9911796707
TMI Blog1981 (4) TMI 212X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany has made substantial profits and except in those years, the shareholders have been getting good dividends. All parties before us are agreed that on 11th July, 1977, the Company Law Board had to pass an order under section 408 of the Companies Act, 1956, appointing certain Government directors in view of what happened in the years 1976 and 1977. As far as the parties before this court are concerned, it is also the common case that the "Kapadias" were in control of the company at that time and the order passed on 11th July, 1977, was necessitated by the manner in which they had been managing the company. It may be mentioned here that, even earlier, there were Government directors appointed under section 408 of the Act, but at that time, this section allowed only two Government directors to be appointed. The section was substantially amended by Act, 41 of 1974, to enable the Central Govt. to appoint as many directors as it thought necessary to effectively safeguard the interests of the company or its shareholders or in the public interest. The amendment was effective from 1st February, 1975, and hence, after that date, it is possible for the Government to appoint as many directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a period of three years. Therefore, the situation when the question arose as to whether the order should be extended was quite different. At the same time, even the regular shareholder-directors, which numbered seven, were dominated by the financial institutions. According to the position as it now exists, it is common ground that there are 15 directors of which eight are Government directors and four directors represent the financial institutions. The remaining three represent the ordinary shareholders. Even if the Government directors were not there, the majority on the Board would be of the financial institutions. In short, the case of the petitioner is that there has been a radical change in the circumstances during the period 1977 to 1980 and the question whether Government directors should or should not be appointed, and how many should be appointed, has to be considered from a different standpoint, as the situation which existed when the initial order was passed in 1977, no longer exists. The case of the respondents, very shortly set out, is that there had been a substantial improvement in the situation of the company due to the Government's order. The new board appoin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercised, there is no limit on the number of persons that the Central Govt. may appoint as directors. Therefore, complete control of the company can be taken by a board of directors appointed by the Central Govt. as the other directors would be a minority. This is a great power, because, virtually the Central Govt. can take the control of the company out of the hands of an existing management and put it into the hands of its own appointees. The previous section, as it stood before the amendment made in 1974, gave only a limited power to the Central Govt. to appoint additional directors on the board. If the power is to be exercised, the persons appointed can hold office as directors for periods not exceeding three years on any one occasion. Then the section continues that the Central Govt. may exercise the power either on its own motion or on the application of not less than one hundred members of the company or of members of the company holding not less than one-tenth of the total voting power. This power is analogous to the power exercised by the court under sections 397 and 398 of the Companies Act, 1956. There also, section 399 states that an application can be, made to the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of the inquiry to be made initially before passing the order in 1977 seems to be quite different from the type of inquiry that may be necessary when the question of renewal of the order is to be considered. Very little reasoning is necessary to point out this difference. Initially, if mismanagement or oppression exists, or the functioning of the company is prejudicial to the interests of the company, or public interest, etc. , then the conditions for passing the order are immediately established. Once the order is passed, the control of the company passes to a board appointed by the Central Govt. Now, there can be no mismanagement, there can be no oppression and there can be no functioning of the company prejudicial to the public interest or to the shareholders of the company. This is because the control is now with the Government directors. This brings to light an interesting question as to how and in what circumstances the order is to be renewed. Either the order cannot be renewed because the conditions for passing the order no longer exist; or the order can be renewed just as if the situation was the same as it was three years earlier. Or, some other reasons have to exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituation. As the discussion is regards the general construction and interpretation of the provision it is well to keep in view the numerous situations in which section 408 may be brought into action. The peculiarity of the present case is that the financial institutions who are even otherwise controlling the board of the company fully support the appointment of Government directors. Another set of persons said to represent the "Berlias", who are one of the major shareholders, also support the Government. So, the notice to show cause was eventually issued because of the application of the financial institutions and the response to the notice was that everybody approved of the necessity for the renewal of the Government directors. It may be necessary to point out that the persons who were interested in not having the renewal or having the order modified were the other persons, i.e., shareholders of the company in a minority, who would be interested in seeing that the progress of the company is again placed under private management. These persons were not given any show-cause notice. It is one of this set of persons who has petitioned the court in this case. It is now necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Then the order continues that the Company Law Board decided to give the directors and the financial institutions a hearing. Some written submissions were sent by Shri Vijay Kumar Berlia and a rejoinder was filed by the company. Then a reply was sent to this rejoinder on behalf of Berlia. The Company Law Board came to the conclusion that as the affairs of the company were not being properly conducted in July, 1977, the order had been passed in the interests of the company and its members and also the general public. The order notes that the situation in 1977 was a dismal one as far as the company was concerned. It was also noted that the market value of the shares which was Rs. 429 in 1974 had slumped to Rs. 165 in 1977. This is how the order came to be passed. It appears that some receivers had been appointed because of the actions of banks who were creditors. There were some debentures worth Rs. 2.44 crores which were falling due for repayment on 30th September, 1977. Because of the appointment of the new board, the institutions were persuaded to extend the life of the debentures; the banks were persuaded to withdraw the receiver and there was an improvement in the day to day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be appointed by the Central Govt. The notification was published in the Gazette of India, Extraordinary, GSR 471(E). It merely states that among the powers retained by the Central Govt. would be the power to select the directors or additional directors. Hence, the effect of the modification would be that the Company Law Board would have to find out whether an order was necessary under section 408, but the actual selection of the directors would be with the Central Govt. and not the Company Law Board. The exact insertion which amended the previous notification dated 18th October, 1972, was as follows : "Sub-sections (1) and (2) of section 408 in so far as they relate to the selection of directors or additional directors, as the case may be, of companies for appointment under the said sub-sections." The final order which has been attacked in the present petition is the one passed on 9th September, 1980. This states as follows : "NOW THEREFORE, on a careful consideration of the various submissions referred to above, the Central Government in exercise of the powers conferred by...appoints the following persons as directors of the company under section 408(1) of the Companies A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the order. We have now to read the reasons given in the order dated 7th July, 1980, with the order dated 9th September, 1980. If we treat the first as the order giving the reasons and the second as the order appointing the directors, we would find that there are two reasons for passing the order under section 408. Firstly, that the working of the order passed in 1977 had brought about a great improvement which necessitated the continuance of the board. Secondly, that the improvements and expansions made by the Government-controlled board necessitated a continuance of the same board and some litigation and follow-up action was also to be continued. All these reasons lead to the inference that the same board which was appointed in 1977 should continue as their working was half done. The Company Law Board did not take into account the necessity for changing the members of the board of directors and continued the same persons. However, the Government directors appointed by the Government itself by the order dated 9th September, 1980, are a completely different set of person. of course, there may be other reasons to justify a change in the membership of the board, but the very fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the support of other shareholders apply to the court under section 397 or section 398. The petitioner is the owner of 1,100 equity shares of a total value of Rs. 1,10,000. He is obviously a person interested in the prosperity of the company being part owner of the company. Normally, he could not be given any hearing, but, in the circumstances of this case, he, and other shareholders who might be interested in the Government directors being discontinued may be interested that the majority control should not be with the Government directors, has the right to represent his point of view. We, therefore, are of the view that the petitioner does have locus standi at the stage when the order was to be renewed, though he may have no right or locus standi when the initial order was to be passed because his interests were secure in the hands of the elected board of directors. There may be some situations when even the elected board may not be able to represent the shareholders properly, in which case a shareholder might have in some situations a locus standi to move the court. However, in the situation which exists in this case, we do think that the petitioner has locus standi t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all representations and section 640B(2) of the Companies Act was referred to, saying that when an application was made to the Central Govt. under section 408, a notice had to be given to the shareholders also. Lastly, it was contended that the order was mala fide. These were the submissions in relation to the July order passed by the Company Law Board. There were some other contentions in respect of the September order. It was submitted that the reasons supporting the July order could not support the order eventually passed by the Central Govt. The order passed in September had to be justified for other reasons which did not appear in the face of the order. It was further submitted that the amendment withdrawing the delegation from the Company Law Board to the Central Govt., i.e ., the withdrawal of the powers of appointment of directors, was bad in this case. It was bad because the reasons for passing the order could not be disassociated from the persons to be appointed under the order. It was submitted that the rules of natural justice require a de novo hearing by the Central Govt. because the initial order which was passed for one month had already expired. This submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India [1957] 12 FJR 284; [1957] SCR 1052 ; AIR 1957 SC 676, in which case the validity of an order passed under section 18A(1)( b ) of the Industries (Development and Regulation) Act, 1951, was examined by the court. The relevant section permitted the taking over of the management of the whole or any part of the undertaking for a period not exceeding five-years as may be specified in the order. There is a proviso to the section which states that even after five years the period could be extended by the Central Govt. in public interest. It so happened that the order intially passed on 8th November, 1955, took over the management of Ishwari Khetan Sugar Mills Ltd., Lakshmiganj, for only one year. On 7th November, 1956, the order was altered by a notification which stated that the words "one year" would be substituted with the words "two years". It was contended on behalf of the petitioner under article 32 of the Constitution, that the necessary pre-conditions for passing the second order were not satisfied. The court held by a majority judgment that once an investigation revealed the necessity of the order, the conditions continued to exist, and, therefore, the order was passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by elapse of the statutory period. After that, the Government has to pass a new order and it can also do so only under the powers given by the section, which means that such inquiry as thought fit had to be held and the necessary preconditions visualised by the section have to exist. We do not agree with the learned counsel for the petitioner that mismanagement by the Government directors or oppression by them, etc. , has to exist. That would totally nullify the effect of the section. The way we read the section is that it visualises the passing of an order under section 408 on the existence of certain preconditions. If those preconditions exist, then the order can be passed. When the period of three years elapses, then the initial conditions have been brought under check by the passing of the order under section 408, so that they cannot come to life again. At that time, what has to be seen is whether those pre-existing conditions could come to life again. For the purpose of this argument, it may be necessary merely to repeat that the wording of the section is: " that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucted in a manner prejudicial to the shareholders or the interests of the company. In fact, these shareholders might very well have shown that it would be advantageous to the company to revert to private management. They could have said that the financial situation was such that the company would undertake some other business or undertake some other works or, take advantage of the economic situation in regard to the growth and expansion of the company which was not possible under a Government Controlled Board. But, the point for consideration is whether such a hearing should have been denied to the petitioner. It may be that the contentions of the petitioner might have been rejected, or the petitioner could not show anything to justify a variation of the order or show that no order was necessary at all, etc. But, by denying to hear the petitioner the Company Law Board has in fact shut its mind to an aspect of the case which appears to be quite fundamental to the question as to whether the order should be renewed, and if so, as to what type of order should be passed. It was urged before us that on the basis of the judgment of the Full Bench of this court in Swadeshi Cotton Mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any which is to be found reported as Baldevdas R. Raheja v. Union of India [1977] Bom. LR 581, decided by Rege J. It was held in that case that the powers of the Government under section 408 were of an urgent and emergent nature and it would be difficult to hold an inquiry of the type contended for by the petitioner. We are in full agreement with that judgment. At that time, the power of the Government was to appoint two directors and only two directors had been appointed to the board. Moreover, there were two warring groups of directors, namely, "Kapadia group" and "Chinai group". There were a number of difficulties in the working of the company due to those two groups, which led the Company Law Board to suo motu initiate proceedings under section 408 for the appointment of Government directors. Show-cause notices were issued to the company, the Chinai group and the Kapadia group. The company did not oppose the action ; the Chinai group welcomed it, but the Kapadia group opposed the action alleging that there was mismanagement by the Chinai group. This led to the appointment by the Company Law Board of Shri T.A. Pai and Shri K.C. Raman. Later, Shri Pai became a Minister in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as. 639; AIR 1967 SC 295, as well as in Rohtas Industries' case just referred to, were referred to, as well as the judgment in Nakkuda Ail v.Jayaratne [19511 AC 66 (PC). It was observed by the court as follows (at p. 926 of 40 Comp. Cas.): "...the High Court is not constituted a Court of Appeal over the judgment of the Board. The court has merely to consider whether in arriving at its decision the Board has restricted itself to the enquiry contemplated to be made and has taken into consideration all the relevent circumstances and that its decision is not vitiated by irrelevant or extraneous matters." The court then held that the High Court was right in determining whether Govan Brothers were fit and proper persons to be re-appointed as managing agent and its past conduct and dealings had to be taken into account. Having set out the propositions for consideration, we think we are not in a position to adjudicate on the correctness of the Company Law Board's decision because the order can both be justified as well as not justified. If all the relevant material is taken into consideration, then we are not to sit in appeal over the decision of the Board. We are of the view tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any Law Board may invite representations and give an oral hearing to the extent that may be thought necessary. We make it clear that the section does not visualise the hearing of all the shareholders, but it does visualise a representation and hearing in the particular situation which exists in this particular company. As some time is bound to elapse before such representations can be obtained and actual hearing granted, we have now to decide what to do with the order in the meantime although we have quashed the same. It was held in Union of India v. Swadeshi Cotton Mills Co Ltd. [1979] 49 Comp. Cas. 74; AIR 1978 SC 1818, by the Supreme Court that an order staying the operation of the order of the Company Law Board, could not be justified. The reason for this was that the order of the specialised body like the Company Law Board should not be interfered with at an interlocutory stage. We have come to the conclusion that the order has to be struck down, but we have to make some interim arrangement for the running of the Company till a fresh order is passed. We are not in a position to make any interim arrangement about the company. We have, therefore, decided to suspend our ord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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