1966 (5) TMI 36 - SC - Companies Law

Company Law Board Appeal against orders of, Investigation of company s affairs in other cases, Power of inspectors to carry investigation into affairs of related companies

Issues Involved:
1. Mala fides in the issuance of the order.
2. Relevance of circumstances under Section 237(b) of the Companies Act.
3. Validity of the order issued by the Chairman of the Company Law Board.
4. Constitutionality of Section 237(b) under Articles 14 and 19(1)(g) of the Constitution.

Detailed Analysis:

1. Mala Fides in the Issuance of the Order
The appellants alleged that the order was made mala fide at the instance of the then Finance Minister, who bore hostility towards them. They argued that the High Court erred in not allowing cross-examination of the concerned officials and in not compelling the production of documents. The court found that the allegations were based on "reasons to believe" rather than concrete evidence. The affidavits from the respondents, including the Chairman, categorically denied these allegations and stated that the order was made independently based on materials before the Board. The court held that in the absence of specific particulars and tangible evidence, the High Court did not err in refusing to allow cross-examination or additional evidence. The court concluded that the appellants failed to establish mala fides.

2. Relevance of Circumstances Under Section 237(b) of the Companies Act
The appellants argued that the circumstances disclosed by the Chairman in his affidavit were extraneous to Section 237(b) and could not form the basis for the impugned order. The court examined the relevant provisions and concluded that while the formation of opinion by the Board is subjective, the existence of circumstances suggesting fraud or misconduct is a condition precedent to the formation of such opinion. The court held that the circumstances disclosed in the affidavit, such as delay, bungling, faulty planning, continuous losses, and the resignation of directors, did not suggest an intent to defraud or fraudulent management. The court found that these circumstances were not relevant to the matters specified in Section 237(b) and thus, the order was ultra vires the section.

3. Validity of the Order Issued by the Chairman of the Company Law Board
The appellants contended that the order was invalid as it was issued by the Chairman alone under rules that were ultra vires Section 10E of the Companies Act. The court examined the relevant rules and the order of distribution of work by the Chairman. It held that Section 10E did not provide for the splitting up of the Board's work among its members and that the power to order an investigation under Section 237(b) could only be exercised by the Board as a whole. The court found that the rule allowing the Chairman to distribute the Board's work was not a matter of procedure but amounted to sub-delegation, which was not authorized by the Act. Therefore, the order made by the Chairman was invalid.

4. Constitutionality of Section 237(b) Under Articles 14 and 19(1)(g) of the Constitution
The appellants challenged the constitutionality of Section 237(b) on the grounds that it violated Articles 14 and 19(1)(g) of the Constitution. The court held that Section 237(b) did not confer discriminatory power on the Government as it provided different powers exercisable in different circumstances and manners. The court also held that an order directing an investigation under Section 237(b) did not amount to a restriction on the right to carry on business under Article 19(1)(g). Even if it were considered a restriction, it was a reasonable one in the interests of protecting shareholders, creditors, and other interested persons from potential misuse of power and malpractices in the management of companies. Therefore, the challenge under Articles 14 and 19(1)(g) failed.

Conclusion:
The court allowed the appeal, holding that the impugned order was invalid due to the extraneous circumstances considered and the improper delegation of power to the Chairman. However, the court did not uphold the allegations of mala fides or the constitutional challenge to Section 237(b). No order as to costs was made.

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