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TMI Blog1969 (3) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... d., of 11, Clive Row, Calcutta, was at all material times and still is the managing agents of the appellant. The authorised capital of the appellant is rupees five crores divided into 30,00,000 ordinary shares of Rs. 10 each and 20,00,000 preference shares of Rs. 100 each. The paid-up capital of the appellant is Rs. 2,89,00,000 divided into 33,000 preference shares of Rs. 100 each fully called-up and 25,60,000 ordinary shares of Rs. 10 each fully called-up. The capital of the appellant was increased by Rs. 42,75,000 in 1958 and further by Rs. 42,75,000 in 1959 and again by Rs. 85,00,000 in 1961. These figures are mentioned to show that the appellant is a substantial company. In the petition it is stated that at all material times the business of the appellant was run on sound principles resulting in substantial profits, declaration of good dividends and provision for sufficient reserve. For example, it is stated that the appellant made a net profit of Rs. 1,32,55,724 for the year ended 31st March, 1963, after meeting all expenses and interest charges and after providing Rs. 53,55,584 for depreciation. The appellant declared as dividend a sum of Rs. 28,60,000 in addition to payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation into the affairs of a company, which the Companies Acts of most countries confer on Government or a quasi-independent authority, are intend' d primarily as a check on the activities of such people. We recognise that, in some cases, the use of the powers of inspection and investigation may, initially, tend to shake the credit of a company and thereby adversely affect its competitive position, although the allegations against the company may in the end be found to have been largely unfounded. It is, therefore, necessary that the investigation provisions of the Act should be so conceived as to reduce this threat to the credit of companies to a minimum. This risk should not, however, deter us from considering the desirability of conferring adequate powers on an appropriate authority to investigate the affairs of a company, where such investigation is prima facie called for. On the contrary, we consider it to be in the long term interest of the trade and industry of this country that such powers should be vested in a competent authority and exercised energetically, albeit with due caution and fairness in all cases which require investigation." (Report of the Company Law Committe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to the remuneration and other incidental expenses of the inspector." On receipt of the said order the appellant wrote to the respondent No. 1 objecting to the investigation, inter alia , on the ground that the order was unwarranted, without jurisdiction and made on consideration of extraneous circumstances, and requested the said respondent to furnish to the appellant the materials on the basis of which the order had been made. The said respondent by his letter dated 17th June, 1963, repudiated the allegation and refused to disclose any material as asked for. The said Mr. S.P. Chopra who was appointed inspector was, however, allowed to commence the investigation but could not complete it within the period originally fixed and by an order dated 9th August, 1963, the period originally fixed was extended to 31st October, 1963. On or about the 6th September, 1963, an order was made for inspection by Mr. I. N. Puri under sub-section (4) of section 209 of the Act. The appellant-company objected to this order also, but the objection was overruled. By an order dated 31st October, 1963, a further extension was given to Mr. S. P. Chopra to complete his investigation and report up to 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, in terms of sub-clauses ( i ) and ( ii ) of clause ( b ) of section 237. In Sahu Jain's case ( supra ), the stand taken by the respondent was that the "opinion" of the Central Government, based on circumstances mentioned in sub-clauses ( i ) and ( ii ) of clause ( b ), were subjective and it was not bound to disclose, either to the party concerned or the court, even the prima facie grounds upon which the opinion was based. In Sahu Jain's case ( supra ) a complete blanket was drawn and, although affidavits were filed, no grounds were disclosed to the court. By his judgment and order dated 6th August, 1965, the rule in that case was made absolute and the impugned orders were quashed, mainly on the ground that the respondents were bound to satisfy the court that there existed prima facie grounds for making an order under sub-clauses ( i ) and ( ii ) of clause ( b ) of section 237, and, as this was not done, the orders were defective and without jurisdiction. In the instant case, the very same attitude has been taken, namely, that the "opinion" of the Central Government was subjective and needed no disclosure either to the party or to the court. By an elaborate judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m not in a position to decide which version is correct. Be that as it may, paragraph 4 of the affidavit-in-opposition makes one definite allegation against the petitioner-company and the nature of the allegation is not such as does not make a reasonable man inquisitive. The petitioner-company controls very large capital contributed by the public. Its liabilities by way of loan and otherwise are also considerable. If it does not do its business honestly and properly, the repercussions on the economics of the country may be pretty severe. If in the opinion of the Central Government there are circumstances suggesting that the petitioner-company has been employing an obliging firm of auditors which may cover up its malpractices, it cannot be said that the Government did not act reasonably in taking action under section 237( b ) or must have proceeded on a fundamental misconception of the law and the matter in regard to which the opinion was to be formed." There were other grounds argued in support of the rule, but mainly on the ground stated above, the application failed and the rule was discharged on 4th August, 1965, although no order of to costs was made. It is against this order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, the Barium Chemicals Ltd., the appellant No. 1, was incorporated with an authorised capital of rupees one crore and an issued capital of rupees fifty lakhs. Its primary object was to carry on the business of manufacturing all types of barium compounds. Balasubramaniam, the appellant No. 2, was appointed the managing director of the company from December 5, 1961. The erection of the plant was undertaken by M/s. L. A. Mitchell Ltd., Manchester, in pursuance of a collaboration agreement approved by the Central Government. In November, 1961, the Central Government granted a licence to the said company for import of machinery. On or about this time, Mr. T. T. Krishnamachari, the respondent No. 2, was appointed a Minister and rejoined the cabinet later on becoming the Minister of Finance and Economic Co-ordination and thereafter the Finance Minister of India. On August 30, 1962, the licence granted to M/s. T. T. K. Ltd. was revoked. It is stated that the appellant No. 2 was instrumental in having this done, by speaking to Prime Minister Nehru. On the other hand, it was stated that M/s. T.T.K. Ltd. had themselves decided to surrender it. Meanwhile, the appellant No. 1 was not faring we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ....' " Pursuant to the notice, search warrants were obtained and searches were carried out and documents were seized. The second appellant submitted a representation to the Board that the company was the first of its kind in India, that it could not go into production because of defective planning by the collaborators and that the impugned order had been made on account of trade rivalry between the company and M/s. T. T. K. and Company, in which the Minister, Mr. T. T. Krishnamachari, was interested. It was stated that the order was mala fide and it was made on grounds extraneous to the provisions of section 237( b ) of the said Act and at the instance of the second respondent, Mr. Krishnamachari. As the Board was determined to proceed with the implementation of the order, an application was made before the Punjab High Court under article 226 for having the impugned order quashed and for certain other reliefs. This application failed and thereupon the appellants appealed to the Supreme Court. On behalf of the appellants four contentions were raised: 1.That the impugned order dated May 19, 1965, was mala fide and was the result of the personal hostility of the Minister. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (2)here is no doubt that the formation of the opinion by the Central Government is a purely subjective process. There can also be no doubt that, since the legislature has provided for the opinion of the Government and not of the court : such an opinion is not subject to a challenge on the ground of propriety, reasonableness or sufficiency. (3)But the authority is required to arrive at such an opinion from circumstances suggesting the existence of circumstances set out in sub- clauses ( i ) or ( ii ) or ( iii ). The expression "circumstances suggesting" means that the circumstances need not be such as would conclusively establish an intent to defraud or a fraudulent or an 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 matter of subjective opinion. The law requires 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. The legislature could not have left to the subjective process both the formati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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." It was held that the grounds disclosed in the affidavit of the Chairman did not establish any intent to defraud or unlawful purpose either in the formation or conduct of the company or misfeasance or misconduct towards the company or its members. Delay, bungling or faulty planning could not constitute fraud, misfeasance or misconduct. The relevant findings of Hidayatullah J. (as he then was) may be summarised as follows : (1)The power contained in section 237( b ) of the said Act 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 implicit that the opinion must be an honest opinion. (2)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 as follows : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which showed "delay, bungling and faulty planning" resulting in "double expenditure", for which the collaborators had put the responsibility on the second appellant. There was admitted loss in the running of the undertaking, for which the blame was put on faulty planning and design by the collaborators. None of these circumstances showed intent to defraud. That some directors had resigned did not also establish fraud or misconduct. There might be other reasons for their resignation. The affidavit of Mr. Dang merely repeated the allegations made by the chairman and stated that a "deeper probe" was necessary. It did not prove the existence of circumstances under which the power could be exercised. On the relevant point, Bachawat J. agreed with the views stated above. He expressed different views on the question of delegation, but we are not concerned with it in this case. The next case to be considered is the unreported decision of Rohlas Industries Lid. v. S . D. Agarwal Since reported in [1969] 39 Comp. Cas. 781 , 785, 787, 791 (SC) . The facts in that case were briefly as follows : The appellant in the appeals was a company incorporated under the Indian Companies Act, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the management of the petitioner-company in the conduct of its affairs." The High Court dismissed the writ petition, holding that the opinion formed by the Central Government was not open to judicial review. From that order there was an appeal to the Supreme Court. In the Supreme Court, a further affidavit was filed and the only additional material that was placed before the court were three complaints received by the Government which were marked as annexures "A", "B" and "C". At the hearing it was conceded that the allegations made in annexuie "A" were too vague and could not have been the basis for making the impugned order. One concrete allegation made therein related to an event prior to the date from which an enquiry had been ordered. In fact, it had occurred in 1939, whereas the enquiry was ordered for a period subsequent to April 1, 1950. The allegations in annexure "B" were also found to be vague and not relied on. The following complaint in annexure " C " was relied on : "The investments of the company in Albion Plywoods Ltd. and their variations by the company's managing agents appear to have been done to benefit the managing agents, their friends and brokers, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as is now proved, the market price of those shares on or about May 6, 1960, was only Rs. 11 per share then the transaction in question could not have afforded any basis for forming the opinion required by section 237( b ). If the market price of an ordinary share of that company on or about May 6, 1960, was only Rs. 11, it was quite reasonable for the directors to conclude that the price of the ordinary shares is likely to go down in view of the company's proposal to put on the market another 50,000 shares as a result of the conversion of the preference shares into ordinary shares. We do not think that any reasonable person, much less any expert body like the Government, on the material before it, could have jumped to the conclusion that there was any fraud involved in the sale of the shares in question. If the Government had any suspicion about that transaction it should have probed into the matter further before directing any investigation. We are convinced that the precipitate action taken by the Government was not called for nor could be justified on the basis of the material before it. The opinion formed by the Government was a wholly irrational opinion. The fact that one of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the principles laid down in the two cases mentioned above and has now been set aside. The only distinction in this case is that the learned judge in the court below had found that in paragraph 4 of the affidavit-in-opposition, certain statements were made which have been set out above. According to the learned judge, there were sufficient reasons to uphold the legality of the order made. We have some doubts as to whether the allegations made amount to fraud, misfeasance, or misconduct as is required under sub-clauses ( i ) and ( ii ) of clause ( b ) of section 237. Be that as it may, an objection has been taken by the Advocate-General, which appears to be fatal to the respondents. He argues with great force that if the law is that the respondent-authorities must show to the court that prima facie reasons existed for arriving at the opinion upon which the impugned order is based, it must be averred and shown that these circumstances existed at the time when the order was made and that the authority making the order was aware of them and based its opinion on these circumstances. Briefly put, the allegation in paragraph 4 is that there has not been adequate and proper audit o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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