rs. 8.10 lakhs, respectively, the net income of the company from this source, after deducting the expenditure incurred for earning the said income, came to only Rs. 1.95 lakhs for the first year and there were actually losses of Rs. 65,000 and Rs. 2.24 lakhs, respectively, for the succeeding two years. Full details of the computations on the basis of which these figures were arrived at were given in A-3. It was pointed out that the New Delhi office of the petitioner looked after this business and also the work of three regional offices at Chandigarh, Jaipur and Sawaimadhopur. The work for the cement agency at these places was considerable and involved the setting up of a number of establishments with sufficient personnel to handle the work efficiently. Though the company also dealt in certain other commodities such as sale of steel pipes, plywood, paper and rubber goods, the turnover of cement was the maximum. The turnover in the other commodities varied between 1 and 2 1/2 per cent, of the cement turnover. The company, therefore, apportioned the total expenditure on the basis of turnover and deducted the same to arrive at the net figures referred to earlier. The second misconception of the respondent, according to the petitioner, was that the petitioner was entitled to some compensation for the unexpired period of the agency but had voluntarily forgone the same. This was also not correct. Under s. 294A(c) of the Companies Act, the agents were not entitled to compensation on resignation.

The respondent tried to meet the above case of the petitioner in its affidavits A-4 and A-6. The correctness of the computation of the expenditure deductible against the commission income was contested on the following grounds:

(a)        The New Delhi office of the petitioner looked after the cement agency not merely of JUL but also of other brands of cement such as Rohtas, Portland and Ashoka. The commission earned by the petitioner from JUL was 40% of the total commission earned by it in 1966-67, and 33% in 1967-68. The expenditure deductible against the commission received from JUL would, therefore, be much less than what has been claimed by the company.

(b)        The allocation of expenditure on the basis of turnover was not correct because cement was a commodity in short supply which did not require any special efforts for sale.

(c)        The expenditure taken into account by the petitioner included the interest paid by the head office which should be excluded and if this is done the net commission figures would work out to Rs. 4.12 lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 0.22 lakhs in 1968.

(d)        As a result of the surrender of the sole selling agency the petitioner-company's asset position was considerably affected. It has to call back a loan of Rs. 60 lakhs from NCI and also dispose of other investments of about Rs. 45 lakhs. Moreover, it had to meet liabilities to the extent of Rs. 268 lakhs relating to the business of the sole selling agency and in order to raise this amount it had to sell its plywood factory for Rs. 57 lakhs, sell debentures for the amount of Rs. 63 lakhs, make over loans due to it from 9 parties amounting to Rs. 43 lakhs and pay cash of Rs. 105 lakhs.

These points have been effectively met by the petitioner-company. Regarding (a) it has been pointed out that the agencies of Rohtas, Portland and Ashoka cements were not accounted for in the New Delhi books of the company but were accounted for in the Calcutta books of the company. The expenditure pertaining to those agencies was, therefore, not included in the New Delhi books. The Delhi office was having only the sale of paper, asbestos and certain other commodities in addition to the sole selling agency of JUL. It is, therefore, not correct to say that only a part of the commission accounted for in the Delhi books was attributable to the JUL agency. This contention is also borne out by the copy of account of the New Delhi office placed on record by the petitioner. The first point made by the respondent is, therefore, without force. Regarding (b) there is merely an assertion on behalf of the respondent that the sale of cement was very easy and did not call for any expenditure on the part of the company. In A-3, the petitioner-company has set out at very great length the nature of the activities and functions it had to undertake in relation to the business of the sole selling agency. A detailed analysis of the expenditure under various heads was also furnished. In the face of all these details, the mere assertion that the cement sold itself and that all the expenditure was unnecessary cannot be accepted. Point (a) made on behalf of the respondent again has not been substantiated. The interest paid by the company was interest paid by it on the advances it had received from stockists and purchasers of cement. The interest is, therefore, expenditure properly debitable against the commission income and there is no justification for excluding the same from the P. & L. account. Regarding the other plea that interest received by the head office has not been taken into account, the respondent has not placed before us the details of interest earned by the petitioner in relation to the sole selling agency, which, according to it, should have been included but has been left out of the account by the petitioner. Apart from the above lack of material we may also point out that even if, as contended by the respondent, the expenditure by way of interest is left out of account, the net profit earned from the sole selling agency would be Rs. 4.12 lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 22,000 in 1968. In other words, it was a dwindling income and the mere fact of surrender of such a source of income cannot lead to the adverse inference sought to be drawn by the respondent.

Coming now to the points made out in A-6, we find again that the company has given a satisfactory reply. So far as the recall of a sum of Rs. 60 lakhs from the NCJ is concerned, it is pointed out that the petitioner-company had advanced Rs. 1,40,00,000 to the NCJ. The Company Law Board had directed the company to recall the loan in terms of s. 370 of the Companies Act. Actually, the company applied for extension of time for the recalling of the above amounts and it was only in pursuance of the directions of the Company Law Board, dated September 25, 1968, that the sum of R. 60 lakhs was repaid by the NCJ. This point, therefore, is of no significance. As to the last point made regarding the sale of the company's assets, we may point out that the respondent is confusing between the result of the surrender of the sole selling agency and the cause therefor. Naturally, when the petitioner-company surrendered the sole selling agency, it had to repay the security amounts and advances received by it in its capacity as sole selling agents. This had necessarily to be done by disposing of some assets and by paying a certain amount of cash. It could also be that some of these assets may have been acquired out of the moneys received in the course of the sole selling agency. From the mere fact that, as a result of the transfer of the sole selling agency, the petitioner had to discharge its liabilities incurred in relation thereto by the disposal of certain assets and transfer of certain loans and payment of cash, it cannot follow that the very act of the surender of the managing agency was inspired by improper motives.

The essence of the case of the department was that the sole selling agency was a very valuable asset which no prudent businessman would give up. A point has also been sought to be made in para. 9 of A-6 that whereas 5,000 out of 15,000 shares of the petitioner-company are in the hands of nationalised banks, BOL is a private Ltd. Co., the profits earned by which go to certain individuals who are at the helm of affairs of the petitioner-company. In considering it to be a valuable asset, the respondent has gone by the figures of gross commission without allowing the deduction of any expenditure thereagainst. Even if the expenditure cannot be allowed to the extent claimed by the petitioner, some expenditure must be allowed and, even according to the respondent's figures, the income from this source was dwindling over the years. The respondent's allegation that BOL is an associated concern has been denied in A-2 and A-6 and no material to show any close connection or control has been placed on record. In A-3 and A-7, the petitioner has alleged that, early in 1968, JUL had indicated to it that they wished to terminate its agency and appoint BOL as its agents and it was in this context that they had to surrender the agency. Sri Kataria objects to this allegation made at a late stage being taken into account. There is also nothing to show that the initiative for terminating the agency came from JUL. So, we shall leave it out of account. But even ignoring all these submissions of the petitioner and taking the respondent's case at its best, all that has been made out is that the petitioner-company gave up a sole selling agency which was remunerative. But will this alone be a ground for drawing an inference that the persons in management have been guilty of fraud, misfeasance or misconduct towards the company? We think not, and this will become clearer if we bear in mind that this transaction of surrender of the sole selling agency in favour of BOL was simultaneous with another transaction of surrender of the sole undertaking of APL, which we are discussing below and consider these two transactions together. We shall, therefore, proceed to discuss the second charge against.

Charge No.2: Purchase and sale of plywood factory

The APL was a losing concern. It had sustained losses to the tune of Rs. 52.72 lakhs between October 1, 1962, to March 31, 1966. The petitioner-company had advanced loans to APL to the extent of Rs. 40 lakhs, and on October 31, 1965,a sum of Rs. 41,91,561.64 was due to the petitioner on account of principal and interest from APL. According to the petitioner, there was no way of recovering this loan and so the petitioner ultimately decided to purchase the undertaking of APL and carry on the business in plywood on its own. This proposal was placed before a meeting of the shareholders of the company held on 21st March, 1966. The explanatory note attached to the notice of this general meeting contained the resolution of the company approving the commencement by it of a business in plywood which was necessary in terms of s. 149 of the Companies Act as amended by Act 31 of 1965. The block assets were taken over at a value fixed by a reputed firm of valuers and the other assets were taken over at book value. The petitioner-company worked the concern for a period of three years but it was not a very successful experiment. In the period of April 1,1966, to August 31, 1968, during which the petitioner-company ran the business it had to incur a further loss of Rs. 38.94 lakhs. Eventually, therefore, the company decided that it was not profitable to continue carrying on the business and it was decided to dispose of the same. It was about this time that the surrender of the selling agency of JUL by the petitioner-company in favour of BOL was also contemplated and it was decided that the undertaking of APL would also be transferred to BOL. This transaction was also placed before a meeting of the shareholders of the company held on the 28th September, 1968, and the undertaking was transferred to BOL w.e.f. 1st October, 1968.

According to the petitioner, the above undertaking was purchased at a cost of Rs. 77.17 lakhs and the sale price was Rs. 88.18 lakhs representing the book value of the various assets as on the date of the sale. If this is correct, there is nothing even prima facie wrong with the transaction. The respondent's allegation, however, is that the undertaking was purchased not for Rs. 77.17 lakhs but for Rs. 88.65 lakhs and sold not for Rs. 88.18 lakhs but only for Rs. 57 lakhs. The discrepancy in the purchase price is due to the fact that, according to the respondent, an interest amount of Rs. 3.49 lakhs recoverable from the APL had not been realised. This has been categorically denied by the petitioner and it has been asserted in A-7 that interest was duly recovered from APL. It is then alleged by the respondent that the valuation report on the basis of which the purchase was effected does not give any basis for the valuation and that an inspection report showed that it had made a profit of Rs. 11.40 lakhs in the bargain. The inspection report relied upon has not been placed before us. That apart, the valuation was got done by a reputed firm of valuers. If the valuation report did not give the details, it was open to the respondent to have found out the details from the said firm. It cannot be merely assumed that this valuation report was a made-up one and that it did not represent the proper value of the purchased undertaking and that the consideration paid by the petitioner-company must have been an exaggerated consideration.

While, on the one hand, the respondent criticises the purchase as having been made at an exaggerated price, allegations of a contrary nature are made in regard to the sale transaction of the undertaking in 1968. Here, it is alleged that the sale price was only Rs. 57 lakhs and not Rs. 78.18 lakhs as stated by the petitioner. This allegation has also been denied by the petitioner. The respondent has drawn the inference that the sale price was only Rs. 65 lakhs from the fact that certain liabilities of the petitioner-company to the extent of Rs. 268 lakhs which was transferred to BOL were adjusted in the following manner:

 

Rs.

Transfer of debentures

63 lakhs

Cash paid

105 lakhs

Loan transferred

43 lakhs

Price of plywood factory

57 lakhs

Total

268 lakhs

The petitioner has pointed out in A-7 that this proceeds on a misapprehension. The total sale price was Rs. 78.18 lakhs as explained in detail in the annexure filed along with A-2 but only a part of the sale price was adjusted against the sum of Rs. 268 lakhs. Again, the respondent alleges that the transfer of the undertaking at book values was not justified and that the unit must have been worth much more in October, 1968, than in April, 1966. This allegation again is totally unacceptable. When the petitioner-company wanted to take over the undertaking of APL, which had suffered serious losses, it was prepared to take over the same only after having the block assets valued by a reputed firm of valuers. Having taken over the undertaking, the petitioner conducted the business for a period of about two years during which it suffered a heavy loss. It was, therefore, decided to transfer the undertaking to BOL at book value. There is nothing suspicious about this and the respondent admits in A-4 that it is unable to attribute any motive for the petitioner not undertaking a revaluation of the block assets. Thus, the respondent has not been able to make out any satisfactory reason why the purchase and sale price as claimed by the petitioner should be disbelieved.

Realising this, perhaps, the respondent in A-4 poses a question: Why did the company purchase a losing concern? and concludes that this must have been effected in order to claim a loss for income-tax purposes, by claiming a set-off of the losses in the business against its other profits. It will be seen that this allegation overlooks the fact that that the concern was taken over in lieu of a debt is not denied; it does not also help the respondent's case. Even assuming that the petitioner-company took over this losing concern merely in order to reduce its income-tax burden, the transaction would not be one detrimental to the interests of the company because admittedly the transaction helped to reduce the tax liability of the company to the extent of about Rs. 20 lakhs. That apart, this is merely a vague and wild allegation made by the respondent in an effort to make out some charge against the company when the charge, as originally laid, cannot be established.

According to the petitioner-company, the purchase was for Rs. 77.17 lakhs and the sale for Rs. 88.18 lakhs. If this is so, there is no case at all for the respondent. But even assuming that the undertaking had been purchased for Rs. 80.65 lakhs and had been sold only for Rs. 57 lakhs, this would not lead to an inference of any misfeasance, misconduct or fraud on the part of the management, if looked at against the correct factual background. It should not be forgotten that this was an undertaking which had been sustaining losses right from the commencement. The total loss incurred by it was to the tune of about Rs. 92 lakhs. So, the mere fact that it was sold to BOL for a price smaller than the purchase price is not sufficient to draw an inference against the directors or the management of the company. Having regard to the continuous record of losses, the suggestion made in A-4 that the value of the undertaking in October, 1968, must have been considerably more than the value of the undertaking in April, 1966, is obviously absurd and without basis. We are, therefore, unable to spell out from the circumstances of the transaction the conclusion sought to be drawn by the respondent.

Moreover, as we have mentioned earlier, an important circumstance that is relevant in assessing the real effect of the transactions which form the subject-matter of the first two charges against the company is that they are really connected transactions. Both of them took place simultaneously. In or about July, 1978, the company decided to surrender the sole selling agency of JUL and also decided to transfer the undertaking of APL to BOL. In fact, the transaction involved a number of other mutual arrangements and adjustments which have not been properly examined by the respondent. The petitioner has denied that BOL is a part of the group, but granting that it was, still one would appreciate that the two transactions put together do not leave any room for any adverse inference. Let us assume, as contended by the respondent, that the sole selling agency of JUL was a profitable one. Let us also assume that the undertaking of APL was a losing one and had been transferred to BOL at a price lower than the price for which the petitioner purchased it. All these facts put together could only amount to this that, as a result of certain understandings in July, 1968, the petitioner-company transferred to BOL a remunerative undertaking and also an admittedly losing concern. It cannot, therefore, be postulated that the management of the petitioner-company had indulged in these transactions with a view to benefit BOL and its limited shareholders at the cost of the petitioner-company. It should not also be overlooked that the transaction relating to APL had, at both stages, been placed before and unanimously approved by the shareholders of the company. It has been pointed out in A-6 that a substantial proportion of the shares of the petitioner-company was held by nationalised banks and it cannot be assumed that they voted the proposals which were patently detrimental to the company's interests.

We have discussed at length all the materials placed before us by the parties and reached the conclusion that the action initiated by the respondent against the petitioner-company was not justified. Sri Kataria, for the respondent, submitted that, at least in regard to the first two charges, the respondent has shown the existence of some circumstances which called for further investigation. He submitted that if, after investigation, the charges were made out, the board would take other action but that, if the charges could not be substantiated, further proceedings would be dropped. So, according to him, it was not possible on the material for this court to say that even the appointment of an inspector to delve into these matters was not necessary or justified.

We think that the contention of Sri Kataria proceeds on a misconception of the true scope of s. 237 (b). In Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp Cas 639; AIR 1967 SC 295, the affidavit of the Board disclosed that (p. 296—AIR headnote):

"In the conduct of the company there was delay, bungling and faulty planning of project entailing double expenditure, continuous losses resulting in sharp fall in prices of the company's shares and resignation of some of the directors on account of differences of opinion with the managing director".

On the question whether these facts could support an order under s. 237(b), Mudholkar J. (speaking for himself and Sarkar C.J.), observed (AIR headnote p. 296—see also 36 Comp Cas at p. 692):

"It cannot be said that from a huge loss incurred by a company and the working of the company in a disorganised and unbusinesslike way, the only conclusion possible was that it was due to lack of capability. It was reasonably conceivable that the result had been produced by fraud and other varieties of dishonesty or misfeasance. The order did not amount to a finding of fraud. It was to find out what kind of wrong action has led to the company's illfate that the powers under the section were given. The enquiry might have revealed that there was no fraud or other similar kind of malfeasance. It would be destroying the beneficial and effective use of the powers given by the section to say that the Board must first have showed that a fraud could clearly be said to have been committed. It was enough that the facts showed that it could be reasonably thought that the company's unfortunate position might have been caused by fraud and other species of dishonest action".

Two other judges, however, did not agree with this view. Hidayatullah J. (as he then was), expressed himself as follows. (AIR head note—see also pp. 661, 662 of 36 Comp Cas):

"The words 'in the opinion of the Central Government' in section 237(b) indicate that the opinion must be formed by the Central Government and it is of course implicit that the opinion must be an honest opinion. The next requirement is that ' there are circumstances suggesting, etc' These words indicate that before the Central Government forms its opinion it must have before it circumstances suggesting certain inferences........

Again, an action, not based on circumstances suggesting an inference of the enumerated kind will not be valid. In other words, the enumeration of the inferences which may be drawn from the circumstances, postulates the absence of a general discretion to go on a fishing expedition to find evidence. No doubt the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. If the action is questioned on the ground that no circumstances leading to an inference of the kind contemplated by the section exists, the action might be exposed to interference unless the existence of the circumstances is made out... Since the existence of ' circumstances ' is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned, has to be proved at least prima facie. It is not sufficient to assert that the circumstances exist and give no clue to what they are because the circumstances must be such as to lead to conclusions of certain definiteness".

Shelat J. had this to say (See pp. 689, 690 of 36 Comp Cas):

"There must therefore exist circumstances which in the opinion of the Authority suggest what has been set out in sub-clauses (i), (ii) or (iii). If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute.

Even assuming that the entire cl. (b) is subjective and that the clause does not necessitate disclosure of circumstances, the circumstances have in the present case been disclosed in the affidavits of the Chairman and the other officials. Once they are disclosed, the court can consider whether they are relevant circumstances from which the Board could have formed the opinion that they were suggestive of the things set out in cl. (b)".

Bachawat J. expressed no views on this aspect of the case.

The scope of the section was, therefore, again considered by the Supreme Court in Rohtas Industries Ltd. v. Agarwal [1969] 39 Comp Cas 781; AIR 1969 SC 707 "to sort out the requirements" of the section. After a review of the several decisions cited before the court, Hegde J. (speaking for himself and Sikri J., as he then was), concluded thus (p. 800 of 39 Comp Cas):

"Coming back to section 237(b), in finding out its true scope, we have to bear in mind that that section is a part of the scheme referred to earlier and, therefore, the said provision takes its colour from sections 235 and 236. In finding out the legislative intent we cannot ignore the requirements of those sections. In interpreting section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally, we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of the general public. In fact the vires of that provision was upheld by a majority of the judges constituting the Bench in Barium Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311; AIR 1967 SC 295, principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated earlier, we agree with the conclusion reached by Hidayatullah and Shelat JJ. in Barium Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311; AIR 1967 SC 295, that the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question are open to judicial review though the opinion formed by the Government is not amenable to review by the courts. As held earlier, the required circumstances did not exist in this case".

Bachawat J. was of a different view. He observed (p. 803 of 39 Comp Cas):

"If it is established that there were no materials upon which the authority could form the requisite opinion the court may infer that the authority did not apply its mind to the relevant facts. The requisite opinion is then lacking and the condition precedent to the exercise of the power under section 237(b) is not fulfilled. On this ground I interfered with the order under section 237(b) in Barium Chemicals v. Company Law Board [1966] Supp SCR 311 at p. 343; 36 Comp Cas 639: AIR 1967 SC 295 at p.313...... The condition precedent to the exercise of power under section 237(b) is the opinion of the Government and not the existence of the circumstances suggesting one or more of the specified matters. To hold that the factual existence of such matters is a condition precedent to the exercise of the power is to re-write the section. Section 23 7(b) must be interpreted in the light of its own language and subject-matter. We miss its real import if we begin by referring to the construction put by other judges on other statutes perhaps similar but not the same. The decisions are useful when they lay down principles of interpretation or give the meaning of words which have become terms of art "

but he agreed with the conclusion of the majority that, on facts, the order under s. 237(b) was not maintainable. In that case, the only allegation against the company on the basis of which the action under s. 237(b) was sought to be supported was that it had sold certain preference shares at their face value when they could have been converted into ordinary shares of Rs. 10 each which were then quoted at Rs. 15 in the stock market. Hegde J. observed (pp. 800, 801 of 39 Comp Cas):

"The next question is whether any reasonable authority, much less an expert body like the Central Government, could have reasonably made the impugned order on the basis of the material before it. Admittedly, the only relevant material on the basis of which the impugned order can be said to have been made is the, transaction of sale of preference shares of Albion Plywoods Ltd. At the time when the Government made the impugned order, it did not know the market quotation for the ordinary share of that company as on the date of the sale of those shares or immediately before that date. They did not care to find out that information. Hence there was no material before them showing that they were sold for inadequate consideration. If as is now proved that the market price of those shares on or about May 6, 1960, was only Rs. 11 per share then the transaction in question could not have afforded any basis for forming the opinion required by section 237(b). If the market price of an ordinary share of that company on or about May 6, 1960, was only Rs. 11 it was quite reasonable for the directors to conclude that the price of the ordinary shares is likely to go down' in view of the company's proposal to put on the market another 50,000 shares as a result of the conversion of the preference shares into ordinary shares. We do not think that any reasonable person, much less any expert body like the Government, on the material before it, could have jumped to the conclusion that there was any fraud involved in the sale of the shares in question. If the Government had any suspicion about that transaction it should have probed into the matter further before directing any investigation. We are convinced that the precipitate action taken by the Government was not called for nor could be justified on the basis of the material before it. The opinion formed by the Government was a wholly irrational opinion. The fact that one of the leading directors of the appellant-company was a suspect in the eye of the Government because of his antecedents, assuming without deciding, that the allegations against him are true, was not a relevant circumstance. That circumstance should not have been allowed to cloud the opinion of the Government. The Government is charged with the responsibility to form a bona fide opinion on the basis of relevant material. The opinion formed in this case cannot be held to have been formed in accordance with law".

From the foregoing it will be seen that the question whether circumstances have been shown to exist from which, reasonably, an inference of the nature contemplated by the provision can be drawn is a matter for judicial consideration. It is not sufficient for the Board to merely allege some facts which raise some suspicion in order to enable it to enter into a fishing expedition or to undertake an investigation as a result of which possibly some case could be made out against the company. In the present case, if at all, there is some content only in the first two charges. But even there the Board is not clear about the facts and looking at both the transactions together there are no circumstances brought to light from which any fraud, misfeasance or misconduct on the part of the management can be made out. As Shelat J. has pointed out in Barium Chemicals Ltd. v. Company Law Board [1966] Supp SCR 311; 36 Comp Cas 639; AIR 1967 SC 295/ these expressions envisage the following types of conduct (AIR headnote):

"The term 'fraud' connotes actual dishonesty and, however much the court may disapprove of a personal conduct it must consider whether he has been guilty of dishonesty. Misfeasance results from an act or conduct in the nature of a breach of trust or an act resulting in loss to the company. Misconduct of promoters or directors as understood in the Companies Act means not misconduct of every kind but such as has produced pecuniary loss to the company by misapplication of its assets or other act".

In the present case, there is no basis for any allegation of fraud or misconduct. It cannot even be alleged that the management has entered into any of the transactions in the nature of a breach of trust or with a view to cause pecuniary loss to the company. We have, therefore, no hesitation in concluding that no case for action under s. 237(b)(ii) has been made out.

Before parting with the case, we should like to point out one further feature in the present case. As pointed out by the Supreme Court, the circumstances justifying action under s. 237 should exist at the date of the order. In A-1, the respondent only set out a few broad allegations which were controverted by A-2 and A-3. The respondent then filed A-4 giving further details and figures and it is not clear why these were not furnished at the original stage itself. In the original petition, the company had specifically alleged that the earlier investigations by the Board, in particular by Sri Suraj Kapur, had yielded nothing adverse to the company. In the original reply filed by the respondent (paras. 6 and 7 of A-1) this was not controverted, rather there was an indefinite statement that the functions of the Registrar of Companies and Sri Suraj Kapur were limited and they were not required or entitled to make any complaints regarding fraud or misfeasance, admitting impliedly that the reports had contained no adverse comments, etc. The additional facts mentioned in A-4 were more in the nature of pointing out of loopholes in the defence put forward in A-2 and A-3 than a positive case based on definite data. Sri Kataria, however, stated in court that full details regarding the allegations were available from the inspection report and that he would place the same before us. But eventually neither the inspection report nor the facts and details gathered by the inspector were placed before us. Instead, A-6 was filed. This no doubt refers to the report of Sri Kapur dated January 12, 1973, and to the discussions he had with the officers of the company. But A-6 which puts forward certain additional facts avoids stating specifically that these facts were based on the results of the inspection report and had been arrived at after due investigation and enquiries with the company. Even in A-6 the attempt made is only to raise a cloud of suspicion by referring to a number of facts and figures without any attempt at analysing them and making out clear factual charges against the company. The charges are vague and general and do not attempt to bring home to the directors or persons in management in general or any of them in particular any conduct of the nature contemplated by s. 237(b)(ii). As pointed out in the case of Barium Chemicals [1966] Supp SCR 311; 36 Comp Cas 639; AIR 1967 SC 295, an allegation that the company had entered into an unremu-nerative or imprudent transaction cannot suffice to attract s. 237. If the basis of the order under s. 237(b) was only the data furnished in A-l, the material was woefully inadequate to support the order. But even the additional facts furnished in A-4 and A-6 do not add much substance to the charges. We, therefore, hold that the respondent has failed to make out the existence or circumstances justifying the formation of an opinion that there was fraud, misfeasance or misconduct on the part of the persons in management of the company towards the company or its members.

We, therefore, make the rule absolute and quash the impugned orders marked annexs. C, G, H and I to the writ petition. The respondents are restrained from giving effect in any manner to the aforesaid orders against the petitioner-company.

The writ petition is allowed with costs.

[1983] 54 COMP CAS 370 (KER.)

HIGH COURT OF KERALA

Kumaranunni

v.

Mathrubhumi Printing and Publishing Co. Ltd.

M.P. MENON J.

COMPANY PETITION NO. 11 OF 1979

SEPTEMBER 9, 1981

M. Ramanatha Pillai for the Petitioner.

P.K. Kurien and K.A. Nayar for the Respondent.

JUDGMENT

M.P. Menon J.—This is a petition under s. 237(a)(ii) of the Companies Act. The petitioner is a member of a company, and he wants an order declaring that its affairs require investigation by an inspector appointed by the Central Govt. Before going into the facts of the case, it is necessary to examine under what circumstances such a declaration could be made.

Section 237 of the Act reads :

"Investigation of company's affairs in other cases.—Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)         the company, by special resolution ; or

(ii)        the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

(b)    may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members ; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company."

Counsel suggests that the discretion conferred on the court under cl. (a)(ii) is wide and uncontrolled and that the court can pass an order whenever it is satisfied, on a scrutiny of the materials placed before it, that an investigation is called for. The petitioner can prove his allegations before the inspector, when one is appointed, it is said : the court is only to see whether prima facie they have substance. But the question still remains on what kind of material the court can act. Going by the section, the inspector is to investigate into the affairs of the company, and not into the specific allegations made by a petitioner, suggesting thereby that the allegations or the materials should be such as to satisfy the court about the need for such an investigation. Section 237(b) enumerates the circumstances under which the Central Govt. can suo motu order a similar investigation ; and the discretion there is not uncontrolled. The Central Govt., before exercising its power thereunder, should form an opinion that circumstances suggesting the existence of one or other of the matters specified in sub-cls. (i) to (iii) are there. It should form an opinion that there are circumstances to suggest—

(i)         that the business of the company is being carried on with intent to defraud its members, or otherwise for a fraudulent or unlawful purpose ; or

    (ii)        that it is carried on in a manner oppressive of its members ; or

(iii)       that the company itself was formed for a fraudulent or unlawful purpose; or

(iv)       that the persons concerned with its formation or management are guilty of fraud, misfeasance or other misconduct in connection with the formation or management; or

            (v)        that due information is withheld from the members.

It is not as if a member can make any allegation and the Central Govt. can order an investigation on being satisfied that it calls for a further probe. The nature of the allegations must have relevance to the matters enumerated in cl. (b). The question then is, is the situation different when the court has to decide under cl. (a) about the desirability of an investigation ?

The answer to my mind lies partly in the history of company law, and partly in some of the other provisions of the Act. A company is an association of men or women for trading, more or less like a partnership. In a partnership, the members are few, and each has confidence in the other. When the members participating in the association are few, their relationship can be worked out within the . confines of contract and agency. But when their number is large, a different form of organisation will be necessary. In the initial stages, these unincorporated bodies were developing in England on the lines of quasi-partnership with fluctuating membership. But as the law of contract arid agency could not be fully applied to a situation where the actual management of the business was in the hands of a few, with the bulk of the members forming the association waiting outside, the Chancery courts of England started to apply the equitable doctrine of trust to those larger bodies. Those in management of the business of the association were held to be occupying a fiduciary position, with certain fiduciary duties, in relation to the association and its members. Basically, the business association, or the company as it came to be called, rested on contract between the members ; but in certain respects, the members in management (i.e., directors) were held to have fiduciary duties, as distinct from contractual. The sanctity of contract which was the philosophy of the 18th and 19th centuries, as modified by the rules of equity developed by the equity courts, thus contributed to the development of company law even before Parliament thought of legislating on the subject. It was the Joint Stock Companies Act of 1844 which first drew the distinction between a partnership and a company. The enactment provided for registrations of associations with more than 25 members. Limited liability was recognised only in 1855, and it was only under the Joint Stock Companies Act of 1856 that registration became a matter of course. Even after the Companies Act of 1862 was placed on the statute book, the position was that the members of a company, particularly those in a minority, had little control over the directors in actual management. If the minority could approach the equity courts with complaints of breach of trust, they obtained some redress, and not otherwise.

In Foss v. Harbottle [1843] 2 Hare 461, it was held that the courts could not normally interfere with the internal management of the company at the instance of a minority of members dissatisfied with the conduct of its affairs by the majority. This approach was sought to be justified on various grounds. The first was that the members who had contracted to abide by the decision of the majority could not complain against something to which they had agreed. The second was that the majority alone knew what was good for the association or company, and that the court's views could not be imposed on them. And the third was that as the company was a separate juristic person, it alone, or at least only a majority of its members, could complain of any injury to it, and not a minority. In Salomon v. Salomon & Co. [1897] AC 22, the House of Lords went to the extreme of refusing to discover dummies and nominees behind the veil of incorporation, by placing emphasis on the separate legal personality of the company. In spite of the fact that free trans-ferability of shares is one of the important features of any company, it was held in In re Gresham Life Assurance Society : Ex fiarte Penney [1872] 8 Ch App 446, that where the articles of association vested an absolute discretion in the directors of a company to refuse to recognise a transfer of shares, the court would presume that the directors had exercised the power bona fide. They could not be compelled to disclose reasons for their refusal, unless want of good faith was affirmatively established by a petitioner. Dishonesty, fraud, bad faith, breach of trust and the like were the minimum to be established by individual shareholders before they could get any equitable relief from the Chancery courts ; in all other cases, the contract was supreme.

The various provisions of the Companies Act relating to minority protection have to be examined in the above background if their true content is to be discovered. Chapter VI deals with "oppression and mismanagement". Section 397 enables the minority shareholders to approach the court with a grievance that the company's affairs are being carried on in a manner oppressive to them, and s. 398 provides for a like complaint that the affairs of the company are carried on in a manner prejudicial to public interest or to the interests of the company. Oppression or mismanagement, in the context, have been understood as conduct involving lack of probity or bona fides. When the directors of a company with their majority support conduct themselves in a manner inequitable, i.e., when their conduct is tainted with lack of probity or selfish interest (as distinct from the interests of the company and the public), the court can step in and rectify matters. What lies behind the statutory provisions is a breach of the fiduciary duties the majority is supposed to honour and the basis of the complaint itself is that there is a breach of such duties. Section 408 confers a similar power on the Central Govt. to rectify matters, if the minority is able to satisfy that authority that similar circumstances verging on breach of trust are there. Winding up is another remedy available to minority shareholders when they find that those in management of the company have failed in their duties, some of which are statutory and some, fiduciary. Section 433(f), in particular, makes a provision for winding up on "just and equitable" grounds. Section 542 is an instance where even a single contributory can approach the court, in the course of the winding up of a company, for a declaration that the persons in management be held liable for fraudulent conduct of business. Misfeasance proceedings contemplated by s. 543 are also intended to assess and recover damages from persons responsible for a misapplication of the company's funds and properties, and for breach of trust. The thread running through all these provisions is the existence of a duty on the part of those in control of the affairs to conduct themselves more or less like trustees, and a liability to account when they are in breach thereof. When the majority of shareholders find that the directors are acting improperly or that the company's affairs are mismanaged, they could remove the directors in a general meeting; they need not go to court. But when the minority has a similar grievance, all that they can do is to approach the court. The provisions are thus intended to protect minority interests on the footing, and on the only footing, that their rights are being trampled upon in an inequitable or unconscionable manner. They are thus exceptions to the rule in Foss v. Harbottle [1843] 2 Hare 461, that a minority cannot ordinarily invite the court to look into the internal affairs of a company. And each of the exceptions rests on the principle that dishonesty, fraud, want of good faith, misfeasance, breach of trust and the like are remediable in equity, irrespective of contractual obligations.

The provisions of ss. 235 to 251 dealing with "investigation" recognise only another form of the remedy available to the minority shareholders. While ss. 235 to 237 deal with the circumstances under which investigation could be ordered, ss. 238 to 241 deal with inspectors, their powers and the report they have to make. Once the report is made, follow-up measures are contemplated by ss. 242 to 244. Section 242 provides for the prosecution of those found criminally liable. Section 243 empowers the Central Govt., through a person authorised by it, to apply for a winding-up on "just and equitable" grounds or to apply for the removal of the oppression and mismanagement. And s. 244 conceives of proceedings in misfeasance. The purpose of the investigation is thus to find out whether those in charge of the affairs of a company are guilty of illegal conduct or of conduct trenching upon breach of fiduciary obligations. That is way s. 237(b) speaks of unlawful purpose, fraud, oppression, misfeasance and misconduct. Whether it be under s. 235 when the Central Govt. acts on the application of a group of members, or under s. 237 when it acts suo motu or under orders of court, the machinery for investigation is to be set in motion only in the context of a complaint regarding breach of duties which equity has imposed on the majority.

If the above be the true position, it follows that in proceedings under s. 237(a)(ii), the court will look into only those allegations which have a bearing on the fiduciary duties of the majority, or their duty to abide by the law. of course, the court need not satisfy itself that the allegations are true, it is enough if a prima facie case is made out. No investigation can be ordered merely because the petitioning shareholder feels aggrieved about the manner in which, the company's affairs are being carried on, or because the court thinks that they could be better managed. The remedy being equitable, the court has also to satisfy itself that the petitioner has come to court bona fide for obtaining redres-sal, and not for any other purpose. An isolated instance of mismanagement, already remedied, could not also justify the passing of an order under s. 237(a)(ii).

As to the facts of the case, the petitioner is a shareholder of the Mathrubhumi Printing and Publishing Company Ltd., Calicut, a company engaged - in the printing and publishing of, mainly, the Malayalam daily newspaper "Mathniobhnmi" from Calicut, Cochin and Trivandrum. The late Mr. V. M. Nair was the managing director of the company till his death in May, 1977. He was occupying that position at least from 1958 and on his death, there was a change in management. One M. J. Krishna Mohan succeeded him and continued in office till November, 1979, when he too passed away. The present managing director is a cousin of Krishna Mohan, The company petition was filed in June, 1979, i.e., after the death of Sri V. M. Nair and while Krishna Mohan was alive. The petitioner was the advertising representative and special correspondent (or part-time news reporter) for the newspaper at Bangalore. The arrangement regarding news reporting was terminated in February, 1978. The advertising agency was also terminated by April 1, 1979. He had filed a suit against the company ; that was dismissed, but the matter is pending in appeal. He had raised certain claims before the Labour Court and there he succeeded ; but the company has challenged the decision in writ proceedings. An industrial dispute, and a criminal complaint filed by the company against him, are also said to be pending. What is relevant to notice is that the relationship between the petitioner and the present management of the company is somewhat strained, and that the company petition itself was filed soon after his advertising agency was terminated. And, if the proceeding of the 56th annual meeting of the company is any guidance, there are at least two groups among the members, one supporting the present management and another loyal to the old.

Though a number of allegations are raised in the petition, Mr. Ramanatha Pillai for the petitioner pressed only some of them at the hearing ; and I am dealing with only those allegations.

The first relates to the alleged theft or loss of newsprint. At the 54th annual meeting held on January 29, 1977, a member complained that a large quantity of newsprint belonging to the company was stolen and sold in black market by some people. Since the management took no action, the question was again raised at the 55th meeting held on March 27, 1978. A committee was thereupon appointed to go into the matter and at the 56th annual meeting, the convenor of the committee informed members that there was a prima facie case. These are the bare averments in para. 3 of the petition. There is no allegation that the directors or their friends or relatives were involved, or that the management attempted to cover up the matter. At the most, the allegation is that there was some theft or loss some time during 1975-76 and that the management has failed to take any action.

Exhibit A-2 is the report of the committee. It is dated July 21, 1979, and was made available to the company in August, 1979. The petitioner was examined as P.W. 1 in January, 1981, and by this time he could refer to its contents also. Still, all that he has said in evidence is that 7 to 8 tons of newsprint were stolen or otherwise lost in 1974, and that in spite of Ex. A-2 report, the management has not taken any action.

Exhibit A-2 shows that according to the then manager, Sri Krishnan Nair, he was authorised to dispose of waste newsprint (discoloured, sticky, broken, with no tensile strength), and that he had allowed the watchman, Beeran Haji, to keep a lorry load in a separate godown, pending disposal, as the company's godowns were full. The value of the waste was fixed by the press superintendent and, after sale, the proceeds were made over to the company. Beeran Haji, however, was not sure whether the reels were waste. The committee came to the conclusion that the transaction was not above suspicion, though there was no evidence of theft as such ; it was not at any rate impressed by Sri Krishnan Nair's version. It is even possible to think that in the opinion of the committee, Krishnan Nair was in some way responsible for the loss. The committee also noted that after the alleged incident, the machinery for dealing with waste newsprint had been improved. There is also evidence to show that waste can legitimately go up to 12%, that the percentage for the company during the relevant period was around 9%, and that all the rest of the paper was used and accounted for as good quality, according to the Audit Bureau of Circulation. Even assuming that the allegation of theft or loss is true, and that Ex. A-2 contains any specific finding, it is difficult to see what useful purpose would be served by ordering an investigation at this distance of time into an alleged theft of 1974. The petitioner was aware when he came to this court that the committee was looking into the matter ; it was not as if the management had hushed it up or had failed to take any action. Exhibit A-2 discloses that even if there was some scope for malpractice in 1974, the machinery for dealing with waste newsprint has since been strengthened and streamlined. The committee itself does not place the blame on the directors then in management; and the matter was allowed to be raised and discussed at three general body meetings, suggesting thereby that there was no attempt to stifle minority criticism or to suppress anything. In any event, the material available is insufficient to disclose a prima facie case regarding breach of fiduciary duties. I may add that the petitioner himself had suggested at the 56th meeting that a "memorial" be created to honour ex-manager, Krishnan Nair, for the valuable services rendered by him while in service.

The next complaint is about irregularities and corruption in the purchase of a flat at Bombay. All that is stated in para. 4 of the petition is that there was such an allegation and that the committee had enquired into it. The petitioner's evidence as P.W. 1 does not also take us any further. Exhibit A-2 shows that the flat was purchased during the tenure of Sri V. M. Nair, and that the administrative officer of the company was responsible for negotiating the deal. According to this officer, he had acted under the instructions of Sri V. M. Nair. The majority of the committee recorded that though this could not be verified, as Sri Nair was no more alive, there was reason to think that sufficient care was not taken. One of the members of the committee dissented, and indicated that the attempt was only to malign the old management. The company's lawyers, who examined Ex. A-2 report, expressed the opinion that there was nothing but suspicion and no action could be taken on its basis. After a careful reading of Ex. A-2, I am inclined to agree with this view. Of course, the majority had made an observation in Ex. A-2 report that the title obtained was not perfect and that the full consideration was paid before getting the title deed. When Mr. Ramanatha Pillai high lighted this aspect at the hearing, I directed the management to produce the title deed. But when it was produced along with certain other documents, it was contended that production of documents at that stage could not be allowed. I am not inclined to take such a technical view of the matter because if that be the case, most of the allegations in the petition could only be considered as vague and unspecific. Some of them could not even be considered as allegations. The petitioner's attempt may be to settle some scores with the present management, but so far as the court is concerned, the attempt should be to find out whether the mino rity shareholders have anything real to complain of. I am, therefore, marking the documents as Exs. C-1 to C-10. The title deed, Ex. C-1, dis closes that transfer of flats in Bombay was being made by transferring shares in the building company and that the company herein acquired the concerned shares on the day the consideration was paid. Sri V. M. Nair himself has signed Ex. C-1. The flat is admittedly in the exclusive and undisturbed possession of the company. On the materials available, therefore, I am unable to hold that misfeasance, misconduct, breach of trust or fraud have been established, prima facie, in regard to this trans action.

Another case is about the writing off of large sums as bad debts, and the allegation in the petition is only this :

"It is also seen from Ex. P-1 proceedings that large sums are written off in the financial year to which Ex. P-1 relates."

There is no complaint, at least in the pleadings, that the amounts were recoverable, or that they were written off in order to benefit the directors or their favourites, or that the action was in any other way irregular or improper. Exhibits C-2 to G-10 show that the Board had decided to write off the amounts concerned at three different sittings. The amounts were outstanding from advertisers, agents and other people numbering about 160, Exhibit P-1 referred to in the petition is Ex. A-1 minutes of the 56th annual meeting; and the only question at the meeting relating to writing off was whether charges for printing the Janata Party posters for the Chickmaga-loor election were also included in the amounts written off. The suggestion was denied and it was pointed out that the election itself was held during the previous financial year and that printing charges for posters had been fully realised. An Interesting interlude was a suggestion by someone that only printing charges due from the Congress party were being written off in the past. The amount written off during the year in question was Rs. 1,02,623. For the year ended July 31, 1977, the amount written off was higher. A large amount is seen written off during 1979-80 also. Taking into account the business turnover and the accounting practice of the company, it cannot be said that anything unusual had taken place during Ex. A-1 year. The auditors had raised no objection and the general body had approved the accounts. In my opinion, this allegation of the petitioner is devoid of any merit.

The next grievance relates to the purchase of some land at Trivan-drum. There was no reference to such a complaint either in the petition or in the reply affidavit filed in September, 1979. The point was raised in para. 4 of the reply affidavit dated October 23, 1980, in the following manner :

"It may also be kindly noted that Sri Damodaran who is found to be one of the employees responsible for the deal in respect of the purchase of the flat in Bombay has again been allowed to participate effectively in the transaction regarding the purchase of property by the company in Trivandrum which again is a reckless venture whereby the company is put to loss."

The evidence of P.W. 1 is to the effect that the land was purchased for starting the Trivandrum edition of the newspaper and that it is kept vacant, while the Trivandrum edition is being published from some other premises. There is also a statement that more than one lakh of rupees was spent for acquiring land in a marshy area. But when it came to argument, the point stressed was that it was an unwise policy to have acquired land and then depended on other premises for the Trivandrum edition. The company has produced documents to show that land in the neighbourhood is being sold at three times the rate it had paid. It is also explained that the equipment and machinery for the Trivandrum press had arrived, and that their erection and the publication of the Trivandrum edition could not have been postponed. The evidence discloses that about one crore of rupees was set apart for the Trivandrum edition, and that there was a prolonged strike and lock-out in the meanwhile. There is thus no material to hold that the investment of about a lakh of rupees in land, to be eventually used for housing the Trivandrum project, was a reckless venture or a foolish adventure.

Paragraphs 5 and 5A of the petition deal with another charge, and that relates to the appointment of one Sri Manakalath as public relations manager of the company in June, 1978. It is alleged that he was appointed without a board resolution and without inviting applications for the post, and that lie was allowed to draw large sums as T.A. advance without vouchers. It was, however, conceded at the hearing that the managing director was competent to appoint such officers without the Board's sanction and that there was no practice of inviting applications for such posts. The person concerned was working at Madras as the company's advertisement representative, and there is evidence to show that his appointment as P.R.M. was followed by an increase in advertisement revenues. The main attack was directed against payment of advances. R.W. 1 has given evidence that all payments were effected only against vouchers and that bills and accounts were being subsequently presented, verified and adjusted. The auditors have raised no objection. The reports of the directors and auditors, as also the balance-sheet and profit and loss accounts, were duly passed during every year. Counsel referred to some discrepancy in one of the answers given at the 56th annual general meeting, but the control and supervision of finances and accounts should normally be left to those in charge and the auditors, subject to acceptance by the general body. There is no evidence regarding any particular disbursement or voucher, even if such a matter could be gone into in proceedings like the present.

Another matter raised in paras. 5 and 5A concerns the appointment of one C.G.K. Reddi as adviser. The allegation is that he entered into an agreement with a foreign concern for the monopoly supply and distribution of the company's publications and that this was done without the sanction of the Reserve Bank and to the detriment of the company. My attention has not been drawn to any passage in the evidence of PAY. 1 dealing with want of Reserve Bank sanction or detriment to the company. All that was said by P.W. 1 was that the agreement had not benefited the company and that there was some litigation. It was also added that there was no board resolution authorising Sri Reddy to enter into the contract. The company's answer is that Reddy was appointed as adviser for one year for modernising the company and planning the Trivandrum project. He had acquired experience as general manager of the "Deccan Herald" and as business manager of the "Hindu". The evidence of R.W. 1, along with the documents produced, show that Reserve Bank permission had been obtained, that the agreement was entered into with the full concurrence of the managing director after effecting modifications suggested by him, and that the arrangement had come to an end within a matter of days because of some ban ordered by the U.A.E. government. There is no evidence of litigation loss, detriment, illegality or even unauthorised dealing. This complaint should also, therefore, fail.

Another allegation which, if proved, would have been a matter of some substance, is about the appointment of one Sri P. V. Chandran as the director of the company. What is argued is that he was a partner in a firm of advertisers with which the company had dealings, and that he was appointed in violation of s. 299 of the Companies Act inasmuch as his interest in that business was not disclosed. But the allegations in paras. 9 and 9A of the petition make no reference to s. 299, but only to the extending of credit facilities to the firm as a "non-accredited" advertising agent. From the evidence, however, it is clear that such agents are also given credit facilities, though for a shorter term. The decision to appoint Sri Chandran as director was taken at the board meeting held on May 14, 1978 ; he was not present at the meeting. Exhibit B17 dated July 14, 1978, is a letter from Chandran, in reply to the company's letter dated June 2, 1978, disclosing his interest in the firm. R. W. 1 says that though the firm was a valuable customer, no fresh contract was given to it after Sri Chandran was appointed as director. He resigned from the firm by the end of March, 1979. Violation of s. 299 is thus not made out.

Paragraph 7 of the petition complains of the company's attempt to borrow one crore of rupees, when it has a paid up capital of less than nine lakhs only. The interest liability would be too much for the company, it is averred. It is added that "in the peculiar circumstances now obtaining in the company, there is every reason to suspect the bona fides of the management in the matter". The company's answer is that newspaper business had become highly competitive with other papers like Malyala Manorama starting editions from different centres and that it was, therefore, decided to expand the company's business by starting a Trivandrum edition of the Malhrubhumi and that the borrowing was intended to raise funds for the purpose. The decision to borrow was actually taken at an extraordinary general meeting held on June 23, 1969. It was unanimous and the petitioner was also a party to it. If this be the true position, I fail to see how he could challenge the bona fides of the decision, and how it could be said that that anyone is guilty of breach of fiduciary duties.

The last complaint is that "information regarding the affairs of the company and its working are purposely withheld from the members"; and the company's answer is that members of the company have access to all the records of the company as laid down in the Companies Act. P. W. I has no case that any particular information he wanted has been withheld. What is suggested by counsel is that some of the questions asked by members at the 56th meeting (Ex. A-1) remained unanswered. Disclosure is no doubt one of the fundamental principles underlying the formation and working of a company. Members have a right to know how the company's affairs arc conducted. Creditors would also like to learn about its financial position. Even members of the public are interested, at least from the point of view of future investment. The Companies Act, therefore, provides for maintenance of registers, books, records and for publication and compulsory disclosure of accounts duly audited. Every company should have a registered office and that office must maintain the memorandum and articles of association, register of directors, of members, and other books and files regarding share capital and other matters. The accounts should be audited every year and annual returns are to be submitted. Charges should be registered. All these are available for inspection by members of the company and even by the public. The audited accounts have to be placed before the annual general body for the information of the members. The directors have to report every year to the shareholders in general meeting. Extraordinary general body meetings are also held. These are some of the provisions of the Act which insist on supply of information to members and others. But that does not mean that every question asked at every general meeting should be forthwith answered, without even considering whether they relate to the affairs of the company as understood in law, and whether it would be possible to answer such questions without due notice. A business organisation like a company cannot function like a legislative assembly, if only for the reason that the powers of the directors and the members in general body are denned. Section 237(b)(iii) speaks of "information with respect to its affairs which they might reasonably expect", i.e., the information sought for must be about the affairs of the company and something which could reasonably be expected to be supplied. No attempt has been made before me, either in the course of evidence or at the hearing, to point out that any particular information of such a character has been withheld.

On an anxious consideration of the materials on record and the arguments advanced, and even overlooking the unsatisfactory nature of the pleadings, I am unable to hold that circumstances suggesting the existence of fraud, illegality, misfeasance, misconduct, etc., have been made out even prima facie, so as to relax the rule in Foss v. Harbottle [1843] 2 Hare 461 and direct an investigation into the internal affairs of the company. The company petition is, therefore, dismissed, but without costs.

[1981] 51 COMP. CAS. 634 (DELHI)

HIGH COURT OF DELHI

Ashoka Marketing Ltd.

v.

Union of India

T.V.R. TATACHARI, C.J.

AND S. RANGANATHAN, J.

Civil Writ Petition No. 918 of 1974

APRIL 26, 1978

A.K. Sen , Mrs. Leila Seth and B. Mohan for the Petitioner.

K.M. Kataria for the Respondent.

JUDGMENT

S. Ranganathan, J. —This is a writ petition filed by Ashoka Marketing Ltd. (hereinafter referred to as "the company" or AML) for the issue of a writ of certiorari to quash the orders passed on December 31, 1973, June 26, 1974, and July 2, 1974, by the Company Law Board (hereinafter referred to as "the Board") and an order dated July 2, 1974, passed by the Government. The Union of India and the Secretary, Ministry of Law, Justice and Company affairs, have also been made respondents.

The order dated December31, 1973, passed by the Board is an order under s. 237(b) of the Companies Act, 1956, appointing a firm of chartered accountants as inspector to carry out an investigation into the affairs of the company during the period from March 1, 1966, to December 31, 1973, and "to report thereon to the Company Law Board pointing out, inter alia, all irregularities and contraventions of the provisions of the Companies Act, 1956, and of any other law and the person or persons responsible for such irregularities or contraventions" on or before June 30, 1974. The reason why the Board considered this action necessary appears from the first paragraph of the order which contains the preamble:

"Whereas in the opinion of the Company Law Board there are circumstances suggesting that the persons concerned in the management of the affairs of the company have in connection therewith been guilty of fraud, misfeasance and other misconduct towards the company and its members".

Which is nothing more than a repetition of the language of s. 237(b)(ii) as to the circumstance warranting the appointment of an inspector under that provision. The grievance of the company is that there were no such circumstances in existence on the basis of which the Board could have formed such an opinion or ordered such an appointment. In the writ petition, the company has sought to substantiate its plea on the basis of the following allegations.

The company had been incorporated in 1948 and was carrying on business as traders, exporters, selling agents, dealers in stocks, shares and investments and for some time in the manufacture and sale of plywood. It had also recently commenced a business in the manufacture and sale of electronic goods. It had built up a very efficient and effective organisation and had been carrying on its business and activities scrupulously in accordance with law. It has a respectable board of directors. It maintained regular books of account and records; its turnover was increasing from year to year; its profits were reasonable and it was also declaring reasonable dividends. While so, on April 11, 1963, the Govt. of India ordered an investigation into its affairs under ss. 237(b) and 249(1) of the Companies Act, 1956, but this order was quashed by the High Court of Calcutta by its judgment dated March 7, 1969. In the meantime, the Registrar of Companies had been making several enquiries and, to the understanding of the company, he was satisfied with the information and explanation given to him. In September, 1972, the Board, acting under s. 209(4)(b)(ii) of the Companies Act had appointed one Sri Sooraj Kapoor, to inspect the company's books. He had also called for explanation, information and books from the company. The company's affidavit specifically avers in para. 7:

"So far as your petitioner is aware there has been no complaint by the inspector of any fraud and/or misfeasance and/or misconduct and/or irregularity and contravention in the business or affairs of the company, Nor had, to the knowledge of the company, any shareholder or creditor of the company made any such allegation.

In these circumstances, the order dated 31-12-1973 was without any basis or justification".

It is pointed out that the order does not set out any circumstance or material leading to the formation of the opinion expressed therein. Therefore, soon after the order was received on 7-1-1974, the company applied to the board for a review of the order setting out all the above facts, pointing out that the provisions of s. 237 were drastic and should not be commenced "unless there are satisfactory grounds supported by relevant and cogent materials and evidence" and without such materials an inspector should not be given "arbitrary and untramelled powers to make a fishing inquiry and to investigate into any affair of your petitioner which is not authorised under the law" during the period from March 1, 1966, till the date of the order. The company offered to furnish any information that may be needed in respect of any particular transactions and prayed that the order for a general investigation be cancelled. This petition was rejected by the Government and the Company Law Board and hence this writ petition by which the petitioner requests this court to quash the order u/s. 237(b) dated December 31, 1973, the letter dated June 26, 1974, by which the Company Law Board extended the period for the inspector's report till December 31, 1974, and the orders dated February 2, 1974, by which the Board and the Company Affairs Dept. of the Govt. of India declined to review the order dated December 31, 1973.

Perhaps all that a company could do at this stage was to deny that there were any circumstances justifying action u/s. 237 in its case, for the Board does not take the company into confidence or indicate to it the basis for the action taken by it. It is, therefore, of the greatest importance that when a company approaches the court with a writ petition, making out a prima face case that the action u/s. 237 was not justified, the Board should place before the court all the circumstances available to it on the record on which the opinion has been formed that the persons in management were guilty of fraud, misfeasance or misconduct towards the company and its members. Unfortunately, in this case, the stand of the Board has been put forward piecemeal in its original counter-affidavit and two supplemental counter-affidavits filed by it, one before the hearing of the case started and the other at a considerably advanced stage of the hearing. The company has also filed more than one rejoinder. In order to understand the full facts, we have to consider the following seven affidavits, which we shall, for convenient reference, designate as A-1 to A-7:

A-1.

Reply affidavit of respondent

dt.

31-7-75

A-2.

Rejoinder of petitioner

"

25-8-75

A-3.

Further rejoinder

"

28-10-76

A-4.

Supplemental reply of respondent

"

7-12-76

A-5.

Further rejoinder of petitioner

"

22-12-76

A-6.

Further reply of respondent

"

13-1-78

A-7.

Final reply of petitioner

"

24-1-78

The case against the company was first spelt out in A-1. In para. 10, it was stated that the order in the instant case had been passed on the basis of seven transactions of the company which had come to the notice of the Board:

        1. Surrender of the sole selling agency of Jaipur Udyog Ltd.

        2. Purchase and sale of the undertaking of Albion Plywood Ltd.

        3. Sale of certain shares at a loss.

        4. Investment in low yielding debentures.

        5. Sale of jeeps at a loss.

        6. Unsecured loan of large amounts to closely connected persons and

        7. Write off of three loans.

As a general preface to these charges it was stated that the company was one of twelve companies that belong to a group known as the Sahu Jain group and it was a common tendency of common block shareholders of such group concerns to benefit each other even if at the cost of the other shareholders, We have to examine by taking up each of these "charges" seriatim and analysing the averments of the parties, whether circumstances have been made out to sustain the action taken by the Board.

General charge

According to A-1, the petitioner belongs to a group of companies known as "Sahu Jain group". It is stated that, according to the report of the Monopolies Enquiry Commission, 1965, a group of 26 companies has been said to belong to this business house and that, according to the report of the Industrial Licensing Policy Enquiry Committee, 1969, there were 29 such concerns. The respondent has referred to 12 concerns which are mentioned in both the reports and alleged that they belong to the Sahu Jain group. These concerns are, besides the petitioner (AML), Albion Plywood Ltd. (APL), Bharat Oversees Pvt. Ltd. (BOL), Hindustan Vehicles Ltd. (HVL), Jaipur Udyog Ltd. (JUL) Mahespur Holdings Ltd. (MHL), Parshya Properties Ltd. (PPL), Rohtas Industries Ltd. (RIL), Shree Kesaria Investments Ltd. (KIL), Shree Rishab Investments Ltd. (SRIL), New Central Jute Mills Co. Ltd. (NCJ) and Bharat Nidhi Ltd. (BNL). After setting out the names of these concerns, A-1 alleges "a common tendency of such shareholders/directors in these concerns to benefit each other even if at the cost of the other shareholders of the concern".

In reply to the above, the petitioner-company has stoutly repudiated the existence of any such group as alleged. It is stated that though a notice was given by the Dept. of Compay Affairs in 1974, calling upon the petitioner to show cause why action under s. 48(2) of the Monopolies and Restrictive Trade Practices Act, 1969, should not be taken for default in compliance with the provisions of s. 26 of the said Act, the proceedings were dropped by a decision communicated on 26th April, 1976. In other words, the same Dept. of Company Affairs had accepted the position that no case had been made out for treating these concerns as inter-connected.

Apart from the fact that the respondent has not answered the point made in the reply or given details to show that AML is one of the concerns belonging to a closely knit group along with the 11 others we are of opinion that this general allegation made in A-1 is not helpful in determining the issues in the present case. Merely because certain companies are said to form a group and there are transactions between these companies, it cannot be presumed that the transactions are mala fide or that they were entered into with a view to defraud or otherwise act in a manner detrimental to some or all of the concerns. No doubt, in considering the nature of a particular transactions, or the purpose and motive behind it, the relationship between the parties may be a relevant consideration and while examining the seven specific charges made against the company, we shall keep this aspect also in mind to see whether there has been any attempt to act to the detriment of AML with a view to benefit any of the other concerns mentioned. But, all that we would like to observe here is, that the approach indicated in A-l, of starting with a presumption that there must be necessarily something wrong because the transactions are between companies of the same group, is not correct. The general charge formulated in A-l, therefore, cannot, by itself, be a ground justifying the action under s. 237, in the present case, unless it is substantiated with reference to one or more of the other seven charges.

Charge No. 3: Sale of shares at a loss.

It will be convenient to take up the first two charges last. Taking up the third charge first, the complaint against the company is that between September, 1968, and February, 1970, it sold at a huge loss some of the shares held by it in NCJ, APL, HVL, MHL and KIL. The sale was at an unnecessarily low price (lower than the market price) and, in the case of two concerns, was of the controlling interest therein. So, it is alleged this transaction was "prima facie" against the interest of the company.

The factual position that emerges from the various affidavits in regard to these sales is as follows:

(a)        In the case of NCJ, the shares were sold at rates varying from Rs. 4.40 to Rs. 4.50 per share as against the face value of Rs. 10. Though according to the respondents, NCJ had large reserves and had also earned good profits, it is admitted that the shares are quoted on the stock exchange and that the market quotations for the shares at the relevant time ranged between Rs. 4.56 to Rs. 4.62 per share. The claim of the petitioner-company is that the shares were sold at the rates quoted at the Calcutta Stock Exchange and this statement has not been denied by the respondent. Further, it is pointed out that even on the basis that they had been sold at rates slightly less than the market value, the transaction was still beneficial to the company inasmuch as the value of the shares fell from Rs. 4.50 this year to Rs. 3.75 in the subsequent year and, if the company had not sold the shares when it did, the loss would have been even greater.

(b)        In the case of APL and HVL, it is common ground that these concerns had been incurring huge losses and that their shares were worth less. Forced to admit this position in A-4, the respondent would still find fault with the petitioner for having sold thirty-five thousand shares of HVL "for a nominal amount of Rs. 3,500" 'alleging vaguely that this "conveys no sense except of getting the set-off against profits for the purpose of taxation".

(c)        In regard to the MHL and KIL, the shares are not quoted on the stock exchange. The allegations of the respondent that these were transfers of controlling interest is not correct. The number of shares sold were 23,000 out of 50,000, in the case of KIL, and 16,000 out of 35,000, in the case of MHL. There is no allegation that the petitioner had earlier transferred shares in these companies to the same person or associated person so as to give them controlling interest. Regarding the price, the complaint is that the shares were sold at Rs. 2.55 and Rs. 2.80, respectively, although the break-up value of the shares would have worked out to Rs. 15.71 and Rs. 11.58, respectively.

A study of the above facts would show that the charge that the petitioner had sold the shares at less than the market price is not borne out by the material on record. This is very clear in the case of the first three companies. In the case of the last two, no doubt, the sale price is less than the alleged break-up value. But in the case of a private limited company, the break-up value does not always or necessarily furnish a correct clue as to its market value at any particular point of time: [CWT v. Mahadeo Jalan [1972] 86 ITR 621 (SC)]. There is no other material to indicate that the actual sale price did not represent the value which those shares could realise in the open market on the respective dates of sale though the companies whose shares were sold are said to belong to the Sahu Jain Group, that fact is of no significance as the sale does not benefit those concerns. Nor is there any allegation that these shares have been transferred to other companies of the same group at a favourable price to benefit them at the cost of the petitioner-company. In regard to this charge, therefore, no circumstances have been shown to exist which could lead to the formation of an opinion that there has been some fraud, misfeasance or misconduct on the part of the management of the petitioner-company.

Charge No. 4: Investment in low yielding debentures.

The purport of the charge against the company under this head is not clear. The allegation in A-1 is in the following terms:

"In June, 1970, the company purchased from Sri P. Jain, Smt. Indu Jain, Smt. Shushila Jain, the Bhartiya Gyanpit and the Universal Trust certain debentures worth Rs. 10 lakhs yielding 8% per annum, whereas the loans of the company yielded 11% per annum".

The above allegation can mean one of two things. The first is that, whereas certain other investments made by the company by way of loans yielded an interest rate of 11% per annum, the debentures in question yielded only 8%. But if this were the charge against the company, that would not be sufficient to attract action under s.237. All the funds held by the company cannot be invested so as to yield the same return. Merely because on some investments by way of loans, the petitioner has been able to get 11% interest, the inference does not follow that an investment in debentuces yielding 8% must be the result of some fraud, misfeasance or misconduct on the part of the directors. There is no material to suggest that all the investments of the company were yielding 11% interest and despite similar investments being available readily, the petitioner-company purchased these "low rate" debentures to oblige the vendors. It is also not alleged that funds yielding higher return were withdrawn for making these purchases to the detriment of the company.

The other possible interpretation of the allegation is that, whereas the company had received advances and deposits and paid interest thereon at 11%, it has invested the funds drawn from those advances and deposits in debentures which yielded a smaller return. This contention is met by A-2 which points out the fallacy in the above line of reasoning. There is no material to correlate the funds invested by the company in the above debentures with the loans taken by it on payment of interest at 11%. The resources of the company were not limited only to such loans. The company had received advances from its customers on which it paid no interest whatever. It has security deposits on which it was paying interest at only 6 to 6 1/2%. The surplus funds of the company had to be invested and there is no material to suggest that the investment in these debentures was in any way motivated. In fact, the charge does not even allege that the purchases were made to benefit the vendors who, it would appear, may be connected with the directors of the petitioner-company. In these circumstances, therefore, no circumstances have been brought to light for drawing an inference of fraud, misfeasance or misconduct.

For the first time, in the reply affidavit, A-4, the respondent, took a fresh point that the debentures purchased by the company were those of PPL which, in the year ended January 31, 1970, had incurred a net loss of Rs. 596 lakhs as against its paid up capital of Rs. 5 lakhs. It will be seen that this is a totally new charge. The original allegation against the company was only for having made an investment yielding a smaller return and did not even mention the name of the company whose debentures were purchased. However, A-4 attaches importance to the name and seems to doubt the solvency of the company the debentures of which have been acquired, perhaps also because it is one of the concerns of the group according to the respondent. But this criticism has not been made out by reference to the balance-sheet position of the said company. As its name indicates it appears to be a property holding company. There is no information regarding its assets and liabilities. In the case of a property company it is not unusual that there are only losses in working in the initial stages of its development before the income from the properties constructed or held by it starts flowing in. Moreover, debentures are secured loans and there is not an iota of evidence placed to show that these debentures were worthless. The fact that PPL is a company of the group will not, per se, render the debentures worthless or the purchase motivated. A-4 has only attempted to voice a suspicion of bona fides but backed it by no material on record. Here also the respondent has failed to make out the existence of circumstances to show that in purchasing these debentures, the directors of the company have been guilty of any fraud, misfeasance or misconduct towards the company or its members. Charge No.5: Purchase and sale of jeeps.

The allegation is that in November, 1966 and January, 1967, the company purchased twelve jeeps. Seven of these were sold in March, 1967, and two more in October, 1967. The company incurred a loss of Rs. 47,000 on the purchase and sale. The jeeps had been insured only from January to August, 1967. The accounts of the petitioner did not show any expenses in respect of petrol during the year 1967. From these facts, the inference is sought to be drawn that the purchase of the jeep was not for the purposes of the business of the company and that the transactions were not in the interests of the petitioner-company.

The company's plea is that the jeeps were purchased and sold under the authority of resolutions passed by the board of directors. The transaction was in the ordinary course of business of the company and in order to ensure its smooth running. Though the exact manner of utilisation of these jeeps had not been indicated in the affidavits, Sri Sen submitted that the transaction should be judged in the light of the fact that it was put through at the time of the general elections, that the jeeps were purchased in business interests, "in order to ensure the smooth running of the business of the company" and that no mala fides were involved in the transaction.

We are unable to see how this transaction can attract the impugned action by the respondent. As suggested by Sri Sen, there is an explanation for the purchase of the jeeps and their disposal within a short time. But, even disbelieving this explanation and assuming the worst, it is a mere instance of purchase and sale by the company of a certain asset which resulted in a loss to the company. It has not been explained in what manner this transaction reveals fraud, misfeasance or misconduct on the part of the persons concerned in the management of the company. There is no allegation that these jeeps were intended for or utilized by those persons or that they were sold to them or to other concerns of this group in which they were interested at concessional rates or the like, Except that the company had entered into an imprudent transaction, there are no circumstances of the nature outlined in s. 237(b)(ii).

Charge No. 6: Loans to certain individuals

The respondent has taken objection to the advances of loans by the petitioner-company to a number of persons "who belonged to the Sahu Jain group" to the extent of Rs. 1.26 crores. In particular, it is stated that loans to the extent of Rs. 68.75 lakhs were advanced to one R.G. between August, 1968, and March, 1972, and that similar loans were also advanced to A.P.J. From these persons Rs. 20 lakhs and Rs. 95 lakhs, respectively, remained due to the petitioner.. The answer of the company is that the petitioner had vast resources by way of deposits from stockists and advances from customers. The investment of these funds among others by way of loans was part of the business of the company. These were loans carrying a high rate of interest (as admitted in para. 10(4) of A-1), and were repayable on demand. It has been denied that any loan in excess of Rs. 20 lakhs was given to R.G. In the case of A.P.J. only Rs. 4.45 lakhs was due and, in the case of R.G., the entire amount of the loan was repaid by 6th November, 1974.

The petitioner's reply that these are loans earning a high rate of interest has not been denied. In fact, one of the earlier charges against the company was that when these loans were earning a higher rate of interest of 11%, the debentures of P.P.L. carrying 8% interest should not have been acquired. It is, therefore, inconsistent on the part of the Board to find fault with the company also for having advanced these loans. It is not the respondent's suggestion that these persons were not capable of returning the loans or that the persons concerned in the management of the company stood to gain in some way as a result of these transactions. The loans have also been substantially repaid. In these circumstances, we fail to see how this transaction can attract action under s. 237(b)(ii).

Charge No. 7: Write off of three loans

According to A-1, the petitioner-company had advanced in 1963-64, three loans, one, a sum of Rs. 50,000 to Sri K.L.M., two, Rs. 30,000 to Sri T.H.K. and three, Rs. 15,000 to Shri H.K.M. Neither these loans nor any interest thereon was recovered from these persons though the interest itself was quite substantial and amounted to as much as Rs. 46,553. No efforts were made to recover them and a major part has been written off.

The explanation given by the company is that these were very respectable and prominent persons in public life. One of them was a counsel for the company and one of them held a high office in the State of Orissa. When they were in some financial difficulty, the company advanced certain loans to them. But the circumstances were such that the loans could not be repaid. It was embarrassing for the company to take legal proceedings against them. However, some efforts for recovery were made. In the case of Sri T.H.K., Rs. 25,000 were recovered and only Rs. 5,000 had to be written off. The other two, however, became bad debts and were written off in 1973.

All that the materials placed on record discloses is that the petitioner-company advanced certain loans which became irrecoverable and had to be written off. The persons to whom the monies were lent were not relatives or associates of the persons concerned in the management of the company. They were outsiders and influential people to whom the company, bona fide, though perhaps imprudently, as events turned out later, advanced certain monies which had to be written off. We are unable to conceive how this transaction of the company can be made the basis of a charge of fraud, misfeasance or misconduct on the part of the directors, etc., towards the company or its members.

We shall now take up the first two charges which are the most important. Shri Kataria, in particular, has placed considerable reliance on the first charge as sufficient by itself to warrant the action taken. As will be seen later, there is an inter-connection between the two transactions which may have to be considered together. We shall, however, set out the facts discussed in respect of each of these charges separately and then discuss the resultant position that emerges.

Charge No.1: Surrender of sole selling agency of JUL

The allegation, as set out in A-l, was that the petitioner had been appointed the sole selling agents of JUL for the sale of cement for a period of five years from April 1, 1966. From this agency, the petitioner was deriving an annual return of about Rs. 8 to 10 lakhs. Notwithstanding this, the company surrendered the agency in favour of BOL, without receiving any compensation for the unexpired period of the agency. The transaction, therefore, was said to be, prima facie, against the interests of the company.

On behalf of the petitioner, it was pointed out by A-2 that this allegation was based on two misconceptions. The first was that the agency was extremely profitable to the petitioner-company. This was not so factually. Though the gross commission from this agency in the accounting years which ended on August 31, 1966, August 31, 1967, and August 31, 1968, amounted to Rs. 92 lakhs, Rs. 108 lakhs and Rs. 8.10 lakhs, respectively, the net income of the company from this source, after deducting the expenditure incurred for earning the said income, came to only Rs. 1.95 lakhs for the first year and there were actually losses of Rs. 65,000 and Rs. 2.24 lakhs, respectively, for the succeeding two years. Full details of the computations on the basis of which these figures were arrived at were given in A-3. It was pointed out that the New Delhi office of the petitioner looked after this business and also the work of three regional offices at Chandigarh, Jaipur and Sawaimadhopur. The work for the cement agency at these places was considerable and involved the setting up of a number of establishments with sufficient personnel to handle the work efficiently. Though the company also dealt in certain other commodities such as sale of steel pipes, plywood, paper and rubber goods, the turnover of cement was the maximum. The turnover in the other commodities varied between 1 and 2 1/2 per cent, of the cement turnover. The company, therefore, apportioned the total expenditure on the basis of turnover and deducted the same to arrive at the net figures referred to earlier. The second misconception of the respondent, according to the petitioner, was that the petitioner was entitled to some compensation for the unexpired period of the agency but had voluntarily forgone the same. This was also not correct. Under s. 294A(c) of the Companies Act, the agents were not entitled to compensation on resignation.

The respondent tried to meet the above case of the petitioner in its affidavits A-4 and A-6. The correctness of the computation of the expenditure deductible against the commission income was contested on the following grounds:

(a)        The New Delhi office of the petitioner looked after the cement agency not merely of JUL but also of other brands of cement such as Rohtas, Portland and Ashoka. The commission earned by the petitioner from JUL was 40% of the total commission earned by it in 1966-67, and 33% in 1967-68. The expenditure deductible against the commission received from JUL would, therefore, be much less than what has been claimed by the company.

(b)        The allocation of expenditure on the basis of turnover was not correct because cement was a commodity in short supply which did not require any special efforts for sale.

(c)        The expenditure taken into account by the petitioner included the interest paid by the head office which should be excluded and if this is done the net commission figures would work out to Rs. 4.12 lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 0.22 lakhs in 1968.

(d)        As a result of the surrender of the sole selling agency the petitioner-company's asset position was considerably affected. It has to call back a loan of Rs. 60 lakhs from NCI and also dispose of other investments of about Rs. 45 lakhs. Moreover, it had to meet liabilities to the extent of Rs. 268 lakhs relating to the business of the sole selling agency and in order to raise this amount it had to sell its plywood factory for Rs. 57 lakhs, sell debentures for the amount of Rs. 63 lakhs, make over loans due to it from 9 parties amounting to Rs. 43 lakhs and pay cash of Rs. 105 lakhs.

These points have been effectively met by the petitioner-company. Regarding (a) it has been pointed out that the agencies of Rohtas, Portland and Ashoka cements were not accounted for in the New Delhi books of the company but were accounted for in the Calcutta books of the company. The expenditure pertaining to those agencies was, therefore, not included in the New Delhi books. The Delhi office was having only the sale of paper, asbestos and certain other commodities in addition to the sole selling agency of JUL. It is, therefore, not correct to say that only a part of the commission accounted for in the Delhi books was attributable to the JUL agency. This contention is also borne out by the copy of account of the New Delhi office placed on record by the petitioner. The first point made by the respondent is, therefore, without force. Regarding (b) there is merely an assertion on behalf of the respondent that the sale of cement was very easy and did not call for any expenditure on the part of the company. In A-3, the petitioner-company has set out at very great length the nature of the activities and functions it had to undertake in relation to the business of the sole selling agency. A detailed analysis of the expenditure under various heads was also furnished. In the face of all these details, the mere assertion that the cement sold itself and that all the expenditure was unnecessary cannot be accepted. Point (a) made on behalf of the respondent again has not been substantiated. The interest paid by the company was interest paid by it on the advances it had received from stockists and purchasers of cement. The interest is, therefore, expenditure properly debitable against the commission income and there is no justification for excluding the same from the P. & L. account. Regarding the other plea that interest received by the head office has not been taken into account, the respondent has not placed before us the details of interest earned by the petitioner in relation to the sole selling agency, which, according to it, should have been included but has been left out of the account by the petitioner. Apart from the above lack of material we may also point out that even if, as contended by the respondent, the expenditure by way of interest is left out of account, the net profit earned from the sole selling agency would be Rs. 4.12 lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 22,000 in 1968. In other words, it was a dwindling income and the mere fact of surrender of such a source of income cannot lead to the adverse inference sought to be drawn by the respondent.

Coming now to the points made out in A-6, we find again that the company has given a satisfactory reply. So far as the recall of a sum of Rs. 60 lakhs from the NCJ is concerned, it is pointed out that the petitioner-company had advanced Rs. 1,40,00,000 to the NCJ. The Company Law Board had directed the company to recall the loan in terms of s. 370 of the Companies Act. Actually, the company applied for extension of time for the recalling of the above amounts and it was only in pursuance of the directions of the Company Law Board, dated September 25, 1968, that the sum of R. 60 lakhs was repaid by the NCJ. This point, therefore, is of no significance. As to the last point made regarding the sale of the company's assets, we may point out that the respondent is confusing between the result of the surrender of the sole selling agency and the cause therefor. Naturally, when the petitioner-company surrendered the sole selling agency, it had to repay the security amounts and advances received by it in its capacity as sole selling agents. This had necessarily to be done by disposing of some assets and by paying a certain amount of cash. It could also be that some of these assets may have been acquired out of the moneys received in the course of the sole selling agency. From the mere fact that, as a result of the transfer of the sole selling agency, the petitioner had to discharge its liabilities incurred in relation thereto by the disposal of certain assets and transfer of certain loans and payment of cash, it cannot follow that the very act of the surender of the managing agency was inspired by improper motives.

The essence of the case of the department was that the sole selling agency was a very valuable asset which no prudent businessman would give up. A point has also been sought to be made in para. 9 of A-6 that whereas 5,000 out of 15,000 shares of the petitioner-company are in the hands of nationalised banks, BOL is a private Ltd. Co., the profits earned by which go to certain individuals who are at the helm of affairs of the petitioner-company. In considering it to be a valuable asset, the respondent has gone by the figures of gross commission without allowing the deduction of any expenditure thereagainst. Even if the expenditure cannot be allowed to the extent claimed by the petitioner, some expenditure must be allowed and, even according to the respondent's figures, the income from this source was dwindling over the years. The respondent's allegation that BOL is an associated concern has been denied in A-2 and A-6 and no material to show any close connection or control has been placed on record. In A-3 and A-7, the petitioner has alleged that, early in 1968, JUL had indicated to it that they wished to terminate its agency and appoint BOL as its agents and it was in this context that they had to surrender the agency. Sri Kataria objects to this allegation made at a late stage being taken into account. There is also nothing to show that the initiative for terminating the agency came from JUL. So, we shall leave it out of account. But even ignoring all these submissions of the petitioner and taking the respondent's case at its best, all that has been made out is that the petitioner-company gave up a sole selling agency which was remunerative. But will this alone be a ground for drawing an inference that the persons in management have been guilty of fraud, misfeasance or misconduct towards the company? We think not, and this will become clearer if we bear in mind that this transaction of surrender of the sole selling agency in favour of BOL was simultaneous with another transaction of surrender of the sole undertaking of APL, which we are discussing below and consider these two transactions together. We shall, therefore, proceed to discuss the second charge against.

Charge No.2: Purchase and sale of plywood factory

The APL was a losing concern. It had sustained losses to the tune of Rs. 52.72 lakhs between October 1, 1962, to March 31, 1966. The petitioner-company had advanced loans to APL to the extent of Rs. 40 lakhs, and on October 31, 1965,a sum of Rs. 41,91,561.64 was due to the petitioner on account of principal and interest from APL. According to the petitioner, there was no way of recovering this loan and so the petitioner ultimately decided to purchase the undertaking of APL and carry on the business in plywood on its own. This proposal was placed before a meeting of the shareholders of the company held on 21st March, 1966. The explanatory note attached to the notice of this general meeting contained the resolution of the company approving the commencement by it of a business in plywood which was necessary in terms of s. 149 of the Companies Act as amended by Act 31 of 1965. The block assets were taken over at a value fixed by a reputed firm of valuers and the other assets were taken over at book value. The petitioner-company worked the concern for a period of three years but it was not a very successful experiment. In the period of April 1,1966, to August 31, 1968, during which the petitioner-company ran the business it had to incur a further loss of Rs. 38.94 lakhs. Eventually, therefore, the company decided that it was not profitable to continue carrying on the business and it was decided to dispose of the same. It was about this time that the surrender of the selling agency of JUL by the petitioner-company in favour of BOL was also contemplated and it was decided that the undertaking of APL would also be transferred to BOL. This transaction was also placed before a meeting of the shareholders of the company held on the 28th September, 1968, and the undertaking was transferred to BOL w.e.f. 1st October, 1968.

According to the petitioner, the above undertaking was purchased at a cost of Rs. 77.17 lakhs and the sale price was Rs. 88.18 lakhs representing the book value of the various assets as on the date of the sale. If this is correct, there is nothing even prima facie wrong with the transaction. The respondent's allegation, however, is that the undertaking was purchased not for Rs. 77.17 lakhs but for Rs. 88.65 lakhs and sold not for Rs. 88.18 lakhs but only for Rs. 57 lakhs. The discrepancy in the purchase price is due to the fact that, according to the respondent, an interest amount of Rs. 3.49 lakhs recoverable from the APL had not been realised. This has been categorically denied by the petitioner and it has been asserted in A-7 that interest was duly recovered from APL. It is then alleged by the respondent that the valuation report on the basis of which the purchase was effected does not give any basis for the valuation and that an inspection report showed that it had made a profit of Rs. 11.40 lakhs in the bargain. The inspection report relied upon has not been placed before us. That apart, the valuation was got done by a reputed firm of valuers. If the valuation report did not give the details, it was open to the respondent to have found out the details from the said firm. It cannot be merely assumed that this valuation report was a made-up one and that it did not represent the proper value of the purchased undertaking and that the consideration paid by the petitioner-company must have been an exaggerated consideration.

While, on the one hand, the respondent criticises the purchase as having been made at an exaggerated price, allegations of a contrary nature are made in regard to the sale transaction of the undertaking in 1968. Here, it is alleged that the sale price was only Rs. 57 lakhs and not Rs. 78.18 lakhs as stated by the petitioner. This allegation has also been denied by the petitioner. The respondent has drawn the inference that the sale price was only Rs. 65 lakhs from the fact that certain liabilities of the petitioner-company to the extent of Rs. 268 lakhs which was transferred to BOL were adjusted in the following manner:

 

Rs.

Transfer of debentures

63 lakhs

Cash paid

105 lakhs

Loan transferred

43 lakhs

Price of plywood factory

57 lakhs

Total

268 lakhs

The petitioner has pointed out in A-7 that this proceeds on a misapprehension. The total sale price was Rs. 78.18 lakhs as explained in detail in the annexure filed along with A-2 but only a part of the sale price was adjusted against the sum of Rs. 268 lakhs. Again, the respondent alleges that the transfer of the undertaking at book values was not justified and that the unit must have been worth much more in October, 1968, than in April, 1966. This allegation again is totally unacceptable. When the petitioner-company wanted to take over the undertaking of APL, which had suffered serious losses, it was prepared to take over the same only after having the block assets valued by a reputed firm of valuers. Having taken over the undertaking, the petitioner conducted the business for a period of about two years during which it suffered a heavy loss. It was, therefore, decided to transfer the undertaking to BOL at book value. There is nothing suspicious about this and the respondent admits in A-4 that it is unable to attribute any motive for the petitioner not undertaking a revaluation of the block assets. Thus, the respondent has not been able to make out any satisfactory reason why the purchase and sale price as claimed by the petitioner should be disbelieved.

Realising this, perhaps, the respondent in A-4 poses a question: Why did the company purchase a losing concern? and concludes that this must have been effected in order to claim a loss for income-tax purposes, by claiming a set-off of the losses in the business against its other profits. It will be seen that this allegation overlooks the fact that that the concern was taken over in lieu of a debt is not denied; it does not also help the respondent's case. Even assuming that the petitioner-company took over this losing concern merely in order to reduce its income-tax burden, the transaction would not be one detrimental to the interests of the company because admittedly the transaction helped to reduce the tax liability of the company to the extent of about Rs. 20 lakhs. That apart, this is merely a vague and wild allegation made by the respondent in an effort to make out some charge against the company when the charge, as originally laid, cannot be established.

According to the petitioner-company, the purchase was for Rs. 77.17 lakhs and the sale for Rs. 88.18 lakhs. If this is so, there is no case at all for the respondent. But even assuming that the undertaking had been purchased for Rs. 80.65 lakhs and had been sold only for Rs. 57 lakhs, this would not lead to an inference of any misfeasance, misconduct or fraud on the part of the management, if looked at against the correct factual background. It should not be forgotten that this was an undertaking which had been sustaining losses right from the commencement. The total loss incurred by it was to the tune of about Rs. 92 lakhs. So, the mere fact that it was sold to BOL for a price smaller than the purchase price is not sufficient to draw an inference against the directors or the management of the company. Having regard to the continuous record of losses, the suggestion made in A-4 that the value of the undertaking in October, 1968, must have been considerably more than the value of the undertaking in April, 1966, is obviously absurd and without basis. We are, therefore, unable to spell out from the circumstances of the transaction the conclusion sought to be drawn by the respondent.

Moreover, as we have mentioned earlier, an important circumstance that is relevant in assessing the real effect of the transactions which form the subject-matter of the first two charges against the company is that they are really connected transactions. Both of them took place simultaneously. In or about July, 1978, the company decided to surrender the sole selling agency of JUL and also decided to transfer the undertaking of APL to BOL. In fact, the transaction involved a number of other mutual arrangements and adjustments which have not been properly examined by the respondent. The petitioner has denied that BOL is a part of the group, but granting that it was, still one would appreciate that the two transactions put together do not leave any room for any adverse inference. Let us assume, as contended by the respondent, that the sole selling agency of JUL was a profitable one. Let us also assume that the undertaking of APL was a losing one and had been transferred to BOL at a price lower than the price for which the petitioner purchased it. All these facts put together could only amount to this that, as a result of certain understandings in July, 1968, the petitioner-company transferred to BOL a remunerative undertaking and also an admittedly losing concern. It cannot, therefore, be postulated that the management of the petitioner-company had indulged in these transactions with a view to benefit BOL and its limited shareholders at the cost of the petitioner-company. It should not also be overlooked that the transaction relating to APL had, at both stages, been placed before and unanimously approved by the shareholders of the company. It has been pointed out in A-6 that a substantial proportion of the shares of the petitioner-company was held by nationalised banks and it cannot be assumed that they voted the proposals which were patently detrimental to the company's interests.

We have discussed at length all the materials placed before us by the parties and reached the conclusion that the action initiated by the respondent against the petitioner-company was not justified. Sri Kataria, for the respondent, submitted that, at least in regard to the first two charges, the respondent has shown the existence of some circumstances which called for further investigation. He submitted that if, after investigation, the charges were made out, the board would take other action but that, if the charges could not be substantiated, further proceedings would be dropped. So, according to him, it was not possible on the material for this court to say that even the appointment of an inspector to delve into these matters was not necessary or justified.

We think that the contention of Sri Kataria proceeds on a misconception of the true scope of s. 237 (b). In Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp Cas 639; AIR 1967 SC 295, the affidavit of the Board disclosed that (p. 296—AIR headnote):

"In the conduct of the company there was delay, bungling and faulty planning of project entailing double expenditure, continuous losses resulting in sharp fall in prices of the company's shares and resignation of some of the directors on account of differences of opinion with the managing director".

On the question whether these facts could support an order under s. 237(b), Mudholkar J. (speaking for himself and Sarkar C.J.), observed (AIR headnote p. 296—see also 36 Comp Cas at p. 692):

"It cannot be said that from a huge loss incurred by a company and the working of the company in a disorganised and unbusinesslike way, the only conclusion possible was that it was due to lack of capability. It was reasonably conceivable that the result had been produced by fraud and other varieties of dishonesty or misfeasance. The order did not amount to a finding of fraud. It was to find out what kind of wrong action has led to the company's illfate that the powers under the section were given. The enquiry might have revealed that there was no fraud or other similar kind of malfeasance. It would be destroying the beneficial and effective use of the powers given by the section to say that the Board must first have showed that a fraud could clearly be said to have been committed. It was enough that the facts showed that it could be reasonably thought that the company's unfortunate position might have been caused by fraud and other species of dishonest action".

Two other judges, however, did not agree with this view. Hidayatullah J. (as he then was), expressed himself as follows. (AIR head note—see also pp. 661, 662 of 36 Comp Cas):

"The words 'in the opinion of the Central Government' in section 237(b) indicate that the opinion must be formed by the Central Government and it is of course implicit that the opinion must be an honest opinion. The next requirement is that ' there are circumstances suggesting, etc' These words indicate that before the Central Government forms its opinion it must have before it circumstances suggesting certain inferences........

Again, an action, not based on circumstances suggesting an inference of the enumerated kind will not be valid. In other words, the enumeration of the inferences which may be drawn from the circumstances, postulates the absence of a general discretion to go on a fishing expedition to find evidence. No doubt the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. If the action is questioned on the ground that no circumstances leading to an inference of the kind contemplated by the section exists, the action might be exposed to interference unless the existence of the circumstances is made out... Since the existence of ' circumstances ' is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned, has to be proved at least prima facie. It is not sufficient to assert that the circumstances exist and give no clue to what they are because the circumstances must be such as to lead to conclusions of certain definiteness".

Shelat J. had this to say (See pp. 689, 690 of 36 Comp Cas):

"There must therefore exist circumstances which in the opinion of the Authority suggest what has been set out in sub-clauses (i), (ii) or (iii). If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute.

Even assuming that the entire cl. (b) is subjective and that the clause does not necessitate disclosure of circumstances, the circumstances have in the present case been disclosed in the affidavits of the Chairman and the other officials. Once they are disclosed, the court can consider whether they are relevant circumstances from which the Board could have formed the opinion that they were suggestive of the things set out in cl. (b)".

Bachawat J. expressed no views on this aspect of the case.

The scope of the section was, therefore, again considered by the Supreme Court in Rohtas Industries Ltd. v. Agarwal [1969] 39 Comp Cas 781; AIR 1969 SC 707 "to sort out the requirements" of the section. After a review of the several decisions cited before the court, Hegde J. (speaking for himself and Sikri J., as he then was), concluded thus (p. 800 of 39 Comp Cas):

"Coming back to section 237(b), in finding out its true scope, we have to bear in mind that that section is a part of the scheme referred to earlier and, therefore, the said provision takes its colour from sections 235 and 236. In finding out the legislative intent we cannot ignore the requirements of those sections. In interpreting section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally, we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of the general public. In fact the vires of that provision was upheld by a majority of the judges constituting the Bench in Barium Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311; AIR 1967 SC 295, principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated earlier, we agree with the conclusion reached by Hidayatullah and Shelat JJ. in Barium Chemicals' case [1966] 36 Comp Cas 639; [1966] Supp SCR 311; AIR 1967 SC 295, that the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question are open to judicial review though the opinion formed by the Government is not amenable to review by the courts. As held earlier, the required circumstances did not exist in this case".

Bachawat J. was of a different view. He observed (p. 803 of 39 Comp Cas):

"If it is established that there were no materials upon which the authority could form the requisite opinion the court may infer that the authority did not apply its mind to the relevant facts. The requisite opinion is then lacking and the condition precedent to the exercise of the power under section 237(b) is not fulfilled. On this ground I interfered with the order under section 237(b) in Barium Chemicals v. Company Law Board [1966] Supp SCR 311 at p. 343; 36 Comp Cas 639: AIR 1967 SC 295 at p.313...... The condition precedent to the exercise of power under section 237(b) is the opinion of the Government and not the existence of the circumstances suggesting one or more of the specified matters. To hold that the factual existence of such matters is a condition precedent to the exercise of the power is to re-write the section. Section 23 7(b) must be interpreted in the light of its own language and subject-matter. We miss its real import if we begin by referring to the construction put by other judges on other statutes perhaps similar but not the same. The decisions are useful when they lay down principles of interpretation or give the meaning of words which have become terms of art "

but he agreed with the conclusion of the majority that, on facts, the order under s. 237(b) was not maintainable. In that case, the only allegation against the company on the basis of which the action under s. 237(b) was sought to be supported was that it had sold certain preference shares at their face value when they could have been converted into ordinary shares of Rs. 10 each which were then quoted at Rs. 15 in the stock market. Hegde J. observed (pp. 800, 801 of 39 Comp Cas):

"The next question is whether any reasonable authority, much less an expert body like the Central Government, could have reasonably made the impugned order on the basis of the material before it. Admittedly, the only relevant material on the basis of which the impugned order can be said to have been made is the, transaction of sale of preference shares of Albion Plywoods Ltd. At the time when the Government made the impugned order, it did not know the market quotation for the ordinary share of that company as on the date of the sale of those shares or immediately before that date. They did not care to find out that information. Hence there was no material before them showing that they were sold for inadequate consideration. If as is now proved that the market price of those shares on or about May 6, 1960, was only Rs. 11 per share then the transaction in question could not have afforded any basis for forming the opinion required by section 237(b). If the market price of an ordinary share of that company on or about May 6, 1960, was only Rs. 11 it was quite reasonable for the directors to conclude that the price of the ordinary shares is likely to go down' in view of the company's proposal to put on the market another 50,000 shares as a result of the conversion of the preference shares into ordinary shares. We do not think that any reasonable person, much less any expert body like the Government, on the material before it, could have jumped to the conclusion that there was any fraud involved in the sale of the shares in question. If the Government had any suspicion about that transaction it should have probed into the matter further before directing any investigation. We are convinced that the precipitate action taken by the Government was not called for nor could be justified on the basis of the material before it. The opinion formed by the Government was a wholly irrational opinion. The fact that one of the leading directors of the appellant-company was a suspect in the eye of the Government because of his antecedents, assuming without deciding, that the allegations against him are true, was not a relevant circumstance. That circumstance should not have been allowed to cloud the opinion of the Government. The Government is charged with the responsibility to form a bona fide opinion on the basis of relevant material. The opinion formed in this case cannot be held to have been formed in accordance with law".

From the foregoing it will be seen that the question whether circumstances have been shown to exist from which, reasonably, an inference of the nature contemplated by the provision can be drawn is a matter for judicial consideration. It is not sufficient for the Board to merely allege some facts which raise some suspicion in order to enable it to enter into a fishing expedition or to undertake an investigation as a result of which possibly some case could be made out against the company. In the present case, if at all, there is some content only in the first two charges. But even there the Board is not clear about the facts and looking at both the transactions together there are no circumstances brought to light from which any fraud, misfeasance or misconduct on the part of the management can be made out. As Shelat J. has pointed out in Barium Chemicals Ltd. v. Company Law Board [1966] Supp SCR 311; 36 Comp Cas 639; AIR 1967 SC 295/ these expressions envisage the following types of conduct (AIR headnote):

"The term 'fraud' connotes actual dishonesty and, however much the court may disapprove of a personal conduct it must consider whether he has been guilty of dishonesty. Misfeasance results from an act or conduct in the nature of a breach of trust or an act resulting in loss to the company. Misconduct of promoters or directors as understood in the Companies Act means not misconduct of every kind but such as has produced pecuniary loss to the company by misapplication of its assets or other act".

In the present case, there is no basis for any allegation of fraud or misconduct. It cannot even be alleged that the management has entered into any of the transactions in the nature of a breach of trust or with a view to cause pecuniary loss to the company. We have, therefore, no hesitation in concluding that no case for action under s. 237(b)(ii) has been made out.

Before parting with the case, we should like to point out one further feature in the present case. As pointed out by the Supreme Court, the circumstances justifying action under s. 237 should exist at the date of the order. In A-1, the respondent only set out a few broad allegations which were controverted by A-2 and A-3. The respondent then filed A-4 giving further details and figures and it is not clear why these were not furnished at the original stage itself. In the original petition, the company had specifically alleged that the earlier investigations by the Board, in particular by Sri Suraj Kapur, had yielded nothing adverse to the company. In the original reply filed by the respondent (paras. 6 and 7 of A-1) this was not controverted, rather there was an indefinite statement that the functions of the Registrar of Companies and Sri Suraj Kapur were limited and they were not required or entitled to make any complaints regarding fraud or misfeasance, admitting impliedly that the reports had contained no adverse comments, etc. The additional facts mentioned in A-4 were more in the nature of pointing out of loopholes in the defence put forward in A-2 and A-3 than a positive case based on definite data. Sri Kataria, however, stated in court that full details regarding the allegations were available from the inspection report and that he would place the same before us. But eventually neither the inspection report nor the facts and details gathered by the inspector were placed before us. Instead, A-6 was filed. This no doubt refers to the report of Sri Kapur dated January 12, 1973, and to the discussions he had with the officers of the company. But A-6 which puts forward certain additional facts avoids stating specifically that these facts were based on the results of the inspection report and had been arrived at after due investigation and enquiries with the company. Even in A-6 the attempt made is only to raise a cloud of suspicion by referring to a number of facts and figures without any attempt at analysing them and making out clear factual charges against the company. The charges are vague and general and do not attempt to bring home to the directors or persons in management in general or any of them in particular any conduct of the nature contemplated by s. 237(b)(ii). As pointed out in the case of Barium Chemicals [1966] Supp SCR 311; 36 Comp Cas 639; AIR 1967 SC 295, an allegation that the company had entered into an unremu-nerative or imprudent transaction cannot suffice to attract s. 237. If the basis of the order under s. 237(b) was only the data furnished in A-l, the material was woefully inadequate to support the order. But even the additional facts furnished in A-4 and A-6 do not add much substance to the charges. We, therefore, hold that the respondent has failed to make out the existence or circumstances justifying the formation of an opinion that there was fraud, misfeasance or misconduct on the part of the persons in management of the company towards the company or its members.

We, therefore, make the rule absolute and quash the impugned orders marked annexs. C, G, H and I to the writ petition. The respondents are restrained from giving effect in any manner to the aforesaid orders against the petitioner-company.

The writ petition is allowed with costs.

[1983] 53 Comp. Cas. 485 (Ker)

High Court OF Kerala

P. Sreenivasan

v.

Yoosuf Sagar Abdulla & Sons (P.) Ltd.

M. P. Menon j.

COMPANY PETITION NO. 22 OF 1978.

January 29, 1980

 

M. Ramanatha Pillai for the Petitioner.

M. Ramachandran, U.K. Ramakrishnan and P. Vijayamma for the Respondent.

JUDGMENT

M.P. Menon J.—The petitioner, a director and also a manager of Yoosuf Sagar Abdulla & Sons (P.) Ltd., seeks a declaration under s. 237 of the Companies Act, 1956, that the affairs of the company ought to be investigated by the inspector appointed by the Central Govt. Necessary directions to the Central Govt. are also sought for.

The facts stated and the allegations made in the petition briefly are these. A foreign national, Yoosuf Sagar Abdulla, was doing import and export business at Calicut. On the eve of his return to Kuwait in 1954, he formed the company for taking over that business. Yoosuf Sagar Abdullah is no more, but 51 shares still continue to be in his name, apparently for want of sanction from the competent authority for transferring them to others. Only 161 shares have been issued, and the other shares are now being held by Yakkob Yoosuf Sagar (son of the founder through his Indian wife), Ahammed Yoosuf Sagar (son through a Kuwait wife), K.V. Kunhammed, Mrs. Fathima, Damodaran Nambiar and the petitioner (2 shares). Ahammed Yoosuf is a Kuwaiti citizen and a non-resident. He was appointed as managing director in February, 1973. During the same month, K.V. Kunhammed (2 shares) was appointed as assistant director and he was also authorised to manage the affairs of the company and to carry out the duties and exercise the powers of the managing director. No permission was obtained from the Reserve Bank to appoint the foreign national (Ahammed Yoosuf) as managing director. K.V. Kunhammed, who is now in virtual management, is managing partner of M/s. Haji P.I, Ahammed Koya 8c Sons, a firm carrying on the same business ; and it is this firm that is now actually doing the business of the company. The premises of the firm was raided by officers of the Enforcement Directorate, in July, 1976, and they found out "that Kunhammed had got some unaccounted money in the import, of date fruits made on the basis of the licence issued to the company”. The non-residential interest in the company is more than 40 per cent, and no sanction from the Reserve Bank has been obtained to continue this position. Kunhammed has "lately" been keeping back the minutes book and other documents without permitting the petitioner to have access to them. Consideration of the profit and loss account and the balance-sheet for the year ending September 15, 1976, was unusually postponed to July, 1977, to cover up what was detected in the 1975 raid. The business is being carried on in a manner oppressive to members including the petitioner, and he is also not being furnished with the information he is entitled to get, as director.

K.V. Kunhammed has filed a detailed counter-affidavit on behalf of the company denying all the petitioner's allegations and suggesting that he (the petitioner), who was actively participating in the management till 1978, has chosen to make them only because his remuneration was reduced and some of his powers were curbed during 1977 and 1978. The petitioner has got himself examined as P.W. 1 and Exs. A-1 to A-3 are marked on his side. The respondent has produced only some documents and they are Exs. B-1 to B-6.

Counsel for the petitioner raised the following points at the time of hearing

"(i)    the appointment of Ahammed Yoosuf as managing director in February, 1973, without the sanction of the Reserve Bank was opposed to the provisions of the Foreign Exchange Regulation Act;

(ii)    non-resident equity participation exceeding 40 per cent, is illegal, in view of section 29 of the Foreign Exchange Regulation Act, 1973 ;

(iii)   the raid of 1976 and the consequent disclosures reveal a state of affairs which requires investigation ; and

(iv)   because of Kunhammed's interest in the rival firm, the company's business has been going down."

The above, according to counsel, are circumstances calling for an order under s. 237(a)(ii) of the Companies Act, 1956. Section 237 reads :

"Investigation of. company's affairs in other cases.—Without prejudice to its powers under section 235, the Central Government—

(a)    shall appoint one or more competent persons as inspectors to in vestigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if—

        (i)         the company, by special resolution ; or

(ii)        the Court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government ; and

(b)    may do so if, in the opinion of the Central Government, there are circumstances suggesting—

(i)         that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose;

(ii)        that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members ; or

(iii)       that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company."

The section conceives of three situations where the Central Govt. can appoint inspectors for investigation. The first is when the company itself declares that such an investigation is necessary. The second is when the court makes an order. And the third is when the Central Govt. forms an opinion that the circumstances enumerated in cl. (b) exist. The first is easy to understand: When the company itself wants an investigation, the Central Govt. need not stop to enquire why. The third can also be understood because when suo motu action is proposed to be taken by the Government, it shall not act arbitrarily, but only consistent with guidelines laid down. But what about the second situation, where the court has to make an order ? Mr. Ramanatha Pillai for the petitioner suggests that the power and the discretion of the court are uncontrolled ; it can direct an investigation whenever it suspects that all is not well with the company. Whether the apprehensions of the court are true or not is a matter to be found by the investigating inspectors, and the court is not to insist on evidence. It appears to me that this is too broad a statement. Investigation of the company's affairs by the Department of Trade in England has always been understood as a statutory exception to the rule in Foss v. Harbottle ([1843] 2 Hare 461) that the internal affairs of a company is a matter for the majority, and a dissatisfied minority cannot seek outside interference. The Companies Act provides for the protection of minorities in three ways (i) by giving them a right to complain against oppression, (ii) by permitting them to act on behalf of the company when it is wound up, as in the case of misfeasance proceedings, and (iii) by enabling them to obtain remedies indirectly through investigation. The court's discretion under s. 237 is, therefore, to be exercised only when it is satisfied that the minority has made out at least a prima facie case that the rule in Foss v. Harbottle [1843] 2 Hare 461, requires relaxation in the interests of the company. The Calcutta High Court has held in In re Patrakola Tea Co. Ltd., AIR 1967 Cal 406, that before the company court orders an investigation under s. 237(a)(ii), the petitioner should make out a strong case in relation to one or other of the matters referred to in cl.(b). In other words, the circumstances enumerated in cl. (b) are material for the exercise of the court's discretion also. The discretion is certainly a judicial one and is to be exercised only when a minority acts in the interests of the company as a whole.

Turning to the first point raised by the petitioner, the answer furnished by the respondent is that in February, 1973, when Ahammed Yoosuf was appointed managing director, there was no prohibition against a foreign national being so appointed. The Foreign Exchange Regulation Act, 1973, was not then in force; and the predecessor enactment of 1947 contained no such restrictions. Mr. Ramanatha Pillai is unable to dispute this position ; and it is also seen from Ex. A-1 that the proposal to appoint Ahammed Yoosuf as managing director was made by the petitioner himself at the 71st meeting of the Board held on February 14, 1973. He cannot certainly complain in 1978 about a lawful decision taken by the Board in 1973 at his own instance, and then seek an investigation on that ground.

As regards non-resident equity participation, what s. 29 of the FER Act, 1973, lays down is that a company with more than 40 per cent. "nonresident interest" shall not carry on in India, or establish in India a branch, office or other place of business for trading, except with the permission of the Reserve Bank. Sub-section (2) provides that companies of this nature which were there at the commencement of the Act should apply to the Reserve Bank for permission to continue, within six months of such commencement. When an application is made, the Reserve Bank will hold an enquiry and pass orders allowing it or rejecting it. If the application is rejected, the company shall discontinue business from the expiry of 90 clays after receipt of the order. When no application is made within the time allowed, a like order can then also be issued by the Reserve Bunk. In the case of a company like the present, therefore, a violation of section 29(1) can be established only if it is shown that no application at all has been made to the Reserve Bank, or that the application made has been rejected. But the petitioner admits in evidence (as P. W. 1) that in May, 1974, he himself had discussed with a firm of lawyers in Madras the question of approaching the Reserve Bank for permission under the FER Act (46/73). He adds :

"It is true that we had taken some steps to get appropriate permission from the Reserve Bank under the Foreign Exchange Regulation Act. I do not know whether the Reserve Bank has denied or given permission."

Thus, an application for permission has admittedly been made and there is nothing to show that it has been rejected, and that the company is continuing its activities in spite of such rejection. It is difficult to accept the petitioner's contention that the burden of showing that permission has already been obtained is on the respondent ; the respondent has no such case. Even the petitioner does not state that the application has been rejected. The respondent's case in the counter-affidavit is that the matter is still pending with the Reserve Bank ; and they cannot be called upon to produce an order which has not been passed at all. The FER Act, 1973, also provides the machinery for its enforcement and it is idle to think that it will be set in motion only under orders of this court under s. 237. of the Companies Act. In this view, it is also unnecessary to consider the respondent's contention that the 51 shares of the deceased founder could not be taken note of for arriving at the 40% limit.

The third circumstance relates to the 1976 raid and its consequences. According to the petitioner, the officers of the Enforcement Directorate raided the business premises of Kunhammed Koya's firm as also the office of the respondent-company in July, 1976. A typed sheet of paper evidencing transactions to the extent of Rs. 6,75,000 was seized from Koya's office and this indicated that Koya had concealed, as unaccounted, the company's income to that extent. The amount was later included in Ex. A-3, balance-sheet for the year ending September 15, 1976 ; but the company had never received this amount. It was forced to pay income-tax for the said amount and to borrow funds for the purpose. Koya also took his commission for the profit. The petitioner signed Ex. A-3 as a director only because he was persuaded to do so by Koya and the auditors. But in cross-examination (as P.W. 1), the petitioner admits that his residence was also raided and some papers seized, including a file of the year 1972. The petitioner himself had brought down this paper from Kuwait. Copies of letters he had sent to Yakkob Yoosuf Sagar were also taken away. An exact copy of the typed sheet seized from Koya's office was found at the petitioner's residence also. The sheet disclosed disbursements to the tune of Rs. 6.75 lakhs, including Rs. 52,000 to Koya, Fathima, her daughter and the petitioner himself. He had not actually received any portion of the aforesaid amount, though he had given a statement to the Enforcement Officers that he had received Rs. 2,000. It was the petitioner himself who had typed out the sheet, though under instructions from Koya. Both Koya and himself are parties to the adjudication proceedings initiated in pursuance of the raid and the proceedings are still pending.

If anything, the above discloses that the raid was conducted at a time when the petitioner and Koya were on good terms, and was directed against something which was not the making of Koya alone. One of the files seized admittedly belonged to a period before Koya was made a director. It was the petitioner who had brought it down from Kuwait. The contents of the typed sheet were equally against Koya and the petitioner. Even on his own admission, the petitioner was actively participating in the management of the company's affairs from 1973 to 1978. He was operating the bank account from 1975 to 1978. He was attending office every day and was getting a decent salary and bonus. He was carrying on correspondence on behalf of the company. Exhibit A-3, balance-sheet, which accounted for the income said to have been concealed, was signed by him long after the raid. I refrain from saying anything more because the adjudication proceedings are still pending, but it will certainly be unwise to bring about a parallel investigation by the inspectors of the company department into a matter which has already been enquired into by officers of the Enforcement Directorate, and is now at the stage of adjudication. The investigation under s. 237 is into the affairs of a company, and not into a specific illegal act which a company or even an individual could commit.

Detriment to the company by reason of Koya's interest in the rival firm also remains a bare allegation ; if anything, the evidence is opposed to it. The company's business is to import dates, and to export wood scantlings, coir products, spices and the like. P.W. 1 does not refer to the diversion by Koya of even a single item of import or export. Before 1973, the company had very little export business ; the business was practically confined to importing dates of the annual value of Rs. 5 lakhs. This business continued in the same fashion till 1977, when the system of "open general licence" was introduced, and it became less attractive. Obviously, therefore, the import business had not suffered because of Koya's induction. As for exports, this line of business had picked up only from 1973, and the maximum amount of business was done in 1974. In 1975 and 1976, the company got some expert orders, and these were executed by using the licence of Koya's firm ; the company itself had no export licence. On the export side also, therefore, the company had not suffered any difficulty because of Koya. The petitioner knew, when Koya was brought in as director with his active participation in February, 1973, that the "rival firm" was doing the same business on a large scale, at least from 1958.

The respondent's case that the petitioner's present approach to this court is the result of his annoyance at the board resolutions reducing his remuneration and cancelling his power to operate bank accounts, need not be minutely examined in view of what has been stated above. It must, however, be noticed that the petitioner was a party to Exs.A-1 and A-2, resolutions of 1973, whereunder Ahammed Yoosuff was made managing director and Koya, the director-in-charge. On his own admission, the officers of the Enforcement Directorate had reason to suspect his complicity in the circumstances that led to the 1976 raid. The business of the company had also not gone down because of Koya's rival interests ; and at any rate, the petitioner was a full-time salaried director during the period in question. Under these circumstances, it is difficult to assume that the accusations now made in regard to these matters are all based on a bona fide apprehension about the affairs of the company, and not influenced by an anxiety to grind one's own axe. No circumstance have been brought to light to suggest that the business of the company is being carried on for fraudulent or unlawful purposes or in a manner oppressive of the minority, or that those in management (and the. petitioner is admittedly one among them) have misconducted themselves towards the company or its members.

I, therefore, dismiss the company petition, leaving the parties to bear their own costs.

[1983] 53 COMP. CAS. 493 (KER)

HIGH COURT OF KERALA

Mrs. U. A. Sumathy

v.

Dig Vijay Chit Fund (P.) Ltd.

M. P. Menon J.

COMPANY PETITION NO. 23 OF 1978

July 1, 1980

 

M. Ramanatha Pillai for the Petitioners.

Mani J. Meenattoor for the Respondent.

JUDGMENT

M.P. Menon J.—This is a petition filed by the two members of the Dig Vijay Chit Fund (P.) Ltd. under s. 237 of the Companies Act, 1956, for a declaration that the affairs of the company require investigation by an inspector appointed by the Central Govt.

The main business of the company is in kuries and in money-lending. The first petitioner, along with six other shareholders, had earlier filed a petition for winding up it, but that was dismissed on the ground that they had other remedies, and that the prayer for winding-up was unreasonable in the circumstances disclosed. The present is a resort to one of the other remedies available.

The allegations in the petition are broadly the following : The chief agent and the directors of the company are utilising their position to oppress the other shareholders. The chief agent and his relatives hold 72 shares and the directors control another 122. In April, 1972, the company fraudulently sold 64 shares, belonging to seven members, who were not supporting the directors; and these shares were purchased by the relatives of the directors and the chief agent. The group in management has been misappropriating the company's funds, destroying valuable records to cover up their misdeeds, causing loss to the company by declining to proceed against debtors, and writing off bad debts after privately collecting amounts from the concerned debtors. Some particulars relating to the alleged misappropriation, destruction of records, etc., are furnished, and there is also a general allegation that the company has been incurring losses as a result of all the above.

The company has denied all these allegations in its counter-affidavit. The 2nd petitioner has been examined as P.W. 1 and Exs. A-1 to A-6 have been marked on the side of the petitioners. The company has examined its present managing director as R.W. 1, and marked Exs. B-1 to B-7.

Sections 235 to 246 of the Companies Act, 1956, deal with the investigation of the affairs of a company. Under s. 235, the Central Govt. is given power to appoint inspectors for the purpose; and the power is to be exercised either on the application by members or on the basis of a report by the Registrar under s. 234. Section 236 provides that members applying under s. 235 should furnish evidence to show that they have "good reason for requiring the investigation ". Clause (a) of s. 237 obliges the Central Govt. to arrange for an investigation when the company, by special resolution, or the court, by order, declares that an investigation is called for, while cl. (b) confers a discretion on the Government to do so when the circumstances enumerated thereunder are found to exist. Sections 238 to 241 deal with inspectors, their powers and the report they have to make. Sections 242 to 244 specify the follow-up measures the government could take on the basis of the reports. Prosecution of persons found criminally liable, moving the court for winding-up or for relief from oppression, and initiation of misfeasance and other proceedings are some of the measures contemplated. Section 245 provides for the expenses of investigation, and s. 246 declares that the inspectors' reports shall be admissible as evidence in legal proceedings. An analysis of the above provisions indicates that appointment of inspectors is a matter in the discretion of the Govt. under s. 236, and also cl. (b) of s. 237; but in cases governed by s. 237(a), the Government has a duty to act. The machinery for inspection could be set in motion on the request of members under s. 236, only when a certain percentage of the total number of members apply; the Central Govt. cannot aet when the strength of those who apply is below the minimum prescribed. But what about an application to the court under s. 237(a)(ii)? Can the court order an investigation irrespective of the number of members who seek to invoke its power ?

Section 237 does not in terms speak of an application to be filed in court; but r. 11(a)(9) of the Companies (Court) Rules, 1959, conceives of such an application. In Raghunath Swarup Mathur v. Har Swamp Mathur [1970] 40 Comp Cas 282, the Allahabad High Court observed thus (at p. 296):

"As the declaration sought amounts to a direction to the Central Government, it should only be granted either where a party, having applied to the Central Government for an investigation, has failed despite sufficient grounds shown for it, or, when the court finds that a proceeding before it, under either section 397 or section 398 of the Act, cannot satisfactorily terminate without such an investigation".

But it appears from the decision of the Delhi High Court in Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp Cas 33, that a prior application to the Central Govt. under s. 236, or the pendency of proceedings under ss. 397 and 398, are not conditions precedent for exercising the court's power under s. 237(a)(ii). The Delhi case had arisen from an application filed by a single shareholder; and it is also not Contended before me that the numerical strength of the members, who move the court under s. 237, should satisfy the minimum prescribed by s. 235.

The present proceedings are only for the purpose of deciding whether the affairs of the company should be looked into by the inspectors. And, according to counsel for the petitioners, it is not necessary for his clients to prove their allegations before this court; they could prove them before the inspectors. NO doubt, cl. (a)(ii) of s. 237 does not lay down what circumstances are to be proved before the court and on what materials the court could act. But that does not mean that mere allegations are sufficient. A court can act only on the materials placed before it; and those materials should at least be such as to satisfy the court that a deeper probe into the company's affairs is desirable in the interests of the company itself. According to the Delhi High Court in Delhi Flour Mills Co. Ltd.'s case [1975] 45 Comp Cas 33 (Delhi), noticed above, the materials should be such as would result in proceedings being taken under ss. 242 to 244; no investigation could be ordered merely because a shareholder feels aggrieved about the manner in which the company's business is being carried on. The scope of s. 237 was considered by me in C. P. No. 22 of 1978 decided on 29-1-1980. [P. Sreenivasan v. Yoosuf Sugar Abdulla & Sons (P.) Ltd. [1983] 53 Comp Cas 485 (Ker)], in the following terms (at p. 489):

"The section conceives of three situations where the Central Government can appoint inspectors for investigation. The first is when the company itself declares that such an investigation is necessary. The second is when the court makes an order. And the third is when, the Central Govt. forms an opinion that the circumstances enumerated in cl. (b) exist. The first is easy to understand; when the company itself wants an investigation, the Central Govt. need not stop to enquire why. The third can also be understood because when suo motu action is proposed to be taken by the Government, it shall not act arbitrarily, but only consistent with the guidelines laid down. But what about the second situation, where the court has to make an order? Mr. Ramanatha Pillai for the petitioner suggests that the power and the discretion of the court are uncontrolled; it can direct an investigation whenever it suspects that all is not well with the company. Whether the apprehensions of the court are true or not is a matter to be found by the investigating inspectors, and the court is not to insist on evidence. It appears to me that this is too broad a statement. Investigation of the company's affairs by the Department of Trade in England has always been understood as a statutory exception to the rule in Foss v. Harbottle [1843] 2 Hare 461, that the internal affairs of a company is a matter for the majority, and a dissatisfied minority cannot seek outside interference. The Companies Act provides for the protection of minorities in three ways: (i) by giving them a right to complain against oppression, (ii) by permitting them to act on behalf of the company when it is wound up, as in the case of misfeasance proceedings, and (iii) by enabling them to obtain remedies indirectly through investigation. The court's discretion under section 237 is, therefore, to be exercised only when it is satisfied that the minority has made out at least a prima facie case that the rule in Foss v. Harbottle [1843] 2 Hare 461, requires relaxation in the interests of the company. The Calcutta High Court has held in In re Patrakola Tea Co. Ltd., AIR 1967 Cal 406, that before the company court orders an investigation under section 237(a)(ii), the petitioner should make out a strong case in relation to one or other of the matters referred to in clause (b). In other words, the circumstances enumerated in clause (b) are material for the exercise of the court's discretion also. The discretion is certainly a judicial one and is to be exercised only when a minority acts in the interests of the company as a whole".

It is in the above background ,that I propose to examine the allegations made and the evidence adduced herein.

As regards misappropriation, two specific instances are referred to in para. 5 of the petition. The first is that in 1971, the then managing dire-tor, Sri Chandrasekharan, had drawn an amount of Rs. 3,000 from the "Anamath account" when there was no deposit with the company in his name. The company's answer in para. 8 of its counter-affidavit is that Mr. Chandrasekharan had drawn an amount of Rs. 3,000 on September 23, 1971, when he had a credit balance of only Rs. 602.99, but that he had subsequently made deposits of Rs. 1,534 and Rs. 2,300 in November and December, 1971. The correctness of this statement is not disputed in the petitioners' reply affidavit. And a mere entry in the suspense account is not sufficient to establish misappropriation. The concerned account books have not been called for; and neither Mr. Chandrasekharan nor the person who made the entry has been cited to explain it. No attempt has also been made to bring out what the powers of the managing director were in matters of this kind. P. W. 1, who was himself a managing director of the company for some time, made only a bare reference to the entry in the course of his evidence; he did not even say that the amount was misappropriated or lost to the company.

The second instance relates to the compromise effected in O.S. 137/70, filed by the company against one Francis for the recovery of Rs. 680; and the allegation is that the party had produced a receipt showing that the amount had been paid personally to the managing director, Mr. Namboodiri-pad, and that the suit was compromised without crediting the amount in the company's accounts. But the documents produced tell a different tale. Exhibit B-1 dated November 16, 1970, discloses that P.W. 1, who was then the managing director of the company, had authorised R.W. 1, who was then its secretary, to compromise the suit, though the party had produced a "false receipt". Exhibit B-3 shows that an amount of Rs. 498 was credited in P.W. 1's suspense account with the company on the next day. According to R.W. 1, the party had produced in court a false receipt and when he was threatened with criminal action, he offered to settle the matter by paying Rs. 500. The matter was settled with the concurrence of P.W. 1 and the amount (less Rs. 2 for expenses) was credited in his suspense account as per Ex. B-3, pending filing of a compromise petition before the court. Exhibit A-2 is a certified copy of the compromise petition filed on November 6, 1971, and Ex. A-1 is a compromise decree. The petitioners' case that Sri Namboodiripad had received payment and issued a receipt and that the suit was compromised when this was brought to light, does not stand scrutiny in the light of the admitted circumstance that P.W. 1 himself was aware that the receipt was a false one and that the compromise was effected on the footing that it was not genuine. Misappropriation is a serious matter, and the evidence available is insufficient to establish even a prima facie case.

The allegations relating to destruction of records and the fraudulent transfer of the 64 shares were not pursued at the time of hearing. P.W. 1 did not in his evidence even make mention about the destruction of any records; and a suggestion thrown at R.W. 1 during his cross-examination about "removal" of records was promptly denied. The same is the position regarding the 64 shares said to have been fraudulently transferred.

The next allegation relates to the writing off of Rs. 22,074 and Rs. 14,476, respectively, as bad debts, in the profit and loss account marked as Exs. A-4 and A-5; and the case attempted to be made out is that the directors and the chief agent had actually received payment of the amounts and had thereafter attempted to cover up the misappropriation by making it appear that they were bad debts. Exhibits A-4 and A-5 do show that the amounts were written off; but there is nothing but the assertion of P.W. 1 to suggest that any officer of the company had actually received payments as alleged. P.W. 1 stated in cross-examination that the amounts written off included Rs. 800 due from one Sachidanandan, Rs. 750 from Ummer, Rs. 600 from Ayyappan and Rs. 700 from Madhavan; but Sachidanandan alone had told him that he had paid the amount to the company. P.W. 1 had no other knowledge or information about the alleged payments. The company's case, on the other hand, is that the amount written off in Ex. A-4 represents arrears of kuri collections and amounts due under promissory notes from over 400 persons, considered as irrecoverable. The company had conducted more than 100 chitties and made a large number of other advances; and some amounts were being written off from time to time. Exhibit B-4, the minutes book, indicates that the amount was written off as per Board's resolution dated November 9, 1973. Exhibit A-4, the audited accounts, must have been approved by the general body also. That apart, the list of bad debts referred to in the Board's resolution is Ex. B-5 and it contains particulars of 446 debts due from chit subscribers, the amounts varying from Rs. 2.50 to Rs: 118. Sachidanandan's name is not there, and no debt exceeding Rs. 118 is seen written off. The debts in Ex. A-5 were also written off by a Board's resolution, and, according to R.W. 1, those were amounts due from employees (bill collectors), who were going about making collections. They had left the services of the company and they had no assets. It is usual for men in a business of this type to periodically write off irrecoverable debts. In the present case, it was done by resolutions duly passed by the Board, and obviously approved by the general body of members. The accounts were duly audited and filed with the Registrar. The evidence is totally insufficient to raise even a serious suspicion that anything else had been done.

The only other point raised is that the company has been incurring loss year after year; but no investigation could be ordered unless that result is linked with fraud, misfeasance, mismanagement, oppression and the like. The loss might be an ordinary business risk: It may be noticed that the company's paid up capital and membership have risen by at least one hundred per cent between 1976 and 1978. The petitioners are only two out of 1,312 members. The company has also a case that the first petitioner is the wife of a dismissed employee and that the 2nd is annoyed by a notice demanding payment of some amounts due from him. It is unnecessary to go into this aspect because, even otherwise, the attempt of the petitioners has only been to show that something suspicious had taken place between 1971 and 1975.

In, my view, therefore, no case for the issue of a direction under s. 237(a)(ii) is made out, and the petition has to fail. It is accordingly dismissed, but without any order as to costs.