1979 (11) TMI 223 - HC - Companies Law

Issues Involved:
1. Legality of the order passed under Section 108D of the Companies Act, 1956.
2. Violation of principles of natural justice.
3. Satisfaction of the conditions under Section 108D.
4. Application of mind by the Central Government.
5. Constitutional validity of Section 108D.
6. Post facto hearing as a remedy for the violation of natural justice.

Detailed Analysis:

1. Legality of the Order Passed Under Section 108D of the Companies Act, 1956:
The petitioners challenged the order dated June 17, 1978, issued by the Central Government under Section 108D of the Companies Act, 1956. The order directed the company not to give effect to the transfer of shares, citing concerns over a potential change in controlling interest that could be prejudicial to the company's interests. The court found that the order was passed without proper application of mind and without any relevant material to substantiate the government's satisfaction that a change in controlling interest was likely to occur.

2. Violation of Principles of Natural Justice:
The petitioners contended that the impugned order was illegal, void, mala fide, and unjust as it was passed without giving them a hearing, thus violating the principles of natural justice. The court held that the principles of natural justice were indeed violated as the petitioners were not given an opportunity to be heard before the order was passed. The court emphasized that any order affecting the legal rights of individuals must be preceded by a fair hearing.

3. Satisfaction of the Conditions Under Section 108D:
Section 108D requires the Central Government to be satisfied that the transfer of shares is likely to result in a change in controlling interest and that such a change would be prejudicial to the company or public interest. The court found that the government did not have sufficient material to reach such satisfaction. The order was based merely on allegations and suspicions without concrete evidence, making the satisfaction under Section 108D unfounded.

4. Application of Mind by the Central Government:
The court observed that the Central Government failed to apply its mind to the facts of the case before passing the order. The order did not specify the names of the persons to whom the shares were transferred or the numbers of these shares. The court concluded that the order displayed a complete lack of application of mind, as it was based on mere allegations without any substantive material.

5. Constitutional Validity of Section 108D:
The petitioners also challenged the constitutional validity of Section 108D, arguing that it violated their fundamental rights under Articles 14 and 19 of the Constitution. However, the court did not find it necessary to address this issue in detail, as the petitioners were entitled to succeed on other grounds. The court noted that while Section 108D does not explicitly provide for a hearing, the principles of natural justice would still apply unless explicitly excluded by the statute.

6. Post Facto Hearing as a Remedy for the Violation of Natural Justice:
The respondents argued that a post facto hearing could remedy the violation of natural justice, citing the Supreme Court's decision in Maneka Gandhi v. Union of India. The court, however, rejected this argument, stating that the impugned order was passed without any application of mind and without reaching the requisite satisfaction under Section 108D. The court held that a post facto hearing could not cure the fundamental defects in the order, as the order itself was null and void.

Conclusion:
The court quashed and set aside the impugned order dated June 17, 1978, under Section 108D of the Companies Act, 1956, due to the violation of principles of natural justice, lack of application of mind, and absence of relevant material. The court directed that the petitioners be given a fair opportunity of hearing before any fresh order is passed under Section 108D. The respondents were also ordered to pay the costs.

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