9911796707
TMI Blog1966 (5) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act, 1956, or of any other law for the time being in force and the person or persons responsible for such irregularities and contraventions". The order was made by the Chairman of the Board, Mr. R.C. Dutt, on behalf of the Board by virtue of the powers conferred on him by certain rules to which we shall refer later. On June 4, 1965, the company preferred a writ petition under article 226 of the Constitution in the Punjab High Court for the issue of a writ of mandamus or other appropriate writ, direction or order quashing the order of the Board dated May 19, 1965. The managing director, Mr. Balasubramanian, joined in the petition as petitioner No. 2. The writ petition is directed against 7 respondents, the first of which is the Company Law Board. The second respondent is Mr. T.T. Krishnamachari, who was at that time Minister for Finance in the Government of India. The inspectors appointed are respondents Nos. 3 to 6 and Mr. Dang is the 7th respondent. Apart from the relief of quashing the order of May 19, 1965, the appellants sought the issue of a writ restraining the Company. Law Board and the inspectors from giving effect to the order dated May 19, 1965, and also sought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oole belonged. It would appear that, as the work of setting up of the plant was being delayed, the company sent a notice to M/s. Mitchell Ltd. on April 2, 1965, in which the company stated that if the plant was not completely installed and got into running order by June 1, 1965, the company will have to make alternative arrangements and that it would hold M/s. L.A. Mitchell Ltd. liable to pay damages to the company for the loss suffered by it. As a result of the notice, Lord Poole visited India in April/May, 1965. In his. opinion, the design of the plant was defective. Certain negotiations took place between the company and Lord Poole in the course of which an undertaking was given by Lord Poole on behalf of the collaborators that the work would be completed with necessary alterations and modifications in accordance with the report of M/s. Humphrey Co., and that the collaborators would spend an additional amount up to 250,000 as may be required for the purpose. It is said that the plant was producing at that time only 25% of its installed capacity but that according to the assurance given by Lord Poole it would yield full production by April, 1966. According to the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des. Mr. Setalvad points out that the Company Law Board had decided in December, 1964, to take action against appellant No. 1 under section 237( b ) and had actually obtained approval of Mr. T.T. Krishnamachari to the proposed action. Therefore, according to him, the real order is of Mr. Krishnamachari, even though the order is expressed in the name of the Board. We find no substance in the argument. The decision to take action was already taken by the Chairman and there is nothing to indicate that in arriving at that decision he was influenced by the Finance Minister. If the decision arrived at by the Chairman was an independent one, it cannot be said to have been rendered mala fide because it was later approved by Mr. Krishnamachari whose sons undoubtedly constitute the partnership firm of M/s. T.T. Krishnamachari Sons. It is also suggested by Mr. Setalvad that the action approved of in December, 1964, was delayed till May, 1965, because in the interval some negotiations with Kali Chemie had been started and, had they ended fruitfully, M/s. T.T. Krishnamachari Sons would have secured the sole monopoly for sale of the products of barium chemicals. Now it does seem from certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een arrived at mala fide. To say that the opinion to be formed must be as to the necessity of making an investigation would be making a clear departure from the language in which section 237( b ) is couched. It is only after the formation of certain opinion by the board that the stage for exercising the discretion conferred by the. provision is reached. The discretion conferred to order an investigation is administrative and not judicial since its exercise one way or the other does not affect the rights of a company nor does it lead to any serious consequences as, for instance, hampering the business of the company. As has been pointed out by this court in Raja Narayan Bansilal v. Maneck Phiroz Mistry [1960] 30 Comp. Cas. 644 ; [1961] 1 SCR 417, the investigation undertaken under this provision is for ascertaining facts and is thus merely exploratory. The scope for judicial review of the action of the board must, therefore, be strictly limited. Now, if it can be shown that the board had in fact not formed an opinion its order could be successfully challenged. This is what was said by the Federal Court in Emperor v. Sibnath Banerjee [1944] FCR 1, on appeal [1945] FCR 195 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same for the court's perusal provided it is not shown to the petitioners." It may be mentioned that the court did not call for this material at all nor did the appellants seek its production. In paragraph 9 Mr. Dutt has categorically stated that the order of May 19, 1965, was passed after careful and independent examination of the material by the chairman and that it was issued in proper exercise of the powers conferred upon it. He has specifically denied that it was issued at the instance of the second respondent. In paragraph 10 Mr. Dutt has taken the plea that the petition was liable to be dismissed as it had not been made bona fide but for extraneous reasons and to create prejudice with a view to thwart statutory investigation. Then he has set out the circumstances upon which his contention is based. In paragraph 13 he has stated that without prejudice to his submissions in the earlier paragraphs he would reply to allegations contained in the various paragraphs of the writ petition. Then follows paragraph 14 upon which Mr. Setalvad has founded an argument that the grounds disclosed therein being extraneous, the order is invalid. In this paragraph Mr. Dutt has admitted some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts members. This paragraph is in answer to paragraph 21 of the writ petition. It is in that paragraph alone that the appellants had specifically raised the contention that the recital in the order as to the existence of material is not correct and that in point of fact there was no material before the Board to form the said opinion. In this state of pleadings it would not be right to construe the affidavit of Mr. Dutt to mean that the only conclusions emerging from the material before the Board are those that are set out in paragraph 14 of his affidavit. Apart from this, we do not think that the conclusions set out in paragraph 14 are extraneous to the matters indicated in the order of May 19, 1965. What is said therein is that there are circumstances suggesting that the business of the appellants is being conducted with intent to defraud its creditors, members and others, and that the persons concerned with the management of the affairs of the company have been guilty of fraud, misfeasance and other misconduct towards the company and its members. It has to be borne in mind that what the Board is to be satisfied about is whether the circumstances suggest any of these things and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do reasonably suggest any of these things to the Board, the power can be exercised, though another individual might think that the facts suggest otherwise. 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 is that it was due to lack of capability. It is reasonably conceivable that the result had been produced by fraud and other varieties of dishonesty or misfeasance. The order does not amount to a finding of fraud. It is to find out what kind of wrong action has led to the company's ill-fate that the powers under the section are given. The enquiry may reveal 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 show that a fraud can clearly be said to have been committed. It is enough that the facts show that it can be reasonably thought that the company's unfortunate position might have been caused by fraud and other species of dishonest action. In our opinion, therefore, the argument of Mr. Setalvad about the circumstances being extraneo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not only two sets of memoranda dated May 30, 1964, and July 9, 1964, respectively, from four ex-directors of the company alleging serious irregularities and illegalities in the conduct of the affairs of the company but also other materials. The Board points out that over a long period beginning from September, 1961, the department had been receiving various complaints in regard to the conduct of the affairs of the company. One complaint had also been received by the Special Police Establishment and forwarded by it to the department in November, 1963. The matter was enquired into by the Regional Director of the Board at Madras and he, in his report sent to the Board in September, 1964, suggested an urgent and comprehensive investigation into the affairs of the company. In his affidavit the Chairman of the Board, Mr. Dutt, has stated further in paragraph 5( b ) as follows : "The material on the file was further examined in the light of the Regional Director's recommendation by the two Under Secretaries of the Board (Sarvashri M.K. Banerjee, C.S.S. and K.C. Chand, I.R.S.) at the headquarters of the Board in New Delhi and both of them endorsed the recommendation of the Regional Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribed in the order dated February 6, 1964. The validity of this rule is challenged by Mr. Setalvad on the ground that this amounts to sub-delegation of a delegated power and is ultra vires the Act. Clause ( a ) of sub-section (1) of section 637 read with section 10E(1) empowers the Central Government to delegate its powers under section 237 to the Company Law Board. By notification dated February 1, 1964, the Central Government has delegated, amongst other powers and functions, those conferred upon it by section 237 upon the Company Law Board. By another notification of the same date, the Central Government has made and published rules made by it in exercise of its powers under section 642(1) read with section 10E(5), rule 3 of which reads thus : "Distribution of business. The Chairman may, with the previous approval of the Central Government, by order in writing, distribute the business of the Board among himself and the other member or members, and specify the cases or classes of cases which shall be considered jointly by the Board." By order dated February 6, 1964, the Chairman of the Company Law Board specified the cases and classes of cases to be considered joint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order made by the Chairman on behalf of the Board is not invalid. To sum up, then, our conclusions may be stated thus : The discretion conferred on the Central Government by section 237( b ) to order an investigation and delegated by it to the Company Law Board is administrative, that it could be validly exercised by the Chairman of the Board by an order made in pursuance of a rule enacted by the Central Government under section 642(1) read with section 10E(5), that the exercise of the power does not violate any fundamental right of the company, that the opinion to be formed under section 237( b ) is subjective and that if the grounds are disclosed by the Board the court can examine them for considering whether they are relevant. In the case before us they appear to be relevant in the context of the matter mentioned in sub-clauses ( i ) to ( iii ) of section 237( b ). Though the order could be successfully challenged if it were made mala fide, it has not been shown to have been so made. The attack on the order thus fails and the appeal is dismissed with costs. Hidayatullah, J. We are concerned in this appeal with the legality of an order of the Chairman, Company Law Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on interested places materials before the Registrar ( a ) that the business of the company is being carried on in fraud of its creditors or of persons dealing with the company, or ( b ) otherwise for a fraudulent or unlawful purpose, the Registrar can, after hearing the company, call upon it to furnish any information or explanation, A further power is conferred after December 28, 1960, on the Registrar, who may, after being authorised by a Presidency Magistrate or a Magistrate, First Class, enter anyplace, search and seize any document relating to the company, its managing agents, or secretaries and treasurers or managing director or manager, if he has reason to believe that it may be destroyed or tampered with. Sections 235 to 251 provide for investigation of the affairs of a company and for sundry matters related to such investigations. They follow the scheme of sections 164 to 175 of the English Act of 1948. Section 235 enables the Central Government to appoint inspectors for investigation and report generally if the Registrar reports under section 234 and also if a stated number of shareholders or shareholders possessing a stated voting power apply. When members apply they m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and discharge such powers and functions conferred on the Central Government by or under this Act or any other law as may be delegated to it by that Government, (2) The Company Law Board shall consist of such number of members, not exceeding five, as the Central Government deems fit, to be appointed by that Government by notification in the Official Gazette. (3) One of the members shall be appointed by the Central Government to be the Chairman of the Company Law Board. (4) No act done by the Company Law Board shall be called in question on the ground only of any defect in the constitution of, or the existence of any vacancy in, the Company (5) The procedure of the Company Law Board shall be such as may be prescribed. (6) In the exercise of its powers and discharge of its functions, the Company Law Board shall be subject to the control of the Central Government." The Board was constituted on February 1, 1964, by a notification and by a notification of even date in exercise of the powers conferred by clause ( a ) of sub-section (1) of section 637 read with sub-section (1) of section 10E of the Companies Act, the Central Government delegated its powers and functions to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . What is the Board, is not a question which admits of solution by procedural rules but by the enactment of a substantive provision allowing for a different delegation. Such an enactment has been framed in relation to the Tribunal constituted under section 10B and has now been framed under section 10E also. The new sub-section involves a delegation of the powers of the Central Government to a member of the Board which the Act previously allowed to be made to the Board only. The statute, as it was formerly, gave no authority to delegate it differently or to another person or persons. When it spoke of procedure in sub-section (5), it spoke of the procedure of the Board as constituted. The lacuna in the Act must have been felt, otherwise, there was no need to enact sub-section (4A). The argument of the learned Attorney-General that sub section (4A) was not needed at all, does not appeal to me. It is quite clear that its absence would give rise to the argument accepted by me, which argument is unanswerable in the absence of a provision such as the new sub-section. My brother Shelat has dealt with this aspect of the case fully and I cannot add anything useful to what he has said. I agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s already been dealt with in part when I considered the malice and influence of the Minister. It may be said at once, that apart from that allegation, nothing has been said attributing to the Chairman any personal bias, grudge, oblique motive or ulterior purpose. Even in the arguments it was not suggested that the Chairman acted from improper motives. Therefore, all that I have to consider is whether the action of the Chairman can be challenged as done either contrary to the provisions empowering him or beyond those provisions. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Now the Chairman in his affidavit referred to two memoranda dated May 30, 1964, and July 4, 1964, presented by certain ex-directors and also stated that from September, 1961, complaints were being received in regard to the conduct of the affairs of the company, and one such complaint was received from the Special Police Establishment in November, 1963. The nature of the complaints was not disclosed but in reference to the memoranda it was stated that "irregularities" and "illegalities" in the conduct of the affairs of the company were alleged therein. It was also stated that the memo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h it due to differences with petitioner No. 2 on account of the manner in which the affairs of the company were being conducted." (Paragraph 14 of the affidavit) It may be mentioned that in paragraph 16 of the affidavit the Chairman also stated: "With reference to paragraph 21 of the petition, I have already stated above that there was ample material before the Board on which it could and did form the opinion that there were circumstances suggesting that the business of the company was being conducted with intent to defraud its creditors, members and other persons and further that the persons concerned in the management of the affairs of the company had in connection therewith been guilty of fraud, misfeasance and other misconduct towards the company and its members." The question thus arises what has the Chairman placed, before the court to indicate that his action was within the four corners of his own powers ? Here it must be noticed that members are ordinarily expected to take recourse to the Registrar because there they have to be in a certain number or command a certain proportion of the voting power. They are also required to give evidence and the company gets an opp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er words, he has not disclosed anything from which it can be said that the inference which he has drawn that the company was being conducted with intent to defraud its creditors, members and other persons or persons concerned in the management of the affairs of the company were guilty of fraud, misfeasance and misconduct towards the company and its members was based on circumstances present before him. In fact, paragraph 16 is no more than a mechanical repetition of the words of the section. Coming now to the affidavit of Mr. Dang I find that he merely repeats what was stated in the affidavit of the Chairman. He also said that he had seen the papers and agreed with his two Under-Secretaries and the Regional Director that a "deeper probe" was necessary. There is no hint even in this affidavit that the circumstances were such as to suggest fraud, intent to defraud or misconduct, that is to say, circumstances under which investigation can be ordered. The other affidavits also run the same way and it is not, therefore, necessary to refer to them. We are concerned really with the affidavits of the Chairman and Mr. Dang in relation to the exercise of the power conferred by section 237( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not re-delegate his authority. As a general rule, "if the statute directs that certain acts shall be done in a specified manner or by certain persons, their performance in any other manner than that specified or by any other person than one of those named is impliedly prohibited" : see Crawford on Statutory Construction, 1940 edition, article 195, page 335. Normally, a discretion entrusted by Parliament to an administrative organ must be exercised by that organ itself. If a statute entrusts an administrative function involving the exercise of a discretion to a Board consisting of two or more persons it is to be presumed that each member of the Board should exercise his individual judgment on the matter and all the members of the Board should act together and arrive fat a joint decision. Prima facie, the Board must act as a whole and cannot delegate its function to one of its members. The learned Attorney-General submitted that a distribution of business among the members of the Company Law Board is not a delegation of its authority, and the maxim has no application in such a case. I cannot accept this submission. In Cook v. Ward [1877] LR 2 CPD 255 , the court held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olves the exercise of a discretion. Prima facie, all the members of the Board acting together were required to discharge this function and they could not delegate their duty to the Chairman. However, under sections 10E(5) and 642(1), the Central Government may frame rules regulating the procedure of the Board and generally to carry out the purposes of the Act. In the context of section 10E, I am inclined to construe this rule-making power liberally. The Central Government has power to constitute the Company Law Board, to delegate its functions to the Board and to control the Board in the exercise of its delegated functions. In this background, by conferring on the Central Government the additional power of framing rules regulating the procedure of the Board and generally to carry out the purposes of section 10E, Parliament must have intended I that the internal organisation of the Board and the mode and manner of j transacting its business should be regulated entirely by rules framed by the Government. The Government had, therefore, power to frame the Company Law Board (Procedure) Rules, 1964, authorising the Chairman to distribute the business of the Board. In the exercise of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the management resulting in double expenditure, huge losses, sharp fall in the price of the company's shares and the resignation of some of the directors on account of differences in opinion with the managing director. I think that these circumstances, without more, cannot reasonably suggest that the business of the company was being conducted to defraud the creditors, members and other persons or that the management was guilty of fraud towards the company and its members. No reasonable person who had given proper consideration to these circumstances could have formed the opinion that they suggested any fraud as mentioned in the order dated May 19, 1965. Had the Chairman applied his mind to the relevant facts, he could not have formed this opinion. I am therefore inclined to think that he formed the opinion without applying his mind to the facts. An opinion so formed by him is in excess of his powers and cannot support an order under section 237( b ). The appeal is allowed and the impugned order is set aside. concur in the order which Shelat J. proposes to pass. Shelat J. The appellant-company is a public limited company registered on July 28, 1961, having its registered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough it had been incorporated as early as July, 1961, production had not commenced. There arose also disputes among its directors. On May 30, 1964, and July 9, 1964, four of its directors submitted two memoranda alleging irregularities and even illegalities in the conduct of the company's affairs to the Company Law Board. According to the second appellant, the four directors were disgruntled directors, hostile to him and the company. The company was not able to start work in full capacity not because of any irregularities but because of the faulty planning and designing by the collaborators. The company realised this fact only in June, 1964, when it received a survey report after the breakdown of the plant during that month from Messrs. Humphreys and Glascow (Overseas) Ltd., Bombay. In September, 1964, a meeting was arranged in London between the company's representatives and the representatives of L.A. Mitchell Ltd. of which Lord Poole was the chairman. It was agreed that L.A. Mitchell Ltd. should depute Messrs. Humphreys and Glascow Ltd., London, to go through the designs, etc., and to make a report showing the causes of the repeated failures of the plant and suggesting remedie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company Law Board there are circumstances suggesting that the business of M/s. Barium Chemicals Ltd. . . . is being conducted with 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. G.S.R. 178, dated the 1st February, 1964, the Company Law Board hereby appoint . . . as inspectors to investigate the affairs of the company since its incorporation in1961. . ." On May 25, 1965, search warrants were obtained by respondents Nos. 3 to 10 and accordingly search was carried out at the office of the company at Ramavaram and at the residence of the second appellant and several documents and files were seized. On May 28, 1965, the second appellant submitted a representation to the Chairman of the first respondent Board. He explained that out of the company's paid up capital of Rs. 50 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he parties were enough for the disposal of the petition. On October 7, 1965, the High Court dismissed the petition observing that the appellants had failed to establish their allegation as to mala fides and accepted the respondents' contention that the decision to order investigation was arrived at in December, 1964, but could not be crystallized into a formal order till May 19, 1965, owing to language strikes in Madras and other administrative difficulties and that the fact the order was ultimately passed on May 19, 1965, soon after the said meetings of the 10th and 11th May, 1965, was a mere coincidence. The High Court was also of the view that even assuming that the second respondent had retained his interest in M/s. T.T.K. Co., and that firm was interested in the production of barium chemicals or for being appointed as sole selling agents or otherwise, the first respondent, its chairman and officials were not shown to have been, aware of the second respondent's interest in M/s. T.T.K. Co. and therefore in the absence of any allegation of persona] malice against them the allegation as to mala fides failed. The High Court also rejected the contention that section 237( b ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cers to furnish information or' explanation. If such information or explanation is not furnished or is inadequate, the Registrar has the power to order production of such books and papers he thinks necessary for his inspection and thereupon it is the duty of the company and its officers to produce such books and papers. Sub-section (4) provides for penal consequences for failure to furnish information or explanation or to produce the books and papers. Sub-section (6), provides that if the said information or explanation is not furnished within the specified time or if on perusal of such information or explanation, etc., furnished or produced under sub-section (3A) or (4) the Registrar is of opinion that the document referred to in sub-section (1) together with such information or explanation to be furnished as aforesaid discloses an unsatisfactory state of affairs, he has to report the case to the Central Government. Sub-section (7) provides that if it is represented to the Registrar on materials placed before him by a contributory or a creditor or any other person interested that ( i ) the business of the company is being carried on in fraud of its creditors or of persons dealin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fraudulent or unlawful purpose or in a manner oppressive of any of its members, or ( ii ) that the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or any of its members. Sub-clause ( iii ) is not relevant and therefore need not be cited. Thus the consideration on which action is permissible under section 234 and the kind of action taken thereunder are different from those under section 237. It is true that the authority to take action under section 235 is the Government and the action authorised thereunder is investigation but action can be taken thereunder not suo moto but only on an application by a certain number of members or by members with a certain amount of voting power or on the Registrar's report. Section 234, besides, has nothing to do with investigation as section 235 and section 237 have, though on a report under section 234, the Government can institute investigation under clause ( e ) of section 235. Section 10E was inserted in the Act by Act LIII of 1963 and deals with the constitution of the Company Law Board. The Board constituted under this section consists of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the interests of M/s. T.T.K. Co., in which he continued to have interests in one way or the other and that his stand that he went out of the firm long before he became the Minister and had nothing to do with it thereafter was not true. The registration of the firm on December 21, 1943, shows that the second respondent was a partner therein along with his son, Narasimhan and, one G. Veeraraghavan. It appears that in 1947 there was a change in the firm's constitution. The registration on April 18, 1947, shows that the second respondent ceased to be a partner, his two sons, T.T. Narasimhan and T.T. Rangaswami, were henceforth the partners and in his place was substituted his minor son, T.T. Basu, entitled to the benefits of the firm, the minor son being represented by the second respondent as his father and guardian. The said minor son attained majority on April 27, 1947. but he gave notice of election to become a partner only on April 5, 1952. It was said that this fact indicated that the second respondent maintained his interest till April, 1952. According to the second appellant, the second respondent's active interest in the firm did not cease even after 1952. Mr. Setalva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries against what he called manipulations in the policy of manufacture of motor cycles in favour of the said Madras concern with which he alleged the second respondent was on friendly terms. The case of the second appellant was that it was due to his efforts that the Government revised its policy in 1959, invited applications from other persons interested in the manufacture and on April 9, 1960, granted a licence to the Ideal Motors of Bombay for manufacture of motor cycles. It was also pointed out that in the General Elections of 1957, the second appellant supported the candidature of one Balasubramania Mudaliar, the rival of the second respondent. Mr. Setalvad argued that these facts established at least a prima facie , case of ( i ) the second respondent's continued interest in M/s. T.T.K. Co. in spite of his denial, ( ii ) the trade rivalry between the appellant-company and M/s. T.T.K. Co., ( iii ) the attempt of that firm to have control or at least a substantial interest in the appellant-company through a collaboration agreement with the German company, and ( iv ) of personal animosity. He contended that with this background the appellant-company should have been affor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to mala fides was that the impugned order was not really the order of the Board but that it was made at the second respondent's dictate and that though it was issued formally by the Board it was in truth that of the second respondent who manoeuvred to have it passed. The question then is : What were the materials placed by the appellant in support of his case which the respondents had to answer ? According to paragraph 27 of the petition, the proximate cause for the issuance of the order was the discussion that the two friends of the second respondent had with him, the petition which they filed at his instance and the direction which the second respondent gave to respondent No. 7. But these allegations are not grounded on any knowledge but only on "reasons to believe". Even for their reasons to believe, the appellants do not disclose any information on which they were founded No particulars as to the alleged discussion with the second respondent, or of the petition which the said two friends were said to have made, such as its contents, its time or to which authority it was made are forthcoming, fit is true that in a case of this kind it would be difficult for a petitioner to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion the conditions of section 237( b ) were existent. Can the High Court in these circumstances be said to have failed to exercise its discretion when it refused to take evidence in addition to the affidavit evidence by permitting the appellants to cross-examine the second respondent and the Chairman of the Board and to compel production of documents which they desired to have produced ? In a petition under article 226, there is undoubtedly ample power in the High Court to order attendance of a deponent in court for being cross-examined. Where it is not possible for the court to arrive at a definite conclusion on account of there being affidavits on either side containing allegations and counter-allegations, it would not only be desirable but in the interest of justice the duty also of the court to summon a deponent for cross-examination in order to arrive at the truth. As observed in A.P.S.R.T. Corporation v. Satyanarayan Transports AIR 1965 SC 1303, 1307 , if the evidence led by the parties is tested by cross-examination, it becomes easier to determine where the truth lies. In B. Venkatarathnam v. Registrar of Co-operative Societies, Andhra Pradesh CA No. 321 of 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r grave, cannot substitute evidence. It is true as observed in Pannalal Binjraj v. Union of India [1957] SCR 233, 259; [1957] 31 ITR 565, that in a case where want of bona fides in the authority passing the impugned order is alleged the burden of proof, though on the party alleging it, is to the extent of its being shown as reasonably probable. But the allegation made in the present case is that the impugned order was in fact the order of the second respondent either because he directed the seventh respondent to make it or because he agreed to it or that it was passed by the authority not on his own but at the behest of the second respondent. In the present case the court is not directly concerned with the alleged malice the second respondent might have against the appellants. The Board is a statutory authority, has an independent existence and the absence of bona fides with which the court in such a case is concerned is that of the Board and not of the second respondent. As observed in Partap Singh v. State of Punjab AIR 1964 SC 72, 81 an allegation as to bad faith or indirect motive or purpose cannot be held established except on clear proof thereof. In the absence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, for, what the clause lays down is that the authority must come to an opinion on materials before it that there exist circumstances suggesting fraud or intent to defraud, etc. Such dichotomy, according to him, is impossible and not reasonable because it cannot be that the authority must first ascertain by holding an inquiry that there are circumstances suggesting fraud or intent to defraud etc. and then form a subjective opinion that those circumstances are such as to suggest those very things. He emphasised that the words "opinion" and "suggesting" were clear indications that the entire function was subjective, that the opinion which the authority has to form is that circumstances suggesting what is set out in sub-clauses ( i ) and ( ii ) exist and, therefore, the existence of those circumstances is by itself a matter of subjective opinion. The legislature having entrusted that function to the authority, the court cannot go behind its opinion and ascertain whether the relevant circumstances existed or not. The question is which of the two constructions is correct ? In Emperor v. Sibnath Banerjee [1944] FCR 1; [1943] FLJ 151, 166, 181, one of the questions which arose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith similar words in section 2 of the Central Provinces and Berar Public Safety Act, 1948, again held that the court can examine the grounds disclosed by the Government to see if they are relevant to the object which the legislature had in view, viz., the prevention of acts prejudicial to public safety and tranquillity, for, satisfaction in this connection must be grounded on materials which are of rationally probative value. In this case, the statute no doubt required that the grounds should be disclosed but that makes no difference to the principle that though the satisfaction was exclusively of the executive authority, it was none the less a condition precedent to the exercise of the power. In Atma Ram Sridhar Vaidya's case ( supra ), this court, while dealing with section 3 of the Preventive Detention Act, 1950, observed that though the satisfaction necessary thereunder was that of the Central or the State Government and the question of satisfaction could not be challenged except on the ground of mala fides , the grounds on which it was founded must have a rational connection with the objects which were to be prevented from being attained. At page 176 it is stated : "If, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fides and was therefore invalid. The University contended that its powers were cumulative and that it could resort to either of the two remedies open to it. The action adopted by the University was executive. Yet, this court held that though the University possessed both the powers and could exercise one or the other of them, the action, as held in the State of Kerala v. C. M. Francis Co. [1961] 3 SCR 181 , could still be challenged on the ground of its being ultra vires . Hidayatullah J. said that proof of alien or irrelevant motive is only an example of the ultra vires character of the action. The University having adopted action under Statute 30, it was not possible to undo everything and rely upon other powers which were not available in the special circumstances which led to action under the statute and that, though the University had the discretion to adopt either of the two courses, the discretion could not be read in the abstract but had to be read within the four corners of Statute 30 and not outside it. In this sense action on matters extraneous to the statute conferring power is a species of the vice of ultra vires. These two are sometimes inter-related and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as limited by the terms of the said Ordinance and therefore the declaration was liable to a challenge if the authority stepped beyond those terms and (2) that the ground on which it was made was other than the one set out in the Ordinance. In Ross-Clunis v. Papadopoullos [1958] 1 WLR 546, 560, the challenge was to an order of collective fine passed under regulation 3 of the Cyprus Emergency Powers (Collective Punishment) Regulations, 1955, which provided that if an offence was committed within any area of the colony and the Commissioner "has reason to believe" that all or any of the inhabitants of that area failed to take reasonable steps to prevent it to render assistance to discover the offender or offenders, it would' be lawful for the Commissioner with the approval of the Governor to levy a collective fine after holding an inquiry in such manner as he thinks proper subject to satisfying himself that the inhabitants of the area had been given an adequate opportunity of understanding the subject-matter of the inquiry and making representations thereon. The contention was that the only duty cast on the Commissioner was to satisfy himself of the facts set out in the Regulation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 62 of the Defence (Control of Textiles) Regulations, 1945. Lord Radcliffe, who spoke for the Board, first considered the construction given to similar words in Liversidge v. Anderson [[1942] AC 206 and said : "Their Lordships do not adopt a similar construction of the words in Regulation 62 which are now before them. Indeed, it would be a very unfortunate thing if the decision in Liversidge's case ( supra ) came to be regarded as laying down any general rule as to the construction of such phrases when they appear in statutory enactments. It is an authority for the proposition that the words ' if A.B. has reasonable cause to believe ' are capable of meaning 'If A.B. honestly thinks that he has reasonable cause to believe' and that in the context and attendant circumstances of Defence Regulations 18B, they did in fact mean just that." Having confined that construction to that case only, he proceeded to observe : "After all, words such as these are commonly found when a legislature or law-making authority confers powers on a minister or official. However read, they must be intended to serve in some sense as a condition limiting the exercise of an otherwise arbitrary powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of" as whether a law which requires the High Court to order winding up because the Reserve Bank is of that opinion is constitutional. But it is not without significance that the divergence of opinion in this court was that according to the minority opinion the vice of the impugned provision lay in the power vested in the Reserve Bank to apply to the High Court for a winding up order exercisable solely on its subjective satisfaction while according to the majority opinion the power did not rest solely on the subjective satisfaction and that what the impugned clause did was to leave the determination of an issue to an expert body, viz., whether the continuance of the banking company in question was detrimental to the interests of the depositors. In support of this view Hidayatullah J., speaking for the majority, made the following significant observation : "It is enough to say that the Reserve Bank in its dealings with banking companies does not act on suspicion but on proved facts." And again, at page 672, he observed : "But this seems certain that the action (winding up) would not be taken up without scrutinising all the evidence and checking and re-checking all the findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and not of the court such an opinion is not subject to a challenge on the ground of propriety, reasonableness or sufficiency. But the authority is required to arrive at such an opinion from circumstances suggesting what is set out in sub-clause ( i ), ( ii ) or ( iii ). If these circumstances were not to exist, can the Government still say that in its opinion they exist or can the Government say the same thing where the circumstances relevant to the clause do not exist ? The legislature no doubt has used the expression "circumstances suggesting". But that expression means that the circumstances need not be such as would conclusively establish an intent to defraud or a fraudulent or 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 a matter of subjective opinion. That expression points out 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. It is hard to contemplate that the legislature could have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naging director, petitioner No. 2 ; ( ii )since its floatation the company has been continuously showing losses and nearly l/3rd of its share capital has been wiped off; ( iii )that the shares of the company which to start with were at a 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." No doubt the words " inter alia " occur in this paragraph but that expression means no more than that those which are set out were among others. But those others would be of the same category, for if they were of other category they would naturally be stated. The deponent would not be content by using the expression " inter alia " unless he meant that the things contained in that phrase were of the same type as those expressly set out. Paragraph 16 is in reply to paragraph 21 of the petition which alleges that there was no material from which the Board could form the opinion and that no such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd formed the opinion. In paragraph 8 of his affidavit, the Chairman no doubt refers to other materials which he says he was agreeable to disclose to the court though not to the appellants. But those materials, assuming they were before him, cannot help, for they would not disclose any circumstances other than those formulated in paragraph 14. This is clear from the fact that, as stated there, those circumstances were deduced from the said memoranda and ''other examination" meaning the examination of all the materials before him. The question is : are the Materials formulated in paragraph 14 circumstances suggestive of the .things set out in clause ( b ) ? The learned Attorney-General contended that on the assumption that paragraph 14 disclosed the circumstances, they would suggest an intent to defraud, fraudulent management, misfeasance or misconduct; and that even if delay, bungling and faulty planning of the project might not suggest the relevant intent or purpose, they together with the facts that one-third of the subscribed share capital was wiped off, the shares of the company being quoted at half of their face value and of some eminent persons having severed their connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volving, according to current notions of fair trading among commercial men, real moral blame". 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 director 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 (cf. In re Kingston Cotton Mill Co. (No. 2) [1898] 2 Ch. 279 and Cavendish Bentinck v. Fenn ) [1887] 12 App. Cas. 652. Are the allegations set out in paragraph 14 of the Chairman's affidavit capable of suggesting an intent to defraud or a fraudulent or unlawful purpose either in the formation or conduct of the company or misfeasance or misconduct towards the company or its members ? Delay, bungling and faulty planning of the project entailing double expenditure, continuous losses resulting in 1/3rd of the share capital being wiped out, shares being quoted at half their face value and severance of their connection by some eminent persons cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcise its delegated power by one of them or by the Board as a whole, but notwithstanding such distribution it is the Board which acts. As an analogy he relied on section 10A and section 10B under which the Company Tribunal is constituted and which enables its Chairman to form Benches which discharge the functions entrusted to the Tribunal, to section 6 of the Code of Criminal Procedure and to article 145 and the orders passed by this court delegating certain powers to the Registrar to show that procedure might differ from Act to Act according to the legislative understanding of the word "procedure". Therefore, he argued, the expression "procedure" must not be construed in any inflexible sense. When a particular procedure permits allocation of work for the smooth discharge or exercise of a function or power, it is not tantamount to sub-delegation but is simply distribution. However wide a connotation of the word "procedure" one may accept, there is a sharp cleavage between power and procedure. Section 10E which provides for the constitution of the Board nowhere provides for the splitting up of the Board into benches as is expressly done in the case of the Tribunal under section 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions and Acts relied upon by the learned Attorney-General, such as section 10A or section 10B of the Act or section 6 of the Code of Criminal Procedure or article 145 of the Constitution. Under the first, there is an expresss provision providing for the constitution of benches of the Tribunal which was absent in section 10E till sub-section (4A) was enacted ; under the second the Code provides for setting up of different kinds of courts with varying jurisdiction. Such an arrangement can bear no analogy as it is not distribution of power of one body to its components. The third illustration also gives no assistance, for it relates not to procedure but to entrustment of certain functions to the Registrar of this court. Such power is there in article 145 which is an inclusive article. It was however argued that under section 165( b ) of the English Companies Act, 1948, a power similar to the one under section 237( b ) has been conferred on the Board of Trade. Reliance was placed on a passage in Halsbury's Laws of England (3rd edition), vol. VII, at page 421, where it is stated that the Board of Trade never meets and for all practical purposes the President is the Board of Trade. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by which the Government can take action, under section 234 or section 235 and section 236 and lastly under section 237( b ), that the power contained under section 237( b ) was more drastic than under the former sections and that these sections enabled the Government to discriminate between companies and companies and pick and choose any one of them at its pleasure for action under section 237( b ) In support of this contention reliance was placed on Suraj Mall Mohta Co. v. A.V. Visvanatha Sastri [1955] 1 SCR 448; [1954] 26 ITR 1 where section 5(4) of the Taxation on Income (Investigation Commission) Act, 1947, was declared discriminatory legislation and Shree Meenakshi Mills Ltd. v. A.V. Visvanatha Sastri [1955] 1 SCR 787 ; [1954] 26 ITR 713, reported in the same volume, at page 787, where section 5(1) of the Act was struck down after the Income-tax (Amendment) Act, XXXIII of 1964, was enacted. These decisions, however, cannot avail the petitioners, for the reasons for which these provisions were struck down are lacking in the present case. No question of discrimination arises in regard to the powers under section 234 and section 237. Section 234 only empowers the Regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company's affairs. Even if it is regarded as a restriction, it is not possible to say that it is not protected under clause 6 of article 19(1). As stated in Raja Narayan Bansilal v. Maneck Phiroz Mistry [1961] 1 SCR 417, 444 ; [1960] 30 Comp. Cas. 644 , though the Companies Act, on the one hand, throws open to all citizens the privilege of carrying on business with limited liability, on the other hand, since the company's business has to be conducted through human agency, irregularities and even malpractices in the management of the company's affairs sometimes arise. "If persons in charge of the management of companies abuse their position and make personal profit at the cost of the creditors, contributories and others interested in the company, that raises a problem which is very much different from the problem of ordinary misappropriation or breach of trust. The interest of the company is the interest of several persons who constitute the company, and thus persons in management of the affairs of such companies can be classed by themselves as distinct from other individual citizens. A citizen can and may protect his own interest, but where the financial interest of a large num ..... X X X X Extracts X X X X X X X X Extracts X X X X
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