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TMI Blog1974 (6) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies, appeared. He also appeared on behalf of the Registrar of Companies. Shri H.S. Bhatia stated that the Central Government was not making any representation in respect of this petition. The Registrar of Companies filed a reply in the form of an affidavit. A reply was also filed by the company in the form of an affidavit and a further affidavit was filed by the petitioner. Subsequently, an application, C.A. No. 5 of 1974, was moved by the first respondent (Delhi Flour Mills Co. Ltd.), in which it was urged that the petition was entirely misconceived and was not maintainable, inter alia for the reason that the Central Government alone could direct investigation and section 237( a )( ii ) of the Companies Act, 1956, was not available to a private party for the purpose of getting the affairs of a company investigated by an inspector appointed by the Central Government, except if there were other proceedings pending before the court such as proceedings under sections 397 and 398 of the Act. It was urged that the court had no jurisdiction to make an order directing the investigation of the affairs of the company as this jurisdiction was exclusively reserved to the Central Gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintainable. In rule 11, the proceedings, which may be moved by applications to the company court, have been divided into two categories, some of which are to be instituted on petition, and some of which have to be commenced by judge's summons. There is a list of 23 applications which are to be instituted on petitions. These petitions are to be tried in a different manner from judge's summons. In the list of 23 applications, the 9th entry is: "Applications under section 237 for an order that the affairs of a company are to be investigated." Thus, it appears that applications for the investigation of the affairs of a company can be instituted by themselves as original petitions in the court and it is so contemplated by the Companies (Court) Rules. Mr. Satish Chandra, learned counsel for the petitioner, has contended that such petitions must be tried fully before an order is given as to whether investigation should be ordered or not. I do not want to express any opinion on this question at this stage. It appears to me that the very object of moving a petition under section 237 of the Act to the court is to order an investigation by an inspector to be appointed by the Central Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. It is unnecessary to order an investigation merely because a shareholder feels aggrieved at the manner in which the company's business is going on. It is in this light that I propose to analyse the allegations contained in the petition. The substance of the petition can be divided into three portions. The first portion, commencing from para 8.1, deals with the profits made by the company in four separate financial years ending 31st October, 1966, 31st October, 1967, 31st October, 1968, and 31st October, 1969. The figures for purchase and sales disclosed by the company are set out as well as net profits. According to the petition, the net profits had fallen from Rs. 13 lakhs in 1966 to only Rs. 1.74 lakhs in 1969, which showed mis-management and misconduct on behalf of the respondents. The petitioner stated that it should be discovered as to where the profits had been eaten up and the responsibility should be fixed for the same. I need hardly say that the profitability of a company varies from year to year and depends on such things as price, cost of labour, cost of electricity and other factors which vary from year to year. I do not think that the purpose of section 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest on the loan advanced to the subsidiary company. It is claimed that the total amount recoverable from the subsidiary company (Indian Hardware Industries Ltd.) totalled to about Rs. 47 lakhs as on 31st August, 1972. In the next paragraph of the petition, paragraph 8.7, it is claimed that the investment by Delhi Flour Mills Co. Ltd. (hereinafter called the "holding company"), in the shares of the subsidiary company and the advance of the loan to the same company suggests serious misconduct and certain grounds are given as to why this is so. I may now deal with these grounds. It is firstly stated that large borrowings had been made by the holding company in the form of deposits and debentures from the open market for the purpose of making investments in the subsidiary company and high interest had been paid on those loans. The figures for 1966, 1967, 1968 and 1969 are given and show that the debentures and deposits varied between Rs. 22 lakhs and Rs. 29 lakhs approximately in these four years. The next ground was that the directors of the first respondent were behaving as despotic owners by investing about seven times the paid up capital of the holding company in the subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er all, what has the inspector to investigate ? Is he to merely ascertain that large sums of money are invested ? This is a known fact. It is patent from the balance-sheets of the holding company which has also included the balance-sheets of the subsidiary company. Along with the petition, the petitioner has filed the accounts of the Delhi Flour Mills Company Ltd. for the years 1966, 1967, 1968 and 1969. These are annexures "C-1" to "C-4". Each one of these printed books also set out the balance-sheets of Indian Hardware Industries Ltd. for the corresponding periods. For instance, in the balance-sheet of Delhi Flour Mills Company Ltd. for the year ending 31st October, 1966, the balance-sheet of M/s. Indian Hardware Industries Ltd. as on 30th June, 1966, is enclosed. From the balance-sheet of Indian Hardware Industries Ltd. ending on 30th June, 1969, I find that there was a carry-forward loss of Rs. 1,89,833-87 which was reduced to Rs. 89,44672. The balance-sheet for the period ending 30th June, 1966, showed a carry-forward loss of Rs. 3,38,508*54. This shows that Indian Hardware Industries Ltd. had a loss of about Rs. 3 50 lakhs prior to 1966, which was reduced to about Rs. 89,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may now set out. It is open to any petitioner to move the court for an order of investigation against the company. He need not be a shareholder, he need not have any personal interest; he may be a complete stranger and yet he can move the court seeking an order for investigation of the affairs of a company. If the court has to deal with all such petitions, the court may be literally flooded with them. It is, therefore, necessary for the court to act most cautiously on the question of considering whether the affairs of a company need investigation. It is for this purpose and this reason that I have considered this point from the point of view of maintainability rather than on the material that might be found if an investigation was actually ordered. It is quite possible that if a particular company is investigated some other facts may arise or be discovered. Such facts might justify an investigation. On such an argument, the affairs of all companies could be investigated throughout the country. In order to prevent such an unusual situation arising, I think that the court has to act with the greatest caution when acting under section 237 of the Act. It is to be noticed that the Cent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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