1988 (7) TMI 366 - HC - Companies Law

Summary

Issues Involved:
1. Validity of the show-cause notices dated March 13, 1987, and June 24, 1987.
2. Legality of the order dated November 13, 1987, passed by the Company Law Board under Section 408 of the Companies Act, 1956.
3. The role and jurisdiction of the Reserve Bank of India (RBI) in regulating the schemes of the petitioner-company.
4. The sufficiency and adequacy of the materials on record for invoking Section 408 of the Companies Act.
5. Compliance with the principles of natural justice and procedural requirements by the Company Law Board.

Detailed Analysis:

1. Validity of the Show-Cause Notices:
The petitioners challenged the show-cause notices dated March 13, 1987, and June 24, 1987, issued by the Company Law Board. The notices were based on observations made by the Supreme Court in the case of Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. The Supreme Court had noted several issues with the company's schemes, including lower yields for subscribers, misleading advertisements, and the choice of field staff based on social, political, or official connections. The petitioners argued that these observations did not justify the invocation of Section 408 of the Companies Act.

2. Legality of the Order Dated November 13, 1987:
The Company Law Board's order dated November 13, 1987, appointed four government directors to the petitioner-company's board for three years. The petitioners contended that the conditions precedent for invoking Section 408 were absent. Section 408 allows the Central Government to appoint directors to prevent the affairs of the company from being conducted in a manner prejudicial to the company's or public interest. The petitioners argued that the materials on record did not establish that the company's affairs were being conducted in such a manner.

3. Role and Jurisdiction of the RBI:
The petitioners argued that the RBI, as the statutory authority, had already issued directions regulating the company's schemes in public interest. The RBI's directions included provisions for the minimum rate of return, security of deposit, and advertising norms. The petitioners contended that they had complied with these directions and that the Company Law Board had no jurisdiction to regulate the schemes further. The court agreed, stating that the RBI was the competent authority to regulate the schemes and that the Company Law Board could not bypass the RBI's directions.

4. Sufficiency and Adequacy of Materials on Record:
The petitioners argued that the Company Law Board had taken into consideration grounds not disclosed in the show-cause notice, such as the company's inability to comply with the RBI's directions. The court held that the decision taken on grounds not disclosed in the show-cause notice was illegal and void, violating the principles of natural justice. The court emphasized that the Company Law Board must be satisfied based on sufficient evidence that the company's affairs were being conducted in a manner prejudicial to the company's or public interest.

5. Compliance with Principles of Natural Justice:
The petitioners contended that the Company Law Board had not complied with the principles of natural justice, as it had taken into consideration grounds not disclosed in the show-cause notice. The court agreed, stating that the Company Law Board had traveled beyond the show-cause notice and that the decision was based on speculative findings. The court emphasized that the power under Section 408 could only be exercised on the existence of certain conditions and that the Company Law Board's decision was arbitrary and contrary to the materials on record.

Conclusion:
The court held that the Company Law Board had no jurisdiction under Section 408 of the Companies Act to regulate the petitioner's schemes in view of the RBI's directions. The impugned order dated November 13, 1987, was declared illegal and void. The writ application succeeded, and the show-cause notice dated March 13, 1987, and the impugned order dated November 13, 1987, were canceled. There was no order as to costs.