9911796707
TMI Blog2005 (3) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... 16 appeals are challenging an order passed by the company law board under which it has ordered an investigation into one of such alleged scams under section 237( b )( i ) of the Companies Act which is being known as Ketan Parekh - Stock scam of 2001. 2. Few facts dealing with the complex question of law which have been raised by the appellant in the present proceedings are briefly narrated as under : 3. In 2001 there was a sudden crash in the stock market i.e., the sudden increase in the prices over the board securities in the period 1999-2000 and then sudden crash of the stock market is attributed and alleged to one Mr. Ketan Parekh. It is alleged that he by his conduct through his various entities and companies has committed fraud which led to the said crash in the stock market. It is also alleged that the 14 companies in the present appeals are entities which are controlled and owned directly or indirectly by the said Ketan Parekh, who is the alleged King-player in the stock exchange scam of 2001. There are also allegations that with the crash of the stock market, there has simultaneously been a crash of the Madhavpura Co-operative Bank, Global Trust Bank and UTI and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 237( b )( i ) is based on the material gathered from three basic sources namely, the report of the Joint Parliamentary Committee, the interim report of the SEBI investigation and thirdly the reports pursuant to the investigation under section 209A of the Companies Act. The petition which is filed on 2-5-2003 by the respondent in detail sets out the various findings on the aforesaid three reports and the material gathered by the said authorities as required for the purpose of carrying out investigation under section 237( b )( i ). This petition dated 2-5-2003 was served on the company on 16-5-2003. It is the case of the petitioner that on 20-7-2003 they applied to the Company Law Board for a certified true copy of the SEBI report and other documents which are relied upon by the respondent in the said company petition before the Company Law Board. On 12-7-2003 the appellant herein sought a transfer of the proceedings from the Principal Bench of the Company Law Board, New Delhi to the Western Region Bench of the Company Law Board at Mumbai. Simultaneously they have also applied for inspection of the various documents which are referred to and/or relied upon by the respondent in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and therefore a further investigation in the matter by the said investigating authorities appointed by the Central Government under section 237( b )( i ) is neither necessary nor efficacious and it would only affect the interest of the appellant company prejudicially. The respondents on the other hand in their rejoinder have placed extensive reliance upon the inspection report of the CBI and Joint Parliamentary Committee and also the inspection carried out by the Department of Company Affairs under section 209(A). Even a certain extract of the JPC report has been annexed to the said rejoinder. 6. After hearing the parties the Company Law Board has passed an impugned order on 27-9-2004. By the impugned order the Company Law Board has inter alia held that there is a ground made out for carrying out investigation under section 237( b )( i ). It has been further held that there are serious allegations of fraud and scams by these corporate entities and there is substantive material in support of the said allegations to conduct support the investigation under section 237( b )( i ) of the Companies Act. Thus the Company Law Board allowed the company petition and permitted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as may be authorised by it : Provided that such inspection may be made without giving any previous notice to the company or any officer thereof: Provided further that the inspection by the Securities and Exchange Board of India shall be made in respect of matters covered under sections referred to in section 55A. (2) It shall be the duty of every director, other officer or employee of the company to produce to the person making inspection under sub-section (1), all such books of account and other books and papers of the company in his custody or control and to furnish him with any statement, information or explanation relating to the affairs of the company as the said person may require of him within such time and at such place as he may specify. (3) It shall also be the duty of every director, other officer or employee of the company to give to the person making inspection under this section all assistance in connection with the inspection which the company may be reasonably expected to give. (4) The person making the inspection under this section may, during the course of inspection,- ( i )make or cause to be made copies of books of account and other books and paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n order under sub-section (1), it shall be the duty of the company, and of all persons who are the officer of the company, to furnish such information or explanation to the best of their power. (3) On receipt of a copy of an order under sub-section (1), it shall also be the duty of every person who has been an officer of the company to furnish such information or explanation to the best of his power. (3A) If no information or explanation is furnished within the time specified or if the information or explanation furnished is, in the opinion of the Registrar, inadequate, the Registrar may by another written order call on the company to produce before him for his inspection such books and papers as he considers necessary within such time as he may specify in the order; and it shall be the duty of the company, and of all persons who are officers of the company, to produce such books and papers. (4) If the company, or any such person as is referred to in sub-section (2) or (3), refuses or neglects to furnish any such information or explanation or if the company or any such person as is referred to in sub-section (3A) refuses or neglects to produce any such books and papers,- ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion or explanation on matters specified in the order, within such time as he may specify therein; and the provisions of sub-sections (2), (3), 3(A), (4) and (6) of this section shall apply to such order. ** ** ** (8) The provisions of the section shall apply mutatis mutandis to documents which a liquidator, or a foreign company within the meaning of section 591, is required to file under this Act." "235. Investigation of the affairs of a company. (1) The Central Government may, where a report has been made by the Registrar under sub-section (6) of section 234, or under sub-section (7) of that section, read with sub-section (6) thereof, 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. (2) Where ( a )in the case of a company having a share capital, an application has been received from not less than two hundred members or from members holding not less than one-tenth of the total voting power therein, and ( b )in the case of a company having no share capital, an application has been received from not less than one-fifth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been made or a special resolution referred to in clause ( b ) has been passed." 9. Learned counsel appearing for appellant has vehemently contended before me that the proceedings which are initiated by the respondent before the Company Law Board for investigation under section 237( b )( i ) of the Companies Act is totally without jurisdiction and non est. It has been further contended that the condition precedent prescribed under the said section having not been complied with by the Company Law Board was not entitled in law to exercise jurisdiction under the provisions of section 237( b )( i ) of the Companies Act. The learned counsel has further contended that on true and correct interpretation the Company Law Board gets jurisdiction to pass an order of investigation only if the company is carrying on business with the intention to defraud its creditors, members and/or carrying on business for fraudulent or unlawful purpose or in a manner oppressive to any of its members in a praesentis . It is therefore contended that if the company is not carrying on business at present then irrespective of the fact that during the period when the company was carrying on business w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terfering with the business of the company and such power must not be permitted to be utilised save and except directly in accordance with law and therefore the said application for investigation when the business is not running in praesentis cannot be granted. 10. On the facts of the present case the learned counsel has contended that it is an admitted position that in respect of some of the appellants who are inter alia carrying on business of share brokerage their share brokers card has been suspended and in some of the cases the said card is revoked and/or terminated by the concerned stock exchange and SEBI and some of the trading firms who were carrying on business as a share broker have come to a halt and therefore those companies are not carrying on any business in praesentis and thus the jurisdiction vested under the Central Government and/or the Company Law Board to investigate under section 237( b )( i ) cannot be exercised in respect of these companies. It has been further contended that business of the various companies has also been closed because of the freezing of the bank accounts in parallel investigations which have been carried out by the SEBI, CBI an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Central Government and it is of course implicit that the opinion must be an honest opinion. The next requirement is that there are circumstances suggesting, etc. These words indicate that before the Central Government forms, its opinion it must have before it circumstances suggesting certain inferences. These inferences are of many kinds and it will be useful to make a mention of them here in a tabular form : ( a )that the business is being conducted with intent to defraud- ( i )creditors of the company ( ii )members, or ( iii )any other person; ( b )that the business is being conducted ( i )for a fraudulent purpose, ( ii )for a unlawful purpose; ( c )that persons who formed the company or manage its affairs have been guilty of- ( i )fraud, or ( ii )misfeasance or other misconduct-towards the company or towards any of its members; ( d )that information has been withheld from the members about its affairs which might reasonably be expected, including calculation of commission payable to- ( i )managing or other director, ( ii )managing agent, ( iii )the secretaries and treasurers, ( iv )the managers. These grounds limit the jurisdiction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igation is necessary and the further requirement is that there are circumstances suggesting the inference set out in the section; an action not based on circumstances suggesting an inference of the enumerated kind will not be valid; the formation of the opinion is subjective but the existence of the circumstances relevant to the inference of the enumerated kind will not be valid; the formation of the opinion is sine qua non or action must demonstratable; if their existence is questioned, it has to be proved at least prima facie; it is not sufficient to assert that those circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness; the conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In other words they held that although the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstratable; if their existence is questioned, it has to be proved at least prima facie ; it is not sufficient to assert that those circumstances exist and give no clue to what the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier we agree with the conclusion reached by Hidayatullah and Shelat, JJ. in Barium Chemicals case that the existence of circumstances suggesting that the company s business was being conducted as laid down in sub-clause (1) or the persons mentioned in sub-clause (2) 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." 14. Apart from the aforesaid two judgments of the Apex Court the learned counsel has in support of his contention has also relied upon the judgment of the Delhi High Court in the case of Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634 and the judgment of the Calcutta High Court in the case of New Central Jute Mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i ) and should not interpret the section which results in absurd consequences. According to the learned counsel the section cannot be interpreted in a manner which can provide a scope to do the things which are in fact meant to be prevented by the provisions thereof. Insofar as the aforesaid authorities are concerned, the learned counsel for the respondent has contended that the judgment of the Apex Court in the case of Barium Chemicals Ltd. ( supra ) does not in any way or manner set out any such proposition of law as contended by the learned counsel for the respondent i.e. the company must be running the business in praesentis so as to attract the provisions of section 237( b )( i ). The learned counsel has contended that the paras referred to by the learned counsel for the appellant did not carve out any such proposition of law as canvassed by the learned counsel for the appellant before this Court and therefore the said argument ought not to be accepted. The learned counsel has further contended that if the interpretation is given as suggested by the learned counsel for the appellant in most of the cases, then the company would commit fraud and carry on business for fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 237( b )( i ), I do not find any such proposition of law laid down by the Apex Court that the power under section 237( b )( i ) can only be exercised when the company was carrying on business in praesentis . The paras on which strong reliance has been placed by the learned counsel for the appellant in my opinion does not raise any such issue of law. In the said paras the Apex Court was dealing with the issue of formation of opinion of the Central Government and requirement of the material in support thereof while ordering investigation under section 237( b )( i ) of the Act. The para clearly indicates that the court was considering the words in the opinion of the Central Government and was considering that whether such words suggest in any manner that there should be material in support. While considering the aforesaid issue the court has analysed the said sections and has broken in into four parts a, b, c and d therein. Such division of the section in four parts namely a, b, c and d is nothing else but division of the plain language of the section as it is. The learned counsel for the appellant has contended that the Apex Court while considering the section in parts ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 237( b )( i ) is concerned it is by now well-settled that the interpretation of the section as a first principle must be on the basis of simple and plain language used in the section itself. However, there is a case at which has been well recognised by the various courts that if interpretation is likely to result in absurd consequences or it defeats the intention of the Legislature then in that event purposive interpretation ought to be resorted to and interpretation should be such to advance the intention of the Legislature rather than defeating the same. In my opinion the provisions of investigation under section 237( b )( i ) are being introduced by the Parliament with the intention to prevent persons who enter the business in the guise of corporate entities to carry on fraudulent business with a view to harm the public interest. Butterworth in his 5th edition on the company law while tracing out the background of the similar legislation i.e. English Company Law has inter alia considered the reason for introduction of such a legislation and while doing so it has stated as under : "It is important to know the background of the legislation. It sometimes happens that p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( b )( i ) then all these companies would commit fraud and would close down the business and consequently make the provisions a dead letter on the statue. Apart therefrom it is also difficult to interpret the section in a manner the learned counsel for the appellant has called upon me to do because while so interpreted it is necessary that the Central Government must detect and investigate all such cases of the company which are conducted in a fraudulent or unlawful purpose in a course when such conduct is being carried on by the company. I do not think this could be a legislative intention while enacting the said section 237( b )( i ). 20. The principles of interpretation of statue are well settled. It is repeatedly held by the Apex Court that the interpretation must be to avoid absurdity and unrealistic result or consequences of such an interpretation. The Maxwell has in his book Interpretation of Statutes in the 10th edition as opined as under : "....if the choice is between two interpretation, the narrow of which would fails to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility and should rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court and the Judges and Division Bench thereof shall sit at Allahabad or at such other places in the United Provinces as the Chief Justice may, with the approval of the Governor of the United Provinces appoint. The word or cannot be reads as and . If the precise words used are plain and unambiguous, they are bound to be construed in their ordinary sense. The mere fact that the results of a statute may be unjust does not entitle a court to refuse to give it effect. If there are two different interpretations of the words in an Act, the Court will adopt that which is just, reasonable and sensible rather than that which is none of those things. If the inconvenience is an absurd inconvenience, by reading an enactment in its ordinary sense, whereas if it is read in a manner in which it is capable, though not in an ordinary sense, there would not be any inconvenience at all; there would be reason why one should not read it according to its ordinary grammatical meaning. Where the words are plain the court would not make any alteration." (p. 338) 24. In the case of Molar Mal v. Kay Iron Works (P.) Ltd. [2000] 4 SCC 285 while reconsidering the aforesaid principle the Apex Court h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat no investigation can be carried out once the company has ceased to operate its business. In any event on a true and proper construction of the section I do not accept the contention of the learned counsel for the appellant that the business of the company should be conducted in praesentis for the purpose of ordering investigation by the Central Government under section 237( b )( i ). 26. Even otherwise on facts the learned counsel for the respondent has been able to establish that the business of the company is not totally stopped though undoubtedly it has been seriously affected by virtue of the orders passed by the SEBI and stock exchange of suspension of the brokerage licence, suspension or freezer of bank account and collapse of Madhavpura Co-operative Bank and Global Trust Bank. The learned counsel has drawn my attention to the affidavit filed by the company before the Company Law Board in which it has been stated as under : "3( b ) It is incumbent that in order to achieve this objective, the functioning of the Applicant/Respondent group of companies ought not to be crippled which situation would inevitably result if the order dated 27-9-2004 passed by this Hon bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the company. He has relied upon the judgment of the Apex Court in the case of Bengal Assam Investors Ltd. v. CIT AIR 1966 SC 1514 particularly para 13 of the said judgment. The said para 13 of the said judgment reads as under : "13. Mr. Desai laid a great deal of stress on the argument that the very fact that a company is incorporated to carry on investment shows that the company is carrying on business. We are unable to agree with this contention. Bhagwati, J. observed in Lakshminarayan Ram Gopal Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 that when a com-pany is incorporated it may not necessarily come into existence for the purpose of carrying on a business . He further observed that the objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business. " (p. 1518) 28. While considering the aforesaid contention the Apex Court has held that there is difference between the incorporation of a company and conduct of the business of the company. In this case the company was only incorporated on the paper but no bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Trust Bank has collapsed in view of the stock market scam. However appellants have denied their involvement in the scam. They have on the contrary contended that they are the victims of the collapse of the share market and not the beneficiaries. The respondents therein have produced before the Company Law Board in support of the application for investigation under section 237( b )( i ) a report of the Joint Parliamentary Committee investigating said scam. The respondents have also produced the report and/or order passed by the SEBI against the appellants and Ketan Parekh alleged moving spirit behind the 14 companies. The Central Government has also in support of the application relied upon the reports which are filed by the inspectors in the course of carrying out investigation under section 209(A). The Central Government has also relied upon large number of breaches of the provisions of the Companies Act by the various companies in support of investigation. In my view not only there is a material in the form of aforesaid reports, documents and orders but a more than prima facie case has been made out for investigation of the appellant company. The Joint Parliamentary Committ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offence. It is merely a fact-finding venture. It is no doubt true that in the context of the companies it is a serious issue because it interferes with their rights to carry out free trading but it has been held that every right is coupled with reasonable restrictions and if the company has prima facie carried out fraudulent activities then obviously it cannot complain about investigations carried out by the Central Government in exercise of statutory powers conferred under section 237( b )( i ). 30. This leads me to the third question of law which has been raised by the learned counsel for the appellant. 31. It has been inter alia contended that the power conferred under the provisions of section 237( b )( i ) of the Act must be sparingly exercised and cannot be utilised in casual manner. It has been contended by the learned counsel for the appellant that in respect of the so called security scam of 2001 there are already investigations undertaken by the SEBI, CBI and even the Department of Company Affairs by ordering investigation under section 209(A). It has therefore been contended that on the same material and on the same allegations one more investigation ought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestigation Office (SFIO) and it is required that the corporate frauds should be investigated by the said SFIO. It is also brought to my attention that under the said resolution the SFIO will be conferred with the power to investigate in the company because the investigation under section 237( b )( i ) of the Companies Act is entrusted to the SFIO. The learned counsel for the respondent has further contended that there are authorities and authorities which require to investigate the various aspects of fraud committed by the companies like the appellant herein. It has been contended that the SEBI under the SEBI Act has a restrictive power to investigate i.e., in respect of security transactions but when it comes to transaction in respect of banks and other institutions which are not within the purview and/or jurisdiction of the SEBI and the same are required to be investigated by the Central Government through the appropriate authority and/or body. It has been contended that the inquiry under the different acts by the different authorities are in respect of their respective jurisdiction and spheres assigned to them under the various legislations and it cannot be stated in law th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant cannot be accepted particularly in view of the fact that every authority has been conferred various powers in their respective legislation. A similar issue aroused before the English Court under the identical provisions of investigation under the Companies Law and the Court of Appeal in the case of London United Investments Plc, In re 1992 BCLC 285 equivalent to 1971 All Eng. LR 849 it is held as under : "The power of the Secretary of State to appoint inspectors to investigate the affairs of a company and to report is an important regulatory mechanism for ensuring probity in the management of companies affairs. That of course is in the public interest. Since the Secretary of State s powers under section 432(2) are exercisable where there are circumstances suggesting fraud, it is likely that in many cases where inspectors are appointed an investigation by the police or the Serious Fraud Office could also be appropriate. But the code under the 1985 Act is a separate code even though it may overlap the field of criminal investigation." 34. Apart from the aforesaid position in law : I am also of the further opinion that the Central Government having constituted the Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the investigation is necessary or not limited jurisdiction or power is conferred on the court is to ascertain whether there is a material in support of the opinion arrived at by the Central Government and/or the said exercise is not a mala fide exercise of power. In the facts of the present case I do not consider that the exercise of the Central Government is mala fide . There is a plethora of material and in view therein I do not desire to interfere with the inves- tigation ordered by the Central Government in exercise of power conferred under section 237( b )( i ) of the Act. 36. In view thereof I find that there is no substance in the present appeals. I accordingly dismiss all the 14 appeals with cost quantified at Rs. 10,000 each per appeal. At the request of the learned counsel for the appellant the statement of the learned counsel for the respondent to maintain status quo is to continue till 29-4-2005. In view of the dismissal of the appeals itself nothing remains in the Company Applications (L) No. 1030 of 2004 to 1043 of 2004 for ad interim orders and the same is dismissed accordingly with no order as to costs. - - TaxTMI - TMITax - Corporate La ..... X X X X Extracts X X X X X X X X Extracts X X X X
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