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TMI Blog1980 (4) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... he opinion of the Company Law Board there are circumstances suggesting that the persons concerned with the management of the company named as Modi Industries Limited having its registered office at Modinagar District, Meerut, Uttar Pradesh (hereinafter referred to as the company) have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company/or its members : AND WHEREAS the Company Law Board is further of the opinion that inspectors should be appointed to investigate into the affairs of the company. NOW, THEREFORE, in exercise of the powers conferred by clause (b) of section 237 of the Companies Act, 1956 (Act 1 of 1956), read with section 10E(1) of the said Act, and the notification of the Government of India in the Department of Company Affairs, No. G.S.R. 443(e) dated the 18th October, 1972, the Company Law Board hereby appoints S/Shri Jagdish G. Wadhwan, Amolak Lal Bajaj and Harish Kumar, Chartered Accountants, C/o. M. Pal & Company, 4850/24, Ansari Road, New Delhi-2, as inspectors to investigate into the affairs of the company and to report thereon pointing out all the irregularities and contraventions of the Companies Act, 1956, and/o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that the opinion of the Company Law Board was that there are circumstances suggesting that persons connected with the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company or its members. The order moreover provides that the persons appointed to carry out the investigation have to look into the affairs of the company and make a report pointing out all irregularities and contraventions of the provisions of the Companies Act or any other law, and also, the person or persons responsible for such irregularities and contraventions. It is contended before us that the order merely sets out the words of the section and does not point out the circumstances that might have come to the notice of the Company Law Board. Also, the report required from the chartered accountants appointed to carry out the investigation is concerned with the irregularities and contraventions of the Companies Act, 1956, and other law, which means the investigation is not limited to fraud, misfeasance or misconduct. A large number of cases have been brought to our notice concerning the manner in which the courts have examined orders passed by the Central Govt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. This affidavit refers to the circumstances under several headings : (1) working of the steel unit, (2) working of gas and chemical units, (3) working of distillery unit, (4) working of sugar unit, (5) working of vanaspati unit, and (6) working of soap unit. The purpose of this affidavit is to bring to the notice of the court that there are certain circumstances specifying malpractices. In reply to this, a rejoinder affidavit dated 14th January, 1980, has been filed, which is the affidavit of Shri A. K. Jain, Company Secretary of the petitioner-company. This is a detailed document referring to a number of facts, the object of which is to show that the circumstances alleged to exist do not in fact exist, or at least the circumstances are quite different from what are alleged to exist. As we are to follow the procedure followed in the three judgments referred to, it may be now useful first to state the legal position which emerges from the judgments. In Rohtas Industries' case [1969] 39 Comp. Cas. 781 ; AIR 1969 SC 707, the order is reproduced at p. 785 (p. 709 of AIR) of the report. It seems to be exactly in the same terms as in the present case. An affidavit being the aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ium Chemicals' case that the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (i) or the persons mentioned in sub-clause (ii) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the courts are entitled to examine whether those circumstances were existing when the order was made. In other words the existence of the circumstances in question are open to judicial review though the opinion formed by the Government is not amenable to review by the courts. As held earlier, the required circumstances did not exist in this case." The court then considered whether any reasonable authority, much less an expert body like the Central Govt., could have made the impugned order on the basis of the material before it and came to the following conclusion (p. 801 of 39 Comp. Cas.): "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 fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusions. If he has, his action cannot be questioned because the inference is to be drawn subjectively and even if this court would not have drawn a similar inference that fact would 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 that action would be ultra vires the Act and void." This quotation would show that there has to be an objective demonstration of the circumstances, but if the circumstances are shown to exist then the question whether the opinion is rightly or wrongly formed is not the subject of judicial review. The same view has materially been adopted by the Division Bench of this court in deciding Ashoka Marketing Ltd.'s case [1981] 51 Comp. Cas. 634 . There is another case decided by myself, section L. Verma v. Delhi Flour Mills Co. Ltd. [1975] 45 Comp. Cas. 33 (Delhi), wherein it has been pointed out that even the court has to be careful when applying its power under section 237 although there is no apparent limit in the section. Having now stated the manner in which the court is to act, it is necessary to examine the facts of the case with a view to determining whether circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would not interfere in disputes between shareholders and would leave the determination of the rights of shareholders entirely to the brute majority as represented by majority shareholders. This has all been altered in various ways. Sections 397 and 398, as they now exist in the Act, enable the court to protect minority rights. Ample powers to prevent oppression of the minority or to prevent the misuse of the company's funds against the public interest or to prevent mismanagement and other evils now exist. Nevertheless, it cannot be denied that corporations are run in such a way that it is difficult for a small shareholder or for other persons belonging to the public getting inside information as to the actual manner in which the funds collected from the public are being employed by the persons who are in-charge of the management of the company. As at present, there are several powers available to various authorities under the Act in addition to those granted to the company court to protect the interests of the shareholders and the general public. Under section 209 of the Act, accounts have to be kept by a company in a particular manner. Those accounts are open to inspection by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of account and other papers of the petitioner-company. According to the petitioner, nothing was revealed by this special inspection. On 24th January, 1973, the Company Law Board issued a notice under section 233A, which appears as annex. B to the petition. It states that an inspection of the books and records of the company had been made under section 209A(4) and according to that inspection certain transactions had taken place which showed that the company was not being managed in accordance with sound business principles and prudent commercial practices. A large number of allegations regarding alleged malpractices was set out in this document but the same need not mentioned in extenso. In reply to the show-cause notice a detailed reply was given which is annex. C. This reply was considered by the Company Law Board and the petitioner-company was represented by an advocate, Shri G. section Shah. Eventually, in May, 1974, the Central Govt. decided that no special audit was necessary. It is then stated in the petition that a further inspection of the books of account and other books of the company was made for the period January, 1975, to May, 1975, and all information required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances which would show fraud, misconduct or misfeasance. These terms have been analysed in the judgment of Sbelat J. in Barium Chemicals Ltd.'s case [1966] 36 Comp. Cas. 639 (SC). They are also set out in section 543 of the Companies Act, 1956. The words used in section 237 are as follows : "237. Investigation of company's affairs in other cases.-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 as 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 appointed 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 its members, or that the company was formed for any fraudulent or unlawful purpose ; (ii)t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or sale could not be sustained. The reasons given for this were : (a) the accounting and quantitative records of the assessee maintained from purchase to the stage of finished products, (b) the employment of a large number of workers and staff without whose connivance the products could not obviously be removed or sold, (c) the fact that bonus was payable based on production. Furthermore, the operations were handled by outside contractors and quantitative records of finished goods fully reconciled with outside contractor's wage bills. No discrepancy in the record had been pointed out, and there was no evidence of any unaccounted sale of finished goods. From this affidavit and the circumstances of the case we have to determine whether there is any objective fact rather than subjective fact to show that any steel had been surreptitiously removed after producing the same. The explanation offered by counsel for the petitioner was that it is customary to check the stock at the end of the accounting period and it is only on the basis of verification that the stock of scrap was reduced by Rs. 12.60 lakhs. It is pointed out that the scrap is bought in bulk and consumed periodically. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries Agency and Industrial Gas Distributors, of which 353 had been lost in the year 1970-71. It is claimed that these cylinders are being used the Delhi agent for their own business who are taking advantage of the goodwill of the company and selling Modi gas. In connection with acetylene gas, it is claimed that the company started 30 MT. of calcium carbide which was later on treated as having been received for the purpose of processing. These allegartions are refuted in the affidavit in reply. It is stated that the lost cylinders had been paid for. A copy of the agreement with the agent has also been filed. It is stated that the replacement cost of these cylinders had been received. It cannot be said that these allegations can show circumstances of the type mentioned in section 237. With regard to the other allegation concerning the diversion of 30 MT. of calcium carbide, it is stated that there is nothing in the record of the company to show this and no reasonable man could come to such a conclusion. It appears that the explanation of the company is correct. No material has been placed before us to show how and where these 30 MT. of calcium carbide are mentioned except in the aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot concerned with the quantum of production, but with the question whether an inference can be raised from circumstances showing the existence of fraud, misconduct, etc. It cannot possibly be said that the carbon-dioxide is being manufactured and sold outside the books of the company without some other circumstances being shown to exist concerning this fact. So, the circumstances set out in the affidavit would not justify the order under this heading. It is alleged in the affidavit that as the cylinders are reported to be lost but the employment of cylinders shows that they are in use, hence this business was being done outside the books of the company. As explained by the company, this would mean that the carbon-dioxide is being smuggled out of the premises of the company in spite of the excise department. As no facts appear in the affidavit showing that any cylinders have been found to have been smuggled out, this appears to be merely a conjecture rather than a circumstance. Working of sugar unit : Under this heading, the irregularities alleged to exist are : (a ) in the manner in which items have been classified, (b) it is alleged that certain repairs are of a capital nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utta Sales Depot. The commission is neither an expenditure nor a receipt by the company. (b)As regards the refining loss, technical reasons are given ; some loss takes place because the oil used in the production of vanaspati is purchased from Delhi, Hyderabad and Rajasthan. In some cases excessive impurities are contained. Refining losses depend on a number of factors, namely, the quality of oil, suspended impurities, mucilage, power failure and efficiency of workers. It is claimed that the refining losses increase due to more free fatty acid content. It is stated that the Appellate Assistant Commissioner, Central Range, Meerut, by an order dated 30th March, 1978, had held that the refining losses were not excessive. (c)As regards the sale to M/s. Banarsidas Ramniwas of New Delhi, it is claimed that there is no relationship of the directors of the company within the meaning of the Companies Act. It is claimed that the price of vanaspati fluctuates from day to day and hour to hour and in no case was a lesser rate charged. As far as credit facilities are concerned, it is stated that similar facilities are given to other firms, namely, Salig Ram Nagar Mal, Hapur, and Mangal Sen Faq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaining whether any of them would justify an investigation. In reaching the conclusion that there are no circumstances to justify an investigation it has to be kept in view that an investigation is made when an offence is claimed to exist. If one compares the case of a criminal offence, first, there must be a report about the commission of an offence which may be by complaint or by police report. Once, it is found that there is an offence or an apparent offence then a prima facie case exists for making an investigation. Similarly, there must be some kind of facts objectively existing which show that an offence of the type mentioned in section 237(b) has taken place. It must be kept in view that the offences mentioned in section 237(b) are of a serious nature. Fraud in the running of a company or misconduct or misfeasance by the management of the same are serious matters. The directors of a company are in the position of trustees. They are responsible like trustees. The allegations we have referred to deal with the manner in which the business is being conducted. Whether one considers the steel unit and the allegation concerning the possibility of production existing outside the bo ..... 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