9911796707
TMI Blog1983 (5) TMI 180X X X X Extracts X X X X X X X X Extracts X X X X ..... w-cause notice under section 408 of the Act requiring the company to show cause as to why the Government directors should not be appointed on the board of directors of the company. The main allegation in the show-cause notice was that the company had given substantial loans to Mr. K. M. Choksey, B. M. Choksey Co. and N. R. Aggarwal, all of whom were sharebrokers. Besides this, one Mr. B. P. Roongta, another share-broker, was also given a substantial loan. It was further alleged that these persons seemed to have advanced substantial loans to certain other companies which had been closely held by Morarkas, who were in management and control of W. H. Brady Co., and that the said brokers were only acting as cover to the transaction between the company and the other companies controlled by Morarkas. It was stated in the show-cause notice that the transaction and the other features mentioned therein indicated that the affairs of the company were being conducted in a manner oppressive to its members and prejudicial to the interests of the company and the public. Before any order could be passed under section 408, Gokul Chand Morarka died on October 18, 1973. In his place, his son, P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition appears to have been dismissed on the ground that it was premature. Soon thereafter, by order dated December 31, 1976, the Company Law Board appointed five persons as directors of the company under section 408(1) of the Act. The ground for passing the order was the same, namely, to prevent the affairs of the company from being conducted in a manner prejudicial to the interests of the company, its employees and to the public interest. In August, 1978, the company filed a suit in the Bombay High Court being Suit No. 1093 of 1978 against the petitioners and other persons being the shareholders of the company holding in the aggregate about 55,388 ordinary shares. In the suit, it was, inter alia , alleged that the said shares were acquired by the respective shareholders by use of the funds of the said company. The allegation was that the Morarkas and the companies controlled by them had purchased a controlling interest in the shares from the group controlled by the members of the family of Pallonji Shapurji Mistry. The purchase price of these shares was alleged to have come out of loans which had been advanced by the company to the aforesaid sharebrokers and petitioner No. 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as followed by another telegraphic notice dated December 16, 1978, whereby the Company Law Board required petitioner No. 2 to show cause why Government directors should not be appointed under section 408(1) of the Act and which required the said petitioner to appear before it on December 20, 1978. In response to the said show-cause notice, the company, which was in effect being managed by the Government directors, inter alia , submitted its reply dated December, 18, 1978. It represented that if Government directors were not appointed for a fresh term, the result would be that the suit filed by it against the Morarka group will be abandoned and allowed to be dismissed in default. Petitioner No. 2, on the other hand, contended that there was no justification for Government directors being appointed under section 408. However, on January 1, 1979, the Company Law Board, in exercise of its powers under section 408(1) of the Act, appointed the same five persons, who were on the board of directors of the company, as Government directors for a further period of three years with effect from January 2, 1979. By the said order, Shri Dara Metha was appointed as the chairman of the board o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd's opinion, this view is particularly justified in view of the fact that the future control of the company depends very substantially on the result of the suit. It will be idle to expect a few minority shareholders to get themselves involved in a litigation of this magnitude where they stand to gain very little, particularly when their share value will not justify the expenditure that they are likely to incur. The activities of the company in the future will very much depend upon who is in control of the company. In view of this, the Board is of the opinion that there is sufficient public interest to justify the appointment of Government directors, apart from the interests of the company itself which also is sufficient enough to justify such an action. The Board also is of the opinion that the employees' co-operation will be forthcoming in an abundant measure only if Government directors continue to control the affairs of the company. At this juncture, when the company has started making profits, without their co-operation, the future running of the company will be in serious jeopardy. The employees have also made a request that the Government directors must be continued and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1981, this petition was dismissed on the ground that it was premature. It was, however, observed by this court as follows: "We are quite sure that if the petitioners want further information, they can ask the same and the Company Law Board, which is aware of the law applicable to such matters, will supply them with the information which the petitioners are entitled to under the law...................". The petitioners then received a notice from the Company Law Board informing them that the case would be heard on December 10, 1981. At the hearing, which took place on that date, it was, inter alia , submitted by the counsel for the petitioners that the grounds and material on the basis of which the show-cause notice dated October 29, 1981, had been issued had not been supplied to the petitioners. It was also represented that the counsel for the petitioners was entitled to know what were the representations made to the Company Law Board by the company. According to the averment in the petition, it is alleged that the chairman of the Company Law Board had assured the petitioners' counsel that the grounds on the basis of which the show-cause notice was issued, as well as copies of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te, by letter dated January 2, 1982, had requested the Company Law Board to furnish the reasons on the basis of which the said order was passed. Along with its letter dated February 27, 1982, the Company Law Board forwarded a copy of the reasons for the order dated December 29, 1981. In the present writ petition which has been filed after it was allowed to be amended, the challenge is to the validity of the aforesaid orders dated December 29, 1981, and January 1, 1982, passed by the Company Law Board and the Central Government. It was contended by the learned counsel for the petitioners that an order under section 408 of the Act can be passed only in order to prevent the majority shareholders from misusing and/or abusing their rights and powers as majority shareholders. It was submitted that such a construction is compelled by a reading of the proviso to the said section. In other words, the true scope and ambit of section 408 is indicated by the proviso. It was submitted that if reference is made to the other provisions of the Act contained in Chapter VI, it would appear that the powers under section 408 can be exercised only in order to prevent oppression or mismanagement by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained in section 397 or 398, without giving adequate opportunity to the Central Government to make submissions before the court. The powers of the court under section 397 or 398 read with section 402 are of the widest amplitude. These powers, however, cannot be exercised without hearing the Government, even if the Government itself has not filed or authorised the filing of an application under section 397 or 398 of the Act. Sections 408 and 409, on the other hand, contain the powers of the Central Government which are to be exercised if the conditions contained therein are satisfied. The conditions prescribed by section 408 are similar to those of section 397, whereas the provisions of section 409 are analogous to section 398. Relevant provisions of sections 408 and 409 are as follows; "408. (1) Notwithstanding anything contained in this Act, the Central Government may appoint such number of persons as the Central Government may, by order in writing, specify as being necessary to effectively safeguard the interests of the company, or its shareholders or the public interest to hold office as directors thereof for such period, not exceeding three years on any one occasion, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ownership of any shares held in the company, a change in the board of directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Central Government may, if satisfied, after such inquiry as it thinks fit to make that it is just and proper so to do, by order, direct that no resolution passed or that may be passed or no action taken or that may be taken to effect a change in the board of directors after the date of the complaint shall have effect unless confirmed by the Central Government; and any such order shall have effect notwithstanding anything to the contrary contained in any other provision of this Act or in the memorandum or articles of the company, or in any agreement with, or any resolution passed in general meeting by, or by the board of directors of the company". If the majority shareholders act in a manner which is oppressive to the minority, then it is one of the circumstances which can be taken into consideration by the Central Government while exercising its powers under section 408. We are, however, unable to agree with the learned counsel for the petitioners that that is the only circumstance which is to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence in the powers of the court contained in sections 397 and 398 and the powers of the Central Government contained in sections 408 and 409 is that whereas the court can pass various orders under sections 397, 398 and 402 including orders which result in amendment of the articles of association, termination and setting aside of agreements, regulating the conduct of the company's affairs in future, etc ., the Central Government, however, under section 408 can only order the appointment of directors to the Board. The powers of the Central Government under sections 408 and 409 are preventive in nature. The powers are exercised in order to see that in future the affairs of the company are conducted in a manner which are not prejudicial to the interests of the company, its members or to the public interest. An order under section 408 may not be able to cure the illegal or prejudicial acts which may have already been performed by the company and its directors, but it can try and prevent repetition of such acts in future by appointing the directors of the company. The aforesaid provisions were also considered by a Division Bench of this court in the case of Vinod Kumar v. Union of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, power under section 408 can be exercised not only with a view to prevent the majority shareholders from exercising or abusing their rights or powers but also for other reasons, as indicated above. From the aforesaid observations, it is also clear that if the Government is of the opinion, which opinion has to be formed after taking into consideration all relevant facts, that allowing the previous management to take over the company would be prejudicial to the interests of the company or the general public then, even if, at the time when the order is passed, the company is being managed properly, the Government directors can be reappointed. It was then contended that one of the main reasons that the impugned order has been passed was that Suit No. 1093 of 1978 has been filed by the Government against the Morarkas and the said suit is pending in the Bombay High Court. According to Mr. Salve, the nature of the suit is such that no prejudice would be caused to the company, at this stage, even if the suit is withdrawn so as to warrant an order under section 408 being passed. In this connection, it was further urged that the company had earlier filed suits against the broke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the correctness of the facts alleged in the plaint. The facts as alleged have to be assumed as correct, unless on the face of the suit, it is apparent or it can be demonstrated that false averments have been made. After reading the amended plaint filed in the Bombay High Court, we are unable to persuade ourselves to come to the conclusion that the suit filed by the company is frivolous or is one which is bound to fail. Shortly put, the averments in the plaint are that the Morarka Group purchased a controlling interest in the company by purchase of shares from Pallonji group. The cost of the shares acquired by the Morarka Group up to the end of 1969 amounted to Rs. 63.95 lakhs. The loans which were advanced by the company to the brokers were more than this amount. It is clearly averred that the loans granted by the company were utilized for the purpose of acquisition of the shares of the company. Apart from pleading that sharebrokers were merely benamidars of the petitioner-company and other concerns and members of the Morarka Group, it was specifically alleged as follows : "The plaintiffs, therefore, submit that the said shares were acquired by the defendants as a direct cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the shares. Further, the court may direct the restoration of the property to the company and simultaneously permit the company to sell the said shares to other persons. If the suit is thus decreed, it will mean that the Morarkas would not be having majority of the shares in the company and would obviously not be entitled to have control of the board of directors. The Government would be justified in coming to the conclusion that if action is not taken under section 408, then it would certainly be to the interest of the Morarkas group to see that the said suit is not properly pursued and is dismissed. The success of the suit would mean the complete ouster of the Morarkas from the company. It was imperative, therefore, to ensure that the said suit is properly and diligently pursued and till the same comes to an end, there could be no question of handing over the reins of the company in the hands of the defendants to that suit, namely, the Morarkas. In this view of the matter, the Central Government was not wrong in observing that the fact that some of the loans had been returned to the company was not relevant. What is of importance is whether the shares were purchased out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it had to consider was as to whether the pendency of the suit, wherein serious allegations had been made against the defendants, justified the passing of an order under section 408 or not. If the allegations in the plaint are ultimately substantiated, it is possible for that court trying the suit to come to the conclusion that the return of the loans was of no consequence and the shares which had been purchased, if they were out of the money provided by the company, would in law be regarded as being the property of the company, by virtue of the provisions of sections 82 and 88 of the Trusts Act. In this view of the matter, no serious objection can be taken to the Government not considering the said circumstances as being relevant. From the facts available on record, it appears that all relevant material was taken into consideration before the passing of the impugned order. Originally, under section 408, the Government could appoint not more than two directors. By virtue of the amendment made in the Companies Act, 1956, in 1974, the Government has been given the power to appoint such number of persons as directors as may be necessary to effectively safeguard the interests of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t when directions are issued under section 408(6), the same have to be complied with, but that may not, by itself, be adequate protection against the possible prejudicial acts which may be performed by the Board, if it is allowed to be controlled by a majority of the directors appointed by the Morarkas. We are also unable to agree with the contention that the Government did not consider and decide the question with regard to the number of directors who should have been appointed. It is true that the order of the Central Government is not as happily worded as it could have been. The Central Government, however, has in its order observed that the control of the company cannot be allowed to vest in the Morarka group and in its opinion, there was sufficient reason to justify the continuance of the appointment of the Government directors on the Board. It is quite obvious that if only two directors or less than live directors were appointed by the Central Government, then the control of the company would vest in the Morarka group; because the remaining number of directors could have been appointed by the company in general meeting wherein the Morarkas were admittedly the majority share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n effective opportunity can be availed of only if the party knows the reasons which are being taken into consideration by the Central Government for the passing of an order under section 408 of the Act. Whether an adequate opportunity has been granted or not depends upon the facts of each case. In order to decide whether in the present case, the principles of natural justice have been violated or not, reference to some facts in detail becomes necessary. The show-cause notice dated October 29, 1981, merely stated that the current tenure of the Government directors appointed under section 408 of the Companies Act would expire on January 1, 1982, and the petitioner should indicate as to why the Government directors should not be appointed for a period beyond January 1, 1982, under the said provision of law. Strongly relying upon the Supreme Court judgment in the case of Kapoor v. Jagmohan, AIR 1981 SC 136, the contention of the learned counsel for the petitioner is that it was imperative for the respondents to indicate in the show-cause notice the reason as to why the proposed action was contemplated. According to the learned counsel, neither in the show-cause notice nor thereaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve. The authority acting under section 238(1) is the master of its own procedure. There need be no oral hearing. It is not neccessary to put every detail of the case to the Committee; broad grounds sufficient to indicate the substance of the allegations may be given". From the aforesaid observations of the Supreme Court, it would follow that there is no requirement of law that in the show-cause notice itself the grounds on which the action is proposed to be taken must be stated. Even after the issuance of the show-cause notice, but prior to the decision being taken, the Government can inform the party as to why action is proposed to be taken and give that party an opportunity to represent its case. It is, therefore, to be seen whether in the present case, before the impugned decision was arrived at by the Central Government, any such opportunity was given to the petitioner. In other words, was the petitioner informed about the grounds on the basis of which the Government intended to appoint Government directors. In our opinion, however, the facts on record cannot persuade us to come to the conclusion that principles of natural justice have in any way been violated. While it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se notice had been issued had not been supplied. In our opinion, however, we see no reason to disbelieve the aforesaid observations of the Central Government wherein it is stated that at the time of hearing on December 10, 1981, the Chairman of the Board had clarified that "the parties would have to proceed on the basis of the grounds which had already been made out for the appointment of Government directors under section 408(1) of the Act". This obviously means that the grounds would be the same which were contained in the earlier show-cause notices and orders which had been passed by the Company Law Board. Amongst the documents which were given to the petitioner on December 14,1981, by the Company Law Board, were the reply dated November 10, 1981 of the company to the show-cause notice as well as the representation of the staff members of the company dated November 7, 1981. The counsel for the respondents has brought to our notice, by the written submissions dated April 19, 1983, the synopsis of the reply of the company to the show-cause notice. A perusal thereof shows that the company had specifically contended that the Government directors should be appointed in view of the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioners were aware of the grounds on the basis of which it was proposed that an order under section 408 would be passed by the Government and sufficient opportunity was given to make their submissions. It was next contended that the principles of natural justice also required that an opportunity should have been given to the shareholders to object to the name of any person who was proposed to be appointed as a director. We see no force in this contention. It is for the Central Government to decide as to how many directors are to be appointed. It is also for the Government to decide as to who should be appointed. As we read section 408, the only opportunity which has to be granted to a party is to show cause whether any director should be appointed or not. The section does not postulate hearing a party as to whether it objects to any particular person being appointed as a director or not. Once a valid decision has been taken to appoint a certain number of directors, thereafter it is for the Government to consider who is the best person to be so appointed. This is a matter of discretion which has to be exercised by the Government and there can be no question of applying the princip ..... X X X X Extracts X X X X X X X X Extracts X X X X
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