2003 (12) TMI 320 - HC - Companies Law

Issues Involved:
1. Necessity of Central Government approval for the appointment of the appellant as Chairman and Managing Director under section 269 of the Companies Act.
2. Validity of the rejection of approval by the Central Government and whether the absence of reasons in the order caused any prejudice to the appellant.

Detailed Analysis:

1. Necessity of Central Government Approval:

The appellant challenged the necessity of Central Government approval for his appointment as Chairman and Managing Director of the company, arguing that the approval was not required under the amended provisions of section 269 of the Companies Act.

The court noted that the amended provisions of section 269, applicable from 1-6-1988, necessitate Central Government approval unless the appointment complies with conditions specified in Parts I and II of Schedule XIII. Specifically, clause (f) of Part I requires that the company must not have suffered a loss or had inadequate profits in the preceding financial year or in any of the three out of four financial years immediately preceding the preceding financial year.

The court examined the financial records and found that the company had not made adequate profits in the years 1983, 1984, 1985, and 1987, with only the year 1986 showing adequate profits. The court rejected the appellant's argument that adequate profits in any one of the four preceding years would suffice to avoid the requirement for approval, interpreting the clause to mean that the company must have adequate profits in at least three out of the four preceding years.

The court concluded that the Central Government's approval was indeed necessary for the appellant's appointment, as the company did not meet the conditions specified in Schedule XIII.

2. Validity of the Rejection of Approval:

The appellant argued that the order rejecting approval was arbitrary and lacked reasons, thus constituting a non est order. The court examined whether the act of granting approval under section 269 was judicial or quasi-judicial, requiring a reasoned order.

The court referred to precedents, including the Division Bench judgment of the Gujarat High Court in Cibatul Ltd. v. Union of India and the Supreme Court decision in Rampur Distillery & Chemical Co. Ltd. v. CLB, which established that such powers are quasi-judicial and require reasoned orders.

The court noted that the Central Government had conducted a thorough investigation into the company's affairs and issued a detailed show-cause notice outlining six specific reasons for rejecting the approval. The appellant was given an opportunity to respond, and his replies were considered.

The court found that the Central Government had provided adequate reasons for rejecting the approval, including the appellant's misuse of fiduciary capacity, unauthorized financial transactions, and personal benefits derived from the company's resources. The court held that the order was not arbitrary and met the requirements of a reasoned decision.

Conclusion:

The court upheld the necessity of Central Government approval for the appellant's appointment and found the rejection of approval to be valid and reasoned. The appeal was dismissed with costs of Rs. 5,000.

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