9911796707
TMI Blog1987 (8) TMI 388X X X X Extracts X X X X X X X X Extracts X X X X ..... al of the Central Government for appointment of sole selling agents. Respondent No. 3 applied and obtained the approval of the Central Government to the appointment of C. Doctor and Company as its sole selling agents for the periods 1972-77, 1977-82 and 1982-87. C. Doctor and Company was a family concern of Sayaji Mills Ltd. inasmuch as the directors of C. Doctor and Company were closely related to the chairman of respondent No. 3 company. In January, 1982, a family arrangement was arrived at by way of a memorandum of understanding between two sons of the family of Shri V.L. Mehta, who was the then chairman-cum-managing director of the company. Shri B.V. Mehta and his branch got the management of respondent No. 3 company and other assets and Shri S.V. Mehta and his branch got other companies of the family including C. Doctor and Company. C. Doctor and Company had two separate divisions, namely; (1) starch division and (2) engineering division. Since C. Doctor and Company had vested with Shri S.V. Mehta and his branch, it was decided to separate the starch division which was agreed to be taken over by a new company, namely, L.G. and Doctor Associates P. Ltd., respondent No. 4 herein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Being recently established, the sole selling agency company also does not have a proper staff organisation of its own ; however, services of certain staff members of another company, C. Doctor and Company Pvt. Ltd., have since been obtained by them. The proposed arrangement involves handling of a turnover of about Rs. 20 crores of the applicant company. As per the projections made, the commission receivable by the sole selling agent is expected to be of the order of Rs. 60 lakhs in the first year and Rs. 66 lakhs in the second year and after meeting the expenses, the sole selling agent is expected to earn a profit of Rs, 6.24 lakhs in the first year and Rs. 7.17 lakhs in the second year (on a meagre paid up share capital of Rs. 4 lakhs, as aforesaid). (b)The applicant company is an old established large-size public limited company in existence for the last over 40 years. About 33% of its share capital is held by the proposed sole selling agent and its directors and their relatives. The proposed sole selling agent, thus have quite a substantial interest in the applicant company. Shri B.V. Mehta who is the chairman of the sole selling agency company, is also the managing director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and also to Mr. P.K. Vyas. However, before a decision was taken on the second application but after the hearing was concluded on December 29, 1984, petitioner No. 1 who had since resigned as manager of the company and holding approximately 375 shares filed his objections to the application. On January 23, 1985, the Company Law Board by a non-speaking order accorded its approval to the appointment of respondent No. 4 as the sole selling agent of respondent No. 3. This order of the Company Law Board has been challenged by the petitioners in this writ petition under articles 226 and 227 of the Constitution of India. The validity and legality of the impugned order will, to a large extent, depend on the nature of jurisdiction exercised and the power conferred on the Central Government/Company Law Board while granting or rejecting approval to the appointment of a sole selling agent under section 294AA(3) of the Act. Section 294AA, which was inserted by the Companies Amendment Act, 1974, with effect from February 1, 1975, gives power to the Central Government to prohibit the appointment of sole selling agents in certain cases. The powers and functions of the Central Government under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ; and (ii) approval of the Central Government. It is the common case of the parties that in the present case, since the paid-up share capital of the company is more than Rs. 50 lakhs, both the conditions as envisaged in sub-section (3) of section 294AA would have to be fulfilled before appointment of a sole selling agent is made by the company. Mr. Sibal, learned counsel for the petitioners, contended that the power of the Central Government under sub-section (3) of section 294AA is quasi-judicial in nature inasmuch as the act of approval requires the ascertainment of facts, investigation as to the veracity of the facts stated in the application filed by the company and also the application of mind to the relevant considerations resulting in a favourable conviction. The further submission which is a corollary of the previous one is that the power being in discharge of a quasi-judicial function, the Company Law Board is duty bound to give reasons for its decision and since in the present case, the Company Law Board failed to give reasons for granting approval in the impugned order, the order is liable to be struck down on that ground alone. Considerable reliance was placed by le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the power conferred upon the Central Government by that section is restrictive of valuable rights of a company and of the proposed managing agent and severely restricts the liberty of contract. The scheme of the section envisages investigation and a decision on the matter set out therein. The section specifically lays down conditions in which the Central Government may override the resolution of the general body of shareholders on the existence of the ground on which the satisfaction is to be founded. The satisfaction has to be oh the basis of certain objective facts and, therefore, the power is quasi-judicial in nature. The Division Bench of the Bombay High Court in Nanavati's case [1975] 45 Comp Cas 91, analysing the section which concerned the court in that case held that the power of the Company Law Board under section 294(5) was purely administrative in nature. Section 294(5) of the Act confers power on the Central Government to require information regarding the terms and conditions of appointment of a sole selling agent to come to a conclusion whether or not such terms and conditions are prejudicial to the interests of the company. Clause( b) of sub-section(5) em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itially, in the case of Province of Bombay v. Khushaldas S. Advani, AIR 1950 SC 222, wherein the Supreme Court held that there was nothing in the Bombay Land Requisition Ordinance, 1947, which empowered the Provincial Government to requisition any property, if in its opinion it was necessary and expedient to do so for any public purpose which required the Government to act judicially. Following Advani's case, AIR 1950 SC 222, the Supreme Court in a number of cases observed that an inference whether an authority acting under a statute has to act judicially will depend on the express provisions of the statute read along with the nature of the rights affected, the manner of disposal provided, the objective criteria, if any, to be adopted, the effect of the decision on the person affected and other indicia afforded by the statute. This judicial thinking changed following the landmark judgment of the House of Lords in Ridge v. Baldwin [1964] AC 40 wherein it was held that "an authority may be required to observe the principles of natural justice even though it is not exercising judicial functions". It was in the case of State of Orissa v. Binapani Dei, AIR 1967 SC 1269, that the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not supplant the law of the land but supplement it. The concept of natural justice has undergone a great deal of change in recent years. In the past it was thought that it included just two rules, namely, (1) no one shall be a judge in his own cause (nemo debet esse judex propria causa) , and (2) no decision shall be given against a party without affording him a reasonable hearing (audi alteram partem). Very soon thereafter a third rule was envisaged and that is that quasi-judicial enquiries must be held in good faith, without bias and not arbitrarily or unreasonably. But in the course of years many more subsidiary rules came to be added to the rules of natural justice., Till very recently it was the opinion of the courts that unless the authority concerned was required by the law under which it functioned to act judicially there was no room for the application of the rules of natural justice. The validity of that limitation is not questioned. If the purpose of the rules of natural justice is to prevent miscarriage of justice one fails to see why those rules should be made inapplicable to administrative enquiries. Often times it is not easy to draw the line that demarcates adminis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which entails civil consequences". Now, natural justice demands that a person who is likely to be directly affected by an administrative action should be given adequate notice of the action proposed so that an adequate representation can be made to effectively meet the points raised and the opportunity so given must be reasonable. Again, what is a reasonable opportunity depends on the nature of the power so exercised and the extent of the right so affected. As observed by Lord Denning in Regina v. Secretary of State for the Home Department : Ex parte Santillo [1981] QB 778 (CA) (at p. 795), "Rules of natural justice or of fairness are not cut and dried. They vary infinitely". The Supreme Court in A.K. Roy v. Union of India, AIR 1982 SC 710, has observed thus (at page 749) : "Two fundamental principles of natural justice are commonly recognised, namely, that an adjudicator should be disinterested and unbiased (nemo judex in cause sua) and that the parties must be given adequate notice and opportunity to be heard (audi alteram partem). There is no fixed or certain standard of natural justice, substantive or procedural, and in two English cases the expression 'natural justice' was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rials on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject-matter for a decision whether it is purely administrative or quasi-judicial. They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable". Thus, irrespective of whether the power is purely administrative or quasi-judicial, if the principles of natural justice so require, the authority must give reasons for its decision. It is necessary at this stage to consider the statutory scheme in the light of the object for which Parliament conferred this power on the Central Government/Company Law Board. The section permits interference with the right of a company to enter into a contract with the object of protecting the interests of the company and preventing unnecessary expenditure. The section requires that a company having a paid up share capital of Rs. 50 lakhs or more shall appoint a sole selling agent only after obtaining the consent of the company accorded by a special resolution and further after obtaining the approval of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the sole selling agency and also the necessity of appointing a sole selling agent for the purposes of the sale of the products of the company. It is the right of every party affected by a decision to know the reasons. In a case where the right of a company to enter into a contract and carry on business is affected, the company has a right to know why it is not allowed to enter into that particular business transaction or contract and to show that the appointment of the sole selling agent would not entail unnecessary expenditure and is in the interest of the company. Though there are administrative guidelines issued, the section itself gives very wide discretion and if this power has to be reasonable, the authority must be required to give reasons. Now, the next question to be considered is whether the petitioners as shareholders of the company can complain of violation of natural justice and insist on knowing the reasons for grant of approval. It was argued by Mr. Diwan on behalf of respondent No. 3 that the shareholders as a class are not a party and are not entitled to insist upon knowing the reasons. In fact, they have no legal right or standing and are not entitled to insi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under article 226 of the Constitution of India interferes not only where reasons are not given but also where reasons are unsatisfactory and considering the objective of the enactment, since a shareholder has the locus standi to file a petition and challenge the order by way of a petition under article 226 of the Constitution of India, he has also a right to know the reason. Reliance was placed by learned counsel on the judgment of the Gujarat High Court dated November 19, 1981, in the case of Company Petition No. 49 of 1978 (Shri Narendra Gordhan Bhain Shodhan v. Shri Arbudha Mills Limited, Ahmedabad) in support of this contention. It was submitted that in this case it was held that in proceedings for confirmation under sections 101 and 102, shareholders being interested parties must be heard and have locus standi to object to the scheme of reduction of share capital though there is no statutory right given to the shareholders to object and the same logic applies to proceedings under section 294AA of the Act and the shareholders can object to the approval though the statute is not explicit in that behalf. I find substantial force in the argument of Mr. Diwan that there is no li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be exercised by the company in general meeting, in all other cases, the board of directors are entitled to exercise all powers. Thus, the shareholders can express their view at the special meeting convened for passing the special resolution and if the majority of the shareholders do not approve the proposed appointment of a sole selling agent, the shareholders can reject the proposal made by the board of directors but once the general body approves the appointment and passes the special resolution, even if a minority shareholder does not approve of the majority view, the grievance cannot be redressed in proceedings under section 294AA of the Act. If the Legislature had intended that every shareholder must have opportunity to express his view before the Central Government in proceedings under section 294AA of the Act, it would have provided for it by making notice to the shareholders obligatory as it is done in the Monopolies and Restrictive Trade Practices Act or for that matter in the present Act by incorporating a condition to that effect in the section itself or including section 294AA in the list of sections mentioned in section 640B or otherwise. The petitioners cannot gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are not given. In such a case, the court will strike down a decision of an administrative authority only if the same is mala fide or perverse. The Supreme Court in S.P. Gupta v. President of India, AIR 1982 SC 149, popularly known as the Judges' case has, if I may say so with respect very succinctly observed (at page 190) : "We would regard the first proposition as correctly setting out the nature and purpose of the judicial function, as it is essential to the maintenance of the rule of law that every organ of the State must act within the limits of its power and carry out the duty imposed upon it by the Constitution or the law. If the State or any public authority acts beyond the scope of its power and thereby causes a specific legal injury to a person or to a determinate class or group of persons, it would be a case of private injury actionable in the manner discussed in the preceding paragraphs. So also if the duty is owed by the State or any public authority to a person or to a determinate class or group of persons, it would give rise to a corresponding right in such person or determinate class or group of persons and they would be entitled to maintain an action for judic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to find out if the decision is vitiated on any of the above grounds, I permitted the Company Law Board to place on record the minutes of the meeting held by the Company Law Board and the relevant documents. It was argued by Mr. Diwan that Sayaji Mills Ltd. has been having a sole selling agency arrangement for its proudcts (starch, glucose, dextrose, etc.) since its inception in 1941 and a family company C. Doctor and Co. which was in starch business since 1914 was appointed as the sole selling agent of respondent No. 3 company since then. It was submitted that in accordance with the Act as amended by the Companies (Amendment) Act, 1974, the approval of the Central Government was required for appointment of sole selling agents. Accordingly, respondent No. 3 company applied for and obtained approval of the Central Government to the appointment of C. Doctor and Co. as its sole selling agents right from 1974 for the period 1972-77, 1977-82 and 1982-87. The last of such approval granted with effect from October, 1982, was valid up to September, 1987. However, before that period expired in or about January, 1982 (sic), a family arrangement was arrived at by way of a memorandum of und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus the conduct of the petitioners is not bona fide. Though the fact that the petitioners did not object to the resolution and their sudden objection to the approval may raise some doubts about their bona fides, I do not consider it proper to throw out this petition on that ground alone. Having heard lengthy arguments, in my view, it is appropriate to look at the documents which were produced by learned counsel appearing for the Company Law Board to ascertain whether the impugned decision is, on the facts of the case, justified. It was contended by Mr. Sibal that the special resolution of the shareholders exhausted itself when the Company Law Board refused approval on May 31, 1984, and, therefore, when the company was advised to file a fresh application, it was necessary for the company to obtain fresh consent from the general body. It was argued that it was only fair and reasonable that the shareholders should have been informed of the changed circumstances and also of the order of the Company Law Board dated May 31, 1984, rejecting the previous application of the company. I do not think this argument has any force. By a special resolution dated September 29, 1983, the shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary to the guidelines and based on extraneous considerations. He submitted that the main purpose of enactment of section 294AA of the Act is to ensure that there is no siphoning of funds and though no guidelines are given in the section itself, the Central Government has issued guidelines by way of circulars in order to ensure that this object is achieved and unnecessary expenditure is avoided. It was submitted that once the Central Government has issued guidelines, it is bound by the same and if it does not do so, some cogent reasons must be given for departing from these guidelines for otherwise the action shall be deemed to be arbitrary. It was submitted that the Company Law Board while rejecting the first application for approval had given reasons why it felt that the agreement between the sole selling agent and the company did not appear to be an arm's length transaction. One of the reasons why the Company Law Board came to that conclusion was because the entire share capital of the sole selling agency was held by Shri B.V. Mehta, his wife, son, daughter and their HUF and Shri B.V. Mehta was also its chairman. By way of change, though Shri B.V. Mehta had ceased to be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Ltd. was considerably changed. For instance, Shri B.V. Mehta who was formerly the chairman of the sole selling agency company, and his family members divested themselves of their holdings in the sole selling agency company and also ceased to be its chairman and directors. The fact that one of the married daughters is a shareholder in the sole selling agency company, does not in any way, in my view, make the decision contrary to the guidelines. Circular No. 61.6 provides that where the involvement of the proposed appointee either through himself or his family members in the selling agency is quite substantial, the Board will not approve the said appointment. If, however, the interest of the appointee and or the family members in the selling agency is nominal, the Board approves the appointment but with certain conditions to safeguard the interest of the company. There is also another circular issued by the Government of India bearing No. 61.4 at page 176 in the book on Clarifications and Circulars on Company Law, the relevant portion of which reads thus: "It has also been decided that the companies should not, except with the approval of the Central Government, be allowed to app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about by L.G. and Doctor Associates to meet the objections raised by the Company Law Board, if the Company Law Board thought it fit to grant the approval, I do not think that it could be said to be an arbitrary or perverse decision. Furthermore, by that time, the Company Law Board had received the clarification and report of the Registrar of Companies, Gujarat, which strengthened the case of the applicant company. Now, it is well-settled that the court, while exercising jurisdiction under article 226 of the Constitution of India, would be slow to interfere with an executive decision relating to economic matters and must allow certain freedom to the executive. Therefore, I do not think I need go into the question whether reimbursement for previous periods ought to have been permitted by the Company Law Board or not, because it involves decision on disputed questions of fact and though the Company Law Board has granted the reimbursement on grounds of equity, it has done so after fully considering its financial impact on the applicant company as well as the sole selling agent. Thus, assuming there are some technical and minor defects in the order, in my opinion, the order cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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