9911796707
TMI Blog1978 (4) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... "to report thereon to the Company Law Board pointing out, inter alia , all irregularities and contraventions of the provisions of the Companies Act, 1956, and of any other law and the person or persons responsible for such irregularities or contraventions" on or before June 30, 1974. The reason why the Board considered this action necessary appears from the first paragraph of the order which contains the preamble: "Whereas in the opinion of the Company Law Board there are circumstances suggesting 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". Which is nothing more than a repetition of the language of section 237( b )( ii ) as to the circumstance warranting the appointment of an inspector under that provision. The grievance of the company is that there were no such circumstances in existence on the basis of which the Board could have formed such an opinion or ordered such an appointment. In the writ petition, the company has sought to substantiate its plea on the basis of the following allegations. The company had been incorpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any affair of your petitioner which is not authorised under the law" during the period from March 1, 1966, till the date of the order. The company offered to furnish any information that may be needed in respect of any particular transactions and prayed that the order for a general investigation be cancelled. This petition was rejected by the Government and the Company Law Board and hence this writ petition by which the petitioner requests this court to quash the order under section237( b ) dated December 31, 1973, the letter dated June 26, 1974, by which the Company Law Board extended the period for the inspector's report till December 31, 1974, and the orders dated February 2, 1974, by which the Board and the Company Affairs Dept. of the Govt. of India declined to review the order dated December 31, 1973. Perhaps all that a company could do at this stage was to deny that there were any circumstances justifying action under section 237 in its case, for the Board does not take the company into confidence or indicate to it the basis for the action taken by it. It is, therefore, of the greatest importance that when a company approaches the court with a writ petition, making out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner belongs to a group of companies known as "Sahu Jain group". It is stated that, according to the report of the Monopolies Enquiry Commission, 1965, a group of 26 companies has been said to belong to this business house and that, according to the report of the Industrial Licensing Policy Enquiry Committee, 1969, there were 29 such concerns. The respondent has referred to 12 concerns which are mentioned in both the reports and alleged that they belong to the Sahu Jain group. These concerns are, besides the petitioner (AML), Albion Plywood Ltd. (APL), Bharat Oversees Pvt. Ltd. (BOL), Hindustan Vehicles Ltd. (HVL), Jaipur Udyog Ltd. (JUL) Mahespur Holdings Ltd. (MHL), Parshya Properties Ltd. (PPL), Rohtas Industries Ltd. (RIL), Shree Kesaria Investments Ltd. (KIL), Shree Rishab Investments Ltd. (SRIL), New Central Jute Mills Co. Ltd. (NCJ) and Bharat Nidhi Ltd. (BNL). After setting out the names of these concerns, A-1 alleges "a common tendency of such shareholders/directors in these concerns to benefit each other even if at the cost of the other shareholders of the concern". In reply to the above, the petitioner-company has stoutly repudiated the existence of any such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at an unnecessarily low price (lower than the market price) and, in the case of two concerns, was of the controlling interest therein. So, it is alleged this transaction was " prima facie " against the interest of the company. The factual position that emerges from the various affidavits in regard to these sales is as follows: ( a )In the case of NCJ, the shares were sold at rates varying from Rs. 4.40 to Rs. 4.50 per share as against the face value of Rs. 10. Though according to the respondents, NCJ had large reserves and had also earned good profits, it is admitted that the shares are quoted on the stock exchange and that the market quotations for the shares at the relevant time ranged between Rs. 4.56 to Rs. 4.62 per share. The claim of the petitioner-company is that the shares were sold at the rates quoted at the Calcutta Stock Exchange and this statement has not been denied by the respondent. Further, it is pointed out that even on the basis that they had been sold at rates slightly less than the market value, the transaction was still beneficial to the company inasmuch as the value of the shares fell from Rs. 4.50 this year to Rs. 3.75 in the subsequent year and, if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e formation of an opinion that there has been some fraud, misfeasance or misconduct on the part of the management of the petitioner-company. Charge No. 4: Investment in low yielding debentures. The purport of the charge against the company under this head is not clear. The allegation in A-1 is in the following terms: "In June, 1970, the company purchased from Sri P. Jain, Smt. Indu Jain, Smt. Shushila Jain, the Bhartiya Gyanpit and the Universal Trust certain debentures worth Rs. 10 lakhs yielding 8% per annum, whereas the loans of the company yielded 11% per annum " . The above allegation can mean one of two things. The first is that, whereas certain other investments made by the company by way of loans yielded an interest rate of 11% per annum, the debentures in question yielded only 8%. But if this were the charge against the company, that would not be sufficient to attract action under section 237. All the funds held by the company cannot be invested so as to yield the same return. Merely because on some investments by way of loans, the petitioner has been able to get 11% interest, the inference does not follow that an investment in debentures yielding 8% must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondent. But this criticism has not been made out by reference to the balance-sheet position of the said company. As its name indicates it appears to be a property holding company. There is no information regarding its assets and liabilities. In the case of a property company it is not unusual that there are only losses in working in the initial stages of its development before the income from the properties constructed or held by it starts flowing in. Moreover, debentures are secured loans and there is not an iota of evidence placed to show that these debentures were worthless. The fact that PPL is a company of the group will not, per se, render the debentures worthless or the purchase motivated. A-4 has only attempted to voice a suspicion of bona fides but backed it by no material on record. Here also the respondent has failed to make out the existence of circumstances to show that in purchasing these debentures, the directors of the company have been guilty of any fraud, misfeasance or misconduct towards the company or its members. Charge No.5: Purchase and sale of jeeps. The allegation is that in November, 1966 and January, 1967, the company purchased twelve jeeps. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 68.75 lakhs were advanced to one R.G. between August, 1968, and March, 1972, and that similar loans were also advanced to A.P.J. From these persons Rs. 20 lakhs and Rs. 95 lakhs, respectively, remained due to the petitioner.. The answer of the company is that the petitioner had vast resources by way of deposits from stockists and advances from customers. The investment of these funds among others by way of loans was part of the business of the company. These were loans carrying a high rate of interest (as admitted in para. 10(4) of A-1), and were repayable on demand. It has been denied that any loan in excess of Rs. 20 lakhs was given to R.G. In the case of A.P.J. only Rs. 4.45 lakhs was due and, in the case of R.G., the entire amount of the loan was repaid by 6th November, 1974. The petitioner's reply that these are loans earning a high rate of interest has not been denied. In fact, one of the earlier charges against the company was that when these loans were earning a higher rate of interest of 11%, the debentures of P.P.L. carrying 8% interest should not have been acquired. It is, therefore, inconsistent on the part of the Board to find fault with the company also for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf to warrant the action taken. As will be seen later, there is an inter-connection between the two transactions which may have to be considered together. We shall, however, set out the facts discussed in respect of each of these charges separately and then discuss the resultant position that emerges. Charge No.1: Surrender of sole selling agency of JUL The allegation, as set out in A-l, was that the petitioner had been appointed the sole selling agents of JUL for the sale of cement for a period of five years from April 1, 1966. From this agency, the petitioner was deriving an annual return of about Rs. 8 to 10 lakhs. Notwithstanding this, the company surrendered the agency in favour of BOL, without receiving any compensation for the unexpired period of the agency. The transaction, therefore, was said to be, prima facie, against the interests of the company. On behalf of the petitioner, it was pointed out by A-2 that this allegation was based on two misconceptions. The first was that the agency was extremely profitable to the petitioner-company. This was not so factually. Though the gross commission from this agency in the accounting years which ended on August 31, 1966, Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not require any special efforts for sale. ( c )The expenditure taken into account by the petitioner included the interest paid by the head office which should be excluded and if this is done the net commission figures would work out to Rs. 4.12 lakhs in 1966, Rs. 2.19 lakhs in 1967 and Rs. 0.22 lakhs in 1968. ( d )As a result of the surrender of the sole selling agency the petitioner-company's asset position was considerably affected. It has to call back a loan of Rs. 60 lakhs from NCI and also dispose of other investments of about Rs. 45 lakhs. Moreover, it had to meet liabilities to the extent of Rs. 268 lakhs relating to the business of the sole selling agency and in order to raise this amount it had to sell its plywood factory for Rs. 57 lakhs, sell debentures for the amount of Rs. 63 lakhs, make over loans due to it from 9 parties amounting to Rs. 43 lakhs and pay cash of Rs. 105 lakhs. These points have been effectively met by the petitioner-company. Regarding ( a ) it has been pointed out that the agencies of Rohtas, Portland and Ashoka cements were not accounted for in the New Delhi books of the company but were accounted for in the Calcutta books of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany has given a satisfactory reply. So far as the recall of a sum of Rs. 60 lakhs from the NCJ is concerned, it is pointed out that the petitioner-company had advanced Rs. 1,40,00,000 to the NCJ. The Company Law Board had directed the company to recall the loan in terms of section 370 of the Companies Act. Actually, the company applied for extension of time for the recalling of the above amounts and it was only in pursuance of the directions of the Company Law Board, dated September 25, 1968, that the sum of R. 60 lakhs was repaid by the NCJ. This point, therefore, is of no significance. As to the last point made regarding the sale of the company's assets, we may point out that the respondent is confusing between the result of the surrender of the sole selling agency and the cause therefor. Naturally, when the petitioner-company surrendered the sole selling agency, it had to repay the security amounts and advances received by it in its capacity as sole selling agents. This had necessarily to be done by disposing of some assets and by paying a certain amount of cash. It could also be that some of these assets may have been acquired out of the moneys received in the course of the so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the sole undertaking of APL, which we are discussing below and consider these two transactions together. We shall, therefore, proceed to discuss the second charge against. Charge No.2: Purchase and sale of plywood factory The APL was a losing concern. It had sustained losses to the tune of Rs. 52.72 lakhs between October 1, 1962, to March 31, 1966. The petitioner-company had advanced loans to APL to the extent of Rs. 40 lakhs, and on October 31, 1965,a sum of Rs. 41,91,561.64 was due to the petitioner on account of principal and interest from APL. According to the petitioner, there was no way of recovering this loan and so the petitioner ultimately decided to purchase the undertaking of APL and carry on the business in plywood on its own. This proposal was placed before a meeting of the shareholders of the company held on 21st March, 1966. The explanatory note attached to the notice of this general meeting contained the resolution of the company approving the commencement by it of a business in plywood which was necessary in terms of section 149 of the Companies Act as amended by Act 31 of 1965. The block assets were taken over at a value fixed by a reputed firm of valuer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an exaggerated consideration. While, on the one hand, the respondent criticises the purchase as having been made at an exaggerated price, allegations of a contrary nature are made in regard to the sale transaction of the undertaking in 1968. Here, it is alleged that the sale price was only Rs. 57 lakhs and not Rs. 78.18 lakhs as stated by the petitioner. This allegation has also been denied by the petitioner. The respondent has drawn the inference that the sale price was only Rs. 65 lakhs from the fact that certain liabilities of the petitioner-company to the extent of Rs. 268 lakhs which was transferred to BOL were adjusted in the following manner: Rs. Transfer of debentures 63 lakhs Cash paid 105 lakhs Loan transferred 43 lakhs Price of plywood factory 57 lakhs Total 268 lakhs The petitioner has pointed out in A-7 that this proceeds on a misapprehension. The total sale price was Rs. 78.18 lakhs as explained in detail in the annexure filed along with A-2 but only a part of the sale price was adjusted against the sum of Rs. 268 lakhs. Again, the respondent alleges that the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t should not be forgotten that this was an undertaking which had been sustaining losses right from the commencement. The total loss incurred by it was to the tune of about Rs. 92 lakhs. So, the mere fact that it was sold to BOL for a price smaller than the purchase price is not sufficient to draw an inference against the directors or the management of the company. Having regard to the continuous record of losses, the suggestion made in A-4 that the value of the undertaking in October, 1968, must have been considerably more than the value of the undertaking in April, 1966, is obviously absurd and without basis. We are, therefore, unable to spell out from the circumstances of the transaction the conclusion sought to be drawn by the respondent. Moreover, as we have mentioned earlier, an important circumstance that is relevant in assessing the real effect of the transactions which form the subject-matter of the first two charges against the company is that they are really connected transactions. Both of them took place simultaneously. In or about July, 1978, the company decided to surrender the sole selling agency of JUL and also decided to transfer the undertaking of APL to BOL. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d [1966] 36 Comp. Cas. 639 ; AIR 1967 SC 295, the affidavit of the Board disclosed that (p. 296 AIR headnote): "In the conduct of the company there was delay, bungling and faulty planning of project entailing double expenditure, continuous losses resulting in sharp fall in prices of the company's shares and resignation of some of the directors on account of differences of opinion with the managing director". On the question whether these facts could support an order under section 237( b ), Mudholkar J. (speaking for himself and Sarkar C.J.), observed (AIR headnote p. 296 see also 36 Comp. Cas. at p. 692): "It cannot be said that from a huge loss incurred by a company and the working of the company in a disorganised and unbusiness like way, the only conclusion possible was that it was due to lack of capability. It was reasonably conceivable that the result had been produced by fraud and other varieties of dishonesty or misfeasance. The order did not amount to a finding of fraud. It was to find out what kind of wrong action has led to the company's illfate that the powers under the section were given. The enquiry might have revealed that there was no fraud or other similar kin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Even assuming that the entire clause ( b ) is subjective and that the clause does not necessitate disclosure of circumstances, the circumstances have in the present case been disclosed in the affidavits of the Chairman and the other officials. Once they are disclosed, the court can consider whether they are relevant circumstances from which the Board could have formed the opinion that they were suggestive of the things set out in clause ( b )". Bachawat J. expressed no views on this aspect of the case. The scope of the section was, therefore, again considered by the Supreme Court in Rohtas Industries Ltd. v. Agarwal [1969] 39 Comp. Cas. 781 ; AIR 1969 SC 707 "to sort out the requirements" of the section. After a review of the several decisions cited before the court, Hegde J. (speaking for himself and Sikri J., as he then was), concluded thus (p. 800 of 39 Comp. Cas.): "Coming back to section 237( b ), in finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is then lacking and the condition precedent to the exercise of the power under section 237( b ) is not fulfilled. On this ground I interfered with the order under section 237( b ) in Barium Chemicals v. Company Law Board [1966] Supp SCR 311 at p. 343; 36 Comp. Cas. 639 : AIR 1967 SC 295 at p.313...... The condition precedent to the exercise of power under section 237( b ) is the opinion of the Government and not the existence of the circumstances suggesting one or more of the specified matters. To hold that the factual existence of such matters is a condition precedent to the exercise of the power is to re-write the section. Section 237( b ) must be interpreted in the light of its own language and subject-matter. We miss its real import if we begin by referring to the construction put by other judges on other statutes perhaps similar but not the same. The decisions are useful when they lay down principles of interpretation or give the meaning of words which have become terms of art " but he agreed with the conclusion of the majority that, on facts, the order under section 237( b ) was not maintainable. In that case, the only allegation against the company on the basis of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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". From the foregoing it will be seen that the question whether circumstances have been shown to exist from which, reasonably, an inference of the nature contemplated by the provision can be drawn is a matter for judicial consideration. It is not sufficient for the Board to merely allege some facts which raise some suspicion in order to enable it to enter into a fishing expedition or to undertake an investigation as a result of which possibly some case could be made out against the company. In the present case, if at all, there is some content only in the first two charges. But even there the Board is not clear about the facts and looking at both the transactions together there are no circumstances brought to light from which any fraud, misfeasance or misconduct on the part of the management can be made out. As Shelat J. has po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble from the inspection report and that he would place the same before us. But eventually neither the inspection report nor the facts and details gathered by the inspector were placed before us. Instead, A-6 was filed. This no doubt refers to the report of Sri Kapur dated January 12, 1973, and to the discussions he had with the officers of the company. But A-6 which puts forward certain additional facts avoids stating specifically that these facts were based on the results of the inspection report and had been arrived at after due investigation and enquiries with the company. Even in A-6 the attempt made is only to raise a cloud of suspicion by referring to a number of facts and figures without any attempt at analysing them and making out clear factual charges against the company. The charges are vague and general and do not attempt to bring home to the directors or persons in management in general or any of them in particular any conduct of the nature contemplated by section 237( b )( ii ). As pointed out in the case of Barium Chemicals [1966] Supp SCR 311; 36 Comp. Cas. 639; AIR 1967 SC 295, an allegation that the company had entered into an un-remunerative or imprudent transa ..... 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