9911796707
TMI Blog1969 (1) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... rying on the business of spinning, weaving, ginning, baling and pressing of cotton, yarn, hemp, jute and other fibrous material; upon its incorporation it started a textile mill at Gwalior of which M/s. Birla Brothers Ltd, were the managing agents. The present business of the company consists, inter alia, of the manufacture and production of textiles at Gwalior in Madhya Pradesh and caustic soda and soda ash at Porbunder in Gujarat. Since 1st July, 1948, 'M/S Is. Birla Brothers (Gwalior) Ltd. are the managing agents of the company in place and stead of M/s. Birla Brothers Ltd. The company claims that whereas its original authorized share capital was Rs. 35,00,000 its present authorized share capital is Rs. 8,25,00,000 ; its reserves, assets and production capacity have also increased considerably since its incorporation and it has at present 59,204 spindles and 1,711 looms besides modern and well-equipped dyeing, bleaching, printing and power generating plants. The petitioner further claims that it has also set up four ginning and pressing factories-one in the Punjab, two in Madhya Pradesh and one in Rajasthan-and that it has also installed a chemical plant at Porbunder in Gujarat. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rration of the cimultaneous raids that were conducted in various textile mills of "Birla group" in India, including the petitioner-mills, on 15th June, by the Ceatral Bureau of Investigation and the seizure of books, documents, papers, etc., made in the raids and the proceedings that followed in this court and in the High Court of Gujarat in which the legality of the raids and the seizures made therein was challenged. In Misc. Petition No. 415 of 1967 which was filed in this court the order that was passed on 20th January, 1968, was in the following terms: "Learned counsel appearing for the parties agreed before us that an order on the lines passed by the Supreme Court in S. K. Rattan v. New Swadesh Mills Civil Appeal No. 1702 of 1967, decided on 4th January, 1968 should be passed in this case as a working arrangement and that, as a consequence of this working arrangement, the grounds of attack raised in the petition in respect of the alleged contravention of section 165 of the Code of Criminal Procedure shall be deemed to have been concluded, but the petitioner shall be at liberty to press the other grounds raised in the petition. We order accordingly and further direct, without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came to its mills at Gwalior in September/October, 1967, and examined the records, documents, papers and registers 01 the company and also examined and interrogated some of its officers and employees even though they were not authorized to examine or interrogate them; that it allowed them to do so without any objection and extended all co-operation and facilities to the said respondents. It is the complaint of the. petitioner that, though by a letter dated 19th October, 1967, addressed to the Chairman of the Company Law Board, it offered to give further information and particulars that might be required by the board, no further particulars were called for from it; that no reply was ever sent to the letter dated 19th October, 1967, and that despite its repeated requests, a copy of the report said to have been made by the respondents Nos. 7, 8 and 9 to the board was not furnished to it. The order impugned was made by the board on 7th December, 1967. The order runs thus :- "Whereas, in the opinion of the Company Law Board, there are circumstances suggesting that the persons concerned in the management of the affairs of Messrs. Jiyajeerao Cotton Mills Ltd., having its registered offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is as follows : "237. Without prejudice to its powers under 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 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 appointee1 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 us members, or that the company was formed for any fraudulent or unlawful purpose; (ii)that persons concerned in the formation of the company or the management of its affairs have in connection there with 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 affai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he formation n of opinion under section 237(b) was no doubt subjective, but the existence of circumstances relevant to the inference on which the opinion was founded could always be enquired into by the court. In regard to the scope of action 237, Hidayatullah J. (the present Chief Justice) said : "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 mention of them here in a tabular form: (a)that the business is being conducted with intent to defraud- (i)creditors of the company, or (ii)members, or (iii)any other person; (b)that the business is being conducted- (i)for a fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct could 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". Shelat J. summed up his conclusion on this point thus: "There must therefore exist circumstances which in the opinion of the authority suggest what has been set out in sub-clauses (i), (ii) or (iii ). If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute". In Barium Chemicals Ltd. [1966] 36 Comp. Cas. 639, 68; AIR 1967 SC 295, 325 Bachawat J. did not deal specifically with the question of the scope and construction of section 237(b). But the concluding observations of the judgment pronounced by him seem to show that in his view the court could always enquire, in any case, whether the Government could reasonably have formed the opinion on the material before it. He said [1966] 36 Comp. Cas. 63 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty of fraud, misfeasance or other misconduct towards the company or towards any of its members....... 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 au 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". He then referred to the views expressed by the judges in the case of Barhim Chemicals Ltd. [1966] 36 Comp.Cas.639 (SC) and to several Indian and English decisions and proceeded to observe [1966] 36 Comp.Cas.639 [1966] Supp. SCR 311 : "Coming back to section 237( b), in finding out its true scope, we have to bear in mind that that section is a part of the scheme referred to earlier and therefore the said provision takes its colour from sections 235 and 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the director in charge c f the company is a member of a particular community. Within these narrow limits the opinion is not conclusive and can be challenged in a court of law. Had section 237(b) made the opinion conclusive, it might be open to challenge as violative of articles 14 and 19 of the Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned order, stated in paragraph 49 of the petition that there were and are no circumstances whatsoever suggesting that the person or persons concerned in the management of the company's affairs has or have in connection therewith been guilty of any fraud, misfeasance or misconduct towards the company or its members; the impugned order has been passed on no basis whatsoever and there are no grounds or circumstances existing which can in the remotest manner justify the passing of the impugned order; no reasonable person could or would have passed +he impugned order. The reply of the respondents to these statements of the petitioner is contained in paragraph 48 of the return wherein the circumstances which persuaded the Government to pass the impugned order have been narrated. Broadly stated the circumstances are three. The respondents first say that the petitioner-company was the managing agents of the Investment Corporation Ltd., a company incorporated in 1948 under the Jaipur Companies Act, 1942, having its registered office at Pilani (hereinafter referred to as "the Pilani company"); in 1948 the board of directors of the petitioner-company and the Pilani company included, among ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporation Ltd. were purchased at a higher premium was not at all disclosed to the shareholders when an offer was made to the shareholders in March, 1949, to accept the dividend in cash or shares of the Investment Corporation Ltd. held by the petitioner-company in lieu of cash payments. Had this fact been revealed from the annual statement of accounts or by any statement anywhere, the majority of shareholders of J. C. Mills Ltd. would have been in a position to exercise their option in better way to accept the shares in Investment Corporation Ltd., which were in fact of greater value that the payments of dividend in cash. This concealment of the true position dissuaded the shareholders of the petitioner-company as was the anticipated consequence from accepting the shares of the Investment Corporation Ltd. in lieu of cash dividends, leaving thereby fullest opportunity to the directors of the managing agents of J. C. Mills Ltd. and the directors of the J. C. Mills to secure the majority of shares in Investment Corporation Ltd. on the face value of the shares, though those shares were secured at a higher premium by the petitioner-company. Thus a huge amount advanced by the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aling, fraud, misfeasance and misconduct towards the company and its shareholders. The other set of circumstances relied on by the Board relates to loans advanced by the petitioner-company to the Investments Ltd., a company incorporated on 9th June, 1948, at Gwalior with authorised capital of Rs. 1 crore and a paid up capital of Rs. 5 lakhs only and a subsidiary of the petitioner-company. It has been stated that in 1948-49 a loan of Rs. 2,13,83,694 was advanced by the petitioner-company to the Investments Ltd. at 2 per cent, per annum interest; a major amount of this loan was converted into 1,95,000 preference shares of Rs. 100 each which were purchased by the petitioner-company, thus reducing the loan amount to about Rs. 19 lakhs; the preference shares originally carried a dividend of I per cent, and it was not until 1955 that the share-return was increased to 3 per cent.; that besides the advance of Rs. 2 crores by way of investment in preference shares in Investments Ltd., substantial amounts were also given as loans to that company which were utilized by it for advance to companies in which the directors were interested. The respondents say that there could be no " commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondents is that though she has not received education "beyond primary stage", she was paid Rs. 2,000 per month for "looking after the lawns of the company" and further that she was allowed to overdraw on her account with the petitioner-company Rs. 56,000 in November, 1959, " when there was no sufficient credit balance in her account". The petitioner has filed a further statement replying to the statements made by the respondents in paragraph 48 of the return disclosing the circumstances on which, according to the respondents, the impugned order is based. The respondents have also filed a supplementary return "for better appreciation of the facts". These additional statements will be referred to later while dealing with the contentions advanced by Shri Sidharth Ray, learned ounce appearing for the petitioner, and the learned Attorney-General appearing for the respondents The circumstances on which the board relied for making the impugned order were disclosed to the petitioner for the first time in the return filed by the respondents. That being so, in our opinion, the petitioner is entitled to file a further statement to show that those circumstances did not justify the makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders of 99.8% and 99.9% of the petitioner's shareholders got the benefit of the shares of the Pilani company was, learned counsel asserted, a clear proof that all the shareholders were fully aware of the real value of the shares of the Pilani company and the presumption made by the respondents that in the two aforesaid years the petitioner deliberately did not disclose the true value of the shares was unwarranted. He added that during the intervening period of mere than 18 years that preceded the passing of the impugned order not a single shareholder had alleged or suggested that he was in any way misled or deprived of benefit as was suggested by the respondents. Learned counsel proceeded to say that the respondents' statement that on 31st March, 1948, out of 129 shareholders of the petitioner-compary only 11 shareholders belonged to the Birla group and held l.03 lakh shares out of 3.09 lakh shares was misleading ; that the register of members of the petitioner-company clearly showed that there was no material change in the holding of the shares of the petitioner-company by the Birla group during the years 1948 to 1958 ; that the group remained in majority and its holdings were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of the petitioner and they had or should have had full knowledge of the facts and if the Board had applied its mind to the real facts and the relevant documents, it could not have, acting reasonably, come to the conclusion that it did. In answer, the learned Attorney-General said that even If a very large and substantial majority of the shareholders of the petilioner-company accepted by way of dividend the shares of the Pilani company, the suggestion that by not disclosing the true value of the shares the petitioner-company dissuaded the remaining few shareholders, who did not take shares, from opting for the shares, would still remain ; the " option letter " which the shareholders had to use for claiming dividend showed that the sharec were not distributed as dividend by the petitioner directly to the shareholders but were channelled through its managing agents or through some other persons including some employees ; and that as the power under section 237(b)( ii) was exercised by the Government suo motu, it made no difference whether any shareholder did or did not complain. He added that there was no commercial justification for the payment of a high premium for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losed to the shareholders of the petitioner-company when an offer was made to them in 1948 and 1949 to accept by way of dividend the shares of the Pilani company or cash and further that if this fact had been revealed in the annual statements of accounts the majority of the shareholders of the petitioner-company would have exercised their option and taken the shares as dividend; that consequent to this " concealment", an opportunity was given to the directors and the managing agents of the petitioner-company to secure the majority of the shares in the Pilani company at their face value and ultimately when the Pilani company capitalised its premium and issued bonus shares, the benefit was reaped by the Birla group. Now if, as is manifest from the dividend registers (annexure I to the further statement filed on behalf of the petitioner-company), 99.8% of the shareholders in one year and 99.9% of the shareholders in another year accepted the shares of the Pilani company by way of dividend, then the suggestior. that the omission to state in the annual statements of accounts that the shares of the Pilani company had been purchased at a premium and their true value was deliberate and fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed becomes clear from the judgment of Bachawat J. in Rohtas Industries Ltd. case (supra) . In that case while dealing with circumstances suggesting fraud, etc., Bachawat J. said : "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". Therefore, the fact that in the present case no shareholder ever complained cannot be ignored. It emasculates the suggestion of fraud made by the board. The fact that more than 99% of the shareholders in each year accepted the shares as dividend would have become obvious to the Board if it had seen the dividend registers. According to the petitioner, the dividend registers were inspected by the respondents Nos. 7, 8 and 9. This has been denied. The fact remains that if the Board had seen the dividend registers, it could not have reasonably come to the conclusion that the distribution of shares of the Pilani company by way of dividend in the manner in which it was done was for benefiting the Birla group of shareholders. If, on the other hand, the dividend registers were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders said to be holding 33.3% capital of the petitioner-company on 31st March, 1948, belonging to the Birla group and referred to in sub-paragraphs (x), ( xi) and (xiv) of paragraph 48 of the return were these: "1 Gwalior Commercial Co Ltd. 5000 shares 2 Central India Industries Ltd. 5000 shares 3 B.M. Birla 100 shares 4 G. Prasad 100 shares 5 Punjab Produce & Trading Co. Ltd. 8051 shares 6 Madho Prasad Birla 10,000 shares 7 Ujjain General Trading Society Ltd 34,516 shares 8 Shree Krishnarpan Charity Trust 14,880 shares 9 Raja Baldeodas Birla Santatikosh 25000, shares 10 B. Kumar 101 shares 11 Birla.Bros.Ltd.,Gwalior Branch 25 shares The Gwalior Commercial Co. Ltd. held in 1948,73,873 shares. On 29th September, 1949, it held 74,375 shares. In the years 1943 to 1948 this compam- no doubt held 5,000 shares, but the fact that in 1949 it came to possess substantially the same number of shares as it possessed in 1948, leads to the legitimate inference that during the intervening period the Gwalior Commercial Co. transferred the shares to its nominees and again acquired them back from them in 1949. The same is the position with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii). The fact that the snares of the Pilani company purchased at Re. 100 each were offered to the shareholders equating them to cash of Rs. 10 per share is irrelevant. It is well known that such offers of giving shares as dividends at par value even when the shares are of greater value are often made when one company is closely connected with another. This is often done in order that one company may have stake in another with the success of which its own interest is closely connected. The statement of the respondents that in the balance-sheet of the year ending with 31st March, 1949, the written down value of the total investments was shown at Rs. 57,00,000 only and that the value of 3,69,846 shares of the Pilani company purchased by the petitioner for Rs. 3,69,84,600 could not have dwindled down to Rs. 57,00,000 within a span of six months does not seem to have any relevance to the matters specified in section 237(b)(ii ). The learned Attorney-General did not indicate how the total value of the investments shown in the balance-sheet for the year ending on 31st March, 1949, by itself or taken with the other statements made by the respondents in connection with the " first circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the fact that it did not attract income-tax in the former Gwalior State; the petitioner regarded investment of a part of the loan amount in preference shares of the .Investments Ltd. as a good and sound investment. It was not disputed that the Investments Ltd. gave moneys to other companies out of the advances it had received from the petitioner-company. But it was said that there was nothing illegal about the investments of the Investments Ltd. in companies in which the directors were interested as the investments were safe, secure and gave a good return. Learned counsel referred us to sub-paragraph (viii) of paragraph 14 of the further statement filed by the petitioner-company, and urged that the details of loans advanced by the Investments Ltd. to other companies and of the interest received on loans given therein would show that return on the loans given by the Investments Ltd. was more than 50% higher than on investments made in Government securities and that the rate of interest on the loans and the rate of dividend on the preference shares in actual fact did not affect the interests of the petitioner-company or its shareholders in any way. He refuted the suggestion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on grounds of commercial expediency, that could not constitute a valid ground for the making of an order under section 237(b). The learned Attorney-General in reply said that the second circumstance was one suggesting not fraud but misconduct on the part of persons in the management of . the affairs of the petitioner-company leading to pecuniary loss to the company by misapplication of its assets. He said that the amount which the petitioner-company earned by way of 2 per cent, interest on the loan amount of Rs. 2,13,83,694 was reduced to \ per cent, when a substantial portion of the loan amount was converted into preference shares and it was only several years later in 1955 that the return on preference shares was increased to 3 per cent. He sought to emphasize that the funds of the petitioner-company had been utilised for the benefit of the Birla group of companies in which the directors of the Investments Ltd. were interested and that the funds were placed at the disposal of the Investments Ltd. for their utilisation for the benefit of the Birla group. On the argument of the learned Attorney-General the question arising for consideration on the alleged second circumstance is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner or the petitioner's shareholders. The suggestion that by transactions effected with the subsidiary, the Investments Ltd., the petitioner-company desired to screen the utilization of its funds from the direct scrutiny of its shareholders cannot be sustained in view of the fact that the investment made by the petitioner-company in the Investments Ltd. found a mention in its annual statements of accounts and the balance-sheets and the profit and loss accounts and the balance-sheets of the subsidiary, the Investments Ltd., were attached to the balance-sheets of the holding company, namely, the petitioner-company, as required by section 212 of the Act. What we have said earlier in connection with the first circumstance about the composition of shareholders of the petitioner-company during the years 1948 to 1959 shows the untenability of the further suggestion that the funds of the petitioner-company were utilised for furtherance of the interest of the Birla group in the management of the petitioner-company and that when that purpose was served the Investments Ltd. was amalgamated with the petitioner-company. During the years 1948 to 1959, the majority of the shares of the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order under challenge on the basis of the second set of circumstances. The third set of circumstances, according to the learned counsel for the petitioner, was wholly extraneous to section 257(b)( ii). Learned counsel referred us to paragraph 16 of the further statement of the petitioner and argued that the allegation that Shri Mandelia received by way of remuneration more than Rs. 30,000 per month from different companies including the petitioner company was totally false ; he was paid a salary of Rs. 6,200 per month besides Rs. 625 as entertainment allowance by the petitioner and the total remuneration received by him from different companies including the petitioner-company at no time exceeded Rs. 17,826 per month inclusive of entertainment and conveyance allowance. It was said that the records of the income-tax department relating to Shri Mandelia's assessment could have revealed this fact to the Company Law Board. He proceeded to urge that Shri Mandelia was the adviser of the petitioner and was connected with the petitioner-company in one capacity or the other since 1931 and that at no time he was a director or manager of the company and never exercised any powers of manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich were relevant. In this connection he referred to the decision of the Supreme Court in State of Maharashtra v. B. K. Takkamore AIR 1967 SC1353. In our judgment, the third set of circumstances disclosed in the return of the respondents is non-existent and irrelevant. It is difficult to comprehend how those circumstances are even remotely suggestive of the matters specified in section 237(b)( ii). Even if it be assumed that Shri Mandelia was virtually occupying the position of manager or managing director of the petitioner-company and his appointment was contrary to sections 197A and 269 of Act, that cannot advance the matter any further. The appointment, even if contrary to the aforesaid provisions of the Act, is in no sense suggestive of fraud, misfeasance or misconduct as explained in the judgment of Shelat J. in Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp.Cas.639 (SC) . The circumstances comprised in the third set were, therefore, wholly extraneous. That the Company Law Board was influenced by these extraneous circumstances is clear from the return filed by the respondents wherein the circumstances in justification of the impugned order were disclosed. Neither t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the other two sets of circumstances alone. The impugned order thus being based on matters extraneous to section 237(b)( ii) of the Act cannot be sustained. In our judgment, the circumstances disclosed by the Company Law Board for making the impugned order in no way suggest that the persons concerned in the management of the affairs of the petitioner-company have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or its members. No reasonable person or authority, much less an expert body like the Company Law Board, could have reasonably formed the opinion that those circumstances were so suggestive. The board did not apply its mind to the material before it and totally failed to take into account the very relevant material, namely, the dividend registers and the annual returns of shareholders, and if this material had been taken into consideration, then the Board could not have reasonably formed the opinion that it did. Again, in making the impugned order, the Board was influenced by matters extraneous to section 237(b)(ii ), namely, those referred to while dealing with the third set of circumstances, it cannot, therefore, be held ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
