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TMI Blog2003 (12) TMI 320X X X X Extracts X X X X X X X X Extracts X X X X ..... 1% commission on the net profits of the company and other perquisites. As per the amended provisions of section 269 of the Companies Act, which amendment came into force from 1-6-1988, an application dated 19-7-1988 came to be made for approval under that section. 2.1 The Government called for some particulars from the company, which were duly furnished. Thereafter, by communication dated 19-3-1990, the company as also the appellant were called upon to show cause within thirty days as to why the proposal of the company for re-appointment of the appellant as the Chairman and Managing Director should not be rejected. 2.2 In this detailed show-cause notice, it was, inter alia, contended that one M/s. Tambraparani Enterprises, wherein the appellant, his wife and son were the partners, was appointed as the Commission Agent under an agreement dated 10-7-1986 and has received huge commissions in the years 1986, 1987 and 1988. It was urged that while making an application for re-appointment, the appellant had failed to disclose his own interest in the aforesaid partnership firm against item No. 7 in Form 25A and this amounted to a mis-statement, punishable under section 628 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant was not a fit and proper person to be appointed as the Chairman and Managing Director. It also came to the conclusion that the contention of the appellant that the approval was not at all necessary was also not correct. In that, it was pointed out that the company had suffered a loss in the previous years and had also suffered the loss in two years of the three previous years thereto; that as per the company s letter dated 24-5-1990, the company had adequate profits either in the year 1987 or in any of the three years out of the four financial years immediately preceding the financial years and as such condition ( f ) of Schedule XIII i.e. adequate profits test was not satisfied. 5. This was challenged before the learned Single Judge, who initially allowed the petition on the ground that the order was a non-speaking order. However, the petition was again posted at the instance of the third respondent. Association and ultimately the petition was dismissed by the impugned judgment. It will be pertinent to note that by the order dated 23-4-1991 on WMP No. 26872 of 1990, the third respondent Association was allowed to be impleaded as a party to the writ petition. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Government to act as the watchdog of the interests of the shareholders of the Government. He further pointed out that before taking the decision of refusing the approval, the Government had made a thorough investigation and had gone to the extent of even affording the personal hearing to the appellant. 8. Shri Dulip Singh, learned counsel appearing on behalf of the company, supplemented the arguments of Shri Arunan by pointing out that the interpretation sought to be put on section 269 of the Companies Act and Schedule XIII thereto by the appellant was not correct and that in reality the approval was a must. He also pointed out that the misuse of the financial powers and the shaddy financial transactions were apparent on the face of the record and was almost an admitted position. He also reiterated that the function under section 269 for granting of the approval was not a judicial or quasi-judicial function and that the procedure adopted by the Government for giving the findings that it did was extremely fair. 9. Shri Prasad, learned counsel appearing on behalf of the third respondent association, also reiterated that the appellant had tried to drain the finances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y disputed that it is only the amended provisions of section 269 of the Companies Act which are applicable to the present controversy because the amendments have been made applicable with effect from 1-6-1988 and the resolution appointing the appellant was passed on 2-6-1988. We will, therefore, proceed on the basis that is the amended provisions of the Act which are applicable. Learned senior counsel urged that the requirement of approval and the procedure therefor was felt cumbersome and, therefore, section 269 of the Companies Act was extensively amended. Sub-section (1) of section 269 provides that on the commencement of the Amendment Act, 1988, every public company, or a private company which is a subsidiary of a public company, having a paid-up share capital of a particular level would have a managing or whole-time director or a manager. Sub-section (2) of section 269 read as under : "On and from the commencement of the Companies (Amendment) Act, 1988, no appointment of a person as a managing or whole-time director or a manager in a public company or a private company which is a subsidiary of a public company shall be made except with the approval of the Central Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TRAL GOVERNMENT PART I Appointments 1. No person shall be eligible for appointment as a managing or whole-time director or manager of a company unless he satisfies the following conditions, namely : ( a ) to ( e )****** ( f )if the company had [not] suffered loss or had inadequate profits during the financial year immediately preceding the financial year in which the appointment is made (hereinafter referred to as the preceding financial year) or in any of the three financial years, in the four financial years immediately preceding the preceding financial year." It is this clause which is very heavily relied upon by the learned counsel to suggest that the approval was not necessary. Learned counsel invited our attention to a document on record, which is a letter dated 24-5-1990, sent by the company to the Central Government in response to the Central Government letter dated 14th/15th May, 1990. Learned counsel points out that in that letter, the Government had provided the details of the loss or adequate profits furnished by the company under section 198. The position relied upon by the learned senior counsel is being re-produced here : Year ended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en if the company had earned adequate profits in any of the four preceding years of the year of appointment, Schedule XIII will not apply and necessarily, the appointment will not come within the mischief of section 269. For this purpose, learned counsel invites our attention to the Company Law Board Circular No. 3 of 1989, dated 13-4-1989. Our attention is more particularly drawn to clause (1) which deals with the appointment and remuneration of the managerial personnel vide sub-section (1) of section 269. Learned counsel then relied upon the following text : "( b ) Insofar as clause ( f ) is concerned, the company has to ensure at the time of appointment of its managerial personnel that it had not suffered loss or had adequate profits during the financial year immediately preceding the financial year in which the appointment is made or in any of the three financial years in the four financial years immediately preceding the financial year in which the appointment is made. In other words, the company must have earned adequate net profits computed in the manner laid down in sections 349, 350 and 351 either during financial year immediately preceding the year of appointment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appointment of the appellant. We answer the first question accordingly. 19. Learned counsel then urged that even if that be so, the order was clearly bad as it is bereft of reasons. For this learned counsel urged that the act of approval as required under section 269 is a judicial or at any rate quasi-judicial act. In support of his proposition, learned counsel relied on the Division Bench judgment of the Gujarat High Court in Cibatul Ltd. v. Union of India [1980] 50 Comp. Cas. 437 . Learned counsel suggested that the power under section 269 has been held in the nature of quasi-judicial power and, therefore, it must be shown before such an order is passed that the relevant facts have been taken into consideration, a fair and proper opportunity is given, there has been an active consideration of all the facts before the authority, which have also been brought by the concerned parties; lastly, such consideration must be writ large by way of reasons in the order. Learned counsel was at pains to point out that in the aforementioned judgment, the Division Bench has relied on the reported decision of the Supreme Court in Rampur Distillery Chemical Co. Ltd. v. CLB AIR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... soon as one tells in that his prayer is rejected and that he is not bound to give reasons, the order passed is an order which is arbitrary and is required to be set aside. That order can never be sustained in a State where the citizens are governed by law. Even a citizen who approaches any authority who has a power to act judicially and he acts in a quasi-judicial manner where he is bound to take objective facts into consideration, the person against whom the order is passed is entitled to know that only the relevant factors were considered objectively, that irrelevant factors were never entered the field, that the mind was applied and that with a proper reasoning the order was passed. It is quite likely that another person may take a different view, but that is entirely a different matter. If the Court has no power of appeal over a quasi-judicial officer, the Court may not exercise that power but the Court has certainly a power to examine as to whether the person had a power, whether the person exercised that power judicially, whether the power that was exercised was not exercised arbitrarily and it was in a judicial manner in the sense it was made known that all relevant factors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore test the impugned order on these lines. It is an admitted position that after the application was made by the company for re-appointment of the appellant as the Chairman and Managing Director of the company, the Central Government thoroughly investigated the affairs of the company. It is clear that a thorough investigation was made into the affairs of the company and it is only thereafter that the show-cause notice came to be issued. The very language of the show-cause notice suggests that a proper investigation was made into the affairs of the company by the Central Government and its officers because, otherwise, it would not have been possible to frame those six reasons in the nature of findings which are to be found in the communication dated 19-3-1990. In its counter before the learned Single Judge, the Central Government points out in paragraph 3 that the representation of the appellant was not only considered but his advocate representative was also allowed to make a representation in writing on the question of the necessity of the approval. It is reiterated that the facts stated in the show-cause notice had not been controverted at all and as such, it was established th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Central Government had formulated the reasons on the basis of its investigation and the earlier correspondence and thereafter the notice dated 9-3-1990 came to be issued, giving a complete idea of the reasons probably with the sole idea to give an opportunity to the appellant to dispute the correctness or otherwise of the facts stated therein. Not only this but, even the appellant was heard in person and was allowed to be represented by an advocate. It is on this backdrop that we will have to examine the order passed to see whether it meets the requirement of the Supreme Court decision. 24. The impugned order is in the nature of a communication. In the opening portion, it refers to the correspondence and specifically mentions the letter dated 24-5-1990, which was sent by the appellant after his letter dated 16-4-1990 by way of supplementing that letter. The order then specifically mentions the facts as detailed in the show-cause notice of even number dated 9-3-1990 as also the regulations/submissions made by the proposed appointee in the letters dated 16-4-1990 and 24-5-1990. It also makes a reference to the explanations furnished and suggests that those explanations have n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares of which also owned by the wife of the appellant. It is also suggested that huge amounts were paid by way of commissions to the firms in which the appellant himself was a partner. Huge advances were given to a firm called Madras Fabricators in which the wife of the appellant was holding 55% shares and thereby the said firm made huge profits in the year 1987-88 when the second respondent company itself went in loss. Huge amounts were sanctioned to foot the bills of Singapore trip of the son of the appellant, properties of the company, viz. Colour Television and Video Cassette Recorder were enjoyed by the appellant not in the company s premises but at his residence. So also, unauthorised expenditure were made on account of gas and electricity consumption charges during the period 1984-85 in excess of the limits prescribed by the approval letter. 26. We have carefully seen the reply which does not in any manner dispute any of these facts but, merely justifies the same on the ground that firstly, it was made known to the shareholders and secondly, that it was necessary in the interests of the company and that the company was benefited thereby. If the Central Government spe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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