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1968 (12) TMI 50

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..... suming without deciding, that the allegations against him are true, was not a relevant circumstance. That circumstance should not have been allowed to cloud the opinion of the Government. The Government is charged with the responsibility to form a bona fide opinion on the basis of relevant material. The opinion formed in this case cannot be held to have been formed in accordance with law. In the result we allow these appeals and set aside the impugned order. - 2274 TO 2276 OF 1966 - - - Dated:- 16-12-1968 - S.M. SIKRI, R.S. BACHAWAT AND K.S. HEGDE, JJ. M C. Setalvad, M.C. Chagla, R.K. Garg, S.C. Agarwal and Miss. S. Chakravarti for the Appellant. Niren De, V.C. Mahajan and S.P. Nayar for the Respondent. JUDGMENT Hegde, J. The only question that arises for decision in these appeals by special leave is whether the order made by the Central Government in No. 2(4)-CL.I/63, Government of India, Ministry of Commerce and Industry, Department of Company Law Administration, on April 11, 1963, is liable to be struck down as not having been made in accordance with law. The appellant in these appeals is a company incorporated under the Indian Companies .....

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..... ame of President of India. Sd/-D. S. DANG, Deputy Secretary to the Government of India". The time granted to the inspector has been repeatedly extended. For one reason or the other the investigation directed is still in its initial stage. The various extensions given for completing the investigation are also challenged in some of the appeals. But that contention was not debated before us. Hence it is not necessary to consider that question. The contention of the appellant is that the Central Government had no material before it from which it could have come to the conclusion that the business of the appellant-company is being conducted with intent to defraud its creditors, members or other persons or the persons concerned in the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the said company or its members. In response to the rule issued by the Patna High Court, Shri Rabindra Chandra Dutt, the then Secretary to the Government of India, Ministry of Finance, Department of Company Affairs and Insurance, and Chairman, Company Law Board, New Delhi, filed an affidavit in opposition on behalf of the respondent .....

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..... of the High Court is challenged in this court. When this appeal came up for hearing on 17th September, 1968, this court directed the respondents to file a further affidavit placing on record tuc complaints mentioned in paragraph 5( b ) of the aforementioned affidavit of Shri Rabindra Chandra Putt. The said affidavit was directed to be filed within a fortnight from that date and the appellants were permitted to file a reply affidavit within a week thereafter. In pursuance of the above order Shri Sisir Kumar Datta, Secretary to the Government of India, Ministry of Industrial Development and Company Affairs, Department of Company Affairs, New Delhi, filed his affidavit on October 4, 1968. Along with that affidavit he produced in court three complaints received by the Government which are marked as Annexures "A" to "C". Shri Datta does net claim to have any personal knowledge of the facts of this case. Therefore the only additional material that is placed before us are the three annexures marked as annexures "A" to "C". Shri Niren De, learned Attorney-General stated before us that the Union of India had placed before the court all the relevant material it possessed bearing on the .....

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..... agents appear to have been done to benefit the managing agents, their friends and brokers, at the expense of shareholders. It appears that the preference shares in this company were sold at the market rate of Rs. 100 each when these could be converted into ordinary shares of Rs. 10 each which were then quoting at Rs. 15 in the stock market. This and various other acts of deliberate commissions and omissions require a thorough investigation so that shareholders in general may have a feeling of security in the company". It appears that Albion Plywoods Ltd. at the relevant time had a subscribed capital of rupees ten lakhs made up of 50,000 ordinary shares of the face value of Rs. 10 each and 5,000 preference shares of the face value of Rs. 100 each. Though the preference shares were not by right convertible into ordinary shares, it appears in about the end of April or beginning of May, 1960, the Albion Plywoods Ltd. gave notice of a special resolution to Dermit the conversion of the preference shares into ordinary shares and the said resolution was passed by the general meeting on May 20, 1960. On May 6, 1960, the appellant-company which held 3,000 preference shares of the Albion Pl .....

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..... ns were gathered from Indian Finance. Evidently as he was inquiring into the complaint made against the New Central Jute Mills Co. Ltd. he did not mention the market quotation for the shares in question either on May 6, 1960, or immediately before that date. During the hearing of these appeals an affidavit has been filed on behalf of the appellant stating that the market quotation of the ordinary share in the Albion Plywoods Ltd. on May 6, 1960, or immediately before that date was Rs. 11. Along with that affidavit, the relevant copy of the Indian Finance was produced. It was not disputed before us that the market quotation for the ordinary shares of Albion Plywoods Ltd. on or immediately before May 6, 1960, was Rs. 11 per share. At this stage it may be mentioned that though the Under-Secretary to the Government required the Regional Director to find out the names of the partners of Bagla and Co. and whether the brokers who dealt with the shares were actively associated with Sahu Jain, it does not appear that the Regional Director supplied those informations. Admittedly, there was no material before the Government when it issued the impugned order from which it could have reason .....

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..... ported by evidence and power to call for security. An application by members of a company under clause ( a ) or ( b ) of section 235 shall be supported by such evidence as the Central Government may require for the purpose of showing that the applicants have good reason for requiring the investigation ; and the Central Government may, before appointing an inspector, require the applicants to give security, for such amount not exceeding one thousand rupees as it may think fit, for payment of the costs of the investigation". The power conferred on the Central Government under section 235 as well as under section 237( b ) is a discretionary power whereas the Central Government is bound to 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 the company by special resolution or the court by order declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government (section 237( a )( i ), ( ii );. It may be noted that before the Central Government car take action under section 235 certain pre-conditions have to be satisf .....

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..... red. Hence, it is clear that in making the impugned order irrelevant considerations have played an important part. The power under sections 235 to 237 has been conferred on the Central Government on the faith that it will be exercised in a reasonable manner. The department of the Central Government which deals with companies is presumed to be an expert body in company law matters. Therefore, the standard that is prescribed under section 237( b ) is not the standard required of an ordinary citizen but that of an expert. The learned Attorney-General did not dispute the position that if we come to the conclusion that no reasonable authority would have passed the impugned order on the material before it, then the same is liable to be struck down. This position is also clear from the decision of this court in Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp. Cas. 639 ; [1966] Supp. S.C.R. 311. It was urged by Mr. Setalvad, learned counsel for the appellant, that clause ( b ) of section 237 prescribed two requirements, i.e., ( 1 ) the requisite opinion of the Central Government and ( 2 ) the existence of circumstances suggesting that the company's business was being co .....

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..... on must be demonstrable ; if their existence is questioned, it has to be proved at least prima facie ; it is not sufficient to assert that those circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness ; the conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In other words, they held that, although the formation of opinion by the Central Government is a purely subjective process and such an opinion cannot be challenged in a court on the ground of propriety, reasonableness or sufficiency, the authority concerned is nevertheless required to arrive at such an opinion from circumstances suggesting the conclusion set out in sub-clauses ( i ), ( ii ) and ( iii ) of section 237( b ) and the expression "circumstances suggesting" cannot support the construction that even the existence of circumstances is a matter of subjective opinion. Shelat J. further observed that it is hard to contemplate that the legislature could have left to the subjective process both the formation of opinion and also the existence of circumstances on which it is to be founded; .....

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..... expediency of making a reference in the circumstances of a particular case are matters entirely for the Government to decide upon, and it will not be competent for the court to hold the reference bad and quash the proceedings for want of jurisdiction merely because there was, in its opinion, no material before the Government on which it could have come to an affirmative conclusion on those matters". This interpretation of section 10(1) is based on the language of that provision as well as the purpose for which the power in question was given and the effect of a reference. That decision cannot be considered as an authority for the proposition that whenever a provision of law confers certain power on an authority on its forming a certain opinion on the basis of certain facts the courts are precluded from examining whether relevant facts on the basis of which the opinion is said to have been formed were in fact existent. Reliance was next placed on the decision of this court in Josep Kuru-villa Vellukunnel v. Reserve Bank of India [1962] 32 Comp. Cas. 514; [1962] Supp. 3 SCR 632 , wherein this court was called upon to examine the vires of section 38( 1 ) and 3( b )( iii ) of .....

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..... ject to the mandate of article 19( 1 )( g ). Further, their Lordships were careful enough to observe: "that they are unable to see that there is anything in the language of the sub-section or in the subject matter to which it relates on which to found the suggestion that the opinion of the Government is to be subject to objective tests". In other words in their Lordships' opinion the subject matter of a legislation has an important bearing on the interpretation of a provision. We may also add that section 4(1) of the Electricity Act, 1910, stood by itself and in finding out its scope no assistance could have been taken from any other provision in that Act. In Robinson v. Minister of Town and Country Planning [1947] 1 KB 702 the declaratory order made by the Minister that he was satisfied that the area comprised in the order should be "laid out afresh and re-developed as a whole" was held not open to judicial review. The order in question to an extent depended on questions of policy. It is not open for courts to decide questions of policy. In Point of Ayr. Collieries Ltd.v. Lloyd George [1943] 2 All ER 546 (CA) the Court of Appeal upheld the contention that the order .....

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..... on 62, 'where the Controller has reasonable grounds to believe that any dealer is unfit to be allowed to continue as a dealer' as imposing a condition that there must in fact exist such reasonable grounds, known to the Controller before he can validly exercise the power of cancellation". The decision of the House of Lords in Padfield v. Minister of Agriculture, Fisheries and Food [1968] AC 997, 1046; [1968] 1 All. ER 604 is of considerable importance. Therein the material facts are these. The appellants in that appeal, members of the south-east regional committee of the Milk Marketing Board, made a complaint to the Minister of Agriculture, Fisheries and Food, pursuant to section 19( 3 ) of the Agricultural Marketing Act, 1958, asking that the complaint be referred to the committee of investigation established under that enactment. The complaint was that the board's terms and prices for the sale of milk to the board did not take fully into account variations between producers and the cost of bringing milk to a liquid market. In effect, the complaint was that the price differential worked unfairly against the producers in the popular south-east region, where milk was more valua .....

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..... ter has a complete discretion under the Act of 1958, as in my opinion he has, the only question remaining is whether he has exercised it lawfully. It is on this issue that much difference of judicial opinion has emerged although there is no divergence of opinion on the relevant law. As Lord Denning M. R. said, citing Lord Greene M. R. in Associated Pro vincial Picture Houses Ltd. v. Wednesbury Corpn. [1947] 2 All. EE. 680, '......a person entrusted with a discretion must direct himself properly in law. He must call his own attention to the matters which he is bound to consider. He must exclude from his consideration matters which are irrelevant to the matters that he has to consider'". Lord Pearce in his speech observed [1968] AC 997, 1053: "If all the prima facie reasons seem to point in favour of his taking a certain course to carry out the intentions of Parliament in respect of a power which it has given him in that regard, and he gives no reason whatever for taking a contrary course, the court may infer that he has no good reason and that he is not using the power given by Parliament to carry out its indentions. In the present case, however, the Minister has given reaso .....

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..... necessarily make that authority the sole judge of what are its powers as well as the sole judge of the way in which it can exercise such powers as it may have. It is axiomatic that, to follow the words used by Lord Radcliffe in the Canadian case ( Attorney-General for Canada v. Hallet Carey Ltd. [1952] A.C. 427) ' the paramount rule remains that every statute is to be expounded according to its manifest or expressed intention'. It is no less axiomatic that the application of that rule may result in phrases identical in wording or in substance receiving quite different interpretations according to the tenor of the legislation under consideration. As an apt illustration of such a result it is not necessary to go further than Liversidge v. Anderson [1942] AC 206; [1941] 3 All. ER 338 (HL) and Nakkuda Alt v. Jayaratne [1951] AC 66 (PC) in which cases the words 'reasonable cause to believe' and 'reasonable grounds to believe' received quite different interpretations. To my mind a court is bound before reaching a decision on the question whether a regulation is intra vires to examine the nature, objects, and scheme of the piece of legislation as a whole and in the lig .....

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..... ons. In interpreting section 237( b ) we cannot ignore the adverse effect of the investigation on the company. Finally, we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under article 19(1)( g ) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of the general public. In fact the vires of that provision was upheld by a majority of the judges constituting the Bench in Barium Chemicals' case ( supra ) principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated earlier, we agree with the conclusion reached by Hidayatullah and Shelat JJ. in Barium Chemicals' case ( supra ) that the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards t .....

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..... ernment was a wholly irrational opinion. The fact that one of the leading directors of the appellant-company was a suspect in the eye of the Government because of his antecedents, assuming without deciding, that the allegations against him are true, was not a relevant circumstance. That circumstance should not have been allowed to cloud the opinion of the Government. The Government is charged with the responsibility to form a bona fide opinion on the basis of relevant material. The opinion formed in this case cannot be held to have been formed in accordance with law. In the result we allow these appeals and set aside the impugned order. The respondents shall pay the costs of the appellant both in this court as well as in the High Court (Hearing fee one set). Bachawat, J. The Central Government is authorised to appoint an inspector to investigate the affairs of a company under section 235, clauses ( a ) and ( b ), of the Companies Act, 1956, on the applications of its members, under section 235, clause ( a ), on the report of the Registrar, under section 237, clause ( a ), sub-clause ( i ), if required by a special resolution of the company, under section 237, clause ( a ), s .....

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..... n administrative and not a judicial power; secondly, that the power is discretionary, thirdly, that the object of the investigation is to find out whether in fact fraud, etc., have been committed by persons in relation to the company's affairs, fourthly, that the condition for making the order is the opinion of the Central Government that there are circumstances suggesting fraud, etc., and, lastly, that there is no appeal from such opinion to the court. The law recognises certain well recognised principles within which the discretionary power under section 237( b ) must be exercised. There must be a real exercise of the discretion. The authority must be exercised honestly and not for corrupt or ulterior purposes. The authority must form the requisite opinion honestly and after applying its mind to the relevant materials before it. In exercising the discretion the authority must have regard only to circumstances suggesting one or more of the matters specified in sub-clauses ( i ), ( ii ) and ( iii ). It must act reasonably and not capriciously or arbitrarily. It will be an absurd exercise of discretion, if, for example, the authority forms the requisite opinion on the ground that .....

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..... of 1910), which read : "The Provincial Government may, if in its opinion the public interest so requires, revoke a licence in any of the following cases, namely : ( a ) where the licensee, in the opinion of the Provincial Government, makes wilful and unreasonably prolonged default in doing anything required of him by or under this Act". The Government acting under section 4(1)( a ) revoked the licence. The licensee filed a suit for a declaration that the order was invalid. The Government pleaded that it had formed the opinion as mentioned in section 4(1)( a ), and contended that on the true construction of the Act the court was not entitled to go behind its opinion. The appellant submitted that the opinion referred to in section 4(1)( a ) was not the subjective opinion of the Government but an opinion subject to objective tests. Lord Uthwatt said AIR 1949 PC 136, 139: "Their Lordships now turn to the question of construction of section 4, sub-section (1)( a ). Their Lordships are unable to see that there is anything in the language of the sub-section or in the subject-matter to which it relates on which to found the suggestion that the opinion of the Government is to be s .....

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..... )".See also State of Maharashtra v. B. K. Takkamore [1967] 2 SCR 583, 585, 588. The other decisions cited at the Bar are not helpful on the construction of section 237( b ). In construing statutory provisions of this description, the actual words used and their subject-matter are of the utmost importance. Thus, if the statute provides that "if in the opinion of the Provincial Government it is necessary or expedient to do so, the Provincial Government may, by order in writing, requisition any land for any public purpose", the existence of the public purpose but not its necessity or expediency is justiciable: see Province of Bombay v. K. S. Advani [1950] SCR 621. The reason is that the factual existence of the public purpose is by the larguage of the section a condition precedent of the requisition ; and now, in view of article. 31(2) of the Constitution, this is a constitutional requirement irrespective of the language of the section. Where the statute authorises the executive action "if AB has reasonable grounds to believe" the certain circumstance or thing, it means what it says. AB must in fact have reasonable grounds for believing a circumstance or a thing: see Nakkud .....

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..... p to date and should he consider it necessary also for the period prior to April 1, 1958. Learned Attorney-General conceded that the affidavit of R. C. Dutt affirmed on August 25, 1965, and the further affidavit of Sisir Kumar Dutta on October 4, 1968, pursuant to the order of this court dated September 9, 1068, disclosed all the materials which were before the Central Government when it passed the order dated April 11, 1963. He further conceded that the only circumstance suggesting fraud, etc., in relation to the company's affairs after April 1, 1958, was the transaction relating to 3,000 preference shares in Albion Plywoods Ltd. on May 6, 1960, and that but for this transaction the Government would not have passed the impugned order. The materials before the Government with regard to the transaction were as follows : Albion Plywoods Ltd. had issued 50,000 ordinary shares of Rs. 10 and 5,000 5 per cent, cumulative redeemable preference shares of Rs. 100. 2,000 preference shares were held by New Central Jute Mills Co. Ltd. and 2,000 preference shares were held by Rohtas Industries Ltd. New Central Jute Mills Co. Ltd. and the Rohtas Industries Ltd. were both controlled by the Cah .....

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..... inistration, Calcutta. On the subject of the sale of preference shares there was no other material before the Government when it passed the order dated May 11, 1963. Several things are to be noticed in this connection. No complaint with regard to the impropriety of the sale of the preference shares held by Rohtas Industries Ltd. was made to the Central Government by any of its creditors or members. There was no material before the Central Government suggesting that M/s. Bagla and Co. held the preference shares as benamidars of M/s. Sahu Jains or their friends. On May 30, 1960, M/s. Bagla and Co. continued to hold 32,000 ordinary shares in Albion Plywoods Ltd. It is not suggested that the market price of preference shares on May 6, 1960, was more than Rs. 100. The market price of the ordinary shares fluctuated between Rs. 14 and Rs. 17 between May 13 and June 17, 1960. But there was no material showing that the huge block of 50,000 ordinary shares issuable on conversion of 5,000 preference shares could be sold in the market for more than Rs. 10 per share. No attempt was made to find out the market price of ordinary shares on May 6, 1960. It now transpires that on that date the p .....

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